Stuart v. President, Directors & Co. of the Mechanics' & Farmers' Bank

Spencer, Ch. J.

The grounds assumed by the appel-' lanl’s counsel for the reversal of the decree, are :

1. That the appellant, being surety only for the debt of .6,500 dollars due from G. S. to the respondents, and they hgving, without the appellant’s knowledge and consent, extended the time for the payment of the debt,, by a negotiation between them, whereby the. appellant is prejudiced, and exposed to the eventual loss of the debt, the appellant and the mortgage he gave, are discharged, and exonerated from the debt..

*505 2. That the loan made to G. S., on the 24th of March, 1819, of $6,500 by the respondents, was usurious and corrupt, and that, therefore, the bond and mortgage mentioned in the pleadings, and given as collateral security, are void,

3. That the loan, if not usurious, was an unconscionable transaction, and such as a Court of equity will not enforce.

I. The first point admits of little doubt or difficulty. It is an undeniable principle, that the decree of a Court of equity must be founded on some matter put in issue between the parties. The ‘examination of witnesses must be confined to facts asserted on the one side, and denied on the other, It is competent for a defendant to set up in his defence, by way of answer or plea, any matter which goes to defeat the plaintiff's claim, and if such fact be denied, and the defendant put to the proof thereof, by a general replication, the defendant must then support his defence by evidence. A Court of equity is as much bound to decide according to the allegations and proofs, as a Court of law. And if, in the examination of witnesses, facts come out which, had they been alleged, would furnish ground of relief, or defence, such facts must be disregarded, unless they are warranted by the allegations of the bill or answer. This doctrine was advanced, and fully, recognized by this Court, in James v. M‘Kernon, (6 Johns. Rep. 559, 560.) The contrary doctrine would be mischievous, as it might entrap, the parties, and entinely throw them off their guard. The interrogatories are framed with a view to the points in issue; and if witnesses, not confining themselves to the interrogatories, go beyond them, it could not be foreseen; and thus, facts that might have been controverted and disproved, had the party apprehended an attempt to prove them, come upon him by surprise. Should a Court of equity take cognizance of facts, thus improperly i? evidence, and found a decree on themf the most manifest injustice would result. The only safe rule is, to proceed on the allegations of the bill and answer, and on the matters in issue between the parties, and to discard every thing not fairly in issue.

Now, in this case, the answer does not allege, nor set up, that the extension of the credit to (?. S. was without the *506 knowledge, and against the consent of the appellant. It does not question that transaction, in any shape, or form. The hill states the renewal of the notes by G. S., with the appellant’s endorsement; yet no suggestion is made in the answer, that the appellant was uninformed of, or ignorant of (]ie extension of the credit to G. S. Without examining the proofs, my opinion clearly is, that the appellant cannot now draw in question the extension of the credit, as discharging him, admitting him to have' been a surety, and" admitting that he was prejudiced thereby, because, he has not taken that ground in his answer, and because by permitting him now to do so, would be inconsistent with the defence, and a total surprise on the respondents.

I do not mean to be understood as admitting, that the facts, could we take notice of them, malee out any defence on that point. On the contrary, I think, clearly, that they do not..

2. Upon the question of usury, it has, also, been objected, • that the answer is insufficient, in omitting to state the respondent’s knowledge of the irresponsibility of the Bank of Mar gara, and its inability to redeem its bills, and that they were depreciated. I consider the allegations sufficient, especially as the answer was not excepted to ; and no application has been made in the Court below to suppress the evidence, nor any objection taken, either to the answer, or the proofs in that Court. , The question has been discussed in the Court below on that ground ; and it would be too rigid in the Court of Appeals, to refuse entertaining a question, the facts in respect to which, had been examined into in the Court of Chancery, without objection there, because, there were technical omissions in the pleadings.

The material fadts on which this question depends, are, that G. S. was indebted to the bank prior to the 2.3d. of filarch, 18.19, in the sum of 2,753 dollars and 64 cents, upon several notes, of some of which he was drawer, -and pf others endorser. He made application to some of the.directors, a few days before, that period, for a loan of 5,000 dollars, upon the ordinary terms, and apprehending, from what passed, that he could' not obtain such loan, he made a *507 written proposal for a loan of 2,500 dollars, in current money, and for a loan of 5,000 dollars, in the bills of the Niagara bank, offering to secure what he then owed the respondents, together with these additional loans, by a mortgage, to be executed by the appellant on the Janesville property, and, also, by his and the appellant’s bond.

The bank accepted his terms, with a modification, reducing the loan proposed of 2,500 dollars, in current money, to 1,500 dollars. To this G. S. acceded, and, thereupon, the loan was effected, and the proposed security given.

It appears, that on the 23d of March, 1819, when the loan was completed, the credit of the Bank of Niagara was impaired, to a certain extent. That bank had, in the month of January or February, 1819, refused to receive their bills, arid redeem them, with specie, or in bills of the banks of New-York or Albany; and on the 27th of February, 1819, the Bank of Niagara, being indebted to the respondents in about 20,000 dollars, secured the payment of the debt by notes, bonds, and mortgages, held by the Bank of Niagara, and by them assigned to the respondents; and as a further security, the Bank of Niagara gave to the respondents their bond and mortgage for the amount of the debt; so that, as it appears from the testimony of T. W. Olcott, the cashier of the respondents, and I. Leake, the then cashier of the Bank of Niagara, the securities were an ample guaranty against any loss, by the' respondents, on account of that/ debt.

The bills of the Bank of Niagara, lent by the respondents to G. S., were received by them of I. <¡>. Leake, about the 24th of February, 1819. They were deposited with the respondents, as collateral and further security, for the debt due them from the Bank of Niagara. The amount deposited was 10,000 dollars. They were thus deposited, with authority tp lend or exchange them, at par, and on condition of there being passed to the credit of -the Banh of Niagara, on account of the debt, whenever they should be disposed of by the respondents ; and it appears, by the testimony of T. W. Olcott, that the sum of 5,000 dollars, the amount lent to G. B., was, in consequence of that loan, credited to the Bank of Niagara, by *508 the respondents, in their account with that bank, on the 29th of March, 1819, and was, at the same time, endorsed on the bond given by the Bank of Niagara to the respondents. This credit was given on the day G. S. received from the respondents the Niagara bills. It appears, from the testimony of Olcott, that when G. S. applied for the loan of 1,500 dollars, and 5,000 dollars, in Niagara-.bills, he assigned as a reason, that he owed the Bank of Niagara 1,000 dollars, which he could pay in the bills of that bank, and that the residue he could disburse in the vicinity - of Buffalo, in the purchase of provision, fuel, and other articles, for the steam boat.

There is no evidence in the cause, of the value of the bills of the Bank of Niagara, in the city of Albany, or in this part of the state, on the 23d of March, 1819, or at any time about that period, except from mere hearsay.

Several merchants, and others, residing in Buffalo, have been examined. Some of them depose, thát the merchants there received Niagara bills, in payment of debts, except where they were confident of getting better money, if they required it; and that these bills were generally taken by merchants there for goods, at par. Others considered the bank as then insolvent, and refused to take their bills. And, it seems, that by subsequent events, the opinion is now- universal, that the bank was then insolvent. We have no direct evidence what loss, or whether any has been sustained by G. S., on the bills he received. These are the material facts on which we are now called upon to pronounce whether the loan to G. S. was usurious or not.

In this,.as in every other case, where the question of usury is raised, all the facts and circumstances are to be taken into view ; and as Ch. J. Eyre said, in Hammett v. Yea, it is to be analyzed and reduced to all the parts of which it is composed, and to all the conclusions of fact which fairly result from the whole of the evidence; and when it is so examined, the question is, whether this was a loan of money contrary to the statute; whether the respondents, under the device of lending part in the bills of their own bank, and part in the bills of. the Bank of Niagara, have," ineffect, intentionally and knowingly, taken more" than at the rate Of *509 six per cent, interest, for the loan and forbearance of money, I say, knowingly and intentionally ; for it cannot be pretended, that unless the respondents knew, that the bills of the •Niagara bank were depreciated, and not intrinsically worth their nominal amount, and intentionally put them off at their nominal value, with such knowledge, it would be a case of _ , , , , r i 11 . , usury. There can be no doubt, and 1 shall not stop to examine the rmmerouscases to the point, that if, in a negotiation for a loan of money, the lender impose on the borrower, goods, in part or in whole, at a higher value than they are worth, such device is within the statute, and usurious. The same consequence follows, if the lender impose upon the borrower, as part of the condition of the loan, the. depreciated paper either of an individual or bank, at a higher value than it is worth. When I say impose, I think there is a distinction between a voluntary and spontaneous offer, on the part of the borrower, to take money in part, and property in part, as a condition of the loan, and the imposition of such terms by the lender, as matter of evidence, to show the real nature of the transaction, and the intent of the parties. I am not to be understood, that the consent of the borrower to pay a higher rate of interest than the law allows, would have the least effect to render the transaction legal; yet, where goods, or the notes of a hank, or a third person, constitute part of the loan, and the value of such goods or notes was uncertain and fluctuating, a voluntary and spontaneous proposition to receive on a loan, part money, and part in such goods or notes, made by a person whose credit stood well, would not seem to be usurious-.

The appellant’s counsel rely oh the testimony of G. S., to prove, that the loan of 6,500 dollars, made to him by the respondents, on the 23d of March, 1819, was usurious; and they rely, as a strong fact, in the transaction, on the circumstance, that he applied to one or more of the directors, with a view to negotiate a loan in the ordinary way, for 5,000‘dollars ; and that during the negotiation, he became satisfied, that he could not obtain in current bank bills to the amount he desired, and then agreed, if the respondents would lend him 2,500 dollars, in current bank *510 bills, be' would receive 5,000 dollars in bills of the Bank of Niagara, and procure a mortgage from the appellant, to executed on the Jamesville property, as a collateral security. It has been urged, that this furnishes satisfactory proof, both of the necessities of G, S., and of the intention t*le respondents to take advantage of his situation, by putting upon him the 5,000 dollars in Niagara bills, in consequence of the accommodation, which the lean of 1,500 dollars, in current money, afforded him. It has, also, been urged, that G. S.’s proposition was for a loan of 2,500 dollars, in current money; and that that part of the loan was reduced by the respondents to 1,500 dollars, when the other part of the proposition, the loan of 5,000 dollars, in bills of the Niagara bank, was acceded to; thus showing, that the respondents themselves made a. material distinction between lending in their own notes, and those of the Bank of Niagara ; and the further fact is relied on, that the loan of 5,000 dollars was for four months, without interest.

Now, by referring to the evidence of G. £>., it will be-seen, that he does not attribute the conduct of the respondents, in being willing to lend only 1,500 dollars, fn current bills, whilst they agreed to his proposal to lend the 5,000 dollars, in the bills of the Bank of Niagara, either to his want of credit, or to. a disposition to oppress and take advantage of him, or to the circumstance, that he was then indebted to the respondents, or to the more important fáct, that the bills of the Niagara bank were not wo^th their nominal amount. He is altogether silent upon thése material and important points. It is impossible for this Court to infer any thing prejudicial to the respondents, from the mere fact, that they were unwilling to lend more than 1,500 dollars, in current money, and were willing to lend 5,000 dollars in the bills of the Niagara bank. Persons conversant with banks, must know, that there are periods when-prudence dictates a forbearance to lend their funds. But there was a good reason, without referring it to a disposition to commit usury, why the respondents should be willing to lend the bills of the Bank of Niagara, in preference to their own bills. The Bank of Niagara was indebted to the respondents in upwards of 20,000 dollars, and on the *511 opposition, that the hank was solvent, hut had declined redeeming their paper, it was the dictate .of 'prudence to render themselves even more secure, by a compliance with the proposition made by G. S.

The deposition of G. S., in no part of it, warrants the idea, that either he, or the respondents, did believe, or had any reason to believe, that the Bank of Niagara was then insolvent, or that their insolvency was suspected. On the contrary, it appears, from the testimony of Thomas W. 01-cott, that G. S. assigned as a reason for applying for the bills of the Bank of Niagara, as part of the loan, that he owed that bank a debt of 1.000 dollars, which he could pay in these bills, and the residue he could disburse in the vicinity of Buffalo, in the purchase of provision, fuel, and other articles, for the use of the steamboat.

It is a fact, also, worthy of consideration, that the appellant, to whom, G. S. states he made known his application, and who was to receive, and did receive, 4,000 dollars of these bills, (the 1,000 dollars having been paid and received in discharge of G. S.’s nóte to the Bank of Niagara,) should be willing, he having, as it is alleged, no interest in the money, but being merely a surety, to mortgage his property, which was deemed an adequate security, and to unite with G. S., in his bond for this very loan, if he had then considered it either a usurious, or a hard and oppressive loan, as regards G. S.

I have already observed, that there is no evidence what the notes of the Bank of Niagara were worth in the city of Albany, when the loan was contracted. It is not shown, that they were under par here; and it is not shown, that the respondents had not good reasons to believe that the bank was perfectly solvent. It is true, that the respondents knew that the negotiations for a loan in New-York had failed; but /. Q. Leake, who gave that information, declares, it was still hoped the Bank of Niagara would resume its business; and I cannot find in this case, evidence warranting the Court in saying, that the respondents knew, or had reason to believe, when this loan was effected, that the Bank of Niagara was insolvent because it had refused to *512 redeem its bills in the winter preceding, or because their, negotiation for a loan had failed. A bank may be quite s0^vent> notwithstanding it fails to redeem its bills. This we know to have happened in several instances, where ability and solvency of the banks have been, after-wards, fully established. A man, says Dallas, J. (5 Taunt. R ep. 548.) may be in difficulties, and not slop payment; lie may stop payment and not be insolvent, and he may be insolvent, and not a bankrupt.

There is a fact in the case which appears to me to be a strong manifestation of the purity of this loan. I have already stated, that the evidence clearly established the'fact, that the respondents had security from the Bank of Niagara, for the debt due to them from that Bank They had, therefore, no inducement whatever to lend the bills of the Niagara bank, at par, when they were under par ; or, in other words, the respondents had no motive to defraud G. S., by inducing him to take these bills at their nomi.nal value, when they were depreciated; for if any thing was gained on the one hand, or lost on the other, by the negotiation, the gain would not accrue to the respondents.

It has been very much relied on, that G. S> was indebted to the respondents when,this loan was effected. He was so; but it does not appear, that he was pressed for the debt, or that his credit was impaired. His subsequent insolvency, soon after this transaction, and his deep defalcation, for aught that appears, was unknown and unexpected by the respondents.

Judging of this case from the facts before us, my conclusion is, that the loan was not usurious; but, on the contrary, that the transaction was fair and upright, neither contaminated with usury, nor marked with oppression or fraud. In my judgment, therefore, the decree ought to be affirmed.

April 3. This being the opinion of the rest of the Court, (Huntington, Senator, dissenting,) it was, thereupon, ordered, adjudged, and decreed, that the decree of the Court of Chancery be in all things affirmed, with costs, &c.

Decree of affirmance.-