1. The judgment in an action brought by the holder of negotiable
paper against the endorsers is not a bar to his subsequent action
against the maker, who was not notified of the pendency of the
first action.
2. An estoppel by judgment is equally conclusive upon all the
parties to the action and their privies, and may not be invoked or
repudiated at the pleasure of one of them as his interest may
require.
3. The transfer by endorsement to a creditor of negotiable paper
before maturity merely as security for an antecedent debt, although
it is without his express agreement for indulgence, is not an
improper use of such paper, and is as much in the usual course of
commercial business as its transfer in payment of the debt. In
neither case is the
bona fide holder affected by equities
or defenses between prior parties of which he had no notice.
4. The courts of the United States are not controlled by the
decisions of state courts on questions of general commercial law.
Swift v. Tyson,
16 Pet. 1, and
Oates v. National Bank, 100 U.
S. 239, reaffirmed.
This was an action by The National Bank of the Republic of New
York against The Brooklyn City and Newtown Railroad Company.
The case, as made by an agreed statement of facts, is this:
The company, a corporation organized under the laws of New York,
executed, at Brooklyn, in that state, May 9, 1873, its promissory
note for the sum of $5,000, payable four months after date to the
order of William V. LeCount, its treasurer, at the Atlantic State
Bank of Brooklyn. It was endorsed in blank, first by him and then
by Palmer & Co., a firm composed of Thomas Palmer, Jr., and
Anson S. Palmer, the former being the president and the latter the
financial agent of the company, and together owning the larger
portion of its stock. It was made for the purpose only of raising
money thereon for the company. Neither LeCount nor Palmer &
Co.
Page 102 U. S. 15
received any consideration for their respective endorsements.
The note thus endorsed was, with others, placed by the company in
the hands of Hutchinson & Ingersoll, a firm of note brokers in
Wall Street, for negotiation and sale.
Prior to the execution of the note, Hutchinson & Ingersoll
had frequently borrowed money from the bank. They, however, kept no
account, and had no transactions with it, other than those to which
reference will now be made.
In the month of October, 1872, the bank first made them a call
loan at seven percent interest, of $25,000, on collaterals.
Subsequently, in 1873, it made to them other call loans on
collaterals, at the same rate of interest, as follows: March 11,
$15,000; March 15, $10,000; April 11, $10,000; May 16, $10,000; May
20, $20,000; May 23, $10,000; June 4, $15,000; June 6, $12,000;
June 12, $10,000; June 19, $36,000; and July 11, $10,000. Each of
these loans was a separate one upon a particular and distinct lot
of collaterals. Hutchinson & Ingersoll were in the habit of
borrowing money from various banks and from individuals or firms
upon specific lots of collaterals.
The loan of $36,000 on 19th June, 1873, was upon several notes
as collateral security, among them the above-described note for
$5,000, executed May 9, 1873. All the loans by the bank prior to
the one of $36,000 had been paid off before that loan was made.
The loan of $10,000 on 11th July, 1873, was upon the following
notes as collateral security: two notes of Howes, Hyatt, & Co.
for $2,605.98 and $3,540.15, and two of H. L. Ritch & Co. for
$3,320.17 and $2,146.92.
On the 22d of July, 1873, Howes, Hyatt, & Co. having become
insolvent, Hutchinson & Ingersoll executed and delivered to the
bank, at its request, antedated to June 19, 1873 (which was the
date of the $36,000 loan), a written instrument whereby they agreed
with the bank
"that all securities, bonds, stocks, things in action, or other
property or evidences of property whatsoever, which have been or
may at any time hereafter be deposited or left by us or on our
account, with said bank, whether specifically pledged or not, may
be held by said bank, and shall be deemed to by and are hereby
pledged
Page 102 U. S. 16
as security for the payment of any and every indebtedness,
liability, or engagement on our part, held by said bank, and that
on the nonpayment, when due and payable, of any sum or sums of
money which have been or may hereafter be by said bank lent, paid,
or advanced to or for the account or use of us, or for which we are
or may become in any way liable or indebted to said bank, the said
bank, or its president or cashier, may immediately thereupon, or at
any time thereafter, sell, &c., . . . and apply the net
proceeds of sale to the payment of any sum or sums due and payable
from us to said bank, and hold any surplus of such net proceeds,
together with any and all remaining securities, property or
evidences of property, then held by said bank and not sold, as
security for the payment of any and all other of our then existing
and remaining liabilities and engagements to said bank."
When that writing was executed, no agreement was made to extend
the loan, or to refrain from calling it in.
The bank knew that Hutchinson & Ingersoll were note brokers,
but until Aug. 8, 1873, had no knowledge or information of the
connection of the Palmers with the railroad company, or of the
circumstances attending the making or endorsement of the note in
suit, or of the purpose thereof, or of any relations, dealings, or
communication between Hutchinson & Ingersoll, and the parties
to the note (except that they knew Hutchinson & Ingersoll to be
note brokers), or that the note was anything else than ordinary
business paper, or that there was any question as to the right of
said Hutchinson & Ingersoll to pledge or negotiate it. Nor did
the railroad company know or suspect that the firm had parted with
or hypothecated said note until Aug. 15, 1873.
The company, by reason of certain advances made to its use by
Hutchinson & Ingersoll, became indebted to the latter, on the
8th of August, 1873, in the sum of $600. On the fifteenth day of
August, 1873, it tendered that sum to the firm and demanded a
return of the $5,000 note. During the same month, it made a like
tender to the bank, and demanded the note.
The $36,000 loan was paid in full out of the collaterals given
to secure its payment, as they respectively matured, without
resorting to the note in suit, the first payment of $4,580
being
Page 102 U. S. 17
July 22, 1873, and the last payment being April 4, 1874, leaving
the $5,000 note in the bank's possession.
Hutchinson & Ingersoll are insolvent. The collaterals
collected exceeded the $36,000 loan by $2,403.61.
On the $10,000 loan of July 11, 1873, there was a balance due
the bank, Nov. 21, 1876, of $5,136.68 after exhausting all
collaterals in its possession which had been specially pledged to
secure that loan, and crediting the amount, with interest
collected, of a certain judgment to be now referred to.
In 1874, the bank sued Palmer & Co., as endorsers upon the
note in suit, in the supreme court of New York. The case was sent
to a referee, who rendered judgment in favor of the bank for $601,
which seems to be the amount due from the railroad company to
Hutchinson & Ingersoll. That judgment, with the costs, was
satisfied.
The present action is by the bank against the railroad company
to recover the amount of the $5,000 note executed by the latter on
the 9th of May, 1873, and placed in the hands of Hutchinson &
Ingersoll for sale for the benefit of the company. It was agreed
that if the company is liable to the bank upon that note, the
amount would be as of Nov. 21, 1876, $5,136.68.
The court below gave judgment for the bank, and the company sued
out this writ.
Page 102 U. S. 21
MR. JUSTICE HARLAN, after stating the facts, delivered the
opinion of the Court.
The first proposition of the plaintiff in error is that there
has been a final determination by a court of competent
jurisdiction, between the same parties of their privies, upon the
same subject matter as that here in controversy. This contention
rests upon the judgment of the supreme court of New York, in the
action instituted by the bank against Palmer & Co., as the
endorsers of the note in suit.
The judgment in the state court clearly constitutes no bar to
the present action. Personal judgments bind only parties and their
privies. The railroad company was not a party to the separate
action against Palmer & Co., nor did it receive notice from the
latter of the pendency of that suit. It was therefore in no manner
affected by the judgment. Had the company received such notice in
due time, it would perhaps, although not technically a party to the
record, have been estopped, at least as between it and it
accommodation endorsers, from saying that the latter were not bound
to pay the judgment, if obtained without fraud or collusion. Being,
however, an entire stranger to the record, it had no opportunity or
right, in that proceeding, to controvert the claim of the bank, to
control the defense, to introduce or cross examine witnesses, or to
prosecute a writ of error to the judgment.
If, in the action against Palmer & Co., the bank had
obtained judgment for the full amount of the note, and, being
unable to collect it, had sued the railroad company, the latter
would not have been precluded by the judgment in that action, to
which it was not a party, and of the pendency of which it had not
been notified, from asserting any defense it might have against the
note. This being so, it results that the company cannot plead
Page 102 U. S. 22
the judgment in the state court as a bar to this action. An
estoppel, arising out of the judgment of a court of competent
jurisdiction, is equally conclusive upon all the parties to the
action and their privies. It may not be invoked or repudiated at
the pleasure of one of the parties, as his interest may happen to
require.
The liability of the maker and endorsers was not joint, but
several, and therefore a judgment in an action against the
endorsers upon the contract of endorsement could not bar a separate
action by the bank against the maker -- certainly not where the
maker was without notice from the endorsers of the pendency of the
action against them.
The next proposition involves the right of the railroad company
to show, as against the bank, that the note was executed and
delivered to Hutchinson & Ingersoll for the purpose only of
raising money upon it for the company, and that consequently they
had no authority to pledge it as collateral security for their own
indebtedness to the bank. It will have been observed, from the
statement of facts, that the note in suit was among those pledged
to the bank as security for the call loan of $36,000, made June 19,
1873; that Howes, Hyatt, & Co., whose notes had been pledged of
$10,000, made June 19, 1873, of $10,000, made June 19, 1973, having
become insolvent, Hutchinson & Ingersoll, July 22, 1873, at the
request of the bank, executed the writing, dated June 19, 1873,
whereby they pledged all securities, bonds, stocks, things in
action, or other property theretofore deposited with the bank,
whether specifically or not, as security for the payment of any and
every indebtedness, liability, or engagement held by the bank, for
which they were, or should become, in any way liable. Although,
therefore, the call loan of $36,000 was extinguished, without
resorting to the note in suit, that note, under the agreement made
July 22, 1873, stood pledged as collateral security also for the
$10,000 call loan of July 11, 1873.
The bank, we have seen, received the note, before its maturity,
endorsed in blank, without any express agreement to give time, but
without notice that it was other than ordinary business paper, or
that there was any defense thereto, and in ignorance of the
purposes for which it had been executed and
Page 102 U. S. 23
delivered to Hutchinson & Ingersoll. Did the bank, under
these circumstances, become a holder for value, and as such
entitled, according to the recognized principles of commercial law,
to be protected against the equities or defenses which the railroad
company may have against the other parties to be note?
This question was carefully considered, though perhaps it was
not absolutely necessary to be determined, in
Swift v.
Tyson, 16 Pet. 1. After stating that the law
respecting negotiable instruments was not the law of a single
country only, but of the commercial world, the Court, speaking by
Mr. Justice Story, said:
"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
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 is according to the known usual course of trade
and business. And why, upon principle,"
continued the court,
"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
Page 102 U. S. 24
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."
After a review of the English cases, the Court proceeded:
"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."
The opinion in that case has been the subject of criticism in
some courts because it seemed to go beyond the precise point
necessary to be decided, when declaring that the
bona fide
holder of a negotiable note, taken as collateral security for an
antecedent debt, was protected against equities existing between
the original or antecedent parties. The brief dissent of Mr.
Justice Catron was solely upon that ground, which renders it quite
certain that the whole court was aware of the extent to which the
opinion carried the doctrines of the commercial law upon the
subject of negotiable instruments transferred or delivered as
security for antecedent indebtedness. In the judgment of this
Court, as then constituted (Mr. Justice Catron alone excepted), the
holder of a negotiable instrument, received before maturity, and
without notice of any defense thereto, is unaffected by the
equities or defenses of antecedent parties, equally whether the
note is taken as collateral security for or in payment of previous
indebtedness. And we understand the case of
McCarty v.
Roots, 21 How. 432, to affirm
Swift v.
Tyson upon the point now under consideration. It was there
said: "Nor does the fact that the bills were assigned to the
plaintiff as collateral security for a preexisting debt impair the
plaintiff's right to recover." P.
62 U. S. 438.
"The delivery of the
Page 102 U. S. 25
bills to the plaintiff as collateral security for a preexisting
debt, under the decision of Swift v. Tyson, was legal." P.
62 U. S.
439.
It may be remarked in this connection that the courts holding a
different rule have uniformly referred to an opinion of Chancellor
Kent in
Bay v. Coddington, 5 Johns. (N.Y.) Ch. 54,
reaffirmed in
Coddington v. Bay, 20 Johns. (N.Y.) 637.
There is, however, some reason to believe that the views of that
eminent jurist were subsequently modified. In the later editions of
his Commentaries (vol. iii. p. 81, note
b), prepared by
himself, reference is made to
Stalker v. McDonald, 6 Hill
(N.Y.) 93, in which the principles asserted in
Bay v.
Coddington were reexamined and maintained in an elaborate
opinion by Chancellor Walworth, who took occasion to say that the
opinion in
Swift v. Tyson was not correct in declaring
that a preexisting debt was, of itself, and without other
circumstances, a sufficient consideration to entitle the
bona
fide holder, without notice, to recover on the note, when it
might not, as between the original parties, be valid. But
Chancellor Kent adds: "Mr. Justice Story, on Promissory Notes, p.
215, note 1, repeats and sustains the decision in
Swift v.
Tyson, and I am inclined to concur in that decision as the
plainer and better doctrine." Of course it did not escape his
attention that the court in
Swift v. Tyson declared the
equities of prior parties to be shut out as well when the note was
merely pledged as collateral security for a preexisting debt, as
when transferred in payment or extinguishment of such debt.
According to the very general concurrence of judicial authority
in this country as well as elsewhere, it may be regarded as settled
in commercial jurisprudence -- there being no statutory regulations
to the contrary -- that where negotiable paper is received in
payment of an antecedent debt; or where it is transferred, by
endorsement, as collateral security for a debt created, or a
purchase made, at the time of transfer; or the transfer is to
secure a debt, not due, under an agreement express or to be clearly
implied from the circumstances, that the collection of the
principal debt is to be postponed or delayed until the collateral
matured; or where time is agreed to be given and is actually given
upon a debt overdue, in consideration of the transfer of negotiable
paper as collateral security
Page 102 U. S. 26
therefor, or where the transferred note takes the place of other
paper previously pledged as collateral security for a debt, either
at the time such debt was contracted or before it became due -- in
each of these cases the holder who takes the transferred paper,
before its maturity, and without notice, actual or otherwise, of
any defense thereto, is held to have received it in due course of
business, and, in the sense of the commercial law, becomes a holder
for value, entitled to enforce payment, without regard to any
equity or defense which exists between prior parties to such
paper.
Upon these propositions there seems at this day to be no
substantial conflict of authority. But there is such conflict where
the note is transferred as collateral security merely, without
other circumstances, for a debt previously created. One of the
grounds upon which some courts of high authority refuse, in such
cases, to apply the rule announced in
Swift v. Tyson is
that transactions of that kind are not in the usual and ordinary
course of commercial dealings. But this objection is not sustained
by the recognized usages of the commercial world, nor, as we think,
by sound reason. The transfer of negotiable paper as security for
antecedent debts constitutes a material and an increasing portion
of the commerce of the country. Such transactions have become very
common in financial circles. They have grown out of the necessities
of business, and, in these days of great commercial activity, they
contribute largely to the benefit and convenience both of debtors
and creditors. Mr. Parsons, in his treatise on the Law of
Promissory Notes and Bills of Exchange, discusses the general
question of the transfer of negotiable paper under three aspects --
one where the paper is received as collateral security for
antecedent debts. We concur with the author
"that when the principles of the law merchant have established
more firmly and unreservedly their control and their protection
over the instruments of the merchant, all of these transfers (not
affected by peculiar circumstances) will be held to be regular, and
to rest upon a valid consideration."
1 Parsons, Notes and Bills (2d ed.) 218.
Another ground upon which some courts have declined to sanction
the rule announced in
Swift v. Tyson is that upon the
Page 102 U. S. 27
transfer of negotiable paper merely as collateral security for
an antecedent debt, nothing is surrendered by the endorsee -- that
to permit the equities between prior parties to prevail deprives
him of no right or advantage enjoyed at the time of transfer,
imposes upon him no additional burdens, and subjects him to no
additional inconveniences.
This may be true in some, but it is not true in most cases, nor,
in our opinion, is it ever true when the note, upon its delivery to
the transferee, is in such form as to make him a party to the
instrument and impose upon him the duties which, according to the
commercial law, must be discharged by the holder of negotiable
paper in order to fix liability upon the endorser.
The bank did not take the note in suit as a mere agent to
receive the amount due when it suited the convenience of the debtor
to make payment. It received the note under an obligation imposed
by the commercial law to present it for payment and give notice of
nonpayment in the mode prescribed by the settled rules of that law.
We are of opinion that the undertaking of the bank to fix the
liability of prior parties by due presentation for payment and due
notice in case of nonpayment -- an undertaking necessarily implied
by becoming a party to the instrument -- was a sufficient
consideration to protect it against equities existing between the
other parties of which it had no notice. It assumed the duties and
responsibilities of a holder for value, and should have the rights
and privileges pertaining to that position. The correctness of this
rule is apparent in cases like the one now before us. The note in
suit was negotiable in form, and was delivered by the maker for the
purpose of being negotiated. Had it been regularly discounted by
the bank at any time before maturity and the proceeds either placed
to the credit of Hutchinson & Ingersoll or applied directly to
the discharge,
pro tanto, of any one of the call loans
previously made to them, it would not be doubted that the bank
would be protected against the equities of prior parties. Instead
of procuring its formal discount, Hutchinson & Ingersoll used
it to secure the ultimate payment of their own debt to the bank. At
the time the written agreement of July 22, 1873, was executed, by
which this note, with others,
Page 102 U. S. 28
was pledged as security for any debt then or thereafter held
against them, the bank had the right to call in the $10,000 loan --
that is, to require immediate payment. The securities upon which
that loan rested had become in part worthless, and it is evident
that but for the deposit of additional collateral securities, the
bank would have called in the loan or resorted to its rightful
legal remedies for the enforcement of payment. It was, under the
circumstances, the duty of the debtors to make such payment or to
secure the debt. It was important to them, and was in the usual
course of commercial transactions, to furnish such security. If the
bank was deceived as to the real ownership of the paper or as to
the purposes of its execution and delivery to Hutchinson &
Ingersoll, it was because the railroad company entrusted it to
those parties in a form which indicated that the latter were its
rightful holders and owners, with absolute power to dispose of it
for any purpose they saw proper.
Our conclusion, therefore, is that the transfer, before
maturity, of negotiable paper as security for an antecedent debt
merely, without other circumstances, if the paper be so endorsed
that the holder becomes a party to the instrument, although the
transfer is without express agreement by the creditor for
indulgence, is not an improper use of such paper and is as much in
the usual course of commercial business as its transfer in payment
of such debt. In either case, the
bona fide holder is
unaffected by equities or defenses between prior parties of which
he had no notice. This conclusion is abundantly sustained by
authority. A different determination by this Court would, we
apprehend, greatly surprise both the legal profession and the
commercial world.
See Bigelow's Bills and Notes 502
et
seq.; 1 Daniel, Neg.Inst. (2d ed.) c. 25, secs. 820 833;
Story, Promissory Notes, secs. 186, 195 (7th ed.), by Thorndyke; 1
Parsons, Notes and Bills (2d ed.) 218, sec. 4, c. 6; and Redfield
& Bigelow's Leading Cases upon Bills of Exchange and Promissory
Notes, where the authorities are cited by the authors.
It is, however, insisted that by the course of judicial decision
in New York, negotiable paper transferred merely as collateral
security for an antecedent debt is subject to the equities
Page 102 U. S. 29
of prior parties existing at the time of transfer; that the bank
being located in New York, and the other parties being citizens of
the same state, and the contract having been there made, this Court
is bound to accept and follow the decision of the state court,
whether it meets our approval or not. This contention rests upon
the provision of the statute which declares that
"The laws of the several states, except where the Constitution,
treaties, or statutes of the United States 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."
It is undoubtedly true that if we should apply to this case the
principles announced in the highest court of the State of New York,
a different conclusion would have been reached from that already
announced. That learned court has held that the holder of
negotiable paper transferred merely as collateral security for an
antecedent debt, nothing more, is not a holder for value within
those rules of commercial law which protect such paper against the
equities of prior parties.
The question here presented is concluded by our former
decisions.
We remark at the outset that the section of the statute of the
United States already quoted is the same as the thirty-fourth
section of the original Judiciary Act.
In
Swift v. Tyson, supra, the contention was that this
Court was obliged to follow the decisions of the state courts in
all cases where they apply. But this Court said:
"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
Page 102 U. S. 30
cases which have hitherto come before us for decision this Court
have uniformly supposed that the true interpretation of the thirty
fourth 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 has never 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 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."
In
Carpenter v. The Providence
Washington Insurance Co., 16 Pet. 495, decided at
the same term with
Swift v. Tyson, it was necessary to
determine certain questions in the law of insurance. The Court
said:
"The questions under our consideration are questions of general
commercial law, and depend upon the construction of a contract of
insurance which is by no means local in its character or regulated
by any local policy or customs. Whatever respect, therefore, the
decisions of state
Page 102 U. S. 31
tribunals may have on such a subject, and they certainly are
entitled to great respect, they cannot conclude the judgment of
this Court. On the contrary, we are bound to interpret this
instrument according to our own opinion of its true intent and
objects, aided by all the lights which can be obtained from all
external sources whatsoever, and if the result to which we have
arrived differs from these learned state courts, we may regret it,
but it cannot be permitted to alter our judgment."
In
Oates v. National Bank, 100 U.
S. 239, we had before us the precise question now under
consideration. That was an action by a national bank, located in
Alabama, against a citizen of that state, upon a promissory note
there executed and negotiated. It was contended that the decision
of the Supreme Court of Alabama should be accepted as the law
governing the rights of parties. We, however, held -- referring to
some of our previous decisions -- that the federal courts were not
bound by the decisions of the state courts
"upon questions of general commercial law. . . . We have already
seen that the statutes of Alabama placed under the protection of
the commercial law promissory notes payable in money at a certain
designated place; but how far the rights of parties here are
affected by the rules and doctrines of that law is for the federal
courts to determine, upon their own judgment as to what these rules
and doctrines are."
To this doctrine, which received the approval of all the members
of this Court when first announced, we have, as our decisions show,
steadily adhered. We perceive no reason for its modification in any
degree whatever. We could not infringe upon it, in this case,
without disturbing or endangering that stability which is essential
to be maintained in the rules of commercial law. The decisions of
the New York court, which we are asked to follow in determining the
rights of parties under a contract there made, are not in
exposition of any legislative enactment of that state. They express
the opinion of that court, not as to the rights of parties under
any law local to that state, but as to their rights under the
general commercial law existing throughout the Union, except where
it may have been modified or changed by some local statute. It is a
law not peculiar to one state, or dependent upon local
authority,
Page 102 U. S. 32
but one arising out of the usages of the commercial world.
Suppose a state court, in a case before it, should determine what
were the laws of war as applicable to that and similar cases. The
federal courts, sitting in that state, possessing, it must be
conceded, equal power with the state court in the determination of
such questions, must, upon the theory of counsel for the plaintiff
in error, accept the conclusions of the state court as the true
interpretation, for that locality, of the laws of war, and as the
"law" of the state in the sense of the statute which makes the
"laws of the states rules of decision in trials at common law." We
apprehend, however, that no one would go that far in asserting the
binding force of state decisions upon the courts of the United
States when the latter are required, in the discharge of their
judicial functions, to consider questions of general law, arising
in suits to which their jurisdiction extends. To so hold would be
to defeat one of the objects for which those courts were
established, and introduce infinite confusion in their decisions of
such questions. Further elaboration would seem to be
unnecessary.
Judgment affirmed.
MR. JUSTICE MILLER and MR. JUSTICE FIELD dissented.
MR. JUSTICE CLIFFORD and MR. JUSTICE BRADLEY, concurring in the
judgment, delivered the following opinions:
MR. JUSTICE CLIFFORD.
Commercial law is a system of jurisprudence acknowledged by all
maritime nations, and upon no subject is it of more importance that
there should be, as far as practicable, uniformity of decision
throughout the world.
Bills of exchange and promissory notes are commercial paper in
the strictest sense, and as such must ever be regarded as favored
instruments, as well on account of their negotiable quality, as
their universal convenience in mercantile affairs. Everywhere the
rule is that they may be transferred by endorsement, or when
endorsed in blank or made payable to bearer they are transferable
by mere delivery. International regulations encourage their use as
a safe and convenient medium for the settlement of balances among
mercantile men
Page 102 U. S. 33
of different nations, and any course of judicial decision
calculated to restrain or impede their full and unembarrassed
circulation for the purposes of foreign or domestic trade would be
contrary to the soundest principles of public policy.
Goodman v.
Simonds, 20 How. 343,
61 U. S.
364.
Sufficient appears to show that the corporation plaintiff became
the holder of the note described in the declaration, and that,
payment being refused, it instituted the present action of
assumpsit to recover the amount. Service having been made, the
defendant appeared and set up several defenses, which are fully
exhibited in its answer filed in the case. Certain proceedings
followed, which it is not necessary to notice, as the parties by
consent waived a jury and submitted the cause to the circuit court
upon an agreed statement of facts. Hearing was had, and the circuit
court rendered judgment in favor of the plaintiff for the amount of
the note and costs of suit, and the defendant sued out the present
writ of error.
Eight errors are assigned, but it will not be necessary to give
the several assignments a separate examination, as the questions
presented do not properly involve more than three material
propositions:
1. That the cause of action is barred by a former recovery in an
action by the plaintiff against the endorsers of the note.
2. That the plaintiff, inasmuch as it holds the note as
collateral security for a preexisting debt, is not a
bona
fide holder of the same within the meaning of the commercial
rule which shuts out proof of equities between the antecedent
parties to the instrument.
3. That by the law of the state the plaintiff, in view of the
facts exhibited in the agreed statement, is not entitled to the
benefit of that rule, and that the law of the state in that regard
furnishes in such a case the rule of decision in the federal
courts.
Special findings were made by the circuit court, from which it
appears that the defendant was the maker of the note, and that it
was payable to the order of its treasurer, by whom it was endorsed
in blank, and that it was also endorsed by the firm of Palmer &
Company, consisting of the president and financial agent of the
corporation defendant.
Enough appears to show that the note was made and endorsed for
the sole purpose of raising money for the use of
Page 102 U. S. 34
the defendant, nothing having been paid to either of the
endorsers for their endorsement. When duly executed and endorsed in
blank, the defendant placed the note with others in the hands of a
firm of note brokers for sale to raise money for its use. Prior to
that, the same note brokers had frequently borrowed money from the
corporation plaintiff; but they did not keep any account with the
bank, and had no other transactions with the same than those set
forth in the findings of the court.
Twelve call loans at seven percent interest were made at
different times by the plaintiff to the note brokers on
collaterals, as specifically enumerated and described in the
findings, each of which was separate and had no reference to any
other, and it appears that each was made upon a separate lot of
collaterals. Two of those loans, to-wit, the one for $36,000, and
the last one, which is for $10,000, will be the subject of special
comment in disposing of the case.
Before the brokers applied for the loan of $36,000, it appears
that they had paid all their previous loans obtained from the
plaintiff, and that they procured the loan upon collaterals, among
which was the note for $36,000 described in the findings. Other
banks or capitalists made loans to these brokers, taking
collaterals as security, and the plaintiff three weeks later loaned
them $10,000 more, taking as security the four notes mentioned in
the findings.
Adequate collaterals were at that time held by the plaintiff for
each of those loans, but it appears that the promisors of one of
the collaterals given for the last loan, within eleven days after
the money was advanced, failed in business and became notoriously
bankrupt, and that knowledge of that fact reached the plaintiff.
Prior to that, it was known that the brokers who negotiated the
loans were insolvent, and the findings show that they, at the
request of the plaintiff, executed and delivered to it the
instrument exhibited in the transcript, in which they agreed that
all securities, bonds, stocks, or other property deposited by them
with the plaintiff might be held by it, and be deemed security for
all their indebtedness to the plaintiff, as more fully set forth in
the findings.
Certain advances were made by the brokers to the defendant,
Page 102 U. S. 35
by reason of which the latter became indebted to them in the sum
of $600, and it appears that the defendant tendered that sum both
to the brokers and the plaintiff, and demanded the return of note
in suit.
Payment in full of the large note was obtained by the plaintiff
out of the collaterals originally deposited with it for that
purpose, and it appears that the moneys collected from those
collaterals exceeded the amount of that loan by the sum of
$2,403.61, so that the entire balance remaining due on the last
loan was $5,906.99.
Process to enforce payment was first sued out against the
endorsers, and in that action the plaintiff recovered judgment in
the sum of $600, which sum, with the costs of suit, was duly paid;
and it appears that the balance due, deducting the collections from
the collaterals and the judgment against the endorsers, is
$5,136.68, for which, with interest and costs, the judgment was
entered in the circuit court.
Judgments rendered in courts of competent jurisdiction are
conclusive between the parties and privies until the same are
reversed or in some manner set aside and annulled.
When a fact has once been tried and decided by a court of
competent jurisdiction, it cannot be again contested between the
same parties or their privies in the same or any other court, if it
appear that the same matter was directly involved in the pleadings
and that the merits of the cause were decided in the first
case.
Parties and privies in such a case are bound by the estoppel,
but the holder of a negotiable bill of exchange or promissory note
may pursue his remedy against the endorsers as well as the
immediate promissory party. Consequently, as stated by Mr. Bigelow,
an endorsee of a bill of exchange or promissory note may sue all
the prior parties concurrently or successively at his election,
subject to the condition that he is entitled to but one
satisfaction. Bigelow, Estoppel (2d ed.) 55;
Bishop v.
Haywood, 4 T.R. 478;
Britten v. Webb, 2 Barn. &
Cress. 483;
Windham v. Wither, 1 Stra. 515;
Burgess v.
Merrill, 4 Taunt. 468;
Farwell v. Hilliard, 3 N.H.
318;
Porter v. Ingraham, 10 Mass. 88.
Authorities to show that the holder in such a case is not
Page 102 U. S. 36
estopped to sue the maker because he has recovered judgment
against the endorser are numerous and decisive.
Russell &
Erwin Mfg. Co. v. Carpenter, 5 Hun. (N.Y.) 162; Story,
Promissory Notes (7th ed.), sec. 401;
Pritchard v.
Hitchcock, 6 Man. & G. 151, 201.
Suppose that is so, then it is insisted by the defendant that
the plaintiff is not a
bona fide holder for value in the
usual course of business within the meaning of the commercial
law.
Questions of fact are set at rest by the findings, from which it
appears that the note is payable to the treasurer of the defendant
or order, by whom it was endorsed in blank as well as by the firm,
consisting of the president and financial agent of the company;
that it was placed by the maker in the hands of the brokers for
sale to raise money for the use of the maker, and that the
plaintiff loaned the full amount of the note to the agents of the
defendant and took the note endorsed in blank as collateral
security for the loan before maturity. None of these matters are
disputed, and it is equally and undeniably true that the whole of
the money loaned went into the hands of the defendant, in pursuance
of the arrangement it made with its own agents.
Neither fraud nor mistake is alleged or even suggested in
respect to any one of these matters, from which it follows, as a
necessary legal conclusion, that the plaintiff became the actual
holder of the note in good faith before maturity by delivery from
the agents of the defendant, and that it as such assumed the
responsibility to demand payment of the maker when the note fell
due, and, if not paid, to give the required notice of nonpayment to
the endorsers.
Beyond all question, the findings show that the plaintiff in
good faith became a party to the note described in the declaration
before maturity, and that as such holder it was bound to adopt
proper measures to fix the liability of the endorsers, and that if
it had failed to demand payment of the maker, or to give the
required notice to the endorsers, it would have become liable to
the party from whom it received the note for whatever loss ensued
from such neglect. Such a holder of a foreign bill of exchange, if
not paid at maturity, must see that it is duly protested; and for
the same reason the holder of an inland
Page 102 U. S. 37
bill or negotiable promissory note must see to it that proper
steps are taken, in case of nonpayment by the acceptor or maker, to
fix the liability of parties to the instrument who would otherwise
be discharged.
Securities of a negotiable character may be transferred by
endorsement made at the time they are delivered, or if endorsed in
blank or made payable to bearer, they may be transferred by mere
delivery without any new endorsement. In either case, the holder,
other things being equal, acquires full title to the instrument,
the correct commercial rule being that whoever lawfully and in good
faith becomes the holder of a valid negotiable bill of exchange or
promissory note before maturity, by direct endorsement or by
delivery when endorsed in blank or made payable to bearer, assumes
the responsibility, if not paid when it falls due, of entering
protest or of making demand and giving notice of nonpayment as the
case may require; and that in all cases of such a transfer the
holder, whether he paid cash for the note or made new advances to
the transferror, or accepted it in substitution of prior
collaterals surrendered, or received it in payment of property sold
or of antecedent indebtedness, or as collateral security of a
preexisting debt or any pecuniary liability for the pledgeor, is a
holder for value in the usual course of business within the meaning
of the commercial law, and is unaffected by any equities between
the antecedent parties, provided he took it in good faith and
without notice of anything to impeach the title of the person from
whom it was received.
Authorities everywhere agree at the present time that a
bona
fide holder of a negotiable instrument for a valuable
consideration, without notice of anything which impeaches its
validity, if he takes it under an endorsement made before maturity,
holds the title unaffected by any equities between the antecedent
parties, even though as between them it may be without any legal
validity.
Swift v. Tyson,
16 Pet. 1,
41 U. S. 15.
Instruments of the kind are commercial paper in the strictest
sense, and must ever be regarded as favored securities, on account
of their universal convenience in mercantile transactions and the
settled rule is that transferees of the same hold the instrument
clothed with the presumption that it was negotiated
Page 102 U. S. 38
for value, in the usual course of business, at the time of its
execution, and without notice of any equities between the
antecedent parties to the instrument.
Collins v. Gilbert,
94 U. S. 753.
Possession of such an instrument before maturity, if endorsed in
blank or payable to bearer, is
prima facie evidence that
the holder is the owner and lawful possessor of the same; and
nothing short of proof that he had knowledge, at the time he took
it, of the facts which impeach the title as between the antecedent
parties, not even gross negligence, if unattended with
mala
fides, is sufficient to overcome the effect of that evidence,
or to invalidate the title of the holder supported by that
presumption.
Goodman v. Harvey, 4 Ad. & E. 870;
Goodman v.
Simonds, 20 How. 343,
61 U. S. 365;
Bank v. Leighton, 2 Exch.Rep. 61;
Wheeler v.
Guild, 20 Pick. (Mass.) 545, 550;
Magee v. Badger, 34
N.Y. 247, 249.
Apply that rule in an action by the transferee against the maker
of a negotiable note endorsed in blank, or payable to bearer, and
it is clear that he has nothing to do in the opening of his case
except to prove the signatures to the instrument and introduce the
same in evidence, as the instrument goes to the jury clothed with
the presumption that the plaintiff became the holder of the same
for value at its date in the usual course of business, without
notice of anything to impeach his title.
Pettee v. Prout,
3 Gray (Mass.) 502;
Way v. Richardson, id. 412.
Clothed as the instrument is with the described presumption, the
plaintiff is not bound to give any evidence to show that he gave
value for the same until the other party has clearly proved that
the consideration was illegal, or that the instrument was
fraudulent in its inception, or that it had been lost or stolen
before it came to the possession of the holder.
Fitch v.
Jones, 5 El. & Bl. 238;
Smith v. Braine, 16 Ad.
& E. N.S. 242;
Hall v. Featherstone, 3 H. & N.
282.
Cases arise where the supposed defect or the infirmity of the
title appears on the face of the instrument; and where that is so,
the question whether the party who took it had notice or not is in
general a question of construction, and must be determined by the
court as matter of law.
Andrews v.
Pond,
Page 102 U. S. 39
13 Pet. 65;
Fowler V.
Brantley, 14 Pet. 318;
Brown v. Davis, 3
T.R. 86.
Decided cases of the highest authority support that proposition,
but it is a very different matter when it is proposed to impeach
the title of the holder by proof of facts and circumstances outside
of the instrument itself, as he is then to be affected, if at all,
by what has occurred between other parties. For his own acts he is
plainly responsible, but he may well claim exemption from any
consequences flowing from the acts of others, unless it be first
clearly shown that he had knowledge of such facts and circumstances
at the time he became the holder of the instrument. Actual
knowledge of such facts and circumstances must be proved to defeat
the title of the holder, and the question whether he had such
knowledge or not is a question of fact for the jury, and, like
other questions of
scienter, must be submitted to their
determination.
Endorsers of negotiable securities enjoyed the protection of
that rule for ages before any successful attempt was made to annex
to it any qualification, unless it appeared that the consideration
was illegal, or that the instrument was fraudulent in its
inception, or that it had been lost or stolen before it came to the
possession of the holder.
Hinton's Case, 2 Show. 235;
Anonymous, 1 Salk. 126;
Miller v. Race, 1 Burr.
452;
Grant v. Vaughan, 3
id. 1516;
Peacock v.
Rhodes, 2 Doug. 633;
Lawson v. Weston, 4 Esp. 56.
Throughout the whole period covered by those decisions it was
universally understood that the title of the
bona fide
holder was unaffected by any equities between the antecedent
parties; but it was subsequently decided that if the endorser of
the instrument had no valid title to the same, and that such facts
and circumstances were known to the endorsee, at the time of the
transfer, as would have caused a person of ordinary prudence to
suspect that the endorser had no right to transfer the instrument
or to use the same for his own benefit, then the holder, as against
the acceptor or maker, is not entitled to recover.
Gill v.
Cubitt, 3 Barn. & Cress. 466.
For a brief period, that rule was followed, but it was never
satisfactory, and at the end of twelve years was distinctly
overruled in the tribunal where it was first promulgated.
Page 102 U. S. 40
Goodman v. Harvey, 4 Ad. & E. 870;
Arbouin v.
Anderson, 1 Ad. & E. N.S. 498.
We must hold, said Lord Denman, in the case last cited, that the
owner of a bill of exchange is entitled to recover upon it if he
has come by it honestly, and that that fact is implied
prima
facie by possession, and that, to meet the inference so
raised, fraud, felony, or some such matter must be proved.
Abundant authority to support the proposition that the case
which for a period relaxed that rule has been overruled for more
than half a century is found in the reported cases already cited,
and Mr. Chitty says that the old rule of law, that the holder of a
negotiable security transferable by delivery can give a title,
which he himself does not possess, to a person taking the same
bona fide for value, is by those decisions again re
established in its fullest extent. Chitty, Bills (13th ed.) 257;
Worcester County Bank v. Dorchester & Milton Bank, 10
Cush. (Mass.) 491. Conclusive support to that conclusion is found
in decisions not previously cited and in the text writers of the
highest authority.
Bank of Pittsburgh v.
Neal, 22 How. 96;
Murray v.
Lardner, 2 Wall. 110.
Nothing short of fraud, not even gross negligence, says Mr.
Justice Story, if unattended with
mala fides on the part
of the taker of the instrument, will invalidate his title so as to
prevent him from recovering the amount. Story, Promissory Notes
(7th ed.), sec. 382. Every person, says the same learned author, is
treated in the sense of the rule as a
bona fide holder for
value, not only who has advanced money or other value for it, but
who has received it in payment of a precedent debt, or has a lien
on it, or has taken it as collateral security for a precedent debt,
or for future as well as for past advances. Story on Bills (4th
ed.), sec. 192.
During the period the modified rule referred to was recognized
as good law in the courts of the country where it was first
promulgated, it must be admitted that the courts of several of the
states in our own country accepted the same rule, and that the
pernicious effects resulting from those examples are still to be
seen in some of the more recent state decisions. Attempt was made
at one time to maintain that the holder of a negotiable security,
if he received it as payment of a precedent
Page 102 U. S. 41
debt, could not be regarded as a
bona fide holder for
value in the usual course of business, even though he took it
without notice of any defect in the title of the transferror, or of
any equities between the antecedent parties, but that erroneous
rule of decision is abandoned and overruled.
Bank of St. Albans
v. Gilliland, 23 Wend. (N.Y.) 311;
Small v. Smith, 1
Den. (N.Y.) 583, 586; Edwards, Bills and Notes (2d ed.) 322.
Reported cases also show that it was decided during that period
in the courts of the same state that if a party in good faith took
a negotiable security of a holder without due inquiry, or with
knowledge of such facts and circumstances as would put a prudent
man upon inquiry in making purchases of personal property, he would
not acquire a good title to the instrument, if it appeared that
equities existed between the antecedent parties, and that vigilant
inquiry would have enabled the taker to have ascertained the true
character of those equities; but the appellate tribunal of the
state has exploded that legal heresy as applied to negotiable
securities, and has in that respect adopted the true commercial
rule as administered in the courts of Westminster Hall.
Pringle
v. Phillips, 5 Sandf. (N.Y.) 157;
Welch v. Sage, 47
N.Y. 143, 147.
Prior to the decision in the case of
Gill v. Cubitt,
the rule was that nothing short of proof of knowledge of the facts
and circumstances constituting the equities between the antecedent
parties would enable the maker to defend the suit of the holder;
but the court in that case decided that the transferee could not
recover if the circumstances under which the transfer took place
were such as would naturally have excited the suspicion of a
prudent and careful man. State court decisions in many cases
followed that erroneous theory, but the case itself has been
authoritatively overruled in the tribunal where it had its origin,
and the old rule as re established by the later adjudications has
been in repeated instances adopted by this Court and by the highest
courts of the state where the present controversy arose.
Goodman v. Harvey, 4 Ad. & E. 870;
Goodman v.
Simonds, 20 How. 343,
61 U. S. 364;
Seybel v. National Currency Bank, 54 N.Y. 288, 295;
Dutchess Insurance Co. v. Hachfield, 73
id.
226.
Much progress, it will be seen from the preceding observations,
has been made within the last thirty years in securing
Page 102 U. S. 42
uniformity of decision in respect to mercantile controversies
between the federal and state courts, and the courts of this
country and those of the parent country, from which most of our
commercial rules and usages are derived.
Howry v.
Eppinger, 34 Mich. 29.
Concede all that, and still it is insisted by the defendant that
the plaintiff took the note merely as a collateral security for a
preexisting debt, without any present consideration at the time of
the transfer, and that a party who takes a negotiable security
under such circumstances cannot be regarded as acquiring it in the
usual course of business, and consequently that he takes it subject
to prior equities. Many decisions of the courts of the state concur
that if there is a present consideration at the time of the
transfer, independent of the previous indebtedness, a party
acquiring a negotiable bill of exchange or promissory note before
maturity as a collateral security for a preexisting debt, without
knowledge of the facts which impeach the title as between the
antecedent parties, thereby becomes a holder in the usual course of
business, and that his title is complete, so that it will not be
affected by any prior equities between other parties, at least to
the extent of the debt for which it is so held.
White v.
Springfield Bank, 3 Sandf. (N.Y.) 222;
New York Marbled
Iron Works v. Smith, 4 Duer (N.Y.) 362.
When commercial paper is pledged by the apparent owner before it
matures as collateral security for advances, the pledgee in good
faith is entitled to hold it for the amount of such advances,
though it turns out afterwards that the party making the pledge was
a mere agent for the true owner, and that the transaction was a
breach of duty to the principal.
Belmont Branch Bank v.
Hoge, 35 N.Y. 65;
Murray v. Beckwith, 81 Ill. 43.
Where full value is paid by the pledgee, and the transfer is
made before maturity, without notice of any prior equities between
the antecedent parties, the title of the holder of the security is
not subject to be defeated by proof that he might have obtained
such notice by the exercise of active vigilance. Cash advances or
the sale of goods or other property will constitute a good
consideration for the transfer; nor is such a payment
Page 102 U. S. 43
or sale indispensable, as it is equally well settled that the
actual discharge of a precedent debt, or the surrender of prior
collaterals, or a binding agreement to give time for the payment of
a debt then due, will have the same effect.
Elting v.
Vanderlyn, 4 Johns. (N.Y.) 237;
Morton v. Burn, 7 Ad.
& E. 19;
Jennison v. Stafford, 1 Cush. (Mass.) 168;
Baker v. Walker, 14 Mee. & W. 465;
Walton v.
Mascall, 13
id. 452;
Wheeler v. Slocum, 16
Pick. (Mass.) 62;
Kearslake v. Morgan, 5 T.R. 513.
Examples given by Mr. Justice Story show that the receiving a
note as security for a debt, or forbearance to sue a present claim
or debt, or an exchange of securities, or becoming a surety, or
doing any other act at the request or for the benefit of the maker
or endorser will constitute a sufficient consideration for note as
well as the payment of money, or the making of advances, or giving
credit, or the discharge of a present debt, or the performance of
work or labor at the request of the party. Story, Promissory Notes
(7th ed.) sec. 186.
Differences of opinion, however, still exist where the transfer
is made as a collateral security for a preexisting debt, without
any other consideration than what flows from the nature of the
contract at the time the instrument is delivered, and such as may
be inferred from the relation of debtor and creditor in respect to
the preexisting debt.
Further argument to show that where negotiable paper is received
in payment and extinguishment of a preexisting debt, the holder is
entitled to protection is quite unnecessary, as the authorities in
support of the proposition, even in this country, are quite too
numerous for citation.
Townsley v.
Gamrall, 2 Pet. 170,
27 U. S. 182;
Parsons, Bills and Notes 221.
Nor is it necessary to add anything to prove that the title of
the holder is good if he took the note outright for goods or other
property sold and delivered to the transferror of the note at the
time the transfer was made. All this is admitted, or if not
admitted is so fully established by authority as not to require any
further argument in its support. Substantial uniformity of judicial
opinion exists both in this country and in England to that extent,
but there is still some diversity of decision in this country upon
the question whether the same
Page 102 U. S. 44
conclusion will follow where the negotiable security is
transferred as collateral security, without any other consideration
than the delay of payment incident to the transaction and what
flows from the relation of debtor and creditor in respect to the
existing debt and the obligation which the transferee assumes by
the reception of the negotiable instrument before maturity.
Standard decisions of the state courts are referred to by the
defendant where it is held that the title of the holder under such
circumstances is not good.
Bay v. Coddington, 5 Johns.
(N.Y.) Ch. 54, 59;
Coddington v. Bay, 20 Johns. (N.Y.)
637, 644;
Stalker v. McDonald, 6 Hill (N.Y.) 93, 95.
Sixty years have elapsed since the commercial rule adopted and
enforced by that series of decisions was first promulgated, and yet
it does not and never has commanded the slightest countenance from
any court sitting in Westminster Hall. Earnest differences of
opinion existed in that country among judicial men in respect to
the extent of the protection which the commercial law afforded to a
bona fide holder of a negotiable security against the
equities between the antecedent parties, but there is no authentic
evidence that any substantial diversity of opinion ever arose in
the courts of that country touching the question under
consideration.
Partners engaged in business being in want of available means,
the senior member gave his note to a bank to enable the firm to
overdraw their account, and the junior member gave his note to the
maker of the first note for half the amount. In the course of
subsequent transactions the payee of the last note endorsed it to
his creditors as collateral security for a preexisting debt.
Payment of the note being refused, the holders sued the maker, who
made defense that the plaintiffs were not
bona fide
holders; but the court held otherwise, and rendered judgment in
favor of the plaintiffs, separate opinions being given by all the
justices of the court.
Heywood v. Watson, 1 M. & P.
268;
s.c. 4 Bing. 496.
Consideration was given for the note in the case of
Percival
v. Frampton (2 C., M. & R. 180), but the court unanimously
held that, if the note had been transferred merely as a collateral
security for a previous debt, the plaintiffs might properly be
described as holders for a valuable consideration.
Page 102 U. S. 45
Holders of a negotiable security transferred before maturity as
a collateral security for a preexisting debt become parties to the
instrument to such an extent that they assume the responsibility of
making demand and giving the required notice to fix the liability
of the endorser; and it is held that where a creditor received such
a security from the debtor and failed to make seasonable demand of
payment, that his laches as between himself and his debtor were
equivalent to the payment of the collateral.
Peacock v.
Purcell, 14 C.B. N. S. 728;
Taylor v. Williams, 11
Metc. (Mass.) 44.
Proof of fraud may defeat the right of the holder in such a
case, but where there is no such proof the settled rule in England
is that a party taking a negotiable instrument as a collateral
security takes it for a sufficient consideration and is entitled to
recover.
Poirier v. Morris, 22 Law J.Rep. N.S. Q.B. 313;
S.C. 2 El. & Bl. 89, 104.
Securities of the kind were deposited by the defendant with the
plaintiffs as collaterals for a preexisting debt, among which was
the check in controversy, and it appeared that the defendants
having failed to pay the debt the plaintiffs brought an action on
the check, the defense being the want of consideration and that the
plaintiffs were not holders for value; but the Court of Exchequer
ruled otherwise, and rendered judgment in favor of the plaintiffs,
from which the defendant appealed to the Exchequer Chamber. Both
parties were fully heard in the appellate tribunal, and the court
decided that the title of a creditor to a negotiable security
transferred to him on account of a preexisting debt, if received
bona fide, without notice of any infirmity in the title of
the debtor, is indefeasible, whether the instrument is payable at a
future time or on demand.
Currie v. Misa, Law Rep. 10 Ex.
153.
Questions of various kinds, it seems, were discussed in the
subordinate court; but the statement of the justice who gave the
opinion of the court in the appellate tribunal is, that the
argument was addressed almost entirely to the question whether an
existing debt formed of itself a sufficient consideration for a
negotiable security payable on demand, so as to constitute the
creditor to whom it was paid a holder for value; and the court,
Justice Lush giving the opinion, decided that question in the
Page 102 U. S. 46
affirmative. His reasons for the conclusion are cogent and
satisfactory, and in the course of the opinion he remarked that
"it was not disputed on the argument, nor could it be, that if
instead of a check the security had been a bill or note, payable at
a subsequent date, however short, the plaintiffs' title would have
been unimpeachable,"
to which he also added, that the proposition had been
established by many authorities, both in that country and in the
American courts.
No attempt was made to controvert that proposition as applied to
bills or notes payable at a future day; but the defendant insisted
that inasmuch as the check was payable on demand the rule did not
apply, as there was no consideration, because it could not be
implied that there was any agreement for delay. Suffice it to say
in that regard that the court decided that the supposed distinction
"had no foundation either in principle or upon authority," and
proceeded to remark that it does not follow that the legal element
of consideration is entirely absent where the security is payable
immediately.
Forbearance is doubtless a good consideration for the transfer
of such an instrument, but a valuable consideration in the sense of
the law, as the court remarked in that case, may consist either in
some right, interest, profit, or benefit accruing to the one party,
or some extension of time of payment, detriment, loss, or
responsibility given, suffered, or undertaken by the other.
Call loans may be regarded as payable on demand, and inasmuch as
the collateral in this case was payable at a future day, the
implication is not an unreasonable one that the arrangement
operated as an injury to the holder and as a benefit to the debtor
and pledgeor. Such a reason may doubtless have weight; but it is by
no means certain that it is the true foundation of the title of the
holder, as other authorities hold that a negotiable security
transferred for such a purpose is in some sense a conditional
payment of the debt, the condition being that the debt revives if
the security is not realized.
Belshaw v. Bush, 11 C.B. 191
205;
Griffiths v. Owen, 13 Mee. & W. 58, 64.
Still not satisfied, the defendant in the case (
Currie v.
Misa) appealed from the judgment of affirmance rendered in
the
Page 102 U. S. 47
Exchequer Chamber to the House of Lords. Much instruction is
derived in respect to the issue between the parties by referring to
the propositions maintained by the counsel of the appellant, of
which the following are the most important:
1. That there was a total failure of consideration, inasmuch as
the defendant Misa never received any value for his draft except
the four bills which were dishonored.
2. That the check in question was not a bill of exchange, nor a
promissory note, nor an order for the payment of money on
demand.
3. That the existence of a past debt is not a sufficient
consideration for the transfer of the check.
Enough is reported of the arguments for the appellant to show
that nothing was left undone by his counsel in their power to do to
sustain those propositions; but the learned judges overruled them
all, and affirmed the judgment rendered in the two lower courts. In
giving the principal opinion, Lord Chelmsford said that he
entertained no doubt that, as between the defendant and the
depositor of the check, there was a sufficient consideration, and
that the bankers were holders for value, and he proceeded to remark
that the counsel of the appellant admit that if the judges are of
that opinion it will dispose of the case. All the judges concurred
that the holders were holders for value, and the result was the
same as in the court of original jurisdiction.
Misa v.
Currie, 1 App.Cas. 554, 563.
Corresponding views are held in the Queen's Bench, in the Court
of Appeals, and in the High Court of Chancery. Where a party by
means of a false pretense, or condition which he does not fulfill,
procures another party to give him a note or acceptance in favor of
a third person, to whom he pays it and who receives it
bona
fide for value, the Queen's Bench decided that the giver
remains liable to pay the same, because his acceptance or transfer
of the same imports value
prima facie, and he can only
relieve himself from his promise to pay the holder by showing that
he is not a holder for value, or that he received the instrument in
bad faith, or with notice of its infirmity.
Watson v.
Russell, 3 B. & S. 34, 40.
Two of the justices concurred in that proposition without any
qualification, and the Chief Justice also concurred in the
Page 102 U. S. 48
same to the extent of the debt of the holder it was pledged to
secure, which is the same rule that Shaw, C.J., with the
concurrence of all his associates, adopted nearly twenty years
earlier.
Chicopee Bank v. Chapin, 8 Metc. (Mass.) 40.
Commercial securities, when transferred to discharge a
preexisting debt, it is admitted, give the holder a good title
which will shut out prior equities; and the Court of Appeals in a
recent case decided that there was no difference in that regard
between past and present consideration to be found in the books,
and held that the transfer of a bill of lading for a valuable
consideration to a
bona fide transferee defeats the right
of stoppage
in transitu of the unpaid vendor of the goods,
although the consideration was past and not given at the time the
bill of lading was delivered to the transferee by the lawful
holder.
Leask v. Scott, 2 Q.B.D. 376, 380.
Certain bankers pressed their debtors for better security, and
the debtors, having promised to comply with the request,
hypothecated merchandise for the purpose, evidenced by warehouse
certificates, which the debtors agreed to deliver as soon as they
could be procured from the warehouse. They, the debtors, procured
the warrants, but refused to deliver the same, when the plaintiffs
instituted the present suit, to which the respondents demurred,
insisting that the existence of the debt is no sufficient
consideration for such an agreement. Among other things, the
respondents contended that the allegations of the bill did not
exhibit a transaction where the complainants promised to abstain
from suing their demand for any certain time; but the Vice
Chancellor held that the bankers did in effect give, and that the
respondents did receive, the benefit of some degree of forbearance
and benefit that they would not have obtained if they had not made
the agreement, and the demurrer was accordingly overruled.
Alliance Bank v. Broom & Co., 2 Drew. & Sm.
289.
Without more, these authorities are sufficient to show that
there is but one voice upon the subject in the courts of the parent
country, and that they speak to the point with a degree of
unanimity and uniformity well calculated to excite admiration and
to inspire confidence that the rule of decision is both correct and
just. Not only every court, but every
Page 102 U. S. 49
judge of every court, in that country concurs in the
proposition, that the holder of such a negotiable security before
maturity, as collateral to a preexisting debt, without notice of
any prior equities, is a
bona fide holder for value in the
usual course of business, and that his title to the instrument is
good, and wholly unaffected by any such prior equities between the
antecedent parties. Text writers everywhere adopt the same rule,
and recognize and commend it as the correct and true rule of
decision.
So, if a bill or note be endorsed as a collateral security, says
Chitty, that is an adequate consideration to enable the party to
sue thereon, though he advanced no new credit on the bill or note
at the time; and he lays down the same rule as to the receipt of a
bill or note in payment of a preexisting debt. Chitty, Bills (13th
ed.) 74.
In the ordinary course of things, says Mr. Justice Story, the
holder is presumed to be the
prima facie holder of such a
security for value, and he is not bound to give evidence that he
gave any value for it, until the other party establishes the want
or failure or illegality of the consideration, or that the bill had
been lost or stolen before it came to the possession of the holder.
It may then be incumbent on him to show that he has given value for
it, because he ought not, under such circumstances, to be placed in
a better situation than the antecedent parties through whom he
obtained the instrument. Story, Bills (4th ed.), sec. 193; Story,
Notes (7th ed.), secs. 195, 196.
A creditor, says Byles, may agree to take a bill as collateral
security for a debt already due, without affecting his present
right to sue for the debt; but if a creditor elects so to do, he
becomes the trustee to that extent of the debtor, and is bound to
perform the duties of a holder in respect to presentment and notice
of dishonor, and if he fail to do so, the parties only liable
conditionally are discharged, as no one but the actual holder can
perform those duties. Byles, Bills (5th Am. ed.) 369;
Peacock
v. Purcell, 32 L.J. 256;
S.C. 14 C.B.N.S. 728.
Litigated cases often arise where there is a present
consideration given for the transfer; and Mr. Daniel regards it
as
Page 102 U. S. 50
agreed that the holder of the collateral security, in all such
cases, is a
bona fide holder for value, if he took the
security without notice of any equities between the antecedent
parties, or if there was any agreement, express or implied, to give
time of payment of the debt to the debtor; but he admits that,
where neither of these conditions exists in the case, the question
is one of more difficulty. Those two propositions he supports by
sound reasons and convincing suggestions, and then proceeds to
examine the argument for and against the proposition, that the same
conclusion should be reached even where there is no new
consideration other than what arises from the relation of debtor
and creditor, nor any express agreement to extend the time of
payment. His view is that the issue in such a case must turn upon
the question whether there is any implied suspension of the prior
debt until the collateral becomes due, and that an implied
agreement is as binding as one expressed in terms, of which it is
supposed no one entertains the least doubt.
Different examples are put by the author, and the proper
presumption in each supposed case is stated; but he finally comes
to the conclusion that, inasmuch as the holder in such a case
becomes a party to the collateral security, and that he thereby
assumes the burden as such holder of fixing the liability of the
endorser, he is properly to be regarded as a holder for value, if
he took the collateral in good faith and without notice of any
equities between the antecedent parties. 1 Daniel, Negotiable
Securities (2d ed.), secs. 827 830;
Blanchard v. Stevens,
3 Cush. (Mass.) 162, 167;
Maitland v. Citizens' National Bank
of Baltimore, 40 Md. 540, 564.
Three of the theories involved in the controversy are presented
by Mr. Parsons for careful examination:
1. Where negotiable paper is received in payment of an
antecedent debt; but further discussion of that topic is
unnecessary, as it is conceded in this case that the title of the
holder in such a case is as good as if the contents were paid in
cash.
2. Where it is received as collateral security for a preexisting
debt.
3. Where it is received as collateral security for a debt
contracted at the date of the transfer.
Two objections, as the author states, are usually taken to each
of the last two theories:
1. That, as no new consideration
Page 102 U. S. 51
is paid by the holder, he is not injured by the impeachment of
his title.
2. That such a transfer as is supposed in either of the last two
cases is not one made in the usual course of business.
Transfers of negotiable securities, for the purpose supposed,
are seldom made, except in the execution of some agreement or
understanding, by which the transferror is to be benefited; as by
delay or forbearance or further credit, or the giving up of other
collaterals, or the substitution of one collateral for another, or
the promise to forego the means of obtaining other indemnity or
security.
Few cases, it is presumed, arise where the interest of the
debtor is not consulted; so that, if the rule should be confined to
the cases falling within the abstract theory of such a defense, the
question would cease to be of much importance, nor would it often
be true that, if the title of the holder should be impeached, he
would be left in as good condition as he was before. 1 Parsons,
Bills and Notes, 219.
Debtors are often benefited by delay, but creditors are usually
sufferers. Transactions of the kind, it is said, are not to be
regarded as transfers made in the usual course of business; but the
court is unable to adopt that conclusion, as the statement of the
learned author is believed to be correct, that a large part of the
use that is made of negotiable paper is as a means of borrowing
money or of securing debts previously contracted.
Bills and instruments of the kind, endorsed in blank or payable
to bearer, when transferred to an innocent holder create the same
liability as if endorsed at the time of the transfer. Where a party
executed such a note to take up a prior note, and his agent
delivered it to a third person as collateral security for his own
preexisting debt, Shaw, C.J., held that the holder took a good
title as against the maker to the extent of his debt, but that he
could not recover any more than the amount of his preexisting debt.
Stoddard v. Kimball, 6 Cush. (Mass.) 469.
Adjudged cases, almost without number, decide that, where the
preexisting debt is discharged, the title of the innocent holder is
beyond question; but frequent attempt is made to show that there is
a distinction between taking such a note in
Page 102 U. S. 52
payment of a preexisting debt and taking it as a collateral
security for such a payment. One whose debt is due, says Redfield,
C.J., must pay it, or become a bankrupt in the commercial sense.
If, instead of money, he gives a bill or note, either on time or at
sight, whether this is payment in form or is given as collateral to
his debt, he gains time, and is saved from the disgrace and ruin
consequent upon stopping payment. Viewed as it may be, the debtor
in either case derives the benefit of an implied understanding that
the creditor will not immediately press for payment, unless the new
security proves unproductive, and, if it does, that the creditor
may pursue any other proper remedy. Difference in form between
payment and collateral security, it was admitted, existed; but the
court unanimously held that there was no difference in principle,
provided the endorsement was unqualified, so as to impose upon the
holder the obligation to conform to the law merchant in enforcing
payment.
Atkinson v. Brooks, 26 Vt. 569, 576.
Other state decisions, too numerous for citation, hold that a
party taking a negotiable note in payment of, or as a collateral
security for, a precedent debt, is a
bona fide holder for
a valuable consideration, and that he is entitled to the same
protection as a holder who receives the same in payment for goods
delivered at the time of the transfer, or one who pays cash for the
instrument when it is delivered.
Allaire v. Hartshorne, 21
N.J.L. 665;
Hamilton v. Vought, 34
id. 187, 191;
Culver v. Benedict, 13 Gray (Mass.) 7, 10;
Johnson v.
Way, 27 Ohio St. 374, 379;
Brush v. Scribner, 11
Conn. 388;
Gwynn v. Lee, 9 Gill (Md.), 138.
Even suppose that the title of the plaintiffs is good under the
rule of the commercial law, as understood and administered in the
federal courts, still it is insisted by the defendants that the
state courts have adopted a different rule in such a case, and that
the state rule of decision is the one applicable in the case before
the court. Both parties are citizens of the same state; and it must
be admitted that if the state rule is applicable in the case, then
the ruling of the circuit court is erroneous. Various arguments
were advanced in support of the proposition, but the one most
pressed is that derived from the thirty fourth section of the
Judiciary Act, which provides that the laws of
Page 102 U. S. 53
the several states, except where the Constitution, treaties, or
statutes of the United States 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. 1 Stat.
92.
State laws furnish rules of decision in trials at common law in
the federal courts, in cases where they apply, which leaves it
plainly to be understood that those laws do not apply in all cases,
and it was early decided that they do not apply to the process and
practice of the federal courts.
Wyman v.
Southard, 10 Wheat. 1.
In cases depending on the statutes of a state, and more
especially in those representing titles to land, the court adopts
the construction of the state, where that construction is settled
and can be ascertained.
Polk's Lessee v.
Wendell, 9 Cranch 87,
13 U. S. 98.
Where any rule of real property has been settled in the state
courts, the same rule will be applied by this Court that would be
applied by them.
Jackson v.
Chew, 12 Wheat. 153,
25 U. S.
162.
Controversies often arise where this Court will refuse to adopt
a decision of the state court, as in the construction of a will,
unless it appears that the decision has become, by acquiescence, a
rule of property in the state.
Lane v. Vick,
3 How. 464,
44 U. S.
476.
Three decisions from the state courts show that the rule of
decision adopted by the courts of the state at that period support
the views of the defendants, and we regret to say that the tendency
of some of the later decisions in the same tribunals are in the
same direction.
Atlantic National Bank of New York v.
Franklin, 55 N.Y. 235.
Such being the fact, it becomes necessary to decide the question
whether the decisions of a state court compel this Court to apply
to the facts of the case a rule of decision, believed to be in
direct conflict with the rule of commercial law. Nearly forty years
have elapsed since this question was first presented to this Court
for decision. Doubts were then entertained whether the state rule
was absolutely settled; but, for the purposes of the decision, that
point was unconditionally admitted.
Page 102 U. S. 54
Then as now the chief argument in support of the proposition was
that the question was controlled by the thirty-fourth section of
the Judiciary Act, to which the court responded, in the first
place, by denying that the word "laws," used in the section,
included the decisions of the local tribunals within the scope of
its meaning. In the ordinary meaning of language, said Mr. Justice
Story, it will hardly be contended that the decisions of the courts
constitute laws, adding that, at most, they are only evidence of
what the law is, 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.
His views were that the laws of a state are more usually
understood to be the rules and enactments of the legislature, or
long established local customs having the force of laws. None, it
is believed, can dissent from that view, and we have the authority
of that opinion for saying that, in all cases prior to that time,
the court had uniformly supposed that the section, when properly
interpreted, was limited in its application to state laws strictly
local, and the construction thereof 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 intra territorial in their nature and character; that the court
had never supposed that the section applied, or was designed to
apply, to the construction of ordinary contracts or other written
instruments, nor to questions of general commercial law.
These views were enforced by many other illustrations, and the
court decided -- every member of the court but one concurring --
that the section, upon its true intendment and construction, is
strictly limited to local statutes and local usages, and that it
does not extend to contracts and other instruments of a commercial
nature, the true interpretation and effect of which are to be
sought, not in the decisions of the local tribunals, but in the
general principles and doctrines of commercial jurisprudence.
Swift v. Tyson,
16 Pet. 1,
41 U. S. 18.
Judicial views of a corresponding character were expressed by
Lord Mansfield, as Chief Justice of the King's Bench, nearly a
century earlier, when he said that the maritime law is not the
Page 102 U. S. 55
law of a particular country, but the general law of nations.
Luke v. Lyde, 2 Burr. 882.
Mr. Justice Story referred to that case, in support of the
decision of the court, and quoted the celebrated maxim of Cicero,
which, liberally interpreted, is to the effect that maritime law is
not one thing in one country and another thing in a different
country, nor one thing today and another tomorrow, but that, in all
times and nations, it is immutable and imperishable. Translation by
Yonge (London 1853), 360.
Commercial law, says Bouvier, is a phrase employed to denote the
branch of the law which relates to the rights of property and the
relations of persons engaged in commerce. Persons engaged in
commercial adventures, wherever they may have their domicile, have
business relations throughout the civilized world, from which it
results that commercial law is less local and more international
than any other system of law, except the law of nations.
Codes, laws, and ordinances of other states, says a learned
writer, whether ancient or modern, are received by the courts with
great respect, not as containing any authority in themselves, but
as evidence of the general law merchant. Where these are
contradicted by judicial decisions, they cease to have any value in
the jurisdiction where the law is decided to be the other way. Levi
(2d ed.) 2.
Authoritative support to the proposition, that the decisions of
the state courts do not control in such a case, is also derived
from other decisions of this Court, in which every member of the
court concurred.
Carpenter v. The Providence
Washington Insurance Co., 16 Pet. 495,
41 U. S.
511.
Insurance against fire in that case was effected by a mortgagor,
and one of the questions was as to the amount the insured was
entitled to recover. Reported cases from the state reports were
referred to as furnishing the rule of decision. Responsive to that
argument, Mr. Justice Story remarked, among other things, that the
question presented was a question of general commercial law,
involving the construction of an insurance contract, which is by no
means local in its character, or regulated by any local policy or
customs; that the decisions of the state tribunals are entitled to
great respect, but that
Page 102 U. S. 56
they cannot conclude the judgment of this Court in such a case;
and that this Court is bound to interpret the instrument according
to its own opinion of its true intent and objects.
Equally decisive views have often been expressed by this Court
in other cases, of which one deserves special notice. Preliminary
to the point decided, the court very properly admitted that the
federal courts will pay due regard to the laws of the states and
their construction by the state tribunals; but the Court decided,
Mr. Justice Harlan giving the opinion, that this Court is not bound
by the decisions of the state courts in determining a question of
general commercial law; that such is the established doctrine of
the court, so frequently announced as not to require any extended
citation of authorities in its support.
Oates v. National
Bank, 100 U. S. 239;
Amis v. Smith,
16 Pet. 303,
41 U. S. 314;
Conkling's Treatise (5th ed.) 140.
Argument to show that the decisions of this Court referred to
contradict the decisions of the state court upon the matter in
decision is quite unnecessary, as that is admitted. Nor is it
correct to suppose that the leading case, contradicting the views
of the state court, is unsupported to its full extent by other
decisions of this Court. Instead of that, the doctrines of that
case were directly and fully reaffirmed in the following case,
decided more than twelve years later.
Watson v.
Tarpley, 18 How. 517.
State legislation, as shown in that case, had prescribed
regulations in respect to the protest of bills of exchange, and
notice of their dishonor repugnant to the requirements of the law
merchant; and this Court held that the state regulations were not
operative, and that the payee or endorsee of the bill, in spite of
the state law, might enforce his rights in the federal court, as
defined and recognized by the decisions of this Court. Reference
was there made to the sentiments expressed by Lord Mansfield that
the maritime law was not the law of one country only, but of the
commercial world, and the Court decided that the commercial law was
not circumscribed within any local limits, and that citizens
resorting to the federal tribunals for the ascertainment of their
rights might well claim the benefit of the rules of the general
commercial law. Six of the
Page 102 U. S. 57
Justices of the Court, including the Chief Justice, held the
same views in the still later case, to which special reference is
made.
Goodman v.
Simonds, 20 How. 343,
61 U. S.
371.
Collaterals, previously held in that case, had been surrendered
when the new arrangement was made, and the evidence showed an
agreement for forbearance; and the Court, in order to prevent a
dissent, rested the case, so far as respected the question of
consideration, upon those special facts; but it is deemed proper to
state that two-thirds of the Court entirely approved of the views
of Mr. Justice Story, as expressed in
Swift v. Tyson, and
in his valuable works upon bills of exchange and promissory notes.
Confirmation of the proposition that his views in that decision are
correct is also derived from a note appended to the text of the
third volume of Kent's Commentaries, by the distinguished author,
in which he says that he is inclined to concur in that decision as
the plainer and better doctrine. 3 Kent, Com. (12th ed.) 81;
Cooley, Const.Lim. (4th ed.) 18.
State decisions, in respect to titles to real estate and
transfers of property, usually furnish the rule of decision in the
federal courts, by virtue of the before mentioned provision of the
Judiciary Act; but the established practice is, that it does not
apply, except in matters of a strictly local character; that is to
say, to the positive statutes of the states and the interpretations
of the same by their own tribunals, including rights and titles to
things having a permanent locality, such as real property, and that
it does not extend to questions of general commercial law, from
which it follows that where any controversy arises as to the
liability of a party to a bill of exchange, promissory note, or
other negotiable paper, in one of the federal courts, which is not
determined by the positive words of a state statute, or its meaning
as construed by the state courts, the federal courts will apply to
its solution the general principles of the law merchant, regardless
of any local decision. 1 Daniel, Neg.Inst. (2d ed.) sec. 10.
Transactions of a commercial character extend throughout the
civilized world, and it is well known that they are chiefly
conducted through the medium of bills of exchange and other
negotiable instruments. Uniformity of decision is a matter of
Page 102 U. S. 58
great public convenience and universal necessity, acknowledged
by all commercial nations. Should this Court adopt a principle of
decision which when carried into effect would establish as many
different rules for the determination of commercial controversies
as there are states in the Union, it would justly be considered a
public calamity, as it must necessarily depreciate our negotiable
securities in all the foreign markets of the world where our
merchants have commercial transactions.
Stable and immutable rules are necessary to give confidence to
those who receive such securities in the usual course of business,
when endorsed in blank, or made payable to bearer, so that if such
a bill or note is made without consideration, or be lost or stolen,
and afterwards be negotiated for value to one having no knowledge
of such facts, in the usual course of business, his title shall be
good, and he shall be entitled to collect the amount.
Uniformity of decision in such cases is highly desirable, and
these observations are sufficient to show that nothing is wanting
to accomplish that great object but the concurrence of a few more
of the state courts, of which none are more to be desired than the
courts of New York and Pennsylvania. It is hoped that they will
concur at no distant day.
For these reasons, the conclusion is that the judgment should be
affirmed.
MR. JUSTICE BRADLEY.
I concur in the judgment rendered in this case, and in most of
the reasons given in the opinion. But, in reference to the
consideration of the transfer of the note as collateral security, I
do not regard the obligation assumed by the endorsee (the bank), to
present the note for payment and give notice of nonpayment, as the
only, or the principal, consideration of such transfer. The true
consideration was the debt due from the endorsers to the endorsee,
and the obligation to pay or secure said debt. Had any other
collateral security been given, as a mortgage, or a pledge of
property, it would have been equally sustained by the consideration
referred to; namely, the debt and the obligation to pay it or to
secure its payment. If the endorsers had assigned
Page 102 U. S. 59
a mortgage for that purpose, the title of the bank to hold the
mortgage would have been indubitable. In that case prior equities
of the mortgagor might have prevailed against the title of the
bank; because a mortgage is not a commercial security, and its
transfer for any consideration whatever does not cut off prior
equities. But the
bona fide transfer of commercial paper
before maturity does cut off such equities; and every collateral is
held by the creditor by such title and in such manner as appertain
to its nature and qualities. Security for the payment of a debt
actually owing is a good consideration, and sufficient to support a
transfer of property. When such transfer is made for such purpose,
it has due effect as a complete transfer, according to the nature
and incidents of the property transferred. When it is a promissory
note or bill of exchange, it has the effect of giving absolute
title and of cutting off prior equities, provided the ordinary
conditions exist to give it that effect. If not transferred before
maturity or in due course of business, then, of course, it cannot
have such effect. But I think it is well shown in the principal
opinion that a transfer for the purpose of securing a debt is a
transfer in due course. And that really ends the argument on the
subject.