History of Bankruptcy – Part 8

Written by: Robert DeMarco
United States Bankruptcy Laws – The Beginning
The subject of bankruptcy was not addressed in the Constitutional Convention of 1787 until its waning days by Charles Pinckney of South Carolina. Warren, Charles, Bankruptcy in United States History, p. 4 (Harvard University Press, 1935). On September 3, 1787, the Bankruptcy Clause, the power of the federal government to establish uniform laws on bankruptcies, was adopted into the Constitution. Id.; United States Constitution, art. I, sec. 8, cl. 4. The bankruptcy power remained unexercised by the federal government until 1800, when Congress enacted the first federal bankruptcy law. Bankruptcy Act of 1800, Act of Apr. 4, 1800, ch. 19, 2 Stat. 19, repealed by Act of Dec. 19, 1803, ch. 6, 2 Stat. 248. The Bankruptcy Act of 1800 lasted three years and closely tracked 5 Geo. II, c. 30 (1732).
The salient features of the Bankruptcy Act of 1800 are:

only merchants were eligible debtors; only involuntary bankruptcy was allowed, on proof of an act of bankruptcy; and the act provided for the discharge of debts as well as the person of a cooperative debtor. It granted a graduated allowance to the conforming bankrupt … and allowed limited property exemptions…. Fraudulent bankruptcy constituted a criminal offense, subjecting the debtor/criminal to a prison term of from twelve months to ten years (but not to capital punishment, as under the English law).

Bankruptcy Discharge, 65 Am. Bankr. L. J. 325 at 346. However, as indicated above, the statute was short lived. After its repeal in 1803, creditors and debtors were again dependent upon the individual states for rules of law concerning bankruptcy. Bankruptcy Discharge, 65 Am. Bankr. L. J. 325 at 348.
The Bankruptcy Act of 1841, while short lived (approximately one year), provided a major substantive change to the law of bankruptcy. The Bankruptcy Act of 1841, Act of Aug. 19, 1841, ch. 9, 5 Stat. 440,repealed by Act of Mar. 3, 1843, ch. 82, 5 Stat. 614. First, by virtue of the Panic of 1837, it evidences a shift in the focus from a creditor oriented statute to one that is more debtor oriented. Bankruptcy Discharge, 65 Am. Bankr. L. J. 325 at 349-40. Second, it permitted voluntary bankruptcy. “A debtor desiring the benefit of a bankruptcy discharge could simply file a petition in bankruptcy, comply with the provisions of the act, and, if the creditors consented, receive a discharge.” Bankruptcy Discharge, 65 Am. Bankr. L. J. 325 at 349-50. Third, relief was extended to “all persons whatsoever … owing debts.” The Bankruptcy Act of 1841, ch. 9, 5 Stat. 441.
There is no doubt, but that the Bankruptcy Act of 1841 generated much attention and discourse in its day. In fact, in September, 1842, Judge Wells, in the United States District Court in Missouri, held the Bankruptcy Act of 1841 to be unconstitutional and dismissed some 900 pending bankruptcy cases. Bankruptcy in United States History, at 86. Judge Wells, however, was over turned at the Circuit Court level and “[f]or the next fifteen years from the date of the repeal of the Act of 1841, not only was the question of the constitutionality of voluntary bankruptcy not seriously raised, but there was practically no agitation either for or against any National bankruptcy law.” Bankruptcy in United States History, at 87. In short, Americans lost interest in the debate over a national bankruptcy law. Bankruptcy in United States History, at 87-92.
This disinterestedness amongst Americans concerning federal bankruptcy legislation came to an abrupt halt after the Panic of 1857. Bankruptcy in United States History, at 95-98. Nonetheless, it was not until 1867 that there was a new federal bankruptcy statute. Id.; The Bankruptcy Act of 1867, Act of Mar. 2, 1867, ch. 176, 14 Stat. 517,amended by Act of June 22, 1874, ch. 390, 18 Stat. 178,repealed by Act of June 7, 1878, ch. 170, 20 Stat. 99. The battle lines for the debate on the Bankruptcy Act of 1867 were understandably along the Mason-Dixon line. The Northern States seeking passage, while the Southern States expressing opposition.
The Bankruptcy Act of 1867 provided for both voluntary and involuntary petitions and the commencement of proceedings by corporate debtors. As regards the debtor’s discharge, in the first couple years of the Bankruptcy Act of 1867, creditor consent was not required. Subsequently, and for the remainder of the Act’s tenure, some form of creditor consent was required. Also, in keeping with the times, debtors were required to swear their allegiance to the United States of America. Nonetheless, this bankruptcy law too succumbed to the criticism of the day and was repealed in 1878.
DATED:  July 8, 2013
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