Swift v. Tyson

In the mid-1800s, the United States was still a young country in the process of 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 $1,540.30 and 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 by Keith 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, that is 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 the state 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 of the Judiciary Act of 1789 to follow the laws of New York and invalidate the assignment.

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 enjoy the support of business leaders concerned with growing the nation's economy. If New York insisted on retaining its strict laws prohibiting the assignment of negotiable instruments, the argument went, interstate transactions would cease 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 law made 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 Justice Story, 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 hold for 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 a different approach. Justice Story wrote,

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.