An action of covenant was instituted by the executors of M.J.
upon an obligation executed by A.R.D., under seal, to M.J., by
which she agreed to pay a certain note or bond, loaned by M.J. to
A.R.D., which had been sold by A.R.D. at a usurious discount and on
a usurious contract. The bond or note of M.J. had been given to
enable A.R.D. to raise money to pay a debt due by her, and for
which the note of M.J. had been previously loaned to her. It was
denied by the executors of M.J. that she had any knowledge of the
usurious dealing in which the bond or note of M.J. was sold. The
executors of M.J. were obliged to pay a large portion of the note
or bond, and the action was instituted to recover so much as they
had paid. A.R.D. set up the usury between her and the person to
whom she had sold the note or bond, as a defense to the suit of the
executors of M.J. It was held that the action on the covenant of
A.R.D. could be maintained, and that the usurious dealing between
A.R.D. and the purchaser of the note or bond of M.J., did not
render the covenant of A.R.D. to pay the bond or note invalid. The
court said the contract between the defendant and the purchaser of
the bond, if embracing no other person than themselves, could
affect no contract between other parties, previously made, and
whether that contract was usurious depended on the intention of the
parties to it. If it was made
bona fide for the sale and
purchase of the bond, although at a discount which would insure to
the purchaser twelve percent a year for the money advanced, it
would not be usurious. If, on the other hand, the sale of the bond
was a mere cover for avoiding the statutes against usury, and the
real intention of the parties was to make a contract for the loan
of money at a higher rate than the legal interest, then the
contract was usurious. But to involve M.J. in the usury and to
extend its taint to the covenant of A.R.D., it must be shown by
proof that M.J. executed the bond or note sold for the purpose of
aiding A.R.D. to borrow money at usurious interest, and not to
enable A.R.D. to raise money by selling it in the market. When the
holder of M.J.'s. note threatened proceedings on it, it was not
necessary that the executors of M.J. should give notice
thereof.
No subsequent confirmation of a usurious contract nor any new
contract stipulating to pay the debt with the usurious interest
will make it valid.
It is the settled law of Virginia that the
bona fide
purchaser of a bond or note may take it at any rate or discount,
however great, without violating the statute.
The plaintiffs in error, executors of Mary James, instituted an
action of covenant against the defendant on the following
instrument of writing:
"Whereas Mary James has executed her bond or note, dated the
28th day of November, 1828, payable to me on demand, for the sum of
twenty-six hundred and twenty dollars, which said bond or note was
merely loaned to me for the purpose of raising money upon, and
whereas, I have, since the execution of the said bond or note as
aforesaid, assigned it to Philip Alexander, of Fredericksburg, for
value received of him, I do therefore hereby bind myself, my heirs,
executors, and administrators, to pay and discharge the said bond
or note, with all interest that may accrue thereon, when the same
shall become due and payable."
"Given under my hand and seal, this 12 August, 1829."
"ANN R. DERMOTT [SEAL]"
Page 38 U. S. 346
The evidence showed that the note of Mary James, which had been
assigned to Philip Alexander, was not fully paid by Ann R. Dermott,
and that a large portion of the same remained unpaid at the death
of Mary James, who had executed a deed of trust to secure the
payment of it, and that her executors, Philip Alexander having
ordered the deed of trust to be enforced by the sale of the land
and negroes conveyed by the deed, paid the same out of the funds of
the estate in their hands.
The defendant alleged usury in the transaction for the loan of
the money, and by an agreement between the counsel for the
plaintiff and the defendant, usury was allowed to be given in
evidence as if specially pleaded.
On the trial of the cause, certain bills of exceptions to the
ruling of the court were filed by the counsel for the plaintiff,
and the jury, under the charge of the court, gave a verdict for the
defendant, upon which the circuit court gave judgment. The
plaintiffs prosecuted this writ of error.
The case, and the whole of the plaintiffs' bills of exceptions,
are fully stated in the opinion of the Court.
Page 38 U. S. 350
MR. JUSTICE McKINLEY delivered the opinion of the Court:.
The plaintiffs brought suit against the defendant in the court
below upon a covenant executed by the defendant as follows:
"Whereas Mary James has executed her bond or note, dated 28
November, 1828, payable to me on demand, for the sum of twenty-six
hundred and twenty dollars, which said bond or note was merely
loaned to me for the purpose of raising money upon, and whereas I
have since the execution of said bond or note assigned it to Philip
Alexander, of Fredericksburg, for value received of him, I do
therefore hereby bind myself, my heirs, executors and
administrators, to pay and discharge the said bond or note, with
all interest that may accrue thereon, when the same shall become
due and payable. Given under my hand and seal, this 12 August,
1829."
"ANN R. DERMOTT [SEAL]"
To this suit the defendant pleaded
nonassumpsit, with
leave to give usury in evidence.
At the trial it was proved that the testatrix became principal
in a bond to Thomas Poultney & Son, of Baltimore, bearing date
31 March, 1826, for the sum of three thousand six hundred and
thirty-three dollars, it being for the payment of a debt due by the
defendant, who also signed the bond, payable on 23 November, 1828,
and that the testatrix executed a deed of trust upon her land and
negroes to secure and save harmless William C. Beale, John Moncure,
and Thomas Ledden, who had become sureties to said bond at the
request of the testatrix, and that the reason why she gave her own
bond for the debt of the defendant was because the defendant could
not give satisfactory security to the sureties; that in the spring
of the year 1828, the defendant applied to John Moncure to aid her
in borrowing money to pay off the bond to Poultney & Son, who
informed her that he did not believe that money could be borrowed
in Fredericksburg at legal interest and advised her to procure the
note of the testatrix, who was her aunt, and sell it in the market.
Several conversations took place between that time and the next
November between Moncure, acting as agent of the defendant, and
Philip Alexander, of Fredericksburg, in relation to the sale of a
bond or note of the testatrix, when finally Alexander agreed that
he would buy the bond provided he could make at the rate of twelve
percentum a year upon his money, and obtain security for its final
payment by a deed of trust upon the land and negroes of the
testatrix. While these negotiations were pending, the testatrix
addressed a letter to Alexander, dated 25 November, 1828, in which
she stated that her
Page 38 U. S. 351
niece, the defendant, had informed her that she intended selling
and assigning to him the bond of the testatrix for $2,880, payable
on demand, and proposing, if he would give her time for the payment
of the money, she would give a deed of trust upon her land and
negroes to secure its payment. These negotiations were protracted
until the money to Poultney & Son was so nearly due that there
was not time sufficient to complete the arrangements in relation to
the bond and security, and Alexander agreed to advance the sum
required, $2,340, upon an undertaking on the part of Moncure and
Beale that they would refund the money to him if the defendant
failed to assign the bond and the testatrix to execute the deed. On
1 December, 1828, the defendant assigned to Alexander the bond of
the testatrix for twenty-six hundred and twenty dollars, and on the
10th day of the same month the testatrix executed the deed of
trust, in which it was stipulated that the bond was to be paid at
the end of two years, with legal interest.
During all this time, the testatrix and the defendant lived
together in Virginia, some distance from Fredericksburg. The
defendant afterwards removed to Washington, where she resided when
this suit was commenced. From the month of April, 1831, to the
month of May, 1832, she made several payments to Alexander on the
bond, and by letters to the testatrix expressed her anxious desire
to pay it off, that the testatrix and her property might be
released from further responsibility on her account. After the
death of the testatrix, Alexander put the bond into the hands of
the trustee with directions to sell the trust property unless
within a reasonable time the plaintiffs paid the balance due.
The plaintiffs prayed the court to instruct the jury that it is
not competent for the defendant in this action to deny, by plea or
otherwise, the validity of the note of 28 November, 1828, recited
in the covenant on which this suit is brought, and that she is
estopped from setting up in this action any alleged usury as
affecting the validity of said note; that the plaintiffs are
entitled to recover in this action the sums which the jury are
satisfied from the evidence were paid by the plaintiffs to Philip
Alexander, on the bond dated 28 November, 1828, unless the
defendant proves to the jury that before such payments the
plaintiffs were notified that the bond of 28 November, 1828, was
tainted with usury, and instructed to dispute the same, which the
court refused. And then further prayed the court to instruct the
jury as follows: that if the jury should believe from the evidence,
that the note of Mary James to the defendant, assigned by
Alexander, dated 28 November, 1828, was made on an usurious
agreement entered into between said defendant and said Alexander,
but that the plaintiffs had no knowledge of such usury at the time
they were called upon to pay the balance due on the note, nor at
any time before, and paid the same under the belief that the same
was
bona fide due, and without any knowledge that there
was any objection to the validity of said note, and without any
notification or communication from the defendant, then the
plaintiffs
Page 38 U. S. 352
are entitled to recover; unless the jury should be satisfied
from the evidence, that the said Mary James knew of the said
usurious agreement, under which the said note was given and
assigned as aforesaid, which the court also refused. And further
prayed the court as follows: that if the jury should believe from
the evidence that the note of Mary James, the defendant, assigned
by her to Alexander, dated 28 November, 1828, was made on an
usurious agreement entered into between said defendant and said
Alexander, but that the plaintiffs had no knowledge of such usury
at the time they were called upon to pay the balance due on the
note nor at any time before, and paid the same under the belief
that the same was
bona fide due, and without any knowledge
that there was any objection to the validity of said note, and
without any notification or communication from the defendant, and
if the jury believe from the evidence the defendant waived and
abandoned all objection to the validity of said note, and assented
that the same should be considered as a valid and legal obligation,
then the plaintiffs are entitled to recover. And it is competent
for the jury to infer such waiver and assent if they shall believe
from the evidence that the defendant, after obtaining said money,
made payments of interest as the same became due, and expressed her
desire and intention to pay the said note, and her anxiety to save
her aunt's property from sale under the said deed of trust; which
the court also refused. To all which refusals by the court to give
the several instructions as prayed, the plaintiffs except.
And the plaintiff's counsel then further prayed the court as
follows: that if the jury believe from the evidence that there was
no loan of money from Alexander to defendant secured by the bond of
28 November, 1828, but that the said bond was
bona fide
purchased by said Alexander of defendant at a discount exceeding
the legal rate of interest, the said Alexander not knowing when he
purchased said bond that the same was loaned by Mary James to the
defendant solely to raise money on, the transaction is not usurious
and the plaintiffs are entitled to recover in this action the
moneys paid by them to Alexander on said bond, and further, if the
jury should believe that Philip Alexander, when he paid the money
and took the note as aforesaid, intended to buy the said note for
the amount given on it, not knowing that the note was made by Miss
James to defendant, in order to raise money on it, and did not
mean, by disguising the advance under the form of a purchase, to
evade the statute of usury, then such purchase was lawful, which
prayers the court gave as prayed, and to which the defendant
excepts.
And the defendant's counsel thereupon prayed the court as
follows: if the jury find and believe from the evidence aforesaid
that for several months before the execution and assignment of the
bond or note mentioned and described in the covenant on which the
suit is brought, there were such negotiations and propositions
pending between said John Moncure (acting in behalf of defendant)
and
Page 38 U. S. 353
said Philip Alexander as are mentioned and set forth in said
affidavits of Moncure and Alexander and in the papers and exhibits
therein referred to, that the true and genuine nature and object of
such negotiations and propositions, and of the successive
arrangements and understandings resulting from them, as really
contemplated by both parties, were that said Alexander should make
an advance of money to defendant upon a future bond or note of said
Mary James, payable to defendant, and by her to be assigned to said
Alexander under the name and form of a sale of such bond or note at
a discount, above legal rate of interest, that such discount, from
the amount of such bond or note should be so adjusted, as that the
difference between the full amount of the bond or note and the sum
advanced on it, should be equivalent to an interest at the rate of
twelve percent per annum on the sum actually advanced for the time
of forbearance, to be given on such bond or note; that all the said
preliminary negotiations, propositions, and arrangements, were,
just before the execution and assignment of the bond or note
referred to in the covenant set forth in the plaintiffs'
declaration (such bond or note being the same note under seal, or
bill obligatory, above given in evidence by plaintiffs, with the
said covenant, and annexed to the said original affidavit of said
J. Moncure, as aforesaid) terminated in an arrangement so modifying
the before pending propositions and arrangements aforesaid, as that
said Alexander should immediately advance the defendant 2,340
dollars, and that defendant should assign to him a note or bond
thereafter, to be drawn and executed by said Mary James, for such
amount as should make the difference between the sum so advanced
and the sum to be ultimately received by him for the principal and
interest of such bond or note, equivalent to an interest of twelve
percent per annum on the sum so advanced, according to the
principle on which said Alexander, in his letter, a copy of which
is on the record, to said Moncure, insisted that the profits of the
transaction should be calculated and secured, and that the payment
of such bond or note should be collaterally secured by a deed in
trust of the land and slaves of said Mary James.
That the said Alexander, in pursuance and execution of such
arrangement and understanding, did advance the said 2,340 dollars
to defendant or for her use; that the said Mary James, in the
pursuance and execution of the same arrangement and understanding
on her part, did afterwards, on 28 November, 1828, execute and
deliver the said note under seal or bill obligatory of that date,
and afterwards, on 10 December, 1828, duly execute and deliver to
said J. Moncure and P. Alexander the said deed in trust bearing
that date, as above given in evidence by defendants, and annexed to
the said cross-examination of said Moncure, a copy of which is on
the record, and that the defendant, in the pursuance and execution
of the said arrangement and understanding, did assign the said bill
obligatory to said Alexander immediately on the execution of the
same by said Mary James; that the amount of said securities, and
the time with which said Mary James was indulged
Page 38 U. S. 354
by said deed, in trust for payment, were knowingly and
designedly calculated and adjusted by and between said Alexander
and said Moncure in behalf of defendant, so as to produce in the
end a yearly interest of twelve percent on the sum advanced during
such time of indulgence, and that the principal and interest
secured by the said instruments were intended and designed by both
parties to amount, and did in fact amount, to greatly more than the
sum so advanced with legal interest for such time of indulgence as
aforesaid, and did in fact substantially secure to said Alexander,
a yearly interest of twelve percent on the sum so advanced by
him.
Then the jury, if they find such facts as aforesaid
satisfactorily proved, and fairly deducible from the evidence
aforesaid, may properly infer from such facts and fairly presume
that the transaction was substantially a loan within the meaning of
the statute against usury, notwithstanding it may appear to have
been made in the form and name of a sale of the said Mary James'
bond or note, and then the jury may, from the same facts and
circumstances, if proved and deduced as aforesaid, also properly
infer and well presume that the sum of money deducted and retained
by said Alexander, from the nominal amount of said bond or note,
was substantially usurious interest under another name for the
forbearance of the money so lent or advanced, which the court gave
as prayed, to which the plaintiffs except and pray the court to
sign and seal this bill of exceptions, as well as the granting of
the said defendant's prayer, as to the refusal to grant the prayer
aforesaid of said plaintiffs, which is accordingly done this 24
May, 1838. And the said defendant, by her said counsel, having
excepted, as aforesaid, to the said instructions given by the court
at the request of the plaintiff as aforesaid, also prays the court
to sign and seal this her bill of exceptions to the said
instruction, so given at the request or prayer of the plaintiff,
which is also done this 24 May, 1838.
Upon the judgment of the circuit court on the several prayers
for instruction to the jury, by the plaintiffs and the defendant,
these questions arise: 1. Does proof of usury, in the contract
between the defendant and Alexander,
per se, make void the
bond assigned to Alexander, and the covenant, also, upon which the
suit in the court below was founded? 2. If the testatrix had no
knowledge of the usurious agreement between the defendant and
Alexander, and the plaintiffs were also ignorant, and knew nothing
of such usurious agreement, when they were called on to pay the
balance due on the bond, and they paid it under the belief that it
was a
bona fide debt, and without any notice to the
contrary from the defendant, were they entitled to recover in the
court below?
The contract between the defendant and Alexander for the
purchase of the bond, if embracing no other party than themselves,
could affect no contract between other parties previously made, and
whether that contract was usurious depended on the intention of the
parties to it. If it was made
bona fide for the sale and
purchase of the bond, although at a discount which would insure to
Alexander
Page 38 U. S. 355
twelve percent a year, for the money advanced, it would not be
usurious. If, on the other hand, the sale of the bond was a mere
cover for the purpose of evading the statute against usury, and the
real intention of the parties was to make a contract for the loan
of money at a higher rate of interest than six percent, then the
contract was usurious. But to involve the testatrix in the usury
and to extend its taint to the bond as well as to the assignment,
it must have been shown by proof that she executed the bond for the
purpose of aiding the defendant to borrow money at usurious
interest, and not to enable her to raise money by selling it in the
market.
As the third prayer of the plaintiffs is materially different
from the first and second, we will examine it first. If the first
member of it had been presented alone, it would in our opinion have
been proper for the court below to have granted it; but as it was
inseparably connected with the latter member, it presented a very
different question. The objectionable part is in these words:
"And if the jury believe from the evidence the defendant waived
and abandoned all objection to the validity of said note and
assented that the same should be considered as a valid and legal
obligation, then the plaintiffs are entitled to recover, and it is
competent for the jury to infer such waiver and assent if they
shall believe from the evidence that the defendant, after obtaining
said money, made payments of interest as the same became due and
expressed her desire and intention to pay the said note and her
anxiety to save her aunt's property from sale under the said deed
of trust."
This reasoning proceeds on the assumption that a bare promise to
pay an usurious debt or a partial payment of it would take the
contract out of the statute against usury. No subsequent
confirmation, nor new contract stipulating to pay the debt with the
usurious interest, will make it valid. Notwithstanding, therefore,
the defendant may have declared her determination to pay the debt
and did actually pay a part of it, she had nevertheless a perfect
right afterwards to avail herself of the plea of usury; therefore,
the court below did right in refusing the instruction.
The first and second instructions prayed for by the plaintiffs,
and that prayed for by the defendant, may well be considered
together. Jointly they embrace the whole case, and present the two
questions before stated. The facts stated in the prayer of the
defendant, if found by the jury, taken alone and unconnected with
the facts stated in the prayers of the plaintiffs, would oppose no
legal bar to the plaintiffs' action, unless, indeed, an usurious
contract between the defendant and Alexander could impart its
usurious taint to the bond assigned and the covenant sued on. The
court below having decided, by refusing the prayers of the
plaintiffs, that knowledge on the part of the testatrix of the
usurious contract was not necessary to subject the two contracts
between her and the defendant to the taint of usury.
They therefore put the case upon the express ground that
proof
Page 38 U. S. 356
of usury in the contract between the defendant and Alexander did
per se make void the bond assigned and the covenant sued
on. If the testatrix had no knowledge of the existence of usury in
the contract between the defendant and Alexander, the bond which
she gave to the defendant, although without valuable consideration,
was not usurious. There must be a loan, and the taking of more than
legal interest or the forbearance of payment of a preexisting debt
upon a contract for illegal interest to constitute usury.
Barclay v. Walmsley, 4 East 57. The fact of knowledge in
the plaintiff's testatrix is very material first, to show whether
the bond which she executed to the defendant was usurious, and
secondly to show whether the contract between the defendant and
Alexander was usurious. If the bond was free from usury in its
inception, no subsequent transaction between other parties could
invalidate it.
Nichols v.
Fearson, 7 Pet. 106. Although this bond may have
been executed without valuable consideration, in the hands of a
bona fide purchaser without notice of that fact it would
be good against the obligor. It is the settled law in Virginia that
the
bona fide purchaser of a bond or note may take it at
any rate of discount, however great, without violating the statute
against usury.
Hansborough v. Baylor, 2 Mun. 36; 5 Rand.
33. If the testatrix was neither a party nor privy to the contract
between the defendant and Alexander, it was a very material fact
for the jury to consider when inquiring whether there was usury in
the agreement between the defendant and Alexander, because if the
testatrix had no knowledge of the usurious contract between them,
it was impossible that she could have been party or privy to it.
Suppose the jury had found specially that the testatrix was neither
party nor privy to the contract between the defendant and Alexander
and that Alexander had no knowledge of the fact that the bond which
he purchased from the defendant had been executed by the testatrix
without valuable consideration; the contract of assignment would
have been entirely free from usury, and the testatrix liable upon
the bond. But that liability has never been questioned. Viewing the
case in this aspect, the defendant would have had no pretext for
pleading usury against the plaintiffs in this cause.
But upon what ground is it that usury is set up by the defendant
against her covenant of indemnity? If that covenant had been given
to Alexander and the first contract was usurious, he would have
been in no better condition, because, the consideration being the
same, the taint of usury would have attached to it at once. But the
case is very different between the defendant and the testatrix. The
latter had lent her note to the defendant and conveyed her land and
negroes to a trustee to secure the payment of it. She was not party
to the usury, and she had given a full and valuable consideration
to the defendant for the covenant of indemnity. The circuit court,
by refusing to permit the jury to inquire into the fact of
knowledge on the part of the testatrix, in relation to the usury,
thereby admitted
Page 38 U. S. 357
her ignorance of that fact. Therefore, as between these parties,
the whole transaction was legal, and the covenant free from all
taint of usury.
Cuthbert v. Haley, 8 Term 390.
Upon the second question it will only be necessary to examine
the point whether the defendant was bound to give notice to the
plaintiffs of her intention to plead the statute against usury in
bar of the debt due to Alexander, the other points having been
fully examined on the first question stated. It is obvious from the
evidence in the cause that the defendant commenced the negotiation
with Alexander for the sale of the bond of the testatrix and
conducted it to its final conclusion, and that she was bound to
know every fact and circumstance connected with the whole case. In
Ford v. Keith, 1 Mass. 138, the case was of a surety who
had paid the debt, knowing at the time that it was founded on an
usurious contract. He brought suit against the principal to recover
the amount paid, to which he pleaded the usury between him and the
payer of the note. Judge Strong, who delivered the opinion of the
court, said:
"The defendant says it is true the money was borrowed for me; I
received it, and had the benefit of it; I requested you to become
my surety and sign the note, and you have paid the contents; yet as
I had a legal right to avoid the note, you shall not recover of me.
Will the law permit the defendant to get rid of the present action
on such grounds? He presumed it would not. No man is bound to take
advantage of a penal law and avoid a contract which it equity he
ought to perform, and nothing could excuse the defendant but his
giving express notice to the plaintiff that he, the defendant, did
not mean to pay the note."
The present is a much stronger case for the plaintiffs than the
one just quoted. The defendant, as before stated, knew all the
facts of the case; she had paid, at different times, parts of the
debt; nearly five years had elapsed from the date of the contract
till its final payment; there was no evidence that the executors
had any knowledge of illegality in the contract; the suit was not
brought on the contract said to be tainted with usury, but upon the
covenant of the defendant, stipulating to indemnify the testatrix
against the payment of the debt, which the plaintiffs had been
compelled to pay under these circumstances. She sets up the alleged
usury between her and Alexander to defeat her bond of indemnity,
and insists that she is entitled to the benefit of it unless the
plaintiffs prove that they gave her notice before they paid the
debt. That she was bound to give notice of her intended defense has
already been shown, and to remove all doubt on these points, we
refer to 8 Wend. 452 to show that she was not entitled to
notice.
To permit the defendant to avail herself of the plea of usury
under the circumstances of this case would be to encourage the
grossest fraud and injustice. The plaintiffs paid the balance of
the debt to Alexander in the regular discharge of their duty as
executors, without knowledge or notice of the alleged usury. We
therefore think that the circuit court erred in refusing the first
and
Page 38 U. S. 358
second instructions prayed for by the plaintiffs and in granting
the instructions prayed for by the defendant. Wherefore the
judgment of the circuit court is
Reversed and the cause remanded for further proceedings to
be had therein not inconsistent with this opinion.
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 ordered and adjudged by
this Court that the judgment of the said circuit court in this
cause be and the same is hereby reversed with costs, 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 and for
further proceedings to be had therein in conformity to the opinion
of this Court.