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Newell v. National Bank of Somerset.

tions made by those having the right to speak for the bank. These representations have turned out to be untrue. Had the sureties suspected that they were untrue, it cannot be supposed they would have entered into the contract of suretyship. Such being the case, the contract must be adjudged invalid.

The judgment against the sureties is reversed, and the cause remanded with instructions to dismiss appellee's cross-petition.

NEWELL V. NATIONAL BANK OF SOMERSET.

(12 Bush, 57.)

Interest What rate National banks may exact· State courts will not enforce penalties imposed by act of Congress.

By the statute of Kentucky no more than six per cent interest could be exacted, but parties were allowed to contract to pay and receive ten per cent " by memorandum in writing, signed by the party chargeable thereon, and not otherwise." A National bank located in the State discounted notes, charging interest in advance at the rate of ten per cent without other “ memorandum in writing" than the notes, wherein was a promise to pay the principal and accrued interest at the rate of ten per cent. Held, that the transaction was not usurious.

Semble, that the State courts will not enforce the penalties imposed by the National Banking Act for exacting unlawful interest.*

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CTION by the National Bank of Somerset against Newell and others, on promissory notes discounted by the bank. There were three cases. Judgments were rendered for the plaintiff below and the defendants appealed.

Fox and Morrow and A. J. James, for appellant.

John S. Van Winkle, for appellee.

LINDSAY, J. These three appeals present the same question. J. R. and J. P. Ingram, with these appellants as sureties, commenced in 1872 to borrow money from the appellee. The notes were made payable to one or more of the accommodation parties,

*See State v. Tuller, ante, p. 375; Missouri River Telegraph Co. v. National Bank, ante, p. 401; Ordway v. Central National Bank, post.

Newell v. National Bank of Somerset.

and by him or them indorsed to the bank. They were made to run four months, and were from time to time renewed as they fell due. The bank, at the time of the discounting of the first notes and at each and every renewal, retained the interest in advance. The sums so retained were in proportion to ten per cent per annum upon the face of the notes.

The notes last accepted in the way of renewals were not paid at maturity, and these actions were instituted to enforce their collection.

The sureties pleaded the facts above set out, and insist that the bank, by retaining the said amounts of interest in advance, in effect charged and received interest at a rate greater than ten dollars upon one hundred dollars for a year, and that it thereby violated the fifth section of the act of March 14, 1871 (Session Acts 1871, page 61), and the fourth section of article 2, chapter 60, General Statutes, and forfeited to the borrowers the whole amount of interest paid.

They further claim that it also violated the 30th section of the National Currency Act of June 3, 1864, and forfeited to the borrowers twice the amount of the interest paid.

They sought to have their claims arising out of those supposed forfeitures set off against the notes sued on, and prayed to be credited by the amounts thus made up.

We need not inquire as to the rights of the parties under the provisions of the act of Congress. The forfeitures claimed under said act are highly penal in their nature. The courts of this State have not up to this time undertaken to enforce penalties arising under the laws of the government of the United States, and these cases present no sufficient reason to authorize the inauguration of a new judicial policy upon that subject.

It is undoubtedly true that by retaining out of the sum loaned the full amount of the legal interest that would accrue thereon during the time for which the note is to run, banks are enabled to realize upon their available capital a greater rate of interest than could be realized if the interest was not collected until the note became due; but the practice of thus discounting bills or notes began with the business of banking, and was soon so firmly established that the courts sanctioned it almost of necessity. 3 Parsons on Contracts, 131.

This practice must be confined to short paper; and the instru

Newell v. National Bank of Somerset.

ment discounted, or upon which the interest is taken in advance, must be such as will circulate in the course of trade, or such as by statute has been placed upon the footing of that character of paper. Id. 132; Firemen's Insurance Co. v. Ely, 2 Cowen, 703.

The deduction of legal interest from the face of the note or bill discounted has always been tolerated in this State; and it was long since held by the Supreme Court of the United States that transactions of that sort are not to be treated as usurious. 8 Wheaton, 354; 3 Peters, 40.

We find nothing in the legislation of this State upon the subject of interest and usury to take such transactions out of the general rule applied to them by the courts of the United States and of our various sister States. We therefore conclude that neither section 5 of the act of March 14, 1871, nor section 4, article 2, chapter 60, General Statutes, entitles appellants to recover the supposed forfeitures claimed in their several answers.

But there is still another view of the case. It is not denied that interest, at the rate of ten per cent per annum, was collected in advance on each and all of the notes indorsed to the bank. By the laws of the Commonwealth, no more than six per cent interest can be lawfully collected for the loan or forbearance of money, unless it be upon contract, evidenced by a memorandum in writ ing signed by the party or parties chargeable thereon. Acts 1871, page 61. The General Statutes provide that the contract must be "by memorandum in writing, signed by the party or parties chargeable thereon, and not otherwise."

It is not denied that the borrower may pay and the banks receive interest at the rate of six per cent per annum under oral agreements; but appellants insist that the additional four per cent admitted to have been paid was usury, and claim that the bank cannot refuse to credit each note by the excess of interest over six per cent paid on the debt evidenced by it, unless the payments were made under contracts reduced to writing and signed by the parties charged therewith.

Strictly speaking, there were no written memorandums authorizing the bank to collect interest in advance; but the notes signed and delivered to the bank were written memorandums signed by the parties to be charged, and they evidenced the contracts or agreements to pay at maturity to the bank sums of money equal to the principal and the accruing interest, at the rate of ten per

Huffaker v. National Bank of Monticello.

cent per annum for the time they were each to run. It follows, therefore, that the contracts touching the payment of interest on the various notes conformed to the spirit and letter of the conventional interest law, and that they were properly upheld by the Circuit Court.

Consequently the judgments of said court, refusing to allow the defenses relied on by the appellants in the three cases under consideration, must be Affirmed.

By an act to amend chapter 60 of the General Statutes of Kentucky, title "Interest and Usury," approved March 14, 1876, the General Statutes are so

amended as to change the rate of conventional interest from not exceeding ten to not exceeding eight per centum per annum Session Acts 1876, page 68.

HUFFAKER V. NATIONAL BANK OF MONTICELLO.

(12 Bush, 287.)

Organization of National bank - How put in issue.

The organization of a National bank under the National Banking Act may be put in issue by a party who has not estopped himself. But a party who has accepted as payee a promissory note payable at a banking institution which the parties to the note style a National bank, and has sold and transferred the note to such banking institution, cannot be allowed to raise that issue by merely averring want of knowledge or information sufficient to form a belief as to whether the institution is a body corporate, etc. *

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CTION by the National Bank of Monticello against Huffaker and others, as indorsers of a promissory note, payable at the plaintiff's bank, and by the said defendants, who were payees, indorsed and transferred to the plaintiff. The defendants answered, alleging want of knowledge as to whether the plaintiff was a National bank. We give below only such part of the opinion as relates to National banks.

Gibson and Gibson, for appellant.

J. S. Van Winkle and Alexander & Dickinson, for appellees. *See Hungerford National Bank v. Van Nostrand, post.

Schmidt v. The First National Bank of Selma.

LINDSAY, C. J. [After deciding questions of practice.] The demurrer to the first paragraph of the appellants' answer was properly sustained. We do not doubt the right of a party who has not estopped himself from so doing to put in issue the organization of a corporation professing to have organized and to be doing business. under the provisions of the act of Congress known as the National Currency Act. But when, as in this case, the party attempting to raise such an issue has accepted as payee a promissory note made payable at a banking institution which the parties to the note style a National bank, and has sold and transferred said note to said banking institution, he cannot be allowed to raise the issue by merely averring want of knowledge or information sufficient to form a belief as to whether the institution is a body corporate organized and doing business under the act of Congress. Whilst he is not estopped to make the defense, he has placed himself in an attitude which makes it his duty to ascertain from an examination of the public records of the treasury department of the general government whether the association with which he has been voluntarily dealing has authority to do business as a National bank.

SCHMIDT V. THE FIRST NATIONAL BANK OF SELMA.

(22 Louisiana Annual, 314.)

Paramount lien of United States on assets of National banks.

The National Banking Act gives to the United States a first and paramount privilege upon all the assets of a banking association organized under the act to reimburse to the United States the amount expended in paying the circulating notes of such bank association. Therefore, the privilege given to an attaching creditor over the assets of the First National Bank of Selma must be postponed to that of the privilege of the United States where it is shown, as in this case, that the Louisiana National Bank, a debtor of the First National Bank of Selma, had notice of the claim of the United States on the assets of the First National Bank of Selma before the seizure by the creditors under the attachment.

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PPEAL from Seventh District Court, parish of Orleans. COLLENS, J.

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