
    LITCHFIELD COUNTY,
    OCTOBER TERM, 1859.
    Present, ^Stores, O. J., Henman, Ellsworth, and Sanford, Js.
    In the Matter of the Litchfield Bank.
    I'he L bank borrowed of the C bank $5,000 and gave its notes therefor, with $7,000 of its circulating bills and certain notes of Y as collateral security, with an agreement that the bills might be put into circulation by the C bank, after the maturity of the notes given by the L bank, if they were not paid at maturity. The notes were not paid when due. Soon after the notes fell due the ,L bank failed and passed into the hands of receivers, after which the C bank, with full knowledge of the failure, and without notice to the officers or receivers of the L bank, sold the $7,000 of bills in the market. ' The C bank credited the proceeds of the sale of the bills to the L bank, and presented to the receivers a claim for the balance of the $5,000 and interest. The bills had gone into the hands of bona .fide holders, by whom they were presented against the L bank. Held, 1st. That the C bank had no right, after the failure, to sell the bills in the market, and thereby put them into circulation. 2d. That in doing this the C bank had made itself liable to the L bank, not for the par value of the bills, but for the actual injury which the L bank had sustained by having the bills put into circulation, which was the amount of the dividend which should be paid by the receivers to the holders of the bills. 3d. That whatever was thus paid on the bills should therefore be applied in reduction of the claim of the C bank upon the original loan. 4th. That the O bank had a right to retain the Y notes as security for any balance which might remain due after such application.
    This was a proceeding upon the report of the receivers of the Litchfield Bank to the superior court, under the provisions of the statute on the subject, Rev. Stat., tit. 8, § 249.) The report stated that the Connecticut Bank had presented to them a claim of $4,725.93 against the Litchfield Bank, which, for reasons stated in the report, they had disallowed. The [ *576 ] Connecticut Bank was cited in to show reason why the disallowed should not be confirmed, and a hearing was had .before the court, upon which the following facts were found.
    
      On the 23d day of July, 1858, the Litchfield Bank, then just organized, borrowed of the Connecticut Bank $5,000, for the purpose of enabling itself to commence redemption in Boston, and gave therefor two promissory notes, for $2,500, each, payable in sixty and ninety days. To secure the payment of the notes, the Litchfield Bank delivered to the Connecticut Bank its circulating bills, to the amount of $7,000. The bills at the time were at a discount, but at no greater discount than often attaches to bills of banks which do not redeem in Boston. The Litchfield Bank continued specie payments until about the 15th of October, 1858, when it failed, and passed into the hands of receivers. At the time the loan was made it was agreed that these bills might be put into circulation after the maturity of the notes, if they should not be paid at maturity, but nothing was said as to a sale of the bills for a less sum than their nominal value, nor was the contingency of the insolvency of the bank alluded to in the negotiation. Before the maturity of the notes the Litchfield Bank passed to the Connecticut Bank certain notes of Van Clief & Smith, of the nominal value of $5,000, to be held also as collateral security for the loan, or discounted and the avails credited to the Litchfield Bank. The notes of the Litchfield Bank were not paid at maturity, and have never been paid. The Van Clief & Smith notes all matured and none were paid. A part of them, however, were discounted, and the remainder retained by the Connecticut Bank. On the 16th of February, 1859, the Connecticut Bank, with full knowledge of the failure of the Litchfield Bank, and without notice to either the officers or receivers of the Bank, sold the $7,000 in circulating bills at a large discount, and they finally came into the possession of parties in the city of New York, who were ignorant of any equity of the Litchfield Bank with regard to them, and who presented them to the receivers, and claimed their full, amount, which w'as allowed.
    [ *577 ] Upon these facts the court held, 1st. That the Connecticut Bank had no right to sell the bills at a discount, either with or without notice to the Litchfield Bank, and charge the Litchfield Bank with the loss. 2d. That having so sold them, and their nominal value exceeding the amount of the debt and interest, the claim of the Connecticut Bank should be disallowed, and its lien on such of the Van Clief *& Smith notes as were not discounted and credited should be given up, and the notes transferred to the receivers; but that the notes discounted and credited might be retained. 3d. That if the receivers should be compelled to pay a dividend to the bona fide holders of the bills, exceeding the loan to the Connecticut Bank and interest, such excess would he recoverable from the Connecticut Bank. The court therefore confirmed the disallowance of the claim by the receivers.
    The Connecticut Bank thereupon filed a motion in error and brought the case before this c'ourt.
    
      Loomis and A. S. Treat, for the plaintiffs in error.
    1. The Connecticut Bank had a right to dispose of the bills in the market. If they were money, then it had a right to dispose of them as it would have done of any other money, that is, it had a right to apply them on its debt at some value, at once, without notice to the Litchfield Bank. It is only by common consent that bank lulls are regarded as money, and this solely because they represent that which has value. This common consent determines their value. In the case of a solvent bank it'gives them a par value, because they represent their full amount of actual value. In the case of an insolvent bank it of course gives them a less value, because they then represent a less value. The value which they then have is their market value, which is determined by the condition of the bank and its ability to redeem them. In this case the bills were sold at their market value. The bank had a right, treating them as money, to apply them to its debt at this market value. Now, by the contract itself, the bank had the right to put the bills into circulation if the debt was not paid. But what is the sale of the bills but putting *them into circulation? [ *578 ] The putting them into circulation in the ordinary mode, would perhaps be the exchanging them for other money. But th^Connecticut Bank could not exchange them at anything above their market value, and a sale of them is merely exchanging them for other money at this value. And if the bank could put any of them into circulation it could the whole. The agreement was that if the debt was not paid, the bills (that is, the whole $7,000,) might be put into circulation. It is evident that it was not intended that they should be put into circulation only at their par value, for, if so, why was so large an amount of the bills deposited as security ? The margin beyond the debt would be of no advantage whatever to the bank. This margin was given for the very purpose of securing the Connecticut Bank in case of a depreciation of the bills. The bills of course were not current after the bank had failed, and could be put into circulation only by a sale. The bills were mortgaged, not pledged, to the Connecticut Bank. This distinction we deem important in determining the right of the bank to sell them, since a mortgage carries the title, while a pledge creates only a special property. Story on Bailments, § 287. 2 Sto. Eq. Jnr., § 1030. Jones v. Smith, 2 Ves. Jr., 378. 4 Kent Com., 138. 1 Parsons on Cont., 595. Huntington v. Mather, 2 Barb., 538. Thus, considering both the contract and the nature of the property, the bank had a right to dispose of the bills as it has done. But we claim that the bills were in no proper sense money. The bank had, failed. They were no longer current, and could not be used as money, and are therefore not to be regarded as money. Foquet v. Hoadley, 3 Conn., 534. Nor were they like the negotiable notes of individuals, as such notes have no market value. They were mere chattels.
    2. But, supposing that the plaintiffs in error are to be regarded as having sold the bills without right, that is, tortiously, so as to have subjected themselves to a liability for them ; the question then arises, what is the ruje of damages ? The legal rule is well settled to be, in such a case, the value of the property at the time of the conversion, and interest. [ *579 ] * West v. Pritchard, 19 Conn., 212. Jones v. Hoyt, 25 id., 374. Stearns v. Marsh, 4 Denio, 227. Wilson v. Little, 2 Comst., 443. Allen v. Dykers, 3 Hill, 593. Dykers v. Allen, 7 id., 498. But if it be regarded as inequitable that the Litchfield Bank should be left to pay more, by way of dividend on the bills, to the parties holding them, than the amount which we realized from them at their market value, then we are willing to be charged with whatever amount the Litchfield Bank may have to pay as such dividend, instead of being charged with the market value merely. But in any event we have a right to retain the Van Clief & Smith notes, as there will be a balance of our claim remaining unpaid, and the collateral security can not be taken out of our hands until we are fully paid.
    
      G. C. Woodruff and L. G. Peck, for the defendants in error.
    The real indebtedness of the Litchfield Bank is only $5,000, fijr money lent by the Connecticut Bank. Yet there is now presented to the receivers a claim for $12,000, the original debt and the $7,000 of bills. These bills are in the hands of bona fide holders, who have a right to payment, and the receivers will be compelled to pay them so far as the assets go. As they can not resist the payment of the bills, they resist the payment of the $5,000. We claim that this debt is virtually paid. The Connecticut Bank, by putting the bills into circulation, became accountable for them at their par value. The bills, we claim, were placed in their hands as a pledge. If a pledgee would avail himself of a pledge for the payment of the debt, he must take one of the following courses: 1st. If the pledge be of personal chattels, he must either obtain a judicial order to sell, or sell at public sale after notice to the debtor. Wheeler v. Newbould, 16 N. York, 392. 2 Kent Com. 582. 4 id., 139. Parker v. Brancker, 22 Pick., 46. Willoughby v. Comstock, 3 Hill, 389. 2d. If the pledge be of choses in action, he can not sell at all, but must collect the debt and apply the proceeds. Wheeler v. Newbould, supra. Garlick v. James, 12 Johns., 146. 3d. If the pledge is of money or of bills, he can not sell, but can *only apply so much [ *580 .] thereof as maybe necessary in satisfaction of the debt, and account for the balance at its nominal value. This last is the case now before the court. The deposit with the Connecticut Bank was strictly a pledge and not a mortgage. 2 Kent Com., 577. In this view the debt to the Connecticut Bank is extinguished. Even if the bills were not money, but were choses in action, or were personal chattels, as claimed by the plaintiffs in error, yet the Connecticut Bank had no right to sell them without notice to us, if they had the right to sell them at all; and having sold them, and thereby subjected the Litchfield Bank to the payment of a full dividend upon them, they have no right to require from the bank a dividend upon their claim besides. And if the debt is to be regarded as extinguished, the Connecticut Bank has of course no right to retain the Van Clief & Smith notes, which were deposited with it only as security for the debt. It is no objection to our view that the Connecticut Bank will be subject to a large loss. It has so conducted as to be justly chargeable in the manner claimed by us, and if there is to be any loss it should be borne by them rather than by us.
   Ellsworth, J.

We are all agreed that there is manifest error in this record, and that the judgment of the superior court must be reversed. The reasons for this opinion we will briefly state, that the court below may know the grounds upon which we proceed, and be able to direct the receivers in their future course, should they find it necessary to ask for further instructions.

We can not assent to the principle of law laid down by the judge of the superior court, as the very ground work of his opinion, that because the Connecticut Bank had no right, (as we think it had not,) to sell as merchandise in the market the seven thousand dollars in bills of the Litchfield Bank held by it as collateral security for the loan of five thousand dollars, it follows that the Connecticut Bank is liable to account for them [ *581 ] at their par value. They are liable, doubtless, *for doing what they had no right to do, and, as we have said, under the circumstances they had no right to put the bills into circulation as money, as was originally agreed, when they had lost their character as money and had become mere chattels ; but then they are liable only for the injury which they have thereby done to the Litchfield Bank, the amount of which is just what the bank or the receivers of the bank have to pay to the bona fide holders of these bills. To that amount only are the assets in the receivers’ hands reduced by having the bills presented against the bank by these holders.

Adopting this rule as the correct one, the receivers should allow to the Connecticut Bank, as a good debt in its favor, the loan of five thousand dollars with its interest, deducting therefrom the amount of dividend made on the seven thousand dollars of bills; for what is paid on the collateral is paid to be applied on the debt. As to the Connecticut Bank, the collateral may still be treated as the security of the five thousand dollar loan. Though separated from it by the sale, its relation to the loan must be regarded as yet continuing.

This view of the case does eqflal justice to both parties; to the Litchfield Bank, for it is saved harmless from the seven thous- and dollars of bills thus put into circulation, unless, indeed, the dividend on these bills should amount to more than, the five thousand dollar loan and interest, which it is agreed is not the fact; and to the Connecticut Bank, by the allowance in its favor of the amount loaned to the Litchfield Bank, with interest thereon, while it is permitted to retain the Van Clief & Smith notes for any balance due, if any shall remain after applying the dividend declared on the seven thousand dollars of bills taken as collateral.

Other questions were made on the argument which we have not thought it necessary to consider. There is manifest error in the judgment of the superior court.

In this opinion the other judges concurred.

Judgment reversed.  