“The committing an act of bankruptcy is, in law, considered as criminal. The bankrupt law is, therefore, in this respect, to be construed strictly.”
This quotation is a punch line from the very first opinion by the U.S. Supreme Court on a federal bankruptcy law: Wood v. Owings, 5 U.S. (1 Cranch) 239 (1803). [Fn. 1]
The “Criminal” Nature
The “criminal” reference for bankruptcy debtors is cringe-worthy, by today’s understanding. But it is significant because:
- It arose during a time when prison was an accepted remedy for an entrepreneur’s non-payment of debts; and
- It reveals the historical backdrop from which today’s attitudes towards debtors in bankruptcy are drawn [e.g., our relatively recent Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 is punitive towards all but the most-impoverished debtors].
The Wood v. Owings case is an appeal from the Federal Circuit Court for the District of Maryland, sitting at Baltimore.
The Case Chronology
April 4, 1800: U.S. Congress passes the Bankruptcy Act of 1800—this is the first-ever U.S. law on the subject of bankruptcy, which deals exclusively with entrepreneurs.
May 30, 1800: William Robb signs, seals, and delivers a deed conveying his “real and personal estate in trust” (including “two vessels . . . on the high seas”) as an assignment for creditors under Maryland’s insolvency law.
June 2, 1800: The Bankruptcy Act of 1800 becomes operative, with the provision that it applies to any conveyance made “after 1 June next succeeding the passage of the act, with intent unlawfully to delay or defraud” creditors.
June 14, 1800: The said deed is “acknowledged” and “enrolled according to the laws of Maryland.”
July 12, 1800: William Robb is declared a bankrupt, under the Bankruptcy Act of 1800, based upon the said deed being a fraudulent transfer (since the transfer was for the benefit of some—but not all—creditors), and suit is brought under the Act against the deed’s grantee to recover the money received by him under the deed.
Is the Bankruptcy Act of 1800 applicable to a deed that was, (i) signed, sealed and delivered before the operative date of the Act, but (ii) acknowledged after that date?
The U.S. Supreme Court rules:
- Had the deed been executed three days later (after the first day of June), it would have been subject to the provisions of the Bankruptcy Act of 1800; but
- Since the deed is signed, sealed and delivered on May 30, 1800, it is “not within the act, which only comprehends conveyances made after 1 June.”
The Losing Argument
The losing party argues:
- Under the laws of Maryland, a deed is not complete until it is acknowledged; and
- This conveyance was made on June 14, 1800, when it was acknowledged, and not on May 30, when it was sealed and delivered.
The Maryland law alluded to declares, “any estate for above seven years, shall pass or take effect except the deed . . . shall be acknowledged in the provincial court . . . and be also enrolled, &c., within six months after the date of such deed or conveyance.”
Here’s the rationale of the U.S. Supreme Court on why such argument loses:
- “It is well established doctrine of the common law that a deed becomes complete when sealed and delivered”—it “then becomes the act of the person who has executed it, and whatever its operation may be, it is his deed”;
- The acknowledgment “is not a necessary part of the deed”—instead, it means only that “a deed, not acknowledged, will not pass a legal estate in lands, as to creditors”;
- “the words used in the act of Maryland, which have been recited, consider the instrument as a deed, although inoperative until acknowledged and enrolled”—such words “do not apply to the instrument, but to the estate that instrument is intended to convey”;
- Since the bankruptcy law is criminal in nature, it must be strictly construed; and
- Since “the bankrupt law of the United States does not affect deeds made prior to 1 June, 1800, and this deed was made on 30 May, 1800,” the deed is not subject to its provisions.
The U.S. Supreme Court’s first-ever opinion on the subject of bankruptcy is revealing on the attitudes of olde toward entrepreneurs in bankruptcy, which attitudes have implications for today’s views on the subject of debtors in bankruptcy.
Footnote 1: Thanks to John P. Barrett for his research efforts (while serving as a Summer Associate at Koley Jessen P.C., L.L.O.) toward identifying this Wood v. Owings opinion as the U.S. Supreme Court’s first-ever opinion on the subject of a federal bankruptcy law.
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