THE RECENT AMENDMENTS TO THE BANKRUPTCY ACT OF 1898

By GEORGE W. CARR, Esq.

Mr. President and Brothers of the Pennsylvania Bar Association:

No Federal statute enters more directly into the everyday life of the citizen, whether he be merchant, manufacturer, or wage-earner, than the bankruptcy law. Even the tariff act is felt more remotely in its effects. The bankruptcy act is always before the people. No one escapes its operation. It is deserving of the most careful consideration. It may not, therefore, be unprofitable to briefly review the bankruptcy legislation of our country.

Since the foundation of the federal government, four bankruptcy acts, including the present one, have been passed by Congress. The first two were short-lived. The act of April 4, 1800, was limited to five years, and so great was the jealousy of the federal courts existing at that time, that it was repealed December 19, 1803. The second act was that of August 14, 1841, and its repeal on March 3, 1843, was largely due to political opposition based upon its alleged unconstitutionality. The third act endured longer than either of its predecessors. It was adopted March 2, 1867, amended June 22, 1874, February 6, 1875, and July 26, 1876, and repealed June 7, 1878, to take effect September 1, 1878. During the one hundred and twenty-seven years of our national existence, bankruptcy acts have been in force but twenty-one years.

The act of 1867, because of its delays and excessive costs, was so unpopular, that for a long time it was impossible to secure the adoption of a substitute, notwithstanding the demands of important and numerous commercial organizations, and for nearly twenty years the United States was the only civilized nation without such a law. The statute of 1898 was, like most important measures, a compromise, and

resembling all composite efforts, lacked the clearness and vigor of many of its component parts. While the act of 1867 was considered as leaning to creditors, that of 1898 was believed to be more favorable to debtors, and it was largely due to that belief that it was finally adopted.

The first year or two of its administration was not encouraging to the friends of permanent bankruptcy legislation. Many creditors who would scorn to be considered as entertaining views of political economy similar to those who years ago believed that by a fiat of the government value could be implanted where none existed, were loud in their complaints that thousands of debtors had secured their discharges without paying a penny of their debts. These creditors did not realize that, in the fifth of a century which had passed since the repeal of the act of 1867, the number of failures, even under normal conditions in a country whose industries were so great and diversified and whose progress in the race between the nations of the world for commercial supremacy had been phenomenal, could not help being enormous, even if not swelled by a panic like that of 1893. And yet the existence of this large class of financial wrecks was not without its compensating advantages, for it was largely the moving cause of the passage of the act of 1898. After all, the discharges of these thousands of debtors caused no actual loss to their creditors, but was a positive gain to the community; for most of them were either out of business and had nothing which could be reached by process, or if trading, were making a living and enjoying immunity from the payment of their debts by sheltering themselves in the encircling folds of the garments of their "sisters, cousins or aunts," and more often-wives.

The number of debtors who took advantage of the voluntary feature of the act when the multitude eligible is considered, was small. For the years ending September 30th, there were filed voluntary petitions as follows:

19,176, in 1899; 20,128, in 1900; 17.015, in 1901; 16,374, in 1902.

The steady decrease in this class of cases since 1900 indicates the high water mark was reached that year, and that before long the number of voluntary petitions will be no greater, and probably much less than would be the case were no bankruptcy act in force and failing debtors compelled to take advantage of the insolvency laws of their respective states.

Another source of dissatisfaction was the construction by the Supreme Court of certain sections of the act. The first of such cases was Bardes vs. Bank, 178 U. S. 524, holding that suits by the trustee could not be brought in the federal courts save only when the bankrupt could have maintained the action before his bankruptcy, unless with the consent of the defendant which, of course, was rarely if ever given. This decision compelled trustees to bring their suits to recover illegal preferences or property fraudulently transferred in the state courts, which if not positively hostile to the act, were often without sympathy for it, and necessarily more or less ignorant of its provisions and the precedents established by the decisions of the federal courts. Bardes vs. Bank was embarrassing for another reason. Compelling the trustee to bring suits of the character described meant a serious delay in the settlement of the estate. In many states owing to the congested condition of their trial lists, from two to three years had to elapse after a case was at issue before it could be reached for trial.

Then came Carson vs. Chicago Title & Trust Co., 182 U. S. 438. That case decided that the receipt by a merchant of a payment on account of a pre-existing indebtedness, after his debtor had become insolvent, without the knowledge or even in the absence of reasonable cause to believe insolvency existed, was a preference, and such payment must be surrendered before the claim could be proved. While this decision was probably justified by a literal construction of the act, it resulted in an absurdity. The creditor who received a payment amounting to but ten per cent. of his