Danforth v. National State Bank

• Decision Date: 18 November 1891
• Parties: DANFORTH et al. v. NATIONAL STATE BANK OF ELIZABETH.
• Court: U.S. Court of Appeals — Third Circuit

48 F. 271

DANFORTH et al. v. NATIONAL STATE BANK OF ELIZABETH.

United States Court of Appeals, Third Circuit.

November 18, 1891

A. S Brown and James H. English, for plaintiffs in error.

R. V Lindabury, for defendant in error.

Before ACHESON, BUTLER, and WALES, JJ.

ACHESON J.

This action was brought by the National State Bank of Elizabeth, a national bank located in the state of New Jersey, against Waldo Danforth and Seth B. Ryder, executors of the last will of Edward G. Brown, deceased, to recover the amount of certain drafts and interest thereon. The material facts disclosed by the record are these: Brainard Bros. drew nine drafts, payable to the order of themselves, upon Edward G Brown, who accepted the same. Afterwards, and before the maturity of the drafts, Brainard Bros. indorsed, and placed them in the hands of James W. Raynor, a broker in commercial paper, for sale, and the plaintiff bank bought the drafts from Raynor at a discount, at the rate of 15 per centum per annum for the length of time they had to run, paying to Raynor the face amount of the drafts, less the said discount. The bank did not know that Raynor was acting for Brainard Bros., or that the latter then owned the drafts. The legal rate of interest in the state of New Jersey was 6 per centum per annum. On April 5, 1889, Ryder, one of the executors of Brown, paid to the bank $2,500. Shortly before, the cashier of the bank had made a demand on Ryder for the interest on the drafts. Ryder consulted his counsel, who advised him not to pay the interest, but to make a check for even $2,500 which was something more than the interest would be, and give it to the bank. This Ryder did, handing the check to the cashier without saying anything.

He testified that his intention was to make a general payment. The cashier, without the consent or knowledge of Ryder, credited the $2,500 on account of interest. The defendants resisted the recovery of anything more than the amount of money advanced by the bank on the drafts, less the payment of $2,500, claiming that all interest was forfeited under the following provisions of the national banking law, (sections 5197, 5198, Rev. St.:)

'Sec. 5197. Any association may take, receive, reserve, and charge on any loan or discount made, or upon any note, bill of exchange, or other evidence of debt, interest at the rate allowed by the laws of the state, territory, or district where the bank is located, and no more; except that where, by the laws of any state, a different rate is limited for banks of issue organized under state laws, the rate so limited shall be allowed for associations organized or existing in any such state under this title. When no rate is fixed by the laws of the state, territory, or district, the bank may take, receive, reserve, or charge a rate not exceeding seven per centum, and such interest may be taken in advance, reckoning the days for which the note, bill, or other evidence of debt has to run. And the purchase, discount, or sale of a bona fide bill of exchange, payable at another place than the place of such purchase, discount, or sale, at not more than the current rate of exchange for sight-drafts, in addition to the interest, shall not be considered as taking or receiving a greater rate of interest.

'Sec. 5198. The taking, receiving, reserving, or charging a rate of interest greater than is allowed by the preceding section, when knowingly done, shall be deemed a forfeiture of the entire interest which the note, bill, or other evidence of debt carries with it, or which has been agreed to be paid thereon. In case the greater rate of interest has been paid, the person by whom it has been paid, or his legal representatives, may recover bank, in an action in the nature of an action of debt, twice the amount of the interest thus paid from the association taking or receiving the same: provided such action is commenced within two years from the time the usurious transaction occurred.'

The court below overruled the defense, assigning as reasons for so doing the following:

'First. That the transaction was not usurious, there being a difference between discount and purchase.

'Second. That the payment made by Ryder upon the indebtedness was either a distinct payment upon interest, or, if a payment generally, must be by law credited upon the interest account in this transaction.

'Third. That, if the transaction was usurious as to Brainard Bros., the drawers of the drafts, that does not relieve the defendants from liability to pay the full amount.'

-- And by direction of the court the jury rendered a verdict for the plaintiff for the whole amount of its claim, namely, the sum of $13,654.44, and judgment therefor was entered.

We are now to determine whether these rulings were correct. Undoubtedly, the suggested distinction between discount and purchase has been judicially recognized as existing under state usury laws, and it has been held that, without infraction of those laws, a promissory note or draft, valid in its inception, and originally free from usury, may be purchased from the holder at any agreed price, without regard to the rate of interest fixed by law. But such decisions are not applicable here. Bank v. Johnson, 104 U.S. 271. It was there held that, so far as loans and discounts are concerned, 'the sole particular in which national banks are placed on an equality with natural persons is as to the rate of interest, and not as to the character of contracts they are authorized to make. ' In that case a national bank, located in the state of New York, acquired from the payee certain promissory notes, business paper, and valid for the full amount in his hands, at a deduction exceeding the lawful rate of interest, and the notes were transferred to the bank by the indorsement of the payee, imposing upon him the ordinary liability of an indorser. By the law of the state of New York it was not usurious or unlawful for natural persons thus to acquire business paper, the transfer being treated as a sale. But the supreme court of the United States adjudged that the transaction was a discount by the bank, and was within the prohibition and penalty of sections 5197 and 5198 of the Revised Statutes. Now the only distinction between that case and the case in hand is that here the bill-broker who negotiated with the bank, and who was the ostensible owner of the drafts, transferred them to the bank by mere delivery, without his own indorsement. Does this circumstance so distinguish the two cases as to justify the conclusion of the court below that the transaction in question was not a discount, within the meaning of the sections above quoted?

In Fleckner v. Bank, 8 Wheat. 338, 350, the supreme court of the United States, speaking by Judge STORY, said:

'Nothing can be clearer than that by the language of the commercial world, and the settled practice of banks, a discount by a bank of means, ex vi termini, a deduction or drawback made upon its advances or loans of money upon negotiable paper, or other evidences of debt, payable at a future day, which are transferred to the bank.'

-- And it was added that, if the transaction there was a purchase, it was 'a purchase by way of discount. ' It will be perceived that the above definition of discount embraces as well a transaction where money is advanced upon paper transferred to a bank without the indorsement of the previous holder, as the case of a strict loan thereon, where the relation of debtor and creditor is created. Mr. Justice Matthews, in Bank v. Johnson, supra, tersely defined 'discount' as 'the difference between the price and the amount of the debt, the evidence of which is transferred. ' In Tracy v. Talmage, 18 Barb. 456, 462, the court said: 'Now to 'discount' includes to buy; for discounting, in most cases, is but another term for 'buying at a discount;" and this proposition the court of appeals of New York cited with approval in Bank v. Savery, 82 N.Y. 291, 302. In Bank v. Baker, 15 Ohio St. 68, 85, the court declared:

'It is also undeniably clear that the term 'discount,' when used in general sense, is equally applicable to either business or accommodation paper, and is appropriately applied either to loans or sales by way of discount, when a sum is counted off or taken from the face or amount of the paper, at the time the money is advanced upon it, whether that sum is taken for interest upon a loan, or as the price agreed upon a sale.' In Pape v. Bank, 20 Kan. 440, 451, the court said: 'And the term 'discounting' includes purchase, as well as loan. ' It is worthy of observation that the opinion of the supreme court of Kansas in that case was delivered by Judge BREWER, now an associate justice of the supreme court of the United States. In Bank v. Sherburne, 14 Ill.App. 566, the court expressed the opinion that 'a purchase may be made by way of discount equally as well as a loan may be made by way of discount. ' That question was before the court of appeals of the state of New York in Bank v. Savery, supra, where the facts were substantially the same as they are here. There a negotiable promissory note, duly indorsed, was delivered by the holder to a firm of brokers, to whom he was indebted, with directions to sell the note, and apply the proceeds on that indebtedness. They accordingly sold and delivered the note to the bank, without their own indorsement upon it, at a greater rate of reduction than

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