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217 U.S.

Argument for Appellant.

decree of the District Court. Only the Unity Bank and Saving Company appealed to this court.

Mr. Constant Southworth, with whom Mr. Louis J. Dolle was on the brief, for appellant:

Fritz was engaged in a gambling transaction with the bankrupts. He has no standing in this court of equity to claim the Carey certificate.

Fritz and the bankrupts are charged with knowledge that their dealings were illegal. See Re A. B. Baxter & Co., 152 Fed. Rep. 137; Wood v. Hubbell, 10 N. Y. 479; Irwin v. Williar, 110 U. S. 499, 511; Flagg v. Baldwin, 38 N. J. Eq. 219, 231; Lester v. Buel, 49 Ohio St. 240, 252; Barnard v. Backhaus, 52 Wisconsin, 593. Hence Fritz has no standing in this court of equity. .Kahn v. Walton, 46 Ohio St. 195; Higgins v. McCrea, 116 U. S. 671; Loevy v. Kansas City, ,168 Fed. Rep. 524; Marden v. Phillips, 4 Am. Bk. Rep. 566; St. Louis R. R. Co. v. Terre Haute R. R., 145 U. S. 393, 407; Thomas v. City of Richmond, 12 Wall. 349; Hanauer v. Doane, 12 Wall. 349.

The Unity Bank is in a far better position than the bankrupts. If the bankrupts could have interposed the defense of illegality, much more can the Unity Bank, which is an innocent purchaser for value. Baxter v. Deneen, 98 Maryland, 181; Plank v. Jackson, 128 Indiana, 424; and see Conťl Wall Paper Co. v. Voight & Sons Co., 212 U. S. 227.

As against an innocent purchaser for value such as the Unity Bank, Fritz has no standing in this court of equity to recover the Carey certificate, because his gambling partners abused his confidence. See Ohio statutes as to gaming, $ 6934a-1; 8 1; $ 6934a-2; 8 6934a-4; $ 4.

The Ohio statutes as to losses at gaming are in the nature of penal statutes, Paul v. Groene, 4 0. L. R. 632; and of course they will not be recognized or enforced in a Federal court. Perkins v. B. & A. R. R. CO., 90 Fed. Rep. 321. The local law, including the Ohio cases, controls. Security Warehousing Co. v. Hand, 206 U. S. 415.

Argument for Appellant.

217 U.S.

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The fact of the illegality of a contract may be raised at any time in a legal proceeding; and the court may do so of its own motion in the absence of objection by the parties. Oscanyan v. Arms Co., 103 U. Ş. 261; In re Wilde's Sons, 144 Fed. Rep. 972; Loveland's Bankruptcy, 3d ed., 143.

The answer of the Unity Bank is evidence and proves that the disputed signature is genuine and adopted by Fritz.

Bankruptcy proceedings are governed by the rules of equity. Re McIntire, 142 Fed. Rep. 593; Bardes v. Bank, 178 U. S. 524; Dodge v. Nortin, 133 Fed. Rep. 363; Nashville Ry. Co. v. Bum, 168 Fed. Rep. 862; Shook v. Dozier, ,168 Fed. Rep. 867; Scott v. McNeely, 140 U. S. 106; Elliott v. Toeppner, 187 U. S.. 327; General Orders in Bankruptcy, No. 37; Schwarts v. Siegel, 117 Fed. Rep. 13, 16; In re Rochford, 124 Fed. Rep. 182; In re Cooper Bros., 159 Fed. Rep. 956; Goldman v. Smith, 93 Fed. Rep. 182; Dokken v. Page, 147 Fed. Rep. 438; Barton v. Barbour, 140 U. S. 126; Rouse y. Hornsby, 161 U. S. 588; Mercantile Trust Co. v. Pitts. & W. Ry. Co., 115 Fed. Rep. 475; Loveland's Bankruptcy, 3d ed., pp. 34, 88, 458, 459.

Marshalling assets is essentially equitable relief. 2 Pomeroy's Equitable Remedies, $ 865 (6 Pomeroy's Eq. Jur., $ 865).

The circumstantial evidence in the case shows conclusively that the power of attorney was Fritz's either by actual execution or by adoption. The referee wrongfully placed the burden of proof on the Unity Bank, which materially prejudiced its rights. McNutt & Ross v. Kaufman, 26 Ohio St. 127; List & Sons Co. v.'Chase, 80 Ohio St. 42. · Where a party like Fritz attempts to make his case by prov

a ing the commission of crime, as forgery, in a civil case, his testimony must be clear and convincing. United States v. Am. Bell Tel. Co., 167 U. S. 224; Lexington Ins. Co. v. Paver, 16 Ohio, 324, 332; approved in Strader v. Mullane, 17 Ohio St. 624; Still v. Wilson, Wright, 505; Sprague v. Dodge, 48 Illinois, 142; Lalone v. United States, 164 U. S. 255; Conner v.

217 U.S.

Argument for Appellant.

Groh, 90 Maryland, 674; Kansas M.O. M. Ins. Co. v. Rammelsberg, 58 Kansas, 531.

The bankrupts had the right to rehypothecate the Carey stock to raise money to carry out Fritz's orders. The Unity Bank, therefore, acquired a valid lien to the extent of its advance. Lawrence v. Maxwell, 58 Barb. (N. Y.) 511; 53 N. Y. 19; Whitlock v. Seaboard National Bank, 29 Misc. (N. Y.) 84; and see also Martin v. Megargee, 212 Pa. St. 558; Horton v. Morgan, 19 N. Y. 170; Caswell v. Putnam, 120 N. Y. 152; Mays v. Knowlton, 134 N. Y. 250; Berlin v. Eddy, 33 Missouri, 426; Price y. Gover, 40 Maryland, 103.

The rehypothecation of the Carey certificate to the Unity Bank gave it in equity all the rights of the bankrupts. Talty v. Freedman's Savings & Trust Co., 93 U. S. 321; Belden v. Perkins, 78 Illinois, 449; and see also Donald v. Suckling, L. R., 1 Queen's Bench, 585; Reardon v. Patterson, 19 Montana, 231; National Cash Register Co. v. Cerrone, 76 Ohio St. 12.

It is also held that the assignment of the collateral carried with it the debts secured. Lahmers v. Schmidt, 35 Minnesota, 434; Dintruff v. Crittenden, 1 Thomp. & C. (N. Y.) 143; Hawkins v. Oswald, 2 Woodw. Dec. (Pa.) 345.

It makes no difference whether or not Fritz knew of the equitable assignment to the Unity Bank of his debt, or that the equitable assignment was of part only of his debt to the bank. Knickerbocker Trust Co. v. Coyle, 139 Fed. Rep. 792; Exchange Bank v. McLoon, 73 Maine, 498, 505; Jones on “Liens,” 2d ed., $ 43. Fritz's debt to the bankrupts is still unpaid. Fritz was negligent and must bear any loss that may occur. First National Bank of Chicago v. Baird, 141 Fed. Rep. 862; Brown v. Blydenburg, 7 N. Y. 141, approved in Kenochan v. Dunham, 48 Ohio St. 1, 24; Syracuse Savings Bank v. Merrick, 182 N. Y. 387; Hoffmaster v. Black, 78 Ohio St. 1; 4 Cyc. 85, note 13.

Even though Fritz could recover the Carey stock from the bankrupts, he cannot recover it from an innocent transferee,

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such as the Unity Bank. Fenno v. Sare, 3 Alabama, 458; Willis v. Hockaday, 1 Spear (So. Car. Law), 379; Chiles v Coleman, 2 A. K. Marshall (Ky.), 296 (687); Neuremberger v. Lehenhauer, 23 Ky. L. Rep. 1753; Greathouse v. Throckmorton, 7 J. J. Marshall (30 Ky.), 17, 28; Harrod v. Black, 1 Duv. (62 Ky.) 180; Braswell v. Braswell, 109 Kentucky, 15, 17; Smith v. Kamerer, 152 Pa. St. 98; Martinez v. Lindsey & Gay, 91 Alabama, 334; Parsons v. Joseph, 92 Alabama, 403; Maue v. Krell Piano Co., 7 0. L. R. 539; Lawler v. Kell, 4 Ohio Nisi Prius, 218; Oliver v. Cincinnati, C. & W. T pk ('0., Hosea, 457, affirmed. And see Combes v. Chandler et al., 33 Ohio St. 178.

Mr. Theodore Horstman for appe!lee Fritz.

MR. JUSTICE HARLAN, after stating the case as above, delivered the opinion of the court.

Briefly outlined, the case as disclosed by the above statement is this: The certificate of stock in the Carey Manufacturing Company was placed in the possession of Holzman & Co. under an express agreement that it should not go out of their possession, but be held simply for the purpose of showing Fritz's financial responsibility; that Holzman & Co. had no authority to pledge the stock with the Unity Banking and Saving Company as security for the payment of their individual note for $10,000 to that institution; that the pledging of the stock with the bank by Holzman & Co. was without Fritz's knowledge; that his signature to the blank power of attorney was unauthorized by him and was a forgery: that Fritz did not, by anything said, done or omitted by him, lead the bank to believe that he had executed such power of attorney, or had authorized any one to do so for him; and that he never, in any way, ratified the forgery of his name or approved the pledging of the stock to the Unity Banking and Saving Company for the individual debt of Holzman & Co.

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In view of these facts--which the Referee as well as the District and Circuit Courts of Appeals correctly held to have been established by the evidene--it would seem unnecessary to cite authorities to show that, as between the bank and Fritz, the bank did not acquire any interest, legal or equitable, in the stock represented by the certificate placed in the possession of Holzman & Co. under the circumstances stated. The bank no doubt relied upon the integrity of that firm, and acted in the belief that Fritz had in fact signed the blank power

of attorney or authorized it be signed for him. But that belief was not, according to the evidence, superinduced by anything said, done or omitted by Fritz. He was not chargeable with laches or negligence. The bank having elected to rely upon Holzman & Co., must stand the consequences. It cannot say that it was misled by Fritz to its prejudice. It could not, therefore, as between itself and Fritz, take anything in virtue of the forgery. As against the true owner, a right of property cannot be acquired by means of a forged written instrument relating to such property. This is the general rule. An exception to the rule arises where the owner by laches, or by culpable, gross negligence, or by remaining silent when he should speak, has induced another, proceeding with reasonable caution, to act with reference to the property, in the belief that the instrument was genuine, or would be so recognized by the owner. In such cases the owner would be equitably estopped to rely upon the fact of forgery, as against the person who was misled by his conduct. There are no facts in this case from which could arise an exception to the general rule.

Nor, in view of the facts, need we follow the example of counsel and enter upon an examination of the cases bearing on the general inquiry as to the circumstances under which a broker who, by the act of the owner, comes into the lawful possession of a stock certificate-but, without the legal title having been transferred to him-may retain the certificate as security for any balance ascertained upon settlement due

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