Bankruptcy Power

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BANKRUPTCY POWER

Article I, section 8, of the Constitution authorizes Congress to establish "uniform Laws on the subject of Bankruptcies throughout the United States." As interpreted in the circuit court decision in In re Klein (1843), this clause empowers Congress to enact laws covering all aspects of the distribution of a debtor's property and the discharge of his debts. Contrary to some early arguments, Congress's bankruptcy power is not limited to legislating only for the trader class. Commencing in 1800, Congress repeatedly exercised its bankruptcy power during periods of depression or financial unrest, but all early bankruptcy laws were repealed whenever unrest subsided. Since 1898, however, the United States continuously has had a comprehensive bankruptcy law, one completely revised by the bankruptcy reform act of 1978.

Article I expressly requires bankruptcy legislation to be uniform. As interpreted in Hanover National Bank v.Moyses (1902), the uniformity limitation does not prevent incorporation of state law into federal bankruptcy provisions. Bankruptcy law, the Court held in that case, is uniform "when the trustee takes in each state whatever would have been available to the creditor if the bankrupt law had not been passed. The general operation of the law is uniform although it may result in certain particulars differently in different states." And under the Regional Rail Reorganization Act Cases (1974) a bankruptcy statute may confine its operations to a single region where all covered bankrupt entities happen to be located. Railway Executives' Association v. Gibbons (1982), the only Supreme Court case to invalidate a bankruptcy law for lack of uniformity, struck down the Rock Island Transition and Employee Assistance Act because it covered only one of several railroads then in reorganization.

However many other theoretical limitations restrict Congress's bankruptcy power, only a few have led to invalidation of bankruptcy legislation. As interpreted in reorganization cases, the Fifth Amendment's due process clause limits Congress's bankruptcy power to alter or interfere with the rights of secured creditors. In louisville joint stock land bank v. radford (1934) the Court found the original frazierlemke act unconstitutional because it too drastically interfered with a mortgagee's interest in property. But within months Congress enacted the second Frazier-Lemke Act, with scaled down interference, which the Court upheld in wright v. vinton branch of mountain trust bank of roanoke (1937). And in Continental Illinois National Bank and Trust Co. v. Chicago, Rock Island and Pacific Railway Company (1935) the Court held that secured creditors could at least temporarily be enjoined from selling their security. Van Huffel v. Harkelrode (1931) allows property to be sold free of a mortage holder's encumbrance where his or her rights are transferred to the proceeds of the sale. The Regional Rail Reorganization Act Cases found no constitutional flaw in the government's refusal to permit liquidation of an unsuccessful business where the Tucker Act permitted a suit for damages in the court of claims.

For a brief period, there was doubt about Congress's authority to regulate municipal bankruptcies. In ashton v. cameron county water improvement district (1937) the Supreme Court invalidated, as an interference with state sovereignty, a 1934 municipal bankruptcy law. But in United States v. Bekins (1938), in a shift that may be attributable to changes in Court personnel, the Court sustained a similar law. The Bankruptcy Reform Act of 1978 contains an updated municipal bankruptcy law.

Under sturges v. crowninshield (1819), when no national bankruptcy laws are in effect, states may regulate insolvency. Their effectiveness in doing so is limited by the requirement that states not impair the obligation of contracts. When national bankruptcy legislation is in effect, Stellwagen v. Clum (1918) and other cases indicate that state laws are abrogated only to the extent that they undermine federal law.

Theodore Eisenberg
(1986)