Fowler v. Scully ex rel. First National Bank , 72 Pa. 456 ( 1873 )

The opinion of the court was delivered, by

Agnew, J.

— The First National Bank of Pittsburg asked the District Court to enforce by scire facias the payment of a mortgage for future advances. The defendant, the owner of the mortgaged land, asserts that the mortgage is forbidden by the Act of Congress, which confers upon the bank its charter and all its powers. The simple question is, Is the mortgage valid or void; and if void will the law enforce it ? In deciding this question, we must be guided by the Federal laws and Federal precedents, for the subject is one of. Federal origin and Federal control. The plaintiff is a corporation created and governed by the Act' of Congress, approved the 8d of June 1864, commonly called the National Bank Act. What is the Federal rule to be applied to such a corporation? In the Bank of U. S. v. Dandridge, 12 Wheaton 64, Justice Story lays down this rule : “ Whatever may be the implied powers of aggregate corporations by the common law, and the modes by which these powers are to be carried into operation, corporations created by statute must depend, both for their powers and the mode of exercising them, upon the construction of the statute itself.” For this he cites the following language of Chief Justice Marshall, in Head v. Prov. Ins. Co., 2 Cranch 127: “Without ascribing to this body, which in its corporate capacity is the mere creature of the act to which it owes its existence, all the qualities and disabilities annexed by the common law to ancient institutions of this sort, it may correctly be said to be precisely what the incorporating act has made it; to derive all its powers from that act and to be capable of exerting its faculties only in the manner the act authorizes.” These propositions are repeated by himself in Dartmouth College v. Woodward, 4 Wheaton 636, and by C. J. Taney, in Bank of Augusta v. Earle, 13 Peters 587, and Penrise v. Chesapeake & Delaware Canal Co., 9 Howard 184. In our own state, the same doctrine is recognised in the case of a National Bank. Justice Strong said: “ The bank is a creature of the act, dependent on it for all its powers, and controlled by all the restrictions which the act imposes Venango National Bank v. Taylor, 6 P. F. Smith 14.

This being the settled rule of interpretation, the question is: “ Does the Act of Congress authorize or permit a National Bank to take a mortgage of lands, to secure the payment of future loans and discounts?”

The banking powers of these associations are to be found in the 8th section, and are “ to carry on the business of banking by discounting and negotiating promissory notes, drafts, bills of exchange and other evidences of debt; by buying and selling exchange, coin and bullion; by loaning money on personal security; by obtaining, issuing and circulating notes according to the provisions of the act.” In view of the rule of interpretation of such charters given to us by the Federal courts, and the maxim expressio unius est exclusio alterius, the argument might close with the terms of the power to loan money on personal security: for agreeably to this rule and maxim, no other security than personal can be taken for money lent. This is the law of the bank’s capacity, and of its control. It accords also with the nature o£ banking as a business, which is precisely described in the language of the law itself; the discounting and negotiating of promissory notes, drafts, bills and other evidences of debts (meaning, of course, debts ejusdem generis, such as checks, certificates of deposits, &c.), the buying and selling of bills of exchange, bullion, and lending of money on personal security. The reasons are manifest. The business of a bank is commercial, not that of dealing in real estate, brokerage, &c. It, therefore, does not buy and sell real estate, ground-rents, mortgages, stocks, produce, &c.

It deals in commercial paper, on the security afforded by the personal responsibility of drawers, endorsers and payers, and this because banks are created for the purposes of trade, which require ready access to loans of money, and discounts on business paper made in the course of trade. Experience also has shown, that whenever banks abandon the legitimate practice of loaning or discounting on the well known standing of the parties to commercial paper ; to lend money on the hypothecation of stocks, real estate, &c., alone in lieu of personal security, they enter an uncertain and unknown region of credit. The directors can well know or ascertain the standing of drawers and endorsers as men of capital or means in the community, but the moment they leave this plain field to enter the region of corporation stocks, real estate and liens, they take a leap in the dark, and must resort to outside agents, such as lawyers, brokers, &c. The internal affairs and condition of a corporation are known to few, while the security of a mortgage rests on both title and liens, requiring professional skill to explore them. The evident intent of Congress is, that National Banks should be institutions of commerce, not dealers in real estate, stocks or produce. What power there may be to accept an hypothecation of stocks in addition, and to strengthen a loan, we do not say. We are discussing the power conferred to maJce or create loans.

Another' obvious purpose of confining their loans of money to personal security, is to prevent these associations from splitting on the rock which has ruined so many banks, to wit, that of lending too much of their capital to one person or firm. The 29th section provides: “ That the total liabilities to any association, of any person, or of any company corporation, or firm for money borrowed, including in the liabilities of a company or firm, the liabilities of the several members thereof, shall at no time exceed one-tenth part of the amount of the capital stock of such association actually paid in.” Thus Congress has prohibited an undue aggregation of its capital in single hands even though each note or bill may be well secured by the names upon it. Then what must we say of large aggregations of capital in the hands of one man, without personal security on the faith of an estimated value of real estate and the risk of title, and conflicting liens ? In the present case we see an aggregate of loans to Fowler, tbe mortgagor, of $76,303.59; the very mortgage reciting, that it was taken to dis pense with personal security, and to extend to the sum of $100,000 How much the paid in capital of this bank is, we do not know. That such a transaction is contrary to the first principles of correct banking and to the charter, is obvious.

The intention of Congress is manifested by other features of the act. The 35th section declares: “That no association shall make any loan or discounts on the security of the shares of its own capital stock, nor be the purchaser or holder of any such shares, unless such security or purchase shall be necessary to prevent loss upon any debt previously contracted in good faith, and stocks so purchased or acquired, shall within six months from the time of its purchase, be sold or disposed of at public or private sale, in default of which a receiver may be appointed to close up the business of the association according to the provisions of this act.” What is this, but to repeat to the bank — you must lend money only on personal security. Then comes the 37th section, prohibiting the bank from hypothecating its circulating notes to procure money to pay on its capital, or to be used in its banking operations or from using its notes so as in any form to increase its capital. These two sections, the 35th and 37th, when viewed together, teach another lesson, that these banks shall not live upon themselves, so that when compelled to wind up, creditors and stockholders shall not then discover that their apparent assets are composed of their own decayed viscera, instead of outside personal security. In this way only can the public be made safe against mismanagement.

Here the argument might rest, that the lending of money on mortgage or real estate security is ultra vires and forbidden. But Congress has left nothing to implication, and in the 28th section has said in what cases these hanks may hold real estate, and has forbidden all others. The 28th section reads thus: “ That it shall be lawful for any such association to purchase, hold and convey real estate as followsThen follow four numbered cases.

“ First.' Such as shall be necessary for its immediate accommodation in the transaction of its business.

“ Second. Such as shall be mortgaged to it in good faith by way of security for debt previously contracted.

“ Third. Such as shall be conveyed to it in satisfaction of debts previously contracted in the course of its dealings.

“ Fourth. Such as it shall purchase at sales under judgments, decrees, mortgages held by such association, or shall purchase to secure debts due to such associations.”

Now comes the prohibition against any other mode, and the appointed time such as shall have been legally acquired, shall be held.

“ Such association shall not purchase or hold real estate in any other ease or for any other purpose than as specified in this section, nor shall it hold possession of any real estate under mortgage, or hold the title and possession of any real estate purchased to secure any debts due to it, for a longer period than five years.”

Thus the section speaks to the bank in plain language — you shall not purchase or hold real estate (besides your banking-house) except in good faith to secure debts already contracted, and you shall not hold in mortmain, for a longer period than five years, that which you can legally take. This section is interpreted also by the 35th section, which forbids the bank from taking its own stock in security, except to prevent the loss of a debt previously contracted in good faith ; and when stock shall be so taken it shall not be held longer than six months. The language of prohibition in the 28th section is quite clear. The bank “ shall not purchase or hold real estate in any other case or for any other purpose than as specified in this section.” The second specified case in this section is, “ such as shall be mortgaged to it in good faith by way of security for debts previously contracted.” The law therefore says plainly — you shall not hold a mortgage for future loans, for that is another case.

If anything were wanting to make plain that which is clear, it is the amendment of the 2d clause in the 28th section, and the debate on it in the Senate. See Cong. Globe, April 26th 1864. The amendment of the committee proposed to strike out, “for loans made by such association in the usual course of its banking business or for money due thereto,” and to insert “ for debts previously contracted,” so as to make the clause read, “ such as shall be mortgaged to it in good faith by way of security for debts previously contracted.” At the call of Senator McDougall, Senator Sherman explained the amendment of the committee to allow the banks to take a mortgage for a pre-existing debt; but not to loan money on real estate security ; “ Not to loan money on mortgage ?” said Mr. McDougall. Mr. Sherman again replied, “ They have no right to loan money upon mortgage ; they must take personal security, but after a debt is contracted they may, in order to secure the debt, take a mortgage upon real estate.” The amendment was adopted, and the section now stands so.

It is argued, however, that a mortgage is not real estate, and therefore it cannot be said that the bank holds real estate when it holds a mortgage. The criticism is unsound, in forgetting that the law is its own interpreter. A mortgage is one of the four enumerated cases of which the law says the bank may hold real estate as follows. Then follows the second case. It is also one of the cases referred to when the law says, the bank shall not hold in any other case than as specified in this section. The criticism overlooks the fact also that the act as a Federal law is intended to embrace the various conditions of the law of mortgage as realty or personalty, in the several states. Even in Pennsylvania, where no court of chancery existed, though viewed only as a security for money, mortgages have been regarded as conveyances of real estate in form and subject to real estate remedies, as by ejectment, and by writ of waste.

The argument founded on the 52d section is unsound. The mortgages therein referred to are of course those which may be (awfully taken for pre-existing debts, which when found among the assets of the bank shall not be so assigned as to create preferences among creditors. The express prohibition of the 28th section cannot be repealed by this reference to mortgages in the 52d section, when so ready a meaning can be found for the latter.

It is a clear and incontrovertible position, therefore, that a National Bank cannot lend money on the security of a mortgage, and that its power to take and hold a mortgage is confined to the second case in the 28th section, for debts previously contracted. .

It is argued that the mortgage before us is not a mortgage for future advances of money, because of the recital that the bank “ hath agreed to discount for said Fowler an amount in the aggregate not exceeding $100,000, such negotiable paper as he shall offer for that purpose.” It is said this is a covenant or obligation on part of the bank to loan that sum, and, therefore, the money to be lent is not a future loan. But this confounds distinctions and ignores facts. Treat the recital as a covenant to lend, still the loans and discounts to be made are future. The bank did not owe Fowler $100,000, and if it did, it had a security without a mortgage. The mortgage before us is not to secure a debt from the bank to Fowler, but a debt from Fowler to the bank, not exceeding $100,000, which is to consist of negotiable business paper discounted for him without the necessity of procuring the additional endorsement for said paper by a third party. If the bank is bound to make the discounts, the breach of the covenant would be followed by such damages only as Fowler could show. So much is drawn from the instrument itself. Then the fact is, as it appears in the schedule of discounts, that though the mortgage bears date the 21st October 1869, acknowledged and recorded on the same day, the first discount claimed under it was on the 11th April 1870, after which come twenty-two others, down to September 26th 1870. These are Fowler’s debts to the bank, and they are all future to the mortgage. It would be an unmitigated fraud upon the Act of Congress if a bank could first covenant to lend the money, and then found upon its own covenant a mortgage to cover a line of future loans and discounts.

The distinction between a mortgage to cover future advances at the discretion of the mortgagee, and one to cover advances he is bound to make, recognised in TerHoven v. Kerns, 2 Barr 99, and other cases, has no bearing on the present question. That distinction was taken to regulate the rights and equities of lien-creditors among themselves, but does not change the nature of the advance itself. The advance in either case is future, but the effect upon the lien is different, just as the creditor was bound or not bound to make the advance.

It is further argued that to prevent injustice, equity will regard the mortgage as delivered anew, on each discount or advance. This will do inter partes, to prevent wrong; but such a fiction cannot confer a power upon a corporation, withheld from it by its charter. The error is in forgetting that this is a question of statute power and public policy, not of mere equity between the parties. Any want of corporate power might be supplied by this means, and the mere interests of parties be made to override the law.

Whether Yankirk, the voluntary assignee of Fowler, can set up the defence here, depends not on his character as a volunteer, but on the question whether the law will aid the plaintiff’s recovery. If it will not, it is clear that Yankirk, as the owner of the estate by assignment, and under bond to administer his trust according to law, may and ought to defend for the interest of the creditors. This brings us to the second question stated in the outset of this opinion. The mortgage being void, will the law enforce it ? All the authorities, English, Federal and state, say no. Mr. Powell, in his work on Contracts, p. 166, says, that all contracts repugnant to the welfare of the state, or against some maxim or rule in law, or in contradiction to some positive statute, are void. Then follow numerous instances. Mr. Comyn, in his work on Contracts, pp. 59 to 67, enumerates many statutes upon which contracts have been declared by the courts to be void as mala prohibita, and it is not essential that the statute itself should declare the contract to be void.

The doctrine that a contract, in violation of the provisions of a statute, though not expressly made void by it, is null and will not be enforced by the courts, is very distinctly stated and sustained by authorities in the case of the Bank of the U. S. v. Owens, 2 Peters 538. Johnson, J., said: “ No court of justice can in its nature be made the handmaid of iniquity. Courts are instituted to carry into effect the laws of the country; how can they become auxiliary to the consummation of violations of law ? There can be no civil right where there can be no legal remedy, and there can be no legal remedy for that which is itself illegal.” The sam.e principles are recognised in Coppell v. Hall, 7 Wallace 558. Justice Swayne, commenting on the instruction of the court below, that the illegality had been waived by the act of the defendant, says, “ In such cases there can be no waiver. The defence is allowed not for the sake of the defendant, but of the law itself.” Again, “ Whenever the illegality appears, whether the evidence comes from one side or the other, the disclosure is fatal to the case. No consent of the defendant can neutralize its effect. A stipulation in the most solemn form to waive the objection, would be tainted with the vice of the original contract, and void for the same reasons. Where the contamination reaches, it destroys. The principle to be extracted from all the cases is, that the law will not lend its support to a claim founded on its own violation.” See also Bank v. Lanier, 11 Wallace 369. ■ And in Bank of Augusta v. Earle, 13 Peters 587, C. J. Taney says: “ It may be safely assumed that a corporation can make no contracts and do no acts within or without the state which creates it, except such as are authorized by its charter.”

Coming now to our own state, a long line of decisions testifies that our courts will not lend their aid to enforce illegal contracts. In Mitchell v. Smith, 1 Binney 110, a case of the sale and purchase of a Connecticut title to Pennsylvania lands, Shippen, C. J., says : “ The contract is illegal, being founded on the breach of the law, and of consequence is a void contract and cannot be enforced in a court of law.” In Siedenbender v. Charles, Administrator, 4 S. & R., it was held there could be no recovery upon a ticket in an illegal lottery. Tilghman, C. J., said: “ I consider it perfectly settled that an action cannot be sustained, founded on a transaction prohibited by statute, although it is not expressly declared that the contract is void;” p. 160. Yeates, J., said: “ The principle of public .policy is, that no court will lend its aid to a man who grounds his action upon an immoral or illegal act. Justice as between these individuals would require either payment of the money or reconveyance of the property, but principles of public convenience demand that the justice of the case shall yield to higher considerations, the operation of the precedent on public morals and the public interest. It is for these reasons courts of justice will not assist an illegal transaction in any respect.” In Biddis v. James, 6 Binney 329, a case of. lottery ticket also, O. J. Tilghman states the same doctrine in fewer words. There is, therefore, no room for equitable presumptions, or estoppels, in cases of illegal contracts. Without protracting the statement too much, I may refer to the following cases of illegal contracts, which the courts have refused to aid by a recovery: Maybin v. Coulon, 4 Dallas 298; Duncanson v. McLure, Id. 308; Badgely v. Beale, 3 Watts 263; Kepner v. Keefer, 6 Id. 231; Wagonseller v. Snyder, 7 Id. 343; Clippinger v. Hepbaugh, 5 W. & S. 315; Filson v. Himes, 5 Barr 452; Columbia Bank & Bridge Co. v. Haldeman, 7 W. & S. 233; App v. Coryell, 3 Penna. R. 494; Edgell v. McLaughlin, 6 Wharton 176; Brua’s Appeal, 5 P. F. Smith 295. Two of these cases may be noticed particularly on the ground that the contracts were collateral to the illegal act, and that the court refused its aid. Badgely v. Beale was for wages as a marker at an illicit billiard-table ; and Columbia Bank, &c., v. Haldeman, was on a bond of indemnity to a stakeholder for paying over money won on a wager on an election. Here the bank, as plaintiff, asks to recover on an illegal mortgage; and it follows, from the doctrine stated, that the court will not assist the illegal act; and that the argument in regard to the state, being the only party to avail herself of the illegal forfeiture, has no place here. The defendant has the right to avail himself of the defence, and prevent a recovery. The doctrine of Leazure v. Hillegas, 7 S. & R. 313, and cases following in its track, is founded on the law of Pennsylvania as to corporations, that though they may take real estate, except for superstitious uses, yet they cannot hold it in consequence of the statutes of mortmain, but as the title has passed into the corporation, it must rest there, till the state enforces the forfeiture. This is very clearly shown by C. J. Tilghman in that case. But in the case now before us, as we have seen, the Act of Congress forbids the taking of a mortgage, except as a security for debts previously contracted. The disability attaches therefore to the acquisition, and not to the retaining of the mortgage. The transaction is without authority and illegal from the start, and the law will not enforce it. The defendant may, therefore, defend against it, not because of his own merit, but because the law will not suffer itself to be prostituted. This being the rule, it only remains to state the test adopted. “ The test (says Judge Duncan, in Swan v. Scott, 11 S. & R. 164) whether a demand connected with an illegal transaction is capable of being enforced at law, is whether the plaintiff requires the aid of the illegal transaction to establish his case. If the plaintiff cannot open his case without showing that he has broken the law, the court will not assist him, whatever his claim in justice may be upon the defendant.” This test has been .repeated in the following cases: Thomas v. Brady, 10 Barr 170; Scott v. Duffy, 2 Harris 20; Evans v. Dravo, 12 Id. 65. The mortgage of Fowler to the plaintiff is, on its face, a security for future advances, and the schedule of the debts claimed under it shows also their subsequent character. The plaintiff could not open its case, therefore, without disclosing that it sought the enforcement of an illegal security — one forbidden by the law. The action must, therefore, fail. Judgment reversed.

Sharswood and Williams, JJ., dissented.

March 12th 1873. The Supreme Court awarded a procedendo.