Schlesinger v. Gilhooly

• Decision Date: 04 June 1907
• Citation: Schlesinger v. Gilhooly, 189 N.Y. 1, 81 N.E. 619 (N.Y. 1907)
• Court: New York Court of Appeals Court of Appeals
• Parties: LEO SCHLESINGER, as Receiver of the FEDERAL BANK OF NEW York, Respondent, v. ANDREW GILHOOLY, Appellant.

189 N.Y. 1

81 N.E. 619

SCHLESINGER

v.GILHOOLY.

Court of Appeals of New York.

June 4, 1907.

Appeal from Supreme Court, Appellate Division, First Department.

Action by Leo Schlesinger, as receiver of the Federal Bank of New York, against Andrew Gilhooly. Defendant appeals from a judgment of the Appellate Division of the Supreme Court (10 N. Y. Supp. 1143), overruling his exceptions and directing judgment for plaintiff. Affirmed.

The complaint sets forth two causes of action in favor of the plaintiff as receiver of the Federal Bank of New York, a domestic banking corporation, each founded on a promissory note made by the defendant, payable to his own order. The complaint, as amended upon the trial, alleges that each of said notes ‘before maturity was indorsed by the said defendant in bank and delivered to William Muirhead, and was thereafter and prior to maturity discounted by the said bank in due course and for value.’ The answer sets forth facts tending to show that each of said notes was made by the defendant and delivered by him to said Muirhead for a usurious consideration exacted and paid as part of a transaction relating to a loan of money; that such transaction was the first inception of both notes; and that both were void for usury when presented for discount to the Federal Bank. Upon the trial the allegations of the complaint were admitted, and all defenses waived except that of usury, whereupon the plaintiff moved that the court direct a verdict in his favor for the amount of said notes, notwithstanding the answer, on the ground that ‘usury is not available as a defense against oof interest which may be taken,’ embraces to the jury on the facts of the case'; but his application was denied, and the motion of the plaintiff was granted. The exceptions taken by the defendant, when heard in the first instance by the Appellate Division, were overruled, and the judgment directed from which the appellant appeals to this court.

Cullen, C. J., and Werner and Hiscock, JJ., dissenting.

Ernest Hall, for appellant.

George W. Glaze, for respondent.

VANN, J. (after stating the facts).

The learned Appellate Division rendered judgment in this case on the authority of its previous decision in Schlesinger v. Kelly, 114 App. Div. 546,99 N. Y. Supp. 1083. That case involved the same questions as the one now before us, and all the justices were of the opinion that the plaintiff was entitled to recover; four of them on the ground that the usury statute of this state ‘has been repealed by implication so far as state banks are concerned, not only where the bank itself has been a direct participator in the usurious transaction, but also where it is an innocent holder in due course of the paper which in the hands of private parties would be void for usury in its inception.’ One of the justices hesitated to affirm on that ground, but concurred in the result, because he thought that Negotiable Instruments Law, Laws 1897, p. 719, c. 612, rendered ‘the defense of usury inapplicable to a bona fide holder of negotiable paper acquiring the same in due course.’

The subject is of great importance to the business community, since it affects all banks doing business in this state, and, if the appellant is right, leaves them open to daily loss, even if they act with the utmost care and in the best of faith. The solvency of every bank, as well as the solvency of many depositors, might depend more upon accident than upon business foresight and ability, while the most scrupulous effort to obey the law would afford no protection. It was stated on the argument, as an illustration, for the fact does not appear in the record, that the makers ‘of more than half of the commercial paper held by the Federal Bank at the time of its failure allege an usurious origin thereof.’ Without passing upon the effect of the negotiable instruments law, I shall first discuss the question considered in the prevailing opinion below, to which we are much indebted. That question depends primarily upon the effect of certain sections of the federal banking act, when read in connection with section 55 of our state banking law (Laws 1892, p. 1869, c. 689). We divide in judgment on that question, as well as upon another, not considered below nor argued before us, which relates to the power of Congress to pass an act having the effect which I think should be given to the federal statute.

The law of this state relating to interest and usury not only forbids the taking of interest upon a loan of money in excess of the rate prescribed, but also renders void all bonds, notes and other contracts given to secure a loan made in violation of that provision. 1 Rev. St. (1st Ed.) pt. 2, p. 772, c. 4, §§ 2, 5; Laws 1837, p. 486, c. 430, § 1. The act of Congress entitled ‘An act to provide a national currency secured by a pledge of United States bonds and to provide for the circulation and redemption thereof,’ approved June 3, 1864, provided that any association organized thereunder might ‘take, receive, reserve and charge on any loan or discount made, or upon any note, bill of exchange or other evidences of debt, interest at the rate allowed by the laws of the state or territory 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 in any such state under this act. * * * And the knowingly taking, receiving, reserving or charging a rate of interest greater than aforesaid, shall be held and adjudged 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. And in case a greater rate of 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 the interest thus paid from the association taking or receiving the same, providing that such action is commenced within two years from the time the usurious transaction occurred.’ Act June 3, 1864, c. 106, § 30, 13 Stat. 108. This statute was re-enacted in 1874 without substantial change, and the section quoted now appears in two sections of the United States Revised Statutes. Rev. St. U. S. §§ 5197, 5198 [U. S. Comp. St. 1901, p. 3493]. Section 5197, entitled ‘Limitation upon rate of interest which may be taken,’ embraces the first sentence quoted from the original act, and section 5198, entitled ‘Consequences of taking usurious interest,’ the remainder. The banking law of the state of New York provides that: ‘Every bank and private and individual banker doing businessin this state may take, receive, reserve and charge on every loan and discount made, or upon any note, bill of exchange of other evidence of debt, interest at the rate of six per centum per annum; and such interest may be taken in advance, reckoning the days for which the note, bill or evidence of debt has to run. The knowingly taking, receiving, reserving or charging a greater rate of interest shall be held and adjudged a forfeiture of the entire interest which the note, bill or evidence of debt carries with it, or which has been agreed to be paid thereon. If a greater rate of interest has been paid, the person paying the same or his legal representatives may recover bank twice the amount of the interest thus paid from the bank and private or individual banker taking or receiving the same, if such action is brought within two years from the time the excess of interest is taken. * * * The true intent and meaning of this section is to place and continue banks, and private and individual bankers on an equality in the particulars herein referred to with the national banks organized under the act of Congress, entitled ‘An act to provide a national currency secured by pledges of United States bonds and to provide for the circulation and redemption thereof,’ approved June the third, eighteen hundred and sixty-four.' Laws 1870, p. 437, c. 163; Laws 1892, p. 1869, c. 689, § 55, as amended by Laws 1900, p. 668, c. 310, § 1. This part of the statute needs no construction, and no argument is required to unfold its controlling purpose, which, as the simple reading shows, was to place state banks on an absolute equality with national banks, so far as the subject of usury is concerned, in order to prevent state banks from being driven out of business, for capital goes where there is the least risk. It does not occur to me how that object could be made plainer, and the criticism of more than 30 years or more since the pioneer act of 1870 was passed seems to have raised no serious doubt in that respect.

The notes in question were void as between the original parties thereto, and they would have continued void in the hands of any individual to whom they might have been transferred.Claflin v. Boorum, 122 N. Y. 385, 25 N. E. 360; Webb on Usury, § 308. Whether they were void in the hands of the Federal Bank, after it had discounted them for value before maturity and in due course, depends upon the effect of the statutes above set forth. If they leave the original usury law of this state in full force with reference to a note taken by a state bank under such circumstances, doubt is cast upon every piece of commercial paper made by one person and indorsed by another that is presented to a bank for discount. This would be a serious result, and would carry confusion into all channels of trade; but if such is the law it must be obeyed. If, on the other hand, the old act against usury, which once applied to all loans made and payable in this state, has been so modified as to take its stifling grasp from promissory notes discounted by a bank under the circumstances named, banking business may still be carried on in this state, as it is in others, without undue exposure to loss. What have the courts said with reference to the subject?

The...