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.)