Case Name: German Bank v. DeShon
Court: Arkansas Supreme Court
Jurisdiction: Arkansas
Decision Date: 1883-11
Citations: 41 Ark. 331
Docket Number: 
Parties: German Bank v. DeShon.
Judges: Hon. E. H, English did not sit in this case.
Reporter: Arkansas Reports
Volume: 41
Pages: 331–353

Head Matter:
German Bank v. DeShon.
1. Promissory íTote : Payable to order of maker, when complete.
A promissory note payable to the order of the maker and endorsed, does not become an operative contract, binding upon the maker and endorsers, until it is negotiated by the maker.
2. Same: Made to borrow money: Usury.
When a promissory note, payable to the order of the maker and endorsed, is made for the purpose of borrowing money, and the party to whom it is negotiated, by agreement between him and the maker before delivery, obtains the note at a greater discount than would be the interest at ten per cent, on the amount he pays for it to the maturity of the note, and the parties to the loan intended to pay and receive a greater rate of interest than ten per cent, per annum, the transaction and note will be usurious and void as to principal and interest, and as to both the maker and endorsers.
:3. Usury : The corrupt agreement: Ignorantia legis.
To constitute the corrupt agreement which constitutes usury it is not necessary that the parties intended to violate the law. If it was the intention of the one to reserve and the other to pay more than the rate of ten per cent, per annum on the amount loaned, it is, in the .sense of the law, a corrupt agreement and void for usury, whether ithey knew the interest to be.usurious or not.
4. Usury: Bona fide holder.
A note usurious in the hands of the payee is also usurious and void im the hands of a subsequent purchaser, though he purchased in good faith before the maturity of the note and without any notice of the-usury.
This is an exception to the general rule, that protects a bona fide holder-of negotiable paper, though founded upon an illegal consideration. The reason is that the statute makes the usurious note void and it. can gather no validity by circulation.
5. Usury: Act of Feb. 9,1875, unconstitutional.
So much of the act of February 9,1875, as attempts to validate a usurious contract in the hands of a bona fide holder or endorsee for a. valuable consideration, and without notice of the usury, is unconstitutional and void. [Eakin, J., dissenting].
APPEAL from PulasM Circuit Court.
M. L, Rice, Special Judge.
V. M. Rose, for appellant.
The note is a negotiable instrument, Gantt’s Digest, sec.. 566, and the bank is an innocent holder for value before maturity and by sec. 4, Act Peb’y 9, 1875, the note is valid, notwithstanding any usury between original parties.
Although the language of the Constitution makes usurious contracts void, yet.the word “void” has been construed to mean “voidable” ' in many cases. 2 Hill, 522; 13' Mass., 518 ; 3 Met., 448 ; 3 Oowen, 89.
Though a statute provide that a negotiable instrument shall be void, it.is nevertheless valid in the hands of an innocent holder. 2 Hill, 522; 10 John., 195; Oro. Jac.,. 33 ; Yeld., 47; 1 Ld. Raym., 87; 2 N. H.,410 ; 3 N. H., 119; 7 Cow., 13.
Usury is a personal plea and can only be pleaded by the-borrower. An indorsee can not plead usury between the original parties. Bayley on Bills, ch. 12, p. 368-9 ; Bdwards on Bills and Notes, p. 289; 32 Oonn., 550; <$" Ind., 352; 3 Ala., 458; 21 Iowa, 36; 4 Dana, (Ay,)-181; 13 Mass., 515 ; 1 Mich.., 84; 37 N. Y, 218 ; 33 Vt., 533 ; 5 Leigh, ( Va.) 478.
The additional ten dollars, paid by Fatherly, was com■pensation for Blocher’s trouble, made without any prior .agreement, and did not render the note usurious.
J. M. Rose and Geo. L. Basham, for appellant.
To constitute usury there must be an intent to take ille.-gal interest, or knowingly contract for usurious interest. .25 Ark., 260 ; 9 Ark., 22 ; 25 Id., 195; 4 Id., 55, ■410; 26 Id., 359 ; 9 Peters, 378; Tyler on Usury, 103, .107, 108 ; 21 AT. Y., 219; 4 Pet., 205; 9 Pet., 399 ; .2 Black., 865.
If the transaction was not usurious in its inception, no after transaction can make it so. 17 Oonn., 441, 453 ; 7 .Peters, 104.
The bank is an innocent holder, and not made to suffer except upon the clearest proof. 18 Graft, 873. The taking of more than legal interest is not sufficient to make a prima facie case. 25 Ark., 195; 4 Id., 410 ; 26 Id., 359. When the defense is usury the burden of proof is •on defendant. 21 Wis.,320; 20III., 434; 4 Ind., 221; .3 Blackf., 267-, 5 Id., 334-, 7 Id., 344-, 31 Me., 155; .9 Barb., 619; 9 Rich. (8. O.), 75.
Compensation for services, commissions or brokerage cannot be added to the interest and thus render the trails-*¡action usurious. 18 Ark., 463 ; 25 Id., 195; 21 AT. Y., -531-9; 38 N. Y., 218-8; 37 N. Y., 356; 2 Sweeney, 160-, 15 Vesey, 120-, 2 Tenn., 52; 2 Conn., 341; 8 Id., 513; 4 Id., 604-, 30 Id., 175-9-, 2 Keys, 41, 47; 1 Hilton, 532.
The bank being an innocent purchaser for value would take a good title even if the note were tainted by the usury of prior parties. Acts 1875, p. 146, sec. 4; 8 Ark., 167; ■3 Gratt, 246; 16th Q. B., 244, etc.
John McGlure, for appellee.
“All contracts for a greater rate of interest than ten per cent, per annum shall be void as to principal and interest,”’ sec. 13, art. XIX, Const. 1874. “Anote void by statute-is void in the hands of a bona 'fide holder.” 5Mass., 286.
The note had its inception when it x>assed into the hands of Blocher, and not before. It was payable to the maker and no action could have been maintained upon it before the delivery to Blocher. .65 N. Y, 523; 22 Id., 312. If void in the hands of Blocher no subsequent transfer could give it validity. /Supra, and 14 /Sup. Ct. (N. Y.), 576 6 Wend., 615; 36 Barb., 585.
Blocher was not a banker and had no right to discount the note. 22 Ark., 414« And the receiving of interest in advance, gives more than ten per cent, per annum on the money actually loaned, and is usurious, lb.
' A subsequent taking of more than lawful interest is not conclusive evidence of usury, but if unexplained it is presumptive and very strong evidence of a usurious contract. 2 Cowen, 705; 1 Kern. {N. Y.), 368-, 4 Comst., 364," 10 Ind., 57. The payment and receipt of usurious interest is prima facie evidence of a corrupt agreement. Tyler on Usury, 276; 2 Cowen, 678; 3 Id., 284, and it became the duty of appellant to show that that which appeared to be usurious was the result of accident or mistake.
The act of February 9, 1875, is unconstitutional. The legislature has no power to make a contract which is declared void by the constitution, good in the hands of any one. The constitution makes no exceptions- and the legislature cannot interpolate them.

Opinion:
Battle, Special Judge.
William A. Fatherly executed his promissory note, bearing date the eighth day of July, 1878, and thereby promised to pay, ninety days after the date thereof, to his own order, the sum of sixteen hundred- and fifty dollars, and ten per centum per annum interest thereon from the maturity of the note until paid,, and. Francis' E. Ashley and A. G. DeShon endorsed it. The-note was executed and endorsed for the purpose of borrowing money. After Ashley and DeShon endorsed the note, William D. Blocher gave Fatherly his check on the German bank for the sum of sixteen hundred and eight dollars and seventy-five cents, and Fatherly endorsed and delivered the note to Blocher... Fatherly collected the check and paid Blocher the sum of ten dollars. Blocher transferred the note to the German bank and received a credit on his account with the bank for the sum of sixteen hundred and eight dollars and seventy-five cents. After this, DeShon delivered' to the bank the sum of four hundred dollars. The bank brought suit on the note against Fatherly, DeShon and Ashley.. DeShon answered, setting up usury and claiming a set-off for- the four hundred dollars, and the bank replied,, denying the set-off. The other defendants did not answer. A trial was had and a verdict was returned in favor of DeShon against the bank for the sum of four hundred dollars.
The court below instructed' the jury, at the instance of DeShon, substantially, as follows:-
That contracts for a greater rate of interest than ten percentum per annum are void as to principle and interest. That the paying and receiving of ' a greater rate of interest than ten per centum per annum on a loan of money isprima facie evidence of a corrupt agreement, notwithstanding the parties to the loan acted-in ignorance of the law. That a note payable to the order- of the maker has its inception when it is delivered by the maker to some one for-value or as evidence of a contract and not before, and the-person to whom it is so- delivered for the first time is the payee, although not named in the note. That if Blocher gave Fatherly his check for sixteen hundred and eight dollars and seventy-five cents,, and' upon tlie delivery of the check, received the- note for sixteen hundred and fifty dol lars, and the check was paid, and Fatherly, afterward, under an agreement between himself and Blocher, made previous to the receiving of the check and the delivery of the note, paid to Blocher the sum of ten dollars or any other sum in addition to the sum of forty-one dollars and twenty-five cents already received in the discount of the note, and these sums of money amounted in the aggregate to more than ten per centum per annum interest for the time the money was •loaned, and the same was knowingly done, the note would 'be void because of usury, although the parties to the transaction in so doing, acted in ignorance of the law; and was void in the hands of the German bank, notwithstanding it became the owner thereof, by paying a valuable consideration before maturity, and without notice of the usury.
That if they believed from the evidence, that the note • sued on was usurious in its inception, and that DeShon deposited with the German bank the sum of four hundred dol•lars under a special agreement; that the contingency and •purpose for which the deposit was made had not happened ; and, that under the terms of the deposit, DeShon is entitled to a return of the same, they should find for DeShon in the ¡sum of four hundred dollars.
And the court on its own motion, instructed the jury, among other things, "that if Blocher negotiated the-note to 'the bank, as the agent of Fatherly, and took a commission for his trouble in making the negotiation, that such commission could not. be added to the interest so as to constitute usury ; but if Blocher gave Fatherly a check and took the note as his property, and afterwards negotiated it to the bank on his own behalf, it would make him the first payee of the note and would not constitute him the agent of Fatherly,"
Is there any error in these instructions ?
The thirteenth section of article nineteen of the constitution of this State declares that l'all contracts for a greater rate of interest than ten per centum per annum shall be void as to principal and interest." This section is clear and unambiguous. With the wisdom and policy of it the courts have nothing to do. It is their duty to carry it into effect according to its true intent, to be gathered from its own words, without regard to the hardships incident to the faithful execution of such laws.
The note sued on was executed and endorsed for avowed purpose of borrowing money. It was payable to the order of the maker, and did not become an operative^ contract and binding on the maker and endorser until it was negotiated by Fatherly. Until then it did not become a promissory note and was not a subject of sale. The person to whom he endorsed and delivered it became the payee therein, and the money advanced thereon, less whatever sum the maker agreed, before the delivery thereof, to pay, and thereafter paid to such payee, if any, for advancing, became the consideration thereof, and it accomplished its purpose by becoming a note for borrowed money. If consideration was less than the principal of the note and the difference was greater than ten per centum per annum on such consideration, from the date of the note to the maturity thereof, and the parties to the loan intended to pay and receive a greater rate of interest than ten per cent, per annum, the note would be void for usury. If, for example, Blócher gave his check for sixteen hundred and eight dollars and seventy-five cents to Fatherly with the understanding, at the time, that Fatherly would return or pay to him ten dollars and transfer to him the note, and Fatherly, thereupon, transferred the note to him and, thereafter, collected the check and paid the ten dollars to him, with the intent aforesaid, the whole transaction was usurious, and the note was void as to principal and interest, because there was intentionally reserved — paid and received, a greater rate of interest than ten per centum per annum on the money actually loaned. Scull v. Edwards, 13 Ark., 24 ; Howe v. Potter, 61 Barb., 356; Young v. Wright, 1 Camp., 139 ; Ashland v. Pearce, 2 Camp., 599 ; Wilkes v. Roosevelt, 3 John. Cases, 66; Whitten v. Hayden, 7 Allen, 407; Tufts v. Shepperd, 49 Me., 312; Sylvester v. Swan, 5 Allen, 134; Bossange v. Ross, 29 Barb., 576; Aeby v. Rapelye, 1 Hill, 9 : Cockey v. Forrest, 3 Gill and John., 482 ; Bynum v. Rogers, 4 Jones (N. C.,) L., 399; Ruffin v. Armstrong, 2 Hawks, 411; Dowe v. Schutt, 2 Denio, 621 ; Wallace v. The Branch Bank of Mobile, I Ala., 565; Sauerwein v. Brunner, 1 Harris & Gill, 48.3; Jones v. Hake, 2 John. Cases, 60; Munn v. Commission Co., 15 John., 44; Farris v. King, 1 Stewart, (Ala.), 255; and Richardson v. Scobee, 10 B. Mon., 12.
Like the note, the endorsement of Ashley and DeShon had no binding force and did not become a contract until the note was negotiated, when it became a contract on the part of Ashley and DeShon with the person to whom it was passed, by which they undertook, among other things, to pay the nóte to such person, or other holder, provided the same was duly presented and was not paid by Fatherly, and due and reasonable notice was given to them of the dishonor. In the transfer and delivery of the note and endorsement, Fatherly represented himself and the endorsers, and by the same contract negotiated the note and endorsement, and made the consideration of each of these contracts the same. If the consideration of the note is usurious, sois that of the endorsement; if one be a contract for a greater rate of interest than ten per centum per annum, so is the other ; and if one is void for usury, so is the other. The note and the endorsement of the accommodation endorsers are so intimately connected that they must stand or fall together ; and the endorsers were entitled to make the same defenses the maker could have made. Story on Promissory Hotes, sec., 129; Rey v. Simpson,
NOVEMBER TERM, 1883. 339 German Bank v. DeShon. 22 How. ( U. S.), 341; Good v. Martin, 5 Otto, 90; Ross v. Jones, 22 Wall., 589; Satoyers v. Chambers, 44 Barb., 42; Wilkie v, Roosevelt, supra; Gaillard v. LeSeigneur & LeRoy, 1 McMullan, 229, and authorities above cited. To constitute the corrupt agreement said to be necessary3- Usx,,g^ to constitute usury, it is not necessary that there be an g?eementl actual intent to violate the statute or constitution. Where parties to a contract for a loan knowingly agree to pay and receive more than ten per centum per annum for the use of the money borrowed, this, in the sense of the law, is a corrupt agreement. If it be the real intention of the parties . to receive or reserve a given rate of interest, and that rate proves to be usurious, the contract will be void for usury, whether the parties knew the interest to be usurious or not. Ignorance or mistake in relation to the law, in such a case, will and does not afford protection against the consequences of usury. New York Firemen's Insurance Co. v. Fly, 2 Cowen, 678; McGill v. Ware, 4 Scam, 29; and Metcalf v, Watkins, 1 Porter, 96. If the note in question was transferred and delivered by 4. void in-J liands of Eatherly to Blocher, in consideration of money loaned, and^^ll31*' it was-void on account of usury in the hands of Blocher, it was likewise void in the hands of the German bank, notwithstanding it was transferred to the bank for a valuable consideration before maturity, and without notice of the usury. It is true, as a rule, that a bona fide holder, who has received negotiable "paper in the usual course of business," as said by Mr. Daniel in his work on negotiable instruments, "is unaffected by the fact that it originated in an illegal consideration, without any distinction between cases of illegality founded in moral crime or turpitude, which are termed mala in se, and those founded in positive statutory prohibition,' which are termed mala prohibita.. The law extends this peculiar protection to negotiable!
instruments, because it would seriously embarrass mercantile transactions to expose the trader to the consequences of having the bill or note passed to him impeached for some covert defect." But there is one exception to this rule, :and that is, when a statute declares a contract void, it gathers no vitality by its circulation in respect to the parties •executing it, but it and the instrument evidencing it are void in the hands of every holder. 1 Daniel on Negotiable Instruments, sec. 197; Young v. Berkley, 2 N. H., 410; Young v. Wright, supra ; Howe v. Potter, 61, Barb., 356; Ackland v. Pearce, supra ; Wilkie v. Roosevelt, supra ; Bridge v. Hubbard, 15 Mass., 95 ; Sauerwein v. Brunner, 1 Harris & Gill, 477 ; Gaillard v. LeSeigneur, supra; Solomon v. Jones, 3 Brevard, 54; Hackney v. Sprague, 10 Wend., 114 ; Lloy v. Scott, 4 Pet., 228 ; Thompson v. Berry, 3 John. Chy., 394; Fleckner v. U. S. Bank, 8 Wheat., 354; Bowyer v. Bampton, 2 Stra., 1155; Townsend v. Bush., 1 Conn., 262; Metcalf v. Watkins, 1 Porter, 57; The City of Aurora v. West, 22 Ind., 88 ; and Dewing v. Perdicaries, 96 U. S. Rep., 196.
But it is said that the general assembly of this state, in 9*section four of an act entitled "an act regulating interest defining usurious contracts," approved February 9, 1875, enacted that no bill of exchange or promissory note, void in its inception on account of usury, shall be void "in the hands of an endorsee or holder who shall have received the same in good faith and for a valuable consideration, and who had not, at the time of discounting or receiving such bill or note, or paying such consideration for the same, actual notice that such bill or note had been originally given for a usurious consideration or upon a usurious contract." But is this section constitutional? We think not. The language of the constitution is broad and eomprehen«ive. It says : "All contracts for a greater rate of inter•est than ten per centum per annum shall be void, as to principal and interest, and the general assembly shall prohibit the same by law. " '•All contracts" include bonds, bills, notes and all other contracts, verbal and written,, whereby a rate of interest greater than ten per centum per annum is reserved, taken or secured, or agreed to be taken, or reserved, as fully and completely as if they had been severally and particularly enumerated in the constitution and declared void. The legal effect of this provision of the constitution was to make bills, notes, and all other contracts tainted with usury void in the hands of every holder. The constitution made no exception as to persons, holders,., or contracts, and the legislature had no power or authority to do so. So far from having power or authority, the constitution expressly makes it the duty of the general assembly to prohibit all such contracts by law.
The instructions of the court below to the jury are substantially correct. We see no error in them prejudicial to the rights of appellant.
Was the verdict of the jury contrary to law and evidence?" The jury evidently found, first, that the note sued on was transferred and delivered to Blocher by Fatherly in consideration of a loan of money ; secondly, that Fatherly paid. Blocher the sum of ten dollars in part consideration of the money loaned, and that in the discount of the note and the. ten dollars there was paid to and received by Blocher, pursuant to an agreement coeval with the loan, more than ten. per centum per annum interest for the use of the money loaned ; and thirdly, that four hundred dollars was deposited by DeShon with the German Bank on conditions which, were never performed.
As to the first of'these facts found by the jury, Fatherly testified that he presented the note to Blocher and requested, him to borrow money for him on it; that Blocher said he had no money of his own, but that ho knew where he could., get twelve hundred dollars ; that he supposed Blocher was. his agent; that Blocher was to raise him some money ; that -on the next day after the conversation related he saw Blopher and Blocher told him he could let him have the money and gave him his check therefor on the German bank for $1,608.75 ; that he gave Blocher the note in question; that he collected the check and then paid Blocher ten dollars for his trouble ; and that he paid Blocher altogether $51.75 for the money advanced on the note.
Blocher testified he was not the agent or broker of Fath•erly ; that he purchased the note with his own money and on his own account' and gave his. check on the German bank for $1,608.75 ; that he does not know how much he received from Fatherly as commissions, certainly not more than $8.75, or that he received anything, but thinks he did not; and that the note was his and he sold it t© the German bank at ten per cent, discount.
C. T, Walkerj the cashier of the German bank, testified, "that on the ninth or tenth day of July, 1878, - Blocher presented the note to th,e German bank, and the bank discounted it at less than ten per cent, per annum; and that the bank paid Blocher $1,608.75 for it, and credited that •amount on Blocher's account.
As to the second fact found by the jury, the note, on its face, was notice to Blocher that it had no validity or operative force or effect as a note, when it was first presented to •him, and that any money advanced upon it would be a loan. In fact, Fatherly testified, that it was presented to Blocher, with the request that he borrow money on it. In addition to this fact he further testified, that Blocher said he could let him have the money, and gave him his check on the 'German bank for $1,608.75, for the note ; and that he collected the check and paid Blocher ten dollars. Why did he .pay Blocher this ten dollars? For his trouble? There was no evidence that Blocher was at any trouble. He had. discounted the note $41.25, and in that way had already re ueived a fair remuneration for the use of his money. Why did he receive an additional compensation? Could the jury come to the conclusion other than that the ten dollars was paid and received as a part of the consideration for the loan of $1,608.75, pursuant to an agreement coeval with the loan? There was.certainly some evidence to support the jury in coming to this conclusion, and they were the sole judges of the weight that should be attached to it. Hammett v. Tea, 1 Bos. and Pull., 143; Catlin v. Gunter, 1 Kernan, 372; New York Firemens' Insurance Co. v. Ely, 2 Cowen, 706; Andrews v. Pond, 13 Pet., 65, 80; Wright v. Wheeler, 1 Camp., 165; Towslee v. Durkee, 12 Wis., 480; and Price v. The Lyons Bank, 33 (N. Y.), 55, 57, 60.
As to the third fact found by the jury, DeShon testified, that he proposed to the cashier of the German bank, to deposit the full amount of the note, if the bank would sue Mrs. Ashley on the note, and that the bank should have the dejcosit if it failed to collect of Mrs. Ashley the amount of the note ; that the cashier agreed to this ; that thereupon he •deposited with the bank four hundred dollars, and was proceeding to make another deposit, when the cashier informed him that the bank would not sue Mrs. Ashley ; that no one had any authority to credit the four hundred dollars on the *note ; and that he did not hear the cashier tell Thompson to credit the four hundred dollars on the note, and did not know that it was so credited until after the institution of the suit.
C. T. Wa'lker, the cashier, testified that DeShon did not offer to deposit the amount of the note with the bank if plaintiff would sue Mrs. Ashley; that he understood the four hundred dollars to be paid as a credit on the note, and handed it to Thompson, who credited it on the note in De-Shon's presence.
This was substantially the evidence before the jury. It was within their peculiar province to w_eigh it and determine the facts in the case. They returned a ver diet as before stated. The court who heard the evidence, 'and is therefore presumed to be better qualified to pass upon its weight and the credibility of the witnesses in the case than we are, refused to disturb it. It was sustained by evidence. It is not for us t,o decide whether we would have returned a like verdict or believe the evidence properly weighed.
The judgment of the court below is, in all things, affirmed.