debt owing by the payee, it is subject to any defense which the maker could set up in an action thereon by the payee.5 However, it has been held that if a note is indorsed as collateral security for a precedent indebtedness by the payee to the indorsee after maturity, it is not subject to the plea of failure of consideration in favor of the maker.

§ 558.

Transfer after maturity-Priority of transfer—Different notes of different persons. If a creditor, holding his debtor's note and also the note of another person as collateral, transfers them to different persons, after the notes are due, the rights of the transferees will depend on the priority of the transfers. A first transfer of the collateral operates to extinguish the original debt pro tanto, and the party taking a subsequent transfer of the original note takes it subject to a credit pro tanto. But, if the original note is first transferred, the collateral will follow it into whose soever hands it passes, being subject in them to any defense the maker might have made in first hands."

§ 559. Pledgor and pledgee-Laches, negligence or tortious acts-Statute of limitations.-That a pledgee may become liable through his gross negligence or by his tortious dealings with the pledge, where the pledgor is injured thereby, and that the pledgee of negotiable paper as collateral security is bound to use ordinary diligence in preserving the legal validity of the pledge, and is answerable for a loss through a corresponding degree of negligence to the extent of such loss, are propositions well established. And where a creditor holds property of the

5 Cooke v. Mesmer, 164 Cal. 332, 128 Pac. 917.

6 Rohde v. Lodge, 15 Tex. 446.

7 Ware v. Russell, 57 Ala. 43, 29 Am. Rep. 710.

8 Citing Coleb. Coll. Sec., § 114 and notes; Lamberton v. Windom, 12 Minn. 232 (Gil. 131), 90 Am. Dec. 301; Jemison v. Parker, 7 Mich. 355; Griggs v. Day, 136 N. Y. 152, 32 N. E. 612, extended note, 32 Am. St. 718; Cal. Civ.

Code, § 1714. For an answer, an action on a note given as collateral seIcurity which was held not to state a defense for failure to allege that the stock charged to have been converted was of any value or that defendant had sustained any damage, and for failure to plead by way of set-off or counterclaim, see Wills v. James Rowland & Co., 117 App. Div. 122, 102 N. Y. S. 386.

debtor as collateral security, and also property of a third person, the surrender by the creditor of the property of the debtor so held, without the consent of such third person, has the effect of forfeiture of the right to hold as collateral the property of such third person. It has been held also that where, by the negligence of the pledgee, the collection of collateral securities has been lost by operation of the statute of limitations, and such statutory defense has become perfect, the pledgor may, by a counterclaim, recover the value of his collateral, even though it be not known that his debtor will, when sued on such collateral, plead the statute in defense. 10

§ 560. Renewals - Continuance of security- Extinguishment of debt.-If collateral to secure a note is placed in the hands of the creditor and the note is renewed at the same rate of interest with the same parties, the debt is the same and the collateral security remains as securing it.11 Where the holder takes a renewal note he is under no duty to keep alive the original note for the benefit of accommodation indorser.12 So it is said in a Maryland decision that: "Wherever collateral security is given for the payment of a debt, the collateral will continue as a security until the debt is satisfied, unless both the parties to the original contract agree to its surrender or the pledgee in some other way discharges or releases it. If the debt be evidenced by a promissory note and upon the maturity of that note the parties intend by a renewal merely to extend the time for payment and nothing more, then a simple renewal so made will not extinguish the original debt.13 The same debt will still remain. Consequently, the collateral pledged for it in the first instance will not be released where the renewal transaction is, and was meant by both parties to

9 In re Sanderson, 150 Fed. 236. 10 Hawley Bros. Hardware Co. v. Brownstone, 123 Cal. 643, 56 Pac. 468, citing Bank v. O'Connell, 84 Iowa 377, 51 N. W. 162, 35 Am. St. 313; In re McQueen, 104 Pa. St. 595, 49 Am. Rep. 592; Miller V. Bank, 8 Watts (Pa.) 192, 34 Am. Dec. 451.

11 Partridge v. Williams, 72 Ga. 807; First Nat. Bank v. John McGrath & Sons Co., 111 Miss. 872, 72 So. 701.

12 Elgin Nat. Bank v. Goecke, 213 Ill. App. 559.

13 Citing Flanagan v. Hambleton, 54 Md. 222.

be, a mere extension of the time for payment.14 It equally follows that the ex parte unexpressed intention of the pledgor that the collateral shall not apply to and secure a renewal which is, in fact, a mere extension of the time for payment, and not an extinguishment of the original debt, can not defeat the right acquired by the pledgee under the contract made by both of them when the debt was created. The right so acquired is the right of a bona fide holder for value.15 And it is a right to retain the collateral until the debt shall be paid or extinguished.16 And where a renewal note is signed by an accommodation indorser it may be enforced against such indorser, notwithstanding that there have been several subsequent renewals of the note.17 In a Wisconsin case a note was indorsed in blank and had been deposited with a person for safe keeping and he gave plaintiff the note as collateral security for borrowed money such pledgee receiving the same in good faith without knowledge of defects in the title of the pledgor. When the note became due the other collaterals in the pledgee's hands were of sufficient value to discharge the indebtedness but it was not discharged. Thereafter the pledgor obtained other loans from the pledgee agreeing that all collaterals in the latter's hands should remain as security for the last as well as for the preceding loans. Subsequently the makers paid the pledgor the amount of the note and took his receipt upon his claim that the note had been mislaid and that he would send it when found. The pledgor became insolvent and the collaterals were insufficient to satisfy his indebtedness to the pledgee. It was decided that the latter might apply the other collaterals to the payment of the second loan and hold the note in question to secure the first for which it was pledged before its maturity.18 Under a Maine decision the defendant signed his name on the

14 Citing 3 Rand. Com. Pa., § 1371: Ryan v. Security Sav. & Commercial Bank, 271 Fed. 366; Commercial Sav. Bank v. Schaffer, 190 Iowa 1088, 181 N. W. 492; White v. Hulls, 59 Mont. 98, 195 Pac. 850.

15 Citing 1 Danl. Negot. Inst. (6th ed.), § 824.

16 Williams v. National Bank, 72 Md. 441, 20 Atl. 191.

17 Elgin Nat. Bank v. Goecke, 213 Ill. App. 559.

18 Strong v. Bowes, 102 Wis. 542, 78 N. W. 921, a question of application of payments.

back of a note at its inception and before its negotiation by the payee, and his signature was above the indorsement of the payee, and the note was discounted by the plaintiff in the regular course of business for its customer, the payee, and without knowledge that the true facts and relations of the parties were otherwise than as disclosed by the note itself. This note was a second renewal of a note of like tenor, by the same. parties and in the same order. Upon its maturity a renewal note was executed except that it did not bear the name thereon of the defendant and the holder was requested to continue to hold the note as collateral security for the new note, and it was held that the plaintiff could do this without thereby releasing the defendant from the liability which it had assumed as indicated by the note.19

§ 561. Right of holder of collateral to sue thereon.-If the debt secured by collateral is not paid at or after maturity, the holder of the collateral can sue the maker and apply the proceeds from the collateral to the payment of the debt.20 But after payment of the secured debt, the holder of the collateral has no right to enforce payment of the collateral, and it should be turned over to the person entitled thereto.21

§ 562. Extent of recovery-Bona fide holder.-Upon the question of the extent of recovery by a bona fide holder upon a note held by him as collateral security the general rule seems to be that his recovery is limited to the extent of the amount due on the debt, claim, advances, payments or loan made, and which it was intended to secure by such collateral.22 So a

19 Merchants Co. v. Jones, 95 Maine 335, 50 Atl. 48.

20 American Nat. Bank v. Hill, 169 N. Car. 235, 85 S. E. 209.

21 In re Philpott, 169 Iowa 555, 151 N. W. 825, Ann. Cas. 1917B, 839.

22 Brown v. Callaway, 41 Ark. 418 (may recover not exceeding amount); Laster v. Stewart, 89 Ga. 181, 15 S. E. 42; Partridge v. Williams, 72 Ga. 807; Exchange Bank v. Butner & Edge

worth, 60 Ga. 654 (bona fide holder to extent of money loaned); Bealle v. Bank, 57 Ga. 274; Lull v. Stone, 37 Ill. 224; Valette v. Mason, 1 Ind. 288 (can only recover debt actually due); First Nat. Bank v. Werst, 52 Iowa 684, 3 N. W. 711 (but this was an accommodation note indorsed after maturity); Gardner v. Maxwell, 27 La. Ann. 561; Smith v. Hiscock, 14 Maine 449; Stoddard v. Kimball, 6 Cush.

party receiving negotiable paper as collateral security is entitled to be protected as a bona fide holder to the same extent as one who becomes an absolute owner and may sue in his own name as the real party in interest. The only difference between the rights of an absolute bona fide owner for value and a bona fide holder as collateral security, as against the maker, is that the former may recover in full, and the latter, if there be equities, is restricted to the extent of his advances. 23 Again, the extent of recovery is held to be the amount of the original pledgee's debt to his transferee; not otherwise paid or realized from other securities;24 or an amount only which is not beyond what will cover indorsements to be made and against which it was designed as security.25 So the balance

(Mass.) 469; Chicopee Bank v. Chapin, 8 Metc. (Mass.) 40; Burnes v. New Mineral Fertilizer Co., 218 Mass. 300, 105 N. E. 1074; International Bank v. German Bank, 71 Mo. 183, 36 Am. Rep. 408; Johnson v. Grayson, 230 Mo. 380, 130 S. W. 673; Fifth-Third Nat. Bank v. McCrory, 191 Mo. App. 295, 177 S. W. 1058; Yellowstone Nat. Bank v. Gagnon, 19 Mont. 402, 48 Pac. 762; Barmby v. Wolfe, 44 Nebr. 77, 62 N. W. 318; Haydon v. Nicoletti, 18 Nev. 290, 3 Pac. 473; Texas Bank & Trust Co. of El Paso, Tex. v. Cavin, 26 N. Mex. 326, 192 Pac. 365; Manhattan Sav. Inst. v. New York Nat. Exch. Bank, 170 N. Y. 58, 88 Am. St. 147; Mechanics &c. Bank v. Livingston, 4 Misc. 257, 23 N. Y. S. 813 (but note was for accommodation); Kerr v. Cowen, 17 N. Car. (2 Dev. Eq.) 356; Sutton v. Kautzman, 6 Ohio Dec. 910; Memphis Bethel v. Bank, 101 Tenn. 130, 45 S. W. 1072 (to extent of amount justly due on debt secured); Wright v. Hardie, 88 Tex. 653, 32 S. W. 885; Texas Banking & Ins. Co. v. Turnley, 61 Tex. 365; Syler v. Culp (Tex. Civ. App.), 138 S. W. 175; Iowa City State Bank v. Friar (Tex. Civ. App.), 167 S. W. 261; Union Nat. Bank v. Roberts, 45 Wis. 373; Stevens v. Campbell, 13 Wis. 375; Bond v.

Wiltse, 12 Wis. 611; Wolf v. American Trust & Sav. Bank, 214 Fed. 761. Where the holder of collateral sues thereon, the maker may set up in defense what would have been available against the payee, and thus limit the amount of recovery to the extent of the interest of the pledgee. Gold Glen Mining, Milling & Tunneling Co. v. Dennis, 21 Colo. App. 284, 121 Pac. 677. Examine Steere v. Benson, 2 Ill. App. 560; Mahaska County State Bank v. Crist, 87 Iowa 415, 54 N. W. 450; Claflin v. Rowlinson, 2 Kans. App. 82, 43 Pac. 304; Mechanics Building Assn. v. Ferguson, 29 La. Ann. 548; Citizens Bank v. Payne, 18 La. Ann. 222, 89 Am. Dec. 650; Helmer v. Commercial Bank, 28 Nebr. 474, 44 N. W. 482; Allaire v. Hartshorne, 21 N. J. L. 665, 47 Am. Dec. 175; Fourth Nat. Bank v. Snow, 3 Daly (N. Y.) 167; Pearce & Miller Eng. Co. v. Broner, 10 Misc. 502, 31 N. Y. S. 195: Curtis v. Mohr, 18 Wis. 615; Watson v. Russell, 3 Best & S. 34; Wiffen v. Roberts, 1 Esp. 261.

23 Hayden v. Nicoletti, 18 Nebr. 290. 24 Kinney v. Kruse, 28 Wis. 183 (note here was put into circulation by fraud). 25 Williams v. Smith, 2 Hill (N. Y.) 301.