McCormick v. Fallier

• Decision Date: 26 March 1931
• Docket Number: 3 Div. 928.
• Citation: 223 Ala. 80,134 So. 471
• Parties: MCCORMICK v. FALLIER ET AL.
• Court: Alabama Supreme Court

134 So. 471

223 Ala. 80

MCCORMICK v. FALLIER ET AL.

3 Div. 928.

Supreme Court of Alabama

March 26, 1931

Rehearing Denied May 21, 1931.

Appeal from Circuit Court, Montgomery County; Leon McCord, Judge.

Bill in equity by Charles Fallier and others against J. H. McCormick and another. From a decree for complainants, respondent named appeals.

Reversed and remanded.

Hill Hill, Whiting, Thomas & Rives, of Montgomery, for appellant.

Carter & Pickett, of Montgomery, for appellees.

BROWN J. (after stating the case).

The first assignment of error is predicated on the court's ruling on the demurrer, going to the equity of the bill. If the bill is without equity, the other assignments of error are not important.

It is well settled, as a general rule, that a court of equity, at the instance of the maker who has a good defense thereto in the hands of the payee, will enjoin the transfer of negotiable notes or other negotiable instruments, if the effect of such transfer is to cut off or destroy such defense, and on proper showing the court will order the instrument delivered up to the maker or cancel the same. 32 C.J. 152, § 202; Oden v. King, 216 Ala. 504, 113 So 609, 54 A. L. R. 1413.

So the question to be decided is whether or not the defense of usury is available to the maker, in the hands of a purchaser for value, in due course, without notice. If so, the complainants have an adequate remedy at law.

The statute provides that: "All contracts for the payment of interest upon the loan or forbearance of goods, money, things in action, or upon any contract whatever, at a higher rate than is prescribed in this chapter, are usurious, and cannot be enforced either at law or in equity, except as to the principal. Nor shall the borrower of money at a usurious rate of interest ever in any case in law or equity be required to pay more than the principal sum borrowed, and if any interest has been paid the same must be deducted from the principal and judgment rendered for the balance only." Code of 1923, § 8567. (Italics supplied.)

Before its amendment by the Act of March 9, 1901 (Acts 1900-01, p 2685), the statute was applied in Barclift v. Fields, 145 Ala. 264, 41 So. 84, 85, where it was said: "The contract stipulating for a greater rate of interest than eight per cent. was tainted with an evil and wrongful intent. Hawkins v. Pearson, 96 Ala. 369, 11 So. 304. There was no contractual right to recover any interest, and that was so because the contract, to the extent of all interest, was offensive to the policy and positive mandate of the law." And in Jones v. Meriwether, 203 Ala. 155, 82 So. 185: "Our statute does not make usurious instruments void except as to the interest, but, of course, where usurious interest has been paid, the debtor could upon proper and timely application, have it applied to the principal." (Italics supplied.)

Some of the cases decided before the last amendment of the statute heretofore noted hold that usurious contracts are not void, but voidable as to the interest, but they all agree that the courts will not compel the borrower to pay usurious interest, by proceedings at law or in equity; nor will courts of equity require the payment of legal interest as a predicate to relief from usurious contracts. Gross v. Coffey, 111 Ala. 468, 20 So. 428; Cooledge v. Collum, 211 Ala. 203, 100 So. 143; Barclift v. Fields, supra; First National Bank of Abbeville v. Clark, 161 Ala. 497, 49 So. 807.

And in Blue v. First National Bank of Elba, 200 Ala. 129, 131, 75 So. 577: "It is familiar law that, if the original debt in fact persists and was usurious in its inception, the taint abides in it, and will affect it throughout all its renewals and mutations, and follow it into whose hands soever it may come, unless the holder receives it through the fraud of the debtor." (Italics supplied.)

And in Pearson et al. v. Bailey, 23 Ala. 542: "Neither does the renewal of the note, or change of the form of the contract, alter the character of the original transaction. Jackson v. Jones, 13 Ala. 121. If it is usurious in its inception, the taint abides in it, and will affect it throughout all its renewals and mutations, and follow it into whose hands soever it may go, unless the holder receives it through the fraud of the maker." (Italics supplied.)

In Masterson v. Grubbs, 70 Ala. 406, 408: "The illegal taint can be purged or eliminated, however, in either of two ways: first, by a renewal of the note or contract, after it has passed into the hands of a bona fide purchaser for value, without notice of the usury; secondly, by a reformation of the contract, by which the usurious interest is expunged by remitting the excess, and only lawful interest is retained or exacted." (Italics supplied.) See, also, to the same effect, Lewis v. Hickman, 200 Ala. 672, 77 So. 46.

In Saltmarsh v. Tuthill, 13 Ala. 390, it was held that an innocent purchaser of a bill of exchange-negotiable under the law merchant-was not protected from the defense of usury.

To quote from the opinion of the court in Saltmarsh v. Planters' & Merchants' Bank, 14 Ala. 668, 680: "In Cameron v. Johnson & Nall, 3 Ala. 158, it is held, the change of the statute which avoids the note or bill, as to the interest merely, makes such change in the character of the contract, as to authorize an innocent purchaser of it to recover the amount advanced by him. Our present statute avoids the note or bill, only as to all but the principal sum. Digest, 591, § 9. It is clear, in the present case, that Wilson could have recovered from the acceptors only the $5000 advanced by him by reason of the usury, having received the bill from them at the rate of 20 per cent. discount; and by the well settled law, the statute avoiding the bill as to all but the principal sum, as between the original parties, the bill is void to the same extent in whose soever hands it may afterwards go. It is, however, unnecessary to elaborate this point, as having had occasion to examine the question of usury, at considerable length, in the case of Saltmarsh v. Tuthill, at the last term of this court, it is unnecessary further to notice it here." 14 Ala. 680.

In Hanrick v. Andrews, 9 Port. 9, 37, a case arising under and governed by the laws of the state of New York, the court, after quoting from a decision of the New York Court (Hockley v. Sprague), reported in 10 Wend. 113, applying the usury statutes of that state, further observed: "Thus, we discover that it is incumbent upon an indorsee, if he would prevent usury from being set up against him, to show that he became the innocent holder of the paper, for a valuable consideration, before its maturity. Nothing of this kind seems to have been shown or attempted by the defendant in error." (Italics supplied.) From these expressions it appears that this utterance was not only dictum, but it was in respect to the laws of New York, and is not in conflict with the utterance of this court in the cases heretofore referred to.

In Sewell v. Nolen Bank et al., 204 Ala. 93, 85 So. 375, it was assumed that the defense of usury was not available against an innocent purchaser without notice, but the court held that the alleged purchaser for value before maturity, without notice, failed to sustain the defense by the proof.

The rule established by the cases decided before the last amendment of the statute is that a negotiable paper in the hands of a holder in due course, who acquired it for value and before maturity, without notice, is subject to the defense of usury to the extent of restricting the amount of the recovery to the sum actually paid by such holder, and the question is, Has the subsequent amendment of the statute changed the rule so as to limit the recovery to the principal sum, in every case?

From the Historical Statement, 27 R. C. L. 203, § 1, we take the following as shedding light on the purpose of the statute: "There is no people, known to history, with any considerable financial or commercial structure, that has not had laws against usury. It has always been recognized that in the power of the lender to relieve the wants of the borrower lies the germ of oppression. This view, carried to its extreme, and finding support in the now discredited economic theory that money, being barren, cannot beget money, at one time led to the prohibition of all interest. The doctrine that any interest is usurious was never adopted in this country. On the contrary, by the common law as here adopted no rate of interest is illegal, in the absence of statutory enactment, unless so great as to be unconscionable, and at the present time usury must be regarded merely as malum prohibitum, not malum in se. It rests wholly in statute."

It is a matter of history that the statute on this subject has been repeatedly amended to meet decisions of this court, making a liberal application in favor of the lender, and, in its present form, it prohibits the enforcement of usurious contracts, as to the interest, and in emphatic language declares: " Nor shall the borrower of money at a usurious rate of interest ever in any case in law or equity be required to pay more than the principal sum borrowed, and if any interest has been paid the same must be deducted from the principal and judgment rendered for the balance only." (Italics supplied.) Code 1923, § 8567.

While this statute does not in terms declare that such usurious contracts are void as to the interest, by necessary implication it does, and to that extent it is void ab initio.

Daniel on Negotiable Instruments, vol. 1, p. 959, § 806, says "There are some defenses which are as available against a bona fide holder for value, and without notice, as against any other party. They are those which go to show that the...