Early Bankruptcy Legislation

Professor Warren noted in his early 1935 study, Bankruptcy in United States History, that the trail of the bankruptcy clause of the Constitution was "strewn with a host of unsuccessful objections based on constitutional grounds against the enactment of various provisions, all of which are now regarded as perfectly orthodox features of a bankruptcy law. The first exercise of the bankruptcy power was the Bankruptcy Act of 1800, which by its terms was to last five years and, in fact, lasted only three." It largely followed English law and applied only to traders. During the long interval before a replacement law was adopted there were two significant decisions of the Supreme Court, Sturges v. Crowninshield  and Ogden v. Sounders,  answering the question of whether a state bankruptcy law might impair an existing contract in the negative and that of whether such a law might impair a future contract in the affirmative. The latter decision was crucial if a discharge was to be possible under a state insolvency statute, the only form of relief available to debtors during the extended periods in which there was no federal statute. After nearly 40 years a second bankruptcy act, the Bankruptcy Act of 1841, was enacted after a protracted congressional struggle. While the new Act worked well, it rapidly became unpopular and was repealed in little more than a year." At least one decision of the Supreme Court in connection with the Bankruptcy Act of 1841 is of interest in a study of the treatment of secured creditors in bankruptcy. In Ex parte Christy the Court faced the question of whether the bankruptcy court might stay enforcement action by a secured creditor, a power which was not mentioned in the Act. The Court held that the power did exist, noting that:

"From this brief review of these enactments it is manifest that the purposes so essential to the just operation of the bankrupt [sic] system could scarcely be accomplished; except by clothing the courts of the United States sitting in bankruptcy with the most ample powers and jurisdiction to accomplish them; and it would be a matter of extreme surprise if, when Congress had thus required the end, they should have at the same time withheld the means by which alone it could be successfully reached."

Ex parte Christy, was decided after the repeal of the Act, as were all of the other Supreme Court decisions concerning the 1841 Act, at which time, as Professor Warren has noted, the Act "had done its work and disappeared." The next attempt at federal bankruptcy legislation, the Bankruptcy Act of 1867, was the product of political compromise; this was the first such statute to contain a recognition of state exemption laws, the validity of which was not finally resolved until the decision of the Supreme Court in Hanover National Bank v. Moyses, The Act of 1867 "from the outset proved a failure and unpopular everywhere" and was amended materially by the Act of 1874 which among other changes introduced language providing for compositions. This raised the question of the limits of constitutional bankruptcy power, since compositions were unknown at the time of the adoption of the Constitution. That matter was not settled until the decision of the Supreme Court in Wilmot v. Mudge in 1881. In the meantime, in 1878 the Bankruptcy Act of 1867 had been repealed in response to overwhelming public sentiment.

Involuntary Bankruptcy?