Hodge v. Truax , 184 Wash. 360 ( 1935 )

The majority say:

"The general question presented is whether the appellant can recover upon the pledged agreement. This depends ultimately upon whether she has a right to take advantage of the fact that the statute of limitations had run against most of the notes for the payment of which the contract was pledged."

At the time of Hodge's death, the bank held his notes in the face amount of $42,248.72, to secure which Hodge had pledged the Truax contract. At that time, there was a balance due and to become due under that contract of $35,400. That contract became the property of plaintiff under the decree of distribution entered in the administration of the J.T. Hodge estate. In December of 1929, the bank and Truax, without consulting Mrs. Hodge, entered into an agreement whereby the bank undertook to release Truax of his obligations under the contract, upon payment by the latter of twenty thousand dollars.

Now, it is elementary that a pledgee, in the absence of specific authority, has no right to compromise with persons liable on pledged collateral for less than the amount of their obligation. 49 C.J. 952. Respondent seeks to escape the consequences of the rule under the exception that a pledgor cannot complain of a compromise or settlement which is clearly advantageous to him. The argument is that the settlement was advantageous to the plaintiff (the owner of the pledged instrument), since the amount due the bank on Hodge's notes exceeded the amount owing by Truax under the contract. This argument, however, fails to take into account the fact that the statute of limitations had run against all of the Hodge indebtedness, except $5,867.57.

Now, this court has long been committed to the rule that, when the statute of limitations has run against the principal obligation, recovery against the security cannot be had. SpokaneCounty v. Prescott, 19 Wash. 418, 53 P. 661, 67 Am. St. 733;Dickman v. Strobach, 26 Wash. 558, 67 P. 224; George v.Butler, 26 Wash. 456, 67 P. 263, 90 Am. St. 756, 57 L.R.A. 396; Johnson Service Co. v. Aetna Indemnity Co., 46 Wash. 434,90 P. 590; Pratt v. Pratt, 121 Wash. 298, 209 P. 535, 28 A.L.R. 548; Mood v. Mood, 171 Wash. 210, 18 P.2d 21,23 P.2d 1118. While the foreclosure of collateral of the character of that in the instant case was not sought in any of those cases, they are indistinguishable in principle. See King v. Rodgers,108 Kan. 311, 195 P. 598.

The reason for the rule is obvious, and is just as applicable to an indebtedness secured by the pledge of personal property as it is to an indebtedness secured by real estate mortgage. For, if the rule were otherwise, the statute of limitations would become a dead letter in all cases where the security exceeds the amount of the indebtedness.

With this rule in mind, let us see what the situation would be had the bank undertaken, by due process of law, to foreclose on the pledged contract. It would have brought suit on the Hodge notes in the face amount of $42,248.72. Mrs. Hodge would have interposed the defense of the statute of limitations. The bank would have recovered judgment in the sum of $5,867.57. The court would have ordered the security sold to satisfy the judgment. Assuming the bidding was brisk, Mr. Truax might have bought his contract in for twenty thousand dollars. Out of this, the bank would have satisfied its judgment for $5,867.57, and, of necessity, turned the balance (in the neighborhood of fourteen thousand dollars) over to plaintiff.

As the result of a compromise which they had no right to make, the bank has recovered fourteen thousand dollars which it could not have recovered under any legal process, and Truax has escaped payment of $15,400, which would become due under his contract with Hodge.

To my mind, the assumption that the bank could have "sat tight" and collected on the Truax contract as payments became due, notwithstanding the statute of limitations had run against most of the Hodge notes, is fallacious for several reasons. In the first place, the bank did not do that. Had it done so, an entirely different issue would have arisen. Instead of "sitting tight," however, it assumed an aggressive position and sought to circumvent the defense of the statute of limitations. In making the compromise, it has, to its own advantage and to plaintiff's detriment, deprived her of that defense to Hodge's notes. Under any definition, this conduct constituted a wrong, in contemplation of law. For the plaintiff was deprived of a legal right — a right of which the supreme court of the United States has said:

"Statutes of limitation are vital to the welfare of society and are favored in the law. They are found and approved in all systems of enlightened jurisprudence. They promote repose by giving security and stability to human affairs. An important public policy lies at their foundation. They stimulate to activity and punish negligence. While time is constantly destroying the evidence of rights, they supply its place by a presumption which renders proof unnecessary." Wood v.Carpenter, 101 U.S. 135.

In the second place, even when acting under a power to sell, a pledgee of personal property "is bound to exercise the utmost good faith." Dodge v. Scripps, 179 Wash. 308, 37 P.2d 896. "The sale must be fair, and the contract must be construed benignantly for the debtor's interest as well as that of the pledgee." Foote v. Utah Commercial Savings Bank, 17 Utah 283,54 P. 104. In making the compromise and so circumventing Mrs. Hodge's right to the defense of the statute of limitations, neither the bank nor Truax exercised "the utmost good faith" toward her.

Finally, Truax is not entitled to credit on his contract in excess of twenty thousand dollars. For, by the clear weight of authority, an obligor under pledged collateral, who settles with the pledgee for less than the face of his obligation, is still liable to the pledgor for the balance. 21 R.C.L. 696; Jones on Collateral Securities (3d ed.), § 716; Zimpleman v. Veeder,98 Ill. 613; Vaughn v. Central State Bank, 27 S.W.2d (Tex.Civ.App.) 1112; Parmley v. Aynesworth, 37 S.W.2d (Tex.Civ.App.) 836; De Clark v. Waters, 10 Wyo. 31, 65 P. 855. In the case last cited, the court states the rule as follows:

"Ordinarily the pledgee of a promissory note as collateral security is not permitted to compromise with the maker and accept less in its discharge or satisfaction than the face value of the paper. There may be instances where such a settlement will be upheld, as where by reason of the fact that the debt is insufficiently secured and the maker is insolvent, a compromise is advantageous to all parties; but, according to all the authorities, it will be sustained only in extreme cases. (Coleb on Col. Sec. 96; Jones on Pledges, 716; Wood v. Matthews, 73 Mo. 479; Garlick v. James, 12 Johns. 146; Depuy v. Clark, 12 Ind. 427; Union Trust Co. v. Rigdon, 93 Ill. 471; Zimpleman v. Veeder, 98 Ill. 613.) Wherenotes held as collateral are surrendered to the maker by thepledgee at a sum considerably less than their face value thepledgor has his election to bring an action against the pledgeein tort for wrongfully disposing of the collateral, or againstthe maker to recover the residue of the face of the notes sosurrendered." (Italics mine.)

There are certainly no equities in this case to cause the court to hesitate to apply this rule against Truax. To apply it, would compel him to pay only that which he agreed to pay. Failure to apply it, permits him to escape his obligation to the extent of $15,400.

MITCHELL, J., concurs with BLAKE, J.