Twice in the last week I have had an attorney ask me a bankruptcy question and then comment that it seems to him that the answer is in the supremacy clause. In other words, the federal law is bigger and better and more important and more powerful than state law so it wins. This shows a lack of understanding of preemption and the supremacy clause.
It is constitutional law 101 that the federal government has the power to do only what the constitution gives it the power to do. Everything else is reserved to the states. Further, the states can do anything they want unless the constitution says they cannot or the federal government has passed a law, using a power given to it in the constitution, which is intended to preempt the field. How do we know when congress “intended” to preempt the field? When it says so right in the legislation or when the law it passed is so comprehensive that it leaves nothing left for the states to do.
In Sturges v. Crowninshield, 17 U.S. 122 (1819), the Supreme Court, Chief Justice John Marshall, ruled that states can pass bankruptcy laws! At least until congress passes a law which it intends to preempt the field. States cannot however grant a discharge of debts since the constitution says states cannot “impair the obligations of contracts.”
Most states including California have assignment for the benefit of creditors laws (“ABC”) which function very similar to bankruptcy laws. Someone liquidates the assets for the debtor and distributes the proceeds to the creditors. So obviously the bankruptcy act we have today, Title 11, is not a law which has preempted the field, at least completely.
States cannot however pass laws which “unreasonably” interfere with federal laws. A state cannot pass a law for example that provides that persons who file bankruptcy must nevertheless pay their attorneys the amount owed prior to bankruptcy. That would, in effect, amend the bankruptcy code. Congress has decided who gets a discharge and for what. States cannot interfere with that decision. Congress could amend the code and say that each state can decide what debts will be discharged as it has done with exemptions. But it has not so states must steer clear. Why? Because of the supremacy clause.
Two examples of this come to mind. In Local Loan Co. v. Hunt, 292 U.S. 234 (1934), Illinois law provided that a lien could attach to future wages and we all know liens don’t go away in bankruptcy. The Supreme Court struck down the law saying, “The … Illinois [law] is ‘precluded here by the clear and unmistakable policy of the Bankruptcy Act.’” The effect of the law was to prevent discharges that congress intended to include.
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