Walker, J.,
after stating the case: There are three principal questions raised in this case: (1) Was there usury? (2) If so, can it be recovered by way of counterclaim? (3) Is the action barred by the statute ?
1. If a bank loans two thousand dollars at 6 per-cent interest, with the understanding and agreement that it shall retain five hundred dollars of the amount -as a deposit of the borrower in the bank, which shall not be subject to his check or his withdrawal of it, but remain on general deposit under control of the bank, it is evident that the bank is
charging and receiving 7% per cent interest or 1% per cent m excess of the legal rate of interest. The transaction has not even the merit of being an ingenious device to hide or conceal the usury, for. it is perfectly apparent that the legal effect is, as the borrower is paying 6 per cent on two thousand dollars, when he is to receive only fifteen hundred dollars. The usury is plain and palpable and there can be no doubt of the intent, on the part of the bank, to violate the law against the payment of excessive interest or usury. There are, generally speaking, four elements of usury: (1) A loan or forbearance of money, either express or implied; (2) upon an understanding that the principal shall be or may be returned; (3) and that for such loan or forbearance a greater profit than is authorized by law shall be paid or agreed to be paid; (4) entered into with an intention to violate the law. 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 a sufficiency of evidence. The transaction in question clearly embraces all of these elements. The usury is indisputable. 29 Am. and Eng. Enc. (.... Ed.), 509, states that, “In the case of loans or discounts by a bank at the highest legal rate of interest, a provision that the proceeds of the loan or discount or any part thereof shall be kept as a deposit in the bank during the period or a portion of the period of the loan renders the transaction usurious, for the reason that the borrower thus pays interest on money which he does not receive or have the use of.” It was held in
Gilder v. Hearne,
14 S.
W.,
1031, that where the statute provides that all contracts which, either directly or indirectly,, stipulate for a higher rate of interest than 12 per centum per annum shall be void and of no effect for the whole rate of interest, a note for thirteen hundred and eighty dollars, bearing interest at 12 per centum, for which only twelve hundred dollars is received by the maker, is usurious. Judge Denio, in
East River Bank v. Hoyt,
32 N. Y., 119, 126, said that “the character of the transaction, and particularly the material feature, that $500 of the money borrowed and for which interest was paid was to be retained by the lender until the expiration of the credit, is conceded by all the evidence. It was illegal to stipulate for such an advantage. In that, the case shows a contract for usury, with scarcely an attempt at disguise.” And
Judge Potter,
who spoke for the Court in that case, said: “Assuming these facts to be true, it presents a case of bold, unmitigated violation of the statute in its letter and spirit. If the statute prohibiting usury can be evaded by such a subterfuge as has been offered in this case, it has become a dead letter, and had better be repealed at once. By such a contrivance an individual or a bank, in the loan of one-half their • capital, may draw interest upon the whole. The device in this case lacks even the merit of ordinary skill in its consummation; it is
an act of cupidity and- extortion, that is not provided with even the decencies of a cloak to cover its nudity. If the Court could have anything to do with the policy of the usury laws the review of this case would present a fitting occasion to raise a warning voice against their repeal, but the policy of these laws is with the Legislature and not with the courts. The defense of usury, like every other legal defense'authorized by statute, is entitled to the same respect as other defenses in the courts, and when proved, it is the duty of the court to regard them the same as other cases. In the review of this case I have come to the conclusion that the testimony, independent of the testimony objected to, presents a clear case of judgment in favor of the defendant.”
Chancellor Halstead
said of a transaction substantially similar to this one: “I think it is well calculated to show how very hard is the way of the transgressor; and to impress upon us the truth that if shallow devices are to be permitted to succeed in overcoming the defense of .usury, great elasticity of conscience and great injury to the cause of morals will be the result.”
Cummins v. Wire,
6 N. J. Eq., 73, at p. 84. He added that the plaintiff with “studied sentences” could not disguise or conceal the usury, which was so glaring, and that his replication to the charge of-demanding and receiving usury amounted “to nothing and a little less,” and concludes that the case, then, as it stood when the bond and mortgage were executed, is clearly proved as set up in defense by the answer of Magie and Sanford. It was a loan of $1,900, and the taking, therefor, a bond and mortgage for $2,000, and interest thereon. This is clearly usurious.
Another ease like the one at bar is
Butterworth v. Pecare,
where it was held that in an action by the receiver of a banking incorporation against the endorser of a note, an answer alleging that the bank of which plaintiff is receiver discounted the note on which he sues, upon a corrupt agreement against the form of the statute that the defendant should receive $300 (the amount of the note being $500 and it being payable three months from its date), and leave the remaining $200 in the bank until the note became due, then to be applied towards its payment, sufficiently states the defense of usury. Where it is proved that the bank discounted the note at the full legal rate for the time it had to run, and required the endorser to give them his check for $200, in pursuance of an agreement to that effect, on which it was discounted, and the next day charged this check against the credit given on the discount, a verdict finding usury should be sustained. Charging the check in account shows that the endorser was to have the use of only $300, less the discount on $500, and was to pay therefor interest on $500. Upon such facts it' would be proper to instruct the jury to find for the defendants. 8 Bosworth (N. Y.), 671. And to the same effect
is
Barr v. Am., etc., Pisgah Church,
10 Atl. Rep. (N. J. Ch.), 287. It was there held that where one, as agent of the mortgagee in the negotiation of a mortgage after the execution of the same, held it for three or four months, and delayed payment of the money due, and then, on the order of the mortgagors, advanced part of the money and collected interest on the full amount of the mortgage, and on foreclosure proceedings it appeared that the subsequent acts of the agent were in part, if not altogether, the acts of the mortgagee:
Held,
that the mortgage was subject to the penalty of the New Jersey statute respecting usury, which provides that the true sum loaned, without interests or costs, only can be collected. It has also been held that where a person lends a sum of money, the repayment of which, with interest at the rate of 6 per cent, is secured by a mortgage, and at the time of the loan and in consideration of it a portion of the money in excess of the legal rate of interest is returned to him by the borrower, the transaction is usurious.
Andrews v. Poe,
30 Md., 486. See, also,
Vilas v. McBride,
17 N. Y. Supp., 171.
This kind of usurious agreement has been cast in various forms, but the courts have invariably stripped it of its flimsy disguise, and decided according to its substance and its necessary tendency and effect, when the purpose and intent of the lender are unmistakable. And this is the correct rule.
Unifelder v. Carter’s Admr.,
64 Ala., 527. In
Clark v. City of Des Moines,
19 Iowa, 199, it was held that warrants issued by a municipal corporation in payment of a judgment at the rate of one-dollar in warrants for every seventy-five cents due on the judgment are tainted with usury. See, also, Webb on Usury, sec. 27
et seq.
But we are of the opinion that the principle of
Ehringhaus v. Ford,
25 N. C., 522 and 529, denounces this kind of transaction as usurious. It was. there held that where a bank of this State agreed to lend to an individual notes of a Virginia bank, which were at a depreciation in the market, below both specie and the notes of the bank in this' State,' and the borrower was to give his note at ninety days, to be discounted by the bank, and to be paid in specie or in the notes of the bank making the loan, the note given in pursuance of this agreement was void for-usury, though the borrower stated at the time that he could make the Virginia notes answer his purpose in the payment of his debts to others. Usury consists in the unlawful gain, beyond the rate of 6 per cent, taken or reserved by the lender, and not in the actual or contingent loss sustained by the borrower. The proper subject of inquiry is, what is the lender to receive, and not always what the borrower is to pay, for the forbearance. In the course of the opinion it was said by
Judge Gaston:
“If the agreement was that the borrower should receive the amount lent, after deduction of the discount, in notes known to be depreciated
at tbeir nominal value, and at the expiration of the term should repay that amount in lawful money, or in a currency less depreciated than that in which it was advanced, without further explanation, an assurance to carry that agreement into execution would be usurious. It is manifest that by that assurance there is reserved to the lender, after taking out the legal discount, the difference between the actual value of what was lent and what is to be returned. This is prohibited gain.” And again: “The proper subject of inquiry is what is the lender to receive, and not always what the borrower is to pay, for the forbearance. Where the entire gain of the lender is derived from the borrower, the profit of the former and the loss of the latter are necessarily commensurate. Rut it is always safer to apply, when we can, the standard given by the law than to make use of any other, however exactly in general it may appear to correspond therewith.” Relying upon
Ehringhaus v. Ford, supra,
this Court, in
Bank v. Ford,
27 N. C., 692, held that every attempt by a bank to put upon a borrower bank bills not its own, and below par at the time and place, is usurious, unless the bank by its contract of loan engage to make the notes good as cash.
Judge Gaston
once observed: “If by an agreement it was intended to obtain in fact a greater compensation for the money lent than the statute allows, the law pronounces the agreement corrupt, whatever misapprehensions might have prevailed as to the construction of the statute, or however free the arrangement from every taint of moral turpitude. This may be hard, but thus the law is written and we must obey it.”
Ehringhaus v. Ford, supra.
See, also,
Grant v. Morris,
81 N. C., 150;
Burwell v. Burgwyn,
100 N. C., 389;
Miller v. Ins. Co.,
118 N. C., 612;
Yarborough v. Hughes,
139 N. C., 199. We virtually held, at this term, in
Bank v. Wysong, Miles & Co.,
that a transaction like the one involved in this case was usurious.
2. While the transaction is usurious and the plaintiff can recover only the principal of the debt
(Barnet v. Bank,
98 U. S., 555), the defendant cannot counterclaim for twice the amount of interest actually paid, because the Federal court of last resort, whose decisions upon the construction of the statute are both authoritative and conclusive upon us, has decided in several cases that the recovery cannot be had by way of counterclaim, but that payment of the penalty can be enforced only by a separate and independent action “in the nature of an action of debt.” The principle is well stated by that Court in
Barnet v. Bank, supra
(25 L. Ed. of U. S. S. C., at pp. 212, 213), as follows: (1) Wrhere illegal interest has been knowingly stipulated for, but not paid, there only the sum lent without interest can be recovered. (2) Where such illegal interest has been paid, then twice'the amount so paid can be recovered in a penal action of debt or suit in the nature of such action
against the offending bank, brought by the persons paying the same or their legal representatives. The statutes of the States upon the subject of usury may be laid out of view. They cannot affect the case. Where a statute creates a new right or offense, and provides a specific remedy or punishment, they alone apply. Such provisions are exclusive.
Bank v. Dearing,
91 U. S., 29 (23 L. Ed., 196). . . . The third defense set forth the like payment, and there is a claim to recover double the amount paid by way of counterclaim in the pending suit on the bill. This pleading is also fatally defective for the same reason as the first one. The remedy given by the statute for the wrong is a penal suit. To that the party aggrieved or his legal representative must resort. He can have redress in no other mode or form of procedure. The statute which gives the right prescribes the redress, and both provisions are alike obligatory upon the parties. While the plaintiff in such cases, upon making out the facts, has a clear right to recover, the defendant has a right to insist that the prosecution shall be by a suit brought specially and exclusively for that purpose, where the sole issue is the guilt or innocence of the accused, without the presence of any extraneous facts which might confuse the case and mislead the jury to the prejudice of either party.” In
Schuyler Nat. Bank v. Gadsden,
191 U. S., 451 (4 L. Ed., 258), the Court, through
Justice White,
said: “The question for decision is, Did the Supreme Court of Nebraska rightly decide that the controversy concerning usurious interest paid was to be governed by the statutes of Nebraska on that subject, and not by the laws of the United States on the same subject, as expressed in ch. 5198 of the Revised Statutes (U. S. Comp. Stat. 1901, p. 3493) ? We say this is the sole question, because it is undoubted that if the rights of the parties are to be determined by the laws of the United States, the ruling below was wrong. This results from the prior adjudications of this Court, holding that where usurious interest has been paid to a national bank the remedy afforded by ch. 5198 of the Revised Statutes (U. S. Comp. Stat. 1901, p. 3493), is exclusive, and is confined to an
independent
action to recover such usurious payments.
Haseltine v. Central Nat. Bank,
183 U. S., 132, 46 L. Ed. 118, 22 Sup. Ct. Rep. 50, and cases cited.” The Court then held that the Nebraska court should have laid out of view the State law, and determined the rights of the parties according to the law of the United States, which is that the penalty cannot be recovered by counterclaim but
only
by a
separate
and
distinct
action. The cases in the highest Federal court have been perfectly uniform to this effect, and we cannot disregard them, but it is our duty to follow the decisions of that court, though we may radically disagree with the reasoning. These are the cases:
Barnet v. Bank,
98 U. S., 555;
Bank v. Dearing,
91 U. S., 29;
Driesbach v. Bank,
104 U. S., 52;
Stephens v. Bank,
111 U. S., 197;
Bank v. Morgan,
132 U. S., 141;
Haseltine v. Bank,
183 U. S., 132;
Bank v. Gadsden,
191 U. S., 431, and perhaps others. Those above cited are sufficient to show that the rule of construction in respect to this matter has been well established so that we cannot depart from it, it being the law and as much so as if the very words, “by a separate and an original action,” had been inserted in the statute.
We
must adopt that construction by following the highest judicial court, as said by us at the last term, through
Justice Hoke,
in
Belch v. R. R.,
176 N. C., 22, where it was held that our rule cannot prevail where there is, according to the construction of the highest Federal court, provision to the contrary in the Federal statute; citing
U. S. v. Boomer,
183 Fed. Rep., 726. This construction of the Federal statute (U. S. Rev. Stat., sec. 5198) as to usury has been so firmly settled that State courts, which had held otherwise, reversed their decisions when
Bank v. Dearing, supra,
and
Bank v. Barnet, supra,
were decided, and attention is called to that fact by the U. S. Supreme Court in one of its decisions. Notable instances of such reversals are
Haseltine v. Bank, 155 Mo., 58
(aff. in 183 U. S., 132);
Bank v. Bushane,
96 Pa., 340;
Bank v. Lewis,
81 N. Y., 15;
Caponigri v. Altieri,
165 N. Y., 255;
Huggins v. Bank,
24 S.
W.,
926. This Court, in
Oldham v. Bank,
85 N. C., 241, holds that we are to be governed by the ruling of the Federal court of last resort,
Justice Buffin
saying: “The result of the decisions, both of this and the Supreme Court of the United States, is that no State law upon the subject of usury can be made to apply to national banks, and that the only law which touches them in this respect is the provisions of the statute under which they are organized. The construction given to those provisions, too, by the Court must be respected and accepted by every other tribunal, seeing that it is the court of last resort whose jurisdiction extends to the subject. And it is well, perhaps, however some of its determinations may differ from preconceived opinions, that we have a Court whose judgments in such matters can have universal prevalence.” He then refers to
Barnet v. Bank,
98 U. S., 555, as deciding that usurious interest paid to a national bank cannot be pleaded by way of set-off or payment on the principal of the debt, the sole and exclusive remedy being by a separate and simple action of debt unmixed with any other matter, and follows that decision. He further says: “Influenced by this decision
(Barnet v. Bank, supra),
as we feel ourselves to be, the Supreme Court of Pennsylvania in
Bank v. Dushone,
96 Pa. St., 340, recently decided, made a similar ruling, by which it overruled many of its previous adjudications. As we read the decision, it goes to the full length of saying that in an action brought by a national bank the plea of usurious interest paid, whatever be its form, can avail nothing, and that no action for a like cause, of what
ever nature, lies against sucb an institution save tbe one given in terms by tbe statute.” Tbe Court of Appeals of New York held, in respect to tbis question and tbe Federal statutes of 1882, tbat in an action brought to recover tbe amount of a promissory note discounted by a national bank, it cannot be set up by way of counterclaim or set-off tbat tbe bank, in discounting a series of notes, the proceeds of which were used to pay other notes, knowingly took a greater rate of interest than tbat allowed by law. Tbe remedy in sucb case is a separate action of debt to recover back twice tbe amount paid. Tbe rule laid down in tbis case upon a former argument
(Nat. Bank of A. v. Lewis,
75 N. Y., 516) was modified, as above, in conformity witb tbe decision in
Barnet v. Nat. Bank
(98 U. S.) (8 Otto), 555, which the Court held to be controlling. Although State courts have concurrent jurisdiction witb tbe Federal courts in actions by and against National banks, in an action in a State court tbe practice and pleadings prescribed by tbe Legislature of tbe State in regard to a counterclaim or recoupment cannot be resorted to, so as to defeat tbe object and intention of a Federal enactment. Tbe provision of the U. S. Statute (sec. 914) tbat tbe practice, pleadings, forms and modes of proceedings in civil cases, in. tbe Circuit and District courts, shall conform,_ as near as may be, to those existing at tbe time in tbe courts of record of tbe State, has no application in sucb case; it cannot annul or operate to prevent tbe application and enforcement of a statutory provision of a penal character. . Where, however, a national bank, in tbe discount of a note, has usuriously reserved a sum greater than tbe lawful rate of interest, tbe amount so reserved is forfeited (U. S. R. S., sec. 5198), and cannot be recovered in an action upon tbe note.
Bank v. Lewis,
81 N. Y., 15.
It is said now, and we believe by all tbe courts, tbat tbe local law as to pleading and procedure cannot alter tbe law and has no application, when tbe method of pleading is specially prescribed by tbe Federal law, which must be followed. The subject is fully considered and the authorities collected and reviewed in tbe notes to
Bank v. Gentry,
56 L. R. A., 672, at pp. 689-699. We would not ourselves adopt tbis construction of tbe act of Congress were it a question before us to be decided irrespective of tbe ruling of the highest Federal court, as tbe words by an “original or independent” action in tbe nature of an action of debt are not used in tbe act, nor do we think there is anything there from which they should be implied, but tbat tbe Congress merely intended to refer to tbe nature of tbe action in which recovery should be bad, as being substantially one of debt, without regard to whether it was an independent one, or by way of cross-bill or cross-action or counterclaim. There is no sound reason, in our opinion, why it should be so. It would seem to be more appropriate to try tbe question by way
of counterclaim in tbe action upon tbe debt, when tbe whole matter may be considered and tbe rights of tbe respective parties determined upon all tbe facts, and with greater precision. But we follow tbe decision of tbe highest Federal court as binding upon us, without regard to its reasoning or tbe mental process by which it reached tbe conclusion we have stated, which was tbe course taken by tbe Court in
Higgins v. Cit. Nat. Bank,
24 S.
W.
Rep., 926, and by many other courts. Our cases bolding that unlawful interest paid may be recovered back by way of counterclaim have no application, as they refer to our own statutes, which now expressly give that remedy.
Bank v. Ireland,
122 N. C., 571. That case dealt with our usury statute (Code, sec. 3836), and was founded upon
Smith v. B. and L. Asso.,
119 N. C., 257, and not upon tbe Federal statute', and even if applicable, which it is not, we could not ■disregard the decisions of the Federal Supreme Court in such a matter. The United States Statute of 1882 is equally inapplicable. It only ■confers jurisdiction on the State courts of suits for or against national banks, and as said in
Kinser v. Farmers Nat: Bank,
58 Iowa, 728, the ■design of the Congress was to confer jurisdiction upon the proper State court, and to leave it, after the action is begun, to be governed by its ■own mode of proceeding, when not in contravention of any special provision of the Federal law upon the subject. It was clearly not intended to repeal the provision as to how actions for usurious interest actually paid should be brought. Several of the cases cited by us were brought upon transactions which occurred after the act of 1882 was passed, and still the former rule was applied, as if that statute had no effect whatever upon the'question.
The other exceptions are untenable or without merit. It would seem that they now become irrelevant, as we will direct judgment to be •entered for the plaintiff according to the finding upon the fourth issue and the prayer of his complaint, that is, for the principal of the debt without interest, except as specified in that issue. But we discover no ■error in the other rulings to which exceptions were taken. A decision of the question raised by the plea of the limitation contained in the Federal statute becomes, of course, unnecessary.
It all results in this, that the counterclaim must be ■ dismissed, and that the judgment be modified so as to strike therefrom all recovery upon the same, and that judgment be entered for the plaintiff upon the fourth issue and the answer thereto, without' deduction therefrom, or diminution thereof, by reason of any penalty for unlawful interest paid, the amount to be inserted in the judgment, being $10,449.54, with interest from 15 January, 1918. This gives the defendant the benefit of .the forfeiture of interest, but not of the penalty, under the Federal statute.
Plaintiff’s appeal. Error. Defendant’s appeal. No error.