Case Name: The Utica Insurance Company against Kip
Court: New York Court for the Correction of Errors
Jurisdiction: New York
Decision Date: 1827-10
Citations: 8 Cow. 20
Docket Number: 
Parties: *The Utica Insurance Company against Kip.
Judges: 
Reporter: Cowen's Reports
Volume: 8
Pages: 20–25

Head Matter:
*The Utica Insurance Company against Kip.
On demurrer to the defendant’s plea. The second count the declaration was for $10,000, money lent. The secon(j p]ea to this count, was, except as to the sum of $2,965, -* # * x « « # parcel of the $10,000, non assumpsit And aS to the $2,965 that theplaintiffs, before the lending, unauthorized by law, and contrary to the statute in such case made and provided, did subscribe to, and become members of an ássociati°n? institution or company, and became proprietors of a bank or fund, for the purpose of issuing"hotes and receiving deposits, making discounts and transacting all other business which incorporated banks might and did transact, . „ , , . , « - ■ -t by virtue ot their respective acts ot incorporation; and ^ai: in pursuance of such unauthorized, illegal and corrupt intent, the plaintiffs afterwards established an office or banking house, and issued notes, received deposits, made discounts, and transacted other business, which incorporated banks might or could lawfully do or transact, by virtue °f their respective acts of incorporation; and continued so to do, until, &c., and for several years next thereafter: and that on, &c., a certain pormissory note was made and drawn by the defendant for $3,000, payable to the order of one William Kirkpatrick, at the office of the plaintiffs, on, &c., and on, &c., the note was indorsed by Kirkpatrick, an¿ the note was so made and indorsed for the benefit of , j , the maker, with intent to have it discounted by the plain-for his benefit, at their office, or banking house so illegally established; that afterwards the defendant presented the note, so indorsed, to the plaintiffs, who accepted an(j discounted it for the benefit of the defendant: and , thereupon- lent and advanced to him the $2,965, as the consideration or avails of the note, whereby the loan, was void, &c.
Special demurrer to that part of the plea relating to the $2,965, and joinder. It is not necessary to mention the *causes specially assigned, because the decision of the court went on the substance of the plea.
Though a note discount-©d ss security for money lent bers1 of aTassociation constraming actpi void1- yet’\he contract ofioan orTwhich00^ action lies by the lenders to recover it of
Insurance _ rorporated by (sess 62, p. 47,) may pe^sonTsec"" rity-
ing act, (2 r l. merely the°sm curity; not the loama0t °f
Where money is advancedupon aeonmdlmhpro£ utvm merely, may'bfrecovered hack by an action proceeding upon a oftlm™ntraet.
V. «Z Einman, in support of the demurrer.
The plain-' tiffs are " authorized "by their act of incorporation, to moneys. (Act of Incorporation, Laws, sess. 39, ch. 52. March 29,1816, p. 47.) The act of loaning was, therefore, lawful in itself. The only consequence of its being lent contrary to the restraining act, (2 R. L. 234, 5, sess. 36, ch. 71,) is to avoid the security. The act does not, in terms, go beyond this; and the security being void, the lender may go back to his loan. (Utica Ins. Co. v. Scott, 19 John. 1.)
J. Platt, contra,
denied that there is any distinction between the security and contract of lending, as was intimated by the court in the case cited. The dictum was extrajudicial) and, with great respect, it is not law. The maxim for this case is, ex turpi causa non oritur, actio. The act of discounting the note as bankers, was unlawful; and there needed ho statute provision to make both contract and security void. The rule is founded in public policy. The cases relied on by the court, to support the dictum cited, are inapplicable. They arose upon the statute of gaming, which did not forbid lending money to game with; though it avoided the security for it. The lending of money as bankers is expressly forbidden by the restraining act. Where the act is illegal, though merely malum prohibitum, it can give no right of action whatever to the offending party. (3 B. & P. 371. Doug. 468. 3 B. & P. 34. 14 John. 159. 12 John. 1. 3 T. R. 266. 1 East, 94.)
Talcoti, (attorney general,) in reply.
The restraining act forbids an unauthorized person becoming the member of an association, for the purpose of issuing notes, discounting, &c. The offence is complete without discounting or doing any act of banking. The loaning or discounting, itself is untouched. Such an act still remains lawful. The act of associating for the purpose is the act forbidden; *by which the offence is complete ; and which wi-11 subject to an action for the penalty, without the purpose being carried into effect. The act of discounting is mere-proof of .the.purpose. The-discounting; of notes for,'banking-purIoses is not punishable as a thing of public concern., pro‘hibitedby statute.
. The statute of incorporation, authorises, the; company to make loans, on. personal responsibility; and if discounting be within the act, still the illegal,contract was not the,loan ; hut the, agreement to secure it by a note, discounted. Avoiding thp latter,, would not necessarily affect:the.former; and the policy of' the'.statute is satisfied by avoiding- the security alone. Bringing an action for the money lent, is in disaffirmance of the illegal contract. This course is fully warranted by authority. (2 Com. on Contr. 109,. 1 H. Bl. 67. 4 T. R. 561. 4 John. Ch. Rep. 332.).
It will-be seen, by. the opinion of the court, that other ground's were discussed by the counsel; but they were.not passed upon by the. court..

Opinion:
Curia, per Woodworth, J.
The plaintiffs, cpntend, 1. That the restraining act.does, not extend to. apy. incorporated company 2. If it. does so extend, on.the,ground that a body corporate is.in law a person, it does.not affect the, incorporated company as, such) unless it.has, as such, become.a subscriber ; 3. That the restraining act does npt .reach incorporations in general.; and.especially it.does not extend, to the Utica Insurance Company, because the provisions of their charter- are, sufficient to take them, out of that act; 4, That if the. preceding propositions cannot, be maintained, the plaintiffs are, nevertheless, entitled to judgment; because the restraining act avoids the security .>nly, but- leaves the contract of loan,, upon the-advancement. of the mpney, untouched and capable of enforcement as - a valid' contract.
The plaintiffs' counsel, in support of the three first points, in the course :of a very lucid and able examination of them, attempted., to; prove that .the cas.e.of The People v. The Utica Insurance Company, (15 John, 334.) is -founded in error; and ought, not to;be recognized, as.:a. correct exposition of the. law, in relation to the .powers and authority of the plaintiffs, under- their act., of incorporation-, I have no Hesitation in saying, that' if the question- were now res integra, ray conclusion would be in- opposition to that case. When the point is necessarily brought in review, it will be re-considered'. Until then, it is more fit to waive further remarks. This cause may be decided on a different groundas will, I think, be obvious on a brief examination, of the fourth" head of inquirywhether the contract of loan, as distinguished from the security taken, is valid:
It is conceded in the opinion of chief justice Thompson; (15 John. 334,) that the surplus Binds of the plaintiffs may be loaned at interest. The act of incorporation allows the investment of their funds, which the business of insurance may not actually employ. Whether" the loan is secured by a bond or a note, would seem- to be a circumstance resting in their discretion.
But admitting, that taking a note" by way of discount; was" an illegal exercise of the right to loan; and further, that it is prohibited by the restraining act; and the security declared void ;" still the-contract'of lending, which, per se; affords a good cause of action for money lent and advanced; and is distinct from that" founded in the note, does'not appear to be within the purview of that" act. The check against the continuance of banking operations, would, I apprehend, be complete, the moment an- association had ascertained that no security could be taken, and their only remedy would be against the individual to whom the money was lent. It was unnecessary for the act" to go farther than to avoid the note of security taken-; thereby depriving the association of the means' of effectual operation; True, it was competent for the legislature to have avoided the* contract also. Bht they have not -done so: The evil was amply guarded- against without going to that .extent: Had the act contained such a" provision, if might have well been complained of as severe and'arbitrary. We will suppose, for the sake of "argument, that the Utica Insurance "^Company were possessed of a fund for" the purpose- of con* travenitig the act;' surely the" legislature had no-means to prevent the use of "that fund in a lawful manner. The mere act of loaning money belonging to a party, which then was, and still is a lawful act, cannot be affected by the fact that. the fund was raised for an unlawful purpose, This consideration goes to show, that-the legislature would not, (for it was unnecessary,) and I think have not, by the statute, made any provision to affect the contract of loan The company have authority to make loans; the note, in this case, was a security for the loan; the restraining act, at most, only avoids the note ; and therefore leaves a good consideration for the money lent.
This suit cannot be said to arise out of an illegal transaction, which defeats a recovery. The illegal contract, if any, was not the loan, for the plaintiffs had a right to loan the money to the defendant; but it was the agreement to secure the loan by a note discounted. Avoiding what was illegal, does not avoid what was lawful. The action for money lent, is rather a disaffirmance of the illegal contract. The plaintiffs claim nothing under it. In 2 Com. on Contr. 109, this distinction is' taken: " Where the action is in'/ affirmance of an illegal contract, the object of.which is to enforce the performance of an engagement prohibited by ; law, such an action can in no case be maintained ; but where the action proceeds in disaffirmance of such a contract, and instead of endeavoring to enforce it, presumes it to be void, and seeks to prevent the defendant from re- .' taining the benefit which he derived from an unlawful act, there it is consonant to the spirit and policy of the law, that the plaintiff should recover."
In the case of Munt v. Stokes, (4 T. R. 561,) the reasoning of Lord Kenyon goes to show, that where the original contract was not malum in se, but malum prohibitum, although the security was void by the statute, an action might be maintained to recover the money back; and jus- j tice Buíler observed, that in the case of illegal contracts, j if one party comes to rescind the contract, he may recover1 back so much as has been paid. In *Parker v. Rochester, (4 John. Ch. Rep. 332,) chancellor Kent, in speaking of notes discounted by this company, says, " there can be no doubt that the makers and indorsers are holden in equity and good conscience to pay them; for they were given for a fair and valuable consideration."
The case of The Utica Insurance Company v. Scott, (19 John. 1,) was an action on a note®discounted by the plaintiffs. The question as to the legality of the contract of loan, was not the point before the court; for there was no count on the loan. The court, however, considered the question; and recognized the distinction1 between the security, and the contract of lending. They say, " the lending money is not declared to be void; and, therefore, wher¿ver money has been lent, it may be recovered, although the security itself be void."
. Here the plea states, that the money loaned was the consideration for the note, which the plaintiffs discounted for the benefit of the defendant. I think the plea bad in substance. The plaintiffs are entitled to judgment on the demurrer, with leave to the defendant to amend.
Judgment for the plaintiffs.