ArtI.S8.C4.2.4 Expansion of the Scope of Bankruptcy Power

Article I, Section 8, Clause 4:

[The Congress shall have Power . . . ] To establish an uniform Rule of Naturalization, and uniform Laws on the subject of Bankruptcies throughout the United States; . . .

Through the years, Congress has expanded the coverage of the bankruptcy laws. As a result, the scope of statutory relief afforded debtors and the rights of creditors have been correspondingly adjusted. The act of 1800,1 like its English antecedents, was designed primarily to benefit creditors.2 Beginning with the act of 1841,3 which first permitted voluntary petitions, debtor rehabilitation has become an object of increasing importance in American bankruptcy law.4 Under the act of 1867,5 as amended in 1874,6 the debtor was permitted, either before or after adjudication of his or her bankruptcy, to propose terms of composition that would become binding if accepted by a designated majority of his or her creditors and confirmed by a bankruptcy court.7 In a decision by the United States District Court for the Southern District of New York that the Supreme Court would later cite with approval, future-Justice Samuel Blatchford held that this measure was constitutional.8 The Supreme Court has upheld the constitutionality of laws that provided for the reorganization of corporations that were insolvent or unable to meet their debts as they matured,9 limitation of landlords’ claims for indemnification for rent,10 and composition and extension of debts in proceedings for the relief of individual farmer debtors.11 The Court also has concluded that a bankruptcy court is permitted under the Constitution to authorize sales of property free from encumbrance by state tax liens,12 and that, because Congress “possesses supreme power in respect of bankruptcies,” a state that desires to recover assets in a bankruptcy must comply with bankruptcy court requirements regarding filing claims by a designated date.13

Congress’s bankruptcy power is not limited to adjusting creditor rights. The Supreme Court has ruled that Congress’s bankruptcy power extends to a purchaser’s rights at a judicial sale of a debtor’s property, and Congress may modify such rights by reasonably extending the period for redemption from such sale.14 The Court has also held that a federal law permitting reorganization courts to stay pending bankruptcy court proceedings “was within the power of Congress,” 15 and that a statute enacted under Congress’s bankruptcy power deprived a state court of power to proceed with pending foreclosure proceedings after a farmer-debtor filed a petition in federal bankruptcy court for a composition or extension of time to pay his debts.16 All of these developments demonstrate the Supreme Court’s broad view of “the subject of Bankruptcies.” 17 In Wright v. Union Central Life Insurance Co.,18 the Court explained that, while “incapable of final definition,” “[t]he subject of bankruptcies is nothing less than the subject of the relations between an insolvent or nonpaying or fraudulent debtor and his creditors, extending to his and their relief.” 19

The Court considered the relationship between the Bankruptcy Clause and the Eleventh Amendment20 in Central Virginia Community College v. Katz.21 In Katz, the Court determined that the Eleventh Amendment poses no obstacle to proceedings by bankruptcy trustees to avoid preferential transfers of property to state agencies and to recover such property. The Court held that, when they ratified the Bankruptcy Clause, states relinquished their ability to assert sovereign immunity as a defense in proceedings that implicate a bankruptcy court’s authority over the debtor’s property and the bankruptcy estate.22 The Court determined that given this relinquishment, Congress’s effort to abrogate sovereign immunity in Section 106 of the Bankruptcy Code23 was unnecessary.24

Act of Apr. 4, 1800, ch. 19, 2 Stat. 19 (repealed 1803). back
See Continental Bank v. Rock Island Ry., 294 U.S. 648, 670 (1935). back
Act of Aug. 19, 1841, ch. 9, 5 Stat. 440 (repealed 1843). back
See Louisville Joint Stock Land Bank v. Radford, 295 U.S. 555, 588 (1935) ( “The discharge of the debtor has come to be an object of no less concern than the distribution of his property.” ). back
Act of March 2, 1867, ch. 176, 14 Stat. 517 (repealed 1878). back
Act of June 22, 1874, ch. 390, 18 Stat. 178 (repealed 1878). back
Id. § 17, 18 Stat. at 182–84. Under the composition procedure of the 1874 amendments, a debtor could offer a plan to retain its property and repay its creditors a portion of its obligations over a period of time. Charles Jordan Tabb, The History of the Bankruptcy Laws in the United States, 3 Am. Bankr. Inst. L. Rev. 5, 21 (1995) (discussing Section 17 of the 1874 amendments). If a creditor did not agree to the composition agreement, the 1874 amendments provided that the creditor must obtain the same amount of value it would have obtained in liquidation proceedings. Id. at 21 (citing Act of June 22, 1874, Ch. 390, § 17, 18 Stat. at 183). back
In re Reiman, 20 F. Cas. 490 (D.C.S.D.N.Y. 1874) (Blatchford, J.), cited with approval in Continental Bank, 294 U.S. at 672. back
Rock Island Ry., 294 U.S. 648, 671–75 (1935). back
Kuehner v. Irving Trust Co., 299 U.S. 445, 450–51 (1937). back
Wright v. Vinton Branch, 300 U.S. 440, 466–70 (1937); Adair v. Bank of America Ass’n, 303 U.S. 350, 355–56 (1938). back
Van Huffel v. Harkelrode, 284 U.S. 225, 228 (1931); see Gardner v. New Jersey, 329 U.S. 565, 578 (1947) (stating, citing Van Huffel, that “[t]he constitutional authority of Congress to grant the bankruptcy court power to deal with the lien of a State has been settled,” and holding that a “reorganization court [had] jurisdiction over” property “on which [the State of] New Jersey assert[ed] a lien, and that the power of the court to deal with liens extend[ed] to the lien which New Jersey claim[ed]” ). back
New York v. Irving Trust Co., 288 U.S. 329, 333 (1933). back
Wright v. Union Cent. Life Ins. Co., 304 U.S. 502, 514–15 (1938). A right of redemption is “the right of the borrower to redeem the property by paying off the entire balance of the mortgage” and a “redemption period is a period during which the borrower has redemption rights.” Andra Ghent, How Do Case Law and Statute Differ? Lessons from the Evolution of Mortgage Law, 57 J. Law & Econ. 1085, 1090 (2014). back
Duggan v. Sansberry, 327 U.S. 499, 510 (1946). back
Kalb v. Feuerstein, 308 U.S. 433, 439–40 (1940). The Court has upheld or opined on other statutory provisions as within the scope of Congress’s bankruptcy power. See Reconstruction Fin. Corp. v. Denver & R. G. W. R. Co., 328 U.S. 495, 509 (1946) (holding that Congress’s delegation of “authority to the [Interstate Commerce] Commission to eliminate valueless claims from participation in reorganization is a valid exercise of the federal bankruptcy power,” and stating that this conclusion is a restatement of the Court’s decisions in Group of Institutional Investors v. Chicago, M., S. P. & P. R. Co., 318 U.S. 523 (1943), and Ecker v. Western P. R. Corp., 318 U.S. 448 (1943)); see also BFP v. Resolution Trust Corp., 511 U.S. 531, 543 (1994) ( “Surely Congress has the power pursuant to its constitutional grant of authority over bankruptcy . . . to disrupt the ancient harmony that foreclosure law and fraudulent conveyance law, those two pillars of debtor-creditor jurisprudence, have heretofore enjoyed. But absent clearer textual guidance . . . we will not presume such a radical departure.” ); Butner v. United States, 440 U.S. 48, 54 (1979) (opining that, although Congress had not elected to do so, “[t]he constitutional authority of Congress to establish ‘uniform Laws on the subject of Bankruptcies throughout the United States’ would clearly encompass a federal statute defining the mortgagee’s interest in the rents and profits earned by property in a bankrupt estate” ) (quoting U.S. Const. art. I, § 8, cl. 4); Schumacher v. Beeler, 293 U.S. 367, 374 (1934) (explaining that “Congress, by virtue of its constitutional authority over bankruptcies, could confer or withhold jurisdiction to entertain . . . suits” by the bankruptcy trustee against an adverse claimant “and could prescribe the conditions upon which the federal courts should have jurisdiction.” ); United States v. Fox, 95 U.S. 670, 672 (1877) (explaining that statutory provisions designed to prevent fraud concerning the distribution of proceeds to creditors or the debtor’s discharge “would seem to be within the competency of Congress” ). back
U.S. Const. art. I, § 8, cl. 4 (Congress is empowered “[t]o establish . . . uniform Laws on the subject of Bankruptcies throughout the United States” (emphasis added)). back
304 U.S. 502 (1938). back
Id. at 513–14 (citation and internal quotation marks omitted). back
U.S. Const. amend. XI. For more information about the Eleventh Amendment, see Amdt11.1 Overview of Eleventh Amendment, Suits Against States to Amdt11.6.4 Tort Actions Against State Officials. back
546 U.S. 356 (2006). back
Id. at 378. back
11 U.S.C. § 106. Section 106 states that “sovereign immunity is abrogated as to a governmental unit to the extent set forth in this section with respect to” a number of sections of the Bankruptcy Code. Id. § 106(a). A “governmental unit” includes a state. Id. § 101(27). The Court had held, in two prior decisions, that an earlier version of Section 106 had not successfully abrogated state or federal sovereign immunity regarding suits seeking monetary recoveries. United States v. Nordic Village, Inc., 503 U.S. 30, 39 (1992); Hoffman v. Conn. Dep’t of Income Maintenance, 492 U.S. 96, 104 (1989) (plurality); id. at 105 (O’Connor, J., concurring); id. (Scalia, J., concurring in the judgment). In their concurring opinions in Hoffman, Justices O’Connor and Scalia, respectively, opined that the Bankruptcy Clause did not permit Congress to abrogate states’ sovereign immunity. Id. at 105 (O’Connor, J., concurring); id. (Scalia, J., concurring in the judgment). back
Katz, 546 U.S. at 361–62. A year earlier, the Court held that a debtor’s adversary proceeding against a state to establish the dischargeability of student loan debt was “not a suit against a State for purposes of the Eleventh Amendment.” Tenn. Student Assistance Corp. v. Hood, 541 U.S. 440, 451 (2005). back