Pledge. On April 14, 1992, David and Myrna Grossman borrowed $10,000 from Brookfield Bank in Brookfield, Connecticut, and signed a note to repay the principal with interest. As collateral, the Grossmans gave the bank possession of stock certificates

Question

representing 123 shares in General Electric Co The note was nonnegotiable and thus was not subject to UCC Article 3. On May 8, the bank closed its doors. The Grossmans did not make any payments on the note and refused to permit the sale of the stock to apply against the debt. The Grossmans' note and collateral were assigned to Premier Capital, Inc, which filed a suit in a Connecticut state court against them, seeking to collect the principal and interest due. The Grossmans responded in part that they were entitled to credit for the value of the stock that secured the note. By the time of the trial, the stock certificates had been lost. What should be the duty of a creditor toward collateral that is transferred into the creditor's possession as security for a loan? How should the court rule, and why?

Answer 1

Pledge
The court ruled in favor of Premier for the total amount due. The Grossmans appealed to a state intermediate appellate court, which reversed the judgment on the Grossmans' claim that they were entitled to recoup the value of the stock, and remanded the case for a determination of the amount to be offset against the debt. The appellate court concluded that "it was clearly erroneous for the [trial] court to adopt the finding that the defendants were [not] entitled to a credit for the value of the stock." As for the creditor's duty towards a debtor's property, the appellate court explained that "[w]here property has been pledged to secure a note, there is an implied agreement on the part of the pledgee for the safe-keeping of the pledge. He is under a duty to exercise ordinary or reasonable care in the preservation of the property pledged and in protecting the pledgor's rights . . . . He cannot so deal with the pledged property as to destroy or even impair its value." In this case, "[t]he property that served as the pledge . . . was the stock certificates representing 123 shares of General Electric stock. The record reveals that the plaintiff cannot redeliver those stock certificates to the defendants upon their tender or payment of the [entire amount due] on the debt because . . . the stock certificates had been lost or misplaced."