First National Bank v. Davis

Mr. Justice Dickey delivered the opinion of the Court: The position, of Davis and wife, that, as in equity they owe Davidson nothing therefore the bank can claim nothing, is not tenable. In chancery the substance, and not the mere form, is regarded. While in form this was a note and mortgage to Davidson, it was, with the indorsed guaranty, made for the purpose of securing to the bank the debt of $3000, to be paid, with interest, at the end of the year. The doctrine they contend for has no application to such a case. The taking of the note for $8880 is defended by counsel for the bank as free from usury, upon the ground that the Banking law of the United States expressly authorizes the bank to reserve interest on loans at the rate of interest authorized by the interest laws of the State as to transactions between natural persons. It is contended that the bank might lawfully have demanded and received $800 in cash, as interest in advance upon the $8000 of principal extended for one year, and then it might lawfully have lent to Davidson the $800 in cash so received, for one year, and taken their note for $880, payable in one year, without interest,—and it is insisted that what was done was the same thing in substance, the difference in the result being merely that the amounts to be paid at the end of the year are embodied in one note instead of two. It is true it has been held by the courts of this and other States that an agreement to take interest in advance is not usurious, but it is hard to defend that position by sound reasoning. That doctrine stands as stare decisis, upon authority only, and can be carried no further than the decisions have already gone. By the authorities, if Davidson or Davis had paid, when this note was given, $800 in advance, as interest upon the $8000 for one year, and the note had then been taken for $8000, at one year, without interest, until after maturity, there would have been no usury in that; and after receiving the $800 in that way, in good faith, so that the bank might loan the same or refuse to do so, the bank might lawfully have lent the $800 to Davidson, and might lawfully have either taken a separate note for the $880, or have merged the two notes into one, and made a note for $8880,, without violating the usury statute. In this case it is not perceived that the difference consists merely in the fact that one note is taken for the aggregate instead of two notes. If, however, it were a part of the agreement of the parties in the case put, that as soon as the §800 was paid in for advance interest, it should at once be loaned back to the debtor and a separate note taken for $880, it is not conceived that such a transaction could be sustained. Courts would hold such an arrangement a mere device and trick to cover the real transaction, which, by the agreement, gives the creditor more than ten per cent interest, and is clearly usurious. The only reason occurring to the writer for the support of such a distinction has relation to public policy. The weakness of debtors will often lead them to make improvident promises to secure the present possession of money, or to put off the evil day when debts are due, which they would not do if they were able to pay as they go. Be this as-it may, we regard the toleration of taking interest in advance at the highest rate allowed by law, as an artificial rule, resting upon long usage and authority, unsupported by any sound reasoning, and can not consent to take that artificial rule as the basis of a philosophy by which a like rule may be extended to eases not within the artificial rule. The circuit court was right in holding the note usurious. It is not so plain, however, that appellee ought not to have been charged, in making up the amount due upon this mortgage, with lawful interest upon $8000 (the principal of the note) from and after maturity. The statute in force at that time provided that if any person shall contract to receive a greater rate of interest than ten per cent, such person shall forfeit the whole of said interest so contracted to be received, and shall be entitled only to recover the principal sum due to such person. The note of Davis, given for $8000 principal and $880 interest, dated November é, 1876, payable one year after date, was a clear contract, binding upon both parties,—on the creditor, to forbear for one year, and upon the debtor, to pay $880 for that forbearance. This much, as interest, the creditor contracted to receive. This being more than the rate allowed by law, this $880 was clearly forfeited, and the creditor could not, at maturity of the note, recover more than the principal,—that is, $8000. By section 2 of the Interest act it is provided: “Creditors shall be allowed to receive at the rate of six per centum per annum for all moneys after they become due on any bond, bill, promissory note, or other instrument in writing. ” Now, by the provisions of section 6, when applied to this note, there was due on this note on November 4, 1877, the sum of $8000, and Davis, by his guaranty, became on that day liable to pay to the bank that sum upon this contract, although it was usurious, and by section 2 that sum bears interest from that day, at six per cent. It is true, section 6 says the creditor in such ease can “only recover the principal sum due,”— that is, upon the principal sum as due, when by this section, under the contract, it became due. The question arises, does the provision in the note that it shall bear ten per cent after maturity, debar the bank from claiming interest upon the sum that was at the maturity of the note lawfully due ? We think not. There is no agreement for any forbearance after • maturity. This court has treated provisions for interest after due, as stipulated damages. That promise is not strictly an agreement to receiv.e interest at that rate after due, for the creditor was not bound to forbear a day after maturity. The most that can be said, is that it is a contingent agreement, which, if not usurious, might be enforced upon the happening of the contingency, but still is not, at its making, such an absolute contract as is necessary to incur a forfeiture, and therefore it should hot be regarded as subjecting the party to forfeiture in that regard. This contingent contract was, however, unlawful, for the amount mentioned (that is, ten per cent upon $8880,) was more than the law állowed, for by law only $8000 was due. Being unlawful, the court should not enforce it; but not being such a contract as under the statute carries with it a forfeiture, it should be disregarded. The case, we think-, especially in view of the long delay, should be treated as though the note was simply to pay $8000 at maturity of the note, and interest should run from that date, at six per cent. As we have seen, upon the contract, usurious as it was, there was by law due and.payable upon this paper on November 4, 1877, the sum of $8000. On this sum, so long as unpaid, Davis ought to be charged with interest at six per cent per annum, and at the same rate, from time to time, upon the unpaid part thereof, from the time of its reduction by payment. The decree of the circuit court ought to have been reversed for not regarding this feature of the case. The judgment of the Appellate Court is reversed, and the cause remanded, that the decree of the circuit court be there reversed and the cause sent to the circuit court, that the account may be stated in accordance with this opinion, and for such other proceedings as justice may require. Judgment reversed. Sheldon, Oh. J., and Craig, J.: Under the decisions in this State there is no usury in taking the legal rate of interest in advance for no longer time than one year. [McGill v. Ware, 4 Scam. 21; Goodrich v. Reynolds, 31 Ill. 490; Mitchell v. Lyman, 77 id. 525.) Ten per cent was a lawful rate of interest at the time the note was given. It was the practice of appellant, in its loans, to receive interest in advance. In the four successive instances of the original loan in this case of $8000, and its three renewals, the interest had been paid in advance. On the further renewal on November 4, 1876, the interest was not formally paid in advance, but it was made equal to that by giving a note for $S880, payable at the end of one year. That was no more than might have been realized from lawful interest, had the interest for one year been paid in advance. Or, if Davis and Davidson had had their note for $8880, at one year, discounted by the bank, and with the proceeds taken up their overdue note of $8000, the bank, at the discount rate of ten per cent, would have not paid to them more than $8000. Indeed, the note should have been for. $8888, to have given $8000 on such discount. Although the transaction was not in form a loan of $8000, with the interest paid in advance, and a loaning of such interest, or the discount of a note for $8880, it might, in its essential character, be viewed as either one of such, under a favorable construction, which would impute innocence rather than wrong. As the note calls for no more than, upon a ten per cent discount of it, would have yielded $8000, (the sum which the bank paid appellees by the surrender of their old note of that amount,) or than could have been lawfully realized upon the loan of $8000, with the interest paid in advance, and the loan of such interest, we think there need not be put upon it the construction of being usurious. We therefore disagree with the opinion on the point of there being usury. r, Scott and Walker, JJ.: We concur in holding the transaction was usurious, but dissent from all other views expressed in the opinion, and from the judgment of reversal. We think the judgment should be affirmed.