THE LIMITS OF BANKRUPTCY CODE
PREEMPTION: DEBT DISCHARGE AND VOIDABLE
PREFERENCE RECONSIDERED IN LIGHT OF
SHERWOOD PARTNERS
Alan J. Feld*
INTRODUCTION
Although the United States has had a federal bankruptcy statute
since 1898, liquidation, and even reorganization1 under state law, has
never disappeared. The interrelation between federal and state
collective creditor proceedings remains, after over a century, something
of a mystery. A recent Ninth Circuit decision, Sherwood Partners Inc.
v. Lycos, Inc.,2 once again calls attention to this pervasive and important
question in bankruptcy law: what effect do federal bankruptcy
provisions have on various state insolvency statutes,3 which themselves
* Notes Editor, Cardozo Law Review. J.D. Candidate (2007), Benjamin N. Cardozo School
of Law; B.A., The University of Texas at Austin (2002). I thank Professor David Gray Carlson
for his assistance and insightful guidance throughout this project. I also recognize the efforts of
past and present editors in offering advice and for helpful editing. Finally, I thank my family,
especially my parents and sister, and friends for their support and encouragement.
1 See Paula Whitney Best, Note, Corporate Receiverships and Chapter 11 Reorganizations,
10 CARDOZO L. REV. 285 (1988).
2 394 F.3d 1198 (9th Cir.) (2005), cert. denied, 126 S.Ct. 397 (2005).
3 Early literature on the subject distinguished between insolvency laws and bankruptcy laws:
“[A]n insolvency law is aimed to relieve a debtor from imprisonment for debt, while the primary
aim of a bankruptcy law is the equal distribution of his property among his creditors.” Samuel
Williston, The Effect of a National Bankruptcy Law Upon State Laws, 22 HARV. L. REV. 556, 557
(1909). The Supreme Court recognized this distinction in one of the first cases on the subject, in
which it noted:
[T]he particular act which the states granted to congress a power to pass, was one
having reference to bankruptcies; which meant something contradistinguished from
insolvencies. It is not denied, that insolvency, in its most comprehensive sense, is a
universal, of which bankruptcy is a particular; but taking it in this sense, it is insisted,
that the grant to congress narrows the universality of the previous power of the states,
only by excluding from it the ancient, and well-understood, distinct matter of bankrupt
laws. But it is in more exact conformity to the facts, and therefore, more precise
language and safer reasoning, to say, that modified as this matter is, and has been, for
centuries, in practice, they are different things, expressed by essentially different terms.
Sturges v. Crowninshield, 17 U.S. 122, 143-44 (1819). Notwithstanding this distinction and the
fact that in 1909, statutes in New Jersey and Pennsylvania maintained such a distinction, most of
the states have treated insolvency laws and bankruptcy laws as synonymous. Williston, supra, at
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act like bankruptcy laws?4
For half a century bankruptcy preemption seemed settled—only
Congress, and not state legislatures, may enact discharge provisions to
relieve debtors of their previously incurred debts.5 Beyond that
limitation, states are largely free to enact collective creditor regimes.
Statutes that regulate assignments for the benefit of creditors are thus
permitted. Indeed, the federal Bankruptcy Code6 specifically refers to
their existence, making their creation within 120 days of a bankruptcy
petition grounds for an adjudication in an involuntary bankruptcy case.7
In addition, the Bankruptcy Code requires “custodians”—a term defined
to include assignees for the benefit creditors8—to turn over their estate
to bankruptcy trustees9 when the bankruptcy petition has been filed
within 120 days of the assignment.10
An assignment for the benefit of creditors is a voluntary transfer of
property, usually to a trustee or “general assignee,” who administers the
property, liquidates it, and distributes the proceeds equitably to all
creditors.11 These general assignments lead to orderly liquidation at
minimum expense.12 A general assignment effectively freezes the rights
of the parties as efficiently as other insolvency proceedings in that
557. The last sentence of the Bankruptcy Act of 1898, for example, which referenced
“insolvency laws,” has been interpreted to refer to “state laws that are in fact bankruptcy laws
rather than laws relieving poor debtors from imprisonment for debt.” Id. at 557 n.2.
(“Proceedings commenced under State insolvency laws before the passage of this Act shall not be
affected by it.” 30 Stat. 566, quoted in Pobreslo v. Joseph M. Boyd Co., 287 U.S. 518, 526
(1933)). Thus, although English law distinguished between bankruptcy laws and insolvency
laws, the state statutes at issue are those that may provide relief from prison, debt discharge,
voluntary or involuntary proceedings, and even avoidance powers, all of which compose elements
of bankruptcy. See VERN COUNTRYMAN, CASES AND MATERIALS ON DEBTOR AND CREDITOR
312-13 (1964); see also Hanover Nat’l Bank v. Moyses, 186 U.S. 181, 185 (1902) (quoting
Justice Story, who argued that the English distinctions were not carried over to colonial
legislation, and that no distinction exists between insolvency and bankruptcy).
4 See, e.g., Notes, Effect of National Bankruptcy Act on State Insolvency Statutes, 49 YALE
L.J. 1090 (1940).
5 See Charles G. Hallinan, The ‘Fresh Start’ Policy in Consumer Bankruptcy: A Historical
Inventory and an Interpretive Theory, 21 U. RICH. L. REV. 49, 59 (1986).
6 11 U.S.C. §§ 101-1527 (2000 & Supp. 2006) (recently amended by the Bankruptcy Abuse
Prevention and Consumer Protection Act of 2005, Pub. L. No. 109-8, 119 Stat. 23 (2005)).
7 11 U.S.C. § 303(h)(2).
8 Id. at § 101(11).
9 The bankruptcy trustee is the sole representative of the bankruptcy estate, and as
representative of the estate, the trustee represents all creditors of the estate generally, is entitled to
administer the estate’s property, and has the exclusive capacity to bring suits and be sued. 3
COLLIER ON BANKRUPTCY ¶ 323.01-02 (Lawrence P. King et al. eds., 15th ed. 2003) (referencing
11 U.S.C. § 323(a)-(b)).
10 11 U.S.C. § 543(b)(1), (d)(2).
11 John Hanna, Contemporary Utility of General Assignments, 35 VA. L. REV. 539, 539-40
(1949).
12 Statutory Regulation of Assignment for the Benefit of Creditors, 47 YALE L.J. 944, 945
(1938).
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LIMITS OF BANKRUPTCY CODE PREEMPTION
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individual creditors cannot levy upon the transferred assets.13 Rather,
the assets no longer belong to the debtor, but to the assignee in trust for
all of the creditors. The debtor benefits from this arrangement because
it is in the debtor’s interest to act fairly towards creditors, the debtor
avoids the stigma of bankruptcy, and the debtor may even retain good
will with creditors.14 The arrangement serves as an alternative to formal
bankruptcy proceedings,15 and it is a more expeditious and a less costly
form of liquidation than that found in the Bankruptcy Code.16
Though such assignments originated out of common law notions of
ordinary property transfer and trust creation, in most states, they are
codified and regulated by statute in order to prevent abuses.17
Typically, statutes regulating general assignments do not permit the
assignee to prefer certain creditors to others.18 Without such a statutory
restriction, a debtor could abuse the assignment statutes by ordering
assignees to, for example, pay the debtor’s relatives before paying trade
creditors.
If this restriction is the essence of state regulation of general
assignments, it is no great extension for a state legislature to prevent an
assignor’s separate transfer of assets to designated creditors just prior to
13
14
Id. at 947.
With the increased amount of filings and the use of bankruptcy as an economic planning
tool, the stigma associated with bankruptcy has generally lessened. See, e.g., CONGRESSIONAL
BUDGET OFFICE, PERSONAL BANKRUPTCY: A LITERATURE REVIEW (2000), http://www.cbo.gov/
showdoc.cfm?index=2421&sequence=0.
15 David S. Kupetz, Assignment for the Benefit of Creditors: Exit Vehicle of Choice for Many
Dot-Com, Technology, and Other Troubled Enterprises, 11 J. BANKR. L. & PRAC. 71, 71 (2001)
(quoting Credit Managers Ass’n v. Nat’l Ind. Bus. Alliance, 209 Cal. Rptr. 119, 120 (Cal. Ct.
App. 1984)) (Assignments may also be considered “‘a business liquidation device available to an
insolvent debtor as an alternative to formal bankruptcy proceedings.’”); Sherwood Partners, Inc.
v. Lycos, Inc., 394 F.3d 1198, 1206 (9th Cir. 2005) (Nelson, J., dissenting) (same).
16 Some corporations turn to state assignment for the benefit of creditors provisions as an
alternative to filing for bankruptcy. David A. Skeel, Jr., Rethinking the Line Between Corporate
Law and Corporate Bankruptcy, 72 TEX. L. REV. 471, 492 (1994).
17 Kupetz, supra note 15, at 71; see also Note, Discharge by Assignment for the Benefit of
Creditors, 36 VA. L. REV. 813, 813 (1950) (“The right of a debtor to make a voluntary
assignment for the benefit of his creditors has always been recognized as a right inherent in the
ownership of property. It does not depend upon statutes, as it creates an express trust partaking of
the nature of a private contract.”). Countryman traces the history of preferential transfer law from
the English common law through the various bankruptcy acts enacted in the United States. See
Vern Countryman, The Concept of a Voidable Preference in Bankruptcy, 38 VAND. L. REV. 713
(1985).
18 General assignment for the benefit of creditors is defined in California through the
satisfaction of the following criteria:
(a) The assignment is an assignment of all the defendant’s assets that are transferable
and not exempt from enforcement of a money judgment.
(b) The assignment is for the benefit of all the defendant’s creditors.
(c) The assignment does not itself create a preference of one creditor or class of
creditors over any other creditor or class of creditors, but the assignment may
recognize the existence of preferences to which creditors are otherwise entitled.
CAL. CIV. PROC. CODE § 493.010 (West 2006).
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the assignment. Although outside of the bankruptcy context, there is
nothing wrong in preferring certain creditors to others,19 in the
bankruptcy context, preferential transfers are usually considered
inequitable because the transfer limits funds that would otherwise be
shared by similarly situated creditors.20 To address the inequality
inherent in these transfers, some states21 purport to empower a general
assignee to avoid,22 or recover, preferential transfers made shortly23
before the general assignment.
19 Juliet M. Moringiello, Distinguishing Hogs from Pigs: A Proposal for a Preference
Approach to Pre-Bankruptcy Planning, 6 AM. BANKR. INST. L. REV. 103, 103 (1998).
20 Bethaney J. Vazzana, Comment, Trustee Recovery of Indirect Benefits Under Section
547(b) Bankruptcy Code, 6 BANKR. DEV. J. 403, 405 (1989); see also David Gray Carlson,
Tripartite Voidable Preferences, 11 BANK. DEV. J. 219, 220 (1994-1995) (omitting footnote
reference to the Bankruptcy Code) (“A transfer of an interest in debtor’s property shortly before
bankruptcy may be a voidable preference. The theory behind voidable preferences is that
unsecured creditors are supposed to be treated equally with other creditors of similar rank. If a
transfer from the debtor produces more for the creditor than the bankruptcy distribution would
have, then the creditor may be forced to return the property to the bankruptcy estate so that it can
be divided ratably among the creditors.”).
21 See Skeel, supra note 16, at 556 app. B. As of 1994, twenty-two states maintained
voidable preference statutes, and Skeel lists them in chart form. He characterizes these provisions
as only being vestigial remnants. Id. at 491. These statutes regulate general assignments at
common law, which are, as referenced
equivalent to the creation of a trust, i.e., the assignee becomes a trustee of the property
which is conveyed to him by the debtor and the creditors become the beneficiaries
under the trust. But at common law the debtor had the right to prefer any creditor or
creditors over another which apparently is the predominant cause of statutory
regulation.
Legislation, A Classification of State Statutes Regulating General Assignments for the Benefit of
Creditors, 20 VA. L. REV. 222, 223 (1934). In this 1934 article’s consideration of all states with
statutes attempting to regulate assignments, it found only one state (Georgia), which at that time
did not forbid preferences. Id. at 228. As of 1938, there were thirty-six states that regulated
voluntary assignments for the benefit of creditors. Statutory Regulation of Assignment for the
Benefit of Creditors, supra note 12, at 946.
22 The standard legal meaning of avoid is “annul” or “undo.” Farrey v. Sanderfoot, 500 U.S.
291, 296 (1990) (citing BLACK’S LAW DICTIONARY 136 (6th ed. 1990)).
23 Countryman, supra note 17, at 713. Such statutes generally empower transfer avoidance
within so many days of filing a bankruptcy petition. The Bankruptcy Code contains a federal
preference avoidance statute, codified at 11 U.S.C. § 547 (2000 & Supp. 2006). See infra note 35
and accompanying text. The federal statute grants this power to the bankruptcy trustee when the
transfer occurred ninety days before the filing. Under 11 U.S.C. § 550(a), the trustee may recover
the preference meeting the perquisites of § 547. See 11 U.S.C. § 550(a) (“[T]he trustee may
recover, for the benefit of the estate, the property transferred . . . from (1) the initial transferee of
such transfer or the entity for whose benefit such transfer was made; or (2) any immediate or
mediate transferee of such initial transferee.”). The California statute, section 1800, grants this
power to general assignees. See infra note 25 and accompanying text. The Sherwood majority
focused part of its analysis on the distinction between which entity may avoid the preference.
Sherwood Partners, Inc. v. Lycos, Inc., 394 F.3d at 1198, 1201-02, 1205 (9th Cir. 2005)
(concluding that statutes granting state assignees or trustees avoidance powers beyond those
granted individual creditors “trench too close upon the exercise of federal bankruptcy power.”).
See generally Dubis v. B.W. Supply (In re Delta Group), 300 B.R. 918, 923-24 (Bankr. E.D. Wis.
2003).
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In Sherwood,24 Judge Alex Kozinski, writing for the majority of a
three-judge panel, concluded that the Bankruptcy Code preempts the
preference avoidance portion of California’s assignment for the benefit
of creditors statute.25 In reaching this conclusion, Judge Kozinski
discussed and relied on three Depression-era cases decided by the
United States Supreme Court,26 namely Stellwagen v. Clum,27
International Shoe Co. v. Pinkus,28 and Pobreslo v. Joseph M. Boyd
Co.29 Although these cases have been called “murky,”30 they stand for
the proposition that discharge is the limit of preemption,31 a unifying
theory not previously offered. Because of this, preference statutes that
supplement voluntary assignments generally survive preemption.32
24
25
394 F.3d at 1198, 1206.
The statute provides, in relevant part:
[T]he assignee of any general assignment for the benefit of creditors . . . may recover
any transfer of property of the assignor:
(1) To or for the benefit of a creditor;
(2) For or on account of an antecedent debt owed by the assignor before the transfer
was made;
(3) Made while the assignor was insolvent;
(4) Made on or within 90 days before the date of the making of the assignment or made
between 90 days and one year before the date of making the assignment if the creditor,
at the time of the transfer, was an insider and had reasonable cause to believe the
debtor was insolvent at the time of the transfer; and
(5) That enables the creditor to receive more than another creditor of the same class.
CAL. CIV. PROC. CODE § 1800(b) (West 2006). General assignment for the benefit of creditors is
defined in California through the satisfaction of the following criteria:
(a) The assignment is an assignment of all the defendant’s assets that are transferable
and not exempt from enforcement of a money judgment.
(b) The assignment is for the benefit of all the defendant’s creditors.
(c) The assignment does not itself create a preference of one creditor or class of
creditors over any other creditor or class of creditors, but the assignment may
recognize the existence of preferences to which creditors are otherwise entitled.
CAL. CIV. PROC. CODE § 493.010 (West 2006).
26 Pobreslo v. Joseph M. Boyd Co., 287 U.S. 518 (1933); Int’l Shoe Co. v. Pinkus, 278 U.S.
261 (1929); Stellwagen v. Clum, 245 U.S. 605 (1918).
27 245 U.S. 605 (1918).
28 278 U.S. 261 (1929).
29 287 U.S. 518 (1933).
30 RICHARD I. AARON, An Overview of Bankruptcy Choices Under Chapter 7, Chapter 11,
Chapter 12 and Chapter 13, 1 BANKR. LAW FUNDAMENTALS § 1:4 (2005).
31 Although Pobreslo, International Shoe, and Stellwagen, supra note 26, are the principal
cases related to whether a federal bankruptcy act in effect preempts state statutes regulating
voluntary assignments for the benefit of creditors, there are other cases that also address this
issue. These cases are: Johnson v. Star, 287 U.S. 527 (1933); Boese v. King, 108 U.S. 379
(1883); Mayer v. Hellman, 91 U.S. 496 (1875); and Sturges v. Crowninshield, 17 U.S. 122
(1819). The Sherwood Court did not fully explore all of these cases, and it only mentioned the
Pinkus decision in passing. See Sherwood Partners, Inc. v. Lycos, Inc., 394 F.3d at 1198, 1203,
1207 (9th Cir. 2005) . Nevertheless, the three principal cases, along with their supplements,
establish the federal case law that serves as a basis for the thesis. See infra Part III.A. In
addition, this Note considers other cases to illustrate its point, including: Moskowitz v. Prentice
(In re Wisconsin Builders Supply Co.) 239 F.2d 649 (7th Cir. 1956), cert. denied, 353 U.S. 985
(1957); and In re Tarnowski, 210 N.W. 836 (Wis. 1926).
32 Establishing the manner of reading these cases together is admittedly not obvious.
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Accordingly, Sherwood must be viewed as wrongly decided.
To prove this conclusion, Part I of this Note describes preference
laws, their relationship to assignments for the benefit of creditors, and
discharge. Part II examines the reasoning employed in Sherwood. Part
III considers federal Bankruptcy Code preemption of state insolvency
legislation. The historical and modern approaches to preemption are
distinguished in this Part. Finally, this Part introduces the analytical
framework through which preemption is considered in the bankruptcy
context. Part IV argues that the principal cases on preemption to do not
justify preemption of voidable preference regulation by state legislation.
Nevertheless, some state statutes might be preempted if they constitute
“complete bankruptcy legislation” and do not merely codify preexisting
common law concepts underlying an assignment for the benefit of
creditors. The California legislation in Sherwood by no means meets
this criterion, as the Sherwood majority expressly recognized.
I. PREFERENCE LAWS AND DISCHARGE PROVISIONS
A.
Preference Laws and Assignment for the Benefit of Creditors
The right to execute an assignment for the benefit of creditors is an
inherent common law right that exists independent of statute.33 The
assignment laws merely govern the creation and administration of a
trust.34 Preference provisions in turn limit the power of an assignor to
make other transfers just prior to the general assignment.
If no preference avoidance statute is in effect, then the preferred
creditor who receives property before the general assignment may keep
the property. The other creditors then have a smaller pool of property
However, one perspective from the 1960s described the cases as guideposts:
Although the frontier that separates the zone of permissible state legislation from the
zone to be occupied exclusively by the Bankruptcy Act is not clearly defined, several
guideposts are available. At one pole, no invasion by a state law affording debtors a
discharge will be tolerated. At the other pole, it is clear that a state statute providing
for voluntary assignment for the benefit of creditors is operative. In the vast gray areas
between these poles, persevered by the realistic attitude that states may be guilty of
legislating “on the subject of bankruptcy” despite omission of a discharge provision ,
the guiding principle is that state laws will be suspended to the extent of actual conflict
with the act.
Nahum L. Gordon, The Security Interest in Inventory Under Article 9 of the Uniform Commercial
Code and the Preference Problem, 62 COLUM. L. REV. 49, 59 (1962) (citations omitted).
33 Statutory Regulation of Assignments for the Benefit of Creditors, supra note 12, at 946.
34 Id. at 947; Legislation, A Classification of State Statutes Regulating General Assignments
for the Benefit of Creditors, supra note 21, at 223; see also GARRARD GLENN, THE LAW
GOVERNING LIQUIDATION § 106 at 173 (1935). Glenn provides an extensive description, history,
and notes on the operation of this trust. See id. §§ 105-25. Glenn also provides another
description of the issues concerning assignments for the benefit of creditors and preferences.
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from which to have their debts satisfied. Pursuant to voidable
preference law, if a debtor assigns property to a creditor to satisfy or
secure a previous obligation within a specified time before filing for
bankruptcy, then the non-preferred creditors may sue to recover that
transfer, usually through a representative such as an assignee. All
creditors may then share in this recovered property.
B.
Goals and Purposes of Bankruptcy
The Bankruptcy Code contains its own preference provision35 to
avoid transfers and return the transfer to the debtor’s estate for
subsequent equal distribution.36 Federal voidable preference law
35
11 U.S.C. § 547(b) (2000) provides:
(b) Except as provided in subsection (c) and (i) of this section, the trustee may avoid
any transfer of an interest of the debtor in property—
(1) to or for the benefit of a creditor;
(2) for or on account of an antecedent debt owed by the debtor before such transfer was
made;
(3) made while the debtor was insolvent;
(4) made—
(A) on or within 90 days before the date of the filing of the petition; or
(B) between ninety days and one year before the date of the filing of the petition, if
such creditor at the time of such transfer was an insider; and
(5) that enables such creditor to receive more than such creditor would receive if—
(A) the case were a case under chapter 7 of this title;
(B) the transfer had not been made; and
(C) such creditor received payment of such debt to the extent provided by the
provisions of this title.
The purpose of section 547 is twofold:
First, by permitting the trustee to avoid prebankruptcy transfers that occur within a
short period before bankruptcy, creditors are discouraged from racing to the courthouse
to dismember the debtor during the debtor’s slide into bankruptcy. The protection thus
afforded the debtor often enables the debtor to work a way out of a difficult financial
situation through cooperation with all of the creditors.
5 COLLIER ON BANKRUPTCY, supra note 9, ¶ 547.01, at 547-49. Second, preferences further the
“prime bankruptcy policy of equality of distribution among creditors.” Id. The policy objective
of § 547(b) is to bring prepetition transferred property back into the bankruptcy estate so that the
unsecured creditors receive an equal, pro rata share of that property. Higgins v. Erickson (In re
Higgins), 270 B.R. 147, 152 (Bankr. S.D.N.Y. 2001). This power is granted to the trustee who
can assure that the property is brought back into the estate for the benefit of all unsecured
creditors. Id. at 153.
36 Vazzana, supra note 20, at 404-05; see also Bear, Stearns Sec. Corp. v. Gredd, 275 B.R.
190, 194 (S.D.N.Y. 2002) (“[T]he purpose of § 547 is to ensure fair distribution between
creditors . . . .”). Legislative history of the Bankruptcy Code also evidences this purpose:
The purpose of the preference section is two-fold. First, by permitting the trustee to
avoid prebankruptcy transfers that occur within a short period before bankruptcy,
creditors are discouraged from racing to the courthouse to dismember the debtor during
his slide into bankruptcy. The protection thus afforded the debtor often enables him to
work his way out of a difficult financial situation through cooperation with all of his
creditors. Second, and more important, the preference provisions facilitate the prime
bankruptcy policy of equality of distribution among creditors of the debtor. Any
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therefore promotes the goal of equal distribution by preventing
dismemberment of the debtor’s estate shortly before a bankruptcy case
commences.
In contrast, the discharge provisions of the Bankruptcy Code
evidence another major purpose of bankruptcy—providing debtors with
a fresh start.37 Bankruptcy discharge, which may be traced to English
legislation in 1705,38 releases debtors from previously incurred debts.39
creditor that received a greater payment than others of his class is required to disgorge
so that all may share equally. The operation of the preference section to deter “the race
of diligence” of creditors to dismember the debtor before bankruptcy furthers the
second goal of the preference section—that of equality of distribution.
H.R. REP. NO. 95-595, at 177-78 (1978), reprinted in 1978 U.S.C.C.A.N. 5961
37 See Local Loan Co. v. Hunt, 292 U.S. 234, 244-45 (1934) (“One of the primary purposes
of the Bankruptcy Act is to ‘relieve the honest debtor from the weight of oppressive indebtedness,
and permit him to start afresh free from the obligations and responsibilities consequent upon
business misfortunes.’ This purpose of the act has been again and again emphasized by the courts
as being of public as well as private interest, in that it gives to the honest but unfortunate debtor
who surrenders for distribution the property which he owns at the time of bankruptcy, a new
opportunity in life and a clear field for future effort, unhampered by the pressure and
discouragement of pre-existing debt.”) (internal citations omitted); see also Ochs v. Nemes (In re
Nemes), 323 B.R. 316, 323 (Bankr. E.D.N.Y. 2005) (“The purpose of the Bankruptcy Code is to
provide a procedure by which debtors can reorder their affairs, make peace with their creditors,
and enjoy a new opportunity in life with a clear field for future effort, unhampered by the
pressure and discouragement of pre-existing debt.”) (quoting Christy v. Kowalski (In re
Kowalski), 316 B.R. 596, 600-01 (Bankr. E.D.N.Y. 2004). Thus, the underlying purpose of the
Bankruptcy Code is to grant the honest debtor a “fresh start.” Ochs, 323 B.R. at 323 (quoting
McCord v. Sethi (In re Sethi), 250 B.R. 831, 839 (Bankr. E.D.N.Y. 2000)); Peter C. Alexander,
With Apologies to C.S. Lewis: An Essay on Discharge and Forgiveness, 9 J. BANKR. L. & PRAC.
601, 601-02 (2000) (claiming that the central purpose of bankruptcy is “to forgive the
indebtedness of the honest but unfortunate individuals who seek protection from their creditors”
through a creative essay borrowing C.S. Lewis’ writing style to examine the central tenants of
bankruptcy, considered by this commentator to be “discharge and forgiveness of indebtedness”).
38 Charles Jordan Tabb, The History of the Bankruptcy Laws in the United States, 3 AM.
BANKR. INST. L. REV. 5, 5 (1995) [hereinafter Tabb, History] (citing Statute of Anne 4, ch. 17 § 7
(1705)). Tabb provides a comprehensive history of bankruptcy laws in the United States from
their English origins through the Bankruptcy Reform Act of 1978, the year the current bankruptcy
law was enacted, up through the Bankruptcy Reform Act of 1994. For a more focused discussion
on the origins of discharge, see generally Charles Jordan Tabb, The Historical Evolution of the
Bankruptcy Discharge, 65 AM. BANKR. L.J. 325 (1991) [hereinafter Tabb, Evolution](tracing
discharge from its initial introduction as a benefit for creditors in England, that evolved over time
in the United States as a benefit for debtors, solidified in the “debtor-oriented” Bankruptcy Act of
1898, and basically molded into the current form through amendment in 1903). Another detailed
account of bankruptcy law, its history, and suggested limits may be found in Thomas E. Plank,
The Constitutional Limits of Bankruptcy, 63 TENN. L. REV. 487 (1996).
39 A discharge has three significant features. First, “a discharge . . . discharges the debtor
from all debts that arose before the date of the order for relief under this chapter.” 11 U.S.C.
§ 727(b) (2006). Second, a discharge also “voids any judgment at any time obtained, to the
extent that such judgment is a determination of the personal liability of the debtor.” Id.
§ 524(a)(1). Third, the discharge acts as an injunction against commencing any new action
against the discharged debtor. Id. § 524(a)(2). Some debts that may never be discharged include
taxes, family support obligation, intentional torts, and, unfortunately, student loans. Id. A debtor
may lose the right to a discharge for a number of reasons, including, for example, the destruction
of financial records. See Id. § 727(a). In addition, the court shall revoke the right to a discharge
in certain situations. See Id. § 727(d).
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The presence of a discharge provision evidences a “true” bankruptcy
statute,40 and, since 1898, has been considered an essential feature of the
bankruptcy scheme in the United States.41
After the enactment of the Bankruptcy Act of 1898,42 the Supreme
Court decided a small number of cases concerning whether federal
legislation preempts state insolvency laws.43 In these decisions, the
Court focused in part on the discharge provisions of the state laws at
issue because great importance had been placed on the presence of such
provisions to determine whether state legislation was suspended.44
Because of their central relevance to bankruptcy law, the Supreme
Court ultimately recognized that only Congress can pass discharge
provisions, and the states cannot.45
Discharge provisions differ in a fundamental way from voidable
preference provisions. Actions to recover preferential payments have
common law roots, as recognized by the Supreme Court.46 Discharge
40 Recent Decisions, Bankruptcy: Section 74 of 1933 Amendments to National Bankruptcy
Act: Construction and Constitutionality, 22 CAL. L. REV. 220 (1934) (citing Mayer, Stellwagen,
Pinkus, Pobreslo, and Star); Stellwagen v. Clum, 245 U.S. 605, 616 (1918)
41 See generally Tabb, Evolution, supra note 38; John M. Czarnetzky, The Individual and
Failure: A Theory of the Bankruptcy Discharge, 32 ARIZ. ST. L.J. 394 (2000) (presenting a
cohesive theory to explain the purpose, history, and scope of the discharge and arguing that from
the perspective of debtors, the discharge provision is the Bankruptcy Code’s central feature).
42 ch. 541, 30 Stat. 544 (1898) (“[a]n Act To establish a uniform system of bankruptcy
throughout the United States”) (repealed in 1978). Though there were a number of amendments
to the 1898 Act, major reforms in some areas were enacted through the Bankruptcy Reform Act
of 1978, Pub. L. No. 95-598, 92 Stat. 2549 (1978). The only significant amendment to the
Bankruptcy Act of 1898 that is relevant to discharge is that the 1903 amendment added grounds
upon which a court could refuse to grant a discharge and created other exceptions. Tabb,
Evolution, supra note 38, at 366-67. Still, the Bankruptcy Act of 1898 was different in that
discharge was an affirmative defense that had to be pleaded. Id. at 369. Tabb further noted that
one of the reasons for Congress to pass the Bankruptcy Act of 1898 was to make discharge more
readily available to debtors than it was under the bankruptcy law passed in 1867. See id. at 36566; see also 4 COLLIER ON BANKRUPTCY, supra note 9, ¶ 524.LH (explaining the history of § 524
as it changed from Section 14 of the Bankruptcy Act of 1898, as amended, to the new section and
underwent subsequent amendments). For a further discussion of the Bankruptcy Act of 1898, see
also Tabb, Evolution, supra note 38, at 366-69.
43 See supra note 26 (listing key cases).
44 See In re Tarnowski, 210 N.W. 836 (Wis. 1926). But cf. Moskowitz v. Prentice (In re
Wisconsin Builders Supply Co.) 239 F.2d 649, 652 (7th Cir. 1956), cert. denied, 353 U.S. 985
(1957) (indicating that the emphasis placed on discharge should not be the sole test to determine
whether state legislation constitutes a bankruptcy act). Some of the cases use the term
“suspended” when a statute is preempted. A state law is suspended and not wholly voided
because it might return to life when the federal law’s effectiveness ends. Thus, suspension and
preemption may be treated as synonymous.
45 See Charles G. Hallinan, supra note 5, at 59 (1986) (citing Sturges v. Crowninshield, 17
U.S. 122, 122 (1819)).
46 Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 43 (1989) (finding that actions to recover
either preferential or fraudulent transfers were often brought at law in the eighteenth century, and
quoting Schoenthal v. Irving Trust Co., 287 U.S. 92, 94 (1932) (“In England, long prior to the
enactment of our first Judiciary Act, common-law actions of trover and money had and received
were resorted to for the recovery of preferential payments by bankrupts.”)).
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provisions, on the other hand, derive from statute, have become a
central aspect of bankruptcy law by themselves, and are distinct from
preference law.47
II. THE SHERWOOD DECISION
In Sherwood, the Ninth Circuit held that the Bankruptcy Code
preempts the portion of the California assignment for the benefit of
creditors statute related to the recovery of preferences.48 As part of his
analysis, Judge Kozinski first responded to the contention that the
Bankruptcy Code specifically incorporates the California provision
through § 544(b)(1).49
The subrogation power under § 544(b)(1) enables a bankruptcy
trustee to utilize the power of an unsecured creditor to avoid a transfer
of debtor property under an applicable state statute.50 Judge Kozinski
emphasized that the powers granted to the trustee under § 544(b)(1) are
limited to those that the individual unsecured creditor possessed.51 The
California provision, however, empowered only the general assignees to
avoid the transfer.52 Judge Kozinski determined that Congress limited
the definition of creditor so that an assignee could not be included in
that category.53
Finding that the assignee’s avoidance powers under the California
statute were not expressly incorporated into the Bankruptcy Code
through § 544(b)’s subrogation power, Judge Kozinski then considered
whether the California statute could nevertheless coexist with the
47
48
49
50
See Tarnowski, 210 N.W. at 837.
Sherwood Partners, Inc. v. Lycos, Inc., 394 F.3d 1198, 1206 (9th Cir. 2005
Id. at 1201.
See 11 U.S.C. § 544(b)(1) (2000) (“[T]he trustee may avoid any transfer of an interest of
the debtor in property or any obligation incurred by the debtor that is voidable under applicable
law by a creditor holding an unsecured claim.”) (emphasis added).
51 Sherwood, 394 F.3d at 1201.
52 Id. at 1201-02.
53 Id. at 1202. A creditor is an “entity that has a claim against the debtor that arose at a time
of or before the order for relief concerning the debtor.” 11 U.S.C. § 101(10)(A) (2000 & Supp.
2006). An assignee, Judge Kozinski argued, falls under the definition of a custodian. Sherwood,
394 F.3d at 1202. A custodian includes a receiver or trustee of any property of a debtor and
“assignee[s] under a general assignment for the benefit of the debtor’s creditors.” 11 U.S.C. §
101(11)(B). Despite this analysis, there are some courts that allow the bankruptcy trustee to
exercise the preference avoidance powers of a receiver or assignee. The Preemptive Effect of the
Bankruptcy Code for Preference Avoidance Under State-Law Assignments for the Benefit of
Creditors, 25 BANKR. LAW LETTER No. 4, Apr. 2005, at 1 [hereinafter, Preemptive Effect]
(collecting cases). On the other hand, some courts concur with the Sherwood view and find that
Congress intentionally excluded from § 544(b)(1) avoidance powers that could be exercised only
by a general creditor. Id. For a case finding that a bankruptcy trustee may not subrogate to a
state receiver’s right to collect a preference, see Dubis v. B.W. Supply (In re Delta Group), 300
B.R. 918 (Bankr. E.D. Wis. 2003).
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LIMITS OF BANKRUPTCY CODE PREEMPTION
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bankruptcy scheme.54 To answer this question, the Sherwood court
focused on the two goals of bankruptcy—discharge and equitable
distribution.55 In line with established precedent, Judge Kozinski noted
that state statutes granting a discharge are preempted whether or not the
state discharge is identical to the federal discharge provision.56 He then
extended this reasoning to state statutes implicating the goal of
equitable distribution.57 According to Judge Kozinski, if the assignees
could avoid preferences for the benefit of creditors under the state
statute, the Bankruptcy Code’s goal of equitable distribution would be
frustrated.58 If a state assignee has already recovered a preferential
transfer and distributed the proceeds to creditors, a federal trustee could
not recover that same property if a federal bankruptcy proceeding were
undertaken.59 Thus, given the coexistence of both statutes, the action of
the state assignee would not lead to equitable distribution and would
alter the incentives of filers who invoke the potentially more expensive
and time-consuming federal process.60
Although concerned with incentives, Judge Kozinski curiously left
almost unanalyzed two key provisions of the Bankruptcy Code, which
presuppose the coexistence of a federal bankruptcy proceeding and a
state general assignment. According to § 303(h)(2), a bankruptcy court
must permit an involuntary bankruptcy case to proceed if
within 120 days before the . . . filing of the petition, a custodian,
other than a trustee, receiver or agent appointed . . . to take charge of
less than substantially all of the property of the debtor for the
purpose of enforcing a lien against such property, was appointed or
took possession.61
Further, under § 543(b)(1), a custodian, such as a general assignee,
has the duty to “deliver to the trustee any property of the debtor held by
or transferred to such custodian, or proceeds, product, offspring, rents,
or profits of such property, that is in such custodian’s possession,
custody, or control on the date that such custodian acquires knowledge
54
55
56
See Sherwood, 394 F.3d at 1202.
Id. at 1203.
Id. Citing Stellwagen, the majority reiterated that state discharge provisions are preempted
because discharge “‘is one of the requisites of a true bankruptcy law.’” Id. (quoting Stellwagen v.
Clum, 245 U.S. 605, 616 (1918)).
57 Id.
58 Id. at 1204.
59 See id. However, Judge Kozinski states that
[t]his is not a matter for federal concern when the assignee has no special avoidance
rights. If individual unsecured creditors can sue to recover preferences under state law,
the same powers are also available to a bankruptcy trustee under section 544(b); there
is obviously no conflict then between federal law and state law giving those powers to
an assignee.
Id. at 1204 n.6.
60 Id. at 1205.
61 11 U.S.C. § 303(h)(2) (2000 & Supp. 2006).
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of the commencement of the case.”62 This duty is excused if the
custodian is an assignee for the benefit of creditors appointed or in
possession more than 120 days before the commencement of a
bankruptcy case, “unless compliance with such subsections is necessary
to prevent fraud or injustice.”63
These provisions64 suggest that, even if a general assignee has
recovered a preference, the proceeds of that recovery can be obtained by
a subsequent bankruptcy trustee pursuant to § 543(b)(1). Admittedly,
this conclusion requires a finding that the voidable preference recovery
is “debtor property,” within the meaning of § 543(b)(1). This
conclusion is not straightforward. The debtor has already alienated the
voidable preference before the custodian obtained possession of
whatever property the debtor still had at the time of the general
assignment.65 But it is equally the case that a debtor never has a
property interest in an assignment for the benefit of creditors once the
assignment is accomplished. The legislative history to § 543, however,
indicates that a very broad definition of “debtor property” is intended.66
If property of the debtor includes the custodian’s property in which
the debtor has no interest, it is no great stretch for a court to conclude
that the custodian’s ownership of a voidable preference recovery is also
debtor property. After all, this recovery is based on a transfer of funds
the debtor once owned but no longer does, in light of the general
assignment. The same premise governs assignments for the benefit of
creditors generally. Also, when the debtor makes a voidable transfer,
the courts are to treat the matter as if the debtor made no transfer.67 In
other words, voidable property transferred to another is still debtor
property. In any case, the alternative is untenable. If a general assignee
must turn over “debtor” property but not the voidable preference
62
63
64
Id. § 543(b)(1).
Id. § 543(d)(2).
Arguments referencing these sections may also be found in other sources. See Sherwood,
394 F.3d at 1207 (Nelson, J., dissenting); Craig Rankin & Christopher Alliotts, 9th Cir.
“Sherwood” Case, NAT’L L.J., Oct. 24, 2005, at 20 (pointing out that 11 U.S.C. § 303(h)(2),
along with §§ 101(11)(B) and 543(d)(1) and (2), may evidence Congress’s express allowance for
certain assignment proceedings to continue even after the filing of a federal bankruptcy petition).
65 David Gray Carlson, Voidable Preferences and Proceeds: A Reconceptualization, 71 AM.
BANKR. L.J. 517 (1997) (arguing that a bankruptcy trustee’s voidable preference recovery right is
not proceeds of debtor property).
66 According to the Senate Report that accompanied the enactment of the Bankruptcy Code:
This section requires a custodian appointed before the bankruptcy case to deliver to the
trustee and to account for property that has come into his possession, custody, or
control as a custodian. “Property of the debtor” in section (a) includes property that
was property of the debtor at the time the custodian took the property, but the title to
which passed to the custodian.
S. REP. NO. 95-989, at 85 (1978).
67 See Am. Nat’l Bank v. MortgageAmerica Corp. (In re MortgageAmerica Corp.), 714 F.2d
1266, 1277 (5th Cir. 1983).
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LIMITS OF BANKRUPTCY CODE PREEMPTION
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recovery, as it is not debtor property, the question exists as to what
would come of it. Surely the assignee cannot keep it personally. Under
state law, the preferred creditor is not entitled to it. There is little
alternative to the conclusion that the general assignee must turn it over
to the bankruptcy trustee, along with the rest of the general assignment.
If these conclusions follow, Judge Kozinski’s analysis fails. It may
be true that a bankruptcy trustee may not, under § 544(b)(1), subrogate
to the general assignee’s right to recover a preference under state law.
But the trustee obtains the preference recovery anyway under
§ 543(b)(1). Further, even if the custodian-assignee has not yet
recovered the preference, the avoidance cause of action is still part of
the custodian’s estate, and these state-law causes of action must be
transferred to the bankruptcy trustee, permitting the enforcement of
state-law voidable preference causes of action.68
Responding to the majority’s position69 that permitting states to
enact voidable preference legislation would create evil incentives, Judge
Dorothy Nelson in dissent noted these incentives exist whenever state
insolvency regimes exist. Taken to its logical end, this anti-incentive
position leads to the preemption of all state-law insolvency regimes
altogether.70
In no way could this concern be limited to the presence of a
voidable preference provision as a small part of the assignment scheme.
Further, Judge Nelson emphasized that the state provision was virtually
identical to the federal provision.71 If the same transfer could be
68 This point was overlooked by the trustee and also by the court in Dubis v. B.W. Supply (In
re Delta Group), 300 B.R. 918 (Bankr. E.D. Wis. 2003), where a state receiver with a voidable
preference right under Wisconsin law had been appointed prior to the bankruptcy proceeding.
The federal bankruptcy trustee should have inherited the receiver’s avoidable preference cause of
action under § 543(b)(1).
69 Relying on the rule of Walker v. Kiousis, 114 Cal. Rptr. 2d 69, 77 (Cal. Ct. App. 2001) that
lower federal court decisions are persuasive but not binding on state courts, a California appellate
court countered Kozinski’s arguments in Sherwood, focusing in part on the dissent’s arguments,
and held that section 1800 is not preempted by the Bankruptcy Code. Haberbush v. Charles &
Dorothy Cummins Family Ltd. P’Ship, 43 Cal. Rptr. 3d 814 (Cal. Ct. App. 2006). This decision
thus raises interesting federalism questions beyond the scope of this Note. Even more recently,
another California court found the Haberbush decision persuasive and similarly held that the
Bankruptcy Code does not preempt § 1800 in an unpublished opinion. Credit Managers Ass’n of
Calif. v. Countrywide Home Loans, Inc., No. 04CC11546, 2006 WL 2820882 (Cal. App. Dep’t
Super. Ct. Oct. 4, 2006). Nevertheless, this Note makes an independent evaluation of the
Sherwood reasoning and goes further by considering the preemption analysis employed by the
Supreme Court in the principal cases, leading to the unifying theory that discharge is the limit of
preemption.
70 Sherwood Partners Inc., v. Lycos, Inc., 394 F.3d 1198, 1208 (9th Cir. 2005) (Nelson, J.,
dissenting) (“When the majority’s reasoning is carried to its logical extension, it has the effect of
pushing corporations threatened with insolvency from the less stigmatic, and less costly,
voluntary assignment scheme into the world of federal bankruptcy.”).
71 Id. at 1207 (Nelson, J., dissenting) (referencing Angeles Elec. Co. v. Superior Court, 32
Cal. Rptr. 2d 660, 663 (Cal. Ct. App. 1994) and noting that the California provision was
intentionally meant to conform to the federal law). Compare CAL. CIV. PROC. CODE § 1800
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avoided in both the state and federal system, then it is not clear why the
state system interferes with the goal of equitable distribution.72
Voluntary assignments and the federal system had peacefully coexisted
for many years without interfering with the goal of equitable
distribution.73 She went on to argue that the California preference
provision is incorporated into the Bankruptcy Code by virtue of § 543.74
Finally, as will be demonstrated, the Supreme Court has never extended
preemption beyond the concept of state discharge statutes.
III. FEDERAL BANKRUPTCY CODE PREEMPTION OF
STATE INSOLVENCY LEGISLATION
In general, bankruptcy law did not draw much attention from the
Framers,75 though the Constitution’s Bankruptcy Clause sets forth
Congress’s power to establish “uniform Laws on the subject of
(West 2006) with 11 U.S.C. § 547 supra notes 25 and 35.
72 Sherwood, 394 F.3d at 1207 (Nelson, J., dissenting).
73 Id. The majority noted, along with the dissent, that § 543(d)(2) is one instance in which the
federal law coexists with state law. Id. at 1201, 1207. Under this section, the bankruptcy court
shall excuse compliance with subsections (a) and (b)(1) of this section if the
custodian is an assignee for the benefit of the debtor’s creditors that was
appointed or took possession more than 120 days before the date of the filing of
the petition, unless compliance with such subsections is necessary to prevent
fraud or injustice.
11 U.S.C. § 543(d)(2). This section, in essence, excuses some assignees from complying with
property turnover requirements. Sherwood, 394 F.3d at 1201. Another section that might reveal
the Bankruptcy Code’s preservation of assignment for the benefit of creditors proceedings is 11
U.S.C. § 305. Rankin & Alliotts, supra note 64, at 20. This section provides:
(a) The court, after notice and a hearing, may dismiss a case under this title, or may
suspend all proceedings in a case under this title, at any time if—
(1) the interests of creditors and the debtor would be better served by such dismissal or
suspension; or
(2)(A) a petition under section 1515 for recognition of a foreign proceeding has been
granted; and
(B) the purposes of chapter 15 of this title would be best served by such dismissal or
suspension.
(b) A foreign representative may seek dismissal or suspension under subsection (a)(2)
of this section.
(c) An order under subsection (a) of this section dismissing a case or suspending all
proceedings in a case, or a decision not so to dismiss or suspend, is not reviewable by
appeal or otherwise by the court of appeals under section 158(d), 1291, or 1292 of title
28 or by the Supreme Court of the United States under section 1254 of title 28.
11 U.S.C. § 305 . Though not stated explicitly, the argument is that under this section, the court
may dismiss a case or suspend all proceedings after a hearing; the court may decide that other
proceedings, such as voluntary assignment proceedings, are in the best interests of the creditors
and the debtor. See Rankin & Alliotts, supra note 64, at 20.
74 Sherwood, 394 F.3 at 1207 (Nelson, J., dissenting).
75 The only vote against inclusion of the clause was Roger Sherman from Connecticut who
was concerned that bankruptcies could still be punishable by death, as was the law in England.
Tabb, History, supra note 38, at 13.
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LIMITS OF BANKRUPTCY CODE PREEMPTION
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Bankruptcies throughout the United States.”76 Between constitutional
ratification and 1898, when the era of permanent federal bankruptcy
legislation began, Congress exercised its broad and sweeping77 power to
enact federal bankruptcy legislation for a total of sixteen years.78
Because Congress only occasionally enacted federal legislation, states
passed statutes to fill the void left during periods when no federal
legislation was in effect.79
Courts consider the relationship between federal bankruptcy laws
and state laws through preemption analysis.80 The modern analysis is
relatively familiar.81 Preemption analysis begins with a consideration of
the Supremacy Clause82 and requires an examination of congressional
76 U.S. CONST. art. I, § 8, cl. 4. The uniformity expressed in the Bankruptcy Clause has been
held to refer to geographic uniformity, meaning that debtor and creditor rights may differ among
states, though the application must be uniform to all states. Recent Cases, 3 TEMP. L.Q. 213, 213
(1928-1929) (citing Thomas v. Woods 173 F. 585, 590 (1909)). The Stellwagen Court made an
early statement related to geographic uniformity, stating that:
Notwithstanding this requirement as to uniformity the bankruptcy acts of Congress
may recognize the laws of the state in certain particulars, although such recognition
may lead to different results in different states. For example, the Bankruptcy Act
recognizes and enforces the laws of the states affecting dower, exemptions, the validity
of mortgages, priorties [sic] of payment and the like. Such recognition in the
application of state laws does not affect the constitutionality of the Bankruptcy Act,
although in these particulars the operation of the Act is not alike in all the states.
Stellwagen v. Clum , 245 U.S. 605, 613 (1918). Thus, “[b]ankruptcy legislation need not apply
to all classes in the same way. It is sufficient if each class throughout the country is accorded like
treatment, for the prescribed uniformity is geographic rather than personal.” John Gerdes,
Constitutionality of Section 77B of the Bankruptcy Act, 12 N.Y.U. L.Q. REV. 196, 203 (1934)
(citing Hanover Nat’l Bank v. Moyses, 186 U.S. 181, 188 (1902)).
77 Gerdes, supra note 76, at 203.
78 Tabb, History, supra note 38, at 12-23. Federal bankruptcy laws were in effect from 18001803, 1841-1843, and from 1867-1878. The Bankruptcy Act of 1898 began a period of
continuous federal bankruptcy legislation, though the act has undergone a few notable
amendments, including the Chandler Act of 1938 and the Bankruptcy Reform Act of 1978, which
set forth the current Bankruptcy Code and has undergone amendment as recently as 2005.
79 See id. at 48 (“Subject to the limitation that states may not impair the obligation of
contracts, states were free to fill this vacuum with bankruptcy and insolvency laws of their
own.”). Further, it has been argued that because the “subject of Bankruptcies” does not extend
beyond the insolvent debtor, the Constitution does not authorize Congress to pass laws related to
general debtor-creditor relations. Thomas E. Plank, The Constitutional Limits of Bankruptcy, 63
TENN. L. REV. 556 (1996). Voluntary assignment statutes may be said to govern such relations.
80 See LAURENCE H. TRIBE, AMERICAN CONSTITUTIONAL LAW § 6-28 (3d ed. 2000).
81 Widely used constitutional law casebooks contain a section covering the preemption
analysis employed by the Court in recent cases. See, e.g., KATHLEEN M. SULLIVAN & GERALD
GUNTHER, CONSTITUTIONAL LAW 324-33 (15th ed. 2004).
82 U.S. CONST., art. VI, cl. 2 (“This Constitution, and the Laws of the United States which
shall be made in Pursuance thereof; and all Treaties made, or which shall be made, under the
Authority of the United States, shall be the supreme Law of the Land; and the Judges in every
State shall be bound thereby, any Thing in the Constitution or Laws of any State to the Contrary
notwithstanding.”); English v. Gen. Elec. Co., 496 U.S. 72, 78-79 (1990) (“Our cases have
established that state law is pre-empted under the Supremacy Clause in three circumstances.”)
(internal citation omitted); Hillsborough County, Florida v. Automated Med. Labs., 471 U.S. 707,
712-13 (1985). Further, “[i]t is a familiar and well-established principle that the Supremacy
Clause . . . invalidates state laws that ‘interfere with, or are contrary to,’ federal law.” Id. at 712
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intent to preempt state authority.83 Under the Supremacy Clause,
federal law may preempt state law (1) expressly, (2) by implied
occupation of a field, or (3) by implied exclusion of conflicting state
regulation.84 When Congress acts within constitutional limits, it may
(quoting Gibbons v. Ogden, 22 U.S. 1, 211 (1824) (Marshall, C.J.)). Cf. Stephen A. Gardbaum,
The Nature of Preemption, 79 CORNELL L. REV. 767 (1994) (arguing that supremacy and
preemption are distinct legal and constitutional concepts, ultimately suggesting that preemption
cases should be resolved through the ordinary rules of statutory interpretation and thus,
preemption doctrine does not exist at all); TRIBE, supra note 80, at 1204 (“‘[C]onflict’ and ‘field’
preemption rarely offer much help in the inherently difficult task that lies at the heart of
preemption analysis—the task of determining statutory meaning.”).
83 English, 496 U.S. at 78-79 (1990).
84 See Pac. Gas & Elec. Co. v. State Energy Res. Conservation & Dev. Comm’n, 461 U.S.
190, 203-04 (1983); see also Lorillard Tobacco Co. v. Reilly, 533 U.S. 525, 541 (2001)
State action may be foreclosed by express language in a congressional enactment, see,
e.g., Cipollone v. Liggett Group, Inc., 505 U.S. 504, 517 (1992), by implication from
the depth and breadth of a congressional scheme that occupies the legislative field, see,
e.g., Fidelity Fed. Sav. & Loan Ass’n v. De la Cuesta, 458 U.S. 141, 153 (1982), or by
implication because of a conflict with a congressional enactment, see, e.g., Geier v.
American Honda Motor Co., 529 U.S. 861, 869-74 (2000).
Id. See also Karen A. Jordan, The Shifting Preemption Paradigm: Conceptual and Interpretive
Issues, 51 VAND. L. REV. 1144, 1157 (1998); Gardbaum, supra note 82, at 767. The Supreme
Court has expressed its categorical approach in an oft-quoted passage:
In determining whether a state statute is pre-empted by federal law and therefore
invalid under the Supremacy Clause of the Constitution, our sole task is to ascertain the
intent of Congress. Federal law may supersede state law in several different ways.
First, when acting within constitutional limits, Congress is empowered to pre-empt
state law by so stating in express terms. Second, congressional intent to preempt state
law in a particular area may be inferred where the scheme of federal regulation is
sufficiently comprehensive to make reasonable the inference that Congress left no
room for supplementary state regulation . . . .
As a third alternative, in those areas where Congress has not completely displaced state
regulation, federal law may nonetheless pre-empt state law to the extent it actually
conflicts with federal law. Such a conflict occurs either because compliance with both
federal and state regulations is a physical impossibility, or because the state law stands
as an obstacle to the accomplishment and execution of the full purposes and objectives
of Congress.
California Fed. Sav. & Loan Ass’n v. Guerra, 479 U.S. 272, 280-81 (1987) (internal citations and
quotation marks omitted). This approach is generally understood as divided into two categories.
See Jordan, supra, at 1150. Congress may preempt state law expressly when it “attempts to
define the extent to which a particular federal law will preempt state law.” Id. Congress may
also preempt state law impliedly by implementing legislation that occupies a field or conflicts
with state law. Id. Accordingly, both “field” and “conflict” relate to preemption determined by
implication. However, field preemption may fall into either express preemption, implied
preemption, or conflict preemption. See TRIBE, supra note 80, § 6-28, at 1176-77. The Supreme
Court further clarified its statement of modern preemption law more recently, stating:
First, Congress can define explicitly the extent to which its enactments pre-empt state
law . . . when Congress has made its intent known through explicit statutory language,
the courts’ task is an easy one. Second, in the absence of explicit statutory language,
state law is pre-empted where it regulates conduct in a field that Congress intended the
Federal Government to occupy exclusively. Such an intent may be inferred from a
scheme of federal regulation . . . so pervasive as to make reasonable the inference that
Congress left no room for the States to supplement it, or where an Act of Congress
touch[es] a field in which the federal interest is so dominant that the federal system
will be assumed to preclude enforcement of state laws on the same subject. Although
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LIMITS OF BANKRUPTCY CODE PREEMPTION
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expressly preempt state law.85 Field preemption occurs when the
federal regulatory scheme is so “pervasive” that it would be a
reasonable inference that “Congress left no room for the States to
supplement it.”86 Finally, as for conflict preemption:
where the federal government, in the exercise of its superior
authority in [a] field, has enacted a complete scheme of regulation
and has therein provided a standard . . . states cannot, inconsistently
with the purpose of Congress, conflict or interfere with, curtail or
complement, the federal law, or enforce additional or auxiliary
regulations.87
A conflict arises when complying with federal and state regulations
is a “physical impossibility.”88 In general, courts are reluctant to infer
preemption in a case where ambiguity exists.89 Further, as a general
matter, bankruptcy courts tend to incorporate, instead of preempt,
relevant state law.90
this Court has not hesitated to draw an inference of field pre-emption where it is
supported by the federal statutory and regulatory schemes, it has emphasized:
Where . . . the field which Congress is said to have pre-empted includes areas that have
been traditionally occupied by the States, congressional intent to supersede state laws
must be clear and manifest. Finally, state law is pre-empted to the extent that it
actually conflicts with federal law. Thus, the Court has found pre-emption where it is
impossible for a private party to comply with both state and federal requirements, or
where state law stands as an obstacle to the accomplishment and execution of the full
purposes and objectives of Congress.
English, 496 U.S. at 78-79 (1990). Despite this seemingly direct statement of the categorical
approach, the English Court noted that:
By referring to these three categories, we should not be taken to mean that they are
rigidly distinct. Indeed, field pre-emption may be understood as a species of conflict
pre-emption: A state law that falls within a pre-empted field conflicts with Congress’
intent (either express or plainly implied) to exclude state regulation. Nevertheless,
because we previously have adverted to the three-category framework, we invoke and
apply it here.
Id. at 79 n.5. The recognition by the Court that the rigidity of the categorical approach is not “air
tight,” TRIBE, supra note 80, § 6-28, at 1177, has led to new conceptions of the analytical
framework. Jordan, supra, at 1150 (arguing that the Court is moving away from the categorical
approach and suggesting an approach that considers the purpose underlying the regulatory
provisions).
85 Hillsborough, 471 U.S. at 713 (citing Jones v. Rath Packing Co., 430 U.S. 519, 525
(1977)). A summary of the doctrine is that field preemption is where such congressional intent is
inferred from the comprehensiveness of federal regulation, which “leaves no room for the States
to supplement it.” Jordan, supra note 84, at 1157-58 .
86 Rice v. Santa Fe Elevator Corp., 331 U.S. 218, 230 (1947).
87 Hines v. Davidowitz, 312 U.S. 53, 66-67 (1941). Under conflict preemption, “[s]tate law is
preempted if that law actually conflicts with federal law.” Jordan, supra note 84, at 1150.
88 Florida Lime & Avocado Growers, Inc. v. Paul, 373 U.S. 132, 142-43 (1963).
89 TRIBE, supra note 80, § 6-28, at 1175.
90 See Skeel, supra note 16, at 491 (referencing the Supreme Court’s approval of such
deference to state law by citing Butner v. United States, 440 U.S. 48 (1979), which held that
Congress left the determination of property rights in the bankruptcy context to state law); see also
Local Loan Co. v. Hunt, 292 U.S. 234, 245 (1934) (“The various provisions of the Bankruptcy
Act . . . are to be construed when reasonably possible in harmony with it so as to effectuate the
general purpose and policy of the act. Local rules subversive of that result cannot be accepted as
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However, the Supreme Court undertook a slightly different
approach when it decided the principal cases.91 From 1912 through
1920, the Court established automatic preemption by sole occupation of
a field and during that period almost always found state legislation to be
preempted.92 Only in 1933 did the Supreme Court begin a definitive
shift towards the modern analysis,93 with its focus on congressional
intent,94 and a more nuanced approach to automatic field preemption.
Accordingly, the Court did not employ the modern preemption analysis
in the principal cases of interest here, even though the Court
demonstrated some of the foundational tendencies towards the modern
doctrine in those cases.
A. Preemption Analysis in the Bankruptcy Context
In 1819, the Supreme Court first considered the implication of
federal legislation on state bankruptcy law enacted during the existence
of federal legislation in Sturges v. Crowninshield.95 The Sturges Court
controlling the action of a federal court.”). Bankruptcy courts especially defer to state law in the
corporate governance context. Skeel, supra note 16, at 491.
91 See infra Part IV.A. The first state statute to be overturned on preemption grounds
occurred in 1912. Gardbaum, supra note 82, at 803.
92 Gardbaum, supra note 82, at 801. In essence, automatic preemption meant that it was “not
merely conflicting state laws that [were] overridden by federal law on the same subject, but any
state laws—even those that [were] consistent with and supplement federal law.” Id. at 801. The
prevailing idea at the time considered that the “effect of congressional action is to end the
concurrent power of the states and thereby to create exclusive power at the federal level from that
time on.” Id. The motivation for this automatic preemption stemmed from the recognition that
uniform regulation had become a necessity, especially because of the advent of the railroads, and
contrasted the previous tendency to uphold almost all state laws. Id. Three features characterized
the preemption power established by the Court during the period from 1912 through 1920: (1)
“Preemption was an automatic consequence of congressional action in a field” and state laws
were superseded when Congress exercised its power in an area of concurrent power; (2) The
concept of “latent exclusivity” prevailed, signifying that states could act in an area until Congress
exercised its inherent Commerce Clause powers at which time the congressional action had an
automatic preemptive effect, leading to the concept of “occupation of a field;” (3) Preemption
stemmed from the implications of the Supremacy Clause. Id. at 801-02. Justice Holmes
summarized automatic preemption, stating that “the alleged absence of conflict is immaterial.
When Congress has taken the particular subject-matter in hand coincidence is as ineffective as
opposition, and a state law is not to be declared a help because it attempts to go farther than
Congress has seen fit to go.” Charleston & W. Carolina Ry. Co. v. Varnville, 237 U.S. 597, 604
(1915), quoted in Gardbaum, supra note 82, at 805.
93 Gardbaum, supra note 82, at 806 (citing Mintz v. Baldwin, 289 U.S. 346 (1933), which was
argued on April 10 and decided on May 8). The Court judicially affirmed this analysis in 1937.
Id. As for the principal cases, the Court decided Stellwagen in 1918; Pobreslo was argued on
December 13, 1932 and decided on January 9, 1933, before the changes in preemption analysis
took hold.
94 Generally, intent began to play a role in response to federalism in the United States, which
began with the New Deal in 1933. Id. This infusion of intent into the analysis does not play any
substantive role in the arguments or analysis supportive of this Note’s thesis.
95 17 U.S. 122 (1819).
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held that states have the authority to pass a bankruptcy law provided
that no federal law establishing a uniform system of bankruptcy was in
force that conflicted with the state law.96 Specifically, the Court stated
that “state laws are thus suspended only to the extent of actual conflict
with the system provided by the Bankruptcy Act of Congress.”97
Sturges thus stands for the proposition that state insolvency laws are
valid when no federal bankruptcy law is in effect; however, when
Congress passes federal legislation, state laws are preempted “so far as
they [are] in conflict” with federal legislation.98
Since then, the Supreme Court has addressed the issue of state
statutes preempted by federal bankruptcy legislation mainly through
three principal cases.99 First, in Stellwagen v. Clum,100 a secured
creditor sought turnover of lumber and cash from a “bankruptcy” trustee
appointed pursuant to an Ohio state procedure. The trustee resisted on
the grounds that the security interest on the lumber and cash was a
voidable preference under Ohio law. The secured creditor in turn
responded that the the federal Bankruptcy Act preempted the Ohio
voidable preference law. The Supreme Court did not find the Ohio
statute preempted.101 The Stellwagen Court observed that the “statute is
96 Sturges, 17 U.S. at 208. The Court also limited the state bankruptcy law with the proviso
that it “not impair the obligation of contracts, within the meaning of the constitution . . . .” Id.
97 Stellwagen v. Clum, 245 U.S. 605, 613 (1918) (citing Sturges, 17 U.S. at 122); GLENN,
supra note 34, § 125, at 208 (“They are suspended while congressional legislation is of effect,
they revive when national law is repealed, and they lose their force again when Congress chooses
once more to give the country a national law.”).
98 Note and Comment, The Federal Bankruptcy Act and its Effect on State Insolvency Laws,
16 MICH. L. REV. 540, 540 (1918); Williston, supra note 3, 547 (1909) (“It is clearly established
that when no national act is in force, states have full power to pass bankruptcy laws. The only
limitation at such a time on the power of the states is the constitutional prohibition against
impairing the obligation of contracts. Owing to this prohibition, even though no national law is in
force, a state cannot by a bankruptcy or insolvency law discharge a debt arising either under a
contract entered into before the discharge of the state law in question or under a contract made
without the state.”); see also Stellwagen, 245 U.S. at 613 (“In view of this grant of authority to
the Congress it has been settled from an early date that state laws to the extent that they conflict
with the laws of Congress, enacted under its constitutional authority, on the subject of
bankruptcies are suspended. While this is true, state laws are thus suspended only to the extent of
actual conflict with the system provided by the Bankruptcy Act of Congress.”); In re Newport
Offshore Ltd., 219 B.R. 341 (Bank. R.I. 1998) (“[t]he existence of federal bankruptcy legislation
suspends the operation of state bankruptcy laws”) (citing International Shoe v. Pinkus, 278 U.S.
261, 265 (1929))); John S. Miller, The Illinois Business Corporation Act and Bankruptcy
Legislation, 29 ILL. L. REV. 695 (1935); ; ; Effect of National Bankruptcy Act on State Insolvency
Statutes, supra note 4, at 1090; Editorial Note, General Assignments for the Benefit of Creditors
and the Federal Bankruptcy Act: Peaceful Coexistence?, 14 RUTGERS L. REV. 800, 800-01
(1960) [hereinafter Peaceful Coexistence?].
99 See supra note 26; Peaceful Coexistence?, supra note 98; see also Sherwood Partners, Inc.
v. Lycos, Inc., 394 F.3d 1198, 1203 (9th Cir. 2005) (“[W]e know, because the Supreme Court has
repeatedly told us . . . state statutes that purport to . . . [give] debtors a discharge of their debts are
preempted . . . .”) (citing cases).
100 245 U.S. 605 (1918).
101 The Sherwood majority noted that the statute in Stellwagen was not a true preference
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not opposed to the policy of the bankruptcy law or in contravention of
the rules and principles established by it with a view to the fair
distribution of the assets of the insolvent.”102 The Court also ruled that
only state laws in conflict with federal bankruptcy legislations are
suspended,103 but those “which are in aid” of federal legislation may
stand.104
In Sherwood, Judge Kozinski had to square his decision with
Stellwagen.105 He argued that pursuant to the Ohio law under
contention in Stellwagen, any creditor could have exercised the
avoidance power exercised by the state trustee.106 The distinction in
Judge Kozinski’s mind, then, is the distinction between a right that only
a creditor representative could exercise, as in California, and a right of
avoidance that an individual creditor could avoid. The latter is never
preempted because the bankruptcy trustees can subrogate themselves to
the Ohio-style powers under § 544(b)(1).
In fact, this attempt to distinguish Stellwagen can be challenged,
statute because it required the transfer to have been made in contemplation of insolvency or with
the intent to defraud creditors, which resembles a fraudulent conveyance statute. Sherwood, 394
F.3d at 1202 n.3. However, the Sherwood court did not consider this distinction relevant to its
analysis. Id. The Ohio statute in Stellwagen stated, in pertinent part:
Every sale, conveyance, transfer, mortgage or assignment, made in trust or otherwise
by a debtor or debtors, and every judgment suffered by him or them against himself or
themselves in contemplation of insolvency, and with a design to prefer one or more
creditors to the exclusion in whole or in part of others, and every sale, conveyance,
transfer, mortgage or assignment made, or judgment procured by him or them to be
rendered, in any manner, with intent to hinder, delay or defraud creditors, shall be
declared void as to creditors of such debtor or debtors at the suit of any creditor or
creditors, and in any suit brought by any creditor or creditors of such debtor or debtors
for the purpose of declaring such sale void, a receiver may be appointed who shall take
charge of all the assets of such debtor or debtors, including the property so sold,
conveyed, transferred, mortgaged, or assigned, which receiver shall administer all the
assets of the debtor or debtors for the equal benefit of the creditors of the debtor or
debtors in proportion to the amount of their respective demands, including those which
are unmatured.
Stellwagen, 245 U.S. at 609 n.1.
102 Stellwagen, 245 U.S. at 615.
103 See supra note 44 for a brief explanation comparing “suspension” and “preemption.”
104 Stellwagen, 245 U.S. at 615. (“It is only state laws which conflict with the bankruptcy
laws of Congress that are suspended; those which are in aid of the Bankruptcy Act can stand.”).
This observation is similar to a statement made by the Court in Sturges, supra note 98, but it
should be juxtaposed against the Court’s statement in Pinkus: “States may not pass or enforce
laws to interfere with or complement the Bankruptcy Act or to provide additional or auxiliary
regulations.” Int’l Shoe Co. v. Pinkus, 278 U.S. 261, 265 (1929) (quoted in Effect of National
Bankruptcy Act on State Insolvency Statutes, supra note 4, at 1092 n.16). The Pinkus dicta cited,
though, has been considered to be a broader statement than that which the Supreme Court had
actually implemented, especially because in Pobreslo, the Court stated that the statute in question
was “quite in harmony with the purposes of the federal act.” Pobreslo v. Joseph M. Boyd Co.,
287 U.S. 518, 526 (1933).
105 Sherwood Partners, Inc. v. Lycos, Inc., 394 F.3d 1198, 1205 (9th Cir. 2005)
106 Id.
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with reference to the then extant Ohio law.107 This section indicates
that, although an individual creditor could commence a voidable
preference action, this commencement also had the effect of
commencing an involuntary collective proceeding. A creditor had the
right to avoid a preference, but Ohio law indicated that the fruits of the
action had to be shared pro rata with other creditors. The provision is
therefore a strange mixture between a private creditor’s right and a
collective right to avoid transfers. Oddly, this ends up being the federal
rule as well set forth in Moore v. Bay.108 Under Moore, a bankruptcy
trustee could subrogate himself to the rights of an unsecured creditor
and avoid a transfer by the debtor pursuant to state law, but the proceeds
did not go to the creditor to whom the trustee was subrogated. Rather,
the recovery was added to the bankruptcy estate where all creditors
could share pro rata. Thus, Ohio law merely replicates the end result in
bankruptcy under § 544(b)(1).109 In any case, as emphasized earlier,
even if a subsequent bankruptcy trustee may not subrogate himself to
the Ohio creditor’s right to avoid a preference, the bankruptcy trustee
can obtain the voidable preference recovery (or the cause of action to
recover the preference) under the turnover provision in § 543(b)(1).110
Stellwagen represents a turning point because most prior decisions
found provisions in state insolvency laws controlling voluntary
assignments preempted during the operation of federal bankruptcy
legislation.111 However, the statutes analyzed in most previous cases
contained a discharge provision, whereas the Ohio statute in Stellwagen
107
The statute sets forth:
Any creditor or creditors, as to whom any of the acts or things prohibited in the
preceding section are void . . . may commence an action in a court of competent
jurisdiction to have such acts or things declared void. And such court shall appoint a
trustee or receiver according to the provisions of this chapter, who upon being duly
qualified shall proceed by due course of law to recover possession of all property so
sold, conveyed, transferred, mortgaged or assigned, and to administer the same for the
equal benefit of all creditors, as in other cases of assignments to trustees for the benefit
of creditors. And any assignee as to whom any thing or act mentioned in the preceding
section shall be void, shall likewise commence a suit in a court of competent
jurisdiction to recover possession of all property so sold, conveyed, transferred,
mortgaged or assigned, and shall administer the same for the equal benefit of all
creditors as in other cases of assignments to trustees for the benefit of creditors.
Stellwagen, 245 U.S. at 609 n.1 (emphasis added).
108 284 U.S. 4 (1931).
109 Congress retained the rule of Moore in the Bankruptcy Code because of its desire to avoid
having the trustee spend resources to determine which creditors enjoyed avoidance rights and
which did not. See S. REP. NO. 95-989, at 85 (1978).
110 See supra notes 63-68 and accompanying text.
111 See The Federal Bankruptcy Act and its Effect on State Insolvency Laws, supra note 98, at
542 (citing Ketcham v. McNamara, 46 A. 146 (Conn. 1900); Capital Lumber Co. v. Saunders,
143 P. 1178 (Idaho 1914); Closser v. Strawn, 227 F. 139 (D. Pa. 1915); Hasbrouck v. La Febre,
152 P. 168 (Wyo. 1915); Pelton v. Sheridan, 144 P. 410 (Or. 1914)). This article explains that
Pelton is especially difficult to reconcile with Stellwagen.
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did not.112 The lack of this discharge provision was a key factor in the
Stellwagen Court’s determination.113 This distinction led the Court to
hold that a state statute is suspended if it discharges debts but continues
in force if it does not.114 In its analysis, the Stellwagen Court relied on
its 1875 decision, Mayer v. Hellman,115 which considered another Ohio
provision116 permitting an assignment for the benefit of creditors. In
Mayer, the Court also upheld the provision,117 focusing on the fact that
because the statute in Mayer did not include a discharge provision, the
Court did not consider the statute an insolvency law.118
112
113
Id.
The Court stated:
It is settled that a state may not pass an insolvency law which provides for a discharge
of the debtor from his obligations, which shall have the effect of a bankruptcy
discharge as to creditors in other states, and this although no general federal
bankruptcy act is in effect. And while it is not necessary to decide that there may not
be state insolvent laws which are suspended although not providing for a discharge of
indebtedness, all the cases lay stress upon the fact that one of the principal requisites of
a true bankruptcy law is for the benefit of the debtor in that it discharges his future
acquired property from the obligation of existing debts.
Stellwagen, 245 U.S. at 615-16.
114 Id. at 615; see supra note 98 and accompanying text. The two primary statements of the
conflict with respect to discharge may be found in the language of “actual conflict” and the
language related to the “aims and purposes” of the federal law. 245 U.S. at 613, 618. However, a
commentator has found caution in Justice Day’s language. See The Federal Bankruptcy Act and
its Effect on State Insolvency Laws, supra note 98, at 542. Specifically, the concern relates to the
fact that “it is not necessary to decide that there may not be state insolvent laws which are
suspended although not providing for a discharge of indebtedness.” Stellwagen, 245 U.S. at 616.
This caution is also recognized in the opinion of In re Weedman Stave Co., 199 F. 948 (E.D. Ark.
1912), which held that “a state statute will be suspended even though it does not provide for a
discharge.” The Federal Bankruptcy Act and its Effect on State Insolvency Laws, supra note 98,
at 542. One point worth noting that will be discussed in the section covering Pinkus (at infra text
accompanying notes 122-129), and especially in the section on Star (at infra text accompanying
notes 140-145), is that the Arkansas Supreme Court in In re Weedman Stave Co. ruled that the
law was a complete bankruptcy statute. See Roberts Cotton Oil Co. v. F. E. Morse & Co., 135
S.W. 334 (Ark. 1911).
115 91 U.S. 496 (1875).
116 The Mayer Court did not quote the statutory language or cite directly to the statute.
However, the argument of plaintiff’s counsel summarized that the Ohio statute, entitled
‘An Act regulating the mode of administering assignments in trust for the benefit of
creditors,’ has none of the distinctive features of an insolvent or a bankrupt law. It
does not purport or attempt to discharge the debtor either from arrest or imprisonment,
or to free him from future liability. His after-acquired property is liable to his creditors
to the same extent in every particular as if he had not made an assignment in trust for
his creditors.
91 U.S. at 498.
117 Id. The Court did not grant possession of the transferred property to the federal bankruptcy
assignee. This aspect of the decision has been reversed legislatively. See 11 U.S.C. § 543 (2000
& Supp. 2006).
118 The Court stated that the
[S]tatute of Ohio is not an insolvent law in any proper sense of the term. It does not
compel, or in terms even authorize, assignments: it assumes that such instruments were
conveyances previously known, and only prescribes a mode by which the trust created
shall be enforced. It provides for the security of the creditors by exacting a bond from
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Although not referenced in the Stellwagen opinion, an earlier case,
Boese v. King,119 also considered whether federal legislation suspended
an assignment for the benefit of creditors statute.120 In Boese, a judicial
lien creditor attempted to levy property from a general assignee on the
theory that the New Jersey assignment statute was entirely preempted
by the Bankruptcy Act of 1897. The Boese Court found that the
discharge provision of the statute was preempted, but the Court also
severed the offending portion from the rest of the statute, which it
allowed to stand. Consequently, Boese stands for the proposition that
preemption of discharge provisions does not necessarily lead to
preemption of the entire statute.121
Conversely, the next case in the sequence after Stellwagen,
International Shoe Co. v. Pinkus,122 did not allow for severance. In
Pinkus, the Supreme Court held an entire assignment statute preempted
because it contained a discharge provision.123 In its analysis, the Court
the trustees for the discharge of their duties; it requires them to file statements showing
what they have done with the property; and affords in various ways the means of
compelling them to carry out the purposes of the conveyance. There is nothing in the
act resembling an insolvent law. It does not discharge the insolvent from arrest or
imprisonment: it leaves his after-acquired property liable to his creditors precisely as
though no assignment had been made. The provisions for enforcing the trust are
substantially such as a court of chancery would apply in the absence of any statutory
provision. The assignment in this case must, therefore, be regarded as though the
statute of Ohio, to which reference is made, had no existence. There is an insolvent
law in that State; but the assignment in question was not made in pursuance of any of
its provisions. The position, therefore, of counsel, that the Bankrupt Law of Congress
suspends all proceedings under the Insolvent Law of the State, has no application.
Mayer, 91 U.S. at 502-03. The Stellwagen Court quotes this passage. 245 U.S. at 616-17.
119 108 U.S. 379 (1883). Boese concerned a New Jersey statute in which only the claims of
creditors who elected to participate under the assignment could be discharged. Id. The Supreme
Court affirmed a New York state court decision that although the local statute was inoperative as
far as it provided for the discharge of the debtor from future liability to creditors, the state act was
not suspended in its entirety and the assignment was effective at common law to transfer title to
the assignee. Id. Specifically, the Court stated that “the local statute was, from the date of the
passage of the Bankruptcy Act, inoperative in so far as it provided for the discharge of the debtor
from further liability to creditors who came in under the assignment and participated in the
distribution of the proceeds of the assigned property.” Id. at 385.
120 Id.
121 See The Federal Bankruptcy Act and its Effect on State Insolvency Laws, supra note 98, at
543. Both In re Tarnowski and Pobreslo, which considered Wisconsin statutes, reflect this
demarcation. The courts in both instances allowed severance of the discharge provision. By
allowing this severability of the discharge provision and enabling the continued existence of the
assignment portion, the Court may have demarcated a limit of preemption. See infra text
accompanying notes 135-137.
122 278 U.S. at 261 (1929).
123 Id. In Pinkus, a judgment creditor brought suit against a debtor when the sheriff, in
response to a writ of execution, could not find any property because the debtor had commenced
an action in state court and the receiver it appointed had sold the debtor’s property and controlled
the assets. Id. The judgment creditor claimed that the Arkansas statute was superseded and
suspended by the passage of the bankruptcy act. Id.
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found the statute to be a complete insolvency law,124 relying in part on a
like determination by the Arkansas Supreme Court.125 By so finding,
the Pinkus Court reasoned that the statute encroached on the field
entered into by Congress126 and was thus preempted.127
The Pinkus court distinguished the result in Boese. In Boese, the
judgment creditor could have (but did not) commence a federal
bankruptcy proceeding, where the general assignment could have been
undone. In Pinkus, however, the creditor could not have done so, unless
other creditors joined in an involuntary petition. Furthermore, the
debtor in Pinkus had received a federal bankruptcy discharge within the
past six years and so was ineligible to obtain another.128 Nevertheless,
124 Id. at 264. The Court described the aspects of the law that made it subject to preemption,
finding that the statute “provides for surrender by insolvent of all his unexempt property . . . to be
liquidated by a trustee for the payment of debts under the direction of the court. It classifies
creditors, prescribes the order of payment of their claims and gives preference to those fully
discharging the debtor in consideration of pro rata distribution.” Id. Compare these factors with
the factors the Court considered in Mayer, see supra note 118 and accompanying text.
125 See Pinkus, 278 U.S. at 264 (citing Hickman v. Parlin-Orendorff Co., 115 S.W. 371 (Ark.
1909); Baxter County Bank v. Copeland, 169 S.W. 1180 (Ark. 1914); Morgan v. State, 242 S. W.
384 (Ark. 1922); Int’l Shoe v. Pinkus, 292 S.W. 996 (Ark. 1927); Friedman & Sons v. Hogins,
299 S.W. 997 (Ark. 1927). The Supreme Court four years later discussed deference for a state
court’s determination in Star. See infra text accompanying notes 140-145.
126 Pinkus, 278 U.S. at 264 (“The state enactment operates within the field occupied by the
Bankruptcy Act.”). Some have taken an expansive view of this decision arguing that “the
reasoning used to justify the holding that the state act was suspended discloses a broad effect to
be given the suspensory power of the Bankruptcy Act,” and concluding that when Congress
entered the field of bankruptcy, it covered the entire field with its national act such that
bankruptcy laws are “laws for the distribution of the property of insolvent debtors and releases
from debts.” Harold S. Irwin, Notes, Suspension of State Insolvency Laws by Federal Bankruptcy
Act, 35 DICK. L. REV. 78, 81-82 (1931).
127 278 U.S. at 266. (“It is clear that the provisions of the Arkansas law governing the
distribution of property of insolvents for the payment of their debts and providing for their
discharge, or that otherwise relate to the subject of bankruptcies, are within the field entered by
Congress when it passed the Bankruptcy Act, and therefore such provisions must be held to have
been superseded.”). See infra note 128 for a discussion on the fact that the discharge was already
granted and therefore the Pinkus Court could not sever that provision.
128 278 U.S. at 266. Regarding discharge, the Court noted that Pinkus had been discharged
under state provisions six years prior to the filing of his state court filing, and because of this, the
Court recognized that he could not have obtained a discharge under the Bankruptcy Act, “and, in
proceedings under that Act, all his creditors would have been entitled to participate in distribution
without releasing the insolvent as to unpaid balances.” Id. at 264-65. The Bankruptcy Code only
permits one discharge every seven years. See 11 U.S.C. § 727(a)(8) (2000 & Supp. 2006). The
Court further stated that:
The purpose to exclude state action for the discharge of insolvent debtors may be
manifested without specific declaration to that end; that which is clearly implied is of
equal force as that which is expressed. The general rule is that an intention wholly to
exclude state action will not be implied unless, when fairly interpreted, an act of
Congress is plainly in conflict with state regulation of the same subject. In respect of
bankruptcies the intention of Congress is plain. The national purpose to establish
uniformity necessarily excludes state regulation. It is apparent, without comparison in
detail of the provisions of the Bankruptcy Act with those of the Arkansas statute, that
intolerable inconsistencies and confusion would result if that insolvency law be given
effect while the national act is in force. Congress did not intend to give insolvent
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Arkansas law was prepared to give the debtor a discharge. The Pinkus
Court therefore found the entire Arkansas scheme inconsistent with the
Bankruptcy Act of 1898 and so proclaimed the entire statute preempted.
On the other hand, the Pinkus Court specifically denied that its holding
extended to preemption of common law assignments for the benefit of
creditors.129
The final principal case is Pobreslo v. Joseph M. Boyd Co.,130
involving a Wisconsin assignment for the benefit of creditors statute.
Prior to Probreslo, the Wisconsin state courts had analyzed an earlier
version in In re Tarnowski,131 under which a debtor made a voluntary
assignment.132 Resulting from its preemption analysis, the Tarnowski
court concluded that state statutes relating to the subject of bankruptcy
were preempted, and the statutes did not permit state courts to discharge
debtors from their debts.133 Finding that voluntary assignment law is
“separate and distinct” from the granting of a discharge, the court
concluded that the voluntary assignment provisions did not contravene
the current federal bankruptcy legislation, though the discharge
provisions did.134
debtors seeking discharge, or their creditors seeking to collect claims, choice between
the relief provided by the Bankruptcy Act and that specified in state insolvency laws.
States may not pass or enforce laws to interfere with or complement the Bankruptcy
Act or to provide additional or auxiliary regulations.
278 U.S. at 265 (citations omitted).
129 Id. (“[W]e need not decide whether, independently of statute, an assignment for the benefit
of creditors on the conditions specified in the decree would protect the property of the insolvent
from seizure to pay the judgment. And, as the passage of the Bankruptcy Act superseded the state
law, at least in so far as it relates to the distribution of property and releases to be given, plaintiff
is . . . in error.”). See infra notes 164-174 and accompanying text for a more complete description
of what it meant that the Court did not make this determination.
130 287 U.S. 518 (1933).
131 210 N.W. 836 (Wis. 1926).
132 The Wisconsin statute (section 125.25) provided the state circuit court with supervision
over voluntary assignments, authorized the assignee to set aside preferences, fraudulent
conveyances, as well as judicial liens, provided for proof and allowance of claims, and authorized
the debtor to be discharged from his debt. COUNTRYMAN, supra note 3, at 320.
133 210 N.W. at 837 (“This act shall go into full force and effect upon its passage: Provided,
however, that no petition for voluntary bankruptcy shall be filed within one month of the passage
thereof, and no petition for involuntary bankruptcy shall be filed within four months of the
passage thereof. Proceedings commenced under state insolvency laws before the passage of this
act shall not be affected by it.”) (quoting 30 Stat. 544 ch. 541(1898)).
134 Id. The court referred to the Mayer and Stellwagen decisions in making its final
determination, and stated:
[T]here can be no doubt that legislation prescribing regulations for the administration
of voluntary assignments constitutes one subject of legislation, while the discharge of
bankrupts constitutes quite another. A voluntary assignment for the benefit of creditors
is a personal right inherent in the ownership of property. Such a right existed at
common law independent of statute. The statutes do not confer the right, but statutes
in this country have been enacted for the purpose of regulating the administration of
the estate for the benefit of creditors. The discharge of the bankrupt from his debts
constitutes the very essence of a bankrupt law. While the administration of the estate
of the bankrupt and the distribution of the proceeds thereof pro rata among his creditors
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The Supreme Court decision in Pobreslo considered a different
version of the Wisconsin voluntary assignment provision, and in finding
the newly written discharge provision135 to be preempted, basically
affirmed136 the severance approach undertaken in In re Tarnowski. In
upholding the severance the Pobreslo Court recognized a need to
reconcile its decision with Pinkus.137 The Court observed that Pinkus
took place under a complete state insolvency law that provided for a
discharge and not under a law regulating and controlling voluntary
assignments for the benefit of creditors.138 Conversely, the actions in
Pobreslo involved a voluntary assignment in the nature of the creation
of a trust.139 Since a trust can be created by a solvent or insolvent
transferor, the Wisconsin statute considered in Pobreslo was not an
is a usual, if not a necessary, incident of a bankrupt law, the discharge of the debtor
from his debts is no part of an assignment law. The winding up and a fair and equal
distribution of the estate of insolvent debtors may arise in various ways, but where
such a proceeding does not result in the discharge of the insolvent debtor statutes
regulating such a proceeding do not conflict in any manner with the bankruptcy law,
and it has been squarely held by the Supreme Court of the United States that such laws
are not superseded by the national Bankruptcy Act.
Id. at 838. The court reached this conclusion without reference to Boese, but it seems that the
Boese decision also would have supported a finding by a court that certain provisions of a statute
are separable. This decision contravened the understanding of many state courts, which held that
the federal power to legislate on insolvency was so pervasive that it would destroy assignment
statutes as well, especially those that provided for a discharge. Statutory Regulation of
Assignment for the Benefit of Creditors, supra note 12, at 961. However, the Supreme Court did
not go that far, finding a suspension of the discharge provisions, but allowing state preference
statutes regulating voluntary assignments to remain in force. Id.
135 In relevant part, the clause at issue stated:
No creditor shall, in any case where a debtor has made or attempted to make an
assignment for the benefit of creditors, or in case of the insolvency of any debtor, by
attachment, garnishment or otherwise, obtain priority over other creditors upon such
assignment being for any reason adjudged void, or in consequence of any sale, lien or
security being adjudged void.
Pobreslo, 287 U.S. at 521-22 (quoting Chapter 128.06 of the Wisconsin Statutes, 1929).
136 Statutory Regulation of Assignment for the Benefit of Creditors, supra note 12, at 961.
137 See Pobreslo, 287 U.S. at 525.
138 See id. (“As shown by our decision in that case, the Arkansas insolvency law not only
related to the subject of bankruptcies, but actually dealt with essential features of that subject
which are covered by the act now in force. It not only governed discharge of the bankrupt debtor,
but imposed conditions which trammeled and made against equal distribution of his property.”).
139 Id. at 525-26
The provisions regulating the administration of trusts created by voluntary assignments
for the benefit of creditors apply whether the assignor is solvent or insolvent. They do
not prevent creditors from bringing action against the debtor or require those seeking
to participate in the distribution of the estate to stipulate for his discharge. And, quite
in harmony with the purposes of the federal act, the provisions of chapter 128 that are
regulatory of such voluntary assignments serve to protect creditors against each other,
and go to assure equality of distribution unaffected by any requirement or condition in
respect of discharge . . . . [T]he Wisconsin law merely governs the administration of
trusts created by deeds like that in question which do not differ substantially from
those arising under common-law assignments for the benefit of creditors. The
substantive rights under such assignments depend upon contract; the legislation merely
governs the execution of the trusts on which the property is conveyed.
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insolvency statute and hence not preempted.
Though not referenced by Sherwood, the Supreme Court decided
Johnson v. Star140 on the same day as Pobreslo, and held that the case
was “ruled by” Pobreslo.141 The Texas statute in Star regulated
assignments for the benefit of creditors and provided for the discharge
of a debtor as to all consenting creditors who received at least one-third
payment.142 In relying on the Texas court’s construction of the state
statute, the Star ruling suggested that state assignment statutes
authorizing discharge were preempted by the federal bankruptcy act, as
was the prevailing rule, but that state common law permitting voluntary
assignments remained unaffected.143 The Court reached its conclusion
because the Texas Supreme Court determined in two previous decisions
that an assignment requiring release was valid as per Texas common
law.144 Thus, the Star ruling manifests the Supreme Court’s willingness
to defer to a state court’s finding that a state statute codifying or
regulating the common law does not conflict with federal bankruptcy
law.145
Finally, in 1956, more than twenty years after the Supreme Court
decided Pobreslo and Star, the Seventh Circuit struck down a revised
Wisconsin voluntary assignment statute in Moskowitz v. Prentice (In re
Wisconsin Builders Supply Co.).146 The Wisconsin Builders court
140
141
142
Id. at 527).
Id. at 530.
Id. at 527. The statute at issue in Star concerned assignments and required ratable
distribution of the estate among consenting creditors, such that a “debtor may make such
assignment and shall thereupon stand discharged from all further liability to such consenting
creditors. . . . Such debtor shall not be discharged from liability to such creditor who does not
receive as much as one-third of the amount
allowed in his favor.” Id.
143 COUNTRYMAN, supra note 3, at 321 (citing Weintraub, Levin & Sosnoff, Assignments for
the Benefit of Creditors and Comparative Systems for Liquidation of Insolvent Estates, 39
CORNELL L.Q. 3, 24 (1953)). But cf. John E. Muldor & Charles M. Solomon, 87 U. PA. L. REV.
763, 785-86 (1936); Peaceful Coexistence?, supra note 98, at 800, 807; Note, Discharge by
Assignment for the Benefit of Creditors, 36 VA. L. REV. 813, 820 (1950). The United States
Supreme Court had relied on decisions made by the Texas Supreme Court in Patty-Joiner &
Eubank Co. v. Cummins, 57 S.W. 566 (Tex. 1900), and Haijek & Simecek v. Luck, 74 S.W. 305
(Tex. 1903).
144 See supra note 143.
145 Warren Shattuck, Notes and Comments, The Effect of Recent Federal Cases on Suspension
of the Washington General Assignment Law by Operation of the Federal Bankruptcy Act, 8
WASH. L. REV. 189, 190 (1933). Under this reasoning, the Court may not find the statute
preempted even if it contains a discharge provision. Id.
146 239 F.2d 649 (7th Cir. 1956), cert. denied, 353 U.S. 985 (1957). The issue presented in
Wisconsin Builders mirrored earlier questions of voluntary provisions included in a Wisconsin
statute related to general assignments possibly in conflict with federal bankruptcy laws and that
therefore may be suspended during the operation of the federal law. In this case, a corporation
executed a general assignment for the benefit of creditors pursuant to a state statute, and a
receiver was appointed. Some months later, the debtor corporation filed a voluntary petition for
bankruptcy in a federal district court in Wisconsin in which the corporation was adjudged
bankrupt. The bankruptcy trustee brought this action against the state court receiver to turn over
the debtor’s assets. The bankruptcy court referee found that statute was a comprehensive
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recognized that state statutes may regulate general assignments, and
state courts may supervise these assignments, either under powers
conferred by statute or under traditional equity powers.147 The problem
the Seventh Circuit found was that the Wisconsin statute impermissibly
established an entire insolvency system.148 If the statute in Wisconsin
Builders contained a discharge provision, the court could have followed
precedent and severed the offending part of the statute.149 However,
with no discharge provision in the statute, the court relied on the
“sweeping language”150 in Pinkus.151 The court opined that although the
Pinkus language does not prevent states from creating legislation
covering debtor-creditor relationships,152 the Wisconsin statute changed
a general assignment into a state insolvency system covering the same
subject matter as the federal bankruptcy laws.153
bankruptcy statute in conflict with the federal act and thus suspended. The district court affirmed
the bankruptcy court’s decision.
147 Id. at 651 (citing Pobreslo, Star, Boese, and Mayer).
148 Id.
149 The Seventh Circuit did not find the Wisconsin statute’s lack of a discharge provision
dispositive. See Wisconsin Builders, 239 F.2d at 652. The court cited lower federal court
decisions supporting the view that discharge is not an essential element of bankruptcy law and
that state legislation may be suspended “notwithstanding the absence of such a provision.” Id.
The court continued:
Some of the emphasis on discharge as the criterion of a bankruptcy act is misguided.
Historically, discharge has not been an inherent characteristic of bankruptcy legislation
in the United States. In fact the present Federal Bankruptcy Act is the first to permit
discharge without some consent of the creditors of the insolvent. Further, as regards a
corporate debtor such as we have here, discharge is frequently of no importance when
it is noted that a general assignment or the appointment of a receiver is often a prelude
to dissolution of the corporate entity.
Id.
150 Preemptive Effect, supra note 53.
151 The sweeping language is as follows:
The national purpose to establish uniformity necessarily excludes state regulation. It is
apparent, without comparison in detail of the provisions of the Bankruptcy Act with
those of the Arkansas statute, that intolerable inconsistencies and confusion would
result if that insolvency law be given effect while the national act is in force. Congress
did not intend to give insolvent debtors seeking discharge, or their creditors seeking to
collect claims, choice between the relief provided by the Bankruptcy Act and that
specified in state insolvency laws. States may not pass or enforce laws to interfere
with or complement the Bankruptcy Act or to provide additional or auxiliary
regulations.
Wisconsin Builders, 239 F.2d at 652-53 (quoting Int’l Shoe Co. v. Pinkus, 278 U.S. 261, 265)
(1929). The court relied on Pobreslo, Star, Stellwagen, Boese, and Mayer for this position.
Specifically, Pobreslo, Star, and Mayer, in the Seventh Circuit’s reading, all stand for the
Supreme Court’s position that “general assignments may be regulated by state statutes and
supervised by state courts exercising powers specifically conferred by statute.” Id. at 653.
152 Id. at 653.
153 Id. at 651.
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IV. PREFERENCE LAWS ARE NOT PREEMPTED
A.
Preemption Analysis Employed at the Time of the Decisions
Demonstrates that Preemption is Limited to Discharge
In each of the principal bankruptcy preemption cases, the
Supreme Court emphasized the fact that “true” bankruptcy statutes
provide a discharge for the debtor.154 This emphasis is the first step in
demonstrating a limit to state statute preemption by federal legislation.
Only after it made this determination did the Court next consider
whether the specific statute at issue actually conflicted with federal
legislation. In other words, the Court first undertook a field preemption
analysis and then undertook the Sturges conflict preemption analysis.155
By undertaking the analysis in this order, the Court demonstrated that,
at least insofar as assignments for the benefit of creditors are concerned,
preemption was limited to discharge.
The focus on the absence of a discharge provision156 in a case such
as Stellwagen157 evidences that discharge is within the field of federal
bankruptcy legislation. Discharge thus may be considered on the
subject of bankruptcies, automatically preempted, and within the field in
which Congress acted.158
154 Recent Decisions, Bankruptcy: Section 74 of 1933 Amendments to National Bankruptcy
Act: Construction and Constitutionality, 22 CAL. L. REV. 219, 220 (1934) (citing Mayer,
Stellwagen, Pinkus, Pobreslo, and Star).
155 Whether actual conflict from Sturges, see supra text accompanying note 97, is substantially
similar to modern conflict preemption is not a necessary distinction. What should instead be
understood is that at the time of preemption analysis undertaken in the principal cases, the courts
used the framework of field preemption. After undertaking a field preemption analysis, then the
court might evaluate if the particular statute in some way is in conflict with federal legislation.
Conflict would be evident if the statute is not derivative of common law in the state, for example.
See infra Parts IV.A & B.
156 The emphasis on discharge as a principle characteristic of bankruptcy contradicts those
arguing that that discharge is not an inherent part of bankruptcy law because of its addition in
1705 in the Statute of Anne. See, e.g., Effect of National Bankruptcy Act on State Insolvency
Statutes, supra note 4, at 1092. But see supra text accompanying notes 40-41, and consider that
the goal of bankruptcy is:
not only to distribute the property of the debtor, not by law exempted, fairly and
equally among his creditors, but as a main purpose of the act, intends to aid the
unfortunate debtor by giving him a fresh start in life, free from debts, except of a
certain character, after the property which he owned at the time of bankruptcy has been
administered for the benefit of creditors. Our decisions lay great stress upon this
feature of the law—as one not only of private but of great public interest in that it
secures to the unfortunate debtor, who surrenders his property for distribution, a new
opportunity in life.
Stellwagen v. Clum, 245 U.S. 605, 617 (1918).
157 Paul Lipton, Comments, Effect of the Bankruptcy Act upon State Laws, 1938 WISC. L. REV.
303, 312 (1938). The law also allowed a bankruptcy trustee to take advantage of state preference
avoidance statutes. Id.
158 Stellwagen, 245 U.S. at 618 (“We think that Congress in the Bankruptcy Act did not intend
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This view is further enhanced by the Supreme Court’s upholding
of the severance of a discharge provision.159 Pobreslo, along with
Boese, solidified the distinction between preempted discharge
provisions and preference statutes not preempted, and hence not found
to be within the field of federal legislation. The Pobreslo Court used
the language of field preemption when it analyzed the provisions of the
Wisconsin statute.160 Pobreslo is significant because even during this
period of automatic field preemption, when the Court considered that
statutes not in conflict could be preempted, the Court still decided only
to sever the discharge provision161 and allowed for the continuation of
the portion of the statute regulating and controlling voluntary
assignments, which was the clause of the statute specifically related to
assuring equality of distribution.162 Under the prevailing preemption
test, the Court could have found the provision preempted automatically.
Instead, the Court allowed for continuation of the provision, recognizing
that it was not within the field of federal legislation.163
B.
Common Law Exception Theory Also Explains a
Consistency in the Principal Cases
The common law exception theory, first suggested in 1960,164
any such result, but meant to permit the trustee in bankruptcy to have the benefit of state laws of
this character which do not conflict with the aims and purposes of the federal law”). Though such
language somewhat references modern conflict preemption, the understanding of preemption at
the time clarifies that the Court actually employed an automatic field preemption analysis to the
discharge provision. See supra note 92 and accompanying text.
159 See supra text accompanying notes 133-134
160 See Pobreslo v. Joseph M. Boyd Co., 287 U.S. 518, 526 (1933) (finding the Wisconsin
statute in “harmony” and “not inconsistent” with the purposes of federal bankruptcy legislation,
while finding the Arkansas statute analyzed in Pinkus to be “within the field of the federal act”).
161 The discharge provision transformed the regulation into an invasion of federal power but
not the regulation of the common law privilege of making an assignment. Statutory Regulation of
Assignments for the Benefit of Creditors, supra note 12, at 962.
162 See supra note 135 for the clause’s text; see also Pobreslo, 287 U.S. at 526.
163 The Pobreslo Court made its determination by analogizing that the preference provision
was like a mere regulation of a trust. See supra note 139. Assignments for the benefit of
creditors have been valid at common law, recognized early by the Supreme Court, and federal
bankruptcy legislation does not preclude states from regulating these assignments. Legislation
Note, The Wisconsin Creditor’s Actions Statute, 24 VA. L. REV. 66, 66-67 (1937) (citing
Brashear v. West, 7 Pet. 608 (U.S. 1833) and Probreslo). When all of the rights at stake have
been invoked by contract and not by state law, the law would not be suspended by the operation
of federal bankruptcy legislation. Id. at 68.
164 Peaceful Coexistence?, supra note 98, at 801-02. The common law exception test states
that “[i]f the state statute under scrutiny merely regulates or codifies the state common law with
regard to assignments for the benefit of creditors, the statute is not pre-empted by the federal act.”
Id. at 802. The author also set forth other proposed preemption tests found in the literature. As
summarized, these proposals include:
(1) If the state statute precludes the attacking creditor from utilizing an independent
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helps explain Pinkus and clarifies the Sherwood decision. The premise
of the common law exception is that if a state statute concerning debtor
asset distribution under conditions of insolvency merely regulates or
codifies the state common law, then the federal bankruptcy law does not
preempt it.165 On the other hand, if the statute varies from the common
law, then it must be preempted in toto or, if found severable, pro
tanto.166
Following this reasoning, the Court upheld the preference statutes
in Mayer and Boese because they did not change the character of the
common law and regulated assignments that were in any case valid at
common law.167 In contrast, the entire proceeding in Pinkus was
statutory.168 The difference between the statutes was that in Boese,
there was an express assignment valid at common law, whereas in
Pinkus, there was not.169 In Pinkus, the debtor did not purport to make a
common law assignment of property for the benefit of creditors.
Rather, the debtor simply petitioned the Arkansas court for relief under
the Arkansas insolvency statute.170 Since the entire proceeding was
statutory, and therefore not a codification or regulation of the common
law, then the statute could not escape preemption under the common
law exception and faced invalidation.171 This common law exception
view explains why the Pobreslo Court found the Wisconsin statute not
preempted where an assignment actually occurred.172 Finally, in Star,
Texas common law permitted consensual creditor release of debt after
proceeding and forces him to move solely against the assigned fund, it is pre-empted.
In short—coerced creditor participation in the state statutory proceedings is fatal.
(2) If the state proceeding is wholly in invitum through the direct aid of the state courts
rather than by debtor-creditor agreement, it is pre-empted.
(3) If the state statute is duplicative of the federal act as to preferences and the
promotion of equitable distribution, it is pre-empted.
(4) If a creditor meets the prerequisites of the federal act and files an involuntary
petition thereunder within the prescribed time, the state statute is pre-empted.
(5) If the state statute provides for any of the following, it may be pre-empted: (a) a
proceeding involuntary in character; (b) classification of creditors; (c) a provision for
discharge; (d) provisions in excess of those necessary for mere regulation of
assignments for the benefit of creditors.
Id. at 801-02 (internal citations omitted).
165 Id. at 802.
166 Id. at 804 (“The fact that the common law differs from state to state gives rise to a further
complication. Thus, identical factual situations arising under similar state statutes may occasion
opposite results vis-à-vis pre-emption, because of the difference in the underlying common law.
This, it is submitted, accounts for the seemingly inconsistent decisions rendered by the Supreme
Court.”). “Pro tanto” signifies something done only to that a certain extent whereas “in tanto”
refers to complete preemption. See BLACK’S LAW DICTIONARY 823, 1259 (8th ed. 2004).
167 Peaceful Coexistence?, supra note 98, at 804-05.
168 Id. at 805-06.
169 Id.
170 Id.
171 Id.
172 Id. at 806-07.
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an assignment, so the provisions in the case derived from common law
antecedents and were not purely statutory as they were in Pinkus.173 In
essence, regulating or codifying the common law places the statute
within the common law exception, and as such, will not be
preempted.174
As a general matter, general assignment statutes that merely
regulate or codify the common law would not face preemption under
this analysis. What is more difficult and at issue is whether preference
provisions, if considered only to be an adjunct175 of or supplement to
assignment law themselves, withstand scrutiny under this test or
whether voidable preference legislation is “statutory.” The relationship
between a preference provision and the assignment statute itself might
then be determinative. One way to consider this issue is to focus on the
use of the term “regulate” in the common law exception test. If
preference provisions regulate, or control, by limiting the effectiveness
of a preferential transfer and enabling the avoidance of that transfer,
then, when enacted, in a sense they regulate common law
assignments.176
Another consideration should be that the statutes analyzed in the
principal cases concerned equitable distribution. Preference provisions,
when enacted, govern equitable distribution under voluntary
assignments. In fact, the article setting forth the common law exception
test applied its analysis to a New Jersey statute regulating general
assignments for the benefit of creditors that included a voidable
preference provision, which would ultimately have the effect of equal
distribution to creditors.177 On the strength of a common law exception,
the article concluded that the statute should not be preempted.178 The
article did not consider a possible bright line distinction between
preference provisions and assignment statutes generally, accepting that
the function of equitable distribution embodied in voidable preference
law has a common law derivation itself, as preference avoidance
173
174
175
Id. at 807.
Id.
David Gray Carlson, Security Interests in the Crucible of Voidable Preference Law, 1995
U. ILL. L. REV. 212, 218 n.24.
176 The standard legal understanding of “regulate,” expressed in its form as a noun is “[t]he act
or process of controlling by rule or restriction.” BLACK’S LAW DICTIONARY 1311 (8th ed. 2004)
(defining regulation). Another definition of “regulate” is “to control or direct by a rule, principle,
method, etc.” RANDOM HOUSE UNABRIDGED DICTIONARY 1624 (2d ed. 1993). It is in this sense
that preference statutes regulate assignments for the benefit of creditors. Preference avoidance
statutes “regulate” assignments for the benefit of creditors in that they “govern or direct according
to rule.” MERRIAM-WEBSTER ONLINE, http://www.m-w.com/dictionary/regulate (last visited
Oct. 23, 2006). More specifically, the preference avoidance statutes regulate the common law to
make an assignment in that they limit the ability of debtors to make assignments under certain
conditions.
177 Peaceful Coexistence?, supra note 98, at 810-12.
178 Id. at 812.
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LIMITS OF BANKRUPTCY CODE PREEMPTION
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provisions themselves also derive from the common law.179
One final avenue for analysis seeking to explain how the common
law exception test can apply to state common law would be to argue
that voidable preference law is a fraudulent conveyance concept.
Fraudulent conveyances were unquestionably part of the common
law.180 If voidable preference law is a fraudulent conveyance idea, then
the common law exception test is easier to apply.
Under Section 5(a) of the Uniform Fraudulent Transfer Act (now
the law in 33 states), preferences to insiders are voidable preferences.181
Assuming there is nothing inherent about insider status, section 5(a)
establishes that at least in thirty-three states, voidable preference
theories are fraudulent conveyance theories.182 Even in states such as
New York, which has not enacted the Uniform Fraudulent Transfer Act,
insider preferences have been avoided because they are fraudulent
conveyances.183
Under this analysis, the state-by-state inquiry
necessary to apply the common law exception test would look to a
state’s common law fraudulent conveyance antecedents and discern
that, because voidable preference law has the same root, the state
provision might still simply be the codification of the common law and
satisfy the common law exception test.
C.
Summary of the Principal Cases
In Stellwagen, the Court upheld the Ohio preference provision,
noting that state laws that aid federal legislation may stand and
emphasizing the absence of a discharge provision, just as there was
none in Mayer. In Boese and Pobreslo, the Court permitted the state
laws regulating the assignment to continue in force, even while
suggesting that state discharge provisions were impermissible. These
179 See supra note 46. The Supreme Court has recognized and reiterated as recently as 1989 in
Granfinanciera S.A. v. Nordberg, 492 U.S. 33 (1989) that preference avoidance also has a
common law derivation. Id.
180 Id.
181 According to the statute:
[A] transfer made or obligation incurred by a debtor is fraudulent as to a creditor
whose claim arose before the transfer was made or the obligation was incurred if the
debtor made the transfer or incurred the obligation without receiving a reasonably
equivalent value in exchange for the transfer or obligation and the debtor was insolvent
at that time or the debtor became insolvent as a result of the transfer or obligation.
UNIF. FRAUDULENT TRANSFER ACT § 5(a) (2006).
182 See, e.g., Douglas G. Baird, Security Interests Reconsidered, 80 VA. L. REV. 2249, 2266
(1994) (arguing that “the idea of fraudulent preference has deep roots in the law of fraudulent
conveyance”). Further analysis as to the relationship between fraudulent conveyance and
voidable preference law is beyond the scope of this Note.
183 See, e.g., Citibank, N.A. v. Benedict, No. 97 Civ. 9541 (AGS), 2000 U.S. Dist. LEXIS
3815 (S.D.N.Y. Mar. 28 2000).
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cases, in effect, severed the discharge provisions, which in the words of
the Tarnowski court, were “separate and distinct.”184 The Pinkus Court
did not allow for severance of the discharge provision, but similar to the
later determination made in Star, the Court deferred to the state supreme
court’s initial interpretation that the entire statute functioned as an
insolvency law. These cases lead to the conclusion that preemption is
limited to discharge or to situations in which the state tries to legislate
an impermissibly complete insolvency system. Meanwhile, when a
state statute simply describes a common law idea (such as preference
avoidance), the Bankruptcy Code is not preemptive. The matter is
different with debt discharge, which is a statutory innovation on the
common law.185
D.
Application of the Proper Precedent to Sherwood
The power to legislate on the “subject of bankruptcies” as defined
in the Constitution is a broad grant of power.186 Congress has used this
power but has specifically presupposed the survival of much state law
regarding insolvency. With debt discharge, however, the matter is
different. In preemption language, discharge provisions are preempted
because they are within the field of the federal regulation. Even the
Sherwood court recognized that it is settled doctrine that discharge
provisions are within this field.187 Still, during the period before the
mid-1930s, when automatic preemption would lead to preemption of
any legislation within the federal statute’s field, the Court spared
provisions regulating and controlling the components of general
assignment statutes dealing with equitable distribution. When the Court
permitted such provisions concerning equitable distribution to remain
under this regime, what it really determined was that preference statutes
are outside the field of bankruptcy. In the principal cases, the only time
the Court found such a provision preempted was in Pinkus, when the
Court deferred to the state’s construction of its statute as a complete
bankruptcy statute.188 For that reason, the Court could not sever the
184
185
In re Tarnowski, 210 N.W. 836, 837 (Wis. 1926).
The decision in Star also seems on point because it emphasizes deference to state statutes
with common law antecedents, though not statutes that are entirely a legislative creation.
186 Gerdes, supra note 76, at 201.
187 See supra note 99, quoting Judge Kozinski.
188 See Int’l Shoe Co. v. Pinkus, 278 U.S. 261, 268 (1929); see also Straton v. New, 283 U.S.
318, 327 (1931) (“state insolvency laws which are tantamount to bankruptcy because they
provide for an administration of the debtor’s assets and a winding up of his affairs similar to that
provided by the national act are suspended while the latter remains in force, and proceedings
under them are utterly null and void . . . .”). Stanton approved the decision in Weedman Stave
Co., 199 F. 948 (E.D. Ark. 1912). See Lipton, supra note 157, at 313. In some ways, this
analysis is a backwards preemption analysis because the federal court would defer to the state
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provision.
The common law exception theory applies to the next step in the
analysis after the Court undertook what is analogous to the modern field
preemption analysis. In reality, of course, the Court operated under a
period of automatic preemption. Still, the particular statute, if not
merely a codification of common law or a regulation of trusts,189 could,
under Sturges, be subject to preemption if state law actually conflicts
with federal bankruptcy law. If the statute goes too far, if it is not
merely a codification or regulation of the common law, then it will not
fall into the exception carved out by the common law exception test and
may be preempted under a conflict analysis. Accordingly, a distinct
statute that did not stem from the common law and was purely a
statutory construct could face preemption.190
To a certain degree, the Sherwood court recognized this issue. The
Sherwood court argued that it did not “question the validity of voluntary
assignments for the benefit of creditors, which have a venerable
common-law pedigree, were upheld in Pobreslo and are specifically
contemplated in the Bankruptcy Code.”191 The distinction noted by the
Sherwood court was that the California provision gave the state assignee
powers beyond those that would have been derived from contract or
trust law.192
Even so, when viewed in light of the fact that voidable preference
law is considered a fraudulent conveyance concept, a common law
theory, the rationale is not as persuasive. In addition, the Sherwood
statute was not like that in Wisconsin Builders, where the statute could
court’s conclusion as to the meaning and completeness of the statute.
189 Even though preemption is limited to discharge, there are statutes that have only a statutory
and not common law basis. Historically at common law, assignments for the benefit of creditors
were valid and looked upon with approbation, and states passed statutes to “safeguard and
expedite” the administration of the estate by the assignee in the interest of all creditors. Lipton,
supra note 157, at 304; see Preemptive Effect, supra note 53 (“Justice Butler’s anomalous
decision in Pinkus, at most, means that state statutory provisions for discharge of the claims of
participating creditors are preempted, but any such discharge provision nonetheless retains its
force and effect to the extent it would be valid under a common law assignment for the benefit of
creditors.”) (citing Weintraub, Levin & Sosnoff, Assignments for the Benefit of Creditors and
Competitive Systems for Liquidation of Insolvent Estates, 39 CORNELL L.Q. 3, 24 (1953)). But cf.
DOUGLAS G. BAIRD & THOMAS H. JACKSON, CASES, PROBLEMS, AND MATERIALS ON
BANKRUPTCY 1300 (2d ed. 1990) (questioning “why should the presence of discharge in the state
statute lead to constitutional infirmity?”).
190 In general, when there is legislation in an area traditionally occupied by the states, the
likelihood of preemption is lowered, and that may be true as well in the area of state common
law. TRIBE, supra note 80, at § 6-30, at 1208-09. This suggestion relates to specific Supreme
Court holdings regarding the regulation of nuclear power plants, but the concept of state common
law antecedents is analogous.
191 Sherwood Partners, Inc. v. Lycos, Inc., 394 F.3d 1198, 1205 n.8 (9th Cir. 2005)
192 Id. The court also pointed out that the Pobreslo Court noted that the voluntary assignment
process it upheld did not create any new rights that did not already belong to the debtor or
creditors. Id. (quoting Pobreslo v. Joseph M. Boyd Co., 287 U.S. 518, 526 (1933)). See supra
note 139 for the quoted language.
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be considered a complete insolvency system and could fail under field
preemption. As a result, analyzing Sherwood with reference to the
common law exception test further supports the contention that
preemption is limited to discharge, and that preference statutes
generally fall outside of that limit.
CONCLUSION
The Supreme Court established through a series of cases that
federal bankruptcy preemption of state statutes is limited to discharge,
and preference avoidance statutes that regulate voluntary assignment for
the benefit of creditors fall outside of that limit. Preference statutes may
only be preempted if a state court determined that the statute were an
entire insolvency scheme that treaded on the field of a federal act or if
the statute, in line with the common law exception test, was not a
codification or regulation of state common law rights.
This
understanding necessarily considers that the precedent established by
the Supreme Court can only be ascertained through the lens of the
preemption analysis employed at the time the cases were decided, not
through modern preemption distinctions. Because the preference
provision is beyond the limit of preemption, in the analysis of a state
preference provision, the particular statute is to be evaluated under what
might be considered a form of conflict preemption analysis. But any
such conflict is impossible. Even the Bankruptcy Code itself, in
§ 544(b)(1), permits the bankruptcy trustee to expropriate the property
the general assignee holds for the creditors, including the voidable
preference recoveries and causes of action the assignee might have
under state law.
Nevertheless, Sherwood itself recognized that a general assignment
regime is no such thing. Since it is established that assignment statutes
are not preempted generally and remain along with their preference
avoidance components, though such provisions may only be “vestigial”
remnants,193 there is no justification for the view that states may not
legislate with regard to voidable preferences.
193
Skeel, supra note 16, at 491.