[In the case excerpted below, a court held that even after transferring a promissory note "without recourse," the original lender was liable to the transferee for the unenforceability of the note. The promissory note was unenforceable because the original lender charged a greater interest rate than permitted under these circumstances by law.]
"In October, 1960, Walker & Dunlop . . . loaned $100,000 to Suburban Motors, Inc. The loan, evidenced by a promissory note, was to bear interest at an annual rate of 6 1/2% and was secured by a deed of trust on real property owned by Suburban."
"In January, 1961, pursuant to an understanding reached before the loan was made, Walker & Dunlop transferred the note and deed of trust to Hartford, endorsing the note 'without recourse'."
"In March, 1962, Suburban sold the property, subject to the deed of trust, to Adams Properties, Inc., a subsidiary of Parkwood, Inc. In July, 1966, [the] companies [owing debt under the note] filed petitions for reorganization under the Bankruptcy Act. Later that year, Hartford filed a proof of claim as a secured creditor of Adams for the balance due on the note some $79,000.00."
"In May, 1968, the Trustee appointed for Adams objected to the claim on the ground that the loan had been made in violation of the Loan Shark Act, Section 601. That statute makes it unlawful to charge yearly interest on a secured loan at a higher rate than 6% unless a license has been procured to charge the higher rate."
"Hartford instituted this action in December, 1972. In its amended complaint, Hartford seeks to recover its loss from Walker & Dunlop on contractual theories of failure of consideration, breach of warranty, and unjust enrichment."
"The District Court held that the causes of action against Walker & Dunlop in the amended complaint were barred by the applicable statute of limitations and by the 'without recourse' endorsement on the note which Walker & Dunlop had transferred to Hartford."
"[However, a] 'without recourse' endorsement is a qualified endorsement; it does not eliminate all obligations owed by the transferor of an instrument to his transferee. By endorsing the note 'without recourse', Walker & Dunlop still warranted to Hartford that it had no knowledge of any fact which would establish the existence of a good defense against the note. Walker & Dunlop breached this warranty. At all times it was fully aware of the facts relevant to our later determination that the note was unenforceable because of the illegality of the underlying loan."