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
Page 27 U. S. 528
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
Page 27 U. S. 529
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,"
&c.
To this plea, the plaintiffs by their attorney demurred.
Page 27 U. S. 530
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?
Page 27 U. S. 535
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
Page 27 U. S. 536
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
Page 27 U. S. 537
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
Page 27 U. S. 538
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
Page 27 U. S. 539
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
Page 27 U. S. 540
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 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
Page 27 U. S. 541
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
Page 27 U. S. 542
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.
