PLEDGES
238. Pledge Defined. A pledge is one form of a mutual benefit bailment. It is a deposit of personal property by a debtor with a creditor as security for a debt, the title to the property remaining in the debtor until the property is disposed of by the creditor in accordance with the express or implied agreement of pledge. A pledge differs from a chattel mortgage in that possession of personal property is given a creditor for the purpose of securing a debt, the title remaining in the debtor. In case of a chattel mortgage, the title to the personal property passes to the mortgagee, who is the creditor, subject to revesting in the mortgagor, who is the debtor, in case of payment of the mortgage debt. In a chattel mortgage, possession of the property generally remains in the debtor.
A owes B $100.00. He gives B possession of a diamond ring as security for the debt. If A does not pay the $100.00 when due, B may retain possession of the ring until he receives $100.00 from A, or he may sell the ring at public sale, advising A of the time and place of sale. If the ring sells for more than $100.00, B must pay A the excess of $100.00.
Pledges form an important part of present day business. Pledges of bonds, stocks and negotiable paper are common in transactions with banks. Banks commonly make loans, taking a promissory note secured by a pledge of stocks, bonds, negotiable instruments, or other personal property. Their loans are commonly called loans on collateral or loans on collateral security.
239. Parties to a Pledge. A pledge of chattel property is a contract express or implied. The party giving the property as security to his creditors is called the pledgor, the party receiving the property is called the pledgee. Like any contract, it requires competent parties. (See Competency of Parties, chapter on Contracts.) A person mentally insufficient, intoxicated, or an infant, is not competent to make a contract. An infant's contracts of pledge, like any of its contracts are voidable, but not void. The infant may carry out the contract if he chooses. An infant's contracts are not illegal. They cannot be enforced against an infant, however, if he objects by reason of infancy. A competent party, contracting with an infant, cannot void his contract on the ground of infancy of the other contracting party. Most contracts of pledge are implied. If A owes B $10.00 and gives B his watch as security, B impliedly has the right to retain possession of the watch until A pays him $10.00. B also has the right after A fails to pay him the $10.00 when due, to sell the watch at public auction, and apply as much of the proceeds as is necessary to the payment of his debt. In most pledges of importance where securities are pledged, the contract of pledge is reduced to writing, and a stipulation is made giving the pledgee the right to sell the property at public or private sale without notice to the pledger, and permitting the pledgee himself to be a purchaser at the sale. No matter what the contract of pledge provides, the sale should be public, notice of which should be advertised, and notice of the time and place should be given the pledgor.
240. Personal Property Which May Be Pledged. Any kind of personal property which is the subject of transfer may be pledged. This includes personal property having a tangible existence, as well as that which is intangible. That is, choses in action as well as choses in possession may be pledged. A promissory note, a certificate of stock, or a bond which is an evidence of something tangible or the right to obtain something tangible, is the subject of a pledge, as well as furniture, jewelry and other tangible personal property. Property which has no active or potential existence is not the subject of a pledge. A person cannot pledge a horse which he expects to purchase, or a crop which he expects to grow on the land of another. A person may, however, pledge a growing crop.
241. The Debt Secured. A pledge or delivery of personal property is for the purpose of securing a debt owing the pledgee. The existence of a debt is one of the essential elements to a valid pledge. A delivery of personal property to another in the absence of a debt may constitute a bailment for the sole benefit of the bailor, the bailee, or for the mutual benefit of both parties. To constitute a pledge, however, there must be a debt owing the pledgee, and the property must be delivered to him, and accepted by him as security for the debt. The debt must be legal, and must be supported by a sufficient consideration to support the contract of pledge.
A won $50.00 at cards from B. B gave A his watch as security for the debt. B was permitted to recover possession of his watch from A by legal action, since the gambling transaction was illegal. B did not legally owe A $50.00. An illegal debt cannot support a contract of pledge. If, for any reason, the debt is not owing or is not valid, it will not support a contract of pledge.
242. Title to Property Pledged. The legal title or ownership of personal property pledged remains in the debtor or pledgor. A right of possession is given the pledgee. This is sometimes called a special property. A pledge differs from a sale in that, in a sale, the title or ownership of the personal property passes to the purchaser, while the possession may remain in the seller. In a pledge, however, the possession passes to the pledgee or creditor, while the title remains in the pledgor or debtor. A pledge differs from a chattel mortgage in that, in the latter, the title passes to the creditor or mortgagee, subject to revesting in the mortgagee or debtor, upon the latter's paying the mortgage debt.
There is probably one exception to the rule that title to property pledged does not pass to the pledgee, and that is in case of negotiable instruments. A negotiable instrument endorsed in blank, or made payable to bearer passes like currency by delivery. A pledge of such paper passes title to the pledgee. A pledge of negotiable paper not endorsed in blank, or not payable to bearer should be made by proper endorsement. In this event title passes to the pledgee. The title is revested in the pledgor by proper indorsement, or by delivery, if the instrument is transferable by delivery, when the debt secured is paid. A pledgee of negotiable paper, who takes it before it is due without notice of defenses, is an innocent purchaser for value without notice, and as such, is entitled to the rights of an innocent purchaser for value without notice. (See Innocent Purchaser for Value Without Notice, chapter on Negotiable Instruments.)
243. Collateral Securities. Loans by banks are frequently made on collateral securities. This means that the borrower gives a bank a promissory note for the amount, and pledges personal property to secure the note. The contract of pledge may be by separate written instrument, or it may be made a part of the note itself. Where made a part of the note, the note is called a collateral note. (See Collateral Note, chapter on Negotiable Instruments.) Any kind of property which is the subject of a pledge may be used as collateral security. Stocks, bonds, and even commercial paper are commonly used. Jewelry, bills of lading, and warehouse receipts are not infrequently used in this kind of a pledge. Collateral security given as security for a promissory note or other negotiable instrument is a pledge. The rules governing ordinary pledges govern this kind of pledge as well. The only practical distinction between a collateral loan and an ordinary loan is that, in a collateral loan, the debt is evidenced by a negotiable instrument which is secured by a pledge of personal property.
244. Rights and Duties of Pledgor and Pledgee. A pledgor has the right to have his pledged property returned to him upon payment of the debt secured by the pledge. He also has the right to have the property carefully preserved and cared for while in the possession of the pledgee. The pledgee is entitled to retain possession of the property pledged until the debt owing him is paid. He may re-pledge the property if he so desires. If the pledged property is negotiable paper, the pledgee must collect the paper as it falls due, and observe all the requirements necessary to preserve the rights of the pledgor. If the property pledged is tangible personal property, the pledgee must use the care of an ordinarily prudent man in the preservation and protection of it. He is not permitted to use property which may be injured by use, and should not use the property except to the extent that it is necessary for its preservation. If the pledgee sells or transfers the debt secured, the purchaser is entitled to the benefit of the pledge. That is, if A owes B $500.00 and pledges five shares of stock to B as security for the debt, and B sells the debt to C, C is entitled to the benefits of the pledged certificates of stock. If B gives C possession of the stock, C may retain the same until he receives the $500.00 from A. If B does not turn over the shares of stock to C, C may bring an action to compel the transfer of possession to him.
245. Disposal of Property by Pledgee After Default. If the pledgor fails to pay the debt secured when due, the pledgee has the right to enforce his pledge. In the absence of any special agreement, the law impliedly gives the pledgee the right to sell the property at public sale, and apply as much of the proceeds of the pledged property as is necessary to the payment of his debt. This sale must be public. The pledgee must first notify the pledgor that he is in default of payment, and of his intention to sell the property, giving the time and place of the proposed sale. The pledgee cannot be a purchaser at the sale, unless so permitted by express stipulation in the contract of pledge. Many contracts of pledge are in writing, by the terms of which the pledgor waives notice of default and of time and place of sale, and permits the pledgee to sell at private sale, and to become a purchaser at the sale. When a pledgee is given the right to purchase by the contract of pledge, he cannot make a valid purchase without advertising the property, and without exerting himself reasonably to obtain the greatest amount possible for the pledged property at the sale.
In selling pledged property, notice of default should be given the debtor. He should also be notified of the time and place of sale. The sale should be advertised publicly, and should be public. The pledgee cannot himself purchase the property unless the contract of pledge expressly so provides. Even in this event, the sale will not be held valid unless it is public and fair in every way to the interests of the pledgor. A pledgee is permitted in some states to sell according to certain statutory methods provided. A pledgee may sell by foreclosing his lien in equity. This means by filing a written request in a court of equity to sell the property. In this event, the sale is conducted by order of court.
246. Redemption. A pledgor has the right to obtain possession of the property pledged, by paying the debt secured at any time before actual sale of the property. A pledgor sometimes agrees by the contract of pledge, to waive the right to redeem the property after default of payment of the debt secured. Courts will not enforce such a provision of the agreement against him. The pledgor is permitted to redeem the property by paying or tendering the amount of the debt at any time before sale of the pledged property. If the pledgor is in default of payment, however, and agrees by separate agreement, made subsequently to the contract of pledge, that the pledgee may keep the property pledged in satisfaction of the debt, he is bound by this agreement.