4 Wheat. (17 U.S.) 122 (1819), argued 8 Feb. 1819, decided 17 Feb. 1819 by vote of 7 to 0; Marshall for the Court. This case provided the first test of the constitutionality of state insolvency laws, in this instance an 1811 New York statute that freed debtors from imprisonment for debt and discharged their debt if they assigned their property for the benefit of their creditors.
Chief Justice John Marshall rejected a challenge to the state act based on the argument that federal power over bankruptcy was exclusive but warned in dictum that a federal statute would preempt conflicting state legislation. He voided the statute because it discharged a preexisting debt and thus ran afoul of the Contracts Clause (Article I, section 10). Marshall did, however, concede that a state could modify remedies that enforced an obligation (thus the constitutionality of that section of the statute that liberated an insolvent from debtors’ prison), provided that it not revise the underlying obligation itself.
The constitutionality of state relief laws remained unsettled until 1827, when the Court ruled in Ogden v. Saunders that states could discharge debts, provided they did not impair contracts made before the statute was enacted.
Even so, the policy question relating to bankruptcy and insolvency remained unresolved throughout the nineteenth century. Some states, mostly in the North, did create debtor relief systems, but legislators had difficulties in balancing the interests of both debtors and creditors. They wanted to ease the plight of “unfortunate” defaulters, especially during periods of economic hardship, but at the same time they did not want to discourage lenders, whose role they prized as essential to business well being and economic growth. This conflict was largely resolved by enactment of national bankruptcy legislation in 1898.
Peter J. Coleman