Source: https://supreme.justia.com/cases/federal/us/41/1/
Timestamp: 2019-04-19 10:26:44+00:00

Document:
Federal courts are not bound by the decisions of state court in matters regarding general commercial law, since those decisions do not rise to the level of new law.
Swift took a bill of exchange as payment of a promissory note that was due to him by Norton & Keith. The bill was issued in Maine, but Tyson had accepted the bill in New York and was responsible in that capacity for paying the amount of $1,540.30 to Swift. When the bill was dishonored after it came due, Swift sought to compel payment from Tyson. Recognizing that Swift was a bone fide holder of the bill who was unaware of any problems with it, Tyson responded that he had originally accepted the bill from Norton & Keith as partial consideration for buying property in Maine to which Norton & Keith had fraudulently and falsely claimed title.
Tyson claimed that there was no consideration for the obligation to Swift, that New York state law governed the case because the bill had been accepted in New York, and that these laws, as interpreted by state courts, provide that a pre-existing debt generally does not constitute consideration of value that is applicable to negotiable instruments. The lower federal courts were uncertain about how to rule on these issues, so they certified the question to the Supreme Court.
State laws can be defined as rules and enactments created by the state legislatures or long-standing local customs in a state that have the same effect as law. Under the 34th section of the Judiciary Act of 1789, federal courts are bound to follow only state statutes and their interpretations by state courts, as well as rules on rights and titles to real estate or other things that have a permanent locality. They are not conclusively bound with regard to general issues like the interpretation of contracts, even though they should give some respect to state court decisions. These do not create laws that a federal court is bound to follow, instead offering only evidence of what the law may be. State court decisions often are reversed or wrongly decided, so deference to them must be limited.
This case can be viewed as a precursor to the Erie doctrine, under which the Supreme Court resolved that federal courts sitting in diversity jurisdiction needed to apply state substantive law and federal procedural law.
Action in the Circuit Court of New York on a bill of Exchange accepted in New York, instituted by the holder, a citizen of the state of Maine. The Acceptance and endorsement of the bill were admitted, and the defence was rested on allegations that the bill had been received in payment of a preexistent debt, and that the acceptance had been given for lands which the acceptor had purchased from the drawer of the bill, to which lands the drawer had no title, and that the quality of the lands had been misrepresented, and the purchaser imposed upon by the fraud of the drawer, and those who were co-owners of the land and cooperators in the sale. The bill accepted had been received bona fide, and before it was due.
There is no doubt that a bona fide holder of a negotiable instrument for valuable consideration, without any notice of the facts which implicate its validity as between the antecedent parties, if he takes it under an endorsement made before the same becomes due, holds the title unaffected by those facts, and may recover thereon although, as between the antecedent parties, the transaction may be without any legal validity.
The holder of negotiable paper, before it is due, is not bound to prove that he is a bona fide holder for valuable consideration, without notice, for the law will presume that in the absence of all rebutting proof, and therefore it is incumbent of a defendant to establish by way of defence satisfactory proofs of the contrary, and thus to overcome the prima facie title of the plaintiff.
"[t]hat the laws of the several states, except where the Constitution, treaties, or statutes of the United States shall otherwise recognise or provide, shall be regarded as rules of decision in trials at common law in the Courts of the United States in cases where they apply,"
things having a permanent locality, such as the rights and titles to real estate and other matter immovable and intraterritorial in their nature and character. The section does not extend to contracts or other instruments of a commercial nature, the true interpretation and effect whereof are to be sought not in the decisions of the local tribunals, but in the general principles and doctrines of commercial jurisprudence.
On a certificate of division from the Circuit Court for the Southern District of New York.
This action was instituted in the circuit court upon a bill of exchange dated at Portland, in the state of Maine, on the first day of May 1836, for $1,536.30, payable six months after date, drawn by Nathaniel Narton and Jairus S. Keith upon and accepted by the defendant, the bill having been drawn to the order of Nathaniel Norton, and by him indorsed to the plaintiff. The principal and interest on the bill, up to the time of trial, amounted to $1,862.06. The defense to the action rested on the answers to a bill of discovery filed by the defendant against the plaintiff, by which it appeared that the bill had been received by him from Nathaniel Norton, with another draft of the same amount, in payment of a protested note made by Norton & Keith, and which had been paid by him to the Maine Bank. When the draft was received by the plaintiff, it had been accepted by the defendant, who resided in New York. The plaintiff had no knowledge of the consideration which had been received for the acceptance, and had no other transaction with the defendant. He had received the drafts and acceptances in payment of the protested note, with a full belief that the same were justly due, according to their tenor, and he had no other security for the payment of the protested note except the drafts, nor had he any knowledge of any contract or dealing between the defendant and Norton out of which the said draft arose.
of them which were warranted by them to be correct, and also contracted to convey a good title to the land, all of which representations were in every respect fraudulent and false, and that said Keith & Norton had never been able to make a title to the land; whereupon, the plaintiff, by his counsel, objected to the admission of said testimony, or any testimony, as against the plaintiff, impeaching or showing the failure of the consideration on which said bill was accepted, under the facts aforesaid admitted by the defendant, and those proved by him, by reading said answers in equity of the plaintiff in evidence. And the judges of the court divided in opinion on the point or question of law, whether, under the facts last mentioned, the defendant was entitled to the same defence to the action, as if the suit was between the original parties to the bill, that is to say, the said Norton, or the said Norton & Keith, and the defendant? And whether the evidence so offered in defence, and objected to, was admissible as against the plaintiffs in this action.
And thereupon, the said point or question of law was, at the request of the counsel for the said plaintiff, stated as above, under the direction of the judges of the court, to be certified under the seal of the court to the supreme court of the United States at the next session thereof to be held thereafter, to be finally decided by the said last-mentioned court.
The case was submitted to the court, on printed arguments, by Fessenden for the plaintiff and by Dana for the defendant.
became due, in payment of a promissory note due to him by Norton & Keith; that he understood that the bill was accepted in part payment of some lands sold by Norton to a company in New York; that Swift was a bona fide holder of the bill, not having any notice of anything in the sale or title to the lands or otherwise impeaching the transaction, and with the full belief that the bill was justly due. The particular circumstances are fully set forth in the answer in the record, but it does not seem necessary further to state them. The defendant then offered to prove that the bill was accepted by the defendant, as part consideration for the purchase of certain lands in the state of Maine which Norton & Keith represented themselves to be the owners of, and also represented to be of great value, and contracted to convey a good title thereto, and that the representations were in every respect fraudulent and false, and Norton & Keith had no title to the lands, and that the same were of little or no value. The plaintiff objected to the admission of such testimony, or of any testimony, as against him, impeaching or showing a failure of the consideration, on which the bill was accepted, under the facts admitted by the defendant, and those proved by him, by reading the answer of plaintiff to the bill of discovery. The judges of the circuit court thereupon divided in opinion upon the following point or question of law: whether, under the facts last mentioned, the defendant was entitled to the same defence to the action as if the suit was between the original parties to the bill, that is to say, Norton, or Norton & Keith, and the defendant. and whether the evidence so offered was admissible as against the plaintiff in the action. And this is the question certified to us for our decision.
in its support. As little doubt is there that the holder of any negotiable paper, before it is due, is not bound to prove that he is a bona fide holder for a valuable consideration, without notice, for the law will presume that in the absence of all rebutting proofs, and therefore, it is incumbent upon the defendant to establish, by way of defence, satisfactory proofs of the contrary, and thus to overcome the prima facie title of the plaintiff.
that the court of errors have not pronounced any positive opinion upon it.
"that the laws of the several states, except where the constitution, treaties or statutes of the United States shall otherwise require or provide, shall be regarded as rules of decision, in trials at common law, in the courts of the United States, in cases where they apply."
local usages of a fixed and permanent operation, as, for example, to the construction of ordinary contracts or other written instruments, and especially to questions of general commercial law, where the state tribunals are called upon to perform the like functions as ourselves that is, to ascertain, upon general reasoning and legal analogies, what is the true exposition of the contract or instrument, or what is the just rule furnished by the principles of commercial law to govern the case. And we have not now the slightest difficulty in holding that this section, upon its true intendment and construction, is strictly limited to local statutes and local usages of the character before stated, and does not extend to contracts and other instruments of a commercial nature, the true interpretation and effect whereof are to be sought not in the decisions of the local tribunals, but in the general principles and doctrines of commercial jurisprudence. Undoubtedly the decisions of the local tribunals upon such subjects are entitled to, and will receive, the most deliberate attention and respect of this court, but they cannot furnish positive rules or conclusive authority by which our own judgments are to be bound up and governed. The law respecting negotiable instruments may be truly declared in the languages of Cicero, adopted by Lord Mansfield in Luke v. Lyde, 2 Burr. 883, 887, to be in a great measure not the law of a single country only, but of the commercial world. Non erit alia lex Romae, alia Athenis, alia nunc, alia posthac, sed et apud omnes gentes, et omni tempore una eademque lex obtinebit.
is according to the known usual course of trade and business. And why, upon principle, should not a preexisting debt be deemed such a valuable consideration? It is for the benefit and convenience of the commercial world to give as wide an extent as practicable to the credit and circulation of negotiable paper that it may pass not only as security for new purchases and advances, made upon the transfer thereof, but also in payment of, and as security for, preexisting debts. The creditor is thereby enabled to realize or to secure his debt, and thus may safely give a prolonged credit, or forbear from taking any legal steps to enforce his rights. The debtor also has the advantage of making his negotiable securities of equivalent value to cash. But establish the opposite conclusion that negotiable paper cannot be applied in payment of, or as security for, preexisting debts, without letting in all the equities between the original and antecedent parties, and the value and circulation of such securities must be essentially diminished, and the debtor driven to the embarrassment of making a sale thereof, often at a ruinous discount, to some third person, and then, by circuity, to apply the proceeds to the payment of his debts. What, indeed, upon such a doctrine, would become of that large class of cases where new notes are given by the same or by other parties, by way of renewal or security to banks, in lieu of old securities discounted by them, which have arrived at maturity? Probably more than one-half of all bank transactions in our country, as well as those of other countries, are of this nature. The doctrine would strike a fatal blow at all discounts of negotiable securities for preexisting debts.
than the one now before us, for the bill of exchange, there drawn in discharge of a preexisting debt, was held to bind the party as acceptor upon a mere promise made by him to accept, before the bill was actually drawn. Upon that occasion, Lord Mansfield, likening the case to that of a letter of credit, said that a letter of credit may be given for money already advanced, as well as for money to be advanced in future, and the whole court held the plaintiff entitled to recover. From that period downward, there is not a single case to be found in England in which it has ever been held by the court that a preexisting debt was not a valuable consideration, sufficient to protect the holder, within the meaning of the general rule, although incidental dicta have been sometimes relied on to establish the contrary, such as the dictum of Lord Chief Justice Abbott in Smith v. De Witt, 6 Dow. & Ryl. 120, and De la Chaumette v. Bank of England, 9 Barn. & Cres. 209, where, however, the decision turned upon very different considerations.
"in toto or in part cannot be insisted on if the plaintiff, or any intermediate party between him and the defendant, took the bill or note bona fide and upon a valid consideration."
Bayley on Bills, p. 499-500 (5th Lond. edit. 1830). It is observable that he here uses the words "valid consideration," obviously intended to make the distinction that it is not intended to apply solely to cases where a present consideration for advances of money, on goods or otherwise, takes place at the time of the transfer and upon the credit thereof. And in this he is fully borne out by the authorities. They go further and establish that a transfer as security for past, and even for future, responsibilities will, for this purpose, be a sufficient, valid and valuable consideration. Thus, in the case of Bosanquet v. Dudman, 1 Stark. 1, it was held by Lord Ellenborough that, if a banker be under acceptances to an amount beyond the cash balance in his hands, every bill he holds of that customer's, bona fide, he is to be considered as holding for value, and it makes no difference though he hold other collateral securities more than sufficient to cover the excess of his acceptances.
The same doctrine was affirmed by Lord Eldon in Ex parte Bloxham, 8 Ves. 531, as equally applicable to past and to future acceptances. The subsequent cases of Heywood v. Watson, 4 Bing. 496, and Bramah v. Roberts, 1 Bing.New Ca. (N.C.) 469, and Percival v. Frampton, 2 Cromp.Mees. & Rose 180, are to the same effect. They directly establish that a bona fide holder, taking a negotiable note in payment of or as security for a preexisting debt, is a holder for a valuable consideration, entitled to protection against all the equities between the antecedent parties. And these are the latest decisions which our researches have enabled us to ascertain to have been made in the English courts upon the subject.
In the American courts, so far as we have been able to trace the decisions, the same doctrine seems generally, but not universally, to prevail. In Brush v. Scribner, 11 Conn.R. 388, the supreme court of Connecticut, after an elaborate review of the English and New York adjudications, held, upon general principles of commercial law, that a preexisting debt was a valuable consideration, sufficient to convey a valid title to a bona fide holder against all the antecedent parties to a negotiable note. There is no reason to doubt that the same rule has been adopted and constantly adhered to in Massachusetts, and certainly, there is no trace to be found to the contrary. In truth, in the silence of any adjudications upon the subject, in a case of such frequent and almost daily occurrence in the commercial states, it may fairly be presumed that whatever constitutes a valid and valuable consideration in other cases of contract to support titles of the most solemn nature is held a fortiori to be sufficient in cases of negotiable instruments, as indispensable to the security of holders and the facility and safety of their circulation. Be this as it may, we entertain no doubt that a bona fide holder, for a preexisting debt, of a negotiable instrument is not affected by any equities between the antecedent parties where he has received the same before it became due, without notice of any such equities. We are all, therefore, of opinion that the question on this point propounded by the circuit court for our consideration ought to be answered in the negative, and we shall accordingly direct it so to be certified to the circuit court.
Upon the point of difference between the judges below, I concur that the extinguishment of a debt, and the giving a post consideration, such as the record presents, will protect the purchaser and assignee of a negotiable note from the infirmity affecting the instrument before it was negotiated. But I am unwilling to sanction the introduction into the opinion of this court a doctrine aside from the case made by the record, or argued by the counsel, assuming to maintain that a negotiable note or bill, pledged as collateral security for a previous debt, is taken by the creditor in the due course of trade, and that he stands on the foot of him who purchases in the market for money or takes the instrument in extinguishment of a previous debt. State courts of high authority on commercial questions have held otherwise, and that they will yield to a mere expression of opinion of this court, or change their course of decision in conformity to the recent English cases referred to in the principal opinion, is improbable, whereas, if the question was permitted to rest until it fairly arose, the decision of it either way by this court probably would, and I think ought to, settle it. As such a result is not to be expected from the opinion in this cause, I am unwilling to embarrass myself with so much of it as treats of negotiable instruments taken as a pledge. I never heard this question spoken of as belonging to the case until the principal opinion was presented last evening, and therefore I am not prepared to give any opinion, even was it called for by the record.
offered in defence, and objected to, was not admissible as against the plaintiff in this action. Whereupon, it is now here ordered and adjudged by this court that an answer in the negative be certified to the said circuit court.

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