Opinion
Argued October 26, 1882
Decided December 12, 1882
A.J. Vanderpoel for appellant.
M.W. Divine for respondents.
There can be no doubt that Berry Heiser were guilty of a conversion of the plaintiffs' note. They were employed as brokers in commercial paper to sell the note at a discount not exceeding eight per cent, for which service they were to be paid a commission of one-quarter of one per cent. Had they sold the note, the proceeds thereof would have been the property of the plaintiffs. They did not sell it, but pledged it to the defendant, together with a large number of other notes, amounting to about $60,000, for a loan of $50,000 to themselves. Being the ostensible owners of the note they could undoubtedly pledge it for a loan, and the pledgee accepting the same, in ignorance of the circumstances under which it was held, would be a good faith holder to the extent of the money advanced on the faith of the note. But the defendant did not thereby become the owner of the note. The right of property does not pass to the pledgee, but remains with the pledgor, subject to the lien of the former. ( Wheeler v. Newbould, 16 N.Y. 398.) Upon payment of the loan the pledgor would be entitled to the possession of the note. ( Wilson v. Little, 2 N.Y. 448.) Had Berry Heiser paid off and discharged the loan at any time before the payment of the plaintiffs' note there can be no doubt, under the facts disclosed in this case, but that the plaintiffs would have been entitled to the possession of the note in question. The defendant, as pledgee, had power to collect the notes as they respectively fell due ( Wheeler v. Newbould, supra, 16 N.Y. 392; Nelson v. Eaton, 26 id. 416), but the money thus collected would stand as a substitute for the notes upon which it had been received. "The possessor of negotiable paper has no better or other title to the proceeds arising from the sale thereof than to the paper itself, and if he has no title to the latter he can be compelled to account to the true owner of the proceeds." ( Comstock v. Hier, 73 N.Y. 269; 29 Am. Rep. 142; Garlick v. James, 12 Johns. 148.) The plaintiffs waived none of their rights by paying the note at the time it fell due. At that time less than $30,000 had been received by the bank on other collaterals held as a security for the loan. The bank had a right to collect the note, because it was not then known that the entire amount of the plaintiffs' note would not be required to satisfy the debt due the defendant. Previous to the payment, however, the defendant had been informed by the plaintiffs of the true situation of the case and their claim upon the note.
It was argued at great length by the learned counsel for the appellant that, upon the payment of the note, the bank had the right to apply it at once in part payment and extinguishment of the loan, and that such application having been made cannot be recalled. We think the defendant had no such right. Had the loan made by the defendant to Berry Heiser been a time loan, maturing on a day certain, it is clear that the defendant would have had no right to apply the proceeds of the notes held as collateral in payment of the loan until it became due and payable, for the reason that the debtor could not be compelled to pay his debt before it fell due, nor could the creditor be compelled to receive it. The same rule, we think, must apply to a loan payable on demand or upon call. In the absence of an agreement to that effect the debtor has no right to insist upon paying such a loan by installments. The entire loan was to be paid or demanded at one time, and until so paid the defendant had a right to continue to charge interest upon the entire amount of the loan.
In Strong v. The Nat. Mechanics' Banking Association ( 45 N.Y. 720), RAPALLO, J., assumes that a loan on call is not due until demanded. The law will not apply money received to the payment of a debt not due, nor can such an application be made, except by express agreement of the parties. In the absence of such an agreement the bank's only right was to collect the notes held as collateral as they respectively fell due and to hold the proceeds as a substitute for the notes collected. As we have seen, the only title or interest which the defendant had in the note or its proceeds was that of a pledgee, and as between the pledgor and pledgee the rule is well settled that, before the pledgee has the power to apply the proceeds of securities held as collateral, he must give the pledgor notice to redeem. ( Lewis v. Varnum, 12 Abb. Pr. 305; Wilson v. Little, 2 N.Y. 443, supra; Garlick v. James, 12 Johns., supra.) In the case last cited Chief Justice THOMPSON says: "The authority of the defendant, with respect to the note, could extend no further than receiving the money due upon it without first calling upon the pledgor in some way to redeem. The money, when received, would be a substitute for the note, and would be held upon the same terms and subject to the same rights and duties as the note." It follows, therefore, that the defendant held the proceeds of the plaintiffs' note, subject to the same equities in favor of the plaintiffs as would have existed if the note itself had remained uncollected till after the entire loan had been fully paid from the proceeds of the notes belonging to Berry Heiser. It being proved and found that the fund which belonged to Berry Heiser was amply sufficient to pay their loan in full, we think it clear that the proceeds of the plaintiffs' note became released from the pledge to the defendant, and that the defendant became liable to pay the same to the plaintiffs. ( Comstock v. Hier, 73 N.Y. 269; 29 Am. Rep. 142; Story's Eq Jur. 633; Ingalls v. Morgan, 10 N.Y. 178; Broadbent v. Barlow, 3 DeGex, F. J. 570; 64 Eng. Ch. [Am. ed.] 570.) After the notice given by plaintiffs to the defendant November 25, 1873, plaintiffs stood as mere sureties for the loan to the extent of their note, and could compel the defendant to apply the proceeds of the securities belonging to Berry Heiser to the payment of the loan before resorting to their note. ( Gould v. Central Trust Company, 6 Abb. N.C. 381; Watson v. Cabot Bank, 5 Sandf. 423.) Berry Heiser had no authority to pledge the plaintiffs' note in payment of an antecedent debt. The agreement of 1873 cannot, therefore, nor can the rule of the banker's lien, avail the defendant. ( Bay v. Coddington, 5 Johns. Ch. 54; Coddington v. Bay, 20 Johns. 637; Stalker v. McDonald, 6 Hill, 93; Moore v. Ryder, 65 N.Y. 438; Comstock v. Hier, 73 id. 269; 29 Am.Rep. 142.)
The defendant was not entitled to a trial by jury. The cause of action made by the complaint was one for equitable relief. The object of the action was to ascertain by an accounting to what extent, if any, the defendant held a lien upon the proceeds of the plaintiffs' note to satisfy the loan made to Berry Heiser, and to compel the defendant to account to the plaintiffs for any balance in its hands not necessary to satisfy such lien. Assuming that Berry Heiser were necessary parties, which we do not decide, the objection should have been taken by answer or demurrer. (Code, § 148; Fosgate v. Herkimer, etc., Manuf. Co., 12 N.Y. 580.) Nor were the plaintiffs bound to exhaust any remedy which they might have against Berry Heiser before bringing this action. No action against a wrong-doer is necessary in order to lay the foundation of an action against one receiving from him. ( Spraights v. Hawley, 39 N.Y. 441; Ballard v. Burgett, 40 id. 314.) It follows from the conclusions here reached that no error was committed by the court in the trial of this action, in the admission or rejection of evidence, or in refusing to find as requested by the defendant.
The judgment should be affirmed, with costs.
All concur, except EARL, J., dissenting, and RAPALLO, J., not voting.
Judgment affirmed.