Case Western Reserve Law Review Volume 64 Issue 2 Article 9 2013 A New Understanding of the Bankruptcy Clause Stephen J. Lubben Follow this and additional works at: https://scholarlycommons.law.case.edu/caselrev Part of the Law Commons Recommended Citation Stephen J. Lubben, A New Understanding of the Bankruptcy Clause, 64 Case W. Rsrv. L. Rev. 319 (2013) Available at: https://scholarlycommons.law.case.edu/caselrev/vol64/iss2/9 This Article is brought to you for free and open access by the Student Journals at Case Western Reserve University School of Law Scholarly Commons. It has been accepted for inclusion in Case Western Reserve Law Review by an authorized administrator of Case Western Reserve University School of Law Scholarly Commons. Case Western Reserve Law Review·Volume 64·Issue 2·2013 A New Understanding of the Bankruptcy Clause Stephen J. Lubben† “The Congress shall have Power . [t]o establish . uniform Laws on the subject of Bankruptcies throughout the United States . .”1 Abstract In the contest for least-studied part of Article I, Section 8 of the Constitution, the Bankruptcy Clause—Clause 4—certainly might win. Although we have lived with a permanent bankruptcy law since the end of the nineteenth century, efforts to understand the Clause typically extend little further than an assumption that the Clause is the bankruptcy counterpart to the much better-known Commerce Clause. To the extent the Bankruptcy Clause is given any thought at all, the modern conception is to assume it part of a larger Hamiltonian effort to federalize the economy: the Commerce Clause, the Bankruptcy Clause, and the Contracts Clause—combined perhaps with the Supremacy Clause and the Necessary and Proper Clause— work together to provide that the most important aspects of commerce are federalized and kept from piecemeal regulation by the states. Indeed, this conception has probably been the most common understanding for almost a century. That may have been the Framers’ intent, and it works well in explaining the recent past, particularly since the New Deal, but if struggles as an explanation once we remember that Congress only rarely exercised its powers under the Bankruptcy Clause for almost a century after the nation’s founding. It also neglects the understanding of the Bankruptcy Clause that developed shortly after ratification: namely, that Congress’s powers regarding insolvency were simply to impose uniformity, and that the states continued to enjoy full power to enact bankruptcy legislation that would apply to debtors within their realm. † Harvey Washington Wiley Chair in Corporate Governance & Business Ethics, Seton Hall University School of Law. This Article is all the better because Michelle Harner, Eddie Hartnett, Emily Kadens, Rich Levin, Troy McKenzie, Daniel Pines, John Pottow, Mark Roe, David Skeel, Charles Tabb, and Jay Westbrook took the time to read early drafts and provide their comments, and it also benefited from exceptional research assistance by Amanda E. McKinlay and Sarah B. Chopnick and historical discussions with Monty Waller. 1. U.S. Const. art. I, § 8, cl. 4. 319 Case Western Reserve Law Review·Volume 64 ·Issue 2·2013 A New Understanding of The Bankruptcy Clause In this Article, I argue that the only way to really understand the Bankruptcy Clause is to relearn its history. Thus, I begin with the ways in which American bankruptcy—as enacted by the colonies and the states—diverged from that of England. This divergence helps to explain why the federal 1800 Bankruptcy Act, which was heavily reflective of English bankruptcy practice, was so ill received. From there, the Article traces the long era of state bankruptcy regulation, consistent with the postratification understanding of the Clause. It was only after interstate commerce began to grow and, following the Civil War, the Fourteenth Amendment changed the state-federal dynamic that a long-term federal Bankruptcy Act was considered needed and palatable. In short, I view the enactment of permanent bankruptcy legislation more as the result of external factors and less the result of the cyclical process that Charles Warren famously described. The Article concludes with a revised understanding of the Bankruptcy Clause, one that I argue is more faithful to the history and evolving understanding of the Clause. I argue that the Bankruptcy Clause, as currently understood, is not the limited thing it once was, but that the current understanding is the process of an evolution that was far from inevitable. Contents Introduction ................................................................................... 322 I. The Colonial Years ................................................................ 325 A. Early Influences on English Bankruptcy .............................................. 326 B. Methods Available to Early Creditors .................................................. 327 C. First English Bankruptcy Laws ........................................................... 328 1. Limited Application to Merchants and Traders ............................ 330 2. Procedural Devices and Commissions ............................................ 331 3. Severe Penalties and Erratic Application ...................................... 334 4. Limited Relief: Discharge .............................................................. 336 D. First Colonial Bankruptcy Laws .......................................................... 337 II. Bankruptcy in the United States Before Crowninshield ...... 340 A. Differing Views of the Bankruptcy Clause ........................................... 340 B. State-Based Regulation Following Constitutional Adoption ................ 341 C. The Bankruptcy Act of 1800: Short-Lived Exception to State Regulation .......................................................................................... 343 1. Similarity to English Bankruptcy Law .......................................... 344 2. Amendment ................................................................................... 345 3. Federal-State Balance .................................................................... 345 D. Courts Weigh in on the Bankruptcy Clause Debate ............................ 349 1. Early Cases and Disagreement ...................................................... 349 2. Sturges v. Crowninshield Affirms State Authority to Regulate Bankruptcy .................................................................................. 352 3. Expansion of Crowninshield .......................................................... 354 III. The Fight Crowninshield Provoked ....................................... 355 320 Case Western Reserve Law Review·Volume 64 ·Issue 2·2013 A New Understanding of The Bankruptcy Clause A. Ogden v. Saunders: The Court’s Attempted Clarification ................... 356 B. Resulting Confusion ............................................................................ 358 C. The 1841 Bankruptcy Act: A Brief Federal Intrusion in Response to the Panics of 1837 and 1839 ......................................................... 360 1. Voluntary Bankruptcy Petitions ................................................... 361 2. Commissioners and Assignees ........................................................ 363 3. Shortcomings ................................................................................. 364 D. After 1841 ........................................................................................... 365 1. Initial Return to State Regulation and Continuing Debate ........... 365 2. Bankruptcy Law Developments: Individuals and Corporations ..... 369 E. After the Civil War ............................................................................. 372 1. The Bankruptcy Act of 1867: A Response to the Panic of 1857 .... 373 a. Treatment of Corporations ...................................................... 374 b. Registers .................................................................................. 374 c. Shortcomings ........................................................................... 375 d. Amendment ............................................................................. 376 2. Continuing State Regulation and Growing Use of Receiverships .. 379 IV. The Modern Era ...................................................................... 383 A. 1880s ................................................................................................... 383 1. Continuing Debate Influenced by Growth of Interstate Commerce and the Fourteenth Amendment ................................ 383 2. Moving Toward a Permanent Federal Bankruptcy Law ............... 385 B. The 1898 Bankruptcy Act ................................................................... 385 1. Distinct from English Bankruptcy Law ......................................... 387 2. Distinguishing Personal and Business Bankruptcy ........................ 388 3. Structure ....................................................................................... 390 C. Pre–New Deal Amendments and Continued Debate over Congress’s Power Under the Bankruptcy Clause ............................... 390 D. New Deal Amendments and the 1938 Chandler Act: Expanding the Bankruptcy Clause ............................................................................. 392 1. Contention Regarding the New Deal Expansion ........................... 394 2. Court Treatment of the New Deal Amendments: Initially Limiting Under the Fifth Amendment but Ultimately Embracing the Modern, Broad Conception