Thе motion for a rehearing of this cause calls in question the correctness of the opinion rendered at a former day of the term affirming the judgmеnt of the District Court.
It is urged that there was error in applying the whole of the $500 payment as a credit upon the note for $1065, upon which this suit was brought. It is also contended that it was not proved on the trial from which this appeal was prosecuted that the note for $1423 was usurious.
In fact the record cоntains no evidence with regard to that note except a petition filed by the plaintiff in this suit in the District Court for. its collection, and the answer to said suit filed by the defendant. The record does not indicate that the evidence was objected to or limited, nor does it show for what purpose it was оffered. If said pleadings had been objected to they should not have been admitted for the purpose of proving usury in that note. The record furnishеs some reasons to induce the belief that they were not introduced for the purpose of proving usury in said note, and that they were not so cоnsidered upon the trial.
As we have concluded that' a rehearing should be granted and the judgment reversed, even if the appellees are givеn the benefit of everything that they tend to prove, we will in this opinion treat them as evi *464 dence establishing the truth of their allegations, and from them and othеr portions of the record we make the following statement:
The $1065 note was the result of the $750 originally borrowed and usurious interest. The $1423 note was the result of $426 originally borrowed and usurious interest. Before the $500 payment was made (of which we shall speak again presently), payments amounting to $450 had bеen made on the last mentioned note, which if applied to the principal would have more than discharged it. Ho credit was ever indorsed оn either note except, -it appears, one for $7 on the $1423 note; and on the 16th day of April, 1885, Smith,.the payee, sued separately on eаch note for the full amount thereof without the mention of any credit. Besides the payment of $450 above mentioned on the $1423 note, the following pаyments had been in fact made: On the daté named $500 was paid to Smith, for which he executed the following receipt:
“July 24, 1886.—Received of J. A. Stevens $500, to be рlaced as a credit on his notes.
[Signed] “ J. Wesley Smith.”
On the 27th day of December, 1886, Stevens paid $700 on the $1423 note.
In this suit upon the $1065 note, in addition to their plea of usury the defendants pleaded substantially as follows:
“These defendants are entitled to a credit of $500, for they say that heretofore, to-wit, on the 24th day of July, 1886, the defendants paid and delivered to plaintiff the sum of $500 as a payment on the note sued on, and plaintiff agreed to place the same аs a credit on defendants’ notes, which has never been done by plaintiff, to defendants’ damage the sum of $500, and plaintiff has refused and still refuses to crеdit the notes of defendants with said sum of money, though often requested so to do. Wherefore defendants here plead the same as a set-off аnd in reconvention to plaintiff’s cause of action, and ask that the sum be allowed as a credit on the same,” etc.
The plaintiff replied, denying the credit and pleading the statute of limitations of two years to the plea of set-off.
It appears that at the date of the paymеnt of the $500 the principal of the $1423 note had been discharged by the payments made on it previous to that time, amounting to $450, and not by the $700 payment, bеcause that had not been then made. In addition to the contents of the receipt both Smith and Stephens testified with regard to the $500 payment without mаterially affecting the result under the facts of this case. Smith testified that he was directed to apply the payment to the interest upon the notеs, while Stephens denied that anything was said on the subject except what the receipt contains. If the notes had not been usurious, the payment wоuld have been applied, in any view of the evidence, to the extinguishment of the interest in the first place. *465 If they were usurious, no agreement to the contrary would have kept the law from applying the payment to the unpaid principal, if there was any. If upon either note there remained no unpaid principal after the application to it of all previous payments, the pro rata part to which that note was еntitled would from necessity be applied to the usurious interest.
We think that the contract with regard to the appropriation of the $500 payment wаs complete when the receipt was given, and that neither the failure to actually indorse the credits on the notes nor the failure to admit the payment in plaintiffs pleading when the notes were sued upon could change or modify it. If it could be held that the subsequent action or nonaction of Smith would have that effect as to him, it still could not be allowed to operate to the injury of the sureties on either note.
The appropriation made by the receipt was to “notes,” not to one note. If Smith at the time had held only one note, then the whole of the payment would, notwithstanding the use of the word “notes,” have been applied to that. Conceding that the principal of the $1423 note had" been paid before thаt time, and that it then existed only as a promise to pay usurious interest, as to which the law denounced it as void, still can the note properly be trеated, for the purpose of deciding the question now before us, as having no legal existence? We think not. Usurious interest may be voluntarily paid.
The $500 was voluntarily paid in this case and directed to be applied as well to the note upon which nothing was lawfully due as upon the one upon which there was a lawful balance remaining unpaid. Whatever part of the voluntary payment was applied to the $1423 note was not a payment uрon the $1065 note. '
It does not follow from what we have said that the whole of thé $500 payment may not be pleaded as a defense to this suit. But the distinction bеtween pleading and treating it as a payment or as a counter-claim must be observed. So much of the sum as should have been applied tо the $1065 note should be pleaded as a payment, and the remainder, if considered at all in this case, as a counter-claim. It can not be pleaded as a counter-claim to a suit upon the $1065 note without showing that the $1423 note to which it is first to be applied has been extinguished, or for the excess above what may be required to satisfy the principal of said note. When pleaded as a counter-claim instead of as a payment, the rule of recovery will not be the same. In the former case the excess "above 12 per cent only will be recoverable. Bexаr Building and Loan Association v. Robinson,
In making the appropriation of the $500 as a payment we think it should be applied in the proportion that the smaller note bears to the larger one. White v. Blackmore, 8 Lea (Tenn.), 49; White v. Trumbull, 3 Green (N. J.), 314.
*466 Because the charge of the court treated the whole of the $500 ás a payment upon the note in controversy the motion for a rehearing will be granted, and the judgment will be reversed and the cause remanded.
Reversed and remanded.
Delivered June 23, 1891.