Swift v. Tyson

Petitioner
John Swift
Respondent
George W. Tyson
Petitioner's Claim
In a federal case based on diversity jurisdiction, the common law of the locus state should govern the tender of a negotiable instrument, not common law developed by a federal court.
Chief Lawyer for Petitioner
Fessenden
Chief Lawyer for Respondent
Dana
Justices for the Court
Henry Baldwin, John Catron, Peter Vivian Daniel, John McKinley, John McLean,Joseph Story (writing for the Court), Roger Brooke Taney, Smith Thompson, James Moore Wayne
Justices Dissenting
None
Place
Washington, D.C.
Date of Decision
January 1842
Decision
In a federal case based on diversity jurisdiction, a federal court has the power to make its own decisions, in the absence of a controlling state statute.
Significance
The decision allowed federal courts hearing civil cases based on diversity jurisdiction to create their own body of common law. Diversity jurisdiction isa special way for a federal court to gain jurisdiction over a case. Generally, federal courts hear only matters of federal concern. However, they can preside over a case that concerns state law if the parties to the case live in different states and the controversy involves a dollar figure that exceeds a minimum threshold amount.
The Need For a Uniform System of Commerce
In the mid-1800s, the United States was still a young country in the processof developing and expanding. One of the major economic problems the United States was encountering was the lack of a uniform system of commercial laws, including the laws on negotiable instruments--any document in which one party promises to pay either money or goods to another party. When a negotiable instrument is issued in a commercial situation, it is called "commercial paper."In the 1830s, the laws on commercial paper varied from state to state, so that commercial paper valid in one state might be worthless in a different state.
On 1 May 1836, George W. Tyson bought land in Portland, Maine, from Jairus S.Keith and Nathaniel Norton. Tyson drew up a bill of exchange worth $1,540.30and gave it to Norton. Norton later assigned the bill of exchange to John Swift to satisfy a debt that he owed to Swift. When Swift tried to redeem the bill of exchange, Tyson refused to pay, claiming that he had been defrauded byKeith and Norton, who did not own the property they had sold to him. Swift sued Tyson in a federal court in New York.
The common law (law of the courts rather than statutory law created through legislation) of the day prohibited the assignment of a bill of exchange, thatis to say an order for a third party to pay a debt between two others. Statutory law is the primary authority in any case because a democratic system requires that laws be made by elected officials. However, not all disputes are covered by statutes, and statutes often must be amplified and construed: in such cases, the opinions of courts create laws that fill in the blanks left by statutes. At the time of the Swift case, a federal court sitting in diversity jurisdiction was, under judicial interpretation of Section 34 of the Judiciary Act of 1789, obliged to follow the statutory and common laws of thestate in which it was sitting.
At trial, Swift argued that Tyson was liable for the bill of exchange, and that such a bill should be considered assignable. Tyson countered that, under New York common law, the assignment of the bill of exchange by Norton was invalid. The federal court, Tyson argued further, was obliged under Section 34 ofthe Judiciary Act of 1789 to follow the laws of New York and invalidate theassignment.
At the time, New York City was fast developing into the country's financial hub. Although Swift did not have the law of New York on his side, he did enjoythe support of business leaders concerned with growing the nation's economy.If New York insisted on retaining its strict laws prohibiting the assignmentof negotiable instruments, the argument went, interstate transactions wouldcease and the national economy would suffer. The federal judges in New York were divided on the issue, and they certified the matter to the U.S. Supreme Court, which unanimously sided with Swift.
Prior to the Swift decision, under the Judiciary Act, federal courts were to use the law of the state when they were sitting on a case involving state law. At the heart of the Swift case was the definition of the word"laws." Tyson argued that "laws" included common law made by a state's courts. Swift countered that "laws" was only meant to describe statutory laws. Since the New York law forbidding the assignment of a bill of exchange was a lawmade by the New York courts, Swift maintained, the federal court was not obliged to enforce it. The High Court agreed. Common laws "are, at most, only evidence of what laws are, and are not, of themselves, laws," declared JusticeStory, writing for the majority.
Having decided that the federal courts may create their own federal common law in the absence of a controlling state statute, the Court proceeded to holdfor Swift in the case. Specifically, the Court held that federal common law allowed the assignment of commercial papers. The Court observed that England followed a similar course on negotiable instruments, noted the benefits to both commercial debtors and commercial creditors, and found no reason to take adifferent approach. Justice Story wrote,

It is for the benefit andconvenience 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.

Impact
The Swift case made it possible for federal courts to attempt to create a uniform set of laws for commercial papers. The decision made it safe forpersons engaged in interstate commerce to assign commercial paper, and the national economy grew. However, the decision had drastic, unintended consequences on the U.S. court system. The notion that a federal common law on commercial paper existed was illusory, as federal judges sitting on such cases merelydecided cases based on their own particular views. Moreover, the decision encouraged "forum shopping," which is a search for the most favorable court tohear a case. For example, in Black & White Taxicab & Transfer Co.v. Brown & Yellow Taxicab * Transfer Co. (1928), a taxi company wanted to contract with a bus company to provide exclusive service for the bus company's terminal. Realizing that such a contract was illegal under Kentucky law but not illegal under the law created by the area's federal courts, the company moved to Tennessee for the sole purpose of gaining diversity jurisdiction and ensuring that the case went to federal court. Such maneuvers allowed businesses to circumvent state laws. In 1938, after enduring years of criticism, the Swift decision was reversed and laid to rest by the High Court in Erie R. Co. v. Tompkins. The Swift decision's highest purpose--encouraging the formation of a uniform set of laws governing commercial transactions--was realized one-half century later by the National Conference ofCommissioners on Uniform States Laws (NCCUSL). The first set of uniform rulescrafted by the NCCUSL and intended for adoption by all the states was the Uniform Negotiable Instruments Act, published in 1896.
Related Cases

• Black & White Taxicab & Transfer Co. v. Brown & Yellow Taxicab & Transfer Co., 276 U.S. 518 (1928).
  
• Erie R. Co. v. Tompkins, 304 U.S. 64 (1938).