Overholt v. National Bank

| Pa. | Nov 13, 1876

Mr. Justice Sharswood

delivered the opinion of the court November 13th 1876.

The 30th section of the Act of Congress of June 3d 1864, under which the defendants in error were organized and incorporated as a national bank declares that “the knowingly receiving, reserving or charging” by a national bank, “ a rate of interest greater than” that lawful in the state in which such bank may be located, “ shall be held and adjudged a forfeiture of the entire interest which the note, bill or other evidence carries with it or which was agreed to be paid thereon; and in case a greater interest has been paid, the person or persons paying the same or their legal representatives may recover back in any action of debt twice the amount of interest thus paid from the association taking or receiving the same : provided, .that such action is commenced within two years from the time the usurious transaction occurred.”

It is very clear we think that Congress intended that the national banks should be effectually prevented, as far as legislation could prevent it, from either charging or receiving more than the legal rate of interest in the states in which they might be located and carry on their business. Experience had abundantly shown that to do this it would not be sufficient to provide that the excess over the lawful rate only should be illegal. These institutions of large capital would naturally exercise great power over those who should stand in need of their assistance; for it is as true now as it was in the days of Solomon, “ The rich ruleth over the poor and the borrower is servant to the lender.” It was considered no doubt that it would be too severe a measure to provide that the debt itself should be forfeited or the security given for it declared void. That too had been tried in England and some of the United States, but was found not to arrest the practice, but only to increase the unjust gain of the -usurer, who required to be indemnified by the needy borrower for the risk he run by a much increased rate. It was deemed a sufficiently' effectual prevention to enact that wherever the bank violated the law by “ knowingly receiving, reserving or charging,” more than the lawful interest, they should recover none, and that where the unlawful interest had been voluntarily paid, the debtor should be entitled to recover as a penalty double the whole interest paid provided suit were brought within two years. Wherever the bank must resort to a suit, there the forfeiture of the entire interest when an illegal rate has been stipulated or taken, follows as a necessary result. It was abundantly shown in Campbell v. Sloan, 12 P. F. Smith 485, by numerous English and American authorities cited in the opinion of the court, that where there has been a series of renewal notes given for the continuation of the same original loan or advance, the taint of usury in the first transaction follows down the descent through the entire line. A renewal note is not payment of the original debt, and a new debt or novation in .'view of the usury laws, however it may be, if the parties so intend, as to other questions. If it were held otherwise nothing would be so easy as to evade the statute. What the creditor is entitled to recover is the original loan with lawful interest, and the borrower is entitled to credit for all that he has paid beyond what by law he was bound to pay. It is clear then as to the national banks that whenever they charge or stipulate for an illegal rate all payment of interest and not merely the excess is illegal. “ The illegal Act” as is well remarked by Mr. Justice Gordon in Lucas v. Government National Bank, 28 P. F. Smith 231, “ destroys the interest bearing power of the obligation.” “ The receiving of such excessive interest is treated by the supreme power in the state as a public evil and as such prohibited; consequently when taken against the statutory prohibition, it- is acquired without right and no title thereto vests in the taker. In such ease he is to be held as one wrongfully in possession of his neighbor’s property.” It follows that when the bank resorts to legal proceedings to recover its debt on the last of the series of renewal notes, the borrower is entitled to credit for all the interest he had paid from the beginning on- the loan and not merely to the excess above the lawful rate.

This question was not before the court, and was not decided in Brown v. The Second National Bank of Erie, 22 P. F. Smith 209. The only matters which could avail the plaintiff in error there, were the answers to the two first points which he made below. These were, that the bank could not recover any part of its claim, and that if it could the debtor was entitled to defalk double the amount of interest paid. These the court below refused, and their judgment was affirmed. His third point was, that he was entitled to credit for the excess of interest he had paid from time to time on the renewal notes; and his fourth was, that he was entitled to an abatement of all the interest on the note in suit; and these the court below affirmed. What is stated in the syllabus as decided by the court below — if indeed it was meant to say that the debtor could only set off the excess of interest on previous notes — was not involved in the affirmance of the judgment. In Lucas v. Government National Bank, 28 P. F. Smith 228, the credit claimed was not for interest paid on former notes of which the note in suit was the last renewal, but upon entirely independent loans which had been paid in full; and the defendant claimed to defalk double the amount which he had paid. This the court held he could not do, but that he was entitled to defalk the usurious interest he had paid on previous transactions. The affidavit of defence stated that the defendant had paid not less than $8000 in excess of the legal rate of interest; and this, it was held, he had a right to defalk. Further than this it was not necessary to go in order to reverse the judgment and award a procedendo..

We are of opinion that the defendant below was not entitled to defalk the interest on the four-thousand-dollar note, which was not in suit. The words of the Act of Congress, “ shall be held a forfeiture of the entire interest which the note, bill or other evidence carries with it,” as was said in Brown v. The Second National Bank of Erie, have evident reference to the enforcement of the contract by judicial process. No action is given to recover back the interest charged, and if not, there can be no defalcation against an independent claim. Non constat that the principal of the four-thousand-dollar note will eve? be sued for; but when it is, all the interest paid on the notes of which it is the last renewal will be a credit upon it.

Judgments reversed and writs of procedendo awarded.