GOULD v. THE CENTRAL TRUST CO.

GOULD v. THE CENTRAL TRUST CO. N. Y. Supreme Court, First Department; Special Term, January, 1879. Pledgee.—Sale of Securities Pledged.—Subrogation.—Marshaling Assets. A pledgee, with whom securities, which belonged to several persons, are pledged as collateral security for a loan, made thereon to one having all the securities in his possession, and who wrongfully pledged them, should proceed pa/ri passu, in the application of the securities to the satisfaction of the loan. The complete interest of one owner should not be spared, at the expense of other owners, by an intentional discrimination in a sale of the securities by the pledgee. When a pledgee, without notice of the, claims of the true owners, sells the securities of one, and realizes a sum equal to the amount loaned on all the securities, leaving in his hands, undisposed of, the securities of the others, a court of equity will, at the suit of one whose securities were sold, order the remaining securities to be disposed of and the proceeds applied in such a manner that the burden of the loan will be borne by all in equitable proportions. This result is reached through the equitable principle of subrogation, as well as the rule observed in marshaling assets. Trial by the court. This action was brought by William R. Gould and another, against The Central Trust Company, Thomas S. Marlor and others, to compel the trust company to sell certain stock, which had been wrongfully hypothecated to it by John Bonner & Co. On October 15, 1877, the plaintiffs borrowed from John Bonner & Co. $50,000, on the security of 800 shares of Chicago & Alton Railroad stock. Soon afterwards John Bonner & Co. borrowed from The Central Trust Company $100,000, on the security of 500 shares of the plaintiff’s stock, and certain other stocks and bonds, including $3,000 of Wabash Railway bonds, which had been pledged by the defendant, Thomas S. Marlor, and 400 shares of stock in the Bankers’ & Brokers’ Association, which belonged absolutely to said Bonner & Co. No demand of payment was ever made by said firm upon the plaintiffs, but, on January 3, 1878, the latter found that all their stock had been re-hypothecated, and were compelled to pay to the Union Bank $21,000, to redeem 300 shares, while on January 4, The Central Trust Company sold out the 500 shares pledged to it, realizing $38,000 therefrom, and at the same time sold other securities pledged by Bonner & Co., sufficient, with the proceeds of the plaintiff’s stock, to pay all the loan made by it to Bonner & Co., and to leave a surplus of $989.59. But the trust company did aot sell Mr. Marlor’s $3,000 of Wabash bonds, nor the .400 shares of Bankers’ & Brokers’ Association stock. On January 5, 1878, the plaintiffs offered to pay to John Bonner & Co. the full amount of their loan, with interest, upon condition that their stock should be returned; but this, of course, Bonner & Co. refused to do. The plaintiffs then requested The Central Trust Company to, sell the other securities remaining in its hands, so as to increase the surplus in which the plaintiffs would be entitled to share, but this the trust company refused to do. This action was brought to compel the trust company to do this, so that the loss might be apportioned between the owners of all the securities originally pledged. . ‘ Thomas G. Shearman {Shearman & Sterling, attorneys), for plaintiffs. The plaintiffs are entitled to a sale of the securities. It is plainly inequitable that a pledgee, to whom several parcels of stock have been re-hypothecated, without authority, should select one or more of such stocks, sell them, to the destruction of the owner’s title, and, having thus satisfied his" own claim, hand over the remaining securities free of all incumbrances to certain favored parties. All must be treated alike; and, if the pledgee will not do this voluntarily, a court of equity will compel him to do so (Exp. Alston, L. R. 4 Ch. 168 ; Broadbent v. Barlow, 3 De Gex, F. & J. 570 ; Semmes v. Boykin, 27 Ga. 47; see Ingalls v. Morgan, 10 N. Y. 178; Glass v. Puller, 6 Bush, 346). Where a creditor, having the right to resort to two funds, has actually exercised his right and satisfied his claim by exhausting one only of those funds, any person having a subordinate interest in that fund, whether as owner or creditor, has the right to be subrogated to, and stand in the place of such creditor, and to enforce against the untouched fund the same rights which the senior creditor could have enforced against it, to the extent of the interest of such person in the exhausted fund (Story Eg. Jur. §§ 499, 562, 564; Galton v. Hancock, 2 Atk. 436 ; Clifton v. Burt, 1 P. Wms. 679, and note ; Cheesebrough v. Millard, 1 Johns. Ch. 409, 413 ; Clowes v. Dickenson, 5 Id. 235; Wilson v. Fielding, 2 Vern. 763 [see especially the decree in the note]; Haslewood v. Pope, 3 P. Wms. 322; Powell v. Robins, 7 Ves. 209; Alston v. Munford, 1 Brock. Marsh. 266 ; Gist v. Pressley, 2 Hill Ch. [S. C.] 318 ; Jones v. Zollicoffer, 2 Hawks. 623 ; Ramsey’s Appeal, 2 Watts, 228 ; Mosier’s Appeal, 56 Penn. St. 76; Exp. Alston, L. R. 4 Ch. 168). The plaintiffs are entitled to contribution on the ground of surety-ship. Their property and that of Mr. Marlor was hypothecated to secure the same debt; and this fact entitled them all to the rights of sureties against Bonner and against one another (See Vartie v. Underwood, 18 Barb. 561 ; Gahn v. Niemcewicz, 11 Wend. 312; 3 Paige, 614; Barnes v. Mott, 64 N. Y. 397). A surety, out of whose funds a creditor has obtained payment, is entitled to receive contribution from all his co sureties, so as to put them upon an equality, although they became sureties without any communication with, or knowledge of, each other, and without regard to the order of time in which they became sureties (Norton v. Coons, 3 Den. 130 ; aff’d, 6 N. Y. 33 ; Story Eq. Jur. § 492; Layer v. Nelson, 1 Vern. 456; Kemp v. Finden, 12 M. & W. 421 ; Deering v. Winchelsea, 1 Cox, 318 ; 2 Bos. & P. 270 ; Stirling v. Forrester, 3 Bligh, 575). This doctrine is not confined to sureties alone. It extends to all cases in which the property of one person is taken to satisfy an obligation which is equitably a burden upon the property of several persons. Thus, among tenants in common, one of whom had been obliged to pay a debt burdening the whole land (Fitzherbert Nat. Bren. 16, 338). So, if land was aliened to several parties, subject to a lien which one of them was compelled to satisfy (Barbert’s Case, 3 Coke, 12, 13). A very old instance was that of the prisage of wine. The king was entitled to one tun before the mast and one tun behind ; and accordingly, a writ of contribution accrued to the parties whose particular wine was taken. The king might take, by his prerogative, any two tuns of wine which he thought fit; but the owners of that wffne were never allowed to bear the burden alone. All the others had to contribute (See Deering v. Winchelsea, 1 Cox, 321; 2 B. & P. 270). So a specific legatee, whose legacy is taken in satisfaction of testator’s debts, is entitled to contribution from other specific legatees (Chase v. Lockerman, 11 Gill & J. 185; Snow v. Callum, 1 Dessaus, 543). So in the case of a devisee, whose land is taken for debt (Livingston v. Livingston, 3 Johns. Ch. 148; Rogers v. Rogers, 1 Paige, 88 ; Schermerhorn v. Barhydt, 9 Id. 28). The familiar rule of general average in maritime law is founded upon this same general principle ; and there is no more reason for refusing relief to the plaintiffs, simply because their property has been sold first, than there would be in holding that the owners of a cargo must see that it is thrown overboard in equal proportions, or be deprived of remedy. William H. Arnoux, for defendant Marlor. Thomas H. Hubbard, for the Trust Company. Charles M. Da Costa, for assignee of Bonner & Co. Compare Chamberlain v. Greenleaf, 4 Abb. New Cas. 178; Rich v. Boyce, 39 Md. 314. [MAJORITY — Van Vorst, J.] Van Vorst, J. The claim of the plaintiffs is reasonable and just, and, in arguing that the Central Trust Company, under the circumstances of this case, should have proceeded pari passu, in the application of the securities deposited with it by Bonner & Co., as collateral security to the loans made to them, so that what loss should be occasioned to the parties whose stock and bonds Bonner & Co. wrongfully pledged to it shall fall on them ratably, they contend only for what equity approves. Had they known of the rights and claims of the plaintiffs and Marlor, at the time they sold, they should have so proceeded. This is but an application of the principle of natural justice, which requires every one to exercise his rights in a way not to occasion loss to others, which might be avoided without inconvenience to himself. The principle contended for by the learned counsel for the plaintiff is fundamental in equity, and is well sustained by the numerous and well selected authorities which he has been careful to cite. The securities of the plaintiffs and the defendant Marlor, in the hands of the trust company, originally stood upon equal footing, and should be regarded equally by the company. The complete interest of one real owner should not be spared at the expense of the other. Neither by a partial election, or intentional discrimination on the part of the pledgee, shall either party be disappointed. Had the attention of the trust company been in season called to the rights of the parties claiming to own the stock and bonds, it would have been inequitable to proceed to sell the property of one exclusively, and satisfy its claims thereout, with an idea that it could in that way relieve the property of the other wholly from the burden of the loan made to Bonner & Co. That would be to throw the loss entirely on one party. But that it has, in this manner, without notice of the claims of the - real owners, proceeded to sell the securities of one of them, has not placed it beyond the power of this court to intervene, and, even now, order to be done what equity requires; It may be that the pledgees were under no duty, and would not have been originally justified to sell more of the securities than was sufficient to satisfy its claims, but that would not relieve the unsold security from the burden of contribution. I do not think the defendant Marlor should now be allowed to say, this “is a luclcy MV’ The Central Trust Company has satisfied its whole claim out of the plaintiff’s stock, and my property, although equally pledged, shall be free. The stock of the defendant Marlor is still in the hands of the trust company, and relief may yet be granted on principles applicable to marshaling assets (Aldrich v. Cooper, 8 Ves. 308; Exp. Alston, L. R. 4 Ch. 168; Story Eq. Jur. § 638; Broadbent v. Barlow, 3 De G., F. & J. 570 ; Cheeseborough v. Millard, 1 Johns. Ch. 409, 413). Plaintiffs are also, as is well urged by their counsel, entitled to relief arising from the relation of surety-ship between them and the defendant Marlor, for through their stock and bonds pledged by Bonner <& Co. to the trust company, they were to that extent, in substance, sureties for the debt, and are interested upon conditions, with rights of subrogation with all its incidents (Delaware & Hudson Canal Company’s Appeal, 2 Wright, 512, 516; see also Barnes v. Mott, 64 N. Y. 397, which was applied in Green v. Milbank, 3 Abb. New Cas. 138, 155). The rule of general average, in maritime law, is founded upon the same general principle. The plaintiffs, being in ignorance as to with whom Bonner & Co. had pledged their stock, were unable to give notice in season to prevent a sale, or adequately protect themselves, but that does not defeat their right of subrogation, and to subject the defendant’s bonds, even now, to their just proportion of a common burden. Nor is it a good answer to plaintiffs’ claim, that Bonner & Co. had wrongfully pledged the defendant’s bonds; he had done the same with the plaintiffs’ stock. The title of the trust company, who was a bona fide holder, attached to all the securities alike, and it is through such legal title and claim, as it originally existed, that the plaintiffs are entitled to relief. And it must be adjudged that the Wabash bonds, and the Bankers’ and Brokers’ Association stock, still in the hands of the trust company, should be sold, and that the proceeds should be divided between the plaintiffs and the defendant Marlor, according to their interests, and in such proportions as is equitable, with reference to the amount realized on the sale of the plaintiffs’ stock, which has already been made, and the total proceeds of the sale now ordered to be made. Under the facts of the case, I do not think that the assignees of Bonner & Co. are entitled to any of the proceeds. The stock and bonds did not belong to that bankrupt firm, and were pledged in fraud of the rights of the true owners. The claims of the Brokers’ and Bankers’ Association, who are not parties to the action, cannot be now determined, and if they have any claim or right, they are not to be prejudiced by the judgment to be entered herein.,: '