Is rabid partisanship and campaign money dominating national politics today? It’s mild compared to the pistol duels and banking rivalries of our founding fathers.

The history of Chase Bank goes back to 1799 with the founding of its earliest predecessor, the Bank of Manhattan Company, by a U.S. Senator and future Vice-President. He established this bank to compete against the bank that had been founded by a political rival. And then killed him five years later in a pistol duel!

Yes, the founder of the predecessor to Chase Bank was Aaron Burr, who killed Alexander Hamilton in their infamous duel in 1804. At the time Burr was Vice-President under Thomas Jefferson, but was dropped from the ticket in that year’s election. Burr and Hamilton were fierce political rivals, but business rivals as well.


Back in 1782 Alexander Hamilton had founded the first corporate bank, the Bank of New York. According to its current successor Bank of New York Mellon’s own history, Hamilton

personally wrote the company’s constitution and, during the early years, remained the individual most actively involved in the organization. Hamilton’s economic vision and firm grasp of financial principles served the company well. Hamilton went on to become the first U.S. Secretary of the Treasury and a member of George Washington’s first cabinet.

The Bank of New York was the only major commercial bank in the new country until, according to Chase Bank’s own history

Aaron Burr, a U.S. Senator and future vice president . . . founded The Bank of The Manhattan Co. [, which] had an unusual beginning. Burr led a group of New Yorkers, including Hamilton, in obtaining a state charter for a company to supply fresh water to the residents of Lower Manhattan. At Burr’s initiative, [and in opposition to Hamilton, who then withdrew from the deal], the charter included a provision allowing the company to employ its excess capital in any activity “not inconsistent with the Constitution and laws of the United States.” Burr then used that provision to start a bank.

And the reason for their duel? Hamilton allegedly made disparaging remarks about Burr that were published in a newspaper, and which had apparently come after many similar such statements over the course of many years. When Burr demanded that Hamilton deny or recant these statements Hamilton felt he could not do so without further harming his own reputation, which had been deeply damaged earlier because of a sex scandal!

In the early 1790s Hamilton had had an affair with a married woman, and paid the woman’s husband to be allowed to continue it. He subsequently admitted the affair in confidence to the future President, James Monroe, in the midst of a Congressional investigation against governmental corruption, in order to be exonerated of possible corruption charges. Monroe later passed this information, and evidence in the form of love letters between Hamilton and his lover, to Monroe’s close friend, Thomas Jefferson, a political adversary of Hamilton. Jefferson used the information to spread damaging rumors about him. In 1797, Hamilton’s incriminating love letters were published.

Then in 1804, as Burr was leaving the Vice-Presidency (because President Jefferson opposed him for a second term), he lost an election to be governor of New York State. He lost in part because of the political opposition of Hamilton, and a statement alleged to have been made by Hamilton that Burr was “a dangerous man, and one who ought not be trusted with the reins of government.” Burr demanded that Hamilton deny or recant that remark, and other similar statements allegedly made over the course of many years. Hamilton refused to do so because of his own very delicate reputation. So Burr challenged Hamilton to a duel, which Hamilton accepted. Hamilton’s shot missed; Burr’s did not, and Hamilton died from the wound the next day.

Burr was charged with murder in New York, and in New Jersey where the duel had taken place. He escaped to South Carolina, eventually came back to Washington, while avoiding New York and New Jersey, to finish his term as Vice-President. He was never prosecuted, but lived on for more than thirty years thereafter until reaching the advanced age (for that era) of 80.

And that’s how the original founder of Chase Bank murdered the original founder of the Bank of New York Mellon.

The U. S. Constitution doesn’t talk about it, so how does filing bankruptcy give you the power to stop a foreclosure?

As you’ve probably heard, bankruptcy is explicitly covered in the Constitution. But not much.  All it says is that Congress has the power “to establish… uniform laws on the subject of bankruptcies throughout the United States.”  (Article 1, Section 8, Clause 4.) Not a word about the rights and obligations of the person filing bankruptcy. Nor about the rights and obligations of creditors.

The Fifth Amendment talks about the rights of creditors when it says that a person shall not “be deprived of… property, without due process of law.”  So let’s say you have entered into a contract to pay a loan taken out on the purchase of your home, and that contract includes a condition that the creditor can take your home when you don’t maintain the payments on the loan.  If indeed you do not make payments, the creditor’s contractual ability to take your home is a property right it then owns. It bargained for that right with you when it lent you the money to purchase the home.

But you’ve heard that bankruptcy DOES have the power to stand in the way of your mortgage holder’s right to foreclose on the mortgage. Where does that power come from?

According to the U. S. Supreme Court, which dealt with this issue a number of times during the Great Depression in the 1930s, that power “incidentally to impair or destroy the obligation of private contracts… must have been within the contemplation of the framers of the Constitution.” Continental Bank v. Rock Island Ry., 294 U.S. 648, 680-81 (1935). The Court’s rationale was that because Congress was given “the express power to pass uniform laws on the subject of bankruptcies,” delaying the exercise of creditors’ rights “necessarily results from the nature of the power.”

But, showing this isn’t so straightforward, later that same year the Supreme Court struck down an amendment to the bankruptcy law that had been enacted in 1934 to address the massive number of farm foreclosures. One of the reasons the law was ruled unconstitutional is because it took away from the mortgage-holding bank a property right: the “right to determine when such [foreclosure] sale shall be held, subject only to the discretion of the court.” Louisville Joint Stock Land Bank v. Radford, 295 U.S. 555, 594 (1935).

So Congress quickly changed the law that same year to try to meet the Court’s objections. When that new law came before the Court, this time it was upheld, in an opinion written by the same justice, the eminent Justice Louis Brandeis, who had written the above opinion striking down the earlier law.

This time the bank holding the farmer’s mortgage based its argument that the law was “unconstitutional… mainly upon the… assertion is that the new Act in effect gives to the mortgagor [the farmer filing bankruptcy] the absolute right to a three-year stay; and that a three-year moratorium cannot be justified.”

After listing numerous ways in which the three-year stay was conditioned for the protection and benefit of the creditor, Justice Brandeis concluded that this stay, and the entire new law, was constitutional, as follows:

The power here exerted by Congress is the broad power “To establish… uniform Laws on the subject of Bankruptcies throughout the United States.” The question which the objections raise is… whether the legislation modifies the secured creditor’s rights…  to such an extent as to deny the due process of law guaranteed by the Fifth Amendment. A court of bankruptcy may affect the interests of lien holders in many ways. To carry out the purposes of the Bankruptcy Act, it may direct that all liens upon property forming part of a bankrupt’s estate be marshalled; or that the property be sold free of encumbrances and the rights of all lien holders be transferred to the proceeds of the sale. Despite the peremptory terms of a pledge, it may enjoin sale of the collateral, if it finds that the sale would hinder or delay preparation or consummation of a plan of reorganization. It may enjoin like action by a mortgagee which would defeat the purpose of [the new law] to effect rehabilitation of the farmer mortgagor. For the reasons stated, we are of opinion that the provisions of [the new law] make no unreasonable modification of the mortgagee’s rights; and hence are valid.

Wright v. Vinton Branch of Mountain Trust Bank of Roanoke, 300 U. S. 440, 470 (1937)(emphasis added, internal case citations omitted).

That why your bankruptcy filing powerfully stops a home foreclosure, even though the Constitution doesn’t say anything directly about this, and even though stopping that foreclosure impinges on a property right of your foreclosing mortgage lender.

If you’re financially hurting during this 4th of July, you may not exactly be feeling like this is a great country. But it is.

Here’s why:

  • We are the fresh-start nation of the world. We’ve all heard the famous words from the poem at the base of the Statute of Liberty:

Give me your tired, your poor,
Your huddled masses yearning to breathe free,
The wretched refuse of your teeming shore.
Send these, the homeless, tempest-tost to me,
I lift my lamp beside the golden door!

Emma Lazarus, 1883

  • Much of our history is one of migration within or beyond the edges of the country in hopes of finding a better life:
    • in the late 1700s, following Daniel Boone’s route through the Cumberland Gap of the Appalachian Mountains from Virginia to Kentucky
    • during the first half of the 1800’s, pouring into and throughout the Ohio Valley and the Great Lakes region, and across the southeast into Texas
    • from the 1840s through the 1860s, trekking 2,000 mile along the dangerous Oregon, California , and Mormon Pioneer Trails
    • populating the Great Plains as encouraged by the Homestead Act of 1862 which distributed free land  to those who “have resided upon or cultivated the same for the term of five years,” and the Oklahoma Land Run of 1889
    • in the first half of the 20th century, 6 million African Americans participating in the “Great Migration” from the rural South to the urban North and West
    • since the end of World War II, the consistent shift in population from the northeast and Midwest Rust Belt to the southern and western Sun Belt.
  • The spirit of a fresh start is woven into our history and culture, as expressed in our laws, starting with our foundational law, the Constitution: “The Congress shall have Power… To establish… uniform Laws on the subject of Bankruptcies throughout the United States” According to a famous commentary on the Constitution, this clause was not in the original draft, but was added after a vote of 9 states in favor and 1 against.
  • In spite of this clear Constitutional mandate, it took Congress more than 100 years– until 1898—to pass a bankruptcy law that wasn’t repealed within a few years!  We’ve managed to have a comprehensive bankruptcy law in effect ever since then.
  • Property exemptions—your right to keep a certain amount of your property when filing bankruptcy–is the result of a 200-year-old Constitutional battle of states’ right versus federal power.  Throughout the 1800s, the country waged a political and economic war between Northeastern bankers and Western and Southern farmers and small merchants. Because of reoccurring devastating financial “panics” during that century, the farmers and merchants had good reason to worry about losing their homes and farms to out-of-state creditors. As a result, the first law exempting property from the collection of debt was adopted in 1839 in the Republic of Texas, and spread quickly through the South and the Midwest during the 1840s and 1850s. Exemption laws continue to protect our property from creditors today.
  • In spite of huge efforts over the years by creditors to make bankruptcy less accessible to consumers, the Chapter 7 and Chapter 13 options do continue to provide tremendous relief for most people who need them. Although not perfect, they give you a relatively flexible, balanced, and effective way to personally take part in the centuries-old and sometimes necessary American tradition of a financial fresh start.

You think the present Congress can’t get anything done? It took more than a hundred years for Congress to pass the first permanent bankruptcy law.

Lots of people know that bankruptcy was important enough to our founders to be included in the U.S. Constitution. But that’s just the very beginning of the story:

  • The Bankruptcy Clause, giving power to Congress to “pass uniform laws on the subject of bankruptcies” was added with very little debate, late in the Constitutional Convention’s proceedings. There had been no provision for nationwide bankruptcy in the earlier doomed-to-fail Articles of Confederation.
  • The only vote against the Bankruptcy Clause was by Connecticut, which already had a detailed bankruptcy law and wanted to keep it instead of ceding that authority to the federal government. One of their delegates also was concerned that a federal bankruptcy law would include the death penalty for debtors for certain bankruptcy offenses, as English law still did at the time.
  • But just because Congress was empowered by the Constitution to pass bankruptcy legislation, for nearly half our history it did so in an extraordinary irregular and knee-jerk fashion. Three different times during the 19th century a federal bankruptcy law was passed, each time immediately after a devastating financial “Panic,” only to be repealed after just a few years. During the majority of the time that no federal law was in effect, the states developed a patchwork of bankruptcy and debtor-creditor laws, which became less and less effective as commerce became ever more interstate.
  • Then finally Congress passed the Bankruptcy Act of 1898, which lasted 80 years.  Although primarily inspired by commercial creditor interests, it included the following debtor-friendly provisions: most debts became dischargeable, creditors no longer had to be paid a certain minimum percentage of their debts, and no longer could withhold their consent to the debtor’s discharge.
  • The Bankruptcy Act of 1898 survived many attempts at repeal, in contrast to its predecessors. It was amended numerous times, in a major way in 1938 in response to the Great Depression. That 1938 amendment added the “chapter XIII “wage earners’ plans, the predecessor to the current Chapter 13s.
  • The 1978 Bankruptcy Reform Act, which brought into existence the Bankruptcy Code, was the result of a decade of study and debate. It is the only major enactment of bankruptcy law in U.S. history which was not enacted in reaction to a severe economic downturn. It has been tweaked every few years since then, most significantly in 2005.

You’ve heard of debtors’ prisons. But that’s only one hideous part of the very colorful history of bankruptcy law.

American bankruptcy law was of course based on the law of England at the time of the colonies. Today’s blog tells how incredibly different pre-Revolutionary War bankruptcy laws were from current law.

  • The first bankruptcy law in England was enacted more than 450 years ago during the reign of Henry the Eighth, the one who had a habit of decapitating his former wives. Debtors were called “offenders” under this first law, essentially as perpetrators of a property crime.  The purpose of this law, and as if was expanded during the following hundred and fifty years, was not to give relief to debtors but rather to give creditors a more effective way to collect on the debts owed by their debtors.
  • Consistent with that, the law included no discharge of debts. After a bankruptcy was finished—with the assets of the “offender” seized and sold and distributed to creditors—separate creditors could still continue chasing the individual for any remaining balance.
  • Only creditors could start a bankruptcy proceeding. Creditors had to allege an “act of bankruptcy” by the debtor. Physically hiding from creditors was “an act of bankruptcy,” as was hiding assets by conveying them to others. Today’s very seldom used “involuntary bankruptcy” is a throwback to this.
  • Since credit was seen as immoral, only merchants were allowed to use credit, for whom it was seen as a necessary evil. So only merchants could become bankrupt.
  • For the following century and a half, Parliament made the law even stronger for creditors, allowing bankruptcy “commissioners” to break into the homes of “offenders” for their assets, put them into pillories (those wooden structures with holes for head and hands used for public shaming), and even cut off their ears.
  • The discharge of debts was finally introduced in the early 1700s for cooperative debtors, but was given only upon consent of the creditors. Furthermore, to induce cooperation, fraudulent debtors were subject to the death penalty (although it was very seldom used).
  • Cooperative debtors received an allowance from their own assets, a bit of a foreshadowing of Chapter 13 payment plans.

This was the English bankruptcy law in effect that the U.S. Constitution was adopted, with its Bankruptcy Clause giving Congress power to “pass uniform laws on the subject of bankruptcies.” More on that and the very rocky history of U.S. bankruptcy laws in my next blog.

The amount of property you get to keep in a bankruptcy is the result of a 200-year-old Constitutional battle of states’ right versus federal power.  The Bankruptcy Code provides for a uniform federal set of property exemptions, but if you live in one of 35 states you cannot use those exemptions. Instead you’re stuck with your state’s separate set of exemptions. Your state has chosen to “opt-out” of the federal exemptions.

If bankruptcy law is federal law, how come states get to do that? Here’s the back story to this legal oddity.

You’ve heard that the idea of bankruptcy was important enough to our country’s founders that they put it into the U.S. Constitution. It’s right near the top, in Article 1. The enumerated powers of Congress include “to establish… uniform Laws on the subject of Bankruptcies throughout the United States.”

But did you know that we did not have a federal bankruptcy law for most of the century after the signing of the Constitution? And that the reason we didn’t is in large part because of the contentious issue of property exemptions?

How so? Throughout the 1800s—way before and long after the Civil War–the country waged a political and economic war between Northeastern bankers and Western and Southern farmers and small merchants. Because of reoccurring devastating financial “panics” throughout the century, the farmers and merchants had good reason to worry about losing their homes and farms to out-of-state creditors. Largely in response to this, the first law exempting property from the collection of debt was adopted in 1839 in the Republic of Texas, and spread quickly through the South and the Midwest during the 1840s and 1850s.

Also in reaction to those severe “panics,” three different federal bankruptcy laws were passed and signed into law during that century. But each resulted from a delicate regional compromise to address the immediate economic turmoil, and all were repealed as soon as the economy improved and the political winds shifted. When the first long-standing law finally passed in 1898, it could only get enough votes by allowing debtors filing bankruptcy to use their state law exemptions.

That 1898 bankruptcy law lasted 80 years. When it was repealed and replaced with the current Bankruptcy Code in the late 1970s, some in Congress wanted to continue using state exemptions, while others wanted to impose a mandatory uniform federal system.  The compromise: as I said at the beginning, you can choose between a federal set of exemptions or the local state exemptions, UNLESS you are a resident of one of the 35 states which has “opted out” of the federal exemptions, requiring you to use that state’s exemptions.

Sounds like a big win for states’ rights. States get to have their way whether they want their residents to have exemptions more generous or more narrow than the federal ones, and whether those residents have the choice between the two exemption systems or must use the state one. This system can help you or hurt you depending where you live and what you own. For better or for worse, it sure is a big exception to the Constitution’s pronouncement about “uniform laws on the subject of Bankruptcies.”