1. Possession is of the essence of a pledge, and without it, no
privilege can exist as against third persons.
2. This doctrine is in accordance with both the common and the
civil law, the Code Napoleon (art. 2076), and the Civil Code of
Louisiana (art. 3162).
3. The thing pledged may be in the temporary possession of the
pledgeor as special bailee without defeating the legal possession
of the pledges, but where it has never been out of the pledgeor's
actual possession, and has always been subject to his disposal by
way of collection, sale, substitution, or exchange, no pledge or
privilege exists as against third persons.
4. Though in such a case the pledgee, by a real action against
the pledgeor or his heirs, may, under the law of Louisiana, recover
possession of the thing, he cannot sustain a privilege thereon as
against creditors or against a bank receiver, or an assignee in
bankruptcy who represents them.
5. Equity will not regard a thing as done which has not been
done when it would injure third parties who have sustained
detriment and acquired rights by what has been done.
6. Where it was agreed that a bank should deposit bills and
notes with its president and his partner by way of pledge to secure
a loan made by a third party, and the president delivers them back
to the bank officers for collection, with power to substitute other
securities therefor, it is not such a delivery and possession as is
necessary to create a privilege by the law of Louisiana.
The National New Orleans Banking Association, an organization
formed under the National Banking Act of 1864, failed and suspended
payment on the 4th of October, 1873, and on the 27th of that month
was placed in the hands of a receiver under the fiftieth section of
the act. At or about the time of the failure, Charles Cavaroc, the
president of the bank, took therefrom certain bills and notes to
the amount of $325,011.26 and delivered the same to his firm of C.
Cavaroc & Son, who claimed to hold them as agents for the
Societe de Credit Mobilier of Paris, by way of pledge to secure
said society for certain acceptances of bills drawn by the bank in
July previous. The bill in this case was filed by the receiver to
recover possession of said securities, alleging that they were
delivered by the bank to Cavaroc & Son in contemplation of the
insolvency of the bank, not by way of pledge, but with a view to
give a preference to Cavaroc & Son and the Credit Mobilier over
other creditors of the bank,
Page 96 U. S. 468
contrary to the provisions of the fifty-second section of the
banking act. The defendants, Cavaroc & Son and the Credit
Mobilier, by their several answers, deny that the securities were
delivered by way of preference in contemplation of the insolvency
of the bank and insist that they were actually pledged to the
society by virtue of a distinct agreement, as a consideration and
security for the acceptance by if of bills drawn by the bank to the
amount of one million francs, which bills were drawn in pursuance
of said agreement and were negotiated by the bank for over
$218,000, and were duly accepted by the society upon the faith of
the pledged securities. The answers aver that at the time of this
transaction, the bank was in good credit and standing.
The parties having gone into proofs, the following facts were
shown:
From May, 1873, until the time of its failure, the bank was in a
weak financial condition and constantly becoming weaker. The
cashier testified that on the 31st of May, it had hardly any funds
to meet current checks, whilst the amount due to depositors was
$680,775. A deposit of $25,000 was opportunely made by a customer
on that day, but the president, Cavaroc, was so apprehensive of
immediate suspension that he refused to let it be used, telling the
paying teller that if anything should happen, he did not want the
depositor to lose this money. By getting temporary relief from the
other banks of the city and from the New Orleans Insurance
Association and other large loans, it kept its doors open until the
4th of October, though, in connection with most of the other banks
of New Orleans, it ceased, from and after the 24th of September, to
pay cash, except for very small amounts, paying only in
clearing-house certificates, which it obtained by depositing
collaterals with the trustees of the clearing-house. Although it
held notes and bills receivable amounting to about a million of
dollars, a large portion of these were comparatively worthless,
being either protested or renewed at maturity, and the makers
constantly failing, and all of them of any value being pledged or
agreed to be pledged for its various loans. Although this condition
of the bank was not generally known, and presumably unknown to the
Credit Mobilier, yet suspicion
Page 96 U. S. 469
of its solvency began to be entertained by many of the
businessmen of New Orleans as early as June or July, and its stock
became almost totally unsalable in the market.
In the early part of July, 1873, Charles Cavaroc, Jr., a member
of the New Orleans firm of C. Cavaroc & Son, being in Paris on
behalf of the New Orleans National Banking Association, entered
into negotiation with the Credit Mobilier for procuring the
acceptance of the latter for the accommodation of the bank, and on
the 11th and 12th of July the said negotiation was concluded in the
form of a letter addressed by Cavaroc to the society, and of an
answer thereto by the latter. The following are the material parts
of this correspondence. Cavaroc, in his letter dated July 11, 1873,
says:
"The verbal agreements entered into between us relative to this
operation can, we think, be thus resumed:"
"In order to benefit by the difference in the rates of exchange
between the summer months and end of the year time when the large
shipments commence, the Society of the Credit Mobilier authorizes
the New Orleans National Banking Association to draw upon it, and
binds itself to accept these drafts at ninety days, up to 1,000,000
francs."
"The drafts made under these conditions shall be renewable under
the same conditions, but it is expressly specified that, ten days
before maturity, the Society of the Credit Mobilier shall be
covered by Mr. Cavaroc, president, to the amount of the payments to
be made."
"The funds realized from these emissions shall be used by the
bank against guaranties and securities of the first class, which
shall be deposited by the bank with the firm of Messrs. Cavaroc
& Son, which shall be the depository thereof, and advise the
Credit Mobilier of such deposit."
"The bank shall guarantee the investment of these sums, and the
interest shall be carried to the credit of the joint account at the
rate of seven percent per annum."
"This account shall in no manner allow any commission or
privileged charge on either side -- there shall figure only
brokerage, stamps, and diverse charges really and honestly incurred
by either side."
"The accounts shall be stated at the closing of each
operation."
"Profit and loss shall be equally divided between the Credit
Mobilier and the New Orleans National Banking Association. "
Page 96 U. S. 470
The answer of the society, dated on the 12th of July, 1873,
repeats this contract and accepts its terms.
During the negotiation, on the 11th of July, Cavaroc and the
Credit Mobilier, respectively, dispatched the following successive
telegrams to the bank in New Orleans:
"1. Bank exchange one million, ninety days' sight, Societe de
Credit Mobilier, giving best securities deposited with house."
"[Signed] CAVAROC"
"2. Defer drawing; the agreement is not yet completed."
"[Signed] CAVAROC"
"3. Draw bank one million, ninety days' sight, Credit Mobilier
accepting our guarantee."
"[Signed] CAVAROC"
In pursuance of these advices, on the 12th of July, the bank
drew its bills on the Credit Mobilier to the aggregate amount of
one million francs, and negotiated them through Schuchardt &
Co., of New York, realizing therefrom $218,454.34. The bills were
accepted by the society in due course and were afterwards paid by
it, no funds being provided by the bank for that purpose.
The answers allege that in this transaction Cavaroc & Son
acted as the agents of both parties. The answers further allege
that the securities in question were delivered by the bank to
Cavaroc & Son, for the Credit Mobilier, in pursuance of the
agreement; that a portion thereof, to the nominal amount of
$220,021.41, a list of which is contained in a schedule annexed to
the answer of the society, marked "Exhibit B," were delivered on
the day the drafts were drawn, to-wit, July 12, 1873, and that
these not being deemed sufficient, another deposit, representing
about $100,000, was made a few days afterwards; that some portion
of these securities coming to maturity and being paid, Cavaroc
& Son allowed the bank to receive the cash paid thereon, upon
other securities being given equal thereto in lieu thereof.
It was proved that the securities were delivered, or pretended
to be delivered, as stated, but the evidence as to the time and
manner of the delivery, and the manner in which
Page 96 U. S. 471
the securities were afterwards treated, presented serious
questions for the consideration of the court. It was evident that
the identical securities specified in "Exhibit B" could not have
been delivered as early as the 12th of July, because they were
dated and discounted after that day, and "Exhibit B" itself was not
made out until the nineteenth day of August. There was some
evidence that securities to the amount of this schedule had been
delivered to Cavaroc & Son at or soon after the twelfth day of
July, and that those named in the exhibit had been substituted for
them as they severally became due and were renewed or paid, as
stated in the answer. The other securities, amounting to about
$100,000, could not have been added until after Aug. 19, when
"Exhibit B" was made out, or they would have been included therein.
This list, contained in "Exhibit B," was made out for the purpose
of being transmitted to the Credit Mobilier. A letter from C.
Cavaroc & Son to the society, bearing date Aug. 19, 1873, was
exhibited in evidence, with which, as Cavaroc, Sen., testified, a
copy of the list "Exhibit B" was forwarded to the society. It
contained the following passage:
"If we have not sent you, at first, the memorandum of the
valuables we have received from the bank to guarantee our house and
yourselves, it is because the subsequent dispatch of our son gave
us to understand that the operation was made under our guaranty,
and we had ourselves taken these valuables. But we think it more
just that we should not only transfer you this deposit, but that we
should give you the details of these notes, which are all of the
first class."
"As soon as certain of them will mature, we will take care to
replace them by others, and will advise you."
A letter from the society to the bank dated Sept. 5 acknowledges
the receipt of this letter of Cavaroc & Son in the following
terms:
"By their letter of the 19th of the same month, Messrs. Cavaroc
& Son, of your city, have sent us the memoranda of the
valuables which you deposited with them to secure your drafts on
us. Said valuables amount together to $220,021.41, which is well.
"
Page 96 U. S. 472
Precisely when the additional $100,000 of securities were added
to the first lot does not appear, but Charles Cavaroc, the
president of the bank, testified that it was a few days after the
delivery of the latter.
But a more serious question related to the manner in which the
securities were delivered and disposed of. The evidence on this
point was to the following effect: Charles Cavaroc, Sen., the
president of the bank, acting as agent of both parties, directed
the discount clerk of the bank, who had charge of its portfolio of
notes and bills discounted, to select the securities for the Credit
Mobilier. They were selected accordingly to the amount of
$220,021.41, and placed in an envelope by themselves, and handed to
Mr. Cavaroc, for Cavaroc & Son. He handed them to the cashier
of the bank for safekeeping. But as some of the securities soon
matured, they had to be taken out of the envelope for collection,
and Cavaroc had them collected or renewed in the usual manner by
the discount clerk. The trouble of going to the cashier whenever a
note became due to get it out of the envelope after a few days
induced a change, and the securities were handed back to the
discount clerk in the envelope in order that he might more
conveniently attend to their collection and renewal. When any of
them were paid, the money was taken and used by the bank and other
notes were substituted in their place. When renewed, the new note
took the place of the old. On one occasion, quite a large amount of
the notes was exchanged for others, because more available in some
other transaction of the bank. The entire lot, however, subject to
this exchange of individual securities, appears to have been kept
in the envelope by itself. In this manner, the notes were kept in
the bank until its failure on the 4th of October, when Mr. Cavaroc
took possession of the package, and thereafter it was kept in the
office of his firm. At the same time, the endorsement of the bank
was placed on the several securities, which had not been done
before. Lists of the securities contained in the envelope had been
made out from time to time -- the last being made on the 4th of
October, when they were finally removed from the bank. A copy of
this list is annexed to the Credit Mobilier's answer as "Exhibit
C."
Page 96 U. S. 473
No entry was made on the books of the bank of this transaction
with the Credit Mobilier, except that the bills drawn on it were
duly entered amongst bills payable, and the Credit Mobilier was
credited with the amount, which was put down amongst the
liabilities of the bank, and so appeared in all the monthly
statements, beginning with the 1st of August. The pledge of
securities was not noticed. These all remained on the portfolio of
bills discounted, as before, and their amount continued to be
represented in the daily and monthly statements, without any note
or memorandum to show that they had been pledged. So far as the
public and those with whom the bank dealt could perceive, the bank
continued to have possession and control of all the securities in
its own right, and they all appeared to be equally liable with the
other assets to the claims of all the creditors.
The circuit court rendered a decree dismissing the bill of
complaint, and from that decree the receiver appealed.
Page 96 U. S. 475
MR. JUSTICE BRADLEY, after stating the case, delivered the
opinion of the Court.
The substance of the agreement in this case, so far as necessary
to be considered, was that the Credit Mobilier should accept the
drafts of the banking association to the amount of a million of
francs at ninety days, the bank agreeing to furnish funds to pay
the drafts at maturity, with the privilege of a renewal, and it was
stipulated that this obligation of the bank should be guaranteed by
Cavaroc & Co. and by a deposit with them, for the use of the
Credit Mobilier, of first-class securities of which deposit the
latter was to be advised.
This arrangement was immediately telegraphed to New Orleans, and
the drafts were drawn on the 12th of July, but the weight of the
evidence is that none of the collateral securities was delivered
until the 19th of August -- which might raise a question whether
the accommodation acceptances of the Credit Mobilier could be
considered as a contemporary consideration therefor, or, if not,
whether the bank was at that time,
Page 96 U. S. 476
in the apprehension of Cavaroc (the common agent), in a
condition of solvency and good credit -- as to which an affirmative
answer could not well be given, since the proof is quite clear that
the bank was then struggling with serious financial difficulties
from which it never recovered.
Waiving this question, however, for the present, we will proceed
to examine whether, supposing that no objection arises from the
time when this transaction took place, it amounted to such a
transfer or pledge of the securities in question as to entitle the
Credit Mobilier to a preference upon them over the other creditors
of the bank at the time of its failure. Was there such a delivery
and retention of possession of the collateral securities as to
constitute a valid pledge by the law of Louisiana? Clearly they
were never out of the possession of the officers of the bank, and
were never out of the bank for a single moment, but were always
subject to its disposal in any manner whatever, whether by
collection, renewal, substitution, or exchange; and collections,
when made, were made for the benefit of the bank, and not that of
the Credit Mobilier.
The case has some features in common with, though differing in
others from, that of
Clarke v.
Iselin, 21 Wall. 360, in which this Court held that
collateral securities transferred by the borrower to the lender at
the time of the loan were not divested out of the latter by the
mere fact of his depositing them with the borrower for collection.
The Court said: "Obviously this deposit in no degree affected the
title of the defendants to the notes. It merely facilitated
collections." The Court then cited
White v. Platt, a New
York case in 5 Denio 269, in which it was said:
"Where promissory notes are pledged by a debtor to secure a
debt, the pledgee acquires a special property in them. That
property is not lost by their being redelivered to the pledgeor to
enable him to collect them, the principal debt being still unpaid.
Money which he may collect upon them is the specific property of
the creditor. It is deemed collected by the debtor in a fiduciary
capacity."
The case of
Clarke v. Iselin, being a New York case and
governed by New York law or the common law as understood in New
York, the authority cited was necessarily of great
Page 96 U. S. 477
weight, if not controlling. When, as in that case, the title has
been transferred to the creditor and the collections are made for
his benefit, the pledgeor merely acting as his servant or agent in
making them, the character of the security is not affected at the
common law by the debtor's having actual possession of the
collaterals, there being no fraud in the transaction. In such case,
they are held by the creditor by way of mortgage as well as pledge,
and a mortgage is valid notwithstanding the mortgagor has the
possession. The difference ordinarily recognized between a mortgage
and a pledge is that title is transferred by the former and
possession by the latter. Indeed, possession may be considered as
of the very essence of a pledge, Pothier, Nantissement 8, and if
possession be once given up, the pledge, as such, is extinguished.
The possession need not be actual: it may be constructive as where
the key of a warehouse containing the goods pledged is delivered,
or a bill of lading is assigned. In such case, the act done will be
considered as a token standing for actual delivery of the goods. It
puts the property under the power and control of the creditor. In
some cases, such constructive delivery cannot be effected without
doing what amounts to a transfer of the property also. The
assignment of a bill of lading is of that kind. Such an assignment
is necessary, where a pledge is proposed, in order to give the
constructive possession required to constitute a pledge; and yet it
formally transfers the title also. In such a case, there is a union
of two distinct forms of security -- that of mortgage and that of
pledge -- mortgage by virtue of the title and pledge by virtue of
the possession.
This advantage exists when notes and bills are transferred to a
creditor by way of collateral security. His possession of them
gives them the character of a pledge. Their endorsement if payable
to order, or their delivery if payable to bearer, gives him the
title also, which is something more than a pledge. This double
title existed in
White v. Platt and in
Clarke v.
Iselin. Hence the actual possession of the securities by the
creditor was a matter of less importance in those cases.
Whether constructive possession in the creditor can be affirmed
where an article to which his only title is that of pledge is
actually redelivered to the debtor, with general
Page 96 U. S. 478
authority to dispose of it and substitute another article of
equal value in its place, is the question which we have to meet in
this case. Such a redelivery for a mere temporary purpose, as for
shoeing a horse which has been pledged and is owned by the farrier,
or for repairing a carriage which has been pledged and is owned by
the carriage-maker, does not amount to an interruption of the
pledgee's possession. The owner is but a mere special bailee for
the creditor. So, when the debtor is employed in the creditor's
service, his temporary use of the pledged article in the creditor's
business does not effect a restoration of the possession to the
debtor. This is in accordance both with the common and the civil
law.
Reeves v. Capper, 5 Bing. N.C. 136, was a case of
this kind. A sea captain pledged his chronometer for a debt. He was
afterwards employed by the pledgee as master of one of his ships,
and the chronometer was placed in his charge, to be used on the
voyage. It was held that the possession of the pledgee was not
lost. He recovered the chronometer against a person to whom the
master pledged it a second time.
In
Hays v. Riddle, 1 Sandf. (N.Y.) 248, the plaintiff
delivered to the defendant, at his request, a convertible bond of
the New York & Erie Railroad Company (which had been pledged by
the latter to the former) in order to get it exchanged for stock of
the same company, which stock was to be returned and substituted
for the bond in pledge. The defendant never returned either the
bond or the stock. The plaintiff brought an action of trover
against him for the bond, and recovered its value, being less than
the debt for which it was pledged. It being objected that by
delivering back the bond to the pledgeor the plaintiff had lost his
special property in it as pledgee, the court said:
"At common law, as a general rule, the positive delivery back of
the possession of the thing, with the consent of the pledgee,
terminates his title. 2 Pick. 607; 15 Mass. 389. If the thing,
however, is delivered back to the owner for a temporary purpose
only, and it is agreed to be redelivered by him, the pledgee may
recover it against the owner if he refuse to restore it to the
pledgee after the purpose is fulfilled. 2 Taunt. 266; Story on
Bailm., sec. 299. So, if it be delivered back to the owner in a new
character, as for example as
Page 96 U. S. 479
a special bailee or agent. In such case, the pledgee will still
be entitled to the pledge not only as against the owner, but also
as against third persons. 14 Pick. 497."
In
Macomber v. Parker, 14 Pick. (Mass.) 497, referred
to in the last case, the proprietors of a brickyard contracted it
out on shares to a brickmaker, agreeing to advance the money
requisite to carry on the manufacture of bricks, and, after being
repaid their advances, to divide the profits with the latter. It
was agreed that the bricks, as fast as made, should be pledged to
the owners of the yard as security for their advances; but the
brickmaker was to keep them in his charge, and sell them at retail,
and as often as he got the amount of a hundred dollars from the
sales, he was to deposit it in bank to the credit of the owners.
The bricks were afterwards attached as to the share of the maker
for his debts. But the court held that the owners of the yard had
not, by leaving the bricks in the hands of the maker, lost their
lien as pledgees of the entire property. They remark:
"To say that this limited authority to sell the bricks by
retail, in small sums, on account of the plaintiffs, was a waiver
of their possession of the residue that remained in the kilns in
their yard would be clearly against the intent and meaning of the
parties, unreasonable, and unwarranted by the evidence."
Again:
"The special authority given by the plaintiffs to Evans [the
brickmaker] was to clothe him with the character of agent to a
limited extent only, and no remission to him, in his character of
pledgeor, of the plaintiffs' right to retain the bricks according
to the agreement."
To the objection that retention of possession by the pledgeor
would have the effect to deceive those dealing with him, the court
said:
"If the vendor or the pledgeor should have the actual possession
of the property after it were pledged or sold, it would only be
prima facie, but not conclusive, evidence of fraud. The
matter might be explained and proved to be for the vendee or
pledgee. It is a most familiar principle that one man may have the
actual possession or custody, while another has the legal title and
the constructive possession."
In this case, it will be observed, the pledgees were joint
owners of the brick, and were owners of the premises on which the
bricks were kept, and the decision was undoubtedly correct.
Page 96 U. S. 480
But in the general remarks made by the court there is manifest,
as in many other cases, a tendency to confound the distinction
between cases in which the title is in the creditor, and those in
which his whole interest depends on possession. All the cases
cited, however, show that a bailment to the pledgeor for a mere
temporary purpose for the use of the pledgee, or for the repair and
conservation of the pledge, will not destroy the latter's
possession; at the same time, they imply that a redelivery to the
pledgeor, except for the special and temporary purposes indicated,
divests the possession of the pledgee and destroys the pledge.
The civil law, which is more particularly our guide in the
present case, is to the same general effect, though it is more
careful in denouncing the danger of losing the right of pledge by
parting with any thing like permanent or continued possession to
the pledgeor, and it preserves very clearly the distinction between
pledge and hypothecation or mortgage. The old civil law of the
Digest, it is true, was more indulgent, and permitted the pledge to
be delivered to the pledgeor without prejudice to the security, in
a manner that would not be allowed at the present day. Thus, in
book xiii of the Digest, title vii, law 35, Modestinus says:
"A pledge transfers only the possession to the creditor, the
property remaining in the debtor; yet the debtor may have the use
of it, either as a gratuity, or for hire."
And Paulus, in the same title, law 37, says:
"If I lend a pledge to the owner thereof, I retain possession by
means of the loan, for before the debtor borrowed it, the
possession was not in him, and when he borrowed it, it was my
intention still to retain the possession, and it was not his to
acquire it."
Pothier's Pandects, vol. vii, p. 360.
As to this law of the Digest, Mr. Bell, in his Commentaries on
the Scotch Law, remarks as follows:
"Voet very justly observes in criticizing this law that to
permit such practices were to endanger the safety of other
creditors and to sanction a fraud upon the rule which requires
possession to complete a real right to movables, and that no true
analogy can hold between the law of Rome, where hypothecs without
possession were admitted, and the laws of modern commercial
nations, in which the rule is established that possession preserves
property. "
Page 96 U. S. 481
"It is true," Bell continues,
"that, in the course of many contracts there is a necessity for
separating property and possession, and that the mere circumstance
of goods being in the hands of another on a temporary contract will
not deprive the real proprietor of his right in favor of the
creditors of the temporary possessor. And there seems to be no
doubt that the right of a pledgee will also be sufficiently strong
to support this temporary dereliction of possession, in the course
of necessary operations on it, the manufacturer or other holder,
being custodier for the pledgee, without injury to the real
security. But the doctrine delivered by Voet is sound where the
possession is given up without necessity to the owner of the
goods."
2 Bell, Com. (7th ed.), p. 22.
The modern French law, governed by a similar policy, has been
put into a very explicit form in the Civil Code, which has been
followed in the Civil Code of Louisiana. A quotation of some of the
principal articles, bearing on this subject, will show the care
taken to require distinct possession in the pledgee.
Art. 3158, Rev.Civ.Code La., relating to movables, is as
follows:
"This privilege [namely, that of pledge] shall take place
against third persons only in case the pawn is proved by an act
made either in a public form, or under private signature,
provided that in this last case it should be duly
registered in the office of a notary public at a time not
suspicious,
provided also that, whatever may be the form
of the act, it mentions the amount of the debt as well as the
species and nature of the thing given in pledge, or has a statement
annexed thereto of its number, weight, and measure."
This article is copied from art. 2074 of the Code Napoleon.
As to negotiable securities, the Louisiana Code, by art. 3161,
provided that a regular transfer by endorsement should be
sufficient. But by a subsequent act, passed in 1852 and reenacted
March 15, 1855, it was provided
"hat where a debtor wishes to pawn promissory notes, bills of
exchange, stocks, obligations, or claims upon other persons, he
shall deliver to the creditors the notes, bills of exchange,
certificates of stock, or other evidences of the claims or rights
so pawned, and such pawn so made, without further formalities,
shall be valid as well against third persons as against the
pledgeors thereof if made in good
Page 96 U. S. 482
faith."
A question was made on the argument whether this statute was in
force in 1873, when the transaction in question took place. Without
giving our reasons at present, it is sufficient to say that we are
satisfied that the act was in force at that time.
The next article, 3162, which is not affected by the statute and
which is copied from art. 2076 of the Code Napoleon, is important,
and is in these words:
"In no case does this privilege subsist in the pledge except
when the thing pledged, if it be a corporeal movable, or the
evidence of the debt, if it be a note or other obligation under
private signature, has been actually put and remained in the
possession of the creditor, or of a third person agreed on by the
parties."
As might be supposed, this article has formed the subject of
much discussion by the commentators. Troplong says:
"The pledgee has this privilege only on the condition of being
possessed of the thing. This condition was expressly imposed upon
him by art. 181 of the Custom of Paris. This is reproduced by art.
2102, No. 2, of the Code Civil, and we shall specially discuss it
in the commentary on art. 2076. Possession is indispensable to him.
It withdraws the thing from the hands of the debtor and from the
actions of creditors and sets it aside in a privileged situation.
'
Possidentis melior est conditio.' Possession is the most
sure foundation, and the most striking index of his privilege.
Without it, the creditor would have no ground for escaping the law
of contribution. Casaregis says, 'Preference is accorded to a
pledgee on the thing pledged, because he has it in his own
hands.'"
"This possession ought to be certain and not equivocal. If it is
ambiguous, if the things pledged have been so placed as to deceive
the other creditors, and to lead them to believe that the debtor
always continued the possessor, the pledge would be
endangered."
Troplong shows, however, that this possession may be a civil
possession, as where the delivery is made by the transfer of a bill
of lading of goods on board a ship, &c. Troplong, Nantissement,
arts. 97-99.
The same author, in commenting on art. 2076, after treating of
the absolute necessity of possession by the pledgee, in order
Page 96 U. S. 483
to constitute the relation of pledge, and after discussing the
different forms of possession, actual and constructive, adapted to
the nature and situation of the thing pledged, proceeds
(Nantissement, No. 309) to treat of the manner in which it may be
in the hands of the pledgeor without destroying the possession and
right of the pledgee. He says:
"Though the merchandise be deposited in the creditor's
storehouse, it may still need the care of the debtor. Then it is
not forbidden to stipulate that he shall continue to attend to it
in the interest of the creditor. The important thing is that this
clause does not cover a fraud. Aside from this, the possession of
the creditor is not incompatible with a certain cooperation of the
debtor -- being for the conservation of the thing -- he still being
the owner. The creditor does not any the less continue exclusive
possessor of the thing. The debtor is nonetheless dispossessed of
it."
He then gives some cases by way of illustration. For
example:
In 1839, Morin & Co., of Braune, pledged to Weiland &
Co., of Baden, sixty thousand bottles of sparkling Burgundy for a
debt. The wine was delivered to an agent of Weiland & Co. and
deposited in a vault hired by him for the purpose. It was agreed
that Morin & Co. should give the wine all necessary care, in
presence of the agent, who was to keep the keys of the vault. But,
to facilitate matters, it sometimes happened that the agent gave
the keys to Morin & Co., and once, in 1840, the latter removed
some of the bottles of wine to their own premises. Morin & Co.
having failed, their assignees (syndics) insisted that the pledge
was null and void because the debtors were not dispossessed of the
wine. But Weiland & Co., having renounced their privilege on
the wines which had been removed, were sustained by the highest
court in their claim to the remainder. It was held that the special
character of the wine, and the difficulty of finding persons
qualified to take proper care of it, were sufficient reasons for
employing Morin & Co. to attend to it, and the agent's allowing
them to take the keys occasionally for this purpose was a mere
matter of convenience to facilitate the operations of the workmen.
Troplong, Nant., No. 311; Dalloz, Repertoire, vol. xxxii. p. 455,
art. Nantissement.
See also Duranton, vol. xviii, Nos.
525, 528, 531.
Page 96 U. S. 484
A different result was had in another case where certain
Champagne wines were the object of the pledge, and the debtor had
reserved the care of them, and though the vaults in which they were
stored were leased to the creditors, they communicated by open
doors with the other vaults of the debtors, where their workmen
were employed on the wines, and there was nothing to indicate which
were pledged and which were not, and nothing to prevent a
substitution thereof, so that the debtors appeared in possession,
and kept up their credit thereby, which they could not otherwise
have done. Troplong, No. 312;
Ricou v. Syndics of Joly &
Co., Dalloz, Repertoire, Nantissement, No. 93, note.
In another case, it was decided that the debtor might be
permitted to make sales of the goods pledged, provided that they
remained in the pledgee's possession and could not be delivered to
the purchaser without his consent. Dalloz, No. 129.
Troplong deduces from these and other cases the general
conclusion that whenever the assistance of the debtor is necessary
to the better accomplishment of the object of the pledge, it ought
to be permitted, provided always that it does not disturb the
possession of the creditor in any respect. Nant., No. 313. Dalloz
says:
"It is evident that if the pledge of movables could, without a
delivery, have effect in regard to third persons, it would be the
source of great frauds and deceptions. When the debtor is obliged
to surrender possession, he cannot deceive third parties dealing
with him by keeping possession of the pledged articles as part of
his estate and getting credit thereby."
He takes special notice of the decision that a pledge is not
valid if the dispossession of the debtor is not sufficiently
complete to prevent substitution, or if there is a mere contract
for a pledge, and not an actual pledge. Dalloz, Rep. Nant. 119. And
he lays down the principle that though a contract for a pledge may
be enforced against the pledgeor and his heirs (Nant., No. 121),
yet that, by the very words of the Code, he cannot set up the
privilege of the pledge, which alone constitutes his right as
against third persons, without actual possession, or its
equivalent. Nant. 119, 209.
From these authorities it seems to be evident that, in the
French law at least, the text of which, in this regard, is the
Page 96 U. S. 485
same as that of Louisiana, a delivery by the owner of securities
by way of pledge, followed by a return thereof to him for the
purpose of enabling him to collect them and apply the money to his
own use, on substituting others in their stead, and with general
liberty of substitution, and to appear as the owner and possessor
thereof in his dealings with others (the title of the securities
not being transferred to the creditor), is not such a delivery of
possession as is necessary to establish the privilege due to a
pledge as to third persons. It would be contrary to the very letter
of the law to allow such a transaction to have that effect. It
would not be mere evidence of fraud, which might be rebutted by
counter evidence, but it would be contrary to the rule of law
adopted to prevent fraud. In other words, as to third persons, it
would not be a pledge at all within the meaning and requirements of
the law.
We think that the decisions in Louisiana lead to the same
conclusion. In the case of
Geddes v. Bennett, 6 La.Ann.
516, the object of the pledge was certain barrels of whiskey in the
warehouse of a third person. The creditor allowed the debtor to
remove them to his own premises upon giving the following receipt:
"Received from J. & R. Geddes four hundred and fifty-six
barrels of whiskey, on storage." Having the goods thus in his own
possession, the debtor parted with them to a third person. The
supreme court, in an action brought by the pledgees to recover the
whiskey, said:
"The plaintiffs have shown no compliance with the articles of
the Code concerning the form of the contract of pledge, which it
would be necessary to observe in order to enable them to recover
against the defendants, who are third persons, and our impression
is that, under the circumstances of the case, the delivery of the
object pledged to Bennett, even under the receipt he gave, would of
itself defeat the pledge,"
referring to article 3162 of the Code, which we have been
considering. And in the late case of
D'Meza's Succession,
26 id. 35, Myers & Levy had made certain accommodation
endorsements for the deceased, upon the faith and promise of
receiving from him a policy of insurance upon his life, for which
he had made application. Having procured the policy, he told, them
to call at his office and get it from his bookkeeper, informing
them that he had told the bookkeeper
Page 96 U. S. 486
it was for them. But he died before it was actually delivered.
The court held that the policy was never placed beyond the control
of D'Meza, and that Myers & Levy never had the requisite
possession thereof. "The book-keeper," say the court,
"never held the policy as agent or trustee for Myers & Levy.
Although informed of his employer's intention in regard to one of
the policies [he had obtained two of the same amount], he was never
instructed to deliver it to Myers & Levy, or anyone else. There
was, therefore, no delivery of the policy to Myers & Levy,
although the deceased intended to do so. Consequently, they never
held it as a pledge or collateral security for their accommodation
endorsements."
These cases appear to us to govern the present. The securities
claimed to have been pledged to the Credit Mobilier remained in the
possession and control of the bank until the time of its failure.
Up to that period, they were not in such a condition as the law
requires for a pledge. The placing them in such a condition
afterwards, by Cavaroc's removing them from the bank at the time of
its failure, was in fact an attempt to create a pledge then by
assuming the possession requisite thereto, and a pledge taking its
origin at that time was a preference forbidden by the banking
act.
It must not be overlooked that the Credit Mobilier has no other
claim to the securities in question but that of pledge. A pledge,
and possession, which is its essential ingredient, must be made out
or their privilege fails. An agreement for a pledge raises no
privilege. There is no mortgage, for the title of the securities
was never transferred to them. The evidence of the cashier is that
they were all stamped payable to the order of the bank when
discounted. They were not endorsed by the cashier until the day
they were removed by Cavaroc, which was after the bank had
failed.
Two cases decided by the Supreme Court of Louisiana have been
cited and relied on (as well as some other cases in England and the
United States), to show that an assignee only takes the property
assigned exactly in the plight in which the debtor held it, and
subject to all the equities to which it was subject in his hands.
The first case is that of
Campbell v. Slidell, 5 La. Ann.
274, in which a syndic claimed certain real
Page 96 U. S. 487
estate which the debtor had conveyed to a bona fide purchaser,
but the deed had not been duly registered. The court held that this
made no difference. The debtor had parted with the title, and
therefore he could not assign to the syndic what he did not himself
own, although the deed might be void for want of registry as
against a subsequent purchaser in good faith or a subsequent
judgment creditor who should acquire a mortgage by recording his
judgment. It is evident that this case is unlike the one now under
consideration. Here, the debtor never transferred the title, and
the only question is whether there was such an attempt to pledge as
to raise a privilege -- which, as we have seen, there was not.
The second case is that of
Partee v. Corning, 9 La.Ann.
539. In this case, the debtor had actually pledged and delivered
bills receivable to the defendants for simultaneous advances, but
had not endorsed the bills, as required by art. 3156. The court
said:
"It is clear that the pledgeors could not have set up this
objection, and we are of opinion that the syndic cannot, upon a
mere naked informality of this sort, disturb the pledge. Let it be
observed that there is no pretense that the pledges were taken in
bad faith or that an injury was done to creditors in taking
them."
Here the indispensable requisite of possession existed. The
other formalities (which were required at that time) were enjoined
by the article referred to, it is true, but there was no
declaration that the pledge should be void, or that the privilege
should not exist without them. We do not think that these cases
conflict with the conclusion which we have reached in this
case.
We have examined the other authorities referred to, among which
are
Mitford v. Mitford, 9 Ves.Jr. 86;
Mitchell v.
Winslow, 2 Story, 630; and also the cases of
Gibson v.
Warden, 14 Wall. 244, and
Cook v.
Tullis, 18 Wall. 332, but these were all cases in
which the creditor claiming adverse to the assignee had a clear
legal or equitable title to the property claimed. None of them
stood, as the present case does, upon the claim of a privilege
expressly denied by the law. We do not deem it necessary,
therefore, to go into a review of those cases. They cannot affect
this.
Whilst it is generally true that an assignee for the benefit
of
Page 96 U. S. 488
creditors holds the property assigned subject to the same
equities as the debtor or assignor held it, it is not universally
true. Many transactions would be binding on the latter which would
not be binding on the assignee. All sales and securities made for
the actual purpose of defrauding creditors are of this class. By
the law of Louisiana, a pledge, in order to be effective against
third persons, must be accompanied by a privilege. It may be valid
as a contract between the parties without this quality, as held
both in the French law (as already shown) and in Louisiana, in the
case of
Matthews v. Rutherford, 7 La.Ann. 225. But art.
3162 expressly declares that the privilege arising from a pledge
does not subsist except when the thing pledged has been actually
put and remained in the possession of the creditor, or of a third
person agreed on by the parties. Without the privilege, or right of
preference, the Credit Mobilier has no claim to hold the securities
in question as against the other creditors. How, then, can it set
up such a claim against the receiver? The receiver does not
represent the bank alone: he represents all the parties. He
represents the law, which takes charge of the property for the
benefit of all creditors according to their respective and mutual
rights. Suppose no receiver had been appointed, and when the bank
failed, it had called the creditors together, and laid all its
assets on a table, could the Credit Mobilier, in presence of the
other creditors, have laid its hands on the securities in question
and claimed them by right of any privilege or preference? It
certainly could not have done so if it had no privilege as against
them. And yet this is precisely the relation in which the parties
stood. The existence of a receiver as trustee for all did not
change it. That one essential thing which the law requires for the
subsistence of the privilege -- namely possession -- was wanting.
Other formalities might have been dispensed with. But possession is
essential -- made so by the express terms of the law. Nearly all
the cases in France, where this question has arisen, have been
contests between creditors claiming by way of pledge, and the
syndics of the failing debtor, who stand in the place occupied by
the receiver here. If there is any distinction between them, it is
in favor of a firmer right on the part of the receiver to protect
the interests of the general creditors.
Page 96 U. S. 489
He is not made receiver by a voluntary assignment of the bank,
but is appointed by the magistrate
in invitum the bank for
the very purpose of securing equal justice to all its creditors,
and under a law which sternly forbids preferences. Surely such an
officer, whatever may be the rule in the case of voluntary
assignments, may assert those rights of the general creditors,
which the law itself creates, without being subject to all the
disabilities under which the bank would labor in combating its
private engagements with favored creditors. If the law says, "there
shall be no privilege, as to third persons, by a pledge without
possession," there will be no need of a judgment and execution in
order to oppose such a pledge, if only a creditor, or one who
represents creditors, has a proper standing in court. Insolvency of
the debtor, if a bank, and the appointment of a receiver thereof
will force the pledgee into concurrence with the general creditors,
and the receiver's power will be fully adequate to the protection
of their interests as established by law. The case of
Bank of Alexandria v.
Herbert, 8 Cranch 36, presents a state of things
almost precisely analogous to this. There, the trustee of an
insolvent debtor recovered the proceeds of property which the
latter had mortgaged to the bank. The recovery was had on the
ground that the mortgage had not been recorded in proper time under
the law of Virginia, which declared that all deeds and mortgages,
though good between the parties, should be void as to creditors and
subsequent purchasers without notice unless recorded within eight
months from date. "To set up this deed against the creditors," said
Mr. Chief Justice Marshall, "would be to defeat the very object for
which the law was made."
Indeed it may be laid down as a general rule, as well at the
common law as the civil law, that a trustee, assignee, or syndic,
having the powers and occupying the relations which are sustained
by a receiver under the National Banking Act or an assignee in
bankruptcy, may well oppose any privilege or preference which the
law itself, unaided by a
bona fide purchase or judgment,
would regard as void against the general creditors in a direct
contest between them and the parties claiming such privilege or
preference, even though the debtor himself, on account of some
personal disability arising from his own acts
Page 96 U. S. 490
or engagements, could not resist the claim. That an assignee in
bankruptcy has this power cannot well be doubted, and since a
national bank cannot be put into bankruptcy, but can only be wound
up under the peculiar provisions of the banking act, the receiver
appointed by virtue thereof must have the same power, or the absurd
consequence would follow that the property of a bank disposed of by
voluntary conveyances, or pledges not good as to third persons,
would be beyond the reach of creditors.
Where the legal or equitable property in a security passes, and
there is no express law invalidating the transfer, the creditor
will be entitled to hold it as well against the assignee or
receiver as against the debtor, because the assignee only takes
such title as the debtor has at the time of the assignment or
insolvency. In that case, however, the question of fraud would be
admissible as a question of fact to invalidate the transaction.
But, in the present case, that question does not arise, or, if it
might be raised, it is immaterial. The Credit Mobilier claims a
privilege by virtue of a pledge, and such a privilege, as we have
seen, cannot be maintained as to third persons without possession.
Bad faith, it is true, would defeat the pledged though the creditor
had possession. But want of possession is equally fatal, though the
parties may have acted in good faith. Both are necessary to
constitute a good pledge so as to raise a privilege against third
persons. The requirement of possession is an inexorable rule of law
adopted to prevent fraud and deception, for if the debtor remains
in possession, the law presumes that those who deal with him do so
on the faith of his being the unqualified owner of the goods.
This consideration meets the objection which is urged against
the rule that it would result in giving to the general creditors
the benefit of the advances made to the debtor on the faith of the
stipulated pledge, inasmuch as the estate as increased to the
extent of these advances. It is true that the estate is so
increased, but the debts and liabilities are also increased to the
same amount by the demand of the party who makes the advances --
the only effect of the rule being, that the latter comes into
concurrence with the other creditors on an equality, and not by way
of preference, and if the latter derive any benefit from this
result, it must be remembered that, in the view
Page 96 U. S. 491
of the law, they might not have given credit to the common
debtor had he not remained in possession of the goods, and appeared
to continue as the absolute owner thereof. If the pledge should be
sustained, they would have good cause to complain that they had
been deceived by the acts of the parties setting up the pledge. So
that on the question of relative merit and demerit, the parties are
in all respects equal. It is on this principle that the law is
founded.
These considerations also supply an answer to another
suggestion, that equity will consider as done what the parties
intended should be done, which it is assumed was, in this case, a
transfer of the title of the securities. Equity will not exercise
this power when it would injure third persons who have incurred
detriment and acquired consequent rights by the acts that are done.
Such detriment has, in the view of the law, been incurred in this
case, and such rights have, by the express letter of the law,
accrued.
This suggestion may also be answered by the fact that it cannot
be truly said to have been the intent of the parties to transfer
the title. The agreement was only that "securities of the first
class shall be deposited with the firm of Messrs. Cavaroc &
Son." A transfer of the title would have been inconsistent with
that unrestricted control over the securities which the bank
desired to, and did, retain, and which must be considered as having
been assented to by the Credit Mobilier, through the common agent,
Cavaroc.
On this ground, therefore, of want of possession in the pledgee
or of a third person agreed upon by the parties, and of actual
possession and control in the pledgeor, we feel compelled to hold
that the Credit Mobilier had no privilege as to third persons, and
that the receiver was entitled to the securities in question.
The decree will accordingly be reversed and the cause remanded
to the circuit court with directions to enter a decree in favor of
the complainant below in conformity to this opinion, and it is
So ordered.
MR. JUSTICE SWAYNE, MR. JUSTICE FIELD, and MR. JUSTICE HARLAN
dissented.
