# Curtis and Others v. . Leavitt

> New York Court of Appeals · June 5, 1857 · 15 N.Y. 9

URL: https://www.frixlaw.com/law-library/cases/3590526

## Case

- **Full name:** Curtis, Graham and Blatchford, Against Leavitt, Receiver, Leavitt, Receiver, Against Curtis, Graham and Others
- **Court:** New York Court of Appeals
- **Decided:** June 5, 1857
- **Citations:** 15 N.Y. 9
- **Precedential status:** Published
- **Opinion:** Opinion of the court
- **Judges:** COMSTOCK, J.
- **Cited by:** 221 later opinions in the Frix Law Library

## Citator (automated)

- No negative treatment found by the automated citator. That is not the same as a confirmation that the case is good law; read the citing cases.
- Full citator and citing cases: https://www.frixlaw.com/law-library/cases/3590526

## Opinion text

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It will be convenient to approach the questions in this case, having first an accurate notion of the *Page 43
rights and powers of the appellant as receiver of the North American Trust and Banking Company. His counsel have been understood to argue, in effect, that all possible objections to the million and first half million trusts are centred in him, constituting in the sum total a simple power to repudiate them, if repudiation were possible at any time, under any circumstances, and for the benefit of any parties — a power to be exercised without regard to the elements of which it is composed, and without inquiry whether the parties who will receive the fruits of its exercise could, in their own peculiar right, assert the particular objection which may be held fatal to those trusts. It is claimed that the receiver represents both creditors and stockholders, and so all objections derived from either and both of these sources are put together and urged with united force, although it may happen that one of these classes will take the entire benefit of objections which only the other class can make. Views of this sort are perhaps slightly encouraged by a generality of expression, in adjudged cases, which did not, in their circumstances, call for precision and accuracy.
The receivership in question was constituted under sections thirty-nine, forty and forty-one of the Revised Statutes, concerning "Proceedings against corporations in equity." (2 R.S., 463, 464.) Under those statutes, any creditor or stockholder of a banking corporation may commence a suit in equity for the causes therein enumerated, and the court may issue an injunction, and "appoint one or more receivers to take charge of the property and effects of the corporation," with authority to recover the debts due to it, and "the property that may belong" to it. The next section declares that "such receiver shall possess all the powers and authority" conferred by article third of the same title upon receivers appointed in case of the voluntary dissolution of a corporation. According to art. 3, secs. 67, 68, receivers appointed on voluntary dissolution "are vested with all the estate, *Page 44
real and personal, of such corporation" — "as trustees for the benefit of creditors and stockholders," and they are declared to have all the power and authority conferred by law upon trustees of the estates of insolvent debtors, under the provisions of part 2, chap. 5, of the Revised Statutes. According to those provisions (2 R.S., 4], §§ 6, 7), trustees of insolvent debtors are "deemed vested with all the real and personal estate of the debtor," and they have "power to sue, in their own names or otherwise, and recover all the estate, debts and things in action belonging or due to such debtor, in the same manner and with the like effect as such debtor might or could have done, if no attachment had been issued or trustees appointed."
The appellant, as receiver, has no interest in or power over the property affected by the trusts in question, except such as he derives under the statutes which have been mentioned. It has been said in this, as in other cases, that he represents the creditors and the stockholders, but for all the purposes of inquiry into his title, he really represents the corporation. He is by law vested with the estate of the corporate body, and takes his title under and through it. It is true, indeed, that he is declared to be a trustee for creditors and stockholders; but this only proves that they are the beneficiaries of the fund in his hands, without indicating the sources of his title or the extent of his powers. If, then, in a controversy between the receiver and third parties, in respect to the corporate estate, it is possible to form a conception of rights, legal or equitable, belonging to the shareholders as individuals, which the corporation itself could not assert in its own name, the receiver does not represent those rights. So far as shareholders are concerned, he can litigate respecting the fund upon precisely the grounds which would be available to the corporation, if it were still in existence, solvent, and no receivership had been constituted. In regard to creditors, I should certainly incline to take the same view of his rights and powers *Page 45
under the statutes referred to. It has, however, been uniformly assumed, and was not denied on the argument, that he succeeds to the rights of creditors, and takes his title under them, where conveyances have been made in fraud of their rights, but otherwise valid. In such cases, he holds adversely to the debtor corporation. For all the purposes of the present controversy, I shall proceed upon this assumption.
In general, then, a receiver of this description takes merely the rights of the corporation, such as could be asserted in its own name, and on that basis only can he litigate for the benefit of either stockholders or creditors, except when acts have been done in fraud of the rights of the latter, but valid as to the corporation itself. In this particular case, it will readily be seen that the controversy is still further reduced, in respect of parties interested, to a mere question between the Palmers and others, holding the bonds secured by the two trusts, and the general creditors, claiming to annul those trusts and to share in the property embraced therein. On the part of the receiver, it has been strenuously argued that the corporation was insolvent when the trusts were created. If not, then its insolvency afterwards and at the present time has not been denied. If by repudiating the debts, or the greater portion thereof, something might be left for the shareholders, the decision which we pronounce in another branch of the case renders that result impossible. Following the principles laid down in the case of the State of Indiana ( Tracy v. Talmage, 4 Kern., 162), and applying them to this controversy, we determine that the debts of the corporation cannot be repudiated upon any of the grounds which have been urged. It becomes absolutely certain, therefore, that the claims of creditors, including the bondholders, greatly exceed the entire value of the corporate effects. For this reason, if no other, the shareholders or individuals may be regarded as strangers to the controversy. The rights of creditors only are really in question. *Page 46
The observations, so far made, lead not inappropriately to a general classification of the objections urged by the receiver against the validity of the million and first half million trusts. They are: 1. Those which assume that the trust conveyances are null and void to all intents, so that the corporation itself could at any time repudiate them; 2. Those which assume them to be void only as to creditors, on the grounds of fraud or illegal preference. Among these I include, conventionally, the objection that they were made for the "use of the grantor." In respect to the first class, the claim of the creditors, and consequently of the receiver, is under and through the corporation, and it rests on no other basis. In respect to the second, their claim is adverse, because it overreaches transactions valid against the corporation itself. I will now consider the several objections, proceeding according to the classification here suggested.
I. And first, then, it is claimed that both of the trusts are void, under section eight of the statute "to prevent the insolvency of moneyed corporations" (1 R.S., 588), because they were not authorized by any previous resolution of the board of directors. That statute declares that no conveyance, c., not authorized by such a resolution, "shall be made by any such corporation, of any of its real estate or of any of its effects exceeding the value of one thousand dollars." The next clause in the section makes certain exceptions not material to the question; and the concluding one declares that the conveyances,c., shall not be rendered "void in the hands of purchaser, for a valuable consideration and without notice." Conceding that no previous resolution of the directors was in fact adopted, sufficient in its terms to authorize either of the trusts, some of my brethren are of opinion that they can be sustained on the ground that the holders of the trust bonds are bona fide
purchasers, and so within the protection afforded by the last clause of this statute. While I do not dissent from *Page 47
their views in this respect, I shall place my own conclusion mainly upon another ground, and three of my brethren concur with me in so doing.
In accordance with what seems to have been the opinion of one of the judges in this court, in Gillett v. Moody (3 Comst.,
486), opposed to his well considered decision in another tribunal ( Gillett v. Campbell, 1 Denio, 520 ); in accordance, also, with a resolution concurred in by a majority of the judges, in Talmage v. Pell (3 Seld., 328), after that case had been disposed of on other grounds; and with a decision somewhat more directly involving the question, in a case quite recent ( Gillett v. Phillips, 3 Kern., 114), where the point was neither argued by counsel nor considered by the court, I shall assume that banking associations, organized under the general act of 1838, are brought within the statute under consideration and within other provisions of the same title. I must observe, however, in passing, that this is an assumption opposed to the clearest convictions of my own mind; and that, if it were necessary in the determination of a controversy so important as the present, I should feel bound to inquire whether a doctrine which appears to me so plainly erroneous is irreversibly settled.
The objection we are now considering does not deny that the corporation had power to create the trusts. It only insists they were created in the corporate name and under the corporate seal by certain subordinate agents, who acted without due authority from their principal, and hence that they are void, If we may apply to the question the most familiar of all the doctrines of agency, such an objection cannot prevail, provided the principal at the time approved or afterwards ratified the act of its agent. The ratification need not be declared in express terms. Mere silence and acquiescence will in many cases be sufficient. So it may be inferred from the acts and proceedings of the principal in pais . When he receives and appropriates the *Page 48
proceeds of a transaction done in his name and by his assumed authority, there exists the highest possible evidence of his approval. These rules are elementary, and are founded on the simplest ideas of justice in the dealings of men. They are also as plainly applicable to corporate as to other transactions, where the dealing is within the powers of the corporation . In such a case, no possible reason can be suggested why a corporate, as well as a private, principal is not bound by the dealings of its agent, which it has approved, and the benefit of which it has received and appropriated.
To these principles, so simple and so just, the receiver's counsel oppose the peculiar language of the statute. That requires, as they argue, a previous resolution of the directors and they insist that the assent of the corporation to the trust conveyances could not be given at any other time or manifested in any other manner; and the conclusion from this argument is, that the trusts must be annulled, however formally assented to at the time or afterwards, and even although the corporation actually received the proceeds thereof, amounting to over a million of dollars, and applied the moneys to its use in the payment of its debts and otherwise. If these views are justified by the statute, then, as to all the moneyed corporations of this state, principles of hitherto universal application, and founded in the plainest justice, are no longer in force. I cannot bring my mind to the conclusion that such was the intention of the legislature.
The precise object of the statute was to prevent fraudulent and improper transfers of the corporate effects by officers of the corporate acting without the sanction of the board of directors. It was simply in restraint of their authority and of their acts that the statute was enacted. It was not intended in any wise to abridge or restrain the power of the corporations themselves, as represented by their directors, over their effects, or to confine them to any special mode or particular time of manifesting their will in *Page 49
the disposition of their property. The officer or particular agent who undertakes to dispose of the corporate estate, or any part of it exceeding one thousand dollars in value, must take his authority under a previous resolution of the directors. If he has no such authority, his act, standing alone and unsupported by any sanction, is void: just as the unauthorized act of any other agent is void as against his principal. But the corporations themselves, like other principals, may, nevertheless, act and be bound in any of the modes not opposed to the general rules of law applicable to such bodies. They may previously resolve; they may subsequently acquiesce; they may expressly ratify; they may intentionally receive and appropriate the proceeds of the unauthorized transaction, and so put it out of their power to dispute its validity. It is true the literal reading of the statute is, that no conveyance, c., " shall be made " without a previous resolution of the directors. But supply the words, "by particular officers or agents of the corporation," evidently implied in the whole scope and meaning of the section, and irresistibly suggested by the object the legislature had in view, and the whole difficulty disappears. Primarily, no doubt, the meaning of a statute is to be sought for in the language used, but that must be read with a due attention to the subject matter of the enactment, and to the general or particular end to be attained or mischief to be remedied. More than all, we ought not, unless compelled, to adopt a construction which would impute to the legislature an extreme and absurd intention, such as would be a design contrary to principles universally received in any other dealings, to take from corporations the power of giving effect in any possible mode of conduct to acts lawful in themselves and within their charters, but defective only because they were not within the authority of the particular agent who assumed to perform them.
Very different, I am persuaded, were the intentions of the legislature. At the time this statute was passed, it was *Page 50
well known that moneyed corporation, besides their boards of directors, had presidents, cashiers and committees. It was also well known that these officers or particular agents might assume, and in fact that they did sometimes assume, to transfer the corporate effects, without any authority derived from the boards of directors. The power thus exercised was liable to great abuses, and experience had already exhibited such abuses. The legislature, therefore, struck directly at the power, and declared that it should not be exercised at all. The statute should therefore be interpreted, not as designed to abridge a single power which the corporations would possess if it had not been enacted, or to cripple them, and through them their creditors, in any of the modes of action by which they could bind themselves, but simply to protect them against the acts of their officers or agents, done without their authority. Quite consistently with this intention, they can bind themselves by approval and confirmation, expressly declared or implied from their conduct, although the previous authority was wanting. No one surely will contend that, upon general principles, a corporation cannot confirm any dealing or transaction which is within the reach of its powers, and which, therefore, it can originally authorize. A different doctrine would be a singular anomaly, which I do not think this statute has introduced.
Upon these views I prefer to rest my conclusion on this branch of the case. The North American Trust and Banking Company never questioned the validity of these trusts; on the contrary, we have the very highest evidence that it approved them. The deeds were executed in the name and under the seal of the corporation. Regarded as the acts simply of the officer who signed them, they were void (so I assume) under the statute; but, almost contemporaneously with the execution of the deeds, the company itself sold and pledged the bonds which the conveyances were made to secure, received the proceeds and used the *Page 51
same in its dealings. These bonds were taken by parties who, it is not denied, acted in ignorance that the trusts were not authorized by a previous resolution, and who, as subjects of a foreign country, are not even chargeable with notice of the statute which it is supposed required such a resolution. I do not by any means say that a foreigner, any more than a citizen, can enforce in our courts a title to property here, acquired in contravention of our laws. The contrary is plainly true. But when the question is one of fair and honest dealing, our statutes are usually to be regarded as facts of which the foreigner is presumed to have no knowledge. I am not, however, seeking to introduce here the doctrine of equitable estoppel, but put my conclusion, as before stated, on the competency of the corporation to confirm the trusts in any effectual mode of corporate action, a competency which this statute was never intended to destroy; and I refer to the good faith of those dealing in the bonds, in reliance upon the trusts, for the purpose of showing what great injustice would result if we were to adopt the opposite view.
The trusts being valid as against the corporation, so far as the objection considered is concerned, the receiver cannot repudiate them for the benefit of creditors. In the absence of fraud, a creditor holds under and through his debtor, and is concluded by all the valid acts and assurances of the latter. ( Candee v. Lord, 2 Comst., 275.) This principle is just as applicable to a corporate as any other debtor. Whether the trusts were fraudulent as to creditors is a distinct question, having no connection with the one which has been examined.
II. I come next to the objection that banking associations formed under the general law of 1838, have no power to borrow money, and hence that this corporation could not issue its bonds, create the trusts, or give any valid assurance for a loan. This is a very grave proposition, opposed to the known practice of probably every banking institution in *Page 52
the state. It should, therefore, be well considered before it is received as the law. The question, it should be observed, in the form now presented, is one of simple capacity to borrow at all, and not whether the power was abused or even transcended by the North American Trust and Banking Company. If the power is found to exist, the question whether this company went beyond it in the particular scheme of which these trusts formed a part, and what are the consequences of such excess, might form a distinct branch of inquiry. It is proper also to observe, in this connection, that the authority to receive deposits, specially enumerated among the powers of these institutions, is not the one of which I am speaking. A general deposit in a bank, in its exact legal result, is a loan of money ( Chapman v. White, 2 Seld.,
412); yet it may be true, as my learned associate, Judge Selden, thinks, that a power to receive deposits is not a power to borrow money in the more general and appropriate sense of those words. I proceed, now, to some examination of this objection to the trusts in question.
Banking is not in its nature a corporate franchise. In the absence of legislative restraints, it may be carried on by individuals and partnerships in all its departments of issuing, lending, receiving deposits, discounting, dealing in exchange, bullion, c.; and in examining the powers of banking corporations, the nature and incidents of banking as a business, when not under special legal restraints, are in the highest degree important. It is true the question will always be one of corporate power rather than of the rules and principles of banking; but those rules and principles may have a decisive influence in the construction of charters which profess to confer powers of this description. And this leads me to observe that banking, regarded as a business and not as a franchise, includes the borrowing of money as one of its features or incidents. As no one denies this proposition, I will not dwell upon it further than to *Page 53
quote the remarks of an eminent English judge, Mr. PEMBERTON LEIGH, Chancellor of the Duchy of Cornwall, in a late case in the privy council ( The Bank of Australasia v. Breillat, 6 Moore's P.C., 152, 194). He observed: "The nature of a banker's business, especially if the bank be one both of issue and deposit, necessarily exposes him to sudden and immediate demands, which may be to the extent of a large portion of his debts, while his profits are to be made in employing his own moneys and those intrusted to him in discounting bills, in loans and other modes of investment. It is impossible that he should always have his assets in such a state as to be applicable immediately to the payment of all demands that may be made upon him; and if a partner has no power, under such circumstances, to borrow money for the partnership, either the assent of each individual must be obtained, which is impractible, or the concern must be ruined. We have no doubt at all, therefore, that in ordinary banking partnerships such power exists, and that the directors, by the terms of their appointment, have all the general powers, and, among the rest, the power of borrowing, unless such power is excluded by other provisions of the deed." It may be quite material, when we come to examine the general banking act of 1838, to observe now, in passing, that in these observations, so just and forcible, the borrowing of money is spoken of, not as a distinct department or branch in the business of banking, but is asserted as the incident and result of two of its most important operations: those of issuing and receiving deposits . The opposite idea, I think, will presently appear to be a source of error in conclusions on this subject.
If, then, a number of persons should associate themselves together as bankers, in the recognized modes of carrying on that business, it will be, and, as I understand, it is admitted that the managing partner or partners, or any general and unrestricted agent, could bind the firm by engagements contracted for moneys loaned, without a specification of the *Page 54
power in the partnership deed. I consider it, moreover, to be plain, that an association which has filed the proper certificate, under the law of 1838, and so become incorporated, has precisely the powers, direct and incidental, which a mere partnership would have if all the provisions of that act, supposed to confer powers or to restrict them, were inserted in the articles of agreement, and providing there were no other restraining laws. I have, indeed, no hesitation in calling these associations partnerships, although they have also so many of the peculiarities of corporations that the courts of this state have quite uniformly held them to be such, upon most questions which have arisen concerning them. I broadly admit them to be corporations, but they are also associations or partnerships. I admit, also, that they take their powers under the organic act, but so do partnerships under their articles. What I assert is, that the measure of power would be the same in both cases, if conferred in the same terms. Corporations, I admit also, can only exercise the powers expressly or incidentally conferred. It scarcely needed a statute of this state to declare a principle of the common law so familiar; and there is nothing in the terms of the statute (1 R.S., 600, § 3), quoted with so much emphasis, to give greater intensity to the doctrine.
Let us then suppose all statutes prior to 1838, in restraint of banking, to be done away, and a mere partnership formed under articles, reciting an intention to pursue "the business of banking," and declaring that the associates would, under a certain name, carry on that business in or by the issuing of circulating notes, receiving deposits, discounting bills, dealing in exchange, bullion and coin, and loaning money on real or personal security. I know of no broader terms in the English language to define "the business of banking;" and would any one, who admits that the borrowing of money is included in that business, deny that the power would be embraced as the incident of some or all of the operations *Page 55
enumerated? And yet, in this supposed language of a partnership agreement, we have the organic law of 1838. In the title of the act the intention is declared "to authorize the business of banking." In the first fourteen sections the issuing power is granted without limit, but under very peculiar and exact regulations, framed to protect the currency and afford to the billholder, in the securities provided, an absolute certainty of ultimate redemption. In the 18th section, all the remaining banking powers of which I have ever heard are conferred. It declares that "such association shall have power to carry on the business of banking, by discounting bills, c., by receiving deposits, by buying and selling bullion, coin and exchange, by loaning money on real and personal estate, "and by exercising such incidental powers as shall be necessary to carry on such business ." Now, if a mere partnership, such as I have supposed, could borrow money, and the act would not be ultra vires if done by those in the direction of the business, how, it may well be asked, would the same association lose that power by merely making and filing a certificate according to the 16th section of the banking law, but without any other change in its organization? It is not the banking powers, let it be remembered, which turn the association into a corporation. The capacity of perpetual succession, the power of suing and being sued, of contracting in the particular name selected, of having a common seal, of making by-laws, c., are the incidents which, in the judgment of the courts of this state, have invested these associations with a corporate character. ( Thomas v. Daken, 22 Wend., 9 ; Warner v. Beers, 23 id., 103 .) The banking powers conferred are not, either in their nature or extent, changed or affected by this conclusion of the courts, the soundness of which I do not question.
If, so far, I have differed from those who deny the power in question, I think the difference is in the mode of statement rather than in principle. The objection to the power is, after all, really made to turn on the terms of the banking *Page 56
law itself; and many of the preceding observations have been made in order to approach the construction of those terms through the usages and necessities of banking as well as that through the technical law of corporations in general.
We come then to the question of construction, which to my own mind presents no difficulty. The argument on the other side urges that "the business of banking" is authorized by the 18th section, only according to the specifications therein contained, among which the power to borrow is not found. To this the answer is, that these specifications, with the issuing power granted in the previous sections, cover the whole ground of banking. If the statute had omitted the general terms "business of banking," and had merely enumerated the power of issuing, and all the others named in the 18th section, that would have been a general grant of banking powers, including, as their incident, the right to borrow money when a necessity may arise in the exercise of those powers.
To deny this conclusion is necessarily to assume (and it seems to be assumed, perhaps unconsciously) that borrowing is an independent operation in the business of banking; in other words, that it is banking in one of its branches, and hence that the power cannot exist without a particular specification. This is, I think, plainly an error; and yet it appears to lie at the foundation of the opposing view of the present question. Now, in a very simple and elementary view of the subject, borrowing is not banking, nor is it in a just and proper sense any other kind of business. It is the incident and auxiliary of various kinds. Let us test this. If a person should open and keep an office for receiving deposits payable on demand, he would carry on a well known branch of banking business, although he might use the deposits in speculation or other modes totally unconnected with banking. He would be a banker. So if he were to keep an office for issuing his own circulating notes, or for dealing in exchange, or for discounting bills, and should *Page 57
actually carry on either of those operations without the others, he would exercise a banking power, although confined to a single one. But suppose he keeps an office and habitually borrows money on time, which he uses in manufacturing or some other branch of industry: was it ever supposed that such a practice made a man a banker? In truth he performs neither a banking nor a manufacturing operation, but one which is simply auxiliary to the business in which he is engaged. A banking corporation, therefore, when it borrows money, exercises an incidental and auxiliary power, not expressed, but implied from those which are expressed. On this ground the English Privy Council proceeded in the case of the Bank of Australasia v. Breillat ( supra ), as will be seen in the extract quoted above from the opinion in that case. The right to borrow was not among the specifications in the deed, but was referred to the powers of issuing and of receiving deposits, which were specified. If these views are correct, they would seem to be decisive, for in the act of 1838 all known express banking powers are enumerated.
The course of bank legislation in this state leads to the same conclusion. In the charters prior to 1825 there was no enumeration of the banking powers, but in that year the Commercial Bank of Albany was chartered, "with all incidental and necessary powers to carry on the business of banking, by discounting bills, c.," proceeding with the same specifications as in the act of 1838, now under consideration. This was the model of a vast number of charters down to and including the year 1836, when special legislation of this kind ceased. Now, it is a fact not at all remarkable, but very pertinent to the present question, that in no special bank charter ever granted in this state was it thought of to specify the borrowing of money as one of the substantive and express banking powers. Yet I am not aware that it was ever before suggested that the right to borrow was excluded by the enumeration of those powers. *Page 58
Those specifications were evidently intended not to restrict the appropriate business of banking, but as a mere legislative definition of that business; a definition not indispensable, perhaps, but eminently useful, because it left nothing to construction or in doubt. Even the restraining laws may be referred to in corroboration of these views. Corporations, not expressly incorporated for banking purposes, were prohibited from exercising banking powers under a specification precisely like that found in all the special bank charters and in the general charter of 1838. (1 R.S., 712, §§ 3, 6.) Indeed, it would be difficult to conceive a greater absurdity than a prohibition against borrowing money in a statute intended merely to restrain unauthorized banking.
Again, suppose a corporation were chartered under a special or general law for manufacturing purposes, with a particular authority to borrow money whenever deemed necessary in the business: would that be considered a grant of one of the banking powers? Plainly not; and quite as plainly it would be, if the authority were to receive deposits or discount bills, or issue circulating notes.
Under these views, it is not very important to answer the question, Why did the legislature of 1838 specify the express powers which it was intended to confer, instead of leaving them to be derived from the general grant to carry on "the business of banking?" That legislature surely might copy the language of its predecessors since the year 1825, without affording any occasion for imputing to it the special intention of excluding a well known incident of that business. Still the question is not difficult to answer. In the restraining law of 1830 (1 R.S.,
712, § 6), it was declared to be unlawful, without express legislative authority, to keep offices of deposit, discount, c. The act of 1837 ( Stat., p . 14) removed this restraint only in favor of persons and associations not incorporated. In order, therefore, to confer upon associations, under the act of 1838, the *Page 59
powers of discount and deposit, it was necessary to specify them. This, it is true, is a reason which does not apply to the other powers enumerated. But a specification of these two only would have furnished pretty strong ground for the very inconvenient inference that the others were intended to be excluded. If the statute had read: "Such association shall have power to carry on the business of banking, by discounting bills and receiving deposits," the rule " expressio unius exclusio alterius " would have been of very dangerous import to the right of dealing in exchange, bullion and coin. In short, the existing state of the restraining laws rendered it necessary to specify some of the express powers intended to be granted, and those alone could not be specified and the others safely omitted.
We arrive then at the conclusion that the North American Trust and Banking Company had capacity to borrow money as incidental to the banking business and the powers expressly granted. But the objection takes another form. It has been urged that these associations cannot borrow money as a substitute for capital. If by this proposition it is only meant that these institutions, having no capital subscribed at all, cannot lawfully procure it upon loan and so make a total substitution of credit for capital, the doctrine has no precise application to the present case; for this company had an actual capital of some $3,000,000 subscribed and paid, and it is not denied that the subscriptions were paid in a manner which the law permitted. It is remarkable, however, that there is no provision in the law requiring a single dollar to be paid by the shareholders. The association must, in some way, whether upon credit or with capital, procure mortgages and stocks, and deposit them with the comptroller of the state, in order to secure the ultimate payment of its circulating notes, if it issues any. But it is not compelled to exercise the issuing power at all; and if it chooses not to do so, then it has no occasion to procure or deposit the securities, and it will have no circulation to *Page 60
redeem in cash. It may confine itself exclusively to the banking operations of deposits, of discount, c., specified in the 18th section; and there is certainly nothing in the act which prohibits carrying them on with borrowed capital. An individual banker can certainly do this. So can a partnership which has no corporate privileges. And why then cannot a partnership which has power to incorporate itself and does so under a general law? Corporations, it is said, can act only in accordance with the law which creates them. But if the law authorizes them to do acts specifically, and is silent as to the manner and means of doing those acts, where is the restriction, except such as the nature of the business implies? Banking, I repeat, is a business and not a franchise. The public have a special concern in the circulation only, and that is guarded in the act of 1838 by a series of very peculiar and exact provisions. Beyond that, I have no doubt the legislature intended to leave the business essentially free. It allowed all persons to associate, to become incorporated by their own act, and it conferred the most ample banking powers, without a single restriction in the use of those powers. And this view derives additional strength when we consider that by a legislative act in the previous year all restraints upon banking, except those intended to protect the currency, had been abolished in favor of all persons and mere associations, and the business thrown open to them without restriction. ( Stat. of 1837, p . 14.) Now it may be true that, in point of public policy, associations in the banking business which have filed a certain certificate, and so incorporated themselves, ought to be under some legislative restraint in the power to borrow money in that business; but whatever argument can be adduced to prove this, the same argument will establish incontrovertibly that banking should be altogether prohibited to individuals and mere partnerships, for in them the power to borrow is confessedly unrestrained. Such I say may or may not be sound public policy, but these were not the views which *Page 61
prevailed in 1837 and 1838, or since that time, nor was it the policy of the legislature of those years. For proof of this we need only to look at their acts. The statutes of 1837 removed the restraints upon banking (of course I do not speak of issuing bills for circulation), and thus by necessity connected it with the most unlimited power of borrowing by individuals and associated bankers. Such became from that time the policy of the state, whether wise or unwise is not the question. The act of 1838, so far from interfering with this policy, carried it still further into the issuing department, requiring only that the associated bankers should incorporate themselves in the manner provided, as the condition of exercising that power also, and that both individuals and associations should deposit a perfect security and receive from the comptroller their circulating notes. In those conditions, I confidently affirm, are to be found the only remaining restraints upon the business of banking left by the act of 1838. Whoever, therefore, invokes public policy for the purpose of finding a restriction of the right to borrow in the course of that business, in order to render himself intelligible, should refer to his own private views, and not to the actual policy of this state.
If we admit, then, that these associations can borrow, and I trust this has been shown, I do not see in what quarter we are to find restraints upon the power, so long as it is exercised in the course of that business. The right exists as the incident of banking, and beyond that it cannot be exercised without transcending the limit of corporate power. The act of borrowing for objects not within the general scope of that business would be ultra vires . But if the power exists, we cannot say that the lending contract is void, because the occasion for the loan arises out of a course of merely imprudent and hazardous dealing. This particular company, no doubt, carried its credit to extraordinary lengths, and it may even be true that its embarrassments arose out of speculations in stocks or other *Page 62
transactions not within its powers. But its debts, in the forms they had assumed when the million and half million trusts were created, so far as they have come under our consideration, and particularly its great debt to the Palmers, were legal and valid. So we adjudge in that branch of the controversy. The necessity of paying these debts was therefore a banking necessity. Without going back to original transactions in this country, which may have been ultra vires or illegal, the creditors of this company, and chiefly the Palmers, had advanced immense sums upon its bills of exchange, and in redeeming its certificates of deposit and debentures; and these advances, as we determine, constitute legal and just debts. Those the company were bound to pay. Even if we admit that a large amount of outstanding obligations, not yet due, were illegal or prohibited in their form, still the holders who had advanced money thereon were entitled to recover it. This was determined in the Indiana case. Now, if a bank may not borrow money when it cannot otherwise meet its pressing engagements, and must go into insolvency if it does not meet them, I know not what exigency will justify a resort to the borrowing power.
The conclusions at which we arrive, affirming the right of banking institutions to borrow money, and sustaining its exercise in the case before us, do not necessarily result in the doctrine laid down by a very able judge, assistant Vice-Chancellor Sandford, in the case of Barry v. The Merchants' Exchange Company (1 Sand. Ch. R., 280, 289). That case, however, should not be overlooked in this discussion, because it asserts a principle which more than covers the ground now in controversy, and because the same question afterwards arose in this court. The Merchants' Exchange Company was chartered with a capital of $1,000,000, for the purpose of building an exchange in the city of New-York. After the first erection was destroyed by fire, the corporation purchased more land and rebuilt on a larger *Page 63
scale, at a total cost of over $2,000,000, but without any increase of the capital. There was no authority to borrow money expressed in the charter, but the entire expense, over and above the amount of the capital, was defrayed by means of loans procured upon the corporation bonds, secured by one or more mortgages executed in trust to Mr. King. The great question in the case was upon the power of the company to contract the loans and to secure them by the bonds and the trust mortgages, and the power was affirmed. The precise doctrine of the case is stated in the following language of the assistant vice-chancellor: "A corporation, in order to attain its legitimate objects, may deal precisely as an individual may who seeks to accomplish the same ends. If chartered for the purpose of building a bridge, it may contract a debt for labor, the materials, or the land upon which the bridge is abutted. If more advantageous, it may borrow money to purchase such land or materials, or to pay for such labor; and, as the evidence of the indebtedness, it may execute to the creditors a note, a bond or a mortgage, whether the debt be for the money borrowed, or the work, materials or land." The question was also before this court, in the case of King v. The same Corporation, upon the very same exercise of power (1 Seld.,
547); and the objection, that the company had no authority to borrow money, was distinctly presented on the argument. The point seems also to have been necessarily involved in the case. The decree of the supreme court of the city of New-York was affirmed, thus establishing the validity of the trust mortgages made to secure the loans. In the opinion of the court, the objection made to them under the statute of uses and trusts is the only one discussed; but the one which alleged the want of power to borrow money was equally involved. It must have been disposed of by including it among what are called, in the opinion, "various minor objections, which did not require a particular notice." I do not regard such a decision as conclusive upon us *Page 64
when it can be shown to be wrong. It would not, however, be respectful to those who were then members of this court to suppose that this question escaped their notice, for it was distinctly involved in the case, and was called to their attention on the argument. The decision is, therefore, at least high evidence of what they understood and assumed the law to be.
But can these decisions be shown to be wrong upon principle or authority? I confess my own inability to refute the doctrine so perspicuously laid down by Assistant Vice-Chancellor Sandford. I am not aware that it comes in conflict with any known distinction between private persons and corporations. It is true that the latter take all their powers, direct and incidental, under their charters; but when the direct power is granted in terms, they take it, as a natural person enjoys it, with all its incidents and accessories. A simple association of merchants to build an exchange, could, if they so agreed with each other, very appropriately borrow money in furtherance of the object; and why can they not, if they take the principal power under a charter from the government, which enables them to act as a single person and with a collective will?
It is truly said that corporations can only exercise such incidental powers as are necessary to carry into effect the express objects of their charters. But necessity is a word of flexible meaning. There may be an absolute necessity, a great necessity, and a small necessity; and between these degrees there may be many others depending on the ever varying exigencies of human affairs. It is plain that corporations, in executing their express powers, are not confined to means of such indispensable necessity that without them there could be no execution at all. The contrary doctrine would lead at once to a very great absurdity; for if there are several modes of accomplishing the end, neither one is indispensable, and each would exclude all the others. And thus, by inevitable logic, an express grant of power *Page 65
would lie forever dormant, because there are more modes than one of carrying it into execution.
It is almost as difficult to say that the incidental power depends for its existence on the degree of necessity which connects it with the power in chief. Such a doctrine would impose upon courts a never ending difficulty, for the inquiry would always be whether the chosen instrumentality is the very best that could be selected; and if not the very best, however minute the difference may be, then the inevitable decision must follow that the choice was fatally bad, although strictly adapted to the end in view and made in the utmost good faith.
These demonstrations, for such they appear to me, would seem to leave but one other conclusion, which is, that corporations, along with their specific powers, take all the reasonable means of execution, all that are convenient and adapted to the end in view, although not the very best by many degrees of comparison. And this is a doctrine which must necessarily result in the liberty of choice amongst those means. The choice may be wise or unwise. If made in the exercise of an intelligent good faith, the wisdom of the selection may be called in question, but the power to make it cannot be.
I can therefore see no room for the distinction which admits the power of a corporation to contract debt for labor and materials to be used in building an exchange, or a bridge, or a turnpike road, or in manufacturing, those being in each case the specified object of the charter, but denies the right to borrow money to be used in the purchase of the same labor and materials. If there be any reason for a distinction, resting on a comparison of benefit to the corporation, the advantages of borrowing would in most cases be undeniable. So, in point of public policy, the reason for that preference would appear to be still stronger, for while the industrial classes would require no protection, the money lenders could safely be left to guard their own interests. I *Page 66
believe the distinction referred to is not recognized by any adjudged case.
If these views in regard to trading corporations in general are sound, then our conclusion, which affirms the power of incorporated banks to borrow money, when not specially restrained, rests not only upon the peculiar nature and necessities of banking business, but upon a principle somewhat more comprehensive.
III. The trusts are also objected to on the ground that the power to borrow money could not be exercised in the particular mode of issuing the so-called million and half million trust bonds as assurances for the moneys advanced, and this point is next to be examined. This objection raises the following questions: 1. Is it within the power of corporations generally to issue instruments of this kind, when no prohibitory or restraining statute is violated, and the purpose or occasion of making them is lawful? 2. Is there any express or implied prohibition, contained in the act of 1838 or in any antecedent statute, by which this company was bound? There are no other aspects in which this objection can be presented, provided the bonds were issued prior to June 3, 1840, when another statute took effect. The time of their issue will be hereafter noticed.
The first of these inquiries can be briefly answered. The right of corporations in general to give a note, bond or other engagement to pay a debt is so nearly identical or so inseparably connected with the right to contract the debt, that no doubt upon the question ought to be admitted. When a corporation can lawfully purchase property or procure money on loan in the course of its business, the seller or the lender may exact, and the purchaser or borrower must have the power to give, any known assurance which does not fall within the prohibition, express or implied, of some statute. The particular restriction must be sought for in the charter of the corporation, or in some other statute binding upon it; but if not found in that *Page 67
examination, we may safely affirm that it has no existence. This doctrine would seem to be clear in principle, and it is well settled in this state. ( Mott v. Hicks, 1 Cow., 513 ; Barber v. Mechanics' Ins. Co., 3 Wend., 96 ; Jackson v. Brown, 5 id., 596; Moss v. Oakley, 2 Hill, 265 ; Attorney-General v. The Life and Fire Ins. Co., 9 Paige,
470 ; Safford v. Wykoff, 4 Hill, 442 ; Barry v. Merchants' Exchange Co., 1 Sandf. Ch. R., 280.) It would be a very illogical conclusion to hold that an indefinite number of corporations, authorized by a general law, do not possess the same right in this respect which they would have if the express powers of each were derived from a special charter.
In the second place, if there are any special legislative restraints, which in their terms or policy condemn the trust bonds, they are to be found in the safety fund act of 1829, or in the statutes against unauthorized banking, called the restraining laws, or in the organic act of 1838, from which this corporation derived its powers. There is no other particular legislation supposed to have any bearing on the question.
The argument of the receiver's counsel, so far as it is derived from the safety fund act ( Laws of 1829, ch . 94, p . 167; 1 R.S., 737, 3 d ed .), turns wholly upon the thirty-fifth section of that statute, and may also be answered in few words. This was an act, applicable only to future banks and those whose charters should be renewed in future, requiring them to contribute annually, for six years, one-half of one per cent upon their capital to a fund specially pledged for the redemption of the circulating notes of insolvent institutions. The thirty-fifth section contains a prohibition against the "issuing of notes and bills," unless payable on demand and without interest. The evil intended to be suppressed by this prohibition was undoubtedly the practice of issuing post notes, designed and calculated to circulate as money. The provision is, however, broad enough in its terms to include all bills and notes payable at *Page 68
a future day, and so it has generally been construed. It is, however, in its very language, confined to banks "subject to the provisions" of that act; in other words, liable to contribute to the safety fund thereby created. These trust bonds were issued by an association which, as we know, was not subject to the provisions of that act, and was therefore exempt from the operation of this particular section. This is a decisive answer to the objection in this form, and no discussion can make the argument plainer. I will add, however, in this connection, that in enacting the general banking law of 1838, the legislature had this statute before them and refused to adopt it into their work. They refused not only to adopt this restriction, but any other indicating the same policy. The reason for this refusal, I think, we shall see when we come to look once more at the structure and policy of the system which they did adopt, and compare them with previous systems.
In further discussing the objection to these bonds we are to consider the restraining laws and the general act of 1838, and these matters are so connected that they must in some degree be examined together.
The statute of 1829 against unauthorized banking (1 R.S.,
712), known as the restraining act, declares (§ 6) that "no person, association or body corporate, except such bodies corporate as are expressly authorized by law, shall keep any office for the purpose of receiving deposits or discounting notes or bills, or issuing any evidences of debt, to be loaned or put in circulation as money, nor shall they issue any bills or promissory notes or other evidence of debt as private bankers, for the purpose of loaning them or putting them in circulation as money, unless thereto specially authorized by law ." Some of the other sections in the same act are intended to promote the same policy, but they need not be referred to. It cannot fail to be noticed that this statute does not forbid either natural or artificial persons from entering into written engagements of any description, provided they *Page 69
are not issued to be loaned or put in circulation as money. Indeed, the inference is almost irresistible that corporations, whether banking or not, as well as individuals, might, at least in the opinion of the legislature, create evidences of debt which do not fall within the particular class condemned. Such a statute is not, however, the source from which to derive that power. It is simply a prohibitory statute, which appears to assume that the power exists. The particular object of the act, it is well known, was to restrain all unincorporated persons and all corporations which had not a special authority of law from exercising banking powers.
The most delicate and dangerous by far of all these powers was that of creating a paper currency, to be loaned and put in circulation as money, for the use of the community. While, therefore, all other restraints were removed, by the act of 1837, already cited for another purpose, so far as unincorporated persons are concerned, this particular one was kept in full force precisely as it stood in the act of 1829, binding both upon persons and corporations of every description. It may be useful to add, that the restraining act of 1829 contained nothing new which is material to the present purpose. The policy began in the year 1804, was continued in the acts of 1813, 1818, 1829, down to the year 1837, and even in the statute of that year it was maintained, as we have just seen, so far as the power of creating currency is concerned. It was thus that banking in general became with us a franchise at an early day; but it has never been held, and I think never suggested, that there was anything in the restraining statutes, or in the policy they indicated, to deprive corporations of any kind of the incidental power to contract debts and make their written engagements therefor in any form not coming within the particular condemnation of these statutes. Banking only was restrained, one of the distinct operations of that business being the issuing upon loan of a paper currency; but the incidental *Page 70
power of corporations, whether belonging to that class or not, to become a debtor as well as a creditor, and to create their obligations not intended or calculated to mingle in the currency, never came within the prohibition.
We come then to the general act of 1838, which I am sure can now be intelligibly examined with reference to this question. The restraints upon issuing notes, bills, c., upon loan or for circulation as money, as we have seen, were still in force; and it is now very pertinent to observe, that this act did not repeal them. They are in full force at this day. The statute, however, did authorize the creation of an indefinite number of associated banks, which we call banking corporations, and gave them the issuing power upon the precise conditions therein contained; and it gave the same power to private individuals also, under the same exact conditions. Those conditions required that the notes intended to be loaned and issued as currency should be payable on demand, should be countersigned and registered in one of the departments of the state government, and should be secured by a pledge of bonds and mortgages and stocks. This, I repeat, was not a repeal of the restraining acts, but it was the "special authority of law" required by the very language of those acts, in order to exercise the business of banking in the particular department of creating and issuing a paper currency. It is, therefore, beyond all question, true that this power cannot be exercised under the act of 1838, except upon the precise conditions named; and if the trust bonds of the North American Trust and Banking Company were an exercise of that independent banking power, the conclusion would certainly follow that they were unauthorized. They would be ultra vires, because no "express authority" to issue them can be found in that statute, and expressly prohibited by the restraining act.
But it is just as plain that this "special authority of law," which conditionally relieved, and which was necessary *Page 71
to relieve, associated banks and private persons from the operation of the restraining laws, was not in any sense a prohibitory statute. On the contrary, it was plainly an enabling statute. It prohibited, neither expressly nor impliedly, anything previously lawful; but it simply enabled that to be done, under particular conditions, which was before unlawful. The legislature of 1829, and its predecessors since 1804, had declared that no banking powers should be exercised without special authority of law, and that authority was contained in a great number of special bank charters. The legislature of 1837 declared that individuals and associations might exercise those powers without restraint, except the one of creating currency. The legislature of 1838 said to them: "You shall have that power also, provided you associate in a certain manner if you act as associations; and provided, further, whether you act as individuals or associations, that you procure your circulation and secure its redemption in the manner we have pointed out."
These views of the act of 1838, and of antecedent legislation, if they are correct, meet with directness and force the argument so much urged by the receiver's counsel, that out of the express provisions contained in that act, allowing circulating notes of a particular kind to be issued, payable on demand, there arises an implied prohibition against all other written engagements, and especially against all time paper. We are enabled to see distinctly that, without the express authority of law contained in those provisions, neither associations nor individuals could lawfully issue notes for circulation or upon loan, payable on demand. That banking power was sealed up as a franchise by the previous legislation and policy of the state. It was opened only on the performance of the conditions precedent which have been named. To all persons and associations not performing those conditions it remains sealed as before. But it would be absurd to hold that, in thus opening the franchise *Page 72
and laying down those conditions, the legislature intended anything more; and especially it would be absurd to say that out of such a statute there springs a condemnation of that which was antecedently lawful. How it is that an act of legislation, extending a particular franchise to new classes of individuals and associations, and so removing from them one restriction, engenders another and a new one, has certainly not been explained.
The objection to the bonds as time paper, when urged under the act of 1838, not only overlooks the restraining laws, as indispensable to a correct view of that act, but also the distinction between the express and the implied powers of banking and other corporations. The argument assumes that when one of these associations gives a written obligation for money borrowed or stocks purchased, payable at a future day, it exercises a distinct and express banking power not granted in the statute. This is not true: the right thus exercised is incidental and accessory to those banking powers which are expressly given. This distinction has already been considered at large in discussing the power to contract a debt, inseparably connected with which must be the ability to promise, in any form not expressly forbidden, to pay such debt. Indeed, the necessity of creating time paper, for money borrowed to redeem circulating notes payable on demand, often arises out of the particular franchise of issuing such notes, and that necessity results in the right to enter into such engagements. In this view, the grant of the franchise in express terms, instead of excluding the power now in question, may become the very source from which it springs.
There is, then, in the language of the general banking law, no implied force to invalidate the trust bonds. It is next to be observed that the act contains no express prohibition. Its provisions will be examined in vain for a single clause to which such an interpretation can be given. On the contrary, we shall find language which plainly recognizes *Page 73
a distinction between the special issues for circulation, countersigned and secured in the manner provided, and other contracts and engagements of the associated banks. But I do not rest the right to issue these bonds upon that foundation. Its source must be found, both theoretically and practically, in the incidental power of corporations, and especially in the nature of banking, and the accidents and necessities which attend that business.
We are brought, then, to an inquiry which belongs essentially to the facts of the case: What was the character of these instruments? Were they in the nature of currency? Were they issued to be loaned, or for circulation as money? If they were, then their issue and sale amounted to the usurpation of a banking franchise not granted in the general charter and prohibited by the restraining laws. Here, I apprehend, is the turning point on which the validity or invalidity of the bonds must depend, and on this subject, it seems to me, there is no room for reasonable doubt. They were not issued "to be loaned." The banking association was not creditor in these transactions, nor did the dealer become a debtor. The relation was exactly reversed. The association was the borrower and the debtor in respect to each bond, and the dealer became the lender and creditor. They were not issued for "circulation as money." Without examining the question whether, in strict law, they were perfect as sealed instruments, they had impressed upon them the corporate seal, were intended to be and in all their appearances were sealed. They were eminently special, also, in the language which expressed the obligation. Still, in their legal effect, they might be promissory notes if the seal be entirely rejected; but it is certain they could not be accepted and received as such in any community. They were moreover payable in large sums, at distant periods of time and in the coin of a foreign country to which they were transmitted, and where they were sold or pledged. They were, in short, wholly unadapted to circulation as *Page 74
money; they were not designed to be circulated, and in fact they never were. We must therefore hold that these obligations were not issued in a course of unauthorized banking, and hence that they do not fall under the condemnation of the restraining statutes.
We find, then, in all the legislation of this state, antecedent to the issuing of these bonds, nothing, either in the direct or implied force of language, which pronounces against their validity. On the other hand it cannot be pretended that there was any express authority. The question therefore turns upon the incidental power of corporations, and particularly of banking corporations, when not specially restrained, to contract a debt for money borrowed upon a lawful occasion, and to execute an appropriate assurance for the payment of such debt at a future day. That question has already been examined, and the power asserted upon grounds which are to me satisfactory. Something however remains to be observed, which I think will place the subject in a still clearer light.
In the argument upon this branch of the case, much was said concerning the general intention of the legislature and the supposed policy of the state. These matters I will now briefly examine, endeavoring to show why, in the free banking system of 1838, the legislature omitted to impose restraints upon the business of banking, except in the particular department of issuing bills to circulate as money. That system has been undoubtedly in some degree misunderstood.
In the year 1791 an act was passed "to incorporate the stockholders of the Bank of New-York," which became the model of some forty other institutions specially chartered prior to the year 1825. These banks were authorized to carry on the "business" of banking, in general terms, without specification of the power to issue bills or any other banking power. They were unrestricted in the exercise of any of their powers except that of contracting debt, which, over *Page 75
and above the specie in their vaults, was not to exceed three times the capital subscribed and actually paid in. The debt might be contracted in the issue of currency for circulation, or otherwise, the amount only being limited. There was a prohibition, also, against trading in merchandize and stocks, which was designed of course to confine these institutions to the business for which they were chartered. The solvency of banks was only guarded by these two provisions; but what is chiefly to be observed is, that the currency was not in any other manner protected. Such was banking prior to 1825. It was a most imperfect system, not for the particular reason that a bank might become insolvent in the exercise of the debt-creating power, whether by issues payable on demand or by time engagements, but because in the event of insolvency the currency circulating through the community would not be redeemed. No distinction was made between the billholder and other creditors. The duty of government to protect the public against a debased currency, and the wisdom of not interfering with banking in its other operations, were not yet understood. ( For an example of these charters, see the act to incorporate the Mechanics and Farmers' Bank of Albany, Laws of 1811, ch . 64.) Under this system I suppose it will not be doubted that banks could borrow money to pay their debts and execute time obligations to the lender. The precise evil of the system was the excessive issue of a paper currency with no security for its redemption. ( Message of Gov. Clinton, in 1827.)
In the year 1825 two bank charters were granted, and no others until 1829. In these, the business of banking was defined, as we have already seen, but the definition included all known powers belonging to that business, and therefore, in this respect, those charters instituted no new policy or restraint. In other respects, some new provisions were introduced, one of which required that fifty per cent of the capital stock should be actually paid in. But the system remained unchanged. The debt-creating power remained *Page 76
as before, it being declared that the total amount of debt, whether "by bond, bill, or other contract, " should not exceed, c. This language was certainly anything but a restriction confining the banks to issues of currency payable on demand. Another clause declared the assignability of sealed obligations, thus distinctly implying that such might be created. ( Charter of the Commercial Bank of Albany, Laws of 1825, p . 198.)
In the year 1827 a general act was passed, which took effect in January, 1828, and became incorporated in the Revised Statutes (1 R.S., 601), applicable only to existing banks . In this statute are some new regulations concerning the management of banking corporations, directed to special abuses, but no change in the system. It was thought no important change could be made in respect to preëxisting charters. The power of creating debt remained as before, and was limited, as before, to three times the amount of capital paid in, whether created by " bond, bill, note or other contract " (§ 3); and thus the legislature, so far from restricting the right, again justifies the inference that time engagements might be issued. The issues for currency were still blended with other modes of creating debt and still the community was unprotected.
The evils and abuses of such a system gave rise also to another code of regulations, elaborately prepared, which took effect at the same time (1828), applicable to future charters and charters which should be renewed in future. This was the act to prevent the insolvency of moneyed corporations. (1 R.S., 589.) This code, as well as the one applicable to existing banks, recognized in very unambiguous language a distinction between bills and notes for circulation, payable on demand without interest, and demands of a different character and bearing interest. (§ 20, subs . 5, 8; id . 2, sub . 2.) It omitted the provision limiting the amount of debt, but required the whole capital to be paid. Reports were required to be made to the comptroller, *Page 77
and a series of new and stringent regulations were laid down. The principles of bank legislation, however, remained unchanged. The great vice of the system was untouched. There was no limit to the power of creating debt. Excessive issues of currency might be made, and there was as yet no specific provision for the billholder.
The safety fund act of 1829 took a feeble step in the right direction by establishing a specific fund for the redemption of the circulating notes of insolvent institutions. This, it is true, was a fund of very minute proportions, but, so far as it went, it provided a special security for the billholder, and tended, no doubt, in some degree, to impart stability and soundness to the currency. This act limited the issues for circulation to twice the amount of capital paid in, and, for the first time in the legislation of this state, it prohibited the issue of bills and notes unless payable on demand. The act was only applicable to future charters, or previous ones to be renewed. Between the years 1829 and 1836, inclusive, many bank charters were granted, subject to the code of regulations and the safety fund law. But fundamental principles underwent no change, and the system was soon after exploded by its own inherent vices.
Thus far, since 1804, banking in this state had been a monopoly by force of the restraining laws. In the year 1837 these monopolies had become intensely odious, and no more special charters were then or ever afterwards granted. The legislature, moreover, as we have before seen, by a change in those laws in the year 1837, reduced banking to a private business, except in the department of creating a circulating medium, and, as a private business, left it absolutely without restraint or control. Any person or association could deal in bullion, could habitually lend money, could receive deposits, discount notes and bills, and with these banking powers could run in debt, borrow money and execute every species of obligation, except circulating notes, just as a private person in any other business could do. *Page 78
The wisdom of this policy has never been denied; but it remained for the legislature of 1838 to complete the work thus begun. Circulating notes could still be issued only by chartered banks, and no plan had yet been adopted which would both secure their redemption and open the franchise of issuing them. That was the work to which the legislature of 1838 addressed itself. This could only be done by special legislation. The rest had been essentially accomplished by a simple repeal of preëxisting restraints.
At that period (1838) the principles of banking had undergone a thorough discussion both in this country and England. The ablest theorists and writers had asserted the duty of government to exact absolute security for the redemption of the circulating medium, and the policy of leaving banking, in all its other operations, like merchandize a private business. These views prevailed with the legislature of New-York. The preëxisting system, so often amended without any change in its fundamental principles, had fallen in the crisis of 1837. All the forms of special charter, and all the codes and regulations which made up that system, were before the legislature and received a most careful consideration. They were all discarded, and a policy entirely new was adopted. The cardinal point was to render the circulation absolutely secure. This was accomplished by providing for a deposit of mortgages and stocks, dollar for dollar, and by leaving the restraining laws in force as to all issues for currency not thus secured. Connected with this fundamental measure was the policy, adopted by the legislature of 1837, as to other modes of banking, of permitting individuals and associations to issue their notes on giving the required security. This was also done. The next grand idea was to leave banking, in all its other operations, with the fewest possible restraints, and to permit it to be carried on like other branches of business. This too was accomplished. These were the great features of the organic act of 1838, and they were wide departures from all legislation prior to *Page 79
1837. The currency was wisely guarded with tenfold strictness; and with equal wisdom, in my judgment, banking, in all its other relations to community, was left without a single regulation in the case of individuals, and with scarcely one in the case of associations, except such as belong to the mere mechanism of their formation. Let us look at the frame-work of this act. First we have, in fourteen sections, a system of banking in the particular department of issuing for currency; a system so rounded and complete in itself as to exclude all reference to antecedent legislation. I do not see the possibility of incorporating into it either the provisions or policy of the codes of 1828 or 1829, relating to a system fundamentally different. The residue of the act is summed up in the rules laid down for forming associations; in giving to them certain peculiarities which the courts, and not the legislature, have said transform them into corporations; in granting to them the right, which every individual enjoyed without restraint, of carrying on the "business of banking" by receiving deposits, discounting notes, c.; in limiting the acquisition of real estate, in providing for an examination into their affairs upon cause being shown, and for a periodical statement to be made public for the information merely of all concerned to know their condition. In this grant of power it should be observed that the legislature speak of banking as a business, without including in the definition the power of issuing circulating notes. It is material also to observe that as the law then stood, and was suffered to remain, banking associations (I mean now simple partnerships) might be formed without filing a certificate or following a single provision of this statute, and they could carry on the "business of banking," in all the modes specified, without being subject to a single restriction or regulation. It was necessary to associate in the peculiar manner specified only for the purpose of receiving, from the comptroller, and issuing circulating notes. The government would allow the countersigned *Page 80
currency only to individuals and to associations which had made and filed their certificate as the act required. But there was no restraint upon the "business of banking," as the legislature defined it, because it could be carried on by private persons and partnerships, as at common law.
Thus, in the simple contrivance of exacting security to be deposited with the government for all circulating notes, and causing them to be issued with the government stamp, we have a paper currency which has been favorably tested now for nearly twenty years. How, it may well be asked, is this contrivance, so simple and efficacious, improved by judicially attaching to it either the provisions or policy of the exploded system? A code of regulations, like the act which took effect in 1828, "to prevent the insolvency of moneyed incorporations," ineffectual as it proved to be, was nevertheless appropriate in a banking system which gave to the circulation no other protection than the solvency of the chartered banks. Such a system could not be too watchfully guarded, for the currency and the bank must go down together. But such regulations are inappropriate to the free banking system, because principles entirely new lie at its foundation. Persons who are not bankers at all may have circulating notes if they will go and deposit the required security for their redemption. So may associations which will do the same, and file a certificate as the evidence of their organization. Private individuals and associations may also, if they choose, carry on the general business of banking in the departments of discount, deposit, c. They may discount with their circulation, or with other capital at their command. If they circulate, they must secure one hundred cents on the dollar; but the idea of preventing the banker's insolvency, which had proved so fallacious, was wholly abandoned. The private banker or the association might be solvent or insolvent — might deal with actual or borrowed capital; but the currency, which is the life-blood of commercial and industrial communities. was rendered *Page 81
safe. That object being accomplished, the legislature saw no more reason for preventing the insolvency of a banker than of a merchant or manufacturer. We accordingly find, in the new system, no provision requiring the actual payment of capital, none limiting the power of creating debt, none limiting the issues, providing they are secured, none against post notes or time paper, which cannot enter into circulation, and none against contracting in any form in which individuals and corporations may contract. The legislature justly considered it a duty to protect the masses of the community against a debased currency, and there, it was wisely thought, the office of government, in the regulation of banking, essentially ended. That duty was discharged, not by regulations to prevent insolvency, but by securing every dollar of the issues.
Upon this subject views to which I cannot assent have made some progress. The courts began, at an early day, by declaring associations, which had filed a certificate, to be corporations. This was a simple common law necessity, resulting from the peculiarities of a common seal, perpetual succession, c. But this doctrine surely did not, by any legal or logical sequence, draw after it, and incorporate into the banking law of 1838, all or any of the complex machinery of an exploded system. Yet it is true, starting at that point, that, by a mere logic of words, we can, if we will, take in both the act of 1828, to prevent insolvency, and the safety fund law of 1829, and annex them as adjuncts to the system of 1838. I say the safety fund law, for it begins by declaring that "every moneyed corporation, having banking powers, hereafter to be created in this state, shall be subject to the provisions of this act." Associations under the general law, we admit, are corporations, and clearly they have banking powers. We find here a perfect adaptation of words to a result, and that result is, that every free bank in the state must contribute its one-half per cent annually, for six years, to the safety fund; and, by the same reasoning, we car. *Page 82
adopt the prohibition against post notes, which is one of the provisions of that law. This, I repeat, is a logic of words, but not of ideas. It has never received a judicial sanction, and has never convinced a single mind. We have had the free banks for nearly twenty years, but the safety fund has never received from them any contributions. It has been admitted, without a single exception so far, that the legislature of 1838, in authorizing associations to carry on the business of banking, did not intend to subject them to any one of the provisions of the safety fund act. In the rejection of them all, I find, although some others have not found, conclusive evidence that the policy of each one of those provisions was also rejected.
It is by following, in the same way, mere verbal sequences, that efforts have been made with some success to bring into the free banking system the elaborate act of 1828, to prevent insolvency. But we shall find the difficulties still greater. Some of the provisions of that act are absolutely incongruous and cannot by any ingenuity be made to harmonize with the law of 1838. We have been told by a resolution that we may take them so far as "not inconsistent." ( Talmage v. Pell, supra .) What is to be the degree of consistency or inconsistency, and how much ingenuity must be exercised upon each question as it arises, we have not been informed. If we are to take them when not absolutely repugnant, then we must adopt the entire safety fund act also. If this is not the rule, then must we adopt them when they are only slightly repugnant? Even in that case, we must take in also the safety fund statute. I repeat, the difficulties are still greater; for aside from the admitted impossibility of receiving into the system of 1838 many of the provisions of the act to prevent insolvency, c., we shall find that some of them, deemed useful in the working of the free banking associations, were adopted verbatim, and one or two others with modifications. This I hold to be unanswerable proof that the legislature carefully *Page 83
consulted that statute, adopted all that was thought desirable or useful, and deliberately rejected the residue. This subject might be pursued at greater length, but enough has been said for the present purpose. In the provisions of the Code of 1828, whether we adopt or reject them, it is not pretended that time engagements for the payment of money are prohibited.
IV. If the trust bonds had not been issued before the 3d of June, 1840, when the act of May 14th took effect, which made it unlawful to "issue or put in circulation any bill or note, unless payable on demand and without interest," some questions would arise which have not been discussed. But the evidence shows, beyond any reasonable doubt, that they were issued before that day. [The learned judge here stated the facts in regard to the negotiation of the trust bonds; the pledge of such bonds to the Palmers; the alterations in the form of the deeds, and the substitution of sets of bonds, substantially as stated on pp . 27, and 33-38, ante, and then proceeded.]
Upon these facts, the counsel for the receiver have insisted that all the so-called bonds, which they claim were unsealed instruments, and, therefore, in legal effect, promissory notes, except the one hundred and eighty-seven sold before June 3d 1840, fall under the condemnation of the statute which took effect on that day. It has also been urged that no more than the four hundred and ninety-nine bonds were ever negotiated or sold in pursuance of the trusts, and therefore that the trusts, if not illegal or void in their creation, never became operative as to all the residue of the bonds. It will be seen that both of these propositions are refuted, if the pledge to the Palmers was effectual, according to the intention of the parties, so as to give them a right to hold the bonds until they could be sold; and if they could not be sold at all, then still to hold them and take the benefit of the trusts. *Page 84
On this subject we do not entertain any doubt. An individual, compelled to raise money to meet his engagements, may execute his negotiable obligation and a trust deed or mortgage to secure its payment. If a lender comes forward who will advance the money for the time the obligation has to run, and take it as absolute owner, the transaction is closed. But if temporary advances are required, before the dealing can be consummated, we see no reason to question the right of the debtor to pledge the instrument, with a power to negotiate and sell it pursuant to the original design, or the right of the pledgee to the benefit of the security. This appears to be precisely the character of the transaction with the Palmers. The bonds had five and seven years to run. They could not be sold fast enough or soon enough to meet the necessities of the bank. The company must have money immediately, and must have it from the Palmers, who were already very largely creditors. In this exigency the bonds created for sale were pledged to that house, with authority to sell and apply the proceeds to the payment of their debt, and especially the new advances. The proceeds of other securities released by them and sold, appear to have been sufficient to liquidate the preëxisting debt, so that they may be regarded as now holding the bonds which remain in their hands in pledge for advances made on the faith of these very transactions. In this branch of the case, therefore, we reach the following conclusions: First. All the bonds having been executed and pledged to the Palmers before June 3, 1840, so that the company could not recall them, were not issued in violation of the statute which on that day became the law of the state, whatever may be the legal character of those instruments. Second. The holders of the four hundred and ninety-nine bonds hold their title under the pledge and the execution by the Palmers of the power to sell. They are therefore entitled to come in under the trusts and share in their benefits, without discrimination between such as purchased before and such as *Page 85
purchased after the 3d of June. Third. The Palmers, still holding five hundred and fifty-seven bonds under pledges anterior to that day, have the same rights as any other holders, to the extent of their demands. The claims of the Philadelphia banks, or their assignees, holding two hundred and seventy of the half million, and of the Holfords Co., holding twenty-four of the million trust bonds, will be hereafter considered.
V. But the receiver insists that the four hundred and ninety-nine bonds, part of those in the million trust, were negotiated in England, at a usurious rate of interest, and on this ground it is claimed that the trust is void, so far at least as the bonds thus usuriously sold are concerned. This part of the case will now be examined. These bonds, like all the others, bore interest at the rate of six per cent; were negotiated at ninety per cent on their par value; and I assume that, when paid, the lenders will receive a higher rate of interest than is allowed by the usury laws of this state or of England, and therefore that the bonds are void, unless by recent legislation, both here and in that country, the case is withdrawn from the operation of those laws. The statute of this state, passed April 6, 1850 ( Session Laws, 334), declares that "no corporation shall hereafter interpose the defence of usury;" and the term corporation is defined in the same act so as to include banking associations. If these bonds are to be regarded as New-York contracts, I am inclined to think that this statute would be decisive against the right of the receiver to allege usury in any stage of these causes, either as a defence to the original bill or as a foundation for his cross bill. My impression is that the act must be construed as a repeal of the statutes of usury as to all contracts of corporations stipulating to pay interest, thus leaving the contracts in full force according to their terms, and that such an act is liable to no constitutional objection.
But however this may be — and the subject is not free from doubt in some of its aspects — it is clear that the legislature *Page 86
did not intend to repeal, nor could it repeal, the usury laws of England. If these bonds were English contracts, and as such were usurious, it is certain, I think, that our act of 1850 has not relieved them from the taint. The utmost effect we can give to the enactment in that view is, to consider it a simple prohibition upon corporations against interposing the allegation of usury to invalidate contracts governed by the laws of a foreign country. Whether the prohibition could be extended so as to include creditors of corporations in all situations, and all other parties claiming in hostility to the usurious contract or incumbrance, is another question not free from difficulty. The receiver, however, as I have shown in another place, is the immediate representative of the corporation, and as such I incline to think that he is affected by the prohibition to the same extent as the corporation itself. But I propose now to inquire: First. Are these bonds English contracts? and, Second. Are they free from usury by the law of that country? If these questions are answered in the affirmative, then we have no more to do with the statute of New-York.
We are of the opinion that they are English contracts. The circumstances which are decisive upon this point may be briefly stated as follows: The bonds were not intended to be negotiated in this country. This is conclusively shown by the million trust deed, which recites that they were intended to be sold in England. Having been transmitted for that purpose, they were actually sold and the money advanced upon them there. They were made payable in the currency of England and not of New-York. Before they were sold, the parties who actually took them entered into a written agreement with the agent of the company to take, each, a certain number, amounting in all to four hundred and ninety-nine. This agreement was made in London. The interest, semi-annually, during the period they had to run, was, by the terms of the bonds, payable at the house of the Palmers, in London. The place where *Page 87
the principal was to be paid, I think, cannot be considered as specified, on a strict grammatical construction of the language used, but it certainly was not in New-York; and the legal result is, that the debtor bank must seek the creditor in England, and would be in default if it did not do so at the maturity of the obligation. The holder of each bond had a right, by its terms, to convert it into the stock of the bank on giving notice of his intention at the Palmers' place of business in London, and on surrendering the bond there. In the final trust deed, moreover, we find introduced three trustees residing in England, to whom the three in New-York covenant, on default in payment of principal and interest due upon the bonds, to pay over for the benefit of the bondholders the moneys to be received under the trust. The property embraced in the trust consists of bonds of private persons, secured by mortgages upon lands situated in this state.
These are the essential facts on which the question must turn, and they lead to the plain conclusion that the several contracts of loan, into which the four hundred and ninety-nine bonds enter as a part, are English contracts, and I think this would be so even if the facts tending to that result were less decisive. We may take the single circumstance that the interest is payable in London. The question here is one of interest, solely, and if the rate had not been specified at all, that allowed by the laws of England, in cases where there is no specification, would, most clearly, be deemed the one in reference to which the parties contracted. If, therefore, the actual rate agreed upon will amount in the result to eight or ten per cent, and that is not unlawful there upon contracts of this particular character, but would be, as it plainly was, by the statutes of New-York in force at the time of these transactions, then it is still more plain that the English laws must govern. The lawfulness or unlawfulness of the contract, as determined by the statutes and policy of the country to which we assign the dealing, very commonly *Page 88
affords a conclusive test in cases of this kind. So, also, we may take the circumstance that the moneys to be received upon the securities held in trust were to be paid over to the three trustees in London, to be received at their hands by the English bondholders. Although the bonds themselves do not appear to specify the place where the principal is payable, yet when we look at this provision of the trust deed, which is a part of the same transactions, and consider, also, that the interest is payable in London, and both principal and interest in sterling money, I think we must hold that England is the place of final payment according to the true construction of the whole contract. So, also, we may rest our conclusion upon the fact that all the negotiations were conducted and the transactions closed in England. In general, the rule is, that if no place of performance is stated, or the contract may be indifferently performed anywhere, it must be referred to the lex loci contractus . If this rule will not always hold, when both the parties, being residents of one country, are temporarily sojourning in another where they contract, it admits, I think, of no qualification when the contract is made in the country where one of the dealers resides, and the other goes there, either personally or by his agent, and there negotiates or concludes the dealing Without discussing this subject more at large, the following authorities may be referred to as decisive: Story on Conflict of Laws, §§ 280, 282, 284, 287, and cases cited in notes; Albion Assurance Co . v. Mills (3 Wilson Shaw, 218, 233); S.C. Pattison v. Mills (1 Dow Clark, 342, 362); De Wolf v. Johnson ( 10 Wheat., 367 ); Malpica v. McKown, (1 Louis., 249); Blanchard v. Russell, ( 13 Mass., 1 ); 2 Kent's Com., 457, 458, 460, and notes ; Fanning v. Consequa ( 17 John., 511 ); Scofield v. Day ( 20 John., 102 ). It is proper to add, however, that the case of Chapman v. Robertson ( 6 Paige,
627 ), decided by Chancellor WALWORTH, has not been overlooked. That decision may perhaps be sustained upon several circumstances which distinguish it from the *Page 89
present case. The reasoning of the learned Chancellor has, however, been questioned by high authority. ( Story's Con. of Laws, § 293, c, and note .) Whether the case was well decided or not, the conclusion to which we come, upon the facts of the one before us, is in accordance with principles entirely settled.
Were the loans, then, upon the four hundred and ninety-nine bonds, usurious by the laws of England? They certainly were, until the statute of 2d and 3d Victoria, ch. 37, enacted in 1839. This act provided that "form and after the passing thereof, no bill of exchange or promissory note, made payable at or within twelve months from the date, or not having more than twelve months to run, nor any contract for the loan or forbearance of money above the sum of ten pounds sterling," should be void by reason of any rate of interest taken or agreed to be taken. Loans of money upon the "security of any lands, tenements or hereditaments, or any interest therein," are expressly excepted from the operation of the act; and there is another provision limiting the rate of interest to five per cent, as it stood before, in all cases where the parties did not otherwise agree. The statute was to continue in force only until January 1, 1842, a period which included the transactions now in question. The argument on the part of the receiver is, that the four hundred and ninety-nine so-called bonds, in consequence of the imperfect sealing, were, in legal effect, promissory notes having more than twelve months to run, and therefore that they do not come within this statute. If they are not held to be promissory notes, then it is further insisted that the loans were secured upon lands,
and so were excepted from the operation of the act.
We here reach the inquiry whether the bonds were sealed instruments, and as we hold them to be English contracts, that question also must be determined by the law of England. The validity of the seal goes directly to the obligation of the contracts, and, like any other question *Page 90
of obligation or construction, it belongs to the lex loci contractus and not the lex fori . What, then, is the rule in England on this subject? Lord COKE defined a seal thus: " Sigillum est cera impressa; quia cera sine impressione non est sigillum ." If, in his time, mechanical contrivances had come into use, distinctly impressing corporate and official seals upon paper, I think, in the spirit of that definition, he would have held it sufficient; for clearly the impression, and not the wax, according to him, was the fundamental requisite. He did not say " impressio sine cera, " but " cera sine impressione, " c. In this state it is said there must be wax or some tenacious substance, and we are referred to adjudged cases on the subject. ( 2 Hill, 227 ; 3 id., 493; 5 John., 238 ; 4 Cow., 508 ; 1 Denio, 376 .) To meet the doubts suggested by these cases, or to change the rule which, it may be, they affirm long after all reason for the rule had ceased, the legislature, in 1848, passed a statute declaring the impression of a corporate seal upon paper to be sufficient. But the inquiry here is, what was and is the rule in England? and it is thus laid down by SIR EDWARD SUGDEN ( Sugden on Powers, 1 st Am. ed., 236): "It is not necessary," he says, "that an impression should be made with wax or with wafer. If the seal, stick or instrument used, be impressed by the party on the plain parchment or paper, with an intent to seal, it is clearly sufficient." This authority was referred to and approved in the queen's bench, in the case of The Queen v. The Inhabitants of St. Paul's, c . (7 Adol. Ellis., N.S., 232), LORD DENMAN observing, "we do not wish to encourage the slightest doubt on this point." ( Mathews on Presumptive Ev., 36; 2 Brown, C.C., 585.) The corporate seal was plainly impressed on the bonds. They are declared on their face to be sealed; they were so intended, so far as we know; they were so accepted by the English holders who advanced their money upon them, and so we must hold them to be. Being each of them for more than £ 10, it follows that they came within *Page 91
the statute 2 and 3 Victoria, unless their payment is secured upon lands . The security, as we know, consisted of bonds and mortgages upon lands in this state, assigned, by the million trust deed, to the three trustees in New-York. Now those mortgages were all New-York contracts, having no connection with the transactions in question, until so assigned, and by the settled law of this state they were chattel interests merely. For this reason, if for no other, the four hundred and ninety-nine trust bonds were not secured upon lands, and we hence come to the conclusion that, falling within the protection of the statute of Victoria, they are free from the taint of usury. This objection to the million trust deed, therefore, falls to the ground.
VI. The claim of the Philadelphia banks, or their assignees, to the benefits of the half million trust as pledgees of the two hundred and seventy bonds, part of the four hundred and fifty issued under that trust, presents not only the question of usury, but some others of considerable importance.
[The learned judge here stated the facts substantially, as stated at pp . 28-32, ante, and then proceeded.]
Upon these facts the receiver insists, in the first place, that the rate of interest on the loan of $250,000, although in terms six per cent, will amount, when the certificates of deposit are paid, to more than seven per cent on the sum actually received in cash, and therefore that the contract was usurious and void by the laws of New-York. Without examining the question in that light, we hold that the contract must be governed by the laws of Pennsylvania. In all the negotiations, a Pennsylvania loan was evidently, in the contemplation of the parties, to be made in the currency of the Philadelphia banks, and at the rate of interest which prevails in that state. But a more controlling circumstance is, that the contract was to be performed by the company in Pennsylvania, by the payment there of the money loaned. The authorities do not leave this question in doubt. ( Story's Con. of Laws, §§ 242, 242 a, 285-7, c.; Dewolf v. Johnson, *Page 92
10 Wheat., 367 ; Andrews v. Pond, 13 Peters, 65, 77 ; Foden v. Sharp, 4 John., 183 .) It appears, from the evidence in the case, that the only statute in Pennsylvania establishing the rate of interest, is a colonial act passed in March, 1723, which fixed it at six per cent, and that by a long and well settled course of decision in the courts of that state, a stipulation to pay a higher rate does not invalidate the contract of loan, nor prevent the lender from recovering the principal and lawful interest. Without examining further, this would seem to dispose of the question of usury. The objection on this ground to the half million trust, or rather to the claims of the Philadelphia banks or their assignees, in respect to the two hundred and seventy bonds, is therefore untenable.
But the receiver also insists that the twelve certificates of deposit were promissory notes, and being issued by the banking association after the act of May 14, 1840, took effect, are illegal and void, because expressly prohibited by that act. If this position is sound, and I do not stop to question it, the consequences upon the contract of loan, in part evidenced by those certificates, and upon the half million trust, are to be carefully considered.
It is well to observe, in the first place, that, prior to the Philadelphia loan, this trust had an independent, valid existence. This has already been shown. The four hundred and fifty trust bonds were placed in the hands of the Palmers, as pledgees, in May, 1840, and the trust itself had therefore fully taken effect as the security for those bonds. Now, it is plain that the dealing with the Philadelphia banks, in whatever light we may regard it, did not and could not invalidate the trust. The Palmers, although they parted with two hundred and seventy of the bonds, still retained, and they now hold, the remaining one hundred and eighty. If the pledge of the two hundred and seventy is void for any cause, and the receiver is in a position to assert the voidness, the result is, not that the trust is gone, *Page 93
but the banks cannot hold the bonds and so share in its benefits. Whether they are to be returned to the receiver, as the immediate representative of the banking association, to be canceled, or revert to the Palmers, as the original pledgees, is another question. If they are to be returned to the receiver and canceled, the trust nevertheless remains until the Palmers are fully paid as the holders of the one hundred and eighty still in their hands; and if the property included in the trust will no more than pay those bonds, it must all be exhausted for that purpose. The trust is a unit. Each bond is secured by all the property placed in trust, and there can be no apportionment so long as the fund is not sufficient to pay all that are outstanding.
The simple inquiry then is, can the Philadelphia banks or their assignees, now in possession of the two hundred and seventy bonds, hold them as security for the moneys loaned to this company, according to the pledge under which they were delivered? If they can, then they are cestuis que trust in respect to the half million trust. If they cannot, then the Palmers are the only cestuis que trust, either as holders of the other one hundred and eighty or of the whole four hundred and fifty. The solution of this question must depend, in the first place, on the general validity of the contract of loan, notwithstanding the alleged illegality and voidness of the twelve certificates of deposit or written promises to repay the money. It was lawful for the banks to lend the money, and for this company to borrow it, and engage, either verbally or in writing, to repay it at the times agreed on. The only thing unlawful, then, about the transaction was the particular form in which the engagement was given. Can the corporation, on this ground, repudiate the whole contract, keep the money, and recover back the pledge? Or, if it cannot do all this, then can it annul the pledge on the faith of which the loan was made and recover the thing pledged? These are very grave inquiries. *Page 94
In the recent case of the claim of Indiana against this same company (4 Kern., 162), where post notes were issued for the price of stocks purchased, we held, upon the fullest consideration, that there was no delictum on the part of the vendor of the stocks, although we assumed that the post notes might be illegal; and we also held that the vendor was entitled to recover the value of the stocks sold. That doctrine disposes of one of the difficulties here. The Philadelphia banks are not to be deemed participants in the offence of issuing a prohibited form of security. There is an especial force in this conclusion, because these banks, as foreign corporations, are not chargeable even with knowledge of the statute on which the alleged illegality depends. Our decision in the case mentioned, it is true, proceeded on the idea of disaffirming the contract of sale, leaving the vendor to recover a quantum valebant, or what the stocks were worth at the time of the sale. The difference between the value and the price agreed on was not material. The price was presumed to be the value. We did not say that the seller was obliged to disaffirm the whole contract in order to recover at all. In that case it was most strenuously argued, in opposition to the claim of Indiana, that the post notes were illegal and the whole contract therefore void. Without considering whether that position was sound, we held the innocent party was entitled to the value he had parted with, even upon that theory. We certainly did not say that the guilty violator of the law could take advantage of his own wrong, and disaffirm, at his election, not only the notes but the contract in all its parts. In that case, disaffirmance accomplished exact justice, because there was no special security for the demand. If this case is determined upon the same theory, we not only permit the wrong-doer to elect to disaffirm, but the pledge, on the faith of which the money was loaned, must fall with the contract; and although an implied assumpsit may remain to *Page 95
restore the money, the debt, now amounting to a half million of dollars, is of very trifling value.
There are in the books many cases which assert the right of the more innocent party to disaffirm an illegal contract, and so recover back, on an implied assumpsit, the money or value advanced. These were relied on in the Indiana case for the particular purpose of showing that the claimant was not within the influence of the maxim " in pari delicto, " c. His right to relief was contested upon the force of that maxim; but principle and authority, as we said, agreed in denying its application to such a case. Now, those cases are liable to mislead us here unless we discriminate with some care. The distinction will be seen at a single glance. They are all cases where the plaintiff had no title to the money if the contracts were allowed to stand, and where the defendant had a right to hold it by the very terms of the contract. Hence, there was no possibility of relief except through an unqualified disaffirmance. For example in the earliest of those cases ( Smith v. Bromley, Doug., 696), the plaintiff had paid to the defendant £ 40, to induce him to sign a bankrupt's certificate, and the action was brought to recover the money back. Clearly the plaintiff could have no title to the money except through the absolute invalidity and a disaffirmance of the whole contract, because, by the very terms of that contract, the defendant was entitled to retain it. So in Jaques v. Golightly (2 W. Bl., 1073), the action was brought to recover money paid for illegally insuring lottery tickets; and there, too, relief was, in the very nature of the case, impossible until the contract was wholly disaffirmed. This precise principle runs through all the cases where illegal transactions have been disaffirmed. It will be found that in all of them the contracts themselves, if lawful and valid, stood directly in the way of the action. But here the broad difference is, that the Philadelphia banks can recover, and seek to recover, the money lent without a disaffirmance, and upon the very terms of the *Page 96
lending contract. The alleged illegality of one of its parts is the objection to their claim, and not, as in the cases referred to, the very foundation on which it rests. They do not seek to disaffirm, because they need not do it in order to recover. If the contract is void in all its parts, then it is true there is nothing but an implied assumpsit left; but even then they will recover, not through the illegality but in spite of it. In this case, in short, the claim is resisted on the voidness of the contract, while in those which have been mentioned, it was asserted on that very ground.
What, then, is the precise question now before us? It is. I apprehend, whether the contract of loan made between this company and the Philadelphia banks is void, for the particular reason that in one of its incidents the company exceeded its powers or violated the statute, the lending parties being innocent both in fact and in judgment of law What was the contract? On the part of the banks it was to loan $250,000, and on the part of the borrower to repay the money at certain periods, and to secure the debt by a pledge of certain securities. This is exactly what was agreed on, but, as the evidence of the promise to pay at the times specified, post notes were issued in a form prohibited by law. There was no other illegality in the transaction, and, as far as the lenders are concerned, even the notes were not illegal. As to them, they were merely worthless and void. I assume such to be the logical result of the prohibition upon the borrower against issuing them, but there is no other result. It is a mere voidness, and not a contamination which spreads itself over the whole contract.
Now, a doctrine which is expressed in the words "void in part, void in toto," has often found its way into books and judicial opinions as descriptive of the effect which a statute may have upon deeds and other instruments which have in them some forbidden vice. There is, however, no such general principle of law as the maxim would seem to indicate. On the contrary, the general rule is, that if the *Page 97
good be mixed with the bad it shall nevertheless stand, provided a separation can be made. The exceptions are: First. Where a statute, by its express terms, declares the whole deed or contract void on account of some provision which is unlawful; and, Second. Where there is some all-pervading vice, such as fraud, for example, which is condemned by the common law, and avoids all parts of the transaction because all are alike infected. The alleged invalidity of the contract, now under consideration, depends wholly upon the statute of May 14, 1840, but that prohibits the post notes only and not the contract itself. The legislature did not even declare the notes to be void, but only forbid banks to issue them under a penalty.
The principle which upholds this contract is powerfully supported by a series of decisions in this state, known as the Utica insurance cases. ( Utica Insurance Co . v. Scott, 19 John., 1 ; Same v. Kipp, 8 Cow., 20 ; Same v. Cadwell,
3 Wend., 296 ; Same v. Kipp, id., 369 ; Same v. Bloodgood, 4 Wend., 652 .) In all these cases the Utica Insurance Company had taken notes in a course of unauthorized banking. The restraining act then in force (2 R.L., 234) declared that all notes and securities for the payment of money, made to any association, institution or company not authorized as aforesaid, should be null and void. It was held that the corporation, having violated the statute and transcended its powers, could not recover on the notes it had discounted, but could recover on the contract of loan, being authorized by its charter to lend its surplus funds. The court, in each of the cases, affirmed the distinction between the lending contract and the security which the statute had declared void. In one of them ( 8 Cow., 20 ), the supreme court said: "It was unnecessary for the act (the restraining law) to go further than to avoid the 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. But they have not done so." And again it was observed: "This *Page 98
suit cannot be said to arise out of an illegal contract which defeats a recovery. The illegal contract, if any, was not the loan, for the plaintiffs had the right to loan 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." In what was also observed concerning a disaffirmance of the illegal contract, the illegal security was plainly intended. Now these cases have been questioned in the court which pronounced them, and it seems to me there is great difficulty in sustaining them, for the particular reason that the violator of the law was allowed to recover upon the very contract in which the violation consisted. The restraining act not only declared the notes void, but in terms made it unlawful to discount them; in other words, to lend money in that particular mode. Nevertheless, the distinction between the loan and the security taken therefor was drawn with great perspicuity, and in that respect I am not aware that those cases have ever been questioned. Indeed, the distinction had been settled long before in England, in Robinson v. Bland (2 Burr, 1077). The action was for money lent, and on a bill of exchange. The plaintiff had won money from the defendant at play, and had also lent him another sum at the time and place of play, and the bill was drawn by the defendant to include both sums. The statute on the subject declared that all notes, bills, bon

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/3590526. Public record. Not legal advice.