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.
MORTGAGES OF PERSONAL PROPERTY
247. Mortgages of Personal Property Defined. By mortgage of personal property, is meant the transfer of title to personal property by a debtor to a creditor; the possession of the property usually remaining in the debtor, and the transfer being made for the purpose of giving the creditor security for the debt, the debtor having the right to secure a return of title to the property by paying the debt within a stipulated time. It is a conditional sale. It is not absolutely necessary that possession of property which is the subject of a chattel mortgage, remain in the debtor. Possession may be given the creditor with the understanding that possession and title are to revest in the debtor when the latter pays the debt secured. As a matter of business practice, however, possession of personal property which is the subject of a chattel mortgage, remains in the debtor, the creditor taking the title as security for the debt, with the right to secure possession or sell the property in case the debtor fails to pay the debt secured when due. When possession of personal property is given a creditor as security for a debt, the transaction is usually in the form of a pledge. In a pledge, title remains in the debtor, but possession is given the creditor. The distinguishing features of a sale, bailment or pledge, and a mortgage of personal property are important. In a sale of personal property title passes to the purchaser, while possession usually remains in the seller until the purchase price is paid. In a pledge, which is a form of a bailment, title remains in the bailor, and possession only is given the bailee or creditor. In case of a chattel mortgage, possession remains in the debtor, while title passes to the creditor subject to revesting in the debtor upon payment of the debt secured. The debtor, or person giving the mortgage, is called the mortgagor, the creditor, or person receiving the mortgage, is called mortgagee.
IN THE PRIVATE OFFICE OF THE GENERAL MANAGER OF THE S. OBERMAYER CO., CINCINNATI, OHIO