Swift v. Tyson, 41 U.S. 1

Mr. Justice Story

delivered the opinion of the Court.

This cause comes before us from the Circuit-Court of the, southern district.s>í New York, upon a certificate of division', of the ■ judges of that Court.

The action wasbrought- by the plaintiff, Swift, as endorsee, against the defendant, Tyson, as acceptor, upon a-bill of exchange dated at Portland, Maine, on the first day of May, 1836, for the sum of' one thousand five hundred and-forty dollars, thirty, cents, payable six months after date and grace, drawn by one: Nathaniel Norton and one - Jairas S. Keith upon and accepted by Tyson, at the city of New York,-in favour of. the order, of Nathaniel Norton, and by Norton endorsed to the plaintiff. The bill was dishonoured at maturity.

At the trial the acceptance, and endorsement 'of the bill were admitted, and the plaintiff there rested his case. The 'defendant then introduced in evidence the answer of Swift to á bill of discovery, by which it appeared that Swift took the bill before it

became due, in payment of a promissory note due to him by Norton .and-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 any thing 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 farther to-state them. The defendant then offered to prove, that 'the Dill was accepted by the defendant as part consideration for the purchase of certain lands in the state of Maine, which.Norton and Keith.represented themselves to be the owners ofrand.also represented to he of great value, and contracted to convey, a good title thereto; and that the representations were in every respect fraudulent and false, and Norton and Keith had no title to the lands, and that the same were- of little or no valúe. 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 the 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, qr. Norton -and 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,

. There is no. doubt, that a bonsi fide holder of a negotiable in-. strument for- a valuable consideration, without.anv notice of facts which impeach its validity .as between the > antecedent parties, if he takes it under an endorsement made.before the same becomes due, holds the title unaffected bythese.factsfand may recover thereon, although as between the antecedent parties the transaction, may be without any legal.-validity.- -This is a doctrine so long,-and so .well established, and so-essential to-the security of negotiable paper,-that it is laid up. among the fundaméntate of the law; andr requires no authority or reasoning to be now brought

in its support. - As little doubt is there, that the .holder, of any negotiable paper, before it is due, is not bound to prove tha't.he is a bona fide holder for a valuable consideration, without notice; for the law will presume that, in the absence or ail 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.

In the present case, the plaintiff is a bona fide holder without notice for what the law deems a good and valid consideration, that is, for a pre-existing debt; and the only real question in the cause is, whether, under the circumstances of the present case, such a pre-existing debt constitutes a valuable consideration in the sense of the general rule applicable, to negotiable instruments. We say, under the circumstances of the present case, for the acceptance having been made in'New York, the argument on behalf of the defendant is, that the contract' is to be treated as a New York contract, and therefore to be governed by-.the laws of New York, as' expounded- by its Courts, as well upon geneial principles, as by the express provisions of the thirty-fourth section of the judiciary act of 1789, ch. 20. And then it is further con-, tended, that by the daw of New York, as thus expounded by its Courts, a pre-existing debt does not constitute, in the sense of the general rule, a valuable consideration applicable to negotiable instruments.

.In the first place, then, let us examine into the' decisions of the Courts of New York upon this subject. In the. earliest case, Warren v. Lynch, 5 Johns. R. 289, the Supreme Court of New York appear to have held, that a pre-existing debt was a sufficient consideration to entitle a bonü fide holder without notice to recover the amount of a note endorsed to him, which might not, as between, the original parties, be valid. The same doctrine was affirmed by Mr. Chancellor Kent in Bay v. Coddington, 5 Johns. Chan., Rep. 54. Upon that occasion" he said, that negotiable paper can be assigned or transferred by an agent or factor or by any other person, fraudulently, so as to bind the true owner as against the holder, provided it be taken in the usual course of trade, and for a fair and valuable consideration without notice of the fraud. But he added, that the holders in that case were not entitled to,, the benefit of the rule, because it was not negotiated to

them in the usual course of business or trade, nor in payment of any antecedent and existing debt, nor for cash, or property advanced, debt created, or responsibility incurred, on the • strength and credit of the notes; thus directly affirming, that a pre-existing debt was a fair and valuable consideration within the protection of the general rule. And he has since affirmed the same doctrine, upon a full review of it, in his Commentaries, 3 Kent. Comm, sect. 44, p. 81. The decision in the case of Bay v. Coddington was afterwards affirmed in the Court of Errors, 20 Johns. R. 637, and the general reasoning of the chancellor was fully sustained. There were indeed peculiar circumstances in that case, which the Court seem to have considered as entitling it to be treated as an exception to the general rule, upon the ground either because the receipt of the notes was under suspicious circumstances, the transfer having been made after the known insolvency of the endorser,- or because the holder had received it as a mere security for contingent responsibilities, with which the holders had not then become charged. There was, however, a considerable diversity of opinion among the members of the Court, upon that occasion, several of them holding that the decree ought to be reversed, others affirming that a pré-existing debt was a valuable consideration, sufficient to protect the holders, and others again insisting,-that-a pre-existent debt was not sufficient. From that period, however, for a series of years, it seems to have been held by the Supreme Court of the staté, that a pre-existing debt was not a sufficient consideration to shut out the equities of the original parties in favour of the holders. But no case to that effect has ever been decided in the Court of Errors. The cases cited at'the. bar, and especially Roosa v. Brotherson, 10 Wend. R. 85; The Ontario Bank v. Worthington, 12 Wend. R. 593; and Payne v. Cutler, 13 Wend. R. 605, are directly in point. But the more recent cases, The Bank of Salina v. Babcock, 21 Wend. R. 490, and The Bank of Sandusky v. Scoville, 24 Wend. R. 115, have greatly shaken, if they have not entirely overthrown those decisions, and seem to have brought back the doctrine to that promulgated in the earliest cases. So.that, to sáy the least of it, it admits of serious - doubt, whether any doctrine upon this question can at the present "time be treated as finally established; and it is certain,

that the Court of Errors have not pronounced ahy positive opinion- upon it.

But, admitting the doctrine.to be fully settled in New York, it remains to be considered, whether it is obligatory upon this Court, if it differs from the principles established in the general commercial law. It is observable that the Courts of N&w York do not found their decisions upon this point upon any local statute, or positive, fixed, or ancient local usage: but they deduce the doctrine from the general principles of commercial law. It is, however, contended, that the thirty-fourth section of the judiciary act of 17S9, ch. 20, furnishes a rule obligatory upon- this Court to ■follow the decisions of the state tribunals in all cases to which they apply. That section provides “ 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.” In order to maintain the argument, it' is éssential, therefore, to hold, that the .word “ laws,” in this section, includes within the scope of its meaning the decisions of the local tribunals. In the ordinary use of language it will hardly be contended that the.decisions of Courts constitute laws. They are, at most, only evidence of what the laws are; and are not bf themselves laws. They are often reexamined, reversed, and qualified by the Courts themselves, whenever they are found to be either defective,.-or ill-founded, or otherwise incorrecf. The laws of a state are more usually understood to mean the rales and .enactments promulgated by the legislative authority -thereof, or long established local customs having the force of laws. ' In all the various casés which have hitherto come before, us for decision, this Court have uniformly supposed, that the true interpretation of the thirty-fourth section limited its application to state laws strictly local, that is to say, to .the positive statutes of the state, and the construction thereof adopted by the local tribunals, and to rights .and title's to things. having a permanent locality, such as the rights and titles to real estate, and other matters immovable and' intraierritorial in their nature and character. .It never has been supposed by us, that the section did apply, or was designed to apply, to questions of a more general nature,- not at-all dependent upon local statutes or’

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 géneral 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 principlés 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 language of Cicero,, adopted by Lord Mansfield in Luke v. Lyde, 2 Burr. R. 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 Romee, alia Athenis, alia nunc, alia posthac, sed et apud omnes gentes, et omni tempore, una eadem-. que lex obtenebit.

It becomes necessary for us,, therefore, upon the present occasion to express our own opinion of the true result of the commercial law upon the question now before us. And we have no hesitation in saying, that a pre-existing ■ debt does constitute a valuable consideration in the sense of the general rule, already stated, as applicable to negotiable instruments. Assuming it to be true, (which, however, may well admit of some doubt from, the generality of the language,) that the holder of a negotiable instrument is unaffected with, the equities between the antecedent parties,-of which he ha’s no notice, only where he receives-it in the usual course of trade and business for a valuable consideration, before it becomes due; we are prepared to say, that receiving it in payment of, or as security for-a pre-existing debt,

is according to -the known usual course of trade and business. And why upon principle should not a pre-existing 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 pre-existing 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 pre-existing debts, without letting in all the equities between-the original and antecedent parties, add 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, bv. 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 pre-existing debts.

This question has be.en several times before this Court, and it has been uniformly held, that it makes no difference whatsoever as to the rights of the holder, whether the debt for which the negotiable instrument is transferred to him is a pre-existing debt, or is contracted at the time of the transfer. In each case he equally gives credit to the instrument. The cases of Coolidge v. Payson, 2 Wheaton, R. 66, 70, 73, and Townsley v. Sumrall, 2 Peters, R. 170, 182, are directly in point.

In England the same doctrine has been uniformly acted upon. As long ago as the case of Pillans and Rose v. Van Meirop and Hopkins, 3 Burr. 1664, the very point was made and the objection was overruled. That,indeed, was a case of far more stringency

thaii the one now before us; for the bill of exchange, there drawn in discharge-of, a pre-existing debt, was held to bind the party as acceptor, upon a mere promise made by him tp accept before the bill was actually drawn. Upon that occasion Lord Mansfield, likening the caáe, 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 pre-existing 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 Dowl. & Ryland, 120, and De la Chaumette v. The Bank of England, 9 Barn. & Cres. 209, where, however, the decision turned upon very different considerations.

Mr. Justice Bayley, in his valuable Work on bills of exchange and. promissory notes, lays down the rule in the most general terms. "The want of consideration,’ says he, "in foto or in pkrt, cannot be insisted on, .if the plaintiff or- any intermediate party between him and the. defendant took the bill, or note bonáfide and upon', a valid consideration.” Bayley on Bills, p. 499, 500, 5th London edition, 1830. It is observable that he here uses the .words "valid consideration,” obviously intending 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 farther, 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 Starkie, R. 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, boná 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 coyer 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. R. 496, and Bramah v. Roberts, 1 Bing. New Ca. 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 this 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 áhd New York’ adjudications, held, upon general principies- , of commercial law, that a pre-existing debt was a valuable, consideration, sufficient to convey a valid title to a boná 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 fo be found to the contrary. In truth, in the silence "of any adjudi cations upon the subject, ip 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 solémn nature, is held á 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-.pre-existing debt, of a negotiable instrument, is not affected by any equities between the antecedent parties, where he has received the same before it became dffe, 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. .

Mr. Justice Catron

said:

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 wus 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.

This cause came on to be heard on the transcript of the record from the Circuit Court of the United States, for the southern district, of New York, and on the point and question on which the judges of the said Circuit Court were opposed in opinion, and which were certified to this Court for its opinion, agreeably to the act of Congress in such case made and provided, and was argued by counsel. On consideration whereof, it is .the opinion of this Court, that the defendant was not, under-the facts stated, 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 and Keith and the defendant: and that the evidence

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.