When an agent who is authorized by his principal to lend money
for lawful interest exacts for his own benefit more than the lawful
rate without authority from or knowledge of his principal, the loan
is not thereby rendered usurious.
Where the promisor in a usurious contract makes it the
consideration of a new contract with a third person, not a party to
the original contract or to the usury paid or reserved upon it, and
the new contract is not a contrivance to evade the statutes against
usury, the latter is not illegal or usurious.
This was a suit in equity brought by Henry H. Palmer, the
appellee, against Asa C. Call, the appellant, to foreclose a
mortgage on the land of the latter given by him to secure his note
for $11,000. The record disclosed the following facts:
Albert C. Burnham, residing in Illinois, was a partner in the
firm of Burnham, Ormsby & Co., bankers at Emmetsburg, Iowa. He
had in his hands for investment $10,000 belonging to his relative,
one Mrs. Davidson. Call applied in writing to Burnham, Ormsby &
Co. for a loan of $10,000. Soon after the application was made,
Call met Burnham at Emmetsburg, Iowa, and they entered upon a
treaty for the loan. Burnham, thinking Call's proposition to be a
favorable one, decided to accept it for Mrs. Davidson, and, after
his return to Illinois, sent the money to Burnham, Ormsby & Co.
at Emmetsburg, to be lent to Call on the terms proposed by him.
Burnham, Ormsby & Co. took the note of Call dated in November,
1872, for $10,000, payable to A. C. Burnham, or order, on November
1, 1875, with ten percent interest, payable semiannually, which
Call secured by a mortgage on certain of his real estate in Iowa.
Call received from Burnham, Ormsby & Co. $8,000 for his note;
they retaining $2,000 as a compensation for their services in
negotiating the loan. No part of this sum was paid to Mrs. Davidson
--
Page 116 U. S. 99
she did not know that it had been deducted from the $10,000 lent
by her to Call, and she never authorized Burnham or Burnham, Ormsby
& Co. to lend her money at a greater rate of interest than ten
percent or to retain any commission or bonus out of the sum lent.
In short, she received no benefit from the usury and had no
knowledge of it. A. C. Burnham held the note as the agent and
trustee of Mrs. Davidson, but subject to her control. Afterwards,
the appellee, Palmer, who lived in New Jersey, bought of Burnham
the $10,000 note of Call, with five coupon notes of $500 each, not
then due, given by the latter for interest thereon. The notes were
endorsed by Burnham to Palmer in September, 1873, and Palmer paid
therefor in cash to Burnham for Mrs. Davidson the face of the
principal note, $10,000, and the accrued interest. In this
purchase, Palmer acted for himself without the intervention of any
agent whatever.
On November 13, 1875, the principal note being past due, Call,
in order to raise money to pay it, applied in writing to Burnham,
Ormsby & Co. to lend him $11,000 for five years. They, as
agents of Palmer, agreed to loan Call the money. They took his
note, dated November 1, 1875, for $11,000, payable to the order of
Palmer on November 1, 1880, with ten percent interest, payable
semiannually, secured by a mortgage executed by Call on his lands
in Iowa.
The consideration for the note was as follows: Palmer delivered
up to Call the $10,000 note, which he had purchased from Mrs.
Davidson, and released on the record the mortgage made to secure
it, and he sent to Burnham, Ormsby & Co. $1,000 in cash for
Call. Five hundred dollars of this 1,000 was returned to Palmer
through Burnham, Ormsby & Co., in payment of one of the coupon
notes, for interest due on the Davidson note, and Call consented
that Burnham, Ormsby & Co., who, through Ormsby, had procured
for him the loan from Palmer, might retain the remaining $500 as a
bonus for their services. Palmer had no notice or knowledge that
Call had not received the full amount of the $10,000 for which he
gave his note to Burnham for Mrs. Davidson, until after the
bringing of this suit; nor any notice or knowledge that the said
$500 had been retained
Page 116 U. S. 100
by Burnham, Ormsby & Co. for their services in procuring the
loan for $11,000, and did not in any manner authorize its retention
of Burnham, Ormsby & Co.
Call set up the plea of usury to the suit brought by Palmer to
foreclose his mortgage. The circuit court overruled the defense,
and entered a decree against Call for the amount due on the note,
and for the foreclosure of the mortgage. The appeal of Call brings
that decree under review.
MR. JUSTICE WOODS delivered the opinion of the Court. After
stating the case as above reported, he continued:
The contention of Call is that the note given to Burnham for
Mrs. Davidson was infected with usury in her hands and in the hands
of Palmer, her endorsee, and that the note given by Call to Palmer
was also usurious by reason of the retention by Burnham, Ormsby
& Co. of the $500 as a bonus for effecting the loan for Call.
The note which is the basis of this suit was made in Iowa, and the
contract must be governed by the laws of Iowa.
De Wolf v.
Johnson, 10 Wheat. 367;
Scudder v. Union
National Bank, 91 U. S. 406.
The Code of Iowa of 1873, Tit. 14, c. 2, ยง 2077, provides:
"The rate of interest shall be six cents on the hundred, by the
year, on . . . money due, or to become due, when there is a
contract to pay interest and no rate is stipulated. In all the
cases above contemplated, parties may agree in writing for payment
of interest, not exceeding ten cents on the hundred by the
year."
"SEC. 2079. No person shall directly or indirectly receive in
money, goods, or things in action, or in any other manner, any
greater sum of value for the loan of money or upon contract founded
upon any bargain, sale, or loan of real or personal property, than
is in this chapter prescribed.
Page 116 U. S. 101
"
"SEC. 2080. If it shall be ascertained in any suit brought on
any contract that a rate of interest has been contracted for
greater than is authorized by this chapter, either directly or
indirectly, in money or property, the same shall work a forfeiture
of ten cents on the hundred, by the year, upon the amount of such
contract, to the school fund of the county in which the suit is
brought, and the plaintiff shall have judgment for the principal
sum, without either interest or costs. . . ."
"SEC. 2081. Nothing in this chapter shall so be construed as to
prevent the proper assignee, in good faith and without notice of
any usurious contract, recovering against the usurer the full
amount of the consideration paid by him for such contract, less the
amount of the principal money, but the same may be recovered of the
usurer in the proper action before any court having competent
jurisdiction."
We are of opinion that under these sections, as construed and
administered by the Supreme Court of Iowa, the defense of usury was
not maintained.
The $10,000 lent to Call by Burnham was the money of Mrs.
Davidson, and the note taken therefor, though taken in the name of
Burnham, was her note. Conceding that Burnham acted as her agent in
making the loan, it does not follow that Mrs. Davidson is
chargeable with making a usurious contract. It was said by this
Court in
Bank of the United States
v. Waggener, 9 Pet. 379,
"That in construing the usury laws, the uniform construction in
England has been (and it is equally applicable here) that to
constitute usury within the prohibitions of the law, there must be
an intention knowingly to contract for or to take usurious
interest. . . . When the contract on its face is for legal interest
only, then it must be proved that there was some corrupt agreement
or device or shift to cover usury, and that it was in the full
contemplation of the parties. . . . There must be an intent to take
illegal interest."
To the same effect are the cases of
Lloyd v.
Scott, 4 Pet. 205;
Condit v. Baldwin, 21
N.Y. 219, and
Jones v. Berryhill, 25 Ia. 289.
It is clear, therefore, that Mrs. Davidson cannot be charged
with taking or reserving usurious interest, unless she was
bound
Page 116 U. S. 102
by the acts of her agent, Burnham. But she was not so bound. It
is settled that when an agent who is authorized by his principal to
lend money for lawful interest exacts for his own benefit more than
the lawful rate, without authority or knowledge of his principal,
the loan is not thereby rendered usurious.
Dagnall v.
Wigley, 11 East 43;
Solarte v. Melville, 7 B. &
C. 430;
Barretto v. Snowden, 5 Wend. 181;
Condit v.
Baldwin, 21 N.Y. 219;
Bell v. Day, 32 N.Y. 165;
Conover v. Van Mater, 18 N.J.Eq. 486;
Rogers v.
Buckingham, 33 Conn. 81;
Gokey v. Knapp, 44 Ia. 32;
Wyllis v. Ault, 46 Ia. 46;
Brigham v. Myers, 51
Ia. 397.
In
Gokey v. Knapp, ubi supra, the Supreme Court of Iowa
said:
"Although Danforth may have been the agent of Knapp for the
purpose of loaning the money, and may have contracted for more than
ten percent interest, yet the loan was not necessarily usurious. An
authority to loan money at a legal rate of interest does not
include by implication the authority to loan it at an illegal rate.
An authority to violate the law will never be presumed. When
Danforth exacted, in addition to the ten percent interest which was
embraced in the note, something for the benefit of himself, he went
outside the legitimate purposes of his agency, and as Knapp did not
authorize it expressly or by implication, he should not be affected
thereby."
So in
Brigham v. Myers, 51 Ia. 397, it was held to
be
"well settled that when an agent for loaning money takes a bonus
or commission to himself beyond the legal rate of interest, without
the knowledge, authority, or consent of his principal, it does not
affect with usury the loan of the principal."
These decisions seem to be founded on plain principles of
justice and right. For when two persons, the agent and the
borrower, conspire together and for their own purposes violate the
law, how can punishment for their acts be justly imposed on the
innocent third party, the lender?
The fact on which stress is laid by counsel for defendant, that
Burnham, in his treaty with Call, did not disclose his agency, but
professed to be acting for himself, appears to be an immaterial
circumstance. The misrepresentation of Burnham did not injuriously
affect any right of Call unless it can
Page 116 U. S. 103
be said that he was entitled to know who the real lender was, so
as to place himself in a position to plead usury against her. It
can hardly be contended that the penalties imposed for a violation
of the usury laws are intended as a reward to the borrower.
According to the principles of jurisprudence as generally
administered, and especially as applied by the Supreme Court of
Iowa under the statute law of that state, if suit had been brought
by Mrs. Davidson herself to enforce the payment of the note given
by Call to Burnham for her, the defense of usury would have failed.
It cannot therefore hold as against Palmer.
But the defense of usury set up in this suit must fail for
another reason. For it is settled that where the promisor in a
usurious contract makes it the consideration of a new contract with
a third person not a party to the original contract, or to the
usury paid or reserved upon it, and the new contract is not a
contrivance to evade the statutes against usury, the latter is not
illegal or usurious.
Cuthbert v. Haley, 8 T.R. 390;
Bearce v. Barston, 9 Mass. 48;
Powell v. Waters,
8 Cowen 669;
Kent v. Walton, 7 Wend. 257;
Houghton v.
Payne, 26 Conn. 396.
This rule is recognized by the Supreme Court of Iowa. Thus, in
Wendlebone v. Parks, 18 Ia. 546, it was held in substance
that when the maker of a usurious note which was secured by a deed
of trust borrowed money of a third party to pay the same, and,
instead of executing new securities for the money so borrowed,
caused the note to be transferred by the payee to the lender as
evidence and security for the new debt, the note was not tainted
with usury in the hands of the second holder.
The authorities cited are conclusive against Call on both the
grounds noticed. As the propositions upon which Palmer relies to
defeat the plea of usury have both been sustained by the Supreme
Court of Iowa while the present law against usury was in force, it
is unnecessary to construe or discuss the statute. The result of
the decisions of the supreme court of the state is that there is
nothing in the statutes of Iowa which, upon the facts of this case,
is a bar to the relief demanded by Palmer in his bill.
Decree affirmed.
