Friday, June 5, 2009

Federalist 44 and the US Bankruptcy Code

Posted on Credit Slips by Stephen Lubben:

As others have noted, the Indiana Pension Funds invoke the founding fathers in support of their claim that the government is rolling over their rights as creditors. This part of the brief particularly stands out:

As James Madison wrote long ago in language that is still markedly salient today: “laws impairing the obligation of contract are contrary to the first principles of the social compact, and to every principle of sound legislation.” The FEDERALIST No. 44 (James Madison).

I'm not a constitutional law expert, but this quote seems out of context to me. Federalist 44 deals with the Contract Clause, the prohibition on the States passing laws impairing contractual obligations. Congress' power under the Bankruptcy Clause is not subject to this limitation. The Supreme Court, under the Chief Justice Marshall, explained the relationship between the two clauses in 1819 in Sturges v. Crowninshield:

Without entering further into the delicate inquiry respecting the precise limitations which the several grants of power to congress, contained in the constitution, may impose on the state legislatures, than is necessary for the decision of the question before the court, it is sufficient to say, that, 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, provided it contain no principle which violates the 10th section of the first article of the constitution of the United States [the Contract Clause].

Indeed, it is arguable that a Bankruptcy Code would be unworkable, or at least of limited value, it if could not impair the obligations of preexisting contracts. And similarly, seen from the perspective of those founding fathers who saw debtor-creditor law as an important part of the national economy, it makes perfect sense that the State's ability to atomize debt collection law would be restricted.

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