Newman v. Williams

Mr. Justice Hakdy delivered the opinion of the court. This was a bill filed by the appellant in the district chancery court at Natchez, and taken by appeal to the superior court of chancery, from which it is brought here. It is a bill to foreclose a mortgage, and the case made by the record is as follows:— In November, 1840, Mary Williams and Stephen B. Williams executed their promissory note to Lewis Williams for five — 220 — thousand dollars to become due in January, 1848, and at the same time executed a mortgage to secure this note and others. Shortly after this, Lewis Williams transferred the note by in-dorsement and delivery to the complainant’s intestate, and this bill is filed against the mortgagors and mortgagee to foreclose the mortgage. The defendants set-up the defence of usury, and it appears that in the year 1843 or 1844, Lewis Williams was indebted to Newman, the complainant’s intestate, $4,500, and he not being prepared to pay it, Newman proposed to give him time for payment, if he would pay him ten per cent, interest on the debt; which was agreed to by Williams, and a calculation was made for one thousand dollars payable 1st January, 1846, one .thousand dollars payable 1st January, 1847, and the balance to be paid 1st January, 1848, amounting in the whole to $6,800, the interest included in or discounted from the notes, being calculated at ten per cent, and amounting to about $2,300. For the payment of the amount thus calculated, Williams indorsed to ■Newman three notes made by Mary Williams to him, one for one thousand dollars payable 1st January, 1846, one for one thousand dollars payable 1st January, 1847, and one for five thousand dollars payable 1st January, 1-848, the last being credited by two hundred dollars, and these being the notes secured by the mortgage; and thereupon the debt of Lewis Williams to Newman was discharged by delivering up his notes. The notes transferred by Williams to Newman are shown to be legal and valid as between the maker and payee, and the two notes for one thousand dollars are admitted to be paid. The vice-chancellor decreed to the complainant the original debt due at the time of the transfer of the notes by Lewis Williams, with legal interest at eight per cent, upon the original notes of Lewis Williams to Newman, and to Lewis Williams the residue of the mortgage debt, restoring the parties to their rights as they existed before the transfer of the notes, and ordered a foreclosure. Upon appeal, this decree was reversed in the superior court of chancery and the cause was ordered to be remanded for fur — 221 — ther proceedings; but no directions are given as to principles upon which further proceedings should' be taken, or as to the grounds of reversal. From this decree, this appeal is prosecuted. . The only question for consideration is, whether the note sought to be enforced is liable to the defence of usury under the circumstances of the case. There is no pretence that any usury existed in the note as it stood between the maker and payee, and before the transfer to the complainant’s intestate. And it is, therefore, insisted in behalf of the appellant that, as it was a valid note, founded upon a legal consideration, and complete between the parties without reference to the use to which it was subsequently applied, and in that condition was purchased by the appellant’s intestate, the defence of usury cannot prevail. Let us examine these positions, and see how far they are applicable to the facts here presented. The first point to be settled is, whether Newman can be held to be a purchaser, and his right to the note protected on that ground. We consider the law to be well settled, that when a note is., made without any reference to a usurious loan" or raising of money, and is complete and valid in the hands of the holder, it may be sold for a sum less than its value and at a rate of discount that would render it usurious if it had entered into the original transaction, and that the holder is entitled to recover upon it. This principle has been much considered in the courts of this country; and though there are decisions to the contrary, it is sustained by the great weight and number of authorities. Munn v. Commission Company, 15 J. R. 44; Powell v. Waters, 8 Cow. 685; Nichols v. Fearson et al. 7 Peters, 103; Callin v. Nevill, 3 Dev. 30; French v. Grindle, 15 Maine (3 Shep.), 163; 3 McCord, 365. But in order to render the transfer valid, it must be a bond fide sale of the paper, upon a consideration paid or secured, and, not in anywise a security for the usurious loan of money by the indorser or party taking the paper to or on account of the,party from whom he receives it, and it must not be taken at a — 222 — usurious interest. or discount in consideration of forbearance, and giving time of payment.for a debt due the party requiring it; for if it be transferred, either upon a loan at unlawful interest, or as a security for a preexisting debt agreed to be forborné at an illegal rate of interest, it falls within the statute against usury. The first branch of this proposition is sustained by all the cases above cited; and the latter branch of it is supported by the cases in 7 Peters, 103; Gaither v. Farmers and Mechanics Bank, 1 Peters, 37; Levy v. Gadsby, 3 Cranch, 180. Let us apply these principles >to the circumstances of this case. It appears that Lewis Williams was indebted to Newman, and being unable to make payment, Newman proposed to give him time for payment, if he would allow' him ten per cent, upon the amount then due; to which Williams acceded, and thereupon transferred to him the note in controversy, together with two others, to the amount of Williams’s debt and ten per cent, added thereto up to the time of payment allowed by the arrangement, and the notes constituting Williams’s original indebtedness were discharged and delivered up. It is plain that this was not a purchase by Newman of-the notes transferred to him, in the sense of the rule. It was proposed as a mode of giving time of payment, and was carried out as such, in order to give indulgence to Williams and ten per cent, interest to Newman. The discharge of the original indebtedness of Williams did not change the nature of the transaction, for Williams still gave interest at the rate of ten per cent, for the indulgence and forbearance given him by transferring the notes, including that amount to Newman. It was, therefore, clearly a transaction by which Newman was to receive more than the legal rate of interest for “ the forbearance and giving day of payment ” of the debt due him, and is fully within the prohibition of the statute. Hutch. Dig. 641. The contract of transfer of the note being, therefore, usurious, it remains to be considered whether the makers of the note can set up a defence on that ground to the suit of the indorsee, there being no usury in the note at the time of the transfer. This presents the simple question, whether the assignee or — 223 — indorsee of a note who has derived title to it by means of an illegal contract, can maintain an action upon it when the note itself is valid and free from objection as between the original parties to it. It is immaterial in questions of this nature, what may be the obligation of the defendant to pay. The first question to be settled is, whether the plaintiff has a right to recover; and it is unquestionably true, that if his title be founded on an illegal consideration, he cannot be heard in a court of justice to assert a fight under it. This principle has been repeatedly applied by this court to cases of illegal contracts. In the case of Adams v. Rowan et al. 8 S. & M. 638, the notes of Adams to Runnels, founded on a valid and sufficient consideration, were transferred by Runnels to Rowan' & Harris for an illegal consideration; and it was held that the maker could set up the illegality of the consideration paid by Rowan & Harris, in defence of a suit brought by -them upon the notes. In that case the defence went to the entire suit. The same principle is held in the case of Gaither v. Farmers and Mechanics Bank, 1 Peters, 37. When the illegality of the consideration extends only to a part of the plaintiff’s demand, as in the present case, where the contract of transfer is illegal and void only as to interest, the same rule must apply, and the defence must prevail so far as to prevent the recovery of all interest. .Because where thfe consideration is illegal as to a part of the demand, the defence must prevail to that extent upon the same principle by which the whole action is defeated where the entire claim is rendered void by illegality of consideration. This rule is fully recognized in Coulter et al. v. Robertson, 14 S. & M. 18; and it is now settled beyond controversy in this court, that, under the provisions of our statute, the plaintiff can recover nothing but the principal of his debt on usurious contracts. In this case a question of some difficulty arises as to who is entitled to the interest on the note. We have seen that the complainant is not entitled to recover it; and there is no just reason why the makers should not pay it according to their contract. If it had been usurious interest paid by Lewis Williams to the complainant’s intestate, upon a — 224 — transaction in which they alone were involved, Lewis Williams, upon general equitable principles, would have been entitled to .recover back only the excess paid over the legal interest. Parchman v. McKinney, 12 S. & M. 639. But there has been no payment, and the contract is executory. As no interest can be recovered by the complainant, the transfer to that extent being void, it must either belong to Lewis Williams, or the makers of' the note be released of all interest, which they do not claim, but allege that it should go to Lewis Williams. It appears, therefore, proper that it should be decreed to Lewis Williams, he being a party to the suit. The decree of the chancellor reversing the decree of the vice-chancellor is affirmed, and a decree ordered in favor of the appellant for the amount of the principal due upon the note without interest, and in favor of Lewis Williams for the amount of interest due thereon, and for a foreclosure accordingly; and that Lewis Williams pay the costs.