Former opinion sustained on rehearing January 30, 1923.
On Rehearing.
(212 Pac. 473.)
McCOURT, J.The former opinion on this appeal (210 Pac. 160), was reached upon submission of the cause upon briefs under Rule 18 of this court. (173 Pac. x.) After that opinion Was handed down, a rehearing was granted, and the cause was argued orally by the parties.
Plaintiff for the first time now objects that the plea of usury, interposed by defendant as against those written instruments sued upon by plaintiff, *400each of which stipulated for the payment of interest at 12 per cent per annum, is insufficient to raise that defense. The pleadings herein are rather informal, and neither plaintiff nor defendant pleaded with technical exactness. No objections were raised in the Circuit Court, by either party, to the sufficiency of the pleadings, and evidence was introduced upon the trial in that court without particular reference to the pleadings.
The specific objection that plaintiff now makes to the attempt of defendant to plead usury is that defendant failed to allege in his answer that the several contracts, set out in plaintiff’s complaint and alleged by defendant to be usurious, were entered into with a corrupt intent upon the part of plaintiff to take more than the legal rate of interest for the use of the several sums of money loaned.
Defendant, as trustee in bankruptcy, is entitled to set up the defense of usury against the. contracts of the bankrupt: 39 Cyc. 1066: In re Stern, 144 Fed. 956, 958 (76 C. C. A. 10); In re Kellogg, 121 Fed. 333 (57 C. C. A. 547); In re Pittock, Fed. Cas. No. 11,189 (2 Sawy. 416).
Corrupt intent, as an element of usury, means that the parties must have knowingly agreed upon a rate of interest greater than that allowed by law: Investment Assn. v. Stanley, 38 Or. 319, 342 (63 Pac. 489, 84 Am. St. Rep. 793, 58 L. R. A. 816).
It is the universal rule that, in order to sustain the defense of usury, the party relying thereon must plead and prove: (1) A loan, express or implied; (2) An understanding between the parties that the money loaned shall, or may be, returned; (3) That for such loan a greater rate of interest than is allowed by law shall be paid, or agreed to be *401paid, as the case may be; and (á) A corrupt intent to take more than the legal rate for the nse of the sum loaned: Tyler on Usury, p. 110; Webb on Usury, §§ 18, 397; Balfour v. Davis, 14 Or. 47, 52 (12 Pac. 89); Farrell v. Kirkwood, 69 Or. 413, 417 (139 Pac. 110).
The fourth element may be implied, if all the others are expressed upon the face of the contract. The other three must be established by sufficient evidence: Webb on Usury, § 18.
Plaintiff, in his complaint, declares upon eight written instruments, each of which, when executed and delivered to plaintiff, stipulated for the payment of interest at the rate of 12 per cent per annum upon a sum of money loaned by plaintiff to defendant’s bankrupts.
In the leading case of United States Bank v. Waggener, 9 Pet. 378 (9 L. Ed. 163, 171, see, also, Rose’s U. S. Notes), Mr. Justice Story discussing usury laws, said:
“ * * to constitute usury within the prohibitions of the law, there must be an intention knowingly to contract for or take usurious interest; for if neither party intend it, but act bona fide and innocently, the law will not infer a corrupt agreement. Where, indeed, the contract upon its very face imports usury, as by an express reservation of more than legal interest, there is no room for presumption; for the intent is apparent, res ipsa loquitur.”
Begarding contracts for the payment of money, which expressly stipulate for the payment of interest at a rate in excess of that allowed by statute, an able text-writer says:
“If it be the real intention of the parties to receive or reserve a given rate of interest, and that rate turns out to be usurious, the transaction will be re*402garded as usury, whether the parties knew the interest to be usurious or not. * * No error of the parties, as to the effect of the transaction under the law, can give validity to a contract made in violation of the law.” Tyler on Usury, p. 104.
To the same effect, see Webb on Usury, § 33; 27 R. C. L. 222; Holmes v. Williams, 10 Paige Ch. (N. Y.) 326 (40 Am. Dec. 250); Plyler v. McGee, 76 S. C. 450 (57 S. E. 180, 121 Am. St. Rep. 950); Fielder v. Darrin, 50 N. Y. 437.
The facts set forth in plaintiff’s complaint disclosed that, as security for the payment of eight separate sums of money loaned by plaintiff to the bankrupts, plaintiff had, at the time each loan was made, taken and received from the borrowers a written instrument stipulating for the payment of interest at the rate of 12 per cent per annum upon the particular sum involved in the transaction; that each of the instruments had been in the possession of plaintiff from the date of the delivery of the same to him, and that he still held possession thereof. The complaint also states that the rate of interest stated in each of the writings should have been 10 per cent, and that upon a date subsequent to the receipt of the last of such instruments, a writing, set out in the complaint, was executed by plaintiff and the bankrupts for the purpose of reducing the stipulated interest from 12 per cent to 10 per cent, in which writing it was recited—
“ * * that said interest on all such notes shall be reduced to 10 per cent per annum from date, and said notes are hereby purged from all claim for interest in excess of 10 per cent per annum from date of said several notes.”
The complaint was evidently designed to anticipate the defense of usury, by showing that written in*403struments, which were invalid when made because of the reservation of illegal interest, had been rendered valid by a subsequent agreement whereby they were purged of the illegal taint of usury. But, after setting up facts showing the presence of usury in the contracts sued upon, as originally made, the complaint fails to allege any mistake of fact or inadvertence that might deprive the several transactions of the element of usury, which was present in them at the time of their consummation.
Usury need not be pleaded, if the fact of usury appears from the complaint: Webb on Usury, §§ 399, 409.
Defendant’s answer does not expressly allege that the reservation of excessive interest was made knowingly and intentionally by the parties, but it does allege that the instruments sued upon represent eig’ht separate transactions, extending over a period of more than three months, and that at the conclusion of each transaction, one of the contracts expressly stipulating for the payment of 12 per cent interest, was delivered by the bankrupts to plaintiff. This allegation, showing repeated transactions, identical in character, each reserving in writing interest at the same illegal rate, in itself imports knowledge of the terms of the several instruments and the rate of interest reserved therein and an intention to take the same.
Defendant further alleges that the instruments were secretly given by the bankrupts, and secretly received by plaintiff, and—
“That said instruments were, and are, usurious, which fact was known to the plaintiff at the time of the execution, and the plaintiff has forfeited all right to relief thereunder.”
*404Defendant also alleges that the agreement of the parties to reduce the interest rate from 12 to 10 per cent was made, without consideration whatever therefor.
The evidence, received without objection, clearly establishes that it was the deliberate intention of the bankrupts to pay plaintiff 12 per cent interest upon the several sums evidenced by the contracts under discussion, and that it was likewise the intention of the plaintiff, knowingly formed, to receive interest at the rate of 12 per cent thereon. The excuse offered by plaintiff for making the illegal contracts is that he did not know that 12 per cent is an illegal rate of interest.
In the absence of a demurrer or other timely objection to the answer, it is sufficient: Maule v. Crawford, 14 Hun (N. Y.), 193; Anderson v. Smith, 108 Mich. 69 (65 N. W. 615); Waldner v. Bowdon State Bank, 13 N. D. 604 (102 N. W. 169, 3 Ann. Cas. 847); Wagoner Nat. Bank v. Welch, 7 Ind. Ter. 259 (104 S. W. 610); Siesel & Bro. v. Harris, 48 Ga. 652.
There was not an entire omission to state an essential element of the defense, but a defective statement thereof, which is aided by the decree: Creecy v. Joy, 40 Or. 28, 33 (66 Pac. 295); Lindstrom v. National Life Ins. Co., 84 Or. 588, 596 (165 Pac. 675), in which many earlier Oregon cases are collected; Winters v. Privett, 86 Or. 501, 506 (168 Pac. 942).
To purge a contract of the taint of usury, the usurious agreement must be abandoned by the parties, and the security incident thereto, canceled or surrendered: Case note, 13 A. L. R. 1233; 27 R. C. L. 251. When usury is thus eliminated from the contract, the moral obligation of the borrower to pay the principal sum actually loaned, with lawful inter*405est, is then a sufficient consideration to support and render valid and enforceable a new obligation to pay the actual debt with legal interest: Kilbourn v. Bradley, 3 Day (Conn.), 356 (3 Am. Dec. 273). This may be accomplished by a modification of the original contract (Phillips v. Columbus City Bldg. Assn., 53 Iowa, 719 (6 N. W. 121), in which case the new contract takes effect and becomes operative as to third parties as of the date it is made: Warwick v. Dawes, 26 N. J. Eq. 549.
The modified contracts which plaintiff seeks to foreclose, were made less than four months (twenty-four days), prior to the date the petition in bankruptcy was filed. Eegarded as free from the usury with which they were tainted previously, plaintiff’s right to the benefit of the security evidenced by those contracts attached upon the date of the modifying agreement, viz.: August 18, 1921, and at that time diminished the assets of the bankrupts to the extent of the value of those securities. The transaction amounted to an unlawful preference under the Bankruptcy Act, as we pointed out in our former opinion.
Plaintiff insists, however, that the liens created by the modified contract should be construed as having been given pursuant to a valid prior agreement to execute the same, made when the money was advanced, in which case it is contended, that a transfer of property or giving of security does not constitute an illegal preference, though it takes place at a time when the debtor is insolvent, and within four months prior to his bankruptcy: Black on Bankruptcy (1922), § 585.
The evidence established an agreement whereby plaintiff undertook to advance the purchase price of automobiles purchased by the bankrupts for the *406purpose of enabling the latter to pay the draft of the manufacturer which accompanied the bill of lading of each shipment of new cars; also that in each instance the bankrupts agreed to, and did, secure the sum advanced by plaintiff pursuant to that agreement by a lien upon the purchased cars.
There is no evidence of an agreement between plaintiff and the bankrupts relative to liens or chattel mortgages upon used cars which the bankrupts might take in exchange upon the sale of a new car. The contract shown by the evidence required payment in full to plaintiff, upon the sale of a new car, of the amount advanced by plaintiff for the purchase thereof. The evidence does establish that in the course of business the bankrupts executed and delivered to plaintiff several chattel mortgages, each of which covered a used car taken in exchange by the bankrupts, as part of the sale price of a new car, but so far as appears from the evidence, every such chattel mortgage may have been the result of negotiations arising upon the occasion, and without reference to any prior agreement. No evidence appears in the record of any prior agreement to substitute specific automobiles as further security, upon the failure of the bankrupts to make payments as agreed.
Black on Bankruptcy, Section 585, states the rule invoked by plaintiff, as follows:
“The true doctrine appears to be that if the promise or agreement was of such a specific nature and related to such specific property as to give rise to an inchoate or equitable lien (in advance of its execution) then the creation of a specific lien at a later time, in accordance with the prior promise, will not violate the bankruptcy law. But these conditions are not met by a general parol agreement, entered into when the debt was contracted, not pledg*407ing any specific property * * .” Citing: Johnson v. Root Mfg. Co., 241 U. S. 160 (60 L. Ed. 934, 38 Snp. Ct. Rep. 520); Sabin v. Camp, 98 Fed. 974.
Measured by the foregoing rule, there was no contract between the parties which gave rise to an equitable lien upon specific property, or which deprives the transfers in question of the character of voidable preferences under the Bankruptcy Act.
Upon the rehearing defendant renewed, and vigorously argued, the contentions made in his briefs, that all the chattel mortgages held by plaintiff are void as to the creditors of the bankrupts and as to the defendant, who, as trustee in bankruptcy, is entitled to enforce the rights possessed by such creditors. Those contentions involve the questions decided in our former opinion, and a re-examination of the same satisfies us that they were correctly decided.
This disposes of all the debatable matters presented upon the rehearing, and in our opinion they do not alter the conclusions expressed in our former decision, and we adhere thereto.
Former Opinion Sustained on Rehearing.