U.S. Supreme Court Bank of the United States v. Owens, 27 U.S. 2 Pet. 527 527 (1829)
Bank of the United States v. Owens
27 U.S. (2 Pet.) 527
ON CERTIFICATE OF DIVISION OF OPINION AMONG THE JUDGES
OF THE CIRCUIT COURT FOR THE DISTRICT OF KENTUCKY
The Branch Bank of the United States at Lexington, Kentucky, discounted a promissory note, reserving interest thereon at the rate of six percentum per annum, it being agreed that the owner of the note should receive the proceeds of the discount in notes of the Bank of Kentucky at their nominal value, although the same were at the time of no greater current value than fifty-four percent of the said nominal value. Held that the contract was usurious and void, and that the bank could not recover of any of the parties to the discounted note.
A fraud upon a statute is a violation of the statute.
A profit made or loss imposed on the necessities of the borrower, whatever form, shape, or disguise it may assume, where the treaty is for a loan, and the capital is to be returned at all events, has always been adjudged to be so much profit taken upon a loan, and to be a violation of those laws which limit the lender to a specific rate of interest. According to this principle, the lender in this case has taken forty-six percent for three years, or at the rate of about fifteen percent per annum above his prescribed interest. This is contrary to the provisions of the charter of the Bank of the United States and against law.
Reserving interest as discount is the same as taking the same, since it cannot be permitted by law to stipulate for the receipt or reservation of that which it is not permitted to receive. In those instances in which courts are called upon to inflict penalties upon the lender, whether in a civil or criminal form of action, it is necessarily otherwise, for there the actual receipt is generally necessary to consummate the offense. But where the restrictive policy of a law alone is in contemplation, we hold it to be an universal rule that it is unlawful to contract to do that which it is unlawful to do.
The charter of the Bank of the United States forbids the taking of a greater rate of interest than six percentum, but it does not declare a contract on which a greater interest has been taken or reserved to be void. Such a contract is void upon general principles. Courts of justice are instituted to carry into effect the laws of a country, and they cannot become auxiliary to the violation of those laws. There can be no civil right where there can be no legal remedy, and there can be no legal remedy for that which is itself illegal.
The action was upon a promissory note signed by the defendants bearing date 7 February, 1822, by which they promised to pay to the president, directors and company
of the Bank of the United States or order, on the 7th of February, 1825, $5,000 with interest at the rate of six percentum per annum from the date.
The following endorsement is on the note:
"Mem. Interest is to be charged on this note from 21 May, 1822 only, and not from 7 February, 1822 within mentioned, the former being the day on which the amount was actually received by the makers of this note."
"[Signed] H. CLAY"
The declaration being in the usual form, the defendants, Waggoner, Wagley and Miller pleaded as follows:
"That they ought not to be charged with the said debt by virtue of the said supposed note or writing, because they say that they executed the said note at the instance and for the accommodation of the said Owens and with the view of making him to obtain a loan of the money from the Bank of the United States, upon the discounting of said note, and defendants alleged that afterwards, to-wit, at . . . , the said Owens presented the said note for discount to the president and directors of the office of discount and deposit of the Bank of the United States at Lexington, Kentucky, and that the president and directors of the said office, then and there failed to discount the said note or make any loan thereon, and that after the rejection of the said note as aforesaid at Lexington in Kentucky, to-wit, on 31 May, 1822, it was unlawfully, usuriously, and corruptly agreed by and between the said plaintiffs by their agents, managers, and servants employed in the management and business of said office and the said Owens that they, the said plaintiffs, would receive and discount said note, and that the said Owens should receive from them therefor notes of the Bank of Kentucky or its branches at the nominal value of said notes, and for the forbearance and loan aforesaid that said Owens would pay said note in current money of the United States when it fell due, with interest at the rate of six percent per annum from 7 February, 1822, and they aver that in pursuance of said corrupt and unlawful agreement, the said note was delivered to the said plaintiffs at their said Lexington office upon the terms aforesaid, they advancing
and loaning therefor, as the whole and sole consideration of said note (after deducting a large sum from the amount of said note for discount) to-wit, the sum of $_____ in notes of said Bank of Kentucky, counted and rated at their nominal value. And said defendants aver that at the time said note was discounted as aforesaid, the notes of said Bank of Kentucky and its branches were generally depreciated so much so that one hundred dollars thereof nominally were of the value of fifty-four dollars only or less, and current only at that depreciation for greater or smaller sums, to-wit, at . . . . And the said defendants aver that said transaction and dealing was contrary to law and the fundamental articles of said corporation, and the said note founded upon a corrupt and usurious consideration, the said plaintiffs reserving a greater interest than at the rate of six percent per annum upon the value of the notes loaned by them as aforesaid, and this they are ready to verify. Wherefore,"
To this plea, the plaintiffs by their attorney demurred.
This case came before the court again in January term, 1835, after a trial on the merits, and it was finally decided that the contract was not usurious. United States Bank v. Waggoner, 9 Pet. 378.
Upon the argument of the demurrer, the following questions arose, namely:
1. Whether the facts set forth and the averments in said plea make out a case in which the corporation has taken more than at the rate of six percent per annum upon a loan or discount, contrary to, and in violation of the 9th rule of the fundamental articles of the constitution of the corporation?
2. If the plea does make out such a case, whether the notes sued on or the contract therein expressed to pay to the plaintiffs $5,000 is void in law, so that no recovery can be had thereon in this suit?
3. If not wholly void, whether the plea is sufficient to bar the plaintiffs' recovery of any, and if of any, of what part of the said sum of $5,000?
MR. JUSTICE JOHNSON delivered the opinion of the Court.
This suit is instituted for the recovery of a promissory note.
The plea is filed by the three last named defendants, who represent themselves as securities to Owens, and sets out in substance that the note was created for the purpose of enabling Owens to obtain a loan of money from the plaintiff in the ordinary course of discount; that it was offered for discount, and rejected, and after such rejection it goes on to aver that
"it was unlawfully, usuriously, and corruptly agreed by and between the said plaintiffs, by their agents employed in the management and business of the said office and the said Owens that they the said plaintiffs would receive and discount the said note, and that the said Owens should receive from them therefor notes of the Bank of Kentucky or its branches at the nominal value of said notes and for the forbearance and loan aforesaid, that Owens should pay said note in correct money of the United States when it fell due, with interest at the rate of six percentum per annum from,"
&c.; The plea then avers "that in pursuance of said corrupt and unlawful agreement," this note was passed to the plaintiffs, and Kentucky notes received in loan, "as the sole consideration thereof" at their nominal value, and further
"that at the time the said note was discounted as aforesaid, the notes of the said Bank of Kentucky and its branches were generally depreciated, so much so, that one hundred dollars thereof nominally were of the value of fifty-four dollars only, or less, and current only at that depreciation for greater or smaller sums,"
&c.;, and the defendants further aver
"that the said transaction and dealing was contrary to law and the fundamental articles of the said corporation, and the said note, founded upon a corrupt and usurious consideration, the said plaintiffs reserving a greater
interest than at the rate of six percentum per annum upon the value of the notes loaned by them as aforesaid."
To this plea the plaintiffs demurred, and three points are made on which the court below certify a difference of opinion to this Court.
The 1st is whether the facts set forth and the averments in said plea make out a case on which the corporation has taken more than at the rate of six percentum per annum upon a loan or discount contrary to and in violation of the ninth rule of the fundamental articles of the constitution of the corporation.
The proposition here presented to the Court has relation altogether to the violation of the ninth fundamental rule of the act of incorporation, and it brings under consideration the sufficiency both of the facts and averment contained in the plea, to make out a violation of that article.
I have myself entertained very serious doubts of the sufficiency of the averments in the plea, for it is not a case of a direct reservation of a higher interest than the law allows, since on the face of the note only six percent is reserved, but the facts are calculated to present one of those cases in which a device is resorted to by which is reserved a higher profit than the legal interest under a mask thrown over the transaction, to-wit, by taking a note payable in gold or silver for a loan of depreciated paper; a return, in fact, in specie, for an article of scarcely half the value of specie; a loan of adulterated dollars for which a note is taken, payable dollar for dollar in coin of the United States.
That the law will not tolerate such transactions has long been settled, for a fraud upon a statute is a violation of the statute.
But the difficulty with me was this that the plea neither avers an intention to evade the statute nor a knowledge in the plaintiffs of the actual depreciation of Kentucky money. I am content, however, to unite with the three of my brethren, who make up the majority on this point, in holding the averments to be sufficient, because, in a considerable dearth of authorities on this subject, I find it decided in the case of Bolton v. Durham, in Croke's Reports Cro.Eliz. 642, that
the confession of the quo animo, implied in a demurrer, will affect a case with usury when a very similar case in the same book, in which the plaintiff had traversed the plea, was left to the jury with a favorable charge. Benningfield v. Ashley, Cro.Eliz. 741.
In the present instance, the loan, the unconditional return of the sum lent, the illegality, and even corruption of the bargain are all distinctly averred and more than once reiterated. If the transaction was corrupt and in violation of the fundamental laws of the charter, as averred in the plea and admitted by the demurrer, it could only have been upon the ground of an intention to evade the statute and with a knowledge of the reduced value of the Kentucky bills.
And it is not unnatural here to remark that the plea sets out a refusal to make a loan in the ordinary course, to-wit, in gold or silver or the plaintiffs' own notes, and a subsequent agreement to make the loan, provided payment would be received in this depreciated paper. This state of facts presents an obvious analogy to the leading case of Lowe v. Waller, Douglas 736, in which the negotiation commenced for a loan of money but terminated in a sale of goods, on the resale of which the borrower (as he was held to be) sustained a great loss.
The court charged the lender with that loss as so much exacted from the necessities of the borrower.
That part of the 9th section of the fundamental rules of the bank charter, which is here drawn in question, is expressed in these words,
"The bank shall not be at liberty to purchase any public debt whatever, nor shall it take more than at the rate of six percentum per annum for or upon its loans or discounts."
A profit made or loss imposed on the necessities of the borrower, whatever form, shape, or disguise it may assume where the treaty is for a loan, and the capital is to be returned at all events, has always been adjudged to be so much profit taken upon a loan, and to be a violation of those laws which limit the lender to a specified rate of interest.
According to this principle, the lender has here taken
forty-six percent for three years, or at the rate of about fifteen percent per annum above his prescribed interest. So that in this point, the certificate of this Court must be in the affirmative.
Some doubts have been thrown out whether, as the charter speaks only of taking, it can apply to a case in which the interest has been only reserved, not received. But on that point the majority is clearly of opinion that reserving must be implied in the word "taking," since it cannot be permitted by law to stipulate for the reservation of that which it is not permitted to receive. 1 Hawk.P.C. 620. In those instances in which courts are called upon to inflict a penalty upon the lender, whether in a civil or criminal form of action, it is necessarily otherwise, for then the actual receipt is generally necessary to consummate the offense. But when the restrictive policy of a law alone is in contemplation, we hold it to be an universal rule that it is unlawful to contract to do that which it is unlawful to do.
The second question propounded to this Court is
"Whether if the plea does make out a case of violation of a provision of the charter, the notes sued on, or the contract therein expressed, is void in law, so that no recovery can be had therein in this suit."
The question here propounded has relation exclusively to the legal effect of a violation of the provision in the charter on the subject of interest, and does not bring in question the operation of the statute of usury of Kentucky upon the validity of this contract. To understand the gist of the question, it is necessary to observe that although the act of incorporation forbids the taking of a greater interest than six percent, it does not declare void any contract reserving a greater sum than is permitted. Most if not all the acts passed in England and in the states on the same subject declare such contracts usurious and void.
The question, then, is whether such contracts are void in law upon general principles.
The answer would seem to be plain and obvious that no court of justice can in its nature be made the handmaid of iniquity. Courts are instituted to carry into effect the laws
of a country; how can they then become auxiliary to the consummation of violations of law?
To enumerate here all the instances and cases in which this reasoning has been practically applied would be to incur the imputation of vain parade.
There can be no civil right where there can be no legal remedy, and there can be no legal remedy for that which is itself illegal.
That this is true of contracts violating the laws of morality is recognized in the familiar maxim "ex turpi causa non oritur actio," as has been exemplified in some modern cases of a house let for immoral purposes (cited and admitted in 1 B. &. P. 340, and Esp.N.P. 13).
In the case of Aubert v. Maze, 2 B. &. P. 374, it is expressly affirmed that there is no distinction as to vitiating the contract between malum in se and malum prohibitum. And that case is a strong one to this point, since the contract there arose collaterally out of transactions prohibited by statute.
So the same doctrine was maintained in equity upon a similar contract in the case of Watts v. Brooks, 3 Ves.Jr. 612, in which the court observes
"There is nothing immoral in this transaction, but it is against a prohibitory statute. I doubt a little the policy of the act, but I cannot allow it to be argued that you can break a law covertly. The court will not execute these contracts."
So in the case of Webb v. Pritchett, 1 B. & P. 264, where the action was by a tavern keeper against a candidate for provisions furnished to the voters at an election contrary to the statute of William. Although the statute does not declare the contract void, the court declared it void, and in this explicit language:
"This action is apparently founded on a contract to disobey the law. . . . The defense set up proves the principle of the contract. . . . Then how shall an action be maintained in that which is a direct violation of a public law. The contract is bottomed in malum prohibitum of a very serious nature in the opinion of the legislature; how then can we enforce a contract to do that very thing which is so much reprobated by the act? . . . This
court cannot give any assistance to the plaintiff consistently with the principles which have governed the courts of justice at all times. Persons who engage in such transactions must not bring their cases before a court of law,"
So in the case of assurance in illegal voyages, even where the underwriters have contracted with their eyes open, they are notwithstanding permitted to avail themselves of the plea of illegality ad libitum, as in the cases of Camden v. Anderson, 6 T.R. 723, adjudged in the King's Bench and affirmed in the Exchequer, where it is declared that "the defense is founded upon a principle of law which is permanent to all obligation, by which the parties to a contract can bind themselves." 1 B. & P. 272.
And so in another case of great hardship, Morck v. Abel, 3 B. & P. 35, where the insurance was upon a trading in the East Indies prohibited by an obsolete statute, the plaintiff could not even recover back his premium, although admitted that the risk never commenced because the policy was void in its inception on the ground of illegality.
Nor is it to voyages illegal by statute alone that this principle applies. A respectable writer on insurance makes these remarks.
"Whenever an insurance is made on a voyage expressly prohibited by the common, statute, or maritime law of the country, the policy is of no effect. The principle on which such a regulation is founded is not peculiar to this kind of contracts, for it is nothing more than that which destroys all contracts whatsoever, Park 232, that men can never be presumed to make an agreement forbidden by the laws, and if they should attempt it, it is invalid and will not receive the assistance of a court of justice to carry it into execution."
Nor is the rule applicable only to contracts expressly forbidden, for it is extended to such as are calculated to affect the general interest and policy of the country.
Thus a note given by a bankrupt upon a secret compromise with a creditor is declared void; as it produces inequality in the distribution of the bankrupt's effects and evades the provisions and policy of the law, which proposes
to put all the creditors upon an equal footing. Wells v. Girling, 1 Brod. & Bing. 447.
And on the same principle, a note given for a wager on the future amount of a branch of the public revenue is declared void because it interests an individual in diminishing the production of the revenue. 2 T.R. 610; 2 B. & P. 130.
After citing these more modern decisions upon this subject, it may not be amiss to refer to some reporters whose authority has been consecrated by the respect of ages. They will serve to show the antiquity and universality of this doctrine.
Thus in 1 Bulls. 38, it is laid down
"That wherever the consideration which is the ground of the promise, or the promise which is the consequence or effect of the consideration be unlawful, the whole contract is void."
So in Hobart 72 and Dyer 356, "if one promises to do a thing that is unlawful, such promise is void."
And innumerable ancient cases might be cited from the best reporters, of the application of the rule to maintenance, to simony, and to promises made to public officers, engaging them to act contrary to the duties of their offices, or to individuals imposing upon them restraint inconsistent with the public interest.
For these reasons, and upon these decisions, the majority of the Court is of opinion that an affirmative answer must also be certified upon the second question in the cause.
And this renders it unnecessary to consider the third question.
This cause came on to be heard on the transcript of the record from the Circuit Court of the United States for the District of Kentucky, and on the questions and points on which the judges of the said circuit court were opposed in opinion, and which were certified to this Court for its opinion, and was argued by counsel, on consideration whereof it is the opinion of this Court 1. that the facts set forth, and the averments in said plea, make out a case in which the
corporation has taken more than at the rate of six percentum per annum upon a loan or discount contrary to and in violation of the ninth rule of the fundamental articles of the Constitution of the corporation; 2. that the plea does make out such a case where the notes sued on, or the contract therein expressed to pay the plaintiffs $5,000 is void in law, so that no recovery can be had thereon in this suit; and 3. this Court being of opinion in the affirmative on the first and second points, renders it unnecessary to consider the third question, all of which is ordered and adjudged to be certified to the said circuit court.
* The demurrer entered in this case prevented that investigation of the facts attending the transaction which was the subject of the suit and by which the plaintiffs would have been enabled to present the circumstances under which the loan was made to the drawer of the note so as to fully vindicate the institution from any charge of intentional violation of the provisions of the charter of the Bank of the United States or the general rules of law. The following authentic and explanatory statement has been furnished to the reporter.
The note in this case is joint and several, and was not offered, as the plea suggests, for a loan in the ordinary course of discount in United States bank notes or specie (it being generally known that the Lexington office was at that time restrained from making such loans), but specially for notes of the Bank of Kentucky. These notes had been received by the Bank of the United States at its office at Lexington at their nominal specie value, a part of them being for government deposits; they had always preserved that value to the bank by the balance being liquidated and interest being paid by the Bank of Kentucky periodically, and by the actual payment in specie within a few (six) months after the loan to Owens of the balance due. The bank therefore would have received in specie from the Bank of Kentucky the amount loaned to Owens with its interest, in addition to the sum actually paid, had the loan not been made to him. The public exhibits of the Bank of Kentucky at the time of the loan and before and since have shown its entire ultimate ability to pay its notes and deposits in specie, and individuals have in a great number of instances received from that bank by compromise on time or by assignments of its discounted notes or by recovery on suit the nominal amount of their notes and deposits in specie. The great issue of commonwealth bank notes at the period referred to and their free reception by the Bank of Kentucky in payment of its debts had, however, the effect of giving to the notes of the Bank of Kentucky nearly the same nominal depreciated character as those of the Bank of the Commonwealth.