The Bankruptcy Court in New Jersey

The Bankruptcy Court in New Jersey

Mention of the subject of Bankruptcy appears for the first time in Article I, section 8, clause 4 of the Constitution signed in Philadelphia on September 17,1787. Although other powers also listed in the same section had been dealt with in the Articles of Confederation signed July 9, 1778, the subject of bankruptcy was not among them.

The only reference to the item in The Federalist Papers is found in No. 42 (Madison), which said:

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.

The delegates to the convention in Philadelphia were learned men; the discussions in the course of debate shows that they were well acquainted with the government and laws of ancient Greece and Rome, as well as of the nations of Europe and of England. They had to have been aware of the history of the laws of creditor and debtor and, in older days, to sell him and his children into slavery. They had to have been aware of the Old Testament account of the widow, who went to Elisha and said: "Thy servant my husband is dead; . . . and the creditor has come to take unto him my two sons to be bondsman" II Kings IV.

They had to have known of the history of the English laws, first enacted in 1542 (34 & 35 HENRY VIII, c.4), to enable the chancellor to seize the estates of fraudulent debtors and divide the property among the creditors, but without relieving the debtor from any of his liabilities. In fact, at the time of the Convention, and even at the time of the first bankruptcy act in 1800, the English law did not allow a debtor to initiate the proceeding.

It would be interesting to explore the application of the English bankruptcy laws in the colonies, and in the independent states between July, 1776 and 1789, when the Constitution took effect. In New Jersey, if the English laws took effect, matters would have come before the Governor who also served as Chancellor; and from 1776 on, under the first Constitution of New Jersey, it was expressly directed that the Governor be also the Chancellor (Art. VIII) and also that the common law of England, and so much of its statute law "as have been heretofore practiced in the colony" were continued in force until altered by the legislature (Art. XXII). Just as the States established courts of admiralty to serve between 1776 and 1789, one would expect some trace of bankruptcy cases under the pattern just described; but there is none. Neither Lucius Q.C. Elmer's "Constitution and Government of the Province and State of New Jersey: (1872), nor Richard Stockton Field's "Provincial Courts of New Jersey" contains any reference to bankruptcy. The same is true of Edward Q. Keasbey's "Courts and Lawyers of New Jersey" (1912).

William Paterson, a delegate to the Convention of 1787, and later a Senator who participated in the drafting of the Judiciary Act of 1789 and a justice of the Supreme Court, was also the draftsman engaged by the New Jersey legislature to compile and revise all of New Jersey's laws, drew no bankruptcy law. See, Paterson's Laws, 1800; nor did he assume that the bankruptcy laws of England would be applicable, for one of the last statutes he drew for his revision was "An act relative to statutes", enacted June 15, 1799, providing in section IV that:

"from and after the passing of this act, no statute or act of the parliament of England or of Great Britain shall have force or authority within this state, or be considered a law thereof."

Justice Paterson also drew "An act for the relief of persons imprisoned for debt" (insolvent debtors), passed March 18, 1795. To understand where this law fits in the context of bankruptcy law, it must be remembered that it was not until much later that the summons replaced the capias ad respondendum (the "") as original process, with the capias ad satisfaciendum (the "") for execution. On a declaration for debt, the usual course meant that the debtor was arrested and jailed to answer, subject to release on bail, and if judgment went against him, to be arrested and put in debtor's prison (a different jail than those used to hold criminals).

The Insolvent Debtors' Act of 1795 allowed a debtor, in confinement for debt, who was willing to deliver up to creditors all of his real and personal estate toward payment of debts, could present a petition to the county Court of Common Pleas describing the cause of his imprisonment, containing a just and true account of all his real and personal estate, an inventory of his deeds, books records, papers, accounts, notes and securities and a list of all his creditors with the amount due and owing to each. The court then set a date for hearing, on notice to all the creditors, when the debtor was examined under oath on the substance of the petition, and if the court found that the debtor's conduct had been "fair, upright and just", an appointment was made of one or more assignees for the benefit of creditors to whom the debtor executed and delivered an assignment, whereupon the court would order him discharged from imprisonment on account of debts previously contracted.

The final section, XIX, provided that no person, being able of body and under the age of 35, not having a wife or lawful child, should be entitled to the benefits of the Act unless he signified his willingness to make satisfaction of his debts by servitude, for which he was to indent himself for not more than 7 years, for the benefit of creditors, upon which his former debts were canceled.

This last section was repealed by the Act of January 13, 1819, probably in recognition of the prohibition of Art. 1, sec. 10 of the U.S. Constitution, of any law passed by a State impairing the obligations of the contract.

And it was the sort of statute that had to serve as the major means for dealing with insolvent debtors for quite some time, as there was no federal bankruptcy act passed until April 4, 1800 (2 Stat. 19) and that one was repealed December 19, 1803 (2 Stat. 248).

Nearly 38 years were to pass after the repeal of the 1800 statute before the Congress passed another bankruptcy law, the Act of August 19, 1841, c. 9, 5 Stat. 440, and that one was repealed even more quickly than the first, by the Act of March 3, 1843, c. 82, 5 Stat. 614.

It was not until 78 years after the first Congress had convened in 1789, that a uniform bankruptcy law was passed and kept in force for as long as 10 years; that was the Act of March 2, 1867, c. 176, 14 Stat. 517, which was not repealed until the Act of June 7, 1878, c. 160, 20 Stat. 99.

Finally, more than 100 years after the convening of the first Congress, a federal bankruptcy act was passed that, with the various amendments and revisions has remained in force without repeal to the present time. That was the Nelson Act, the Act of July 1, 1898, c. 541, 30 Stat. 544. It was substantially revised by the Chandler Act of June 22, 1938, c. 575, 52 Stat. 883.

The present bankruptcy laws now in effect amount to the revised 1898 law, as restructured by the Bankruptcy Reform Act of 1978 (which enacted the Bankruptcy Code generally effective October 1, 1979), as amended by the Bankruptcy Amendments and Federal Judgeship Act of 1984, and the Bankruptcy Judges, United States Trustees, and Family Farmer Bankruptcy Act of 1986.

The 1800 law was limited to those who were "merchants", or other residents actually using the "trade of merchandise, by buying and selling in gross, or by retail, or dealing in exchange, or as a banker, broker, factor, underwriter, or marine insurer." It provided only for involuntary bankruptcy, at the instance of one or more creditors (the number depending on the amount of indebtedness).

To justify a petition to obtain a commission in bankruptcy, the creditor had to show the occurrence of an "act of bankruptcy," as detailed to cover various modes of hindering or obstructing creditors, absenting or concealing himself or his property, conveying fraudulently, and so on, and also being subjected to arrest for debt, or having property worth at least $1,000 attached, without securing release by posting bond within 2 months (these two last categories being indirect ways of indicating insolvency).

Under the 1800 law, the judge appointed from one to three commissioners for each bankrupt, and they supervised the proceedings such as creditors' meetings, election of assignees, examination of the debtor, and so on. The assignees undertook to gather assets, liquidate and convert to cash for division as dividends. Compensation of the commissioners and assignees was by allowance as found by the district judge.

By sec.14 of an Act to amend the judicial system of the United States, April 29,1802, it was provided that the President should appoint as many general commissioners in bankruptcy in each district as he thought needed When a commission in bankruptcy was called for under the 1800 law, the district judge was to appoint from one to three of the general commissioners so named; and their compensation was set at 6 dollars a day, to be apportioned among the matters they dealt with on each day. So far, no record has been found of the general commissioners in bankruptcy so appointed.

If all went well, at the end of the matter the debtor would receive a certificate that he had conformed to the Act, and had been discharged from all debts provable under the commission.

Evidently, aside from the petition and the commission, or other matters handled by the district judge, the commissioners were to keep and maintain the records of the proceedings. Once each year, the commissioners were to file specified papers with the clerk for these matters that had been completed during the year. The archives of the court, so far indexed or catalogued, do not indicate that any dockets or papers have survived to reflect the proceedings under the 1800 statute.

The archives do contain two volumes of dockets of cases filed under the Bankruptcy Act of 1841. Volume 1 lists 382 cases, and Volume 2, 474 cases, for a total of 856 cases filed over the period from February 4, 1824 to March 2, 1843. Along with the dockets, there are 12 shelf feet of case files for the same period, but evidently no index, as the cases in the docket are entered in numerical order.

The 1841 law, for the first time, allowed debtors who were unable to meet their debts and engagements (other than debts created by defalcation as a public officer or other fiduciary capacity) to voluntarily file a petition for bankruptcy. Involuntary petitions continued to be restricted to those who were merchants or in related activities, as in the Act of 1800.

A simpler procedure was established: the commissioners were eliminated, as was the need for documents to transfer the debtor's estate. Instead, sec. 3 provided that the decree of the court that the debtor was bankrupt should have the effect, ipso facto, by mere operation of law, from the time of the decree of divesting the bankrupt of his estate and vesting it in the assignee. The assignee was to be appointed and could be removed by the court, which power it could "exercise at its discretion, toties quoties."

The circuit court for the district was vested with concurrent jurisdiction to hear cases on adverse claims between the assignee and person claiming an adverse interest.

The 1867 Act established each district court as a court of bankruptcy and provided for the appointment by the district judges of one or more "registers in bankruptcy" in each Congressional district, each appointment to be made on the nomination and recommendation of the Chief Justice of the Supreme Court.

Registers so appointed were to assist the court in bankruptcy cases, with the idea of having at least one register in each Congressional district, evidently being intended to provide a reasonably accessible officer to debtors and creditors and thereby meeting one of the major objections to both the earlier Acts of 1800 and 1841. However, while lasting longer than its two predecessors, the 1867 Act was used for only eleven years and was repealed in 1878.

While in force, there were, on average, only about 170 cases a year. The court's archives contain, for these cases, a 1-volume index, three volumes (6 inches thick) of dockets, and 87 shelf feet of case files for the 1,885 cases filed from 1867 to 1878.

The eventual successor was the Nelson Act, or the Bankruptcy Act of 1898, as it came to be known, and that law is essentially in force today after major amendments in 1938 (the Chandler Act), a complete revision in 1978 (the Bankruptcy Code), and a restructuring in 1984 (the Bankruptcy Amendments and Federal Judgeship Act).

Under the 1898 Act, bankruptcy cases were referred by the court clerk to a referee in bankruptcy who, more and more as experience suggested and as various amendments authorized, took on a greater share of the judicial function and less of the administrative duties, much of which is now handled by or under supervision of the office of the United States Trustee. That Office is not part of the Bankruptcy Court, but is an arm of the Department of Justice under the Attorney General.

The Bankruptcy Court began to take it's present from after passage of the 1978 Act. Administrative functions were consolidated into a single clerk's office with staff located in each of the three court locations: Camden, Newark, and Trenton. Clifford P. Kirsch served as the first Clerk of Court. He was succeeded by James J. Waldron in 1984. The Honorable Vincent J. Commisa, sitting in Newark, was appointed the first Chief Judge of the Bankruptcy Court in 1984 and served in this capacity until his death in 1990. Chief Judge Commisa was succeeded by the Honorable William H. Gindin, sitting in Trenton, who served as Chief Judge from 1990 until 1998. In 1998, the Honorable Rosemary Gambardella, sitting in Newark, was appointed Chief Judge.

Eight full time Bankruptcy Judges make up the present court. Chief Judge Gambardella and Judges Novalyn L. Winfield, Donald H. Steckroth and Morris Stern sit in Newark; Judges Judith H. Wizmur and Gloria M. Burns sit in Camden, Kathryn C. Ferguson, and Raymond T. Lyons Jr. sit in Trenton. In addition, the 3rd Circuit Court of Appeals has authorized the recall of former Chief Judge Gindin on a part-time basis.