Perkins v. Meyer

Desmond, J. To settle this action (for fraudulent conspiracy) which had been brought, in 1939, by plaintiff’s testator-Schenck against defendants and was then pending untried, a written agreement was entered into in 1940, whereby defendants paid plaintiff’s testator $20,000, and promised to pay him $180,000 more in installments. As security for those deferred payments, defendants agreed to, and did, transfer to a trustee, title to, and possession of, shares of stock and other property belonging to defendants. The trustee chosen for this purpose by the parties was one of the attorneys then representing defendants. The agreement of compromise provided that, on default by defendants in making any of the deferred payments, the trustee was, upon request of the creditor (plaintiff’s testator Schenck), empowered to “ liquidate any or all of the collateral ”. Defendants in 1942, defaulted as to some of their promised payments. The creditor Schenck thereupon requested a sale of the securities, and the trustee gave notice of, and conducted, through an auctioneer, a public sale thereof. At that vendue creditor Schenck was the highest bidder, and so he purchased all the collateral and gave credit to defendants, on the indebtedness, for the amount of his bid. After such credit had been so applied, there was a balance unpaid on the settlement price, and plaintiff moved for judgment therefor, this being pursuant to the earlier — 143 — settlement pact, which provided for entry of judgment for such balance, on default. Defendants, however, pleaded by way of counterclaim in an amended answer they then filed, and testified, that Schenck’s purchase of the pledged securities, at the auction, was subject to an oral agreement made just before the sale, by the terms of which, according to defendants, Sehneck would buy in the property but would give defendants “ a right to it ”, and credit them, not with the amount of Ms bid, but with the amount for which he should later resell the property. The trial court, dismissing the counterclaim as matter of law, refused to submit to the jury the question of fact as to whether such an oral promise was actually made by Schenck. There was no statement by the court as to its precise ground for dismissal, but the motion therefor had urged that the alleged oral agreement, enforcement of which was prayed for in the counterclaim, was unenforcible because of lack of consideration, because of vagueness and incompleteness, and for other reasons. The Appellate Division (with a minor modification not here contested) concurred in that disposition. Appellants say that there was consideration for Schenek’s alleged promise, made on the day of the auction sale. As appellants reason it out, creditor Schenck, as a pledgee, was forbidden by law to be the purchaser at the sale of the pledged property without the consent of the pledgeors. Therefore, say defendants, the permission given by them, as pledgeors, to Schenck, to bid and buy, constituted sufficient consideration for the agreement, which defendants say Schenck made, that he would hold the stock for a later and better turnover for appellants’ benefit. But that argument rests on the assumption that this was a simple pledge or pawn from defendants to the creditor Schenck. It takes no account of the presence in the picture of a trustee, chosen by the parties and given title and possession of the collateral, with obligations to hold and protect it and power and duty to sell it on default. The transaction was, of course, a pledge. Defendants were the pledgeors and Schenck the pledgee. But, by agreement and in fact, there was a tMrd party: “ the holder of the pledge in trust for the purpose ” of the pledge (Union Ins. Co. v. Central Trust Co. 157 N. Y. 633. 639). — 144 — That there was such a third party (call him “ trustee ” or “ pledgeholder ” or “ agent ” or what you will) makes all the difference as to whether or not Schenck had a clear right of his own, and not by leave of defendants, to buy in at the auction sale. When there is such a trustee, the law which disqualifies a pledgee from being the vendee, has no application. Since the prohibition against a pledgee buying is based on a trust relationship to the pledgeor (Toplits v. Bauer, 161 N. Y. 325, 332), the prohibition does not exist when a third party is constituted a trustee by the parties. The leading case is Easton v. German-American Bank (127 U. S. 532). That decision, in plainest terms, says that a creditor, for whose benefit a third party holds pledged property as trustee, may purchase the pawn at a sale held by the trustee under the terms of the trust. The Supreme Court, in the Easton case (supra), first set forth (see pp. 536, 537) the general rule that, where a creditor is a direct pledgee and himself sells the property pledged, he, being the vendor, cannot be the vendee also. The Supreme Court noted that in such a simple pledge relationship the pledgee-creditor “ is in the position of a trustee to sell, and is by a familiar maxim of equity forbidden to purchase for his own use at his own sale.” However, the Supreme Court went on to say (p. 538) that it was “ very plain ” that these familiar principles did not apply in the Easton case where the pledged res (just as in our case) “ was conveyed by the debtor, not directly to the creditor, but to a stranger.” Pointing out that, in the Easton case (just as in our case) “ the sale was made under the direction and control of the trustee ” the Supreme Court held that “ as the creditors who held the obligations of the debtors were not themselves trustees, there was nothing, either at law or in equity, to prevent their being bidders and becoming buyers at the trustee’s sale.” “ In reference to that sale ” the court said further, “ they occupied no position towards the debtor of trust or confidence. They were charged in respect to it with no duty whatever. They had an interest in it that the property should produce enough to satisfy the debts which it had been given to secure. Beyond that they had neither interest nor duty, and in their own interest the creditors had a right to bid so as to prevent the — 145 — property from being sacrificed at the sale below its value in order that it might be made to produce the largest amount towards payment of the debt ” (127 U. S., p. 538). It can make no difference that, in the Easton case {supra), the debt to the bank was, indirectly, secured by a deed of trust of real property, which deed ran to the third party as trustee. The Supreme Court treated the Easton transaction as a pledge and called it a pledge. In its opinion the court stated the general rule as to simple pledges: that the pledgee-creditor cannot be the vendee, and then held that this rule did not apply to a pledge where title and possession went to a third party and not to the creditor or creditors. Similarly, the Circuit Court opinion of Judge Wallace, in Easton v. German-American Bank (24 F. 523), treats the case as one controlled by the law of pledge. Judge Wallace wrote (pp. 526-527): “ The reason why a pledgee cannot ordinarily acquire a valid title as against the pledgeor by a purchase of the property pledged, although the sale is regularly and publicly made, unless the pledgeor assents, (Middlesex Bank v. Minot, 4 Metc. 325; Bryan v. Baldwin, 52 N. Y. 232) is because he cannot be at the same time a vendor and a purchaser of the property. The defendant here was not the vendor, but occupied the position of a creditor, or of a cestui que trust, seeking to realize as much as might be practicable out of a fund by which its debt was secured. The defendant and the pledgeors stood upon terms of complete equality.” It is true that, in the Easton case (supra), the underlying (but not direct) security to the bank was real property, but the case has everywhere been treated and regarded as a controlling authority on the law of pledges, and so applied in many decisions including Morris v. Windsor Trust Co. (213 N. Y. 27) and First Bank of Nostasulga v. Jones (156 App. Div. 277, 167 App. Div. 929, affd. 222 N. Y. 579). A case which cites Easton v. German-American Bank (supra) in this connection, and states well its rule, is Monroe Bros. & Co. v. Fuchtler (121 N. C. 101, 104) where the court said: “ He [the trustee] is the agent of both the maker of the deed and the cestui que trust. * * * The cestui que trust has a right to buy at the trust sale.” That the rationale of the rule, which disqualifies a true pledgee from buying, is not special or peculiar to either personal or real property, appears from many of the authorities. Probably the — 146 — first statement in this court that a pledgee may not buy without the pledgeor’s permission is in Bryan v. Baldwin (52 N. Y. 232, 235). That very case says that the reason why a true pledgee may not buy is because he himself is exposing the pledged thing for sale. The citation by this court, in Bryan v. Baldwin (supra), of Torrey v. Bank of Orleans (9 Paige 649, affd. 7 Hill 260) and Hawley v. Cramer (4 Cow. 717, 736) shows that the disability of a true pledgee is only that which befalls any person who, in any character, occupies a position of trust or confidence in reference to the subject of the sale. It is significant that Hawley v. Cramer (supra) and Torrey v. Bank of Orleans (supra), cited in Bryan v. Baldwin as the bases for the rule against pledgee purchases, are both real property cases. It follows from all the above that, when the trustee conducted this auction sale, the creditor Schenck had as much right as anyone else to be a bidder, and needed no permission from anyone. Thus, the debtor’s purported permission was meaningless and could not form a consideration for any alleged promise by the creditor Schenck that, after he would buy, he would continue to hold the property for the benefit of th§ debtor. And even if the debtor’s consent to a purchase by the creditor, under these circumstances, could somehow amount to a consideration for the creditor’s promise to hold the stock, that promise by the creditor, as testified to here by the debtor, was so vague and so lacking in essential terms, that no court could find a way to enforce it. The farthest that any testimony for defendants goes in this connection is to say that the creditor’s attorney promised: “‘we will credit Joe [defendant Joseph Meyer, Jr.] with the amount that we actually sell the securities for, after they come into our possession.’ ” Other testimony for defendants was that this lawyer said: “ ‘ We do not want to leave it in the name of the trustee because attachment may be made of your [Meyer’s] interest in the stock in the hands of the trustee. We want to get the property out of the hands of the trustee. We will bid it in, give you a right on it and credit you not with the amount of our bid but the amount for which the stock is actually sold by us.’ ” There was nothing said, in that alleged promise by Schenck’s lawyer, as to when, how, at what price, or in what state of the market Schenck would resell. Since no court can write a new contract, or fill iu the blank spaces, for — 147 — these people, we are left with an alleged agreement which is ineffective for any purpose since it lacks the u how, where and when ” needed to make it a full and understandable promise. Appellants attempt to answer this by claiming that, even after the alleged agreement was made on the day of the auction sale, and even after Schenck’s purchase at that sale, Schenck was still a pledgee. So, they say, there was no need of any specification as to where, when and how* he could resell. But that argument assumes that Schenck’s purchase at the auction sale left him still in the position of a pledgee, which is directly contrary to appellants ’ own theory and testimony, above referred to, that they themselves consented that Schenck become the purchaser (see Bryan v. Baldwin, 52 N. Y. 232, 235-236, supra). A pledgee, who with the pledgeor’s permission, buys the collateral, is no longer a pledgee, but a true and actual owner. Perhaps Schenck and Meyer could have agreed that after the sale Schenck would still be a pledgee, but there is no claim or testimony here of any such arrangement. Appellants are caught in the meshes of their own theory. Having for one purpose claimed that they had agreed and arranged that Schenck would be the purchaser, they then claim that Schenck was not a purchaser at all but remained a pledgee, even after the sale, because he had no right to be the purchaser. That is a self-defeating argument. The counterclaim of appellants here does not seek to set aside or reform the auction-day agreement (see Bryan v. Baldwin, supra, p. 235; Roach v. Duckworth, 95 N. Y. 391, 401-402), but aims to enforce it. If it is, as we hold, essentially unenforcible by its own terms, appellants can have no relief. The counterclaim seeks damages for the breach, by plaintiff’s testator, of a promise; but the promise, as we have seen, is, on its face, too vague and incomplete for enforcement. Eespondent, as against the counterclaim, made other attacks which need not be dealt with here. We are convinced that the result of the auction sale made plaintiff’s testator the absolute and unconditional owner of the collateralled stocks, without any obligation in respect thereto except to credit to defendants’ account (as plaintiff’s testator did) the price he had bid at the auction sale. The judgment should be affirmed, with costs.