DANFOBTH .,,;
STATE BANK OF ELIZABETII.271
DANP'ORTHetal.'l1. NATIONA.L
BAm: ,OF ELIZAlmTH.
(CircUit Oourt a/AppeaZs, Third Oiflcidt. November 18,1891.) 1. NA.TIOIUL
The purchase of accepted dmfts by a national bank from the holder without hill indorsement at a greater reduction than lawful interestoD their face value is a discounting of those drafts, within the meaning of Rev. St. U. S. § 5197, which prohibits'such bank from taking interest on any loon or discouut made by it at a greater rate than is allowed by the laws of the whel'e it Is aituated. r
WHA.T,:tll DIBOO,UNTING-USUBY.
2. SA.MB-FoBl"ElTURE PJ"
The acceptor of the t'ira,fts so purchased may 'defend against the, recovery of interest thereon by the bank, uuder section 5198. which provides that the taking of an unlaWfUl rate of fn4ierest ilhall be deemed a.forfeillure of tbeentlre iuterest , wbich the '+blll or other of debt cal'ries witb, it;" for this provision d&st.roystheintllrest.beariugpower of the,instrument. , , , 'Where the acceptor of tbll dl'aftll makes a payment to' the bank Without any , rection aa'toits applicatiOD, Ui cannot be applied to the' forfeited interest, but must be 'Credited on the facevaltte of the drafts. " ' " , ' ,
3.
JerSe
Error
the Circuit Court 'bf the'United States fur the Dl&'trict of Ne'w ' j l" ; ·· : : · " ::"
'AclioribY the Nationll.l 'Stilte ;BankMEIiZ'abiltl1 s;gains,t Waldo fo;rth and B. Ryder. verdict for the tift' for ,the whole .amount pilts claiIQ, and from the judgment thexeQO defendants bring error.' Judgmerit:rev811sed. ' ,A; S.: BfO'UJlnarid Ja'1lte8 H. English, for plaintiffs in error." 1l.V: Lindabu,.y; foi-defendant in error. "
JJ.;,
.
-
'".
:ACHESoN,J. This action was brought by the, National State Bank of Elizabeth, a national banlt located t4estate of New Jersey, against Waldo Danforth andSethB>Ryder;e:x.eeutors;of the last wiIlof -G. Brown, deceased, to recover the amount of certain dra.fts' and mtereSt there,on. Qisclosed by tbe r£l4or4 are these: Bt:tl:ipard Bros. drew nine drafts, payable to the order of themselves, upon Ed.. "Ward r, G. 'Brown, 'whoacceptiedthe same. Afterwards, and, before the fuaturitY'ofthedrtdts,Braibiird'Bros.'iridorsed, ,and placed them in'the hands of W. Rayno.r,',IJ,'broker ipconimercial paper,. for sale,l:l,nd froW a ,of 15 per centum per annum for the length of time theY hlldto,run, ,PI\Y:- . iI;lg to Rayp.or the face of drafts, less the said . The 'b l1 nk did nOt know that Raynbr was acting for Brainard "Bros., ol'tbat 'the latter then'owried the dmfts. Thelegal rate"of intereiltin the state of New Jersey was 6 ·one of Bh>W'n, 'paid- to the bank $2,500. Shortly be'fore,tbe cashier of the bank had'milde ,a. demand on Ryder for the inter,est on the drafts. RyclercoDsulted Who advised him' rtot to pay the interest,but to uheckfor even whieh 'W'as -soniet:bingmorethantI1e interest would' be,aOd"give; itt6the llalb!k'. "rhisB.)"Berdid,handiilg tlle' check.'to thecRshierWithoutsayingafty,. C
FEDJj:RAL
,VQI.
'
thing. He testified that his intention was to make a genera] paY!11ent. The ca,shier, witho;u,t tQe consent kllowledge qf Ryder, credited the 82,500 on account of interest. The defendants resisted the recovery of anything .nore than the,amount of money advanced by the bank on the drafts, less the payment of $2,500, claiming that all interest was forthe following provisions of the national banking law, (sections 5197, 51-98, Rev. St.:) "Sec., 5197. Any association may take, receive, reserve. and charge on any loan or discount made, or upon any note. bill of exchange, or other eviat allo'Wedby the the state, territory, or l1istrlct wher.e bank is located. a,nd no more.; that where, by. the laws, of any state. a.difl'erent rate ill limited for banQQfil;lsue organized under state laws, the rate: so be allowed for organized or eXisting in any sllch state u1'lder this title." When no Tate is fixed by the laws ottl\estate, ,di!ltrict, the bank may ta;ke, re<:eive. reserve. or ch!\l"ge a fijlVI:lD, per centum. andsu,()h interest may be taken in advance, reckoning the days for which the note, bill, or other evidence of debt has to run. And the purchase. discount, or sale of a bona fide bill of 'payabllt,atl\DothElr:place tl,1an·tpe place of purchase; discount, or sale. at not more than the current rate of eXchange for sight-drafts, in adW·lhe. intefl:ls.t. as, taking Of receiving a greater rilote;of interest. .,: " , ' . . ..,' ·.... .. ..... The' re\,ervhig, or charging It rate of interest greater tban Is allowed by the rpreceditlgt seotion, when knOWingly done, shall be deemed a forfeiture of tJile .entire dnteresbwhich, the note, bill, 01" other evidence of d\lbt,cl\rries withrft,. OJ: which has been agrefJ!:1.to be paid thereon. In cllse the greater rate of interest has been paid, whom it,has been paid, or his legal represeptatives,tnay r,ecoverl,>ack,)n an action in, the nature of an action of debt, twice the ltinolirit of the 'interest thus paid from the association taking or receiving the same: provided such action is commencedrwithin two,years. ftom the time the. usurioustil'R{lsaction occurred. II .' . , ,
ing the f()llowing:'
The cOilrt below overrule!i. the defense, assigning as, reasons for so do.
'-
"Fi7'st. That the transaction: 'Was not usurious, there being a difference between discount and purchal;le.; '.. , ' . "Second. That the payment made by' Ryder upon. the indebtedness was either a distinct payment upon interel;lt, or. if a payment generally, must be by law cr,edited upon the intel'lllltaccount i1,1 this transaction. "Third. That, if the transaction was. uSluioU8 as to Brainard Bros·· the drawers of the drafts, that does' not the defendants from liability to pa)':the full amount. .. . i , "I,
-And bydirecti,on of the court the jury rendered a verdict for the pl/linti1t for the whole amount ofits claim, namely, the. sum of$13,'andjudgmenttherefor wasenter.ed. .. '. We are now to deterI:\1ine. whethertheli1e rulings were correct. Unthe suggested hetweell discpu,n,tand purchase has been judicially recognized IJ,s existing undfil,I:state usury laws, and it has that, without infraction of"t,pose laws, a promissory note .or d.raft, valiq in ita. inception, and originally free from usury, . may be the holder at any agreed price,withontregard to the pl1rchased
DANFORTH'll. NATIONAL STATE BANK OF ELIZABETH.
273
rate of interest fixed by law. But such decisions are not applicable here. Bank v. JQhnson, 104 U. S. 271. It was there held that, so far as loans and discounts are concerned, "the sole particular in which national banks are placed on an equality with natural persons is as to the rate of interest, .and not as to the charactE'r of contracts they are authorized to make." In that case a national bank, located in the state of New York, acquired from the payee certain promissory notes, business paper, and valid. for the full amount in his hands, at a deduction exceeding the lawful inierest, and the notes were traJ;lSferred to the bank by the indorsement of the payee, iDlposing upon him the ordinary liability of au indorser·. Bv the law of the state of New York it was not usurious or unlawfql for natural, persons thus to acquire !Jusillesspaper, the tranl'!fer being treated as a. sale. '. But the supreme court of the United States adjudged that the transaction was a discount by the· bank, and was within the pt(l)hibition and pen,alty of sections 5197 and 5198 of the Statutes.!Now the only distinction between that case and the case in hand is that here the bill-broker who negotiated with the. bank, and who ;by was the ostensible owner of the drafts, transferred them to mere.delivery,without his own indorseDlent. Doesthii!' circumstance so distingQ.ishthe,two cases as.tojustify the,conclusion of the court below thatthe:tJ'ansaction iu questil:>nwas not' a discount, ,within .the meaning of thellflctions above. quoted ? ' v. Bank, 8 Wheat. 338, 350, the supreme court oUhe United.States, speakingby,·Judge STORY, said: ..N otbirig can be clearer than that by the language ofthe and the settled practice of "banks, 'a discount by li:bank means, ew tJi terinin:i, a draWback made upon its advances .,or loans of money Iipon negotiable: paper, or other evidences of debt, payable a:t a future day, which are transferred to the bank." -And it was added· that; if the transaction there WaS purchase, it was "n way of discount." It be that the llb()ve definition' of discount embraces as well Ii transaction where money is vanced upon paper transferred to a bank without the indorsement of the previous bolder, as the case of a strict loan theredn,where the relation of debtor and creditor is created. Mr. Justice MATTHEWS, in Bank v. JohnSon, 8upra, tersely defined "discount" as l'the difference between the price and the amount of the debt, the evidence of which is transferred." In TracY v. Talmage, 18 Barb. 456,462, the comt said: "Now to 'discount' includes to buy; for discounting, in most cases, is but another term for buying at a discount;'" and this proposition the court of peals of'New York cited with approval in Bank v. Savery, 82 N. Y. 291, 302. In Bank v. Baker, 15 Ohio St. 68,85, the court declared: "It ill also undeniably Clear that the term ·discount,' when used in a general sense, 1S equally applicable to either Qusiness or accommodation paper, and is appropriately appIiedeither to loans, or sales by way of discount, when a sum is counted off or taken from thefltee Or amount of the paper, time·the money is advanced upon it, whether that sum Is iaken for interest upon a loaJJ,or as the. price l'greed upon a·sale." v.48F.noA-18
will
2;4
FEDERAL
REPORTER, vol. 48.'
u:
:In Pdpe v;' Ban'h, 20 440, 4'81'; 'the court,liaidr"And the term 'dillCountitig' includes 'purchase, us loan. lit I iItis worthy of ob· eervlltionthaV the opinIon of thestipreme court of11Kansas' in .that case 'was deIit'.ered by Judge:BREwER, associatejllstic6ofthesupreme cotirtd'r the United Statel!; In· Bank: tV. Sherbtbtner;14' Ill. App. 566, the court expressed the opinion that "a 'r'nade by way of diScount equally as, well aa '8 loan may hamada,by way of discount'! , This question was before' tha court 'ofappei\lsof the state of New York in Bank vf'Savery, BUpta, where the facts 'were substantially the ,ss.ttieias they are 'here. There:a>negdtiable; pr<!>fi<1issorynote, duly 'indorsed:, "fVas delivered;) by' the holder 'to a firm of brokers, to whom he WltB: withdirecti'ons to sell the note, aQdiapply. the proceeds 'On' thil.tJihdeli>tednese. ; ,They accordingly saId and'd:&li\'ered the note to the without their-own indorsement upon "it, ;at"agreaterrate of l'OOU'etilonthan lawfulinterest. ',The oourt of :heldthat this Wall It discount: within the :meaning of the 'state wh&n authorizes nssociatian1JlQrganbed lIto carry on tbe 'busiriees f 6fbahking by disbills{ootes, and other evidences of :.. , UpmHhescore,then. ,of jl1dicialauthority, theoOl:lolu:sion is well war· ranted ttihat, irithe business of in :tbe ordinary ac· ceptanoe .the term inoludes what is "purchase.» j Weund ndth· ing in the national banking law to suggest that'Qollgress fised the word in,fatly billber to the distinction between discount and 'purchase ius.istedioo.li>y thedefEmdant of ,th,e decilJive.Jn,diClltiions to,thfl .oontra11Y",All! the, powers, national banks have.to deal> iJ11lMgotiablepaperand other eddences·ofdebtare;reonferredby Revised StatuteS. Thegrllntbf'poweris this: ", "To exercise ... ... ... all such incidental ; ng " ,".', , ,,',
be I
to
pi1Js secUl'] Y.',. .' ·.
com, a l1 4
. " " ,',' ,
:p.(lbHl'1'''' ... by by )oaI\In$'mQn,el on " " . . ,
q.uire ,I,lf>tfil8t, ppn()erns ,qu,ireq,
h;l'e used, does acquisition, by 11 bankof"the it lA;:!>Y have aetraosfer;.,tl;lereofby ,tl,le, 1 :Morse, J1.. :.,p.156 there .is.al\Y bet W,eeu ,9iscpunt.,fl:,Qd, plain th!lta na,tiollal.' therA pO,wer to these tl;).do ll.U;I1Ch a. .llg1\inst the exercise of th?power,is . First !fq,t. §prtk, S... etp., ,is 91 paragt.pf( ''l1:mymg':exchange, caN, ,and; wee .discrimination in.the, use, .ofw:ords. A,gain,turning to the concluding clause of seotion 51J97J{wefind there declai'ed that-, , <.J'l] "
,tw,
to ae-
Of
;', The term.
DANFORTH
STATE BANK. OF ELIZABETH.
275
! purchase,disco,untior sale of a bonatt.fJ,e blll of eX(lhange, payable at another place than the pla(leof such purchase. discount, or sale, at not mOl;e than the current rate of exchange for sight·drafts. in addition to the interest. shall not be conslderl'd as taklng.or receiving a greater rate of interest."
The obvious deduction is that but for this saving clause the described purchase wouid have come within the previous limitation as to the rate of interest On loans and discounts. Then, too, as Judge MATTHEWS pointed out in, Bank v. Johnson, supra, "here the purchase, discount, and sale of bills of exchange are classed as one, and subject to the same rule and rate of dislfount." . Page 278. It is incredible that, while the statute carefully restricts the rate of interest upon loans. and disQounts, it was intended that national banks should b!lve the right to buy commercial paper at any agreed price, without respect to the usury laws. This, in effect, would be to relieve these institutionsJrom all limitation on the right to charge interest whenever transfer. on tqeform of a purchase, and is so denom' inated. Weare then cohstrained to differ with the court below as to the ure or.this transaction,arid to hold that the bank acquired the drafts sued On by discount, or by purchase by way of discount, which sUbare the same thiilg. is contended that, even if the transaction between Brainard BroS. or tpeir Raynor, and the bank was us,urious, the fQrleiture the il;lnot an available defense to the executors of Bro.,wn, the acceptor of the drafts; and so the court below held. But this view, in. our judgmeQt, is against the words of the statute, and defeats the legIslative intention. The language of the act is plain: 0
"The, or charging a rate of interest greate'r thap 11'1 allowed by the preceding section. when knowingly done, shall be deemed a of the entire. interest which the note, bill. or otherevtClenceof debt carries with it,'or: which has lJeen to be paid theredn."
''l'heforfeiture here <lenquncoo attaches to the instrument itself, ana the cQnse'quenceiIiheres in it. As it. carries no Interest, how can any interest The clause directly upon the its The statutory franchise to recover interest is losth y the commissionQfthe illegal act. Being without right to demand . the .bank cannot interest from "8ny one. Thenghtto ,defend is not made a personal one; and herein. it will be perceived,thert;l is marked difference between this provision of the law and the succeeding, which gives a particular remedy person by, thee;xcessive interest has been paid. Weare the <;I1>inion that the plaintifff\, in ,error may defend \.\nderthe.'fqrf'eiturec1auseofthe act. . .' , " We, are, ll.ware that thisconp}usion is at variance with the ruling of the Qhi() in, v. Bank'i,26 Ohio St. 141, ando(th,e court of New in Bankv.Littell, 47,N. J. Law, 233; but 'we are the declsion of the Ilupremecourt of PennEiy,lvania .in
276
FEDERAL REPORTER,
vol. 48. '
::1';)
that tM maker of a note discounted by a national bank (the equitable plaintiff) for the payee at a usurious rate of interes,t CQuldnot defend because illegal interest had paid by the payee, the court declared: "The answer to this is that the bank, by its act, has destroyed the interest-bearing power of the note, and'can recover no interest upon it from anybody." Weare brought now to the consideration of the question how far a valid defense exists ,to the claim in suit. It was settled by the case of Barnet v. Bank, 98 U. S. 555, that, where unlawful interest has been paid to, a national bank, it cannot be used by way of set-off or payment in a sujt, by the bank on'the bill, note, or draft., , rrhis principle is applicable' here, so far as relates to the usurious interest taken by the defendant error in ij;s' transaction 'with Raynor. Jt is true the illegal intetestwas not here paid to the bankin money, but it was paid in what was the equivl1lent. , Raynor was the-apparent owner of drafts good in his bands for their face' a'mount as against all'the'pa'rtiestb the paper, and which, indeed, in the hands Bros., themselves, were 'as against the acceptor. the tnihsfer of 'the drafts tijtlie, bank ass payment of the amount' charged for 'discouht. This l:>oint' was expressly so ruled bythe or New York in Na8h,v. Bank, .68 N. Y. 396, wli,ich was an 'action to ti'es under a, state, act identical, as the taking of interest,' with the national law. the sametuling was' alsb by of errOrs and of New. J iii Ea'!1k v.' Oaryenter, 52 N. J. w, 165, 19 ,Atl. Rep. 181, WhICh 'IVa's a salt for a penalty under'sectIOn 5198, Rev. St. Totheextent of th'eface amolintof the driifts, 'then, the bank had an 'enforceable claim. that no interest ,upon the their maturity " . But was recoverable. The Iltatutory is not of part ofthe)nterest, .hut all ()fit. , "The entire interest which the,note,biB, evidence of debt carries with it, or which has been agreed to be paid thereoQ," is comprehenSIve labguage;" It would be difficultto employoh'roaderterms. The legisllitive intent, we think, was ,utterly to' the interest-bearing capacity ofthe instrument. The interdiction of a nlcovery of interest by the trahsgressing hankis salutary, and full effect shouldbe given to it. " These views have prevailed in the courts.' In Ban'kv; Stauffer, 1 Fed. Rep. 187, (Cir. Ct. W. D. Pa.,) a national bank upon the discount of a note, had charged,and received more than the legal rate ofin'terest between 'the date and maturity of the Dtlte;and t,hequestion there, as here,wa!! whether this the bank to 'a forfeiture of the interest, which otherWise would' have accrued upon the, 'note after its matU'rity.' Judge McKENNANhela that it did, and that nothing could be recovered but the face amount of the note, Thes'ame point in Bank, 248, and the supreme'courtof Mas'll6chusetts ruled that, while megal interest paid to the bil:nk upon the dis:count of a note could not be in a suit brought on it, yet the bank was entitled to rec6ver only 'the face' of the note, \vlthout interest.', So, of liptoo, in Alvuv.' B'arik,3"B,owne, Nat. Bankr. Cas.
DANFORTH 17. NATIONAL STATE BANK OF ELIZABETH.
277
peals of Kentucky decided that by receiving a greater rate of interest than was lawful the bank forfp.ited all interest accruing by law upon the discounted note after its maturity. This was also adjudged by the preme court of Pennsylvania in Guthrie v. Reid, 8upra. The court there said: "It is settled law that where a national bank takes, receives, or charges more than the legal rate of interest in the discount of a note, the interestbearing power of the .nota is destroyed; and, when once so destroyed, it remains so. The tain t of· usury clings to it until paid. It is a dead note thereafter, so far as interest is concerned." It only remains for us to consider the question of the application of the payment of $2,500. We have carefully examined the evidence, and are of the opinion that it was not sufficient to warrant il. finding that the The burden of payment was made specifically on account of showing this was upon the bank, especially in view, Of the circumstances of .. No legally Qemandable., 'Besides, Ryder acting 'iria capacity, and he had to the funds of the estate of the decedent; Brown, to forfeited interest: ' Certainly, he .no express the to interest,jtnd such an applIcatIOn by him IS not tb be hghtly Hlferred, but should be satisfactorily proved. The cashier ofthe bank himself testified that wAen thEI'c,heclt ,the did riot say it was' for l'went right away without 'saying anything." Under theevidenMJ, 'it must be regarded as haVing baena generalpaymenti and, if it was thrit, thenclearly'it was notcompeteht f()!,"Jhebank tot apply it to forfeite(I interest,---to'Q claim which had no legalAdam8 v. Mahnken, 41 N; J.Eq. 332, 7Atl. Rep. 435, (N. J. Err. & App.j) Greene v.Ty.ler;39 Pa. St. 361. The law will appropriate the l)ayment to cipalof the d r a f t s . · . Under the evidence, the jury should have been inStructed to render a' verdict fotthe plaintiff below for the face amount: tif the drafts, less the .' , payment of $2,500, without i n t e r e s t . ' The judgment is reversed,and the case is remanded to the circuit .court, with a direction to award a new trial.
, FJilPl1:RAJ,.
vol. 48.
NA.TIONAL BANK OF, COMMERC!i: V.TOWNOFGRANADA.. (O/,rC1,f,tt OOUrt, D, OoZo'l'/ld().
Deoember 9,1891.)
L
MUNICIPAL BONDS-VALIDITY-FAILURE TO PullLISH ORDINANCII.
Under Laws Colo, 1887, p,445, § 1, proV'idiIig that all municipal ordinances ot a shall be published in the manner there prescribed, and not, tlj,lce efl'ect untiLfl.ve days after,such ,publication, a failure to the issuance of municipal bPI1Q!l.l'l'lllders the bonds
2.
SUI:B-iNNOCENT PI:'RCHASER-NoTICIl.
the ,ot the ponds that they were issued under ,an ordinance of the municipality does ndt\'ender them valid in the hands of 'an Int:111cent purchaser llinCll :such a purohaller 18 chargeable with notlela of theltatutory provistpe b()nd,8 were iBSUed.
'.A.ctiop by the National Bank of Comn:;1erce against the town interest coupons of mUllicipal,Jmllds. Tried by the Judgment for defendant. 'or former reports, 8,ee4l Fed. 81, and 44, Fed. Rep. 262,. , ,S. for ,'. .', ' Alvin J·. l1;.!Jeljord, fO'i ·
At
. are
or
'.l'his on coupons funding, bon.dsissued hythe defendant, in The bonds at New York, 15 years after date, tqtl, of city; jnterest at 8. Per cent., evi,coupons similar to, tq.pl!e upon which ,this suit was , ..A.,jury )vas waived., . qause WJlS subplittedto the court
Granada .b()nds, thecotlpons of which are the ,basispf the suit in. this case. ,;"Tpelilta.tuteof .thestate, as found in section 1 Sess. Laws 1887, p. 445, t'ollows: "All spun 8S may be, after th,eir passage,berecordf'd hi R book kept for that and be ,autheuticated by tbe i\ljgnature of the presiding officer of the council board of'tl'listees and the clerk; and all bylaws of a general or permanent nature, and those imposing any fine. penalty, or forfeiture, shall be publish p d in some newspaper puLJJished within the limits of the corporation, or, if there be none Stich, thf'n ill sOllie newspaper of j1;eneral circulation in the municipal corporation; and it shall be ueemf'd a sufficient defense to any suit or prosecution for such fine, ppnalty, or forfeiture to show that no such publil:ation was made: provided, however, that if there is no newspaper published within or which has no general circulation within the l,mits of the ('orpol'ation, thlln, anu in that case, upon a resolution being passed by such council 01' board of trustees to that effpct, such by-laws and 'ordinances may be published by posting copies thereof in the pUiJlic places to Ioe designated by the board of trustees, within the limits of the corporation; and such by-laws and ordinances shall not take effect and be in force until the expiration of five days after they have been so published or postt'd. But the book of ordinances herein provided for shall be taken and ('onsidered in all courts of tilis state as prima facie evidence that such ord!nanres have been published as provided by law."
is""