Durant v. Banta

The opinion of the court was delivered by Potts, J. In the first place, the plaintiff’s counsel ex- cepts to the charge of the court, that if the payee of a bona fide business note disposes of it at a greater rate of discount than six per cent, per annum, and endorses it generally, it is a loan of money, and usurious; and that if the endorsee or payee is held for the ultimate payment of the money, by protest and suit, it is evidence conclusive — 630 — that the transaction was not a sale, but a loan of money on the note. Our act against usury (Nix. Dig. 372) declares that every contract for the loan of any money, &c., at a greater rate than six per cent, shall be utterly void. So that the right of recovery in this case turned upon the question, whether this transaction was a loan or not, for, in the transfer of the note, Durant received at the rate of twenty-four or thirty-six per cent, per annum discount. The charge of the court was in accordance with the ruling in the case of Freeman ads. Brittin, 2 Harr. 191. It was held in that case, substantially, that the transfer of a note without recourse would generally be considered a sale ; the transfer with recourse, that is, by general endorsement, a loan on the security of the note. The rule is stated subject to exceptions not necessary now to notice. The first branch of this rule rests on abundant authority, and is not open to controversy at the present day. Where a note has been fairly executed, and there is no usury between the original parties, so that the payee has acquired a legal right to sue the maker upon the note, he may sell it without recourse at any" rate of discount upon its face, and the purchaser will have a right to enforce it for its full amount against the maker. 2 Parsons on Con. 421, note k; 7 Peters 107, Nichols v. Fearson; 13 Peters 345, Moncure v. Dermott; 8 Cowen 685, Powell v. Waters, per Jones, Ch.; 3 Wend. 65, Rice v. Mather; 7 Wend. 569, Cram v. Hendricks; 15 Johns. 55, Munn v. Commission Co.; 4 Hill 472, Rapelye v. Anderson; 10 Paige 326, Holmes v. Williams; 2 Sandford’s Ch. 149, Holford v. Blutchford; 9 Barb. 647, Ingalls v. Lee; 4 Mass. 162, Churchill, v. Suter, per Parsons, Ch. J.; 2 Conn. 179, Lloyd v. Keach; 4 Conn. 153, Tuttle v. Clark; 3 McCord 365, King v. Johnson; 1 Dall. 217, Musgrove v. Gibbs; 2 Dall. 92, Wycoff v. Longhead; 26 Penn. R. 259, Gaul v. Willis; 15 Maine 163, French v. Grindle; 16 Maine 456, Farmer v. Sewall; 20 Maine 98, Lane v. Steward; 2 Munford 36, Hansbrough — 631 — v. Baylor; 1 J. J. Marshall 497, Shackelford v. Morris; 3 B. Monroe 67, Oldham v. Turner; 6 B. Monroe 529, Metcalf v. Pilcher; 7 Humphreys 451, May v. Campbell; 17 Ala. 768, Saltmarsh v. P. and M. Bank. But upon the second branch of tlie rule, the doctrine that where the transfer is by endorsement with recourse, the transaction is to be considered a loan, and therefore usurious if more than legal interest was taken, is undoubtedly in conflict with the weight of authority. Justices Ford and Dayton dissented from it in Freeman ads. Brittin; and although the rule lias since that ease been generally adopted at the circuits, the force of the objections to it have never ceased to be felt. The case now before the court furnishes a fair example of the way the rule operates practically. Here Bauta honestly owes Northum $375, and gives him his promissory note at ninety days. Before the note becomes due, Northum finds that he needs money in the way of his business, and lie therefore puts this note in the New York market for sale, and, as it is drawn to his order, endorses it. It is sold for a price satisfactory to him, and he receives the proceeds. Nobody is aggrieved; the transaction is voluntary all around ; Mr. Northum is aecom-modated; and, as far as appears, the note has brought its full value in the market at the time. But when the note falls due, and the purchaser, Mr. Durant, asks for his money, he is told he cannot have it; that lie has made a usurious form to Mr. Northum and that, by the law of New Jersey, lie can recover nothing of either Bauta or Northum. But Mr. Durant says, I made no loan; Mr. Morgan, the note broker, brought me a note drawn and endorsed by these parties; offered it for sale, and I bought it. Morgan so testifies. It was considered all around as a sale at the time. The answer is, Northum endorsed it, and that is conclusive evidence that it ivas a loan of money, and ne¡t a. sale of the note. The result of Mr. Morgan’s negotiation, under the rule in Freeman ads. Brittin, is, that Durant loses his tnoticj, — 632 — Northum is released from his liability as endorser, and Banta, who was an entire stranger to the transaction, gets clear of paying an honest note. It is true the object of the act against usury is not to afford a remedy for the mischief, but to prevent it. Yet, as it is in its nature highly penal, it should be strictly construed. The mischief at which it is aimed is'the loaning of money at usurious rates. To lend money on .the security of.a note is one thing; to sell a note is another thing. One is within the statute, if the loan is made at a usurious rate; the other transaction the statute does not reach. Bonds, bills'of exchange, and promissory notes are personal chattels, and may be sold, like any other chattels, for what they will bring. Millions of property of this description change hands every year, selling for more or less, according to their credit and the supply of money in the market; and a penal statute ought not to be extended by construction to cases not clearly within its scope and meaning. If A part with his own note to B at a usurious rate of interest or discount, or obtain money of B at a usurious rate upon a deposit of collaterals, or in any way make himself primarily and unconditionally liable for the re-payment- of a sum of money at a usurious rate; there the nature of the transaction is patent upon itsdace— it is borrowing and lending, no matter what the parties may say they intended at the time. But if A have bonds, or bills, or notes, and disposes of them absolutely, giving them the additional value of his own credit by endorsement or guaranty—in other words, makes himself secondarily and conditionally liable to pay, if the obligor or other parties to the paper do not at maturity, there, I think, the transaction does not necessarily, and as a conclusion of law, import upon its face a contract for a loan. It may be a loan or a sale, according to the real meaning and intention of the parties at the time; and this is to be determined by the evidence, and is a question of fact for the j“ry- — 633 — Twenty-five years ago this question came before the Supreme Court of the United States, in the case of Nichols v. Fearson et al., 7 Peters 103. It was a case stronger than the present. S. and J. Fearson had a business note, drawn to their order, which they sold to Nichols for less than its face, having first endorsed it generally. Nichols sued the Fear-sons upon their endorsement. They set up the defence of usury. The Supreme Court, without a dissenting opinion, held the transaction a sale, and not a loan of money, and Nichols recovered. The court said, “ the endorsement of this note did not necessarily import a loan,” and that the great weight of authority was in favor of the validity of this contract. But they added that they were “ not to be understood as intimating that, if in a treaty for, or conclusion of a loan, the endorsement he expressly stipulated for as security for re-payment, the contract being usurious, may not invalidate the endorsement under the character of a security or assurance.” In the Bank of U. S. v. Waggener et al., 9 Peters 378, the same court said, that “ in construing the usury laws, the uniform construction in England has been, and it is equally applicable here, that to constitute usury within the prohibitions of the law, there must he an intention knowingly to contract for, and to take usurious interest; for if neither party intend it, and act bona fide and innocently, the law will not infer a corrupt agreement.” And so it was held in 4 Peters 224, Lloyd v. Scott. In New York, it is now settled that the transfer by the payee of a valid available note, upon which, when due, he might have maintained an action against the maker, and which he parts with at a discount beyond the legal rate of interest, is not a usurious transaction, although the payee, on such transfer, endorses the note; and on non-payment by the maker the endorsee may maintain an action against the endorser. This doctrine may he found fully discussed, and numerous cases cited in Cram v. Hendricks, 7 Wend. 569; and see Rapelye v. Anderson, 4 — 634 — Hill 472; Ingalls v. Lee, 9 Barb. 647 and Cobb v. Titus, 13 Barb. 45, and the earlier New York cases; Braman v. Hess, 13 Johns. 52; Munn v. The Commission Co., 15 Johns, 44; Powel v. Waters, 17 Johns. 176; Bank of Chenango v. Hyde, 4 Cowen 567; Coster v. Dilworth, 8 Cowen 299; Rice v. Mather, 3 Wend. 62; Beach v. Fulton Bank, 3 Wend. 573; Kent v. Walton, 7 1 Wend. 256. And in Maine, the-cases of French v. Grindle, 15 Maine R. 163; Farmer v. Sewall, 16 Maine R. 456; and Lane v. Steward, 20 Maine 98. In S. Carolina, Brock v. Thompson, 1 Bailey 322. In Kentucky, Metcalf v. Pilcher, 6 B. Monroe 530. In Tennessee, May v. Campbell, 7 Humphreys 450, and 2 Parsons on Contracts 423; also Lloyd v. Keach, 2 Comstock’s R. 175; Tuttle v. Clark, 4 Conn. 153. Chancellor Walworth, in the case of Cram v. Hendricks, and Mr. Justice Cowen, in the case of Rapelye v. Anderson, controverted this doctrine with great ability in New York, but they were overruled in both cases. And there are some few cases in other states, in which the rules adopted in Freeman ads. Brittin, by a majority of the judges, has been maintained. Among these are the eases in North Carolina of Ballinger v. Edwards, 4 Iredell’s Eq. R. 449, and McElwee v. Collins, 4 Dev. & Bat. R. 209. The reasoning in all these cases hinges upon the idea that a transfer by a general endorsement of a promissory note, being a contract to guaranty its ultimate payment, on certain conditions, it amounts to a contract for a loan of money. And it is said, “ if I sell you for $900 a debt of $1000 and agree at the time to repay you the $1000 if the debtor does not, it is the same as if you lend me $900 on my agreement to pay you $1000.” But is it the same? Suppose the debt of $1000 is in the shape of a promissory note, drawn by a man of undoubted ability, payable to my order in one year. • I require $900 to answer the exigencies of my business, and owing to the scarcity of money, every kind of property is at a discount of ten per cent, in the market. In preference to borrowing the money, or — 635 — selling stock or real estate, I take this note into the market and sell it absolutely at ten per cent, discount, with my general endorsement, the very object and intention of the sale being to avoid the necessity of borrowing at a usurious rate. Is that, after all, the same as if I borrow $900 of my neighbor, and agree to pay him $1000 in a year? Is there no difference between an agreement to pay my own debt, and an agreement to become security for the payment of the debt of another f between a contract absolute and a contract conditional ? between a case where the obligation is perfect, and where it may or may not take effect, and is dependent entirely on future contingencies? I think it is this very difference that distinguishes the two cases, and makes the one caso a borrowing of money, and the other the sale of a chattel. If the contract of recourse stamps the transaction as a loan, it is so whether more or less is realized; and there can be no such thing as the sale of a note with the vendor’s general endorsement, or of a bond with a guaranty, a doctrine which is certainly in conflict with the usages and understanding of the business community. A bona fide business note, which a man has taken in exchange for merchandise or money, is as much his property as was that which he gave in exchange for it. His dominion over it is perfect. lie may barter, exchange or give it away as he pleases. He has certainly the same legal right to sell it that he has to sell anything else that is his; and there is not a word in the act against usury which indicates a design to limit or interfere with that right; nor do I believe that a rule which so interferes in effect would be any protection or relief to the needy. But, the argument is, he must not guaranty it. Practically that is simply depriving him of the benefit of his credit and character in the disposition of that description of property—saying to him, true, the note is yours, and you ruay sell it, like any other chattel, for what it will bring, but you shall not guaranty its ultimate payment if you sell it — 636 — below par. You may sell it for fifty per cent, discount without recourse, but you shall not sell it at seven per cent, per annum discount if you give it the additional value of your endorsement. The penalty of forfeiture follows the lending of money at usurious interest; but the intention—the corrupt agreement to commit the offence-—must appear either from the facts of the ease, or, as a conclusion of law, from the facts. And where it is clear, from the facts, that there was no such intention, no such agreement, but that the transaction was absolutely and in good faith a sale, it is going too far to ignore the facts, and draw a’legal conclusion contrary to the facts, for the purpose of bringing the case within the operation of the statutory penalty. The argument, that parties may artfully cover up a usurious transaction in this way, has lost much of its force in this state since the recent laws respecting evidence. I am of opinion that this exception is well taken. The case should have been submitted to the jury with instructions that the mere naked fact that the note was transferred to Durant with Northum’s general endorsement, did not, as a conclusion of law, import that the transaction was a borrowing and lending,'within the meaning of the act against usury; but that if they believed from the testimony that the transaction was fairly and honestly a sale—so intended and understood by both parties at the time—and with no design under cover of form to evade the operation of the statute, that the verdict should be for the plaintiff, otherwise not. As to the doctrine held in New York, that the endorsee of a promissory note, who buys it at less than its face, can only recover from the endorser the amount he paid him, with interest, in ease the maker does not pay it, seems to be without any foundation in law. If the transaction-is a sale in fact, it passes a perfect title, and the holder has a right to look to all parties legally liable for the face of the paper under the provisions of the act concerning promissory notes, &c. Nix. Dig., pi. 667, § 4. — 637 — In the second place, the plaintiff excepts to that part of the charge which instructed the jury that it was no answer to this action that the transaction occurred in New York; that the parties resided in New Jersey, and they could not pass over into New York and enter into a negotiation to avoid our statute of usury. The objection to this instruction is, that it assumed a fact which ought to have been submitted to the jury. Whether this was bona fide a New York transaction, or whether the parties negotiated the transfer of the note in New York merely to avoid the usury laws of this state, was a question to be determined by evidence, and to be considered by those to whom the law has committed the decision of questions of fact. It did not follow, as a conclusion of law, that because the parties lived in New Jersey, they went to New York for an illegal purpose; nor, in truth, did the evidence warrant, as far as I can see, any such inference. It does not even appear, from the evidence, that Durant knew that Northum was the owner of the note. The note was in the possession of Morgan, and Durant bought it of him, without any disclosure by Morgan to him that he was selling for Northum. This exception is therefore also well taken. For affirmance—Judges Valentine and Wood. For reversal—The Chancellor, the Chief Justice, and Judges Elmer, Potts, Haines, Ryerson, Vredenburgh, Cornelison, Rislf.y, and Swain. Cited in Holcomb v. Wyckoff, 6 Vr. 36, 39.