State Control of Pre-Modern Bankruptcy

At the end of my turn, I want to thank the Credit Slips bloggers for the opportunity to talk about some of my work and the readers for putting up with my long posts.

With my last post, I want to turn away from stories and air an issue about which I admit I am rather confused. I hear some modern bankruptcy scholars calling state control the defining characteristic of bankruptcy, and I am not sure what that means, or at least, I am not sure how to explain the way the state and the bankruptcy procedure intersected historically if state control is the defining characteristic. I will agree that from the first, bankruptcy has been a fundamentally statutory system. Not completely, mind you, because medieval northern Europe had a customary debt relief system that was something like bankruptcy, and some of the elements of what became modern bankruptcy were developed customarily in medieval northern Italy. Also, a great deal of English bankruptcy law was judge-created expansion and explanation of the statutes. But at its base, bankruptcy was built on statutes. Thus, even though for centuries the procedure was often run by the creditors, they operated in the shadow or under the compunction of the statutes, and more importantly under the threat of state-imposed punishment for not following the statutes. Given this caveat, I still think that indiscriminately labeling the various shades of state involvement “state control” is to homogenize what was a varied situation. By homogenizing under one descriptor, we lose a sense of important differences. What follows are a few very, very sketchy and selective observations about the public-private coexistence of bankruptcy procedure in several times and places. My question for readers is: what is the role of the state in bankruptcy procedure? Where is it vital and where is it, perhaps, optional?

The roots of modern bankruptcy procedure came from the Roman law. In classical Roman law, the creditors obtained from the Praetor, or legal official, a private right (called a missio in bona) to sell off the debtor’s assets. The creditors with that right elected a magister from amongst themselves to deal with the actual liquidation. But because this was a private right, other creditors could obtain a separate missio in bona and elect another magister, who had the same powers as the first, and so on. In the late Empire period, the system was centralized. The creditors applied to the magistrate for the appointment of a curator, who was not a creditor, and who was put in charge of administering and then liquidating the debtor’s estate and paying the creditors pro rata. The curator was not a public official, but just a private person tapped by the magistrate to perform this act.

Roman bankruptcy law came into Europe via the statutes of the medieval Italian city states. The Italians influenced everyone else, and to keep this brief, I will only talk about the French and Dutch systems as they evolved in the 16th and 17th centuries. In France, the creditors controlled the bankruptcy unless the debtor had fled and the creditors needed the power of the state to issue a warrant for his arrest. If the debtor were around, the creditors could arrest and imprison him, or they could decide as a group to grant him a safe conduct. In that case, the commercial court effectively guaranteed the safe conduct, such that if the debtor were arrested, the court would step in and free him. The creditors met and elected one or a group of administrators, often creditors themselves, to gather and liquidate the estate and oversee the distribution. The parties might involve the court any time a composition or final accord needed to be given official sanction, or if the bankruptcy was fraudulent and therefore criminal, in which case the debtor would be prosecuted by the state. Otherwise, the procedure was basically private.

In Amsterdam, the state played a more important role. The town had a bankruptcy department called the Desolate Boedelskamer, or Chamber of Insolvent Estates. Each year, the town’s justices appointed five commissioners to direct the Chamber, two from among the former aldermen of the town, and the others from among merchants. The commissioners had jurisdiction over all insolvent estates in the city. They were responsible for inventorying the estates and taking custody of them. Trustees were then appointed to recover the debtor’s assets and eventually to sell them with consent of the commissioners. The commissioners controlled any proceeds and oversaw the distribution. Creditors had to prove their debts to the commissioners. The commissioners also oversaw, but did not control, the creditors’ decisions about compositions and regulating distributions. As elsewhere, the creditor majority controlled the minority. In Amsterdam the majority rule was 3/4s of the creditors for 2/3s of the debt or 2/3s of the creditors for 3/4s of the debt.

Then there was England, where the Chancellor chose the commissioners from a list of qualified private citizens. The commissioners had ultimate control over the procedure, but it was the assignees, who were usually major creditors, who collected the assets, reviewed the debtor’s accounts, liquidated the estate, and pursued any necessary litigation. In England, too, a creditor was not forced to participate in the collective. Each creditor had the choice: join the collective action and receive part of the distribution but give up the right to proceed against the person of the debtor, or give up the right to participate in the collective action and the distribution but retain the right to proceed against the person of the debtor. One oddity was that the creditor who elected not to join in the collective still counted when it came time to sign (or not) the debtor’s certificate. The certificate had to be signed by 3/4s of the creditors in value in order for the debtor to be discharged. So a non-participating creditor who controlled more than 1/4th of the total value of the debt could refuse to sign the certificate, which prevented the debtor from getting his certificate, which meant that that outlying creditor could keep the debtor imprisoned until his debt was paid.

Are these systems not bankruptcy systems? If so, then in what sense does state control define bankruptcy?

Comments

[John Pottow]

This is interesting. It seems that the state control aspect comes into play through non-consensual extinguishing of "private" rights. So when minorities can no longer opt out of reorganization (as they could under old UK law), then that state compulsion seems public to me. Similarly the development of "automatic" stays that bind all creditors. But we've come a long way from private sheriffs, haven't we?