the limits of bankruptcy code preemption:...

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THE LIMITS OF BANKRUPTCY CODE PREEMPTION: DEBT DISCHARGE AND VOIDABLE

PREFERENCE RECONSIDERED IN LIGHT OF SHERWOOD PARTNERS

Alan J. Feld*

INTRODUCTION Although the United States has had a federal bankruptcy statute

since 1898, liquidation, and even reorganization1 under state law, has never disappeared. The interrelation between federal and state collective creditor proceedings remains, after over a century, something of a mystery. A recent Ninth Circuit decision, Sherwood Partners Inc. v. Lycos, Inc.,2 once again calls attention to this pervasive and important question in bankruptcy law: what effect do federal bankruptcy provisions have on various state insolvency statutes,3 which themselves * Notes Editor, Cardozo Law Review. J.D. Candidate (2007), Benjamin N. Cardozo School of Law; B.A., The University of Texas at Austin (2002). I thank Professor David Gray Carlson for his assistance and insightful guidance throughout this project. I also recognize the efforts of past and present editors in offering advice and for helpful editing. Finally, I thank my family, especially my parents and sister, and friends for their support and encouragement. 1 See Paula Whitney Best, Note, Corporate Receiverships and Chapter 11 Reorganizations, 10 CARDOZO L. REV. 285 (1988). 2 394 F.3d 1198 (9th Cir.) (2005), cert. denied, 126 S.Ct. 397 (2005). 3 Early literature on the subject distinguished between insolvency laws and bankruptcy laws: “[A]n insolvency law is aimed to relieve a debtor from imprisonment for debt, while the primary aim of a bankruptcy law is the equal distribution of his property among his creditors.” Samuel Williston, The Effect of a National Bankruptcy Law Upon State Laws, 22 HARV. L. REV. 556, 557 (1909). The Supreme Court recognized this distinction in one of the first cases on the subject, in which it noted:

[T]he particular act which the states granted to congress a power to pass, was one having reference to bankruptcies; which meant something contradistinguished from insolvencies. It is not denied, that insolvency, in its most comprehensive sense, is a universal, of which bankruptcy is a particular; but taking it in this sense, it is insisted, that the grant to congress narrows the universality of the previous power of the states, only by excluding from it the ancient, and well-understood, distinct matter of bankrupt laws. But it is in more exact conformity to the facts, and therefore, more precise language and safer reasoning, to say, that modified as this matter is, and has been, for centuries, in practice, they are different things, expressed by essentially different terms.

Sturges v. Crowninshield, 17 U.S. 122, 143-44 (1819). Notwithstanding this distinction and the fact that in 1909, statutes in New Jersey and Pennsylvania maintained such a distinction, most of the states have treated insolvency laws and bankruptcy laws as synonymous. Williston, supra, at

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act like bankruptcy laws?4 For half a century bankruptcy preemption seemed settled—only

Congress, and not state legislatures, may enact discharge provisions to relieve debtors of their previously incurred debts.5 Beyond that limitation, states are largely free to enact collective creditor regimes. Statutes that regulate assignments for the benefit of creditors are thus permitted. Indeed, the federal Bankruptcy Code6 specifically refers to their existence, making their creation within 120 days of a bankruptcy petition grounds for an adjudication in an involuntary bankruptcy case.7 In addition, the Bankruptcy Code requires “custodians”—a term defined to include assignees for the benefit creditors8—to turn over their estate to bankruptcy trustees9 when the bankruptcy petition has been filed within 120 days of the assignment.10

An assignment for the benefit of creditors is a voluntary transfer of property, usually to a trustee or “general assignee,” who administers the property, liquidates it, and distributes the proceeds equitably to all creditors.11 These general assignments lead to orderly liquidation at minimum expense.12 A general assignment effectively freezes the rights of the parties as efficiently as other insolvency proceedings in that

557. The last sentence of the Bankruptcy Act of 1898, for example, which referenced “insolvency laws,” has been interpreted to refer to “state laws that are in fact bankruptcy laws rather than laws relieving poor debtors from imprisonment for debt.” Id. at 557 n.2. (“Proceedings commenced under State insolvency laws before the passage of this Act shall not be affected by it.” 30 Stat. 566, quoted in Pobreslo v. Joseph M. Boyd Co., 287 U.S. 518, 526 (1933)). Thus, although English law distinguished between bankruptcy laws and insolvency laws, the state statutes at issue are those that may provide relief from prison, debt discharge, voluntary or involuntary proceedings, and even avoidance powers, all of which compose elements of bankruptcy. See VERN COUNTRYMAN, CASES AND MATERIALS ON DEBTOR AND CREDITOR 312-13 (1964); see also Hanover Nat’l Bank v. Moyses, 186 U.S. 181, 185 (1902) (quoting Justice Story, who argued that the English distinctions were not carried over to colonial legislation, and that no distinction exists between insolvency and bankruptcy). 4 See, e.g., Notes, Effect of National Bankruptcy Act on State Insolvency Statutes, 49 YALE L.J. 1090 (1940). 5 See Charles G. Hallinan, The ‘Fresh Start’ Policy in Consumer Bankruptcy: A Historical Inventory and an Interpretive Theory, 21 U. RICH. L. REV. 49, 59 (1986). 6 11 U.S.C. §§ 101-1527 (2000 & Supp. 2006) (recently amended by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. No. 109-8, 119 Stat. 23 (2005)). 7 11 U.S.C. § 303(h)(2). 8 Id. at § 101(11). 9 The bankruptcy trustee is the sole representative of the bankruptcy estate, and as representative of the estate, the trustee represents all creditors of the estate generally, is entitled to administer the estate’s property, and has the exclusive capacity to bring suits and be sued. 3 COLLIER ON BANKRUPTCY ¶ 323.01-02 (Lawrence P. King et al. eds., 15th ed. 2003) (referencing 11 U.S.C. § 323(a)-(b)). 10 11 U.S.C. § 543(b)(1), (d)(2). 11 John Hanna, Contemporary Utility of General Assignments, 35 VA. L. REV. 539, 539-40 (1949). 12 Statutory Regulation of Assignment for the Benefit of Creditors, 47 YALE L.J. 944, 945 (1938).

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individual creditors cannot levy upon the transferred assets.13 Rather, the assets no longer belong to the debtor, but to the assignee in trust for all of the creditors. The debtor benefits from this arrangement because it is in the debtor’s interest to act fairly towards creditors, the debtor avoids the stigma of bankruptcy, and the debtor may even retain good will with creditors.14 The arrangement serves as an alternative to formal bankruptcy proceedings,15 and it is a more expeditious and a less costly form of liquidation than that found in the Bankruptcy Code.16

Though such assignments originated out of common law notions of ordinary property transfer and trust creation, in most states, they are codified and regulated by statute in order to prevent abuses.17 Typically, statutes regulating general assignments do not permit the assignee to prefer certain creditors to others.18 Without such a statutory restriction, a debtor could abuse the assignment statutes by ordering assignees to, for example, pay the debtor’s relatives before paying trade creditors.

If this restriction is the essence of state regulation of general assignments, it is no great extension for a state legislature to prevent an assignor’s separate transfer of assets to designated creditors just prior to

13 Id. at 947. 14 With the increased amount of filings and the use of bankruptcy as an economic planning tool, the stigma associated with bankruptcy has generally lessened. See, e.g., CONGRESSIONAL BUDGET OFFICE, PERSONAL BANKRUPTCY: A LITERATURE REVIEW (2000), http://www.cbo.gov/ showdoc.cfm?index=2421&sequence=0. 15 David S. Kupetz, Assignment for the Benefit of Creditors: Exit Vehicle of Choice for Many Dot-Com, Technology, and Other Troubled Enterprises, 11 J. BANKR. L. & PRAC. 71, 71 (2001) (quoting Credit Managers Ass’n v. Nat’l Ind. Bus. Alliance, 209 Cal. Rptr. 119, 120 (Cal. Ct. App. 1984)) (Assignments may also be considered “‘a business liquidation device available to an insolvent debtor as an alternative to formal bankruptcy proceedings.’”); Sherwood Partners, Inc. v. Lycos, Inc., 394 F.3d 1198, 1206 (9th Cir. 2005) (Nelson, J., dissenting) (same). 16 Some corporations turn to state assignment for the benefit of creditors provisions as an alternative to filing for bankruptcy. David A. Skeel, Jr., Rethinking the Line Between Corporate Law and Corporate Bankruptcy, 72 TEX. L. REV. 471, 492 (1994). 17 Kupetz, supra note 15, at 71; see also Note, Discharge by Assignment for the Benefit of Creditors, 36 VA. L. REV. 813, 813 (1950) (“The right of a debtor to make a voluntary assignment for the benefit of his creditors has always been recognized as a right inherent in the ownership of property. It does not depend upon statutes, as it creates an express trust partaking of the nature of a private contract.”). Countryman traces the history of preferential transfer law from the English common law through the various bankruptcy acts enacted in the United States. See Vern Countryman, The Concept of a Voidable Preference in Bankruptcy, 38 VAND. L. REV. 713 (1985). 18 General assignment for the benefit of creditors is defined in California through the satisfaction of the following criteria:

(a) The assignment is an assignment of all the defendant’s assets that are transferable and not exempt from enforcement of a money judgment. (b) The assignment is for the benefit of all the defendant’s creditors. (c) The assignment does not itself create a preference of one creditor or class of creditors over any other creditor or class of creditors, but the assignment may recognize the existence of preferences to which creditors are otherwise entitled.

CAL. CIV. PROC. CODE § 493.010 (West 2006).


the assignment. Although outside of the bankruptcy context, there is nothing wrong in preferring certain creditors to others,19 in the bankruptcy context, preferential transfers are usually considered inequitable because the transfer limits funds that would otherwise be shared by similarly situated creditors.20 To address the inequality inherent in these transfers, some states21 purport to empower a general assignee to avoid,22 or recover, preferential transfers made shortly23 before the general assignment.

19 Juliet M. Moringiello, Distinguishing Hogs from Pigs: A Proposal for a Preference Approach to Pre-Bankruptcy Planning, 6 AM. BANKR. INST. L. REV. 103, 103 (1998). 20 Bethaney J. Vazzana, Comment, Trustee Recovery of Indirect Benefits Under Section 547(b) Bankruptcy Code, 6 BANKR. DEV. J. 403, 405 (1989); see also David Gray Carlson, Tripartite Voidable Preferences, 11 BANK. DEV. J. 219, 220 (1994-1995) (omitting footnote reference to the Bankruptcy Code) (“A transfer of an interest in debtor’s property shortly before bankruptcy may be a voidable preference. The theory behind voidable preferences is that unsecured creditors are supposed to be treated equally with other creditors of similar rank. If a transfer from the debtor produces more for the creditor than the bankruptcy distribution would have, then the creditor may be forced to return the property to the bankruptcy estate so that it can be divided ratably among the creditors.”). 21 See Skeel, supra note 16, at 556 app. B. As of 1994, twenty-two states maintained voidable preference statutes, and Skeel lists them in chart form. He characterizes these provisions as only being vestigial remnants. Id. at 491. These statutes regulate general assignments at common law, which are, as referenced

equivalent to the creation of a trust, i.e., the assignee becomes a trustee of the property which is conveyed to him by the debtor and the creditors become the beneficiaries under the trust. But at common law the debtor had the right to prefer any creditor or creditors over another which apparently is the predominant cause of statutory regulation.

Legislation, A Classification of State Statutes Regulating General Assignments for the Benefit of Creditors, 20 VA. L. REV. 222, 223 (1934). In this 1934 article’s consideration of all states with statutes attempting to regulate assignments, it found only one state (Georgia), which at that time did not forbid preferences. Id. at 228. As of 1938, there were thirty-six states that regulated voluntary assignments for the benefit of creditors. Statutory Regulation of Assignment for the Benefit of Creditors, supra note 12, at 946. 22 The standard legal meaning of avoid is “annul” or “undo.” Farrey v. Sanderfoot, 500 U.S. 291, 296 (1990) (citing BLACK’S LAW DICTIONARY 136 (6th ed. 1990)). 23 Countryman, supra note 17, at 713. Such statutes generally empower transfer avoidance within so many days of filing a bankruptcy petition. The Bankruptcy Code contains a federal preference avoidance statute, codified at 11 U.S.C. § 547 (2000 & Supp. 2006). See infra note 35 and accompanying text. The federal statute grants this power to the bankruptcy trustee when the transfer occurred ninety days before the filing. Under 11 U.S.C. § 550(a), the trustee may recover the preference meeting the perquisites of § 547. See 11 U.S.C. § 550(a) (“[T]he trustee may recover, for the benefit of the estate, the property transferred . . . from (1) the initial transferee of such transfer or the entity for whose benefit such transfer was made; or (2) any immediate or mediate transferee of such initial transferee.”). The California statute, section 1800, grants this power to general assignees. See infra note 25 and accompanying text. The Sherwood majority focused part of its analysis on the distinction between which entity may avoid the preference. Sherwood Partners, Inc. v. Lycos, Inc., 394 F.3d at 1198, 1201-02, 1205 (9th Cir. 2005) (concluding that statutes granting state assignees or trustees avoidance powers beyond those granted individual creditors “trench too close upon the exercise of federal bankruptcy power.”). See generally Dubis v. B.W. Supply (In re Delta Group), 300 B.R. 918, 923-24 (Bankr. E.D. Wis. 2003).


In Sherwood,24 Judge Alex Kozinski, writing for the majority of a three-judge panel, concluded that the Bankruptcy Code preempts the preference avoidance portion of California’s assignment for the benefit of creditors statute.25 In reaching this conclusion, Judge Kozinski discussed and relied on three Depression-era cases decided by the United States Supreme Court,26 namely Stellwagen v. Clum,27 International Shoe Co. v. Pinkus,28 and Pobreslo v. Joseph M. Boyd Co.29 Although these cases have been called “murky,”30 they stand for the proposition that discharge is the limit of preemption,31 a unifying theory not previously offered. Because of this, preference statutes that supplement voluntary assignments generally survive preemption.32 24 394 F.3d at 1198, 1206. 25 The statute provides, in relevant part:

[T]he assignee of any general assignment for the benefit of creditors . . . may recover any transfer of property of the assignor: (1) To or for the benefit of a creditor; (2) For or on account of an antecedent debt owed by the assignor before the transfer was made; (3) Made while the assignor was insolvent; (4) Made on or within 90 days before the date of the making of the assignment or made between 90 days and one year before the date of making the assignment if the creditor, at the time of the transfer, was an insider and had reasonable cause to believe the debtor was insolvent at the time of the transfer; and (5) That enables the creditor to receive more than another creditor of the same class.

CAL. CIV. PROC. CODE § 1800(b) (West 2006). General assignment for the benefit of creditors is defined in California through the satisfaction of the following criteria:

(a) The assignment is an assignment of all the defendant’s assets that are transferable and not exempt from enforcement of a money judgment. (b) The assignment is for the benefit of all the defendant’s creditors. (c) The assignment does not itself create a preference of one creditor or class of creditors over any other creditor or class of creditors, but the assignment may recognize the existence of preferences to which creditors are otherwise entitled.

CAL. CIV. PROC. CODE § 493.010 (West 2006). 26 Pobreslo v. Joseph M. Boyd Co., 287 U.S. 518 (1933); Int’l Shoe Co. v. Pinkus, 278 U.S. 261 (1929); Stellwagen v. Clum, 245 U.S. 605 (1918). 27 245 U.S. 605 (1918). 28 278 U.S. 261 (1929). 29 287 U.S. 518 (1933). 30 RICHARD I. AARON, An Overview of Bankruptcy Choices Under Chapter 7, Chapter 11, Chapter 12 and Chapter 13, 1 BANKR. LAW FUNDAMENTALS § 1:4 (2005). 31 Although Pobreslo, International Shoe, and Stellwagen, supra note 26, are the principal cases related to whether a federal bankruptcy act in effect preempts state statutes regulating voluntary assignments for the benefit of creditors, there are other cases that also address this issue. These cases are: Johnson v. Star, 287 U.S. 527 (1933); Boese v. King, 108 U.S. 379 (1883); Mayer v. Hellman, 91 U.S. 496 (1875); and Sturges v. Crowninshield, 17 U.S. 122 (1819). The Sherwood Court did not fully explore all of these cases, and it only mentioned the Pinkus decision in passing. See Sherwood Partners, Inc. v. Lycos, Inc., 394 F.3d at 1198, 1203, 1207 (9th Cir. 2005) . Nevertheless, the three principal cases, along with their supplements, establish the federal case law that serves as a basis for the thesis. See infra Part III.A. In addition, this Note considers other cases to illustrate its point, including: Moskowitz v. Prentice (In re Wisconsin Builders Supply Co.) 239 F.2d 649 (7th Cir. 1956), cert. denied, 353 U.S. 985 (1957); and In re Tarnowski, 210 N.W. 836 (Wis. 1926). 32 Establishing the manner of reading these cases together is admittedly not obvious.


Accordingly, Sherwood must be viewed as wrongly decided. To prove this conclusion, Part I of this Note describes preference

laws, their relationship to assignments for the benefit of creditors, and discharge. Part II examines the reasoning employed in Sherwood. Part III considers federal Bankruptcy Code preemption of state insolvency legislation. The historical and modern approaches to preemption are distinguished in this Part. Finally, this Part introduces the analytical framework through which preemption is considered in the bankruptcy context. Part IV argues that the principal cases on preemption to do not justify preemption of voidable preference regulation by state legislation. Nevertheless, some state statutes might be preempted if they constitute “complete bankruptcy legislation” and do not merely codify preexisting common law concepts underlying an assignment for the benefit of creditors. The California legislation in Sherwood by no means meets this criterion, as the Sherwood majority expressly recognized.

I. PREFERENCE LAWS AND DISCHARGE PROVISIONS

A. Preference Laws and Assignment for the Benefit of Creditors The right to execute an assignment for the benefit of creditors is an

inherent common law right that exists independent of statute.33 The assignment laws merely govern the creation and administration of a trust.34 Preference provisions in turn limit the power of an assignor to make other transfers just prior to the general assignment.

If no preference avoidance statute is in effect, then the preferred creditor who receives property before the general assignment may keep the property. The other creditors then have a smaller pool of property However, one perspective from the 1960s described the cases as guideposts:

Although the frontier that separates the zone of permissible state legislation from the zone to be occupied exclusively by the Bankruptcy Act is not clearly defined, several guideposts are available. At one pole, no invasion by a state law affording debtors a discharge will be tolerated. At the other pole, it is clear that a state statute providing for voluntary assignment for the benefit of creditors is operative. In the vast gray areas between these poles, persevered by the realistic attitude that states may be guilty of legislating “on the subject of bankruptcy” despite omission of a discharge provision , the guiding principle is that state laws will be suspended to the extent of actual conflict with the act.

Nahum L. Gordon, The Security Interest in Inventory Under Article 9 of the Uniform Commercial Code and the Preference Problem, 62 COLUM. L. REV. 49, 59 (1962) (citations omitted). 33 Statutory Regulation of Assignments for the Benefit of Creditors, supra note 12, at 946. 34 Id. at 947; Legislation, A Classification of State Statutes Regulating General Assignments for the Benefit of Creditors, supra note 21, at 223; see also GARRARD GLENN, THE LAW GOVERNING LIQUIDATION § 106 at 173 (1935). Glenn provides an extensive description, history, and notes on the operation of this trust. See id. §§ 105-25. Glenn also provides another description of the issues concerning assignments for the benefit of creditors and preferences.


from which to have their debts satisfied. Pursuant to voidable preference law, if a debtor assigns property to a creditor to satisfy or secure a previous obligation within a specified time before filing for bankruptcy, then the non-preferred creditors may sue to recover that transfer, usually through a representative such as an assignee. All creditors may then share in this recovered property.

B. Goals and Purposes of Bankruptcy

The Bankruptcy Code contains its own preference provision35 to

avoid transfers and return the transfer to the debtor’s estate for subsequent equal distribution.36 Federal voidable preference law 35 11 U.S.C. § 547(b) (2000) provides:

(b) Except as provided in subsection (c) and (i) of this section, the trustee may avoid any transfer of an interest of the debtor in property— (1) to or for the benefit of a creditor; (2) for or on account of an antecedent debt owed by the debtor before such transfer was made; (3) made while the debtor was insolvent; (4) made— (A) on or within 90 days before the date of the filing of the petition; or (B) between ninety days and one year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider; and (5) that enables such creditor to receive more than such creditor would receive if— (A) the case were a case under chapter 7 of this title; (B) the transfer had not been made; and (C) such creditor received payment of such debt to the extent provided by the provisions of this title.

The purpose of section 547 is twofold: First, by permitting the trustee to avoid prebankruptcy transfers that occur within a short period before bankruptcy, creditors are discouraged from racing to the courthouse to dismember the debtor during the debtor’s slide into bankruptcy. The protection thus afforded the debtor often enables the debtor to work a way out of a difficult financial situation through cooperation with all of the creditors.

5 COLLIER ON BANKRUPTCY, supra note 9, ¶ 547.01, at 547-49. Second, preferences further the “prime bankruptcy policy of equality of distribution among creditors.” Id. The policy objective of § 547(b) is to bring prepetition transferred property back into the bankruptcy estate so that the unsecured creditors receive an equal, pro rata share of that property. Higgins v. Erickson (In re Higgins), 270 B.R. 147, 152 (Bankr. S.D.N.Y. 2001). This power is granted to the trustee who can assure that the property is brought back into the estate for the benefit of all unsecured creditors. Id. at 153. 36 Vazzana, supra note 20, at 404-05; see also Bear, Stearns Sec. Corp. v. Gredd, 275 B.R. 190, 194 (S.D.N.Y. 2002) (“[T]he purpose of § 547 is to ensure fair distribution between creditors . . . .”). Legislative history of the Bankruptcy Code also evidences this purpose:

The purpose of the preference section is two-fold. First, by permitting the trustee to avoid prebankruptcy transfers that occur within a short period before bankruptcy, creditors are discouraged from racing to the courthouse to dismember the debtor during his slide into bankruptcy. The protection thus afforded the debtor often enables him to work his way out of a difficult financial situation through cooperation with all of his creditors. Second, and more important, the preference provisions facilitate the prime bankruptcy policy of equality of distribution among creditors of the debtor. Any


therefore promotes the goal of equal distribution by preventing dismemberment of the debtor’s estate shortly before a bankruptcy case commences.

In contrast, the discharge provisions of the Bankruptcy Code evidence another major purpose of bankruptcy—providing debtors with a fresh start.37 Bankruptcy discharge, which may be traced to English legislation in 1705,38 releases debtors from previously incurred debts.39

creditor that received a greater payment than others of his class is required to disgorge so that all may share equally. The operation of the preference section to deter “the race of diligence” of creditors to dismember the debtor before bankruptcy furthers the second goal of the preference section—that of equality of distribution.

H.R. REP. NO. 95-595, at 177-78 (1978), reprinted in 1978 U.S.C.C.A.N. 5961 37 See Local Loan Co. v. Hunt, 292 U.S. 234, 244-45 (1934) (“One of the primary purposes of the Bankruptcy Act is to ‘relieve the honest debtor from the weight of oppressive indebtedness, and permit him to start afresh free from the obligations and responsibilities consequent upon business misfortunes.’ This purpose of the act has been again and again emphasized by the courts as being of public as well as private interest, in that it gives to the honest but unfortunate debtor who surrenders for distribution the property which he owns at the time of bankruptcy, a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of pre-existing debt.”) (internal citations omitted); see also Ochs v. Nemes (In re Nemes), 323 B.R. 316, 323 (Bankr. E.D.N.Y. 2005) (“The purpose of the Bankruptcy Code is to provide a procedure by which debtors can reorder their affairs, make peace with their creditors, and enjoy a new opportunity in life with a clear field for future effort, unhampered by the pressure and discouragement of pre-existing debt.”) (quoting Christy v. Kowalski (In re Kowalski), 316 B.R. 596, 600-01 (Bankr. E.D.N.Y. 2004). Thus, the underlying purpose of the Bankruptcy Code is to grant the honest debtor a “fresh start.” Ochs, 323 B.R. at 323 (quoting McCord v. Sethi (In re Sethi), 250 B.R. 831, 839 (Bankr. E.D.N.Y. 2000)); Peter C. Alexander, With Apologies to C.S. Lewis: An Essay on Discharge and Forgiveness, 9 J. BANKR. L. & PRAC. 601, 601-02 (2000) (claiming that the central purpose of bankruptcy is “to forgive the indebtedness of the honest but unfortunate individuals who seek protection from their creditors” through a creative essay borrowing C.S. Lewis’ writing style to examine the central tenants of bankruptcy, considered by this commentator to be “discharge and forgiveness of indebtedness”). 38 Charles Jordan Tabb, The History of the Bankruptcy Laws in the United States, 3 AM. BANKR. INST. L. REV. 5, 5 (1995) [hereinafter Tabb, History] (citing Statute of Anne 4, ch. 17 § 7 (1705)). Tabb provides a comprehensive history of bankruptcy laws in the United States from their English origins through the Bankruptcy Reform Act of 1978, the year the current bankruptcy law was enacted, up through the Bankruptcy Reform Act of 1994. For a more focused discussion on the origins of discharge, see generally Charles Jordan Tabb, The Historical Evolution of the Bankruptcy Discharge, 65 AM. BANKR. L.J. 325 (1991) [hereinafter Tabb, Evolution](tracing discharge from its initial introduction as a benefit for creditors in England, that evolved over time in the United States as a benefit for debtors, solidified in the “debtor-oriented” Bankruptcy Act of 1898, and basically molded into the current form through amendment in 1903). Another detailed account of bankruptcy law, its history, and suggested limits may be found in Thomas E. Plank, The Constitutional Limits of Bankruptcy, 63 TENN. L. REV. 487 (1996). 39 A discharge has three significant features. First, “a discharge . . . discharges the debtor from all debts that arose before the date of the order for relief under this chapter.” 11 U.S.C. § 727(b) (2006). Second, a discharge also “voids any judgment at any time obtained, to the extent that such judgment is a determination of the personal liability of the debtor.” Id. § 524(a)(1). Third, the discharge acts as an injunction against commencing any new action against the discharged debtor. Id. § 524(a)(2). Some debts that may never be discharged include taxes, family support obligation, intentional torts, and, unfortunately, student loans. Id. A debtor may lose the right to a discharge for a number of reasons, including, for example, the destruction of financial records. See Id. § 727(a). In addition, the court shall revoke the right to a discharge in certain situations. See Id. § 727(d).


The presence of a discharge provision evidences a “true” bankruptcy statute,40 and, since 1898, has been considered an essential feature of the bankruptcy scheme in the United States.41

After the enactment of the Bankruptcy Act of 1898,42 the Supreme Court decided a small number of cases concerning whether federal legislation preempts state insolvency laws.43 In these decisions, the Court focused in part on the discharge provisions of the state laws at issue because great importance had been placed on the presence of such provisions to determine whether state legislation was suspended.44 Because of their central relevance to bankruptcy law, the Supreme Court ultimately recognized that only Congress can pass discharge provisions, and the states cannot.45

Discharge provisions differ in a fundamental way from voidable preference provisions. Actions to recover preferential payments have common law roots, as recognized by the Supreme Court.46 Discharge

40 Recent Decisions, Bankruptcy: Section 74 of 1933 Amendments to National Bankruptcy Act: Construction and Constitutionality, 22 CAL. L. REV. 220 (1934) (citing Mayer, Stellwagen, Pinkus, Pobreslo, and Star); Stellwagen v. Clum, 245 U.S. 605, 616 (1918) 41 See generally Tabb, Evolution, supra note 38; John M. Czarnetzky, The Individual and Failure: A Theory of the Bankruptcy Discharge, 32 ARIZ. ST. L.J. 394 (2000) (presenting a cohesive theory to explain the purpose, history, and scope of the discharge and arguing that from the perspective of debtors, the discharge provision is the Bankruptcy Code’s central feature). 42 ch. 541, 30 Stat. 544 (1898) (“[a]n Act To establish a uniform system of bankruptcy throughout the United States”) (repealed in 1978). Though there were a number of amendments to the 1898 Act, major reforms in some areas were enacted through the Bankruptcy Reform Act of 1978, Pub. L. No. 95-598, 92 Stat. 2549 (1978). The only significant amendment to the Bankruptcy Act of 1898 that is relevant to discharge is that the 1903 amendment added grounds upon which a court could refuse to grant a discharge and created other exceptions. Tabb, Evolution, supra note 38, at 366-67. Still, the Bankruptcy Act of 1898 was different in that discharge was an affirmative defense that had to be pleaded. Id. at 369. Tabb further noted that one of the reasons for Congress to pass the Bankruptcy Act of 1898 was to make discharge more readily available to debtors than it was under the bankruptcy law passed in 1867. See id. at 365-66; see also 4 COLLIER ON BANKRUPTCY, supra note 9, ¶ 524.LH (explaining the history of § 524 as it changed from Section 14 of the Bankruptcy Act of 1898, as amended, to the new section and underwent subsequent amendments). For a further discussion of the Bankruptcy Act of 1898, see also Tabb, Evolution, supra note 38, at 366-69. 43 See supra note 26 (listing key cases). 44 See In re Tarnowski, 210 N.W. 836 (Wis. 1926). But cf. Moskowitz v. Prentice (In re Wisconsin Builders Supply Co.) 239 F.2d 649, 652 (7th Cir. 1956), cert. denied, 353 U.S. 985 (1957) (indicating that the emphasis placed on discharge should not be the sole test to determine whether state legislation constitutes a bankruptcy act). Some of the cases use the term “suspended” when a statute is preempted. A state law is suspended and not wholly voided because it might return to life when the federal law’s effectiveness ends. Thus, suspension and preemption may be treated as synonymous. 45 See Charles G. Hallinan, supra note 5, at 59 (1986) (citing Sturges v. Crowninshield, 17 U.S. 122, 122 (1819)). 46 Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 43 (1989) (finding that actions to recover either preferential or fraudulent transfers were often brought at law in the eighteenth century, and quoting Schoenthal v. Irving Trust Co., 287 U.S. 92, 94 (1932) (“In England, long prior to the enactment of our first Judiciary Act, common-law actions of trover and money had and received were resorted to for the recovery of preferential payments by bankrupts.”)).


provisions, on the other hand, derive from statute, have become a central aspect of bankruptcy law by themselves, and are distinct from preference law.47

II. THE SHERWOOD DECISION

In Sherwood, the Ninth Circuit held that the Bankruptcy Code

preempts the portion of the California assignment for the benefit of creditors statute related to the recovery of preferences.48 As part of his analysis, Judge Kozinski first responded to the contention that the Bankruptcy Code specifically incorporates the California provision through § 544(b)(1).49

The subrogation power under § 544(b)(1) enables a bankruptcy trustee to utilize the power of an unsecured creditor to avoid a transfer of debtor property under an applicable state statute.50 Judge Kozinski emphasized that the powers granted to the trustee under § 544(b)(1) are limited to those that the individual unsecured creditor possessed.51 The California provision, however, empowered only the general assignees to avoid the transfer.52 Judge Kozinski determined that Congress limited the definition of creditor so that an assignee could not be included in that category.53

Finding that the assignee’s avoidance powers under the California statute were not expressly incorporated into the Bankruptcy Code through § 544(b)’s subrogation power, Judge Kozinski then considered whether the California statute could nevertheless coexist with the 47 See Tarnowski, 210 N.W. at 837. 48 Sherwood Partners, Inc. v. Lycos, Inc., 394 F.3d 1198, 1206 (9th Cir. 2005 49 Id. at 1201. 50 See 11 U.S.C. § 544(b)(1) (2000) (“[T]he trustee may avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable law by a creditor holding an unsecured claim.”) (emphasis added). 51 Sherwood, 394 F.3d at 1201. 52 Id. at 1201-02. 53 Id. at 1202. A creditor is an “entity that has a claim against the debtor that arose at a time of or before the order for relief concerning the debtor.” 11 U.S.C. § 101(10)(A) (2000 & Supp. 2006). An assignee, Judge Kozinski argued, falls under the definition of a custodian. Sherwood, 394 F.3d at 1202. A custodian includes a receiver or trustee of any property of a debtor and “assignee[s] under a general assignment for the benefit of the debtor’s creditors.” 11 U.S.C. § 101(11)(B). Despite this analysis, there are some courts that allow the bankruptcy trustee to exercise the preference avoidance powers of a receiver or assignee. The Preemptive Effect of the Bankruptcy Code for Preference Avoidance Under State-Law Assignments for the Benefit of Creditors, 25 BANKR. LAW LETTER No. 4, Apr. 2005, at 1 [hereinafter, Preemptive Effect] (collecting cases). On the other hand, some courts concur with the Sherwood view and find that Congress intentionally excluded from § 544(b)(1) avoidance powers that could be exercised only by a general creditor. Id. For a case finding that a bankruptcy trustee may not subrogate to a state receiver’s right to collect a preference, see Dubis v. B.W. Supply (In re Delta Group), 300 B.R. 918 (Bankr. E.D. Wis. 2003).


bankruptcy scheme.54 To answer this question, the Sherwood court focused on the two goals of bankruptcy—discharge and equitable distribution.55 In line with established precedent, Judge Kozinski noted that state statutes granting a discharge are preempted whether or not the state discharge is identical to the federal discharge provision.56 He then extended this reasoning to state statutes implicating the goal of equitable distribution.57 According to Judge Kozinski, if the assignees could avoid preferences for the benefit of creditors under the state statute, the Bankruptcy Code’s goal of equitable distribution would be frustrated.58 If a state assignee has already recovered a preferential transfer and distributed the proceeds to creditors, a federal trustee could not recover that same property if a federal bankruptcy proceeding were undertaken.59 Thus, given the coexistence of both statutes, the action of the state assignee would not lead to equitable distribution and would alter the incentives of filers who invoke the potentially more expensive and time-consuming federal process.60

Although concerned with incentives, Judge Kozinski curiously left almost unanalyzed two key provisions of the Bankruptcy Code, which presuppose the coexistence of a federal bankruptcy proceeding and a state general assignment. According to § 303(h)(2), a bankruptcy court must permit an involuntary bankruptcy case to proceed if

within 120 days before the . . . filing of the petition, a custodian, other than a trustee, receiver or agent appointed . . . to take charge of less than substantially all of the property of the debtor for the purpose of enforcing a lien against such property, was appointed or took possession.61 Further, under § 543(b)(1), a custodian, such as a general assignee,

has the duty to “deliver to the trustee any property of the debtor held by or transferred to such custodian, or proceeds, product, offspring, rents, or profits of such property, that is in such custodian’s possession, custody, or control on the date that such custodian acquires knowledge 54 See Sherwood, 394 F.3d at 1202. 55 Id. at 1203. 56 Id. Citing Stellwagen, the majority reiterated that state discharge provisions are preempted because discharge “‘is one of the requisites of a true bankruptcy law.’” Id. (quoting Stellwagen v. Clum, 245 U.S. 605, 616 (1918)). 57 Id. 58 Id. at 1204. 59 See id. However, Judge Kozinski states that

[t]his is not a matter for federal concern when the assignee has no special avoidance rights. If individual unsecured creditors can sue to recover preferences under state law, the same powers are also available to a bankruptcy trustee under section 544(b); there is obviously no conflict then between federal law and state law giving those powers to an assignee.

Id. at 1204 n.6. 60 Id. at 1205. 61 11 U.S.C. § 303(h)(2) (2000 & Supp. 2006).


of the commencement of the case.”62 This duty is excused if the custodian is an assignee for the benefit of creditors appointed or in possession more than 120 days before the commencement of a bankruptcy case, “unless compliance with such subsections is necessary to prevent fraud or injustice.”63

These provisions64 suggest that, even if a general assignee has recovered a preference, the proceeds of that recovery can be obtained by a subsequent bankruptcy trustee pursuant to § 543(b)(1). Admittedly, this conclusion requires a finding that the voidable preference recovery is “debtor property,” within the meaning of § 543(b)(1). This conclusion is not straightforward. The debtor has already alienated the voidable preference before the custodian obtained possession of whatever property the debtor still had at the time of the general assignment.65 But it is equally the case that a debtor never has a property interest in an assignment for the benefit of creditors once the assignment is accomplished. The legislative history to § 543, however, indicates that a very broad definition of “debtor property” is intended.66

If property of the debtor includes the custodian’s property in which the debtor has no interest, it is no great stretch for a court to conclude that the custodian’s ownership of a voidable preference recovery is also debtor property. After all, this recovery is based on a transfer of funds the debtor once owned but no longer does, in light of the general assignment. The same premise governs assignments for the benefit of creditors generally. Also, when the debtor makes a voidable transfer, the courts are to treat the matter as if the debtor made no transfer.67 In other words, voidable property transferred to another is still debtor property. In any case, the alternative is untenable. If a general assignee must turn over “debtor” property but not the voidable preference

62 Id. § 543(b)(1). 63 Id. § 543(d)(2). 64 Arguments referencing these sections may also be found in other sources. See Sherwood, 394 F.3d at 1207 (Nelson, J., dissenting); Craig Rankin & Christopher Alliotts, 9th Cir. “Sherwood” Case, NAT’L L.J., Oct. 24, 2005, at 20 (pointing out that 11 U.S.C. § 303(h)(2), along with §§ 101(11)(B) and 543(d)(1) and (2), may evidence Congress’s express allowance for certain assignment proceedings to continue even after the filing of a federal bankruptcy petition). 65 David Gray Carlson, Voidable Preferences and Proceeds: A Reconceptualization, 71 AM. BANKR. L.J. 517 (1997) (arguing that a bankruptcy trustee’s voidable preference recovery right is not proceeds of debtor property). 66 According to the Senate Report that accompanied the enactment of the Bankruptcy Code:

This section requires a custodian appointed before the bankruptcy case to deliver to the trustee and to account for property that has come into his possession, custody, or control as a custodian. “Property of the debtor” in section (a) includes property that was property of the debtor at the time the custodian took the property, but the title to which passed to the custodian.

S. REP. NO. 95-989, at 85 (1978). 67 See Am. Nat’l Bank v. MortgageAmerica Corp. (In re MortgageAmerica Corp.), 714 F.2d 1266, 1277 (5th Cir. 1983).


recovery, as it is not debtor property, the question exists as to what would come of it. Surely the assignee cannot keep it personally. Under state law, the preferred creditor is not entitled to it. There is little alternative to the conclusion that the general assignee must turn it over to the bankruptcy trustee, along with the rest of the general assignment.

If these conclusions follow, Judge Kozinski’s analysis fails. It may be true that a bankruptcy trustee may not, under § 544(b)(1), subrogate to the general assignee’s right to recover a preference under state law. But the trustee obtains the preference recovery anyway under § 543(b)(1). Further, even if the custodian-assignee has not yet recovered the preference, the avoidance cause of action is still part of the custodian’s estate, and these state-law causes of action must be transferred to the bankruptcy trustee, permitting the enforcement of state-law voidable preference causes of action.68

Responding to the majority’s position69 that permitting states to enact voidable preference legislation would create evil incentives, Judge Dorothy Nelson in dissent noted these incentives exist whenever state insolvency regimes exist. Taken to its logical end, this anti-incentive position leads to the preemption of all state-law insolvency regimes altogether.70

In no way could this concern be limited to the presence of a voidable preference provision as a small part of the assignment scheme. Further, Judge Nelson emphasized that the state provision was virtually identical to the federal provision.71 If the same transfer could be 68 This point was overlooked by the trustee and also by the court in Dubis v. B.W. Supply (In re Delta Group), 300 B.R. 918 (Bankr. E.D. Wis. 2003), where a state receiver with a voidable preference right under Wisconsin law had been appointed prior to the bankruptcy proceeding. The federal bankruptcy trustee should have inherited the receiver’s avoidable preference cause of action under § 543(b)(1). 69 Relying on the rule of Walker v. Kiousis, 114 Cal. Rptr. 2d 69, 77 (Cal. Ct. App. 2001) that lower federal court decisions are persuasive but not binding on state courts, a California appellate court countered Kozinski’s arguments in Sherwood, focusing in part on the dissent’s arguments, and held that section 1800 is not preempted by the Bankruptcy Code. Haberbush v. Charles & Dorothy Cummins Family Ltd. P’Ship, 43 Cal. Rptr. 3d 814 (Cal. Ct. App. 2006). This decision thus raises interesting federalism questions beyond the scope of this Note. Even more recently, another California court found the Haberbush decision persuasive and similarly held that the Bankruptcy Code does not preempt § 1800 in an unpublished opinion. Credit Managers Ass’n of Calif. v. Countrywide Home Loans, Inc., No. 04CC11546, 2006 WL 2820882 (Cal. App. Dep’t Super. Ct. Oct. 4, 2006). Nevertheless, this Note makes an independent evaluation of the Sherwood reasoning and goes further by considering the preemption analysis employed by the Supreme Court in the principal cases, leading to the unifying theory that discharge is the limit of preemption. 70 Sherwood Partners Inc., v. Lycos, Inc., 394 F.3d 1198, 1208 (9th Cir. 2005) (Nelson, J., dissenting) (“When the majority’s reasoning is carried to its logical extension, it has the effect of pushing corporations threatened with insolvency from the less stigmatic, and less costly, voluntary assignment scheme into the world of federal bankruptcy.”). 71 Id. at 1207 (Nelson, J., dissenting) (referencing Angeles Elec. Co. v. Superior Court, 32 Cal. Rptr. 2d 660, 663 (Cal. Ct. App. 1994) and noting that the California provision was intentionally meant to conform to the federal law). Compare CAL. CIV. PROC. CODE § 1800


avoided in both the state and federal system, then it is not clear why the state system interferes with the goal of equitable distribution.72 Voluntary assignments and the federal system had peacefully coexisted for many years without interfering with the goal of equitable distribution.73 She went on to argue that the California preference provision is incorporated into the Bankruptcy Code by virtue of § 543.74 Finally, as will be demonstrated, the Supreme Court has never extended preemption beyond the concept of state discharge statutes.

III. FEDERAL BANKRUPTCY CODE PREEMPTION OF

STATE INSOLVENCY LEGISLATION In general, bankruptcy law did not draw much attention from the

Framers,75 though the Constitution’s Bankruptcy Clause sets forth Congress’s power to establish “uniform Laws on the subject of (West 2006) with 11 U.S.C. § 547 supra notes 25 and 35. 72 Sherwood, 394 F.3d at 1207 (Nelson, J., dissenting). 73 Id. The majority noted, along with the dissent, that § 543(d)(2) is one instance in which the federal law coexists with state law. Id. at 1201, 1207. Under this section, the bankruptcy court

shall excuse compliance with subsections (a) and (b)(1) of this section if the custodian is an assignee for the benefit of the debtor’s creditors that was appointed or took possession more than 120 days before the date of the filing of the petition, unless compliance with such subsections is necessary to prevent fraud or injustice.

11 U.S.C. § 543(d)(2). This section, in essence, excuses some assignees from complying with property turnover requirements. Sherwood, 394 F.3d at 1201. Another section that might reveal the Bankruptcy Code’s preservation of assignment for the benefit of creditors proceedings is 11 U.S.C. § 305. Rankin & Alliotts, supra note 64, at 20. This section provides:

(a) The court, after notice and a hearing, may dismiss a case under this title, or may suspend all proceedings in a case under this title, at any time if— (1) the interests of creditors and the debtor would be better served by such dismissal or suspension; or (2)(A) a petition under section 1515 for recognition of a foreign proceeding has been granted; and (B) the purposes of chapter 15 of this title would be best served by such dismissal or suspension. (b) A foreign representative may seek dismissal or suspension under subsection (a)(2) of this section. (c) An order under subsection (a) of this section dismissing a case or suspending all proceedings in a case, or a decision not so to dismiss or suspend, is not reviewable by appeal or otherwise by the court of appeals under section 158(d), 1291, or 1292 of title 28 or by the Supreme Court of the United States under section 1254 of title 28.

11 U.S.C. § 305 . Though not stated explicitly, the argument is that under this section, the court may dismiss a case or suspend all proceedings after a hearing; the court may decide that other proceedings, such as voluntary assignment proceedings, are in the best interests of the creditors and the debtor. See Rankin & Alliotts, supra note 64, at 20. 74 Sherwood, 394 F.3 at 1207 (Nelson, J., dissenting). 75 The only vote against inclusion of the clause was Roger Sherman from Connecticut who was concerned that bankruptcies could still be punishable by death, as was the law in England. Tabb, History, supra note 38, at 13.


Bankruptcies throughout the United States.”76 Between constitutional ratification and 1898, when the era of permanent federal bankruptcy legislation began, Congress exercised its broad and sweeping77 power to enact federal bankruptcy legislation for a total of sixteen years.78 Because Congress only occasionally enacted federal legislation, states passed statutes to fill the void left during periods when no federal legislation was in effect.79

Courts consider the relationship between federal bankruptcy laws and state laws through preemption analysis.80 The modern analysis is relatively familiar.81 Preemption analysis begins with a consideration of the Supremacy Clause82 and requires an examination of congressional 76 U.S. CONST. art. I, § 8, cl. 4. The uniformity expressed in the Bankruptcy Clause has been held to refer to geographic uniformity, meaning that debtor and creditor rights may differ among states, though the application must be uniform to all states. Recent Cases, 3 TEMP. L.Q. 213, 213 (1928-1929) (citing Thomas v. Woods 173 F. 585, 590 (1909)). The Stellwagen Court made an early statement related to geographic uniformity, stating that:

Notwithstanding this requirement as to uniformity the bankruptcy acts of Congress may recognize the laws of the state in certain particulars, although such recognition may lead to different results in different states. For example, the Bankruptcy Act recognizes and enforces the laws of the states affecting dower, exemptions, the validity of mortgages, priorties [sic] of payment and the like. Such recognition in the application of state laws does not affect the constitutionality of the Bankruptcy Act, although in these particulars the operation of the Act is not alike in all the states.

Stellwagen v. Clum , 245 U.S. 605, 613 (1918). Thus, “[b]ankruptcy legislation need not apply to all classes in the same way. It is sufficient if each class throughout the country is accorded like treatment, for the prescribed uniformity is geographic rather than personal.” John Gerdes, Constitutionality of Section 77B of the Bankruptcy Act, 12 N.Y.U. L.Q. REV. 196, 203 (1934) (citing Hanover Nat’l Bank v. Moyses, 186 U.S. 181, 188 (1902)). 77 Gerdes, supra note 76, at 203. 78 Tabb, History, supra note 38, at 12-23. Federal bankruptcy laws were in effect from 1800-1803, 1841-1843, and from 1867-1878. The Bankruptcy Act of 1898 began a period of continuous federal bankruptcy legislation, though the act has undergone a few notable amendments, including the Chandler Act of 1938 and the Bankruptcy Reform Act of 1978, which set forth the current Bankruptcy Code and has undergone amendment as recently as 2005. 79 See id. at 48 (“Subject to the limitation that states may not impair the obligation of contracts, states were free to fill this vacuum with bankruptcy and insolvency laws of their own.”). Further, it has been argued that because the “subject of Bankruptcies” does not extend beyond the insolvent debtor, the Constitution does not authorize Congress to pass laws related to general debtor-creditor relations. Thomas E. Plank, The Constitutional Limits of Bankruptcy, 63 TENN. L. REV. 556 (1996). Voluntary assignment statutes may be said to govern such relations. 80 See LAURENCE H. TRIBE, AMERICAN CONSTITUTIONAL LAW § 6-28 (3d ed. 2000). 81 Widely used constitutional law casebooks contain a section covering the preemption analysis employed by the Court in recent cases. See, e.g., KATHLEEN M. SULLIVAN & GERALD GUNTHER, CONSTITUTIONAL LAW 324-33 (15th ed. 2004). 82 U.S. CONST., art. VI, cl. 2 (“This Constitution, and the Laws of the United States which shall be made in Pursuance thereof; and all Treaties made, or which shall be made, under the Authority of the United States, shall be the supreme Law of the Land; and the Judges in every State shall be bound thereby, any Thing in the Constitution or Laws of any State to the Contrary notwithstanding.”); English v. Gen. Elec. Co., 496 U.S. 72, 78-79 (1990) (“Our cases have established that state law is pre-empted under the Supremacy Clause in three circumstances.”) (internal citation omitted); Hillsborough County, Florida v. Automated Med. Labs., 471 U.S. 707, 712-13 (1985). Further, “[i]t is a familiar and well-established principle that the Supremacy Clause . . . invalidates state laws that ‘interfere with, or are contrary to,’ federal law.” Id. at 712


intent to preempt state authority.83 Under the Supremacy Clause, federal law may preempt state law (1) expressly, (2) by implied occupation of a field, or (3) by implied exclusion of conflicting state regulation.84 When Congress acts within constitutional limits, it may (quoting Gibbons v. Ogden, 22 U.S. 1, 211 (1824) (Marshall, C.J.)). Cf. Stephen A. Gardbaum, The Nature of Preemption, 79 CORNELL L. REV. 767 (1994) (arguing that supremacy and preemption are distinct legal and constitutional concepts, ultimately suggesting that preemption cases should be resolved through the ordinary rules of statutory interpretation and thus, preemption doctrine does not exist at all); TRIBE, supra note 80, at 1204 (“‘[C]onflict’ and ‘field’ preemption rarely offer much help in the inherently difficult task that lies at the heart of preemption analysis—the task of determining statutory meaning.”). 83 English, 496 U.S. at 78-79 (1990). 84 See Pac. Gas & Elec. Co. v. State Energy Res. Conservation & Dev. Comm’n, 461 U.S. 190, 203-04 (1983); see also Lorillard Tobacco Co. v. Reilly, 533 U.S. 525, 541 (2001)

State action may be foreclosed by express language in a congressional enactment, see, e.g., Cipollone v. Liggett Group, Inc., 505 U.S. 504, 517 (1992), by implication from the depth and breadth of a congressional scheme that occupies the legislative field, see, e.g., Fidelity Fed. Sav. & Loan Ass’n v. De la Cuesta, 458 U.S. 141, 153 (1982), or by implication because of a conflict with a congressional enactment, see, e.g., Geier v. American Honda Motor Co., 529 U.S. 861, 869-74 (2000).

Id. See also Karen A. Jordan, The Shifting Preemption Paradigm: Conceptual and Interpretive Issues, 51 VAND. L. REV. 1144, 1157 (1998); Gardbaum, supra note 82, at 767. The Supreme Court has expressed its categorical approach in an oft-quoted passage:

In determining whether a state statute is pre-empted by federal law and therefore invalid under the Supremacy Clause of the Constitution, our sole task is to ascertain the intent of Congress. Federal law may supersede state law in several different ways. First, when acting within constitutional limits, Congress is empowered to pre-empt state law by so stating in express terms. Second, congressional intent to preempt state law in a particular area may be inferred where the scheme of federal regulation is sufficiently comprehensive to make reasonable the inference that Congress left no room for supplementary state regulation . . . . As a third alternative, in those areas where Congress has not completely displaced state regulation, federal law may nonetheless pre-empt state law to the extent it actually conflicts with federal law. Such a conflict occurs either because compliance with both federal and state regulations is a physical impossibility, or because the state law stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.

California Fed. Sav. & Loan Ass’n v. Guerra, 479 U.S. 272, 280-81 (1987) (internal citations and quotation marks omitted). This approach is generally understood as divided into two categories. See Jordan, supra, at 1150. Congress may preempt state law expressly when it “attempts to define the extent to which a particular federal law will preempt state law.” Id. Congress may also preempt state law impliedly by implementing legislation that occupies a field or conflicts with state law. Id. Accordingly, both “field” and “conflict” relate to preemption determined by implication. However, field preemption may fall into either express preemption, implied preemption, or conflict preemption. See TRIBE, supra note 80, § 6-28, at 1176-77. The Supreme Court further clarified its statement of modern preemption law more recently, stating:

First, Congress can define explicitly the extent to which its enactments pre-empt state law . . . when Congress has made its intent known through explicit statutory language, the courts’ task is an easy one. Second, in the absence of explicit statutory language, state law is pre-empted where it regulates conduct in a field that Congress intended the Federal Government to occupy exclusively. Such an intent may be inferred from a scheme of federal regulation . . . so pervasive as to make reasonable the inference that Congress left no room for the States to supplement it, or where an Act of Congress touch[es] a field in which the federal interest is so dominant that the federal system will be assumed to preclude enforcement of state laws on the same subject. Although


expressly preempt state law.85 Field preemption occurs when the federal regulatory scheme is so “pervasive” that it would be a reasonable inference that “Congress left no room for the States to supplement it.”86 Finally, as for conflict preemption:

where the federal government, in the exercise of its superior authority in [a] field, has enacted a complete scheme of regulation and has therein provided a standard . . . states cannot, inconsistently with the purpose of Congress, conflict or interfere with, curtail or complement, the federal law, or enforce additional or auxiliary regulations.87 A conflict arises when complying with federal and state regulations

is a “physical impossibility.”88 In general, courts are reluctant to infer preemption in a case where ambiguity exists.89 Further, as a general matter, bankruptcy courts tend to incorporate, instead of preempt, relevant state law.90

this Court has not hesitated to draw an inference of field pre-emption where it is supported by the federal statutory and regulatory schemes, it has emphasized: Where . . . the field which Congress is said to have pre-empted includes areas that have been traditionally occupied by the States, congressional intent to supersede state laws must be clear and manifest. Finally, state law is pre-empted to the extent that it actually conflicts with federal law. Thus, the Court has found pre-emption where it is impossible for a private party to comply with both state and federal requirements, or where state law stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.

English, 496 U.S. at 78-79 (1990). Despite this seemingly direct statement of the categorical approach, the English Court noted that:

By referring to these three categories, we should not be taken to mean that they are rigidly distinct. Indeed, field pre-emption may be understood as a species of conflict pre-emption: A state law that falls within a pre-empted field conflicts with Congress’ intent (either express or plainly implied) to exclude state regulation. Nevertheless, because we previously have adverted to the three-category framework, we invoke and apply it here.

Id. at 79 n.5. The recognition by the Court that the rigidity of the categorical approach is not “air tight,” TRIBE, supra note 80, § 6-28, at 1177, has led to new conceptions of the analytical framework. Jordan, supra, at 1150 (arguing that the Court is moving away from the categorical approach and suggesting an approach that considers the purpose underlying the regulatory provisions). 85 Hillsborough, 471 U.S. at 713 (citing Jones v. Rath Packing Co., 430 U.S. 519, 525 (1977)). A summary of the doctrine is that field preemption is where such congressional intent is inferred from the comprehensiveness of federal regulation, which “leaves no room for the States to supplement it.” Jordan, supra note 84, at 1157-58 . 86 Rice v. Santa Fe Elevator Corp., 331 U.S. 218, 230 (1947). 87 Hines v. Davidowitz, 312 U.S. 53, 66-67 (1941). Under conflict preemption, “[s]tate law is preempted if that law actually conflicts with federal law.” Jordan, supra note 84, at 1150. 88 Florida Lime & Avocado Growers, Inc. v. Paul, 373 U.S. 132, 142-43 (1963). 89 TRIBE, supra note 80, § 6-28, at 1175. 90 See Skeel, supra note 16, at 491 (referencing the Supreme Court’s approval of such deference to state law by citing Butner v. United States, 440 U.S. 48 (1979), which held that Congress left the determination of property rights in the bankruptcy context to state law); see also Local Loan Co. v. Hunt, 292 U.S. 234, 245 (1934) (“The various provisions of the Bankruptcy Act . . . are to be construed when reasonably possible in harmony with it so as to effectuate the general purpose and policy of the act. Local rules subversive of that result cannot be accepted as


However, the Supreme Court undertook a slightly different approach when it decided the principal cases.91 From 1912 through 1920, the Court established automatic preemption by sole occupation of a field and during that period almost always found state legislation to be preempted.92 Only in 1933 did the Supreme Court begin a definitive shift towards the modern analysis,93 with its focus on congressional intent,94 and a more nuanced approach to automatic field preemption. Accordingly, the Court did not employ the modern preemption analysis in the principal cases of interest here, even though the Court demonstrated some of the foundational tendencies towards the modern doctrine in those cases.

A. Preemption Analysis in the Bankruptcy Context

In 1819, the Supreme Court first considered the implication of

federal legislation on state bankruptcy law enacted during the existence of federal legislation in Sturges v. Crowninshield.95 The Sturges Court controlling the action of a federal court.”). Bankruptcy courts especially defer to state law in the corporate governance context. Skeel, supra note 16, at 491. 91 See infra Part IV.A. The first state statute to be overturned on preemption grounds occurred in 1912. Gardbaum, supra note 82, at 803. 92 Gardbaum, supra note 82, at 801. In essence, automatic preemption meant that it was “not merely conflicting state laws that [were] overridden by federal law on the same subject, but any state laws—even those that [were] consistent with and supplement federal law.” Id. at 801. The prevailing idea at the time considered that the “effect of congressional action is to end the concurrent power of the states and thereby to create exclusive power at the federal level from that time on.” Id. The motivation for this automatic preemption stemmed from the recognition that uniform regulation had become a necessity, especially because of the advent of the railroads, and contrasted the previous tendency to uphold almost all state laws. Id. Three features characterized the preemption power established by the Court during the period from 1912 through 1920: (1) “Preemption was an automatic consequence of congressional action in a field” and state laws were superseded when Congress exercised its power in an area of concurrent power; (2) The concept of “latent exclusivity” prevailed, signifying that states could act in an area until Congress exercised its inherent Commerce Clause powers at which time the congressional action had an automatic preemptive effect, leading to the concept of “occupation of a field;” (3) Preemption stemmed from the implications of the Supremacy Clause. Id. at 801-02. Justice Holmes summarized automatic preemption, stating that “the alleged absence of conflict is immaterial. When Congress has taken the particular subject-matter in hand coincidence is as ineffective as opposition, and a state law is not to be declared a help because it attempts to go farther than Congress has seen fit to go.” Charleston & W. Carolina Ry. Co. v. Varnville, 237 U.S. 597, 604 (1915), quoted in Gardbaum, supra note 82, at 805. 93 Gardbaum, supra note 82, at 806 (citing Mintz v. Baldwin, 289 U.S. 346 (1933), which was argued on April 10 and decided on May 8). The Court judicially affirmed this analysis in 1937. Id. As for the principal cases, the Court decided Stellwagen in 1918; Pobreslo was argued on December 13, 1932 and decided on January 9, 1933, before the changes in preemption analysis took hold. 94 Generally, intent began to play a role in response to federalism in the United States, which began with the New Deal in 1933. Id. This infusion of intent into the analysis does not play any substantive role in the arguments or analysis supportive of this Note’s thesis. 95 17 U.S. 122 (1819).


held that states have the authority to pass a bankruptcy law provided that no federal law establishing a uniform system of bankruptcy was in force that conflicted with the state law.96 Specifically, the Court stated that “state laws are thus suspended only to the extent of actual conflict with the system provided by the Bankruptcy Act of Congress.”97 Sturges thus stands for the proposition that state insolvency laws are valid when no federal bankruptcy law is in effect; however, when Congress passes federal legislation, state laws are preempted “so far as they [are] in conflict” with federal legislation.98

Since then, the Supreme Court has addressed the issue of state statutes preempted by federal bankruptcy legislation mainly through three principal cases.99 First, in Stellwagen v. Clum,100 a secured creditor sought turnover of lumber and cash from a “bankruptcy” trustee appointed pursuant to an Ohio state procedure. The trustee resisted on the grounds that the security interest on the lumber and cash was a voidable preference under Ohio law. The secured creditor in turn responded that the the federal Bankruptcy Act preempted the Ohio voidable preference law. The Supreme Court did not find the Ohio statute preempted.101 The Stellwagen Court observed that the “statute is

96 Sturges, 17 U.S. at 208. The Court also limited the state bankruptcy law with the proviso that it “not impair the obligation of contracts, within the meaning of the constitution . . . .” Id. 97 Stellwagen v. Clum, 245 U.S. 605, 613 (1918) (citing Sturges, 17 U.S. at 122); GLENN, supra note 34, § 125, at 208 (“They are suspended while congressional legislation is of effect, they revive when national law is repealed, and they lose their force again when Congress chooses once more to give the country a national law.”). 98 Note and Comment, The Federal Bankruptcy Act and its Effect on State Insolvency Laws, 16 MICH. L. REV. 540, 540 (1918); Williston, supra note 3, 547 (1909) (“It is clearly established that when no national act is in force, states have full power to pass bankruptcy laws. The only limitation at such a time on the power of the states is the constitutional prohibition against impairing the obligation of contracts. Owing to this prohibition, even though no national law is in force, a state cannot by a bankruptcy or insolvency law discharge a debt arising either under a contract entered into before the discharge of the state law in question or under a contract made without the state.”); see also Stellwagen, 245 U.S. at 613 (“In view of this grant of authority to the Congress it has been settled from an early date that state laws to the extent that they conflict with the laws of Congress, enacted under its constitutional authority, on the subject of bankruptcies are suspended. While this is true, state laws are thus suspended only to the extent of actual conflict with the system provided by the Bankruptcy Act of Congress.”); In re Newport Offshore Ltd., 219 B.R. 341 (Bank. R.I. 1998) (“[t]he existence of federal bankruptcy legislation suspends the operation of state bankruptcy laws”) (citing International Shoe v. Pinkus, 278 U.S. 261, 265 (1929))); John S. Miller, The Illinois Business Corporation Act and Bankruptcy Legislation, 29 ILL. L. REV. 695 (1935); ; ; Effect of National Bankruptcy Act on State Insolvency Statutes, supra note 4, at 1090; Editorial Note, General Assignments for the Benefit of Creditors and the Federal Bankruptcy Act: Peaceful Coexistence?, 14 RUTGERS L. REV. 800, 800-01 (1960) [hereinafter Peaceful Coexistence?]. 99 See supra note 26; Peaceful Coexistence?, supra note 98; see also Sherwood Partners, Inc. v. Lycos, Inc., 394 F.3d 1198, 1203 (9th Cir. 2005) (“[W]e know, because the Supreme Court has repeatedly told us . . . state statutes that purport to . . . [give] debtors a discharge of their debts are preempted . . . .”) (citing cases). 100 245 U.S. 605 (1918). 101 The Sherwood majority noted that the statute in Stellwagen was not a true preference


not opposed to the policy of the bankruptcy law or in contravention of the rules and principles established by it with a view to the fair distribution of the assets of the insolvent.”102 The Court also ruled that only state laws in conflict with federal bankruptcy legislations are suspended,103 but those “which are in aid” of federal legislation may stand.104

In Sherwood, Judge Kozinski had to square his decision with Stellwagen.105 He argued that pursuant to the Ohio law under contention in Stellwagen, any creditor could have exercised the avoidance power exercised by the state trustee.106 The distinction in Judge Kozinski’s mind, then, is the distinction between a right that only a creditor representative could exercise, as in California, and a right of avoidance that an individual creditor could avoid. The latter is never preempted because the bankruptcy trustees can subrogate themselves to the Ohio-style powers under § 544(b)(1).

In fact, this attempt to distinguish Stellwagen can be challenged,

statute because it required the transfer to have been made in contemplation of insolvency or with the intent to defraud creditors, which resembles a fraudulent conveyance statute. Sherwood, 394 F.3d at 1202 n.3. However, the Sherwood court did not consider this distinction relevant to its analysis. Id. The Ohio statute in Stellwagen stated, in pertinent part:

Every sale, conveyance, transfer, mortgage or assignment, made in trust or otherwise by a debtor or debtors, and every judgment suffered by him or them against himself or themselves in contemplation of insolvency, and with a design to prefer one or more creditors to the exclusion in whole or in part of others, and every sale, conveyance, transfer, mortgage or assignment made, or judgment procured by him or them to be rendered, in any manner, with intent to hinder, delay or defraud creditors, shall be declared void as to creditors of such debtor or debtors at the suit of any creditor or creditors, and in any suit brought by any creditor or creditors of such debtor or debtors for the purpose of declaring such sale void, a receiver may be appointed who shall take charge of all the assets of such debtor or debtors, including the property so sold, conveyed, transferred, mortgaged, or assigned, which receiver shall administer all the assets of the debtor or debtors for the equal benefit of the creditors of the debtor or debtors in proportion to the amount of their respective demands, including those which are unmatured.

Stellwagen, 245 U.S. at 609 n.1. 102 Stellwagen, 245 U.S. at 615. 103 See supra note 44 for a brief explanation comparing “suspension” and “preemption.” 104 Stellwagen, 245 U.S. at 615. (“It is only state laws which conflict with the bankruptcy laws of Congress that are suspended; those which are in aid of the Bankruptcy Act can stand.”). This observation is similar to a statement made by the Court in Sturges, supra note 98, but it should be juxtaposed against the Court’s statement in Pinkus: “States may not pass or enforce laws to interfere with or complement the Bankruptcy Act or to provide additional or auxiliary regulations.” Int’l Shoe Co. v. Pinkus, 278 U.S. 261, 265 (1929) (quoted in Effect of National Bankruptcy Act on State Insolvency Statutes, supra note 4, at 1092 n.16). The Pinkus dicta cited, though, has been considered to be a broader statement than that which the Supreme Court had actually implemented, especially because in Pobreslo, the Court stated that the statute in question was “quite in harmony with the purposes of the federal act.” Pobreslo v. Joseph M. Boyd Co., 287 U.S. 518, 526 (1933). 105 Sherwood Partners, Inc. v. Lycos, Inc., 394 F.3d 1198, 1205 (9th Cir. 2005) 106 Id.


with reference to the then extant Ohio law.107 This section indicates that, although an individual creditor could commence a voidable preference action, this commencement also had the effect of commencing an involuntary collective proceeding. A creditor had the right to avoid a preference, but Ohio law indicated that the fruits of the action had to be shared pro rata with other creditors. The provision is therefore a strange mixture between a private creditor’s right and a collective right to avoid transfers. Oddly, this ends up being the federal rule as well set forth in Moore v. Bay.108 Under Moore, a bankruptcy trustee could subrogate himself to the rights of an unsecured creditor and avoid a transfer by the debtor pursuant to state law, but the proceeds did not go to the creditor to whom the trustee was subrogated. Rather, the recovery was added to the bankruptcy estate where all creditors could share pro rata. Thus, Ohio law merely replicates the end result in bankruptcy under § 544(b)(1).109 In any case, as emphasized earlier, even if a subsequent bankruptcy trustee may not subrogate himself to the Ohio creditor’s right to avoid a preference, the bankruptcy trustee can obtain the voidable preference recovery (or the cause of action to recover the preference) under the turnover provision in § 543(b)(1).110

Stellwagen represents a turning point because most prior decisions found provisions in state insolvency laws controlling voluntary assignments preempted during the operation of federal bankruptcy legislation.111 However, the statutes analyzed in most previous cases contained a discharge provision, whereas the Ohio statute in Stellwagen

107 The statute sets forth:

Any creditor or creditors, as to whom any of the acts or things prohibited in the preceding section are void . . . may commence an action in a court of competent jurisdiction to have such acts or things declared void. And such court shall appoint a trustee or receiver according to the provisions of this chapter, who upon being duly qualified shall proceed by due course of law to recover possession of all property so sold, conveyed, transferred, mortgaged or assigned, and to administer the same for the equal benefit of all creditors, as in other cases of assignments to trustees for the benefit of creditors. And any assignee as to whom any thing or act mentioned in the preceding section shall be void, shall likewise commence a suit in a court of competent jurisdiction to recover possession of all property so sold, conveyed, transferred, mortgaged or assigned, and shall administer the same for the equal benefit of all creditors as in other cases of assignments to trustees for the benefit of creditors.

Stellwagen, 245 U.S. at 609 n.1 (emphasis added). 108 284 U.S. 4 (1931). 109 Congress retained the rule of Moore in the Bankruptcy Code because of its desire to avoid having the trustee spend resources to determine which creditors enjoyed avoidance rights and which did not. See S. REP. NO. 95-989, at 85 (1978). 110 See supra notes 63-68 and accompanying text. 111 See The Federal Bankruptcy Act and its Effect on State Insolvency Laws, supra note 98, at 542 (citing Ketcham v. McNamara, 46 A. 146 (Conn. 1900); Capital Lumber Co. v. Saunders, 143 P. 1178 (Idaho 1914); Closser v. Strawn, 227 F. 139 (D. Pa. 1915); Hasbrouck v. La Febre, 152 P. 168 (Wyo. 1915); Pelton v. Sheridan, 144 P. 410 (Or. 1914)). This article explains that Pelton is especially difficult to reconcile with Stellwagen.


did not.112 The lack of this discharge provision was a key factor in the Stellwagen Court’s determination.113 This distinction led the Court to hold that a state statute is suspended if it discharges debts but continues in force if it does not.114 In its analysis, the Stellwagen Court relied on its 1875 decision, Mayer v. Hellman,115 which considered another Ohio provision116 permitting an assignment for the benefit of creditors. In Mayer, the Court also upheld the provision,117 focusing on the fact that because the statute in Mayer did not include a discharge provision, the Court did not consider the statute an insolvency law.118

112 Id. 113 The Court stated:

It is settled that a state may not pass an insolvency law which provides for a discharge of the debtor from his obligations, which shall have the effect of a bankruptcy discharge as to creditors in other states, and this although no general federal bankruptcy act is in effect. And while it is not necessary to decide that there may not be state insolvent laws which are suspended although not providing for a discharge of indebtedness, all the cases lay stress upon the fact that one of the principal requisites of a true bankruptcy law is for the benefit of the debtor in that it discharges his future acquired property from the obligation of existing debts.

Stellwagen, 245 U.S. at 615-16. 114 Id. at 615; see supra note 98 and accompanying text. The two primary statements of the conflict with respect to discharge may be found in the language of “actual conflict” and the language related to the “aims and purposes” of the federal law. 245 U.S. at 613, 618. However, a commentator has found caution in Justice Day’s language. See The Federal Bankruptcy Act and its Effect on State Insolvency Laws, supra note 98, at 542. Specifically, the concern relates to the fact that “it is not necessary to decide that there may not be state insolvent laws which are suspended although not providing for a discharge of indebtedness.” Stellwagen, 245 U.S. at 616. This caution is also recognized in the opinion of In re Weedman Stave Co., 199 F. 948 (E.D. Ark. 1912), which held that “a state statute will be suspended even though it does not provide for a discharge.” The Federal Bankruptcy Act and its Effect on State Insolvency Laws, supra note 98, at 542. One point worth noting that will be discussed in the section covering Pinkus (at infra text accompanying notes 122-129), and especially in the section on Star (at infra text accompanying notes 140-145), is that the Arkansas Supreme Court in In re Weedman Stave Co. ruled that the law was a complete bankruptcy statute. See Roberts Cotton Oil Co. v. F. E. Morse & Co., 135 S.W. 334 (Ark. 1911). 115 91 U.S. 496 (1875). 116 The Mayer Court did not quote the statutory language or cite directly to the statute. However, the argument of plaintiff’s counsel summarized that the Ohio statute, entitled

‘An Act regulating the mode of administering assignments in trust for the benefit of creditors,’ has none of the distinctive features of an insolvent or a bankrupt law. It does not purport or attempt to discharge the debtor either from arrest or imprisonment, or to free him from future liability. His after-acquired property is liable to his creditors to the same extent in every particular as if he had not made an assignment in trust for his creditors.

91 U.S. at 498. 117 Id. The Court did not grant possession of the transferred property to the federal bankruptcy assignee. This aspect of the decision has been reversed legislatively. See 11 U.S.C. § 543 (2000 & Supp. 2006). 118 The Court stated that the

[S]tatute of Ohio is not an insolvent law in any proper sense of the term. It does not compel, or in terms even authorize, assignments: it assumes that such instruments were conveyances previously known, and only prescribes a mode by which the trust created shall be enforced. It provides for the security of the creditors by exacting a bond from


Although not referenced in the Stellwagen opinion, an earlier case, Boese v. King,119 also considered whether federal legislation suspended an assignment for the benefit of creditors statute.120 In Boese, a judicial lien creditor attempted to levy property from a general assignee on the theory that the New Jersey assignment statute was entirely preempted by the Bankruptcy Act of 1897. The Boese Court found that the discharge provision of the statute was preempted, but the Court also severed the offending portion from the rest of the statute, which it allowed to stand. Consequently, Boese stands for the proposition that preemption of discharge provisions does not necessarily lead to preemption of the entire statute.121

Conversely, the next case in the sequence after Stellwagen, International Shoe Co. v. Pinkus,122 did not allow for severance. In Pinkus, the Supreme Court held an entire assignment statute preempted because it contained a discharge provision.123 In its analysis, the Court

the trustees for the discharge of their duties; it requires them to file statements showing what they have done with the property; and affords in various ways the means of compelling them to carry out the purposes of the conveyance. There is nothing in the act resembling an insolvent law. It does not discharge the insolvent from arrest or imprisonment: it leaves his after-acquired property liable to his creditors precisely as though no assignment had been made. The provisions for enforcing the trust are substantially such as a court of chancery would apply in the absence of any statutory provision. The assignment in this case must, therefore, be regarded as though the statute of Ohio, to which reference is made, had no existence. There is an insolvent law in that State; but the assignment in question was not made in pursuance of any of its provisions. The position, therefore, of counsel, that the Bankrupt Law of Congress suspends all proceedings under the Insolvent Law of the State, has no application.

Mayer, 91 U.S. at 502-03. The Stellwagen Court quotes this passage. 245 U.S. at 616-17. 119 108 U.S. 379 (1883). Boese concerned a New Jersey statute in which only the claims of creditors who elected to participate under the assignment could be discharged. Id. The Supreme Court affirmed a New York state court decision that although the local statute was inoperative as far as it provided for the discharge of the debtor from future liability to creditors, the state act was not suspended in its entirety and the assignment was effective at common law to transfer title to the assignee. Id. Specifically, the Court stated that “the local statute was, from the date of the passage of the Bankruptcy Act, inoperative in so far as it provided for the discharge of the debtor from further liability to creditors who came in under the assignment and participated in the distribution of the proceeds of the assigned property.” Id. at 385. 120 Id. 121 See The Federal Bankruptcy Act and its Effect on State Insolvency Laws, supra note 98, at 543. Both In re Tarnowski and Pobreslo, which considered Wisconsin statutes, reflect this demarcation. The courts in both instances allowed severance of the discharge provision. By allowing this severability of the discharge provision and enabling the continued existence of the assignment portion, the Court may have demarcated a limit of preemption. See infra text accompanying notes 135-137. 122 278 U.S. at 261 (1929). 123 Id. In Pinkus, a judgment creditor brought suit against a debtor when the sheriff, in response to a writ of execution, could not find any property because the debtor had commenced an action in state court and the receiver it appointed had sold the debtor’s property and controlled the assets. Id. The judgment creditor claimed that the Arkansas statute was superseded and suspended by the passage of the bankruptcy act. Id.


found the statute to be a complete insolvency law,124 relying in part on a like determination by the Arkansas Supreme Court.125 By so finding, the Pinkus Court reasoned that the statute encroached on the field entered into by Congress126 and was thus preempted.127

The Pinkus court distinguished the result in Boese. In Boese, the judgment creditor could have (but did not) commence a federal bankruptcy proceeding, where the general assignment could have been undone. In Pinkus, however, the creditor could not have done so, unless other creditors joined in an involuntary petition. Furthermore, the debtor in Pinkus had received a federal bankruptcy discharge within the past six years and so was ineligible to obtain another.128 Nevertheless, 124 Id. at 264. The Court described the aspects of the law that made it subject to preemption, finding that the statute “provides for surrender by insolvent of all his unexempt property . . . to be liquidated by a trustee for the payment of debts under the direction of the court. It classifies creditors, prescribes the order of payment of their claims and gives preference to those fully discharging the debtor in consideration of pro rata distribution.” Id. Compare these factors with the factors the Court considered in Mayer, see supra note 118 and accompanying text. 125 See Pinkus, 278 U.S. at 264 (citing Hickman v. Parlin-Orendorff Co., 115 S.W. 371 (Ark. 1909); Baxter County Bank v. Copeland, 169 S.W. 1180 (Ark. 1914); Morgan v. State, 242 S. W. 384 (Ark. 1922); Int’l Shoe v. Pinkus, 292 S.W. 996 (Ark. 1927); Friedman & Sons v. Hogins, 299 S.W. 997 (Ark. 1927). The Supreme Court four years later discussed deference for a state court’s determination in Star. See infra text accompanying notes 140-145. 126 Pinkus, 278 U.S. at 264 (“The state enactment operates within the field occupied by the Bankruptcy Act.”). Some have taken an expansive view of this decision arguing that “the reasoning used to justify the holding that the state act was suspended discloses a broad effect to be given the suspensory power of the Bankruptcy Act,” and concluding that when Congress entered the field of bankruptcy, it covered the entire field with its national act such that bankruptcy laws are “laws for the distribution of the property of insolvent debtors and releases from debts.” Harold S. Irwin, Notes, Suspension of State Insolvency Laws by Federal Bankruptcy Act, 35 DICK. L. REV. 78, 81-82 (1931). 127 278 U.S. at 266. (“It is clear that the provisions of the Arkansas law governing the distribution of property of insolvents for the payment of their debts and providing for their discharge, or that otherwise relate to the subject of bankruptcies, are within the field entered by Congress when it passed the Bankruptcy Act, and therefore such provisions must be held to have been superseded.”). See infra note 128 for a discussion on the fact that the discharge was already granted and therefore the Pinkus Court could not sever that provision. 128 278 U.S. at 266. Regarding discharge, the Court noted that Pinkus had been discharged under state provisions six years prior to the filing of his state court filing, and because of this, the Court recognized that he could not have obtained a discharge under the Bankruptcy Act, “and, in proceedings under that Act, all his creditors would have been entitled to participate in distribution without releasing the insolvent as to unpaid balances.” Id. at 264-65. The Bankruptcy Code only permits one discharge every seven years. See 11 U.S.C. § 727(a)(8) (2000 & Supp. 2006). The Court further stated that:

The purpose to exclude state action for the discharge of insolvent debtors may be manifested without specific declaration to that end; that which is clearly implied is of equal force as that which is expressed. The general rule is that an intention wholly to exclude state action will not be implied unless, when fairly interpreted, an act of Congress is plainly in conflict with state regulation of the same subject. In respect of bankruptcies the intention of Congress is plain. The national purpose to establish uniformity necessarily excludes state regulation. It is apparent, without comparison in detail of the provisions of the Bankruptcy Act with those of the Arkansas statute, that intolerable inconsistencies and confusion would result if that insolvency law be given effect while the national act is in force. Congress did not intend to give insolvent


Arkansas law was prepared to give the debtor a discharge. The Pinkus Court therefore found the entire Arkansas scheme inconsistent with the Bankruptcy Act of 1898 and so proclaimed the entire statute preempted. On the other hand, the Pinkus Court specifically denied that its holding extended to preemption of common law assignments for the benefit of creditors.129

The final principal case is Pobreslo v. Joseph M. Boyd Co.,130 involving a Wisconsin assignment for the benefit of creditors statute. Prior to Probreslo, the Wisconsin state courts had analyzed an earlier version in In re Tarnowski,131 under which a debtor made a voluntary assignment.132 Resulting from its preemption analysis, the Tarnowski court concluded that state statutes relating to the subject of bankruptcy were preempted, and the statutes did not permit state courts to discharge debtors from their debts.133 Finding that voluntary assignment law is “separate and distinct” from the granting of a discharge, the court concluded that the voluntary assignment provisions did not contravene the current federal bankruptcy legislation, though the discharge provisions did.134

debtors seeking discharge, or their creditors seeking to collect claims, choice between the relief provided by the Bankruptcy Act and that specified in state insolvency laws. States may not pass or enforce laws to interfere with or complement the Bankruptcy Act or to provide additional or auxiliary regulations.

278 U.S. at 265 (citations omitted). 129 Id. (“[W]e need not decide whether, independently of statute, an assignment for the benefit of creditors on the conditions specified in the decree would protect the property of the insolvent from seizure to pay the judgment. And, as the passage of the Bankruptcy Act superseded the state law, at least in so far as it relates to the distribution of property and releases to be given, plaintiff is . . . in error.”). See infra notes 164-174 and accompanying text for a more complete description of what it meant that the Court did not make this determination. 130 287 U.S. 518 (1933). 131 210 N.W. 836 (Wis. 1926). 132 The Wisconsin statute (section 125.25) provided the state circuit court with supervision over voluntary assignments, authorized the assignee to set aside preferences, fraudulent conveyances, as well as judicial liens, provided for proof and allowance of claims, and authorized the debtor to be discharged from his debt. COUNTRYMAN, supra note 3, at 320. 133 210 N.W. at 837 (“This act shall go into full force and effect upon its passage: Provided, however, that no petition for voluntary bankruptcy shall be filed within one month of the passage thereof, and no petition for involuntary bankruptcy shall be filed within four months of the passage thereof. Proceedings commenced under state insolvency laws before the passage of this act shall not be affected by it.”) (quoting 30 Stat. 544 ch. 541(1898)). 134 Id. The court referred to the Mayer and Stellwagen decisions in making its final determination, and stated:

[T]here can be no doubt that legislation prescribing regulations for the administration of voluntary assignments constitutes one subject of legislation, while the discharge of bankrupts constitutes quite another. A voluntary assignment for the benefit of creditors is a personal right inherent in the ownership of property. Such a right existed at common law independent of statute. The statutes do not confer the right, but statutes in this country have been enacted for the purpose of regulating the administration of the estate for the benefit of creditors. The discharge of the bankrupt from his debts constitutes the very essence of a bankrupt law. While the administration of the estate of the bankrupt and the distribution of the proceeds thereof pro rata among his creditors


The Supreme Court decision in Pobreslo considered a different version of the Wisconsin voluntary assignment provision, and in finding the newly written discharge provision135 to be preempted, basically affirmed136 the severance approach undertaken in In re Tarnowski. In upholding the severance the Pobreslo Court recognized a need to reconcile its decision with Pinkus.137 The Court observed that Pinkus took place under a complete state insolvency law that provided for a discharge and not under a law regulating and controlling voluntary assignments for the benefit of creditors.138 Conversely, the actions in Pobreslo involved a voluntary assignment in the nature of the creation of a trust.139 Since a trust can be created by a solvent or insolvent transferor, the Wisconsin statute considered in Pobreslo was not an

is a usual, if not a necessary, incident of a bankrupt law, the discharge of the debtor from his debts is no part of an assignment law. The winding up and a fair and equal distribution of the estate of insolvent debtors may arise in various ways, but where such a proceeding does not result in the discharge of the insolvent debtor statutes regulating such a proceeding do not conflict in any manner with the bankruptcy law, and it has been squarely held by the Supreme Court of the United States that such laws are not superseded by the national Bankruptcy Act.

Id. at 838. The court reached this conclusion without reference to Boese, but it seems that the Boese decision also would have supported a finding by a court that certain provisions of a statute are separable. This decision contravened the understanding of many state courts, which held that the federal power to legislate on insolvency was so pervasive that it would destroy assignment statutes as well, especially those that provided for a discharge. Statutory Regulation of Assignment for the Benefit of Creditors, supra note 12, at 961. However, the Supreme Court did not go that far, finding a suspension of the discharge provisions, but allowing state preference statutes regulating voluntary assignments to remain in force. Id. 135 In relevant part, the clause at issue stated:

No creditor shall, in any case where a debtor has made or attempted to make an assignment for the benefit of creditors, or in case of the insolvency of any debtor, by attachment, garnishment or otherwise, obtain priority over other creditors upon such assignment being for any reason adjudged void, or in consequence of any sale, lien or security being adjudged void.

Pobreslo, 287 U.S. at 521-22 (quoting Chapter 128.06 of the Wisconsin Statutes, 1929). 136 Statutory Regulation of Assignment for the Benefit of Creditors, supra note 12, at 961. 137 See Pobreslo, 287 U.S. at 525. 138 See id. (“As shown by our decision in that case, the Arkansas insolvency law not only related to the subject of bankruptcies, but actually dealt with essential features of that subject which are covered by the act now in force. It not only governed discharge of the bankrupt debtor, but imposed conditions which trammeled and made against equal distribution of his property.”). 139 Id. at 525-26

The provisions regulating the administration of trusts created by voluntary assignments for the benefit of creditors apply whether the assignor is solvent or insolvent. They do not prevent creditors from bringing action against the debtor or require those seeking to participate in the distribution of the estate to stipulate for his discharge. And, quite in harmony with the purposes of the federal act, the provisions of chapter 128 that are regulatory of such voluntary assignments serve to protect creditors against each other, and go to assure equality of distribution unaffected by any requirement or condition in respect of discharge . . . . [T]he Wisconsin law merely governs the administration of trusts created by deeds like that in question which do not differ substantially from those arising under common-law assignments for the benefit of creditors. The substantive rights under such assignments depend upon contract; the legislation merely governs the execution of the trusts on which the property is conveyed.


insolvency statute and hence not preempted. Though not referenced by Sherwood, the Supreme Court decided

Johnson v. Star140 on the same day as Pobreslo, and held that the case was “ruled by” Pobreslo.141 The Texas statute in Star regulated assignments for the benefit of creditors and provided for the discharge of a debtor as to all consenting creditors who received at least one-third payment.142 In relying on the Texas court’s construction of the state statute, the Star ruling suggested that state assignment statutes authorizing discharge were preempted by the federal bankruptcy act, as was the prevailing rule, but that state common law permitting voluntary assignments remained unaffected.143 The Court reached its conclusion because the Texas Supreme Court determined in two previous decisions that an assignment requiring release was valid as per Texas common law.144 Thus, the Star ruling manifests the Supreme Court’s willingness to defer to a state court’s finding that a state statute codifying or regulating the common law does not conflict with federal bankruptcy law.145

Finally, in 1956, more than twenty years after the Supreme Court decided Pobreslo and Star, the Seventh Circuit struck down a revised Wisconsin voluntary assignment statute in Moskowitz v. Prentice (In re Wisconsin Builders Supply Co.).146 The Wisconsin Builders court 140 Id. at 527). 141 Id. at 530. 142 Id. at 527. The statute at issue in Star concerned assignments and required ratable distribution of the estate among consenting creditors, such that a “debtor may make such assignment and shall thereupon stand discharged from all further liability to such consenting creditors. . . . Such debtor shall not be discharged from liability to such creditor who does not receive as much as one-third of the amount allowed in his favor.” Id. 143 COUNTRYMAN, supra note 3, at 321 (citing Weintraub, Levin & Sosnoff, Assignments for the Benefit of Creditors and Comparative Systems for Liquidation of Insolvent Estates, 39 CORNELL L.Q. 3, 24 (1953)). But cf. John E. Muldor & Charles M. Solomon, 87 U. PA. L. REV. 763, 785-86 (1936); Peaceful Coexistence?, supra note 98, at 800, 807; Note, Discharge by Assignment for the Benefit of Creditors, 36 VA. L. REV. 813, 820 (1950). The United States Supreme Court had relied on decisions made by the Texas Supreme Court in Patty-Joiner & Eubank Co. v. Cummins, 57 S.W. 566 (Tex. 1900), and Haijek & Simecek v. Luck, 74 S.W. 305 (Tex. 1903). 144 See supra note 143. 145 Warren Shattuck, Notes and Comments, The Effect of Recent Federal Cases on Suspension of the Washington General Assignment Law by Operation of the Federal Bankruptcy Act, 8 WASH. L. REV. 189, 190 (1933). Under this reasoning, the Court may not find the statute preempted even if it contains a discharge provision. Id. 146 239 F.2d 649 (7th Cir. 1956), cert. denied, 353 U.S. 985 (1957). The issue presented in Wisconsin Builders mirrored earlier questions of voluntary provisions included in a Wisconsin statute related to general assignments possibly in conflict with federal bankruptcy laws and that therefore may be suspended during the operation of the federal law. In this case, a corporation executed a general assignment for the benefit of creditors pursuant to a state statute, and a receiver was appointed. Some months later, the debtor corporation filed a voluntary petition for bankruptcy in a federal district court in Wisconsin in which the corporation was adjudged bankrupt. The bankruptcy trustee brought this action against the state court receiver to turn over the debtor’s assets. The bankruptcy court referee found that statute was a comprehensive


recognized that state statutes may regulate general assignments, and state courts may supervise these assignments, either under powers conferred by statute or under traditional equity powers.147 The problem the Seventh Circuit found was that the Wisconsin statute impermissibly established an entire insolvency system.148 If the statute in Wisconsin Builders contained a discharge provision, the court could have followed precedent and severed the offending part of the statute.149 However, with no discharge provision in the statute, the court relied on the “sweeping language”150 in Pinkus.151 The court opined that although the Pinkus language does not prevent states from creating legislation covering debtor-creditor relationships,152 the Wisconsin statute changed a general assignment into a state insolvency system covering the same subject matter as the federal bankruptcy laws.153

bankruptcy statute in conflict with the federal act and thus suspended. The district court affirmed the bankruptcy court’s decision. 147 Id. at 651 (citing Pobreslo, Star, Boese, and Mayer). 148 Id. 149 The Seventh Circuit did not find the Wisconsin statute’s lack of a discharge provision dispositive. See Wisconsin Builders, 239 F.2d at 652. The court cited lower federal court decisions supporting the view that discharge is not an essential element of bankruptcy law and that state legislation may be suspended “notwithstanding the absence of such a provision.” Id. The court continued:

Some of the emphasis on discharge as the criterion of a bankruptcy act is misguided. Historically, discharge has not been an inherent characteristic of bankruptcy legislation in the United States. In fact the present Federal Bankruptcy Act is the first to permit discharge without some consent of the creditors of the insolvent. Further, as regards a corporate debtor such as we have here, discharge is frequently of no importance when it is noted that a general assignment or the appointment of a receiver is often a prelude to dissolution of the corporate entity.

Id. 150 Preemptive Effect, supra note 53. 151 The sweeping language is as follows:

The national purpose to establish uniformity necessarily excludes state regulation. It is apparent, without comparison in detail of the provisions of the Bankruptcy Act with those of the Arkansas statute, that intolerable inconsistencies and confusion would result if that insolvency law be given effect while the national act is in force. Congress did not intend to give insolvent debtors seeking discharge, or their creditors seeking to collect claims, choice between the relief provided by the Bankruptcy Act and that specified in state insolvency laws. States may not pass or enforce laws to interfere with or complement the Bankruptcy Act or to provide additional or auxiliary regulations.

Wisconsin Builders, 239 F.2d at 652-53 (quoting Int’l Shoe Co. v. Pinkus, 278 U.S. 261, 265) (1929). The court relied on Pobreslo, Star, Stellwagen, Boese, and Mayer for this position. Specifically, Pobreslo, Star, and Mayer, in the Seventh Circuit’s reading, all stand for the Supreme Court’s position that “general assignments may be regulated by state statutes and supervised by state courts exercising powers specifically conferred by statute.” Id. at 653. 152 Id. at 653. 153 Id. at 651.


IV. PREFERENCE LAWS ARE NOT PREEMPTED

A. Preemption Analysis Employed at the Time of the Decisions Demonstrates that Preemption is Limited to Discharge

In each of the principal bankruptcy preemption cases, the

Supreme Court emphasized the fact that “true” bankruptcy statutes provide a discharge for the debtor.154 This emphasis is the first step in demonstrating a limit to state statute preemption by federal legislation. Only after it made this determination did the Court next consider whether the specific statute at issue actually conflicted with federal legislation. In other words, the Court first undertook a field preemption analysis and then undertook the Sturges conflict preemption analysis.155 By undertaking the analysis in this order, the Court demonstrated that, at least insofar as assignments for the benefit of creditors are concerned, preemption was limited to discharge.

The focus on the absence of a discharge provision156 in a case such as Stellwagen157 evidences that discharge is within the field of federal bankruptcy legislation. Discharge thus may be considered on the subject of bankruptcies, automatically preempted, and within the field in which Congress acted.158

154 Recent Decisions, Bankruptcy: Section 74 of 1933 Amendments to National Bankruptcy Act: Construction and Constitutionality, 22 CAL. L. REV. 219, 220 (1934) (citing Mayer, Stellwagen, Pinkus, Pobreslo, and Star). 155 Whether actual conflict from Sturges, see supra text accompanying note 97, is substantially similar to modern conflict preemption is not a necessary distinction. What should instead be understood is that at the time of preemption analysis undertaken in the principal cases, the courts used the framework of field preemption. After undertaking a field preemption analysis, then the court might evaluate if the particular statute in some way is in conflict with federal legislation. Conflict would be evident if the statute is not derivative of common law in the state, for example. See infra Parts IV.A & B. 156 The emphasis on discharge as a principle characteristic of bankruptcy contradicts those arguing that that discharge is not an inherent part of bankruptcy law because of its addition in 1705 in the Statute of Anne. See, e.g., Effect of National Bankruptcy Act on State Insolvency Statutes, supra note 4, at 1092. But see supra text accompanying notes 40-41, and consider that the goal of bankruptcy is:

not only to distribute the property of the debtor, not by law exempted, fairly and equally among his creditors, but as a main purpose of the act, intends to aid the unfortunate debtor by giving him a fresh start in life, free from debts, except of a certain character, after the property which he owned at the time of bankruptcy has been administered for the benefit of creditors. Our decisions lay great stress upon this feature of the law—as one not only of private but of great public interest in that it secures to the unfortunate debtor, who surrenders his property for distribution, a new opportunity in life.

Stellwagen v. Clum, 245 U.S. 605, 617 (1918). 157 Paul Lipton, Comments, Effect of the Bankruptcy Act upon State Laws, 1938 WISC. L. REV. 303, 312 (1938). The law also allowed a bankruptcy trustee to take advantage of state preference avoidance statutes. Id. 158 Stellwagen, 245 U.S. at 618 (“We think that Congress in the Bankruptcy Act did not intend


This view is further enhanced by the Supreme Court’s upholding of the severance of a discharge provision.159 Pobreslo, along with Boese, solidified the distinction between preempted discharge provisions and preference statutes not preempted, and hence not found to be within the field of federal legislation. The Pobreslo Court used the language of field preemption when it analyzed the provisions of the Wisconsin statute.160 Pobreslo is significant because even during this period of automatic field preemption, when the Court considered that statutes not in conflict could be preempted, the Court still decided only to sever the discharge provision161 and allowed for the continuation of the portion of the statute regulating and controlling voluntary assignments, which was the clause of the statute specifically related to assuring equality of distribution.162 Under the prevailing preemption test, the Court could have found the provision preempted automatically. Instead, the Court allowed for continuation of the provision, recognizing that it was not within the field of federal legislation.163

B. Common Law Exception Theory Also Explains a

Consistency in the Principal Cases The common law exception theory, first suggested in 1960,164

any such result, but meant to permit the trustee in bankruptcy to have the benefit of state laws of this character which do not conflict with the aims and purposes of the federal law”). Though such language somewhat references modern conflict preemption, the understanding of preemption at the time clarifies that the Court actually employed an automatic field preemption analysis to the discharge provision. See supra note 92 and accompanying text. 159 See supra text accompanying notes 133-134 160 See Pobreslo v. Joseph M. Boyd Co., 287 U.S. 518, 526 (1933) (finding the Wisconsin statute in “harmony” and “not inconsistent” with the purposes of federal bankruptcy legislation, while finding the Arkansas statute analyzed in Pinkus to be “within the field of the federal act”). 161 The discharge provision transformed the regulation into an invasion of federal power but not the regulation of the common law privilege of making an assignment. Statutory Regulation of Assignments for the Benefit of Creditors, supra note 12, at 962. 162 See supra note 135 for the clause’s text; see also Pobreslo, 287 U.S. at 526. 163 The Pobreslo Court made its determination by analogizing that the preference provision was like a mere regulation of a trust. See supra note 139. Assignments for the benefit of creditors have been valid at common law, recognized early by the Supreme Court, and federal bankruptcy legislation does not preclude states from regulating these assignments. Legislation Note, The Wisconsin Creditor’s Actions Statute, 24 VA. L. REV. 66, 66-67 (1937) (citing Brashear v. West, 7 Pet. 608 (U.S. 1833) and Probreslo). When all of the rights at stake have been invoked by contract and not by state law, the law would not be suspended by the operation of federal bankruptcy legislation. Id. at 68. 164 Peaceful Coexistence?, supra note 98, at 801-02. The common law exception test states that “[i]f the state statute under scrutiny merely regulates or codifies the state common law with regard to assignments for the benefit of creditors, the statute is not pre-empted by the federal act.” Id. at 802. The author also set forth other proposed preemption tests found in the literature. As summarized, these proposals include:

(1) If the state statute precludes the attacking creditor from utilizing an independent


helps explain Pinkus and clarifies the Sherwood decision. The premise of the common law exception is that if a state statute concerning debtor asset distribution under conditions of insolvency merely regulates or codifies the state common law, then the federal bankruptcy law does not preempt it.165 On the other hand, if the statute varies from the common law, then it must be preempted in toto or, if found severable, pro tanto.166

Following this reasoning, the Court upheld the preference statutes in Mayer and Boese because they did not change the character of the common law and regulated assignments that were in any case valid at common law.167 In contrast, the entire proceeding in Pinkus was statutory.168 The difference between the statutes was that in Boese, there was an express assignment valid at common law, whereas in Pinkus, there was not.169 In Pinkus, the debtor did not purport to make a common law assignment of property for the benefit of creditors. Rather, the debtor simply petitioned the Arkansas court for relief under the Arkansas insolvency statute.170 Since the entire proceeding was statutory, and therefore not a codification or regulation of the common law, then the statute could not escape preemption under the common law exception and faced invalidation.171 This common law exception view explains why the Pobreslo Court found the Wisconsin statute not preempted where an assignment actually occurred.172 Finally, in Star, Texas common law permitted consensual creditor release of debt after

proceeding and forces him to move solely against the assigned fund, it is pre-empted. In short—coerced creditor participation in the state statutory proceedings is fatal. (2) If the state proceeding is wholly in invitum through the direct aid of the state courts rather than by debtor-creditor agreement, it is pre-empted. (3) If the state statute is duplicative of the federal act as to preferences and the promotion of equitable distribution, it is pre-empted. (4) If a creditor meets the prerequisites of the federal act and files an involuntary petition thereunder within the prescribed time, the state statute is pre-empted. (5) If the state statute provides for any of the following, it may be pre-empted: (a) a proceeding involuntary in character; (b) classification of creditors; (c) a provision for discharge; (d) provisions in excess of those necessary for mere regulation of assignments for the benefit of creditors.

Id. at 801-02 (internal citations omitted). 165 Id. at 802. 166 Id. at 804 (“The fact that the common law differs from state to state gives rise to a further complication. Thus, identical factual situations arising under similar state statutes may occasion opposite results vis-à-vis pre-emption, because of the difference in the underlying common law. This, it is submitted, accounts for the seemingly inconsistent decisions rendered by the Supreme Court.”). “Pro tanto” signifies something done only to that a certain extent whereas “in tanto” refers to complete preemption. See BLACK’S LAW DICTIONARY 823, 1259 (8th ed. 2004). 167 Peaceful Coexistence?, supra note 98, at 804-05. 168 Id. at 805-06. 169 Id. 170 Id. 171 Id. 172 Id. at 806-07.


an assignment, so the provisions in the case derived from common law antecedents and were not purely statutory as they were in Pinkus.173 In essence, regulating or codifying the common law places the statute within the common law exception, and as such, will not be preempted.174

As a general matter, general assignment statutes that merely regulate or codify the common law would not face preemption under this analysis. What is more difficult and at issue is whether preference provisions, if considered only to be an adjunct175 of or supplement to assignment law themselves, withstand scrutiny under this test or whether voidable preference legislation is “statutory.” The relationship between a preference provision and the assignment statute itself might then be determinative. One way to consider this issue is to focus on the use of the term “regulate” in the common law exception test. If preference provisions regulate, or control, by limiting the effectiveness of a preferential transfer and enabling the avoidance of that transfer, then, when enacted, in a sense they regulate common law assignments.176

Another consideration should be that the statutes analyzed in the principal cases concerned equitable distribution. Preference provisions, when enacted, govern equitable distribution under voluntary assignments. In fact, the article setting forth the common law exception test applied its analysis to a New Jersey statute regulating general assignments for the benefit of creditors that included a voidable preference provision, which would ultimately have the effect of equal distribution to creditors.177 On the strength of a common law exception, the article concluded that the statute should not be preempted.178 The article did not consider a possible bright line distinction between preference provisions and assignment statutes generally, accepting that the function of equitable distribution embodied in voidable preference law has a common law derivation itself, as preference avoidance 173 Id. at 807. 174 Id. 175 David Gray Carlson, Security Interests in the Crucible of Voidable Preference Law, 1995 U. ILL. L. REV. 212, 218 n.24. 176 The standard legal understanding of “regulate,” expressed in its form as a noun is “[t]he act or process of controlling by rule or restriction.” BLACK’S LAW DICTIONARY 1311 (8th ed. 2004) (defining regulation). Another definition of “regulate” is “to control or direct by a rule, principle, method, etc.” RANDOM HOUSE UNABRIDGED DICTIONARY 1624 (2d ed. 1993). It is in this sense that preference statutes regulate assignments for the benefit of creditors. Preference avoidance statutes “regulate” assignments for the benefit of creditors in that they “govern or direct according to rule.” MERRIAM-WEBSTER ONLINE, http://www.m-w.com/dictionary/regulate (last visited Oct. 23, 2006). More specifically, the preference avoidance statutes regulate the common law to make an assignment in that they limit the ability of debtors to make assignments under certain conditions. 177 Peaceful Coexistence?, supra note 98, at 810-12. 178 Id. at 812.


provisions themselves also derive from the common law.179 One final avenue for analysis seeking to explain how the common

law exception test can apply to state common law would be to argue that voidable preference law is a fraudulent conveyance concept. Fraudulent conveyances were unquestionably part of the common law.180 If voidable preference law is a fraudulent conveyance idea, then the common law exception test is easier to apply.

Under Section 5(a) of the Uniform Fraudulent Transfer Act (now the law in 33 states), preferences to insiders are voidable preferences.181 Assuming there is nothing inherent about insider status, section 5(a) establishes that at least in thirty-three states, voidable preference theories are fraudulent conveyance theories.182 Even in states such as New York, which has not enacted the Uniform Fraudulent Transfer Act, insider preferences have been avoided because they are fraudulent conveyances.183 Under this analysis, the state-by-state inquiry necessary to apply the common law exception test would look to a state’s common law fraudulent conveyance antecedents and discern that, because voidable preference law has the same root, the state provision might still simply be the codification of the common law and satisfy the common law exception test.

C. Summary of the Principal Cases

In Stellwagen, the Court upheld the Ohio preference provision,

noting that state laws that aid federal legislation may stand and emphasizing the absence of a discharge provision, just as there was none in Mayer. In Boese and Pobreslo, the Court permitted the state laws regulating the assignment to continue in force, even while suggesting that state discharge provisions were impermissible. These 179 See supra note 46. The Supreme Court has recognized and reiterated as recently as 1989 in Granfinanciera S.A. v. Nordberg, 492 U.S. 33 (1989) that preference avoidance also has a common law derivation. Id. 180 Id. 181 According to the statute:

[A] transfer made or obligation incurred by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made or the obligation was incurred if the debtor made the transfer or incurred the obligation without receiving a reasonably equivalent value in exchange for the transfer or obligation and the debtor was insolvent at that time or the debtor became insolvent as a result of the transfer or obligation.

UNIF. FRAUDULENT TRANSFER ACT § 5(a) (2006). 182 See, e.g., Douglas G. Baird, Security Interests Reconsidered, 80 VA. L. REV. 2249, 2266 (1994) (arguing that “the idea of fraudulent preference has deep roots in the law of fraudulent conveyance”). Further analysis as to the relationship between fraudulent conveyance and voidable preference law is beyond the scope of this Note. 183 See, e.g., Citibank, N.A. v. Benedict, No. 97 Civ. 9541 (AGS), 2000 U.S. Dist. LEXIS 3815 (S.D.N.Y. Mar. 28 2000).


cases, in effect, severed the discharge provisions, which in the words of the Tarnowski court, were “separate and distinct.”184 The Pinkus Court did not allow for severance of the discharge provision, but similar to the later determination made in Star, the Court deferred to the state supreme court’s initial interpretation that the entire statute functioned as an insolvency law. These cases lead to the conclusion that preemption is limited to discharge or to situations in which the state tries to legislate an impermissibly complete insolvency system. Meanwhile, when a state statute simply describes a common law idea (such as preference avoidance), the Bankruptcy Code is not preemptive. The matter is different with debt discharge, which is a statutory innovation on the common law.185

D. Application of the Proper Precedent to Sherwood

The power to legislate on the “subject of bankruptcies” as defined

in the Constitution is a broad grant of power.186 Congress has used this power but has specifically presupposed the survival of much state law regarding insolvency. With debt discharge, however, the matter is different. In preemption language, discharge provisions are preempted because they are within the field of the federal regulation. Even the Sherwood court recognized that it is settled doctrine that discharge provisions are within this field.187 Still, during the period before the mid-1930s, when automatic preemption would lead to preemption of any legislation within the federal statute’s field, the Court spared provisions regulating and controlling the components of general assignment statutes dealing with equitable distribution. When the Court permitted such provisions concerning equitable distribution to remain under this regime, what it really determined was that preference statutes are outside the field of bankruptcy. In the principal cases, the only time the Court found such a provision preempted was in Pinkus, when the Court deferred to the state’s construction of its statute as a complete bankruptcy statute.188 For that reason, the Court could not sever the 184 In re Tarnowski, 210 N.W. 836, 837 (Wis. 1926). 185 The decision in Star also seems on point because it emphasizes deference to state statutes with common law antecedents, though not statutes that are entirely a legislative creation. 186 Gerdes, supra note 76, at 201. 187 See supra note 99, quoting Judge Kozinski. 188 See Int’l Shoe Co. v. Pinkus, 278 U.S. 261, 268 (1929); see also Straton v. New, 283 U.S. 318, 327 (1931) (“state insolvency laws which are tantamount to bankruptcy because they provide for an administration of the debtor’s assets and a winding up of his affairs similar to that provided by the national act are suspended while the latter remains in force, and proceedings under them are utterly null and void . . . .”). Stanton approved the decision in Weedman Stave Co., 199 F. 948 (E.D. Ark. 1912). See Lipton, supra note 157, at 313. In some ways, this analysis is a backwards preemption analysis because the federal court would defer to the state


provision. The common law exception theory applies to the next step in the

analysis after the Court undertook what is analogous to the modern field preemption analysis. In reality, of course, the Court operated under a period of automatic preemption. Still, the particular statute, if not merely a codification of common law or a regulation of trusts,189 could, under Sturges, be subject to preemption if state law actually conflicts with federal bankruptcy law. If the statute goes too far, if it is not merely a codification or regulation of the common law, then it will not fall into the exception carved out by the common law exception test and may be preempted under a conflict analysis. Accordingly, a distinct statute that did not stem from the common law and was purely a statutory construct could face preemption.190

To a certain degree, the Sherwood court recognized this issue. The Sherwood court argued that it did not “question the validity of voluntary assignments for the benefit of creditors, which have a venerable common-law pedigree, were upheld in Pobreslo and are specifically contemplated in the Bankruptcy Code.”191 The distinction noted by the Sherwood court was that the California provision gave the state assignee powers beyond those that would have been derived from contract or trust law.192

Even so, when viewed in light of the fact that voidable preference law is considered a fraudulent conveyance concept, a common law theory, the rationale is not as persuasive. In addition, the Sherwood statute was not like that in Wisconsin Builders, where the statute could court’s conclusion as to the meaning and completeness of the statute. 189 Even though preemption is limited to discharge, there are statutes that have only a statutory and not common law basis. Historically at common law, assignments for the benefit of creditors were valid and looked upon with approbation, and states passed statutes to “safeguard and expedite” the administration of the estate by the assignee in the interest of all creditors. Lipton, supra note 157, at 304; see Preemptive Effect, supra note 53 (“Justice Butler’s anomalous decision in Pinkus, at most, means that state statutory provisions for discharge of the claims of participating creditors are preempted, but any such discharge provision nonetheless retains its force and effect to the extent it would be valid under a common law assignment for the benefit of creditors.”) (citing Weintraub, Levin & Sosnoff, Assignments for the Benefit of Creditors and Competitive Systems for Liquidation of Insolvent Estates, 39 CORNELL L.Q. 3, 24 (1953)). But cf. DOUGLAS G. BAIRD & THOMAS H. JACKSON, CASES, PROBLEMS, AND MATERIALS ON BANKRUPTCY 1300 (2d ed. 1990) (questioning “why should the presence of discharge in the state statute lead to constitutional infirmity?”). 190 In general, when there is legislation in an area traditionally occupied by the states, the likelihood of preemption is lowered, and that may be true as well in the area of state common law. TRIBE, supra note 80, at § 6-30, at 1208-09. This suggestion relates to specific Supreme Court holdings regarding the regulation of nuclear power plants, but the concept of state common law antecedents is analogous. 191 Sherwood Partners, Inc. v. Lycos, Inc., 394 F.3d 1198, 1205 n.8 (9th Cir. 2005) 192 Id. The court also pointed out that the Pobreslo Court noted that the voluntary assignment process it upheld did not create any new rights that did not already belong to the debtor or creditors. Id. (quoting Pobreslo v. Joseph M. Boyd Co., 287 U.S. 518, 526 (1933)). See supra note 139 for the quoted language.


be considered a complete insolvency system and could fail under field preemption. As a result, analyzing Sherwood with reference to the common law exception test further supports the contention that preemption is limited to discharge, and that preference statutes generally fall outside of that limit.

CONCLUSION

The Supreme Court established through a series of cases that

federal bankruptcy preemption of state statutes is limited to discharge, and preference avoidance statutes that regulate voluntary assignment for the benefit of creditors fall outside of that limit. Preference statutes may only be preempted if a state court determined that the statute were an entire insolvency scheme that treaded on the field of a federal act or if the statute, in line with the common law exception test, was not a codification or regulation of state common law rights. This understanding necessarily considers that the precedent established by the Supreme Court can only be ascertained through the lens of the preemption analysis employed at the time the cases were decided, not through modern preemption distinctions. Because the preference provision is beyond the limit of preemption, in the analysis of a state preference provision, the particular statute is to be evaluated under what might be considered a form of conflict preemption analysis. But any such conflict is impossible. Even the Bankruptcy Code itself, in § 544(b)(1), permits the bankruptcy trustee to expropriate the property the general assignee holds for the creditors, including the voidable preference recoveries and causes of action the assignee might have under state law. Nevertheless, Sherwood itself recognized that a general assignment regime is no such thing. Since it is established that assignment statutes are not preempted generally and remain along with their preference avoidance components, though such provisions may only be “vestigial” remnants,193 there is no justification for the view that states may not legislate with regard to voidable preferences.

193 Skeel, supra note 16, at 491.

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