Opinion of the Court, per FINCH, J. Their allowance by the referee was expressly excepted to on behalf of Rucker. The bonds of Austin Stevens were properly allowed to be proved. He bought them of Duncomb who was a director, and whom he knew to be such, but did not know how Duncomb obtained them, or of any defect in his title. Those of Daniel H. Temple for $5,000 were allowed by the referee, but rejected by the General Term. They were taken by him of Duncomb in pledge for a precedent debt. As a consequence he cannot be deemed a holder for value, and must be held to have taken no better title than that of his pledgor. (Taft v. Chapman, 50 N. Y. 445; Coddington v. Bay, 20 Johns. 645; Stalker v. McDonald, 6 Hill, 93; Weaver v. Barden, 49 N. Y. 286.) The title of Duncomb was vulnerable. He got his original bonds from the company, partly for alleged salary, partly at fifty-one cents on the dollar, and partly as a bonus for stock subscription. He was a director in the old company while thus obtaining the bonds and a director in the new company when the exchange of securities was made. His title, therefore, was bad and that of his pledgee must fall with it. As to the bonds of Joshua C. Saunders, there appears to be no doubt that he was the actual owner and holder of $6,000 of them. The referee so finds, and the evidence warrants his conclusion. The balance of $21,000 were held by him as collateral to a note of $1,000. Pending the inquiry before the referee the pledge was foreclosed by a sale at auction, and Saunders testifies that through such sale he became the owner. His testimony is, "these bonds I now own by sale under the power given in the note under which they were hypothecated." That is all we know about it. What the terms of the note were; whether before sale there was a demand of payment and opportunity to redeem (Milliken v. Dehon, 27 N. Y. 364; Lawrence v. Maxwell, 53 id. 19); whether the sale was on notice or not, and who became the purchaser, we are left to imagine. We are, perhaps, bound to assume from what is shown that he bought them in at the sale. He does not Opinion of the Court, per FINCH, J. assert any other or different title. If so, he must still be treated as pledgee since he had no right to buy. (Bryan v. Baldwin, 52 N. Y. 232.) The referee correctly decided that these bonds held as collateral could be proved in full, but the dividend payable upon them should be limited to the amount of the debt. The pledge appears to have been for present advances, so that Saunders was a holder for value. (Durbrow v. MeDonald, 5 Bosw. 130; Winne v. McDonald, 39 N. Y. 233; McNeil v. Tenth National Bank, 46 id. 325.) The modification by the General Term which tended to destroy his margin was erroneous. In the case of the National City Bank we think the referee was wrong, and the modification made by the General Term was also erroneous. The bank loaned $35,000 to George W. Mead, who at the time was a director in the railroad corporation, and known to be such, taking $70,000 of the bonds as collateral. There is no proof that the bank or any of its officers had any knowledge of a defect in his title. That they knew him to be a director was not enough, as we have already said, to put them on inquiry. It is further claimed, however, that the bank, having a capital of $300,000, violated the law in making this loan to Mead of $35,000. (National Banking Act, $5200, 5239, U. S. Stats.) The penalty of such violation is fixed by the act itself, and consists in proceedings against the franchise of the bank, and a liability for damages of the offending officers. As to this question, which arises under the Federal law, and respects corporations created by its authority, we must follow the rulings of the Federal courts, and those determine very clearly that the contract of loan was not invalid but may be enforced. (Gold-Mining Co. v. National Bank, 96 U. S. 640.) As to the claim of John J. Studwell for $70,000 of bonds, we must be guided by the findings of the referee, that Studwell, by assignment from Cornell, the Park Bank and The National Citizens' Bank, acquired their rights to the debts held by them respectively, and the bonds pledged as collateral. His title as pledgee, derived from these sources, has not been Opinion of the Court, per FINCH, J. successfully attacked; and the referee, instead of limiting him to the proof of bonds equal to the debts secured, should have allowed him to prove all the bonds and receive a dividend thereon to an amount not exceeding the amount of the debts for which they were held as collateral. The claim of the East River National Bank should be corrected in the same way. It should be allowed to prove all its bonds and share in the distribution to the amount of the debt for which it holds them as security. The bonds of Eliza Hatfield, held by her to the amount of $20,000, were allowed by the referee to the extent of $2,137, and no more. This was the amount found due upon the debt for which the bonds were held as collateral. The referee's finding was corrected at Special Term, in accordance with the exception filed on the claimant's behalf, and it was determined that she held $13,000 of the bonds as collateral, and should be entitled to receive their proper dividend up to the sum of $2,352.65, and owned $8,000 of said bonds absolutely. There is evidently still an error, for the two sums make $21,000 of bonds instead of $20,000, which was the whole amount. On examining the exception, which was allowed by the Special Term, it is evident that the collateral bonds were 1,087 to 1,098, both inclusive, or $12,000 instead of $13,000. On this claim, therefore, the $8,000 of bonds should be proved in full, and also the remaining $12,000; but on these last no dividend should be paid beyond the sum of $2,352.65. The bonds of George W. Mead, to the amount of $19,500, were disallowed by the referee, but allowed by the General Term, at the amounts said to have been actually paid by him. The evidence leads us to prefer the conclusion of the referee. It is extremely doubtful whether Mead paid any thing what ever for the bonds. His position as director, and the manner in which he sought to use it for his own benefit, make it very clearly our duty to avoid the whole transaction and affirm the conclusion of the referee. As to the Grocers' Bank, it is conceded by the counsel for Opinion of the Court, per FINCH, J. the receiver that we can do no more than affirm the conclusion of the General Term. The claim of William R. Kirkland was rejected both by the referee and the General Term. He was elected president of the railroad company in 1873 and his salary fixed by a resolution of the board of directors at $5,000 per annum. The company failed to pay and gave him its notes for $3,500 and $7,000 of the mortgage bonds as collateral. The salary was honestly due. It was a just debt against the company. The latter has no possible ground of defense against it. Why might not such a debt, fairly and honestly incurred, in the absence of means of payment, be secured by the pledge of the bonds? Grant that the creditor's official position should awake scrutiny and sharpen criticism. Yet the right of the officer to fair compensation which has been honestly earned is as clear as that of a stranger. His services were as necessary to the construction of the road as those of the laborer who laid the rails. The president took the bonds merely in pledge. The right of redemption remained. The company could at any time have repossessed its bonds upon the condition, surely equitable, of paying the debt it owed. No undue or improper advantage was obtained. We are of opinion, therefore, that Kirkland is entitled to prove his bonds, and share in the distribution on that basis. The Seaman's Bank for Savings also appeals from the order which excludes it from the benefit of $2,000 of bonds held as collateral. It appears that the company was indebted to the bank for rent, and these bonds were turned out as security. The bank had the right to demand and receive them. No possible ground of objection occurs to us except an assertion that such use of the bonds was not justified by the lawful purposes of their issue, and the perversion was of course known to the pledgee. But such a construction would be altogether too rigid and narrow. A business office was essential and necessary and fairly embraced within the authority to issue bonds for the purpose of building, operating and maintaining a railroad. It was a necessary and indispensable aid to the end sought to be ac Opinion of the Court, per FINCH, J. complished. As the bank was merely a creditor, it had the right to insist upon security for its rent, and having received a pledge of the bonds to hold them, and prove them to their full amount, and receive a dividend thereon, not exceeding the amount of their debt. We are satisfied with the conclusion reached as to the bonds of Mordecai M. Smith. As to $9,000 of them he was found to be purchaser and owner and permitted to prove them as such. As to the larger amount, all parties seem to concur in treating the alleged title of Wiley, obtained upon a sale of the collateral at auction, as not affecting results. To give it effective force in the absence of definite proof as to its regularity and propriety, and under the circumstances of suspicion which surround it, would hardly be justifiable; and since all his rights were assigned to the parties for whom he evidently acted, it is proper to dismiss it from consideration, and treat the case as if he had not intervened. The firm of Mead & Clark made certain advances to the railroad company upon the faith of these bonds pledged with them as collateral security. Since both were directors the transaction, even if open to criticism, and liable to avoidance, was modified by the further fact that the bonds were pledged for actual advances, and therefore the avoidance could only be made upon condition of the repayment of the advances. Mead & Clark could assign to Smith their debt due from the company and the collateral with it, though not as their own property or in derogation of the rights of the original pledgor. (Nash v. Mosher, 19 Wend 431; White v. Platt, 5 Den. 269; Hays v. Riddle, 1 Sandf. 248; Lewis v. Mott, 36 N. Y. 395.) By the assignment to Smith he acquired the rights of Mead & Clark to the extent of their advances, and was properly allowed to prove his bonds as security for that amount. We should modify the orders of the Special and General Terms to correspond with these views if the facts before us would admit of so doing with absolute accuracy; but as we cannot say what bonds may or may not be produced and proved under our rulings we reverse the orders of the Special and Gen |