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Local Loan Co. v. Hunt

Supreme Court of United States
292 U.S. 234 (1934)
ELI5:

Rule of Law:

A discharge in bankruptcy voids any lien created by a pre-bankruptcy assignment of future wages with respect to wages earned after the bankruptcy adjudication, as the assignment does not attach to property that is not yet in existence and enforcing it would contravene the 'fresh start' policy of the Bankruptcy Act.


Facts:

  • On September 17, 1930, Hunt borrowed $300 from Local Loan Co.
  • As security for the loan, Hunt executed a written assignment granting Local Loan Co. a portion of his wages to be earned in the future.
  • Hunt was employed and expected to earn future wages that would be subject to the assignment.
  • The loan from Local Loan Co. remained unpaid at the time of subsequent legal proceedings.

Procedural Posture:

  • On March 3, 1931, Hunt filed a voluntary petition in bankruptcy in a federal district court in Illinois, listing the debt to Local Loan Co.
  • On October 10, 1932, the bankruptcy court entered an order discharging Hunt from all provable debts.
  • Following the discharge, Local Loan Co. brought an action in the municipal court of Chicago against Hunt's employer to enforce the pre-bankruptcy wage assignment on post-discharge wages.
  • Hunt commenced a new proceeding in the original bankruptcy court seeking an injunction to stop Local Loan Co.'s state court action.
  • The federal bankruptcy court granted the injunction against Local Loan Co.
  • Local Loan Co. appealed the injunction to the U.S. Court of Appeals for the Seventh Circuit, which affirmed the bankruptcy court's decree.

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Issue:

Does a debtor's discharge in bankruptcy nullify a pre-bankruptcy assignment of wages for wages that are earned after the bankruptcy adjudication?


Opinions:

Majority - Mr. Justice Sutherland

Yes. A debtor's discharge in bankruptcy nullifies a pre-bankruptcy assignment of wages with respect to wages earned after the bankruptcy adjudication. The court reasoned that the primary purpose of the Bankruptcy Act is to provide an honest debtor with a 'fresh start,' unhampered by pre-existing debt. An assignment of future wages is not a lien on existing property but a pledge of future earning power, which is a personal liberty. Allowing such an assignment to survive bankruptcy would defeat the Act's purpose, as the debtor's 'new opportunity in life' would be meaningless if their future earnings were already claimed by past creditors. Therefore, federal bankruptcy policy must override any conflicting state law that would treat such an assignment as a continuing lien.



Analysis:

This decision is foundational in consumer bankruptcy law, solidifying the 'fresh start' doctrine as a central policy that can override state property law. By distinguishing future earning power from existing property, the Court ensured that a bankruptcy discharge protects a debtor's ability to earn a living post-bankruptcy. The ruling prevents creditors from using pre-bankruptcy wage assignments to effectively circumvent a discharge, thereby preserving the economic freedom and rehabilitative purpose of the Bankruptcy Act for wage-earning individuals.

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