OF THE

Supreme Court of the United States,

AT

JANUARY TERM, 1842.

Action on bill of exchange-holder of negotiable paper, indorsed to him before maturity, presumptively holder for value-such holder not affected by equities between original parties -construction of 34th section of the Judiciary Act.

Action in the Circuit Court of New York on

bill of exchange accepted in New York, Instituted by the holder, a citizen of the State of Maine. The acceptance and indorsement of the bill were admitted, and the defense was rested on allegations that the bill had been received in payment of a pre-existing debt, as which the acceptance had 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 a valuable consideration, without any notice of the facts which implicate its validity as between the antecedent parties, if he takes it under an indorsement 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.

Na certificate of division from the Circuit District of New York.

This action was instituted in the Circuit land in the State of Maine, on the first day of Court upon a bill of exchange, dated at PortMay, 1836, for one thousand five hundred and thirty-six dollars and thirty cents, payable six months after date, drawn by Nathaniel Norton and Jarius 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 one thousand eight hundred and sixty-two dollars and six cents. 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 drawn by Norton the Maine bank. When the draft was received and Keith, and which had been paid by him to by the plaintiff, it had been accepted by the defendant, who resided in New York. 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

The

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.

The holder of 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 proof, and therefore it is incumbent on a defendant to establish by way of defense satisfac-security for the payment of the protested note tory proofs of the contrary, and thus to overcome the prima facie title of the plaintiff. The 34th section of the Judiciary Act of 1789, which declares "That the laws of the several States, except where the Constitution, treatles, or statutes of the United States shall otherwise recognize 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," has uniformly been supposed by the Supreme Court to be limited in 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 titles to 2] things having a permanent locality, such as the rights and titles to real estate, and other matters 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.

the bill of exchange was accepted by him as The defendant then offered to prove that part consideration for the purchase of certain lands in the State of Maine, of which Keith and Norton, the drawers of the bill, represented themselves to be the owners, and represented them to be of great value, made certain estimates of them which were warranted [*8 by them to be correct, and also contracted to convey a good title to the land; all of which representations were in every respect fraudu lent and false; and that said Keith and Norton have never been able to make a title to the lands: 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, | ferred to; and tending, as they do, to drive and those proven by him, by reading said an-commercial negotiable paper out of one of the swers in equity of the plaintiff in evidence. paths of its greatest untility-are they still to And the judges of the court divided in opinion overthrow the decisions of this court in the on the point or question of law, whether, under cases of Coolidge v. Payson, and Townsley v. the facts last mentioned, the defendant was Sumrall? It is contended, on the part of the entitled to the same defense to the action as if defendant, that they are, and that this high the suit was between the original parties to the court is bound to follow them with unreasoning bill, that is to say, the said Norton, or the said submission, because the bill in question was Norton and Keith, and the defendant; and drawn on the city of New York, in the State whether the evidence so offered in defense and of New York; and on account of the 34th secobjected to was admissible as against the tion of the Judiciary Act of 1789, which proplaintiffs in this action. vides, 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 cases where they apply."

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 direc- | tion of the judges of this court, to be certified under the seal of this 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.

In answer to this, it is urged that in the first place, after observing that it is not pre- [*5 tended that the decisions of the Supreme The case was submitted to the court on Court of New York referred to are founded printed arguments by Mr. Fessenden for the on, or are in exposition of, the constitution or plaintiff, and by Mr. Dana for the defendant. any statute of that State, that the phrase "laws Mr. Fessenden argued that the defense offered of the several States," in the 34th section of the and objected to is no defense as against the Judiciary Act, means nothing else than the plaintiff in this action. The right of the plaintiff written constitutional system and statutes of to recover, resting, in the first place, on admis- such States; and that, if the framers of the act sions and proo., is established prima facie. The of Congress had not known that all the State defendant, by his course of proceeding, has had such written constitutions of governmera admitted: First, that the bill in suit was in-laws of paramount authority in those States dorsed to the plaintiff during its course, as and had not wished to frame their enactments negotiable paper, about five months before it became due, according to its tenor.

in language popular and comprehensive, as well as accurate, they would have used the Second. That when it was received by the word "statutes," the appropriate technical word plaintiff, he had no notice, or knowledge, or for laws framed by the Legislature, instead of the Intimation of any fact to the dishonor of the word "laws." If they had intended to embrace bill; on the contrary, he was assured by his in the section the traditionary, or otherwise de 4*] debtor it would be paid promptly at ma-rived common law of such States, as expounded turity, and that previous acceptances given in payment of the sale of land had been paid at maturity.

Third. That the acceptance was taken in payment of a pre-existent debt, and that the plaintiff had no other security for the debt due to him by Norton and Keith but this acceptance, and an acceptance of the same character for the residue of his claim on Norton and Keith; and that on receiving the acceptance he had given up the note of Norton and Keith, which had been indorsed by one Child.

by the decisions of the State courts, being, a they were, scholars as well as lawyers, they would have incorporated in the section, by way of substitute or addition, some such general phrase as "systems of law." In common parlance, the word "laws," in the plural, means, and did mean in 1789, legislative enactments. The same word also embraces, popularity and technically, when speaking of the regulations of the respective United States, their constitutions of government as well as their legislative enactments; and the former, as well as the latter, were doubtless intended to be included in the thirty-fourth section. For these reasons the word "laws," instead of the word "statutes," makes part of the section.

It is admitted that if the bill had been deliv ered to the plaintiff by Norton for value deliv. ered to him, Norton, at the time on the strength or credit of the bill, the defense should be re

By the cases of Bank of Salina v. Babcock et al. 21 Wendell, 499; and Bank of Sandusky v. Scoville et al. 24 Wendell, 115, it distinctly appears that the latest opinion of the Supreme Court of New York is (and seemingly as if that court had never decided otherwise) that receiving negotiable paper in payment of an antecedent debt, is the same thing, in all re-jected. spects, as regards the rights of the recipient indorsee of such paper, as if he had paid money, or any other valuable consideration for it, at the time, on the credit of the paper.

But if these cases cannot be reconciled with the plaintiff, Swift's side of the present question, are they, unsustained as they are by like decisions in any other of the States in this Union; resting, as they do, on an obvious misinterpretation of the case of Coddington v. Bay; and contradicting, as they do, the earlier decision of the same court on the very point, in the case of Warren v. Lynch, which has been re

But it is contended on the part of the defend. ant, that inasmuch as the bill was received by the plaintiff in payment, though it were absolute payment of a pre-existing debt, and though he has no evidence, o, security for, such debt, except the new security in his hands, received in payment of the old; the bill in question was not indorsed to him in the usual course of trade, so as to give him any rights as the holder of it, different from those of the person who transferred it to him; however he may have received it fairly and in good faith, and without notice of anything which would disenable the party

6*] transferring it to him, to recover it of the The phrase "usual course of trade" is rather acceptor, and however the fact may be as to its vague and indefinite. It was once the usual original lawfulness. This is the question for course of trade to pay debts, and it should still the court to decide, and it is contended that the be so. Most of the notes discounted at banks bill being so transferred and received in pay- are given for the renewal of notes to fall due, ment of a pre-existing debt, gives the indorsee all or for the payment of pre-existing debts. the rights as against the acceptor which he would The later decisions of the Supreme Court of have had, if, at the time he received it, he had New York, referred to, are professedly founded paid the amount of it, in money, to the indorser. on principles alleged to be decided in the case It certainly should be so. The use of nego. of Bay v. Coddington, 5 Johns. Chancery Rep. tiable paper has hardly been of greater service 54, and the same case under the name of Codto civilized man, in facilitating the transmission dington v. Bay, decided in the Court of Corof the equivalent of money, and thus in answer-rection of Errors of that State, on appeal. 20 ing, in some respects, the purposes of money Johns. Rep. 637. This case does not sustain itself, than in preventing hostile proceedings in the position of the defendant. It was decided courts of law for the collection of money due. by Chancellor Kent expressly on the ground Indeed, one of the principal good effects of the that "the defendant did not receive the notes former is, that it tends to prevent suits at law. in the course of business," nor in payment in In point of fact, thousands of suits have been part or in whole of any then existing debt. In prevented by receiving a bill of exchange or the Court for the Correction of Errors the depromissory note, with an additional name upon cision of Chancellor Kent was affirmed. it, payable at a future day, in discharge of a the case of Ward et al. v. Howell, 9 Wend. 170, debt, which although due, the debtor at the the note was not received in payment, but as a moment could discharge in no other way. But security. The other cases referred to, Rowsa v. if it comes to be settled by law that the creditor Botherson, 10 Wend. 85; Ontario Bank . upon such an occasion, must, at his peril, ascer- Worthington, 12 Wend. 593; and Payne v. tain that the additional party, whose name is Cutler, 13 Wend. 605, are all founded on the upon the paper, has no good defense to its pay-principal laid down by Savage, Chief Justice, ment as against the person proposing to transfer in The Ontario Bank v. Worthington. "If the it to such creditor, it will deter him from re- plaintiff fails he loses nothing, he is in the same ceiving it in lieu of the money he demands; situation as before he took the paper, *and [*8 and will, in many instances, lead to suits, which it was his fault if he did not inquire into the otherwise would not have been commenced. value of the paper, and the defense against it; and all the cases assume that the case of Coddington v. Bay decided what it did not decide."

This high court has once and again decided the very question involved in this case, in the case of Coolidge et al. v. Payson et al. 2 Wheaton, 66 to 73; and in Townsley v. Sumrall, 2 Peters, 170 to 180.

The general rule as to negotiable paper is, that where it is not unlawful and void in its inception, he to whom it is transferred while current, in due form, and who receives it in good faith, and for a valuable consideration, without notice of anything which would exonerate the maker or acceptor of it from paying it to the one from whom he receives it, can recover its amount from such maker or acceptor, although the party from whom he received it could not. Lord Raymond, 738; 1 Salkeld, 126; 3 Salkeld, 71; Grant v. Vaughan, 3 Burrows, 1516. But surely the discharge of a just debt is a valuable consideration. Comyn's 7] Digest, New York ed. of 1824, Vol. I. page 300, title, "Action on the case upon assumpsit." B, 3, "Discharge of a debt a good consideration to raise an assumpsit." In Baker v. Arnold, 3 Caines' Rep. 279, it was decided by the Supreme Court of New York that in an action by the indorsee of a note, not void in its creation, and indorsed before it became due, the consideration, as between previous parties to the note, could not be inquired into. In Russell v. Ball, 2 Johns. Rep. 50, a decision upon similar principles will be found. Cited, also, Warren v. Lynch, 5 Johns. 339.

But it is contended on the part of the defendant, that later decisions by the Supreme Court of New York have established an opposite principle, and that receiving a note in payment of a pre-existing debt is not receiving it in the usual course of trade, nor on a consideration which gives the indorsee any rights on the paper beyond those of the indorser.

In

Whensoever a person receives a note or bill in payment of a pre-existing debt, he does lose something if he cannot collect the substitute he receives. He loses the debt. He does not stand in the same situation as before he took the note or bill. The same parties holden on the old and extinguished evidence of debt, may be on the new which he receives, and they may not. If, then, these decisions of the Supreme Court of New York rest essentially on the principle stated by Chief Justice Savage, they are not at war with the law which is contended for in the present case.

For these reasons it is contended that the 34th section of the Judiciary Act does not render it obligatory upon this court to disregard its own decisions, and follow those of any court of the State of New York, upon a general question like the present, not affected by any statute of that State, although the bill of exchange in question was drawn on the city of New York.

But if law is otherwise, it is submitted that the decisions of the highest court of the State is the Court of Correction of Errors. Gelson v. Hoyt, 3 Wheaton, 248. In the Court of Errors of New York, the decision in Bay v. Coddington has been spoken of with disapprobation.

If there is any question of law, not local, but widely general in its nature and effects, it is the present question. It is one in which foreigners, the citizens of different States, in their contests with each other, nay, every nation of the civilized commercial world, are deeply interested. By all without the United States, this court is looked to as the judiciary of the whole nation known as the United States, whose commerce and transactions are as widely diffused as in

upon elaborate examination of all the decisions of the courts of the State of New York, that the defense was good and the verdict ought not to be set aside, if the laws of that State applied to the case.

the use of bills of exchange. The obvious and admitted wisdom of the thirty-fourth section of the Judiciary Act, in reference to our excellent, but delicate and complex system of government, if the section does not receive the construction contended for, and which it is believed the Upon the question whether, by the 34th secframers of that act designed, will lose its nature tion of the Judiciary Act of 1789, the law of and become folly; and the section will, as it the State of New York must be the rule of deseems, be productive of mischiefs, in the ex- cision of this case, he argued that under the inperience and remembrance of which its bene-junctions of the section that "the laws of the fits will be lost sight of, if the principle urged several States, except where the Constitution, on the part of the defendant shall prevail: treaties, or statutes shall otherwise provide or 9*] *How can this court preserve its control require, shall be regarded as rules of decision over the reason and affections of the people of in trials at common law in the courts of the the United States; that control in which its United States, in cases where they apply," imusefulness consists, and which its own untram-posed on the Supreme Court an obligation, as melled learning and judgment would enable it naturally to maintain; if its records show that it has decided (as it may be compelled to decide if the construction of the section referred to, advocated on the part of the defendant, is established) the same identical question, arising on a bill of exchange, first one way, and then the other, with vacillating inconsistency? In what light will the judicial character of the United States appear abroad, under such circumstances?

In cases in which the courts of the United States have jurisdiction, by the Constitution and laws of the United States, the common mercantile law of the respective States applying to and governing those cases, is as much submitted to the actual consciences and judgments of the minds of the judges who constitute those courts, to be considered and declared, without respect to the decision of any State court, as binding authority, as the same law, in cases where the United States courts have not jurisdiction, is to the best judgment of the State courts, without respect to the decision of any court of the United States, as binding authority. Congress, and Congress alone, has power to regulate commerce between the States. But it will be impossible for Congress to regulate commerce between the States, if it be left to State courts to declare authoritatively in the absence of any statute upon the point, the force, and meaning of, and the right of parties under that most important instrument of such commerce -the bill of exchange, when drawn and held in and by a citizen of one State, and accepted and payable in and by a citizen of another State.

Mr. Dana, for the defendant:

The first part of the argument of Mr. Dana was upon the question, whether the acceptance of the bill of exchange by the defendant having been given in New York, the contract was not to be regulated by the laws of that State. This question was not brought before the court by the certificate of division, and the discussion of the point by the counsel of the defendant is therefore omitted.

Mr. Dana declined arguing the question 10*] whether, by the laws of the State of New York, the defense set up by the defendant would have been admissible, as he did not suppose it arose, properly, upon the certificate of division.

He thought the judges did not in fact divide upon that point; but, on the contrary, they gave judgment on a case made by the plaintiff, to set aside the verdict for defendant; and

well to apply the decisions of the courts of this State, as the statutes, to cases which come before this court.

It was necessary to adopt some system or code of law for the administration of justice, by the newly erected courts of the United States.

These courts were anomalous in character, created by statute; under the general provision of the Constitution of the United States, limited in jurisdiction to certain subjects; and without rules of decision in the cases that would arise.

To have attempted to create a code of laws by legislative enactment, would have been without present avail to the courts; and even with the aid of future experience and after years of labor, could not be expected to be perfect.

The alternative was to adopt an existing system of laws. The common law was sufficiently complete, and would have furnished rules of decision for all cases, as well as modes of judicial proceedings; but it would have then been one system of law in the federal courts, for the whole United States. It may be questioned whether the law of the place of the contract, although a principle recognized by the common law, would have had effect in reference to the several States. That principle has reference to a foreign contract. But the territorial limit of the jurisdiction of the federal courts [*11 would be one country, and subject to one law. Wherever within that limit the cause of action might arise, it would be subject to the same administration of law by these courts when resorted to for the purpose of enforcing the right.

This would have led to perpetual confliction between the State and federal courts.

Another objection would be, that the common law, however perfect in its structure, still had many peculiarities not adapted to the condition of things in this counrty, and requiring to be modified to meet the exigencies of an enterprising people. Such modification had in fact taken place in all the States, in all of which, at least those having an English origin, the common law had been adopted or rather inherited. Instead, therefore, of the entire body of the common law, with all its peculiarities, it could be adopted as modified by the States, and by 80 doing, the federal courts would be made to harmonize with the State tribunals, and the law of the place of contract be preserved.

If the phraseology of the section in question be examined with reference to the whole subject that Congress was to provide for, it will be found substantially to express all that was necessary for the adoption of the State laws to the