Historical Background on Bankruptcy Clause

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Article I, Section 8, Clause 4:

[The Congress shall have Power . . . ] To establish an uniform Rule of Naturalization, and uniform Laws on the subject of Bankruptcies throughout the United States; . . .

Colonial American bankruptcy and insolvency laws were inspired by the English bankruptcy experience.1 Under English law, creditors were authorized to institute involuntary bankruptcy proceedings against debtors who committed certain unauthorized “acts of bankruptcy.” 2 The debtor’s property was liquidated and the proceeds from liquidation were distributed to his or her creditors.3 Only a trader or merchant qualified as a debtor for purposes of bankruptcy.4 Debtors could not institute voluntary bankruptcy proceedings—instead, the early English bankruptcy system was by design a collective remedy for creditors.5 Debtors could be punished by, among other measures, imprisonment and, by 1705, death.6 English law did not allow for the discharge of a debtor’s debts until 1705; however, by 1706, a discharge was only available upon the consent of one’s creditors.7

In the American colonies, domestic bankruptcy and insolvency matters were governed by each colony’s laws.8 Early statutes typically were modeled on English laws, but later colonial laws began to differ from English practice in various ways.9 As opposed to English law, colonial American laws “broadly centered on the plight of imprisoned debtors, with somewhat lesser emphasis on the issue of insolvent traders (to the exclusion of other debtors).” 10 Colonial legislatures often passed private bills that discharged individual debtors.11 While English bankruptcy law did not directly govern creditor-debtor relations in the American colonies, colonial bankruptcy laws were subject to invalidation by the Privy Council.12

Following independence, bankruptcy and insolvency laws remained within the purview of the newly independent states. The Articles of Confederation did not empower Congress to establish federal bankruptcy laws.13

During the Constitutional Convention in Philadelphia, the Framers did not appear to spend a considerable amount of time debating what would become the Bankruptcy Clause.14 Charles Pinckney of South Carolina proposed that the Convention add to what would become the Full Faith and Credit Clause15 a provision granting Congress authority “[t]o establish uniform laws upon the subject of bankruptcies, and respecting the damages arising on the protest of foreign bills of exchange.” 16 The Committee of Detail proposed adding slightly modified language— “to establish uniform laws on the subject of Bankruptcies” —to what would become the clause housing Congress’s naturalization power.17 The Convention ultimately approved the bankruptcy provision on September 3, 1787, with only Connecticut voting against the measure.18 Roger Sherman of Connecticut objected to granting Congress authority to establish bankruptcy laws, remarking that in England, “[b]ankrutptcies were in some cases punishable with death.” 19 In response, Gouverneur Morris of New York acknowledged that it “was an extensive & delicate subject,” but agreed with the bankruptcy proposal because he did not see any “danger of abuse of the power by the Legislature of the U.S.” 20

Once the Constitution was submitted to the states for ratification, scant attention was paid to the Bankruptcy Clause in the ensuing public debate. In the Federalist Papers, James Madison remarked that the bankruptcy power “is so intimately connected with the regulation of commerce, and will prevent so many frauds where the parties or their property may lie or be removed into different States, that the expediency of it seems not likely to be drawn into question.” 21 However, some expressed opposition to the Bankruptcy Clause. For example, the Anti-Federalist “Federal Farmer” wrote in one letter that the bankruptcy power “will immediately and extensively interfere with the internal police of the separate states” and aggrandize the new federal judiciary.22 Ultimately, however, the Clause was not a focal point for extensive debate during this period.

1: See Stephen J. Lubben, A New Understanding of the Bankruptcy Clause, 64 Case W. Rsrv. L. Rev. 319, 337 (2013) (explaining that the early American approach to bankruptcy and insolvency “was heavily influenced by English practice,” although noting that “it was never the case that English practice applied directly in the colonies” ). Regarding the distinction between bankruptcy and insolvency laws, the Supreme Court has explained that “[w]hile attempts have been made to formulate a distinction between bankruptcy and insolvency, it long has been settled that, within the meaning of the constitutional provision, the terms are convertible.” Continental Ill. Nat’l Bank & Trust Co. v. Chicago, R.I. & P. R. Co., 294 U.S. 648, 667–68 (1938); accord Sturges v. Crowninshield, 17 U.S. 122, 194 (1819) ( “[T]he subject is divisible in its nature into bankrupt and insolvent laws; though the line of partition between them is not so distinctly marked as to enable any person to say, with positive precision, what belongs exclusively to the one, and not to the other class of laws.” ).
2: Lubben, supra note 1, at 329–30; Israel Treiman, Acts of Bankruptcy: A Medieval Concept in Modern Bankruptcy Law, 52 Harv. L. Rev. 189, 192 (1938). In 1542, during the reign of Henry VIII, Parliament passed what scholars generally consider England’s first bankruptcy law. 34 & 35 Hen. 8, ch. 4 (1542); see Charles Jordan Tabb, The Historical Evolution of the Bankruptcy Discharge, 65 Am. Bankr. L.J. 325, 329 n.21 (1991) [herinafter Tabb, Discharge]. England’s second bankruptcy law arose in 1570 during Elizabeth I’s reign. 13 Eliz., ch. 7 (1570). Parliament enacted several subseqent bankruptcy acts in the following years, although, as one scholar has noted, the 1570 act “filled out the basic parameters of the English bankruptcy system, lacking only the discharge provisions added in the early eighteenth century, and remained in effect until the time of the American Revolution.” Charles Jordan Tabb, The History of the Bankruptcy Laws in the United States, 3 Am. Bankr. Inst. L. Rev. 5, 8 (1995) [hereinafter Tabb, History].
3: Tabb, History, supra note 2, at 8.
4: Tabb, History, supra note 2, at 9, 12; Lubben, supra note 1, at 330.
5: Tabb, History, supra note 2, at 8; Thomas E. Plank, The Constitutional Limits of Bankruptcy, 63 Tenn. L. Rev. 487, 500 (1996).
6: Plank, supra note 5, at 506 (citing 4 Anne, ch. 17, §§ 1, 18 (1705)).
7: Plank, supra note 5, at 506 (explaining that in 1706, “Parliament provided that the debtor could not receive a discharge unless 80% of the creditors, by number and by the value of the outstanding debts, consented” ) (citing 5 Anne, ch. 22, § 1 (1706); 4 Anne, ch. 17, § 7 (1705)); Tabb, Discharge, supra note 2, at 342 & n.112 (explaining that the English bankruptcy law in existence at the time of American independence retained the consent requirement, although it excluded creditors who held claims of less than £ 20) (citing 5 Geo. 2, c. 30, § 10 (1732)). A discharge refers to relief from some or all of one’s debts. CRS Report R45137, Bankruptcy Basiscs: A Primer, by Kevin M. Lewis, at 28.
8: See Lubben, supra note 1, at 337 ( “Through a hodgepodge of general bankruptcy laws, often not titled as such, and private bills, the American colonies managed to provide a system of bankruptcy relief.” ).
9: See Lubben, supra note 1, at 337–39.
10: Lubben, supra note 1, at 337; see Plank, supra note 5, at 518–19.
11: Lubben, supra note 1, at 339.
12: Lubben, supra note 1, at 339 ( “A common problem throughout most of the colonies was the requirement that any commercial legislation, including bankruptcy statutes, obtain the approval of the Privy Counsel and its Lords of Trade. Quite often, colonies enacted statutes only to have them revoked by officials in London.” ).
13: Lubben, supra note 1, at 340.
14: See Plank, supra note 5, at 527 (explaining that the Constitutional Convention “adopted [the Bankruptcy Clause] with little debate” ).
15: See U.S. Const. art. IV, § 1. For information on the Full Faith and Credit Clause, see ArtIV.S1.1 Overview of Full Faith and Credit Clause.
16: Debates in the Federal Convention of 1787 as Reported by James Madison [hereinafter Debates in the Federal Convention of 1787], in Documents Illustrative of the Formation of the Union of the American States, H.R. Doc. No. 398, at 632 (1927); see Plank, supra note 5, at 527; Judith Schenck Koffler, The Bankruptcy Clause and Exemption Laws: A Reexamination of the Doctrine of Geographic Uniformity, 58 N.Y.U. L. Rev. 22, 35 (1983).
17: Debates in the Federal Convention of 1787, supra note 16, at 655; Plank, supra note 5, at 527; see U.S. Const. art. I, § 8, cl. 4. For an overview of Congress’s naturalization power, see ArtI.S8.C4.1.1 Overview of Naturalization Clause.
18: Debates in the Federal Convention of 1787, supra note 16, at 657.
19: Debates in the Federal Convention of 1787, supra note 16, at 657.
20: Debates in the Federal Convention of 1787, supra note 16, at 657.
21: The Federalist No. 42 (James Madison). Madison wrote that the bankruptcy power was one of the powers contained in the Constitution that “provide for the harmony and proper intercourse among the States.” Id.
22: Letter XVIII of the Federal Farmer (Jan. 25, 1788), in 2 The Complete Anti-Federalist 344 (Herbert J. Storing ed., 1981). While not seeking the Clause’s elimination, the New York ratifying convention recommended that the scope of Congress’s bankruptcy power be limited “to merchants and other traders,” and that the states be permitted to “pass laws for the relief of other insolvent debtors.” NY Ratification Convention Debates and Proceedings (July 25, 1788), https://www.consource.org/document/ny-ratification-convention-debates-and-proceedings-1788-7-25/.