Swift v. Tyson
41 U.S. 1, 10 L.Ed.865 (1842)
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Rule of Law:
Section 34 of the Judiciary Act of 1789 does not compel federal courts to apply state court common law decisions on matters of general commercial jurisprudence. In such cases, federal courts are free to exercise independent judgment and apply a uniform general federal common law, under which a pre-existing debt constitutes valuable consideration for a negotiable instrument.
Facts:
- Nathaniel Norton and Jairas S. Keith drew a bill of exchange, payable to Norton.
- Tyson accepted this bill of exchange in New York.
- The bill was accepted as part consideration for the purchase of certain lands in Maine from Norton and Keith.
- Norton and Keith had fraudulently misrepresented their ownership and the value of the land; they had no title and the land was of little value.
- Before the bill of exchange became due, Norton endorsed it to Swift.
- Swift accepted the bill in payment of a pre-existing promissory note owed to him by Norton and Keith.
- Swift was a bona fide holder, having no notice of the fraud related to the underlying land transaction.
- When the bill matured, Tyson refused to honor it.
Procedural Posture:
- Swift, the endorsee, brought an action against Tyson, the acceptor, in the Circuit Court of the United States for the Southern District of New York.
- At trial, Tyson offered to introduce evidence of fraud in the original transaction as a defense against payment.
- Swift objected to the admission of this testimony, arguing that as a bona fide holder for value, he was not subject to such defenses.
- The judges of the Circuit Court divided in opinion on the question of whether Tyson's defense was admissible against Swift.
- The Circuit Court certified this question of law to the Supreme Court of the United States for a decision.
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Issue:
In a suit on a negotiable instrument, is a federal court sitting in diversity required by Section 34 of the Judiciary Act of 1789 to follow state court decisions holding that a pre-existing debt does not constitute valuable consideration, or may the federal court apply a general commercial law standard?
Opinions:
Majority - Justice Story
No, a federal court is not required to follow state court common law decisions on matters of general commercial law. The term 'laws' in Section 34 of the Judiciary Act of 1789 refers to state statutes and long-established local customs, not to judicial decisions on general principles, which are merely 'evidence of what the laws are' and not laws themselves. Matters of general commercial law are not local in nature but belong to the 'commercial world,' and federal courts must exercise their own judgment to ascertain the proper rule. On the substantive question, the court holds that a pre-existing debt does constitute a valuable consideration for a negotiable instrument. This rule promotes the credit and circulation of negotiable paper, which is essential to commerce, and is supported by English precedent and general commercial principles.
Concurring - Justice Catron
Yes, I concur that extinguishing a pre-existing debt is valuable consideration that protects a bona fide holder. However, the majority opinion's discussion of whether pledging a negotiable instrument as mere collateral security for a pre-existing debt also constitutes valuable consideration is unnecessary dicta. That specific question was not presented by the facts of this case and had not been argued by counsel. The Court should have refrained from expressing an opinion on this point until a case directly presenting the issue came before it, as state courts have held otherwise and are unlikely to follow a mere expression of opinion.
Analysis:
This decision established the doctrine of 'general federal common law,' empowering federal courts in diversity jurisdiction cases to disregard state court precedent on non-local matters, particularly in commercial law. The goal was to create a uniform body of commercial law, but it paradoxically led to a dual system where the applicable legal rule depended on whether a case was heard in state or federal court, encouraging forum shopping. This doctrine profoundly shaped federal jurisprudence for nearly a century until it was explicitly overturned by the Supreme Court in Erie Railroad Co. v. Tompkins (1938), which held that federal courts must apply state substantive law, including state common law, in diversity cases.
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