National State Bank v. Brainard

There is no dispute as to the fact that the plaintiff discounted the drafts in suit at the rate of fifteen per cent, per annum, while the rate allowed by the laws of the state-of New Jersey, where the bank is located, was only six per cent. This act brought the bank within the operation of §§ 5197 and 519.8 of the Eevised Statutes of the United States. Section 5197 provides that national banking associations may receive, reserve and charge on any loan or discount made, or upon any note, bill of 'exchange or other evidence of debt, interest at the rate allowed by the laws of the state, territory or district where the bank is-located. Section 5198 provides as follows:

“ The taking, receiving, reserving or charging a rate of interest greater-than is allowed by the preceding section, when knowingly done, shall be deemed a forfeiture of the entire interest which the note, bill or other evidence of debt carries with it, or which has been agreed to be paid thereon. In case the greater rate of interest has been paid, the person by whom it has been paid, or his legal representatives, may recover back, in an action in the nature of an action of debt, twice the amount of the interest thus paid from the association taking or receiving the same, provided such action is commenced within two years from the time the-usurious transaction occurred.”

The effect of the provisions of the national currency act, which are embodied in these sections, was considered by the supreme court of the United States in the case of Barnet v. National Bank, 98 U. S., 555 , and it was there declared that the statute defined two categories, and denounced the consequences thus:

“ 1. Where illegal interest has been knowingly stipulated for, but not paid, there only the sum lent without interest can be recovered.

“ 2. Where such illegal interest has been paid, then twice the-amount so paid can" be recovered in a penal action of debt, or suit

In that case it was accordingly held that where usurious interest had been actually paid to a national bank upon a bill of exchange, such interest could not be applied by way of offset or payment on the instrument.

Under this decision, the interest prior to maturity upon the drafts involved in the present suit was forfeited, if it was merely reserved, but not paid. As was said in the case of the National Bank of Auburn v. Lewis, 81 N. Y., 20 : “ When a note is discounted, the amount reserved for the discount is the interest reserved. In most cases it is not - then paid. The borrower receives the sum called for by the note, less the amount reserved for the discount. That is not paid until the note is paid. It is interest, and it is interest which the note carries with it. If it be a discount at a usurious rate, it is forfeited by reason of the federal statute. In a suit on the note, it may not be recovered. It is to be held and adjudged forfeited.”

These views would necessarily result in an affirmance of the judgment, if no other questions were presented by this appeal. The defendants, however, insist that it was error to permit any recovery on account of interest accruing after the maturity of the drafts in suit, and that a payment of $2,360 made to the bank by the executor of the acceptor was erroneously credited on account of such interest, whereas it should have gone to diminish the amount of the principal debt

In both respects we think the contention of the appellants is correct.

The forfeiture prescribed by the Federal statute is not merely a forfeiture of the interest which has been agreed to be paid, but a forfeiture “ of the entire interest which the note, bill or other evidence of debt carries with it.” In other words, the reservation or acceptance of usury destroys the further interest-bearing capacity of the paper. It was so held by the supreme judicial court of Massachusetts in the case of the Peterborough Nat Bank v. Childs, 133 Mass., 248 , in an opinion with the reasoning and result of which we entirely concur.

As to the payment of $2,360, which has been mentioned, there was no competent evidence of any intention to apply it to the interest on the part of the person from whom the money was received. The drafts having lost their capacity to draw interest, no interest was duo, and the payment could properly be applied only on account of the principal. See Adams v. Mahnken, 14 Stewart, 332 ; Gill v. Rice, 13 Wisc., 549; Greene v. Tyler, 39 Pa. St., 361 .

' The judgment must, therefore, be reversed, and there must be a a new trial, unless the respondent will stipulate to reduce the judgment by deducting the amount included therein for interest accruing since the maturity of the drafts, together with the $2,360 which should have been credited as a payment on the principal. If this is done, the judgment as modified will be affirmed, with costs.

Van Brunt, P. J., Barrett and Bartlett, JJ., concur.