A discharge obtained under the insolvent law of one state is not
a bar to an action on a note given in and payable in the same
state, the party to whom the note was given having been and being
of a different state, and not having proved his debt against the
defendant's estate in insolvency, nor in any manner been a party to
those proceedings.
This was a writ of error to the Circuit Court for the District
of Massachusetts, the case, as appearing from an agreed statement
of facts, being thus:
J. W. Baldwin a citizen of
Massachusetts, made, at
Boston, in that state, his promissory note,
payable
there, in these words:
"$2000 BOSTON, February 21, 1854"
"Six months after date, I promise to pay to the order of myself,
two thousand dollars,
payable in Boston, value
received."
"J. W. BALDWIN"
And duly endorsed it to Hale, the plaintiff, then and afterwards
a citizen of
Vermont. After the date of the note, but
Page 68 U. S. 224
before any suit was brought upon it, Baldwin upon due
proceedings in the Court of Insolvency of the State of
Massachusetts, obtained a certificate of discharge from
his debts; the certificate embracing by its terms all contracts to
be performed within the state of Massachusetts. Hale did not prove
his debt, nor take any part in the proceedings.
Suit having been afterwards brought against Baldwin by Hale, the
endorsee and holder of the note, and still, as originally, a
citizen of Vermont, the question was
whether the certificate
was a bar to the action.
The court below ruled that it was not, and the correctness of
the ruling was now before this Court on error.
Page 68 U. S. 227
MR. JUSTICE CLIFFORD, after stating the case, delivered the
opinion of the Court:
Contract was made in Boston and was to be performed at the place
where it was made, and upon that ground it is contended by the
defendant that the certificate of discharge is a complete bar to
the action. But the case shows that the plaintiff was a citizen of
Vermont, and inasmuch as he did not prove his debt against the
defendant's estate in insolvency, nor in any manner become a party
to those proceedings, he insists that the certificate of discharge
is a matter
inter alios, and wholly insufficient to
support the defense.
Adopting the views of the court in
Scribner v. Fisher,
2 Gray 43, the defendant concedes that the law is so, as between
citizens of different states, except in cases where it appears by
the terms of the contract that it was made and must be performed in
the state enacting such insolvent law. Where the contract was made
and is by its terms to be performed in the state in which the
certificate of discharge was obtained, the argument is that the
discharge is entirely consistent with the contract, and that the
certificate operates as a bar to the right of recovery everywhere,
irrespective of the citizenship of the promisee. Plaintiff admits
that a majority
Page 68 U. S. 228
of the Supreme Court of Massachusetts, in the case referred to,
attempted to maintain that distinction, but he insists that it is
without any foundation in principle, and that the decisions of this
Court in analogous cases are directly the other way.
Controversies involving the constitutional effect and operation
of state insolvent laws have frequently been under consideration in
this Court, and unless it be claimed that constitutional questions
must always remain open, it must be conceded, we think, that there
are some things connected with the general subject that ought to be
regarded as settled and forever closed.
State legislatures have authority to pass a bankrupt or
insolvent law, provided there be no act of Congress in force
establishing a uniform system of bankruptcy, conflicting with such
law, and provided the law itself be so framed that it does not
impair the obligation of contracts. Such was the decision of this
Court in
Sturges v.
Crowninshield, 4 Wheat. 122, and the authority of
that decision has never been successfully questioned. Suit was
brought in that case against the defendant as the maker of two
promissory notes. They were both dated at New York, on the 22d day
of March, 1811, and the defendant pleaded his discharge under an
act for the benefit of insolvent debtors and their creditors,
passed by the Legislature of New York subsequently to the date of
the notes in controversy. Contracts in that case, it will be
observed, were made prior to the passage of the law, and the Court
held, for that reasons, that the law, or that feature of it, was
unconstitutional and void, as impairing the obligation of contracts
within the meaning of the Constitution of the United States.
Suggestion is made that the ruling of the court in the case of
McMillan v.
McNeill, 4 Wheat. 209, decided at the same term,
asserts a different doctrine, but we think not if the facts of the
case are properly understood.
Recurring to the statement of the case, it appears that the
contract was made in Charleston, in the State of South Carolina,
and it is true that both parties resided there at the time
Page 68 U. S. 229
the contract was made, but the defendant subsequently removed to
New Orleans, in the State of Louisiana, and it was in the latter
state where he obtained the certificate of discharge from his
debts. He was also one of a firm doing business in Liverpool, and a
commission of bankruptcy had been issued there, both against him
and his partner, and they respectively obtained certificates of
discharge. Suit was brought in the District Court for the District
of Louisiana, and the defendant pleaded those certificates of
discharge in bar of the action, and the plaintiff demurred to the
plea. Under that state of the case and of the pleadings, the court
held that the certificate of discharge obtained in the State of
Louisiana, was no defense to the suit, and very properly remarked
that the circumstance that the state law was passed before the debt
was contracted made no difference in the application of the
principle. Bearing in mind that the plaintiff was a citizen of
South Carolina, and that the contract was made there, it is obvious
that the remark of the court is entirely consistent with the
decision in the former case.
Secondly, the court also held that a discharge under a foreign
bankrupt law was no bar to an action in the courts of the United
States, on a contract made in this country. Speaking of that case,
Mr. Justice Johnson afterwards remarked that it decided nothing
more than that insolvent laws have no extra-territorial operation
upon the contracts of other states, and that the anterior or
posterior character of the law with reference to the date of the
contract makes no difference in the application of that principle.
Eight years later, the question, in all its phases, was again
presented to this Court in the case of
Ogden v.
Saunders, 12 Wheat. 213, and was very fully
examined.
Three principal points were ruled by the Court. First, the Court
held that the power of Congress to establish uniform laws on the
subject of bankruptcies throughout the United States did not
exclude the right of the state to legislate on the same subject,
except when the power had actually been exercised by Congress, and
the state laws conflicted with those of Congress. Secondly, that a
bankrupt or insolvent
Page 68 U. S. 230
law of any state which discharges both the person of the debtor
and his future acquisitions of property, was not a law impairing
the obligation of contracts so far as respects debts contracted
subsequent to the passage of such law. Thirdly, but that a
certificate of discharge under such a law cannot be pleaded in bar
of an action brought by a citizen of another state in the courts of
the United States, or of any other state than that where the
discharge was obtained. Much diversity of opinion, it must be
admitted, existed among the members of the court on that occasion,
but it is clear that the conclusions to which the majority came
were in precise accordance with what had been substantially
determined in the two earlier cases to which reference has been
made. Misapprehension existed, it seems, for a time, whether the
second opinion delivered by Mr. Justice Johnson in that case was,
in point of fact, the opinion of a majority of the Court, but it is
difficult to see any ground for any such doubt. Referring to the
opinion, it will be seen that he states explicitly that he is
instructed to dispose of the cause, and he goes on to explain that
the majority on the occasion is not the same as that which
determined the general question previously considered. Ample
authority exists for regarding that opinion as the opinion of the
Court, independently of what appears in the published report of the
case. When the subsequent case of
Boyle v.
Zacharie, 6 Pet. 348, was first called for
argument, inquiry was made of the court whether the opinion in
question was adopted by the other judges who concurred in the
judgment of the court. To which Marshall, C.J., replied that the
judges who were in the minority of the Court upon the general
question concurred in that opinion, and that whatever principles
were established in that opinion were to be considered no longer
open for controversy, but the settled law of the court. Judge Story
delivered the unanimous opinion of the Court in that case during
the same session, and in the course of the opinion he repeated the
explanations previously given by the Chief Justice.
Boyle v.
Zacharie, 6 Pet. 643. Explanations to the same
effect were also made by the present CHIEF JUSTICE in the case
of
Page 68 U. S. 231
Cook v.
Moffat, 5 How. 310, which had been ruled by him at
the circuit. He had ruled the case in the court below, in obedience
to what he understood to be the settled doctrine of the Court, and
a majority of the Court affirmed the judgment. Acquiescing in that
judgment as a correct exposition of the law of the Court, he
nevertheless thought it proper to restate the individual opinion
which he entertained upon the subject, but before doing so, he gave
a clear and satisfactory exposition of what had previously been
decided by the Court. Those remarks confirm what had at a much
earlier period been fully explained by the former Chief Justice and
his learned associate. Taken together, these several explanations
ought to be regarded as final and conclusive. Assuming that to be
so, then, it was settled by this Court, in that case --
1. That the power given to the United States to pass bankrupt
laws is not exclusive.
2. That the fair and ordinary exercise of that power by the
states does not necessarily involve a violation of the obligation
of contracts,
multo fortiori of posterior contracts.
3. But when in the exercise of that power the states pass beyond
their own limits and the rights of their own citizens, and act upon
the rights of citizens of other states, there arises a conflict of
sovereign power and a collision with the judicial powers granted to
the United States, which renders the exercise of such a power
incompatible with the rights of other states, and with the
Constitution of the United States.
Saunders a citizen of Kentucky, brought suit in that case
against Ogden, who was a citizen of Louisiana at the time the suit
was brought. Plaintiff declared upon certain bills of exchange
drawn by one Jordan, at Lexington, in the State of Kentucky, upon
Ogden, the defendant, in the City of New York, where he then
resided. He was then a citizen of the State of New York, and the
case shows that he accepted the bills of exchange at the City of
New York, and that they were subsequently protested for
nonpayment.
Defendant pleaded his discharge under the insolvent law of New
York, passed prior to the date of the contract. Evidently,
therefore, the question presented was whether a discharge
Page 68 U. S. 232
of a debtor under a state insolvent law was valid as against a
creditor or citizen of another state, who had not subjected himself
to the state laws otherwise than by the origin of the contract, and
the decision in express terms was that such a proceeding was
"incompetent to discharge a debt due a citizen of another state."
Whenever the question has been presented to this Court since that
opinion was pronounced, the answer has uniformly been that the
question depended upon citizenship. Such were the views of the
court in
Suydam v.
Broadnax, 14 Pet. 75, where it was expressly held
that a certificate of discharge cannot be pleaded in bar of an
action brought by a citizen of another state in the courts of the
United States, or of any other state than that where the discharge
was obtained. Undoubtedly a state may pass a bankrupt or insolvent
law under the conditions before mentioned, and such a law is
operative and binding upon the citizens of the state, but we repeat
what the court said in
Cook v.
Moffat, 5 How. 308, that such laws "can have no
effect on contracts made before their enactment, or beyond their
territory." Judge Story says, in the case of
Springer v.
Foster, 2 Story C.C. 387, that the settled doctrine of the
Supreme Court is that no state insolvent laws can discharge the
obligation of any contract made in the state, except such contracts
as are made between citizens of that state. He refers to the case
of
Ogden v. Saunders to support the proposition, and
remarks, without qualification, that the doctrine of that case was
subsequently affirmed in
Boyle v. Zacharie, where there
was no division of opinion. In the last-mentioned case, he gave the
opinion of the Court, and he there expressed substantially the same
views. Confirmation of the fact that such was his opinion may be
found both in his Commentaries on the Constitution and in his
treatise entitled Conflict of Laws. His view as to the result of
the various decisions of this Court is that they establish the
following propositions:
1. That state insolvent laws may apply to all contracts within
the state between citizens of the state.
2. That they do not apply to contracts made within the state
between a citizen of the
Page 68 U. S. 233
state and a citizen of another state.
3. That they do not apply to contracts not made within the
state: 2 Story on Const., sec. 1390 (3d edition), p. 281; Story on
Confl.L., sec. 341, p. 573.
Chancellor Kent also says that the discharge under a state law
is not effectual as against a citizen of another state who did not
make himself a party of the proceedings under the law. 2 Kent Com.
(9th ed), p. 503. All of the state courts, or nearly all, except
the Supreme Court of Massachusetts, have adopted the same view of
the subject, and that court has recently held that a certificate of
discharge in insolvency is no bar to an action by a foreign
corporation against the payee of a note, who endorsed it to the
corporation in blank before its maturity, although the note itself
was executed and made payable in that state by a citizen of the
state. Repeated decisions have been made in that court, which seem
to support the same doctrine.
Savoye v. Marsh, 10 Met.
594;
Braynard v. Marshall, 8 Pick. 196. But a majority of
the court held, in
Scribner v. Fisher, 2 Gray 43, that if
the contract was to be performed in the state where the discharge
was obtained, it was a good defense to an action on the contract,
although the plaintiff was a citizen of another state and had not
in any manner become a party to the proceedings. Irrespective of
authority it would be difficult if not impossible to sanction that
doctrine. Insolvent systems of every kind partake of the character
of a judicial investigation. Parties whose rights are to be
affected are entitled to be heard; and in order that they may enjoy
that right they must first be notified. Common justice requires
that no man shall be condemned in his person or property without
notice and an opportunity to make his defense.
Nations v.
Johnson, 24 How. 203;
Boswell's Lessee v.
Otis, 9 How. 350;
Oakley v. Aspinwall, 4
Comst. 514.
Regarded merely in the light of principle, therefore, the rule
is one which could hardly be defended, as it is quite evident that
the courts of one state would have no power to require the citizens
of other states to become parties to any such proceeding.
Suydam v.
Broadnax, 14
Page 68 U. S. 234
Pet. 75. But it is unnecessary to pursue the inquiry, as the
decisions of this Court are directly the other way; and so are most
of the decisions of the state courts.
Donnelly v. Corbett,
3 Seld. 500;
Poe v. Duck, 5 Md. 1;
Anderson v.
Wheeler, 25 Conn. 607;
Felch v. Bugbee, 48 Me. 9;
Demerrit v. Exchange Bank, 10 Law Rep. (N.S), 606;
Woodhull v. Wagner, Bald.C.C. 300.
Insolvent laws of one state cannot discharge the contracts of
citizens of other states, because they have no extraterritorial
operation, and consequently the tribunal sitting under them, unless
in cases where a citizen of such other state voluntarily becomes a
party to the proceeding, has no jurisdiction in the case. Legal
notice cannot be given, and consequently there can be no obligation
to appear, and of course there can be no legal default. The
judgment of the circuit court is therefore affirmed with costs.
Judgment accordingly.