A New Understanding of the Bankruptcy Clause
95 Pages Posted: 3 Apr 2013 Last revised: 18 May 2014
Date Written: April 2, 2013
In the contest for least studied part of Article I, section 8, the Bankruptcy Clause certainly might win. We have lived with a permanent bankruptcy law since the end of the Nineteenth Century, yet efforts to understand the Clause typically extend little further than an assumption that the Clause is the bankruptcy counterpart to the much better-known Commerce Clause.
To the extent the Bankruptcy Clause is given any thought at all, the modern conception of the Clause is to assume it part of a larger Hamiltonian effort to federalize the economy: the Commerce Clause, the Bankruptcy Clause, and the Contracts Clause, combined perhaps with the Supremacy Clause and the Necessary and Proper Clause, working together to provide that the most important aspects of commerce are federalized, and kept from piecemeal regulation by the states. Indeed, this conception has probably been the most common understanding for almost a century.
That may have been the framers intentions, and it works well in explaining the recent past, particularly since the New Deal, but struggles as an explanation once we remember that Congress only rarely exercised its powers under the Bankruptcy Clause for almost a century after the Nation’s founding.
It also neglects the understanding of the Bankruptcy Clause that developed shortly after ratification: namely, that Congress’ powers with regard to insolvency were simply to impose uniformity, and that the states continued to enjoy full power to enact bankruptcy legislation that would apply to debtors within their realm.
The Supreme Court’s 1819 decision in Sturges v. Crowninshield, striking down a New York bankruptcy law under the Contracts Clause, upended this. But the issue remained contested – and thus the need for a national bankruptcy law debated – until the Gilded Age. By this time, relations between the states and the federal government had been hugely revamped by the Fourteenth Amendment, which made the original “Hamiltonian” project more consistent with the overall conception of the Constitution.
In this article I argue that the only way to really understand the Bankruptcy Clause is to relearn its history. Central to the new understanding of the Clause I suggest is understanding the ways in which American bankruptcy law as enacted by the colonies and the states diverged from that of England. This divergence was well-established by the revolution, and helps to explain why the federal 1800 Bankruptcy Act, which was heavily reflective of English bankruptcy practice, was so ill-received.
Keywords: Bankruptcy, Constitution, Legal HIstory, Dodd-Frank Orderly Liquidation Authority
Suggested Citation: Suggested Citation