Bank of Lumpkin v. Farmers State Bank

Bussell, C. J.' This case is here on a certiorari to the judg- ment of the Court of Appeals affirming the judgment of the superior court. The proceedings fully appear from the statement — 808 — of facts. The rulings upon the several demurrers and in refusing the amendments offered to the defendants’ plea raise a single question. Did the matters set forth in the original plea as amended and in the amendments which were proposed but which were rejected legally present a valid defense? If so, the striking of the answer and the disallowance of the amendments was error, and the judgment of the Court of Appeals in affirming the judgment of the lower court as to this point was consequently error. The substance of the defendants’ pleadings as well as the amendments offered by the defendants was that the contract upon which the suit was based was infected with usury, that payments which by virtue of the usury charged had been applied to interest should have been used to reduce the principal sum under the provisions of § 3433 of the Code of 1910, and that by reason of these facts the defendants were not indebted, if at all, to the plaintiff in a sum as large by. several thousand dollars as was claimed by the plaintiff. McGee v. Long, 83 Ga. 156 (9 S. E. 1107). The issue as presented to us is thus divided into two subdivisions. (1) Did the pleas and the amendments present the question of usury? (3) If so, was the existence of usury a question for the court or for the jury? Or, to state it as more exactly fitted to this case, were such allegations of fact embodied in the plea or answer of the defendants as that it was error for the court to find as matter of law that the contract was not infected with usury? Section 3436 of the Code declares: “It shall not be lawful for any person, company or corporation to reserve, charge, or take for any loan or advance of money, or forbearance to enforce the collection of any sum of money, any rate of interest greater than eight per centum per annum, either directly or indirectly by way of commission for advances, discount, exchange, or by any contract or contrivance or device whatever.” The act of 1916 (Acts 1916, p. 48) repealed sections 3438 and 3443 of the Code, but it did not repeal section 3439, which declares: “The amount of forfeit as aforesaid may be pleaded as a set-off in any action for the recovery of the principal sum loaned or advanced by the defendant in said action,” or section 3440, which reiterates the declaration that “No contrivance or arrangement between the parties to any such unlawful transaction, or their privies, shall have the effect to dis — 809 — charge such forfeiture, except it be an actual and full payment of the amount so forfeited.” In Union Savings Bank & Trust Co. v. Dottenheim, 107 Ga. 606 (34 S. E. 217), Mr. Justice Cobb traced the history of the Georgia statutes on usury. From its earliest history this court, in obedience to the law as contained in section 3436, has strongly denounced any artifice by which a lender, taking advantage of the distress and necessities of a borrower, has sought to evade or violate the provisions of Georgia law upon this subject. In Troutman v. Barnett, 9 Ga. 30, Judge Nisbet, in passing upon the case in which the transferee of a judgment not tainted with usury agreed with the defendants to forbear its collection for a time in consideration of usurious interest, and holding that)" the subsequent agreement being usurious, nothing but the principal due upon the judgment could be collected, said: “The law mercifully restrains both the power and the cupidity of the creditor, by limiting interest upon loans and all contracts to a fixed rate, . . and, to insure against cruel exactions, makes lawful interest irrecoverable, if more is contracted to be paid. Does not the reason apply in this case? Here the plaintiff pays no money in hand to the defendant, but he gives time upon money due, in consideration of usurious interest — he forbears day of payment, because the debtor has paid him usury. It does not differ from an original loan. The money due on the judgment belongs to the plaintiff; it is in the hands of the defendant. It is the same in principle as if the plaintiff had said to the defendant, ‘ You have in your hands so much money which belongs to me; if you will pay me so much interest per annum, you may retain and use it for a year.’ To which the defendant agrees, and the contract is closed. Is not that an usurious contract ? It is not questioned but that it is, and, if remaining executory, could not be enforced. The agreement to pay usury thus could be defeated by the plea of usury, and clearly, under the old law, would subject the lender to the forfeiture; and if executed, as it was here very clearly, the usury may be recovered back.” In the trial in the lower court, in ruling upon the demurrers as well as the motion to strike the amendments offered by the defendants to their answer, the defendants’ allegations had to be treated as true as matter of fact just as if they had been established by un — 810 — contradicted evidence; and hence our first inquiry is as to whether the allegations of the defendants were sufficient either of themselves to show usury or to so indicate “a device or contrivance” as to raise a question as to the intent of the parties upon the subject of usury as would require the submission of this question to a jury. It is well settled, of course, that upon him who alleges, usury devolves the burden of 'showing the existence of usury. Wilkins v. Gibson, 113 Ga. 31 (38 S. E. 374, 84 Am. St. R. 204); Equitable Mortgage Co. v. Watson, 116 Ga. 679 (43 S. E. 49); Harvard v. Davis, 145 Ga. 580 (89 S. E. 740). It is also recognized that an excess of interest or a mistake caused by inadvertence or mistake where there is no intention to violate the statute will not subject the lender to the burden imposed by the statute. Rushing v. Willingham, 105 Ga. 166 (31 S. E. 154). As to this, Judge Montgomery, in delivering the opinion of this court in Lay v. Seago, 47 Ga. 82, 88, in referring to the “thousand and one devices that the ingenuity of man has resorted to for the purpose of evading the usury laws,” said: “If it be a device, and the accommodation acceptance is only colorable, it is usury; if not, not. ‘It depends principally on the contract being a loan; and the statute uses the words “directly or indirectly;” therefore, in all questions, in whatever respect, repugnant to the statute, we must get at the nature and substance of the transaction; the view of the parties must be ascertained to satisfy the court that there is a loan, and borrowing, and that the substance was to borrow on the one part and to lend on the other; and where the real truth is a loan of money, the wit of man can not find a shift to take it out of the statute.Lord Mansfield in Floyer v. Edwards, Cowp. 112. To find out what is ‘the real truth/ the jury is the appropriate tribunal to inquire of, and the question should be submitted to them under the charge of the court, that if the transaction was resorted to to evade the usury laws, the taint attaches; if it is a bona fide sale of credit to enable the drawer to borrow money of another, it is not usurious.” There are four requisites of every usurious transaction: (1) A loan or forbearance of money, either express or implied. (2) Upon an understanding that the principal shall or may be returned. (3) And that for such loan or forbearance a greater profit than is authorized by law shall be paid or is agreed to be paid. (4) — 811 — That the contract was made with an intent to violate the law. The fourth element may be implied if all the others are expressed upon the face of the contract. Webb on Usury, 17, § 18. Where there is no loan there can be no usury. There are cases which necessarily import a loan; and no disguise, no affectation of sale or barter, can divest them of that character; such, for instance, as a man selling his own note executed in blank. In such instances the law places the stigma of usury upon them without further inquiry. The instrument, having had no virtual existence until the loan or sale was negotiated, can not be regarded as a transfer of property. Webb on Usury, 18, § 20, quoting State Bank v. Coquillard, 6 Ind. 232, citing Nichols v. Fearson, 7 Pet. 103 (8 L. ed. 623). There can be no question in the present case of the ■intention of the parties to effect a loan. It matters not that the ultimate result sought was the liquidation of the Bank of Lump-kin. As appears from the statement of facts, the Bank of Lump-kin was about to be placed in the hands of the State banking department. It had $239,682.08 assets at their book value and $9,736.47 cash on hand. It owed $206,057.57. After submission of the question to the stockholders of the Bank of Éumpkin and to the directors as well, it was agreed that the Farmers State Bank would liquidate the affairs of the Bank of Lumpkin rather than the State banking department. Passing by, for the present, other features of the contract which was entered, and the contents of which are given in the statement of facts, it was agreed that the Bank of Lumpkin should turn over to the Farmers State Bank its cash on hand and place in its hands for collection the evidences of indebtedness amounting to $239,682.08 to which we have referred. But this was not all. The indebtedness of the Bank of Lumpkin was warranted not to exceed $206,057.57, and this, when reduced by the cash on hand, left a balance of $196,321.60, for • which sum the Bank of Lumpkin agreed to give and did execute its several promissory notes falling due upon different dates, but aggregating the sum of $196,321.60, with interest on each and all of them at the rate of eight per centum per annum, and all. of them indorsed by the directors, the plaintiffs in error. It seems to us that the foregoing at least sufficed to raise the implication of a loan; and when the question is doubtful, its solution is not'for tire court but must be referred to a jury. The second essential — 812 — element of usury we think is to be found in the fact that the lender did not rely alone upon the Bank of Lumpkin or take any chance upon a misunderstanding that the principal should be returned, because although the Farmers State Bank had in its hands $239,682.08 (book value) of the assets of the Bank of Lumpkin, and the indebtedness of the latter had been reduced to $196,321.60, the Farmers State Bank assured itself of the payment of the entire debt evidenced by the notes by securing the indorsment of each and all of the directors of the Bank of Lumpkin, male and female alike. Since it thus appears that the transaction was a loan which was understood should be returned, we come next to inquire whether a greater profit was agreed to be paid than is authorized by Georgia law. That is, whether the extension of credit evidenced by the notes resulted in the Farmers State Bank receiving or contracting and attempting to receive a greater rate of interest than eight per centum per annum. To use the language employed by the General Assembly in the act of 1875 (Acts 1875, p. 105, Civil Code of 1910, § 3440), was it or was it not a “contrivance or arrangement” which is declared to be “unlawful,” and entails forfeiture of interest whenever a lender knowingly procures by contract a greater profit for the loan than eight per cent? This question, under the rulings of this court (as well as generally in all other jurisdictions) the jury alone can answer. The plaintiffs in error set up in their pleas that the agreement as to the employment of additional help by the Farmers State Bank at the expense of the Bank of Lumpkin, which services they alleged were not necessary for the purpose, and that the time of these employees was in fact principally devoted to service for the Farmers State Bank itself, was one of the considerations upon which the money was advanced, and that the charge for these services was in fact only a means or device by which the Farmers State Bank should receive more than eight per cent, interest. It is also alleged in the plea that among the debts of the Bank of Lumpkin which the Farmers State Bank was to discharge under the terms of the agreement was $74,383.34 of time certificates which were not required to be paid at the time the $196,321.60 was advanced, because these debts were only due, some of them two months, some three, and others twelve months later than it would be necessary — 813 — for the Farmers State Bank to have to meet them. It is alleged that another stipulation in the contract is usurious, to wit, that portion of the contract in which it is stipulated that the Bank of Lumpkin should not be credited with payments upon the notes except when the amounts collected by the Farmers State Bank amounted to an even $1000 or multiples thereof; and that thereby the plaintiff bank had and used for its benefit an average amount of $900 per month, upon which the Bank of Lumpkin was chargeable with interest. It was also contended that the charge for attorney’s fees was usurious. We shall deal with these items separately. Is the provision in the contract by means of which the Farmers State Bank was to receive from the Bank of Lumpkin interest in advance upon $74,383.34 of time certificates, although these time certificates were not due at the time of the making of the note, subject to be properly construed as usury? The same question applies to the interest upon deposits of collections received from the assets of the Bank of Lumpkin of less than $1000, instead of promptly crediting each amount in full as collected. We have placed the questions in this form, because, unless the court was authorized to adjudge as matter of law that the result reached in the practical working of the agreement was not usury, it was error to sustain the general demurrer.. It is our opinion that prima facie the extra charges to which we have referred would import a result by which the lender would receive more than eight per centum interest per annum for the use of a considerable portion of the $196,321.60 loaned to the Bank of Lumpkin. Where a lender makes a loan and requires that a part of the sum shall be kept on deposit with the lender, the loan is usurious. In other words, a condition that a borrower shall keep on deposit a certain sum, if made a condition precedent to a loan of money, infects the loan with usury; and the provision as to the allowance of credits only in sums of $1000 or multiples thereof has been held to be usurious in cases of loans or discounts at the highest legal rate of interest, for the reason that the borrower thus pays interest on money which he does not receive or have the use of. 29 Am. & Eng. Enc. Law (2d ed.), 509. So we think as to these two portions of the plea it is clear that it was error to strike. The Court of Appeals itself so held in Cooper v. National Bank, 21 Ga. App. 356 (94 S. E. 611). No matter what amount — 814 — of money was retained by the Farmers State Bank, if that amount was included in the $196,321.60 the ease would be one of charging interest at the highest legal rate on that much of the loan, and to that extent would constitute usury. Georgia Southern R. Co. v. Trust Co., 94 Ga. 306 (3) (21 S. E. 701, 32 L. R. A. 208, 47 Am. St. R. 153). It is true that in the last-cited case Justice Samuel Lumpkin, delivering the opinion, found that the transaction involved in that case was not usurious, but he placed his finding squarely upon the ground that as the interest charged was only at the rate of six and one-half per centum, and the loan was for forty years, a calculation made certain that the total interest promised to be paid or payable would nevertheless be at a rate lower than eight per centum. This method of calculation may well be adopted as a sound rule in determining the presence or absence of usury; for the law of this State allows a gross profit of eight per centum per annum for the use of the sum actually loaned, and does not forbid the payment of the interest in installments. The lender may thus, by relending the interest, compound his interest without injury to the borrower in the original transaction. As to these pleas of the defendants, as well as the question of the agreement as to compensation for services to which we have referred, we think the court erred in determining for itself, as matter of law, that it was plain that there was no usury and no intent to exact for the use of the $196,321.60 more than eight per centum interest. It has been frequently held that the court may, in construing a contract, hold it to be usurious as matter of law; but we have been unable to find any case in which a court has held that a contract was not usurious when the validity of a contract was attacked upon the ground that the devices used were employed merely as a cover for usury, and the allegations were such as to properly raise the question whether the contract bespoke a bona fide intention to collect for the use of money no more than the highest rate of interest authorized by law, or whether by the means of outside agreements as a part of the contract of lending a mere contrivance, ingeniously devised, was being used to disguise a case of lending where the result intended was that the lender should obtain, in the language of our Code (§ 3436), “either directly or indirectly” a bonus, no matter by what name denominated, in addition to the legal charge for the use of money, produced by the cupidity of the — 815 — lender and the necessity of the borrower, in addition to the highest rate allowed by law. The fourth element essential to constitute -usury is an intentional charge of more for the use of money than the highest rate permitted by law. In any case of a loan, where there is doubt as to the intent, it is not a matter for the court to decide. All courts, so far as I am aware, and certainly this court, have decided that the circumstances which may bring in question the bona Mes of a lender as to usury as well as the intent are to be submitted to tide jury. Hollis v. Swift, 74 Ga. 595; MacKenzie v. Garnett, 78 Ga. 251; Callaway v. Butler, 79 Ga. 356 (7 S. E. 224); White v. Guilmartin, 83 Ga. 640 (10 S. E. 444); Sanders v. Nicolson, 101 Ga. 739 (28 S. E. 976); Dunham v. Gould, 8 Am. D. 323 (16 Johns. (N. Y.) 367); Deming Inv. Co. v. Grigsby, 65 Okla. 88 (163 Pac. 530); Cockle v. Flack, 93 D. S. 344 (33 L. ed. 949). In our opinion the pleas in this case, with the amendments offered, were amply sufficient to at least have put in doubt whether the stipulations as to the several charges for so-called extra services embodied in the contract under the terms of which the Bank of Lumpkin was to be liquidated were usury and were intended to procure for the lender a profit from the use of the money loaned greater than the law permits. In the circumstances it was the duty of the court to have submitted to the jury, under proper instructions, the question whether the stipulations of the contract by which, in addition to the eight per centum interest specified in the note, the Bank of Lumpkin was to pay every possible expense to be incurred by the Farmers State Bank in connection with- the matter, were designed and intended merely as reasonable compensation for such services, or whether these charges were so unreasonable as to be nothing more than a cover for usury. The Court of Appeals therefore erred in holding that “The court did not err in sustaining the demurrers of the plaintiff . . to the plea of alleged usury in the transaction. . . There was no error of law upon the trial of the cause, and the evidence demanded a verdict in favor of the plaintiff.” “ On the trial below defendants offered two amendments to their answer. These amendments were objected to. on the ground that .their substance did not constitute usury. The amendments are set out in the bill-of exceptions. These amendments made the point — 816 — that while the notes called for all costs of collection including 10% attorney’s fees, and the suit sought to collect 10% for attorney’s fees (an amount in excess of $6,000), as matter of fact the Farmers Bank had contracted to pay its attorney only $2,000, the inference being that it intended to retain the difference, over $4,000, for itself, which would be usury. The objections were sustained and the amendments disallowed, except as to the one allegation that Farmers Bank had contracted to pay its attorney $2,000. Error was assigned on this ruling disallowing these amendments. The Court of Appeals has affirmed this ruling of the trial court. Petitioners except to said ruling of the Court of Appeals and assign error thereon, and aver that said court erred in not holding that the lower court erred when it sustained these objections to the tendered amendments to the answers.” The Court of Appeals did not err in affirming the above-stated ruling of the lower court. On demurrer the pleadings are construed most strongly against the pleader. So construed, the amendments did not clearly allege that at the time the contract sued upon was executed between the Farmers Bank and the Bank of Lumpkin, the former bank and the attorney had entered into a scheme or device by which the Farmers Bank was to collect and reserve for its own use a large part of the expenses of collection denominated as attorney’s fees, that is, while the contract provided for the collection of ten per cent, attorney’s fees, amounting to more than $6,000, that the bank in fact had contracted with the attorney for $2,000, thus retaining more than $4,000 for its own benefit. If the amendment had clearly alleged such to be the facts, the amendment should have been allowed; but the allegations do not make it clear that such scheme or device was entered into at the time of the execution of the contract. It rather leaves the inference that the contract with the attorney was made subsequently. The terms of an attorney’s contract do not come within the privilege provided by section 5785 (2) of the Civil Code. We might cite various rulings in different jurisdictions where there have been various departures from the common-law rule under which all communications between counsel and client were deemed privileged. ’ As to the particular exception now before us we need go no further than the decision of this court in Smithwick v. — 817 — Evans, 24 Ga. 461, in -which it was held that “An attorney employed in a cause may, when it is relevant, be examined as to the amount of his fee, and the terms on which it is to be paid.” In this case Judge McDonald, delivering the opinion of the court, gave a reason original up to that time, but which has since been cited and approved by a large number of courts in other jurisdictions. The reason was not only an expression of sound law but also an utterance of incontrovertible common-sense, — -in no case can the relation of attorney and client exist until there has been an employment ■ of the attorney by the client — a contract which necessarily fixes, in some amount or other, the fee. Judge McDonald said: “The exception to the decision of the court sustaining. an objection to the admissibility of the testimony of E. H. Beall, Esq., constitutes the next ground of error. Mr. Beall is a subscribing witness to the will, and counsel for the propounder. He had been examined by the propounder of the will. The question was as to the amount of his fee, and the terms on which it was to be paid. It was not a matter of confidential communication from his client that he was interrogated to; nor was it as to a matter or thing which he acquired from his client, or during the existence or by reason of the relationship of client and attorney. It was in regard to a matter which must have been necessarily agreed upon before the relation of client and attorney could exist. It was, prima facie, relevant to the matter in issue. He ought to have been required to answer the question.” The facts here are so similar to those in the Smithwick case that the decision as to this point must be controlled by the ruling in that case. Upon the subject generally see O’Brien v. Spalding, 102 Ga. 490 (31 S. E. 100, 66 Am. St. R. 202). Judgment reversed. All the Justices concur.