New York Firemen Insurance v. Ely

Sutherland, J.

The plaintiffs’ right of recovery is resisted on three grounds:

1. That the note on which the suit is brought was discounted by the plaintiffs ; that they had no right to discount notes; and that this note is therefore void.

2. That it was usurious, from the circumstance of the discount, or interest, having been taken in advance.

3. That it was usurious, in consequence of the manner in which the discount, or interest, was calculated.

The discounting of notes is only lending money, and taking notes in payment. Is the power of lending money upon notes either expressly given to this company, or impliedly given from the circumstance of its being necessary to the carrying into effect some power that is expressly given ? If not, the company did not possess the power; for I hold the rule upon this subject to be correctly stated by: Chief Justice Thompson, in The People v. The Utica Insurance Company, ( 15 John. 383 ,) “ that a company incorporated for a specific purpose, have no rights except such as are specially granted, and those that are necessary to carry into effect the powers so granted.- Many powers and capacities are tacitly annexed to a corporation duly created, but they are such only as are necessary to carry .into effect the purposes for which it was established. The specification of certain powers operates as a restraint to such object only, and is an implied prohibition of the exercise of other and distinct powers.” This doctrine is also laid down by Mr. Justice Bayley and Mr. Justice Best, in their opinions in Broughton v. The Manchester Water Works, (3 Barn. & Ald. 9, 12.)

It is not pretended that the power of discounting notes is expressly given by the act of incorporation, in this case ; nor is it necessary to the carrying into effect any power that is granted. The 2d section of the act incorporating this company, declares it to be created for the sole purpose of insurance, and to have power and authority to make contracts of insurance, &c., for such premium or consideration, and under such modification or restriction as may be agreed on between the parties. It may be conceded that the company have authority to take notes for the premiums due to them, *700 instead of demanding cash ;■ because the power of giving cl.e(jjt may ]3e necessary to enable them to make the most advantageous contract of insurance, and because such pow- . , , er is necessarily implied m every authority to contract, where the party making the contract is beneficially interested in it, and does not act in the capacity of agent. The notes thus taken for premiums, might undoubtedly be renewed, and the credit in that way indefinitely extended; but it by no means follows, that because the company may take notes for the premiums due to them that they may loan money on promissory notes. It is not necessary, to enable them to carry into effect any of their powers. If no mode had been pointed out in the act, in which their surplus capital should be invested, it might have been argued with some plausibility, that the power of making such instrument must necessarily belong to every moneyed corporation. It being necessary, to enable them to carry into effect, in the most advantageous manner, their general object, and no particular mode having been designated, they were at liberty to adopt any mode not prohibited by law. The making of loans upon promissory notes, might then, perhaps, have been justifiable, if it was not prohibited by the restraining act. But in .this case, the 16th section of the act expressly provides, that it shall be lawful for the corporation to invest their capital, or any portion of it, either in the stock of the United States, or of the individual states ; thus by the strongest implication, prohibiting any other mode of investment, and destroying the inference which might have resulted from the absence of all regulations upon the subject.

Nor does the authority given to the corporation by the-6th section, to take mortgages to secure the payment of any debt which may become due to them, justify the conclusion, that they may create debts by loaning money upon notes; though it undoubtedly admits that they may have debts due to them, and this strengthens the argument in relation to their authority to give credit for premiums.

They have a right, by the 6th section, not only to buy, but to sell or transfer United States or state stocks. Debts, therefore, may lawfully become due to them upon such sales; *701 ahd it was such debts, and debts due for the shares or stock of the company, and for premiums, which the legislature intended they should be able to secure by mortgage.

But it is said that this debt originated in, and belonged to the old company, which was dissolved by the act of February 27th, 1818; that the directors were mérely trustees in relation to those 'fiíhds, and were not bound by the restriction ' contained in the original act of incorporation. I do not find, in the act referred to, any thing to support this position, It is made the duty of the new directors to take the charge, management, liquidation and settlement, of the business and concerns of the original stockholders, upon themselves, to keep separate accounts, and after payment of all debts, &c., 'to distribute the overplus, &c. These powers are not different or greater than those "conferred by the original act. There is no intimation of any authority, to make dispositions or investments of the funds, which did not exist in the old company, or which, as directors of the new company, they had no right to make in relation to the funds of the latter. Their power, as to both, was the same, and they were merely directed to keep the accounts distinct.

I am, therefore, of opinion that, independent of the restraining act, (2 R. L. 234.) the plaintiffs had rto authority to discount notes by way of loan.

But admitting that they had, was the transaction in question affected by the restraining áct 1 That act provides, “ that no person, unauthorized by law, shall subscribe to or become a member of any association, institution, or company, or proprietor of any bank or fund for the purpose of issuing notes, receiving deposits, making discount's, or transacting any other business which incorporated banks may or do transact by virtue of their respective acts of incorporation and declares all notes and securities, for the payment of money, given to any company or association, not authorized as aforesaid, null and "void.

The object of this act was to prevent banking operations from being carried on by any company ox association of men, not expressly authorized by law to bank. The act is viola *702 ted whenever a company or association of men create a fund for^ an¿ actually apply it to the purpose of issuing notesj receiving deposits and making discounts, without authorjty iaw to carry on banking operations. The fund must not only be applied to those purposes, but it must be created for the purpose of being so applied. What then is the evidence requisite to prove that such was the object of creating the fund? The ordinary and habitual application of the fund to those purposes would be conclusive evidence of the fact. But does an insulated case of discounting a note, by a corporation, ostensibly created for the purpose of insurance, and whose funds are actively and principally employed in that manner, afford evidence that the funds of that company were created, not for the purpose of insurance, but for the purpose of banking ? Would a jury be authorized in drawing such a conclusion from such evidence ? Assuredly not.

In the case of the Utica Insurance Company v. Scott, ( 19 John. 1 ,) the plea alleged, “ that. the fund was created for the purpose of issuing notes, receiving deposits, making discounts, and transacting all other business which incorporated banks may and do transact; and that, in pursuance of such intent, &c., the plaintiffs established an office or banking house, and issued notes, received deposits and made discounts.” Here the offence is fully, set forth, and I apprehend, that in order to bring a case within the restraining act, it is necessary to prove the substantial allegations contained in this plea. The opinion of Mr. Justice Spencer, in the case of The People v. Utica Insurance Company, ( 15 John. 394 ,) is very strong and explicit on this point.

In the case now under consideration, the plea is simply non-assumpsit, and there is no evidence that the plaintiffs have ever discounted any other note than that on which this suit is brought, (and those of which this is one of a series of renewals,) or done any other act which appropriately belongs to a banking institution. I am clearly of opinion therefore, that the note in question is not rendered void by the restraining act.

*703 2. Was the note usurious in consequence of the interest having been taken in advance?

In the Manhattan Company v. Osgood, ( 15 John. 162 .) this Court decided, that discounting a note by a bank, at the rate of seven per cent, is not usurious : and the same principle is perfectly settled in England, in relation to bills of exchange, or promissory notes, discounted either by private bankers or individuals in the regular course of trade. In Lloyd, qui tam. v. Williams, ( 2 Black. Rep. 792 ,) Blackstone, J. says, “ interest may as lawfully be received beforehand fox forbearing, as after the time has expired for having forborne ; and it shall not be reckoned as merely a loan for the balance.” In terms, this position is applicable as well to interest taken in advance upon bonds, as upon bills of exchange and promissory notes; but it is qualified and limited by the cases which he cites to illustrate it. Else, he says, every banker in London, who takes 5 per cent, for discounting bills, would be guilty of usury.

In Marsh v. Martindale, (3 Bos. & Pull. 158,) Lord Alvanley expressly admits this to be the established law in relation to the negotiation of bills of exchange made in the usual course of trade ; but he held the transaction in that case to be usurious, principally because the bill discounted was a bill at three years. He says, “ The jury were impressed with a notion that a bill at three years was such a bill as no reputable man would discount; though it was said that some East India bills, at two years, had been discounted. Indeed, Lord Chief Justice Eyre seems to have thought that the length of the date of a bill was sufficient to afford a presumption that the discount was intended as a cover for a loan. And if we consider the effect of discounting bills at very long dates, the strength of this presumption will be manifest; for if the practice be carried to a great length, the interest will annihilate the principal. I think, therefore, that the discount of such a bill as this, (not coupled with the transaction respecting the annuity,) would have been almost sufficient to have afforded a presumption of usury.”

The principle to be extracted from these cases, and from a variety of others which might be cited in confirmation of *704 them, ! hold to be this : that the taking of interest in adTance ,s allowed, for the benefit of trade, although, by allowing" it, more than the legal rate of interest is," in fact, ta- . that" being" for the benefit of trade, the instrument discounted, or upon which the interest is taken in advance, múst be súeh As will, arid usually does, circulate or pass in the course of "trade. It must, therefore, be a negotiable instrument, and payable at no very distant day ; for, without these qualities, it will riot circulate in the course of trade. "Under these limitations the taking of interest in advance, either by a bank, or incorporated company without banking powers, or an individual,"is not usurious.

The note in question, therefore, was not usurious upon this ground.

3. Was it usurious in consequence of the interest having been calculated upon’ the" supposition that 90 days were the fourth of a year, and" 3 days the tenth of a month ? The effect-of this "mode Of calculation is, to give to the lender interest for 365 days, upon a forbearance for 360; and where the" interest "is seven" per cent, the amount received, upon this principle "of calculation will exceed the rate allowed by law. Whether that" excess be great or small is Unimportant; for the least excess is as much usury as the most enonhotis.

It is admitted by all the Writers, and in all the cases upon this subject, that the intention of the contracting parties is the principal subject of inquiry, in determining whether a contract be usurious or riot"; for if the intent of the contracting parties be righteous, the contract cannot be within the statutes Of usury. (Ord On Usury, 37.) It is said by Mr. Justice "Gould, in Murray v. Harding, (2 Bl. Rep. 865,) that the" ground "and foundation of all usurious contracts is the corrupt agreement.” Chief Justice Eyre, "in Hammett v. Yea, (1 Bos. & Pull. 151,) says, “ where a party, on a contract for a loan, intentionally takes more than 5 per cent, per annum for the forbearance of that loan, he is guil ty of usury but he adds, “ whether more than 5 per cent, is intentionally taken upon any contract for such" forbearance, is a mere question of fact for the consideration of the jury and ritost always be'collected from the whole of'the transaction *705 between the parties ; and it never can be determined that any particular fact constitutes or amounts- to usury,, till all the circumstances with which it was attended have been taken into consideration.

In pleading usury, a corrupt agreement must be alleged, and upon that the issue is taken. (2 Ch. Pl. 467. 1 Saund. 295, a. n. (1) Plea, in Stewart v. Mech. & Farm. Bank, 19 John. 500 .) Where more than sevm per cent, therefore, is unintentionally received, either through an error in calculation or a mistake in drawing the instrument, the contract will not be deemed usurious. (Nevison v. Whitley, Cro. Car. 501. Booth v. Cook, Freem. 264. Bush v. Buckingham, 2 Ventr. 83. Buckler v. Millard, 2 Ventr. 107. Buckley v. Guildbank, Cro. Jac. 678, Glassford v. Laing, 1 Campb. 149.) These cases all go upon the principle, that the corrupt agreement is the essence of the offence, and that a party shall, therefore, be permitted- to show whatth.at agreement was, and that it has not been correctly expressed in the written contract.

The payment and receipt of usurious interest is, prima facie evidence of a corrupt agreement., (1 Saund. 295, b,in note.) It must be conceded-that more than seven per cent, per annum, was received upon the discount of the note, in this case. How is the presumption of law, that it was received in pursuance of a corrupt agreement, sought to be repelled 1 Not by showing that the sum paid for interest was greater than the parties intended .should be paid■; that there was a mistake in telling the money, or that the Clerk who cast the -interest, had fallen into an arithmetical error ; but by showing that the excess arose from the adoption of a principle of calculation, which the parties knew would give more than seven per cent, though they believed, it was not a violation of the statute. In other words, the plaintiffs received more than seven per cent, because they believed that they had a legal right to receive more. If they judged erroneously, it was a mistake in point of law, and mot in point of fact; and unless there be something in the case of usury to distinguish it from all other cases, their ignorance or mistake in relation to the law, can afford them no protection.

*706 I have said that the question of usury is always a question 0f jntent( an¿ the case of Hammet v. Yea was cited in stipport of the position. There can he no usury, without an injen £on t0 take a greater rate of interest than seven per cent. But it is not necessary to the offence, that there should be an actual intention to violate the statute. It may be committed by one who, in point of fact, never heard of the statute. Whether the party intended to take more than seven per cent, by way of interest, is a question of fact, for the determination of the jury. If it be found that he did, it is an invariable inference of law, that it was taken in pursuance of a corrupt agreement, which consummates the offence. In Hammet v. Yea. it was admitted that more than five per cent, had been received by the plaintiff. It was contended that the excess was not received for forbearance of the loan, but as commission for the remittance of it. Whether it was received by way of forbearance, or of commissions for remittance, was the question of fact for the jury; and the observations of Eyre, Ch. J. are to be considered with reference to that state of the inquiry. If it had been admitted, that the whole amount received was intentionally received as interest, there would have been nothing for the jury to find. The law would have pronounced it a case of usury.

In Marsh v. Martindale, (3 Bos. & Pull. 154,) the jury found expressly, “ that the plaintiff did not think he was acting contrary to the statute.” Lord Alvanley says, “ there is nothingin that finding to prevent us from examining this transaction, and declaring it to be corrupt, if it appear to us to be so in point of law and the conclusion to which the Court came upon the case, is thus expressed: “ In this case we are of opinion, that sufficient appears to show that the agreement was corrupt in law, whatever the intention of the plaintiff may have been.”

In the case of the Maine Bank v. Butts, ( 9 Mass. Rep. 55 ,) this principle is very clearly stated. The Court say, “It is probable that in this case, there was no intentional deviation on the part of the bank, but a mistake of their right. This^ however, is a consideration which must not influence of *707 decision. The mistake was not involuntary, as a miscalculation might be considered, where an intention of conforming to the legal rule of interest was proved ; but a voluntary departure from the rate. An excess of interest was intentionally taken, upon a mistaken supposition that banks were previleged in this respect to a certain extent. This was, therefore, in the sense of the law, a corrupt agreement; for ignorance of the law will not excuse.”

The intent of the parties is a legal inference from established facts. In a special verdict, it is not necessary that the jury should find that the agreement was corrupt. They find the facts and circumstances, from which the law infers either that it was or was not corrupt. (Roberts v. Tre nayne, Cro. Jac. 507.)

That the principle of calculation adopted by the plaintiffs, was the one in general or universal use among banks, cannot alter the law of the case. A statute cannot be abrogated by custom, or usage of a particular trade. In Dunham v. Gould, ( 16 John. 374 ,) which was also a case of usury, Chancellor Kent says, “ the custom of merchants is not applicable to such a case. It is not a matter of trade and commerce within the meaning of the law merchant; and if there were such a local usage, it would be null and void, and could not be set up as a cover or pretext to trample down the law of the land. The money lenders throughout the country might as well set up a custom of their own, and then plead it in bar of the statute.”

Where the law is clear, no usage can control it. (Cro. Eliz. 85. Per Ld. Kenyon, in Matthews v. Griffeths, Peak. N. P. Cas. 202. Ex parte Aynsworth, 4 Ves. 678. Ord on Usury, 59, b. The King v. Major, 4 T. R. 750.) The statute of usury speaks of years and not of months. Interest is to be at the rate of seven per cent, per annum; that is, at the rate of seven per cent, for 365 days ; for a legal year is 365 days; the legal half of a year, 182 days; and the legal quarter, 91 days : the law paying no regard to the odd hours. (3 Dy. 345, a. The Bishop of Peterborough v. Catesby, Cro. Jac. 166.) The custom or usage of banks or individuals cannot shorten a year to 360 days ; but a different mode of calculating interest on notes payable at 60 *708 or 90 days, and notes.payable in 2.or 3.months, is establish e¿ an(j; practiced. (Vid, Tables in. Chitty.on Bills, last ed' 608, 9.)

I cannot, therefore, resist, the conclusion, that the note in this case was usurious, in consequence of interest having been calculated, and. taken, upon the principle that 90 days were the four th of a year.

Woodworth, J.

concurred, principally, on the ground that the note was usurious, Savage, Ch. J.

This is, an action of.assumpsit against

the defendants, as endorsers of. a promissory note, dated the 6th July, 1819, and drawn by Sturges. & Sherman.

The defence is, 1, That the noto is. void, having been discounted on a loan. of. money by a company who want the legal- power to do such an, act, 2, If, they have such power, that the note is usurious, and, therefore, void.

On the 2d. of. March, 1.810, an act... was .passed, to incorporate the firemen of the city of New York, as an insurance company. The corporation was created for the sole pur7 pose of insurance against fire, and marine insurance; and. they were prohibited from being, concerned in any trade or other business: provided that. they, might purchase United States stocks, or.any state stocks, by way of investing them capita}; or,might receive a transfer of such stocks for .the payment of shares or of any . debts due to them, either before, or after they commenced business, They had also power to sell and-. transfer these stocks.

By the act of, February 27th, 1818, it is recited that the old company had, been unfortunate and wished to wind up its concerns, and feat a new company were desirous to be incorporated. It was, therefore, enacted, that the business of the o}d company be closed, and their effects divided among the stockholders, after paying debts. The new company was then incorporated with the power to insure against lo.ss by fire, of houses, buildings and personal property ; to make all kinds.of.marine insurance, and to loan inoney on bpttomry, respondentia, or mortgage of - real estate, and dhattelsreal; and, generally, to do gnd.perform.all matters *709 and tilings relating to the said objects. They were also clothed, with all the powers of the old company: Provided, that nothing contained in the act should, in any way, ne construed to grant banking powers. The directors were, to manage the concerns of the old company, of which they were to keep separate accounts, and after payment of all debts, to distribute the overplus to the old subscribers and their representatives.

Such is the authority under which the directors acted: we will.next see what they have done.

The note in question, was given for two other notes, which were renewals of others. The transaction commenced as far back as September, 1817.; and was originally, a loan of money, by the old company, to Sturges & Sherman, for which notes were discounted at 7 per cent, payable at 4 months." Those notes were paid, by others; sometimes at 90 days, sometimes at 3, and sometimes at 4 months. They were all discounted by the company at 7 per cent., and the discount deducted in advance.

The secretary of the company testified, that his practice had been to cast interest considering 30 days the twelfth of a year; 60 days the sixth; and 90 days the fourth of a year. He charged half per cent, for 30'days; one per cent, for 60; one and a half for 90 days, and added to the product one-sixth, to make 7 per cent. The 3 days of grace he called one-tenth of a month. The plaintiffs knew this was his practice ; and such is the usual course in other companies, and the common mercantile custom.

A corporation is merely a political institution. It cap., have no other capacities than such as are necessary to carry into .effect the purposes for which it was established. (1 Kyd on Corporations, 70. 15 John. 383 .) It is a creature of the legislature, and can have no powers but such as are given to it by its creator, either at the time of its creation or subsequently, or such powers as are incidental to those granted. (1 Kyd on Corp. 13, introduction. 15 John. 383 .)

The act of 1810 created the company for the sole purpose of insurance against fire, and marine insurance. Surely the power of lending money has no necessary connection with *710 insurance, nor is in any way incidental to insuring. It is, np doubt, very convenient for the company to have theii funds productive, and in a situation whence they may be called in on short notice; yet this consideration does not give the power. But the act contains a direct prohibition. “ The corporation shall not be concerned in any trade or other business, except insurance, &c. Provided, that they may purchase and hold or sell stocks.” Here, then, is the mode pointed out in which they might employ their funds. It appears to me that the old company had no right to loan money, or discount notes, or transact any business except insurance and buying and selling stocks.

I will next inquire, what powers were granted by the act of 1818 ? By the third section of the act, the new corporation have authority to insure buildings and personal property against fire, and “ to make all kinds of marine insurance, and to loan money on bottomry, respondentia, or mortgage of real estate and chattels real.” Nothing is said about loaning money uponpersonalsecurity, like negotiable notes; but the proviso declares, that nothing in the act contained, shall in any way be construed to grant banking powers.

This act gives powers (not possessed by the old company) to loan money upon securities specified, and it contains a restriction intended to limit those additional powers, by declaring that the legislature does not grant banking powers.

What is the meaning of the terms banking powers, is next to be ascertained. In The Maine Bank v. Butts, ( 9 Mass. Rep. 54 ,) Sewall, Justice, says, “ that expression, (banking principles,) if it has any peculiar meaning, is an authority to deduct the interest at the commencement of loans, or to make loans upon discounts, instead of the ordinary forms of security for an accruing interest.” Again ; “ The principal attributes of a" bank are, the right to issue negotiable notes, discount notes, and. receive deposits.” (Per Spencer, J. 15 John. 390 .) Previous to the restraining acts, there was no power possessed by a bank, not also allowed to individuals and private associations. They could, in common, issue notes, discount notes and receive deposits ; the only difference was, that the former were not liable beyond their cor *711 porate property, while the latter were accountable in their persons, and to the full extent of their private estate. The first restraining act was passed in 1804. It had for its ohject the guaranteeing to banks a monopoly of the rights and privileges granted to them, which had been encroached upon, or infringed by private associations. This was reenacted in the revised laws of 1813 ; and in 1818, the legislature found it necessary to pass the act of April 21st of that year, (sess. 41, ch. 236,) which places individuals upon the same footing with private associations, with the same view to a monopoly, by the incorporated banking companies. The first of these acts prohibits the formation of any bank or fund unauthorized by law, “ for the purpose of issuing notes, receiving deposites, making discounts, or transacting any other business which incorporated banks may or do transact, by virtue of their respective acts of incorporation.” The second piohibits any person, association of persons, or body corporate, from keeping any office of deposite, for the pui pose of discounting promissory notes, or carrying on any kind of banking business or operations, which incorporated banks are authorized by law to carry on ; or to issue any bills or promissory notes, as private bankers, unless thereto specially authorized by law. Assuming, therefore, what, in my opinion, cannot be controverted, that banking powers consist in the right of issuing notes, making discounts and receiving deposites, and that the business which incorporated banks may do, by virtue of their acts of incorporation, is prohibited to all others unless specially authorized by law,—it follows, conclusively, that both the old and new company have done what they were not only not authorized by their charter to do, but what was absolutely prohibited by the restraining act. This act cannot be evaded by making the note payable to individuals. There was a loan made upon personal security: Notes were discounted by the plaintiffs. The act declares all such notes void. Without examining the question of usury, in my. opinion, the defendants must have judgment.

Judgment accordingly.

*712 Note. I ought to hdye mentioned- before,, that though. the two cases next preceding were argued at. May term, 1823, yet the counsel, for both "parties, understanding that, the question of usury, involved in,each, would. b,e again argued in the following case, which was then on th,e calendar, joined in requesting the Court to- postpose the.decision of. the two- former, till, the argument in the latter. should be heard. The Court were pleased to comply with, the request.. The following cause was argued at the last October term.; and. all. three remained, under advisement.to. th,e present term. I was, therefpre, the less minute.in giving the discussions of the learned .counsel upon the point of usury, in the two preceding cases; because I found -that I had a very full. sketch of’almost, every thing- which had been advanced upon this point, in the notes, which 1. had taken- of the last, argument.