ties, and execution of a conveyance by the mortgagor, without the production of the bond and mortgage, is of itself suspicious enough to put the mortgagor upon inquiry, and if unexplained, to render him chargeable with knowledge of the fraudulent character of the transaction. His liability upon his personal obligation still remains valid and enforcible. The like rule applies as against a person advancing money on a bond and mortgage, who fails to require the production thereof. By his neglect he becomes chargeable with notice of any defect in the title of his assignor.'

$198. THE PLEDGEE'S RIGHTS, IN CASES OF FRAUD, MISAPPROPRIATION, ETC.-A bond and mortgage executed and delivered, without consideration, to be used for a specific purpose, must be applied exclusively thereto. Any other disposition of it is a fraudulent misappropriation, against which the mortgagor is entitled to relief in equity. A bond and mortgage were executed as collateral security for the performance of a contract, which was subsequently canceled. The pledgee, in the meantime, fraudulently assigned the bond and mortgage. An action to foreclose the mortgage was brought by the assignee, but he was not allowed to enforce the security, the pledgees having no title thereto, which was not defeasible by cancellation of the contract, and could not convey any greater title. Under the restricted rule prevailing in certain states, the pledgee or sub-pledgee of a bond and mortgage, receiving the same as collateral security for an antecedent debt, without more, is not a holder for value, in the usual course of business, nor protected from equities arising subsequently to the giving of a certificate of "no defense" by the mortgagor. The pledgee of a bond and mortgagee, however, is not re

sponsible for any misappropriation of the money loaned thereon, where the transaction of pledge has been made with an agent, entrusted with the documents of title and apparent absolute ownership for the purpose of selling the same in the market.'

The sub-pledgee of bonds and mortgages, although holding the same for value, in good faith, and with out notice, is subject to like equities as the pledgee, and in cases of fraudulent pledge, not within the established rules. of estoppel in pais, can acquire no greater right to such securities than were acquired under the original loan. The leading case in New York upon the question of the equities to which assignees for value of bonds and mortgages are subject, arose out of a sub-pledge of such securities. In Bush v. Lathrop a non-negotiable bond for $1,400 was given, secured by a mortgage conditioned to pay the bond. The bond and mortgage were assigned as collateral security for a negotiable note for less than one-fifth the face of the bond, the assignment, which otherwise was absolute in form, reciting the amount of the note as the consideration thereof, but containing a covenant on the part of the mortgagor that the whole amount named in the bond, and interest, was due. Shortly afterwards, the collateral securities were fraudulently assigned by the pledgee for a consideration of $1,475, with a covenant on his part that $1,400 and interest was due thereon. Subsequently the assignees reassigned the securities to the defendant for a consideration of $1,488, paid chiefly in money and the residue in notes, the transaction being bona fide and without notice. The property was valued at $2,000. The administrator of the deceased mortgagor tendered to the last assignee the amount of the principal note and interest for which the bond and mortgage were pledged in the first instance, and upon refusal to re-deliver the security, brought an action.

1 Westervelt r. Scott, 11 N.J Eq.78.

Bush v. Lathrop, 22 N. Y. 535.

therefor. The court below found for the sub-pledgee, but the judgment was reversed at general term, and the Court of Appeals affirmed the latter decision.

§ 199. REALIZATION OF THE SECURITIES BY PLEDGEE. -The pledgee, in the exercise of powers granted by contract to sell or collect collaterals, must act in good faith. Where a contract of pledge provides that such securities may be sold, the pledgor should make previous demand of payment of the original debt.' A transfer thereof under such power, to the obligor and mortgagor, or to a person in his interest, for a sum sufficient only to pay the principal debt, but grossly inadequate to the real value of the collateral securities, the mortgagor or person in his interest buying for the purpose of cancelling the same, amounts to a conversion, and the pledgee may be sued for the damages resulting from such wrongful sale.' It is the duty of the pledgee, where a bond and mortgage are pledged as collateral security to secure the payment of a promissory note previously given to the plaintiff, such being the express condition of the bond to produce the note for cancellation at the time judgment is entered on the bond, for it may have passed into the hands of a holder for value, without notice. The pledgee, in enforcing the mortgage security, is not subject to a defense of usury in the principal demand, a promissory note, for which the bond and mortgage were assigned as collateral security. And where a mortgage was made to secure a loan, and other collateral securities are given, the equity of a subsequent mortgagee of part of the same property to require such securities to be marshalled in his favor will not follow them into the hands of an assignee for value, without notice."

$200. PLEDGOR'S RIGHTS UPON PAYMENT OF DEBT. -Where a mortgagor has paid to a pledgee the amount of

1 Campbell v. Parker, 9 Bosw, 322. Ibid.

Matteson v. Matteson, 55 Wis.540.

427.

Stevens v. Reeves, 33 N. J.Eq.

'Reilly v. Mayer, 12 N. J. Eq. 55.

the note made by the mortgagee, to secure the payment of which the bond and mortgage executed by such mortgagor had been pledged, and received the same and the collaterals, he is subrogated as against a subsequent assignee of the bond and mortgage, chargeable with notice that the mortgagee, at the time of the assignment, had not possession thereof, to the rights of the payee of the note, and is allowed to setoff, in a suit in equity to foreclose by the assignee, the full amount of the note and interest, although he took up the same for less than its face. The title of the assignee being subject to the pledge, it was immaterial that he had no notice thereof, by record or otherwise; nor was the title of the mortgagor subsequently redeeming the bond and mortgage, so pledged, affected by payment of the indebtedness.' Where a pledgee, holding a bond and mortgage as collateral security, brought suit to foreclose the security, claiming only the amount of the debt and obtained a decree for a lien on the land for the amount due and for a sale, and the pledgor paid the amount due and then brought his own suit in equity to foreclose, for the full amount of the bond, he was allowed to recover, the former decree upon the special title of the pledgee not operating as a bar to the suit by the pledgor as the general owner of the securities. An equitable mortgage of title deeds was made to secure a loan of £3,000. The pledgee sub-pledged the mortgage securities for a loan to himself of £1,200. The sub-pledgee failed to inform the mortgagor, and subsequently, upon a promise of the pledgee to substitute other equally valuable securities, surrendered the mortgage securities to the pledgee. The mortgagor then paid his loan to the pledgee, and received the deeds. The substituted securities proving worthless, the sub-pledgee sought to enforce his claim as against the mortgagor. The want of notice and his surrender of the deeds were sufficient to defeat his claim.'

98.

1 Kamena . Huelbig, 23 N. J. Eq.

O'Dougherty v.Remington Paper

Co. 81 N. Y. 496.

In re Lord Southampton's Est., L. R 16 Ch. D. 178.

PART III.

THE PARTIES TO THE INSTRUMENT.

CHAPTER XX.

THE CONTRACT OF THE SURETY.

$201. The parties to the instrument.

202. The contract of the surety.

203. The contract, as proved by parol, or by terms of the instrument.

204. The general liability of the surety.

205. The surety's liability on invalid loans, or forged or fraudulent paper. 206. The surety's liability on official bonds.

207. The liability of married women and minors as sureties. 208. Obligations of sureties for married women and minors.

$201. THE PARTIES TO THE INSTRUMENT.-The rights and liabilities of parties to negotiable instruments are governed by the order of their names on the paper, and by their relations to each other, and the holder thereof. Where the payment of such instruments is secured by the deposit of collateral securities held by either, or one or more of the parties thereto, as is frequently the case, the rights accruing in relation to such collateral securities are governed by equitable rules, which have been so uniformly enforced as to become part of the commercial law of the country. The principal relations of parties to the instruments thus created are those of the holder thereof, the maker, surety, indorser, and guarantor, and drawer, drawee and acceptor, and payee of bills of exchange. The equitable principle of subrogation to collateral securities is applied