Debt's Dominion: A History of Bankruptcy Law in America

Overview

"An extremely useful book. Its strength lies in its narrative of the past century and its description of the interplay of interest group politics."--Howard Rosenthal, Princeton University

"David Skeel has written an important book. Debt's Dominion: A History of Bankruptcy Law in America is an interesting and engaging account of bankruptcy law, and a worthy successor to Charles Warren's 1935 classic Bankruptcy in United States History. Skeel's story is startlingly different from ...

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Overview

"An extremely useful book. Its strength lies in its narrative of the past century and its description of the interplay of interest group politics."--Howard Rosenthal, Princeton University

"David Skeel has written an important book. Debt's Dominion: A History of Bankruptcy Law in America is an interesting and engaging account of bankruptcy law, and a worthy successor to Charles Warren's 1935 classic Bankruptcy in United States History. Skeel's story is startlingly different from traditional accounts and shows how the forces that bring about legislative change are more subtle than commonly understood."--Douglas G. Baird, University of Chicago

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Editorial Reviews

Michigan Law Review - Todd J. Zywicki
A brilliant and comprehensive book. . . . Told with a sound understanding of theory and law, and an eye for detail, Skeel's book is an instant classic—a comprehensive and intriguing history of bankruptcy law in America. . . . [It] will serve as the definitive work on the history of bankruptcy law for bankruptcy experts as well as a comprehensive guide on the development of the modern American bankruptcy system for the interested generalist.
National Journal - Shawn Zeller
For anyone with a keen interest in following the unfolding of the Enron case (as well as the liquidations of scores of other corporations, large and small, that have gone bust in the past two or so years), perusing Debt's Dominion would be educational. . . . An informative, useful history.
EH.Net - Bradley A. Hansen
Those interested in bankruptcy law will now turn first to Debt's Dominion. David Skeel has produced an excellent history of bankruptcy law. While many question about the history of bankruptcy remain to be answered, the starting point for answering those questions has changed.
New York Law Journal - John Caher
David A. Skeel's surprisingly readable rummage through the philosophical, political and policy considerations that continue to swirl around bankruptcy . . . is an expertly guided tour. . . . First it offers a rare and insightful examination of how policy and politics interact in bankruptcy legislation; second, it provides an extraordinary look at the rise, fall, rise, fall . . . of the bankruptcy bar, and the immense role it came to play in policy.
Enterprise & Society - Lynne Pierson Doti
David Skeel has written a new definitive source on the history of bankruptcy law in the United States. His work is a detailed and complete history of federal bankruptcy legislation and of the political debates and maneuvering that shaped those laws.
Journal of American History - Charles L. Zelden
Anyone seeking to understand both the evolving shape of bankruptcy law in America and its impacts on American legal, social, and economic trends would find Skeel's book a very useful starting place. Accessibly written and yet full of highly technical information, Debt's Dominion is one of the best books on bankruptcy currently available.
Law and Politics Book Review - Thomas G.W. Telfer
David Skeel's work provides us with a valuable one-volume overview of the progression of American consumer and corporate bankruptcy law over the last century.
Law and Politics Book Review - Thomas G. W. Telfer
David Skeel's work provides us with a valuable one-volume overview of the progression of American consumer and corporate bankruptcy law over the last century.
From the Publisher

"A brilliant and comprehensive book. . . . Told with a sound understanding of theory and law, and an eye for detail, Skeel's book is an instant classic--a comprehensive and intriguing history of bankruptcy law in America. . . . [It] will serve as the definitive work on the history of bankruptcy law for bankruptcy experts as well as a comprehensive guide on the development of the modern American bankruptcy system for the interested generalist."--Todd J. Zywicki, Michigan Law Review

"For anyone with a keen interest in following the unfolding of the Enron case (as well as the liquidations of scores of other corporations, large and small, that have gone bust in the past two or so years), perusing Debt's Dominion would be educational. . . . An informative, useful history."--Shawn Zeller, National Journal

"Those interested in bankruptcy law will now turn first to Debt's Dominion. David Skeel has produced an excellent history of bankruptcy law. While many question about the history of bankruptcy remain to be answered, the starting point for answering those questions has changed."--Bradley A. Hansen, EH.Net

"David A. Skeel's surprisingly readable rummage through the philosophical, political and policy considerations that continue to swirl around bankruptcy . . . is an expertly guided tour. . . . First it offers a rare and insightful examination of how policy and politics interact in bankruptcy legislation; second, it provides an extraordinary look at the rise, fall, rise, fall . . . of the bankruptcy bar, and the immense role it came to play in policy."--John Caher, New York Law Journal

"David Skeel has written a new definitive source on the history of bankruptcy law in the United States. His work is a detailed and complete history of federal bankruptcy legislation and of the political debates and maneuvering that shaped those laws."--Lynne Pierson Doti, Enterprise & Society

"Anyone seeking to understand both the evolving shape of bankruptcy law in America and its impacts on American legal, social, and economic trends would find Skeel's book a very useful starting place. Accessibly written and yet full of highly technical information, Debt's Dominion is one of the best books on bankruptcy currently available."--Charles L. Zelden, Journal of American History

"David Skeel's work provides us with a valuable one-volume overview of the progression of American consumer and corporate bankruptcy law over the last century."--Thomas G. W. Telfer, Law and Politics Book Review

Michigan Law Review
A brilliant and comprehensive book. . . . Told with a sound understanding of theory and law, and an eye for detail, Skeel's book is an instant classic—a comprehensive and intriguing history of bankruptcy law in America. . . . [It] will serve as the definitive work on the history of bankruptcy law for bankruptcy experts as well as a comprehensive guide on the development of the modern American bankruptcy system for the interested generalist.
— Todd J. Zywicki
National Journal
For anyone with a keen interest in following the unfolding of the Enron case (as well as the liquidations of scores of other corporations, large and small, that have gone bust in the past two or so years), perusing Debt's Dominion would be educational. . . . An informative, useful history.
— Shawn Zeller
EH.Net
Those interested in bankruptcy law will now turn first to Debt's Dominion. David Skeel has produced an excellent history of bankruptcy law. While many question about the history of bankruptcy remain to be answered, the starting point for answering those questions has changed.
— Bradley A. Hansen
New York Law Journal
David A. Skeel's surprisingly readable rummage through the philosophical, political and policy considerations that continue to swirl around bankruptcy . . . is an expertly guided tour. . . . First it offers a rare and insightful examination of how policy and politics interact in bankruptcy legislation; second, it provides an extraordinary look at the rise, fall, rise, fall . . . of the bankruptcy bar, and the immense role it came to play in policy.
— John Caher
Enterprise & Society
David Skeel has written a new definitive source on the history of bankruptcy law in the United States. His work is a detailed and complete history of federal bankruptcy legislation and of the political debates and maneuvering that shaped those laws.
— Lynne Pierson Doti
Journal of American History
Anyone seeking to understand both the evolving shape of bankruptcy law in America and its impacts on American legal, social, and economic trends would find Skeel's book a very useful starting place. Accessibly written and yet full of highly technical information, Debt's Dominion is one of the best books on bankruptcy currently available.
— Charles L. Zelden
Law and Politics Book Review
David Skeel's work provides us with a valuable one-volume overview of the progression of American consumer and corporate bankruptcy law over the last century.
— Thomas G. W. Telfer
National Journal
For anyone with a keen interest in following the unfolding of the Enron case (as well as the liquidations of scores of other corporations, large and small, that have gone bust in the past two or so years), perusing Debt's Dominion would be educational. . . . An informative, useful history.
— Shawn Zeller
Journal of American History
Anyone seeking to understand both the evolving shape of bankruptcy law in America and its impacts on American legal, social, and economic trends would find Skeel's book a very useful starting place. Accessibly written and yet full of highly technical information, Debt's Dominion is one of the best books on bankruptcy currently available.
— Charles L. Zelden
EH.Net
Those interested in bankruptcy law will now turn first to Debt's Dominion. David Skeel has produced an excellent history of bankruptcy law. While many question about the history of bankruptcy remain to be answered, the starting point for answering those questions has changed.
— Bradley A. Hansen
Read More Show Less

Product Details

  • ISBN-13: 9780691116372
  • Publisher: Princeton University Press
  • Publication date: 11/10/2003
  • Pages: 296
  • Product dimensions: 8.80 (w) x 5.90 (h) x 0.80 (d)

Read an Excerpt

Debt's Dominion

A History of Bankruptcy Law in America
By David A. Skeel, Jr.

Princeton University Press

David A. Skeel, Jr.
All right reserved.

ISBN: 0691116377


Chapter One

THE PATH TO PERMANENCE IN 1898

CONGRESS'S AUTHORITY to regulate bankruptcy derives quite explicitly from the Constitution, which states in Article I, section 8 that Congress may pass "uniform laws on the subject of bankruptcies." The Founding Fathers included the provision almost as an afterthought. Charles Pinckney of Rhode Island proposed the Bankruptcy Clause late in the constitutional convention of 1787, and it was approved with little debate.1 Almost the only contemporary evidence of the meaning or importance of "uniform bankruptcy" comes in the Federalist No. 42. Written by James Madison, Federalist No. 42 describes federal bankruptcy legislation as "intimately connected with the regulation of commerce," and necessary to prevent debtors from fleeing to another state to evade local enforcement of their obligations.2

Despite its inauspicious beginning, bankruptcy became one of the great legislative battlegrounds of the nineteenth century. The most famous lawmakers of the century, from Thomas Jefferson early on, to Daniel Webster and Henry Clay for many years thereafter, all weighed in on bankruptcy. Bankruptcy pitted farm interests and states' rights advocates against those who favored a more nationaleconomy, and it was repeatedly proposed as a remedy for economic depression. For all the discussion, the debates never seemed to reach a stable conclusion. Prior to 1898, Congress passed a series of bankruptcy laws, each of which quickly unraveled and led inexorably to repeal. In the absence of federal regulation, state insolvency laws filled the gap. But state laws suffered from serious jurisdictional limitations, and each new crisis brought calls for federal legislation. With the Bankruptcy Act of 1898, the instability suddenly came to an end. Although lawmakers often amended this act, most dramatically in the 1930s, and it was replaced altogether in 1978, federal bankruptcy has been a permanent fixture ever since. For individual and small-business debtors, then, the first age of bankruptcy consisted of a century of instability that finally led to a permanent federal law in 1898.

The dramatic transition from episodic bankruptcy to a permanent law in 1898 poses an obvious puzzle: what was the magic of the 1898 act? Why did the instability finally stop? To answer this question, we must briefly go back to the beginning, to the decades of debate that preceded the act. A common theme running through the bankruptcy debates was party politics. Throughout the nineteenth century, Democrats and their predecessors often resisted federal bankruptcy legislation, whereas Republicans and their predecessors were its most fervent advocates.3 Viewing the debates as a conflict between Democrats and Republicans only begins to explain why Congress could not reach a stable resolution, however. Within each party, for instance, lawmakers often held strikingly different views of bankruptcy-Republicans in the commercial Northeast were far more enthusiastic about bankruptcy legislation than their southern and western colleagues, and roughly the reverse held true for the Democratic opposition. Adding to the confusion was the fact that the legislators faced a series of options on the bankruptcy issue. Rather than just favoring or opposing bankruptcy, lawmakers divided into at least three separate camps and sometimes more.

To more fully explain the early instability, I will borrow several basic concepts from the political science literature known as social choice. I will argue in particular that legislators held inconsistent and possibly "cyclical" preferences, no one of which commanded a stable majority: some lawmakers did not want a federal bankruptcy law, some (including both Democrats and Republicans) wanted only voluntary bankruptcy, and some wanted a law that provided for both voluntary and involuntary bankruptcy. We will then go on to consider how this instability was overcome, and how the Republican support for bankruptcy finally won out. The most important development was the emergence of organized creditor groups throughout the country at the end of the nineteenth century. To secure a federal bankruptcy law, creditors were forced to make numerous adjustments to pacify prodebtor lawmakers in the South and West. One of these adjustments, the adoption of a minimalist administrative structure, together with an unusually long period of Republican control, would inspire the rise of the bankruptcy bar. The unique American mix of creditors, prodebtor forces such as populism, and bankruptcy professionals has provided the recipe for every U.S. bankruptcy law that has followed.

We will focus throughout the chapter, as did nineteenth-century lawmakers, on individual and small-business debtors. Chapter 2 will explore the very different approach that emerged for reorganizing railroads and other large, corporate debtors.

The Bust-And-Boom Pattern Of Nineteenth-Century Bankruptcy Legislation

The nineteenth-century bankruptcy debates have long been seen as fitting a loose, bust-and-boom pattern. In times of economic crisis, Congress rushed to pass bankruptcy legislation to alleviate widespread financial turmoil.4 Once the crisis passed, so too did the need for a federal bankruptcy law. Like Penelope and her weaving, Congress quickly undid its handiwork on each occasion, only to start all over again when hard times returned. The traditional account is inaccurate in some respects and, as we will see, it does not explain why bankruptcy suddenly became permanent in 1898. But it provides a convenient framework for describing the first century of bankruptcy debate.

Agitation for bankruptcy legislation rose to a fever pitch at roughly twenty-year intervals throughout the nineteenth century. A depression starting in 1793 led to the first federal bankruptcy law in 1800-an act that Congress repealed three years later.5 Congress went back to the drawing board in the 1820s, when financial crisis and the controversy over the Bank of the United States prompted calls for another bankruptcy law. The debates never came to fruition, however, and it was not until 1841, following the Panic of 1837, that Congress passed its second bankruptcy law. The 1841 act lasted only two years, when defections from the party that had won its passage, the Whigs, led to repeal. The cycle came around once more on the eve of the Civil War, with the Panic of 1857 putting bankruptcy back on the agenda, and setting the stage for the 1867 act. The 1867 act lasted longer than its predecessors, with a movement for repeal leading to amendment instead in 1874. But by 1878, the nation was once again without a federal bankruptcy law.

All told, then, Congress passed three federal bankruptcy laws prior to 1898: the Bankruptcy Acts of 1800, 1841, and 1867. Together, the acts lasted a total of sixteen years. The absence of a federal bankruptcy law did not leave a complete vacuum in debtor-creditor relations, of course. Most states had insolvency laws on the books.6 Some of them, like Massachusetts's, predated the Revolution. In times of financial panic, states also responded by passing stay laws imposing moratoria on creditor collection. Proponents of federal bankruptcy legislation emphasized both the wide variation in these laws and their serious constitutional limitations, such as the inability of state law to bind out-of-state debtors.7

To recite the dates of passage and repeal of the nineteenth-century bankruptcy laws cannot even begin to suggest the urgency and importance that attended lawmakers' deliberations on bankruptcy-especially for a generation like ours that can scarcely remember the last depression. Here is Ralph Waldo Emerson's account of the desperate conditions of 1837. "Society has played out its last stake; it is checkmated. Young men have no hope. Adults stand like day-laborers idle in the streets. None calleth us to labor . . . The present generation is bankrupt of principles and hope, as of property."8

In the early decades of the nineteenth century, commentators characterized the nation's periodic financial panics as acts of God. As recently recounted by a business historian, the Reverend Joel Parker "provided a brief history lesson" for his congregation in 1837 "to illustrate how the financial panic was a direct reproof for the 'peculiar sin' of greed, just as the flood had been a reproof for violence, famine for pride, captivity for sabbath breaking, the destruction of the temple for the rejection of Christ and, more recently, cholera for intemperance." Twenty years later, with the Panic of 1857, commentators looked less to God than to "metaphors of floods, typhoons, tide and hurricanes."9 Panics increasingly were seen in naturalistic terms, but they remained both devastating and unpredictable.

Ever mindful of their constituents' trauma, some of the finest lawmakers to walk the halls of Congress turned their attention to bankruptcy at regular intervals. Even in the most dire years, one group viewed federal bankruptcy with deep suspicion and fought hard to preserve the status quo. John Calhoun, the great senator from South Carolina, insisted that "[t]he distress of the country consists in its indebtedness and can only be relieved by the payment of its debts."10 Not just concern for the repayment of debts, but a belief that local debtors were better served by state regulation of insolvency fueled the ongoing opposition to federal bankruptcy legislation.

On the other side, Daniel Webster, senator from Massachusetts, argued strenuously for federal regulation as necessary for both creditors and debtors.

I believe the interest of creditors would be greatly benefitted [by passing bankruptcy legislation] . . . and I am quite confident that the public good would be promoted . . . I verily believe that the power of perpetuating debts against debtors, for no substantial good to the creditor himself, and the power of imprisonment for debt . . . have imposed more restraint on personal liberty than the law of debtor and creditor imposes in any other Christian and commercial country.11

(A century later, Harvard Law School Professor James McLaughlin referred to Webster's speech as one of the great moments of American political oratory.)12

The two senators just quoted, Calhoun from South Carolina and Webster from Massachusetts, illustrate the geographical lines along which the debates tended to divide. Because southerners feared that northern creditors would use bankruptcy law as a collection device to displace southern farmers from their homesteads, the strongest opposition to federal bankruptcy came from the South. Many western lawmakers opposed bankruptcy legislation for similar reasons. Lawmakers from the commercial northeastern states, by contrast, were much more likely to view federal bankruptcy legislation as essential to the promotion of commercial enterprise.13

In addition to geography, lawmakers' views on bankruptcy also tended to divide along party lines. The Federalists (later Whigs, and then Republicans) promoted bankruptcy as essential to the nation's commercial development. Jeffersonian Republicans (later Democratic Republicans, and then Democrats), on the other hand, sought a more agrarian destiny and insisted that bankruptcy legislation would encourage destructive speculation by traders. Northeastern Federalists were the leading cheerleaders for federal bankruptcy legislation, and southern and western Jeffersonians were the staunchest opponents.

As we shall see, the conservative campaign for a permanent bankruptcy law was underwritten by increasingly well organized creditors groups by the end of the nineteenth century. Although rural interests lobbied in a relatively organized fashion on some issues-such as railroad rate legislation-opposition to bankruptcy came less from organized lobbying than from lawmakers who viewed themselves as representing agrarian interests, together with a few ideological entrepreneurs (such as Representative Bailey of Texas, who figured prominently in the 1890s).

Early in the century, constitutional issues figured especially prominently in the bankruptcy debates. Because the Constitution uses the term bankruptcy without further elaboration, some lawmakers insisted that the drafters intended to preserve the distinction in earlier English law between "bankruptcy" laws and "insolvency" laws. As distinguished from insolvency laws, which were designed to help debtors, they argued, bankruptcy laws only applied to traders and could not permit voluntary bankruptcy-that is, Congress could not give debtors the right to invoke the bankruptcy laws on their own behalf. Bankruptcy, on this view, was designed solely to help creditors round up a debtor's assets and use them for repayment. These lawmakers insisted that Congress simply did not have the authority to enact more sweeping bankruptcy legislation. Lawmakers who supported a broader bankruptcy law rejected this distinction, arguing that the Bankruptcy Clause used the term bankruptcy as a shorthand that referred to any legislation designed to deal with financial distress.

As the nineteenth century wore on, the Supreme Court rejected several of the arguments for a narrow reading of the Bankruptcy Clause.14 In an important early case, the Supreme Court cast cold water on the claim that Constitution permitted "bankruptcy" but not "insolvency" laws. "Th[e] difficulty of discriminating with any accuracy between insolvent and bankruptcy laws," wrote Chief Justice Marshall, makes clear that "a bankrupt law may contain . . . insolvent laws; and that an insolvent law may contain [provisions] which are common to a bankrupt law."15 By 1867, it was evident that Congress could enact both voluntary and involuntary laws, and that its powers were not limited to traders. As in other areas, an increasingly conservative and federally minded Supreme Court paved the way for an expansive bankruptcy law.16 In Congress, however, deep divisions remained as to whether the nation needed a permanent bankruptcy law.

The obstacles for proponents of bankruptcy were not just philosophical, but also practical. The 1800, 1841, and 1867 bankruptcy acts all were administered through the federal district courts. Unlike state courts, which could be found in every county, federal courts were generally located in urban areas. The federal courts were especially inconvenient for potential debtors, many of whom lived far from the nearest city.17 The problems were compounded by the costliness of the administrative process itself. After a debtor paid fees to the clerk of court, the official who administered his assets, and various others as well, the debtor's creditors often wound up with little or nothing.

Continues...


Excerpted from Debt's Dominion by David A. Skeel, Jr. Excerpted by permission.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

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Table of Contents


INTRODUCTION 1
PART ONE: THE BIRTH OF U.S. INSOLVENCY LAW 21
CHAPTER ONE: The Path to Permanence in 1898 23
CHAPTER TWO: Railroad Receivership and the Elite Reorganization Bar 48
PART TWO: THE GREAT DEPRESSION AND NEW DEAL 71
CHAPTER THREE: Escaping the New Deal: The Bankruptcy Bar in the 1930s 73
CHAPTER FOUR: William Douglas and the Rise of the Securities and Exchange Commission 101
PART THREE: THE REVITALIZATION OF BANKRUPTCY 129
CHAPTER FIVE: Raising the Bar with the 1978 Bankruptcy Code 131
CHAPTER SIX: Repudiating the New Deal with Chapter 11 of the Bankruptcy Code 160
PART FOUR: THE VIEW FROM THE TWENTY-FIRST CENTURY 185
CHAPTER SEVEN: Credit Cards and the Return of Ideology n Consumer Bankruptcy 187
CHAPTER EIGHT: Bankruptcy as a Business Address: The Growth of Chapter 11: Practice and Theory 212
EPILOGUE: Globalization and U.S. Bankruptcy Law 238
NOTES 245
INDEX 273
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