8 J. Nat'l Ass'n Ref. Bankr. 70 (1933-1934)
Shall Bankruptcy Jurisdiction be Extended to Include Municipalities and Other Taxable Subdivisions

handle is hein.journals/ambank8 and id is 72 raw text is: JOURNAL OF THE

Shall Bankruptcy Jurisdiction be Extended to Include
Municipalities and other Taxable Subdivisions*
By ASA G. BRIGGS, of Briggs, Weyl & Briggs, St. Paul, Minnesota.

Mr. Chairman and Gentlemen of the Committee: This
paper is devoted to legal and conftitutional questions in-
volved in the subject under discussion. It will make liberal
use of the language of the Supreme Court of the United
There are some familiar rules 6f law that it may be well
to recall. Every officer of every department of the govern-
ment - executive, legislative and judicial (including every
attorney) is bound by his oath and his loyalty to his gov-
ernment to support and defend the Constitution. The Con-
stitution is our government. There is no divided respon-
sibility here; the officers of one department cannot right-
fully shirk responsibility any more than can others right-
fully usurp authority.
A special responsibility rests upon the judiciary, because
it must make the final decision on constitutional questions.
But this fact does not justify passage of acts by the legis-
lative department, or the approval of acts by the executive
department, to avoid their responsibility. Public clamor
and appeal, or even apparent necessity, may at times bring
great pressure upon those who may be placed where they
may act contrary to the constitution; if they shall so act,
knowingly, they will be disloyal to their government and
untrue to their oaths of office. Lawyers are just as tightly
bound to support and defend the Constitution as are other
officers of the government, although they have no vote in
determining the course of action. What you do here may
have serious consequences.
(1) The proposed legislation you are considering is not
bankruptcy legislation. It cannot be brought under the pro-
vision oJ the Federal Constitution giving to Congress power
to establish uniform laws on the subject of bankruptcies.
(2) The Federal Government has no jurisdiction over
municipalities or local taxing districts.
Why is such federal legislation sought? There is one
reason and one reason only. The proponents of this legis-
lation desire laws under which they can impair the obliga-
tions of their contracts. The state can not impair the obli-
gations of contracts. Therefore, they reason, we will go to
Congress which has the power to impair contracts in mat-
ters that can be brought under the bankruptcy provision
of the Constitution.
There is nothing proposed in these bills that cannot be
done with the aid of the state legislature, except that the
state cannot take away any of the creditors' property, or
extend the time of payment of any indebtedness, or coerce
a minority into accepting the will of the majority.
When the federal constitution was adopted and when
the first bankruptcy act was passed in 1800 and for long
years prior thereto in England, bankruptcy was confined
to individuals who were traders (See 2 Kent's Commen-
taries 389). The bankruptcy act of 1867 extended it to
partnerships and monied, business and commercial corpo-
rations and joint stock companies. Municipalities have
never been included under the operation of any bankruptcy
act; municipalities have never been mentioned in any
bankruptcy act until the amendment of 1910 to the act of
1898, and they were mentioned then only to specifically
exclude them from the operation of bankruptcy. It has
been to the advantage and benefit of the municipalities
*An address delivered before the Standing Committee on Commer-
cial Law and Bankruptcy of the American Bar Association at Grand
Rapids, Michigan, August 29, 1933, as published in the American Bar
Association Journal, November, 1933, issue. Reprinted with permission.

that they have been so excluded. Municipalities better
let well enough alone.
What is bankruptcy? There are three fundamental pur-
poses for which bankruptcy acts have been passed. This
statement is borne out by a long line of decisions of the
federal courts.
Collier on Bankruptcy 10th Ed. Page 4, says that these
three fundamentals are:
(1) That a debtor may turn over his unexempt property
to a trustee;
(2) That this property may be applied by the trustee
equitably and ratably to the payment of his debts; and
(3) That the debtor may be then released from his debts.
None of the proposed legislation relating to municipal:
ities provides for any one of these fundamentals.
One of the proposed bills was sponsored by Mayor
Murphy of Detroit who with Mr. Zimmerman from Chi-
cago as his lawyer, appeared before the Senate judiciary
Committee on March 2, 1933. At that time Mayor Murphy
in explaining the purposes of the bill said:
This will give us a breathing spell. There is no repudiation involved.
We will pay one hundred cents on the dollar. We will work it out. A
creditor will eventually receive every dollar that is due to him. (Page
10 of Report.)
The city has never been in default. It has not issued
bonds to its legal limit. Is this insolvency? Does this call
for bankruptcy?
This bill is intended purely as a means of leading to a
moratorium or a compromise. It might be called a compo-
sition with creditors, which we will see is not bankruptcy.
No one, municipality or its creditors, considered the
value of the property owned by the municipality when the
debt was incurred; no one contemplated the taking or
selling of any property owned and used for governmental
purposes by the municipality, in satisfaction of its debt;
it cannot be done. Municipal debts are based on the tax-
able value of the property of every taxpayer in the muni-
cipality, and are paid only by taxes levied upon all of that
property. Courts now have plenary powers to compel the
payment of debts by mandamus.
No one ever intended to give to Congress power to ex-
tend the bankruptcy law to municipalities, or that the
municipality's property held for governmental purposes
might be sold or diverted from its imperative use in the
public interests. This novel idea had to wait for a new
era for its origin.
In 1874 an amendment to the 1867 Bankruptcy Act
provided for a composition between an insolvent debtor
and his creditors. This did not include municipalities. It
did not contain any of the essentials of a bankruptcy act.
It provided a means for debtors and creditors compromis-
ing and settling their matters outside of bankruptcy, and
without going through bankruptcy. The law provided that
the debtor might make a proposition to his creditors which
they might accept or reject as they saw fit. If it were
accepted with the court's approval the bankruptcy pro-
ceedings were abandoned and the settlement became a new
contract which both parties were bound to carry out. The
act contemplated the abandonment of bankrputcy pro-
ceedings. Neither did it consider municipalities possible
debtors in bankruptcy.
Three times the United States Supreme Court has held
that this amendment substituted composition for bank-
ruptcy proceedings.

January, 1934

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