Sec. 108. Conditional Sales

The term "conditional sale," is used to describe a transaction in which a seller of goods parts with their possession to the buyer, but in his contract reserves title for purposes of security.

A conditional sale is not technically a lien but a reservation of title. But it is for practical purposes a lien, the buyer being in a position of an owner, subject to the risk of loss, etc.

We are not here concerned with the conditional sale except to notice its operation as a lien or in the nature of a lien. As between the parties the contract governs. If the title is not to pass until a condition is performed, e.g., the payment of the purchase price, it will not pass and the property can be recovered by replevin or in the manner provided by the contract.

Where one has a right to regain the goods by reason of his reservation of title, his conduct may show that he waived his rights, as by bringing suit for the price, etc.

It was announced in most of the earlier cases that a conditional sale was a transaction whose provisions were good against third parties, and a seller could assert his title against those who had dealt with the purchaser under the belief that he was the owner of the goods, either becoming purchasers or creditors. But because this rule operated very harshly on purchasers and creditors legislatures have passed recording laws in most states in which it is provided that the reservation of title will not be effective against purchasers of such goods from the purchaser in the conditional sale, or effective against creditors of such conditional purchaser, unless certain formalities are complied with, as having them in writing, executing them in a certain way and recording them, or unless the party involved had actual notice of the sale.

Statutes of this sort do not apply to the rights of the parties themselves and the seller may assert his reserved title against the conditional purchaser, though he may not have taken the precautions of proper registration. Neither does it apply where a third party concerned had actual notice, nor where the seller has not parted with possession to the purchaser.

Sec. 109. Pledges

A pledge is a deposit by a borrower of personal property with the lender in security for the debt.

One pledges property when he deposits it with another to secure the payment of a debt or the performance of any obligation. The term pawn is also used to signify the transaction especially where tangible property is subject of the transfer and the lender is in the business of loaning money on chattels which he takes in his possession. Such a lender is known as a pawnbroker.

The term pledge is thus used to describe both highly important and petty transactions in the commercial world. If one deposits a trust deed or certificate of stock with a banker in security for a loan, the transaction is a pledge; if he borrows money from a friend and gives his watch as security, the transaction is a pledge; if he deposits the watch with a pawnbroker to secure a loan, the transaction is a pledge.

The term pledge is also used to describe the thing pledged.

The phrase "collateral security" is also used to indicate a pledge, especially where the thing pledged is intangible property.

A pledge differs from a chattel mortgage very materially. The form of transfer is entirely different; title does not pass even in form and in a pledge, the property is always with the lender, while in a chattel mortgage, as we have seen, the title is with either, according to the contract. Pledges are not placed of record as are chattel mortgages, for the lender's possession of the thing pledged protects him.

The party who owns the property and who deposits it with the other is called the pledgor. The party to whom the pledge is made is called the pledgee.

Any form or sort of personal property may be pledged. Thus one may pledge his watch, his bonds, his mortgages, his certificates of stock. Where intangible property is pledged, it is accomplished by means of an assignment, to which we will devote a separate chapter.

A pledge need not be in writing and the contract may be very informal. Thus A asks his friend to loan him $10 and hands him his watch as security. This is a pledge. The transaction in such a case is very simple.

In the case of a pledge of property which is represented by a document of title the pledge may be by transfer of the document.

We know from the law of sales of personal property that a sale may be accomplished by transferring the document of title, where there is one, that is, the bill of lading, the warehouse receipt, etc., the possession of which is necessary to obtain the goods or at least is evidence of the title to the goods. In the same way property may be pledged by transferring the document of title. Such document when transferred would not necessarily indicate whether the holder was pledgee or purchaser. Thus, the pledge of a warehouse receipt would probably simply hold the receipt endorsed in blank. As between the parties the nature of the transaction would be provable.

Delivery of possession either of the article itself, or of the document which represents the article (the article being with some third person, as a carrier, warehouseman, etc.) is absolutely necessary to constitute a pledge. Thus I cannot pledge my corn unless I deliver the corn to the pledgee; unless the corn is held by some third person and my title to it is evidenced by a bill of lading or receipt, in which case I can pledge by transferring the document of title.

Where a pledge is accomplished by a transfer of a document of title, or where the thing pledged is intangible property, like a note, bond, certificate of stock, etc., the question arises whether indorsement or written assignment is necessary. Provided possession is given, endorsement or assignment to the pledgee is not strictly necessary though it is customary and is also highly convenient to the pledgee in enforcing his pledge. If for instance I hold an unendorsed note as pledgee I may have a right to realize upon it as pledgee if the pledgor defaults, but I might be greatly embarrassed without the endorsement and require the assistance of a court to protect me in my rights.

A pledgee is not confined to his remedy upon the pledge. He may bring suit upon the debt and in this way satisfy his claim. There is no obligation on his part to sell the property pledged. He may, however, and this perhaps is the usual case, find his recourse by a sale of the pledge. His express or implied contract is that he shall have the right to sell the pledge if the debt is unpaid at its maturity and apply the proceeds upon his debt. If the sale does not bring the amount of the debt the pledgor still owes the deficiency. If the sale brings more than the amount of the debt the pledgor is entitled to the surplus after the reasonable expenses incident to the sale are subtracted.

Where notes are pledged, the question arises whether the pledgee may sell the notes, or whether he only has the right to hold them until maturity and collect them. By the weight of authority he cannot sell them. Thus, if A makes a note to B, and B pledges this note with C for a loan, C's right is to collect the note and apply the amount collected on his debt. By special contract however he could sell the note. The same rule applies to bonds, and similar choses in action.229

The contract of the pledge may set forth the circumstances under which the sale is to take place. It

229. Peacock v. Phillips, 247 111. 468.

may, for instance, provide that the sale may be either public or private or that it may be with or without notice. But whatever the terms of the contract, the general law provides that the sale must be conducted in. the utmost good faith. Therefore, a pledgee who has a right of private sale might nevertheless find it to his advantage to sell at public sale for the would thereby protect himself against an allegation of bad faith. The pledgee should give full notice of the sale so as to attract purchasers and obtain the highest price possible. The pledgee can not purchase at his own sale, unless the pledge specifically gives him that right.