Case Name: Kilbreth v. Bates
Court: Supreme Court of Ohio
Jurisdiction: Ohio
Decision Date: 1882-01
Citations: 38 Ohio St. 187
Docket Number: 
Parties: Kilbreth v. Bates.
Judges: 
Reporter: Ohio State Reports, New Service
Volume: 38
Pages: 187–199

Head Matter:
Kilbreth v. Bates.
1. Under the charter oí the Ohio Life Insurance and Trust Company, the discounting of a bill of exchange at a higher rate of interest than was allowed by the charter, rendered such bill void in the hands oí the company. Bank of Chillicothe v. Swayne, 8 Ohio, 257, followed.
2. The effect of the clause in the charter declaring its forfeiture, was not to validate, in whole or in part, an instrument that would, in the absence of such clause, have been invalid ; but to enforce upon the company additional motives for observing in the management of its business the requirements of its charter.
Error to the Superior Court of Cincinnati.
The original action was brought by James P. Kilbreth, assignee of the Ohio Life Insurance and Trust Company, in the Superior Court of Cincinnati, against Isaac Bates ás acceptor, and Eden B. Keeder as indorser, of two bills of exchange. One of the bills was dated June 11, 1857, for $3,500, and payable three months after date at the office of the Ohio Life Insurance and Trust Company, New York, and the other was dated July 14, 1857, for $2,500, payable two months after date, also payable at the office of the company in New York.
One of the defenses interposed by Bates was as follows:
“And the said defendant, for a second answer to said petition, states that he is only an accommodation acceptor upon said bills of exchange in the petition described, for said Eden B. Keeder, who is the principal thereon, and this defendant is only his surety. That this fact was well known to the said Ohio Life Insurance and Trust Company, the original holder of said bills of exchange, when she took the said paper, and he asks that he have the benefit thereof. And further this defendant states, that the said bills of exchange, in the petition named, were so made in pursuance of an arrangement made between the said Keeder and the said Ohio Life Insurance and Trust Company, in order that the latter might discount the same at the rate of six per cent, per annum, and discount therefrom the rate of exchange between Cincinnati and New York, which was, at that time, one and one-half per cent., and which discounts were so made, whereby the said company did reserve to itself for the loan and forbearance of the principal money, covered by said two bills of exchange, a per cent, equal to Seven and one-half per cent, upon the aggregate amount of bpth bills, which was in contravention of the charter of said company, and in violation of the law of the land.
“ That said Ohio Life Insurance and Trust Company, at the time of said arrangement and discounting said bills, well knew that said Reeder and this defendant had no money at New York to meet said bills, and were not expected to have any when said' bills matured, but the same were to be paid and taken up at the city of Cincinnati. That such was the understanding and agreement of said Reeder and company when they discounted said bills, and that said arrangement was a mere shift and device to evade the provisions of the charter of said company against the reservation of more than six per cent, per annum for the loan and forbearance of money by said company. And the defendant further states, that by the charter of said company, and which was in force at the said time of said discounts of said bills, it was and is provided that the said company should not loan money at a rate of interest exceeding six per cent, per annum, whereas the said loans and discounts upon said bills of exchange, were at the rate of seven and one-half per cent, per annum, and which loan and discounting, as aforesaid, of said bills of exchange were usurious and rnrll and void.”
To this defense a demurrer was filed, which was overruled, and judgment rendered for the defendant.
On error this judgment was affirmed in general term; and the present petition in error is prosecuted to reverse these judgments.
JSoadly, Johnson & Colston, for plaintiff in error:
' 1. As the charter of the Ohio Life Insurance and Trust Company contains no limitation or prohibition in regard to the rate of interest that might .be contracted for by it, save a penalty if it demanded or received more than seven per cent., it might contract for and receive any rate, subject, however, to the same restrictions as natural persons, and, in addition, the imposition of the penalty provided by its charter. Corwin v. Ins. Co., 14 Ohio, 6.
In all the Ohio cases in which the supreme court has held contracts of corporations void by reasons of stipulations for usurious interest, the charters of the corporations' have contained prohibitions against such contracts being entered into; and it was by reason of such prohibition that the contracts were held to be ultra vires and void. In the case of the Chillicothe Bank v. Swayne, 8 Ohio, 257, the bank by its charter was prohibited from taking over six per cent.; and on page 289 the court hold that by reason of the prohibition the loan was void. This court, in the ease of Commercial Bank, 11 Ohio, 492, referring to the Chillicothe Bank case, says: “ In the case of the Bank of Chillicothe v. Swayne, the bill was discounted by the plaintiff, and more than six per cent, per annum reserve, in advance, as interest, against an express prohibition in the charter.” In the case of Creed v. Commercial Bank, 11 Ohio, 489, the court held that the bank, by its charter, was-limited to taking interest on “ banking principles and usages,” and the court finds that that is a limitation to taking interest at six per cent., and on the reasoning of the Chillicothe Bank case, held the contract void. Ib. 493. In the case of Spaulding v. Bank of Muskingum, 12 Ohio, 544, the court held that the corporation “is prohibited by its charter, which gave it birth, and not only so, but by general law, from receiving more than six per cent.” interest (Ib. 546), and, therefore, held that the contract could not be enforced. In the case of Miami Exporting Company v. Clark, 13 Ohio, 1, the company was prohibited by its charter from taking over six per cent, per annum, and the court held, “ when a bank, so prohibited, discounts a bill,” at usurious rates, that the loan is void. In the case of Bank of Wooster v. Steven, 1 Ohio St. 233, the bank was limited by its charter to six per cent, interest on its loans, and the -court held that “ a note or other obligation taken by a bank limited by its charter to six per cent, per annum interest upon its loans is void, if more than that is reserved or paid, for want of corporate power to enter into such contract. In the case of Vanatta v. State Bank, 9 Ohio St. 27, the bank discounted a note drawn in a form prohibited by its charter to be discounted, and the court, therefore, held the note void.
Now, it will be noticed that all of these cases, in which the contracts are held void, turn on the prohibition or limitation contained in the charters. Had there been no prohibition, the reason of the decisions would have failed, and as there is no limitation or prohibition in the charter of the Ohio Life Insurance and Ti’ust Company, we submit that these cases are not in point.
That these decisions are against the prevailing authorities in the other states and of the United States courts, we shall hereinafter see ; and the court, in Rock River Bank v. Sherwood, 10 Wis. 238, referring to the cases of The Bank of U. S. v. Owens, 2 Peters, 527; Bank of Chillicothe v. Swayne, 8 Ohio, 252; Creed v. The Commercial Bank, 11 Ohio, 489; Spaulding v. Bank of Muskingum, 12 Ohio, 544, and Orr v. Lacy, 2 Douglass, as cases holding that a usurious contract made, by a corporation is void, says : “I am not prepared to follow these decisions. In my judgment, the reasoning in these cases is clearly and successfully and completely answered by the opinions given in the Commercial Bank of Manchester v. Nolon, 7 How. (Miss.) 508, and McLean, Assignee, &c. v. The Lafayette Bank, 3 McLean, 587.” And, therefore, while these cases in our own state have as yet not been reversed by the supreme court, they should be kept strictly within their limits, and should not be applied to the charter of corporations having no limitations or prohibitions. That this court recognizes this distinction between charters containing prohibitions and charters containing no prohibitions, is, we think, fully demonstrated by the case of Corwin v. Urbana and Champaign Ins. Co., 18 Ohio, 6; Ehrman v. Insurance Co., 35 Ohio St. 337; and see Pollock on Prin. Con. 91; Bank v. Harrison, 57 Mo., 511; McLean v. Bank, 3 McLean, 611; Am. & F. C. W. v. Yount, 9 Reporter, 697, and cases cited; Hoys v. Gas Co., 29 Ohio St., 338; Buckingham v. McLean, 13 How. 151; Bank v. Dearing, 91 U. S. 35; Bank v. Burchard, 33 Vt. 346; Bank v. Mandeville, 1 Cranch C. C. 552; Bank v. Nolan, 7 How. (Miss.) 508; Bank v. Sharpe, 4 S. & M. 75; Bank v. Archer, 8 S. & M. 151; Littleworth v. Archer, 50 Miss. 403; 13 Conn. 249, 257; 26 Conn. 145; 10 Wis. 231; Bank v. Hastings, 12 Wis. 47; Durkee v. Bank, 13 Wis. 216; Brower v. Haight, 18 Wis. 102; Insurance Co. v. Dhein, 43 Wis. 420; Bandel v. Isaacs, 13 Md. 202; Bank v. North, 4 John. Ch. 370; Palmer v. Lawrence, 3 Sandf. 162; Steam Nav. Co. v. Weed, 17 Barbour, 378; Whitney Arms Co. v. Barlow, 63 N. Y. 63; Bank v. Matthews, 98 U. S. 627; Bank v. Hobbs, 11 Gray, 251; Bank v. Butts, 9 Mass. 449; Little v. O’Brien, 9 Mass. 423; Lyon v. Bank, 1 Stewart, 468; Railroad Co. v. Lewis, 33 Pa. St. 33; Railroad Co. v. Transit Co., 83 Pa. St. 160; Steamboat Co. v. McCutchen, 13 Pa. St. 13; Bank v. Pauk, 40 Me. 109; Township of Pine Grove v. Talcott, 19 Wallace, 666; Glass Co. v. Dewey, 16 Mass. 94; Potter v. Bank, 5 Hill, 490; Bank v. Bank, 11 Barb. 213; Mott v. U. S. Trust Co., 19 Barb. 568; Fleckner v. Bank, 8 Wheat. 336.
In view of the cases above cited we think that the current of authority is overwhelmingly against the statement of the law as made by the court in Bank of Chillicothe v. Swayne. Nowhere, except in Ohio and Michigan, has the doctrine in that case been followed and approved. And it is certainly inconsistent with, if not overruled by the case of Hays v. Galion, 29 Ohio St. 330; see also Whitney Arms Co. v. Barlow, 63 N. Y. 62.
II. The charter of the Ohio Life Insurance and Trust Company definitely fixing a penalty, to wit, forfeiture of charter, if interest in excess of seven per cent, should be contracted for, no other or further penalty could be enforced against it. Farmers’ National Bank v. Dearing, 91 U. S. 35. See also Stafford v. Ingersoll, 3 Hill, 38; Whitehall v. Lamb, 57 Barb. 429. Pollock on Contracts (Wald’s edition), note, p. 97.- Citing, in support: Farmers’ National Bank v. Dearing, supra; Bank v. Hobbs, 11 Gray, 250; Bank v. Garlinghouse, 22 Ohio St. 492; Bank v. Moore, 2 Bond, 170; Bank v. Pratt, 115 Mass. 539; Whiley v. Starbuck, 44 Ind. 298; Brown v. Bank, 72 Penn. St. 209.
H. C. Whitman and Clark B. Montgomery, for defendants in error:
I. The law of Ohio as to the powers of corporations, and the proper construction of their charters, is as well settled as any doctrine can be, and the decisions of our highest court are uniform on the question, for a period of more than forty years, without a single exception.
The ^principle is well stated by Hitchcock, J., in the leading case of the Bank of Chillicothe v. Swayne, 8 Ohio, 287. And the principles of that case have been affirmed in Strauss v. Insurance Co., 5 Ohio St. 61; 11 Ohio 12; Creed v. Bank, 11 Ohio 492; 13 Ohio, 17; Spalding v. Bank of Muskingum, 12 Ohio, 544; Morris v. Way, 16 Ohio, 477, 478; Bank of Wooster v. Stevens, 1 Ohio St. 233; Russell v. Failor, 1 Ohio St. 329; Bartholomew v. Bently, 1 Ohio St. 42; Debolt v. Ohio Life Ins. and Trust Co., 1 Ohio St., 575, 576; Union Bank at Massillon v. Bell, 14 Ohio St. 209; Selser v. Brock, 3 Ohio St. 307; and First National Bank of Columbus v. Garlinghouse, 22 Ohio St. 502. The cases cited by opposite counsel as holding a doctrine opposed to what we claim do not sustain their claim.
Nor is it true, as asserted by counsel, that the doctrines of the decision in 8 Ohio have nowhere in the Union, except in Michigan, been approved. On the contrary, the great underlying principle of that decision, that a corporation has only such powers as are expressly granted by its charter, or necessary to carry out such powers, is the settled law of construction in the several states of the Union. McMullen v. City Council of Charleston, 1 Bay, 46; People v. Utica Ins. Co., 15 Johns. 358; New York Firemen's Ins. Co. v. Ely, 2 Cow. 678; Boyce v. City of St. Louis, 29 Barb. 650; 18 How. Pr. 125; 12 Illinois, 138; 14 Illinois, 193; 21 Illinois, 205; 13 Cal. 540; 5 Wendell, 590; 15 N. H. 317; 20 N. Y. 312; 27 Pa. St. 339; 31 Alabama N. S. 76; 33 Ill. 416; 2 Cal. 524; 22 Conn. 522.
To the above might be added numerous decisions of other state courts, if needed.
To same effect, in addition to cases cited, of United States decisions, see Beaty v. Knowles, 4 Peters, 152, affirming 1 McLean, 41; 9 How. 172; 5 McLean, 194; 6 Wheaton, 593; 1 Blachf. C. Ct. 258; 3 Wall. 320; 12 Wall. 349; 23 How. 435, 436; and this principle, says Judge Nelson, in 23 Howard, is a well-settled rule of construction, whether the corporation be public or private.
The logical and inevitable legal conclusion, from the application of this settled rule of construction of the powers of corporations, is that if they are, by the law of their creation, forbidden to make a certain contract to take more than six per cent, interest, and they attempt to do what is so forbidden, the act is null and void. There can be no escape from this conclusion, and it is just, as well as legal. The Ohio cases, from the 8th to the last decision, all stand on this sound, legal and just foundation.
But opposing counsel say, that 8 Ohio is certainly inconsistent- with, if not overraled by the case of Hayes v. Galion, 29 Ohio St. 330, 340. Counsel, however, are clearly mistaken in such idea. The question decided in 8 Ohio, and following cases, is, so far as any analogy may be traced, recognized in 29 Ohio St. The question was, has the Gas Company the power, under the general incorporation act of May 1, 1852, to borrow money to enable it to accomplish the legitimate objects of its creation, and secure the payment of the same by note, and a mortgage of the corporate property ? and the court held it had such power. The court, neither in its syllabus of decision, nor in the opinion, modifies, or limits, or overrules 8 Ohio, or any of the cases sustaining it. Nor is there a word in either inconsistent with the well-settled law of those cases.
In order to properly construe this charter, we must not forget -that it is a peculiar one — that it creates different departments of action with entirely different objects. One is the investment loan department of the whole capital, provided for in section 7. Another is the life insurance department. Another is the annuity department. Another is the general trust department (clause 5 of section 2). Another is the special trust department, embraced in sections, as to infants and, others, 3,4, 5. Another is the banking department. Another is the general loaning and discounting, not embraced in the others.
And so when we are asked to construe the whole, we must look to each department to see what powers therein are granted, and what limitations are imposed, whether as to rates of interest or otherwise. And if we find that the operations under one class of powers, and for one object, are specially limited by a special rate of interest, and that other departments are silent as to rates, or contain a different rate, we of course say that each case and transaction must be controlled by the powers given and limitations imposed by each department.
Now the case at bar is one of the discount of bills of exchange and loaning money upon them. This clearly does not fall under the provisions of the seventh section or the investment loan department; but it falls under the department for loaning money not for specified investment, but as in the ordinary way of banking and loaning or discounted bills. It comes under the banking and loan department. The power to issue notes for circulation is not necessarily a part of banking; and to such a transaction as the one at bar, the limitation of six and not seven per cent, applies. And such was the opinion of the court‘below. But if limitation of seven per cent, applies, it is equally fatal. The sections of the charter cited (7 and 23) as to rates of interest are also prohibitory. They not only limit the rate, but they prohibit a greater. And if a greater rate than is allowed is taken, the loan is usurious and void for want of corporate capacity to make it, and also for its being against an express prohibition.
The reply to the claim .of plaintiffs in error is obvious:
1. It cannot be questioned that there is a clear, positive limitation in the charter, beyond which interest cannot be charged in one class of cases over six per cent., and in another over seven.
2. That this limitation is an absolute prohibition to the company to charge more.
3. That if' the company shall in any case so charge and receive usurious interest, the transaction is necessarily void ; first, for want of corporate power, because the power is only given and is limited to a less rate; and, second, because the act is a prohibited act, and so without authority.
As to the claim that forfeiture of the charter is the only liability imposed on the corporation for such acts thus done ultra vires, and in defiance of express prohibition, such claim is utterly untenable for a moment.

Opinion:
White, J.
The first ground relied on in this case for the reversal of the judgment is, that the charter of the plaintiff not being pleaded, it cannot be known by the court whether the loans in question were in violation of the charter or not.
In answer to this it is sufficient to say, that the only authority of the plaintiff to maintain the action is derived from its charter, which is required, by section 28 thereof, to " be taken and received in all courts, and by all judges, magistrates, and all other public officers, as a public act." 32 Ohio L. 68.
Section 7 of the charter requires the wdiole of the capital stock to be invested in bonds or notes drawing interest not exceeding seven per centum per annum, secured by unincumbered real estate within this state, of at least double the value in each case of the sum so secured. Section 19 Authorizes the trustees to invest " the premium and profits received by the company and the moneys received by them in trust in government, or other public stocks of the United States or of any state, or in the stock of any incorporated city or in such real or personal securities as they may deem proper, or loan the same to any county, city, incorporated town or company." The investments referred to in this section are investments otherwise than by way of loan; and the loans which the section authorizes to be made are limited to counties, cities, incorporated towns, or companies.
The loans now in question come within neither section 7, nor section 19, but under section 23 of the act. The section last named provides that the company may lend money " on notes or obligations, or such other securities as the said trustees may require, at a rate of interest not exceeding six per cent. per annum. If said company shall suspend payment on its bills or notes, in silver or gold coin, lawful money of the United States, for more than thirty days, or shall demand and receive a greater rate of interest in any case than seven per cent, per annum, its charter shall be thereby forfeited."
The language used in this section prescribing the rate of interest at which loans may be made is substantially the same as that used in the charter of the Chillicothe Bank in the case of Bank of Chillicothe v. Swayne, 8 Ohio, 257. The language of the charter in that case was, " The said corporation shall not take more than at the rate of six per centum per annum, on its loans or discounts; " and the court held that the bank had no capacity to loan money at a higher rate, and that, if a loan at a higher rate be effected by discounting a bill of exchange, no recovery could be had thereon. That case was decided in 1838, and contains an elaborate discussion of the question involved, and has ever since been recognized as authority in this State. Creed v. Commercial Bank, 11 Ohio, 489; Miami Exporting Co. v. Clark, 13 Id. 1, 17, 21; Bank of Wooster v. Stevens, 1 Ohio St. 233; Preble County Bank v. Russell, Id. 313, 320; Russell v. Failor, Id. 329; Straus v. Eagle Ins. Co., 5 Id. 59; Union Bank of Massillon v. Bell, 14 Id. 209; First National Bank v. Garlinghouse, 22 Id. 502.
The same principle had previously been decided by the supreme court of the United States, in the case of the Bank of the United States v. Owens, 2 Peters, 257. The authority of the case last named is fully recognized by the same court in Tiffany v. Boatman's Institution, 38. Wall. 375. In the opinion in that case the court say: "The defendant is by its charter authorized to lend money on interest, but is forbidden to exact more than eight per cent, for the loan. No penalty is prescribed for transgressing the law, nor does the charter declare what effect shall be given to the usurious contract. This effect must, therefore, be determined by the general rules of law. The modern decisions in this country are not uniform on the question whether, if the bank takes more than the rate prescribed, the contract shall be avoided or not on these general rules ; nor is this a matter of surprise if we consider the growing inclination to construe statutes against usury so as not to destroy the contract. It is, however, unnecessary to review these cases, or the earlier ones in England and in this country which uniformly hold that the contract is avoided, because this court has in the case of Bank of the United States v. Owens, decided the question.
" The bank in that case brought suit upon a promissory note that was discounted at a higher rate of interest than six per cent., which was the limit allowed by its' charter upon its loans or discounts. The charter, like that of the Boatman's Institution did not declare void any contract transcending the permitted limits, nor affix any penalty for the violation of the law.
" It was contended in that case, as it has been in this, that a mere prohibition to take more than a given per cent, does not avoid a contract reserving a greater rate, and that, when a contract is avoided, it is always in consequence of an express provision of law to that effect. But the court held otherwise, and decided that such contracts are void in law upon general principles; that there can be no civil right where there is no legal remedy, and that there can be no legal remedy for that which is illegal. Chief Justice Taney, in the Maryland circuit, as late as 1854, in a similar case held similar views, and supported them by the decision in this case. Dill v. Ellicott, Taney Circuit Court Dec. 233." See also Pearce v. Railroad Co., 21 How. (U. S.) 441; Ashbury Railway Carriage and Iron Co. v. Riche, L. R, 7 Eng. & Ir. App. Cases, 653; Attorney-General v. Great Eastern Railway Co., L. R. 5 App. Cases. 473; Thomas v. Railroad Co., 101 U. S. 71.
But the principle decided in Bank of Chillicothe v. Swayne is recognized by this court as applying to the charter now in question in the case of Bank of Ashland v. Jones, 16 Ohio St. 145. The question in that case w'as, whether the present plaintiff in error acquired the bonds in question by way of purchase, or for a loan of money at an illegal rate of interest. The court below held that the bonds were taken by the company in the mode last mentioned and held them void for that reason. This court reversed the judgment on the sole ground, that the transaction was not a loan, but a purchase of the bonds. Two members of the court dissented on the ground that the' transaction was a loan of money, and not a sale of bonds at a rate of interest above that allowed by the charter. The only difference between the majority of the court and the minority was as to the character of the transaction, but all agreed, that if the bonds were taken by the company for a loan of money they were void in the hands of the company.
The decisions as to the effect of agreeing for unlawful interest under the National Banking Act have no bearing on the question now under consideration. For, as was said by this court in the case of the First National Bank of Columbus v. Garlinghouse, 22 Ohio St. 502, the forfeiture provided for in that act " is expressly limited to the interest which the note, bill, or other evidence of debt carries with it, or which has been agreed to be paid thereon. In thus limiting the forfeiture to the interest, the right of the bank to the principal is necessarily implied. And so far as the argument as to the entire invalidity of the note is founded on the supposed want of power or capacity in the bank, it is enough to say that authority implied is as effective and available as authority expressly conferred.
"The statute operates on the instrument given for the loan, and, in effect, declares it to be invalid as to the entire interest, but valid and binding as an obligation for the payment of the principal."
Upon the same principle it is claimed by the plaintiff in error, that the only effect of stipulating for an unlawful rate of interest under the charter now in question is the forfeiture of the charter. We think the provision in the charter in relation to forfeiture will bear no such construction. Its effect is not to validate an instrument, in whole or in part, that wrould, in the absence of the forfeiture clause, have been invalid, but to enforce upon the company additional motives for observing in the management of its business the requirements of its charter.
No question arises in this case as to the right of the company to sue for the recovery of the money from the principal who received it. The action in this case, as in the case of the Chiliieothe Bank, is brought on the intruments given for the loan, which being void constitute no cause of action. See Pearce v. Railway Company, 21 How. supra, 441, 444; Miami Exporting Co. v. Clark, 13 Ohio, 1, 19.
Judgment affirmed.