Tiffany v. Boatman's Institution, 85 U.S. 375 (1873)
U.S. Supreme CourtTiffany v. Boatman's Institution, 85 U.S. 18 Wall. 375 375 (1873)
Tiffany v. Boatman's Institution
85 U.S. (18 Wall.) 375
1. Although a loan of money may be usurious and the contract to return it void, yet in the absence of statutory enactment, it does not follow that the borrower, after he has once repaid the money, nor even that his assignee in bankruptcy, whose rights are in some respects greater than his own, can recover the principal and illegal interest paid. Equity, however, in its discretion may enable either to get back whatever money the borrower has paid in excess of lawful interest, and in the present suit, it did enable an assignee in bankruptcy to do so, both in a case
where before his bankruptcy, the money was lent directly to the bankrupt, and in a case where the money had been given to brokers upon endorsed notes which, the evidence made sufficiently plain, were accommodation notes, drawn to enable the bankrupt to raise money on them, and were understood by the lender of the money so to be.
2. A man really insolvent, but not having yet openly failed and hoping to overcome his difficulties and to carry on his business, violates no provision of the Bankrupt Act by pledging his property for money lent, the money being lent at the time when the pledge is made and the lender having no reason to suppose otherwise than that the purpose of the loan is to give effect to hope, such as above described, of the party borrowing.
There was living in St. Louis in 1869 and for many years previously a person named Darby, originally, as it seemed, a member of the bar, but who afterwards entered into various sorts of business, including as a chief one that of an exchange broker and a so-called "banker." He had no capital worth speaking of when he entered into them, nor any considerable cash means at any time. He was always scheming, and as respected ready money always more or less embarrassed. He was, however, regarded as a man of wonderful energy and capacity for business, and though "suspending" in seasons of fiscal embarrassment, would manage to get on his feet again when the monetary crisis would be passed, and so go on anew. In this way he managed to work along for many years, never at any time being broken up. In 1868 he found himself with large property and with large debts -- these being due to a considerable number of creditors, not a few of them by deposit with him as a banker -- and all the time needing ready money in order to keep up appearances and to save himself from open failure. Whether he was at this time in fact insolvent was a matter about which different people differed. For the purposes of this case, he was conceded by the court to have been so, though it seemed that he never so regarded himself.
There existed at the same time in St. Louis, and in the later part of Darby's career, a corporation called the Boatman's
Savings Institution, a company authorized by its charter to lend money. The charter, however, forbade the institution to lend at more than 8 percent for any loan, but prescribed no penalty, nor declared what should otherwise follow as a consequence for lending at higher rates.
The general statutes of Missouri concerning interest, declares that no person shall receive more than 10 percent. [Footnote 1] The act proceeds:
"SECTION 5. If any action or suit shall hereafter be commenced upon any bond, note, mortgage, specialty, agreement, contract, promise or assurance whatever, which shall be made within this state, the defendant may in his answer show that a higher or greater rate of interest than 10 percent per annum was therein or thereby agreed for, or received or taken; and if the answer of the defendant to any such suit shall be sustained by the verdict of a jury, or the finding of the court, the court shall render judgment on such verdict or finding for the real sum of money or price of the commodity actually lent, advanced or sold, and interest on the same at the rate of 10 percentum per annum, upon which judgment the court shall cause an order to be made, setting apart the whole interest for the use of the county in which such suit may be brought, for the use of common schools, and the same, when collected, shall be paid over accordingly and go to and form a part of the common school fund of such county; and the defendant may recover his costs."
With these provisions by way of penalty, the whole subject seemed to end; and if the debtor voluntarily paid the money borrowed no penalties were prescribed.
Among Darby's borrowings of money were two with the Boatman's Institution.
The first was in this way. The County of St. Louis, wishing to build a jail, issued proposals for sale of its bonds, which for convenience were to be issued in sums of $1,000 each. Darby took one hundred and fifty of them ($150,000), at rates considerably below par, and borrowed the money to pay the county from the National Bank of Missouri, pledging
the bonds as security collateral to his notes for the sum borrowed. For some reason not specifically disclosed, Darby after a certain time wished to pay his debt to this bank. In this condition of things, one Hogeman, the cashier of the Boatman's Institution, offered, in behalf of the institution, to lend him, at 10 percent interest, $135,000 (with which sum he could withdraw the bonds then in pledge with the national bank), and to take the bonds as collateral security for a note which Darby should give, Darby to have full power to sell the bonds from time to time at his own price, the amount received to be credited on his note. This arrangement was completed -- that is to say Darby gave his note for $135,000 at 10 percent to the institution, withdrew the bonds from the National Bank of Missouri, deposited them with the institution, sold them at such rates as he saw good -- fair ones -- and by which (throwing out of consideration the usurious rates that he paid for money) he rather gained than lost, and with the proceeds paid his note to the institution with the 10 percent interest.
Next, as to the other of the two transactions above-mentioned, this other, however, being rather a series of transactions, six in number, than a single one.
As already said, Darby was always embarrassed for ready money, always borrowing, and always wanting to borrow. As a banker, his creditors by deposit amounted to $170,000, while he seldom or never had more than about $5,000 to meet their drafts. To meet these and other claims, he was constantly raising money through street brokers, especially through one named Stagg. Darby, generally speaking, would come to him for money, proposing to draw notes which should be endorsed by Messrs. Brotherton & Knox, gentlemen of known character and means, for the amount wanted. Stagg would then go to the Boatman's Institution, see the cashier, and learn whether the institution was disposed to lend the amount wanted. If the reply was in the affirmative, Darby would draw and sign a note, Messrs. Brotherton & Knox would endorse it, Stagg would take it and get the money, deduct his broker's commission, and
pass the balance to Darby. This sort of operation was carried on for a certain time, the Boatman's Institution at the end of it -- that is to say in January, 1869 -- being the holder of six notes for $5,000 each, which, with interest on them, at rates never less than 10 percent, and sometimes near 18 percent, were paid, by a sale of certain real property of Darby's, made in April, 1869, through the agency of Hogeman. [Footnote 2]
Before the 17th of June of the year just mentioned, Darby had become too notoriously embarrassed to go on longer with his business, and at a meeting of his creditors held on that day he was told by one of them that he must file his petition to be adjudged a bankrupt or that he would be forced into bankruptcy. He did accordingly file such his petition, on the 1st of July, and on the 12th was adjudged a bankrupt, one Tiffany being appointed his trustee.
Hereupon Tiffany, as such trustee, filed a bill in the court below against the Boatman's Institution to recover from it, as having been lent at usurious rates and in violation of the Bankrupt Act, the moneys which it had lent to Darby -- that is to say, the $135,000 -- for which he had given the one note, and the $30,000 for which he had given the six notes, and both and all of which loans, as already said, Darby and paid. The provisions of the Bankrupt Act relied on were certain ones in the thirty-fifth section, thus:
"And if any person, being insolvent or in contemplation of insolvency or bankruptcy, within six months before the filing of the petition . . . makes any payment, sale, assignment, transfer, conveyance, or other disposition of any part of his property to any person who then has reasonable cause to believe him to be insolvent . . . and that such payment, sale, assignment, transfer, or other conveyance is made with a view to prevent his property coming to his assignee in bankruptcy or to prevent the same being distributed under this act . . . the sale, assignment, transfer, or conveyance shall be void and the assignee may recover the property or the value thereof as assets of the bankrupt. [Footnote 3] "
The bill did not ask for a decree for the excess of interest reserved and taken over lawful rates, but asked for all the money lent to Darby and repaid by him. The grounds on which it proceeded were apparently these:
I. That at the time of the making of all these notes and of the payments on and of them, Darby was insolvent, and that both he and the Boatman's Institution had cause to know, and did know, that fact; that the payments were thus made with an intent to give the defendant a preference over other creditors, and in violation of the provisions of the Bankrupt Act, and were received with knowledge that such preference was intended and given; and finally, that such violation and fraud was contemplated and accomplished.
II. That the general statute of Missouri declaring the effects of usury and diverting the interest from the lender but saving the principal to him, applied only to "persons" -- that is to say, to natural persons -- and did not include corporations; that therefore loans by corporations at rates forbidden by law -- usurious loans -- stood upon general principles, and being illegal were wholly void; that applying these principles:
1st. To the case of the $135,000, evidenced by the one note; that the loan being illegal and not anything which the law would regard as a loan, the note given as evidence of it was void, and the attempted transfer of jail bonds as security no valid transfer; that therefore there was in law no security held by the Boatman's Institution for the note of $135,000; that accordingly any payments made to the Boatman's Institution stood upon the same ground as any other payments made by an insolvent debtor to an unsecured creditor.
2d. To the case of the $30,000, evidenced by the six notes; that the money had undoubtedly been lent to Darby, and was known by the Boatman's Institution (Hogeman's, its cashier's, knowledge being its knowledge) to have been so; that the loan being at above 8 percent it was void, and the payments, transfers, or gifts of money without consideration.
III. That independently of these general principles, the matter of the $135,000 was specially open to censure; that
the manner in which the subject of the jail bonds, given for the purpose of securing the $135,000, had been arranged by Darby and the company (Darby taking the bonds from the National Bank of Missouri, where he had them on just the same sort of loan as he was about to put them with the Boatman's Institution, except apparently that the bank would not let him appear as owner of them and sell them, and being allowed to put them in the Boatman's Institution on pledge, and yet to manage as his own and sell them as if he were absolute owner), gave to him a fictitious credit and enabled him to defraud his creditors. The special form of the transaction thus involved the Boatman's Institution in complicity with his fraudulent intent.
That though equity might not enable Darby, he being a party to the unlawful dealings, to recover what he had once voluntarily paid, it would enable his assignee under the Bankrupt Act, who was acting for creditors, and was therefore not to be affected by Darby's complicity in the unlawful arrangements, when its effect was to injure them.
The bill was resisted on various grounds, including the one that the general statute of Missouri about usury did apply to corporations, a position for which The Bank of Louisville v. Young [Footnote 4] was cited, as also a provision in the General Statutes "on the construction of statutes," in which it was thought to be declared that under the term "person" corporations were included; [Footnote 5] and that for the rest, equity would not enable the assignee of a bankrupt to pay even the bankrupt's just debts out of other men's money, because the bankrupt had borrowed money at illegal rates and repaid it, and that the most it would do would be to put him where he would have been had he paid no more than lawful interest -- that is to say, would enable him to recover the surplus.
The court below thought that the first transaction -- that of the $135,000 -- it being a transaction directly with Darby -- was
unlawful so far as concerned any interest above 8 percent, the lawful rate, but that it was lawful for the residue. While, as to the other transaction or series of transactions -- the transaction or transactions about the six notes of $5,000 each, $30,000 in all -- assuming, as the court did, that none of these loans were to Darby directly, but were purchases by the Boatman's Institution in the market of negotiable paper, made by Darby to third parties, by them endorsed, and which the institution might naturally believe that such third parties had thrown on the market for their own purposes -- it held that there was nothing unlawful -- not even the excess of interest -- in them.
From a decree to this effect and from a ruling which had excluded certain evidence tending to prove Darby's insolvency at the time of the transactions, the assignee took this appeal.