Bank of the United States v. Herbert/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 per centum 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 per centum 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 per centum 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 per cent. 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 vs. 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 favourable charge. Benningfield vs. 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 vs. Waller, Douglas, 736, in which the negotiation commenced for a loan of money, but terminated in a sale of goods, on the re-sale 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 per centum 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 per cent. for three years, or at the rate of about fifteen per cent. 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 are 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 offence. 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 per cent, 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 vs. 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 vs. Brooks, 3 ''Ves. Jun.'' 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 vs. 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 defence 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, &c.'

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 vs. Anderson, 6 T. R. 723, adjudged in the king's bench and affirmed in the exchequer; where it is declared that 'the defence 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 vs. 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 vs. 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 autiquity 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 are 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 per centum 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 five thousand dollars 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.