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Article 1, Section 8, Clause 4 (Bankruptcy)



Document 8

Farmers & Mechanics' Bank v. Smith

3 Serg. & Rawle 63 Pa. 1816

Tilghman, C. J. I agree with the counsel for the plaintiff, in considering the act of assembly, on which the question in this case arises, as a bankrupt act. Such, it certainly is, in its nature, although confined in its operation, to a particular part of the state. It has the leading features of a bankrupt law; the discharge from all debts, in consideration of the surrender of the property of the debtor, and it possesses the details usually found in bankrupt laws, for carrying the main design into effect. The validity of this law is contested, as violating the constitution of the United States in two respects; 1st, In assuming a power which has been exclusively vested in the Congress of the United States. 2. In impairing the obligation of contracts, contrary to the express prohibition of the 10th sect. of the 1st art. of the constitution.

1. Congress has power, "to establish uniform laws on the subject of bankruptcies, throughout the United States," Constitution, art. 1. sect. 8. Hence it is contended, that no state has power to pass a law on the subject of bankruptcy. There would be great strength in this argument, if Congress had exercised their power, by passing a bankrupt law; because then, the uniformity which they were authorized to establish, would be broken in upon, by the act of an individual state. But it is to be considered, whether the power of Congress is exclusive, even when they do not think proper to exercise it; for thus the matter is at present circumstanced. Antecedent to the adoption of the Federal constitution, the power of the several states was supreme and unlimited. It follows, therefore, that all power, not transferred to the United States, remains in the states and the people, according to their several constitutions. This would have been the sound construction of the constitution, without amendment. But the jealousy of those, who feared that the federal government would absorb all the power of the states, caused it to be expressly recognized in the 11th and 12th articles of amendment. Supposing, then, that there has been ceded to Congress, the exclusive power to regulate the subject of bankruptcy, whenever they shall think it expedient to exercise it, is it to be inferred, that the states have debarred themselves from all exercise of power on the same subject, when Congress do not think it expedient to act? I can perceive no just ground for the inference. The exercise of this power by the states, under such circumstances, could have no interference with the power delegated to Congress, and it would present a situation of things, very ill suited to the commercial habits of many of the states. For, such are the hazards, to which those who engage in trade and commerce, are unavoidably exposed, that, I believe, it has been found necessary, in all commercial countries, to relieve the unfortunate from the burthen of their debts, upon the surrender of all their property. There seem to be but three cases, in which the several states have no power to legislate. 1. Where they are expressly prohibited. 2. Where exclusive power is expressly vested in the United States. 3. Where the power vested in the United States is, in its nature, exclusive. The subject of bankruptcy does not fall within the first or second of those cases. And if it falls within the third, it is only during those times in which Congress exercise their power on the same subject. The states are not to be divested of their power by inferences, unless the inferences be inevitable. Now, that is not the case here. On the contrary, the power contended for, on behalf of the states, is in perfect harmony with the power granted to Congress; a power to legislate, on a subject of necessity, at a time when Congress do not think it expedient to act. I think the constitution has received a practical construction on this point, although I know that the weighty opinion of Judge Washington has lately been pronounced to the contrary, (Golden v. Prince, April, 1814, in the Circuit Court of the United States, at Philadelphia.) But to that opinion, is opposed the strong argument of the Supreme Court of New York, in Livingston v. Van Ingen, in which it was adopted as a principle, that in cases where power is affirmatively vested in Congress, and not expressly taken away from the states, they may go on to legislate, until their laws come in collision with the acts of Congress. By practical construction, however, I do not mean judicial decision, but practice sanctioned by general consent. In the same section of the constitution from which Congress derive their power to establish an uniform system on the subject of bankruptcies, they have also given to them the power of fixing the standard of weights and measures. This they have never done, but the states have regulated them at their pleasure, and I believe, without question. In the same section also, there is granted to Congress, the power to provide for organizing, arming, and disciplining the militia; and yet all the states have passed laws on those subjects, much to the public benefit, and in harmony with the acts of Congress. From all these considerations, although I will not say that a case admits of no doubt, in which men of great talents have doubted, yet I have hesitation in giving it as my opinion, that the act of assembly in question is valid, unless it can be brought within the prohibition of the constitution, which relates to the impairing of the obligation of contracts.

2. It cannot be denied, that, taking the words, in their literal, and fullest extent, contracts are impaired by a bankrupt law. But conventions, intended to regulate the conduct of nations, are not to be construed as articles of agreement at common law. It is of little importance to the public, whether a tract of land belongs to A, or B. In deciding their titles, strict rules of construction may be adhered to--and it is best that they should be adhered to, though sometimes at the expense of justice, because certainty of title is thereby produced, and individual inconvenience is richly compensated by general good. But where multitudes are affected by the construction of an instrument, great regard should be paid to spirit, and intention. In deciding this question, then, it will be important to consider the situation of the United States at the time of framing their present constitution, and the probable intent of the makers. The commercial states had a great preponderance, and it was the interest of commerce, which led to the calling of that convention which formed the constitution. It is not going too far, to assume, that a bankrupt law was thought indispensable; because it is expressly provided for. Yet, it could hardly be unknown to the members of the convention, that in constructing a system, to pervade part of the union, there would be great difference of opinion, and, probably, great delay. So it has turned out.

It was not until 13 years after the constitution went into operation, that a bankrupt act was passed by Congress. When passed, it continued but five years, and ever since the states have been left to act for themselves. Now, it ought not to be supposed, unless clearly expressed, that the states were to be without bankrupt laws, during those periods in which Congress did not think proper to make them. Especially, as the convention had the matter directly before them, and had given power on the subject to Congress, in express terms. Why were not the states restrained from the exercise of this power, in terms equally express, if it was really the intent to restrain them? It must not be imagined, that it was in contemplation, to cover a secret meaning under expressions of general and doubtful import. I presume, it will hardly be contended, that the words, impairing the obligation of contracts, are to be understood in their greatest extent. If they are, the consequences are alarming. For, all acts respecting divorce, all acts of limitations, all acts by which private property has been taken for public use, or for the use of chartered companies, for roads, canals, &c., would be void; because, in all those cases, contracts are impaired. It would be questionable too, whether all insolvent laws, discharging the person of debtor from imprisonment, would not be void. Because these laws deprive the creditor of one very powerful engine for enforcing payment; an engine which operates on the feelings of friends and relations, and often extorts payment where creditors have no property of their own. So that although the contract is not immediately impaired, yet the means of enforcing it are lessened; and when this is done, subsequently to the making of the contract, it places the creditor on a worse footing than that on which it was by both parties intended that he should stand, when the contract was made. The same remarks will apply to laws giving a stay of execution, after judgment; for by those, contrary to the intent of the parties, the creditor is kept out of his money.

I believe all the states have passed insolvent laws, and Congress has passed one, for the district of Columbia, the validity of which has never been questioned. This act was not made under the express power given to Congress to pass a bankrupt law, (because that was to be general and uniform, throughout the Union), but under the power vested in them, to legislate for the District of Columbia. Had it been thought that an insolvent law, was the impairing of a contract, within the meaning of the constitution, we can hardly suppose, that Congress would have passed one for Columbia, although not prohibited expressly by the constitution; because, to say the least of it, it would have been setting a very bad example.

But, it may be asked, by what rule shall the meaning of these words "impairing the obligation of contracts," be restricted or limited, if they are not taken in their full extent? I confess, that to lay down a rule which would decide all cases, appears to me to be very difficult, perhaps impossible. One may be certain, that particular cases are not within the meaning of a law, without being able to enumerate all the cases that are within it. To attempt such enumerations, is unnecessary and dangerous, lest some should be omitted. It is safer to decide on each case, as it arises. It is probable, that, so far as respects contracts between individuals, the principal mischiefs which the convention meant to remedy, were those which arose, from tender laws, and laws by which creditors who sued for their debts, were compelled to take property upon an appraisement. Tender laws, are expressly mentioned; yet they would have been included in the general words, for they certainly alter the obligation of the contract. Laws of this kind, impair the contract, by giving an advantage to the debtor, without any consideration in favour of the creditor. Bankrupt laws are essentially different. They afford, in many instances, advantages to both debtor and creditor; the debtor is discharged, on condition of surrendering his property, without delay, for the benefit of his creditors. The creditor is often a great loser. But he is sometimes a gainer, by the means which are offered him of compelling the debtor to a full discovery of his property, and obtaining possession of it, more quickly than in the usual course of law. The bankrupt system has been adopted in countries the most tenacious of the right of creditors, of which England and Holland are an example, so that without straining, it might be considered as an excepted case, when "laws impairing the obligation of contracts," were mentioned. So it seems to have struck both individuals and public bodies, about the time of the adoption of the Federal Constitution. I well remember, that very soon after its adoption the subject was brought before the legislature of Maryland, upon the petition of a gentleman who prayed to be discharged from his debts on the surrender of his property for the benefit of his creditors. Several members of that legislature had been in the convention by which the Constitution had been recently formed. Doubts were entertained as to the right of the state to pass the law; but the prevailing opinion was in favour of the right, and the petition was granted. From that time to this, Maryland has been in the habit of making such laws. I am not exactly informed how many other states have followed her example; but I understand that Rhode Island and New York are among the number. Judicial decision is not wanting in favour of such right. Judge Washington, as I have mentioned, is against it. The Supreme Court of New York were for it, in the case of Penniman v. Megs, 9 Johns. 325. This Court has never decided directly upon the point; but they have discharged, without bail, where persons have been sued here, who had been discharged from the obligation of their contracts by laws of other states. I refer to the cases of Hilliard & Pippet v. Greenleaf, 5 Binn. 336, in a note, and Boggs, &c. v. Teackle, 5 Binn. 332. We are now called upon to decide whether an act of assembly of this Commonwealth be void, because of its violating the Constitution of the United States. That this Court possesses the power, and that it is bound in duty to declare a law void, when it violates the Constitution of this state or of the United States, has not been denied by the counsel for the plaintiff. It is a point on which I am well satisfied; but at the same time it is certain, that it is a power of high responsibility, and not to be exercised but in cases free from doubt. Such has been the opinion frequently expressed by Judges of the highest respectability in different states, and sanctioned by the Supreme Court of the United States. I will not pretend to say, that the meaning of that part of the Constitution, on which this question arises, is clear. But I may safely say, that it is doubtful. According to the established principles of construction, therefore, in doubtful cases, I am of opinion that the law of the state is valid. It follows, that judgment should be entered for the defendant.


The Founders' Constitution
Volume 2, Article 1, Section 8, Clause 4 (Bankruptcy), Document 8
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