Ogden v. Saunders
12 Wheat. 213 (1827)
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Rule of Law:
A state has the authority to pass a prospective bankruptcy law that discharges contractual debts incurred after its passage without violating the Contract Clause. However, such a discharge cannot bind a creditor who is a citizen of another state and has not voluntarily subjected themselves to the state's laws.
Facts:
- Saunders, a citizen of Kentucky, drew several bills of exchange in September 1806.
- Ogden, a citizen of New York, accepted these bills in New York City, where he resided.
- At the time Ogden accepted the bills, New York had an insolvent law, originally passed in 1801, which allowed for the discharge of debts for insolvent debtors.
- The contract (Ogden's acceptance) was made after the passage of the New York insolvent law.
- Ogden failed to pay the bills when they came to maturity.
- On April 19, 1808, Ogden obtained a certificate of discharge under the New York insolvent law, which purported to release him from all existing debts.
Procedural Posture:
- Saunders sued Ogden in the Circuit Court of the United States for the District of Louisiana on the basis of several bills of exchange.
- Ogden pleaded his discharge under New York's 1801 insolvent law as a bar to the action.
- The jury returned a special verdict finding the facts of the case, and the Circuit Court rendered a judgment in favor of Saunders, holding that the discharge was not a valid bar.
- Ogden, the defendant below, brought the case to the U.S. Supreme Court on a writ of error.
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Issue:
Does a discharge obtained under a New York state insolvent law bar a suit on a contract, made after the law's passage, by a creditor who is a citizen of another state?
Opinions:
Majority - Justice Johnson
No. A discharge granted under a state's insolvency law is not valid against a creditor who is a citizen of another state. When states pass laws that act upon the rights of citizens of other states, a conflict of sovereign power arises. The Constitution created federal tribunals to allow citizens of different states to litigate, preventing states from exercising power over the rights of non-citizens. Therefore, a state discharge cannot bind a creditor from another state who has not voluntarily submitted to that state's jurisdiction, regardless of where the contract was made.
Dissenting - Justice Washington
Yes. The discharge should be a valid bar to the suit. The obligation of a contract is not an abstract moral principle but is defined by the municipal law of the place where the contract is made. A law in existence at the time a contract is formed becomes an implicit part of that contract's obligation. Since New York's insolvent law existed before Ogden accepted the bills, the possibility of discharge under that law was a condition of the contract's obligation from its inception. Therefore, the law does not 'impair' an obligation of which it was always a part.
Dissenting - Chief Justice Marshall
No. The discharge is not a bar to the action, but for reasons different from the majority. The obligation of a contract is intrinsic to the agreement itself, derived from the natural rights of the parties, not from positive law. The Contract Clause forbids any state law, prospective or retrospective, from lessening this intrinsic obligation. Therefore, the New York law is unconstitutional in its entirety because it attempts to discharge a debt without full payment, which fundamentally impairs the contract's obligation. While this reasoning leads to the same outcome in this specific case, it rests on the principle that states lack any power to pass laws that discharge the substantive obligation of contracts.
Analysis:
This case is significant for its fractured decision that established two major principles regarding the Contract Clause. First, a majority of the Court held that states retain the power to pass insolvency laws that apply prospectively (to contracts made after the law's passage) without violating the Contract Clause, based on the theory that the law becomes part of the contract's obligation. Second, a different majority held that such state laws have no extraterritorial effect and cannot discharge the debt of a creditor from another state. This bifurcated holding sharply limited the practical effect of state bankruptcy laws, restricting their power to in-state creditors and paving the way for federal dominance in bankruptcy law.
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