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.
In Perez v. Campbell, 402 U.S. 637 (1971), Arizona took away the debtor’s drivers license if the debtor was uninsured and did not pay the damages caused in a traffic accident, even if the debtor filed bankruptcy. The law also provided however that the debtor and the victim could make a deal on the debt and on that basis, the debtor could get his driver’s license back. The Supreme Court stuck down the law saying it was really a debt collection procedure rather than an attempt to protect the Arizona public from drivers who have no insurance.
If you have further interest in this area, read Sherwood Partners Inc v. Lycos Inc., 394 F.3d 1198 (9th Cir. 2005) and then Haberbush v. Charles and Dorothy Cummins Family Limited Partnership, 139 Cal. App. 4th 1630 (2006). In Sherwood Partners, the Ninth Circuit struck down a California law which allows an assignee of an ABC to recover preferences. Why? Congress has preempted that field. A year later, California struck back in Haberbush saying that the Ninth Circuit was wrong and the state law was fine thank you. Neither decision has been overruled and both are still good law as far as I know.
FOLLOW UP
I sent this post to my son Hunter who is doing a one-year clerkship for Ninth Circuit Judge John Owens in San Diego. He clarified a mistake I made. His two emails to me follows.
“I like it. I think the only thing you’re missing is conflict preemption. Whenever state law conflicts with federal law, in any field and under any circumstances, the state law is void whether or not congress intended to preempt the field. The cases generally say there’s three types of preemption – field, conflict, and interference. So I think it’s a little too broad to say federal law never preempts state law unless congress intended to preempt the field.”
I questioned him about the email saying that I thought intent was still required. His response.
“I’m not sure what you mean. If it’s impossible to simultaneously comply with state and federal law, federal law wins. Nothing to do with intent or broadness. Maybe you mean the canon of construction that says we interpret laws to not conflict if there’s ambiguity? ”
The seminal SCOTUS case Retail Clerks v. Schermerhorn (1963) explains it as such:
Congresses intent is crucial said the court, and the Court has recognized four ways in which such intent may be found:
(1) Express Intent (i.e. Federal Immigration Law where Congress clearly states in the statute that its intent is be # 1 and state laws that conflict are preempted).
(2) Implied Intent (3 subcategories of Implied Intent — Field, Conflict, and Frustration)
a) Field Preemption – where the congressional legislation in question is so comprehensive as to completely occupy a given field and thus leave no room for state regulation of the field (“field preemption”).
b) Conflict Preemption — where federal and state law conflict (“conflict preemption”).
c) Frustration Preemption – where the state law frustrates the purpose of Congress. implied intent where state law would unduly frustrate the purposes of Congress.
As Sevan pointed out it’s a little too broad to say preemption only applies when Congress intends to occupy the field. It’s also true that federal law is “bigger and better and more important” so every time the laws conflict, federal law wins. Happens every day when federal court sits in diversity jurisdiction: federal procedural law always preempts conflicting state procedural law.
Of course, laws will rarely truly conflict. Even if the feds say you can’t do something and the state says you CAN do it, there’s no conflict, since you can comply with both: just don’t do it. That’s why medical marijuana laws are not preempted. But if the feds say you can’t do something and the state says you MUST do it, there’s a conflict. This came up recently in Mutual Pharmaceutical v. Bartlett. FDA regulations limited the ability of a generic drug manufacturer to alter labeling. State tort law (New Hampshire, but probably would have been the same anywhere) required drug manufacturers to provide adequate warnings on the label. The jury said the label was inadequate, but federal law prohibited the generic manufacturer from altering it. State law said you must do something federal law prohibited, so state law was void.