1686. Forbearance.

Forbearance of an existing debt may be as obnoxious to usury statutes as an original loan if a charge greater than legal interest is made for the forbearance. 14 Nor is the transaction saved from illegality if the agreement provides that the creditor, as part of his forbearance, shall dismiss an action or forbear to exercise some other legal remedy for the collection of his claim.15 It should be observed, however, that it is the contract for forbearance which is usurious and that the original indebtedness is not thereby rendered illegal. 15a

§ 1687. Loans in substance though not in form.

The form of a sale or exchange of property may be used as a colorable method of making a usurious loan in several ways.

(1) The lender may require the borrower to purchase property of him at an excessive price as a condition of making a desired loan. The excess in the price of what is sold is in substance additional compensation for lending the money, and will make the loan usurious although no more than legal interest is in terms exacted therefor, 16

Ga. 69; Callanan v. Shaw, 24 Ia. 441;
People's Bank v. Jackson, 43 S. C.
86, 20 S. E. 786, 27 L. R. A. 569, 49
Am. St. 823.

14 Pollard v. Scholy, Cro. Eliz. 20; Manners v. Postan, 3 B. & P. 343; Wade v. Wilson, 1 East, 195; Hogg v. Ruffner, 1 Black (U. S.), 115, 17 L. Ed. 38; Steward v. Cross, 66 Ala. 22; Meeker v. Hill, 23 Conn. 574; Irwin v. Mathews, 75 Ga. 739; Galesburg First Nat. Bank v. Davis, 108 Ill. 633; Craig v. Hewitt, 7 B. Mon. 475; Ticonic Bank v. Johnson, 31 Me. 414; Newman v. Williams, 29 Miss. 212; Hathaway v. Hagan, 59 Vt. 75, 8 Atl. 678; Moseley v. Brown, 76 Va. 419. Cf. Kimball v. Boston Athenæum, 3 Gray, 225.

15 Matlock v. Mallory, 19 Ala. 694; Patterson v. Clark, 28 Ga. 526; Siter v. Sheets, 7 Ind. 132; Rosa v. Doggett, 8 Neb. 48; Trine v. Williamson, 9 Pa.

Cas. 613, 616, 13 Atl. 765; Toole #. Stephen, 4 Leigh, 581. But see Alexander v. Harrodsburg First Nat. Bank, 114 Ky. 683, 71 S. W. 883, 24 Ky. L. Rep. 1486.

150 Bernheimer v. Gray (Ala.), 78 So. 840.

16 Kommer v. Harrington, 83 Minn. 114, 85 N. W. 939; Norton v. Nathanson, 85 N. J. Eq. 409, 97 Atl. 166; Stockwell v. Richardson, 101 N. Y. 643 (memorandum affirming opinion of lower court, reported in 5 N. E. 45); Earnest v. Hoskins, 100 Pa. St. 551. So where the borrower is required to pay a fictitious claim for damages, Hathaway v. Hagan, 59 Vt. 75, 8 Atl. 678; or to assume liability for the debt of an insolvent due to the lender. Bishop v. Exchange Bank, 114 Ga. 962, 41 S. E. 43. See also White v. Anderson, 164 Mo. App. 132, 147 S. W. 1122; Dale v. Duryea, 49 Wash. 644, 96 Pac. 223.

(2) If property is sold at much less than its true value and an option is given to the seller to repurchase it at a later day for a price not exceeding the value of the property, but greater than the original selling price by more than legal interest, the transaction is presumably a usurious mortgage, the apparent seller being in fact a borrower; 17 and the same intention is evident if the agreement instead of attempting to secure usurious interest by means of a repurchase price, excessive as compared with the original selling price, does so by a provision that the seller shall hire the property prior to its repurchase at a rental greater than legal interest.

(3) Instead of making a loan in terms a seller may turn over to the buyer property, immediately and readily salable for cash, for which the buyer promises to pay in the future a sum amounting to the present cash value of the property plus an amount greater than legal interest. Such a transaction intended by the parties as a means of providing the buyer with money from the sale of the property will be regarded as usurious. 18

(4) Though, as has been seen, 19 it is generally held permissible to sell property for deferred payments bearing a higher rate of interest than is permissible on a loan of money, yet if such a transaction is merely a colorable device for making what is in substance a loan, it is usurious. 20

(5) A sale with a lease back and an option to repurchase for the price paid is presumably usurious if the rent reserved is greater than legal interest.21

"Sparks v. Robinson, 66 Ark. 460, 51 S. W. 460; Baggett v. Trulock, 77 Ga. 369, 3 S. E. 162; Delano v. Rood, 6 Ill. 690; Patterson v. Bonner, 14 La. 214; Stockwell v. Richardson, 101 N. Y. 643 (memorandum; opinion of lower court reported in 5 N. E. 45).

18 Lowe v. Waller, 2 Doug. 736; Collier v. Barr, 64 Ala. 543; Quackenbos v. Sayer, 62 N. Y. 344; Swanson v. White, 5 Humph. 373. Cf. Kelley v. Sprague, 13 N. Y. S. 64 (affd., without opinion, 128 N. Y. 582, 28 N. E. 250).

19 See supra, § 1685.

Meyer v. Cook, 85 Ala. 417, 5

So. 147; Ford v. Hancock, 36 Ark. 248; Pope v. Marshall, 78 Ga. 635, 4 S. E. 116; Ferguson v. Sutphen, 8 Ill. 547; Montague v. Sewell, 57 Md. 407; Earnest v. Hoskins, 100 Pa. St. 551; Hartranft v. Uhlinger, 115 Pa. St. 270, 8 Atl. 244.

21 Banks v. Walters, 95 Ark. 501, 130 S. W. 519; Scofield v. McNaught, 52 Ga. 69; Gaither v. Clarke, 67 Md. 18, 8 Atl. 740; Phelps v. Bellows' Estate, 53 Vt. 539. Compare the following cases where the lease was held to be a genuine transaction and not intended as a cover for a usurious mortgage: Jackson v. Morris, 16 Ky. L.

Parties may call a transaction a sale which they really intend as a usurious mortgage.22 And in all cases it is the substance not the form of a transaction which is important.23

Where an obligation originally given for a loan is tainted with usury subsequent renewals thereof will be open to the same defence; 24 and it is immaterial that the renewal obligation is made by a new obligor, if the original obligor still remains bound, 25 or if the new obligor was a party to the original usurious obligation. 26 Nor is it material that the renewal is made to a third person if he takes with knowledge of the usurious character of the original indebtedness, 27 or without value; 28 but an assignee for value of a usurious claim who in ignorance of the

usury takes a new promise or new security from the debtor may enforce it, though he could not have enforced the original claim, 29 and a stranger to a usurious obligation who assumes payment of it in good faith as part of the consideration for the purchase of property or other lawful transaction cannot set up the defence of usury. 30 If a renewal note is given for the amount of the debt with no more than legal interest, the taint of usury is said to be purged and the obligation may be enforced. 31 Where, as under the early English statutes, usury makes the original debt void or unenforceable, such a result seems to involve accepting the doctrine of moral consideration; 32 but under modern statutes there is less difficulty in reaching the conclusion.

§ 1689. Sale of the obligation of a third person cannot be usurious.

The obligation of a third person, as his bill or note, like any other property, may in good faith be sold by the owner for any price he can get. 33 This principle is undisputed if the seller

29 E. g., because under the local statute it was void even in the hands of an innocent holder, Cuthbert v. Haley, 8 T. R. 390; Perdue v. Brooks, 85 Ala. 459, 5 So. 126; Houghton v. Payne, 26 Conn. 396; Dix v. Van Wyck, 2 Hill, 522; or because purchase of a note representing the claim was after maturity and the assignee therefore was subject to personal defences. McFarland v. State Bank, 7 Kans. App. 722, 52 Pac. 110. See also Call v. Palmer, 116 U. S. 98, 29 L. Ed. 559, 6 S. Ct. 301; Taylor v. Morris, 22 N. J. Eq. 606; Armstrong v. Middaugh, 74 N. Y. Misc. 45, 133 N. Y. S. 647. * See supra, § 399.

31 Barnes v. Hedley, 2 Taunt. 184; Wright v. Wheeler, 1 Camp. 165, n. Masterson v. Grubbs, 70 Ala. 406; Kilbourn v. Bradley, 3 Day (Conn.), 356, 3 Am. Dec. 273; Vermeule v. Vermeule, 95 Me. 138, 49 Atl. 608; Clark v. Phelps, 6 Metc. (Mass.) 296; Coleman v. Cole, 96 Mo. App. 22, 69

S. W. 692; Miller v. Hull, 4 Denio, 104; Person v. Mattson, 33 N. Dak. 49, 156 N. W. 780, Ann. Cas. 1918 A. 747; Guinn v. Security State Bank (Okl.), 176 Pac. 898; Bomar v. Smith (Tex.), 195 S. W. 964; Marstin v. Hall, 9 Gratt. 8; Gerlaugh v. Bassett, 20 Wis. 671. Cf. Habach v. Johnson, 132 Ark. 374, 201 S. W. 286; Dean v. Maxfield (Tex. Civ. App.), 209 S. W. 466.

32 See supra, § 147.

33 Junction R. Co. v. Bank of Ashland, 12 Wall. 226, 20 L. Ed. 385; Orr v. Sparkman, 120 Ala. 9, 23 So. 829; Loan, etc., Co. v. Shaffer, 44 Dist. Col. App. 366; Campbell v. Morgan, 111 Ga. 200, 36 S. E. 621; Colehour v. State Sav. Inst., 90 Ill. 152; Metcalf v. Pilcher, 6 B. Mon. 529; Mutual Nat. Bank v. Regan, 40 La. Ann. 17, 3 So. 407; Priest v. Garnett (Mo.), 191 S. W. 1048; Steen v. Stretch, 50 Neb. 572, 70 N. W. 48; Munn v. Commission Co., 15 Johns. 44, 8 Am. Dec.

does not indorse or guarantee payment or if he gives merely an indorsement without recourse.34 If, however, he gives an indorsement or guaranty that the obligation will be paid, there is a conflict of authority. It is obvious that if the instrument were indorsed as collateral for a loan for which excessive interest was bargained the transaction would be usurious, but it should be noticed that it is not the indorsement but the contract to which the indorsed obligation is collateral that is objectionable, and it would be equally objectionable whatever the nature of the collateral. Perhaps because of the possibility that the appearance of a sale may easily be given to what is in fact a loan with collateral, some courts hold that as the indorsing seller is bound for the amount of the obligation, the transaction is in substance a loan to him, and if the rate of discount is excessive, a usurious loan. If it be granted that the transaction is in effect a loan, the consequences of its being usurious will depend upon the statute locally in force. Under the early English statute the indorsement was held void so that not only no recovery against the indorser could be had, but none against the maker.35 But in most jurisdictions of the United States, even though the accuracy of the reasoning be conceded, the penalty for usury is not such as totally to invalidate the indorsement, and the indorsee may recover from the maker. 36 According to another view the transaction is not usurious, but the indorsee can recover from the indorser only the amount paid, with legal interest, though he can recover against prior

219; Weaver Hardware Co. v. Solomovitz, 98 N. Y. Misc. 413, 163 N. Y. S. 121; Atlantic State Bank v. Savery, 82 N. Y. 291; Maas v. Chatfield, 90 N. Y. 303; Baily v. Smith, 14 Ohio St. 396, 84 Am. Dec. 385; Cook v. Forker, 193 Pa. St. 461, 44 Atl. 560, 74 Am. St. Rep. 699; Connor v. Donnell, 55 Tex. 167. It may be sold to the maker at a large discount unless the transaction is intended as a cover for usury. Kentucky Coal Min. Co. v. Mattingly, 133 Ky. 526, 118 S. W. 350.

34 Durant v. Banta, 3 Dutch. 624, 630.

35 Lowes v. Mazzaredo, 1 Stark. 385; Chapman v. Black, 2 B. & Ald. 588; Nichols v. Fearson, 7 Pet. 103, 8 L. Ed. 410. See also Lloyd v. Keach, 2 Conn. 175, 7 Am. Dec. 256; Whitworth v. Adams, 5 Rand. 333, 419.

36 Knights v. Putnam, 3 Pick. 184; Importers, etc., Bank v. Littell, 47 N. J. L. 233; Collier v. Nevill, 3 Dev. 30; Connor v. Donnell, 55 Tex. 167; Bank of Radford v. Kirby, 100 Va. 498, 42 S. E. 303; Armstrong v. Gibson, 31 Wis. 61, 11 Am. Rep. 599.