This was an action by the indorsee against the indorser of a promissory note, in which the plaintiff here was plaintiff in the court below. It comes up upon exceptions taken to certain instructions given at the instance of the defendant, and to the refusal of other instructions prayed for by the plaintiff.
On the motion of the defendants, the court instructed the jury, "that if they believed, from the evidence, that the plaintiff received the note in question from the defendants, with their indorsement upon it, and without any understanding that the defendants were not to be responsible upon their indorsement"
The plaintiff then moved the court to instruct the jury to this effect: "that if they believed the evidence made out a case in which there was no loan contemplated, nor any evasion of the laws against usury, but simply a sale of the note in question, then the transaction was not usurious, and the plaintiff was entitled to recover;" which instruction the court refused.
The case makes out the note to have been a bona fide business transaction, not suspected of usury in its origin, or made up for the purpose of raising money in the market; and the decision of the court below of course affirms this proposition, "that in the sale of such a note, for a sum so much less than that on its face, as will exhibit a discount beyond the legal rate of interest, the guarantee or indorsement of the note, without a stipulation against the indorser's liability, makes out a case of usury; that it is, per se, an usurious contract between the indorsee and indorser; and no action can be maintained upon it against the indorser. And since the rule is universal, that there can be no usury where there is no loan; it follows, that their decision implies the affirmance of the proposition that such a guarantee or indorsement necessarily implies a loan.
It is necessary to bear in mind that we are not now called upon to consider a case occuring upon the transfer of a note which is, in its origin, a mere nominal contract, one on which, as the test is very properly established in the New York courts, no course of action arose between the original parties. 15 John. 44, 55. The present is a case of greater difficulty, for the principle affirmed in the decision under review, operates indirectly upon a contract not affected by usury; since by leaving the possession of the note in the indorsee who has no cause of action, and the cause of action, if anywhere, in the indorser, who has parted with the possession of the note; it virtually discharges the promissor from liability, although his contract, in its inception, may have been wholly unimpeachable. Yet the rule of law is every where acknowledged, that a contract, free from usury in its inception, shall not be invalidated by any subsequent usurious transactions upon it.
The courts of New York have got over these difficulties by adjudicating, that whenever the note or bill, in its inception, was a real transaction, so that the payee or promissor might at maturity maintain a suit upon it, a transfer by indorsement on a discount, though beyond the legal rate of interest, shall be regarded as a sale of the note or bill, and a valid and legal transaction. But not so where the paper, in its origin, was only a nominal negotiation. Such is the result of the decisions in Jones v. Haik, 2 Johns. Cases, 60; Wilkie v. Roosevelt, 3 John. Cases, 66; and Munn v. The Commission Company, 15 John. Rep. 44.
It has been argued that the Massachusetts courts maintain the contrary doctrine. But the cases cited will not be found sufficient to bear out the argument. The case of Churchill v. Suter, 4 Mass. 156, was the case of a nominal contract, a note made to be sold in the market, as is admitted in the case stated; the point of usury was not argued; and the opinion expressed by the learned judge, was, at best, but an obiter dictum. However, let that opinion be confined to the res subjecta, and there can be no reason for controverting it in this case. It was the case of a nominal sale, a loan with the disguise of a sale thrown over it.
The case of Bridge et al. v. Hubbard, 15 Mass. 96, was one of a different character, and decided in conformity with another class of cases. It was the case of the substitution of a new contract for a note given for usurious interest due upon previous transactions. The note passed into the hands of innocent indorsees, and the question was, whether it was affected with the taint of the original usury, or only with the want of consideration. And the majority of the court held it to be a security for a loan of money obtained upon usury, and therefore
The case of Lloyd v. Keach, Connecticut Rep. 175, cited from the adjudications of Connecticut, is in point: but it is an authority against the decision under review. The note was given in the course of business; and in a suit brought upon it by the indorsee against the drawer, the inferior court decided that the sale of such a note by the indorser on a discount exceeding the legal rate of interest, was rendered usurious by his indorsement and guarantee, and that the plea of usury was a good bar to a suit instituted against the drawer. But, on an appeal to the supreme court of errors, although there was a considerable diversity of opinion among the judges, a new trial was granted upon the ground that such a transaction was not, per se, usurious; but that its validity must depend upon the bona fides of the transaction, as being a pure unaffected sale or merely a colour for a loan.
Upon a subject of such general mercantile interest, we must dispose of the question according to our own best judgment of the law. And it becomes necessary first to review some of our own decisions which have a bearing upon it.
The first was the case of Levy v. Gadsby, which was an action by indorsee against indorser, upon a note which would seem to have originated in a real transaction, and the defence was usury. But the distinction between that case and the present is, that the defence was not set up in that case upon any interest or discount taken for the transfer of the note, but upon an usurious negotiation for a loan or forbearance with reference to a pre-existing debt, in consideration of which, Gadsby's note was indorsed to the plaintiff; and thus came within the description of "an assurance for forbearance," which is made void by the statute, as well as the contract secured (3 Cr. 180, 1 Condensed Reports, 486); and the usury there was proved not inferred from the guarantee by indorsement.
The case of Gaither v. The Farmers and Mechanics Bank, 1 Peters, 37, was one precisely of the same character with that of Levy v. Gadsby, except that the suit was instituted by the indorsee against the drawer; the cause was decided upon the
We recollect no other case in which this court has been called upon to consider the effect of usury upon the contracts of parties to negotiable paper. We are therefore uncommitted upon the question now before us; and free to decide it, as well upon reason and principle, as upon what appears to us to be the weight of authority.
There are two cardinal rules in the doctrine of usury which we think must be regarded as the common place to which all reasoning and adjudication upon the subject should be referred. The first is, that to constitute usury there must be a loan in contemplation by the parties; and the second, that a contract, which, in its inception, is unaffected by usury, can never be invalidated by any subsequent usurious transaction.
It is true with regard to the first of these canons, that 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's selling his own bond or note, executed, say in blank: and when these cases occur, the law puts the stigma upon them without further inquiry. The instrument having had no virtual existence until the loan or sale was negotiated, could in no wise be regarded as a transfer of property. But he who sells his lands or stock, and takes a note in payment, holds in his hands the representative of property; an entity to which the improvements of society have attached nearly all the rights and characteristics, in equity at least, which were the acknowledged attributes of the property for which it was received. A promise to return the money borrowed, is indeed one among the ordinary indications of a loan; and upon the idea that the contract of an indorser could not be distinguished from a general engagement to repay, have the
These observations are made to show that the indorsement of this note did not necessarily import a loan. But we are not to be understood as intimating, that if in a treaty for, or conclusion of a loan, the indorsement be expressly stipulated for as security for repayment, the contract being usurious may not invalidate the indorsement under the character of a security or assurance. Such was the decision in Gaither's case in this court; and these remarks only go to show that an indorsement, without a stipulation against ultimate liability, does not necessarily imply a case of usury.
And in this we are sustained by the argument ab inconvenienti, or ducitur in absurdum, which would result from the contrary doctrine, if considered with relation to the second canon or general rule respecting usury, as before laid down, to wit:
That a contract free from usurious taint in its inception, is not to be invalidated by any subsequent usurious transaction; since, as has been shown, by converting a sale on a discount into a loan on usury, and thus rendering null and void the act of indorsing it, a contract wholly innocent in its origin, and binding and valid upon every legal principle, is rendered at least valueless in the hands of the otherwise legal holder: and a party to whom the provisions of the act against usury could never have been intended to extend, would be discharged of a debt which he justly owes to some one.
We have not had leisure fully to explore the decisions of the states on the question, but, as far as we have gone, the great weight of authority is certainly in favour of the validity of the contract under review.
The courts of Kentucky have recognized the validity of such a transfer in a case of admitted usury between the assignor and assignee of a bond. Littell v. Herd, Hardin, 82. The courts of Virginia have given validity both to the assignment of a bond and the indorsement of a note, expressly created for sale, and sold at an usurious discount, where there was no proof of a negotiation for a loan. 2 Mumf. 36, and 5 Rand. 33. Those of Maryland also have lent their sanction to the doctrine in the case of Kenner v. Herd, 2 Hen. & Mumf.; and in South Carolina such has long been the established doctrine. 1 Bay. 456; 3 M'Cord, 365.
On the question whether the plaintiff may recover the whole amount of the note, or only according to the value of the consideration
Upon the whole, we are of opinion, that upon both reason and authority the law is in favour of the plaintiff; and that the court below erred, both in the instructions given for the defendants, and in refusing those prayed by the plaintiff.
Judgment reversed, and a venire de novo awarded.
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 Columbia, holden in and for the county of Washington, and was argued by counsel: on consideration whereof, it is adjudged and ordered by this court, that the judgment of the said circuit court in this cause be, and the same is hereby reversed and annulled, and that this cause be, and the same is hereby remanded to the said circuit court with directions to award a venire facias de novo.