In case a valid pledge of property is made, the pledgee ac quires, as to third parties, no better title than the pledgor had: if the pledgor's title was perfect or defective the pledgee's title is perfect or defective to the same degree; the pledgee's rights are no better than the pledgor's, with two exceptions: (1) if it is a case of pledge of negotiable instruments, or (2) if the owner of the property has clothed the pledgor with the indicia of owner ship, such pledge made in good faith entitles the pledgee to hold against the real owners.
Thus, if certificates of stock are delivered in pledge, the in dorsement of these or the signing of a right of attorney to transfer them is assumed to invest the holder with apparent ownership, and the pledgee who accepts them without notice and in good faith acquires good title. Or, if a person accepts negotiable paper before maturity, in the usual course of business, as collateral security upon a loan made at that time, he becomes a bona fide holder. The indorsement and delivery of the paper transfer to the pledgee perfect title to the paper. Except in Wisconsin, the courts hold that taking negotiable instruments as collateral security for pre-existing debt constitutes the pledgee a holder for value.
If the pledgor is known to the pledgee to be an agent of the owner, the pledgee cannot acquire perfect title unless he inquires into the authority of the agent to make the pledge; nor can the pledgee hold against the owner if the pledgor has acquired pos session of pledged certificates of stock by theft or fraud, or if the instruments, negotiable or non-negotiable, arc forgeries, except under the Uniform Negotiable Instruments Law, or if the indorse ments are forged. The pledgee may assign the interest which he acquires in the pledge; he may assign his whole interest, or he may subpledge it to secure his own debt; or he may turn it over to a third person to hold for him. His assignee or subpledgee, in turn, acquires the pledgee's title, but no more, with the same two exceptions noted above. The pledgee, before default of the pledgor, has the right to hold possession of the pledged security. On his death this right passes to his personal representatives and lasts until the debt is fully satisfied. If the pledgor or an out sider interferes tortiously with the possession of the pledgee, the pledgee may maintain detinue or replevin against such interferer, recover damages against the outsider, and, if the sum thus ac quired exceeds his special interest, hold the residue as trustee for the pledgor.
The Keeping of the Pledge Ordinarily the pledgee has no right to use the pledge in any way, unless by express or implied agreement or assent of the pledgor. He may not use the property pledged to its injury, and is allowed to use it only to the degree that is needful for its proper care, that is, to keep it in condition. To use it wrongly does not terminate the pledge, but makes the pledgee liable for resulting injury. If any profit or increase accrues from the collateral during the life of the pledge, the pledgee is to hold such profit or increase as part of the security, using it to reduce the debt and holding any excess in trust for the pledgor. It is the pledgee's duty to keep and render a strict account of all income derived by him from the pledge; and if there is an obligation to employ the pledge at a profit the pledgee may be held liable for the profits which might have been received but for his negligence. The pledgee can collect dividends on stock and interest coupons on bonds; if the stocks run in the pledgee's name, he may vote them. On the other hand the pledgee is entitled to reimbursement for expenses necessary to keep and care for the pledge; if stocks held in pledge are assessed, the pledgee may charge the assessments to the pledgor.
In the keeping of a pledge the pledgee is required to exercise ordinary care, what constitutes ordinary care depending upon the nature and value of the pledge and other factors; it may be simply safe-keeping, as in the case of jewels, or storage in approved ware houses and insurance in the case of grain; in the case of negotiable paper the due diligence required of the pledgee is that of the holder, who would attempt to collect it when due lest the parties liable on it become insolvent. Neglect by the pledgee to collect these collateral instruments or delay on his part to collect them until the parties become insolvent makes him legally guilty of negligence. His proper duty is to present such paper for pay ment at maturity, and in case it is not paid give notice to the indorsers. Otherwise he is liable for losses; this rule, however, does not apply as against the pledgor himself. The pledgee would be liable if he neglected to use ordinary prudence and to put the collateral in suit to prevent loss.