In re Sherman

• Court: United States District Courts. 4th Circuit. United States District Court (Western District of Virginia)
• Citation: 12 F. Supp. 297
• Decision Date: 08 November 1935
• Parties: In re SHERMAN et al.

12 F. Supp. 297

In re SHERMAN et al.

District Court, W. D. Virginia, at Harrisonburg.

November 8, 1935.

B. P. Harrison, James P. Reardon, and Herbert S. Larrick, all of Winchester, Va., for various creditors.

Kuykendall & Benham, of Winchester, Va., for debtors.

PAUL, District Judge.

The above-named debtors filed in this court their petitions under section 75 of the Bankruptcy Act, as amended by the Act of June 28, 1934, 48 Stat. 1289 (known as the Frazier-Lemke Amendment). Having failed to reach agreements with their creditors for any composition or extension of their indebtedness, they filed their amended petitions invoking the remedies of subsection (s) of section 75, and proceedings thereon were pending at the time of the decision of the Supreme Court of the United States in the case of Louisville Bank v. Radford, 295 U. S. 555, 55 S. Ct. 854, 865, 79 L. Ed. 1593, 97 A. L. R. 1106.

Thereafter, section 75 of the Bankruptcy Act was amended, on August 28, 1935, modifying and re-enacting subsection (s) thereof (11 USCA § 203 (s), and the debtors have sought to have their proceedings continued under the amended subsection (s), which will be referred to as the new Frazier-Lemke Act.

Certain secured creditors have filed in writing their objections to the granting of the relief provided in the new Frazier-Lemke Act and have moved that the proceedings be dismissed or that the debtors, having been adjudged bankrupt, their estates be administered under the terms of the general Bankruptcy Act. The motion is based upon the alleged unconstitutionality of the new Frazier-Lemke Act, and raises specifically the question of whether the amendments of August 28, 1935, have overcome the objectionable features of the original subsection (s), which caused the Supreme Court to hold that it was unconstitutional. The debts of all the secured creditors were incurred and the instruments securing the same were executed prior to the enactment of the original Frazier-Lemke Act.

There need not be discussed at length the language or the effect of the opinion of the Supreme Court in Louisville Bank v. Radford. The case is well known to the profession. One contention there made was that the provisions of the original Frazier-Lemke amendment transcended the power which Congress possessed to "establish * * * uniform Laws on the subject of Bankruptcies" (Const. art. 1, § 8, cl. 4); or, in other words, that the provisions of subsection (s) could not be justified as bankruptcy legislation in any fair or reasonable interpretation of that term. The opinion points out wherein the Frazier-Lemke amendment, in its impairment of the recognized rights of lienors, went far beyond anything theretofore provided by any bankruptcy act. But it also pointed out that the provisions of bankruptcy laws have been progressively broadened from time to time, and that the scope of the power conferred upon Congress to enact bankruptcy

12 F. Supp. 298

laws is not necessarily limited to that heretofore exercised

The court found, however, that it had no occasion to decide whether the bankruptcy clause of the Constitution conferred generally the power upon Congress to abridge a lienor's rights in specific property. Instead, it called attention to the fact that the bankruptcy power of Congress is subject to the Fifth Amendment, that the Frazier-Lemke Act, by its terms, applied only to debts existing at the time of its enactment, and held that because it was retroactive and took away rights of the mortgagee in specific property it was in contravention of the Fifth Amendment and, therefore, invalid. In the course of the opinion, there are enumerated certain specific property rights recognized by the law of Kentucky (where the case arose) which would have been taken from the creditor by the application of the act. I do not understand that the opinion purports to name all of the property rights affected or to say that those enumerated are the only ones affected. Presumably, it named those to which its attention was most forcibly drawn.

The new subsection (s), 11 USCA § 203 (s) was, of course, drawn with a view to curing the invalidity of the previous act in the respects pointed out in the Radford Case. It remains to be seen whether it succeeded in doing so.

First of all it should be noted that the provision making the former act applicable only to pre-existing debts has been eliminated and presumably the new act is intended to apply whether the debt was contracted before or after enactment of the statute. But this does not in itself overcome the objections to the retroactive effect of the previous act. As I understand it, the disapproval of the Supreme Court was not grounded on the failure of the act to apply equally to all debts whether incurred after passage of the act or before. The objection was that it applied at all to pre-existing debts. So far as this feature of the law is concerned, the objections to the act have not been remedied by extending its applicability to debts incurred after its passage. It is still retroactive as to pre-existing debts, and the objections growing out of this fact will still arise if the act continues to take away specific property rights as the original act was held to do.

It is well known that the new subsection (s) has amended many of the provisions of the old act, intending thereby to free the statute of the vices which previously condemned it. Without attempting to discuss the text of the amended act as compared with the original, it is sufficient to say that it was probably intended by Congress that the new act should protect to the creditor all of these property rights which the Supreme Court had enumerated as being taken away by the old act.

The opinion in Louisville...