WILLIAM S. NICHOLS, PLAINTIFF IN ERROR V. SAMUEL J. FEARSON ET AL.

A promissory note, payable at a future day, given for a bona fide business transaction, and which note was not made for the purpose of raising money in the market, was sold by the drawee and indorser for a sum so much less on its face, as exhibited a discount beyond the legal rate of interest, no stipulation having been made against the liability of the indorser; is not per se an usurious contract between the indorser and indorsee, and an action can be maintained upon the note against the indorser who sold the same, by the purchaser.

The courts of New York have adjudicated, that whenever the note or bill in its inception was a real transaction, so that the payee or promissee might at maturity maintain a suit upon it, a transfer by indorsement, though beyond the legal rate of interest, shall be regarded as a sale of the note or bill, and a valid and legal transaction. But not so where the paper, in its origin, was only a nominal negotiation.

There are two cardinal rules in the doctrine of usury which we think must be regarded as the common place to which all reasoning and adjudication upon the subject should be referred: the first is, that to constitute usury, there must be a loan in contemplation by he parties; and the second, that a contract which in its inception is unaffected by usury, can never be invalidated by any subsequent usurious transaction.

IN error to the circuit court of the United States for the dis`trict of Columbia, in the county of Washington.

The plaintiff in error instituted a suit on a promissory note dated at Georgetown, October 22d, 1821, for the sum of one hundred and one dollars, payable to the order of S. and J. Fearson, the defendants, and by them indorsed. The evidence in the case showed, that on the 26th of October 1821 the defendants came into the store of the plaintiff with the note, and told the plaintiff they had obtained the note from the drawer for goods they had sold him at their store, and asked the plaintiff what he would give for it: the plaintiff said he would give ninety-seven dollars for it, which the defendants agreed to take; and thereupon the plaintiff received the note, which was indorsed by the defendants before it was brought to the store, and ninety-seven dollars were paid to the defendants for it.

[Nichols v. Fearson et al.]

When the note became due, and being unpaid by the drawer, the defendants promised to pay it.

Upon this evidence the counsel for the defendants prayed the court to instruct the jury:

"That if they believe from the said evidence that the plaintiff received the note upon which this suit is brought of defendants, with their indorsement upon it, and without an understanding that the defendants were not to be responsible on said indorsement, and that the plaintiff paid or agreed to pay therefor only the sum of ninety-seven dollars, the transaction is usurious, and the plaintiff is not entitled to recover; which the court gave as prayed. To which the plaintiff, by his counsel, excepted, and then prayed the court to instruct the jury:

"If they should believe, from the evidence aforesaid, that the defendants, having the note in question, and wishing to part with it in order to avoid suing the drawer, and not having occasion or desire for a loan of money, offered to sell it to the plaintiff, and that the plaintiff having some accounts with the drawer, against which he expected to be able to set off the said note, and not with any other design, agreed to buy it, and did buy it, for ninety-seven dollars; and that no loan for usurious interest, nor any loan, nor any evasion of the laws against usury was in the contemplation of either of the said parties, then plaintiff is entitled to recover;" which the court refused. The plaintiff's counsel prayed the court to instruct the jury: "If they believe, from the evidence aforesaid, that this note was sold, and not received by plaintiff, by way of discount or loan, plaintiff is entitled to recover;" which also was refused.

The plaintiff excepted to the instructions of the court given to the jury on the prayers of the defendants; and also to the refusal of the court to give the instruction asked by them.

The jury having found for the defendants, this writ of error was prosecuted to reverse the judgment of the court on the

same.

The case was argued by Mr Key for the plaintiff in error; and by Mr Coxe for the defendants.

Mr Key, for the plaintiff in error, contended, that the ques

[Nichols v. Fearson et al.]

tion of usury was one depending entirely on the transaction out of which it was said to arise. If a loan was the object of the dealing between the parties, it might be usury; but if it was only the sale of a note already made, it was not so.

Why should not a person who has claims upon him purchase a note to set it off against such demands? Why should not the holder of a note sell it for what he may consider it worth? The reason that such a sale of a note is said to be usurious is, that the indorser who disposes of it is liable; and yet the sale of a bill of exchange, the payment of which is guarantied by the seller, is valid. Cited, Scott v. Lloyd, 4 Peters, 205; 1 Starkie, 385; 2 Barn. & Ald. 588; 2 Mumford, 36; 8 Cowen, 369; 3 Bos. & Pul. 154; 1 Call, 66, 70; 1 Dall. 217; 2 Strange, 1243.

Mr Coxe, for the defendants in error, argued, that the sale of the note by the defendants, they being indorsers upon it, was a borrowing of money on usury. While it is admitted that promissory notes may be sold for less sums than their nominal amount, and with larger deductions than the regular discount; yet in no such cases does the seller continue liable for the repayment of the money by indorsing the note. The indorsement of the note made it a direct contract between the plaintiff and the defendant for the loan of money, on a usurious consideration. There was nothing therefore to leave to the jury; the fact was admitted, and the law was properly applied to it by the court. Cited, 13 Johns. 52; 15 Johns. 44; 2 Johns. Cases, 60; 15 Mass. 96; 2 Connecticut Reports, 175.

Mr Justice JOHNSON delivered the opinion of the Court. This was an action by the indorsee against the indorser of a promissory note, in which the plaintiff here was plaintiff in the court below. It comes up upon exceptions taken to certain instructions given at the instance of the defendant, and to the refusal of other instructions prayed for by the plaintiff.

On the motion of the defendants, the court instructed the jury, "that if they believed, from the evidence, that the plaintiff received the note in question from the defendants, with their indorsement upon it, and without any understanding that the defendants were not to be responsible upon their indorseVOL. VII.--0

[Nichols v. Fearson et al.]

ment." at a discount beyond the legal rate of interest, then the transaction was usurious, and he could not recover.

The plaintiff then moved the court to instruct the jury to this effect: "that if they believed the evidence made out a case in which there was no loan contemplated, nor any evasion of the laws against usury, but simply a sale of the note in question, then the transaction was not usurious, and the plaintiff was entitled to recover;" which instruction the court refused.

The case makes out the note to have been a bona fide business transaction, not suspected of usury in its origin, or made up for the purpose of raising money in the market; and the decision of the court below of course affirms this proposition, "that in the sale of such a note, for a sum so much less than that on its face, as will exhibit a discount beyond the legal rate of interest, the guarantee or indorsement of the note, without a stipulation against the indorser's liability, makes out a case of usury; that it is, per se, an usurious contract between the indorsee and indorser; and no action can be maintained upon it against the indorser. And since the rule is universal, that there can be no usury where there is no loan; it follows, that their decision implies the affirmance of the proposition that such a guarantee or indorsement necessarily implies a loan.

It is necessary to bear in mind that we are not now called upon to consider a case occurring upon the transfer of a note which is, in its origin, a mere nominal contract, one on which, as the test is very properly established in the New York courts, no course of action arose between the original parties. 15 John. 44, 55. The present is a case of greater difficulty, for the principle affirmed in the decision under review, operates indirectly upon a contract not affected by usury; since by leaving the possession of the note in the indorsee who has no cause of action, and the cause of action, if anywhere, in the indorser, who has parted with the possession of the note; it virtually discharges the promissor from liability, although his contract, in its inception, may have been wholly unimpeachable. Yet the rule of law is every where acknowledged, that a contract, free from usury in its inception, shall not be invalidated by any subsequent usurious transactions upon it.

[Nichols v. Fearson et al.]

It will hardly be contended that, although the indorsemenɩ gave no cause of action against the indorser, yet it did operate to give a right of action against the maker of the note. The statute declares an usurious contract to be invalid to all intents and purposes whatever; a valid indorsement is a contract as well of transfer as of provisional liability; and if invalid to the one purpose, it must be equally so to the other.

The courts of New York have got over these difficulties by adjudicating, that whenever the note or bill, in its inception, was a real transaction, so that the payee or promissor might at maturity maintain a suit upon it, a transfer by indorsement on a discount, though beyond the legal rate of interest, shall be regarded as a sale of the note or bill, and a valid and legal transaction. But not so where the paper, in its origin, was only a nominal negotiation. Such is the result of the decisions in Jones v. Haik, 2 Johns. Cases, 60; Wilkie v. Roosevelt, 3 John. Cases, 66; and Munn v. The Commission Company, 15 John. Rep. 44.

It has been argued that the Massachusetts courts maintain the contrary doctrine. But the cases cited will not be found sufficient to bear out the argument. The case of Churchill v. Suter, 4 Mass. 156, was the case of a nominal contract, a note made to be sold in the market, as is admitted in the case stated; the point of usury was not argued; and the opinion expressed by the learned judge, was, at best, but an obiter dicHowever, let that opinion be confined to the res subjecta, and there can be no reason for controverting it in this case. It was the case of a nominal sale, a loan with the disguise of a sale thrown over it.

The case of Bridge et al. v. Hubbard, 15 Mass. 96, was one of a different character, and decided in conformity with another class of cases. It was the case of the substitution of a new contract for a note given for usurious interest due upon previous transactions. The note passed into the hands of innocent indorsees, and the question was, whether it was affected with the taint of the original usury, or only with the want of consideration. And the majority of the court held it to be a security for a loan of money obtained upon usury, and therefore