27 U.S. 527
2 Pet. 527
7 L.Ed. 508
THE PRESIDENT, DIRECTORS AND COMPANY OF THE BANK OF
THE UNITED STATES
WILLIAM OWENS, HERBERT G. WAGGONER, GEORGE WAGLEY AND
January Term, 1829
THIS case came up, on a certificate of the judges of the circuit court for the district of Kentucky; they being opposed in opinion.
The action was upon a promissory note signed by the defendants, bearing date the 7th of February 1822, by which they promised to pay to the president, directors and company of the bank of the United States or order, on the 7th of February 1825, five thousand dollars with interest at the rate of six per centum per annum from the date.
The following indorsement is on the note:
'Mem. Interest is to be charged on this note from the 21st day of May 1822 only, and not from the 7th of February 1822 within mentioned, the former being the day on which the amount was actually received by the makers of this note.
(Signed) H. CLAY.
The declaration being in the usual form, the defendants, Waggoner, Wagley and Miller pleaded as follows:
'That they ought not to be charged with the said debt by virtue of the said supposed note or writing, because they say that they executed the said note at the instance and for the accommodation of the said Owens, and with the view of making him to obtain a loan of the money from the bank of the United States, upon the discounting of said note; and defendants alleged that afterwards, to wit, at, &c. the said Owens presented the said note for discount to the president and directors of the office of discount and deposit of the bank of the United States at Lexington, Kentucky, and that the president and directors of the said office, then and there failed to discount the said note or make any loan thereon; and that after the rejection of the said note as aforesaid at Lexington in Kentucky, to wit, on the 31st day of May 1822, it was unlawfully, usuriously and corruptly agreed by and between the said plaintiffs, by their agents, managers and servants employed in the management and business of said office, and the said Owens, that they the said plaintiffs would receive and discount said note, and that the said Owens should receive from them therefor notes of the bank of Kentucky or its branches at the nominal value of said notes; and for the forbearance and loan aforesaid, that said Owens would pay said note in current money of the United States when it fell due, with interest at the rate of six per cent. per annum from the 7th day of February 1822, and they aver, that in pursuance of said corrupt and unlawful agreement, the said note was delivered to the said plaintiffs at their said Lexington office upon the terms aforesaid, they advancing and loaning therefor, as the whole and sole consideration of said note (after deducting a large sum from the amount of said note for discount) to wit, the sum of $_____ in notes of said bank of Kentucky, counted and rated at their nominal value. And said defendants aver, that at the time said note was discounted as aforesaid, the notes of said bank of Kentucky and its branches were generally depreciated, so much so that one hundred dollars thereof nominally were of the value of fifty-four dollars only or less, and current only at that depreciation for greater or smaller sums, to wit, at, &c. And the said defendants aver that said transaction and dealing was contrary to law and the fundamental articles of said corporation, and the said note founded upon a corrupt and usurious consideration, the said plaintiffs reserving a greater interest than at the rate of six per cent. per annum upon the value of the notes loaned by them as aforesaid, and this they are ready to verify. Wherefore, &c.'
To this plea, the plaintiffs by their attorney demurred(a).
(a) The demurrer entered in this case, prevented that investigation of the facts attending the transaction, which was the subject of the suit; and by which the plaintiffs would have been enabled to present the circumstances under which the loan was made to the drawer of the note, so as to fully vindicate the institution from any charge of intentional violation of the provisions of the charter of the Bank of the United States, or the general rules of law. The following authentic and explanatory statement has been furnished to the reporter.
The note in this case is joint and several, and was not offered, as the plea suggests, for a loan in the ordinary course of discount, in United States bank notes, or specie; (it being generally known that the Lexington office was at that time restrained from making such loans) but specially for notes of the bank of Kentucky. These notes had been received by the bank of the United States, at their office at Lexington, at their nominal specie value, a part of them being for government deposits; they had always preserved that value to the bank, by the balance being liquidated, and interest being paid by the bank of Kentucky periodically, and by the actual payment in specie, within a few (six) months after the loan to Owens, of the balance due. The bank therefore would have received in specie from the bank of Kentucky, the amount loaned to Owens with its interest, in addition to the sum actually paid, had the loan not been made to him. The public exhibits of the bank of Kentucky, at the time of the loan, and before and since, have shown its entire ultimate ability to pay its notes and deposits in specie; and individuals have, in a great number of instances, received from that bank by compromise on time, or by assignments of its discounted notes, or by recovery on suit, the nominal amount of their notes and deposits in specie. The great issue of commonwealth bank notes at the period referred to, and their free reception by the bank of Kentucky in payment of its debts had, however, the effect of giving to the notes of the bank of Kentucky nearly the same nominal depreciated character as those of the bank of the commonwealth.1
This case came before the court again, in January term 1835, after a trial on the merits, and it was finally decided, that the contract was not usurious. United States Bank v. waggoner, 9 Pet. 378.
Upon the argument of the demurrer, the following questions arose, namely:
1. Whether the facts set forth, and the averments in said plea, make out a case in which the corporation has taken more than at the rate of six per cent. per annum, upon a loan or discount, contrary to, and in violation of the 9th rule of the fundamental articles of the constitution of the corporation?
2. If the plea does make out such a case, whether the notes sued on, or the contract therein expressed to pay to the plaintiffs five thousand dollars, is void in law, so that no recovery can be had thereon in this suit?
3. If not wholly void, whether the plea is sufficient to bar the plaintiffs' recovery of any, and if of any, of what part of the said sum of five thousand dollars?
Mr Sergeant, for the plaintiffs.
1. Upon the first question, after referring to the 9th rule(a), he proceeded to say, that the case presented by the plea was not within the words of the rule. The prohibition is against taking more than six per cent. The utmost that can be made out of the allegations of the plea, supposing the construction attempted to be put upon the transaction to be correct, is, that there was an agreement to take more than at the rate prescribed. Nothing was taken but the note. There is no prohibition against an agreement to take more than six per cent. The offence is in taking more, and nothing else. Penal provisions in a statute are to be construed strictly. This is highly penal, for it is made a violation of the charter, and exposes to the danger of forfeiture.
(a) 'The said corporation shall not, directly or indirectly, deal or trade in any thing except bills of exchange, gold or silver bullion, or in the sale of goods really and truly pledged for money lent and not redeemed in due time, or goods which shall be the proceeds of its lands. It shall not be at liberty to purchase any public debt whatsoever, nor shall it take more than at the rate of six per centum per annum, for or upon its loans or discounts.'
Where a penalty is given for taking usurious interest, it is well settled, that the penalty cannot be recovered without proving an actual taking of the usurious interest. Fisher vs. Beasley, Dong. 236; Maddock vs. Hammett, 7 T. R. 180. Here no discount was deducted, as is most usual in banking operations. The interest was not payable till the maturity of the note. It is clear, therefore, that there has not been a taking of more than six per cent. in violation of the 9th rule.
2. This question does not arise, unless the first be made out affirmatively. If there has been no taking of more than six per cent. in violation of the 9th rule, (as there clearly has not,) this question, being by its statement made dependent upon the first, is also decided in the negative.
There is nothing in the act to make the contract void. The penalty is specified, and is of a different nature. An additional penalty cannot be imposed.
A mere prohibition to take more than six per cent. does not of itself avoid a contract agreeing to take more. When the agreement is avoided, it is always in consequence of an express provision by law to that effect. Such is the law in England against usurious contracts, and in many of the states. Such is the law of Kentucky, and this question could only have arisen from the application of that law to the present case.
Nor do courts incline to destroy the contract. Even under those laws, which avoid the contract for usurious agreement, if chancery get possession of the matter, by the application of the debtor, it will compel him to pay the debt and legal interest as a condition of relief.
But state legislation has no power over the bank of the United States or its contracts. This has been decided, and is obvious from the nature of the case. The bank of the United States is governed by the law of congress, and is subject to no other jurisdiction. M'Cullough vs. The State of Maryland, 4 Wheat. 316; Osborn vs. The Bank of the United States, 9 Wheat. 859; Wayman vs. Southard, 10 Wheat. 1; Bank of the United States vs. Halstead, 10 Wheat. 51.
The rule in the charter, therefore, is the governing rule. That even the taking of more than the legal interest does not under the charter avoid the contract, has been already decided by this Court. Fleciner vs. Bank of the United States, 8 Wheat. 355. 'The taking of interest by the bank beyond the sum authorized by the charter, would doubtless be a violation of the charter, for which a remedy might be applied by the government; but as the act of congress does not declare that it shall avoid the contract, it is not perceived how the original defendant could avail himself of this ground to defeat a recovery.'
Still less can the agreement to take.
3. Admitting, for the argument's sake, that if the bank had agreed to take more than by law it was authorized to take, the Court would not lend its aid to recover the excess, the question arises whether this was an agreement to take more than six per cent. on a loan or discount.
It was not so in terms, for the interest payable was precisely six per cent. neither more nor less. It was not so in extent. The object of the transaction was not to cover illegal interest. The real design was to dispose of the notes of the Bank of Kentucky. It was in substance a sale upon a credit of three years, and not a loan.
If the transaction be unimpeachable on this ground, can it be questioned on any other? The plea seems to aim to extricate the defendants from knowledge of the negotiation. But there are two particulars to be observed in it. 1. It does not aver that the bank knew that the note was given to enable Owens to get a discount in the ordinary way. 2. It does not aver that the defendants were ignorant of the negotiation for the Kentucky Bank notes. What is not denied in pleading, must be considered as admitted. There is an admission, therefore, that the bank did not know that the note was given for any particular purpose (if such were the fact), and that the defendants did know of the negotiation for the bank notes. Upon this basis of knowledge and assent, the case is to be considered.
Was there not then an adequate consideration given? It was so agreed, voluntarily, without coercion, compulsion or duresse; the parties being able and willing to contract, and understanding the subject matter of the contract. The bank had a perfect right to fix the terms upon which it would part with the notes, and the defendants an equal right to decide whether they would accede to them. Both were the exclusive masters of their own judgment in making the contract; but that, once made, and not in itself unlawful, becomes the law between them. No one has a right to alter it. The consideration has passed; the contract is executed; and the parties cannot now be restored to the condition they were in at the time of contracting. Sales are made according to the views of the parties, understood by themselves and influenced by many circumstances. Here, the sale was upon a long credit, enhancing the risk to the seller, and increasing the chances of the buyer. The notes might, and did appreciate during the interval.
It is impossible now to adjust the terms differently. There is no evidence to furnish a rule. What were these notes worth to the Bank of the United States? They were notes for the payment of money, which the Bank of Kentucky was bound to pay, and the payment of which, to the full amount, was compellable by process of law. Who can say, that the full amount might not have been recovered? Again, what was the value to the buyer? He, too, could enforce the payment, and use the notes, for some purposes, as equivalent to money. It does not appear that he did not so use them. He may have recovered the full amount, or passed them off in advantageous negotiation.
The case is not new. Bank paper, being a kind of currency, has been variously depreciated at different periods, and in different parts of the United States; in some to the extent of more than twenty per cent. Contracts made when specie was the basis of circulation were satisfied with depreciated bank paper. Was it ever heard, that he who chose to take them in payment (and none could be compelled to do so) could afterwards recover the difference? Contracts were made in the time of a depreciated currency, and executed since by payment with specie. Was it ever understood that the payee could claim a deduction, or recover back any part of what he had paid?
Bank paper too, which, besides being a currency, was a commodity, was the subject of purchase and sale, for cash and on credit, under all the modifications that affect the dealings in any other article. Those who dealt in it were the judges, as they are with respect to other commodities. It was never thought that courts of justice could be required to revise and reform their bargains. This would be an exercise of equity power, that would end in any thing but equity. It would be wholly without limit or guide.
The pleadings, however, do not admit of such a defence in part. The plea is entire and goes to the whole. If bad for a part, it is bad for the whole. They should have taken defence only for as much as they controverted. 1 Chitty, 523; 6 Cranch, 136.
That such a transaction could not be considered a cover for usury, was quite evident. An increased rate of interest, or profit for the use of the money, was no part of the object. There is no pretence of any such thing. If not, it is unobjectionable, even under the usury laws. A bond, or note, or other security, may be purchased at any discount, without incurring the charge of usury. Musgrave vs. Gibbs, 1 Dall. 217; Wycoff vs. Loughed, 2 Dall. 92. Cases more analogous to the present, and involving the very same sort of negotiation, had been judicially decided upon principles decisive of this. Northampton Bank vs. Allen, 10 Mass. Rep. 254; Stuart vs. Farmers' and Mechanics' Bank, 19 Johns. Rep. 496.
The question whether the bank had a right to make a sale of notes was not presented here. If it had been, he would have cited, as deciding it, Fleckner vs. The Bank of the United States, 8 Wheat. 349. 351. The same point, he would remark, had been fully discussed and decided in the court of appeals in Kentucky, in the case of the Bank of the United States vs. Norton. The opinion would be found at length in the record of the case of the Bank of the United States vs. Venable, decided at the present term of this Court.
No counsel appeared for the appellees.
Mr Justice JOHNSON delivered the opinion of the Court.
This suit is instituted for the recovery of a promissory note.
The plea is filed by the three last named defendants, who represent themselves as securities to Owens, and sets out in substance, that the note was created for the purpose of enabling Owens to obtain a loan of money from the plaintiff, in the ordinary course of discount; that it was offered for discount, and rejected, and after such rejection it goes on to aver, that 'it was unlawfully, usuriously, and corruptly agreed by and between the said plaintiffs, by their agents employed in the management and business of the said office, and the said Owens; that they the said plaintiffs would receive and discount the said note, and that the said Owens should receive from them therefor, notes of the bank of Kentucky, or its branches, at the nominal value of said notes, and for the forbearance and loan aforesaid, that Owens should pay said note in correct money of the United States, when it fell due, with interest at the rate of six per centum per annum from, &c.; the plea then avers, 'that in pursuance of said corrupt and unlawful agreement,' this note was passed to the plaintiffs, and Kentucky notes received in loan, 'as the sole consideration thereof,' at their nominal value, and further, 'that at the time the said note was discounted, as aforesaid, the notes of the said bank of Kentucky and its branches were generally depreciated, so much so, that one hundred dollars thereof, nominally, were of the value of fifty-four dollars only, or less; and current only at that depreciation for greater or smaller sums,' &c.; and the defendants further aver, 'that the said transaction and dealing was contrary to law, and the fundamental articles of the said corporation; and the said note, founded upon a corrupt and usurious consideration, the said plaintiffs reserving a greater interest than at the rate of six per centum per annum, upon the value of the notes loaned by them, as aforesaid.'
To this plea the plaintiffs demurred, and three points are made on which the court below certify a difference of opinion to this Court.
The 1st is, Whether the facts set forth, and the averments in said plea make out a case on which the corporation has taken more than at the rate of six per centum per annum, upon a loan or discount, contrary to, and in violation of the ninth rule of the fundamental articles of the constitution of the corporation.
The proposition here presented to the Court, has relation altogether to the violation of the ninth fundamental rule of the act of incorporation, and it brings under consideration the sufficiency both of the facts and averment contained in the plea, to make out a violation of that article.
I have, myself, entertained very serious doubts of the sufficiency of the averments in the plea; for it is not a case of a direct reservation of a higher interest than the law allows, since on the face of the note, only six per cent. is reserved; but the facts are calculated to present one of those cases in which a device is resorted to, by which is reserved a higher profit than the legal interest, under a mask thrown over the transaction; to wit, by taking a note payable in gold or silver, for a loan of depreciated paper; a return, in fact, in specie, for an article of scarcely half the value of specie; a loan of adulterated dollars, for which a note is taken, payable dollar for dollar, in coin of the United States.
That the law will not tolerate such transactions has long been settled, for a fraud upon a statute is a violation of the statute.
But the difficulty with me was this, that the plea neither avers an intention to evade the statute, nor a knowledge in the plaintiffs of the actual depreciation of Kentucky money. I am content, however, to unite with the three of my brethren, who make up the majority on this point, in holding the averments to be sufficient; because, in a considerable dearth of authorities on this subject, I find it decided in the case of Bolton vs. Durham, in Croke's Reports, Cro. Eliz. 642, that the confession of the quo animo, implied in a demurrer, will affect a case with usury, when a very similar case, in the same book, in which the plaintiff had traversed the plea, was left to the jury, with a favourable charge. Benningfield vs. Ashley, Cro. Eliz. 741.
In the present instance, the loan; the unconditional return of the sum lent; the illegality, and even corruption of the bargain; are all distinctly averred, and more than once reiterated. If the transaction was corrupt, and in violation of the fundamental laws of the charter, as averred in the plea, and admitted by the demurrer; it could only have been upon the ground of an intention to evade the statute, and with a knowledge of the reduced value of the Kentucky bills.
And it is not unnatural here to remark, that the plea sets out a refusal to make a loan in the ordinary course, to wit, in gold or silver, or the plaintiffs' own notes; and a subsequent agreement to make the loan, provided payment would be received in this depreciated paper. This state of facts presents an obvious analogy to the leading case of Lowe vs. Waller, Douglas, 736, in which the negotiation commenced for a loan of money, but terminated in a sale of goods, on the re-sale of which, the borrower, (as he was held to be,) sustained a great loss.
The court charged the lender with that loss, as so much exacted from the necessities of the borrower.
That part of the 9th section of the fundamental rules of the bank charter, which is here drawn in question, is expressed in these words, 'The bank shall not be at liberty to purchase any public debt whatever, nor shall it take more than at the rate of six per centum per annum, for or upon its loans or discounts.'
A profit made, or loss imposed on the necessities of the borrower, whatever form, shape, or disguise it may assume where the treaty is for a loan, and the capital is to be returned at all events; has always been adjudged to be so much profit taken upon a loan; and to be a violation of those laws which limit the lender to a specified rate of interest.
According to this principle, the lender has here taken forty-six per cent. for three years, or at the rate of about fifteen per cent. per annum above his prescribed interest. So that in this point the certificate of this Court must be in the affirmative.
Some doubts have been thrown out, whether, as the charter speaks only of taking, it can apply to a case in which the interest has been only reserved, not received. But on that point the majority are clearly of opinion, that reserving must be implied in the word taking; since it cannot be permitted by law to stipulate for the reservation of that which it is not permitted to receive. 1 Hawk. P. C. 620. In those instances in which courts are called upon to inflict a penalty upon the lender, whether in a civil or criminal form of action, it is necessarily otherwise; for then the actual receipt is generally necessary to consummate the offence. But when the restrictive policy of a law alone is in contemplation, we hold it to be an universal rule, that it is unlawful to contract to do that which it is unlawful to do.
The second question propounded to this Court is, 'Whether if the plea does make out a case of violation of a provision of the charter, the notes sued on, or the contract therein expressed, is void in law, so that no recovery can be had therein in this suit.
The question here propounded has relation exclusively to the legal effect of a violation of the provision in the charter, on the subject of interest; and does not bring in question the operation of the statute of usury of Kentucky upon the validity of this contract. To understand the gist of the question, it is necessary to observe, that although the act of incorporation forbids the taking of a greater interest than six per cent, it does not declare void any contract reserving a greater sum than is permitted. Most, if not all the acts passed in England, and in the states on the same subject, declare such contracts usurious and void.
The question then is, whether such contracts are void in law, upon general principles.
The answer would seem to be plain and obvious, that no court of justice can in its nature be made the handmaid of iniquity. Courts are instituted to carry into effect the laws of a country, how can they then become auxiliary to the consummation of violations of law?
To enumerate here all the instances and cases in which this reasoning has been practically applied, would be to incur the imputation of vain parade.
There can be no civil right where there can be no legal remedy; and there can be no legal remedy for that which is itself illegal.
That this is true of contracts violating the laws of morality, is recognized in the familiar maxim, 'ex turpi causa non oritur actio;' as has been exemplified in some modern cases of a house let for immoral purposes. (Cited and admitted in 1 B. &. P. 340, and Esp. N. P. 13.)
In the case of Aubert vs. Maze, 2 B. &. P. 374, it is expressly affirmed that there is no distinction as to vitiating the contract, between malum in se, and malum prohibitum. And that case is a strong one to this point, since the contract there arose collaterally out of transactions prohibited by statute.
So the same doctrine was maintained in equity upon a similar contract in the case of Watts vs. Brooks, 3 Ves. Jun. 612, in which the court observes, 'There is nothing immoral in this transaction, but it is against a prohibitory statute. I doubt a little the policy of the act, but I cannot allow it to be argued, that you can break a law covertly. The court will not execute these contracts.'
So in the case of Webb vs. Pritchett, 1 B. & P. 264, where the action was by a tavern keeper against a candidate for provisions furnished to the voters at an election, contrary to the statute of William. Although the statute does not declare the contract void, the Court declared it void, and in this explicit language: 'This action is apparently founded on a contract to disobey the law.' 'The defence set up proves the principle of the contract.' 'Then how shall an action be maintained in that which is a direct violation of a public law. The contract is bottomed in malum prohibitum of a very serious nature in the opinion of the legislature; how then can we enforce a contract to do that very thing which is so much reprobated by the act?' 'This Court cannot give any assistance to the plaintiff consistently with the principles which have governed the courts of justice at all times. Persons who engage in such transactions must not bring their cases before a court of law, &c.'
So in the case of assurance in illegal voyages, even where the underwriters have contracted with their eyes open, they are notwithstanding permitted to avail themselves of the plea of illegality ad libitum; as in the cases of Camden vs. Anderson, 6 T. R. 723, adjudged in the king's bench and affirmed in the exchequer; where it is declared that 'the defence is founded upon a principle of law which is permanent to all obligation, by which the parties to a contract can bind themselves. 1 B. & P. 272.
And so in another case of great hardship, Morck vs. Abel, 3 B. & P. 35, where the insurance was upon a trading in the East Indies prohibited by an obsolete statute, the plaintiff could not even recover back his premium, although admitted that the risk never commenced because the policy was void in its inception, on the ground of illegality.
Nor is it to voyages illegal by statute alone, that this principle applies. A respectable writer on insurance makes these remarks. 'Whenever an insurance is made on a voyage expressly prohibited by the common, statute, or maritime law of the country, the policy is of no effect. The principle on which such a regulation is founded, is not peculiar to this kind of contracts, for it is nothing more than that which destroys all contracts whatsoever, Park, 232, that men can never be presumed to make an agreement forbidden by the laws; and if they should attempt it, it is invalid and will not receive the assistance of a court of justice to carry it into execution.
Nor is the rule applicable only to contracts expressly forbidden; for it is extended to such as are calculated to affect the general interest and policy of the country.
Thus a note given by a bankrupt upon a secret compromise with a creditor, is declared void; as it produces inequality in the distribution of the bankrupt's effects, and evades the provisions and policy of the law, which proposes to put all the creditors upon an equal footing. Wells vs. Girling, 1 Brod. & Bing. 447.
And on the same principle a note given for a wager on the future amount of a branch of the public revenue is declared void; because it interests an individual in diminishing the production of the revenue. 2 T. R. 610. 2 B. & P. 130.
After citing these more modern decisions upon this subject, it may not be amiss to refer to some reporters, whose authority has been consecrated by the respect of ages. They will serve to show the autiquity and universality of this doctrine.
Thus in 1 Bulls. 38, it is laid down 'that wherever the consideration which is the ground of the promise, or the promise which is the consequence or effect of the consideration be unlawful, the whole contract is void.
So in Hobart, 72, and Dyer, 356, 'if one promises to do a thing that is unlawful, such promise is void.'
And innumerable ancient cases might be cited from the best reporters, of the application of the rule to maintenance, to simony, and to promises made to public officers, engaging them to act contrary to the duties of their offices, or to individuals imposing upon them restraint inconsistent with the public interest.
For these reasons, and upon these decisions, the majority of the Court are of opinion that an affirmative answer must also be certified upon the second question in the cause.
And this renders it unnecessary to consider the third question.
This cause came on to be heard on the transcript of the record from the circuit court of the United States, for the district of Kentucky, and on the questions and points on which the judges of the said circuit court were opposed in opinion, and which were certified to this Court for its opinion, and was argued by counsel; on consideration whereof, it is the opinion of this Court, 1. That the facts set forth, and the averments in said plea, make out a case in which the corporation has taken more than at the rate of six per centum per annum upon a loan or discount contrary to and in violation of the ninth rule of the fundamental articles of the constitution of the corporation. 2. That the plea does make out such a case where the notes sued on, or the contract therein expressed to pay the plaintiffs five thousand dollars is void in law, so that no recovery can be had thereon in this suit. And 3. This Court being of opinion in the affirmative on the first and second points, renders it unnecessary to consider the third question; all of which is ordered and adjudged to be certified to the said circuit court.