the absence of agreement to the contrary, any part payment of a usurious loan will be regarded as payment of the principal, and not of the interest.76 An action against the bank, may be brought in the state as well as in the federal courts.77 Same-Discount of Paper Void for Usury by State Law

A peculiar case is presented where a state law provides that all usurious instruments shall be void, and a national bank purchases such an instrument from the holder at a legal rate of discount. Such a case is not covered by any provision of the National Bank Act, which merely prescribes penalties when the bank knowingly takes, receives, charges, or reserves on any loan or discount made, or upon any evidence of debt, a rate of interest greater than by the act allowed. It would seem, therefore, that the bank, even if without notice of the usurious inception of the instrument, like any other purchaser, takes it as void paper. A different construction, however, has been placed upon the act by a divided court, in New York,

78

Rep. 474. See “Banks and Banking," Dec. Dig. (Key No.) § 270; Cent. Dig. §§ 1023–1053.

76 Danforth v. National State Bank of Elizabeth, 48 Fed. 271, 1 C. C. A. 62, 17 L. R. A. 622; First Nat. Bank of Newton v. Turner, 3 Kan. App. 352, 42 Pac. 936; Hall v. First Nat. Bank of Fairfield, 30 Neb. 99, 46 N. W. 150; Cadiz Bank v. Slemmons, 34 Ohio St. 142, 32 Am. Rep. 364; McCarthy v. First Nat. Bank of Rapid City, 23 S. D. 269, 121 N. W. 853, 23 L. R. A. (N. S.) 335; Stout v. Ennis Nat. Bank, 69 Tex. 384, 8 S. W. 808. See "Banks and Banking," Dec. Dig. (Key No.) § 270; Cent. Dig. §§ 1023–1053.

77 Claflin v. Houseman, 93 U. S. 130, 23 L. Ed. 833; Pickett v. Merchants' Nat. Bank of Memphis, 32 Ark. 346; Ordway v. Central Nat. Bank of Baltimore, 47 Md. 217, 28 Am. Rep. 455; Endres v. First Nat. Bank, 66 Minn. 257, 68 N. W. 1092; Bletz v. Columbia Nat. Bank, 87 Pa. 87, 30 Am. Rep. 343; Dow v. Irasburgh Nat. Bank of Orleans, 50 Vt. 112, 28 Am. Rep. 493. As to review by United States Supreme Court, see Schuyler Nat. Bank v. Bollong, 150 U. S. 85, 14 Sup. Ct. 24, 37 L. Ed. 1008. See "Banks and Banking," Dec. Dig. (Key No.) § 270; Cent. Dig. §§ 1046-1053.

78 See Traders' Nat. Bank v. Chipman, 164 U. S. 347, 17 Sup. Ct. 85, 41 L. Ed. 461. See "Banks and Banking," Dec. Dig. (Key No.) § 270; Cent. Dig. §§ 1023–1053.

where the law provides that usurious instruments shall be void, but also that state banks shall be subject to the same usury laws as national banks. It was held that such an instrument, when discounted by a national bank, and consequently when discounted by a state bank, at a legal rate, may be enforced against prior parties, if the bank was without notice of its usurious inception." The decision is based upon the ground that the National Bank Act, limiting the rate of interest national banks may charge and imposing penalties for usury, supersedes all state laws on the subject of usury as applied to national banks.80 If the scope of the act is so broad as to embrace even transactions where there is no usury on the part of the bank, it would logically follow that such an instrument could be enforced by the bank, if it had notice of the prior usury; but it has been held in a later case that if the bank purchases with notice it takes subject to the defense of usury.81

COLLATERAL SECURITY

63. IN GENERAL-Unless expressly restricted, a bank having power to lend money may take as collateral security for a loan any property, personal or real.

79 Schlesinger v. Gilhooly, 189 N. Y. 1, 81 N. E. 619. See, also, Schlesinger v. Kelly, 114 App. Div. 546, 99 N. Y. Supp. 1083; Slade v. Bennett, 133 App. Div. 666, 118 N. Y. Supp. 278. See "Banks and Banking," Dec. Dig. (Key No.) § 181; Cent. Dig. §§ 686–700.

80 Ante, p. 239.

81 Schlesinger v. Lehmaier, 191 N. Y. 69, 83 N. E. 657, 16 L. R. A. (N. S.) 626, 123 Am. St. Rep. 591.

The decisions can be justified and reconciled under Negotiable Instruments Law, §§ 55, 57. Some of the judges in both cases (Schlesinger v. Gilhooly, 189 N. Y. 1, 81 N. E. 619, and Schlesinger v. Lehmaier) rest their decisions upon that law, and, indeed, it seems to have controlled the decision of the majority in Schlesinger v. Lehmaier, supra. See "Banks and Banking," Dec. Dig. (Key No.) §§ 181, 270; Cent. Dig. §§ 686-700, 1023–1053.

64. BANK'S OWN STOCK-Banks are often prohibited from making loans on the security of their own stock. National banks are prohibited from making loans or discounts on the security of their own stock, unless such security be necessary to prevent loss upon debts previously contracted in good faith; but if this prohibition can be urged against the validity of such an unauthorized transaction by any one except the sovereign, it cannot be done after the contract has been executed, and the proceeds applied to payment.

65. REAL ESTATE MORTGAGE-Banks are often prohibited from making loans upon the security of a real estate mortgage. National banks are authorized to take such mortgages only by way of security for debts previously contracted in good faith; but the want of authority to take a mortgage for a concurrent loan or for future advances can be urged only by the sovereign in a proceeding against the bank for violation of its charter.

In General-Personal Security

The power to loan naturally carries with it the power to loan on collateral security, and unless a bank be prohibited so to do it may take as security any property, personal 82 or real.83 Sometimes banks are restrained from lending on particular classes of securities; but, even when such loans are made, it is generally held that the borrower cannot avail himself of the violation of law as a defense, and that the only

82 Deloach v. Jones, 18 La. 447 (a crop of cotton); Commercial Bank of Manchester v. Nolan, 7 How. (Miss.) 508. See "Banks and Banking," Dec. Dig. (Key No.) § 179; Cent. Dig. §§ 667-683.

83 Post, p. 230. See "Banks and Banking," Dec. Dig. (Key No.) § 179; Cent. Dig. 88 667-683.

penalty therefor is such as may be imposed on the bank at the suit of the sovereign.84

National Banks

Among the powers conferred on national banks is that of "loaning money on personal security." 85 The words "personal security" are used in contradistinction to real estate security, and the bank "may take a pledge of bonds, choses in action, bills of lading, or other personal chattels." 86

Shares of Stock in Other Corporations

It is the general rule that banks, like other corporations, have no power, unless expressly authorized, to purchase stock in another corporation; 87 but a bank having power to lend money may accept such stock as security for a loan.88 Thus, the power to buy and sell stocks is not conferred upon national banks; but, as incidental to the power to loan money on personal security, a national bank may accept stock of another corporation as collateral security, and by the enforcement of its rights as pledgee may become the owner of the collateral,

89

84 Allen v. Freedman's Savings & Trust Co., 14 Fla. 418; ante, pp. 227, 234; post, pp. 250, 252. See "Banks and Banking," Dec. Dig. (Key No.) § 179; Cent. Dig. §§ 667-683.

85 Rev. St. U. S. § 5136 (U. S. Comp. St. 1901, p. 3455). See “Banks and Banking," Dec. Dig. (Key No.) § 269; Cent. Dig. § 1016.

86 Pittsburgh Locomotive & Car Works v. State Nat. Bank of Keokuk, Fed. Cas. No. 11,198 (locomotive). See, also, Third Nat. Bank of Baltimore v. Boyd, 44 Md. 47, 22 Am. Rep. 35 (bonds); Cleveland v. Shoeman, 40 Ohio St. 176 (warehouse receipt).

A bank may take a chattel mortgage to secure a previous debt. Spafford v. First Nat. Bank of Tama City, 37 Iowa, 181, 18 Am. Rep. 6. See "Banks and Banking," Dec. Dig. (Key No.) § 269; Cent. Dig. § 1016.

87 Post, p. 277..

88 But see Franklin Bank of Cincinnati v. Commercial Bank of Cincinnati, 36 Ohio St. 350, 38 Am. Rep. 594. See "Banks and Banking," Dec. Dig. (Key No.) § 179; Cent. Dig. §§ 667–683.

89 Post, p. 278.

as well as be subject to liability as other stockholders." So a national bank may accept in good faith stock of another corporation as security for a previous indebtedness.1

Shares of Bank's Own Stock

Banks are often prohibited from making any loan or discount on the security of, as well as from purchasing, their own stock.92

The National Bank Act provides that no bank shall make any loan or discount on the security of the shares of its own capital stock, nor be purchaser or holder of any such shares, unless necessary to prevent loss upon a debt previously contracted in good faith, and that stock so purchased or acquired shall within six months be sold, or in default thereof a receiver may be appointed. Under the foregoing provisions a bank may make a loan or discount on the security of its own stock only when necessary to prevent loss on debts previously contracted in good faith. The placing by one bank of its

93

90 Germania Nat. Bank v. Case, 99 U. S. 628, 25 L. Ed. 448; Shoemaker v. National Mechanics' Bank, Fed. Cas. No. 12,801; Canfield v. State Nat. Bank of Minneapolis, Fed. Cas. No. 2,382; Westminster Nat. Bank v. New England Electrical Works, 73 N. H. 465, 62 Atl. 971, 3 L. R. A. (N. S.) 551, 111 Am. St. Rep. 637. See, also, California Bank v. Kennedy, 167 U. S. 362, 366, 17 Sup. Ct. 831, $33, 42 L. Ed. 198. See "Banks and Banking," Dec. Dig. (Key No.) § 269; Cent. Dig. § 1016.

91 Post, p. 278.

92 See Vansands v. Middlesex County Bank, 26 Conn. 144; Battey v. Eureka Bank, 62 Kan. 384, 63 Pac. 437.

Where it was agreed between a bank and defendant that he should buy on the market certain shares of its stock for its benefit, the bank to lend the money on his note, and to hold the stock and renew the note till the stock could be sold, the note to be an obligation, the agreement being in violation of the statute was no defense to an action on the note. St. Paul & M. Trust Co. v. Jenks, 57 Minn. 248, 59 N. W. 299. See "Banks and Banking," Dec. Dig. (Key No.) §§ 91, 179, 180; Cent. Dig. §§ 225, 679, 684-6851⁄2.

93 Rev. St. U. S. § 5201 (U. S. Comp. St. 1901, p. 3494).

94 First Nat. Bank v. Lanier, 11 Wall. 369, 20 L. Ed. 172. See