The Citizens' National Bank of Kansas v. Donnell

• Decision Date: 04 March 1903
• Citation: 72 S.W. 925,172 Mo. 384
• Parties: THE CITIZENS' NATIONAL BANK OF KANSAS CITY v. DONNELL, Appellant
• Court: Missouri Supreme Court

72 S.W. 925

172 Mo. 384

THE CITIZENS' NATIONAL BANK OF KANSAS CITY v. DONNELL, Appellant

Supreme Court of Missouri

March 4, 1903

Appeal from Jackson Circuit Court. -- Hon. E. P. Gates, Judge.

Reversed (with directions).

Edward P. Garnett, John G. Park and Rozzelle & Walsh for appellant.

(1) A national bank is not allowed to "take, receive, reserve or charge" a rate of interest greater than is allowed by the laws of the State where it is located, and in determining the rate of interest it is necessary to look to the laws of the State of Missouri. R. S. U. S. sec. 5197; Bank v Haseltine, 155 Mo. 65; s. c., 183 U.S. 132. (2) Under the laws of Missouri the plaintiff was not allowed to compound the interest on the Mason note oftener than once a year, and by doing so from December 29, 1893, to July 12 1895, it was guilty of charging usury and the Mason note was tainted with usury between those dates. R. S. 1889, sec. 5977 (sec. 3711, R. S. 1899). (3) By the laws of Missouri plaintiff was not allowed to charge any interest on the overdrafts, until after demand, and then only at the rate of six per cent per annum, and in no event was allowed by agreement in writing to charge more than eight per cent, and the charge of one per cent per month compounded monthly was without question unlawful. R. S. 1889, sec. 5972 (sec. 3705, R. S. 1899); Laws 1891, p. 169; R. S. 1899, sec. 3706; Wolf v. Matthews, 98 Mo. 146. (4) When plaintiff deducted the overdraft, with its accumulated one-per-cent-per-month-compounded-monthly interest, from the $ 2,500 note and gave defendant credit on its books for only the net balance, it was guilty of "taking, receiving, reserving or charging a rate of interest greater than is allowed" by the laws of Missouri, and hence that note was tainted with usury from its inception. Bank v. Childs, 133 Mass. 248; Bank v. Lewis, 81 N.Y. 15; Harnsey v. Life Ins. Co., 60 Vt. 209. (5) When the plaintiff received, reserved and took out of the $ 20,000 note in suit the usurious interest charged and calculated into the Mason note, into the $ 17,500 note, into the $ 2,500 note, and into the overdrafts, and gave defendant credit for only the small balance of the net proceeds of the loan represented by that note, it was guilty of "taking, receiving, reserving or charging a rate of interest greater than is allowed" by law, which occasioned the forfeiture of the entire interest carried by said note. The note in suit is the direct descendant of, and the culmination of the usurious transaction preceding it. When there has been a series of renewal notes given, the taint of usury in the first follows down the entire line and infects all the descendant obligations. This is well settled by all the text-writers and all the decisions of the courts, both State and Federal. We cite a few cases. The list could be extended almost indefinitely. Brown v. Bank, 169 U.S. 416; Danforth v. Bank, 48 F. 271; Bank v. Hoagland, 7 F. 159; Overholt v. Bank, 82 Pa. St. 490; Osborn v. Bank, 175 Pa. St. 494; Stephens v. Bank, 88 Pa. St. 157; Marr v. Marr, 110 Pa. St. 64; Bank v. Ragland, 181 U.S. 45; Earnest v. Haskins, 100 Pa. St. 551. (6) The transactions between the plaintiff and the defendant, beginning in 1892 and culminating April 29, 1896, in the note in suit is shown to be a continuous connected running account and in fact "constitutes but one transaction, and the usurious interest in this instance having been carried into the general account and made a part of the sum found due on the final settlement, tainted the whole contract with usury." Pickett v. Bank, 32 Ark. 346; Bank v. Lewis, 75 N.Y. 524. (7) "Taking, receiving, reserving or charging a rate of interest greater than is allowed" by the laws of the State where the bank is located, "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." This is the plain language of the national banking act, section 5198, and the courts have with singular uniformity construed it to mean just what it says -- that "the entire interest" which the note "carries with it" is forfeited. Not merely the excess of interest above the legal rate, but "the entire interest" which the note "carries with it" is forfeited. The note in suit "carries with it" all the interest which had been calculated on the Mason note; all the interest which had been calculated on the $ 17,500 note; all the interest which had been calculated on the $ 2,500 note; and all the interest which had been calculated on the overdrafts; therefore all the interest on all these transactions is forfeited, and the plaintiff is limited in its recovery to the principal sums. R. S. U. S. sec. 5198; Brown v. Bank, supra; Barnet v. Bank, 98 U.S. 555; Bank v. Dearing, 91 U.S. 29; Haseltine v. Bank, 155 Mo. 75; s. c., 183 U.S. 132; Danforth v. Bank, supra; Tomblin v. Higgins, 53 Neb. 92; Snyder v. Bank, 94 Ky. 231; Bank v. Stauffer, 1 F. 187; Bank v. Will, 184 U.S. 155. (8) Usury does not render a note void, so that it has to be set aside and recovery had on the original transaction. The note is not void, but the taint of usury completely destroys its capacity for drawing any interest. It is rendered barren and unfruitful, and neither it nor its descendant obligations can ever draw any interest. The transaction leading up to the note is uncovered in order to discover what interest is included in it, so that all the interest may be stricken out. Bank v. Carlinghouse, 22 Ohio St. 502; Allen v. Bank, 23 Ohio St. 97; Lucas v. Bank, 78 Pa. St. 228; Smith v. Heath, 4 Daly (N. Y.) 123. (9) Plaintiff is not entitled to interest from the commencement of this suit. The taint of usury having completely destroyed the capacity of the note to bear any interest, there was nothing that the plaintiff could thereafter do that would restore to the note or cause of action the power to draw any interest. The vice is in charging usury, and demanding usury by suit does not purge the transaction of usury. Brown v. Bank, 92 Ky. 607; Petersburg Bank v. Childs, 133 Mass. 248; Shaffer v. Bank, 53 Kan. 614; Lucas v. Bank, 78 Pa. St. 228; Danforth v. Bank, 48 F. 277; Bank v. Stauffer, 1 F. 188; Bank v. Hoagland, 7 F. 162; Guthrie v. Reid, 107 Pa. St. 275; Snyder v. Bank, 94 Ky. 231; Cake v. Bank, 86 Pa. St. 303; Bank v. Thompson, 101 Ky. 285; Shunk v. Bank, 22 Ohio St. 512.

Warner, Dean, McLeod & Holden for respondent.

(1) "We understand it to be conceded that, as the note in question was given to a national bank, the definition of usury and the penalties affixed must be determined by the national banking act and not by the law of the State." Haseltine v. Bank, 183 U.S. 134. (2) The national banking act permits interest to be charged at the rate allowed by the laws of the State where the bank is located (U. S. stat. sec. 5197), but it does not prohibit the compounding of interest at the highest rate allowed by the State law. Tyler on Usury, 242, 244; Meyer v. City of Muscatine, 1 Wall. 384. (3) Our statute prohibiting the compounding of interest oftener than once a year must be read in connection with sections 3705, 3706, 3707 and 3708 of our statute relating to interest. By every principle of construction it would not be unlawful or usurious in Missouri, to compound, every six months or quarterly, a note drawing four or five per cent. Such a construction would be absurd. The highest rate of interest would not be exceeded. This is all that the statute is intended to prohibit. In this case at no time did the maximum charge equal seven and one-half per cent. Mills v. Johnson, 23 Tex. 330; Andrews v. Hoxie, 5 Tex. 194; Miner v. Bank, 53 Tex. 561; Martin v. Bank, 5 Tex. Civ. App. 171, 23 S.W. 1032; Watson v. Mims, 56 Tex. 451; Mitchell v. Napier, 22 Tex. 121; Crozier v. Stephens, 2 Willson (Tex. Civ. Cas.) section 802; Brown v. Crow, 29 S.W. 653. (4) Compound interest is not of itself usurious. Mills v. Johnson, 23 Tex. 329; Weaver v. Bank, 53 Tex. 561; Mills v. Bales, 11 Conn. 495; Lewis v. Pascal, 37 Conn. 318; Turner v. Miller, 1 Eng. (Ark.) 468; Wilcox v. Howland, 3 Pick. 169. (5) Stipulations to the effect that, if the debt be not paid at maturity, it shall draw interest thereafter at a rate greater than the statutory limit, are now generally regarded as penalties to induce prompt payment, and as the debtor has it in his power to avoid paying the penalty by discharging the debt when due, such agreements are held free from usury. Upton v. O'Donahue (Neb.), 49 N.W. 267; Burke v. Raab, 4 Ill.App. 338; Lawrence v. Cowles, 13 Ill. 577; Downey v. Beach, 78 Ill. 53; Chaffee v. Landers, 46 Ark. 364; Jones v. Hubbard, 5 Call (Va.) 211; Call v. Scott, 4 Call (Va.) 402; Pollard v. Baylors, 6 Munf. (Va.) 433. (6) Even if the transactions respecting the overdrafts should be thought usurious and are not purged by the subsequent arrangement when the notes were given, and the interest on the entire indebtedness was made less than eight per cent, it can only affect the overdrafts themselves and not the principal part of the indebtedness. Porter v. Jeffries (S. C.), 18 S.E. 229; Smith v. Heath, 4 Daly (N. Y.) 123; Bank v. Hoagland, 7 F. 179; Mills v. Johnson, supra; Smith v. Stoddard, 10 Mich. 152. (7) An agreement to pay interest at a higher rate than allowed by law, in consideration of past forbearance, is held to be free from usury, though it may be unenforcible for want of consideration. Daniels v. Wilson, 21 Minn. 530. (8) In this case it was believed, when the notes were given, that by stipulating that the aggregate interest should be less than eight per cent, the transaction was not usurious. It is universally held that to constitute usury the contract must be entered into with a...