William Nichols v. Samuel Fearson

• Decision Date: 01 January 1833
• Citation: 7 Pet. 103,8 L.Ed. 623,32 U.S. 103
• Parties: WILLIAM S. NICHOLS, Plaintiff in error, v. SAMUEL J. FEARSON et al
• Court: U.S. Supreme Court

32 U.S. 103

7 Pet. 103

8 L.Ed. 623

WILLIAM S. NICHOLS, Plaintiff in error, v. SAMUEL J. FEARSON et al.

January Term, 1833

ERROR to the Circuit Court of the district of Columbia, and county of Washington. The plaintiff in error instituted a suit on a promissory note, dated at Georgetown, October 22d, 1821, for the sum of $101, payable to the order of S. & J. Fearson, the defendants, and by them indorsed. The evidence in the case showed, that on the 26th of October 1821, the defendants came into the store of the plaintiff with the note, and told the plaintiff they had obtained the note from the maker for goods they had sold him at their store, and asked the plaintiff what he would give for it; the plaintiff said he would give $97 for it, which the defendants agreed to take; and thereupon, the plaintiff received the note, which was indorsed by the defendants, before it was brought to the store, and $97 were paid to the defendants for it. When the note became due, and being unpaid by the maker, the defendants promised to pay it.

Upon this evidence, the counsel for the defendants prayed the court to instruct the jury: 'That if they believe from the said evidence, that the plaintiff received the note upon which this suit is brought, of defendants, with their indorsement upon it, and without an understanding that the defendants were not to be responsible on said indorsement, and that the plaintiff paid or agreed to pay therefor only the sum of $97, the transaction is usurious, and the plaintiff is not entitled to recover;' which the court gave as prayed. To which the plaintiff, by his counsel, excepted, and then prayed the court to instruct the jury: 'If they should believe, from the evidence aforesaid, that the defendants, having the note in question, and wishing to part with it, in order to avoid suing the maker, and not having occasion or desire for a loan of money, offered to sell it to the plaintiff, and that the plaintiff, having some accounts with the maker, against which he expected to be able to set off the said note, and not with any other design, agreed to buy it, and did buy it, for $97; and that no loan for usurious interest, nor any loan, nor any evasion of the laws against usury was in the comtemplation of either of the said parties, then plaintiff is entitled to recover;' which the court refused.

The plaintiff's counsel prayed the court to instruct the jury: 'If they believe, from the evidence aforesaid, that this note was sold, and not received by plaintiff, by way of discount or loan, plaintiff is entitled to recover;' which also was refused.

The plaintiff excepted to the instructions of the court given to the jury on the prayers of the defendants; and also to the refusal of the court to give the instruction asked by them. The jury having found for the defendants, this writ of error was prosecuted to reverse the judgment of the court on the same.

The case was argued by Key, for the plaintiff in error; and by Coxe, for the defendants.

Key, for the plaintiff in error, contended, that the question of usury was one depending entirely on the transaction out of which it was said to arise. If a loan was the object of the dealing between the parties, it might be usury; but if it was only the sale of a note already made, it was not so. Why should not a person who has claims upon him purchase a note, to set it off against such demands? Why should not the holder of a note sell it for what he may consider it worth? The reason that such a sale of a note is said to be usurious is, that the indorser who disposes of it is liable; and yet the sale of a bill of exchange, the payment of which is guarantied by the seller, is valid. He cited, Scott v. Lloyd, 4 Pet. 205; 1 Stark. 385; 2 Barn. & Ald. 588; 2 Munf. 36; 8 Cow. 369; 3 Bos. & Pul. 154; 1 Call 66, 70; 1 Dall. 217; 2 Str. 1243.

Coxe, for the defendants in error, argued, that the sale of the note by the defendants, they being indorsers upon it, was a borrowing of money on usury. While it is admitted, that promissory notes may be sold for less sums than their nominal amount, and with larger deductions than the regular discount; yet, in no such cases, does the seller continue liable for the repayment of the money, by indorsing the note. The indorsement of the note made it a direct contract between the plaintiff and the defendant, for the loan of money, on a usurious consideration. There was nothing, therefore, to leave to the jury; the fact was admitted, and the law was properly applied to it by the court. He cited, 13 Johns. 52; 15 Ibid. 44; 2 Johns. Cas. 60; 15 Mass. 96; 2 Conn. 175.

JOHNSON, Justice, delivered the opinion of the court.

This was an action by the indorsee against the indorser of a promissory note, in which the plaintiff here was plaintiff in the court below. It comes up upon exceptions taken to certain instructions given at the instance of the defendant, and to the refusal of other instructions prayed for by the plaintiff. On the motion of the defendants, the court instructed the jury, 'that if they believed, from the evidence, that the plaintiff received the note in question, from the defendants, with their indorsement upon it, and without any understanding that the defendants were not to be responsible upon their indorsement,' at a discount beyond the legal rate of interest, then the transaction was usurious, and he could not recover. The plaintiff then moved the court to instruct the jury to this effect: 'that if they believed the evidence made out a case in which there was no loan contemplated, nor any evasion of the laws against usury, but simply a sale of the note in question, then the transaction was not usurious, and the plaintiff was entitled to recover;' which instruction the court refused.

The case makes out the note to have been a bon a fide business transaction, not infected with usury in its origin, nor made up for the purpose of raising money in the market; and the decision of the court below, of course, affirms this proposition, 'that in the sale of such a note, for a sum so much less than that, on its face, as will exhibit a discount beyond the legal rate of interest, the guarantee or indorsement of the note, without a stipulation against the indorser's liability, makes out a case of usury; that is, per se, a usurious contract between the indorsee and indorser; and no action can be maintained upon it against the indorser.' And since the rule is universal, that there can be no usury, where there is no loan; it follows, that their decision implies the affirmance of the proposition, that such a guarantee or indorsement necessarily implies a loan.

It is necessary to bear in mind, that we are not now called upon to consider a case occurring upon the transfer of a note, which is, in its origin, a mere nominal contract—one on which, as the test is very properly established in the New York courts, no cause of action arose between the original parties. 15 Johns. 44, 55. The present is a case of greater difficulty, for the principle affirmed in the decision under review operates indirectly upon a contract not affected by usury; since, by leaving the possession of the note in the indorsee, who has no cause of action, and the cause of action, if anywhere, in the indorser, who has parted with the possession of the note; it virtually discharges the promisor from liability, although his contract, in its inception, may have been wholly unimpeachable. Yet the rule of law is everywhere acknowledged, that a contract free from usury in its inception, shall not be invalidated by any subsequent usurious transactions upon it.

It will hardly be contended, that, although the indorsement gave no cause of action against the indorser, yet it did operate to give a right of action against the maker of the note. The statute declares a usurious contract to be invalid to all intents and purposes whatever; a valid indorsement is a contract as well of transfer as of provisional liability; and if invalid to the one purpose, it must be equally so to the other. The courts of New York have got over these difficulties, by adjudicating, that whenever the note or bill, in its inception, was a real transaction, so that the payee or promisee might, at maturity, maintain a suit upon it, a transfer by indorsement, on a discount, though beyond the legal rate of interest, shall be regarded as a sale of the note or bill, and a valid and legal transaction. But not so, where the paper, in its origin, was only a nominal negotiation. Such is the result of the decision in Jones v. Hake, 2 Johns. Cas. 60; Wilkie v. Roosevelt, 3 Ibid. 66; and Munn v. Commission Company, 15 Johns. 44.

It has been argued, that the Massachusetts courts maintain the contrary doctrine. But the cases cited will not be found sufficient to bear out the argument. The case of Churchill v. Suter, 4 Mass. 156, was the case of a nominal contract, a note made to be sold in the market, as is admitted in the case stated; the point of usury was not argued; and the opinion expressed by the learned judge was, at best, but an obiter dictum. However, let that opinion be confined to the res subjecta, and there can be no reason for controverting it in this case. It was the case of a nominal sale, a loan with the disguise of a sale thrown over it. The case of Bridge v. Hubbard, 15 Mass. 96, was one of a different character, and decided in conformity with another class of cases. It was the case of the substitution of a new contract, for a note...