Burnes v. New Mineral Fertilizer Co.

Loring, J. The defendants’ first contention in this case is that where a negotiable security is deposited as collateral for a loan made in violation of the small loans act (St. 1911, c. 727, amended by St. 1912, c. 675), not only is the deposit of the security void, but the security itself, by force of that act, becomes a nullity, so that in case it is afterwards separated from the void loan and bought in good faith by an innocent purchaser for value, no recovery can be had upon it. They rely in this connection upon the cases in which it was held under the usury acts that no recovery could be had on notes made void by these acts; even when they are in the hands of bona fide purchasers for value; as to which see Whitten v. Hayden, 7 Allen, 407, and cases there cited. The history of these statutes is given in Kendall v. Robertson, 12 Cush. 156. But four years before the usury laws were repealed, this policy of the Commonwealth was changed, and it was enacted by St. 1863, c. 242, that notes given for a loan on which usurious interest had been charged should be valid in the hands of a bona fide purchaser for value. In the light of the policy finally adopted with respect to notes [303] founded upon usurious interest, we come to the true interpretation of the small loans act. It is apparent that there is nothing in that act which makes void not only notes given in violation of the act, but securities deposited as collateral for such notes. The language of the act (St. 1911, c. 727, § 17, as amended by St. 1912, c. 675, § 5) is: “Any loan made or note purchased, or endorsement or guarantee furnished by an unlicensed person, partnership, corporation or association in violation of this act shall be void.” In Van Schaack v. Stafford, 12 Pick. 565, Dunscomb v. Bunker, 2 Met. 8, and in Harrison v. Hannel, 5 Taunt. 780, the action was brought by the person to whom the usurious loan had been made. In such a case the loan itself is void, and nothing being due on the debt for which the collateral was deposited as security, no recovery can be had on the collateral. The more difficult question in the case is whether the plaintiff can recover the full amount of the note or is restricted in his recovery on it to the amount which could have been collected by the Winnisimmet Trust, Inc. It appears that the Winnisimmet Trust, Inc., was a bona fide purchaser for value. But it also appears that full information of all the facts was given to the plaintiff at the sale when he bought the note. Under these circumstances the plaintiff must claim under the title of the Winnisimmet Trust (R. L. c. 73, § 75). By R. L. c. 73, § 44, the Winnisimmet Trust was “a holder for value to the extent of . . . [its] lien.” This provision of R. L. c. 73, § 44, is a codification of the rule which had been adopted in Massachusetts before the negotiable instruments act was passed. The principle on which that rule was founded is that in such a case the bona fide pledgee should recover nothing more than the amount due to it (the pledgee), because, if it recovers more, it would hold the surplus for the pledgor; and as the note in the hands of the pledgor is void, all that ought to be recovered by the pledgee is the amount due on the loan made by it. Stoddard v. Kimball, 6 Cush. 469. Fisher v. Fisher, 98 Mass. 303. Chicopee Bank v. Chapin, 8 Met. 40. The defendants have contended that inasmuch as the plaintiff in this action recovers not on the strength of his own title but on the strength of the title of the pledgee, he cannot recover more [304] than the pledgee could have recovered if the action had been brought by it. The pledgee had a right to look to the collateral note for payment of the loan made on the faith of it. It had the right to realize upon that collateral in either one of two ways, namely, by suing on the note deposited as collateral, or by selling the collateral note. If the pledgee sued on the collateral note, all that it could recover was the amount due it, because any surplus would belong to the pledgor. But (as we have said) the pledgee also had the right to realize on the collateral by selling it. If he sold it, he had the right in selling it to get payment in full for his loan even if the collateral sold for less than par. If the collateral sold for more than enough to pay the loan due the pledgee, the surplus would go not to the pledgor, who had no right to recover on the note, but to the parties liable on the note. Of the cases which have come to our attention, Trust Estate of Woods, Weeks & Co. 52 Md. 520, and Peacock v. Phillips, 155 Ill. App. 514, are the nearest to the case at bar. But the collateral sold in both those cases was the pledgor’s own notes. Moreover in Trust Estate of Woods, Weeks & Co. ubi supra, the pledgor had become insolvent and the question of double proof of the same debt in competition with other creditors arose, as to which see Third National Bank of Boston v. Eastern Railroad, 122 Mass. 240, and Beals v. Mayher, 174 Mass. 470. But that was not the case in Peacock v. Phillips, ubi supra, which was decided, to some extent at least, on the authority of Third National Bank of Boston v. Eastern Railroad, ubi supra, and the dissenting opinion in Trust Estate of Woods, Weeks & Co. ubi supra. However it may be, when the collateral sold is the note of the pledgor, we are of opinion that when notes of third persons are taken as collateral in good faith by the pledgee he can realize his pledge by a sale, and that the purchaser at such sale, buying under the pledgee’s rights, can enforce the face amount of the notes although he bought for less than par. The purpose of a margin in the amount of the collateral is to meet such a contingency. If in the case at bar a surplus was paid by the plaintiff to the Winnisimmet Trust, Inc., the defendants are entitled to it, and on application by them to the Winnisimmet Trust they can obtain [305] it. If they had wished to do so, they could have redeemed the note while it was in the hands of the Winnisimmet Trust by paying the amount lent by it on the faith of the note, in place of attempting to protect their rights by giving notice at the sale made by the trust company. It follows that the plaintiff is entitled to recover the face amount of the note. By the terms of the report judgment for the defendants is reversed and judgment must be entered for the plaintiff for the full amount of the note with interest from March 27, 1913; and it is So ordered.