From my new post on SSRN titled "Early Ruminations on the Supreme Court's Purdue Pharma Decision," available free at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4915343, on pages 11-12 is my insight that I believe represents a unique contribution to the national discussion about this case (footnotes omitted):
3. The Court’s attempt to characterize the nature of the bankruptcy discharge by assertions of legal history fails.
The attempt of the majority to provide the legal history of the discharge in bankruptcy cases stumbles badly. The current Court considers itself expert in legal history, as its decision-making has made a purported “turn to history” in many subject matter areas in recent years. The Purdue majority purports to furnish relevant history to buttress its conclusion about the nature of the discharge in bankruptcy, but its contention here is insupportable.
Specifically Justice Gorsuch’s opinion avows:
history offers a third [strike against the dissent’s construction of §1123(b)(6)]. When Congress enacted the present bankruptcy code in 1978, it did “not write ‘on a clean slate.’” . . . Recognizing as much, this Court has said that pre-code practice may sometimes inform our interpretation of the code’s more “ambiguous” provisions. . . . While we discern no ambiguity in §1123(b)(6) for the reasons explored above, historical practice confirms the lesson we take from it. Every bankruptcy law the parties and their amici have pointed us to, from 1800 until 1978, generally reserved the benefits of discharge to the debtor who offered a “fair and full surrender of [its] property.”
From the context, it is clear that the Court is speaking of the statutory law of bankruptcy, not its case law or common law. While the parties and the amici curiae may well have failed to point it out, the majority’s proclamation about “[e]very bankruptcy law” is incorrect because one entire chapter of the bankruptcy law that was adopted and was effective for the half century before 1978—a restructuring chapter, no less—unequivocally provided for a debtor to receive a bankruptcy discharge of claims without surrendering its assets. And that chapter remains in effect today.
Chapter IX of the Code’s predecessor, the Bankruptcy Act of 1898, known as municipal bankruptcy, afforded the judicial relief of adjustment of debts for municipal debtors, and this bankruptcy law provided explicitly for a discharge of debts with no surrender of properties into a bankruptcy estate or otherwise into the custody of the bankruptcy court. In municipal bankruptcy, there is no estate, and the debtor not only continues in possession of its assets but also is free to manage and dispose—even sell—those assets without bankruptcy court approval.
The deep legislative history of bankruptcy discloses that one of the innovations of the robust elaboration, development, and reformulation of bankruptcy and reorganization law that occurred during the New Deal was that Congress came to understand that a prior concept of a “fair and full surrender of [its] property” was not a sine qua non of all forms of bankruptcy relief. In a nutshell, here is the interesting story of the evolution of bankruptcy’s constitutional and legal theory that accompanied the formulation and enactment of Chapter IX municipal bankruptcy.
In the flurry of legislative activities during the lame duck phase of Herbert Hoover’s presidency and then the first year and a half of Franklin D. Roosevelt’s first term, members of Congress offered bills to innovate municipal bankruptcy for the relief of many thousands of cities, towns, and other political subdivisions of states that had become insolvent—unable to pay their outstanding bonds. Opponents of the adoption of Chapter IX argued vehemently that surrender of assets for administration by and under the bankruptcy court was the absolutely essential element of bankruptcy, and because a Chapter IX debtor would retain its properties, municipal bankruptcy would be unconstitutional under precedents such as Sturges v. Crowninshield and Hanover Nat. Bank v. Moyses.
But an important legal thinker, the Chair of the Judiciary Committee of the House of Representatives, Congressman Hatton W. Sumners of Dallas, analyzed the Constitution’s article I, § 8, clause 4 (the “Bankruptcy Clause”) and that article’s § 10 (the Contracts Clause) and determined that Congress’s power to legislate statutory bankruptcy law is not so limited. It was Sumners who on January 21, 1933, filed the first bill to afford bankruptcy relief for insolvent political subdivisions of states, and he soon crafted the specific legislation that was enacted as the First Municipal Bankruptcy Act in 1934 and, after the Supreme Court invalidated it in Ashton v. Cameron County Water Improvement District No. 1, re-enacted the law as the Second Municipal Bankruptcy Act in 1937.
Sumners’s rationale survives and continues justify municipal bankruptcy today. Then and still, municipal bankruptcy contains no concept of property of the estate and requires no turnover of assets to the bankruptcy court. A municipal debtor receives the same reorganizational relief that a Chapter 11 debtor does and that includes a discharge of debts upon confirmation of a plan—but with no surrender of assets. So the majority is incorrect in its historical allegation about surrender of property.
-Josiah Daniel