A creditor whose debt is secured by a deed of trust of real
estate to a third party as trustee may purchase the property at a
sale by the trustee under the terms of the trust, and if he credits
the debtor on the mortgage debt with the amount of the purchase
money, it is in fact and in law a money payment to the use and
benefit of the debtor.
The plaintiff in error acquired by the purchase from the
assignee in bankruptcy no interest either in the debt of the
bankrupt to the defendant in error or in the real estate conveyed
in trust to secure it.
Page 127 U. S. 533
The Court stated the case as follows:
On April 14, 1875, the firm of Bowen Brothers, of Chicago,
borrowed of the German-American Bank of New York the sum of
$27,500, for which they gave their promissory notes, payable,
respectively, in two, three, and four months from date. As
collateral security for the payment of the loan, they deposited
with the bank forty bonds executed by themselves, payable to bearer
five years from date, with interest semiannually, of the
denomination of $1,000 each, dated April l, 1873, the payment of
which was secured by a deed of trust made by the individual members
of the firm to George W. Smith, conveying to him certain real
estate therein described, situated in Cook County, Illinois. By the
terms of the written agreement under which the collateral security
was deposited, the bank was authorized, on nonpayment of the notes
at maturity, to sell the bonds either at the board of brokers at
public auction or at private sale, and without notice, and to apply
the proceeds of the sale to the payment thereof. These collateral
bonds thus deposited were part of a series of one hundred of like
tenor and amount, all secured by the deed of trust to Smith. That
deed of trust provided that in case of default in the payment of
the bonds or interest, it should be lawful for the trustee, on the
application of the holder of any of the bonds, to sell the real
estate or any part thereof, and all the right and equity of
redemption of the grantors therein at public vendue to the highest
bidder for cash, and upon making such sale to execute and deliver a
deed of conveyance in fee of the premises sold. In January, 1877,
the trustee in the trust deed, upon the application of the State
Savings Institution of Chicago, the holder of thirty-two of the
bonds upon which there had been a default for nonpayment of
interest, sold the real estate in strict conformity with the terms
of the power in the trust deed, after due notice at public auction,
to Wirt Dexter for the sum of $50,000, and conveyed the premises to
the purchaser in pursuance of the same. Dexter, in making the bid
and purchase of the premises at public auction, acted as agent for
the holders of all the bonds,
Page 127 U. S. 534
including the German-American Bank, he having been authorized by
them to bid for and purchase the property for them jointly.
Thereafter he conveyed an undivided forty one-hundredths of the
property purchased by him, and in a partition suit that interest in
the real estate was set off, to the German American Bank in
severalty. Dexter paid no money in bidding in the property except
the actual costs of the sale, but the trustee credited upon the
bonds held by the German-American Bank forty one-hundredths of the
amount of the bid, being $472 upon each bond, and the whole sum,
amounting to $18,880, was endorsed as a payment on the three notes.
The German-American Bank continued to hold title to the real estate
conveyed to it by Dexter until February 8, 1881, when, in
consideration of $56,000, the bank conveyed the same in fee to John
C. Dore, and thereafter, in February, 1882, also delivered to Dore
the forty bonds then in its possession with the credits endorsed
thereon. These bonds were delivered to Dore in accordance with an
agreement dated February 19, 1881, which recited that Dore "desires
to obtain possession and ownership of said forty bonds in
connection with the purchase of said property from said bank."
In the meantime, the members of the firm of Bowen Brothers, on
November 10, 1877, were adjudged bankrupts on a petition filed on
June 2 of that year, and during 1878 they severally received their
final discharges in bankruptcy. On April 21, 1880, Robert E.
Jenkins, assignee in bankruptcy of the Bowen Brothers, by an order
of the court sold all his right, title, interest, and claim as
assignee, and all right, title, interest, and claim of the
bankrupts in and to the land described in the trust deed to Carl F.
Hermann for the sum of $840, and afterwards conveyed the same to
him by deed dated and acknowledged May 13, 1880. The assignee also
on April 21, 1880, sold to the appellant, Charles L. Easton, for
the sum of $5, the claim against the German-American Bank of New
York "for interest in all collaterals pledged with said bank by
said bankrupts or either of them," and by a deed dated May 15,
1880, assigned the same by the same description to him.
Page 127 U. S. 535
It was not denied that John C. Dore purchased the land from the
German-American Bank with knowledge of the previous conveyances by
the assignee in bankruptcy, to Hermann and to Charles L.
Easton.
On February 24, 1881, James H. Easton, a brother of the
appellant, having succeeded to the title of Hermann to the land in
question, filed a bill in equity in the Circuit Court of the United
States for the Northern District of Illinois against the
German-American Bank, to which, by an amended and supplemental
bill, John C. Dore was also made a defendant, in which were set
forth substantially the facts stated in the present bill of
complaint, and praying for an account against the German-American
Bank, and that the complainant might be permitted to redeem the
land on payment of what might be found due on the original loan to
Bowen Brothers. It is admitted that this suit was brought in the
name of James H. Easton, for the benefit of Josiah H. Helmer, the
latter having previously acquired the title of Hermann and conveyed
it to James H. Easton in order to enable the suit to be brought in
the circuit court of the United States. Helmer himself had
previously brought an action of ejectment to recover possession of
the land. The ejectment suit was abandoned when the bill in equity
was filed, and pending the bill, in September, 1883, before the
commencement of the present suit, a settlement was made between
Helmer and Dore whereby, in consideration of a certain sum paid by
Dore, both Helmer and James H. Easton, the latter at Helmer's
request, by separate deeds released all their right, title, and
interest in and to the lands in question to one Berger for the
benefit of Dore.
On January 27, 1884, the present bill in equity was filed,
wherein Charles L. Easton, claiming title by virtue of the deed of
assignment made to him by Jenkins as assignee in bankruptcy of the
Bowen Brothers, seeks to hold the German-American Bank accountable
to him for the sum bf $56,000, as the proceeds of the collaterals
held by it realized from the sale of the real estate conveyed to
the bank by Dexter, and a decree for any sum found due to it by
reason thereof after payment from the said proceeds of the original
indebtedness of Bowen Brothers to the bank.
Page 127 U. S. 536
The case was heard in the circuit court upon the pleadings and
proofs disclosing the state of facts already recited, when a decree
was rendered dismissing the bill for want of equity. From this
decree the present appeal has been taken.
MR. JUSTICE MATTHEWS, after stating the facts as above,
delivered the opinion of the Court.
The right of the complainant to the relief prayed for is based
upon the contention that the German-American Bank originally held
the bonds secured by the deed of trust as a pledge given by way of
security for the repayment of the loan to Bowen Brothers; that it
has never sold that pledge, in pursuance of the terms of the
agreement between the parties, and as required by law; that the
land itself, the title to which was conveyed by Bowen Brothers to
Smith in trust, was a mere incident to the pledge and a part of it;
that notwithstanding the form of a sale under the trust deed by the
trustee to Dexter, there was no sale in fact and in law the
conveyance by Dexter to the bank operated only to convey the title
to the bank in the same capacity in which it held the bonds as
collateral -- that is, as trustee for the debtors; that the
subsequent sale by the bank to Dore was the first effective
conveyance of an absolute title, but was made by the bank in its
capacity as trustee for the Bowens, and that, as such, the
complainant, having succeeded to the Bowens' rights, is entitled to
require the bank to account for its proceeds.
Where personal property is pledged, the pledgee acquires the
legal title and the possession. In some cases, it is true, it may
remain in the apparent possession of the pledgeor, but if so it can
be only where the pledgeor holds as agent of the pledgee. By virtue
of the pledge, the pledgee has the right by law, on the default of
the pledgeor, to sell the property pledged in satisfaction of the
pledgeor's obligation. As in that
Page 127 U. S. 537
transaction the pledgee is the vendor, he cannot also be the
vendee. In reference to the pledgee and to the pledgeor, he
occupies a fiduciary relation, by virtue of which it becomes his
duty to exercise his right of sale for the benefit of the pledgeor.
He 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.
The same principle applies with a like result where real estate
is conveyed by a debtor directly to a creditor as security for the
payment of an obligation, with a power to sell in case of default.
There, the creditor is also a trustee to sell, and cannot purchase
the property at his own sale for his own use.
In the present case, the bonds of the Bowen Brothers, secured by
the deed of trust, were pledged to the German-American Bank as
security for the repayment of the loan made to the Bowen Brothers,
but those bonds have not in fact been sold, unless the transfer of
them by the bank to Dore be considered a sale. It was not such,
however, in point of fact or of law. Nothing was paid for them, and
they were delivered to Dore merely as muniments of title in
connection with his purchase of the real estate. At that time, they
were of no value, for they were merely the personal obligations of
the Bowen Brothers, from which they had been released by the
discharge in bankruptcy. No suit could have been maintained upon
them as against the only obligors by whose discharge in bankruptcy
they had lost their character as well as their value as
property.
The equity of the complainant, therefore, if he have any, must
be considered as transferred from the bonds themselves, viewed as
instruments and obligations, to the money which had been received
on account of them by virtue of the sale of the real estate by the
bank to Dore. Whether the complainant can now assert any equitable
interest in that money depends in the first place on the nature of
the title which the bank acquired by the conveyance to it from
Dexter, and whether the principles of a pledge, and of a trust
arising thereon, apply to the real estate conveyed by the Bowens to
Smith as a trustee to secure the payment of the bonds.
Page 127 U. S. 538
It is very plain, we think, that these principles do not apply.
The land in question was conveyed by the debtor not directly to the
creditor, but to a stranger. That stranger, by virtue of the
conveyance, held the legal title in trust for the purpose of sale
according to the power contained in it. That power he executed in
strict accordance with its terms. A default has been made by the
debtor, and at the request of a part of the creditors, he was
required to sell the property at public auction to the highest
bidder, without limit or condition, in order that the proceeds of
the sale might be applied to the payment of the debt, to secure
which the land had been conveyed in trust. The sale was made under
the direction and control of the trustee, but, 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, they occupied no position toward 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 property from being sacrificed at the sale below its
value, in order that it might be made to produce the largest amount
toward payment of the debt.
The relation of a creditor secured by such a deed of trust to a
sale made under a power given to a stranger as a power given to a
stranger as trustee does not differ from that of a mortgagee of
real estate sold under judicial proceedings for foreclosure by a
decree of a court of equity. At such a sale, nothing is more common
than for the mortgagee to become the purchaser, and it is as
beneficial to the debtor as to himself that he should be permitted
to enhance the competition at such a sale in order to protect his
own interests. In that respect, his own interest coincides with
that of his debtor, as it is for their mutual benefit that the
property should not be sacrificed so as to leave any part of the
debt unpaid.
It is argued, however, that in the present instance, the
sale
Page 127 U. S. 539
to Dexter was a sale only in form, and not in fact, because no
money passed. This, however, is an error, because the whole amount
bid by Dexter at the sale, which was the consideration for the
conveyance to him by the trustee, was at once credited by the
principal creditors, for whom he was acting as agent, as a credit
of cash upon the overdue obligations of the debtor. In fact and in
law, it was a payment of money to the use and benefit of the
debtors in pursuance of their authority.
In addition to this, there is another ground which equally
supports the decree below. As already recited, the assignee in
bankruptcy, in pursuance of an order of the court, sold and
conveyed to Hermann all the interest which he, as assignee, and the
Bowens, as bankrupts, had in and to the real estate in question,
and by subsequent conveyances, whatever title, if any, thereby
passed has become vested in Dore for his use. All that was conveyed
by the assignee to Charles L. Easton, the complainant in this suit,
was the interest of the assignee and of the bankrupts "in all
collaterals pledged with said bank by said bankrupts, or either of
them." If this can be considered as the conveyance of any interest
in the real estate, it was ineffectual and void, because that
interest had been previously conveyed by the same grantor to
Hermann. If it is limited to the bonds of the Bowen Brothers
secured by the deed of trust, it is equally ineffective, because
there was nothing to convey. These bonds were the mere personal
obligations of the bankrupts themselves, in which neither they nor
their assignee had any right of property and which had become
extinguished as obligations in the hands of anyone by the
bankrupts' certificate of discharge.
For these reasons, the decree of the circuit court is
Affirmed.