GAMBLING AND BANKRUPTCY IN NINETEENTH CENTURY AMERICA.

• Author: Jarvis, Robert M.

TABLE OF CONTENTS I. INTRODUCTION II. BANKRUPTCY LAW IN THE UNITED STATES PRIOR TO 1800 III. THE FIRST FEDERAL BANKRUPTCY ACT (1800) IV. THE SECOND FEDERAL BANKRUPTCY ACT (1841) V. THE THIRD FEDERAL BANKRUPTCY ACT (1867) VI. FEDERAL CASE LAW VII. STATE CASE LAW VIII. CONCLUSION I. INTRODUCTION

Article I, section 8, clause 4 of the U.S. Constitution authorizes Congress to establish "uniform Laws on the subject of Bankruptcies throughout the United States." (1) Exercising this power, Congress enacted three early, but short-lived, bankruptcy statutes (in 1800, 1841, and 1867) before finally passing the Bankruptcy Act of 1898, also known as the "Nelson Act." (2) Forty years later, the Nelson Act was supplanted by the Bankruptcy Revision of 1938, also known as the "Chandler Act." (3) After another forty years, both Acts were replaced by the Bankruptcy Reform Act of 1978 ("BRA"). (4)

Although a fair amount has been written about the treatment of gambling debts under modern U.S. bankruptcy law, (5) very little has been written about them under the country's first three bankruptcy statutes. (6) Accordingly, this article seeks to fill the gap. (7)

II. BANKRUPTCY LAW IN THE UNITED STATES PRIOR TO 1800

At the time of the American Revolution, bankruptcy proceedings in the colonies were governed by the 1732 Statute of George II. (8) As this law applied only to "traders" and authorized only involuntary bankruptcies, (9) many colonies had their own debtor-creditor laws. (10) While some of these laws addressed "bankruptcy," (11) most focused on "insolvency." (12)

The Articles of Confederation (1781-89) made no mention of bankruptcy, (13) thereby leaving the subject to the states. (14) The widespread abuse of state laws--through the practice of state legislators granting "private relief' bills to politically-connected debtors--led to the inclusion of the Bankruptcy Clause in the U.S. Constitution, (15) although its addition appears to have been something of an afterthought. (16) In The Federalist Papers, James Madison devoted just one sentence to the Bankruptcy Clause:

The power of establishing uniform laws of bankruptcy is so intimately connected with the regulation of commerce, and will prevent so many frauds where the parties or their property may lie or be removed into different states that the expediency of it seems not likely to be drawn into question. (17) Professor Jonathan C. Lipson (Temple University) has suggested that the Bankruptcy Clause was inserted merely as a warning to states to avoid being too liberal in their treatment of either creditors or debtors:

Giving Congress the power to sweep aside state bankruptcy (and perhaps insolvency) laws was not the same thing as requiring Congress to use that power. Thus, absent federal bankruptcy legislation, the states could, and did continue to, enact bankruptcy and insolvency laws. ... If the Framers believed this would happen in the absence of federal bankruptcy law, perhaps the purpose of the Bankruptcy Clause was to act as a threat to those states that might wish to give extraordinary relief to debtors (or creditors). Perhaps this was an attempt to preempt a state law race to the bottom. A state can never be extreme in protecting debtors or creditors, the Clause might really be saying, for if it is, Congress always has the power to preempt the rogue state by imposing a uniform law. (18) Regardless of whether Lipson is correct, one thing is clear: during the first 11 years of the Republic, bankruptcy remained entirely a state subj ect, (19) even though states could not give debtors complete relief because of the Constitution's Contract Clause. (20)

III. THE FIRST FEDERAL BANKRUPTCY ACT (1800)

The Panic of 1797 (21) finally caused Congress to pass the country's first federal bankruptcy law in 1800. (22) As has been explained elsewhere, previous efforts had stalled due to Southern opposition:

There had been earlier calls for a federal bankruptcy law, but in the throes of the Panic of 1797, advocates renewed their pleas with a much greater sense of urgency. Since the inclusion of the Bankruptcy Clause in the United States Constitution in 1789, members of Congress had drafted bankruptcy bills every year, only to ignore them or let them die in committees. As the new American economy fluctuated, however, Congressional reluctance to pass a bankruptcy law left the question foremost in the minds of many Americans--particularly as the economy contracted and the number of business and individual failures increased. It had become increasingly clear that chancery courts and state insolvency laws were inadequate to deal with interstate commerce, and, in fact, only three states allowed for the forgiveness of debts in bankruptcy--Rhode Island, Maryland, and Connecticut. Pennsylvania allowed its insolvency law to lapse in 1798 with the expectation that Congress would pass a federal law. The debate over a federal bankruptcy law, though, was highly contentious and would become "one of the great legislative battlegrounds of the nineteenth century." The debate itself was centered on an ideological divide between the Federalists and the Republicans. Federalists believed that commerce was essential to the future of the country and that a bankruptcy law was necessary "both to protect non-fraudulent debtors and creditors and to encourage the speculative extension of credit that fueled commercial growth." Republicans, on the other hand, believed that the future of the economy was agrarian. It was Thomas Jefferson who asked, "Is commerce so much the basis of the existence of the U.S. as to call for a bankrupt law? On the contrary, are we not almost entirely agricultural?" Republicans were reluctant to enact a federal bankruptcy law because they viewed it as a Federalist power grab, fearing such a law would put farms and homes in the South at risk from attachment by greedy, overzealous creditors from the North. (23) The 1800 bankruptcy law (like England's 1732 bankruptcy law) applied only to traders (24) and authorized only involuntary bankruptcies. (25) It also was agreed that the law would sunset after five years. (26)

The law provided for bankruptcy proceedings to be superintended by the district courts, with the day-to-day work handled by "commissioners" with input from one or more "assignees." (27) Even with the creation of the federal bankruptcy courts in 1978, this basic structure has continued to the present day (although the nomenclature has changed over time). (28)

By the time of the 1800 Bankruptcy Act, many Americans had turned against gambling. (29) Partially as a result, profligate bettors were treated harshly by the 1800 bankruptcy law. (30) Section 37 denied bankruptcy relief to any debtor who "has lost, at any one time fifty dollars, or in the whole three hundred dollars, ... within twelve months before he became a bankrupt, by any manner of gaming or wagering whatever." (31) These amounts, in present day dollars, respectively equal $824.05 and $4,944.27. (32)

From the beginning, the 1800 bankruptcy law drew complaints from creditors, who found it "expensive to administer," objected to having to "travel to [distant] federal courts," and insisted "that the law provided opportunities for fraud." (33) Debtors also complained, (34) in large part because the law required two-thirds of their creditors to agree to any discharge of their debts. (35) As a result, the law was repealed in 1803, nearly 18 months before its expiration date. (36)

IV. THE SECOND FEDERAL BANKRUPTCY ACT (1841)

Following the repeal of the 1800 Bankruptcy Act, creditors and debtors once again were relegated to state law. In 1819, the U.S. Supreme Court decided that due to the lack of federal legislation, states were free to enact their own bankruptcy laws (subject, of course, to the limitations imposed by the Constitution's Contract Clause). (37) In 1827, however, the Court held that such laws could not bind out-of-state creditors. (38)

The Panic of 1837 (39) led to the adoption of the country's second federal bankruptcy law in 1841. (40) Unlike its predecessor, the 1841 law did not limit its provisions to traders; (41) permitted voluntary bankruptcies; (42) and reduced the percentage of creditors needed for a discharge from two-thirds to one half. (43) And with the Second Great Awakening having ended, (44) the 1841 law made no distinction between gamblers and other debtors. (45) As a result of these relaxed restrictions, thousands of individuals petitioned to have their debts discharged. (46)

Despite its success, the 1841 law was repealed in 1843, just 13 months after its effective date. (47) As has been explained elsewhere, its demise was caused by a shift in the national mood:

The Whigs [had] made bankruptcy legislation a central issue in the 1840 presidential campaign, which put the Whig candidate William Henry Harrison in the White House and gave the Whigs control of Congress. But this alone was not enough to ensure passage of the act. Almost every Democrat opposed the proposed legislation, as did a small but potentially decisive group of Whigs. The Whig leadership finally secured passage of the act by agreeing to support a land distribution bill in return for votes for the 1841 act. Almost as soon as it came together, the coalition that voted for the 1841 act started to unravel. When a small group of Southern and Midwestern Whigs defected, the 1841 Bankruptcy Act was doomed. John Tyler, who became president [in April 1841] when Harrison died shortly after his inauguration, was much less enthusiastic about the legislation than his predecessor. Popular opinion had turned against the law, and Tyler signed the repeal legislation in 1843. (48) In addition to its loss of political and public support, the 1841 Bankruptcy Act perished for a third reason:

The law was declared unconstitutional by multiple district courts, all on the grounds that a true bankruptcy law allowed only "a proceeding by...