Chapter 18

BANKRUPTCY AND INSOLVENCY COURTS

It is within the power of Congress to assume the exclusive regulation of bankruptcy proceedings throughout the United States.[Footnote: U. S. Constitution, Art. I, Sec. 8.] There is in this country no real difference in meaning between the terms bankruptcy and insolvency. Each denotes a _status_ into which one unable to pay his debts, as and when they fall due, may put himself, or be put by his creditors. The remedy is not confined to any particular classes of persons, and no more fault is implied on the part of one who is adjudged a bankrupt than on the part of one who is adjudged an insolvent.

During most of the history of the United States there has been no uniform law on the subject of bankruptcy for the whole country. Three bankrupt Acts were enacted by Congress from time to time during the first century after the adoption of the Constitution. Each followed some serious financial crisis, and was repealed not long after the immediate effects of the crisis had passed away. They were adopted as a kind of [Greek: seisachtheia] to help insolvent debtors to get on their feet again. A later Act passed in 1898 is still in force,[Footnote: 30 U. S. Statutes at Large, 544; 32 _id._, 797.] and as it contains many provisions which have been found useful by creditors as well as by debtors, it is not unlikely to remain permanently upon the statute-books.

The prosperity of the United States rests mainly on the absolute free trade which exists between the several States. That necessarily results in innumerable credits extended by citizens of one State to those of others, and in immense property interests in each State belonging to non-residents. In case of insolvency full justice can not be worked out except through the legislative powers vested in the United States.

The Act of 1898 allows any one except a corporation to become a voluntary bankrupt. Practically any insolvent debtor can be thrown into involuntary bankruptcy, except wage earners, farmers, incorporated banks, or business corporations owing less than $1,000. This is so even if a State court of insolvency has already taken charge of his affairs; and if that has occurred it is of itself a sufficient reason for bankruptcy proceedings.

Petitions in bankruptcy are preferred to a District Court of the United States. Each bankrupt estate is put in charge of one or more trustees. They can maintain actions to recover or protect it, as a general rule, in the courts of any State as well as in those of the United States.[Footnote: See Bardes _v._ Bank, 178 U. S. Reports, 524.]

Their title does not extend to anything which by the laws of the State where the bankrupt belongs is exempt from his creditors. Such exemptions differ greatly in different parts of the country. In some States certain property of the value of $5,000 may be exempt; in others the amount which the debtor can retain is comparatively trifling. There is, therefore, no uniformity in the result; but there is, nevertheless, uniformity in the rule under which the results are reached, and this is enough to support the validity of this provision of the statute.[Footnote: Hanover National Bank _v._ Moyses, 186 U. S. Reports, 181.]

The bankrupt may propose a composition to his creditors, and it may be accepted by a majority of them in number if they also hold the major part of the indebtedness. If such an acceptance is confirmed by the court the entire indebtedness is discharged when the total amount to be paid (including whatever is necessary to discharge all preferred claims) is deposited in court.

A discharge may be granted to every honest bankrupt (whether his estate pays anything to his creditors or not), which clears him forever of all his ordinary debts. It does not apply to taxes nor to liabilities for certain wrongs of an aggravated character; nor can two successive discharges in bankruptcy be procured within six years unless the first was the result of involuntary proceedings.

Whenever there has been no national bankruptcy law in existence, the States have been held to be free to pass such insolvent laws as they might think proper. During the existence of a national bankruptcy law no State insolvent law can be of any force which covers the same field.[Footnote: Ogden _v._ Saunders, 12 Wheaton's Reports, 213; Tua _v._ Carriere, 117 U. S. Reports, 201; Ketcham _v._ McNamara, 72 Conn. Reports, 709, 711; 46 Atlantic Reporter, 146.] Its operation is excluded or suspended as a necessary effect of the enactment of the Act of Congress, although that contains no express provision to that effect.

Most of the States have on their statute-books provisions for a permanent system of insolvency proceedings. In some they are as favorable to the debtor as the United States bankrupt law of 1898: in more they are less favorable. Generally such proceedings are brought before a court of special jurisdiction, constituted both for this purpose and for the settlement of the estates of deceased persons and of those who are incapable of managing their own affairs. In the older States it is often made a condition of a discharge that the creditors shall have received a certain percentage of their claims.

The relief which the States are competent to give either to debtor or to creditor is very inadequate. The discharge of the debtor is of no avail except as against those creditors who were subject to the jurisdiction of the court. None are so subject except those belonging in the State, or actually taking part in the proceedings.

Every bankruptcy or insolvency proceeding is a great lawsuit. The discharge is the final judgment in it. It can bind none who are not parties to the action. Only those are parties who were bound to appear, or who did appear. No one belonging to any other State or country can be bound to appear, unless in the rare case of a personal service of proper process upon him, made while he was within the territorial jurisdiction. Any creditor, wherever he may reside, who files a claim against the insolvent estate, or receives a dividend from it, makes himself a voluntary party. But as against a non-resident who keeps aloof and takes no part in the proceedings the discharge is worthless, even in the courts of the very State by authority of which it was granted.

On the other hand, the creditor gets less aid from the State courts than a trustee in bankruptcy. The trustee in bankruptcy can sue in any court in the country in which the debtor could have sued for the same cause of action. The trustee or assignee in insolvency, acting under the appointment of a State court, can only sue within that State, unless his title has been fortified by a conveyance from the insolvent which would be good at common law. So far as his title rests on a law, by which it was taken away from the bankrupt and vested in him, it is ineffectual wherever that law is ineffectual; and the law of no sovereign is effectual of its own force outside of his territorial jurisdiction.

*[Footnote: Booth _v._ Clark, 17 Howard's Reports, 322, 337; Hale _v._ Allinson, 188 U. S. Reports, 56.]*

If, therefore, as is commonly true in estates of any magnitude, part of the assets can only be recovered by suit in other States, there must be ancillary insolvency proceedings there, to clothe the principal assignee with the right of action. Should the insolvent be the owner of land in another State, the title to this can only be transferred in accordance with its law, and a foreign assignment in insolvency will be wholly ineffectual. Nor will ancillary proceedings in insolvency be allowed to prejudice the rights of citizens of the State in which they are instituted to any security which they might otherwise have for debts due them from the insolvent.[Footnote: Ward _v._ Conn. Pipe Mfg Co., 71 Conn., 345; 41 Atlantic Reporter, 1057; 42 Lawyers' Reports Annotated, 706; 71 Am. State Reports, 207.] The right, however, of every sovereignty to postpone claims under a foreign bankruptcy or insolvency to the interests of its own people is modified in the United States by the constitutional provision that the citizens of each State are entitled to all privileges of citizens in the other States.[Footnote: Blake _v._ McClung, 172 U. S. Reports, 239.]

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