Old Town Bank v. McCormick , 60 L.R.A. 577 ( 1903 )

This is an appeal from the Circuit Court for Harford County.

On the 22nd of May, 1901, the Old Town Bank of Baltimore filed a petition in insolvency against J. Lawrence McCormick and others under the provisions of Art. 47, secs. 22 and 23 of our Code relating to insolvents as amended by the Act of 1896, ch. 446. The defendants each pleaded to the jurisdiction of the Court. Their pleas are identical. The plea is as follows: "(1.) That this Court has no jurisdiction in these proceedings because the insolvency laws of the State of Maryland have been suspended, superseded or rendered inoperative by the passage of a National Bankrupt Law by the Congress of the United States, and this defendant pleads the said bankrupt law in bar of the jurisdiction of this Court in the premises." The plaintiff bank demurred to these pleas, but the learned Judge below overruled the demurrers, and his certificate states the question raised and decided on the demurrers as follows: "That the enactment of the Act of Congress approved July 1st, 1898, entitled ``An Act to establish a uniform system of bankruptcy throughout the United States' and supplements and additions thereto, suspended the operation of Art. 47 of the Code of Public General Laws of Maryland, 1888, entitled ``Insolvents' and all amendments thereof, and especially suspended the operation of sec. 22 (as repealed and amended by the Act of 1896, ch. 446), and sec. 23 thereof, including the operation of said Article on persons ``engaged chiefly in farming and tillage of the soil,' and the class of persons to which the defendant, J. Lawrence McCormick, is alleged in the petition to belong; and that this Court is without jurisdiction to grant any of the relief prayed for in said petition." From the order dismissing its petition the plaintiff has appealed.

The issue thus presented is clear and well defined.

The defendants contend that the enactment of the National Bankrupt Act suspended the operation of the whole insolvent law of this State, while the plaintiff maintains the position that the passage of this national law by Congress suspends the operation of our insolvent law, only so far as our law conflictswith the national law, and that, inasmuch as the present bankrupt law (Act of Congress, 1898,) contains no provision for involuntary bankruptcy of persons engaged chiefly in the tillage of the soil, the provisions of our State Insolvent Law, so far as they apply to that excepted class, remain in full force and effect.

The question presented must depend, in the first place, upon the provisions of the bankrupt law applicable here. Section 4, "Who may become bankrupts" sub-section (a) provides that "Any person who owes debts, except a corporation, shall be entitled to the benefits of this Act as a voluntary bankrupt." And by sub-section (b) it is enacted that "Any natural person, except a wage earner or a person engaged chiefly in farming or the tillage of the soil * * * * * may be adjudged an involuntary bankrupt upon default or an impartial trial, and shall be subject to the provisions and entitled to the benefits of this Act" * * * * *.

1. From the year 1819 when C.J. MARSHALL delivered the opinion of the Supreme Court of the United States in the leading case ofSturges v. Crowinshield, reported in 4 Wheaton, 122, it has been held that the provision of the Constitution of United States, Art. 1, § 8, (4) providing that Congress shall have power to establish uniform laws on the subject of bankruptcy" does not in itself inhibit the States from passing valid insolvent laws. In the case just cited it was said: "It is not the mere existence of the power, but its exercise which is incompatible with the exercise of the same power by the States." And so also there has been a uniform line of decisions to the effect that so far as Congress has failed to legislate with reference to insolvents, State laws relating to them are operative. Thus in Sturges v. Crowinshield, supra, it is said that "if it is is not the mere existence of the power but its actual exercise by the Congress of the United States which prevents the operation of State insolvent laws it is obvious that much inconvenience would result from that construction of the Constitution which should deny to the Legislatures of the States the power of acting on this subject in consequence of the grant to Congress." "It may be thought more convenient" continued the Court "that much of it should be regulated by State legislation, and Congress may purposely omit to provide for many cases to which its power extends. It does not appear to be a violent construction of the Constitution, and certainly a most convenient one, to consider the power of the State as existing over suchcases as the laws of the land may not reach." But in Ogden v.Saunders, 12 Wheat. 213, the rule is explicitly laid down that "the power of Congress to establish uniform laws on the subject of bankruptcy does not exclude the rights of the States to legislate on the same subject, except when the power has been actually exercised and the State laws conflict with those of Congress." And to the same effect are Baldwin v. Hale, 1 Wall. 229; Tua v. Carriere, 117 U.S. 210;Exparte Eames, 2 Story, 322. In the recent case of the R.H.Herron Co. v. Superior Court, c., decided in April of last year by the Supreme Court of California and reported in 68 Pac. Rep. 814, 136 Cal. 279, it was held that "though the Federal Bankrupt Acts suspend operation of any State laws of insolvency, where there is any conflict between the two, the State laws remain in full force in so far as there is no conflict; and as the Bankruptcy Act of 1898 expressly exempts all corporations from voluntary bankruptcy and only makes subject to involuntary bankruptcy" corporations engaged principally in manufacturing, trading, printing, publishing, or mercantile pursuits" the provisions of the State law applicable to a corporation engaged principally in mining (as was the California corporation) are not suspended. In the course of its opinion the Court said: "If the Bankruptcy Act excepts a class of cases from its operation, either in express terms or by necessary implication, it must be considered that it was the intention of Congress not to interfere in that class of cases with the laws of the several States in reference thereto." A number of cases are cited by JUSTICE HARRISON who delivered the opinion of the Court, and among them is that of Clarke v. Ray, 1 Har. J. 318, C.J. CHASE delivering the opinion of the Court. He said: "The Legislatures of the several States have competent authority to pass laws for the relief of all persons who are not comprehended within the Act of Congress." See also Van Nostrand v. Carr, 30 Md. 131. It should be remarked, however, that the situation in the California case just cited somewhat differs from the one here presented. For there the insolvent proceeded against under the California Insolvent Law was expressly excepted from the provisions relating to the voluntary system, and was not included within, and therefore excepted by implication from the class of corporations made subject to the involuntary system, while here the defendant who is sought to be declared an insolvent under our insolvent law is included under the general terms of the voluntary system and expressly excepted from the involuntary system. See also E.M. Shepardson's Appeal, 36 Conn. 23; Geery's Appeal,43 Conn. 289; Steelman v. Mattix, 36 N.J.L. 344; 16 Am. Eng. Ency., 642 (2nd ed.)

2. This brings us to the real question in the case, namely, is there any conflict between our Insolvent Law and the Federal Bankrupt Law?

We have already transcribed the provisions of section 4 by which it appears that the defendant is expressly excepted from the provision of the Act relating to involuntary bankruptcy, and, therefore, as to this class to which the defendant belongs,i.e., farmers or tillers of the soil, the Federal power has not been exercised. And it, therefore, follows that if this class is not within the State law, there is no existing provision under which those embraced within it can be compelled to distribute their assets fairly and equally among their creditors. InGeery's Appeal, supra, it was said: "The benefit of this principle (the equal distribution of a debtor's property without preference) cannot be denied to a creditor without doing him injustice. It is a remedy which he relied on in giving credit and to which he is fairly entitled. If that remedy is not to be found in the Bankrupt Act, it will not be presumed that Congress intended to take away the remedy provided by the State, Congress having limited and restricted the operation of the Bankrupt Act, leaving a number of cases to which it does not apply, it will not be presumed that it was thereby intended to leave creditors in such cases entirely without remedy, as must be the case if the State law is entirely inoperative." But can it be properly or correctly said that any conflict can exist between the State and the Federal law so long as the latter by express terms excludes from its operation the subject or class of persons expressly provided for by the State law? The power to enact Insolvent or Bankrupt Laws is vested in the States, and it cannot be extinguished except by the establishment of a Federal system in conflict with the State law. And this Federal system of bankruptcy must be a genuine Bankrupt Law (Sturges v.Crowninshield, supra), or in other words, as expressed in Ogden v. Saunders, supra, the power to pass a uniform system of bankruptcy must be actually exercised, and the State law must be in conflict with it in order to render the latter inoperative. The question, therefore, logically arises, does the present Federal Bankrupt Law actually provide for involuntary proceedings against farmers? And the answer must be that it does not, but the answer of the defendant goes further and necessarily must do so in order to save his case. He says it is true that while this class is not included, and is expressly excepted, from the involuntary feature of the system, yet it is included in the voluntary feature, and therefore, it is within the scope of the national system. We cannot approve of this method of reasoning not only because it would seem to be a "contradiction in terms to say that cases excepted from the operation of the most important part of the Act are included in its scope," but because it would seem to involve the proposition that the Federal power can render inoperative the State Insolvent Laws applicable to involuntary insolvency without establishing a genuine Bankrupt Law to take the place of the State law. As we have already seen it has been held from an early day that it is only to the extent that Congress has actually legislated upon the subject that the statutes of the several States are suspended by its legislation. How then can it be said that a failure to legislate, in other words that an express exclusion, raises a conflict? But without pursuing this question further it seems to us that the position taken by the defendant must necessarily lead to the conclusion that if the Congress of the United States can by including this class in the voluntary part of the system and excepting it from the involuntary part withdraw it from the operation of our State Insolvent Law it can do the same in regard to any two or more classes, as for instance merchants, traders and corporations, and the result would be that in spite of the failure on the part of Congress to establish a Bankrupt Law, that is to actually exercise the power conferred by the Constitution to pass a genuine Bankrupt Law, State legislation would become inoperative and creditors would be deprived of a remedy to which, as was said in Geery's Appeal, supra, they are fairly entitled.

But it was forcibly argued on the part of the defendant that sec. 70, sub-sec. (b) of the Bankrupt Act (1898) shows that it was the intention of Congress to substitute that Act for every provision of every insolvent law of the several States. It provides as follows: "Proceedings commenced under State insolvent laws before the passage of this Act shall not be affected by it." To sustain their view the case of Parmenter ManufacturingCo. v. Hamilton, 172 Mass. 178, decided in 1898 was relied on. But all this case decides is that the Federal Act deprives the State Court of jurisdiction to entertain jurisdiction in insolvency proceedings filed after 1st July, 1898, when the Federal Act went into force. Or as the Court said: "The Act is to go into full force and effect upon its passage. That is to say the rights of all persons, in the particulars to which the Actrefers, are to be determined by the Act from the time of its passage." After mentioning a number of the rights which are determined by the Act, the opinion continues: "These various provisions affecting the rights and conduct of debtors and creditors are different from those previously existing in most of the States, and perhaps different from those found in the laws of any State, and they supersede all conflicting provisions." In the concluding part of the opinion the distinguised Judge who has recently been appointed Chief Justice of the Supreme Judicial Court of Massachusetts said that the language of sec. 70, sub-sec. (b) "was chosen to make clear the purpose of Congress that the new system of bankruptcy should supersede all State laws in regard to insolvency from the date of the passage of the Act," but necessarily this language means only that all conflicting provisions of the State law were thus superseded, for this is the well-settled proposition which he had just announced in a preceding sentence and which we have quoted above. If therefore, we are correct in the conclusion already reached that there is no conflict between the provisions of our insolvent law and the present Bankrupt Law, it follows that the language of sec. 70 relied on by the defendant can have no influence upon our conclusion in this case.

But, again, it was urged that there is a distinction between this case and cases which arose under laws which did not includethe class within its scope, as for instance where the Bankrupt Act applied only to debtors whose debts exceeded $300. It was held in Shepardson's Appeal, supra, that in cases where the debts were less than $300, the State law was not suspended and debtors of that class could be proceeded against under State laws. But the true rule was laid down by CHIEF JUSTICE MARSHALL in Sturges v. Crowninshield, supra, that the power of the State continues to exist over such cases as the Federal law does not reach. And, therefore, if cases involving involuntary proceedings against a class are not provided for by the Federal law, such cases are within the reach of the State law in spite of the fact that the members of this same class may avail themselves of the voluntary feature, otherwise the rule laid down by CHIEF JUSTICE MARSHALL would have to be changed so as to read that the power of the State exists only over such cases as are against natural persons or corporations not within any class provided for by any provision of the Federal law. If this were the rule, then, of course, it would follow as contended that the defendant, being of the class called farmers, and the Bankrupt Act having provided he may avail himself of the voluntary feature, no caseagainst him could be reached by the State law. But in our opinion this is not the proper view, for as we have already said it is not within the power of Congress to render inoperative the involuntary feature of State insolvent laws as to any particular class by excepting that class from the involuntary part of the national law. Otherwise the result would be that the State laws as to involuntary insolvency would become inoperative by the mere existence of the power of the United States to establish a system of involuntary bankruptcy. We have seen, however, that it is not the mere existence, but the exercise of the power to establish a genuine bankrupt law in conflict with the State laws, which renders the latter inoperative. Sturges v.Crowninshield, supra.

In conclusion it may be proper to say that if it is the policy of our State to render farmers and tillers of the soil like other persons subject to the involuntary system of our insolvent laws, as it is declared to be by the provisions of our Code, Art. 47, secs. 22 and 23, we should not by any strained construction of an Act of Congress or by a course of ingenious reasoning attempt to thwart this purpose.

From what we have said it will be seen that we are of opinion that the order appealed from should be reversed.

Order reversed and new trial awarded.

(Decided January 21st, 1903.)