October 21, 2007
Bankruptcy Jurisprudence from the Supreme Court - Hanover Nat. Bank v. Moyses
Issue: Is the Bankruptcy Act of 1898 constitutional?
Chief Justice Melvin W. Fuller
Hanover Nat. Bank filed suit in District Court seeking to set aside the discharge of the debtor, Max Moyses, on the grounds that the bankruptcy act of 1898 was unconstitutional. They had three arguments, 1) the Act improperly permitted individuals, i.e., “non-traders” to file bankruptcy; 2) it improperly granted legislative powers to the states in the form of the exemption laws; and 3) it violated due process because it gave insufficient notice to creditors. The District Court dismissed the suit.
The Supreme Court affirmed. At the outset Fuller discussed the differences between a “bankruptcy law” and an “insolvent law.” “Insolvent” laws were common among the states but did not grant a general discharge since that would be a “law impairing the obligation of contracts” prohibited in the Constitution. Those laws primarily worked to free the individual from jail. Bankruptcy laws historically were involuntary only and permitted only against businesses. Fuller points out that the Bankruptcy Act of 1800 permitted involuntary bankruptcy only against traders, but the subsequent acts of 1843 and 1867 allowed individuals to file and seek a discharge.
Fuller cites a District Court case earlier decided: “To what limits is [the bankruptcy] jurisdiction [set forth in the constitution] restricted? I hold, it extends to all cases where the law causes to be distributed the property of the debtor among his creditors; this is its least limit. Its greatest is the discharge of a debtor from his contracts. . . . With the policy of a law letting in all classes,-others as well as traders,-and permitting the bankrupt to come in voluntarily, and be discharged without the consent of his creditors, the courts have no concern; it belongs to the lawmakers.” Fuller added, “The conclusion that an act of Congress establishing a uniform system of bankruptcy throughout the United States is constitutional, although providing that others than traders may be adjudged bankrupts, and that this may be done on voluntary petitions, is really not open to discussion.”
As to the issue of permitting exemptions as set forth by the individual states, Fuller states, “. . . all contracts [are] made with reference to existing laws, and no creditor [can] recover more from his debtor than the unexempted part of his assets.” “[A]s every debt is contracted with reference to the rights of the parties thereto under existing exemption laws, and no creditor can reasonably complain if he gets his full share of all that the law, for the time being, places at the disposal of creditors. One of the effects of a bankrupt law is that of a general execution issued in favor of all the creditors of the bankrupt, reaching all his property subject to levy, and applying it to the payment of all his debts according to their respective priorities.” “[T]he trustee takes in each state whatever would have been available to the creditor if the bankrupt law had not been passed.”
As to the issue of notice, Fuller wrote that, “Adjudication [of bankruptcy] follows as matter of course, and brings the bankrupt's property into the custody of the court for distribution among all his creditors.” “Proceedings in bankruptcy are, generally speaking, in the nature of proceedings in rem.” The Supreme Court ruled that notice to every creditor listed by the debtor, notice by publication which was required at the time, and the right to revoke the discharge for one year after it is entered is sufficient to overcome the due process attack.
Fuller ended the opinion with, “The determination of the status of the honest and unfortunate debtor by his liberation from encumbrance on future exertion is matter of public concern. . . “
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