In some states these rules of the common law as to the power of a factor to pledge his principal's goods have been changed by statute. These statutes enable the factor to make pledges of his principal's goods, and the pledgee in such cases acquires rights superior to those of the principal, who, by placing the property in the factor's hands, clothes him with apparent ownership. If the pledgee takes the goods knowing that the pledgor holds them as factor, the rights of the owner are left intact; nor can a factor, in that case, pledge the principal's goods without the principal's consent. The purpose of these statutes is simply to protect bona fide pledgees, and they turn upon the question of reliance in good faith upon the indicia of title. If an owner of goods clothes another person with the indicia of ownership and this person pledges the goods, the owner cannot recover the goods from a bona fide pledgee who took the goods without notice of the owner's rights. This power to make a valid pledge as against the owner holds even though the indicia of ownership were pro cured by fraudulent representation. A pledgee taking in good faith negotiable instruments in pledge, before maturity, for value, and without notice of any defect in the pledgor's title, ac quires a valid holding title as against the owner. Buying stocks on a margin creates the relation of pledgor and pledgee between customer and broker. A partner may pledge firm property to secure a debt of the firm, but not to secure his private debt. A person acting in a trust capacity cannot pledge his trust property for his own debt.
What May be Pledged For reasons of public policy, statutes prohibit the pledging of the pay of soldiers and pensions given by the United States. National banks are prohibited from making loans on their own stock deposited as collateral, unless it is necessary in order to prevent loss on a debt previously contracted in good faith. With these exceptions any legal or equitable interest whatever in per sonal property may be pledged, provided the interest can be put, by actual delivery or written transfer, into the hands or within the power of the pledgee. The general rule is that property not in existence or not yet acquired cannot be pledged; but a contract to pledge is valid, and the pledge may take effect when the property comes into existence or is acquired, provided rights of third persons have not intervened. Property which is poten tially in existence, such as crops in the ground, may be pledged. The most common subject of pledge is incorporeal property, which term embraces a debt or property evidenced by negotiable instruments, such as bills of exchange and promissory notes, non negotiable instruments, corporate stock, bills of lading, and ware house receipts. Incorporeal property is pledged by delivery of the paper which represents the property.
Creation and Establishment of a Pledge Delivery is essential to the establishment of a pledge. The pledge is created by delivering the subject of the pledge into the hands of the pledgee; without delivery no pledge exists. To protect the pledgee against third persons having claims against the pledgor, it is very necessary that the subject be put beyond the control of the pledgor and into the hands of the pledgee, for the pledgee cannot claim the existence of a pledge if there has been no delivery. Delivery by an agent of the pledgor, or to an agent of the pledgee, is sufficient. If some part of a larger quan tity of goods is to constitute a valid pledge it must be separated from the rest and delivered.
Delivery may be actual or constructive. When property is in the possession of a third person, an actual delivery to the pledgee is not required and a constructive delivery is sufficient, such as delivering the recognized symbols of the thing, as the delivery of a warehouse receipt or the key of a warehouse in which goods are lodged or other indicia of control over goods or property. An order by the pledgor upon the keeper, or if the contract of a pledge be in writing, proper notice by the pledgee to the keeper, constitutes valid constructive delivery. After such
notice the keeper ceases to be agent of the pledgor and becomes agent of the pledgee.
The pledgee may be in possession of the subject of the pledge from the beginning; as where goods already pledged are, by agree ment of the parties, used to secure renewed or additional loans, and the subject may be held by the pledgee jointly with others, and actual delivery dispensed with. A mere agreement to deliver or to pledge does not affect the rights of third persons having subsequent claims on the pledgor. The pledgee acquires no rights under such an agreement until the delivery is actually made; when later, under such an agreement, delivery is made, it validates the pledge, but not as against intervening rights which would be affected. A pledge of incorporeal property is made by delivery of the symbols of the thing. Although pledges of this kind of property are usually made by an assignment in writing, such an assignment is not necessary except in the case of corporate stocks.
A delivery with the intention to create a pledge suffices to create a pledge without writing or other act, except in the case of certificates of stock, where a writing is required unless the certificate has been indorsed in blank. To make a valid pledge of corporate stocks as against third parties, there must be a transfer on the books of the company, or a power of attorney authorizing the transfer, or some assignment or contract in writ ing by which the holder may assert title and compel a transfer when desired. The pledge of corporate stocks is effected by the transfer of the certificates rather than of the stocks themselves. By statute or by by-law of a corporation no transfer of stock is valid against the corporation unless made on the books of the com pany; but, as between the parties to a pledge, it suffices that the certificate is delivered with authority to the pledgee, or anyone whom he may name, to transfer it on the books of the company. Bills of lading and warehouse receipts may be pledged by mere delivery without indorsement, even if they are not made out "to bearer." Rights of Pledgor and Pledgee The rights and liabilities of the pledgor may be varied by special contract, with such terms as may be desired. In the absence of such contract, the law fixes the relations of pledgor and pledgee to each other and to third parties. The pledgor is liable for the original debt, and in case of default the pledgee may sell the pledge and apply the proceeds. Any excess is the property of the pledgor, but if the proceeds are less than the debt the pledgor still owes the balance. A pledgor impliedly warrants his absolute title to property delivered in pledge. Unless he gives the pledgee notice of the qualified nature of his title, he is liable to the pledgee for the amount of any liens or encumbrances on the property which the pledgee is obliged to discharge to perfect his rights. The pledgor retains title in the pledge and has the right to assign, by sale or otherwise, his reversionary interest in it; the assignee in this case takes the property subject to the rights of the pledgee. After the pledgee has received notice that the pledgor has assigned, he becomes holder for the assignee. Both the pledgor and the pledgee have the right to sue third persons for injury to the pledged property; if the pledgor has assigned his rights the assignee acquires the right to sue third parties for injury to the pledge. The pledgor has the right to recover the pledged property by paying the debt or performing the engagement secured, and he cannot be deprived of this right at the time of making the contract by any terms in the contract or pledge. In some states pawnbrokers are allowed to sell the pledge and fore close the pledgor's right to redeem it at the expiration of a fixed time, generally a year.