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CRS Annotated Constitution

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Liberalization of Relief Granted and Expansion of the Rights of the Trustee

As the coverage of the bankruptcy laws has been expanded, the scope of the relief afforded to debtors has been correspondingly enlarged. The act of 1800, like its English antecedents, was designed primarily for the benefit of creditors. Beginning with the act of 1841, which opened the door to voluntary petitions, rehabilitation of the debtor has become an object of increasing concern to Congress. An adjudication in bankruptcy is no longer requisite to the exercise of bankruptcy jurisdiction. In 1867, the debtor for the first time was permitted, either before or after adjudication of bankruptcy, to propose terms of composition that would become binding upon acceptance by a designated majority of his creditors and confirmation by a bankruptcy court. This measure was held constitutional,1244 as were later acts, which provided for the reorganization of corporations that are insolvent or unable to meet their debts as they mature,1245 and for the composition and extension of debts in proceedings for the relief of individual farmer debtors.1246

Nor is the power of Congress limited to adjustment of the rights of creditors. The Supreme Court has also ruled that the rights of a purchaser at a judicial sale of the debtor’s property are within reach of the bankruptcy power, and may be modified by a reasonable extension of the period for redemption from such sale.1247 Moreover, the Court expanded the bankruptcy court’s[p.283]power over the property of the estate by affording the trustee affirmative relief on counterclaim against a creditor filing a claim against the estate.1248

Underlying most Court decisions and statutes in this area is the desire to achieve equity and fairness in the distribution of the bankrupt’s funds.1249 United States v. Speers,1250 codified by an amendment to the Bankruptcy Act,1251 furthered this objective by strengthening the position of the trustee as regards the priority of a federal tax lien unrecorded at the time of bankruptcy.1252 The Supreme Court has held, in other cases dealing with the priority of various creditors’ claims, that claims arising from the tort of the receiver is an “actual and necessary” cost of administration,1253 that benefits under a nonparticipating annuity plan are not wages and are therefore not given priority,1254 and that when taxes are allowed against a bankrupt’s estate, penalties due because of the trustee’s failure to pay the taxes incurred while operating a bankrupt business are also allowable.1255 The Court’s attitude with regard to these and other developments is perhaps best summarized in the opinion in Continental Bank v. Rock Island Ry.,1256 where Justice Sutherland wrote, on behalf of a unanimous court: “[T]hese acts, far–reaching though they may be, have not gone beyond the limit of Congressional power; but rather have constituted extensions into a field whose boundaries may not yet be fully revealed.”1257

Constitutional Limitations on the Bankruptcy Power

In the exercise of its bankruptcy powers, Congress must not transgress the Fifth and Tenth Amendments. The Bankruptcy Act provides that oral testimony cannot be used in violation of the bankrupt’s right against self–incrimination.1258 Congress may not take from a creditor specific property previously acquired from a debtor, nor circumscribe the creditor’s right to such an unreasonable extent as to deny him due process of law;1259 this principle, however, is subject to the Supreme Court’s finding that a bank[p.284]ruptcy court has summary jurisdiction for ordering the surrender of voidable preferences when the trustee successfully counterclaims to a claim filed by the creditor receiving such preferences.1260

Since Congress may not supersede the power of a State to determine how a corporation shall be formed, supervised, and dissolved, a corporation, which has been dissolved by a decree of a state court, may not file a petition for reorganization under the Bankruptcy Act.1261 But Congress may impair the obligation of a contract and may extend the provisions of the bankruptcy laws to contracts already entered into at the time of their passage.1262 Although it may not subject the fiscal affairs of a political subdivision of a State to the control of a federal bankruptcy court,1263 Congress may empower such courts to entertain petitions by taxing agencies or instrumentalities for a composition of their indebtedness where the State has consented to the proceeding and the federal court is not authorized to interfere with the fiscal or governmental affairs of such petitioners.1264 Congress may recognize the laws of the State relating to dower, exemption, the validity of mortgages, priorities of payment and similar matters, even though such recognition leads to different results from State to State;1265 for although bankruptcy legislation must be uniform, the uniformity required is geographic, not personal.

The power of Congress to vest the adjudication of bankruptcy claims in entities not having the constitutional status of Article III federal courts is unsettled. At least, it may not give to non–Article III courts the authority to hear state law claims made subject to federal jurisdiction only because of their relevance to a bankruptcy proceeding.1266


Footnotes

1244 In re Reiman, 20 Fed. Cas. 490 (No. 11,673) (D.C.S.D.N.Y. 1874), cited with approval in Continental Bank v. Rock Island Ry., 294 U.S. 648, 672 (1935).
1245 Continental Bank v. Rock Island Ry., 294 U.S. 648 (1935).
1246 Wright v. Vinton Branch, 300 U.S. 440 (1937); Adair v. Bank of America Assn., 303 U.S. 350 (1938).
1247 Wright v. Union Central Ins. Co., 304 U.S. 502 (1938).
1248 Katchen v. Landy, 382 U.S. 323 (1966).
1249 Bank of Marin v. England, 385 U.S. 99, 103 (1966).
1250 382 U.S. 266 (1965). Cf. United States v. Vermont, 337 U.S. 351 (1964).
1251 Act of July 5, 1966, 80 Stat. 269 , 11 U.S.C. Sec. 501 , repealed.
1252 382 U.S., 271–272.
1253 Reading Co. v. Brown, 391 U.S. 471 (1968).
1254 Joint Industrial Board of the Election Industries v. United States, 391 U.S. 224 (1968).
1255 Nicholas v. United States, 384 U.S. 678 (1966).
1256 294 U.S. 648 (1935).
1257 Id., 671.
1258 11 U.S.C. Sec. 344 .
1259 Louisville Bank v. Radford, 295 U.S. 555, 589, 602 (1935).
1260 Katchen v. Landy, 382 U.S. 323, 327–340 (1966).
1261 Chicago Title and Trust Co. v. Wilcox Bldg. Corp., 302 U.S. 120 (1937).
1262 In re Klein, 1 How. (42 U.S.) 277 (1843); Hanover National Bank v. Moyses, 186 U.S. 181 (1902).
1263 Ashton v. Cameron County Dist., 298 U.S. 513 (1936). See also United States v. Bekii 304 U.S. 27 (1938).
1264 United Slates v. Bekins, 304 U.S. 27 (1938).
1265 Stellwagon v. Clum, 245 U.S. 605 (1918); Hanover National Bank v. Moyses, 186 U.S. 181, 190 (1902).
1266 Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50 (1982). And see Granfinanciera, S.A. v. Nordberg, 492 U.S. 33 (1989) (Seventh Amendment right to jury trial in bankruptcy cases).
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