Case Name: Leo Schlesinger, as Receiver of the Federal Bank of New York, Respondent, v. Andrew Gilhooly, Appellant
Court: New York Court of Appeals
Jurisdiction: New York
Decision Date: 1907-06-04
Citations: 189 N.Y. 1
Docket Number: 
Parties: Leo Schlesinger, as Receiver of the Federal Bank of New York, Respondent, v. Andrew Gilhooly, Appellant.
Judges: 
Reporter: New York Reports
Volume: 189
Pages: 1–34

Head Matter:
Leo Schlesinger, as Receiver of the Federal Bank of New York, Respondent, v. Andrew Gilhooly, Appellant.
Bills and Notes — Validity of Usurious Notes Discounted by State Bank. Promissory notes void for usury as between the original parties are nevertheless valid and enforceable when discounted by a state bank for value before maturity in the due course of business, without notice of their usurious inception.
Bchlesinger v. Gilhooly, 116 App, Div. 914, affirmed.
(Argued March 11, 1907;
decided June 4, 1907.)
Appeal from a judgment, entered December 10,1906, npon an order of the Appellate Division of the Supreme Court in the first judicial department overruling defendant’s exceptions, ordered to be heard in the first instance by the Appellate Division, denying a motion for a new trial and directing judgment for plaintiff on the verdict directed by the trial court.
The complaint sets forth two causes of action in favor of the plaintiff as receiver of the Federal Bank of New York, a domestic hanking corporation, each founded on a promissory note made by the defendant, payable to his own order. The complaint, as amended upon the trial, alleges that each of said notes “ before maturity was indorsed by the said defendant in blank 'and delivered to William Muirhead and was thereafter and prior to maturity discounted by the said bank in due course and for value.”
The answer sets forth facts tending to show that each of said notes was made by the defendant and delivered by him to said Muirhead for a usurious consideration exacted and paid as part of a transaction relating to a loan of money; that such transaction, was the first inception of both notes, and that both were void for usury when presented for discount to the Federal Bank.
Upon the trial the allegations of the complaint were-admitted and all defenses waived except that of usury, whereupon the plaintiff moved that the court direct a verdict in his favor for the amount of said notes, notwithstanding the answer, on the ground that “ usury is not available as a defense against a state bank.” The defendant asked “ to go to the jury on the facts of the case,” but his application was denied and the motion of the plaintiff was granted. The exceptions taken by the defendant, when heard in the first instance by the Appellate Division, were overruled and the judgment directed from which the appellant appeals to this court.
Ernest Hall for appellant.
Under the Usury Act a note infected with usury is rendered absolutely void and no subsequent transaction can make it valid. The vice of usury follows a promissory note into the hands of a bona fide holder. (Claflin v. Boorum, 122 N. Y. 385; F. Nat. Bank v. Benedict, 1 Hall, 480 ; Chatham, Bank v. Betts, 27 N. Y. 358 ; Union Bank v. Gilbert, 83 Hun, 417; Freeport Bank v. Hagemeyer, 91 Hun, 194; Union Bank v. Benedict, 35 App. Div. 216.) The general and undiscriminating statute of the state of Hew York, in so far as it prohibits usury by an individual and renders void in. the hands of every holder a note, tainted with usury taken by an individual, does not conflict with any express provision of the Hational Banking Act, nor does it impair the power of a national bank to perform its functions. It is, therefore, operative upon a national bank that purchases or discounts such a usurious note. (McClellan v. Chipman, 164 U. S. 347; Nat. Bank v. Commonwealth, 9 Wall. 362; Witters v. Sowles, 32 Fed. Rep. 758; Nat. Bank v. A. C. Co., 104 Ga. 403; F. Bank v. Dearing, 91 U. S. 29; Davis v. E. S. Bank, 161 U. S. 275; 142 N. Y. 590; Haseltine v. C. Nat. Bank, 183 U. S. 131; Easton v. Iowa, 188 U. S. 219.) Section 55 of the State Banking Law (L. 1892, ch. 689) places a state bank on an equality with a national bank only as to the rate of interest which a state bank may take and as to the penalty for the taking of usury by a state bank. (Schlesinger v. Kelly, 114 App. Div. 550; Claflin v. Boorum, 122 N. Y. 385; F. Nat. Bank v. Benedict, 1 Hall, 480; Chatham Bank v. Betts, 37 N. Y. 358; Union Bank v. Gilbert, 83 Hun, 417; Freeport Bank v. Hagemeyer, 91 Hun, 194; Union Bank v. Benedict, 35 App. Div. 216.) Sections 96 and 94 of the Negotiable Instruments Law do not repeal section 5 of the Usury Act, so far as it renders a usurious note void in the hands of a bona fide holder. (Claflin v. Boorum, 122 N. Y. 385; Wilkie v. Rosevelt, 3 Johns. Cas. 206; Eastman v. Shaw, 65 N. Y. 522; Vallet v. Parker, 6 Wend. 616; Rockwell v. Charles, 2 Hill, 499 ; Edwards on Bills [1st ed.], 369 ; 1 Daniel Neg. Inst. ,§ 197; Hollingsworth v. Moulton, 53 Hun, 91; 119 N. Y. 612; Cunningham v. Sanz, 79 Hun, 434; Bank of Kinderhook v. Gifford, 40 Barb. 659; Davis v. Supreme Lodge, 165 N. Y. 166; Matter of Curser, 89 N. Y. 403.) The Negotiable Instruments Law is. not repugnant to the statutes against usury and gaming because those acts neither relate to the same subject nor were they enacted for the same purpose. (Davis v. Supreme Lodge, 165 N. Y. 166; Bush v. R. R. Co., 166 N. Y. 210; Eastman v. Shaw, 65 N. Y. 526.)
George W. Glaze for respondent.
The Usury Law has been repealed by implication by the Banking Law so far as applicable to banks and private bankers. (L. 1870, ch. 163; F. Bank v. Hale, 59 N. Y. 53; Whitehall v. Lamb, 50 N. Y. 95 ; F. & M. Nat. Bank v. Dearing, 91 U. S. 29 ; Davis v. E. S. Bank, 161 U. S. 283; McClellan v. Chapman, 164 U. S. 347; Easton v. Iowa, 188 U. S. 220; Haseltine v. Central Nat. Bank, 183 U. S. 132; Caponigri v. Altieri, 165 N. Y. 255; Hintermister v. F. Nat. Bank, 64 N. Y. 214; Bank of Monroe v. Finlay, 6 Hun, 584.) The fact that the bank did not take the usury but purchased usurious paper does not change the legal effect of repeal. (Haseltine v. Central Nat. Bank, 183 U. S. 132; Central Bank v. Pratt, 115 Mass. 539; Hintermister Case, 64 N. Y. 214; Bank of Monroe v. Finlay, 6 Hun, 584; Marine Bank v. Fiske, 9 Hun, 363; Atlantic State Bank v. Savery, 18 Hun, 36; Davis v. Supreme Lodge, 165 N. Y. 167.) The Usury Law, so far as applicable to banks, is in conflict with the National Banking Act. (McClellan v. Chapman, 164 U. S. 347; C. Nat. Bank v. Pratt, 115 Mass. 546; People v. Comrs. of Taxes, 26 N. Y. 163.) The defenses of usury being “ defenses available to the prior parties among themselves ” were cut off by negotiation to the Federal Bank in due course. (Claflin v. Boorum, 122 N. Y. 385 ; Heckmann v. Pinkney, 81 N. Y. 211; Cromwell v. MacLean, 123 N. Y. 485 ; Strickland v. Henry, 66 App. Div. 23 ; Wirt v. Stubblefield, 17 App. Cas. [D. C.] 283 ; Hamilton v. Fowler, 99 Fed. Rep. 18.) The provisions of the Negotiable Instruments Law “ form a system of regulations. All the parts are in harmony with each other and cover the entire subject.” It, therefore, supersedes the Usury Law and repeals it by implication so far as applicable to holders in due course. (Heckmann v. Pinkney, 81 N. Y. 211; Cromwell v. MacLean, 123 N. Y. 485.) The Banking Law and the Negotiable Instruments Law being in pari materia must be read together and construed alike with a view to the purposes and objects thereof. (Smith v. People, 47 N. Y. 330 ; People v. Utica Life, 15 Johns. 358 ; Rogers v. Bradshaw, 20 Johns. 735 ; McCarter v. Orphan, 9 Cow. 437; Rexford v. Knight, 15 Barb. 629 ; 11 N. Y. 308; Waterford Co. v. People, 9 Barb. 161.)

Opinion:
Vann, J.
The learned Appellate Division rendered judgment in this case on the authority of its previous decision in, Schlesinger v. Kelly (114 App. Div. 546). That case involved the same questions as the one now before us and all tlie justices were of the opinion that the plaintiff was entitled to recover, four of them on the ground that the usury statute of this state " has been repealed by implication so far as state banks are concerned, not only where the bank itself has been a direct participator in the usurious transaction, but also where it is an innocent holder in due course of the paper which in the hands of private parties would he void for usury in its inception." One of the justices hesitated to affirm on that ground but concurred in the result, because he thought that the Negotiable Instruments Law rendered " the defense of usury inapplicable to a bona ficle holder of negotiable paper acquiring the same in due course."
The subject is of great importance to the business community, since it affects all banks doing business in this state, and, if the appellant is right, leaves them open to daily loss, even if they act with the utmost care and in the best of faith. The solvency of every bank, as well as the solvency of many depositors, might depend more upon accident than upon business foresight and ability, while the most scrupulous effort to obey the law would afford no protection. It was stated on the argument, as an illustration, for the fact does not appear in the record, that the makers " of more than halfof the commercial paper held by the Federal Bank at the time of its failure allege an usurious origin thereof."
Without passing upon the effect of the Negotiable Instruments Law, I shall first discuss the question considered in the prevailing opinion below, to which we are much indebted. That question depends primarily upon the effect of certain sections of the Federal Banking Act, when read in connection with section 55 of our State Banking Law. We divide in judgment on that question as well as upon another, not considered below nor argued before us, which relates to the power of Congress to pass an act having the effect which I think should be given to the Federal statute.
The law of this state relating to interest and usury not only forbids the taking of interest upon a loan of money in excess of the rate prescribed, but also renders void all bonds, notes and other contracts given to secure a loan made in violation of that provision. (2 R. S. 772, § 2, 5; L. 1837, ch. 430, §!•)
The act of Congress entitled " An act to provide a national currency secured by a pledge of United States bonds and to provide for the circulation and redemption thereof," approved •June third, 18G4, provided that any association organized thereunder might " take, receive, reserve and charge on any loan or discount made, or.upon any note, bill of exchange or other evidences of debt, interest at the rate allowed by the laws of the state or territory where the bank is located, and no more, except that where by the laws of any state a different rate is limited for banks of issue organized under state laws, the rate so limited shall be allowed for associations organized in any such state under this act. And the knowingly taking, receiving, reserving or charging a rate of interest greater " than aforesaid, shall be held and adjudged a forfeiture of the entire interest which the note, bill or other evidence cf debt carries with it, or which has been agreed to be paid thereon. And in case a greater rate of interest has been paid, the person or persons paying the same, or their legal representatives, may recover back, in any action of debt, twice the amount of the interest thus paid from the association taking or receiving the same, providing that such action is commenced within two years from the time the usurious transaction occurred." (13 U. S. Stat. at Large, p. 108, § 30.) This statute was re-enacted in 1874 without substantial change, and the section quoted now appears in two sections of the United States Bevised Statutes. (U. S. B. S. § 5197 and 5198.) Section 5197, entitled " Limitation iipon rate of interest which may be taken," embraces the first sentence quoted from the original act, and section 5198, entitled " Consequences of taking usurious interest," the remainder.
The Banking Law of the state of New' York provides that £ Every bank and private and individual banker doing busi ness in this state may take, receive, reserve and charge on every loan and discount made, or upon any note, bill of exchange or other evidence of debt, interest at the rate of six per centum per annum; and such interest may be taken in advance, reckoning the days for which the note, bill or evidence of debt has to run. The knowingly taking, receiving, reserving or charging a greater rate of interest shall be held and adjudged a forfeiture of the entire interest which the note, bill or evidence of debt carries with it, or which has been agreed to be paid thereon. If a greater rate of interest has been paid, the person paying the same or his legal representatives may recover back twice the amount of the interest thus paid from the bank and private or individual banker taking or receiving the same, if such action is brought within two years from the time the excess of interest is taken. The true intent and meaning of this section is to place and continue banks, and private and individual bankers oil an equality in the particulars herein referred to with the national banks organized under the act of Congress, entitled ' An act to provide a national currency secured by pledges of United States bonds and to provide for the circulation and redemption, thereof,' approved June the third, eighteen hundred and sixty-four." (L. 1870, ch. 163; L. 1892, ch. 689, § 55, as amended by L. 1900, ch. 310, § 1.) This part of the statute needs no construction, and no argument is required to unfold its controlling purpose, which, as the simple reading shows, was to place state banks on an absolute equality with national banks, so far as the subject of usury is concerned, in order to prevent state banks from being driven out of business, for capital goes where there is the least risk. It does not occur to me how that object could be made plainer, and the criticism of more than thirty years or more since the pioneer act of 1870 was passed seems to have raised no serious doubt in that respect.
The notes in question were void as between the original parties thereto, and they would have continued void in the hands of any individual to whom they might have been tran& ferred. (Claflin v. Boorum, 122 N. Y. 385; Webb on Usury, § 308.) Whether they were void in the hands of the Federal Bank, after it had discounted them for value before maturity and in due course, depends upon the effect of the statutes above set forth. If they leave the original usury law of this state in full force with reference to a note taken by a state bank under such circumstances, doubt is cast upon every piece of commercial paper made by one person and indorsed by another that is presented to a bank for discount. This would be a serious result and would carry confusion into all channels of trade, but if such is the law it must be obeyed. If, on the other hand, the old act against usury, which once applied to all loans made and payable in this state, has been so modified as to take its stifling grasp from promissory notes discounted by a bank under the circumstances named, banking business may still be carried on in this state, as it is in others, without undue exposure to loss.
What have the courts said with reference to the subject ?
The first case bearing upon the question that was considered by this court after the National Banking Act of 1864 was passed was decided in 1872, but as the plaintiff in that case was a national bank there was no occasion to consider the effect of the act of 1870. (First National Bank of Whitehall v. Lamb, 50 N. Y. 95.) The National Banking Act, however, was considered and it was held to confer no immunity from the usury laws of the state and that a contract for a loan made in this state with a national bank by which interest at a rate in excess of the one then prescribed by law was reserved was illegal and void. It was further held that the provision of section thirty, limiting'the forfeiture to interest, referred only to the preceding sentence which fixed a rate of interest in those states and territories where none was fixed by local law.
The next case, decided in 1874, presented the same question with reference to a state bank.- The act of 1870 was considered and it was held to have " the effect of giving the state banks the same rights and privileges and making them, subject to the same forfeitures in respect to taking usury as the national banks have under the act of Congress; " that as this court had held that national banks, notwithstanding the national act, were subject to the usury laws of the state, the provision of the state act relating to equality of rights required that state banks should be governed by the same rule and held subject to the same forfeiture. (Farmers' Bank of Fayetteville v. Hale, 59 N. Y. 53.)
The law, as thus laid down, was regarded as settled in this state until 1875, when the provisions of the National Banking Act relating to the subject were presented for consideration by the Supreme Court of the United States. A case arose in this state which involved the question whether national banks are subject to the usury laws of the states in which they are located. When decided by this court- it was held that they were, in accordance with our previous decisions, but on error to the Supreme Court of the United States our judgment was reversed, all the justices concurring. (Farmers & Mechanics' Nat. Bank of Buffalo v. Dearing, 59 N. Y. 659; 91 U. S. 29.)
Mr. Justice Swayee, speaking for the court, after referring to the provisions of the act of 1864, said: " These clauses, examined by their own light, seem to us too clear to admit of doubt as to anything to which they relate. They form a system of regulations. All the parts are in harmony with each other, and cover the entire subject. In any view that can be taken of the thirtieth section, the power to supplement it by state legislation is conferred neither expressly nor by implication. There is nothing which gives support to such a suggestion. There was reason why the. rate of interest should be governed by the law of the state where the bank is situated ; but there is none why usury should be visited with a forfeiture of the entire debt in one state, and with no penal consequence whatever in another. This,- we think, would be unreason, and contrary to the manifest intent of Congress. Where a statute prescribes a rate of interest, and simply forbids the taking of more, and more is contracted for, the contract is good for what might be lawfully taken, and void only as to the excess. The thirtieth section is remedial as well as penal, and is to be liberally construed to effect the object which Congress had in view in enacting it. (Gray v. Bennett, 3 Met. 522.) This section has been elaborately considered by the highest court of Massachusetts, of Pennsylvania, of Ohio and of Indiana. (Davis, Receiver, v. Randall, 115 Mass. 547; Central Nat. Bank v. Pratt, Id. 539; Brown v. Second Nat. Bank of Erie, 72 Penn. St. 209 ; First Nat. Bank of Columbus v. Garlinghouse, 22 Ohio St. 492; Wiley v. Starbuck, 44 Ind. 298.) In all these cases, views were expressed in conflict with those maintained in The First Nat. Bank of Whitehall v. Lamb, 50 N. Y. 100. This adjudication controlled the result of the litigation between these parties. Upon reason and authority, we have no hesitation in coming to the conclusion that there is error in the case before ns."
' The importance of this decision justifies the elaborate quotations I have made and shall make hereafter, for they are necessary in order to appreciate the theory as well as the result. It bears directly and with controlling force not only upon the question 1 am now discussing, but also upon the question soon to be considered. There was no limitation to the decision as made and none has since been applied. It is still regarded as in full force by the court that made it, which, after citing it as recently as 1901, said : " In that case it was held that a law of New York forfeiting the entire debt for usury was superseded by the National Banking Law, and such law was only to be regarded in determining the penalty for usury." (Haseltine v. Central Bank of Springfield, 183 U. S. 132, 134.)
The court held in the Dearing case, as I read the opinion, that the National Banking Act forms " a system of regulations" and covers 'the entire subject" of usury, as applied to national banks; that such banks, as instruments of the general government, cannot be controlled nor their operations in any wise affected by state laws, " except in so far as Congress paay see proper to permit; " that even taxation, unlegs author- ized by Congress, is powerless against them; that the policy of the nation with reference to its banks, including the subject of usury so far as it affects them, when once declared by its legislature, is exclusive, and cannot be thwarted by state legislation; that " whenever the will of the nation intervenes exclusively " with reference to a subject under its control " the authority of the state retires ; " that there is no reason " why usury should be visited with the forfeiture of the entire debt in one state and with no penal consequences whatever in another," and that such a result would be " contrary to the manifest intent of Congress ; " that as the act of. 1864 " creates a new offense and denounces the penalty," such penalty is exclusive; and, finally, in substance, that state laws against usury, so far as they affect national banks, are suspended and in abeyance until Congress permits their enforcement.
The exclusive intent and effect of the National Banking Act was also recognized in Schuyler Nat. Bank v. Gadsden (191 U. S. 451, 456) and Barnet v. Nat. Bank (98 U. S. 555, 558). For a large number of cases to the same effect decided by state courts, see 5 Fed. Statutes, 131, 133, etc., notes.
While the exact question before us was not presented in the Dea/ring case, the principle that national banks are not subject to state legislation without the permission of Congress, and that the National Banking Act covers the entire subject of usury and forfeitures therefor, so far as such banks are concerned, when considered in connection with the parity clause of our State Banking Act, necessarily controls the decision of this case. If that decision was right the judgment under review cannot be wrong.
Congress said in effect: " In creating national banks as national agencies, we subject them to the forfeiture of interest only on account of usury and we make this the sole rule on that subject, to the exclusion of all state laws with their diverse regulations, as applied to said banks." Our state legislature then said in substance: " In order to place state banks on a parity with national banks we enact the same law upon the subject of usury as applied tq the former that Congress has enacted on that subject as applied to the latter." This court recognized the logical result when it expressly overruled its previous decisions in the Lamb and Hale cases and said: "But by the authoritative decision of the court at Washington, the' act of Congress receiving a different interpretation from that which we thought it would bear, it follows that in order to give effect to the evident intention of the legislature of this state, the statute enacted in 1870 to put the state bardes upon an equality with the national banks should have the same interpretation and effect as is given to the act of Congress. Any other interpretation would do violence to the clearly expressed will of the legislature, do injustice to the state institutions and give undue effect to the legislation of Congress so far as it is hostile to the state banks." (Hintermeister v. First National Bank of Chittenango, 64 N. Y. 212, 214.) While the bank itself took the usury in that case the judgment rested on the controlling principle of the Bearing case that the Federal act excluded all penalties for usury except those provided thereby. It was held that section 1 of the act of 1870 was operative and superseded the usury law and that the position taken in the Lamb case that the parity clause in the second section limited the effect of the first section was unsound.
The original National Banking Act of 1863 provided a forfeiture of the debt as the penalty for usury, and clearly that penalty was exclusive and suspended those provided by less stringent state statutes. (12 U. S. Stat. at Large, 665, § 46.) After that act had been in force for one year the act of 1864 was passed and thus the history of Federal legislation shows that it was the national policy " to keep the matter of the penalties to be imposed upon the banks for usurious transactions within the control of Congress." (Cent. Nat. Bank v. Pratt, 115 Mass. 539.) The case last cited is important not only on account of the high standing of the court that decided it, but also because it involved a note discounted by a national bank in this state and was mentioned with approval in the Bearing case. We further quote therefrom as follows: " We are of opinion that it was within the constitutional power of Congress to fix the rate of interest which a national bank might take upon a loan of money and to determine the penalty to be imposed for taking a greater rate ; that such power, when exercised by Congress, is exclusive of state legislation; that the provision of the thirtieth section of the Act of Congress we are considering imposing a penalty for taking unlawful interest applies as well as to banks established in states where a rate of interest is fixed by law as to banks in those where no rate is fixed, and, therefore, that the laws of New York imposing penalties for taking usury do not apply to national banks established within its limits."
The meaning of the court is emphasized by what it said in the next case reported in the same volume: " The defense that the drafts in suit are void under the laws of New York against usury, cannot be sustained. The act of Congress to provide a national currency supersedes the state laws upon this subject so far as applicable to national banks." (Davis v. Randall, 115 Mass. 547, 551.)
The argument that if the legislature had intended by the act of 1892 to repeal the usury law it would have included it in the "schedule of laws repealed" is without force. The legislature did not intend to repeal that law absolutely, for without doubt it left it in force as to individuals. It wished, as it expressly declared, to place state banks on an equality with national banks as to the penalty for usury, and, hence, made the forfeiture of the interest the sole penalty and thus by necessary implication, in view of the Federal statute as construed by the highest Federal court, repealed the usury law as'to state banks, leaving it unchanged in all other respects, with certain exceptions not now material. This court held in the Ilcde case that the first section of the act of 1870, " standing alone, would supersede the usury laws and operate as a repeal by implication, so far as applicable to banking associations," but for the parity clause therein. As, however, it had decided in the Lanib case that Congress had subjected national banks to state laws on the subject of usury, it further held that the parity clause prevented the repeal of the usury statute by placing both classes of banks on an equality. After the Dearing case was decided this court reversed its holding as to the effect of the parity clause, but it has never receded from its construction of the rest of the statute.
" The particulars " referred to in the parity clause of section 55 of the Banking Law are those previously mentioned therein and include interest, usury and the forfeiture therefor; "the purchase, discount or sale" of commercial paper and the like. With reference to those particulars the legislature in 1892, evidently with the Dearing case and our own decisions in mind, re-enacted the act of 1870 and again expressed its intention " to place and continue " state banks on an equality with national banks. It refrained from imposing a forfeiture of the debt when usurious paper was purchased in good faith by such banks. In other words it adopted the Federal statute, as construed by the Federal court, as to those particulars and modified the usury act accordingly. The repeal was by state statute, following a Federal statute, which had superseded fro tanto the state law against usury, but no state law upon any other subject was affected, because no other subject was specifically mentioned. It is only when a Federal statute speaks that the state statute must stand aside. (Caponigri v. Altieri, 165 N. Y. 255.)
We need not search for an express exemption, but only for an express forfeiture, and as no penalty is imposed by either statute for the purchase by a bank, in good faith and-without notice, of a note void for usury as between the original parties, and the only penalty prescribed is when the bank acts " knowingly," it follows, if I have reasoned correctly, that the notes in question were valid in the hands of the Federal Bank and that they are valid in the hands of the plaintiff, it's receiver, provided Congress had power to pass an act making its rule on the subject of usury the only rule applicable to national banks. It is gratifying to reach this conclusion, for otherwise, as was well said below, the result would be this: " That whereas when the bank was the wrongdoer and took the usurious interest, although the usury statute declared the .note void the banking statutes made it valid as to its face value and the wrongdoer escaped all forfeiture except in so far as the interest was concerned ; while if the bank were an absolutely innocent party and had taken the note in good faith for a valuable consideration and without notice, receiving thereon only the legal interest on the face thereof, yet, nevertheless, it would be punished for the illegal act of others by the loss of the full amount advanced by it. Such a result would be so inequitable and illogical as to demonstrate that the reasoning must be fallacious."
I shall endeavor to be brief in my discussion of the question as to the power of Congress to supersede state laws against usury, so far as they affect national banks. The question is already settled if I have properly construed the National Banking Act and have correctly read the Bearing case from which I quote again as follows: " The constitutionality of the act of 1864 is not questioned. It rests on the same principle as the act creating the second bank of the United States. The reasoning of Secretary Hamilton and oS this court in M'Culloch v. Maryland (4 Wheat. 316) and in Osborn v. The Bank of the United States (9 id. 738) therefore applies. The national banks organized under the act are instruments to be used to aid the government in the administration of an important branch of the public service. They are means appropriate to that end. Of the degree of the necessity which existed for creating them Congress is the sole judge. Being such means, brought into existence for this purpose, and intended to be so employed, the states can exercise no control over them, nor in any wise affect their operation, except in so far as Congress may see proper to permit. Anything beyond this is 'an abuse, because it is the usurpation of power which a single state cannot give.' Against the national will c the states have no power, by taxation or otherwise, to retard, impede, burthen or in any manner control the operation of the constitutional laws enacted by Congress to carry into execution the powers vested in the general government.' (Bank of the United, States v. McCulloch, supra ; Weston v. Charleston, 2 Pet. 466; Brown v. Maryland, 12 Wheat. 419; Dobbins v. Erie Co., id. 419.) The power to create carries with it the power to preserve. The latter is a corollary from the former. The principle announced in the authorities cited is indispensable to the efficiency, the independence and indeed to the beneficial existence of the general government; otherwise it would be liable in the discharge of its most important trusts to be annoyed and thwarted by the will and caprice of every state in the Union. Infinite confusion would follow. The government would be reduced to a pitiable condition of weakness. The form might remain, but the vital essence would have departed. Whenever the will of the nation intervenes exclusively in this class of cases, the authority of the state retires and lies in abeyance until a proper occasion for its exercise shall recur. (Gilman v. Philadelphia, 3 Wall. 713 ; Ex parte McNiel, 13 id. 240.) The power of the states to tax the existing national banks lies within the category last mentioned. It must always be borne in mind that the Constitution of the United States, 'and the laws which shall be made in pursuance thereof,' are ' a supreme law of the land ' (Const, art. 6) and that this law is as much a part of the law of each state and as binding upon its authorities and people as its own local constitution and laws."
This is but the logical result of Chief Justice Marshall's .great opinion in M'Culloch v. Maryland (4 Wheat. 415), which, with the approval of all the justices, held that Congress had power to incorporate a national bank, although the subject is not included among the powers expressly enumerated in the Constitution. As was said in a later case, the opinion rests upon the proposition that a national bank is an instrument which is " necessary and proper for carrying into effect the powers vested in the government of the United States." (Osborn v. Bank of the United States, 9 Wheat. 738, 860.)
If Congress has power to pass an act it has power to include such provisions as, in its judgment, will make the act effective, unless they are forbidden by the Constitution, expressly or impliedly. (Easton v. Iowa, 188 U. S. 220.) Having the power to create national banks, it had the power to strengthen them by a general rule, operative in all the states, and to protect them from the varying policies of the different states with reference to the subject of usury, which otherwise might undermine their solvency and destroy their usefulness in certain localities. Their capital, as well as the capital of their depositors, is largely invested and their profits earned by the discount of commercial paper. ' To a great extent that is the business they are organized to carry on, and success or failure depends mainly upon it. Any restriction by state statute upon the power to safely discount such paper, tends to impair the efficiency of these governmental agencies and to defeat the purpose for which they were created. The penalty for taking usury, or ignorantly taking a note already infected with usury, is a dangerous restraint upon freedom of contract in discounting commercial paper, especially when the penalty is so severe as to defeat the debt and thus annihilate so much capital of the bank, even when the management is entirely innocent. It seems to be conceded that Congress has power to authorize national banks to discount paper and to fix the rate of interest on all that they discount, and it is a reasonable incident to that power to provide that paper taken in good faith and in due course shall not be subject to a defense founded only on a state statute in restraint of usury. Assuming that the doctrine which exempts Federal agencies from the effect of state laws is limited by the principle that a state statute which does not impair the usefulness of such agencies is not within the rule of prohibition, as was held in National Bank v. Commonwealth (9 Wall. 353), still the limitation does not apply to a statute which destroys much commercial paper and throws doubt upon all. Such an act necessarily impairs the capacity of the bank to act in the ordinary course of business without great danger. It hinders when there should be freedom and destroys when there should be safety.
While usury is within the scope of the police power, which is ordinarily under the control of the states, when that power is so exercised by a state as to obstruct " a convenient, useful and essential instrumentality in the prosecution of the fiscal operations of government," such as national banks are held to be, it must give way to the supreme power of the nation. Thus, it was held in Easton v. Iowa (supra) that even the criminal laws of a state when in conflict with the National Banking Act, must yield to the superior power of Congress. In that case the president of a national bank was indicted, convicted and sentenced to imprisonment under the provisions of a state statute for the offense of having received, as such officer, a deposit of one hundred dollars in money for said bank at a time when it was not only insolvent, but such insolvency was known to the defendant. The judgment was reversed, and Mr. Justice Shibas, speaking for all the members of the court, after refen'ing to the National Banking Act, said : " That legislation has in view the erection of a system extending throughout the country, and independent, so far as powers conferred áre concerned, of state legislation, which, if permitted to be applicable, might impose limitations and restrictions as various and as numerous as the states." After quoting from the Rearing case the learned justice continued : " Such being the nature of these national institutions, it must be obvious that their operations cannot be limited or controlled by state legislation, and the Supreme Court of Iowa was in error when it held that national banks are organized and their business prosecuted for private gain, and that there is no reason why the officers of such banks should bo exempted from the penalties prescribed for fraudulent banking. Nor is it altogether true, as asserted by that court, that there is no act of Congress prohibiting the receipts of deposits by national banks or their officers when .a bank is insolvent. It is true that there is no express prohibition contained in the Federal statutes, but there are apt provisions, sanctioned by severe penalties, which are intended to protect the depositors and other creditors of national banks from fraudulent banking." He then declared that a national bank is authorized, among other things, " to- make contracts, to exer cise, by its board of directors or duly authorized officers, all such incidental powers as shall be necessary to carry on the business of banking, by discounting and negotiating promissory notes, drafts and bills of exchange; by receiving deposits; by buying and selling exchange; by loaning money on personal security. It thus appears that Congress has provided a symmetrical and complete scheme for banks to be organized under the provisions of the statute." After reviewing many cases he finally said: " Our conclusions, upon principle and authority, are that Congress, having power to create a system of national banks, is the judge as to the extent of the powers which should be conferred upon such banks and has the sole power to regulate and control the exercise of their operations; that it is not competent for state legislatures to interfere, whether with hostile or friendly intentions with national banks or their officers in the exercise of the powers bestowed upon them by the general government." This case-was expressly approved in McClellan v. Chipman (164 U. S. 347) and held not to conflict with National Bank v. Commonwealth (9 Wall. 353). The McClellan case did not involve the power of Congress, but the question whether a state act violated a Federal act and it was held that it did not.
In Davis v. Elmira Savings Bank (161 U. S. 275), an act of the legislature of this state providing for the payment by the receiver of an insolvent bank, in the first place, of deposits in such bank by savings banks, was held to bo in conflict with the National Banking Act, and, therefore, void when attempted to be applied to an insolvent national bank. The court was unanimous and Mr. Justice White delivering its opinion, said : "National banks are instrumentalities of the Federal government, created for a public purpose, and as such necessarily subject to the paramount authority of the United States. It follows that an attempt by a state to define their duties or control the conduct of their affairs is absolutely void, wherever such attempted exercise of authority expressly conflicts with the laws of the United States and either frustrates the purpose of national legislation or impairs the efficiency of these agencies of the Federal government to discharge the duties, for the performance of- which they were created. These principles are axiomatic and are sanctioned by the repeated adjudications of this court. It is certain, that in so far as not repugnant to acts of Congress, the contracts and dealings of national banks are left subject to the state law, and upon this undoubted premise, which nothing in this opinion gainsays, the proposition is advanced that the deposits here considered of the savings bank with a national bank import a contract to pay the claim of the former with the preference allowed by the Hew York statute. If the law of the state is to be read into the contract then, of course, the law of Congress should also be read into it. We should thus have to consider all the deposits as made with an implication that they were subject to the Federal "law and, hence, the conflict between the two laws would become evident and the Federal law, being paramount, would prevail." (See, also, Henderson v. Mayor, etc., 92 U. S. 259, 271.)
If these cases and the cases cited therein, to which I shall not further refer, rest on sound principles, as we are bound to assume, can it be held that Congress has no power to provide a penalty for usury as affecting national banks in any and every aspect to the exclusion of all state laws upon the subject? Witli power to place in abeyance the criminal and insolvent laws of a state as applied to those banks and their officers, has it no power to supersede a state law which attacks the solvency of every national bank within its limits ? Hay an agency of the United States government be destroyed or its usefulness and efficiency seriously impaired by state legislation which directly tends to bring about that result ? The question of policy or expediency is not before us, but simply whether the nation has the power to protect itself and its instrumentalities from grave injury if not total destruction. To hold that it does not would reach far and lead to startling results. The right to create and protect national banks, although not named in the Constitution, is well established by the decisions of the highest Federal court and any attempt to limit the powers and functions of such banks is an attempt to limit a law which is " necessary and proper " for carrying into execution powers vested by the Constitution in the' government of the United States. In view of the dual character of our government, the one state and the other national, when the latter has jurisdiction over a subject its action, of necessity, is paramount, and to the extent of any conflict between state and national legislation must render nugatory all state acts repugnant thereto.
The argument that a state cannot grant an exceptional privilege to a state bank because it would be class legislation, is foreclosed by the settled law that state banks knowingly taking usury forfeit the interest only, the same as national banks, whereas all other corporations, as well as all persons and firms, forfeit both principal and interest. The right to give this exclusive privilege to state banks is thoroughly supported by authority. A classification is justified which frees state banks from injurious competition with national banks by placing the former in the same position as the latter with reference to the subject of usury.
Without prolonging the discussion I think that the ¡National Banking Act was intended to supersede all state laws on the subject.of usury as applied to national banks and that Congress had power to pass the act as thus construed. The judgment appealed from should, therefore, be affirmed, with costs.