Bankruptcy Laws v. Insolvency Laws: A Debtors’ Prison Distinction (Sturges v. Crowninshield)

By: Donald L Swanson

Over the past two hundred and thirty years, the United States of America has been flying high on a massive economic expansion, punctuated periodically by times of economic stress or crisis.

Bankruptcy laws have struggled to keep pace with the expansion and occasional turmoil.

An earliest of such struggles is the effort to eliminate debtors’ prisons in the early 1800s.  That particular struggle created a distinction between:

• “insolvent laws” that discharged a debtor’s body from imprisonment; and
• “bankrupt laws” that discharged a debtor from his/her debts.

One of the U.S. Supreme Court’s earliest bankruptcy opinions, illustrating this struggle, is Sturges v. Crowninshield, 17 U.S. 122 (1819).  This opinion arises during the earliest days of these United States, when no federal bankruptcy law even existed.  Note this chronology:

Facts

Sturges sues Crowninshield in a Massachusetts state court on two promissory notes, both dated at New York, on March 22, 1811, for the sum of $771.86 each. 

Crowninshield raises this defense: his promissory note obligations to Sturges have already been discharged under New York’s “act for the benefit of insolvent debtors and their creditors.” 

Sturges insists that Crowninshield’s discharge under New York’s law is unconstitutional, based on the “Bankruptcies” clause of the U.S. Constitutionstion.

Here’s how the U.S. Supreme Court rules on the “Bankruptcies” clause issue: 

• “until the power to pass uniform laws on the subject of bankruptcies be exercised by congress, the states are not forbidden to pass a bankrupt law.”  [Fn. 1]

However, what’s truly fascinating about the Sturges case is Crowninshield’s impassioned, history-based arguments supporting the New York law under the “Bankruptcies” clause!  What follows is an attempt to summarize Crowninshield’s “Bankruptcies” clause arguments.

First Argument: Insolvent v. Bankrupt

Congress’s constitutional power is to pass uniform laws on the subject of bankruptcies: this power is to pass “bankrupt” laws, not “insolvent” laws.  While the two are analogous subjects, no two things are more clearly distinguishable: they have meant different things for nearly three centuries.

In ancient times, imprisonment for debt was unknown—it was even against Magna Charta. 

In England’s feudal times, different counties were held by great lords; “the greater part of the population were their villeins; commerce hardly existed; and contracts were unfrequent.”  The principal contracts that existed, back then, were between lords and their operatives: e.g., their bailiffs, servants, fine leviers, chamberlains, rent receivers and revenue disbursers. 

In the year 1267, imprisonment for debt was first given against the bailiffs.  In 1283, the imprisonment remedy for debts extended to servants, chamberlains, and receivers. 

A later statute extended imprisonment to other debtors, which served to fill the jails of England beyond capacity.  Sixty years later, a new statute began to restrict debtor imprisonment and guard against its abuses. 

On November 11, 1618, the term “insolvency” is expressly mentioned. 

The first insolvent law was passed in 1660 and became the model of all that followed in the subsequent parliaments in England, and by our colonial legislatures, with almost unvarying exactness. 

About forty acts of insolvency have passed from that time to the present (i.e., 1819) in Great Britain.  A regular system of insolvency becomes established, in courts possessing a jurisdiction that is clearly distinguished from bankruptcy.  In fact, cases of insolvency are being decided in one room of Guildhall, while bankruptcy cases are being decided in another. 

So, both insolvency laws and bankruptcy laws are creatures of statute, which have been defined over the course of centuries by parliamentary enactments. 

In strict chronology, the bankrupt laws came first: in 1542.  There are fourteen or fifteen different acts, since then, that form the present system (i.e., in 1819) of bankruptcy in England. 

Thus, the following occurred simultaneously:

• Insolvent statutes were being created for the benefit of all prisoners confined for debt; and
• Bankrupt statutes were being created that would discharge merchants and traders from their debts upon surrendering their property. 

This distinction of discharge from prison (insolvency) v. discharge of debt (bankruptcy) was perfectly well known to our ancestors in England. 

All the colonies, in some shape or other, had insolvent laws, while only a few had bankrupt laws.  For example: 

• In 1698, Massachusetts passed an insolvent law—a law for the relief of poor prisoners confined for debt; and
• In 1713, that same colony also passed an act concerning bankrupts and for the relief of the creditors of such persons. 

The term insolvency, in its most comprehensive sense, is a universal, of which bankruptcy is a particular.  So, the grant of power of “Bankruptcies” to Congress narrows the previous power of the states, only by excluding from them the power to make uniform laws on the ancient and distinct matter of bankruptcy. 

How have the Congress of the United States and the individual states addressed this distinction?   

• States have always asserted their power to pass insolvent laws, and the United States have always assented; and
• Very soon after the adoption of the constitution, a bankrupt law was introduced into Congress, but it was postponed on the ground that the state insolvent laws were sufficient. 

Thus, Congress and the various states have always agreed upon this point of power.   

Second Argument: An Unexercised Power        

If Congress fails to act upon the grant of bankruptcy power in the Constitution, the states retain the right to do so. 

This proposition arises from the the nature and condition of human affairs and from necessity:

• the duties of humanity are imperative and indispensable, and must be exercised by some one holding the guardian powers of the community; and
• the power to grant relief in the extremities of debt and indigence is a moral necessity—it is essential for the existence and well-being of civilized and commercial society.

When the states, collectively, grant this power to Congress, the exercise of that power is imposed upon Congress as a duty; and if Congress does not exercise that power, the states, by necessity, must. 

Why was the power over bankruptcies granted to Congress at all?  The answer is this:

• So that the power might be exercised, being necessary for the good of the community; and
• As long as Congress fails to act, the power must, justly and properly, be re-assumed by the states. 

Crowninshield’s summary of his unsuccessful argument is this:

• The states, not Congress, have the power to pass insolvent laws;   
• Congress has power to pass bankrupt laws, and if it does, such laws will be paramount; but
• If Congress fails to enact bankrupt laws, the states may do so, since they once held the bankrupt power. 

Conclusion

The struggle to keep bankruptcy laws abreast of the U.S. economy’s development and expansion has always been difficult.  In the beginning, the federal government held the power to make such laws but failed or refused to exercise that power.

Meanwhile, both before and after the revolution from England, the colonies/states provided both insolvency and bankruptcy relief under their own laws. 

It took decades for the federal government to exercise its bankruptcy power/duty.  During those decades:

• interstate travel and commerce were expanding in dramatic ways;
• intervening times of economic troubles highlighted the need for the federal government to act; and
• much confusion and human tragedy surrounded the subjects of bankruptcy, debtors’ prisons and insolvency laws.

Similarly, today, we have punitive and outdated provisions of the Bankruptcy Code that need to be addressed.  And it’s a struggle to get that accomplished—even as progress is being made.  

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Footnote 1. Despite this “Bankruptcies” clause ruling, the Supreme Court ultimately ruled against Crowninshield, rejecting his state-law discharge defense because of the Constitution’s prohibition against states impairing obligations of contract.

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