Penrose v. Canton National Bank

Bond, C. J., delivered the opinion of the Court. This appeal is from ,a judgment on a verdict of a jury against the appellant for -the amount of principal and interest on two promissory notes which he had indorsed. On ■one the maker w’a.s the Springdale Building and Savings' Association, of which the appellant was president; and the other had as maker H. Walter G-anster, a director and attorney for the association. The latter note was secured, according to the testimony of Ganster, by a note of the .association held as collateral.

Both loams were for the association. Each of the notes sued on was the last of a series of renewed notes. The defenses urged were want of consideration, a collateral agreement that the bank should be paid from other securities, and that this indorser should not be liable on his indorsement, and usury. The defense of want of consideration at the time of indorsing is based upon the fact that the indorsements were for accommodation only, and that they were made after the notes had been discounted.

The testimony agrees that both notes were indorsed for accommodation of the makers. The original association note was indorsed by the defendant shortly after it came into the hands of the bank, but whether the indorsement was in pursuance of a previous un derstand ²⁰⁴ ing and arrangement is disputed. See authorities collected in 44 L. R. A. (N. S.), 485 and L. R. A. 1918 E. 580.

The original Ganster note seems not to have been indorsed at all by tbe defendant. It is undisputed, however, that the indorsements were required by tbe bank upon tbe renewals of both, notes, and the defendant himself arranged the renewals with his name on the paper. Therefore, even if consideration might have been found lacking to the original indorsements, the indorsements on the renewal notes would seem to have been free from that defect. Nalitzky v. Wil liams, 237 Fed. 802 .

The contention of a collateral agreement, is based on testimony by the defendant that, upon his hesitating to indorse the notes for fear of having to p>ay at maturity, the cashier of the bank said, “Mr. Penrose, that is a condition that could not arise, because there is collateral here, and we would •give you all the time you could possibly want m liquidate tbe collateral, and it would not be * * * there- would be no pressure brought upon yon to- make payment except out of collateral.” And, according -to this testimony, the cashier repeated, upon the renewals of the notes, -his assurance's that the defendant- would never be pressed to- pay the money personally. The substance of it was, says the- appellant, that he was to be only morally, and not legally, liable. The only other testimony of conversation on this subject to be considered, on behalf of the appellant was that of a witness, Mulligan, produced by him; but bis testimony retails only a conversation had a week before- suit was brought, and shows no stipulations of any sort. It is stated in the record and by counsel in tbe briefs, that objection was made- to the admission of testimony offered to- prove the collateral agreement, and that it was received subject to exception, but the record does not contain the formal notes o-f the objections <and rulings for the- appellee-.

The testimony was not admissible, for its purpose was to destroy and nullify the written agreement. Of a similar defense the Supreme Oourt of Pennsylvania in a recent case (First Nat. Bank v. Lawall, 280 Pa. 407 ), ²⁰⁵ said: “He does not insist there was any fraud, accident or mistake in its execution, that it was improperly used, or a condition annexed or any fund in the hands of the holder applicable to its payment, but only that he was not to be held liable, since the collateral was believed to- be sufficient at the time of signing. The effect of the evidence proposed in substantiation o-f the defense would not be to vary the written instrument, but nullify and destroy it, assuming” that the facts alleged can be shown — and this is not-permissible.” McSherry v. Brooks, 46 Md. 103, 118 ; Black v. Bank of Westminster, 96 Md. 399, 416 .

In the evidence to support the pleas of usury there is no dispute of importance in the ease. ’Witne-ss-es on both sides testified in general terms that the borrowers were required to maintain a balance on deposit or to- discount notes in addition to those for money actually loaned, and then to- pay the additional notes at -once by cheeks; and this testimony might be sufficient to support a finding that -such “balance” notes were taken on account of the two loans. The record of the bank when produced, however, showed only four balance- notes ■taken, and all' these taken against the Springdale Association loan; and counsel for -both parties have argued the case on the assumption that- the balance notes were -so taken on account of -the association loan only. We feel constrained to accept this interpretation and take this to be the case presented for our consideration. In view of the fact that both loans were in reality made to the association, this treatment -of the balance notes is understandable.

Three -of the notes shown by the record were for $5,000 each, for four months periods, and the last was for $10,000 for five months. The total of extra interest collected in this way was $566.18, or over four per cent, on the total of t-he -amounts loaned for the periods specified. And as the notes for -the actual loans were discounted at six per cent., the additional charge was usurious under the law of this State to the extent that it applies. Ea st River Bank v. Hoyt, 32 N. Y. 119 ; Bank v. Wysong & Miles Co., 177 N. C. 380 , and note 12 A. L. R. 1422. ²⁰⁶ The federal law which governs interest chargeable by national banks (sections 5197 and 5198, U. S.' Rev. Stat.) provides that a bank may charge the rate of interest fixed by the laws of the State where the bank is located, and that where those laws fix no rate, then to charge seven per cent.

The charge of a greater rate of interest is, by the terms of the statute, made to involve forfeiture of all interest not paid, or the recovery of twice the amount of interest paid by the person who paid it or by his legal representatives. And in a suit against an indorser the defendant may by virtue of this provision be relieved of all interest up to the time of suit, when excessive interest has been charged for the loan, either originally or on renewal. Barnet v. Muncie Nat. Bank, 98 U. S. 555 ; Brown v. Marion Nat.

Bank, 169 U. S. 416 ; Citizens’ Nat. Bank v. Donnell, 195 U. S. 369 ; Bank v. Wysong & Miles Co., supra. As a result, there could be no recovery of interest oh the association loan in this case— unless defenses advanced by the bank against the pleas of usury should be valid. 'The first defense to the charge of usury, advanced by demurrer to the pleas, is that the'pleas failed to comply with the requirement of article 49, section 5, of the Code, that any such plea shall state the sum of money lent or advanced with the time at which tire same was so lent or advanced. The pleas here do state specifically the amounts and dates of the origin'al loans, and we do not see the ground of the objection, unless it should be in the fact that the pleas do not give the details of the' renewal notes actually sued on, in addition to the details of the original loans.

But the statute does not require that; it requires only the amounts and dates of the loans of the money, and these facts are given in the pleas. The pleas are, therefore, sufficient, and the demurrers .to them were properly overruled. Murphy v. Stubblefield, 133 Md. 23 . Another defense to the charge of usury is that the transaction is governed by the federal law just stated, - and that under that law the indorser who did not pay excessive interest c'annot recover the penalty of twice the amount of in ²⁰⁷ terest charged either by original suit or by way -of set off in a suit against him.

That is true so far as it goes, but, as is shown by the decisions last cited, an indorser sned may have the benefit of the provision for the forfeiture of interest not paid, so that no interest before suit may he recovered from him, which is all the appellant has claimed in his argument in this Court, although a prayer submitted by him at the trial claimed more. The allowance of interest under the instructions given in the appellee’s third prayer is affected by the present contention that él unpéd interest on the loan has been forfeited. But a third defense to the charge of usury on the Springdée Association’s loan is that by the Maryland Acts of 1916, now codified in art. 23, section 10OA of the Code, the defense of usury is no longer available in a suit on a corporation’s note. The words of the statute are that “no corporation shall hereafter interpose the 'defense of usury in any action at law or in equity.” It appears to he a literé copy of the New York statute adopted iu 1850, and later adopted in Illinois and Virginia, and, in .somewhat different words, in New Jersey.

Except in Illinois, -the provision, while procedural in form, has been held to intend that usury shoéd not be a defense to corporation paper. Union Estates Co. v. Adlon Construction Co., 221 N. Y. 183 ; Salvin v. Myles Realty Co., 227 N. Y. 51 ; Rosa v. Butterfield, 33 N. Y. 665 ; Brownell v. Freese, 35 N. J. L. 285; Danville v. Pace, 25 Gratt. (Va.) 1; 6 A. L. R. 581, 586; 14 Ann. Cas. 114; Union Nat. Bank v. Louisville N. A. & C. Ry.

Co., 145 Ill. 208 ; Stack v. Detour Lumber Co., 151 Mich. 21 . And as a consequence of this construction an indorser, even an accommodation indorser, as well as the Corporation maker, has been held barred from making this a defense. Speaking of an accommodation indorser on such- a note, the Court of Appeals of New York, in Stewart v. Bramhall, 74 N. Y. 85 , said: “As such he must abide by the condition of his principé and has no separate standing in respect to the defense of usury.” And see Rosa v. Butterfield, supra, and the other ²⁰⁸ cases cited. The Illinois courts, as will be seen by reference to the case of Union Nat.

Bank v. Louisville N. H. & C. Ry. Co., supra, view the statutes as rendering illegal any charge of interest above the rate fixed, even for corporation notes, although the defense cannot be interposed on these notes. We have found little authority directly on the question of the applicability of this statute to loans by national 'banks. In two cases, In re Wild, 11 Blatchf. 243 , and Bramhall v. Atlantic Nat.

Bank, 36 N. J. L. 243, 248, it was held that the abolition of the defense on a corporation note did not relieve a national bank from forfeiture of interest, or the .penalty, for exceeding the limit of seven per cent, specified in .the federal law. Those courts considered the legal situation to be as if the state laws had omitted to fix .any rate for such loans within the meaning of the federal law, so- that the seven per cent, limit specified in the latter law for States- in which the laws have not fixed a rate would apply. But it seems to- us that, in view of the fact that the obvious purpose of the state statute is to leave lenders and corporate borrowers free to agree upon any rate of interest above the regular limit, the construction of the cases of In re Wild and Bramhall v Atlantic Nat. Bank, supra, is inconsistent with the purpose of the federal l'aw, declared in many decisions of the Supreme Court (Tiffany v. Nat.

Bank of Missouri, 18 Wall. 409 ), to put national banks in a position of equality with state institutions for dealing in loans-. Eollowing out that purpose, it has generally been held in later eases- that in those states in which statutes permit parties to loans to agree upon interest beyond the regular limits-, national banks must be held permitted