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Effect of National Bankruptcy Act on State Insolvency Laws and on Assignments for Creditors.
1. Validity of State Insolvency Laws.
State Insolvency Laws Suspended by National Bankruptcy Law.
3. Same What State Laws Affected.
4. Same Cases Not Covered by Bankruptcy Law.
5. Same-Laws Regulating Assignments for Creditors.
6. Rights of Trustee in Bankruptcy as Against Assignee for Creditors.
7. Practical Effect of Suspension of State Insolvency Laws.
8. Pending Proceedings under State Laws.
1. Validity of State Insolvency Laws.
Insolvency laws may be passed by the several states, regulating the distribution of the estates of insolvent debtors, on their own petition or on compulsory proceedings against them, and authorizing the discharge of debtors from their obligations and liabilities on just and reasonable terms. But these laws are subject to three important limitations: First, they cannot have any effective operation while a national bankruptcy law is in force. Whether the federal law is enacted before or after the passage of the state law, it suspends all state statutes on the same subject so long as it continues in effect. Second, state laws of this kind cannot apply to citizens of other states having claims against the debtor, for the state has no jurisdiction over them, unless they voluntarily submit their claims to the jurisdiction and agree to participate in the distribution of the estate. Third, such state laws cannot apply to contracts entered into before their enactment, for that would impair the obligation of such contracts. Ogden v. Saunders, 12 Wheat. 213, 6 L. Ed. 606; Baldwin v. Hale, 1 Wall. 223, 17 L. Ed. 531; Gilman v. Lockwood, 4 Wall. 409, 18 L. Ed. 432; Brown v. Smart, 145 U. S. 454, 12 Sup. Ct. 958, 36 L. Ed. 773; Hempsted v. Bank, 78 Wis. 375, 47 N. W. 627; Newton v. Hagerman (C. C.) 22 Fed. 525; Roberts v. Atherton, 60 Vt. 563, 15 Atl. 159, 6 Am. St. Rep. 133. Compare Orr v. Lisso, 33 La. Ann. 476. But the fact that the constitution vests in congress the exclusive power to enact bankruptcy laws uniform throughout the United States does not deprive the states of authority to make and enforce insolvency laws, until congress acts. "It is well settled that the power granted to congress by the constitution, to establish uniform laws on the subject of bankruptcies throughout the United States, does not, until the power is exercised and such laws are put into operation by congress, exclude the right of the states to pass similar laws; and that the operation of state insolvency laws is therefore superseded and suspended, so far, at least, as the two are applicable to the same persons, as soon as a national bankruptcy law has taken effect, and not before." Day v. Bardwell, 97 Mass. 246. See, also, Pettit v. Seaman, 2 Root, 178; Pugh v. Bussel, 2 Blackf. 394; Butler v. Goreley, 146 U. S. 303, 13 Sup. Ct. 84, 36 L. Ed. 981.
2. State Insolvency Laws Suspended by National Bankruptcy Law.
It is well settled that the passage of a national bankruptcy law by congress renders it the supreme law of the land, binding alike upon state and federal tribunals. All state insolvency laws in force at the time must yield to it, and can no longer operate upon persons or cases within the purview of the federal statute. The latter does not indeed repeal or destroy the state laws on the same subject, but it supersedes them and suspends their operation for the time being. Sturges v. Crowninshield, 4 Wheat. 122, 4 L. Ed. 529; Ogden v. Saunders, 12 Wheat. 213, 6 L. Ed. 606; Baldwin v. Hale, 1 Wall. 223, 17 L. Ed. 531; In re Bruss-Ritter Co. (D. C.) 90 Fed. 651; In re Etheridge Furniture Co. (D. C.) 92 Fed. 329; In re Richard (D. C.) 94 Fed. 633; In re Mallory, 1 Sawy. 88, Fed. Cas. No. 8,991; Ex parte Eames, 2 Story, 322, Fed. Cas. No. 4,237; In re Merchants' Ins. Co., 3 Biss. 162, Fed. Cas. No. 9,441; Hudson v. Bigham, 12 Heisk. 58; Rowe
v. Page, 54 N. H. 190; In re Reynolds, 8 R. I. 485, 5 Am. Rep. 615; Lavender's Lessee v. Gosnell, 43 Md. 153; Steelman v. Mattix, 36 N. J. Law, 344; Fisk v. Montgomery, 21 La. Ann. 446; Van Nostrand v. Carr, 30 Md. 128; Boese v. Locke, 53 How. Prac. 148; Com. v. O'Hara, 6 Phila. 402; Lumber Co. v. Sawyer, 76 Minn. 118, 78 N. W. 1038; Harbaugh v. Costello, 184 Ill. 110, 56 N. E. 363, 75 Am. St. Rep. 147; E. C. Wescott Co. v. Berry, 69 N. H. 505, 45 Atl. 352; Bank v. Ware, 95 Me. 388, 50 Atl. 24; Mauran v. Carpet Lining Co. (R. I.) 50 Atl. 331; Manufacturing Co. v. Hamilton, 172 Mass. 178, 51 N. E. 529, 70 Am. St. Rep. 258; In re Macon Sash, Door & Lumber Co. (D. C.) 112 Fed. 323. In the face of such an array of decisions, the very few cases holding a contrary view (such as Reed v. Taylor, 32 Iowa, 209, 7 Am. Rep. 180, and In re Scholtz [D. C.] 106 Fed. 834) are not entitled to any consideration. The reason for this rule is found in the inevitable conflict between two statutes affecting, for similar purposes, the same subjectmatter, the same property, the same rights, and the same persons. Since they could not subsist together without direct and positive collision, the federal law must prevail; for a valid act of congress is declared by the constitution to be the "supreme law of the land.”
We have said that the bankruptcy act, while it suspends the operation of state insolvency laws, does not repeal or destroy them. Several important consequences follow from this doctrine. In the first place, no legislation by the state is necessary to put its insolvency law into abeyance during the life of the bankruptcy act, or to justify its courts in refusing to take jurisdiction of cases under such law; the suspension is accomplished by the mere supremacy of the act of congress and its paramount authority. Secondly, a state insolvency law which was in force at the time a national bankruptcy law was passed, or which has been enacted during the time the latter continues effective, is revived by the repeal of the federal statute, and at once resumes all its original force and operation, and this without any new legislation by the state. In other words, there is no necessity of re-enacting a state insolvency law; it did not cease to be a law of the state; and the repeal of the bankruptcy act suffices to remove the bar to its enforcement. Butler v. Goreley, 146 U. S. 303, 13 Sup. Ct. 84, 36 L. Ed. 981; Tua v. Carriere, 117 U. S. 201, 6 Sup. Ct. 565, 29 L. Ed. 855; In re Wright (D. C.) 95 Fed. 807; Lothrop v. Foundry Co., 128 Mass. 120: Ward v. Proctor, 7 Metc. (Mass.) 318, 39 Am. Dec. 782; Lavender's Lessee v. Gosnell, 43 Md. 153; Orr v. Lisso, 33 La. Ann. 476. Nor does the legislation of congress annul that of the state in any such sense that the state law may not be amended without re-enactment after its operation is revived by the repeal of the national law. Torrens v. Hammond, 4 Hughes, 596, 10 Fed. 900. So also, where the court of bankruptcy refuses to grant a discharge to a bankrupt before it, his creditors, after the repeal of the bankruptcy law, may take proceedings against him under the state insolvency law and prove their debts against his estate. Fisher v. Currier, 7 Metc. (Mass.) 424. And again, a state insolvency law, suspended during the operation of a national bankruptcy law and revived by its repeal, may take cognizance of all acts within its provisions done while it was so suspended, and will apply to contracts made during that time. Palmer v. Hixon, 74 Me. 447. So, a conveyance by way of preference, made by an insolvent debtor, in contravention of the provisions of the insolvency law of the state, while the federal bankruptcy act is in force, is a sufficient cause for instituting proceedings in insolvency against the debtor after the repeal of the bankruptcy act. Lothrop v. Foundry Co., 128. Mass. 120. Moreover, it is competent for a state legislature to enact, amend, or repeal a state insolvency law while the bankruptcy act is in force. A state law of this character, passed while the federal act is operative, will not come into effect at once, but this does not make it void ab initio. The legislature has the power to make the time when its enactment shall take effect depend upon the happening of some future event. The event being the repeal of the bankruptcy law, the postponement of the efficiency of the state law until it occurs may be implied, and until that time the insolvency law will remain in abeyance. Tua v. Carriere, 117 U. S. 201. 6 Sup. Ct. 565, 29 L. Ed. 855; In re Wright (D. C.) 95 Fed. 807; Damon's Appeal,
70 Me. 153; Boedefeld v. Reed, 55 Cal. 299; Lewis v. County Clerk, Id. 604; Transportation Co. v. Thomas, 57 Cal. 197.
3. Same-What State Laws Affected.
In connection with the question of the validity of national bankruptcy laws and the insolvency laws of the several states, and the effect of the one upon the other, numerous attempts have been made (but without any marked success) to draw a sharp line of distinction between a bankruptcy law, properly so called, and an insolvency law. See, for instance, Adams v. Storey, 1 Paine, 79, Fed. Cas. No. 66. In fact, as pointed out in Martin v. Berry, 37 Cal. 208, 2 N. B. R. 629, the only substantial difference between a bankruptcy law and an insolvency law lies in the circumstance that the former affords relief upon the application of the creditor, and the latter upon the application of the debtor. In the general character of the remedy there is no difference, however much the modes in which the remedy may be administered may vary. An act which, like the present act of congress, embodies provisions for both voluntary and involuntary proceedings is in effect both a bankruptcy law and an insolvency law. In truth, as regards the matter under discussion, the question is not whether a particular law of a state is a "bankruptcy" law or an "insolvency" law, but whether the statute (without regard to its being called by one or the other of those names, or by neither of them) is incompatible with the effective administration of the national bankruptcy act, by invading the special field which the latter covers, or by usurping for the courts of the state the exclusive province of the bankruptcy courts to collect and distribute the assets of an insolvent debtor who is amenable to the act of congress. For example, the test of the validity of proceedings under a state law does not lie in the question whether or not it purports to release the insolvent from his obligations. "In so far as a state law attempts to administer on the effects of an insolvent debtor and distribute them among creditors, it is to all intents and purposes an insolvent law, although it may not authorize a discharge of the debtor from further liability." In re Merchants' Ins. Co., 3 Biss. 162, Fed. Cas. No. 9,441. Compare Ex parte Rank, Crabbe, 493, Fed. Cas. No. 11,566. On the other hand, several cases have held that the right and power of a state chancery court to appoint a receiver for an insolvent corporation, as authorized by a law of the state, is not abolished by the mere fact of the national bankruptcy law being in force, but will continue at least until proceedings in bankruptcy against such corporation are actually instituted. Watson v. Bank, 5 S. C. 159; State v. Superior Court of King County, 20 Wash. 545, 56 Pac. 35, 45 L. R. A. 177; Chandler v. Siddle, 3 Dill. 477, Fed. Cas. No. 2,594. Compare French v. O'Brien, 52 How. Prac. 394; Barber v. International Co., 73 Conn. 587, 48 Atl. 758. But a different conclusion was reached with reference to a statute of Louisiana which provided for the liquidation of insolvent banks in either voluntary or forced proceedings. The law required the state court, in either case, to appoint commissioners, who were empowered to take possession of all the property and effects of the bank, to make an inventory, to supervise the destruction of all the notes of the bank found on hand, to collect the assets and pay the debts as prescribed by the act, and to distribute the balance, if any, among the stockholders. Also, by the operation of a decree of forfeiture or dissolution, to be rendered in the proceedings, the bank was practically discharged from its debts after the final settlement of its affairs. This was held to be in effect a bankruptcy or insolvency law. "Here," said the court, "we have all the elements of a bankrupt law,insolvency, surrender of property, its administration by assignees or commissioners, distribution among creditors of the assets, and, in effect, the discharge of the corporation." And since "an examination of the act further shows that its provisions apply, as well as those of the general bankruptcy act, to moneyed corporations, and that it prescribes a different rule for the distribution of the assets of an insolvent corporation from that established by the bankruptcy law," it was held that the operation of the state law was suspended, and that no proceedings could be had under it
while the national law was in force. Thornhill v. Bank, 1 Woods, 1, 5 N. B. R. 367, Fed. Cas. No. 13,992.
A state law, however, which merely protects the person of a debtor from imprisonment, without affecting the debt or contract or the other means for its enforcement, or which provides only for the release of poor debtors arrested on civil process, is not of such a nature as to be suspended by the bankruptcy act. Sullivan v. Hieskill, Crabbe, 525, Fed. Cas. No. 13,594; In re Jacobs, 12 Abb. Prac. (N. S.) 273; Jordan v. Hall, 9 R. I. 220, 11 Am. Rep. 245. And of course the latter act does not affect general laws of the states providing for the settlement of the estates of insolvent persons deceased. Hawkins v. Learned, 54 N. H. 333. Nor, it is said, does the bankruptcy law suspend a state law enabling a creditor to prevent the departure of his debtor from the state. Gottschalk v. Meyer, 28 La. Ann. 885. And the opinion has been expressed that an action brought by a receiver in proceedings supplementary to execution is not a proceeding commenced under a state insolvency law, within the meaning of the saving clause of the bankruptcy act regarding such proceedings pending at the time of its taking effect. In re Meyers, 1 Nat. Bankr. N. 293, per Hotchkiss, referee.
4. Same-Cases Not Covered by Bankruptcy Law.
The state courts have frequently asserted-and with much apparent reason-that the insolvency laws of the states are suspended by the United States bankruptcy act only in so far as they conflict with the latter statute; and that, as to any cases not covered by the bankruptcy law, or expressly or impliedly omitted from its operation, it may be presumed that congress did not intend to interfere with the laws of the several states, and they may therefore still be put into effect. Appeal of Geery, 43 Conn. 289, 21 Am. Rep. 653; Pugh v. Bussel, 2 Blackf. 394; Fisk v. Montgomery, 21 La. Ann. 446; Simpson v. Bank, 56 N. H. 466, 22 Am. Rep. 491; Steelman v. Mattix, 36 N. J. Law, 344; In re Winternitz, 7 Phila. 380. To illustrate: The present bankruptcy law is not applicable, in its compulsory features, to all classes of corporations, but only to those which are "engaged principally in manufacturing, trading, printing, publishing, or mercantile pursuits.' Hence, if proceedings under the state insolvency law, or under a law for the winding up of insolvent corporations, are commenced against a corporation which is not amenable to the bankruptcy law, but which is within the terms of the state law, it is difficult to see on what grounds they are to be held invalid, for there is no possibility of conflict between the two statutes. See Simpson v. Bank, 56 N. H. 466, 22 Ain. Rep. 491. Again, the bankruptcy act authorizes involuntary proceedings against a debtor only in case he owes debts to the amount of $1,000 or over. But if the state insolvency law permitted compulsory proceedings against a person whose debts amounted to less than that sum (so that he would not at all be subject to the federal law), it would certainly appear that the state law might be put in force in such a case. See Corner v. Miller, 1 N. B. R. 403. Another illustration of the point here in question is found in the effect of the bankruptcy act on the statute of Pennsylvania relating to domestic attachments. This law provides for the sequestration of the entire estate of an absconding or concealed debtor, on a writ of attachment, for the appointment of trustees to be vested with title to such estate, and for its distribution to creditors. Now the bankruptcy act of 1867 declared that it should be an act of bankruptcy if a debtor should depart from the state with intent to defraud his creditors, or should conceal himself to avoid service of legal process; and in view of this provision, it was held that the state domestic attachment law was suspended while the federal act of 1867 remained in force. Tobin v. Trump, 7 Phila. 123, 3 Brewst. 288. But the bankruptcy act of 1898 does not contain any provision relating to absconding or concealed debtors, and the opinion is now advanced that it does not in any way conflict with the state law, and therefore does not suspend or supersede it (McCollough v. Goodhart, 1 Nat. Bankr. N. 512, and see Scully v. Kirkpatrick, 79 Pa. 324, 21 Am. Rep. 62), although proceedings
begun under the state statute might be superseded by an adjudication in bankruptcy against such a debtor.
5. Same-Laws Regulating Assignments for Creditors.
In this branch of our subject, the most difficult questions arise in connection with the effect of the bankruptcy law upon state statutes which authorize or regulate assignments for the benefit of creditors. Notwithstanding a considerable difference of opinion, the following principles appear to be fairly well settled upon the authorities. First, the common law relating to such assignments is not a part of the state insolvency law, since it neither places the administration of the estate under the control of the courts, nor exonerates the debtor from personal liability, nor releases him or his future acquisitions from the unpaid balance of his debts; and hence it is not suspended by the enactment of a bankruptcy law. That is, an assignment made as at common law will be valid unless it is impeached or overthrown by proceedings in bankruptcy begun within the statutory time. Cook v. Rogers. 31 Mich. 391; Appeal of Hawkins, 34 Conn. 548; Haas v. O'Brien, 66 N. Y. 597; Von Hein v. Elkus, 8 Hun, 516, 15 N. B. R. 194; In re Sievers (D. C.) 91 Fed. 366. In the next place, we are to consider the statutes, in force in several of the states, which are designed to prevent fraudulent assignments and strike down preferences. These laws provide that any assignment, mortgage, or deed of trust, made by a debtor in contemplation of insolvency and for the purpose of giving a preference, shall operate as an assignment and transfer of all his property and inure to the benefit of all his creditors pro rata, if proceedings for that purpose are begun within a limited time. It is held that these statutes are not insolvency laws in such sense as to be suspended or superseded by the bankruptcy law. Linthicum v. Fenley, 11 Bush, 131; Ebersole v. Adams, 73 Ky. 83; Martin v. Hausman (C. C.) 14 Fed. 160. In the next place, there are laws in many of the states which regulate the administration of estates volun tarily assigned for the benefit of creditors. Differing largely in details, these laws yet present the following usual features. They require such an assignment to be recorded, and give to some court of the state the settlement and administration of the estate. They require the assignee to give a bond and to file an inventory of the property. They require creditors who wish to claim under the assignment to present their claims within a stated time. They authorize the collection of assets by the assignee by suit, and his discharge upon the settlement of the trust. And they provide for the distribution of the proceeds of the assigned estate among the creditors pro rata. If the law of the state goes no further than this, it is not to be considered an insolvency law; and proceedings commenced under it are not absolutely void, merely by reason of the existence of a national bankruptcy law, although they are liable to be avoided at the instance of a trustee in bankruptcy of the insolvent assignor, subsequently appointed in bankruptcy proceedings in the proper federal court. Mayer v. Hellman, 91 U. S. 496, 23 L. Ed. 377; In re Gutwillig (D. C.) 90 Fed. 475; In re Sievers (D. C.) 91 Fed. 366; Beck v. Parker, 65 Pa. 262, 3 Am. Rep. 625; Strong v. Carrier, 17 Conn. 319. But there are laws in some of the states which are not confined to regulating the administration of an assigned estate on just and equitable principles, but embrace features characteristic of an insolvency law properly so called. Without compelling any debtor to make an assignment, they treat such an assignment as an act of insolvency, and direct the administration of the estate to proceed substantially as would be the case in voluntary proceedings under an insolvency law, and, in particular, they provide that any creditor who has proved his claim shall be thereafter debarred from prosecuting an action upon it. In other words, they grant the insolvent a discharge from his provable debts. As to statutes of this character, the authorities hold that their operation must be considered as suspended by the enactment of the national bankruptcy law. Patty-Joiner & Eubank Co. v. Cummins, 93 Tex. 598, 57 S. W. 566; In re Curtis (D. C.) 91 Fed. 737; In re Smith (D. C.) 92 Fed. 135; In re McKee, 1 Nat. Bankr. N. 139; Lyman v. Bond, 130 Mass. 291.
Under the former class of statutes certainly, and probably also under