This diversity suit, while appearing to be a run-o^-the-mine suit on a promissory note, is steeped with intriguing and unique questions of vast importance to the lending institutions of this state. The real problem is usury, an ancient one, and the solution is unexpectedly difficult under Louisiana law. The tale, though, is a remarkably familiar one.
On April 6, 1966, Sam J. Recile and Wilson P. Abraham endorsed a negotiable promissory note in the face amount of $4,200,000, which was executed that same day by Bourbon Kings Hotel Corporation, as maker, payable to the order of The Meadow Brook National Bank (now The National Bank of North America) in 180 monthly installments of $35,154 on the first day of each month commencing on June 1, 1966, except that the final payment of the entire indebtedness, if not sooner paid, .was due and payable on May 1, 1981. The face amount of the note included a 5% discount, the Bank advancing only $3,990,-000. The note provided for 8% interest on the face amount of the note from date until maturity, and 8% interest on all matured but unpaid sums. The note contained a typical acceleration clause and fixed attorneys’ fees at 10% in the event resort to attorneys for collection was necessary. A first mortgage on the Bourbon Orleans Hotel in New Orleans secured the note.
The maker was surprisingly quick to default, failing to make the second payment on July 1, 1966. Motivated by its own selfish interests, the second mortgagee intervened and made certain payments on the first mortgage to stave off the Bank’s threatened foreclosure. This burden, obviously onerous, soon broke the second mortgagee’s spirit, and the monthly installment due on December 1, 1966, was never paid nor were any monthly installments paid thereafter. The plaintiff Bank, payee and holder of the note, then exercised its option under the acceleration clause and demanded payment of the entire indebtedness. Meadow Brook National Bank then instituted this suit seeking to recover against the endorsers on the note, Recile *66 and Abraham. 1 Subsequently, Recile was adjudicated a bankrupt by a judgment of January 12, 1968, in proceedings before this Court under Chapter XII of the Bankruptcy Act entitled “In the Matter of Sam James Recile, Debtor, In Proceedings for a Real Property Arrangement,” and numbered Bankruptcy No. 67-702. A myriad of legal issues emerged from these simple facts.
A. Stay of Suit as to Recile
On the morning of the trial, a motion was filed on behalf of defendant Recile suggesting that he was an improper party defendant and requesting that the suit be stayed as to him because he had been adjudged a bankrupt and the bankruptcy proceedings were still pending. We took the motion under advisement and proceeded with the trial. We now deny the motion.
Section 11(b) of the Bankruptcy Act, 11 U.S.C. § 29(b), provides:
“The court may order the receiver or trustee to enter his appearance and defend any pending suit against the bankrupt.”
The defendant Recile requests us to substitute the bankruptcy trustee as defendant in this suit. We have no power to do so. The “court” referred to in § 11(b) is the bankruptcy court which has the exclusive power to- order the trustee to defend a suit such as this. Rhodes v. Elliston,
The aspect of the motion requesting a stay is governed by § 11(a) of the Bankruptcy Act, 11 U.S.C. § 29(a), which provides in pertinent part:
“A suit which is founded upon a claim from which a discharge would be a release, and which is pending against a person at the time of the filing of a petition by or against him, shall be stayed until an adjudication or the dismissal of the petition; if such person is adjudged a bankrupt, such action may be further stayed until the question of his discharge is determined by the court after a hearing * *
Collier states the purpose of this section is primarily for the benefit of the bank
*67
rupt to avoid
being
harassed in two courts at the same time with regard to the same debt. 1 Collier on Bankruptcy H 11.02 (14th ed.). Once a person is adjudged a bankrupt as Recile was, a motion for a stay is directed to the discretion of the court. 1 Collier on Bankruptcy H 11.06 (14th ed.). The exercise of this discretion is governed by a consideration of the equities involved. The very lateness of the motion, coming on the day of the trial, cast the equities against the defendant Recile. The harassment, if any, certainly could not have been very great if it did not prompt Recile to file the motion sooner. The trial itself took only an hour and certainly could not have constituted harassment in itself. Moreover, since this suit was filed against Recile
and
Abraham, the trial had to proceed even if it were stayed against Recile. A stay would thus only necessitate a duplication of effort, time, and expense by the plaintiff and the courts when the claim against Recile was presented in the bankruptcy proceedings. By denying the stay, we avoid this needless waste under circumstances where no real harassment of which the defendant can complain exists. We are fully aware that a judgment
in personam
against the bankrupt is not absolutely
binding
upon the trustee in bankruptcy as to the validity of the claim when, as here, the trustee is not a party to the suit and has not been directed by the bankruptcy court to defend the suit. Coleman v.
Alcock, 272
F.2d
618
(5th Cir. 1959); Rhodes v. Elliston,
B. Character of Defendants’ Liability
The parties being unable to agree as to the character of the defendants’ liability on the note, and this having a direct bearing on the other issues raised herein, we think it important to determine this question before journeying further. The defendants claim to be merely accommodation endorsers, whereas the plaintiff insists they are not accommodation endorsers but rather are liable
in solido
with the maker of the note. Relying on § 29 of the Negotiable Instruments Law, La.Stat.Ann. 7:29, and Gaspard v. Lachney,
As far as this case is concerned, it is immaterial whether the defendants are classified as accommodation endorsers or plain endorsers because, regardless of their classification, they are liable
in solido
2
with the maker of the note. On its face, the note contains a promise to pay by the Bourbon Kings Hotel Corporation. The note does not contain a promise to pay by anyone else. The defendants signed the back of the
*68
note. By virtue of §§ 63 and 17(6) of the NIL, La.Stat.Ann. 7:63, 17(6), it is clear that the defendants are endorsers and not comakers of the note. The liability of endorsers, whether accommodation endorsers or not, is secondary; it is conditioned upon presentment for payment, dishonor, and notice of dishonor. The endorsers, however, may waive these conditions, and when they do so, they become primarily liable on the note insofar as the holder is concerned even though they are entitled to recourse against the maker if they are forced to pay the note. Atkins v. Dixie Fair,
These principles are not altered merely because one may be only an accommodation endorser. As pointed out by the Louisiana Supreme Court in William D. Seymour & Co. v. Castell,
The note before us contains the following clause:
“All parties hereto, whether maker, endorsers, guarantors, or sureties, severally waive presentment for payment, demand, notice of nonpayment, protest and all pleas of division and discussion, and agree that the payment hereof may be extended from time to time, one or more times, without notice, hereby binding themselves in solido, unconditionally and as original promisors for the payment hereof, in principal, interest, costs and attorney’s fees.”
Thus, not only did the defendants render themselves primarily liable on the note by waiving the conditions limiting them to secondary liability insofar as the holder is concerned, but they also expressly obligated themselves
in solido
with the maker of the note. Bonart v. Rabito,
C. Release from Liability
Defendant Abraham contends that he was released from liability on the note due to an unauthorized extension of time granted by the plaintiff. The facts supporting this defense are simple. The date the note was executed, April 6,1966, Mr. Douglas H. Ball, a senior vice president of the plaintiff bank, wrote a letter to the second mortgagee of the Bourbon Orleans Hotel in which he agreed that the Bank would give the second mortgagee twenty days’ notice prior to instituting any foreclosure action in case of default on the first mortgage note. 3 Abraham contends that this binding agreement extended the maturity of the note, and since he had no knowledge of it, did not consent to it, and objected to it upon learning about it, it released him from liability on the note.
Abraham relies upon § 120 of the NIL, La.Stat.Ann. 7:120. That section is inapplicable by virtue of the fact that it applies only to persons secondarily liable to the holder of the note, and the defendant Abraham is primarily liable to the holder. Continental Bk. & Tr. Co. v. Bouterie,
Essentially, the heart of Abraham’s argument is that his rights of subrogation were prejudiced by the Bank’s failure to enforce its security rights against the hotel immediately and by granting the second mortgagee the opportunity to cure the default. This enabled the second mortgagee to keep the first mortgage *70 current and to institute foreclosure proceedings on its own mortgage which was in default. This resulted in prejudice to him, Abraham argues, because it would force him to bid the price of the second mortgage at the judicial sale, as well as the price of the first mortgage, in order to maintain his right of subrogation, whereas if the first mortgagee foreclosed immediately upon default, Abraham would only have to bid the price of the first mortgage to protect his right of subrogation to the security.
It is, of course, clear that the holder of a negotiable promissory note is not required to proceed against the defaulting maker or the security on the note prior to instituting suit against an endorser who is primarily liable on the note. Atkins v. Dixie Fair Co.,
Mere delay by the holder in enforcing his security rights does not, without more, release the endorser because, standing alone, it is not prejudicial. House of Loans, Inc. v. Matassa Motor Co.,
D. Usury
1. Purchase or loan?
The most complex defense to this suit is that the note was usurious. The plaintiff attempts to cut this defense short by contending that it did not make a loan to the Bourbon Kings Hotel Corporation, but rather it merely purchased paper already in existence. If, as plaintiff contends, the transaction was a
sale
of an already existing corporate obligation rather than a
loan
to the corporation, the usury laws would not be applicable for usury is not considered applicable to the well-recognized financial practice of commercial discounting. Lafayette Royale Apts., Inc. v. Meadow Brook National Bank,
The facts presented to us on this issue are scant. A copy of the note was introduced and reflects that it was payable to the order of Meadow Brook National Bank. We fully realize that the burden of proving usury rests upon the defendant; however, we think the introduction of a note payable to the plaintiff is prima facie evidence that the Bank loaned the money to Bourbon Kings Hotel Corporation. The only countervailing evidence introduced was a copy of a commitment tetter, dated March 26, 1964, from plaintiff to American Mortgage Corporation by the terms of which plaintiff agreed to purchase a first mortgage loan on the completed hotel at 95% of par. We do not think the mere introduction of a commitment tetter written some two years prior to the date of the note is sufficient, without more, to overcome the prima facie case established by the introduction of the note payable to the order of the plaintiff. This is certainly not the case of Lafayette Royate Apts., Inc. v. Meadow Brook National Bank, supra, in which the borrower executed a note payable to the order of bearer 5 in order to obtain construction financing from an interim financier who sold the note to the bank, pursuant to a previously issued commitment tetter, when the construction was completed. If the evidence in this case established the same or similar facts as existed in Lafayette Royale Apts., we would have no hesitancy in reaching the same result as that court did. However, from *72 the evidence presented in this case, we can only conclude that the bank refinanced the interim financing and thus made a loan to the Bourbon Kings Hotel Corporation rather than a purchase of already existing paper. Nor is this case similar to the Fenwick Sanitarium case, heavily relied upon by the plaintiff, where all the parties involved and present treated the transaction as a sale rather than a loan.
2. Was the note usurious?
At the outset we are confronted with the question of whether state or federal law governs this question. The plaintiff, a national bank, is subject to the provisions of the National Banking Act, 12 U.S.C. § 21 et seq. Section 85 of Title 12 of the United States Code establishes the rates of interest which national banks may charge. It provides in pertinent part:
“Any association may take, receive, reserve, and charge on any loan or discount made, or upon any notes, bills of exchange, or other evidences of debt, interest at the rate allowed by the laws of the State, Territory, or District Where the bank is located, or at a rate of 1 per centum in excess of the discount rate on ninety-day commercial paper in effect at the Federal reserve bank in the Federal reserve district where the bank is located, whichever may be the greater, and no more, except that where by the laws of any State a different rate is limited for banks organized under State laws, the rate so limited shall be allowed for associations organized or existing in any such State under this chapter. When no rate is fixed by the laws of the State, or Territory, or District, the bank may take, receive, reserve, or charge a rate not exceeding 7 per centum, or 1 per centum in excess of the discount rate on ninety-day commercial paper in effect at the Federal reserve bank in the Federal reserve district where the bank is located, whichever may be the greater, and such interest may be taken in advance, reckoning the days for which the note, bill, or other evidence of debt has to run.”
The plaintiff bank is located in the State of New York. Thus, if § 85 is applicable to this case, we must refer to New York law to determine the maximum interest rate. The loan, however, was made in Louisiana. The issue is whether 12 U.S.C. § 85 is applicable in determining the amount of interest a national bank located in New York may charge on a loan made in Louisiana. Surprisingly, this very important issue is apparently novel.
The Supreme Court has stated that the National Banking Act constitutes “by itself a complete system for the establishment and government of national banks.” Cook County National Bank v. United States,
“This Court has often pointed out that national banks are subject to state laws, unless those laws infringe the national banking laws or impose an undue burden on the performance of the banks’ functions.” At 248,64 S.Ct. at 607 .
McClellan v. Chipman,
“Two propositions have been long since settled by the decisions of this court:
“First. National banks are ‘subject to the laws of the State, and are governed in their daily course of business far more by the laws of the State than of the nation. All their contracts are governed and construed by state laws. Their acquisition and transfer of property, their right to collect their debts, and their liability to be sued for debts, are all based on state law. It is only when the state law incapacitates the banks from discharging their duties *73 to the government that it becomes unconstitutional.’ National Bank v. Commonwealth, 9 Wall. [353] 362 [19 L.Ed. 701 ],
“Second. ‘National banks are instrumentalities of the Federal government created for a public purpose, and as such necessarily subject to the paramount authority of the United States. It follows that an attempt by a State to define their duties, or control the conduct of their affairs, is absolutely void, whenever such attempted exercise of authority expressly conflicts with the laws of the United States, and either frustrates the purpose of the national legislation, or impairs the efficiencies of these agencies of the Federal government to discharge the duties for the performance of which they were created.’ Davis v. Elmira Savings Bank,161 U.S. 275 , 283 [16 S.Ct. 502 ,40 L.Ed. 700 ].
“These two propositions, which are distinct, yet harmonious, practically contain a rule and an exception, the rule being the operation of general state laws upon the dealings and contracts of national banks, the exception being the cessation of the operation of such laws whenever they expressly conflict with the laws of the United States or frustrate the purpose for which the national banks were created, or impair their efficiency to discharge the duties imposed upon them by the law of the United States.” At 356-357,17 S.Ct. at 87 .
These principles have been reiterated by the Supreme Court in numerous decisions. Lewis v. Fidelity & Deposit Co.,
Under these principles if 12 U.S.C. § 85 is applicable, it leaves no room for the operation of the laws of this state as to the interest rate. 12 U.S.C. § 85 would fix the rate of interest the bank may charge (by reference to New York law) and the laws of this state as to the interest rate would then be in conflict with the act of Congress, and therefore would have no force. Thus, in our opinion, it is not proper to determine whether the note in question satisfies both the National Banking Act and the Louisiana laws relating to usury, for if Congress has fixed an applicable rate of interest, the state law defers to that legislation which is paramount. There is simply no room for the operation of both state and federal law in the same sphere. The federal law governs and is exclusive. The question, though, is whether 12 U.S.C. § 85 is applicable to this case. We hold that it is not applicable and that Louisiana law governs.
In effect, 12 U.S.C. § 85 provides that a national bank may charge interest at the rate allowed by the laws of the state where the bank is located. The question is whether this was meant to fix the rate of interest on
all
loans made by the bank or merely those loans
*74
made in that state. Admittedly, the above quoted language would seem to include all loans made by the bank and not solely those made in the state where the bank is located. However, in interpreting an act of Congress, we must attempt to implement the congressional purpose in enacting the statute. In fact, in interpreting § 85 the courts have strenuously endeavored to effectuate its purpose despite the fact that the language of that section may not clearly and readily yield the result intended by Congress. See, for example, Hiatt v. San Francisco National Bank,
It might be suggested that had Congress intended this result, it could have readily been more explicit. The statute, however, was passed in 1864, over one hundred years ago, and we cannot believe that Congress foresaw, at that time, the financial fluidity which exists today. At that time it was undoubtedly most unusual for a national bank to make a loan in a state other than the state where it was. located. Even today, while it is not unusual, banks are hesitant to do so. The above suggestion, then, is not well taken in light of the clear congressional purpose.
Our conclusion is not without support in the language of the statute itself. The sentence following the portion quoted above reads:
“The maximum amount of interest or discount to be charged at a branch of an association located outside of the States of the United States and the District of Columbia shall be at the rate allowed by the laws of the country, territory, dependency, province, dominion, insular possession, or other political subdivision where the branch is located.”
This sentence does not fix the rate to be charged by a branch office. It, in effect, fixes the rate to be charged at the branch office which is naturally only the place where the branch is located. This sentence, then, is susceptible of an interpretation on a reasonable basis which limits the rate fixed therein to loans made within the country, territory, etc., where the branch is located. This interpretation, which indicates the congressional intent, is applicable to the provisions of that same section which we are considering, for the meaning of a statute is to be gained from all of its provisions. Ordinarily, we would not dwell on such technical reasoning. However, out of respect for the apparent novelty of this issue and far flung consequences of our decision, we do so only to illustrate that our decision is supported by statutory interpretation founded on a reasonable basis in addition to *75 the clear guidelines offered by the purpose of the statute.
We hold that 12 U.S.C. § 85 fixes the rate of interest chargeable by a national bank only as to loans made in the state where the bank is located; it does not fix the rate of interest which may be charged by a national bank which is located in one state and makes a loan in another state.
Having determined that 12 U.S.C. § 85 does not fix the rate of interest governing this case, we must determine what law does govern. We think Louisiana law must govern. This much, we believe, is demanded by the National Banking Act. That Act fixes the maximum rate of interest to be charged by national banks on loans made in the state where they are located by reference to the law of that state, the purpose being to establish equality with state banks as to the interest rates. Consequently, loans made in states other than the one where the bank is located ought to be governed by the laws of the state where the loan is made. This establishes equality with state banks in those states as to the interest rates. This result fulfills the legitimate expectations of the parties. We turn then to Louisiana law.
Louisiana law declares interest to be either legal or conventional. Legal interest is fixed at five per cent. La.C.C. Art. 2924. The maximum rate of conventional interest, which is contractual interest, is fixed at eight per cent. La. C.C. Art. 2924. Two exceptions exists to the maximum rate of conventional interest. The first is commercial discounting. This exception was first enacted in 1856 by Act No. 161 which read as follows:
“Section 1. Be it enacted by the Senate and House of Representatives of the State of Louisiana in General Assembly convened, That the owner or discounter of any note or bond or obligation or other written evidence of debt for the payment of money, payable to order or bearer or by assignment, shall have the right to claim and recover the full amount of such note, bond or obligation or other written evidence of debt, and all interest not beyond eight per cent, per annum that may accrue thereon, notwithstanding that the rate of interest or discount at which the same may be or may have been discounted has been beyond the rate of eight per cent, per annum interest or discount, any law to the contrary notwithstanding. Provided the terms of this section shall not effect the validity or obligation of any contract entered into before the going into operation of this Act.”
This provision is now embodied in Article 2924 of the Louisiana Civil Code in practically identical language. Admittedly, this provision is not couched in the clearest of terms. Judicial interpretation, however, has made clear that it excepts commercial discounting from the maximum rate of conventional interest authorized by law. Crane v. Beatty,
“[I]ts purpose has been repeatedly stated as intended to facilitate the sale of notes to raise money and nothing more * * * ” At 69-70.
As indicated above, commercial discounting — the sale of already existing paper — is a justifiable exception to the laws of usury.
The second exception is loan discounting. This exception was first enacted in 1860 by Act. No. 62 which read as follows:
“Section 1. Be it enacted by the Senate and House of Representatives of the State of Louisiana, in General Assembly convened, That the owner of any promissory note, bond or written obligation for the payment of money, to order or bearer or transferable by assignment, shall have the right to collect the whole amount of such promissory notes, bonds or written obligations, notwithstanding such prom *76 issory notes, bonds or written obligations may include a greater rate of interest or discount than eight per cent, per annum: Provided, Such obligations shall not bear more than eight per cent, interest per annum after their maturities until paid.”
This provision is also embodied in Article 2924 of the Louisiana Civil Code in practically identical language. It has been consistently interpreted as authorizing the capitalization of interest (“discount”) in a note. Mayfield v. Nunn,
This situation is shocking and is a disgrace to the laws of the State of Louisiana. It is utterly indefensible. It makes a mockery of the Louisiana laws on usury which are applicable only to the careless and sloppy lender. We can fathom no legitimate reason for the legislature’s failure to abrogate this horror. No excuse whatsoever exists for the retention of this provision as much as one day longer.
We are not alone in our criticism of this totally unconscionable law. Other courts have invoked the legislature to remedy this deplorable situation.
E. g.,
Clasen v. Excel Finance Causeway, Inc.,
The Louisiana law does have one redeeming feature, a truly small concession, in the form of a proviso. Loan discounting is exempt from the law of usury provided the note does not bear more than eight per cent interest after maturity. The note in question here contained a five per cent discount with interest at the rate of eight per cent from the date of the note. The note, failing to satisfy the requirements of the proviso, clearly does not fall within the loan discounting exception of Article 2924. This case, then, appears to be one involving a careless lender inasmuch as the note, which is not excepted from the usury provisions, is clearly usurious. 7
*77
We pause at this juncture to note that even if the note were not usurious, the plaintiff would be unable to collect the full amount it claims is due on the note. When the holder of a note which contains capitalized interest accelerates the maturity of the entire note, the unearned portion of the discount must be rebated. This rule was established by the Louisiana Supreme Court long ago in Williams’ Heirs v. Douglass,
In this case the holder accelerated the maturity of the note, thereby necessitating a remission of the unearned discount. The unearned discount is determined by dividing the amount of the discount by the number of monthly payments, multiplying that figure by the number of months which ran on the note prior to the acceleration, and subtracting this figure from the amount of the discount. Dividing 180 into $210,000, the amount of the discount, yields $1,166.666, which is the amount! of discount earned each month. Multiplying that figure by six, the number of months for which payments were made prior to acceleration, yields $7,000, which is the amount of the earned discount. That figure subtracted from $210,000 is $203,000, which is the amount of the unearned discount which would have to be remitted if the note in question were not usurious.
3. Does L.S.A. 12:603 bar endorsers on corporate note from raising defense of usury?
Plaintiff contends that the defendant endorsers who are liable in solido with the corporate maker on the note in question are barred from raising the defense of usury by virtue of L.R.S. 12:603 which provides:
“Notwithstanding any other provision of the laws of this state to the contrary, any domestic or foreign corporation organized for profit may agree to pay any rate of interest in excess of the maximum rate of conventional interest authorized by law, and as to any such agreement, the claim or defense of usury, or of the taking of interest in excess of the maximum rate of conventional interest, by such corporation, is prohibited.”
This statute was enacted in 1965 and has not yet been subjected to the crucible of judicial interpretation by the Louisiana state courts. The issue then, a highly important one, is res nova in Louisiana.
The plaintiff relies upon decisions from several other jurisdictions. Those decisions establish the principle that, when a corporation is barred from asserting the defense of usury by a statute similar to the one above, the individual endorsers, guarantors, or sureties of a corporate note or obligation may not raise the defense of usury.
9
Winkle v. Scott,
The great number of New York decisions establishing the so-called New York rule and the handful of decisions from other states adopting that rule is, of course, highly persuasive authority for the plaintiff’s position. No decision to the contrary has been cited to us nor have we found one through our own research. As we have already indicated, however, we entertain grave doubts as to the wisdom of that rule. Our task, though, is not to blindly follow the New York decisions, nor even to fashion what we consider to be the better rule. Erie bound, we must endeavor to do as a Louisiana court would do if faced with this question novel to Louisiana. The question is actually one of legislative intent. The defendants direct their argument precisely to this point.
The defendants urge us to consider an amendment to the bill before it was enacted into law as evidencing the legislative intent. As originally presented to the Senate, Section 1 of Senate Bill 33 read as follows:
“AN ACT
“To amend Title 12 of the Louisiana Revised Statutes of 1950 to add thereto a new Section, to be designated as Section 603 of Title 12, relative to interest rates chargeable to corporations, those persons bound in solido with such corporations, or its successors, guarantors, sureties, assigns, and anyone acting on its behalf.
“Be it enacted by the Legislature of Louisiana:
“Section 1. Section 603 of Title 12 of the Louisiana Revised Statutes of 1950 is hereby enacted to read as follows:
Ҥ 603. Rate of interest paid by corporations
“Notwithstanding any other provision of the laws of this state to the contrary, any domestic or foreign corporation organized for profit may agree to pay any rate of interest in excess of the maximum rate of conventional interest authorized by law, and as to any such agreement, the claim or defense of usury, or of the taking of interest in excess of the maximum rate of conventional interest, by such corporation [those persons bound in so-lido with such corporation, or its successors, guarantors, sureties, assigns, and anyone on its behalf ] is prohibited.” The italicized portion of this bill in brackets was later deleted by an amendment. The deleted portion would have clearly barred individual endorsers liable in solido with the corporate maker of a note from asserting the defense of usury. By deliberately deleting that portion of the bill, the legislature made clear its intent, the defendants argue, that it did not wish to bar individuals from asserting the defense of usury even on a corporate note. The plaintiff argues that the provision was deleted because the legislature was aware of the decisions cited above, and therefore it was merely deleting that which was unnecessary. We find the logic of the defendants’ argument compelling. Prior to the enactment of this statute, no party to a note, whether it was an individual or a corporation, was barred by Louisiana law from asserting the defense of usury regardless of whether it was a corporate or an individual note. The Louisiana legislature has now declared that a corporate maker of a note may not assert the defense of usury. The question is whether it intended to abrogate the former law in any respect other than this. We do not think it did; otherwise, why would it have deliberately deleted the clause which would have clearly established its intention? The clause was in the bill as originally drafted. The legislature deliberately struck it from the bill. The only logical conclusion we can draw is that the Louisiana legislature did not intend to modify the existing law in any other respect and did not intend to preclude individual endorsers of corporate notes from raising the defense of usury. The plaintiff’s argument would carry more weight if the provision had never been incorporated into the bill, but because it was included and was deliberately deleted, we conclude that the legis *81 lature did not intend to bar individual endorsers of a corporate note from raising the defense of usury.
Moreover, our ultimate conclusion is further compelled by Article 2098 of the Louisiana Civil Code which provides :
“A codebtor in solido, being sued by the creditor, may plead all the exceptions resulting from the nature of the obligation, and all such as are personal to himself, as well as such as are common to all the codebtors.”
This article clearly allows the defendants, who are liable
in solido
on the corporate note, to plead usury as a defense. It can hardly be denied that usury goes to the
nature of the obligation.
La.Stat.Ann. 12:603 does not say that a note made by a corporation with interest at a rate in excess of the maximum rate of conventional interest authorized by law is not usurious. It merely says that a corporation may agree to pay in excess of that rate and that such a corporation may not assert the defense of usury. While we have found no decisions under Article 2098 regarding usury, usury is surely a defense resulting from the
nature of the obligation.
Under Article 3060 of the Louisiana Civil Code, a surety may plead all exceptions which are
“inherent to the debt.”
Huntington v. Westerfield,
We are not unaware of the statement in Meadow Brook National Bank v. Massengill,
4. Effect of usury.
Having concluded that the note is usurious and that the defendants are not barred from asserting this defense, we must determine the effect of usury. Plaintiff argues that when a note is usurious, the interest should be reduced to the maximum allowed by law — eight per cent. It cites three cases for this principle. Osborne v. Mossler Acceptance Co.,
The pertinent history commences in the year 1844 when the Louisiana legislature amended the Civil Code as follows:
“Section 1. Be it enacted by the Senate and House of Representatives of the State of Louisiana, in General Assembly convened, That article two thousand eight hundred and ninety-five of the Civil Code of Louisiana, [now Article 2924], be amended that the amount of conventional interest shall in no case exceed eight per cent, under pain of forfeiture of the entire interest so contracted.” Acts of 1844, No. 25.
*82
This was the first legislative enactment, as far as we know, regarding the
effect of usury.
The Louisiana Supreme Court interpreted this statute to mean that the
entire contractual interest
was forfeited and not merely the usurious portion. Merville v. Villeneuve LeBlanc, Jr. & Co.,
“Sec. 2. Be it further enacted, etc., That Article two thousand eight hundred and ninety-five of the Civil Code shall be so amended that the amount of conventional interest shall in no case exceed eight per cent, under pain of forfeiture of the entire interest so contracted.” Acts of 1855, No. 291.
Thus, the 1855 Act left unchanged the effect of usury under the 1844 Act.
In the following year, Act No. 161 of 1856, quoted
supra,
was enacted. The Louisiana Supreme Court first came to grips with the meaning of the 1856 Act in Crane v. Beatty,
“After mature consideration, the majority of this court came to the conclusion, that the Above Act of the Legislature [Act of 1856] does not affect, in the case at bar, the Act approved March 15th, 1855, p. 352, entitled ‘An Act to regulate the rates of interest,’ which latter Act must control the decision of the present action. The Act of March 20, 1856, had in view the sale of notes and other written obligations, their discount or sale, for the purpose of raising money, and nothing more.
* * * * * *
“The penalty of the Act of 1855 is a forfeiture of the entire interest contracted for.” At 329-330.
Thus rejecting the argument that the Act of 1856 abrogated the Act of 1855 as to the effect of usury, the court disallowed the entire interest on the usurious note. The Louisiana Supreme Court adhered to this decision in Campbell & Strong v. Hilliard,
In the meanwhile, the Civil Code was revised in 1870. The provision regarding the forfeiture of the entire interest was omitted from the Civil Code of 1870. It was, however, included in the 1870 codification of the Revised Statutes as section 1884. In 1908 Article 2924 was reenacted and amended in two respects, neither one relating to the effect of usury. The prescriptive period for suits to recover usurious interest was changed *83 from twelve months to two years; and the following rule of evidence was added:
“Provided however where usury is a defense to a suit on a promissory note or other contract of similar character, that it is permissible for the defendant to show said usury whether same was given by way of discount or otherwise, by any competent evidence.” Acts of 1908, No. 68.
The Act of 1908 also contained the usual provision repealing all laws in conflict therewith.
Four years later the Orleans Court of Appeals, believing that the Act of 1855 was in conflict with the Act of 1908, and therefore repealed by the latter Act, held that the proper penalty for charging usurious interest was a reduction of the conventional interest to eight per cent as the maximum allowed by the law. Clark v. Harvey, 9 Orl.App. 275, 277 (La.App.1912). Taken in historical context, this decision was clearly erroneous. Had there been any inconsistency in the various provisions, the courts would have been unable to give effect to all of them even prior to the Act of 1908. Yet prior to that time the courts had consistently given effect to each of the various provisions. Indeed, it had even been expressly stated that the provision for the forfeiture of the entire interest was entirely consistent with the provisions relating to the maximum rate of interest and the exceptions thereto.
E. g.,
Succession of Rhoton,
“Any contract for the payment of interest in excess of that authorized by law shall result in the forfeiture of the entire interest so contracted.”
The recodification of this statute in the 1950 Revised Statutes unequivoeably demonstrates the error of Clark. The Act of 1908 simply did not repeal the Act of 1855.
The only decision citing
Clark
is the Louisiana Supreme Court decision in Osborne v. Mossler Acceptance Co.,
We think the error of
Clark
is further demonstrated by the fact that all of the decisions of the Louisiana courts, other than
Osborne
and
Vosbein,
subsequent to
Clark
hold that the effect of usury is the forfeiture of the entire contractual interest. Green v. Johnson,
We are certain, then, that under La.Stat.Ann. 9:3501, the effect of usury is the forfeiture of the entire contractual interest. We have delved into this matter at some length solely to prevent the perpetuation of the Clark error and its progeny. 12
The correct rule in Louisiana is that usury demands the forfeiture of the entire contractual interest; only the principal amount of a usurious note may be recovered. 13 This does not mean that the plaintiff may recover the capitalized interest included in the face amount of the note. All of the interest is forfeited. Discount is interest. It is merely excepted from the usury provisions under certain conditions. Those conditions not having been met, the discount, too, must be forfeited. Article 2924, in effect, provides that the face amount of a usurious note may be collected only when it does not bear more than eight per cent interest after maturity. Consequently, when, as here, the discounted note bears eight per cent interest from date, the payee may not recover the face amount of the note. The payee may recover only the principal sum actually advanced to the borrower. No inconsistency exists between Article 2924 and La.Stat.Ann. 9:3501 in this respect. Section 3501 *85 requires the forfeiture of all interest. This includes discount, the forfeiture of which is clearly contemplated by Article 2924 when the conditions of the proviso excepting loan discounting are „ not fulfilled.
Having determined that the plaintiff cannot recover any of the interest for which it contracted due to the usury, we must still decide the proper time from which to award legal interest at the rate of five per cent. The fact that the plaintiff is entitled to legal interest is hardly open to question, but in the absence of legislation we think it would pose an interesting problem as to the date from which such interest is to accrue, that is, from the date of maturity or from the date of judicial demand. The legislature, however, has anticipated the problem, and Article 1938 of the Louisiana Civil Code precludes further speculation on this point. It provides:
“AH debts shall bear interest at the rate of five per centum per annum from the time they become due, unless otherwise stipulated.”
The portion of the note regarding interest being null and void due to usury, it is as if the parties had not contracted at all regarding interest, and we must apply Article 1938 awarding interest from the date of maturity of the note. See also, Tarver v. Winn,
The note provides for 180 equal monthly installments in the amount of $35,154. This includes interest payments as well as payments on the face amount of the note. The bank apparently used the so-called rule of 78ths in calculating which portion of each monthly payment would be allocated to interest and then to principal. This results in a greater portion of the payment being allocated to interest at first with the allocations to principal gradually and constantly increasing until at the end of the payments it constitutes the major portion of the payment.
14
While this method is acceptable where interest payments are being calculated, Walter E. Heller & Co. v. Mall, Inc.,
The holder of the note exercised its option under the acceleration clause to mature the entire indebtedness as of December 1, 1966, when according to the plaintiff, the note was in default. This, of course, could not mature the entire indebtedness as of that date since the note was not in default at that time. We think it should be regarded, however, as an exercise of the option at the earliest date possible, that is, as soon as the note was actually in default. Otherwise, the holder would be forced, at his peril, to intone the magic words continuously to insure that the acceleration of the note was effective. The law will not descend to such nonsense at the expense of one who has made clear his intent to exercise his contractual rights. Hence, in view of the fact that the note was in default as of March 1, 1967, we regard that date as the date of maturity for the entire note inasmuch as the plaintiff had previously attempted to accelerate the maturity which was ineffective through no lack of conduct on the plaintiff’s part. 15 Consequently, we must award a judgment in favor of the plaintiff against the defendants in the sum of $3,779,076 with interest on that amount at the rate of five per cent from March 1, 1967, together with attorneys’ fees of ten per cent as provided in the note. No evidence or arguments were presented as to the date from which attorneys’ fees are to be awarded nor as to the sum on which they are to be based. Therefore we leave this to be resolved by the parties and, in the event they are unable to reach an agreement on this matter, we will afford them a hearing as to the attorneys’ fees.
Let judgment be entered accordingly.
Notes
. The plaintiff was prevented from instituting suit against the corporate maker of the note by virtue of a stay order dated December 8, 1966, in the corporate reorganization proceedings of the Bourbon Kings Hotel Corporation’s parent corporation, Southern Land Title Corporation, which proceedings were entitled “In the Matter of Southern Land Title Corporation, Debtor Corporation” and numbered Bankruptcy No. 66-1015. Those proceedings, instituted upon a voluntary- petition for corporate reorganization, were subsequently dismissed but the plaintiff was still barred from instituting suit against the corporate maker of the note by virtue of a stay order issued immediately thereafter in the corporate reorganization proceedings entitled “In the Matter of Southern Land Title Corporation, Debtor, in Proceedings for the Reorganization of a Corporation” and numbered Bankruptcy No. 67-135, which proceedings were instituted upon an involuntary petition for corporate reorganization. Prior to the date of the reorganization petitions, Exchange National Bank of Chicago, the holder of a note in the face amount of $583,914.51, secured by a second mortgage against the Bourbon Orleans Hotel, instituted foreclosure proceedings against the Hotel on August 23, 1966, in the Civil District Court for the Parish of Orleans, by filing a petition for executory process in proceedings numbered 452-838 and entitled “Exchange National Bank of Chicago v. Sam Recile, Bourbon Orleans Apartment Hotel, Southern Land Title Corporation, and Bourbon Kings Hotel Corporation, et al.
. In Louisiana liability in solido is similar to joint and several liability at common law.
. Mr. Ball wrote a letter on the same day to the maker of the note stating that the bank would give the maker ten days’ notice prior to declaring the note in default or instituting a foreclosure action. The defendants do not claim that this operated as a release of their liability on the note.
. As noted above, at the same time the bank granted the second mortgagee twenty days to cure any defaults, it granted the maker ten days in which to cure any defaults. Thus, if it were important, the precise issue would be whether the ten additional days granted to the second mortgagee impaired Abraham’s right of subrogation.
. Although the opinion does not reflect that the note was payable to the order of bearer, the record in that case does indicate that it was. It is proper for us to take judicial notice of that record. United States v. Marcello,
. Compare Roux v. Witzman,
. If 12 U.S.C. § 85 were applicable to this case, the note would not be usurious even as to the individual endorsers. That section adopts as the maximum rate of interest the law of the state where the national bank is located. In this case that would be New York. The maximum rate of interest which generally may be charged in that state is 6%. N.Y. General Obligations Law, McKinney’s Consol. Laws, c. 24-A, § 5-501. State banks in New York are subject to the same
*77
limitation. N.Y. Banking Law, McKinney’s Consol.Laws, c. 2, § 108. However, for many years in New York corporations have been barred by statute from asserting the defense of usury. N.Y. General Obligations Law § 5-521. The defendants argued that the federal banking statute adopts the state law
only
as to the maximum rate of interest and does not incorporate statutes barring corporations from asserting the defense of usury. Such statutes, argued the defendants, are merely procedural. We cannot agree with this contention. As indicated above, the purpose of § 85 was to place the national banks on an equal footing with the state banks. It would truly frustrate this purpose to refer only to the maximum rate of interest without also incorporating the exceptions thereto. To adopt the defendants’ argument would result in rank discrimination against national banks, thus defeating the clear congressional intent. This we could not do. Moreover, we have found but three decisions on this issue, and all three decisions hold that the state statute barring corporations from asserting the defense of usury is applicable in determining whether the national bank violated 12 U.S.C. § 85
m
making a loan to a corporation. McNellis v. Merchants National Bank & Trust Co. of Syracuse,
. Even the cautionary proviso can be ignored if it is certain that the holder himself will accelerate the maturity without resort to an attorney.
. However, when an individual is a comaker on a note along with a corporate maker, he may plead the defense of usury because he has then been “usurized.” Grove v. Chicago Title & Tr. Co.,
. Both of these cases were decided under the Act of 1844.
. Halsmith did not even mention the Act of 1855.
. See Pellerin Laundry Machinery Sales Co. v. Hoque,
. We, of course, are not concerned with the effect of usury on a holder in due course and accordingly intimate no view on the validity of the defense of usury in such a situation.
. Of the $219,924 paid on the note in this case, $167,278.21 was allocated to interest and only $43,645.79 was applied to principal under this method.
. Our treatment of the plaintiff’s attempted acceleration as a continuous exercise of its option makes little actual difference in the result in this case since this suit -was filed on March 10, 1967, demanding the entire balance on the note. The filing of the suit is surely an exercise of the plaintiff’s option to accelerate the maturity of the entire note.