By: Donald L Swanson
Today, the sole function a bankruptcy discharge is to rid the debtor of debts and, thereby, provide a fresh financial start.
But in the 1700s, the focus was on getting a debtor’s body discharged from debtor’s prison, to provide a fresh start through personal liberty.
And it is the evils of debtor’s prison that give us the “uniform laws” requirement of the U.S. Constitution’s Bankruptcy Clause.
A Glimpse into History
The U.S. Supreme Court gives us a glimpse into this bit of bankruptcy history in its Central Virginia Community College v. Katz, 546 U.S. 356 (2006), opinion.
What follows is a summary of that historical glimpse.
In Rem Jurisdiction
Bankruptcy jurisdiction, at its core, is in rem—i.e., an adjudication of interests claimed in a res.
That was as true in the 1700s as it is today. Then, as now, the jurisdiction of courts of bankruptcy included the power to issue compulsory orders to facilitate the administration and distribution of the res.
U.S. Constitution’s Bankruptcy Clause
Foremost on the minds of those who adopted the Bankruptcy Clause as part of the U.S. Constitution were the intractable problems, not to mention the injustice, created by one State’s imprisoning of debtors who had been discharged (from prison and of their debts) in and by another State.
Writs of Habeas Corpus
To remedy this problem, the very first Congresses considered, and the Sixth Congress enacted, bankruptcy legislation authorizing federal courts to, among other things, issue writs of habeas corpus directed at state officials ordering the release of debtors from state prisons.
Dual Meaning
The term “discharge” historically had a dual meaning; it referred to both release of debts and release of the debtor from prison.
The earliest English statutes governing bankruptcy and insolvency authorized discharges of persons, not debts:
- one statute enacted in 1649 was entitled “An Act for discharging Poor Prisoners unable to satisfie their Creditors,” the stated purpose of which was to “Discharge . . . the person of [the] Debtor” “of and from his or her Imprisonment”; and
- not until 1705 did the English Parliament extend the discharge (and then only for traders and merchants) to include release of debts.
The 1700s
Well into the 1700s, imprisonment for debt was still ubiquitous in England and the American Colonies:
- bankruptcy and insolvency laws remained as much concerned with ensuring full satisfaction of creditors (and, relatedly, preventing debtors’ flight to parts unknown) as with securing new beginnings for debtors; and
- illustrative of bankruptcy laws’ harsh treatment of debtors during this period was that debtors often fared worse than common criminals in prison—unfortunate insolvents, unlike criminals, were forced to provide their own food, fuel, and clothing while behind bars.
Colonial/State Law Schemes
Common as imprisonment itself was, the American Colonies, and later the several States, had wildly divergent schemes for discharging debtors and their debts:
- the only consistency among debt laws in the 1700s (and into the 1800s) was that every colony, and later every state, permitted imprisonment for debt — most as the result of pre-judgment orders and all to enforce a judgment;
- some colonies/states offered relief through private acts of their legislatures—such acts released debtors from prison upon surrender of their property, and a few coupled that release from prison with a discharge of debts;
- other colonies/states granted release from prison—but only in exchange for indentured servitude; and
- some colonies/states provided no relief at all for the debtor.
Patchwork Difficulties
The difficulties posed by the patchwork of insolvency and bankruptcy laws in the 1700s and into the 1800s were peculiar to the American experience.
In England, with only one sovereign, a single discharge could protect the debtor from both the jailer and creditors.
Two Pennsylvania Cases
Two bankruptcy cases involving Pennsylvania – one litigated shortly before the Constitutional Convention in Philadelphia and one litigated shortly after it – demonstrate how the uncoordinated actions of adjacent states create problems.
In each of these two cases, two different sovereigns (each with its own debtor/creditor laws) lay claim to a debtor’s body. A court of Pennsylvania hears both cases and reaches an opposite decision in each . . . demonstrating how the law is evolving at the time,
Here’s what happened.
–Pennsylvania v. New Jersey
In the first case, debtor is released from debtor’s prison in New Jersey, under New Jersey law, and by order of a New Jersey court.
Shortly thereafter, the same debtor travels to Pennsylvania, where he is arrested for nonpayment of a debt owing to a Pennsylvania creditor.
Debtor argues that all his debts had been discharged by order of the New Jersey court. The Pennsylvania court disagrees, declaring:
- the New Jersey court order goes no further than to discharge the debtor’s body “from imprisonment in the Gaol of Essex County in the State of New Jersey”;
- even if “the fullest obedience were paid” to the New Jersey court order, such order “could not authorize a subsequent discharge from imprisonment in another Gaol, in another State”; and
- “Even the Bankrupt Laws of England, while we were the subjects of that country, were never supposed to extend here, so as to exempt the persons of the Bankrupts from being arrested.”
–Pennsylvania v. Maryland
In the second case, decided a year later, a debtor is “discharged” under an insolvency law of the state of Maryland—such law being “in the nature of a general bankruptcy law.”
Before filing bankruptcy in Maryland, the debtor incurs a debt to a Pennsylvanian. But, in the Maryland insolvency proceeding, the debtor neglects to:
- mention the Pennsylvania debt in his schedules; or
- personally notify the Pennsylvania creditor of the Maryland proceeding.
After receiving an order of discharge from the Maryland court, debtor travels to Pennsylvania and is promptly arrested for the debt to the Pennsylvania creditor.
In the Pennsylvania proceeding, Debtor argues that debtor’s Maryland discharge is effective in every state because, absent such a rule:
- “perpetual imprisonment must be the lot of every man who fails”; and
- “all hope of retrieving his losses by honest and industrious pursuits, will be cut off from the unfortunate bankrupt.”
Unlike the New Jersey debtor a year earlier, the debtor now prevails. The Pennsylvania court declares:
- “allowing a creditor to execute upon a debtor’s person out of the state in which he has been discharged would be giving a superiority to some creditors”;
- creditors in another state would achieve “a double satisfaction – to wit, a proportionable dividend of his property there, and the imprisonment of his person here”;
- “the debtor having already been obliged to surrender all of his effects, to permit the taking of his person here, would . . . compel him to perform an impossibility, that is, to pay a debt after he has been deprived of every means of payment”; and
- “such an attempt would amount to perpetual imprisonment, unless the benevolence of his friends should interfere to discharge his account.”
Backdrop for the Bankruptcy Clause
The two Pennsylvania cases discussed above “illustrate the backdrop against which the Bankruptcy Clause was adopted.”
In both case, the debtors argued that the earlier discharge should be given preclusive effect pursuant to the Full Faith and Credit Clause of the Articles of Confederation.
Problems illustrated by these two cases were discussed at the Constitutional Convention and resulted in a proposal committed to the Committee of Detail:
- to encompass insolvency laws within the coverage of the Full Faith and Credit Clause of the Constitution; and
- “to establish uniform laws upon the subject of bankruptcies.”
A few days after such proposal was taken under advisement, the Committee of Detail reported that:
- it recommends adding the power “‘to establish uniform laws upon the subject of bankruptcies'” to the Naturalization Clause of what later became Article I.
Adopting the Bankruptcy Clause
Two days later, the Convention adopts the Committee’s recommendation with very little debate.
Roger Sherman of Connecticut alone votes against the recommendation, apparently because of a concern that the Bankruptcy Clause:
- “would authorize Congress to impose upon American citizens the ultimate penalty for debt then in effect in England: death” (emphasis added).
The absence of extensive debate over the text of the Bankruptcy Clause or its insertion into the Constitution indicates that general agreement existed on the importance of authorizing a uniform federal response to the problems illustrated by the two cases discussed above.
Conclusion
History is always fascinating.
History behind the requirement of uniformity in the U.S. Constitution’s Bankruptcy Clause is a prime example.
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