GEORGE D. HARTER BANK OF CANTON, OHIO,
v.
INGLIS (and four other cases).
Nos. 4295-4299.
Circuit Court of Appeals, Sixth Circuit.
July 3, 1925.*842 C. M. Horn, of Cleveland, Ohio, and Homer E. Black, of Canton, Ohio (Herbruck, Black, McCuskey & Ruff, of Canton, Ohio, and Dustin, McKeehan, Merrick, Arter & Stewart, of Cleveland, Ohio, on the brief), for appellant.
Luther Day, of Cleveland, Ohio (Day & Day, of Cleveland, Ohio, and Rufus S. Day, of Washington, D. C., on the brief), for receiver.
Wendell Lilly, of Columbus, Ohio (Lemuel D. Lilly, of Columbus, Ohio, and Tolles, Hogsett, Ginn & Morley and J. C. Little, all of Cleveland, Ohio, on the brief), for appellees who were intervening claimants in the court below.
Before DENISON, DONAHUE, and MOORMAN, Circuit Judges.
MOORMAN, Circuit Judge (after stating the facts as above).
In the first four cases there is presented primarily the question of the jurisdiction of the District Court to determine the controversy between the bank and the intervening claimants. Each of the claimants was a resident of the state of Ohio, the bank was a state institution, and no one of the claims was for as much as $3,000. The jurisdictional question was not raised in the lower court. The fund was drawn into court by petition of the receiver, and the intervening claimants filed their respective petitions claiming a part of it. The bank, without demurring to the jurisdiction, responded to their claims as well as to that of the receiver.
Whether the District Court in a summary proceeding could draw to its jurisdiction the controversy between the receiver and the bank is not argued. By failing to object to the form of the proceeding the bank waived any question as to the right of the court so to proceed. The final adjudication that the receiver had no interest in the fund did not affect the jurisdiction that had theretofore rightfully attached. City Railway Co. v. Citizens' Street Railroad Co., 166 U.S. 557, 17 S. Ct. 653, 41 L. Ed. 1114; Mullen v. Torrance, 9 Wheat. 537, 6 L. Ed. 154. As between the receiver and the bank, the ancillary jurisdiction was complete under the powers of the court to administer the estate. Wilson v. Power & Light Co. (D. C.) 300 F. 185, and authorities cited. A complement of that was the authority to determine the rights of all claimants to the fund. The case is not like Fulton National Bank v. Hoosier, 45 S. Ct. 261, 69 L. Ed. ___, reported in advance sheets April 1, 1925, page 261. In that case the proceeding was not initiated by the receiver but by Hoosier, who brought the bank into court, seeking to compel the receivers to litigate with it "for his sole interest and without possibility of benefit to the estate." The proceeding as thus initiated was in no sense ancillary to any right claimed by the receivers or to the power of the court to administer the estate.
There is no controversy as to the facts. It was stipulated that the bank had *843 neither actual nor constructive knowledge of any latent equities in favor of the interveners. The bank claims the right of set-off on the ground that its relation with the Geiger-Jones Company was that of debtor and creditor. Ordinarily a bank may set off a deposit against a debt due it from the depositor. Where insolvency has intervened, equity has extended the right to an unmatured note, upon the theory that in good conscience one ought not to be required to pay a debt to his creditor if he cannot ultimately compel the creditor to pay a debt due him. Laclede Bank v. Schuler, 120 U.S. 506, 7 S. Ct. 644, 30 L. Ed. 704. In neither case, however, is the right absolute or paramount to the superior equities of other claimants. In Bank of Metropolis v. New England Bank, 1 How. 234, 11 L. Ed. 115, 6 How. 212, 12 L. Ed. 409, the Supreme Court held that, unless the creditor bank had extended credit on the faith of an account current between it and another bank, and thus acquired equities not arising from the mere relationship of debtor and creditor, it could not apply the proceeds of notes received by it for collection and apparently belonging to the debtor bank to a debt presently due and defeat the claims of the equitable owners. Cited with approval in Wilson v. Smith, 3 How. 763, 11 L. Ed. 820, and United States v. State Nat. Bank, 96 U.S. 30, 24 L. Ed. 647.
These decisions are said to have been overruled in Central National Bank v. Connecticut Mutual Life Insurance Co., 104 U.S. 54, 26 L. Ed. 693; Union Stock Yards Bank v. Gillespie, 137 U.S. 417, 11 S. Ct. 118, 34 L. Ed. 724, and United States v. Butterworth, 45 S. Ct. 388, 69 L. Ed. ___, March 2, 1925. In each of those cases the bank had actual or constructive notice that the money deposited with it, and absorbed in part satisfaction of the depositor's debt, belonged to some one other than the depositor, and it was held that the equitable owner could follow the fund into the hands of the bank and recover it. In the Mutual Life Insurance Co. Case the court said: "Evidently the bank has no better right than Dillon, unless it can obtain it through its banker's lien. Ordinarily that attaches in favor of the bank upon the securities and moneys of the customer deposited in the usual course of business, for advances which are supposed to be made upon their credit. It attaches to such securities and funds, not only against the depositor, but against the unknown equities of all others in interest, unless modified or waived by some agreement, express or implied, or by conduct inconsistent with its assertion. But it cannot be permitted to prevail against the equity of the beneficial owner, of which the bank has notice, either actual or constructive."
It will be observed that in speaking of the banker's lien that prevails against "unknown equities" the court refers to it as attaching to securities and money deposited in the usual course of business "for advances which are supposed to be made upon their credit." That is not this case. In none of the Supreme Court decisions relied on by the bank did the question arise as to the applicable law in the absence of notice, or as to the rights of the bank as between it and the equitable owner where the credit was not extended on the faith of the deposit. We cannot hold that the denial of the right of set-off as against the real owner, where the bank had notice of his equity, is the equivalent of holding that, in the absence of notice, the right is absolute, for, as pointed out in the case just referred to, although the balance due on a depositing account is only a debt, "the question is always open to whom in equity does it beneficially belong."
The loan to the Geiger-Jones Company was not made upon the credit of its deposit. The bank applied the deposit to a debt that was not due. Its rights were purely equitable, and were subject to superior equities in favor of the beneficial owners. The claims of the interveners were for funds impressed with a trust in their favor. Those funds had been transferred to the Geiger-Jones Company and deposited by it with the bank. The bank had not granted or extended credit or in any respect changed its position because of the deposit. The equitable rights of the interveners were in our opinion superior to the right of set-off in the bank.
The controversy between the bank and the receiver presents the question as to whether collateral deposited by a debtor with a bank to secure the payment of a debt "or any other liability or liabilities of ours to said company, due or to become due, or that may be hereafter contracted" may, after the existing debt is paid, be applied to the payment of a pre-existing obligation to another bank which has absorbed the bank with which the collateral was deposited. Counsel for the bank rely on Mulert v. National Bank of Tarentum, 210 F. 857, 127 Cow. C. A. 419; Richardson v. Winnisimmet, 189 Mass. 25, 75 N.E. 97; Oleon v. Rosenbloom, 247 Pa. 250, 93 A. 473, L. R. A. 1915F, 968, 1 Ann. Cas. 1916B, 233. None *844 of them is in point. They deal with contracts of pledge subjecting the collateral, not merely to debts due the original pledgee, but to all debts and liabilities due any holder of the note, and authorizing any such holder to sell the collateral and apply the proceeds in payment of any debt then due or to become due, or that might thereafter be contracted in favor of any holder of the note. The contract of pledge in the instant case limited the subjection of the collateral to debts due or to become due or that thereafter might be contracted in favor of the original pledgee. The liability to which the Harter Bank is attempting to subject the collateral is not and was never due the City National Bank to which the pledge by its terms was limited. The taking over of that bank did not effect an extension of the pledge to an account which the Harter Bank had prior to that time. Gillett v. Bank of America, 160 N.Y. 549, 55 N.E. 292.
The judgments in all cases are affirmed.