I dissent from the decision about to be made. That statutes regulating the rate of interest to be charged for loans of money and punishing usury are a constitutional exercise of the police power of the state is settled by authority. (Cooley's Principles of Constitutional Law [3d ed.], p. 260.) Such laws may be, as claimed by the political economists, mere relics of barbarism. Nevertheless, as they have been enacted for ages in every country, nobody but a theorist would deny their validity however much jurists might deplore their drastic character. In this *Page 22 state from the year 1787, when the first statute was passed on the subject, until the present time, with the exception of the period between the years 1830 and 1837, usury has rendered all securities infected therewith absolutely void, not only between the parties but as to purchasers in good faith, and not only as to non-negotiable securities but also as to commercial paper. This has been most forcibly stated by my brother VANN in the case of Claflin v. Boorum (122 N.Y. 385), and I cannot do better than quote his language: "The loan, when made, was a violation of the statute, and the notes were thus rendered absolutely void and no subsequent transaction could make them valid. Even if, as the plaintiffs claim, they purchased the notes before maturity for value and without notice, they cannot enforce them, because the vice of usury follows a promissory note into the hands of a bonafide holder. A note void in its inception for usury continues void forever, whatever its subsequent history may be. It is as void in the hands of an innocent holder for value as it was in the hands of those who made the usurious contract. No vitality can be given to it by sale or exchange, because that which the statute has declared void cannot be made valid by passing through the channels of trade." Such being the general rule of law, it is now about to be decided that a note given by A to B for a usurious loan, though void not only in the hands of B and every other human being or corporation but a bank, is vitalized and rendered valid through its purchase or discount by a bank, even though the bank has knowledge of its usurious character. This result is claimed to have been effected by the provisions of the National Banking Act and of our statute of 1870 placing state banks on a parity with national banks. It is seriously urged that such a rule of exceptional favoritism is necessary to the security of the banking business, and it is said that a contrary ruling would carry confusion into all channels of trade. Though the question has not been passed on by this court, it has been necessarily involved in three cases in the Supreme Court (UnionBank of Rochester v. Gilbert, 83 Hun, 417 [1894]; Freeport *Page 23 Bank v. Hagemeyer, 91 id. 194 [1895]; Union Bank ofRochester v. Benedict, 35 App. Div. 216 [1898]), in each of which the decision was adverse to the claim now made for the respondent. Indeed, the suggestion that in the purchase of paper void for usury between third parties a bank stood in any different position from any other purchaser is not to be found in the reports until the decision of the Appellate Division of the first department in the case of Schlesinger v. Kelly (114 App. Div. 546), not a year since. Of course, if the effect of the statute of 1870 is to relieve a bank from loss on the purchase of a usurious note it should be given full effect, even though the point was not discovered till the last month, but when we bear in mind that for three-quarters of a century it was the unquestionable law that usurious paper such as now before us was void in the hands of a bank; that for over a quarter of a century subsequent the only judicial decisions on the subject declared that that law still continued, and when we further consider that during that period of a full century New York has grown from a comparatively insignificant town to be the commercial metropolis of the country and as a financial center, if second to any city in the world, to London alone, despite the drastic and possibly unjust usury laws of the state, the argument that unless we now reverse the law of the past century banking business will be imperilled and the channels of trade thrown into confusion, may be dismissed as chimerical. The history of banking in our state does record many discreditable failures, but I have never heard of one which was in any way occasioned by this provision of the Usury Law.
As to the statement made by counsel for the respondent of an alleged fact not appearing in the record, that the makers "of more than one-half the commercial paper held by the Federal Bank at the time of its failure alleged a usurious origin thereof," it may be said that further research also outside of the record discloses that the president of this bank is now a convict in states prison for the offense of grand larceny. What has driven the bank into a receivership does not appear, *Page 24 but it is as easily attributable to the fact that it had a dishonest president as to the severity of our usury law. Having thus disposed of these extraneous considerations we are now brought to a consideration of the law of the case.
I insist on three propositions: 1st, that the Federal statute deals only with the action of the national banks in taking excessive interest, and has no application to the effect of usury between prior parties to the instrument; 2d, that Congress has no constitutional power to legislate on the validity or invalidity of contracts made between third parties having no relation to the national banks, and 3d, that even if Congress has the power claimed and has exercised it in favor of the national banks, the legislature has no power to extend a similar exemption and exception in favor of state banks. As to the first proposition, the Federal statute enacts that national banks shall be allowed to take the rate of interest permitted by the state or territory where they are located, and in the absence of any local law a rate not exceeding seven per cent per annum. It then provides that the taking of a greater rate of interest than that allowed shall be adjudged a forfeiture of the entire interest on the note, and in case the excess of interest has been paid, that the party paying it may recover from the bank double the amount paid. The statute deals exclusively with the action of the bank in taking interest from the person to whom it loans the money or for whom it discounts the paper. It does not regulate nor assume to regulate in any degree the dealings of the prior parties to the instrument as between themselves or the effect of those dealings on parties who do not contract with the bank. It is confined to the dealings of a bank with its customers. So true is this that even at this day it is an open question in the Supreme Court of the United States whether a national bank can purchase commercial paper as distinguished from discounting it, and if it can, whether the interest provisions of the act of Congress are applicable to such a transaction or not. (National Bank v.Johnson, 104 U.S. 271.) Doubtless, when a national bank discounts a note for its customer it is entitled to all the rights *Page 25 against the other parties to the note that the law would give any holder. The rights against third parties, however, proceed exclusively from the state law, not from the Federal law. The law of negotiable instruments is not constitutionally sacrosanct. Radical and preposterous as the action might be it would not be unconstitutional for the state to abolish the law of negotiable instruments and make all instruments for the payment of money, though in the hands of bona fide holders, open to the defenses and equities of the original parties. This state has done so in the case of notes given for money lost at gaming or to purchase lottery tickets, as well as notes infected by usury, and the constitutionality of the action has never been questioned. It has done so recently in the case of notes given for patent rights. This court has unanimously upheld the validity of the statute (Herdic v. Roessler, 109 N.Y. 127), and the Supreme Court of the United States has sustained similar legislation of the state of Kansas. (Allen v. Riley, 203 U.S. 347.) On the other hand, the state has at times made instruments negotiable which were not so at common law, such as warehouse receipts and bills of lading. It is a curious confusion of ideas to speak of the inability of a bank to collect from the maker a note void for usury between him and the payee for whom the bank has discounted it, as a forfeiture, and to argue that since if the bank had taken usury it would have lost only the interest, it cannot be subjected to a greater loss where it has been guilty of no usury. A forfeiture is a penalty imposed for misconduct or fraud. The bank forfeits nothing in a case of the character of that before us. The indorser for whom it discounted the note is liable to the bank for its full amount, and if he represented that the note was a valid instrument and free from infirmity, he can be prosecuted as a felon. True, the bank loses the responsibility of the maker, if it can properly be said to lose that which it never had. Were the maker an infant or his signature a forgery in neither case would he be liable, but it would be an improper use of language to say that by reason of either fact the bank had been subjected to a forfeiture. *Page 26
The principle involved in the present case has, in my judgment, been expressly decided by the Supreme Court of the United States in McClellan v. Chipman (164 U.S. 347). There it was held that a national bank took real estate subject to the provisions of the Massachusetts law rendering all conveyances void by the insolvent debtor with an intention to give a preference, though the National Banking Act expressly authorized a bank to take such real estate as might be mortgaged in good faith by way of security for debts previously contracted. Mr. Justice WHITE reiterates the declaration previously made in National Bank v.Commonwealth (9 Wall. 353): "National banks are subject to the laws of the state and are governed in their daily course of business far more by the laws of the state than of the nation. All their contracts are governed and construed by state laws. Their acquisition and transfer of property, their right to collect their debts, and their liability to be sued for debts, are all based on state law. It is only when the state law incapacitates the banks from discharging their duties to the government that it becomes unconstitutional."
The whole fabric of the respondent's argument on this question is based on a practice against which I have often had occasion to protest, that is, the excerpting of expressions from judicial opinions and construing them without regard to their context or the subject then before the court. (Fealey v. Bull, 163 N.Y. 397;National Harrow Co. v. Bement Sons, 163 id. 505.) Doubtless the courts have often said that the National Banking Act repealed the state usury laws so far as national banks were concerned. Doubtless this declaration was entirely correct so far as applied to the action of national banks in taking unlawful interest, which was the only subject-matter before the court in any of these cases, and the declarations of the courts must be limited to the cases before them. The present case is the first of its character that we can find has ever been presented to the courts either Federal or State, with the exception of the three cases in the Supreme Court of this state already noticed. The error of construing the declaration *Page 27 of a court, apart from the case then before it, is well exemplified by the statute of 1850, which forbade corporations to plead usury. The courts had several times said that the effect of this statute was to repeal the Usury Law so far as corporations were concerned, yet when the precise question came up this court held that the statute only forbade the plea of usury by a corporation to defeat its own contract, but that when a corporation succeeded to the title of a third party to property, which was the subject of a usurious loan it might avoid that loan for usury the same as any other person. (Merchants' ExchangeNat. Bank v. Commercial Warehouse Co., 49 N.Y. 635. See opinion, p. 641.)
I have said that it is about to be decided that even though a bank, national or state, takes a note with knowledge of the usury between the original parties, it may enforce it, and I contend that this is the necessary import of the decision. The theory of the decision is that the Federal statute abolished or superseded all usury laws of the state as to paper a national bank might discount. The only provision of the Federal statute is that which enacts that if a bank takes usury it shall forfeit twice the interest. The "knowingly" found in the statute applies solely to knowingly taking excessive interest, not to any knowledge of the prior character of the note. If this is the only provision of law extant on the subject, so long as the bank itself does not take usury in discounting the note, what possible statute, state or national, can render a note void or uncollectible, even if the bank had full knowledge of the inception of the note? And in fact, even if it took usury in discounting it, on what principle of law could it be subjected to any other penalty than that provided in the statute for the forfeiture of double the interest? There is no provision in the Federal statute as to the effect of usury on prior parties to the note. Usury only affects the note by virtue of the state statute declaring the usurious note void. If that statute is abrogated from the instant the note is purchased by the bank, what has the knowledge of the bank that it was usurious between the original parties to do with the question before *Page 28 us? There is no middle ground upon which to stand. Either the usurious note is void even though the bank is ignorant of the usury, or it is good though the bank does know of it.
I deny that Congress has the power to enact a statute susceptible of the interpretation that is about to be given. Doubtless it may prescribe an exclusive rule for the government of the transactions of national banks and for the dealings of parties with them. Thus it has been held that the penalties imposed by the Federal statute upon national banks for taking usury are exclusive, and also it has been held that state statutes making criminal certain conduct of national bank officers is an invasion of the powers of Congress. (Farmers M.Nat. Bank v. Dearing, 91 U.S. 29; Easton v. Iowa, 188 id. 220.) I concede plenary power in Congress to regulate all transactions between national banks and parties contracting with them. I assume that it might enact that neither infancy nor coverture should be a defense to a claim for money borrowed from a bank or to an obligation given to a bank. But the note sued on in this case, so far as the maker is concerned, involved no transaction with any national bank. It was a transaction had in this state, solely between citizens of this state, the validity of which must be determined solely by the laws of this state. By those laws the note was void and imposed no liability on the defendant. Congress cannot vary the legal effect of a contract or transfer of property had exclusively between citizens of a state in that state merely by reason of the voluntary action of a national bank intervening and purchasing that obligation. If so Congress might equally prescribe that when a bank purchases mortgages it should hold them free from any defense or equity. It might vary the tenure of all property in this state simply because a national bank saw fit to purchase or assume to purchase some interest therein. That it might be well for the bank to have notes free from all defenses may be assumed, but this is not sufficient to deprive the state of jurisdiction upon the subject. It is not everything that incidentally affects a function of government vested in Federal control that limits the police power *Page 29 of the states. To take an act without the domain of state regulation it must affect the functions of the national government directly, not incidentally. In Pennsylvania R.R. Co. v. Knight (192 U.S. 21) the validity of a state tax upon cab service connected with the Pennsylvania railroad in this state was challenged. It was there said: "Many things have more or less close relation to interstate commerce which are not properly to be regarded as a part of it. If the cab which carries the passenger from the hotel to the ferry landing is engaged in interstate transportation, why is not the porter who carries the traveler's trunk from his room to the carriage also so engaged? If the cab service is interstate transportation are the drivers of the cabs and the dealers who supply hay and grain for the horses also engaged in interstate commerce? And where will the limit be placed?" It doubtless curtails the Federal revenue derived from licenses upon the sale of liquor for the state to prohibit such sale within its limits, yet it has never been doubted that the legislation was a valid exercise of the police power of the state. (McGuire v. Commonwealth, 3 Wall. 387;License Tax Cases, 5 Wall. 462; Beer Co. v. Massachusetts,97 U.S. 25; Mugler v. Kansas, 123 id. 623; Kidd v.Pearson, 128 id. 1; Matter of Rahrer, 140 id. 545.) In the last case cited Chief Justice FULLER said: "The power of the state to impose restraints and burdens upon persons and property in conservation and promotion of the public health, good order and prosperity, is a power originally and always belonging to the States, not surrendered by them to the general government nor directly restrained by the Constitution of the United States and essentially exclusive. And this court has uniformly recognized state legislation, legitimately for police purposes, as not in the sense of the Constitution necessarily infringing upon any right which has been confided expressly or by implication to the national government." So, also, in United States v. E.C.Knight Co. (156 U.S. 1) it was held that the manufacture of a necessity of life did not constitute a part of interstate commerce so as to authorize its regulation by the *Page 30 Federal government. It was there said: "Doubtless the power to control the manufacture of a given thing involves in a certain sense the control of its disposition, but this is a secondary and not the primary sense; and although the exercise of that power may result in bringing the operation of commerce into play, it does not control it, and affects it only incidentally and indirectly." In Hopkins v. United States (171 U.S. 578) it was held that an agreement among the members of a live stock exchange did not affect interstate commerce so as to fall within the act of Congress prohibiting combinations. Authorities might be multiplied to the effect that to render a regulation by the state in the exercise of its police power void as conflicting with the powers of Congress, the operation of the regulation must be direct and not collateral or incidental. Even though the power of Congress were conceded, the Supreme Court of the United States held it to be "the settled rule that a statute enacted in execution of a reserved power of the State is not to be regarded as inconsistent with an act of Congress passed in the execution of a clear power under the Constitution, unless the repugnance or conflict is so direct and positive that the two acts cannot be reconciled or stand together." (Missouri, K. T. Ry. Co. v.Haber, 169 U.S. 613, 623.)
But if Congress possess the power claimed and has exercised it in favor of national banks, it does not follow that the state has the same right to grant the exceptional privilege to state banks. This position does not rest on any claim that the state might not abolish or modify the usury laws, but on the ground that it is class legislation of the most extreme character, I think, that has ever come before the courts. The only authority that exists for the Federal government to character national banks is that they are fiscal agencies of the government. The whole question of Federal authority was reviewed by the Supreme Court of the United States in Osborn v. Bank of the United States (9 Wheat. 738). In the opinion there delivered Chief Justice MARSHALL, in answering the contention that the state had power to tax the bank, said: "The *Page 31 foundation of the argument in favor of the right of a State to tax the bank is laid in the supposed character of that institution. The argument supposes the corporation to have been originated for the management of an individual concern, to be founded upon contract between individuals, having private trade and private profit for its great and principal object. If these premises were true, the conclusion drawn from them would be inevitable. This mere private corporation, engaged in its own business, with its own views, would certainly be subject to the taxing power of the state, as any individual would be; and the casual circumstance of its being employed by the government in the transaction of its fiscal affairs would no more exempt its private business from the operation of that power than it would exempt the private business of any individual employed in the same manner. But the premises are not true. The bank is not considered as a private corporation, whose principal object is individual trade and individual profit, but as a public corporation created for public and national purposes. That the mere business of banking is, in its own nature, a private business, and may be carried on by individuals or companies having no political connection with the government, is admitted; but the bank is not such an individual or company. It was not created for its own sake or for private purposes." This being the theory of the creation of national banks, that they are actually governmental agencies, it may be that Congress can confer upon them rights and privileges greater than that of any other individual or corporation in the country, but the statutes of this state will be searched in vain for any connection between the government of the state and state banks. The state banks are no more governmental agencies of the state than are insurance companies, manufacturing companies, or other business corporations. The statute authorizing the incorporation of banks and the regulation of their conduct contemplates a corporation organized, to use the language of Chief Justice MARSHALL, with "private trade and private profit for its great and principal object." The bank which *Page 32 this plaintiff represents was no more an agent of the state or engaged in the discharge of a governmental function than a Herkimer county dairy company. The state cannot, therefore, grant to such corporations rights and privileges beyond every other citizen of the state. It may be said that this objection would apply with equal force to the statutory provision which enacts that state banks taking usury only forfeit the interest, the same as national banks, while individuals and other corporations forfeit the whole principal, the validity of which enactment has been recognized by the courts. I think a distinction may be drawn between the two cases, but that it is not necessary to consider. The unconstitutionality of class legislation is a doctrine only recently developed in the courts, but, nevertheless, it has of late years become firmly established. It has principally arisen in the the Federal courts and in other states in relation to anti-trust and labor laws. In Connolly v. Union Sewer PipeCo. (184 U.S. 540) the Supreme Court of the United States held a statute of Illinois prohibiting combinations to prevent competition in the manufacture and sale of goods void, because it exempted from its operation persons or associations of agriculturists or raisers of live stock. The doctrine of that case was applied by this court in Matter of Pell (171 N.Y. 48), and still more recently in Wright v. Hart (182 N.Y. 330), where a statute of this state forbidding the sale by merchants of their stocks of merchandise in bulk was held unconstitutional and void because it arbitrarily denied the right of a specified class of citizens to contract for the sale of their property in the way permitted to other citizens. I dissented in the case cited, but had the difference in the rights afforded to one class of citizens and denied to the other been a tithe of the privilege accorded to the favored class in the present case, I should have unqualifiedly concurred. As already stated, the decision about to be made is to the effect that a bank, merely because it is a bank, may purchase and enforce a note or obligation that is void between the parties, and void in the hands of every person or corporation other *Page 33 than a bank who might purchase it in good faith and for a valuable consideration, and this, I say, although the bank knows of its usurious character at the time of its purchase. The most extravagant claim for legislation in favor of labor never approximated in favoritism to this. The objection I make is not as to the absence of difference in circumstance to justify a classification for proper purposes, but a denial of the power of the state to authorize a member of a favored class to determine simply of his or its own volition whether a contract entered into by other citizens shall be valid or not; in other words, to leave to A, a private citizen, the power to determine by his purchase or refusal to purchase a note from B to C, whether that note shall be void or not. It would be a shabby bank which would not, at the solicitation of a director or a large stockholder or depositor, discount for him a note void for usury and thus enable him to enforce indirectly an obligation which the statute says shall be absolutely void.
I shall not discuss at any length the effect of the Negotiable Instruments Law (L. 1897, ch. 612, § 96). It think that under well-settled principles of statutory construction we cannot construe its general language as repealing the provisions of the usury, gaming and lottery laws, which render obligations given on such considerations absolutely void. The Negotiable Instruments Law applies only to commercial paper, and the effect of the usury and gaming statutes, like that relating to patent rights, is to withdraw notes given on such considerations from the domain of negotiable instruments. (Eastman v. Shaw, 65 N.Y. 522.) If, however, the decisions in this case were to proceed on the effect of the Negotiable Instruments Law, I should confine myself to the expression of my vote. Though I cannot concur in such a decision, I appreciate that it would eliminate from the usury laws their most harsh and drastic features, and probably be far more just than the provisions of the old law. Such a decision would inure to the benefit of all purchasers in good faith of commercial paper. The decision about to be made, however, instead of ameliorating the character of our usury *Page 34 laws only accentuates and increases the injustice of their provisions.
The judgments of the Appellate Division and Trial Term should be reversed and a new trial ordered, with costs to abide the event.
GRAY and CHASE, JJ., concur with VANN, J., and WILLARD BARTLETT, J., concurs in result on the ground that under the Negotiable Instruments Law a bona fide purchaser takes a note free from the defense of usury; WERNER and HISCOCK, JJ., concur with CULLEN, Ch. J.
Judgment affirmed.