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Each followed some serious financial crisis, and was repealed not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.]
* * * * *