Case Name: Merchants' Nat. Bank v. Sevier and another
Court: United States Circuit Court for the Eastern District of Arkansas
Jurisdiction: United States
Decision Date: 1882-10
Citations: 14 F. 662
Docket Number: 
Parties: Merchants’ Nat. Bank v. Sevier and another.
Judges: 
Reporter: Federal Reporter
Volume: 14
Pages: 662–675

Head Matter:
Merchants’ Nat. Bank v. Sevier and another.
(Circuit Court, E. D. Arkansas.
October Term, 1882.)
1. Promissory Note — Yoid Provision in.
A provision in a promissory note “ to pay an attorney’s fee of 10 per cent, on the amount due if suit is brought to enforce payment, for use of the attorney bringing the suit,” is a stipulation for a penalty or forfeiture, and tends to (he oppression of (lie debtor; is a cover for usury, and is without consideration and contrary to public policy, and void.
2. Same — Bank Charter.
Such a stipulation in a note discounted by a national bank is void, for the further reason that it is in excess of tne powers of the bank under its charter.
3. Same — Point not Decided.
Whether such a stipulation in a note discounted by a national bank has the effect to avoid the whole instrument, not decided.
At Law.
B. G. Brown, for plaintiff.
M. M. Cohn, for defendants.

Opinion:
Caldwell, D. J.
The Merchants' National Bank of Little Bock brought suit in this court against the defendants on a note of which the following is a copy:
" $500. Little Rook, ARKANSAS, January 7,1S80.
" Sixty days after date, we, or either of us, promise to pay to the order of toe Merchants' National Bank $500, for value received, negotiable and payable without defalcation or discount at the Merchants' National Bank of Little Rock, Arkansas, with interest from maturity at the rate of 10 per cent, per annum until paid; and in the event payment is not completely made at maturity, the undersigned further agree to pay an attorney's fee of 10 per cent, on the amount due and unpaid if suit is brought to enforce payment of this note, and its interest, or any part that may remain due and unpaid, which said fee shall become due and recoverable in the action brought to enforce the payment of this note for the use of the attorney bringing said suit.
"A. H. Sevier,
"T. J. Churchill."
The defendant Churchill has filed a demurrer to the complaint, assigning several grounds of demurrer, but all based on the stipulation contained in the note to pay an attorney's fee. The effect of inserting such a stipulation in a promissory note has been much discussed by the courts. Adjudged cases may be found supporting every conceivable view of the question. One line of cases holds that such a stipulation is a penalty, and does not make the note usurious, because the maker has the right to pay the principal and avoid the penalty. Cutler v. How, 8 Mass. 257; Lawrence v. Cowles, 13 Ill. 577; Billingsley v. Dean, 11 Ind. 33; Gaar v. Louisville Banking Co. 11 Bush, 180. Other cases hold that it destroys the negotiability of the note, making it a mere contract. Banking Co. v. Gay, 63 Mo. 33; First Nal. Bank of Carthage v. Jacobs, 73 Mo. 35 ; Samstag v. Conley, 64 Mo. 476; First Nat. Bank of Carthage v. Marlow, 71 Mo. 618; Woods v. North, 84 Pa. St. 407; Farquhar v. Fidelity Ins. Co. (U. S. C. C. D. Pa.) 35 Leg. Int. 404; S. C. 7 Cent. Law J. 334; Jones v. Radatz, 27 Minn. 240; S. C. 11 Cent. Law J. 512; [S. C. 6 N. W. Rep. 800.] And in others, it is held that it does not affect its negotiability. Seaton v. Scovill, 18 Kan. 435; S. C. 5 Cent. Law. J. 184; Stoneman v. Pyle, 35 Ind. 103; Sperry v. Horr, 32 Iowa, 184; Howenstein v. Barnes, 5 Dill. 482; 1 Daniel, Neg. Inst. 49.
Some courts hold that such a stipulation is valid and will be enforced. Clawson v. Munson, 55 Ill. 394; Smith v. Silvers, 32 Ind. 321; McIntire v. Cagley, 37 Io. 676; Siegel v. Drum, 21 La. Ann. 8; Wilson Sewing-mach. Co. v. Moreno, 6 Sawy. 35; S. C. 7 Fed. Rep. 806; 1 Daniel, Neg. Inst. 49. Other courts, whose opinions are entitled to the highest consideration, hold that such a provision is a stipulation for a penalty or forfeiture, tends to the oppression of the debtor and to encourage litigation, is a cover for usury, is without any valid consideration to support it, contrary to public policy, and void. Bullock v. Taylor, 39 Mich. 137; Meyer v. Hart, 40 Mich. 517; Witherspoon v. Mussulman, 14 Bush, 214; Shelton v. Gill, 11 Ohio, 417; Martin v. Trustees Belmont Bank, 13 Ohio, 250; Dow v. Updike, 11 Nob. 95; [S. C. 7 N. W. Rep. 857;] 2 Pars. Notes & Bills, 414. And see to same effect note to Jones v. Radatz, 11 Cent. Law J. 513; 12 Cent. Law J. 337; 14 Amer. Law Rev. 858, where it is said:
" It seems to us to be more consistent with public policy to consider all such agreements as absolutely void. They can readily be used to cover usurious agreements, and excessive exactions may be made under the guise of an attorney fee."
The doctrine of the cases last cited accords with sound reason and justice, and has our approval. It would serve no useful purpose to review the cases in detail. There is nothing new to be said upon the subject. The comprehensive and forcible reasoning of Mr. Justice Cooley in Bullock v. Taylor, supra, cannot be successfully answered :
"A stipulation for such a penalty, we think, must bo held void. It is opposed to the policy of our laws concerning attorneys' fees, and it is susceptible of being made the instrument of the most grievous wrong and oppression. It would be idle to limit interest to a certain rate, if, under another name, forfeitures maybe imposed to an amount without limit. The provision in those notes is as much void as it would have been had it called the sum imposed by its true name of forfeiture or penalty. There is no consideration whatever that can support it."
The cases which treat such a stipulation as an agreement to pay liquidated damages, and not as a forfeiture or. penalty, are unsound in principle. Their reasoning destroys the efficacy of every statute" and. rule of decision intended to protect debtors from the demands of grasping creditors. If a stipulation for an attorney's fee can be upheld upon the ground that it is a valid agreement hpon sufficient consideration for the payment of a liquidated sum, it is not perceived why a stipulation to pay the taxes of the payee, or his office rent, or the salary of his collector, or all of these and as many more as the genius of a Capacious creditor may devise, should not be upheld and enforced by the same mode of reasoning. Mr. Justice* Sharswood, in Woods v. North, supra, following Chief Justice GibsoN, characterizes such a provision as "luggage," which negotiable paper is unable to carry, and pertinently inquires: "If this collateral agreement may be introduced with impunity, what may not be?"
In Daniel, Neg. Inst. 49, it is said this inquiry "is answered by the assertion that such provisions facilitate rathe'r than incumber the circulation of such instruments; they are not 'luggage,' but,ballast." Mr. Daniel's assertion is in the teeth of many adjudged cases, among which are well-considered judgments of such eminent jurists as Chief Justice GibsoN, Mr. Justice Sharswood, and Mr. Justice Cooley. It will require something more than assertion to overthrow' a doctrine supported by such high authority. Undoubtedly, if it is once understood that courts will uphold and enforce such stipulations, we shall presently see notes so weighed down with this kind of "ballast," that the provisions to pay the debt and interest will be but a part of the obligation incurred by the debtor in signing the note. The "ballast" will become of more' importance than the ship itself. The plaintiff in this case lately sued on a note in this court which contained a stipulation "to pay the attorney's fee, court costs, and all other expenses in enforcing the collection of this note," and it was gravely insisted in argument in that case that the defendant was liable to pay the hire of a horse and buggy, and the wages and expenses of the plaintiff's collector for the time consumed in going to demand payment of the note after it fell due. And if the Reasoning in Me- Intire v. Cagley, supra, and other eases of that kind is sound, the contention in the ease mentioned would not seem to be extravagant.
The suggestion of some of the courts, which maintain the validity of such a provision, that the fee stipulated for must be reasonable in amount, and that the court should reduce it when in its opinion it is excessive, only proves ¿he unsoundness of the doctrine. For if the parties can lawfully stipulate for the payment of an attorney's" fee, in addition to the principle and interest of the debt, and the costs and fees allowed by law, then they can agree upon the amount of the fee, and the court has no more power over such a contract than it has over any other contract entered into between parties capable of contracting. Interest is the only damages the law allows for delay in the payment of money, (Loudon v. Taxing District, 104 U. S. 771,) and in case of suit the only fees and costs that can be recovered are those allowed by law.
But if it were conceded that natural persons had the right to insert such a provision in a note, it does not follow that the plaintiff in this case would have that right. The plaintiff and payee in the note is a national bank. Corporations have only such powers as are specially granted by the act of incorporation, or as are necessary for carrying into effect the powers expressly granted. The specific power given to national banks is "to carry on the business of banking, by discounting and negotiating promissory notes, drafts, bills of exchange, and other evidences of debt; by receiving deposits; by buying and selling exchange, coin, and bullion; by loaning money on personal security-; and by obtaining, issuing, and circulating notes."
In Nat. Bank v. Johnson, 104 U. S. 277, the supreme court, construing this clause of the charter, say: "So the discount of negotiable paper is the form according to which they are authorized to make the loans; and the terms 'loans' and 'discounts' are synonyms." And it is further said in the same case that "the sole particular in which national banks are placed on an equality with the natural persons is as to the rate of interest, and not as to the character of contracts they are authorized to make. *" "=
The authority given to the bank by its charter to make loans and discounts, contemplates loans and discounts as understood in commercial law, and according to the known usage and practice of banks. Applying these tests, we find such a stipulation is no part of a negotiable promissory note or bill of exchange.
It is a significant fact that of all the forms of bills and notes given in the books, not one contains such a provision. It is comparatively of modem origin. It is the invention of cunning shavers, and one of the methods by which they seek to fleece their victims. It is an exotic in commercial and banking circles, where business is conducted according to commercial usage, and with that integrity and fairness usually characterizing the dealings of banks and business men. This is the first instance that has come under our observation where this bad invention has found its way to the discount board of a national bank.
The exigencies of a bank may require the speedy negotiation of its securities to raise money to meet runs or other unexpected demands upon its vaults, and no stipulation in its securities, acquired by loan or discount, should be sanctioned which would render them non-negotiable, or of doubtful negotiability .or validity. "The discount of negotiable paper is the form according to which they are authorized to make their loans." Nat. Bank v. Johnson, supra. The national banking act requires loans to be made "on personal security," and the uniform usage and practice of banks, conducted on sound banking principles, is to make their loans on short time and require payment or renewal at maturity. But if a bank is permitted to insert such a stipulation in its notes, it is obvious that the attorney of the bank, one of its most important and influential advisers and agents, at once becomes interested in having the makers of every note containing the stipulation make default in payment. It will be observed that the provision is that the 10 per cent, shall be "for the use of the attorney bringing the suit." This is offering the attorney of the bank a premium of 10 per cent, on all overdue notes upon which "suit is brought." The inevitable tendency is to foment and encourage litigation, which the law abhors.
That such a stipulation is in excess of the power of a national bank is shown by that provision of the national banking act which declares that the discount of a bill of exchange, payable at another place than the place of such discount, at the current rate of exchange, in addition to the interest, shall not be considered as taking or receiving a greater rate'of interest than is allowed by the act. Section 5197, .Rev. St. If this express provision was deemed necessary in order to enable banks to stipulate for the payment of the current rate of exchange between the place where the bill is discounted and the place where it is payable, it cannot be maintained, with any fair show of reason, that banks possess the implied power to stipulate for an attorney's fee of 10 per cent, if the bill is not paid at maturity. The power to insert such a provision is not given in express terms, and cannot be implied. It is not necessary to the exercise of any legitimate function of the bank, and is contrary to the usage and practice of banks conducted on sound and legitimate banking principles. And in addition, therefore, to the reasons which render such a stipulation void where the payee is a natural person, it is void in the case of the bank for the further reason that it is in excess of the powers of the bank under its charter. The question whether such a stipulation has the effect, in the case of a national bank to avoid the whole instrument, was waived by counsel, and will not be considered by the court.
Let the plaintiff have judgment for the principal and interest of the note, and no more.