Argued October 24, 1888
Decided November 27, 1888
A.R. Dyett for appellants.
Emile Beneville for respondents.
The transaction, although in form a mortgage, was, nevertheless, in contemplation of law a loan of money to the extent of the consideration advanced, the mortgage not having had any inception until its transfer to the plaintiff's testator. The mortgage was void for usury by force of the statute, notwithstanding the purchaser was innocent and had no intent to enter into a usurious transaction, but purchased the mortgage, supposing that it was a bona fide and valid security. ( Bennet v. Smith, 15 Johns. 354; Brooks v. Avery, 4 N.Y. 226; Hall v. Earnest, 36 Barb, 585, and cases cited.) But the plaintiff's testator having been induced to purchase the mortgage upon the false and fraudulent representations of both the mortgagor and mortgagee, that it was a valid security given upon a full consideration, free from usury, they were estopped from setting up this defense. This has now become the settled rule, although the doctrine was established with some hesitation, and there is some ground for supposing that it trenches upon the policy of the usury laws by inducing purchasers to forbear inquiry, relying upon certificates, which have become a common assurance attending the transfer of securities. But the courts have limited the effect of the estoppel in such cases to the purpose of indemnifying the purchaser for the money actually advanced, with interest, and they refuse to permit him to enforce the security to recover the usurious profits or premium in the transaction. ( Payne v. Burnham, 62 N.Y. 69.) The law was so applied in the former action for the foreclosure of the mortgage brought by the plaintiff's testator. The judgment decreed that the land should be sold to satisfy the sum advanced on the purchase of the mortgage, excluding any allowance for the usurious excess, thereby depriving the transferee of the benefit of his bargain to that extent. The present action was subsequently brought for the deceit, and the plaintiffs seek to recover as damages the difference between the value of the mortgage, as represented, and its actual value to the plaintiff's testator. In short, by changing the form of action, the plaintiffs seek to recover the sum which their testator was precluded from recovering in the action on the contract. The general rule undoubtedly is that gains prevented, as well as actual loss incurred, may be recovered as well in an action for false representations as for breach of contract, so far as they are the natural and proximate result of the wrong. ( Grissler v. Powers, 81 N.Y. 61.) The case of Payne v. Burnham ( supra) proceeded upon special grounds, not applicable in ordinary cases of contract, and the recovery was limited because the policy of the usury statute seemed to require such a limitation. We think the same policy requires the same limitation here. If the plaintiffs are permitted to recover, they secure the benefit of the usury, which in an action on the contract was denied. There are no authorities in point on the briefs of counsel, and none, perhaps, can be found directly applicable. The vice-chancellor, in Holmes v. Williams (10 Pai. 332), refers to a somewhat similar question, but expresses no definite opinion. We think the reasoning in Payne v. Burnham ( supra), is against a recovery here. The innocent purchaser of a usurious security, where the purchase is induced by fraud, may enforce the security against an obligor privy to the transaction, to the extent of the money advanced, or he may, on discovery of the fraud, rescind and recover back the money paid, but he cannot, we think, in any form of action, recover more.
This leads to a reversal of the judgment and a new trial.