The concept and origin of bankruptcy law as it is now known in the United States originated in England. The first English bankruptcy law is generally agreed to have been enacted in 1542. (34 and 35, Henry VIII, c.4 (1542) England.)

Actually, bankruptcy was originally planned as a remedy for creditors — not debtors. During the reign of King Henry VIII, bankruptcy law allowed a creditor to seize all of the assets of a trader who could not pay his debts. Additionally, on top of losing all of one's property, the unfortunate debtor also lost his freedom and was subject to imprisonment for failure to pay his debts. This left the family of the debtor in the position of having to pay the debts in order to obtain the release of the debtor. As time progressed, however, so did the rights of debtors in England. In the 1700s, for example, debtors were often released from prison and many fled to the United States to live. Many immigrated to Georgia and Texas, which became known as debtors’ colonies. Finally, by the early 1800s in England, debtors were often released from prison and their debts discharged. However, for many years, bankruptcy continued to be a remedy favoring creditors, involuntary in nature and largely penal in character. It was generally used only against traders.

Under the English system, collusive bankruptcy (agreed upon by creditor and debtor) was codified by the English Act of 1825. This also occurred when a trader filed a declaration of insolvency in the office of the Chancellor’s Secretary of Bankrupts which was then advertised. The advertised declaration supported a commission in bankruptcy to be issued. A law was thereafter enacted which declared that no commission grounded on this act of bankruptcy was to be “deemed invalid by reason of such declaration having been concerted or agreed upon between the bankrupt and any creditor or other person.” (6 Geo. IV, c.16, sections VI, VII (Eng.). Voluntary bankruptcy was not authorized until 1849. (12 and 13 Vict., c.106, section 93 (1849) (Eng.).

The subject of bankruptcy was given specific recognition upon the adoption of the United States Constitution in 1789. The United States Constitution says that Congress shall have power to establish “uniform laws on the subject of Bankruptcies” throughout the United States. U.S. CONST. I, section 8, Cl.4. Thus the law of bankruptcy, as enacted by Congress, is federal law. The first bankruptcy act enacted by Congress was in 1800. Bankruptcy Act of 1800, Ch. 6,2 Stat. 19. It was limited to traders and provided only for involuntary proceedings. Voluntary bankruptcy at that time was unknown.

Voluntary bankruptcy in the United States was established as an institution by the Acts of 1841 (Act of Aug. 19, 1841, section 1, 5 Stat. 440) and 1867 (Act of Mar. 2, 1867, section 11, 14 Stat. 521). From these early acts to the Bankruptcy Act of 1898, which established the modern concepts of debtor-creditor relations, to the Bankruptcy Act of 1938, widely known as the Chandler Act, and to subsequent acts, the scope of voluntary access to the bankruptcy system has been broadened and has made voluntary petitions more attractive to debtors.

The Bankruptcy Reform Act of 1978, commonly referred to as the Bankruptcy Code, constituted a major overhaul of the bankruptcy system. First of all, it covered cases filed after October 1, 1979. Second, the 1978 Act contained four titles: Title I was the amended Title 11 of the U.S. Code; Title II contained amendments to Title 28 of the U.S. Code and the Federal Rules of Evidence; Title III made the necessary changes in other federal legislation affected by the bankruptcy law changes; and Title IV provided for the repeal of pre-Code bankruptcy, the effective dates of portions of the new law, necessary savings provisions, interim housekeeping details, and the pilot program of the United States trustee.

Perhaps the most important changes to bankruptcy law under the 1978 Act, however, were to the courts themselves. The 1978 Act drastically altered the structure of the bankruptcy courts and conferred pervasive subject matter jurisdiction upon the judicial officers of the courts. The act granted the new courts jurisdiction over all “civil proceedings arising under title 11 or arising in or related to cases under title 11.” 28 U.S.C. §1471(b) (1976 ed. Supp.)

While the new courts were denominated adjuncts of the district court, they were in practice free standing courts. The expanded jurisdiction was to be exercised primarily by bankruptcy judges. The bankruptcy judge would continue to be an Article I judge, who was appointed for a set term.

The provisions of the 1978 Act came under scrutiny in the case of Northern Pipeline Co. v. Marathon Pipe Line Co., 458 U.S. 50, 102 S. Ct. 2858, 73 L. Ed.2d 598 [6 C.B.C.2d 785] (1982). In Marathon, the name by which this Supreme Court case is commonly referred, the Court held unconstitutional the broad grant of jurisdiction to bankruptcy judges because those judges were not appointed under and protected by the provisions of Article III of the Constitution. Under the United States Constitution, Article III judges hold their offices during good behavior (an appointment for life) and their salary cannot be cut during their continuance in office. Article I judges do not enjoy that kind of protection.

The jurisdictional challenge started when the debtor filed an adversary proceeding in bankruptcy court, which covered issues such as a breach of contract, warranty, and misrepresentation. The bankruptcy court denied the defendant’s motion to dismiss, which the defendant appealed to the District Court. The District Court held that 28 U.S.C. §1471 violated Article III of the United States Constitution because it delegated Article III powers to a non-Article III Court by its broad grant of jurisdiction to the bankruptcy courts. In a plurality opinion, the Supreme Court held that the broad grant of jurisdiction accorded bankruptcy courts by 28 U.S.C. '1471 was an unconstitutional delegation of Article III powers to a non-Article III Court. Similarly, Section 241(a) of the Bankruptcy Reform Act of 1978, by establishing the jurisdictional provisions set forth in 28 U.S.C. '1471 was unconstitutional. The Court stayed its judgment until October 4, 1982 to give “Congress an opportunity to reconstitute the bankruptcy courts or to adopt other valid means of adjudication, without impairing the interim administration of the bankruptcy laws.” Id. 458 U.S. at 89.

After the stay had expired, Congress still failed to act. Instead a model “Emergency Rule” was adopted as a local rule by the district courts. The purpose of the rule was to avoid the collapse of the bankruptcy system, and it was a temporary measure to provide for the orderly administration of bankruptcy cases and proceedings after the judgment in Marathon. The rule remained in effect until enactment of the 1984 legislation on July 10, 1984. Although the constitutionality of the “Emergency Rule” was under constant attack, the Supreme Court consistently denied certiorari.

In 1984 the legislature revised the Bankruptcy Code and implemented the Bankruptcy Amendments and Federal Judgeship Act of 1984. The observation has been made that most of these amendments were taken out of Justice Brennan’s opinion in Marathon. Title 28 U.S.C. ' 157(a) and (b)(1), which govern the jurisdiction of the bankruptcy court state in part:

(a) Each district court may provide that any or all cases under title 11 and any or all proceedings arising under title 11 or arising in or related to a case under title 11 shall be referred to the bankruptcy judges for the district.

(b) (1) Bankruptcy judges may hear and determine all cases under title 11 and all core proceedings arising under title 11, or arising in a case under title 11, referred under subsection (a) of this section, and may enter appropriate orders and judgments, subject to review under section 158 of this title. [emphasis added]

Core proceedings as delineated by 28 U.S.C. §157, include but are not limited to:

(A) matters concerning the administration of the estate; (B) allowance or disallowance of claims against the estate or exemptions from property of the estate, and estimation of claims or interests for the purposes of confirming a plan under Chapter 11, 12, or 13 of title 11 but not the liquidation or estimation of contingent or unliquidated personal injury tort or wrongful death claims against the estate for purposes of distribution in a case under title 11; (C) counterclaims by the estate against persons filing claims against the estate; (D) orders in respect to obtaining credit; (E) orders to turn over property of the estate; (F) proceedings to determine, avoid, or recover preferences; (G) motions to terminate, annul, or modify the automatic stay; (H) proceedings to determine, avoid, or recover fraudulent conveyances; (I) determinations as to the dischargeability of particular debts; (J) objections to discharges; (K) determinations of the validity, extent or priority of liens; (L) confirmation of plans; (M) orders approving the use or [[lease] of property, including the use of cash collateral; (N) orders approving the sale of property other than property resulting from claims brought by the estate against persons who have not filed claims against the estate; and (O) other proceedings affecting the liquidation of the assets of the estate or the adjustment of the debtor-creditor or the equity security holder relationship, except personal injury, tort or wrongful death claims.

Thus, in effect, Congress granted jurisdiction to an Article III court, namely the district court, and then authorized (by 28 U.S.C. §157) that this jurisdiction could be delegated to the bankruptcy court. The district court was also authorized to withdraw in whole or in part, any case or proceeding referred under Section 157, on its motion or on timely motion of any party, for cause shown.

By this act, with few exceptions, such as the trial of personal injury and wrongful death claims and matters that require consideration of both Title 11 and organizations or activities affecting interstate commerce, the new bankruptcy courts were allowed to exercise all of the subject matter jurisdiction of the district courts. Thus, bankruptcy courts were enabled to hear cases such as the Marathon case.

The Bankruptcy Amendments and Federal Judgeship Act of 1984 in many ways resembled the Bankruptcy Act of 1898. Among other things, the law provided for the redesignation of separate units for bankruptcy judges under the district court system. Bankruptcy cases pending on or filed after July 10, 1984, are subject to most of the amendments relating to bankruptcy jurisdiction.

The Bankruptcy Judges, United States Trustees, and Family Farmer Bankruptcy Act of 1986 made substantive changes relating to family farmers and established a permanent United States trustee system. The 1986 Act applies to cases filed since November 26, 1986.

The Bankruptcy Reform Act of 1994 is effective as to cases filed on or after October 22, 1994. The reform act and the case law interpreting its provisions have a great impact upon the mortgage banking industry and the servicer of mortgage loans. The changes effectuated by this act are discussed in the chapters that follow.