Evans v. National Bank of Savannah/Dissent Pitney
Mr. Justice PITNEY, with whom concurred Mr. Justice BRANDEIS and Mr. Justice CLARKE, dissenting.

I agree that in this case but one federal question is properly presented for our consideration, and that is whether the National Bank of Savannah took usury, in violation of sections 5197 and 5198, Rev. Stat. U.S. when, in discounting short-term notes in the ordinary course of business at its banking house in the state of Georgia, it knowingly reserved in advance a discount at the rate of 8 per centum per annum, computed upon the face of such notes, when by the laws of Georgia this was not allowed to be done by state banks of issue.

I agree that this question is to be determined by the provisions of section 5197; but, so far as it depends upon ascertaining the local rate of interest, we must determine it according to the law of the state of Georgia, because the cited sections make that law the criterion. It is settled that although the consequences of acceptance of usurious interest by a national bank and the penalties to be enforced are to be determined by the provisions of the National Banking Act, the ascertainment of the rate of interest allowable is to be according to the state law. Farmers', etc., National Bank v. Dearing, 91 U.S. 29, 32, 23 L. Ed. 196; Union National Bank v. Louisville, &c. Railway, 163 U.S. 325, 331, 16 Sup. Ct. 1039, 41 L. Ed. 177; Haseltine v. Central Bank of Springfield, 183 U.S. 132, 134, 22 Sup. Ct. 50, 46 L. Ed. 118.

The language of section 5197 is explicit. It allows a national bank to—

'take, receive, reserve, and charge on any loan or discount      made, or upon any note, bill of exchange, or other evidences      of debt, interest at the rate allowed by the laws of the      state. * * * where the bank is located, and no more, except      that where by the laws of any state a different rate is      limited for banks of issue organized under state laws, the      rate so limited shall be allowed for associations organized      or existing in any such state under this title. When no rate      is fixed by the laws of the state, * * * the bank may take,      receive, reserve, or charge a rate not exceeding seven per      centum, and such interest may be taken in advance, reckoning      the days for which the note, bill, or other evidence of debt      has to run. * * *' I regard it as clear that by 'the laws of the state' is meant not merely acts of legislation, much less a particular act or section, or a particular phrase in a single section. In order to determine the point in controversy we must take all applicable provisions of the statutes as interpreted and construed by the decisions of the court of last resort, and from their combined effect determine what is 'interest at the rate allowed by the laws of the state.'

The pertinent statute law of the state of Georgia is found in sections 3426, 3427, and 3436 of the Code. The first of these defines 'what is lawful interest,' and prescribes 7 per centum per annum as the legal rate where no rate is named in the contract, and permits a higher rate to be specified in writing, 'but in no event to exceed 8 per cent. per annum.' Section 3427 defines usury as:

'Reserving and taking, or contracting to reserve and take,      either directly or by indirection, a greater sum for the use      of money than the lawful interest.'

'It shall not be lawful for any person, company, or      corporation to reserve, charge, or take for any loan or      advance of money, or forbearance to enforce the collection of      any sum of money, and rate of interest greater than eight per      centum per annum, either directly or indirectly by way of      commission for advances, discount, exchange, or by any      contract or contrivance or device whatever.'

I agree that, under the decisions of this court and the general current of authority, the discounting of short-term notes with a reservation of interest in advance at the highest rate allowed by statute is permissible, in the absence of special restriction. Fleckner v. U.S. Bank, 8 Wheat. 338, 349, 354, 5 L. Ed. 631.

And I understand it to have been permitted in Georgia prior to the recent decision by the Supreme Court of that state in Loganville Banking Co. v. Forrester, 143 Ga. 302, 84 S. E. 961, L. R. A. 1915D, 1195. See Mackenzie v. Flannery, 90 Ga. 590, 599, 16 S. E. 710; Union Savings Bank v. Dottenheim, 107 Ga. 606, 614, 34 S. E. 217; McCall v. Herring, 116 Ga. 235, 243, 42 S. E. 468.

The Forrester Case was decided April 13, 1915. The claim involved in the present suit includes a series of transactions, the first of which was on November 2, 1914, the last on October 18, 1915. A majority of these were prior to the decision in the Forrester Case, and as to them I agree that there was no violation of the federal statute.

With respect to the others, I have reached a different conclusion. The case was decided on a demurrer to plaintiff's petition, in which it was alleged that defendant (now respondent) knowingly received and charged interest in excess of the highest contractual rate allowed under the laws of the state, specifying the particular dates and amounts. This necessarily imports a knowledge at the time of each transaction as to what then constituted the law of the state, supposing such knowledge need be averred.

As to these later transactions, with great respect for the views of my Brethren, I am constrained to dissent from the opinion and judgment of the court because convinced that there is error in holding without qualification that since the decision of the Forrester Case 8 per cent. is the rate of interest allowed and limited for state banks of issue by the laws of the state of Georgia. It seems to me erroneous to regard that decision as merely defining usury and thus settling what lawfully may be done by state banks in respect of taking interest in advance, and to ignore its effect, in combination with the quoted sections of the Code, as constituting the law of the State which fixes the maximum rate of interest for such banks and therefore, under section 5197, Rev. Stat. U.S., establishes the limit for national banks located in that state. Plainly, I think, the purpose of Congress was to place national banks upon a precise equality in this respect with banks of issue organized under state laws, and that where the local law places a higher or a lower limit upon such banks of issue than upon other lenders of money the same limit should be imposed upon the national banks.

The section has regard to substance, not merely to form; and in determining what is in substance the local rate of interest it is fallacious, I submit, to regard the multiplier only (say, 8 per cent.), and ignore the multiplicand, since both factors have equal influence in producing the result. As in other cases of testing state laws by a federal standard, the question is: What is the effect and operation of those laws, as construed and applied by the state court of last resort?

The difference between the effect of computing discount taken in advance according to the custom of bankers, by applying the allowed percentage to the face of the note, termed 'bank discount,' and the effect of deducting an amount equivalent to exact interest on the sum actually loaned, termed 'true discount,' is very substantial, and is recognized in the standard interest and discount tables, which contain computations on both bases. To illustrate by a comparison: If interest at the rate of 8 per centum per annum be reserved in advance and computed upon the face of a three months note, it amounts to 2.0408 per cent. for the period, or at the rate of 8.1632 per centum per annum upon the money loaned; upon a six months note it amounts to 4.1667 per cent. for the period, or at the rate of 8.3333 per centum per annum; upon a nine months note, to 6.383 per cent. for the period, or at the rate of 8.511 per centum per annum; upon a one year note it amounts to 8.695 per cent.

The legal problem is precisely analogous to that involved in comparing respective burdens of taxation imposed upon different properties or classes of property; concerning which this court has more than once held that a law requiring that one class shall be taxed at the 'same rate of taxation' paid by another requires that not only the percentage of the rate but the basis of the valuation shall be the same. Cummings v. National Bank, 101 U.S. 153, 158, 162-163, 25 L. Ed. 903; Greene v. Louisville & Interurban R. R. Co., 244 U.S. 499, 515, 37 Sup. Ct. 673, 61 L. Ed. 1280, Ann. Cas. 1917E, 88.

The laws of Georgia do not prohibit the taking of interest in advance by a state bank; and they permit it to be charged according to the usual course of banking, with this qualification, that if reserved in advance at the highest percentage, or at any percentage that has the effect of yielding to the lender more than at the rate of 8 per centum per annum upon the amount actually loaned, it is usurious. This qualification, which since the decision of the Forrester Case must be deemed to be the law of Georgia, has precisely the same effect as if it had been inserted by way of an amending proviso to sec. 3426 of the Code. That it happens to arise from the construction and application of that section together with sections 3427 and 3436 by the state court of last resort can make no difference for present purposes.

The case before us comes squarely within the principle of Citizens' National Bank v. Donnell, 195 U.S. 369, 373-374, 25 Sup. Ct. 49, 49 L. Ed. 238. There the question was whether a national bank in Missouri had taken usury, contrary to sections 5197 and 5198, Rev. Stat. U.S., in taking interest computed at a percentage less than the highest rate allowed by the state law, if agreed upon in writing, but at the same time violating a state prohibition against compounding interest oftener than once a year. This court held that the prohibition against frequent compounding affected the 'rate of interest' within the meaning of those words in section 5198, and that this section was violated because the local prohibition was violated. I quote from the opinion (195 U.S. 374, 25 Sup. Ct. 50, 49 L. Ed. 238):

'The rate of interest which a man receives is greater when he is allowed to compound than when he is not, the other      elements in the case being the same. Even if the compounded      interest is less than might be charged directly without      compounding, a statute may forbid enlarging the rate in that      way, whatever may be the rules of the common law. The Supreme      Court of Missouri holds that that is what the Missouri      statute has done. On that point, and on the question whether      what was done amounted to compounding within the meaning of      the Missouri statute, we follow the state court. Union      National Bank v. Louisville, New Albany & Chicago Ry., 163 U.      S. 325, 331 [16 Sup. Ct. 1039, 41 L. Ed. 177]. Therefore,      since the interest charged and received by the plaintiff was      compounded more than once a year it was at a rate greater      than was allowed by Rev. Stat. U.S. § 5197, and it was      forfeited.'

For these reasons I am convinced that the respondent national bank, in knowingly discounting notes and reserving interest at the rate of 8 per centum per annum upon the face of the notes, in violation of the limitation imposed by the quoted sections of the Georgia Code as construed by the Supreme Court of that state in the Forrester Case, charged more than 'interest at the rate allowed by the laws of the state,' and that therefore the judgment in its favor ought to be reversed.

Mr. Justice BRANDEIS and Mr. Justice CLARKE concur in this dissent. 

Notes