Section 34 of the Judiciary Act of 1789 provides that “the laws of the several states, except where the Constitution, treaties or statutes of the United States shall otherwise recognize or provide” were to be applied and followed “as rules of decision in trials at common law.” George Swift, a Maine resident, was assigned a bill of exchange from John Tyson in New York. The bill was dishonored when it became due, and Swift brought a diversity action in the United States District Court for the Southern District of New York seeking payment. New York common law held that bills of exchange could not be assigned, and the federal court found in Tyson’s favor on that basis. Swift appealed to the United States Supreme Court, and the main issue before the court was whether the reference to “the laws of the several states” in Section 34 included common law decisions as well as enacted statutes.
Background of the Case
Swift, a Maine resident, received a bill of exchange from Tyson, who in turn obtained it from North & Keith as partial consideration for a property purchase in Maine, for which North & Keith had fraudulently claimed title. Swift accepted the bill of exchange as payment of a promissory note that North & Keith provided to him as part of a property transaction. The bill was dishonored after it came due.
Swift filed suit to compel Tyson to pay the debt due Swift. Tyson refused, defending on the grounds there was no consideration for the obligation to Swift and that New York common law did not permit assignments of bills of exchange. As New York played a significant role in the financial and commercial market at that time, this issue was of significant importance that the Circuit Court certified the issue for direct appeal to the United States Supreme Court.
The Supreme Court Decision
The Supreme Court unanimously held that Section 34 of the Judiciary Act of 1789 was not intended to require federal courts in diversity actions to apply the common law of the jurisdiction in which the action was brought. While it is appropriate for the federal courts to consider the common law of the particular jurisdiction, Justice Story, writing for the Supreme Court, noted that the federal courts are not bound by the decisions of the state courts:
“But, admitting the doctrine to be fully settled in New York, it remains to be considered whether it is obligatory upon this court if it differs from the principles established in the general commercial law. It is observable that the courts of New York do not found their decisions upon this point upon any local statute or positive, fixed or ancient local usage, but they deduce the doctrine from the general principles of commercial law. It is, however, contended that the 34th section of the judiciary act of 1789, ch. 20, furnishes a rule obligatory upon this court to follow the decisions of the state tribunals in all cases to which they apply. That section provides”
“that the laws of the several states, except where the constitution, treaties or statutes of the United States shall otherwise require or provide, shall be regarded as rules of decision, in trials at common law, in the courts of the United States, in cases where they apply.”
“In order to maintain the argument, it is essential, therefore, to hold that the word ‘laws’ in this section includes within the scope of its meaning the decisions of the local tribunals. In the ordinary use of language, it will hardly be contended that the decisions of courts constitute laws. They are, at most, only evidence of what the laws are, and are not, of themselves, laws…. It never has been supposed by us that the section did apply, or was designed to apply, to questions of a more general nature, not at all dependent upon local statutes or 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….”
Justice Story, who was one of the nation’s leading authorities on commercial law and commercial paper at that time, concluded by holding that the bill of exchange was a negotiable instrument, that the New York common did not apply, and that federal common law, which did apply to this dispute, permitted assignment of commercial paper such as the bill of exchange at issue.
The Swift case permitted the creation of a body of federal common law in diversity cases. Many criticized the decision for intruding into areas that were the responsibility of state courts. Others also criticized the holding because it could lead to differing outcomes, based on the same facts, due solely to whether the case was filed in federal court (in which federal common law would apply) or in state court (in which the state common law would apply).
The Swift decision was a landmark one because it permitted federal courts sitting in diversity to establish federal common law. The Swift decision remained good law until it was overturned in 1938 by the Supreme Court in Erie Railroad Co. v. Tompkins, which held that “the mischievous results of the doctrine [created by the Swift decision] had become apparent” in promoting forum shopping in diversity actions.
Swift v. Tyson (1842) Supreme Court decision:
Decision 9-0, with Justice John Catron concurring in the decision
Dan Cotter is a Partner at Butler Rubin Saltarelli & Boyd LLP and an Adjunct Professor at The John Marshall Law School, where he teaches SCOTUS Judicial Biographies. He is also a Past President of The Chicago Bar Association. The article contains his opinions and is not to be attributed to Butler Rubin or any of its clients, The Chicago Bar Association, or John Marshall.