This section of the book is from the "Canadian Banking Practice" book, by John T. P. Knight.
Question 535.— The bank holds for a certain note security from the promissor, which at the time it is hypothecated is declared to be pledged for the payment of all his present and future liabilities to the bank. The note is not paid by the promissor, but is taken up by the endorser. Subsequently the endorser borrows money from the bank on the security of the note. Can the bank legally hold it and the relative security, and can it deal with the latter on the terms covered by the letter of hypothecation?
Answer.—Our opinion is that the payment of the note to the bank by the endorser gives the latter the right to receive the note and security, and that (assuming that as between, the promissor and himself the note still remains unpaid), he has the right to re-transfer the note and security to the bank as security for a loan he is getting.
The remedy given to the bank under the letter of hypothecation would continue in force according to its terms, and if wide enough to include the liability on this note there would be no legal objection to the bank proceeding under it.