How U.S. Constitution’s Contracts Clause Bans State Bankruptcy Laws (Sturges v. Crowninshield)

Filling the void (photo by Marilyn Swanson)

By: Donald L Swanson

No State shall . . . pass any . . . Law impairing the Obligation of Contracts.”

–U.S. Constitution, Art. 1, Sec. 10, Cl. 1 (the “Contracts Clause”).

One of the earliest opinions from the U.S. Supreme Court on the subject of bankruptcy is Sturges v. Crowninshield, 17 U.S. 122 (1819). 

The opinion arises during a time when no federal bankruptcy law exists.  And the question is whether the states can fill that void with their own bankruptcy laws.

Here’s how the U.S. Supreme Court rules, based on the Constitution’s Contracts Clause:

  • “The act of the State of New York, . . . so far as it attempts to discharge this defendant from the debt . . . , is contrary to the Constitution of the United States”;
  • State insolvency laws “discharge the person of the debtor from prison, but leave his obligation to pay in full force” — “to this the constitution is not opposed”;
  • “But where such laws did discharge the debt, it would not justify our varying the construction of the words of the constitution.” 

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 “Contracts Clause” of the U.S. Constitutionstion. As noted above, the U.S. Supreme Court agrees.

What follows is a summary of, (i) Crowninshield’s Contracts Clause argument supporting the New York discharge, and (ii) the Supreme Court’s rationale in rejecting that argument.

Crowninshield’s Contracts Clause Argument

The words “impairs the obligation of a contract” are not from the English common law or statute or used as a classical or technical term in any book of legal authority. 

Such words are probably from “that great treasury and reservoir of rational jurisprudence, the Roman law.”  Romans protected the rights of creditors with utmost vigilance and severity. 

England also anxiously guards the rights of creditors because her best reputation and interests depend upon commerce and the integrity of her merchants and manufacturers.  And yet England, more than any other country, has her system of insolvency and bankruptcy. 

Good sense, in all ages and in all countries, is the same. As in Rome, in England, and in all other commercial countries, bankrupt and insolvent laws have never been considered as impairing the obligation of a contract. 

Insolvent laws are based upon the confessed and physical inability of a party to perform a pecuniary contract, otherwise than by a surrender of all he has.  The result is that exemption from performance, when confronted by impossibility, is implied in every contract. 

The obligation of a contract, and a remedy for its performance, are different things:

  • The performance of the contract shall be exact, and imprisonment is a remedy for enforcing it; but
  • where there is an inability to perform the contract, society will not protract indefinitely and miserably a vindictive punishment. 

The moral obligation of a contract may, perhaps, remain for ever, but misfortune and extreme indigence put an end to the legal obligation, in the same way as war does to a treaty; as revolution does to a pre-existing government; as death does to personal duties; as insanity does from crimes. 

If the words of the constitution were meant to prohibit passage of bankrupt and insolvent laws, why not, in plain terms, have said so? 

  • It could not have been meant to bury such a meaning under obscurity;
  • To suppose the framers of the constitution were designedly obscure on this delicate and dangerous subject, is an impeachment of their integrity; and
  • To suppose they had so little command of language as to employ such terms to express such a thought, is an unjust imputation upon their acknowledged talents.

If bankrupt and insolvent laws are unconstitutional because they impair contracts, wouldn’t statutes of limitations also be constitutionally repugnant?  Statutes of limitations:

  • take away the remedy, after six years; while the insolvent law does so at once; 
  • hypothetically, confining the statute of limitations remedy to sixty days, or six days, would be an indiscreet, impolitic and unwise law—but it would not be unconstitutional; and
  • if statutes of limitation are valid, it must be that they do not impair the obligation of a contract. 

Yet statutes of limitation have the same effect on contracts as insolvent laws:

  • both take away the remedy;
  • neither annuls the obligation, because a subsequent promise, in both cases, revives, the debt; and
  • if a contract obligation were annulled or impaired by a statute of limitations, a subsequent promise to pay would be void as without consideration.

Or if, for example, states were to abolish imprisonment for debt entirely, could their right be disputed?  The states have such power, even if it’s exercise would prevent a creditor from getting a debt repaid.   

When the sages of the constitutional convention inserted this Contracts Clause into our constitution, they meant:

  • no more, or less, than the inviolability of contracts; and what system of religious faith or of ethics, or of jurisprudence, ever meant less? 
  • But they also meant, that every contract must be limited by the law of nature, which is that necessity (physical, moral necessity) knows no law, but itself. 

The states, in enacting and enforcing their bankrupt and insolvent laws:

  • are exercising their power of discharging poverty and indigence;
  • are conducting themselves lawfully and constitutionally; and
  • are avoiding an impiously absurd result.

It is unjust to insinuate that the constitution of the United States prohibits such an exercise of power. 

As to the power over laws of insolvency (discharging debtors from confinement in debtors’ prisons), Congress cannot exercise it; as to bankruptcies (discharging debts), Congress refuses to act.  The states, therefore, must exercise this power. 

The law would be strange, indeed, that, at the same moment, presses upon society two inconsistent and contradictory duties, as that of:

  • exacting for the payment of debts what the impoverished and imprisoned debtor does not have; and
  • obliging those who have something, to give the debtor a share of what they have, to save the debtor from suffering or death. 

If state law, in the absence of a bankruptcy law from Congress, cannot discharge the debt, here’s what results:

  • Creditor retains the right to a “miserable chance” of recovering from the future acquisitions of the insolvent debtor; and
  • That “miserable chance” often leaves imprisonment as the only viable remedy.

Such a result could not be what the constitutional convention had in view.  Otherwise:

  • you discharge the debtor from prison, to condemn him to work in the mines, and that too, with his chains upon him—you remit the lesser, to inflict the greater punishment;
  • you take debtor from a life of listless indolence, where you are obliged to maintain him, and doom him to a life of labor, without hope;
  • “Nay, worse, you so place him as to have every step watched by a lynx-eye avarice; every morsel he puts into his mouth counted and weighed; every personal indulgence censured; every family sympathy scanned and reprimanded”—“such freedom would be a mockery: nay, worse, it would be aggravated slavery and complicated misery!” 

It is admitted, that the state has a right to the service of its citizens:

  • to fight its battles on the land and ocean;
  • to cultivate its fields, enlarge its industry, promote its prosperity, signalize its fame; but 
  • It does not want a heartless, purposeless, mindless being—but half a man—a worse than slave; it wants a citizen, with all his worth and all his energies of body, mind and soul. 

But what services can ever be rendered by him who is pressed down to the earth by a poverty that must be hopeless and interminable? 

It is an historical fact, that the early English statutes of bankruptcy did not provide for the discharge either of the debt or of the person:

  • Discharge is not mentioned, nor in any way provided for, until after the system of bankruptcy had been established almost two centuries; 
  • Discharge is expressly provided for, it is the object and intention of the first regular insolvent law of England, in the act of 1755, which served as a model for colonial legislation;
  • The law of New York of 1755, and that of Rhode Island of 1756, were copied almost verbatim from this last; and 
  • There is, even now, no discharge, in the case of a second bankruptcy, unless the debtor pays seventy-five per cent of his debt, and in England, none at all, if he has even had the benefit of an act of insolvency. 

A technical construction ought not be given to a constitution of government: it ought to receive an equitable and liberal interpretation, affected by the events which preceded.  Here are questions that ought to be asked:

  • What were the evils which this article of the constitution was intended to remedy? 
  • What evils were the acts of desperation and violence of the revolution directed against?
  • As to the effects of poverty, indigence, natural and moral impossibility to perform contracts, no one complained, because they are among the long catalogue of human ills that exist in all countries and societies. 

The constitution’s obligations of contract provision presupposes a debtor who could pay all his debts.  But what actually happened in the present case is this:

  • Debtor contracted the debt in a time of peace and prosperity, when land was high, with coin in circulation, and with commercial intercourse free and unembarrassed; but
  • When Debtor was called upon to pay, the state of things was reversed—governments issued paper money, altered contractual terms and conditions, interfered in private concerns by extending indulgences in particular cases, and armed debtors with privileges against creditors. 

Insolvent laws were complained of by no one as the evil of the times.  In the debates of the various conventions:

  • no one suggested that the obligations of contract clause prohibited relief for poverty by insolvent laws; and
  • no one offered an amendment to avoid this lurking danger, except in Rhode Island, where it was rejected because passage of insolvent laws is nowhere prohibited in the constitution.

The practice of passing insolvent laws, which began in early colonial times and continued in daily unblamed operation, was not even referred to as an evil.  Instead, state insolvent laws have since been sanctioned by:

  • thirty years’ practice;
  • absence of all complaint;
  • decisions of state and federal courts;
  • acquiescence of congress; and
  • acquiescence of creditors. 

It has taken thirty years to discover the occult meaning that insolvent laws are prohibited within the mystical veil of constitutional language. 

If state insolvent laws are unconstitutional as impairing contracts, what do we do with the following:  

  • A judgment? The judges of England have declared that a judgment is no contract—the creditor has merged the contract into a judgment, so the creditor is no longer protected by the constitution. 
  • A contract of marriage?  The states impair and dissolve such contracts by divorces. 
  • Laws allowing impairment of contract by accident, misfortune, irresistible force, calamity, inevitable necessity, and the decrees and acts of God himself. 

The rule of interpretation, as to insolvent laws, should follow the same common sense.  A whole nation, on such a subject, cannot be in the wrong. 

The parties in the present action contracted with the full knowledge of the New York law, and the practice of the states upon such laws.  Every creditor knows he/she can be paid only what the surrendered property of a distressed debtor can pay. 

But Crowninshield’s argument fails.  What follows is the Supreme Court’s rationale.

Supreme Court’s Contracts Clause Opinion

Question: Does the bankruptcy law of New York impair the obligation of contracts, within the meaning of the constitution of the United States? 

The New York law does two things: it, (i) liberates the person of the debtor, and (ii) discharges him from all liability for any debt previously contracted, on his surrendering his property.

Our first inquiry is this: what is the obligation of a contract? and what will impair it? 

A contract is an agreement, in which a party undertakes to do, or not to do, a particular thing, and the law binds him to perform his undertaking.  This is, of course, the obligation of his contract. 

In the case at bar, the defendant has given his promissory note to pay the plaintiff a sum of money, on or before a certain day.  The contract binds him to pay that money, on that day; and this is its obligation. 

Any law which releases a part of this obligation, must, in the literal sense of the word, impair it—and much more when the law entirely discharges the obligation.

The words of the constitution are express and incapable of being misunderstood—and apply to the promissory notes involved here. 

It is contended that a contract can only bind someone to pay to the full extent of his property and is discharged on surrendering the whole of it.  But future acquisitions are also liable for contracts; and to release them from this liability impairs their obligation.

Until Congress exercises its “Bankruptcies” power under the Constitution, the states have power to do so.  However, the states cannot constitutionally include in such laws a discharge of the obligations a bankrupt has already entered into. 

The constitutional convention did not intend to prohibit the passage by states of all insolvent laws.  Here’s why:

  • To punish honest insolvency by imprisonment for life, and to make this a constitutional principle, would be an excess of inhumanity;
  • A debtor’s imprisonment may be a punishment for not performing his contract or a means of inducing its performance; but
  • Imprisonment is no part of the contract, and simply to release the prisoner, does not impair its obligation. 

Although the spirit of an instrument, especially of a constitution, is to be respected not less than its letter, yet the spirit is to be collected chiefly from its words. 

It is said, the colonial and state legislatures have been in the habit of passing insolvent laws of this description for more than a century; that they have never been the subject of complaint, and, consequently, could not be within the view of the general convention.  However, such laws discharge the person of the debtor from prison, but leave his obligation to pay in full force.  To this the constitution is not opposed.  But where such laws did discharge the debt, it would not justify our varying the construction of the words of the constitution. 

We must give the words their full and obvious meaning.  The convention appears to have intended to establish a great principle, that contracts should be inviolable.  The constitution, therefore, declares, that no state shall pass ‘any law impairing the obligation of contracts.’  These words prohibit the passage of any law discharging a contract, without performance.

The analogies of statutes of limitations and laws against usury, urged by the Debtor, have no merit.  Here’s why:

  • Statutes of limitations relate to the remedies which are furnished in the courts; and
  • A usury law that an interest rate greater than six per centum per annum renders a contract void, renders a contract made thereafter, reserving seven per cent, void from the beginning.

It is the opinion of the court, that the act of the state of New York, which is pleaded by the defendant in this cause, so far as it attempts to discharge this defendant from the debt in the declaration mentioned, is contrary to the Contracts Clause in the Constitution of the United States.

Conclusion

The Sturges v. Crowningshield opinion makes perfect legal and logical sense.

It also highlights the ever-continuing need for Congress to assure that our bankruptcy laws are adequate to meet the needs of our developing economy and society.

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