APPEAL FROM THE CIRCUIT COURT OF THE UNITED STATES FOR THE SOUTHERN DISTRICT OF NEW YORK.
Mr. JUSTICE MATTHEWS, after stating the case as above reported, 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 pledgor, but, if so, it can be only where the pledgor holds as agent of the pledgee. By virtue of the pledge, the pledgee has the right by law, on the default of the pledgor, to sell the property pledged in satisfaction of the pledgor's obligation. As in that
transaction the pledgee is the vendor, he cannot also be the vendee. In reference to the pledge and to the pledgor, he occupies a fiduciary relation, by virtue of which it becomes his duty to exercise his right of sale for the benefit of the pledgor. 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 monuments 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.
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 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 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.
The relation of a creditor secured by such a deed of trust to a sale made under 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 ...