Hicks v. Hotchkiss , 7 Johns. Ch. 297 ( 1823 )

The Chancellor.

The contract upon which the present demand is founded, was made in the state of Connecticut. In July, 1813, H. S. Beach, (whose interest the plaintiff represents,) G. Peck, and the defendants, being at JVeiti Haven, in Connecticut, and engaged in business there, became concerned in a commercial adventure to the West Indies; the cargo of the return voyage was consigned to the defendants W. S. and S. Hotchkiss, and delivered to them in Rhode Island, the latter end of the year 1813. If was shortly thereafter sold and converted into cash, and those consignees became responsible to the other parties for their proportions of the net proceeds; they continued all this time to reside at New-Haven, and none of the parties became inhabitants of this State, until 1815. The one fourth of the proceeds belonging to Beach, and received by W. S. &y S. Hotchkiss for his use, amounted to 1803 dollars and 34 cents, and his right and title to those proceeds was assigned to the plaintiff, on the 38th of October, 1816, with authority to demand and receive them. The defendants,'1 W. S. 8y S. H., have never accounted for Beach’s share; and the only defence set up which they have been able to establish, in point of fact, is their discharge, as insolvent debtors, from all their debts, by the Recorder of New-York, in August, 1818, under the general and permanent insolvent act of this State, of the 13th. of April, 1813.

The only question in the case is, whether that discharge, under the circumstances, be a legal bar to the suit. The facts do not sufficiently warrant the conclusion, that the discharge was fraudulently procured, by concealing or denying the fact that Beach was a creditor at the time H. Sy H. exhibited to the Recorder an account of their debts and creditors. The denial of the existence of that creditor or debt, was not, at the time, necessary to the validity of the proceedings. The act of 1813, only required the assent of two thirds of the creditors, in value, to the petition, and the insolvents had signatures to that amount, without the assent of Beach or his assignee.

The act declared, that the insolvent debtor, upon his petition, in conjunction with two thirds of his creditors in value, and upon assigning over all his property, (except a few articles of necessity,) and complying with the requisitions of the -act, should be discharged “from all his debts due at the time of the assignment, or contracted for before that time, though payable afterwards, except debts due or owing to creditors without the United States, who should not have petitioned for the insolvent’s discharge, or have come in and accepted á dividend of his estate from his assignees, unless two thirds of all the insolvent’s debts, including foreign debts, should have been signed off according to the directions of the act, in which last case, foreign, as well as domestic debts, shall be discharged.”

It is contended, that the discharge in question was no bar, inasmuch as no state can pass any law “ impairing the obligation of contracts,” and the discharge of the insolvents from their contract to pay Beach, without his consent and without having paid him, was an act of law impairing and destroying the obligation of the contract.. If the discharge would have been valid, if the contract had been made in this State, yet it is insisted, that the contraes being made out of the State, and between persons not at the time citizens of this State, the discharge is clearly void.

The question, upon this discharge, is of very grave import, and leads to an examination of the principal decisions on the constitutionality of these state insolvent laws.

The great and leading case on the subject, is that of Sturges v. Crowninshield, decided by the Supreme Court of the United States, in February, 1819. (4 Wheaton, 122.) The defendant, in that case, gave two promissory notes to the plaintiff, dated at Mew- York, the22d of March, 1811, and in February following he was discharged from all his debts under the insolvent act of this State, of the 3d of Jlpril, 1811, entitled, “ an act for the benefit of insolvent debtors and their creditors.” He was afterwards sued in the Circuit Court of the United States, for the district of Massachusetts, upon one of those notes, and pleaded his discharge in bar. To this plea there was a demurrer, and the cause was carried up to the Supreme Court of the United States, and argued in February, 1819. Every topic of discussion, in respect to the policy, the origin, the necessity, and the construction of those parts of the constitution, which bear upon the question, and in regard to the powers of the general and state governments, to pass bankrupt and insolvent laws, and in respect to the history and character of such laws, was investigated and exhausted, and the argument on each side pressed with great talent and. force.

In the opinion of the Court, as delivered by the Chief Justice, it was admitted, that until Congress exercise the power to pass uniform laws on the subject of bankruptcy, the individual States may pass bankrupt laws, provided those laws contain no provision violating the injunction in the constitution, not to impair the obligation of contracts. It was admitted, also, that the States might, by law, discharge debtors from imprisonment, as imprisonment was no part of the contract, but only a means of coercion; and that they might likewise pass statutes of limitation ; for such statutes relate to the remedy, and not to the obligation of the contract. . It was further stated by the Court, that the insolvent laws, of far the greater number of the States, only discharged the person of the debtor, and left the obligation to pay in full force; and to this the constitution was not opposed. But in the judgment of the Court, a law which discharged the debtor from his contract, without performance, and released him, without payment, entirely from any future obligation to pay, impaired the obligation of that contract, and, consequently, the plea of a discharge, under the act of this State, of the 3d of April, 1811, was no bar to the suit on the notes given in New-YorJc, on the 22d of March, 1811.

It is to be observed, that the act of 1811, was retrospective, and discharged the debtor upon his single petition, without the concurrence of any creditor, from all his pre-existing debts; or, in the words of a supplementary provision, (Act of the 9th of April, 1811, ch. 248.) from “ all liability and responsibility, by reason of any bill, indorsement, contract, covenant, obligation or engagement, which the debtor might previously have drawn, made, entered into, or executed.” This act manifestly impaired the obligation of such debts, and the application of the plain and intelligible words of the constitution to such a case, would seem to be inevitable. The debtor was, at once and for ever, released from all obligation to pay his debts, though the property he assigned might be worthless, and though he might afterwards be found in affluence.

So far as this decision has settled the construction of the constitution of the United States, it is to be received as the true construction; for questions of that kind fall within the cognizance of the judicial power. The decisions of the Supreme Court of the United States upon questions arising Upon the construction of the powers and authority of the constitution, must be definitive, and binding upon all the tribunals of the Union ; because the constitution has made their judgments and decrees final, and without appeal. Every decision by a Court in the last resort, in a case within its undoubted jurisdiction, must, from the necessity of the case, be absolutely binding. The proposition, that the State Courts are equally supreme, independent and absolute, in the consideration and decision of such national questions, strikes me as untenable. It would lead to the subversion of all order and subordination. There must be a paramount power, some where, in the organization of every political institution, or there is no government. The Supreme Court of the United States, on questions within its cognizance, is that power; and if the State Courts were to undertake to disobey or elude its decisions, the consequence would be discord and confusion, or a dissolution of the national compact.

I should have deemed it my duty, therefore, to have maintained this doctrine, even if I had considered the application of a prohibition in the constitution to the discharge under the act of 1811, to have been a mistaken application. But this is not the case. The act of 1811, did impair the obligation of contracts to a most fatal and alarming extent. It was equivalent to a general release of every debtor in the State from, all his then existing debts, without or against the will of all his creditors, provided he could only persuade some one of them to be so obliging as to prosecute him, and provided he was willing to assign over his then existing property. There never was a law that held out more alluring and more dangerous temptations to debtors to forget what they owed to good faith, and to disregard the moral obligation of contracts. Its effects upon the community were rapid and deplorable. The evils of it were contagious, and spread like a pestilence. The public became alarmed, and wise and good men and men of property were deeply excited. Petitions for the repeal of the act flowed in from every quarter to the next Legislature; and it was one of the first acts of the session of 1812, (sess. 35. ch. 8.) to abolish the law of the preceding year, without waiting to prepare another and better system in its stead.

I have not described the mischiefs of the act of 181Í, beyond historical truth. We have, as authentic evidence of the fact, the report of the joint committee of the Senate and Assembly of the 6th of February, 1812. That report contained this strong declaration, that “ experience had demonstrated the injustice, impolicy, and pernicious tendency of the act of 1811; that it had multiplied fraud and perjury, and that the dictates of-justice and sound policy required its immediate repeal.” The fate of such a law affords a monitory lesson; and it is, certainly, without any mixture of regret, that I have perceived that, under the authority of the case of Sturges v. Crowninshield, a great number of discharges, procured by means of the act of 1811, have been sacrificed upon the altar of the national justice. An insolvent law, discharging a debtor from his then existing debts, is a violation of vested right, injurious to morals, and dangerous as an example, and ought to be condemned.

But the case of Sturges v. Crowninshield, is not free from difficulty as to the extent of its application. The act of 1811 was passed after the making of the contract, to which the discharge under the act was pleaded as a bar, and the counsel for the plaintiff raised the distinction between the case of a contract made before and after the passing of the act; and contended, that if the act was not unconstitutional and void as to future contracts, it was clearly so as to contracts existing when it was passed. The Chief Justice, however, did not take notice of that distinction ; and all his reasoning went to illustrate and enforce the general principle in the constitution, that contracts should be inviolable; and that any law, releasing the party from his obligation to pay, impaired that obligation. The only part of the opinion that had an allusion to any such distinction, was that which declared that statutes of limitation and usury laws did not impair the obligation of contracts, provided they did not reach contracts already made when the laws were passed. But such regulations are not intended to affect the obligation of the contract. The one relates to the remedy, and prescribes the period of time which shall afford presumption of payment; and the other relates merely to the rate of compensation for the use of the money, or the delay of payment.

The Court, however, Said, at the conclusion of their opinion, that it was “ confined to the case actually under considerationand that case was one in which the contract was existing when the law was passed. It must be admitted, that it is not very safe, to separate the reasoning of the Court, in any given case, from the facts to which the reasoning was meant to apply; and if there be any thing material or solid in the distinction, we may avail ourselves of it, without impairing the authority of such case. A decision is, strictly considered, an authority to the extent only of the facts which warranted it.

In Mather v. Bush, (16 Johns. Rep. 233.) decided by the Supreme Court of this State, in May, 1819, that dis tmction was taken, and very much relied on. The contract was made in 1816, and both parties were citizens of this State. The debtor was prosecuted to judgment, and was then discharged, in 1817, under the general insolvent act of 1813, and the Court set aside a fi. fa. issued after the discharge, and held, that an insolvent law in force when the contract was made, did not, in the sense of the constitution, impair the obligation of that contract. They held, that the parties to a contract have a reference to the existing laws of the country where it is made, and are presumed to contract in reference to those laws. The law may be said to be a part of the contract; and it is an implied condition of every contract, that the party shall be absolved from its performance, if the event takes place, which the existing law declares shall dispense with the performance. The contract, in the opinion of the Court, had no greater force than if the insolvent act had been inserted in it, and made part and parcel of the contract.

I do not perceive the very great force of this last argument ; for if parties are to be supposed to contract in reference to existing laws, they must be presumed to mean laws made in pursuance of the constitution. But the materiality of this distinction between an insolvent act made to affect past, and one confined to future contracts, had been already perceived and acknowledged by the Judges of other Courts. It was admitted by Ch. J. Parker, in Blanchard v. Russell, (13 Mass. Rep. 1.) and by Mr. Justice Washington, in Golden v. Prince. (5 Hall’s L. J. 502.) In this last case, the insolvent act of Pennsylvania was passed after the making of the contract upon which the defendant was sued; and the discharge which was pleaded in bar, was overruled. It was held, that the law was un? constitutional in relation to that particular case, because it impaired the obligation of the contract by discharging the debtor, to use the language of the learned Judge, “ from the payment of his debts, due or contracted before the passage of the law.” He admitted, that a law, prospective in its operation, under which a contract after-wards made might be avoided in a way different from that provided by the parties, would be clearly constitutional.

A great deal may be said against the policy of insolvent laws, which go to discharge the debtor absolutely from his debts, though they are prospective in their operation; and such considerations are proper for the legislative power, when passing upon such laws. Good faith should be earnestly taught, and religiously observed, not only on the part of government, but in the dealings of individuals with each other; and the interference of the law to discharge a party from the obligation of his contract, fairly and freely made, without the consent of the party entitled to performance, and without performance, is, in itself, a strong measure, and of dangerous influence, and requires a pressing necessity to justify it. In the language of the report, which I had the honour, in connexion with the Judges of the Supreme Court, to submit to the Legislature of this State, on the 22 d of January, 1819, “a permanent insolvent act, made expressly for the relief of the debtor, and held up daily to his view and temptation, and when its main object is to set him for ever free from his debts, has a powerful tendency to render him heedless in the creation of debt, and careless as to payment. It induces him to place his hopes of relief rather in contrivances for a discharge, than in increased and severe exertions to perform his duty.” I have no doubt that insolvent and bankrupt laws have an unfavourable effect upon the morals of the community; and that, though it >nay be a discouraging check to industry and enterprise, to subject the future acquisitions of a bankrupt or insolvent debtor to the payment of his debts, according to the rule of the cessio bonorum of the Roman law, the evils resulting from the practice of a complete release of the debtor, are much greater.

But these are questions of policy, properly addressed to the legislative power, and they have no direct concern with the judicial inquiry, as to the true construction of the prohibition, not to pass “ laws impairing the obligation of contracts.” There are many considerations whi^h.'appear to me to be very embarrassing to the argument) irtsupport of the proposition, that the insolvent lapr* operating upon contracts in futuro, is also unconstitutional and void, if it goes to discharge both the person and. the future property - of the' debtor. A prohibition to impair by law the obli-i gation of a contract, would seem, from the plain meaning of,, the expression, to refer to laws affecting existing contrádts. All civil contracts are subject-to the regulations of the lawgiver ; and a contract cannot well create a civil obligation in a mode not permitted, and to an extent beyond that prescribed by the established law of the land, existing when the contract was made» • The prohibition would not surely have prevented theipassing the statute of frauds, declaring I that no interest, in land should thereafter pass by a parol contract, and that no person should be bound by a parol promise to answer for the debt of another. The Legislature have a right to prescribe, according to their sound discretion, the terms and conditions upon which persons shall be, thereafter, bound by their contracts. The Legislature may apply the principle of the cessio bonorum, and discharge the person of the debtor. This is conceded ; and yet to diminish the extent of the remedy materially, would seem to impair the obligation of the contract. If this be denied, why may not the remedy be still further narrowed, and specific parts of the property exempted ? This has been done, from time to time, as to articles of necessity$ and what precise limits can we assign to the discretion of the Legislature ? If they may exempt one article of property, why not another ? If they may take away the remedy by a ca. sa., why may they not take away the remedy by a fi. fa. 9 Utor permisso—demo unum, demo etiam unum. All these things may be done without any difficulty, in respect to future debts, created after the regulations of the law ; but I should doubt whether even the remedy, in any point of view, or of any description, can be essentially diminished as to antecedent contracts.

¡a^n tive in its operation, is constitutionai.

The contemporary exposition of the constitution on this point, and the uniform practice under that exposition, ap- ... . pear to me to furnish a very strong argument against that construction, which would apply the prohibition to prospective insolvent lawsl We have good reason to believe that the construction now under review, was not originally in the contemplation, either of the convention that made, or of the conventions which ratified the constitution.

Insolvent laws, to the extent of the act of 1813, existed, and were in use, when the constitution of the United States was adopted. No person supposed they were repealed by the adoption of the constitution. They have been kept in use ever since, without the suggestion of a doubt as to their validity. It did not occur to any person at that period, that Congress might and ought to pass bankrupt laws, discharging bankrupt merchants from their debts, and that the State Legislature could not pass or continue insolvent laws, discharging any other class of unfortunate debtors, upon the same terms, without a violation of civil and moral obligation. No objection had been raised, as far as I recollect, to the constitutionality of these insolvent laws, by thejudiciary of this or of any other State, or by that of the United States, until the decision in Sturges v. Crowninshield. I have already alluded to the opinions of the Chief Justice of Massachusetts, and of Justice Washington; and I may add, the judicial opinions in Adams v. Storey, (6 Hall’s L. J. 474.) and in the case of the Farmers and Mechanic’s Bank v. Smith, (ib. 547.) as well as in several other early cases before the federal Court, referred to by Mr. Hunter, in his argument, in Sturges v. Crowninshield, to show that such laws were held to be valid. In this State there was a permanent insolvent act in existence when the constitution of the United States was adopted ; and I presume, and I think I know, it never occurred to any person at that period, that the law was overruled or affected by the clause in question. Judge Chase, and Judge Paterson, in Calder v. Ball, (3 Dallas, 386.) both declared, that if the prohibition in the constitution against ex past facto laws extended to laws affecting contracts as well as crimes and penalties, the other prohibition in the constitution, not to pass any laws impairing the obligation of contracts, would have been unnecessary or useless. But why useless, if the prohibition also applied to laws made to operate upon contracts in futuro ? Those learned judges evidently did not carry the construction to that extent. The act of this State, of March, 1788,was amended on the 13th of February, 1789, after the constitution was adopted, and the amendment assumes the act itself to be valid. We have, therefore, a usage of thirty years, founded on a contemporary and uncontradicted and continually acknowledged exposition of the construction. Such a settled, practical, contemporaneous construction, is evidence of universal and uniform acquiescence in that sense of the instrument which was assumed in the first instance 5 and upon a constitutional question affecting most deeply the rights of property, the authority of law, and the powers of the State governments, such an exposition presses upon my mind with insurmountable weight. Whatever, therefore, might be the better opinion, if the question was res integra, and there had been no usage on the subject, I feel myself bound by a construction settled by such usage, except so far as it may have been directly controlled by a decision in point, made by the supreme judicial authority of the Union. I shall, therefore, follow the course adopted by the Supreme Court in Bush v. Mather, and consider the case of Sturges v. Crowninshield an authority to the extent of the facts in that case, and no further. It is an authority, then, to this extent, that an insolvent law of this State, discharging a debtor from, his contract existing when the law passed, so that his future property could not be touched, is unconstitutional, and the discharge void. • ^ That decision, then, does not reach the present case.

But the decision in M'Millan v. M'Neill, at the same term of the Supreme Court of the United States, (4 Wheaton, 209.) went a step further, and held, that a discharge under an insolvent law, existing when the debt was contracted, was equally void, and within the principle of the decision in Sturges v. Crowninshield. This was a case, however, of a discharge under the insolvent law of a different government from that in which the contract was made. The plaintiff resided in South Carolina, and gave a custom house bond, in November, 1811, with the defendant, also a citizen of S. C., as his surety. The bond was paid, after suit and judgment, by the defendant, in 1813. The plaintiff, afterwards, removed to Neto-Orleans, and was discharged in 1815, both as to person, and present and future • property, from all his debts, under an insolvent law of the State of Louisiana, passed in 1808. He was sued in Louisiana, in 1817, by MNiell, and pleaded his discharge under the Louisiana act, and the plea was overruled on demurrer, by the Circuit Court of the United States, for that district, and the judgment affirmed by the Supreme Court of the United States. The Court said, that the circumstance of the State law, under which the debt was attempted to be discharged, having been passed before the debt was contracted, made no difference in the application of the principle of the former decision.

Here, also, the principle of the decision seems to be more general and extensive than the facts in the case required. Do the Court mean to say, that if the debt had arisen in Louisiand, between persons residing there, the discharge, under a pre-existing law, would have been equally unavailing ? Are we bound to regard this decision, as an. authority to that extent ? If we are, then there is an end of all State insolvent laws, that go" to extinguish the-remedy against the future property of the debtor, and insolvent laws are reduced to the level’of the cessio bonorum of the civil law. But it is certainly best and safest, for the reasons which have been already "mentioned, to confine the authority of this case, to the facts upon which the decision toas mcttffy and to consider the Court as intending only to decide,'"that a debt created in South Carolina, between citizens of that State, .ivas not to be discharged, and the remedy extinguished, by the discharge of the debtor, under the insolvent law of another State. If the suit had been brought in the Court of another State, or another district, than that in which the discharge was obtained, there would have been no difficulty in acceding to the decision; for it is well set-tied,'that a debt, contracted in one country, cannot be discharged by the bankrupt laws of another, so as to bar a suit in the country where the debt was contracted. But we have always considered a discharge, under our own insolvent laws, (assuming them, of course, to be constitutional,) to be a bar to suits brought here upon antecedent contracts, wherever made. (Penniman v. Meigs, 9 Johns. Rep. 325.) The insolvent act of 1813, expressly extended to foreign contracts, and our Courts would be bound to regard as valid the discharges under it, even as to such contracts, unless the law itself be against the constitution of the‘United States. But it is impossible, upon a comparison of facts',' to avoid considering the case of Penniman v. Meigs, as overruled by that of M‘Millan v. M‘Neill. If the discharge in Louisiana would have been valid, and free from any constitutional objection, in a Court of that State, it would have been equally so in a Court of the United States sitting in that State. The laws of the several States (except where the constitution and laws of the Union shall otherwise require) are to be regarded, as well upon principles of comity and policy, as under the judicial act of Congress, as rules of decision in the Courts of the United States, in cases where they apply. But it has been adjudged that a discharge in Louisiana is unconstitutional and void, so as not to be a bar even in Louisiana^ in respect to a debt contracted in another State; and it necessarily follows, that the discharge of W. S. S. Hotchkiss, under the insolvent act of this State, is not a bar, even in this State, to an action upon a contract made or debt contracted in Connecticut, between parties residing there at the time.

The subsequent case of the Farmers and Mechanic's Bank of Pennsylvania v. Smith, (6 Wheaton’s Rep. 131.) declared, that though the parties were citizens of the same State, when the contract was made, and continued such to the bringing of the suit, it made no difference in the application of the principle of the former decisions, as the constitution of the United States was equally binding on all the Courts and all the citizens. But here also the facts were more narrow than the general doctrine of the Court, for the insolvent act, in that case, was passed subsequent to the contract; and I must once more advert to the rule, that a case is no authority beyond the facts that called for the decision.

It results, then, from the decisions at Washington, that valid discharges, under an insolvent act, must, at all events, be confined to the case of debts contracted after the passing of the act, and which were contracted within this State. Whether the principles, declared in the case of Sturges v. Crowninshield, are to be more extensively applied, so as to reach and control this remaining power of the insolvent act, I am not prepared to say. It would not be in my power, according to my present view of the subject, to carry these principles to that extent. It is sufficient for the present, to observe, that the case is not an authority for that purpose; and I willingly leave the further application of its doctrine to the consideration and judgment of the Supreme Court of the United States, whose decisions, even when we do not entirely assent to them, never fail to excite reverence, as well as command obedience. And, in this concluding period of my judicial life, I cannot do better than to add my humble testimony to the character which that Court sustains, and to the confidence which it ought to inspire. It has been frequently called to the examination of national questions of great difficulty, extreme delicacy, and of infinite importance; and it is in the habit of discussing them, not only in a masterly manner, and with magnanimous firmness, but with a very engaging moderation, a visible anxiety, and profound meditation. Principles arising on constitutional and public law, have been defined, explained, and enforced, with such clearness of perception and depth of reasoning, and such a fitness and force of illustration, that if we have not been able to concur in all their conclusions, we have never ceased to admire the strength and temper of the decisions.

The following order was entered:

“ It is ordered, that the decree pronounced at the first hearing, in respect to the two defendants, W. S. fy S. Hotchkiss, be vacated, and that they account to the plaintiff for the sum of 1803 dollars and 28 cents, the amount admitted to have been received for H. S. Beach, together with interest thereon, from the 1st of January, 1814, and that they pay to the plaintiff his costs as against them, and that the bill, as to the other defendants, be dismissed, with costs.”