Case Name: John C. Allen v. The First National Bank of Xenia, Ohio
Court: Supreme Court of Ohio
Jurisdiction: Ohio
Decision Date: 1872-12
Citations: 23 Ohio St. 97
Docket Number: 
Parties: John C. Allen v. The First National Bank of Xenia, Ohio.
Judges: 
Reporter: Ohio State Reports, New Service
Volume: 23
Pages: 97–105

Head Matter:
John C. Allen v. The First National Bank of Xenia, Ohio.
1. "Where a national bank, organized from a state bank under the provisions of the national currency act, at the time of its organization took from such state bank, among the discounted notes, one for a larger amount than the national bank was authorized to loan to a single borrower, such note is not, nor is any note subsequently given in renewal thereof, to be regarded within the meaning of section 29 of said act, as given for money borrowed of the national bank.
2. In an action brought by a national bank on a note given by way of renewal for a balance due on a previous loan, which had been reduced by renewals and payments below the maximum sum which it was authorized to loan to a single borrower, it is no defense that the original loan was for a larger sum than the bank was, by its charter, authorized to make.
3. National banks are authorized to take mortgages on real estate in good faith to secure debts previously contracted. A national bank extended the time of payment of indebtedness at a usurious rate of interest, and took therefor notes and a mortgage made by the debtor to a third person, the notes being indorsed by the latter. Held, that the usury only avoided the interest, and that to the extent the debt was valid the mortgage was a bona fide security, and that the bank, by becoming the-owner of the notes, acquired the equity in the mortgage.
Error to the District Court of Greene county.
The original suit was brought by the defendant in error' against the plaintiff in error, Allen, upon four promissory notes and upon a mortgage executed to secure their payment. The notes were dated July 18, 1866, each being for $5,000, and payable one year after date to the order of C. R. Merrick, and were signed by Allen as, sole maker, and indorsed by Merrick. The mortgage was also executed by Allen to Merrick, and was duly recorded.
These notes and mortgage were delivered by Allen to the bank to pay the balance due on two other promissory notes then held by the bank against him. In addition to the-amount of such indebtedness, there was included in said notes interest at the rate of nine per cent, per annum from their date to maturity.
The two notes held by the bank, in satisfaction of which said four notes were given, had been, at the time of giving said last-named notes, some time overdue, and were as follows : One dated December 16, 1865, for $16,000, payable four months after date to the order of the bank, and signed by said Allen and by Merrick, McClure & Co., and Henry Neville, as makers. The other dated January 30, 1866, for $10,000, payable four months after date to the order of said bank, and signed by Henry Neville, said Allen, and Gr. Snyder as makers.
The note of $16,000 was for the balance of a loan of $26,000, which had been made to Allen by the Xenia Branch of the State Bank of Ohio before that bank had been organized into the First National Bank of Xenia, the present defendant in error, under and by virtue of section 44 of the act of Congress known as the national currency act, approved June 3, 1861, and by the transfer of the assets of the said Xenia Branch of the State Bank of Ohio to the defendant in error, became the property of the latter. The original loan had been reduced by payments, and the time extended by renewals subsequent to the transfer.
The note of $10,000 was given for the balance due on two loans originally made by the defendant in error, in 1864, to Merrick, McClure & Co., to secure which to the bank, Allen was one of their'sureties. By an arrangement between Allen and Merrick, McClure & Co., Allen subsequently assumed to pay $14,000 of their indebtedness to the hank. To carry out his arrangement with Merrick, McClure & Co., Allen gave to the bank his note, on which Merrick, McClure & Co. were sureties. This note was from time to time renewed and reduced by payments, until finally the note above named of $10,000 was given.
The paid-up capital of the defendant in error at no time exceeded one hundred and twenty thousand dollars.
The balance due from Allen to the defendant in error, on the 13th of July, 1866, the date of the four notes sued on, was $18,351.77, for which judgment was rendered, and -on default of payment the mortgaged premises were ordered to be sold.
The District Court on error affirmed this judgment. The present petition in error is prosecuted in this court to obtain the reversal of these judgments.
Goode & Bowman, for the plaintiff in error:
I. Upon the facts set forth in the bill of exceptions, the national bank acquired no title to the mortgage sued upon. Those facts show an attempt to evade section 28 of the act under which said bank exists.
II. Said mortgage and the notes secured by it are void? because of the prohibition in section 30 of said act.
In determining the powers of a corporation, its charter must be strictly construed, and every contract made by a corporation, which is not authorized by its charter, is ultra vires and void.
Every contract of a corporation, which is prohibited by its charter, is not only ultra vires, but is also void, because it is prohibited; that there is no distinction in this regard between malum prohibitum aud malum in se. Bank of Chillicothe v. Chillicothe, 7 Ohio, 35, pt. 2; Same v. Swayne, 8 Ohio, 286; Bartholomew v. Bentley et al., 1 Ohio St. 41; Bank of United States v. Owens, 2 Pet. 527; Preble Co. Bank v. Russell et al., 1 Ohio St. 321; Vanatta v. State Bank of Ohio, 9 Ohio St. 27; Straus & Bro. v. Eagle Ins. Co., 5 Ohio St. 61; Bonham v. Taylor et al., 10 Ohio, 110; Pearce v. Mad. & Ind. R. R. Co. et al., 21 How. (U. S.) 442; 22 Conn. 502; Philadelphia Loan Co. v. Trume, 13 Conn. 260; Wheeler v. Russell, 17 Mass. 259; Albert and wife v. Savings Bank et al., 2 Md. 171; L. & F. Ins. Co. v. M. F. Ins. Co., 7 Wend. 31; Broughton et al. v. The Company, etc., 3 B. & Ald. 1.
But it is claimed that the subsequent clauses of the section modify the prohibition contained in the first sentence of the section, and, by providing a forfeiture of the interest shall be adjudged as the penalty of its violation, authorizes the ecovery of the principal.
This precise question is decided by the Court of Appeals 10 a recent case. First National Bank of Whitehall v. James-Lamb et al., Albany Law Journal, Dec. 7, 1872, p. 382.
III. The notes and mortgages are void under the twenty-ninth section of the currency act. This bank could not loan to Allen a sum greater than $12,000. Bank v. Lanier, 11 Wall. 369.
It seems to us there is nothing in the argument that the violation of the prohibition contained in section 29, creates-merely a question of forfeiture between the bank and the government, and does not invalidate the contract.
1. This question was disposed of by our own court ín Bank of Chillicothe v. Swayne et al., and in the subsequent cases approving the principle of this decision, and the case in 8 Wheaton, relied upon by defendant in error, was before the court.
2. Every willful violation of its charter’, and every willful exercise of an unauthorized act by a corporation, raises this question of forfeiture, and authorizes the sovereign power which created the corporation to deprive it of its charter. Section 53 of the national currency act is, therefore, but a mere affirmance of what the law would have been in the-absence of any such provision.
It can not be used, therefore, to work out an intention on the part of Congress that a violation of this section 29' should not be followed by the usual consequences which follow from all attempts of a corporation to step beyond the law of its creation, or to undertake the making of a contract which its charter forbids.
3. If it has this effect upon section 29, why not upon all the other prohibitory sections of the law? Why not upon section 35 of the act, a violation of which the Supreme-Court of the United States has expressly decided, in Bank v. Lanier (supra), invalidates both the loan and the security.
B. Nesbitt, for defendant in error:
I will not discuss the defense of usury, in view of the- able arguments of other counsel in cases now before the court, in which that is the only question presented.
The second claim made on behalf of Allen comes under section 29 of the currency act.
Section 28 gave the bank unlimited power to take mortgages on real estate as security for debts previously contracted in good faith.
But even if the loan, as made to Allen, was a violation .of section 29, the contract is not void. That section is directory only, and the penalty for its violation can only be enforced in a direct proceeding. F. & M. Bank of Milwaukee v. D. & M. R. R. Co., 17 Wis. 372; Bissell v. Mich. So. R. R. Co., 22 N. Y. 258; Commercial Bank of Manchester v. Nolan, 7 How. 508; The Bank v. Paitiaux, 3 Rand. 136; Planters Bank v. Sharp, 4 Sme. & M. 74; Grand Gulf Bank v. Archer, 8 Ib. 151; Penobscot Boom Corp. v. Lamson, 16 Me. 224; Trustees of Vernon v. Hills, 6 Cow. 23; John v. Farmers and Mech. Bank, 3 Blatchf. 367; Cahill v. Kalamazoo Mut. Ins. Co., 2 Doug. 124-139; Hughs v. Bank of Somerset, 5 Litt. 45; Coil v. Pittsburg Female College, 40 Penn. St. 439; Fleckner v. Bank of U. S., 8 Wheat. 338; Stewart v. National Union Bank of Maryland, 4 Am. Law Rev. 397; S. C., 2 Balt. Daily Law Transcript, 967; Bates v. State Bank of Alabama, 2 Ala. (N. S.) 451; Bond v. Central Bank, 2 Ga. (Keely), 92; Steam Nav. Co. v Weed, 17 Barb. 378; Mott v. U. S. Trust Co., 19 Barb. 568; Sacketts Harbor Bank v. Lewis Co. Bank, 11 Barb. 213; Richmond Bank v. Robinson, 42 Me. 589.
At the time the mortgage was given, there was no money loaned by the bank to the plaintiff, nor was there any borrowed, nor “reborrowed” (as the counsel of the plaintiff' states it), by the plaintiff.
Th'e question, therefore, which affects the mortgage is not whether it secures to the bank a liability of one person, for a greater amount than one-tenth part of the capital slock paid in; but the only question is, was this mortgage taken in good faith, to secure a debt previously contracted?
The judgment included only the money due at the time the notes were given. . The mortgage for the money due' is not affected by the usury added to the notes. Bailey v. Murphy, Walk. Ch. 424; Cowles v. Raguet et al., 14 Ohio, 56.
Interest added to a former indebtedness by a bank against a debtor, although there may be usury in such-interest added, does not affect the contract, it not being a loan. Dunckle v. Renick et al., 6 Ohio St. 527.
To constitute a usurious contract, there must be a loan.

Opinion:
White, C. J.
One of the assignments in error in this case has already been decided, at the present term, adversely to the plaintiff in error. The First National Bank of Columbus v. Garlinghouse et al., 22 O. S. 493.
In considering that case, we had before us the argument in this ease of the counsel of the present plaintiff in error on the question then decided; and it is sufficient now to say, that we are satisfied with that decision.
2. Another ground of error assigned is, that the notes sued on were taken by the defendant in error in violation of. section 30 of the national currency act of June 3, 1864-That section provides as follows:
" That the total liabilities to any association of any person, or of any company, corporation, or firm, for money borrowed, including in the liabilities of a company or firm the liabilities of the several members thereof, shall at no time exceed one-tenth part of the amount of the capital stock of such association actually paid in: Provided,, that the bona fide bills of exchange drawn against actually existing values, and the discount of commercial or business paper actually owned by the person or persons, corporation or firm negotiating the same, shall not be considered as-money borrowed."
We are not called on by the facts of this case to determine what would be the rights of the bank on a note or other.evidence of indebtedness given for money borrowed-of it in excess of the amount allowed by this section; for-we do not regard the notes sued on in this case as coming; within the operation of the section. 'The consideration .of the four notes in controversy was the two notes previously held by the bank against- Allen and his sureties. If these notes were valid, there could be no objection to the bank, if it saw proper, extending the time of payment for the convenience of Allen, the principal debtor, or to its taking other security in lieu of what it then held, to insure final payment.
That the two previous notes were not' affected by the section of the statute in question, to us seems clear.
The balance due on the note of $16,000 was for money borrowed by Allen of the Xenia Branch of the State Bank of Ohio before its conversion into a national bank. This indebtedness passed to and became the property of the defendant in error on its organization. The indebtedness, it is true, had been continued by renewals, and reduced by payments, from time to time. But the consideration of the note was at no time money borrowed of the defendant in error.
The consideration of the note of $10,000 was for money originally borrowed of the bank by Merrick, McClure & Co. Of this indebtedness, Allen assumed to pay $14,000, and gave his note to the bank therefor. This amount was for more than one-tenth of the capital stock of the bank paid in. Allen's note to the bank was from time to time renewed and reduced by payments, until this note of $10,000 was given.
Assuming, for the purposes of this case (though not conceding the correctness of the assumption), that Allen's note for $14,000 is to be regarded as given for money borrowed by him of the bank, and that the note for this amount would have been invalid; yet, if such were the case, it would not affect the validity of the note now under consideration. No part of the consideration was illegal in the sense of the maxim, ex turpi causa, non oritur actio. If invalid at all, it would be so simply from want of corporate capacity on the part of the' bank to make a contract in derogation of the authority conferred by its charter, and not because of any illegal element entering into the consideration of the note. First National Bank of Columbus v. Garlinghouse, 22 O. S. 502; Bissell v. The Michigan Southern and Northern Indiana R. R. Co., 22 N. Y. 259; Parish v. Wheeler, Ib. 494.
Regarding Allen as having borrowed a larger sum of money from the bank than it was authorized to loan to him, its repayment was neither contra bonos mores, nor. forbidden by law. It was just and right for him to repay it. And having, by voluntary payments, reduced his apparent indebtedness below the amount which the bank was authorized to loan to a single borrower, the fact that it may have before taken his obligation for a loan in excess of its authority, can constitute no ground for his discharge from an obligation given to the bank for the balance, and which it was clearly within the corporate capacity of the bank to take.
3. The remaining ground of error is the alleged invalidity of the mortgage.
By section 28 of the national currency act, the defendant in error is authorized to purchase and hold such real estate as may be mortgaged to it in good faith, by way of security for debts previously contracted. .
"We think the mortgage in this case comes within this provision of the statute. It was given to secure a debt previously contracted. The debt was valid to the extent of the principal sum included in the notes. The usury operated no further than to defeat the iuterest; and to the extent that there was a valid indebtedness, the mortgage was a bona fide security. The fact that time was given for payment, can make no difference.
Nor do we think the objection is well taken that the mortgage was made to Merrick, and not assigned by him to the bank. The notes and mortgage were both made to Merrick, and the circumstances show this to have been done with his consent. The mortgage was a mere security for the payment of the notes; and both notes and mortgage were delivered to the bank in pursuance of an .arrangement made between it and Allen for extending time on his indebtedness, and for giving up the securities the bank then held. By the indorsement and delivery of the notes, the bank acquired the equity in the mortgage.
Judgment affirmed.