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.
The thirty-fourth section of the Judiciary Act of 1789, which
declares
"[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,"
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
Page 41 U. S. 2
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.
The defendant then offered to prove that the bill of exchange
was accepted by him as part consideration for the purchase of
certain lands in the state of Maine, of which Keith & Norton,
the drawers of the bill, represented themselves to be the owners,
and represented them to be of great value, made certain
estimates
Page 41 U. S. 3
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.
Page 41 U. S. 14
STORY, Justice, delivered the opinion of the court.
This cause comes before us from the circuit court of the
southern district of New York upon a certificate of division of the
judges of that court. The action was brought by the plaintiff,
Swift, as indorsee, 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 $1,540.30, payable six months after date,
and grace, drawn by one Nathaniel Norton and one Jairus S. Keith
upon and accepted by Tyson, at the city of New York, in favor of
the order of Nathaniel Norton, and by Norton indorsed to the
plaintiff. The bill was dishonored at maturity.
At the trial, the acceptance and indorsement of the bill were
admitted, and the plaintiff there rested his case. The defendant
then introduced in evidence the answer of Swift to a bill of
discovery by which it appeared that Swift took the bill, before
it
Page 41 U. S. 15
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.
There is no doubt, that a
bona fide holder of a
negotiable instrument, for a valuable consideration, without any
notice of facts which impeach 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 these facts,
and 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
fundamentals of the law, and requires no authority or reasoning to
be now brought
Page 41 U. S. 16
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.
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 preexisting debt, and the only real
question in the cause is whether, under the circumstances of the
present case, such a preexisting 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 general
principles, as by the express provisions of the 34th section of the
judiciary act of 1789, ch. 20. And then it is further contended
that, by the law of New York, as thus expounded by its courts, a
preexisting 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. 289, the supreme court of New
York appear to have held that a preexisting debt was a sufficient
consideration to entitle a
bona fide holder, without
notice, to recover the amount of a note indorsed 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
Page 41 U. S. 17
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 preexisting
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, Com. § 44,
p. 81. The decision in the case of
Bay v. Coddington was
afterwards affirmed in the court of errors, 20 Johns. 637, and the
general reasoning of the chancellor was fully sustained. There
were, indeed, peculiar circumstances in that case which the Court
seems 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
indorser, 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 preexisting debt was a valuable
consideration sufficient to protect the holders, and others again
insisting that a preexisting 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 state that a preexisting debt was not a
sufficient consideration to shut out the equities of the original
parties in favor 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
Rosa v. Brotherson, 10 Wend. 85;
Ontario Bank v. Worthington, 12 Wend. 593, and
Payne
v. Cutler, 13 Wend. 605, are directly in point. But the more
recent cases
Bank of Salina v. Babcock, 21 Wend. 490, and
Bank of Sandusky v. Scoville, 24 Wend. 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 say 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
Page 41 U. S. 18
that the court of errors have not pronounced any 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 New 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 34th section of the judiciary act of
1789, 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 essential, 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, of 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 incorrect. The laws of a state are more
usually understood to mean the rules and enactments promulgated by
the legislative authority thereof, or long-established local
customs having the force of laws. In all the various cases which
have hitherto come before us for decision, this court have
uniformly supposed that the true interpretation of the 34th 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 titles to
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. 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
Page 41 U. S. 19
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.
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 preexisting 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 has 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 preexisting debt
Page 41 U. S. 20
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.
This question has been 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 preexisting 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 Wheat. 66,
15 U. S. 70,
15 U. S. 73, and
Townsley v.
Sumrall, 2 Pet. 170,
27 U. S. 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 Mierop, 3 Burr. 1664, the very point was made, and
the objection was overruled. That, indeed, was a case of far more
stringency
Page 41 U. S. 21
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.
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 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.
Page 41 U. S. 22
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.
Page 41 U. S. 23
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 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.
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 agreeable 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 & Keith and the defendant; and that the evidence
Page 41 U. S. 24
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.
