Lester v. Howard Bank

• Decision Date: 31 January 1871
• Citation: 33 Md. 558
• Parties: JAMES M. LESTER, and Wife v. THE HOWARD BANK. Orville Horwitz, Assignee v. The Howard Bank, and Others.
• Court: Maryland Court of Appeals

33 Md. 558

JAMES M. LESTER, and Wife v. THE HOWARD BANK.

Orville Horwitz, Assignee v. The Howard Bank, and Others.

Court of Appeals of Maryland

Jan. 31, 1871

The cause was argued before BARTOL, C.J., BRENT, GRASON, MILLER ALVEY and ROBINSON, JJ.

Orville Horwitz and Benj. C. Barroll, for the appellants.

The loan having been made to Purvis while a director and the president of the bank, was in clear violation of law, and of the charter of the bank, and cannot be enforced; it is not a legal, valid claim or contract; it is, as a contract null and void.

When a bank makes a loan in violation of its charter, it is null and void--it cannot be enforced by either party. Albert v Baltimore, 2 Md. 159; Merrick v. Bank of Metropolis, 8 Gill, 64; Bayne v. Suit, 1 Md. 85; Hall v. Mullin, 5 H. & J. 190.

The illegality of this contract arises out of the 10th section of the charter, in these words: "No director or other officer of said corporation shall borrow any moneys from said corporation; and if any director or other officer shall be convicted upon indictment of directly or indirectly violating this section, he shall be punished," etc. It is admitted, in the answer of the bank, that the loan was to Purvis, and that he was an officer of the bank. That the charter was violated, is not, therefore, in dispute.

Does this illegality in the contract, avoid it and make it incapable of enforcement in a Court of Equity.

The bank's counsel contend that it is not mandatory, but directory. The clause in the charter is prohibitory; the bank cannot legally loan its funds to its officers in direct violation of its charter. The bank cannot recover upon a contract so tained with illegality. A State court cannot so stultify itself as to enforce a contract which the State has forbidden to be made--" ex turpi contractu non oritur actio. " The relation of debtor and creditor never arises under a loan made in direct violation of law. It was not only in violation of the charter, but against the known and declared public policy of the State. Const. 1851, Art. 3, sec. 45.

On behalf of the claim of Mrs. Lester: Mrs. Lester is not a complainant in the cause--she is brought into it by the process of the court--and in her answer takes strong ground against the pretensions of the complainant. She is a co-defendant with the bank--resisting the claims of Purvis and the illegal claim of the bank. She did not seek the aid of the court; and the court is now called on to adjudicate her rights with the bank, they being co-defendants, claiming a fund in court.

Although there is conflicting evidence, the court will find that the bank had notice of her interest in the property as half owner before the loan was made to Purvis.

Purvis was president of the bank, and swears that the bank had such knowledge.

The bank, who made the loan, and the president of the bank, by whom the money was borrowed, are in pari delicto, and this is so, notwithstanding the penalty is imposed on the borrower alone. Cannan v. Bryce, 3 B. & Ald. 179; M'Kinnell v. Robinson, 3 M. & W. 441; Pearce v. Brooks, Law Rep. 1 Exch. 217; Joy v. Campbell, 1 Sch. & Lef. 339; Evans v. Richardson, 3 Meriv. 470.

Where a statute is passed or a charter granted, containing prohibitions founded on public policy, contracts in violation of those prohibitions, are void, and both parties to said contracts are in pari delicto. Leavitt v. Palmer, 3 Comst. 19.

If the above proposition were modified at all, it would be in favor of the complainant, who represents, not only Purvis, the president of the bank, but creditors also--parties entirely innocent of the transaction in question, and who are favored in a Court of Equity.

The trustee, under a deed for the benefit of creditors, holds a double relation. He is clothed with the title of the grantor, so as to enable him to enforce all his rights, at the same time that he represents the interests of the creditors, whose rights he is bound to protect and enforce.

The note executed by Purvis to the bank, and the loan by the bank to Purvis, were void transactions, as against the public policy of the State, and the express provisions of the charter of the bank, and in the distribution of the funds of the insolvent, the innocent creditors will be preferred to those whose debts arise ex turpi causa.

Edward Duffy and Henry Stockbridge, for the appellees.

Although a statute prohibits an act or contract and imposes a penalty therefor, yet it does not follow that the act or contract is void--that depends upon the construction to be placed upon the whole statute. Harris v. Runnels, 12 How. 84, 85, 86; Shoemaker v. Mech. Bank, 31 Md. 401.

The prohibition, or limitation of power in this section is not directed against the bank, but against the officers. There is nothing then from which an inference can be drawn that the loan was void.

The manifest object of the prohibition against the officers was to protect the stockholders. Now the doctrine of the appellants is that if the directors borrowed all the capital of the bank, the act being malum prohibitum and void, the bank (that is the stockholders) could not recover its capital, and the very provision passed to protect their money robbed them of it.

Conceding that the bank and the director were both in fault, yet first, the law was intended to protect the former from fraud or aggression of the latter, and secondly, the director is the more guilty of the two, the prohibition and the penalty being directed against him, and the parties therefore are not in pari delicto. Now where a party to a forbidden contract not malum in se is in either of these positions he is entitled to recover. Tracy v. Talmadge, 14 N.Y. 179-191, recognized in Maryland Hospital v. Foreman, 29 Md. 531; Bates v. Bank, 2 Ala. 462, 463, 464; 1 Story's Eq. sec. 300; Curtis v. Leavitt, 15 N.Y. 1; White v. Bank, 22 Pick. 186, 187, 188; Shoemaker v. Mech. Bank, 31 Md. 402, 403.

But suppose the parties were in pari delicto, the bank is defendant and potior est conditio defendentis. 1 Story's Eq. sec. 298.

And Lester and wife occupy the position of complainants as well as Horwitz. Carter v. Denison, 7 Gill, 158, 159.

Even if the bank alone were the guilty party, yet their claim must be allowed because the complainant seeking relief in equity must do equity. 1 Story's Eq. sec. 64 e, 301.

These points apply as well against the complainant as assignee for creditors, as against Purvis himself, because the assignee and the creditors stand in Purvis' place. Curtis v. Leavitt, 15 N.Y. 44, 45-51; Shoemaker v. Mech. Bank, 31 Md. 403. And they apply against Mrs. Lester, because she also claimed under Purvis, and because Purvis acted under her authority.

The complainant is estopped from alleging that the contract for the loan is illegal, because he affirms the contract by his bill. Story's Eq. Pl. secs. 23-27, 28, 37 a; State v. Bank of Maryland, 6 G. & J. 216, 231.

Robinson J., delivered the opinion of the court.

The rule of law is well settled that no action will lie to enforce a contract malum in se, nor if executed, to recover money paid under it. In all such cases, the maxims " ex turpi causa non oritur actio" and " in pari delicto potior est conditio defendentis et possidentis" apply.

In regard to contracts not immoral, or criminal in themselves, but prohibited by statutory law, the same general rule may be said to apply, not however universal in its application, but subject to certain exceptions as binding in authority as the rule itself. Public policy, it must be borne in mind, lies at the basis of the law in regard to illegal contracts, and the rule is adopted not for the benefit of parties but of the public. It is evident, therefore, that cases may arise even under contracts of this character, in which the public interests will be better promoted by granting than by denying relief, and in such the general rule must yield to this policy. Hence Judge Story admits that even between parties " in pari delicto" relief will sometimes be granted if public policy demands it. 1 Story's Eq. secs. 298-300.

Other cases are to be found arising under contracts made in violation of a statute, in the application to which of the general rule, courts have been governed by the plain and obvious purposes of the law; and in such it has been repeatedly held that an action would lie against a party receiving money under such a contract upon a promise implied by law to refund it.

Thus in Smith v. Bromley, Doug. 697, note, Lord Mansfield said: "If the act is in itself immoral, or a violation of the general laws of public policy, there the party paying shall not have this action. * * * But there are other laws which are calculated for the protection of the subject against oppression, extortion, deceit, etc. If such laws are violated, and the defendant takes advantage of the plaintiff's condition or situation, there the plaintiff shall recover."

This was followed by Jacques v. Golighty, 2 W. Bl. 1073 where an action was brought to recover money paid to the defendant as a premium for issuing lottery tickets, in contravention of the Statute 14 Geo. III, ch. 76, and in which it was insisted that the plaintiff being particeps criminis was not entitled to recover, but Blackstone, J., overruled the objection, and gave judgment for the plaintiff. The same principle was affirmed in Browning v. Morris, 2 Cowp. 790, in which Lord Mansfield says, "It is very material that the statute itself, by the distinction it makes, has marked the criminal, for the penalties are all on one side; upon the office keeper." And in Williams v. Hedley, 8 East, 378, where an action was brought to recover money which had been paid by the plaintiff to the defendant to compromise...