488-491 December 30, 1892, between Garretson and that company, which recited that the notes were to be secured by the 2,340 Sioux City, O'Neill, & Western bonds and 14,206 shares of the Sioux City & Northern stock, by an indenture of trust with Tod & Co. December 31, Garretson entered into this indenture of trust whereby he pledged the said bonds and stock to Tod & Co. as trustees for the equal and pro rata benefit and security of all the holders of the notes, it being provided that if default should be made in the payment of the principal or interest of any of the notes, the trustee, on request, might declare the [489]* principal and interest due and sell the bonds and stock at public auction, and that the holders might appoint a purchasing trustee, in whom, if he bought at the sale, the right and title to the bonds and stock [should vest] in trust for all the note holders in proportion to the amounts due them respectively. The note holders were given certain options, and Garretson agreed to pay the debenture company three and a half per cent commission. The Union Debenture Company was a corporation of New Jersey, with a capital stock of $300,000 and over $800,000 of assets, and had issued and had outstanding $500.000 of twenty-year debenture bonds, which had been sold mainly in England, Scotland, and Holland. Tod & Co. owned one third of the capital stock, and the business of the company was transacted through Tod & Co. as brokers. The notes in question, except about $40,000 retained by the debenture com. pany, were sold by them as brokers to various persons, including $590,000 to parties abroad and $500,000 to the Great Northern Railway Company, but Tod & Co. took no part of the loan. The commission of three and one-half per The remainder of the proceeds of the $1,- As already set forth, Tod & Co. then held Garretson was a prominent man in banking, financial, and railroad circles when he began his dealings with Tod & Co., and continued to be so until 1893. He had been, or was, an officer of many business corporations or companies; and one of the chief promot-[491] ers and builders of the Sioux City & Northern Railway, and organizers of the Union Loan The notes for the $1,500,000 were executed & Trust Company. He was highly recomand indorsed by Garretson, and the transac-mended to Tod & Co. by the president of the tion closed, January 30, 1893, and on that Great Northern Railway Company, of which date the Union Debenture Company turned J. Kennedy Tod was a director. Mr. Tod over to Tod & Co. $1,507,500, being principal stated that they believed during the negotiawith accrued interest, and thereupon Tod & tions between their firm and Garretson that Co. paid off the million-dollar loan with ac- he was a man of large wealth. crued interest, $1.004,833.33. They thus released the $2,340.000 Sioux City, O'Neill, & Western bonds, the 18,000 shares of Sioux City & Western stock, and 7,200 shares of Sioux City & Northern stock, and delivered to themselves as trustees under the indenture of trust the bonds, 10,200 shares of Sioux City & Northern stock and also 4.000 of the latter stock; and certified and delivered the bridge notes to the debenture company. [490] *These notes contained the provision that they might be declared due on default in payment of interest or principal, and that they were secured by the indenture of trust of December 31, 1892, and the deposit of the bonds and stock as collateral. The Tods testified that they knew nothing of the dealings between the Manhattan Trust Company and the improvement company, or of the loan transactions of the improvement company, and had no connection therewith; that they had no knowledge or notice of any claims of the Union Loan & Trust Company to these securities at or before the time they were pledged to secure either the loan for $1.000.000. or the loan for $1,500,000, and the first information they had of any such claim was after default had been made in the payment of interest on the latter loan. The interest on the notes was payable July 1, 1893, and January 1, 1894, and the interest due July 1, 1893, not having been paid, 171 U. S. and the default having continued for thirty to repledge the same as security for further days, Tod & Co., on a request of a majority of advances." That "the fair inference from the note holders, declared the principal due, the entire evidence is that the trust company and advertised the securities for sale on consented to the repledging of these securiSeptember 19, in accordance with the inden- ties, in order that further funds might be ture of trust, due notice being given, which procured for carrying on the work in quessale was adjourned to September 26, at the tion, but by so doing it did not abandon its instance of the creditors of the Union Loan *lien upon or equity in the securities, but [493] & Trust Company, when the sale took place, only subordinated its rights to those created and Tod & Co. bought the securities as pur- by the repledging of the securities." chasing trustees, thereto duly appointed, and held the same for the benefit of the holders of the notes. Certificates were issued by Tod & Co. as such purchasing trustees that they so held the securities and that each of the note holders was entitled to a three-hundredth part interest for every $5,000 note deposited. That the sale of the securities by Tod & Co. under the provisions of the trust agreement of December 31, 1892, did not devest the trust company, or its assignee, of the junior lien on the securities, and that its right to redeem remained because the $1,500,000 of notes were not purchased in the ordinary course of business, nor in fact issued by the After the interest had defaulted Tod & bridge company in connection with its busiCo. were interviewed on behalf of some of the ness, but made at the dictation of the syndicreditors of the Union Loan & Trust Com- cate on the suggestion of Tod & Co., and pany, and an offer to pay the defaulted inter-operated as a fraud on the bridge company; est was made on condition that such credit- that the use of its name was in reality a ors should be put in control of the board of matter of form merely, and was so underdirectors of the Sioux City & Northern Rail-stood; and that the transaction must be conroad Company, but with this condition Tod sidered as a loan to the syndicate, secured (492]& Co. were without authority to comply, and by a pledge of the collateral, which lien was the creditors committee declined to pay. superior to that existing in favor of the trust money was tendered. No company. According to the evidence of the Tods it was then, for the first time, that Tod & Co. received any intimation that their right to hold the securities was questioned by the Union Loan & Trust Company or its cred-made by the intervener. itors. The suggestion as to usury was dismissed on the ground that in any view equity required the payment of the sums advanced with interest, and no offer to do this was The circuit court entered a final decree authorizing the redemption of the securities by the intervener on payment to Tod & Co., as trustees, of the sum of $1,500,000, with interest thereon from December 30, 1892, computed with semiannual rests, to the date of payment. From the decree the intervener prosecuted an appeal to une circuit court of appeals for the eighth circuit, assigning as error, in substance, that the circuit court erred in not finding that intervener had a prior lien; that the securities were wrongfully taken from the Union Loan & Trust Company, and that defendants were not bona fide holders and took with notice; that the loans were usurious and void, and defendants, therefore, unable to hold the securities as against the intervener. The opinion is reported 65 Fed. Rep. 559, and it appears therefrom that District Judge Shiras, by whom the cause was heard, held that the transactions prior to the million and a half loan could not be passed on, but Defendants also appealed from the decree, that the inquiry at issue was to be deter-assigning as error the failure of the court to mined by considering the contracts under which Tod & Co. obtained possession of and claimed title to the 10,600 shares of Sioux City & Northern stock, and the $2,340.000 of Sioux City, O'Neill, & Western bonds held by them. After a brief review of the formation of the syndicate and its dealings with the Union Loan & Trust Company, the conclusion was drawn "that the trust company, as against the members of the syndicate, is entitled to the benefit of the securities which were placed in its possession, and upon the faith of which it may be assumed it indorsed the syndicate paper," but that it was fairly deducible from the evidence that "the trust company parted with the possession of the securities, knowing that it was intended to rehypothecate them," and that "it is not now open to the trust company to repudiate the acts of its secretary and treasurer in regard to these securities, by whose action in placing the same in the possession and under the control of Garretson the latter was enabled sustain objections to certain evidence; the The cause was heard in the court of ap- The intervener then applied to this court for a writ of certiorari, which was granted. Messrs. John C. Coombs, Henry J. Taylor, and William Faxon, Jr., for appellant: An equitable lien may be created by agreement of the parties. Walker v. Brown, 165 U. S. 654, 664 41 L. ed. 865, 871; Fourth Street Bank v. Yardley, | U. S. 362, 42 L. ed. 198; Wenlock v. River 165 U. S. 634, 41 L. ed. 855; Ketchum v. St. Louis, 101 U. S. 306, 25 L. ed. 999; Pinch v. Anthony, 8 Allen, 536. Such equitable liens do not depend upon the possession of the property, but are founded upon the contract of the parties, which may be either oral or in writing. Nichols v. Hudgins, 19 U. S. App. 144, 58 Fed. Rep. 490, 7 C. C. A. 335; Hovey v. Elliott, 118 N. Y. 124. The Union Loan & Trust Company, as well in its receipt of these collateral securities as in the agreement so to receive them in pledge and trust, became a trustee in interest, vested with a legal, or entitled to an equitable, lien and trust to protect its indorsement, and for the benefit of all parties, that might become holders of these syndicate notes. Dee Co. L. R. 10 App. Cas. 354; Ex parte Watson, L. R. 21 Q. B. Div. 301; Bank of United States v. Owens. 2 Pet. 527, 7 L. ed. 508; Gibbs v. Consolidated Gas Co. 130 U. S. 412, 32 L. ed. 985; Miller v. Ammon, 145 U. S. 426, 36 L. ed. 762; Pratt v. Short, 79 N. Y. 437, 35 Am. Rep. 531; Blasdel v. Fowle, 120 Mass. 447; Cincinnati Mut. Health Assur. Co. v. Rosenthal, 55 Ill. 85; 27 Am. & Eng. Enc. Law, pp. 943, 945, 946; Tiffany v. Boatman's Sav. Inst. 18 Wall. 375, 21 L. ed. 868. The contracts further offend against the statutory policy of Iowa, and against good faith everywhere. Ottumwa Screen Co. v. Stodghill, 103 Iowa, 437; Murphy's Application, 51 Wis. 519; Moore v. Marshalltown Opera-House, 81 Iowa, 45; Hammond v. Hastings, 134 U. S. 401, 33 L. ed. 960. The contract into which the bridge com Morrill v. Morrill, 53 Vt. 74, 38 Am. Rep. 659; Kramer and Rahms's Appeal, 37 Pa. 71; Ijmes v. Gaither, 93 N. C. 363; Heath v. Hand, 1 Paige, 329; Clark v. Ely, 2 Sandf.pany seemingly entered was ultra vires and Ch. 166; Woodville v. Reed, 26 Md. 181. The discharge of the surety by any cause will not bar the creditor's right. Cullum v. Branch Bank, 23 Ala. 797; Helm v. Young, 9 B. Mon. 394; Crosby v. Crafts, 5 Hun, 327; Roberts v. Colvin, 3 Gratt, 359; Eastman v. Foster, 8 Met. 19. After a trust of this kind has been created, it cannot usually be defeated without the consent of the parties in interest, unless it be by a conveyance to a bona fide purchaser with out notice. Capehart v. Dettrick, 91 N. C. 344; Jones, Mortg. § 387. Assent or knowledge on the part of the creditor is not necessary to perfect the trust. The transaction being for his benefit, his assent will be presumed. Baltimore & O. R. Co. v. Trimble, 51 Md. 99; Moses v. Murgatroyd, 1 Johns. Ch. 119, 7 Am. Dec. 478. It makes no difference that the creditor did not act upon the credit of such security in the first instance, or even know of its existence. Curtis v. Tyler, 9 Paige, 432; Kramer's Appeal, 37 Pa. 71; Re Jaycor, 7 Nat. Bankr. Reg. 314, 8 Nat. Bankr. Reg. 253. Property given to a surety for the payment of a debt is held by such surety in trust for the creditor. Kelly v. Herrick, 131 Mass. 374. There was a trust created in its favor as payee of the note, which was imposed upon the surety. Aldrich v. Blake, 134 Mass. 585. These syndicate securities were partnership property primarily applicable to railroad syndicate notes, which represent the only partnership debts. contrary to the policy of the state of Iowa. Buckeye Marble & F. Co. v. Harvey, 92 Tenn. 115, 18 L. R. A. 252. To recover upon paper which has been diverted from its original destination and fraudulently put in circulation, the holder must show that he received it in good faith, in the ordinary course of business, and paid for it a valuable consideration. Thompson v. Sioux Falls Nat. Bank, 150 U. S. 231, 37 L. ed. 1063; Brooklyn City & N. R. Co. v. National Bank of the Republic, 102 U. S. 14, 26 L. ed. 61; Canajoharie Nat. Bank v. Diejendorf, 123 N. Y. 191, 10 L. R. A. 676; Paton v. Coit, 5 Mich. 505; Bank of United States v. Owens, 2 Pet. 527, 7 L ed. 508. The doctrine of estoppel is applied to promote justice and fair dealing, never to aid a fraudulent purpose. Royce v. Watrous, 73 N. Y. 597. The doctrine of estoppel in pais rests upon equity, good conscience, and honest dealing. Wilcox v. Howell, 44 N Y. 398. The parties and their privies only are bound by, or can take advantage of, an esteppel. 7 Am. & Eng. Enc. Law, p. 23; 2 Pom Eq. Jur. 2d ed. § 813. The Federal courts sitting in Iowa, in a case brought by an Iowa assignee for the recovery of the assets of an assigned estate, are bound to follow the supreme court of the state of Iowa in construing the assignment laws of that state. South Branch Lumber Co. v. Ott, 142 U. S. 627, 35 L. ed. 1136; Union Nat. Bank v. Bank of Kansas City, 130 U. S. 235, 34 L. ed. 341; May v. Tenney, 148 U. S. 60, 37 L. ed. 368: Etheridge v. Sperry, 139 U. S. 266, Beach, Trusts, § 254; Case v. Beaure-35 L. ed. 171: German Sav. Bank v. Frankgard, 99 U. S. 119, 125, 25 L. ed. 370, 372. The holder of negotiable security must have taken it in good faith and due course of an actual business transaction, in order to be entitled to hold it, either absolutely or conditionally, as against an antecedent lienor from whose possession the security was wrongfully diverted. California Nat. Bank v. Kennedy, 167 lin County, 128 U. S. 526, 32 L. ed. 519. When one who is entitled to a lien only, withholds under a claim of absolute ownership, property to which a demandant would be entitled but for the lien, and fails to maintain the ownership claimed, he must surrender the property. Boardman v. Sill, 1 Campb. 410. note; Legg v. Willard, 17 Pick. 140; Mexal v. Dearborn, 12 Gray, 336; Van Winkle v. Crowell, 146 U. S. 42, 36 L. ed. 880; Bailey v. Hervey, 135 Mass. 172; Jacobs v. Latour, 5 Bing. 130; Ayling v. Williams, 5 Car. & P. 399; Jones v. Cliff, 5 Car. & P. 560; White v. Gainer, 2 Bing. 23. Messrs. George W. Wickersham, John L. Webster, Francis B. Daniels, and Strong & Cadwalader, for appellees: The evidence fails to establish the alleged pledge or agreement to pledge the securities in controversy to the Union Loan & Trust Company. 3 Pom. Eq. Jur. § 1235; Walker v. Brown, 165 U. S. 654, 41 L. ed. 865. The entire course of dealing pursued by the Union Loan & Trust Company is at variance with the contention of its assignee that such of the securities as were ever in its possession were wrongfully withdrawn from its custody. Co., when they received the pledge of the collateral in question from Garretson, had any notice of any defect in his title to the securities, or of any interest of the Union Loan & Trust Company in them. Cheever v. Pittsburgh, S. & L. E. R. Co. 150 N. Y. 59, 34 L. R. A. 69; Murray v. Lardner, 2 Wall. 110, 17 L. ed. 857; Stanley v. Schwalby, 162 U. S. 255, 40 L. ed. 960; Clark v. Evans, 27 U. S. App. 640, 66 Fed. Rep. 263, 13 C. C. A. 433. The circumstances amounting to notice should always be strictly proved. Townsend v. Little, 109 U. S. 504, 27 L. ed. 1012; 16 Am. & Eng. Enc. Law, p. 796. A purchaser is not bound to look for latent, equities. Acer v. Westcott, 46 N. Y. 384, 7 Am. Rep. 355; Bank of the Metropolis v. New England Bank, 6 How. 212, 12 L. ed. 409. There is no duty to inquire, if the inquiry would not lead to a discovery of facts changing the rights of the parties. Lea v. Polk County Copper Co. 21 How. 493, 16 L. ed. 203; Wilson v. Wall, 6 Wall. 83, 18 L. ed. 727; Brush v. Ware, 15 Pet. 93, 10 L. ed. 672. Leicester Piano Co. v. Front Royal & R. Improv. Co. 8 U. S. App. 374, 55 Fed. Rep. 190, 5 C. C. A. 60; Moore v. H. Gaus & Sons Mfg. Co. 113 Mo. 98; Fifth Ward Sav. Bank v. First Nat. Bank, 48 N. J. L. 513; Martin v.Webb, 110 U. S. 7, 28 L. ed. 49; Fifth Nat. Bank v. Navassa Phosphate Co. 119 N. While the construction of contracts Y. 256; Martin v. Niagara Falls Paper Mfg. made by a dominating stockholder with a Co. 122 N. Y. 165; Bell v. Hanover Nat. railway company for his own benefit are Bank, 57 Fed. Rep. 821; Hanover Nat. Bank looked upon with suspicion, yet their legal v. American Dock & Trust Co. 148 N. Y. 613. existence cannot be questioned by third perThe trust company delivered the securi-sons who are not injured thereby. ties either to Tod & Co. or to Garretson for pledge to them, in such form as to enable Garretson to hold himself out as owner of them. These facts eston the company and its assignee from now asserting title to the securities. Wright v. Kentucky & G. E. R. Co. 117 U. S. 72, 29 L. ed. 821; Union P. R. Co. v. Chicago, R. I. & P. R. Co. 10 U. S. App. 98, 51 Fed. Rep. 309, 2 C. C. A. 174; Tod v. Kentucky Union Land Co. 57 Fed. Rep. 47. The defense of usury is personal to the borrower and those in privity with or claiming under him. Donald v. Suckling, L. R. 1 Q. B. 585; McNiel v. Tenth Nat. Bank, 46 N. Y. 325, 7 Am. Rep. 341; Merchants' Bank v. Living- Culver v. Wilbern, 48 Iowa, 26, 30 Am. ston, 74 N. Y. 223; Moore v. Metropolitan Rep. 385; De Wolf v. Johnson, 10 Wheat. Nat. Bank, 55 N. Y. 41, 14 Am. Rep. 173; 367, 6 L. ed. 343; Merchants' Exch. Nat. Talty v. Freedman's Sav. & T. Co. 93 U. S. Bank v. Commercial Warehouse Co. 49 N. 521, 23 L. ed. 886; Calais S. B. Co. v. Scud-Y. 635; Chapuis v. Mathot, 91 Hun, 565. der. 2 Black, 372, 17 L.ed. 282; Indiana & I. C. R. Co. v. Sprague, 103 U. S. 756, 26 L. ed. 554. Where the owner intrusts a stock certif icate indorsed in blank to another, who sells or pledges it for value, the latter may hold the stock. First Nat. Bank v. Lanier, 11 Wall. 369, 20 L. ed. 172; Cowdrey v. Vandenburgh, 101 U. S. 572, 25 L. ed. 923; Leitch v. Wells, 48 N. Y. 585; Swift v. Smith. 102 U. S. 442, 26 I. ed. 193; Allen v. St. Louis Nat. Bank, 120 U. S. 20, 30 L. ed. 573; People's Bank v. Manufacturers' Nat. Bank, 101 U. S. 181, 25 L. ed. 907; Railroad Companies v. Schutte, 103 U. S. 118, 26 L. ed. 327; Rumsey v. Town, 20 Fed. Rep. 558; Sandwich Mfg. Co. v. Wright, 22 Fed. Rep. 651; Clapp v. Nordmeyer, 25 Fed. Rep. 71; Goff v. Kelly, 74 Fed. Rep. 327. Subrogation will not be allowed when it is inequitable or will prejudice the rights of creditors. Meyer v. Evans, 66 Iowa, 179; Lyon v. Council Bluffs Sav. Bank, 29 Fed. Rep. 566. But even if the trust company had a lien, and was not estopped from asserting it, there was an utter failure of proof that Tod and The auction sale on September 26, 1893, cut off all equity of redemption of the Union Loan & Trust Company or its assignee in the securities. Elliott v. Wood, 45 N. Y. 71; Richards v. Holmes, 18 How. 143, 15 L. ed. 304; Rose v. Paige, 82 Mich. 105; Campbell v. Wheeler, 69 Iowa, 588; Wylder v. Crane, 53 Ill. 490; French v. Powers, 120 N. Y. 128. The effect of an unauthorized sale and purchase by the pledgee is to leave the property where it was. Terry v. Birmingham Nat. Bank, 93 Ala. 599; Day v. Holmes, 103 Mass. 306; Fay v. Gray, 124 Mass. 500; Stokes v. Frazier, 72 Ill. 428; Jones, Pledges, § 741; Bryan v. Baldwin, 52 N. Y. 232; Collins v. Riggs, 14 Wall. 491, 20 L. ed. 723; Jones v. VanDoren, 130 U. S. 684, 32 L. ed. 1077; Cunningham v. Macon & B. E. Co. 156 U. S. 400, 39 L. ed. 471. If the pledgeor comes into a court of equity he must do equity by first paying the debt secured and allowing for other set-offs. 18 Am. & Eng. Enc. Law, p. 727; Talty v. Freedman's Sav. & T. Co. 93 U. S. 321, 23 L. ed. 886. [494] *Mr. Chief Justice Fuller delivered the opinion of the court: the securities did not absolutely cut off the It is provided by the judiciary act of March 3, 1891, that any case in which the judgments or decrees of the circuit court of Petitioner contends that his alleged lien or appeals are thereby made final, may be re- right was entitled to priority, because the quired, by certiorari or otherwise, to be cer- securities "were wrongfully and fraudulenttified to this court "for its review and deter-ly abstracted and diverted from said trust mination, with the same power and author-company in subsequent rehypothecation with ity in the case as if it had been carried by respondents;" and respondents did not hold appeal or writ of error to the supreme them as received in good faith, in due course of business, for value and without notice, but This case belongs to the class of cases in acquired possession through transactions which the decree of the circuit court of ap-known to be *fictitious, usurious, ultra vires, [496] peals is made final by the statute, and having fraudulent and void, and with notice. been brought up by certiorari on the application of petitioner below, is pending before us as if on his appeal. court." And as respondents did not apply for certiorari, we shall confine our consideration of the case to the examination of errors assigned by petitioner. These errors as assigned in the brief of counsel are, in short, that the circuit court erred, (1) in not establishing the priority of petitioner's lien or right in and to the securities; (2) in subordinating that lien or right, and decreeing foreclosure unless payment was made as prescribed; (3) in not entering a decree giving priority to petitioner because respondents set up absolute title by purchase, which was not sustained by the court; (4) in not restraining respondents by injunction and not ordering the surrender of the securities to petitioner. 1495] *The supposed errors in decreeing foreclosure, and that respondents were entitled to hold as pledgees notwithstanding their title by purchase was so far defective as to let in redemption, may readily be disposed of. The circuit court and the circuit court of appeals agreed that respondents' right to the securities was superior to that asserted by petitioner, and we entirely concur in that conclusion. So far from the securities being wrongfully abstracted from the trust company, we think that, whatever the agreement between the trust company and the syndicate, the trust company must be held to have parted with such of the securities as were ever in its custody, with full knowledge that they were to be hypothecated by Garretson; that, indeed, the evidence fairly shows that those which at any time came into the possession of the trust company were either deposited there by Garretson or by his order and direction, with the understanding on his part that he was authorized to withdraw them for the purpose of sale, pledge, or otherwise, and that he always acted on that theory, with the consent and participation of Smith, as secretary and treasurer; and that in any view Smith's acts in the company's behalf must be held to have been performed with the actual or implied authority of the directors. This was not a proceeding by Tod & Co. to obtain foreclosure. It was petitioner who Smith, as secretary and treasurer, was the sought the aid of the court, and this by an person who was actively engaged in the manapplication which was, in effect, a bill to re-agement of the affairs of the Union Loan & claim the securities absolutely and free from encumbrance. The circuit court treated the pleading as if framed in the alternative, and allowed redemption on conditions stated, the right thus accorded being necessarily declared to be extinguished if the conditions were not complied with as prescribed. And no error is assigned to the particular terms imposed. Nor is there any tenable basis for the proposition that respondents' failure to sustain their purchase at the sale as a defense affected their rights as pledgees. Respondents stood on all their rights, and were not put to an election. If the purchase were valid the equity of redemption was wiped out. If invalid, the original lien remained. If superior, its superiority was not displaced by the claim of absolute title derived through the pledge as set forth in the pleadings. Assuming that, as between the Union Loan & Trust Company and the syndicate, the company or its assignee had a lien on the securities in question, did the circuit court err in holding that the rights of respondents in respect thereof were paramount to those asserted by the intervening petitioner? If not, then although the circuit court may have erred in holding that the sale of Trust Company, and held out to the public It appears to us indisputable on the face |