Opinion
04-18-1871
CITY OF LYNCHBURG v. NORVELL. CITY OF LYNCHBURG v. SLAUGHTER. CITY OF LYNCHBURG v. EAMES, two cases. CITY OF LYNCHBURG v. PHELPS & PAMPLIN.
Ould & Carrington and Garland & Christian, for the appellant. See argument in the preceding case. Kean, Kirkpatrick and Wm. Daniel, for the appellees.
Absent Joynes and Anderson, Js. [a1]
1. City bonds, payable thirty years after date, and bearing six per cent. per annum interest from their date, sold in 1864, for Confederate money, at the rate of 2 1/2 for one, when Confederate money was at the rate of twenty to one for gold. This is usury.
2. The fact that these bonds might be paid in the currency which at the time they fell due, would be taken by the State for taxes, does not constitute such a contract of hazard as relieved it from the taint of usury.
These are actions brought by the appellees in the Circuit court of Lynchburg, against the city of Lynchburg, to recover interest due upon bonds issued by the council of the city. By agreement of the parties, the causes were heard together by the court, without a jury, and the defendant was allowed to prove anything, under the general issues, which might be proved under any proper pleas; and each party was to be allowed to object to any testimony, if not admissible in his case.
In appears that, in 1864, there was great excitement in the city of Lynchburg on the part of many persons who were unable to provide food for their families, and it seemed probable that it would terminate in some public disturbance. In this condition of things, the council of the city, in June 1864, resolved to sell fifty thousand dollars of the bonds of the city, bearing interest at the rate of six per cent. per annum, and payable in not less than thirty years from their date. Accordingly, the bonds were sold at auction in August of that year, at an average of about $249, in Confederate money, for $100; when the difference between such money and gold was from twenty to twenty-five for one. The bonds, which were coupons, bore interest at six per cent. per annum, and were made payable at thirty years from their date. At the time these bonds were sold, it was announced by the president of the council, that they would stand upon the same footing as the old bonds of the city, and would be paid in such currency as was receivable at the time by the State for taxes; and they in fact brought about the same price as the old bonds. The plaintiffs in these actions were the purchasers of the most of them at the sale, though some of the bonds held by Eames were transferred to him by the purchaser; and that was probably the case with the bond held by the plaintiff Norvell.
The object of the sale of these bonds being to furnish supplies for the needy in the city, a store was opened, in which the supplies were sold at cost to all such of the citizens as required assistance.
It appears that, at the end of the war, there was probably goods enough in the store to have paid the principal of the bonds; but, to avoid a riot, it became necessary to continue the sale of the goods for some days for Confederate money.
The Circuit court rendered judgments for the plaintiffs; and the defendant excepted; and took the case to the District court at Lynchburg; but that court affirmed the judgments; and the city of Lynchburg applied to this court for a supersedeas; which was awarded.
The council of the city has authority, in the name and for the use of the city, to contract loans, or cause to be issued certificates of debt or bonds; but such loans, certificates or bonds shall not be irredeemable for a greater period than thirty-four years.
Ould & Carrington and Garland & Christian, for the appellant. See argument in the preceding case.
Kean, Kirkpatrick and Wm. Daniel, for the appellees.
1. Position of the cases.
These causes were tried by the court upon an agreement that all defences might be made, and all objections to the testimony taken.
This puts the plaintiff in error in the position here of a demurrant to evidence. Clafflin & Co. v. Steenbock & Co., 18 Gratt. 847; Ewing v. Ewing, 2 Leigh 337.
This effectually disposes of the evidence tending to show that these bonds were issued for war purposes, which was disproved at any rate. It also establishes the good faith of the whole transaction, and confines the question of ultra vires to the charter, the ordinance and the bond. It also excludes all idea of a shift, contrivance or indirection, on the question of usury, and makes it necessary for the plaintiff in error to make out a case of usury per se.
We understand the questions now open to be
1. That the issue of bonds was ultra vires.
2. That the bonds are usurious.
I. Upon the first of these questions, we submit
1. That the governmental powers of a city are elastic. Richmond has no power to deal in liquors; yet, for the preservation of property and good order, she was competent, under special circumstances, to buy all the liquor within her limits. Jones & Co. v. City of Richmond, 18 Gratt. 517.
The construction contended for on the other side is too narrow. In times like those in 1864, these local governments, necessarily, must do acts which, in ordinary times, they might not do.
1. The council were the judges of the necessity to provide funds for general city purposes, in Confederate States treasury notes.
2. They, in good faith, made what they call a sale of bonds; which was a mere mode of exchange of one security for the other, in order to get the benefit of the high premium bonds bore in Confederate States notes.
3. The universality of Confederate States notes shut them up to this mode of effecting a necessary end for the use, and preservation of the city and people.
Gould v. Town of Sterling, 23 New York R. 456, was not a sale of bonds. It was an issue in direct violation of a special statute permitting the issue for a special purpose.
Talmage v. Pell, 3 Seld. R. 328, was a speculation in State bonds by an insurance and banking company for traffic.
II. Upon the question of usury.
Usury is either express or by a shift.
The second--concealed usury--is excluded.
1. By the actual facts of the case, which show affirmatively that no such offence was contemplated by either side.
2. By the rule above referred to, that the plaintiff in error stands as a demurrant to evidence.
Observe:
1. There is no case where an obligation given for a depreciated currency in greater nominal amount than the obligation has ever been adjudged usurious.
2. It is doubtful whether usury can be predicated at all of a transaction founded upon a fluctuating, yet universal paper currency.
3. All the cases relied on by plaintiffs in error are of transactions in a depreciated currency, which existed along with a good one in actual use--such depreciated notes not being the real currency of the community--and this is always remarked on by the courts as proving the shift to conceal usury.
4. Gold was never referred to during the war as a standard of value. See Joynes J., in Rucker's Adm'x v. Dearing, 18 Gratt. 434.
Gold appreciated more rapidly than any other commodity: greatly more than lands, labor, breadstuffs, subsistence or apparel. Board at the Richmond hotels during the war could be had by foreigners who used specie funds, at a cost of from thirty cents to one dollar a day.
This fact, that gold was not a standard of value at all, is illustrated by this transaction. Lynchburg bonds, issued before the war, were worth 2 1/2 to 1; gold 25 to 1. This $50,000 of bonds would, at gold rates, have brought one and a quarter millions, which would have redeemed the entire funded debt of Lynchburg, at its then market rate, twice over. (That debt was about $400,000.)
Again: The council saw in this state of facts a means of making a judicious financial operation. They sold or exchanged $50,000 of bonds for $125,000 of Confederate States notes, expended $75,000 in supporting the city government without taxation, and so used the other $50,000 that, at the end of the war, they had value sufficient to pay the whole issue of bonds in good money; which they did not do, only because, in order to avoid riot, they distributed over $40,000 of supplies to the mob after the surrender, and realized $8,000 to $10,000 from the residue. This fact that, after using, to avoid a year's taxation, three-fifths of the proceeds of these bonds, the proceeds of the residue represented the value of the bonds in good money at the end of the war, demonstrates that,
1. The council acted wisely, judiciously.
2. They understood the subject of relative values, in those times of dislocated standards, and their judgment was vindicated by results.
3. That the pretence of hardship is utterly without foundation.
4. That while, for purpose of scaling, gold is resorted to, it is only ex necessitate; and this the Legislature saw was often too unjust to be borne. Hence the amendment of 28th February, '67, to the scaling act.
5. That no such standard can properly be set up for the purpose of inferring a quasi criminal intent, and enforcing this penalty of confiscation on parties who never dreamed of violating any rule of law or morals.
Usury laws are for the protection of the weak against the strong. Here they are invoked by a government armed with unlimited power of taxation, against its own citizens, whose whole estates were at its mercy. Hence, if there is usury, it is by the dry letter of the law, not its spirit.
Again: The city gave its bonds; the defendants in error gave Confederate States notes. Suppose the city bonds were for gold. The exchange was in good faith, between parties capable, in law and in fact, of judging whether the contract was judicious. If the bonds were payable in gold, so were the Confederate States notes, and there was a legal probability that the Confederate States notes would be redeemed in gold in a year or two, and the amount was 2 1/2 to 1. Such a transaction is not, per se, usurious, Bank of United States v. Waggener, 9 Peters U. S. R. 378; State Bank of North Car. v. Cowan, 8 Leigh 238; Boswell v. Clarksons, 1 J. J. Marsh. R. 47.
Our case is stronger than any of these, because here the facts exclude the idea of any shift, and the premium (2 1/2 to 1) makes a case essentially different from any case cited by our adversaries. We may safely say there is no case where a premium in depreciated money was given for a man's bond, ever adjudged usurious. Bracken v. Griffin, 3 Call 433, illustrates.
But this case differs radically from all those relied on by the plaintiff in error in a vital particular. Our bonds are not payable in money at all events.
These bonds were issued August 22, 1864. On the 14th October, 1863 (see Acts 1863-'4, page 1), the Legislature enacted that after the 20th of that month all contracts for the payment of money should be payable in such currency as the State was receiving at the time the contract became payable, unless some other medium was expressly stated in writing. Now, it was proclaimed at the bidding that these bonds would be payable in whatever was current in Virginia when they matured. Thus, by the law as well as by express understanding of the parties, these bonds had imbedded into their very bodies and constitution the quality of being payable, not in money, but in such currency as the State of Virginia chose from time to time to receive. At that very time she was receiving Confederate States notes. The interest which matured 1st January, 1865, was payable, and was actually paid, in Confederate States notes worth 60 to 1.
The question whether a contract is usurious is determined at the time it is made. Pollard v. Baylor, 6 Munf. 433, and many cases.
Is there a judge or lawyer on earth who would, in August, 1864, have pronounced this a usurious contract, in view of these facts: the premium; the absence of any ascertainable standard of value; the universal prevalence of Confederate States notes--the act of October 14 making the bonds solvable in a currency then fluctuating, depreciating, changing, and, in the future, payable in no man could or can now say what?
This essential characteristic of these bonds puts them quite outside the principles on which they are assailed, and brings these cases precisely under the rules established in State Bank of North Car. v. Cowan; Selby v. Morgan; Steptoe v. Harvey, and Boulware v. Newton. The principal is at risk--not merely in a potential but in an actual legal and practical sense.
These bonds mature in 1894. Who can say how much value the bondholders will receive in interest, payable in any paper which this State makes receivable at its treasury from now till then. If interest had been paid in 1866, they would have received $40 50 on the $1,000. In 1875, a war with England may make the interest worth in gold half that sum. And in 1894, when the principal is payable, the bondholder may be under the necessity of receiving that in a medium as bad, or worse, than Confederate notes in 1864, dollar for dollar.
STAPLES, J.
In these cases the ground has been taken that the plaintiff's bonds are contracts of hazard, and therefore not within the influence of the principles announced in the case of " Town of Danville v. Sutherlin," supra. In support of this proposition the act of 14th October, 1863, passed by the Richmond Legislature, has been cited and relied on. That act provides that any contract made on or after the 20th October, 1863, for the payment of money, shall be deemed to be for the payment of the sum, expressed or implied, in the currency which, at the time the contract becomes payable, shall be receivable in payment to the State, unless this intendment shall be expressly excluded. It is further provided, that the act shall continue in force until the expiration of six months after a treaty of peace between the Confederate States and the United States.
It seems to me the meaning of this act is too plain to admit of discussion. The Legislature, no doubt, thought that contracts thereafter made, as a general rule, would be based upon Confederate currency as a standard of value. The object was to provide a simple rule of evidence by which such contracts might be discharged in the same kind of currency. This view is confirmed by the provision limiting the operation of the act for six months after a treaty of peace, during which period it was supposed Confederate currency would constitute the sole circulating medium of the country. It is also confirmed by another act passed a short time before, at the same session, providing that Confederate notes should be thereafter receivable in payment of taxes and other public dues. Thus one act declares that Confederate currency shall be receivable in payment of all State dues; another closely succeeding declares that all contracts, after a certain period, shall be presumed to be payable in such currency as the State may receive. The two construed together unmistakably indicate the legislative intent. It is clear that the act was intended as a measure of relief and protection to the debtor class. Such was the understanding when the act was passed, and such has been the construction given to it ever since.
Conceding, however, that these bonds are payable in such currency as the State may receive when they mature, is that such risk or hazard as relieves the contract from the taint of usury. It is well settled, that where, by the terms of the agreement, the repayment of the loan depends upon the happening of contingent events, or is to be made in a currency of fluctuating value, so that the lender may receive nothing, or something less than his principal and legal interest may amount to, the contract is not liable to the imputation of usury. Such loans are not within the statute, because the excessive premium is regarded as a compensation for the hazard, and not for the forbearance. Transactions of this character, in fact, are not loans, but a species of wager. The lender, in making the contract, looks to the risk, and fixes his premium by his estimate of that risk. And the question arises in such cases, is this hazard encountered by the lender, a real, substantial hazard, or is it merely colorable? If the latter, it will not take the case out of the operation of the statute, where the substance of the contract is a borrowing and lending. In the Earl of Chesterfield v. Jansseen, 1 Atk. R. 301, it is said the true distinction is between a colorable and a fair and absolute hazard of the principal money. If the lender has so made his agreement, he is secure from loss, and has a chance of gain. This, by taking away the contingency, deprives the transaction of its legality. Barnard v. Young, 17 Ves. R. 44; Steptoe's Adm'rs v. Harvey's Ex'ors, 7 Leigh 501.
In many cases the courts have held the contracts to be usurious, in consequence of the slightness of the risk, though the loans were upon their face contracts of hazard. Reynolds v. Clayton, 2 Anderson R. 15; Mason v. Abdy, 3 Salk. R. 390; Gibson v. Fristoe, 1 Call. 62. These are acknowledged principles of law. How do they affect the contracts under consideration? The only risk the plaintiffs incur of the loss of their claim, is that of the insolvency of the corporation. That, however, is a hazard every lender incurs in any case; but it does not enter into the definition of legal hazard, according to all the authorities.
The plaintiffs possibly run some risk of receiving less than the amount advanced by them; but it must be admitted to be extremely slight. It is within the bounds of possibility, but altogether improbable. The plaintiffs loaned about ninety-two thousand dollars in Confederate notes, of the value of $4,000 in gold, stipulating for the repayment by the sum of $37,000 in gold or legal currency, with interest thereon from the date of the contract. This interest amounts to $2,200 annually; and, by the time the bonds mature, the plaintiffs will have received, in the way of interest alone, a sum nearly ten times the value of the loan, including principal and interest. And this enormous premium is to be paid before it can be ascertained in what sort of currency the principal is ultimately payable. The interest, for which these suits were instituted, is more than sufficient to repay the amount advanced by the plaintiffs.
Whatever may be the condition of the currency when the bonds mature, the plaintiffs have made themselves secure against loss by the reservation of interest, unless we are to assume that the State, at the expiration of thirty years, and in the meantime each successive year, will continue to receive a highly depreciated currency in payment of her dues. It is idle to say that the parties anticipated or apprehended any such result. If so, why was the enquiry made on the day of sale, whether the bonds were payable in Confederate currency? Why was the assurance given they would be paid in such currency as the State might receive when the day of payment arrived? Why was it made known to the bidders that it was not the purpose of the corporate authorities to make any distinction between these bonds and other liabilities of the city contracted before the war? There can be but one answer to these enquiries. It was apprehended the bonds might be paid in the depreciated currency then in circulation. To remove this apprehension, to give confidence in these securities, the assurance was demanded and given that the common council were determined to make no distinction between these obligations and any other liabilities of the city.
In all real contracts of hazard, the lender charges for the risk, and not for the loan. Here the supposed risk is held out as an inducement to the lender to invest, and was actually supposed to enhance the value of the securities. Upon the face of the transaction, it is apparent that the usurious premium agreed to be paid was in consideration of the loan, and not of the hazard incurred.
It is very clear, the city of Lynchburg would not have sold its bonds at such an enormous discount, but for the extremities to which it was reduced. Threatened with violence from without and violence within, it could only raise money by sacrifices which no people will ever submit to except from stern and imperious necessity. The condition of the country, the apprehension of riots, mob violence, and outrage upon the property and peace of the city, could alone have affected its credit to the extent disclosed by this transaction. We all know--universal observation attests--that as the difficulties and embarrassments of the borrower increase, the lender becomes more exacting in his terms, and will only part with his money at rates ruinous to pay.
I do not mean to cast any reflection upon the plaintiffs. They, no doubt, honestly believed they were purchasing the bonds fairly in open market. And so every lender believes, in discounting the paper of the needy and distressed debtor, hawked about the market in search of a purchaser upon any terms. But his faith in the fairness of the transaction has nothing to do with the question of usury. Upon every reasonable calculation, these plaintiffs for the $4,000 in value advanced by them will ultimately receive little less than $100,000 in a sound currency. If the statutes against usury do not reach cases like these, it is far better and wiser at once to repeal them, and leave to parties the right to make such contracts as their inclination or necessities may suggest.
It was argued that the city of Lynchburg disposed of the Confederate notes upon most advantageous terms. The answer is, it would have disposed of the larger sum, it ought to have received upon still more advantageous terms. It is well settled that the use the debtor may make of the money, or the profit he may derive from it, is not to be considered in ascertaining whether the transaction is usurious. In all such cases the true and only enquiry is, does the lender gain more than the legal rate. If so, the transaction is usurious, whatever may be the profit the borrower may realize. The rule is founded on good sense and sound principles of law, and is too well established to be now called in question.
For these reasons, I think these cases must be settled upon the principles laid down in the case of " Town of Danville v. Sutherlin, " and the judgment reversed, as in that case.
CHRISTIAN, J., concurred in the opinion of Staples, J.
MONCURE, P., dissented.
JUDGMENT REVERSED.
[a1] Joynes J. was sick, and Anderson J. was interested in the question.