State Insolvency Laws

Constitutional Status of State Insolvency Laws: Preemption

Prior to 1898, Congress exercised the power to establish “uniform laws on the subject of bankruptcy” only intermittently. The first national bankruptcy law was not enacted until 1800 and was repealed in 1803; the second was passed in 1841 and was repealed two years later; a third was enacted in 1867 and repealed in 1878.1 Thus, during the first eighty-nine years under the Constitution, a national bankruptcy law was in existence only sixteen years altogether. Consequently, the most important issue of interpretation that arose during that period concerned the effect of the clause on state law.

More about State Insolvency Laws

The Supreme Court ruled at an early date that, in the absence of congressional action, the states may enact insolvency laws, because it is not the mere existence of the power but rather its exercise that is incompatible with the exercise of the same power by the states.2 Later cases settled further that the enactment of a national bankruptcy law does not invalidate state laws in conflict therewith but serves only to relegate them to a state of suspended animation with the result that upon repeal of the national statute they again come into operation without re-enactment.3

State Insolvency Laws: Developments

A state, of course, has no power to enforce any law governing bankruptcies that impairs the obligation of contracts,4 extends to persons or property outside its jurisdiction,5 or conflicts with the national bankruptcy laws.6 Giving effect to the policy of the federal statute, the Court has held that a state statute regulating this distribution of property of an insolvent was suspended by that law,7 and that a state court was without power to proceed with pending foreclosure proceedings after a farmer-debtor had filed a petition in federal bankruptcy court for a composition or extension of time to pay his debts.8 A state court injunction ordering a defendant to clean up a waste-disposal site was held to be a “liability on a claim” subject to discharge under the bankruptcy law, after the state had appointed a receiver to take charge of the defendant's property and comply with the injunction.9 A state law governing fraudulent transfers was found to be compatible with the federal law.10

Other Aspects

Substantial disagreement has marked the actions of the Justices in one area, however, resulting in three five-to-four decisions first upholding and then voiding state laws providing that a discharge in bankruptcy was not to relieve a judgment arising out of an automobile accident upon pain of suffering suspension of his driver's license.11 The state statutes were all similar enactments of the Uniform Motor Vehicle Safety Responsibility Act, which authorizes the suspension of the license of any driver who fails to satisfy a judgment against himself growing out of a traffic accident; a section of the law specifically provides that a discharge in bankruptcy will not relieve the debtor of the obligation to pay and the consequence of license suspension for failure to pay. In the first two decisions, the Court majorities decided that the object of the state law was not to see that such judgments were paid but was rather a device to protect the public against irresponsible driving.12 The last case rejected this view and held that the Act's sole emphasis was one of providing leverage for the collection of damages from drivers and as such was in fact intended to and did frustrate the purpose of the federal bankruptcy law, the giving of a fresh start unhampered by debt.13

Other Issues

If a state desires to participate in the assets of a bankruptcy, it must submit to the appropriate requirements of the bankruptcy court with respect to the filing of claims by a designated date. It cannot assert a claim for taxes by filing a demand at a later date.1437

Resources

References

This text about State Insolvency Laws is based on “The Constitution of the United States of America: Analysis and Interpretation”, published by the U.S. Government Printing Office.

[Footnote 1] Hanover National Bank v. Moyses, 186 U.S. 181, 184 (1902).

[Footnote 2] Sturges v. Crowninshield, 17 U.S. (4 Wheat.) 122, 199 (1819); Ogden v. Saunders, 25 U.S. (12 Wheat.) 213, 368 (1827).

[Footnote 3] Tua v. Carriere, 117 U.S. 201 (1886); Butler v. Goreley, 146 U.S. 303, 314 (1892).

[Footnote 4] Sturges v. Crowninshield, 17 U.S. (4 Wheat.) 122 (1819).

[Footnote 5] Ogden v. Saunders, 25 U.S. (12 Wheat.) 213, 368 (1827); Denny v. Bennett, 128 U.S. 489, 498 (1888); Brown v. Smart, 145 U.S. 454 (1892).

[Footnote 6] In re Watts and Sachs, 190 U.S. 1, 27 (1903); International Shoe Co. v. Pinkus, 278 U.S. 261, 264 (1929).

[Footnote 7] International Shoe Co. v. Pinkus, 278 U.S. 261, 265 (1929).

[Footnote 8] Kalb v. Feurerstein, 308 U.S. 433 (1940).

[Footnote 9] Ohio v. Kovacs, 469 U.S. 274 (1985). Compare Kelly v. Robinson, 479 U.S. 36 (1986) (restitution obligations imposed as conditions of probation in state criminal actions are nondischargeable in proceedings under chapter 7), with Pennsylvania Dep't of Public Welfare v. Davenport, 495 U.S. 552 (1990) (restitution obligations imposed as condition of probation in state criminal actions are dischargeable in proceedings under chapter 13).

[Footnote 10] Stellwagon v. Clum, 245 U.S. 605, 615 (1918).

[Footnote 11] Reitz v. Mealey, 314 U.S. 33 (1941); Kesler v. Department of Pub. Safety, 369 U.S. 153 (1962); Perez v. Campbell, 402 U.S. 637 (1971).

[Footnote 12] Reitz v. Mealey, 314 U.S. 33, 37 (1941); Kesler v. Department of Public Safety, 369 U.S. 153, 169-74 (1962).

[Footnote 13] Perez v. Campbell, 402 U.S. 637, 644-48, 651-54 (1971). The dissenters, Justice Blackmun for himself and Chief Justice Burger and Justices Harlan and Stewart, argued, in line with the Reitz and Kesler majorities, that the provision at issue was merely an attempt to assure driving competence and care on the part of its citizens and had only tangential effect upon bankruptcy.

Tables of Contents

• State Insolvency Laws and other Topics in the Contents – Article 1 of the U.S. Constitution
• U.S. Constitutional Law Category
• List of amendments to the U.S. Constitution
• State Insolvency Laws and other Topics in the Constitution Contents
• Interpretation of the U.S. Constitution (Table of Contents)
• Clauses of the Constitution (Table of Contents)