Gaither v. Farmers & Mechanics Bank — 26 U.S. 37

Majority — Johnson J.

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George R. Gaither, Plaintiff in error, vs. The Farmers and Mechanics Bank of Georgetown, (for the use of Thomas Corcorran,) Defendants in error.

Syllabus

C. & Co. discounted their notes with the F. and M. Bank of Georgetown,-at thirty days ; and, in lieu of money,-they stipulated -to take the post notes of the bank, payable at a future day, without -interest,' while post notes were at a discount of one and one half per cent, in the market, at the timé • of the transaction. Such a contract is usurious; The endorsement of. a promissory ^note of a stranger to the transaction, which was passed tp the bank as a collateral security for the usurious loan,-although the.nóte itself is not tainted with the usury, yet the endorsement is void, and passes , no property to the bank, in the note 5 and the subsequent payhient of the • original note, for which'the security was given, and the repayment of the sum received as usury; will not give legality to the transaction. {43, 44} .

"When an action is in its origin instituted in the name of A, for the use of B, the cestui qiie use, is, by the law of Maryland, regarded as the .real party to the suit.

If a note be free from usury in its origin, no subsequent usurious transactions respecting it, can affect it with the taint of usury, although an endorser of the note, whose property in it was acquired through a usurious transaction, may not be able to maintain a suit upon it. {43}

The Act of Assembly of Maryland, declares “all bonds, contracts, and assurances whatever, taken on an usurious contract, to be’utterly void.” And the endorsement of a promissory note, for a usurious consideration, is a contract within the statute, and was void. {43}

•THIS suit was instituted by the defendants in error, against George R. Gaither, as-the drawer'of a promissory note, dated Georgetown, 24th July 1823,- for 1513 dollars 96 cents; payable - six months after date,- to the order of W. W. Cor-corran & Co. Endorsers, W. W. Corcorran & Co;, and Thomas Corcqrran. ' Before the .swearing of the jury, in.-.the ease, it was stated,' by the counsel of both plaintiff and defendant, to one of the Judges of the Court; who, being a stockholder in the bank, objected to sitting in the case ;■ and the same was also staged tt> the Court, before the jury was sworn; that, the bank was not interested ’in the event of-the cause; and, on the trial, it was also shown to the Court, by- the clerk,' that this suit, standing on the docket in the name of the bank, was', ■ by direction of the plaintiff, on the morning of, and just before the cause was called for trial, entered for thcuse of Thomas' Corcorran; and the ■ jury were sworn to try the cause standing on the docket, ‘to the use of Thomas Corcorran.

W. W. Cor.corran & Co., merchants of-Alexandria, were in •the frequent receipt of large discounts from the bank, upon their own notes, endorsed by Thomas Corcórfan, for- Which

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other notes payable to them, were, from time to time,'deposited in bank, as collateral securities.for the notes discounted; which collateral notes, were kept in deposit by the bank, and, as collected, were passed' to the credit of the borrowers; and the collateral notes, a short time before they became due, were so entered in the deposit book of the bank, as that the bank became the collectors upon their own.account, of their respective amounts, to be appropriated ás stated..

The note of the plaintiff in error was treated in this manner; and, before it became due ánd was protested, it had been enters ed bn the'deposit book of the bank-, and had remained in possession of the bank, until, the day-.of'the trial of the cause. The discounts of the bank for W. W. Corcorran 8c Co., .were hot* generally, .to a large extent in cash; but when large discounts were made, it was with an understanding, that the proceeds of the same should be received in post notes, having some timé to run; without any rebate, for the time being allowed by the bank, but th'e bank retaining the usual discount of six per cent, per annum, on the amoui t of the discounts; and the post notes were made payable at 'various periods, from twenty to ninéty days, but most generally payable when the note discounted, or. the note received, as a collateral security, became due. The amount of discounts' received by W. W. Cor-corran 8c' Co.., from-the 24thof July 1822, to the 22d of February 1823, was 77,732 dollars; and, during that time, the post, notes issued for their use, by the bank, exceeded 59,000 dollars. .

The post notes, at the time they were received, were at a discount of one per 'cent. per month in the market; and some of those .received, by W.-W. Corcorran 8c Co. were sold at that rate.- The-bank always held the note of tlie defendant below, as. a collateral security for the notes discounted for W. W.-Cor-corran & Go.; and -the defendant paid to the'bank, on the 1st day of February 1823, .500 dollars, on account of' the note. Within twb.days of the trial, when the bank having collected as-much money ás reduced, the-debt due by W W. Corcorran & Co. to-a small'sum; they ordered the suit to be marked for the use of Thomas Corcorran, under authority of ah order, dated February 17th 1823, signed by W. W. Corcorran & Co., •“ .to deliver to him, what notes of theirs might remain in possession'of-the' bank; after the debt due by them, -for which they weie. left as collateral, security, should be paid.”

The defendant below, also proved,.that the name of Thomas Corcorran was hot upon the note when it was' passed to the bank, nor-until after the note'became due; and he produced, and -.offered in- evidence to set off the promissory notes of W. W.. Corcorran & Có., which had -been transferred to him,

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by the payee thereof, after the note upon which this suit was brought had been transferred to the bank, but before this suit was brought, and before they fell due, which was after the 17th of February 1823. _ •

_ The plaintiff below, offered -W. S. Nicholls, admitted to be one of the stockholders of the bank, as a witness, who was objected to, as being interested in the event of the suit; but the Court overruled the objection, and he was sworn and examined. The defendants prayed the Court to instruct the jury, that, if they believed the ; evidence of the transaction between the. bank and W. W. Corcorran & Co. were usurious, the plaintiff could not recover; which instruction the Court refused to give. The Court refused to suffer the defendants to give the evidence, of set off, which they proposed to exhibit. To these decisions of the Court, a bill of exceptions was tendered, and the case was brought up to this Court by writ of error.

Mr. Taylor, and Mr. Key, for the plaintiff in error.—

The admission of W.' S. Nicholls as á witness, was erroneous, on two grounds.— ' •

1. He was interested in the event of the suit; — 2. He was. one of the parties, plaintiff, on the, record, he being a- stockholder in the bank.

1. The suit was originally brought for the use of. the Mechanics Bank of Alexandria, and- the bank is responsible, for the costs of suit, to which the' witness will, as a stockholder, be obliged to contribute, on the failure of the suit. 2 Camp. 354. Phillips’s Evid. 57. Under the law of , Maryland, the party to whose use the -suit may be brought, is liable-for costs; but he is only a security for the costs with the- nominal plaintiff.. The'declaration of the counsel,' that' the bank had no interest in the cause, -was made in order to induce the judge, who was a. stockholder, to sit, and whose high character,' placed him aboye the influence of interest. It was hot intended to authorize the introduction of an interested witness, as to the effect of the declaration of parties or counsel.- 1 Stark. Pi. 4. 34.

2. ■ If this suit can be sustained, it must., be'upon a legal title of the Bank in the note ; and aS the note'was made payable to W. Wi Corcorran & Co.-, .they, must have' endorsed, it to the Bank,, in • the course of their transactions with the Bank, and; for an usúriotis consideration. The facts- máke-out a casé from which the jury- might have presumed usury, and there is nothing, which will prevent- the plaintiff in error from availing himself of this'defence. ..They show that the-notes ofW,;W--Corcorran.&'Codwere discounted-by the Bank, and no. money-paid for them, -but tlie proceeds of-the discount were paid in post notes, generally ^payable when the notes discounted

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by the Rank became due, and upon which no rebate or reduction was made for the times the notes had to run. In the course of these transactions, and as’ a- part,of them, the note of the plaintiff in error, was endorsed over to the Bank by the borrowers upon these usurious contracts. This was usury. Chitty on Bills, (Philadelphia edition, 1821,) 112'. The statute .makes the contract upon which, usury, is taken,. void j. and no title can be obtained under it.. It is not the validity of the note which is questioned; but that of the transfer of the note by the endorsement. The plaintiff in error is liable to pay the note, but not to those who claim under an invalid transfer of it;; no one can claim under such -an endorsement. 1 Starke’s'Reports, 385; Chitty, 105, 692.' The Bank having held the note' under an invalid transfer, and instituted a suit upon it, the case cannot be altered, ás to-the right of the person to whose use it is marked. This change in the suit does, not alter the relations of the parties, and give a right to'the cestui que usé which the plaintiffs in the suit did not possess. The whole of the evidence shows that the Bank held the note for their own use. That it became theirs, through the usurious dealings with W. W. Corcorran & Co. and they could pass no “right in it to any person.

3. Upon the evidence, Rie set-off ought to have been -admitted. The law of Virginia authorizes, a set-off to be allowed in such a case. A set-off is allowed-against the party really claiming in the suit, although another may be nominally the plaintiff. Chitty, 12. ,1 T. Rep. 39. 4 T. Rep. 341, 7 T. Rep. 663. 16 East, 36.

Jonés & Coxe, for the defend ants in'error.—

The question as to the interest of the Bank in the event of the suit, and therefore of -the compelling of W. S. Nicholls, as a witness, was closed by the declarations of the counsel, before the cause came 6n for trial., The counsel had power to bind the parties by their-admission, and the Court below was bound to consider any thing cone to release the interest of the Bank that could be done: The real party to the suit was the cestui.que use, and by a court of law he would be so treated ; and he.has full po.werover the cause, in the same manner'as if he was the only party on the record. As to the nature of the interest of a witness who is nominal plaintiff.— 4 Stark, 751. 770. 775, 776. -When a corporation can be a' witness. 4 Stark, 1061. 426. By the laws of Maryland, 1796, chap. 43, sec. 13. the party for w-hose use the suit is marked, is liable to costs. 1 act of 1794, chap. 54, sec. 10:

The Bank held the note of Gaither, as trustees for W. W. Corporran Co., and the stockholders wrould have no interest in the same.

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2. If there was usury between W. W. Corcorran & Co. and the Bank, it cannot affect the claim- in this suit. An usurious •transaction between the drawer of a note and the.endorsee, will not discharge the drawer; and the only danger to which he would be exposed, might be that of a double recovery. 1st, by the drawer, who had hot legally .passed away the note, and 2d, .by the usurious endorsee.

The'law is settled, that the usury must affect the original ■contract, and’ will not affect collateral matters growing out of it. When given originally for an usurious consideration, all are affected by it; but the usury must have attached to the instrument itself, and it will not affect one given in lieu of it to a person who was ignorant of the usury at the inception of the. first .contract.- 3 Esp. 22. 8 T. Rep. 390. 1 Camp. 165, in note. Philadelphia edition of Chitty on Bills, of 1817, page 95.

3. The note was never the property of the Bank, it having been deposited as a. collateral security for notes drawn by W. W. Corcorran & Co. and endorsed by Thomas .Corcorran. The note was not deposited in reference to any particular negotiation, but as a security generally; and the right of the Bank to it; if any existed, was not affected by subsequent transactions, although usurious. Orel on Usury, 104.

4. The set-off was not admissible. It was not the subject of notice or plea — and the interest of Thomas Corcorran.had attached, before any of the claims of the plaintiff in error arose.

delivered the opinion of .the Court. — .

The plaintiff here was defendant in the Court below, to an action instituted by the Farmers and Mechanics Bank of Georgetown, on a note made by .him to -W. W. Corcorran &■ Co. and by them endorsed in blank to the Bank.

The record makes out a case for this Court, of which the following is a summary: That W. W. Corcorran & Co. discounted their own notes with this Bank, at thirty days • the Bank, expressly stipulating, that in lieu of money they should receive what they call a' post note of their own, payable at a future day, without interest. -The evidence would make out that the' post notes given for.this discounted note,w,ere at thirty-five days after date; that it is, two days after the discounted note fell due: so that in fact there was no advance of money, although an interest of six per cent, per annum, was taken’ from the’ Coreor-rans, and the post notes of the Bank wer.e proved to be at a discount of one per cent, making one 'and a half per. cent, for thirty days, or eighteen per cent, per annum. The note on which this suit was instituted, was passed to the Bank as a collateral security for the discounted note, and was altogether unaffected wifh

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Usury in its origin. The ground on which the right of the iBank is • resisted, is, not that Gaither is discharged from his' contract with W. W. Corcorran & Co., but that the endorsement to the plaintiff below, having been made to secure a note given on an usurious contract, could vest no interest or cause of action, in the endorsee. In order to avoid the pressure of .this defence, in the Court below, the plaintiffs there gave in evidence a,writing, addressed by W. W. Corcorran & Co. to the Bank, bearing date 17th February. 1823,' prior to the institution of that suit, in these words: ‘‘ Please deliver to Thomas Corcórrán what notes of ours may remain in your possession, after the debt due the Bank, for which they are left as collateral security, shall have been paid, or hold the Same subject to his order.” And it' was further shown, that'a few days before the issue was tried below, an adjustment had taken place bétw'een the Bank and Thomas Corcorran, (who was then endorser and assignee of W; W. Corcorran'8c Go.) upon which Gaither’s note had been delivered to Thomas Corcdrran; he then endorsed his name t>n Gaither’s noté, below' that of W. W. Corcorran 8c Co. and thereupon the Bank, before the jury were charged, had the name of Thomas fcorcorran enter-, ed on the do.cket, as the cestuy que use, for whom they were-prosecuting their suit, and the jury, it appears, were charged with the causé,■■ according to the exhibition of parties, thus made-upon the docket; that is, to try ah issue between thp-Bank, to the use of Thomas fcorcorran, plaintiff, and Gaither, defendant. .

..This practice is familiar with the. Maryland'Courts, and when the áction originates in that form, the cestuy'que use is regarded is the real party to thé suit.

It is how,contended; that, although substituted at'the eleventh hour, Thomas Corcorran' is tobe regarded in that relation; and ■ under that idea this causo' has' been argued, ds though the question of. usury had been- raised betweén Gaither aád an innocént endorser.

But it is obviously, impossible, in the present action, to pay ■ any regard to Thomas Gorcorran’s interest or claims. The arrangement which -introdufced hisname into the cause, was' too obviously concocted- for the purpose of. rescuing the interests. of the plaintiffs in the record, from- the effects of the defence of usury. • It therefore' can pretend to no-' merit in the administration of justice.-, But if the effects of that - transaction be examined,'without reference to the motive, it is'equally clear, it can’have no bearing upon' the present action. The. interest in, or power over Gaither’s note,-was;only inchoate,-and con tingeh t, - un tilal 1 the debts due-the Bank should hie. paid,-or they otherwise be induced'to relinquish it to him-; and .this did

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not take place until long posterior to the institution of the suit, and even after issue joined. '

The Bank sue on their, own interest, declared on their own Tight, and. acknowledge n<? participation with Thomas Cprcor---ran in the interest or„,the action, until the moment when-the cause is going ,'to trial. Tt was, surely then too late to permit them to assume a hew character, or interpose a new party; however liberally this Court might be disposed to' sacrifice the forms and rules of law, to the Maryland practice.

We will, therefore, -put Thomas Qorcorran’s interest out ot view, and will consider the parties, at the commencement of the action, as the ^parties at its close.

This puts the question on the right of an innocent endorser, out of the cause — since-the endorsee of Gaither’s note received the usurious interest,, and the endorser paid it. The only questions on the .point of usury, then, are,

1st, Whether, Gaither, in the relations in which he stood to these parties, could set up- the usury in his defence.

■ 2d,. Áríd-wHether that defence could be set up, after pay-, meiit'.of the note/om which the usury had been,received.

The. objection in the first point, is, that as there was no usury, in the concoction, of Gaither’s contract, he ought not to'be permitted to. avail himself of the usurious contract between the .endorser, and endorsee,' to avoid a debt -lynioh he' justly owes..

And this .is unquestionably true: for the rule cannot be doubted, that if the note be free from usury, in its origin, no subsequent usurious transactions respecting it, can affect it -with- tjie taint of usury, Nor does Gaither propose by this defence, to1 relieve himself from paying the note ; it goes only to his liability to pay it to this individual; and reason,. analogy, and ¿djudged cases,-.will sustain the defence. ' Suppose a note1 given to a woman, who marries, and then endorses it without her husband’s authority; such endorsement-would be void; (1 East, 432,)- and .the endorsee could not recover, yet the husband . and wife may recover.

In a comment on the case of Jones, and Davison,' in Holt’s Reports, (1 Holt, 256,) an usurious noté is likened to a bill of exchange on a bad. stamp: - If a stamp were necessary to give validity to an iendorsefnent, it- cannot be- doubted that none who claim’ through such1 an endorsement could maintain an action against the drawer. • The endorsement, though actual, was.ineffectual for the purpose of transferring, an interest in the npte. It -was a' void act.

, This case.is' governed by the laws of Maryland : and the Act of Maryland against usixry is in the words of thé Statute of .Ann, It declares, “ All bonds,, contracts, and assurances what

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ever, taken on an usurious contract,” to be utterly void. Now the endorsement of a negotiable note creates several contracts; and if, in this case, it could give a right of action against Gaither, the,drawer,^ it ought also to sustain'an action .against W.- W. Corcorran & Co. the endorsers; but against them, it is perfectly clear that an action could not be maintained, for they were parties to the usurious loan.. It follows,-that their endorsement ■ was a void act, and the property, and of consequence,' the right of action, never passed to these plaintiffs.— ■There is a very strong case, on this subject,' which wé belieye was not quoted in argument, to be found in .the. Books to which we usually refer. We mean the case of.Harrison & Hamell,..in Taunton’s Reports, (5 Taunton, 780,) in which the rights of a collateral s,urety to avail himself of usury in the original trarisaOtion, is distinctly recognised, when the contract of the1, collatéral was wholly unaffected by usury. The case' wás reserved for argument, and the whole Court concurred in the legality of the defence. The language of the Judges is strong, and applies.to the case before us. One of them- remarks:— “ That if a .man lends 1000 pounds on an usurious interest, and gets from a third person a collateral security for 8Ó0 pounds Only, without usurious interest, I 'hold that bond is void, not. because it is given for securing usurious interest, but. because if is given fpr enforcing a contract for usurious interest. ” And another , says, “ That if . giving these collateral acceptances would alter the case, it would be a shift or device, by which the statutes of -usury would be defeated:”

With regal’d to the second point, it is mécéssary to 'see the force of the argument ..which would deduce from the payment, of the discounted note, a cure to the tairit.with which the con-, tract of endorsement was affected. The law declares it abso- • lutely void. By what operation, then, is it to be rendered valid by the payment of the discounted note?' It is argued, by the payment and extinguishment of the latter note, the usury is extinct, and as if it had never existed. We cannot perceive how this reasoning can prevail, either in point of. fact or in--ference. • In point of fact, the crime was only consummated by the payment of that note, since the bank thereby incurred a liability under the statute, 'to "be sued for three times the sum paid them; and as to the inference, it seems very difficult to conceive how the payment of the usurious note should operate to confirm'or give birth to. a.con tract which the law declares.never had existence, and was ab initio,utterly null and void. There have been cases in .which usurious contracts have-been' cancelled, the ■ usury refunded, and new contraéis substituted free from the taint of- usury; and the law-gives to the offender this locus penitentiee.- But there is no analogy between such.a

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transaction and that here presented, in which the money loaned has been paid-by the borrower, and only passed into the . vaults of the Bank, to be deposited with- the usurious interest previously taken. We have not heard of the refunding of this. usury í/. and this; at least,'would have been indispensable to removing the taint. But even that would never have given validity to an endorsement, which, in the eye of the law, was, as though > it had never existed.

As the decision on this point disposes ojf the: right of action, and leaves no probability that the cahse will be again brought up to this Court, we deem "it unnecessary to notice any other of the points made in argument.

• The.judgment was reversed, and the cause remanded to the "Circuit Court, with directions to, award a venire facia s de ncko,