Commercial Morality The Merchant Character and The History of The Voidable Preference

Commercial Morality, the Merchant
Character, and the History of the

Voidable Preference
Robert Weisberg*
American bankruptcy law has never decided what to do about the

crucial but elusive concept of the voidable preference. Defined in the
most roughly general terms, a preference has a few basic elements: It is
a transfer of money or of some interest in property by a debtor to a
creditor to settle an antecedent debt; it occurs when the debtor faces
imminent bankruptcy; and it benefits that creditor to the prejudice of
other creditors by granting the favored creditor a greater share of the
diminished assets of the debtor than that creditor would enjoy under
the formal system of bankruptcy distribution.' Preference doctrine
would seem to be a central part of bankruptcy law. If the general pur-
pose of bankruptcy law is to ensure a ratable distribution of the
debtor's assets among the creditors,2 preference law would seem, by
definition, to be a primary instrument for achieving that goal. Indeed,
the preference, unlike its somewhat mismatched partner, the fraudulent
conveyance, is strictly a creature of bankruptcy law, rather than a part
of nonbankruptcy commercial law that simply receives special enforce-
ment in the bankruptcy process.3
Preference law, however, reflects a kind of insecurity about the for-
mal process of bankruptcy. Bankruptcylaw enforces its principle of rat-
able distribution at the technical point when the petition is filed. But
preference law then sets a still earlier moment at which the debtor's
estate faces a risk of dismemberment. At that earlier moment, prefer-
ence law imposes a duty or sanction on the debtor or individual credi-
tors to preserve the estate so that, when the petition is filed, the trustee
* Professor of Law, Stanford

University. My special thanks to Thomas Jackson and
Robert Gordon for their invaluable encouragement and advice. This article was written with
the support of the Stanford Legal Research Fund, made possible by a bequest from the estate
of Ira S. Lillick and by gifts from Roderick M. and Carla A. Hills and other friends of the
Stanford Law School.
1. This definition, of course, glosses over all the doctrinal nuances, but those nuances
are essentially the subject of this entire article. For a brief and lucid discussion of preferences,
see Jackson, Avoiding Powersin Bankruptcy,36 STAN.L. REV. 725, 756-68 (1984).
2. For a critical discussion of this assumed principle, see Jackson, Bankruptcy,Non-Bank-
ruptcyEntitlements,and the Creditors'Bargain, 91 YALEL.J. 857 (1982).
3. Jackson, supra note 1, at 777.
3
4 STANFORDLAW REVIEW [Vol. 39:3
will still find the assets there to distribute. Bankruptcy law empowers
the trustee and the court to enforce ratable distribution as a matter of
public power; preference law implies that the debtor and creditor have
a private duty to save the bankruptcy process from becoming moot
before it has a chance to start. It places on the debtor and individual
creditor a social or moral responsibility to respect the interests of the
general class of the debtor's creditors, presumably in the name of the
larger social goal of enhancing the efficient sale of credit.
Despite apparent consensus about the purpose of preference law,
the conditions under which debtor and creditor owe this duty have
been heavily contested for several centuries. A common historical ob-
servation is that preference law has followed a line of progress from
somewhat vague ethical edicts to modern, systematic, technical rules.4
In its English origins, the idea of the voidable preference took shape in
a sort of criminal law, full of complicated mens rea notions, that con-
demned devious transfers or payments by debtors who purposely tried
to subvert the bankruptcyprocess.5 Preference law therefore adopted a
moralistic posture by imposing on debtors a duty toward creditors in
the abstract, rather than to individual creditors on the basis of individ-
ual commercial relationships. As American bankruptcy law evolved
from the English model at the start of the nineteenth century, the law of
preferential transfers shifted its concern from the culpability of the
debtor to the culpability of the favored creditor. It thus sought to dis-
courage, if not punish, aggressive self-interested economic behavior by
imposing on individual creditors a social or moral duty to their fellow
creditors.
By the end of the nineteenth century, however, American prefer-
ence law had lost most of its express moral content. The theory of
twentieth century preference legislation has been that we need not en-
gage in any intense moral scrutiny of the behavior of debtors and credi-
tors as commercial citizens. Rather, the theory-or pretense-is that
we have achieved some scientific, economic consensus that certain
transactions undermine the trustee's power of ratable distribution and
obstruct the efficient production of commercial credit, and that we can
therefore draw very technical statutory rules that focus impersonally on
classes of transactions. This notion of a rational progression in prefer-
ence law is essentially a Whiggish myth. Preference law has remained
one of the most unstable categories of bankruptcyjurisprudence. In-
deed, its instability is obvious in the most recent, and perhaps most
scientifically pretentious, efforts at legislating an American preference
law, efforts that have been quickly undermined by the courts and then
by Congress itself.6
4. E.g., Glenn, The Diversitiesof the PreferentialTransfer:A Study in BankruptcyHistory, 15
CORNELL L.Q. 521, 535-40 (1930).
5. See text accompanying notes 126-179 infra.
November 1986] HISTORYOF PREFERENCELAW 5
The perennial-and continuing--debate over preferences has usu-

ally taken the form of a choice between formal mechanical rules and
open-ended normative standards.7 This, of course, is the conventional
form that legal debate takes when the debaters claim to agree on ends
and differ only over means. But I will argue that the rules/standards
debate about preference law reflects a very deep division in a capitalist
culture about the supposed goal of enhancing credit, and suppresses
important questions about moral values in a mercantile credit econ-
omy. Moreover, I will argue that the actual history of preference law
has been, not a progression from standards to rules, but a nervous os-
cillation between these two approaches to lawmaking. In this regard,
the tortured life-cycle of the law of preferences is an emblem of the
morally ambivalent history of bankruptcy law and of commercial law in
general.
I. INTRODUCTION: RULES, STANDARDS, AND MORALS

IN THE CREDIT MARKET
Bankruptcylaw has been playing out a ritualized dance between for-

mal legislative rules and normative commercial and moral standards for
500 years. And for 500 years, there has been a ritualized pattern of
criticism of bankruptcylaw: rules-proponents attacking standard-based
bankruptcy laws, standards-proponents attacking overly formalistic
bankruptcy laws, or sometimes a single critic trying to patch together
both rules and standards as if combination were resolution. The ritual
will continue so long as we waffle over the "essential" purposes of
bankruptcy law, and so long as we conceive, and erratically suppress,
deep-rooted moral and philosophical questions about the phenomena
of trade and credit.
A. Defoeon the Law and Moralsof Bankruptcy

An excellent document for capturing this pattern of thought about
bankruptcy law in English and American history is Daniel Defoe's 1697
EssayuponProjects.8Defoe was the most vocal and literate of the com-
mentators on bankruptcy law who wrote at perhaps the pivotal transi-
tional phase in the history of English bankruptcy law. This phase
occurred at the beginning of the eighteenth century as Parliament was
enacting, in the Statute of Anne, the first provision for a debtor's right
to discharge in bankruptcy. As I will discuss below in some detail,9 the
new right of discharge both reflected and caused a major shift in the
social, moral, and economic perceptions of bankruptcy, credit, and the
7. See Kennedy, Form and Substancein Private Law Adjudication,89 HARV.L. REV. 1685
(1976); see also Ehrlich & Posner, An EconomicAnalysisof Legal Rulemaking,3J. LEGALSTUD.257
(1974).
8. D. DEFOE,AN ESSAYUPONPROJECTS (1697) [hereinafter DEFOEESSAY].
6 STANFORD LA W REVIEW [Vol. 39:3
merchant character. Where bankruptcy law had once stereotyped the

merchant debtor as an elusive social deviant whom the law should crim-
inally punish, it began to develop an opposite image of the merchant
debtor-as a noble and vulnerable statesman of society whom the law
should protect from the cruel contingencies of economic life. Defoe
was a brilliant critic of the older, punitive form of bankruptcy law, and a
prescient proponent of the emerging modern form. But his writing re-
flects the nervous effort of English bankruptcy jurisprudence to accom-
modate both views of bankruptcy law and both underlying views of the
moral status of the merchant debtor.
In his chapter "Of Bankrupts," Defoe concedes that the laws of
England "are generally good, and above all things are temper'd with
Mercy, Lenity, and Freedom."'0 But bankruptcy law
has something in it of Barbarity;it gives a loose to the Malice and Re-
venge of the Creditor, as well as a Power to right himself, while it
leaves the Debtor no way to show himself honest: It contrives all the
ways possible to drive the Debtor to despair, and encourages no new
Industry, for it makes him perfectly incapable of any thing but
starving.11
Here we have, in broad outline, the ritual rhetoric of bankruptcy criti-
cism: Defoe laments that the statute has ceased to meet its purpose, so
that the law is failing to achieve, and indeed is subverting, its funda-
mental goals. Defoe remembers the original evil at which the bank-
ruptcy law was aimed-"Breaking to defraud Creditors."12 But the law
now permits debtors
[t]o evade the Force of the Act by Ways and Shifts to avoid the Power
of it, and secure their Estates out of the reach of it... [and to] turn the
Point of it against those whom it was made to relieve ... [s]ince we see
frequently now, that Bankrupts desire Statutes, and procure them to be
taken out against themselves.'3
The prototypical villain in this dramatic conflict between the letter
and spirit of the law is the absconding Merchant:
[N]o Statute can reach his Effects beyond the Seas; so that he has noth-
ing to secure but his Books, and away he goes into the Friars. If a Shop-
keeper, he has more difficulty;but that is made easy, for there are Men
(and Carts) to be had, whoseTradeit is, and who in One Night shall
remove the greatest Warehouse of Goods, or Cellar of Wines in the
Town, and carry them off into those Nurseries of Rogues, the Mint and
Friars ... .14
Even the naive debtor is told by the wizened ones to ignore the de-
mands of his creditors: "But a Statute, says he again .... Why, 'tis the
10. DEFOEESSAY,supra note 8, at 192.

11. Id. (emphasis in original).
12. Id. at 195.
13. Id. at 196.
14. Id. at 198 (emphasis in original).
Statutes we live by, say they: Why, if 'twere not for Statutes, Creditors
would comply, and Debtors wou'd compound, and We Honest Fellows
here of the Mint wou'd be starv'd."'5
The debtor can blackmail his creditors with a cheap settlement.'6
The creditors know the futility and cost of taking out a commission
against an absconding debtor. Yet some will pursue the commission
out of spite: "[T]he Extremities of this Law are . . . often carried on
beyond the true Intent and Meaning of the Act itself, for Malicious and
Private Ends, to gratify Passion and Revenge."17 Yet ironically, the
other evil is that "the Debtor himself shall confederate with some par-
ticular Creditor to take out a Statute; and this is a Master-piece of Plot
and Intriegue."'8 Defoe paradigmatically complains that the bank-
ruptcy statute has failed to draw the relevant moral distinctions. In this
instance, he complains that the law has taken the form of rigid statutory
rules that make bankruptcyharsh where it should be lenient and lenient
where it should be harsh.
B. DrawingMoral and Legal Categories

To set the proper moral distinctions straight, Defoe first divides
debtors into two rough categories: "For as, the Indigent Debtor is a
branch of the Commonwealth, which deserves its Care, so the wilful
Bankrupt is one of the worstsortof Thieves."9 The goal of the statute is
to identify those debtors who have morally and perhaps physically ab-
sconded from civilized society by breaking rules of commercial de-
cency. The law should capture them, seize their goods for their
creditors, and then cast them out punitively. But these rogues are to be
separated from the honest unfortunate debtors whose business disas-
ters reveal no moral flaw, and whom the law should secure in the bo-
som of society.20
The English law failed at this task. The century-and-a-half old Eng-
lish bankruptcy law that Defoe treats was, at least on its face, a fairly
15. Id. at 200.

16.
[F]or the Laws of Nature tell you, you must not starve; and a Statute is so barbarous,
so unjust, so malicious a way of proceeding against a man, that I do not think
any
Debtor oblig'd to consider any thing but his own Preservation, when once they go on
with that... for Equity is due to a Bankrupt as well as to any man; and if the Laws do
not give it us, we must take it.
Id. at 201-02.
17. Id. at 205.
20.
The law was made for offenders; there needs no law for innocent men: commissions
are granted to manage knaves, and hamper and entangle cunning
designing Rogues,
who seek to raise fortunes out of their creditors estates, and exalt themselves
by their
own downfall; they are not design'd against honest men, neither indeed is there
any
need of them for such.
D. DEFOE,THE COMPLETE ENGLISHTRADESMAN 209 (1726) [hereinafter DEFOETRADESMAN].
rigid set of rules, a purely involuntary, essentially criminal law without

any right of discharge from debt.21 In particular, it provided that bank-
ruptcy would occur automatically if a debtor appeared to commit one of
several specific "acts of bankruptcy," such as keeping to his home and
absenting himself from the market or "yielding himself to prison" on
arrest for debt. Thus, an honest debtor might helplessly fall prey to the
law, while a dishonest one might be able to contrive to avoid its invoca-
tion or, if he had some reason to benefit from bankruptcy, to collude to
invoke its contrivance. For the first two centuries, Parliament and the
courts tried to refine the acts-of-bankruptcy provisions to make the law
more morally sensitive to the fraudulent behavior it was trying to iden-
tify, but the historical literature shows a ritual lament that the tinkering
never succeeds.
Thus, Defoe laments that the merchant villain absconds with impu-
nity into a welcoming society of roguish colleagues. Meanwhile, the
honest debtor faces prison or banishment. He cannot work, because no
man will dare pay him wages for fear that those wages will have to be
paid again to the creditors. No man dares offer him money to live on,
'for there is a Statute against him."22
Defoe's focus on the word "statute" suggests that it is a suspicious
anomaly in English law, a deviantly arbitrary legal form. The Essay upon
Projects is a wonderfully prescient treatment of the great meta-issue of
modern legal process jurisprudence-the choice between rules and
standards to regulate behavior.
Defoe ultimately lays out a 4-part taxonomy of commercial actors:
(1.) There is the Honest Debtor, who fails by visible Necessity,
Losses, Sickness, Decay of Trade, or the like.
(2.) The Knavish, Designing, or Idle, ExtravagantDebtor, who fails
because either he has run out his Estate in Excesses, or on purpose to
cheat and abuse his Creditors.
(3.) There is the moderate Creditor, who seeks but his own, but will
omit no lawful Means to gain it, and yet will hear reasonable and just
Arguments and Proposals.
(4.) There is the Rigorous Severe Creditor, that values not whether
the Debtor be Honest Man or Knave, Able, or Unable; but will have his
Debt, whetherit be to be bad or no; without Mercy, without Compassion,
full of Ill Language, Passion, and Revenge.23
Defoe then poses the legislative problem:
How to make a Law to suit to all these, is the Case: That a necessary
Favourmightbeshownto thefirst, in Pity and Compassion to the Unfortu-
21. Seetext accompanyingnotes 60-125 infra.

22. DEFOEESSAY,supranote 8, at 194 (emphasisin original). Defoe virtuallyhisses the
word "statute"as the paradigmof legal evil. "[A] statute,as we call it, for ever shuts up all
doors to the Debtor's Recovery;as if Breakingwere a Crime so Capital,that he ought to be
cast out of Human Society." Id. (emphasisin original).
23. Id. at 206-07 (emphasisin original).
nate, in Commiserationof Casualtyand Poverty,whichno man is ex-
empt from the danger of. Thata due Rigorand Restraintbe laid uponthe
second,that Villainyand Knaverymight not be encourag'dby a Law.
Thata due Carebe takenof the third,that mens Estates may, as far as can
be, be secur'd to them. And due Limitsto set the last, that no man may
have an unlimitedPowerover his Fellow-Subjects,to the Ruinof both
Life and Estate.24
Here is the fundamental challenge of bankruptcy lawmaking-to cap-
ture this moral taxonomy in legislative words. Defoe participates in the
historical tradition by confidently proposing a new legal instrument.
C. Defoe's Proposal
Defoe anticipates a virtually modern American form of bankruptcy.
His proposal resembles a modern law substantively in that it offers vol-
untary bankruptcy, with discharge and small exemptions in exchange
for full release of the debtor's property.25 Instead of the harsh and
corrupt commissions enforcing harsh and rigid rules, there shall be a
communal "grandjury" of sorts, to include representative common cit-
izens and merchants, as if to combine a lay jury and Lord Mansfield's
model of a commercial jury. The bankruptcy "grandjury" will rely on
a simple normative standard: that the debtor need merely attest that he
is "unable to carry on his Business, by reason of great Losses and Decay
of Trade." Defoe says confidently that his simple standard will draw
the right line, preventing crafty bankruptcies while saving the honest
bankrupt from disaster. Yet this morally flexible instrument of equity
must be armed with brutal sanctions derived from the harsh criminal
form of bankruptcy law that led to the evils Defoe is reforming.26
D. The Themesof PreferenceLaw

Defoe's efforts at line-drawing are largely aimed at the general
bankruptcy problem of distinguishing the debtors whom bankruptcy
should relieve from the debtors whom it should punish. But the
themes he invokes apply with special force to preference law.27 The
24. Id. at 207-08 (emphasis in original).
25. See id. at 208-20 (setting out Defoe's proposed law).
26. Under Defoe's proposed rule, if a merchant fails or gives
up trade without satisfying
his creditors as well as he can, he becomes a felon without benefit of
clergy, and, if he goes
into sanctuary, he automatically becomes subject to search and seizure. Id. at 222-24.
Indeed,
20 years later, after Parliament had at least accepted his argument for
discharge in involuntary
bankruptcy, Defoe acknowledges that the new discharge law serves to encourage fraudulent
"friendly statutes," or collusively contrived discharges designed to cheat creditors, "a vile
corruption of a good law" and a "fraud upon the act." He concedes that "human wisdom is
imperfect, that the law wants some repairs." So this new rather open standard, designed to
relieve honest debtors, has some new stringent rules tacked on to it,
including corporal pun-
ishment for a certain number of repeat "offenses" of
going bankrupt. DEFOE TRADESMAN,
supra note 20, at 210-11.
27. Indeed Defoe, himself explicitly acknowledges this. He demonstrates the over- and
under-breadth of the rudimentary English law of bankruptcy.
Bankruptcy commissions are
necessary evils: "[w]here some creditors, by ... judgments, or by attachments of debts, goods
assumption of preference law is that we can establish a category of

prebankruptcy payments by debtor to creditor that are economically,
and perhaps morally, subversive. But preference law thereby assumes
that the debtor and creditor owe a general duty to the abstract class of
the debtor's creditors, a duty that is itself deeply controversial. Prefer-
ence law often pretends to be an important and scientifically sound in-
strument for regulating commercial behavior. But it has often turned
out to be more like a vague and overinvested legal idea in which our
struggle to achieve consensus about standards of commercial behavior
has played itself out.
Throughout the history of preference law, legislators and commen-
tators have ritually claimed that they have designed a precise legal in-
strument to single out just those prepetition transactions between
debtor and creditor that wrongly threaten the process of ratable distri-
bution. Lawmakers thus proclaim that there is some consensus in our
commercial culture about which commercial actors or transactions
merit legal sanction. Moreover, a common, if unstated, assumption of
preference law has been that legislation can create harmony between
our moral concern for sanctioning antisocial conduct by debtors or
creditors and our purely instrumental concerns with enhancing the flow
of credit in commerce.
Historically, we can associate this optimistic view of preference law
with calls for more inclusive preference-avoiding rules.28 This view as-
sumes that the credit system is fundamentally morally sound, but that
we can identify a few clear abuses, and can thereby create clear rules to
regulate them. Commercial actors will then be able to rely on predict-
able preference rules in planning and executing their credit
transactions.
E. TheRitualsof Preference
Lawmaking
Yet the historical ritual has been that, shortly after such scientific,
morally uncontroversial preference rules are passed, they are quickly
undone. The causes of the ritual breakdown seem to be several. On
the simplest level, preference legislation breaks down due to mere in-
strumental uncertainty. Courts, commentators, or subsequent legisla-
tors propose further tinkerings with each new scientific solution to the
delivered, effects made over, or any other way, have gotten some of the estate into their
hands, or securities belonging to it, whereby they are in a better state, as to payment, than the
rest." DEFOETRADESMAN, supra note 20, at 206. Yet preference law backfires so long as the
technical rules invoking bankruptcy can be manipulated:
For perhaps some Creditor honestly receiv'd in the way of Trade a large Sum of
Money of the Debtor for Goods sold him when he was sui jrlis; and he by consent
shall own himself a Bankrupt before that time, and the Statute shall reach back to
bring in an Honest Man's Estate, to help pay a Rogue's Debt.
DEFOE ESSAY, supra note 8, at 204.
28. The best example of this is the legislative history of the 1910 amendment to the
Bankruptcy Act. See text accompanying notes 355-387 infra.
problem, on the theory that some slightly more refined statutory instru-
ment will better enhance the flow of credit. This uncertainty is some-
times a minor matter of economic finetuning, but at other times-
including the present-it has suggested that lawmakers face a large in-
formation gap about what, if any, effect a particular legal rule has on
behavior in the credit market.29
On another level, the instability of preference legislation lies with
judges who deny that precise legislative rules are ever sensitive enough
to capture the nuances of commercial behavior and the norms of the
marketplace. The one dominant historical ritual in twentieth century
American preference law has been for Congress to enact a new and
supposedly clear and broad preference rule, and for judges then to ig-
nore or shamelessly manipulate statutory rules to preserve transactions
against a preference attack. In short, judges transform rigid statutory
rules into flexible discretionary norms, and turn preference law into a
matter of "I know it when I see it." Judges do so when they test the
transaction against their sense of market norms, and uphold the trans-
action because, whatever the statutory rule, they find no subversive col-
lusion between debtor and favored creditor.
But commercial custom has strong and complex moral roots, and
when judges act this way, they suggest deeper reasons why preference
rules get undone. When judges nullify clear preference-avoiding rules,
they imply that the legislature has failed to establish a consensus about
proper commercial behavior and about the goals of commercial law.
For example, if a highly inclusive preference law purports to redistrib-
ute some wealth from secured to unsecured creditors, the courts that
undermine it may be reflecting a controversy in our commercial culture
about the relative worthiness of these classes of commercial actors. In-
deed, the legislative and judicial history of preference law becomes a
medium for political debate over such questions. Or the courts may be
implying some deeper doubts about social duties within a credit cul-
ture. They may be questioning whether debtors and creditors do in
fact owe any sort of general or abstract duty to creditors as a class.
They may prefer to measure the moral validity of transactions in a case-
specific way, and to argue that some technically preferential transac-
tions are indeed morally worthy expressions of loyalty between debtor
and individual creditor. In a state of uncertainty about the norms of a
credit economy, we may only be able to evaluate transactions in terms
of individual responsibility between a particular debtor and a particular
creditor.
The undoing of clear and broad preference legislation has not been
the work of the courts alone. As another part of the historical ritual,
the frequent reconsiderations of bankruptcy law in Congress have be-
29. Eisenberg, BankruptcyLaw in Perspective,28 UCLA L. REV.953, 966 (1981); McCoid,

Bankruptcy,Preferences,and Efficiency:An Expressionof Doubt, 67 VA. L. REV.249, 262-68 (1981).
come occasions for an explicit debate by legislators and scholars over
the purpose and feasibility of preference law. These occasions have
often produced very explicit attacks on broad and clear preference leg-
islation.30 The language of the statute may reflect an elephantine com-
promise as a result of clumsy legislative efforts to accommodate
conflicting views.
As a result of judicial or legislative subversion, preference laws have
inadvertently become symptoms of the instability of our commercial
norms. On the other hand, as we have seen very recently, the instability
of preference law has resulted from very deliberate economic or polit-
ical attacks on the very concept of systematic preference rules. The os-
cillation from rule to standard often reflects a belief that, because there
can be no clear moral confidence about what are good and what are bad
transactions, we must abjure any attempt at scientific legislation and
should simply accept the necessity of somewhat indeterminate legal
standards.
F. TheContemporary Effort
Perhaps no aspect of the landmark 1978 Bankruptcy Code has dis-
played such a pretense to scientific formalism as section 547, which
purported to be the final scientific word on preferences, a radically sys-
tematic scheme of definition and exception.31 Yet shortly after its en-
actment, federal judges began reviving the grand old style of ignoring
or manipulating the clear language of preference legislation to uphold
transactions that appeared to accord with intuited norms of the credit
market. And just six years later, we encounter an "Improvements" Act
that further tinkers with section 547.32 The new law undermines the
scientific formalism of the statute by indirectly incorporating a "cus-
tomary norm" into the definition of preferential behavior, undoing the
new formal rules with a standard thinly masked as a mild amendment to
a subrule. In just the last few years of American preference law, the
courts, Congress, and scholars have played out the whole ritualized pat-
tern, and have demonstrated that bankruptcy law seems destined to re-
turn to difficult questions about evaluating commercial conduct in a
credit culture.
This article is an interpretive history of preference law as it reflects
the general debate over rules and standards in bankruptcylaw. My ulti-
mate concern will be American bankruptcy history as it leads up to this
30. See text accompanying notes 355-387 infra (discussing the 1910 legislation).
31. Pub. L. No. 95-598, tit. I, ? 547, 92 Stat. 2549, 2597-2600 (1978) (codified as
amended at 11 U.S.C. ? 547 (1982 & Supp. 1986)). SeegenerallyWard & Shulman, InlDefenseof
the BankruptcyCode'sRadical Integrationof the PreferenceRules AffectingCommercialFi,nalnilg, 61
WASH. U.L.Q. 1 (1983). For a discussion of the new Code, see text accompanying notes 470-
495 infra.
32. See Bankruptcy Amendments and Federal Judgeship Act of 1984, Pub. LI.No. 98-
353, 98 Stat. 333 (codified at 11 U.S.C. ? 547 (Supp. 1986)); see also text accompanying notes
545-549 infra.
last contemporary phase of the cycle. But I will begin with a long ex-
cursus on the English historical background. I will argue that this Eng-
lish history and early American history reveal a sort of collective
unconscious in the life of bankruptcy law generally.
II. ENGLISH BANKRUPTCYLAW AND THE ADVENT OF THE PREFERENCE
A. EnglishMercantileCulture
Renaissance and Restoration English culture developed a morally

complex image of the merchant character, an image that helps explain
the ambivalence of English bankruptcy law in regulating, punishing,
and rewarding merchant behavior. The image is actually a pair of
images. The dominant image in the eighteenth century is the merchant
as a noble but vulnerable statesman of international trade, always the
helpless victim to the vagaries of elusive credit, reputation, and fortune.
But the earlier and ever-persisting image is the viciously ugly picture of
the cheat, the evil magician who manipulates intangible credit and
property, who devours the store of others, and who literally and figura-
tively absconds.
1. Themerchantas villain.
The imagery of the merchant derives from English culture's percep-

tion of, or troubled attempt to comprehend, the new phenomenon of
capitalist credit. Credit is essentially a form of property or money, an
intangible wealth that depends on trust, reputation, and rumor. Like
the merchant, it has its good and its bad images. Credit can be a noble
bond or solvent trust among merchants and indeed among nations, and
a means to leverage great wealth out of limited natural resources. Yet
credit instruments are also a false wealth, an illusion, a design of smoke
and mirrors manipulated by merchants to devour the property of
others. The ugly images of credit and merchant emerge in the litera-
ture first, because the profession of commercial exchange is an uncom-
fortable new phenomenon that English writers cannot accommodate to
their comfortable norms of a religiously hierarchical, land-based soci-
ety. And the ugly images appear more particularly in the literature of
bankruptcy, since bankruptcy is the crime or condition of commercial
insolvency that illuminates the new phenomenon most sharply.
The images receive no more intense picture than in the early Jaco-
bean writings of the playwright Thomas Dekker. Dekker makes only a
brief gesture toward the affirmativeimagery of the merchant, mainly for
contrast: "The infortunate Marchant, whose estate is swallowed up by
the mercilesse Seas, and the provident Trades-man, whom riotous Ser-
vants at home, or hard-hearted debters abroad undermine and over-
throw, blotting them with the name of Bankrupts, deserve to be pitied
and relieved ...."33 But his portrait of the devious absconder is the
most ghastly in all the literature: the "Politick Bankrupt" who exhibits
an infinite variety of masks:
a Harpythat lookes smoothly, a Hyenathat enchants subtilly, a Mermaid
that sings sweetly, and a Cameleon,that can put himselfe into all colours
.... [H]e wind[e]s himselfe up into the height of rich mens favors, till
he grow rich himselfe, and when he sees that they dare build upon his
credit, knowing the ground to be good, he takes upon him the condi-
tion of an Asse, to any man that will loade him with gold; and useth his
credit like a Ship freighted with all sorts of Merchandise by ventrous
pilots: for after he hath gotten into his hands so much of other mens
goods or money, as will fill him to the upper deck, away he sayles with
it, and politickly runnes himselfe on ground, to make the world beleeve
he had sufferd shipwrack.34
The bankrupt then absconds, or barricades himself at home, or offers
his helpless creditors cheap compositions. And then he magically re-
generates: "The victory being thus gotton by basenes and trechery,
back comes he marching with spred colours againe to the City; ad-
vances in the open streete as he did before; sels the goods of his neigh-
bor before his face without blushing ...."35
The moral ambivalence of the Renaissance view of the merchant
debtor appears in imagery of reality and illusion, of manipulation of
appearance. The image thereby reflects a kind of social paranoia about
a new economic phenomenon that is perceptually and conceptually elu-
sive, and for that same reason morally suspect.
The merchant class that emerged in seventeenth century England
can be defined, in a sense, as the class of people who made money by
means other than owning land. But the merchant archetype must also
be distinguished from the actual artisan, the manufacturer, and even
the retailer of goods. Most of the wealth among nonlandowning
merchants came from new and innovative forms of capital, and was
concentrated among those who served as brokers-who neither manu-
factured nor retailed goods-and among those who traded solely in
credit as a commodity itself, by serving as private bankers.36
Commercial capital struck the English mind as discomfortingly un-
33. T. DEKKER, THE SEVENDEADLY SINNESOFLONDON16 (1606) (emphasis in original).

34. Id. at 13-14 (emphasis in original).
35. Id. at 14-15. Dekker concludes with his image of the just bankruptcy law:
The Russians have an excellent custome: they beate them on the shinnes, that
have money, and will not pay their debts; if that law were well cudgeld from thence
into England, Barbar Surgeons might in a few yeeres build up a Hall for their Com-
pany, larger than Powles, only with the cure of Bankrupt,brokenshinnes.
I would faine see a prize set up, that the welfed Usurer, and the politick Bank-
rupt might rayle one against another for it....
Id. at 17 (emphasis in original).
Ceentuii:TheComl-
36. SeegenerallyGrassby, English MerchantCapitalismin the Late SevZenteenth
position of BusinessFortunes,46 PAST& PRESENT87 (1970). The actual proportionate capital
holdings of merchants were very small compared to those of the Crown, the Church, and the
landed, but the merchants exerted a social influence beyond their size because of the difficulty
November 1986] HISTORY OF PREFERENCE LAW 15
moored from the solid reality of land, even though it was often the
magical medium for liquidating the value of land. The bulk of the real
wealth of England may still have been in land, but merchant capital
became the crucial solvent of landed wealth.37 The merchants mostly
made their great profits in short-term, indirect manipulation of the sale
of commodities or direct manipulation of the money markets.38 The
true worth of the business fortune was therefore vague, subject to con-
stant variation, and based on highly speculative exchange values.39
The merchant class moved up, and somewhat unsettled, the land-
based social hierarchy. While the landed used their status to create
wealth, the merchants used their wealth to create status. The insatiable
demand for ready cash gave the merchant great leveraging power. But
it was in some ways an evanescent class whose members left little trace
of their life's work. The flexibility of commercial wealth was a great
financial advantage, but it also meant that merchants' estates did not
achieve much lineal continuity. Symbolic money credit was too contin-
gent to insure inherited respectability. Ironically, the very evanescence
of the merchant class was part of its threat to English culture: The frag-
English culture had in accommodating the disturbingly unfamiliar forms that their wealth
took. Id. at 87.
37. Id. at 105-06. Seventeenth century merchants, who tended to lease rather than own
their urban houses entered the real estate market only indirectly, as contractors, agents, and
commissioners for sale. They invested in mortgages, and dealt in urban, not rural, land, seek-
ing the greater short-term capital gains. They profited from the credit and short-run ex-
change value of land, rather than long-term rents or development. Id. at 98-99.
38. Though some manufacturers of perishables, like beer, made great profits by elimi-
nating middlemen, wholesalers and factors made more than retailers, processors were richer
than producers, and middlemen and general merchants were wealthier than chapmen and
retailing artisans. Id. at 97. Abundant labor and inelastic demand made distribution far more
lucrative than manufacturing. Id. at 98.
In terms of finance, private usury was profitable until the statutory maximum interest
rates fell, but merchants still made profits in bottomry and risk loans, secured loans, and
speculative loans to miners. Id. Markets developed in stocks, licenses, and monopolies; an
industry developed in passive stock trading and in the art of timing choices between capital
appreciation and dividends. Id. at 99. The other kind of financial middleman was the private
banker who took money to invest, pay bills, and make foreign exchanges and loans. Id. at 100.
Merchants also made great fortunes in government finance. Indeed, much of the morally
complex view of merchants derives from the government's disproportionate dependence on
them, in the form of customs farms, excise farms, military victualing and supplies of clothing
and ordnance, and the political instability that many Englishmen then blamed on merchant
lenders. The merchants brokered and placed money, and the state needed the merchants for
their liquidity and business contacts. Grassby notes that the great fortunes and
great bank-
ruptcies occurred among merchants who got roles as Paymasters and Treasurers. Merchants
thus became the money manipulators for the government, taking customs,
collecting taxes
and even anticipating provincial revenues on their own credit. Id. at 100-02.
39. Merchants' estates were inherently fragile because of the vagaries of investor confi-
dence, low rates of exchange, and the difficulty of collecting overseas debts because of a lack
of specie. Active businessmen kept their capital moving quickly in
goods, shares, debts, and
stocks, and had little fixed capital. They could manage with little cash only so long as their
reputation was good. Merchants tended to plow profits back into investments in their busi-
nesses; they had a high proportion of their working capital in credit to clients and accounts
receivable; they lived very unostentatiously and saved and reinvested at a high rate; when they
made large capital gains, they tended to place them in loans to the
government. Id. at 104-05.
ile contingency of the merchant world became the fragile contingency
of the economy generally, or so some perceived.40
The conservative political response to the discomforting rise of
commercial exchange was to legislate restrictions. The harsh bank-
ruptcy laws of the seventeenth century were only part of the statutory
effort to control the morally and perceptually elusive forms of trade
that the common law and law merchant had little power to constrain.
The statutes were, in effect, atavistic attempts to maintain a world based
on land status and duty.41
2. Themerchantas hero.
The counter-response in this political battle over the role of com-
merce in English culture was an intellectual project by a great number
of seventeenth century writers-an affirmative ideology of credit and
trade. The emerging sympathetic imagery of the contingent life of the
merchant, and of credit as the solvent of social relations, began to co-
here into a political vision.42
The new ideology demanded a redefinition of money itself as a sort
of symbolic force of nature, not an object of devious manipulation.43
Money was imagined in ideal terms as the pure passive medium, the
proxy for all things of value. Mercantile credit was not only desirable,
but historically inevitable. The English government demanded credit,
40. The birth pangs of the market economy meant that the domestic economy became
more dependent on the vagaries of overseas trade, as when a decline in overseas demand for
wool hurt not just merchants, but also clothiers and farmers. Erratic exchange rates and infla-
tion hurt everyone in the mercantile chain. J. APPLEBY, ECONOMIC THOUGHT ANDIDEOLOGY IN
SEVENTEENTH-CENTURY ENGLAND 35-36 (1978).
41. One of the most dramatic examples of statutory efforts to constrain modern com-
merce was the regulation of the forestalling, regrating, and engrossing of food. The English
had difficulty accepting the notion of trading in food as a commodity. Food was a social
and
necessity, not an economic good in a market, so the laws restricted the ability of farmers
merchants to play the market in food. Id. at 27-28. The Statute of Artificers and the Elizabe-
than Poor Laws played oddly similar roles in restricting the roving vagabond populations. Id.
at 29. Parliament resisted the mobility and flexibility of wealth, and the concomitant mobility
and flexibility of status. Political and intellectual battles were fought over the enclosure laws,
which economically and figuratively meant the "privatization" of landed wealth, id. at 57-63,
and the usury laws, whose premise that money was morally barren was obviously now subject
to question, id. at 63-70.
The English laws may also reflect a frightened reaction to the model of economic disaster
1 F.
provided by the Castilian state bankruptcy at the turn of the seventeenth century. See
at
BRAUDEL, THE MEDITERRANEAN AND THE MEDITERRANEAN WORLD IN THE AGE OF PHILIP II,
501-17 (S. Reynolds trans. 1972); D. MALAND,EUROPEAT WAR: 1600-1650, at 112, 158-59
(1980).
42. The early economist Thomas Mun developed the model of the orderly balance of
trade-the great chain of international being with merchants linking all. The new ideology
conceived a commercial process from production to marketing, which created a place for the
37-41.
pariahs-middlemen and bankers. J. APPLEBY, supra note 40, at
43. Money had an extrinsic measure, determined by the king, but it also had an intrinsic
measure, determined by the merchant: "For let no man doubt, but that money doth attend
Merchandize, for money is the price of wares, and wares are the proper use of money; so that
their coherence is unseparable." T. MUN, A DISCOURSE OF COIN ANDCOINAGE25 (1675),
quotedin J. APPLEBY,supra note 40, at 50.
not treasure, to run its army and navy, and Parliament could do little to
resist the inexorable force of mercantile credit in a modern economy.
The specific political conclusion from this ideology, of course, was that
the statutory restrictions on credit were either counterproductive or fu-
tile, since they fought with human nature itself.44 And the ideology of
free trade exacerbated the legal problem of choosing between firm stat-
utory rules or open standards for regulation. According to the free
trade ideology, the natural progress of commercial development re-
quiredviolations of usury laws, export/import restrictions, and other
regulatory statutes.45
Economic reality thus lay in subtle but powerful forces of calcula-
tion, anticipation, and expectation. The merchant was the secret spe-
cialist, the artist and oracle of these forces, but he was also, in the
disingenuous terms of the new ideology, merely an actor in a natural
drama that no king could control.46 Yet the result was to undermine
some comfortable, land-based notions of social hierarchy. Credit in the
free market of reputation became the new form of honor. Commerce
became the great leveler of social status.47 The Christian norm was
replaced as a paradigm of behavior by the commercial predictability of
traders.
Of course, a counter-ideology persisted,48 but the argument re-
44. Usury laws were denounced as inefficient because usury puts poor people's money
to work. The pro-usury people argued that high interest rates stimulated trade: "[A]s credit
is the sinew of conversation, and nourisher of correspondency, the great manager of affairs:
So is the Usurer the causa emanativa of this Credit." T. MANLEY, USURYAT SIX PER CENT.
EXAMINED3 (1669), quotedin J. APPLEBY, supra note 40, at 92.
45. The mercantile writer Edward Misselden characterized credit as a sort of elusive
spiritual solvent of trade, but he thought it was subject to natural laws beyond official power.
See J. APPLEBY,supra note 40, at 41-48. Locke recognized that the exchange economy was
fragile, that commerce was a system of promises and trust rooted in self-interest. There was
no point in legislating good faith. SeeJ. LOCKE,SOMECONSIDERATIONS OFTHE CONSEQUENCES
OF THE LOWERINGOF INTEREST4 (1692), quotedin J. APPLEBY, supra note 40, at 188.
46. Mun argued that "necessity or gain will ever find some means to violate" legislation
inimical to profit. T. MUN, THE PETITION AND REMONSTRANCEOF THE GOVERNORAND COM-
PANYOF MERCHANTSOF LONDON, TRADING TO THE EAST INDIES 9 (1628), quotedin J. APPLEBY,
supra note 40, at 160-61. The natural order of credit was described by James Hodges: The
government could not regulate credit because credit depended upon natural forces of opin-
ion, reputation, and satisfaction. See J. HODGES,A SUPPLEMENTTO THEPRESENTSTATEOF
ENGLAND 11-15 (1697), cited in J. APPLEBY, supra note 40, at 266-67.
47. For example: "Every Man in a Society . . . from the King to the Peasant is a
Merchant, and therefore under a necessity of taking care of his Reputation." T. SHERIDAN,A
DISCOURSE OF THE RISE & POWER OF PARLIAMENTS225 (1677), quoted in J. APPLEBY,supra note
40, at 188. "[S]hop keepers are, like all other Men (led by their profit), and if it be for their
Advantage to send out Manufactures, they will do it without forcing ... [and] if it be for their
Profit to send over Money or Bills of Exchange, they will do that .. ." J. CHILD, A NEW
DISCOURSE OF TRADE 86 (1693), quotedin J. APPLEBY, supra note 40, at 191.
The concept of commercial trust promoted one means of credit as especially
important-
the surety. A surety is more reliable than conscience and religion, "because in these we are
sure there may be Hypocrisie, but in Interest we know there is none." J. BRISCOE,A DIS-
COURSEOF MONEY 136 (1696), quotedin J. APPLEBY, supra note 40, at 189. This
special role of
the surety will prove important in the development of preference law. See notes 259-262
infra
and accompanying text.
48. Dekker's terrifying imagery of the politick bankrupt, see text
accompanying note 34
18 STANFORD LA WIREVIEW [Vol. 39:3
mained that trade, if not morally admirable, was nevertheless socially

inevitable, and that the elusiveness of its phenomena, though raising
moral doubts, nevertheless made trade regulation futile.
All the possessions [of commercial societies] consist[ed] of scattered
and secret securities, a few warehouses, and passive and active debts,
whose true owners are to some extent unknown, since no one knows
which of them are paid and which of them are owing .... The wealthy
merchant, trader, banker, etc., will always be a member of a republic.
In whatever place he may live, he will always enjoy the immunity which
is inherent in the scattered and unknown character of his property, all
one can see of which is the place where business in it is transacted. It
would be useless for the authorities to try to force him to fulfill the
duties of a subject: they are obliged, in order to induce him to fit in
with their plans, to treat him as a master, and to make it worth his while
to contribute voluntarily to the public revenue.49
Moreover, the new ideology of trade succeeded by inventing a more
specific ideology of the merchant character. If the moral problem lay
with the image of the merchant as a creature of pure interest, uncon-
strained by any traditional standards of religious virtue or social re-
sponsibility, the solution had to lie in the justifying ideology of
mercantile self-interest as potentially restraining and socially responsi-
ble itself.50 It was natural, and thus predictable, for people to act ac-
supra, finds a descendant later in the century in the view of the crucial analyst of trade Gerald
de Malynes, who held up against the apologists of flexible wealth an ideal world of fixed and
real value. Malynes blamed money for manipulating value, rather than respecting it for repre-
senting value. Merchants speculated in and overvalued foreign coin and thereby toyed with
kingly power. Financial trade was subversive-it literally gave merchants royal power. SeeJ.
APPLEBY, supra note 40, at 41-47. Pamphleteers reminiscent of Dekker denounced mercantile
middlemen as leeches. Conservatives denounced the middlemen as "Broggers, Jobbers,
Wool-Drivers, Staple-wool buyers, Combsters, [and] Market-Spinsters." W. SMITH,AN ESSAY
FORRECOVERY OFTRADE4 (1661), quotedin J. APPLEBY, supra note 40, at 117. Divorced from
the more obviously pernicious stereotype of the politick bankrupt, the merchant still was a
morally equivocal figure in English culture. Adam Ferguson spoke in effect of alienation,
contrasting the solidarity of closely knit tribes with "the spirit which reigns in a commercial
state, where ... man is sometimes found a detached and a solitary being." A. FERGUSON, AN
ESSAYONTHEHISTORYOF CIVILSOCIETY19 (D. Forbes ed. 1966).
Davenant typified the continuing moral ambivalence toward trade. For him trade was
necessary to give land a value; it was the solvent of society. But it was also a pernicious thing,
inviting luxury and corruption. Though trade was a necessary evil partly because England
had to defend itself against other great trading powers, it nevertheless bred violence and was
bred by it. For Davenant, trade created war, war created debt, debt killed trade; luxury cre-
ated war and trade, which created money, then paper money, then debt, then corruption. See
C. DAVENANT, An Essay upon the ProbableMethodsof Making a PeopleGainersin the Balanceof Trade,
(1699), reprintedin 2 THE POLITICAL ANDCOMMERCIAL WORKSOFCHARLES D'AVENANT 275 (C.
Whitworth ed. 1771).
49. Quesnay & Mirabeau, Extractfrom 'Rural Philosophy,'quotedin A. HIRSCHMAN, THE
PASSIONS ANDTHEINTERESTS 94-95 (1977).
50. What emerged toward the end of the seventeenth century was the new affirmative
a
stereotype of the Weberian puritan, for whom what appeared to be greed was really calling.
A new bourgeois ideal replaced the old heroic chivalrous ideal. The new figure starts with the
idea of using passions as counterweights to other passions. Economic self-interest becomes a
a
dependably predictable form of passion, which, if properly channelled, could become public
virtue. And passion was directed toward money, rather than more elevated aspirations, be-
cording to measurable economic self-interest, rather than variable or

volatile heroic aspirations. Thus, despite their subtlety and invisibility,
commercial transactions were socially desirable. Because mercantile
self-interest ensured the predictability of private economic transac-
tions,51 it created reliance interests among commercial actors, and so
commerce became a form of ethical bonding.
Measured by older chivalric or heroic standards, the concept of so-
cial virtue under this new mercantile ideology might seem paradoxical
or even perverse,52 but it was an intellectual achievement that permit-
ted the apologists of trade to proclaim the ideal of "le doux com-
merce." Since "[t]here are few ways in which a man can be more
innocently employed than in getting money," the merchant figure be-
came an unheroic hero, praised for his benignity if not his nobility.53
The chameleon quality of merchant capital, which the opponents of
trade see as its moral barrenness, in fact shows it to be a communal,
public good.54 The fragile commercial links among people and na-
tions, denounced as a means by which traders can manipulate tangible
cause it was a more measurable goal that therefore produced greater predictability. The fig-
ure was attractive because it meant that the merchant himself, like the more abstract
phenomena of trade and credit, acted like a predictable natural law. See A. HIRSCHMAN, supra
note 49, at 56-67.
51. "As the physical world is ruled by the laws of movement so is the moral universe
ruled by the laws of interest." C. HELVETIUS, DE L'ESPRIT53 (1758), quotedin A. HIRSCHMAN,
supra note 49, at 43.
52. The conceptual problem for the apologists of trade was to explain how an interest in
profit could restrainmerchant behavior. The solution was to argue that frugality was the key
virtue that actually enhanced interest. The merchant could display Augustan virtue by rein-
vesting his surplus in the circulating common stock, assuming the circulation of goods to be a
public benefit. J. PococK, THE MACHIAVELLIAN MOMENT 445-46 (1975).
53.
[Divine Providence] has not willed for everything that is needed for life to be found
in the same spot. It has dispersed its gifts so that men would trade together and so
that the mutual need which they have to help one another would establish ties of
friendship among them. This continuousexchangeof all the comfortsof life constitutescom-
merceand this commercemakesfor all the gentlenessof life....
J. SAVARY,LE PARFAIT NEGOCIANT 1, quotedin A. HIRSCHMAN, supra note 49, at 59-60 (emphasis
in original). But the claim was often stronger: It was that the merchant, accused of
subverting
royal power and fomenting war, was the hero of international concord. The suspicious mo-
bile character who seemed loyal to no nation and morally and
economically untied to native
soil was indeed the reconciler of all nations. For Montesquieu, "Commerce ...
polishes and
softens barbarian ways." C. MONTESQUIEU, 20 DE L'ESPRITDESLois 1 (1749), translatedby A.
HIRSCHMAN, supra note 49, at 60. For Robertson, it tended to "wear off those prejudices
which maintain distinction and animosity between nations. It softens and
polishes the man-
ners of men." W. ROBERTSON, THE HISTORYOFTHEREIGNOFTHEEMPEROR CHARLES V 65
(Ist Am. ed. 1804). Montesquieu also insisted that the natural effect of commerce is to lead to
peace. Two nations that trade together become mutually dependent: "[I]f one has an interest
in buying, the other has one in selling; and all unions are based on mutual needs." C. MON-
TESQUIEU, 20 DE L'ESPRITDES LOIs 2 (1749), translatedby A. HIRSCHMAN,
54.
While the farmer, employed in the separate cultivation of land, considers
only his
own individual profit; while the landed gentleman seeks only to
procure a revenue
sufficient for the supply of his wants, and is often unmindful of his own interest as
well as of every other; the merchant, though he never overlooks his
private advan-
tage, is accustomed to connect his own gain with that of his brethren, and is, there-
property and undo social stability, once properly inverted, are the
sources of a utopian vision of a commercial society.55
Despite these smug apologies for the ethical and political virtues of
trade, the Augustan literature of the eighteenth century suggests a
more tortured, uncertain rationalization. Augustan writers generally
tried to accommodate trade into the structure of a land-based society
and to rationalize the threat of instability by assuming a harmony of
land and trade. But trade, built on elusive credit, upset the epistemo-
logical foundation of a landed society.56 The virtue of credit remained
subtle and equivocal because the phenomenon itself was fragile:
Of all beings that have existence only in the minds of men, nothing is
more fantastical and nice than Credit; it is never to be forced; it hangs
upon opinion; it depends upon our passions of hope and fear; it comes
many times unsought for, and often goes away without reason; and
when once lost, is hardly to be quite recovered.57
The notion of credit as a natural force also has its weaker, less confident
version:
It very much resembles, and, in many instances, is near akin to that
fame and reputation which men obtain by wisdom in governing state
affairs, or by valour and conduct in the field. An able statesman, and a
great captain, may, by some ill accident, slip, or misfortune, be in dis-
grace, and lose the present vogue and opinion; yet this, in time, will be
regained, where there is shining worth, and a real stock of merit. In the
same manner, Credit, though it may be for a while obscured, and la-
bour under some difficulties, yet it may, in some measure, recover,
where there is a safe and good foundation at the bottom.58
Credit is the symbolic currency through which society expresses its
moral and economic health.59 Credit is a civilizing influence and can
lead to a mercantile utopia. It is also potentially a corrupting influence
fore, always ready to join with those of the same profession, in soliciting the aid of
government, and in promoting general measures for the benefit of their trade.
W. LEHMANN, JOHNMILLAROF GLASGOW, 1735-1801, at 339 (1960), quotedin A. HIRSCHMAN,
55.
[M]en's minds will become quiet and appeased; mutual convenience will lead them
into a desire of helping one another. They will find, that no trading nation ever did
subsist, and carry on its business by real stock; that trust and confidence in each
other, are as necessary to link and hold a people together, as obedience, love, friend-
ship, or the intercourse of speech. And when experience has taught each man how
weak he is, depending only upon himself, he will be willing to help others, and call
upon the assistance of his neighbours, which of course, by degrees, must set credit
again afloat.
1 C. DAVENANT, supra note 48, at 152.
56. J. POCOCK, supra note 52, at 463-64.
57. 1 C. DAVENANT, supra note 48, at 151.
58. Id. Defoe treats Credit as an elusive female, the younger sister of money, a coy lass,
a fickle lady to be courted. He uses the same rhetoric as that by which Machiavelli described
fortuna and occasione, and the instability of secular things. Trade is a mystery without visible
causes, but with convulsive fits and disorders. But it is also virtue, the energizing force of
modern society. SeeJ. PcOCK, supra note 52, at 452-55 & nn.70-75 (quoting Defoe).
59. E.g., J. POCOCK, supra note 52, at 451-56.
because it is based on the passions of fantasy and opinion. To prevent
corruption, society had to engineer these passions. The first two centu-
ries of English bankruptcy law, and of preference law in particular,
show a revealing form of this engineering.
B. EnglishBankruptcy: A Historyof CompulsiveClassification

I offer here a brief interpretive history of the two core concepts in
early English bankruptcy legislation: the requirement that a bankrupt
be a trader or merchant, and the requirement that he commit "acts of
bankruptcy." The requirement that I shall call the "trader rule" estab-
lishes the conflict between the "rules" and the "standards" approaches
to bankruptcy law and the cultural issues underlying those approaches
that will illuminate all later bankruptcy law, and preference law in
particular.
1. Theadventof bankruptcy
legislation.
The first English bankruptcy statute, enacted in 1543, defined its
coverage in a preamble that forthrightly announced the moral norm
inspiring the legislation:
Where divers and soondry persones craftelyeobteyning into theyre
handes greatesubstaunceof other mennes goods doo sodenlie flee to
partes unknowneor kepe theyre houses, not myndingto paie or re-
store to any of theyre creditourstheyre debtes and dueties, but at
theyreowne willes and pleasuresconsumethe substaunceobteynedby
credyte of other men, for theyre owne pleasure and delicate lyving,
againsteall reasone equityand good conscience....60
The imagery of the preamble offers a portrait of an antisocial commer-
cial character; the bankruptcy law itself was essentially a criminal law
designed to brutally punish this character.61 The law denied the debtor
any discharge and left his person and property vulnerable to further
actions by creditors whether or not they had participated in the ratable
bankruptcy distribution.62
Apparently, the 1543 statute sought to overcome flaws in the older
debt collection laws.63 But the coverage of the 1543 statute was hope-
lessly vague, based as much on literary sentiment as on legislation. Be-
60. 34 & 35 Hen. 8, ch. 4 (1542-1543).
61. The commissioners could take any steps to imprison the debtor and could break
down his door to seize all his assets for ratable division among the creditors. They could
forcibly examine him and his wife under oath and criminally sanction those who resisted pro-
cess or concealed assets. See W. JONES, THE FOUNDATIONSOF ENGLISH BANKRUPTCY15-16
(1979).
62. Id. at 16.
63. The continent had a rich commercial law coordinated with efficient collection rules,
so creditors were relatively satisfied with individual remedies. By contrast, English debtor-
creditor law was crude. It gave creditors rights against the debtor's body, but the debtor
could evade execution easily through limits on the sheriff's power under a writ
offierifacias
and through exemptions for intangibles (such as bonds, bills of exchange, and notes), and for
super-personal tangibles (such as jewelry). Imprisoning the debtor denied the creditor all
yond the lively imagery of character and conduct in the preamble, it

failed to explain the precise conditions that invoked the novel bank-
ruptcy process. The statute mentioned "bankrupts" only in the title,
and then referred only to "divers and soondry persones" who had com-
mitted the commercial sins of hoarding or consuming the property of
others and then hiding or absconding.64 It was only in the second stat-
ute, the Elizabethan law of 1571, that Parliament attempted to capture
in particulars the two themes of the Henrician law-a kind of immoral
character and a kind of immoral conduct-in legislative rules.
2. Thetraderrule.
Theruleand its origins. The 1571 law, in contrast to its predecessor,
was a model of precise regulatory legislation. The first key element of
the new statute was a rule defining a type of occupational or social sta-
tus associated with the furtive, manipulative behavior described in the
1543 preamble. In the first version of the trader rule, Parliament said
that a person shall suffer bankruptcy process only if he is a "merchant
or other person using or exercising the trade of merchandize by way of
bargaining, exchange, rechange, bartry, chevisance, or otherwise, in
gross or by retail, ... or seeking his or her trade of living by buying and
selling."65 This clause is one of the central texts in the history of bank-
ruptcy law, and its emanations demanded the attention of Parliament
and the courts for the next three centuries. It is the prime source of the
fundamental tension between closed rules and open standards that
vexes bankruptcyjurisprudence.
Bankruptcy in early English law was far from an arithmetically mea-
surable state of insolvency: It was a social condition and a kind of con-
duct. Although, as we will see, early bankruptcy law conceived of
bankruptcy as a specific form of undisputedly fraudulent conduct iden-
tified by "acts of bankruptcy,"66the trader rule simultaneously tried to
apprehend the moral flaw of bankruptcyas a form of occupation, a mix-
ture of a type of status and a type of commercial activity, that made a
person unusually susceptible to the deviant behavior depicted in the
1543 preamble. The trader rule reflected the vague moral suspicion in
precapitalist England about the elusive, manipulative role of those who
deal in money, credit, and other people's goods.67
useful remedies, and prison, ironically, was often very comfortable for the debtor. Id. at 11-
15.
64. There is some evidence that the statute only operated against merchants, but of
course the commissions had no guiding principle as to what a merchant was or exactly how
one could tell when he had become a bankrupt. Id. at 17.
65. 13 Eliz., ch. 7 (1570).
67. In treating the merchant debtor as a villain and a deviant, bankruptcy law actually
conflicted with the imagery of an older and equally important form of statutory regulation of
trade-usury laws. In usury law, the villain is the creditor, not the debtor, and the evil image
of the usurious creditor as the outsider, especially as the Mediterannean Jew, ironically paral-
The trader rule is thus the legal instrument designed to distinguish

the two images of debtors conceived in early commercial law. One is
the honest but unfortunate shopkeeper who preserves his estate as best
he can for the sake of his creditors and offers or agrees to the most
efficient composition possible. The other is the self-exiling, abscond-
ing Lombard who runs up debt without regard to the survival of his
creditors, secrets his estate, and hides from the law and his creditors in
his comfortable house, or abroad, or even in a prison he has turned
into a sybaritic retreat.68
The instabilityof the traderrule. The legislative and judicial develop-
ment of the trader rule over the next three hundred years reflects the
instability of the merchant as a legal and moral category. The phenom-
enal moral intensity and complexity of the social view of the bankrupt
merchant would have made any lawmaking difficult. But bankruptcy
law compounded the difficulty with the novelty of the statute as a legal
form governing commercial behavior. Bankruptcy law was a purely
statutory form contrived to overcome the inadequacies of common law
collection procedures. The statutory rule as a political art form was a
lels bankruptcy law's image of the evil debtor. Indeed, in TheMerchantof Venice,not only is the
villain the Jewish creditor, but the victim-hero is the merchant debtor, Antonio. Shake-
speare's sympathetic depiction of the fragile merchant debtor, vulnerable to such contingen-
cies as shipwrecks, ironically parallels the later, positive image of the merchant debtor under
bankruptcy law as it emerged in the eighteenth century and was summarized by Blackstone.
See notes 101-103 infra and accompanying text.
The larger subject of the relationship between bankruptcy law and usury law is
complex
and relatively unexplored. Usury law parallels bankruptcy law as a medium for capturing the
ambivalence of English culture about credit and trade. Although anti-usury laws date from
the tenth century in England, Jews were sometimes exempted because they were not bound
by the canon law, and as foreign trade and the demand for capital-grew in Renaissance Eng-
land, Parliament began to put numerous loopholes in the usury prohibition. See D. ORCHARD
& G. MAY,MONEYLENDING IN GREATBRITAIN13-38 (1933). In the early nineteenth century,
spurred by the need for industrial credit and the rise of Benthamite philosophy, commercial
and landed interests persuaded Parliament to repeal many of the usury laws and even en-
hanced the collection rights of high-interest creditors. In fact,
moneylending creditors man-
aged to achieve priority in bankruptcy. Id. at 38-47. This priority was limited by the
Bankruptcy Act of 1869 so as not to cover after-acquired property, id. at 46, and for the first
time, in the 1890 Act, a moneylending creditor's priority claim in bankruptcy was limited to
the principal and a maximum of 5% interest. Id. at 65. Thus,
bankruptcy contained a quali-
fied sort of usury law even after the repeal of usury laws. Indeed,
bankruptcy courts seemed
to retain some equitable power to strike down usurious loans as unconscionable when
they
arose as claims against the estate. Id. at 70; see In re A Debtor, 1 K.B. 705 (1903). Similar
finetuning of the moneylending creditor's dominance over other creditors in bankruptcy con-
tinued through early twentieth century amendments to the
bankruptcy law. D. MESTON, THE
LAWRELATINGTO MONEYLENDERS158 (1968); D. ORCHARD & G. MAY, supra, at 75-77, 126; see
In re A Debtor, 2 K.B. 60 (1917).
68. See notes 33-35 supra and accompanying text. In Dekker's
language, the "honest
bankrupt" is "undone by suretyship, casualties or losses at sea." But the "politic bankrupt" is
"a voluntary villain, a devouring locust, a destroying caterpillar, a golden thief." Furtive in-
solvents are "anthropaphagi-men-eaters." Bankrupts are:
English Wolves ... the Rats that eate up the provision of the people: these are the
Grasshoppers of Egypt, that spoyle the Come-fields of the Husbandman and the rich
mans Vineyards: they will have poore Naboths piece of ground from him,
though
they eate a piece of his heart for it.
T. DEKKER,supra note 33, at 16-17.
relatively undeveloped means of translating moral and economic goals

into administrable practice and of accounting for the irreducible variety
of commercial practices. The statutory trader rule proved haplessly
overbroad and underbroad not only because the imagery inaccurately
captured the economic problem, but also because the language of the
rule inaccurately captured the imagery.69
For example, the statute was unclear in its application to people
who manufactured tangible goods. Small-time craftsmen made visible
contributions to the economy; they were solid native characters, oppo-
site in moral image to the devious usurer. But many craftsmen never-
theless seemed to fit the trader rule because they bought supplies and
sold finished products. Indeed, many types of craftsmen might have
fallen prey to the difficulties and temptations the law was concerned
with because they engaged in the new creative financing of bills of ex-
change and other credit instruments associated with the merchant.70
The apparent inclusion of these craftsmen forced the courts to exercise
the whole variety of result-oriented rhetorical maneuvers we associate
with modern statutory interpretation.7'
One ironic flaw of the trader rule was that in focusing on people
who merely dealt in other people's goods without making or consum-
ing them, it failed to cover people who were in a sense the most purely
mercantile characters of all-those who only dealt in money and there-
fore never touched tangible goods. Anxious about commercial actors
who manipulated the purely abstract value of things, Parliament had
nevertheless failed to deal with the emerging money market.72 Thus, in
1623, Parliament had to add those "that shall use the Trade or Profes-
69. See G. BILLINGHURST, THEJUDGESRESOLUTIONS UPONTHESEVERAL STATUTES CON-

CERNING BANKRUPTS 86-91 (1676); Duffy, English Bankrupts,1571-1861, 24 AM.J. LEGALHIST.
283 (1980); Friedman & Niemira, The Conceptof the "Trader"in Early BankruptcyLaw, 5 ST.
LoUIS U.L.J. 223 (1958).
70. Thus, the courts were ultimately unable to resist the inclusion of shoemakers, Stan-
ley v. Osbaston, Cro. Eliz. 268, 78 Eng. Rep. 523 (K.B. 1592); drapers, Tuthill v. Milton, Cro.
Jac. 222, 79 Eng. Rep. 193 (K.B. 1610); dyers, Squire v. Johns, Cro. Jac. 585, 79 Eng. Rep.
500 (K.B. 1621); bakers, Hawkins v. Cutts, Hutt. 49, 123 Eng. Rep. 1093 (C.P. 1623); and
carpenters, Chapman v. Lamphire, 3 Mod. 155, 87 Eng. Rep. 100 (K.B. 1688).
71. For example, courts excluded "purely manual" laborers like husbandmen or tailors
on the theory that in making garments they did not so much sell goods as provide a service.
See, e.g., Crumpe v. Barne, Cro. Car. 31, 79 Eng. Rep. 630 (C.P. 1627). A tailor might buy
cloth and sell clothing, but buying and selling were not his trades-rather, they were adjuncts
to making the garment, and merely extra services to the customer. SeeG. BILLINGHURST, supra
note 69, at 88. By that reasoning, a clothier who hired out work to poor people might be a
bankrupt, but not if he did the work himself and kept his own looms and servants.
Perhaps the best evidence of the moral intensity with which Renaissance English society
perceived bankruptcy was that many of the important cases interpreting the trader rule were
not bankruptcy cases at all. Rather, they were defamation cases, in which the defendant
charged with falsely calling the plaintiff a bankrupt replied that the plaintiff was not legally
susceptible to such defamation because by his occupation he did not fall within the trader
rule. See Friedman & Niemira, supra note 69, at 226.
72. The courts read the statute to exclude bankers, brokers, and financiers; Parliament
had to add them to the statute a century later. E.g., Bird v. Major, 2 Ld. Raym. 851, 92 Eng.
Rep. 69 (Ch. 1702).
sion of a Scrivener, receiving other Mens Moneys or Estates into his

Trust or Custodie."73
Parliament had certainly never anticipated the application of the
statute to two particular social groups-farmers and the landed
wealthy.74 The economic lives of both groups rested on the ontologi-
cally reassuring earth, and they therefore were supposedly not suscepti-
ble to the economic vagaries of movable and intangible property.
Moreover, neither the solidly virtuous farmer nor the landed gentleman
fit the moral profile of the elusive merchant. But farmers, as well as
ranchers, graziers, and drovers, bought and sold goods, so it was hard
to exclude them from coverage. Since they often went broke, bringing
creditors down with them, coverage made a certain sense. The courts
thus had to strain to exclude them by such rhetorical maneuvers as de-
claring that their trade was merely incidental to their primary occupa-
tion as workers of the soil.75
And though the trader rule aimed to distinguish merchants from
gentlemen, merchants grew wealthy enough to be gentlemen, and gen-
tlemen in search of liquidity began to act like merchants. Parliament
therefore had to expressly amend the rule to exclude them.76 Most
dramatically, Parliament had to reverse by statute a court holding that
an aristocrat who had invested in the East India Company could be a
bankrupt, excluding from the rule "Noblemen, Gentlemen, and per-
sons of quality, no wayes bred up to Trade or Merchandize."77 Thus, a
rule that was logically construed to violate its implicit social and moral
standard had to be amended to rather baldly incorporate that standard.
English bankruptcy law, in its obsessive classifying, began to lose its
coherence because no clear social category matched the ill-articulated
principles of moral worth associated with dealing in credit.78 Strug-
73. 21Jac., ch. 19, ? 2 (1623).

74. W.JONES, supra note 61, at 21-22.
75. E.g., Phillips v. Phillips, Style 420, 82 Eng. Rep. 828 (K.B. 1654).
76. E.g., Anon., Godbolt 40, 78 Eng. Rep. 25 (K.B. 1586). Similarly, adventurers to
Greenland and Virginia who went broke after trading with the Indians were primarily discov-
erers or prospective plantation owners, and only incidentally buyers and sellers. J. STONE,
THE READINGUPONTHESTATUTEOF THETHIRTEENTH OF ELIZABETH 42 (1656) (chapter 7,
entitled "Touching Bankrupts"), cited in W. JONES,supra note 61, at 22 n.38.
The problem with the landed aristocrats was that they often had to resort to base com-
mercial credit to achieve some liquidity or to join in mercantile speculation to invest surplus
funds, especially by investing in joint stock companies. See W.JONES,supra note 61, at 21-22.
77. The case, involving Sir John Wolstenholme, is cited in G. BILLINGHURST, supra note
69, at 88. It was overruled by 14 Car. 2, ch. 24 (1662).
78. Perhaps no occupation so tested the trader rule as that of innkeeper. Innkeepers
certainly bought and sold as a primary part of their livelihood, but after some controversy, the
courts excluded innkeepers because they "uttered" rather than sold their provisions, see G.
BILLINGHURST, supra note 69, at 87-88, and because they sold them under price-fixing regula-
tions, see Crisp v. Prat, March N.R. 34, 82 Eng. Rep. 399 (K.B. 1640). Tradesmen as funda-
mental to the economy as innkeepers could not be left to trade without state regulation.
Bankruptcy, in effect, was the residual, novel statutory regulation for the otherwise purely
unregulated merchants who acted on the moral margins of English society under suspiciously
free contract principles. Thus, a victualer who sold chiefly to the government to provide for
gling to retain some coherent lines in the trader rule, the courts
throughout the seventeenth and eighteenth centuries experimented
with various formal tests: to be a bankrupt, one had to both buy and
sell,79 or one had to seek all one's living or some substantial quantum
of it from trade.80
The problem with the trader rule was English culture's deepening
moral ambivalence about trade. The very factors that made the trader a
suspicious character could make him a sympathetic one; the amorphous
liquidity of his assets made his economic foundation contingent and
unstable. And the rigid rules of bankruptcy that might give the clever
trader room to maneuver at the margins could also be traps into which
the helplessly insolvent trader might fall. So bankruptcy law began to
reflect the emerging affirmativeimage of the merchant in the early sev-
enteenth century literature, ironically, as the economic actor least de-
serving the condemnation of the bankruptcy laws.
Gerard de Malynes depicts the merchant as the least willful of crea-
tures, and the bankruptcy law as an arbitraryset of rules insensitive to
the realities of mercantile misfortune. Far from conniving to evade the
rules, the merchant helplessly falls prey to them because of the "muta-
bility and inconstancy" of commercial life:
[F]or to be rich and to become poor, or to be poor and to become rich,
is a matter inherent to a Merchants estate, and as it were a continual
and successive course of the volubility of variable, blind fortune, ....
So that by the frequency of it, Merchants have made a great difference
and distinction between a Merchant which is at a stay, and taketh days
for the payment of his debts, or one that is broken or bankrupt, having
an especial regard herein for the preservation of credit, which is as
tender as the apple of an eye.81
the military could not be a bankrupt, because he operated under a government-regulated

contract. Sir Thomas Littleton's Case, 1 Freeman 391, 89 Eng. Rep. 290 (K.B. 1675). In
Newton v. Trigg, 1 Salk 109, 91 Eng. Rep. 100 (K.B. 1691), the court caught the essence of
the sentiment of the bankruptcy laws, excluding the innkeeper because he did not "live by the
meer advance of the value of a commodity," so the law groped at identifying those who
noted
manipulated the elusive value of things rather than provided tangibles. The court also
rather illogically that innkeepers normally sold for cash (had they not dealt in credit they
would never go insolvent), but clearly the court simply could not conceive the familiar figure
of the innkeeper as the suspicious character of the merchant.
The litigation career of the innkeeper under the trader rule was not over, however. In
later cases, the courts faced the problem of the innkeeper who engaged in a side trade of
these
"package store" wine and had to finesse the issue by setting a minimum quantity of
99
ancillary sales that might make the innkeeper a trader. See Patman v. Vaughan, 1 T.R. 572,
1825.
Eng. Rep. 1257 (K.B. 1787). Innkeepers were finally included in the rule by statute in
6 Geo. 4, ch. 16, ? 2.
79. Hawkins v. Cutts, Hutt. 49, 123 Eng. Rep. 1093 (C.P. 1623).
80. Mayo v. Archer, 1 Str. 513, 93 Eng. Rep. 669 (K.B. 1722).
81. G. MALYNES, LEXMERCATORIA 156 (1686). The merchant is more the victim than the
beneficiary of his new form of wealth:
For it hapneth many times, that Merchants having taken up money at interest to
shall
augment their trade, and thereby doing good to their Prince and Countrey,
receive some unexpected losses by wars on land, or Embargo's or restraints of
Princes upon the seas, of their ships and goods, or by having sold their goods and
The picture of the swindling debtor evading his creditors turns to the
picture of the helpless debtor undone by creditors. Malynes acknowl-
edges that the Statute of Bankrupts "was done to a very good intent, if
it were executed accordingly, with due consideration of the quality of
persons, and their behaviour."82 But the statute fails to distinguish the
evil from the virtuous debtor because its rigid rules trap the helpless
while offering a roadmap for evasion to the clever:
But some can preventthe means of suing for the same, and so break
the strengthof it, as easilyas a SpidersWeb, whilesplain dealingmen
are laid hold of, thathavean honest intentionto payeverymanaccord-
ing to their abilitypresent or future,as God shal enable them ....83
Parliament constantly tinkered with the Elizabethan statute in the
years following its enactment. But for a century, the tinkering re-
mained within the framework of a generally condemnatory norm. Par-
liament and the courts jousted, nominally to determine the right rules
to carry out that norm, but essentially to correct the failure of that
norm to apprehend the complex cultural standing of the merchant
debtor.84 Ironically, the law was designed precisely to apprehend the
new phenomenon of commerce, yet it was regularly denounced as in-
sensitive to the demands of commerce and to merchants' needs for de-
vices to raise cash and enhance capital investment. The common law
itself had only clumsily handled commercial law, and Parliament could
do little better.
Specifically, if the 1543 statute had been hopelessly vague, the 1571
and later statutes were hopelessly rigid, and legislative tinkering only
worsened their mechanical flaws. Parliament reacted and overreacted
to every problem arising under the statute, such as a perceived increase
in fraudulent conveyances, especially when any easing of the usury laws
expanded the credit market.85 Sometimes the result was a brutal tight-
ening of the law,86 and sometimes the purported technicality of the
merchandises at home at long days of payment, . . . having their best means in re-
mote places, whereby the said Merchants cannot suddenly make the payment of such
Monyes as they have taken up at interest, . . . and so they are driven at a stay,
although they have very good estates. For some rich men (who like an Ape tied to a
Clog, which thinketh that he keepeth the Clog, when the Clog keepeth him) are so
tied to the Clog of their wealth, that upon the least rumours of troubles and acci-
dents happening to their debtors, they become suspicious of these mens estates, and
fearing to become losers, are so inquisitive of their debtors means (without reason
and direction) to the great hurt and impairing of Merchants credit and reputation,
that thereby they are driven into a streight on a sudden, and so overthrow them
(unawares many times) to their own hindrance and loss.
Id.
82. Id. at 157.
83. Id.
84. Francis Bacon explicitly complained of legislative failure-the lack of
sufficiently
purposive preambles and the faulty drafting of the statutory language. 9 THE WORKS OF
FRANCIS BACON 322-24 (J. Spedding, R. Ellis & D. Heath ed. 1857-1874).
85. W. JONES,supra note 61, at 18-19.
86. A 1601 bill against "cozening bankrupts and lewd apprentices and factors"
pro-
statutory rules created loopholes.87 Indeed, one result of the harsh-

ness of the rules was the evolution of a parallel system of equitable
relief which mitigated the effect of the rules, as if recognizing the sym-
pathetic view of the merchant debtor's plight depicted by Malynes.88
Echoing Malynes, Defoe provides a deeper view of the merchant's
moral situation and the complexity of the cultural imagery of the
merchant that had escaped commercial rulemaking. Writing on the ad-
vent of the first right of discharge in bankruptcy legislation, and hence
at the key transitional moment in the moral posture of bankruptcy law,
Defoe offers some representative imagery of the portrait of the
merchant as victim:
[S]ome disasters may befall a tradesman, which it was not possible he
should foresee; as fire, floods of water, thieves, and many such; and in
those cases the disaster is visible, the plea is open, ... the man can have
no blame. A prodigious tide from the sea, join'd with a great fresh or
flood in the river Dee, destroy'd the new wharf below the Roodee at
West Chester, and tore down the merchants warehouses there, and
drove away not only all the goods, but even the buildings ... into the
sea; Now, if a poor shop-keeper in Chester had a large parcel of goods
lying there, perhaps newly landed in order to be brought up to the city,
but were all swept away, if... the poor tradesman was ruin'd by the
loss of those goods on that occasion, the creditors would see reason in
it that they should every one take a share in the loss; the tradesman was
not to blame.89
posed that bankrupts be punished under the embezzlement laws unless they discharged the
burden of proving that their losses came from bad debts or shipwrecks. Id. at 19.
87. The statute prevented the commissioners from forcing the bankrupts' debtors to pay
the estate and allowed creditors to use the quominusfiction to evade the commissioners and
bring suit in Exchequer. Id. at 32-33. The quominus writ permitted the creditor to claim he
was the king's debtor, and that the insolvent debtor had impaired his ability to repay the king.
BLACK'SLAWDICTIONARY 1130 (5th ed. 1979).
88. Where a merchant could not escape the trader rule and the other rules defining
bankruptcy, the Privy Council and Chancery operated on the margins of the statute, enforcing
debts but ensuring debtors relief from harassment and sometimes offering virtual discharge,
as well as inducing creditors to accept extensions. The result was a bitter jurisdictional battle,
as the Privy Council and Chancery, along with special and religious commissions, intervened
in bankruptcy cases, speeding up corrupt commissioners and softening obdurate creditors.
Chancery, more sensitive than the common law to the bill of exchange and other commercial
practices, had some parallel bankruptcy power, sometimes softening the law, sometimes mak-
ing it more efficient. W. JONES,supra note 61, at 35-51. And in any event, equitable liens,
recorded bonds, confessions of judgment, and other recorded obligations fell outside the
purview of the statute. Id. at 44; seeJones, An Introductionto PettyBag Proceedingsin the Reign of
ElizabethI, 51 CALIF.L. REV.882 (1963).
But the harsh legislative approach persisted, and, under the 1624 statute, a debtor who
sought an extension composition became a bankrupt unless he acted in good time, so a mi-
OF
nority of creditors could force bankruptcy. 1 G. SANDERS,ORDERSOF THEHIGH COURT
CHANCERY132-34 (1845). The severe 1624 statute was conceived in an era when the credit
system was rudimentary, record-keeping poor, most transactions were in cash, and most
credit unsecured or nonnegotiable, and Parliament wrongly assumed that any honest trader
Parlia-
pressed to repay his debts could quickly liquidate his assets. This view was naive, but
ment did virtually nothing to change the statute for seven decades after 1624, putting im-
mense pressure on judicial interpolation to adjust the statute to the facts of commercial life.
89. DEFOETRADESMAN, supra note 20, at 91-92.
Here Defoe introduces a crucial theme in English bankruptcy law. The

credit market is not necessarily a competitive arena: It may be a broth-
erhood of traders united by the fragility and contingency of their lives.
A merchant who exhibits no particular moral flaw in suffering such con-
tingency may gain admission into this brotherhood.
Thetraderruleinverted.Defoe's view represents a dramatic transition
in the characterization of the merchant debtor. Some dishonest debt-
ors cause their own misfortune. Even the debtor who falls into peril
honestly might violate the moral norms of commerce by refusing to
break publicly and honestly and by secreting or squandering his credi-
tor's assets. Defoe therefore acknowledges that some find the law too
favorable to bankrupts, and suggests a subtler and more effective con-
trol-a mixture of carrot and stick.90 As a kind of ethical manual for
traders, Defoe's CompleteEnglish Tradesmandelivers to all merchants an
Ecclesiastian warning that the contingency of mercantile wealth can in a
moment throw any of them into a brotherhood of misery: "Lethimthat
thinketh he standeth, take heed lest hefall .... [M]en in trade can but think
they stand.... "91 Defoe conceives a generous utopian community of
forgiving traders, of merchants bound by mutual recognition of their
fragile condition and by their mutual dependence on commercial trans-
actions. "[I]t seems strange that tradesmen should be outrageous and
unmerciful to one another, when they fall.... Why then should any
tradesman, presuming on his own security, and of his being out of the
reach of disaster, harden his heart against the miseries and distresses of
a fellow tradesmen ... ."92
Bankruptcy, then, takes on a more complex moral cast as a univer-
sally inherent commercial crisis in which all must recognize their duties
to each other. Trade is the profession of human contingency. Defoe
exhorts the honest befallen debtor to stop early and thereby fulfill his
duty to his creditors, yet he also urges the creditors to accept the first
reasonable proposal- in self-interest as well as mercy-in "reflection
upon the sad changes which human life exposes us all to."93 The hon-
est debtor who stops in time "will certainly be receiv'd by your credi-
90. Indeed, after noting the tragic fragility of the merchant condition, Defoe heartily
approves a new parliamentary provision of capital punishment for fraudulent concealment.
The law is made for relief of debtors-that is the novel view Defoe embraces-but never
forgets the original and continuing aim of protecting creditors. Id. at 201.
At the same time, Defoe shows his ambivalence about the new carrot of
discharge by
warning against abusive friendly statutes and by suggesting a punishment for repetitive peti-
tions. Id. at 210-11. He makes clear that a debtor owns nothing and is merely a bailee for the
property of his creditors. Id. at 93. Trying to reconcile regulatory instrumental law and moral
norms, Defoe warns the debtor not to succumb to the temptation of trying one more quixotic
project. To "break in time" is rational self-interest and moral duty. Id. at 94-96. He assures
the debtor that the commercial community will deal with him mercifully. Defoe laments that
the tendency of a few merchants to squander all before breaking creates the common social
view that all bankrupts, and potentially all merchants, are knaves.
92. Id. at 198-200.
93. Id. at 204.
tors with compassion and with a generous treatment ... [and] you will
be able to begin the world again with the title of an honest man."94
Defoe thus introduces into the bankruptcy literature a notion of moral
community among merchants-and hence a moral duty of a debtor to
the general class of his creditors, and, by implication, a duty of each
creditor to others of his class.
Parliament finally decided, in 1704, that a statute that was all pen-
alty and no reward was self-defeating, at least in its effect on honest
debtors. In creating the right of discharge in the Statute of Anne, Par-
liament may have intended not so much to make the law generous as to
make it more sophisticated in its instrumental effects.95 Discharge
would give debtors an incentive to cooperate in bankruptcy, or would
at least mitigate their disincentive to do so. Indeed, the new law was
still called "An Act to Prevent Frauds Frequently Committed by Bank-
rupts." Parliament provided capital punishment for recalcitrant bank-
rupts, but it offered cooperative debtors allowance, freedom from
prison, and discharge.96
But the effect of the new concept of discharge was to ratify the more
positive cultural imagery of the merchant character. The advent of dis-
charge was both the cause and effect of the new attitude toward the
bankrupt. Here we see the great, ironic reversal in the history of Eng-
lish bankruptcylaw, a reversal noted but hardly appreciated in the con-
ventional literature.97 The moral terms of the issue began to reverse
themselves. Before the right of discharge, the pressure on the trader
rule was relatively unilateral: On the whole, debtors did not want to
94. Id. at 196.

95. 4 Anne, ch. 17, ? 1 (1705); see Duffy, supra note 69, at 286-87. The original goal of
the Statute of Anne may have been very modest-to provide some short-term relief to
merchants who had faced unusual difficulties after the wars of the late seventeenth century.
Cohen, The Historyof Imprisonment for Debtand its Relationto the Developmentof Dischargein Bank-
ruptcy,3J. LEGALHIST. 153, 156-57 (1982). And the 1705 statute and its short-term predeces-
sors seemed instrumentally designed to deter fraud by making bankruptcy somewhat less
onerous, rather than to reconceive bankruptcy as a benefit system for deserving debtors. Id.
Indeed, discharge simply replaced the discretionary power of such bodies as the Commission
for Poor Prisoners, which relieved debtors imprisoned for debt by arranging compositions
with their creditors. Id. at 157-58. The Statute of Anne thus must be read in relation to
statutes designed both earlier and later to limit the power of the creditor to imprison his
debtor. In that sense, it reflects the general relationship between the expansion of bankruptcy
eligibility and the parallel issue of curtailing, and eventually eliminating, imprisonment for
debt in England. Bankruptcy, in a sense, was the substitute for imprisonment. The political
debates over bankruptcy and the abolition of imprisonment are an erratic mixture of new,
humanitarian views of debtors, and subtle instrumentalism about enhancing debt payments.
For a summary of how the relationship was resolved in the nineteenth century, see note 109
ilnfa.
96. The statute was quickly amended to exclude small traders, forcing them into the
insolvency laws, and the required four-fifths vote for discharge ensured that a malicious mi-
nority could block it. 5 Anne, ch. 22, ?? 2, 7 (1706).
97. See, e.g., G. ROBSON,A TREATISE ONTHIELAWOF BANKRUPTCY2-3 (1894):
[A] new character was given to the whole system of bankruptcy; and instead of being,
as it was previously, a peculiar species of criminal law . . . the bankrupt law became an
equitable system, founded upon the principles of humanity and justice ...
become bankrupts.98 Even though England did not develop our mod-
ern concept of voluntary bankruptcy, once Parliament granted bank-
rupts discharge, bankruptcy inevitably became attractive to many
debtors.99 Thus, the trader rule faced a new counter-pressure to ex-
pand to include "deserving" debtors. The contradictory pressures on
the trader rule perfectly reflect England's fundamental moral ambiva-
lence about insolvent merchants: They "deserved" bankruptcy, either
as punishment or as relief. Yet the irony is that Parliament and the
courts persisted in their previous obsessive, abstract classifying. As the
moral norm underlying the trader rule became wholly paradoxical, the
lawmakers continued their somewhat comic efforts to refine it by tinker-
ing with the same legal forms of rule and standard.
As bankruptcy changed from a reprehensible crime to a sympathetic
commercial crisis, the doctrinal twists of the trader rule became more
bizarre. The liquidity of commercial wealth had made the life of the
trader unstable, but as the economy came to depend increasingly on
commercial credit, the definition of a trader inevitably became unstable
as well. As rich merchants became ennobled and as the landed went
broke and fell into trade, the categories of economic actors blurred. As
more people, and more respectable people, went into trade, the law
had to concern itself with subtler questions of the state of mind with
which one engaged in trade. Conduct, not status, became a key deter-
minant of one's moral culpability under bankruptcy, and the earlier ef-
forts at setting a minimum "quantum of trade" requirement for
merchant status proved inept.
The new form of judicial torture of the statutory rule measured a
person's eligibility for bankruptcy according to his subjective motive,
his intention to submit his economic life to the vagaries of the credit
market.?00 One became a trader subject to-or deserving of-bank-
ruptcy by committing oneself to the instability of trading life. The law
had to discern more subtly what sort of behavior bankruptcywould reg-
ulate-or privilege-and thus, the great subtlety of mens rea analysis
that later characterized the law of preferences entered bankruptcy law.
The new counter-principle underlying the trader rule was that only,
or primarily, traders should have access to bankruptcy, since only they
suffer losses by accident, while others go broke through willful prodi-
gality.'0' Blackstone's view of the merchant debtor is a wonderfully
98. Of course, even before the Statute of Anne, some debtors found it in their interest to
collusively arrange "friendly statutes."
99. See Friedman & Niemira, supra note 69, at 243.
100. Under some cases, even a single act of trading might make a man a trader if he
performed it with the intention of getting into trade. Ex parte Bowes, 4 Ves. Jun. 168, 173, 31
Eng. Rep. 86, 89 (1798). Indeed, even a debtor who was primarily a farmer might fall into the
statute if he sold a few horses with an eye to a flourishing horse business. Bartholomew v.
Sherwood, 1 T.R. 573, 99 Eng. Rep. 1258 (1786). A debtor might be a bankrupt if he set
business and then failed before his first sale. Ex parte Neirinckx, 2 Mont. & Ayr. 384 up a
(1835).
101. Bankruptcy became a crucial device for protecting merchants from disastrous debt
ahistorical rationalization of the trader rule's ironic history.'02 For

Blackstone, the nontrader is liable to fall insolvent out of prodigality-
it is his own fault if he has so encumbered himself with debt as to risk
disaster. He has acted willfully, "voluntarily." But as for the merchant
in Blackstone's view, the very softness and contingency of the
merchant's assets that had made him a threatening villain when he first
emerged, now make him the most fragile and sympathetic figure; for
the merchant's collapse is his misfortune, not his fault, a fact of nature,
not a willful action.103 The merchant is now the victim, not the manip-
ulator, of fortune.
Blackstone's view reflects the success of the ideology of commerce
that took hold in the eighteenth century and turned the morally ques-
tionable and perceptually elusive phenomena of trade and credit into
necessities, and then into virtues. A trader's capital is uncertain and
invisible-the very epistemological problem that originally made the
merchant dangerous now made him sympathetic. The uglier implica-
tions of credit-rumor, dishonesty, collusion, manipulation-did not
define credit, but were the corruption of credit. Credit was at worst
morally neutral, the symbolic currency by which modern economic
forces played themselves out. And credit could be morally affirmative,
the currency of trust and honor by which virtuous merchants bound
themselves.
As the courts continued to expand the trader rule, the formal tests
to determine one's "intent" to take on the life of trade became more
strained.104 The judicial torture revived heavily in the 1780s and con-
tinued well into the nineteenth century, when, inevitably, further legis-
lative tinkering compounded the confusion.'05 The courts came to be
because the other logical device-limited liability through incorporation-was essentially un-
available in England until the middle of the nineteenth century. See Cohen, supra note 95, at
161. Joint stock companies began evolving in the seventeenth century, but they were the
erratic product of royal charters and private acts, and, in any event, English lawyers were slow
to associate incorporation with protection from personal liability. Id. at 161-62.
102. Duffy, supra note 69, at 288-90.
103. 2 W. BLACKSTONE, COMMENTARIES 473-74 (4th ed. 1770).
104. In Hankey v. Jones, 2 Cowp. 745, 98 Eng. Rep. 1339 (K.B. 1778), the debtor was a
clergyman who drew bills of exchange in order to raise cash to drain some land he owned.
The case raised the question of whether the clergyman "used the trade of merchandize," or
fell within the statute because he followed the "profession of a scrivener, receiving other
men's monies or estates into his trust or custody." Facing a conflict between the letter of the
statute and the testimony of expert commercial witnesses, Lord Mansfield held that the cleric
was no trader, since otherwise everyone who drew a bill would be a trader. "This man got no
sketch
profit, only ruin, and the bill were never redrawn or trafficked in." Mansfield began to
out an intention test-the cleric had not purposely committed himself to what might be de-
scribed as a life of trade.
105. The 1825 Parliament added "commission consignment" to "bartering" and
and
"agents" to "factors," and "buying and letting for hire, or by the workmanship of goods
commodities." It included such previous ineligibles as bleachers, builders, calenderers,
2
carpenters, sheep and cattle salesmen, innkeepers, and ship insurers. 6 Geo. 4, ch. 16, ?
(1825). And yet further tinkering was necessary in 1842 to add alum-makers, apothecaries,
auctioneers, brickmakers, carriers, stablekeepers, and shipowners. 5 & 6 Vict., ch. 122, ? 10
(1842).
described as "ships at sea without a compass,"'06 and though they had
begun to rely on various subjective "motive" tests, they also erratically
revived older "objective" tests rooted in old assumptions about trade
as a distinct occupational status.107
The trader rule finally died of exhaustion in the nineteenth cen-
tury.'08 The rule became essentially unnecessary when the bankruptcy
statute merged with the parallel insolvency laws that had regulated the
lives of the nontrader debtors who had not qualified for bankruptcy,
and when Parliament decided to resolve the controversy over imprison-
ment for debt, which was the major entailment of a debtor's falling
under the insolvency and not the bankruptcy law.109 But the history of
106. 1 E. CHRISTIAN, THE ORIGIN, PROGRESS AND PRESENT PRACTICES OF THE BANK-
RUPTCY LAWat ix (1818). Scriveners had disappeared, but the statute then bore an unclear
relation to lawyers, who waffled in their attitude toward coverage depending on whether they
wanted it as businessmen or feared it as lawyers. Malkin v. Adams, 2 Rose 28 (1814). A
proprietor of a lunatic asylum tried to escape into bankruptcy by setting up a servant in a
cottage to sell drugs. Welbourne, BankruptcyBeforethe Era of VictorianReform,in 2 ESSAYS IN
ECONOMIC HISTORY 51, 56 (E.M. Carus-Wilson ed. 1962). A man hawking a few gallons of
milk in a London street was considered a trader, but a keeper of 400 cows who bought cows
and hay and sold milk was not a trader because he bought and sold different things. Id. at 55.
107. For example, the courts revived the requirement that a debtor must both buy and
sell to be a trader, and excluded a fisherman who primarily sold fish but sometimes bought a
few fish to supplement a bad catch. Heanny v. Birch, 3 Camp. 233, 170 Eng. Rep. 1365
(1812). The courts also occasionally persisted in the old notion that trade was limited to per-
sonalty, and a debtor's economic alliance to land entailed exclusion. Thus, miners were ex-
cluded, Port v. Turton, 2 Will. 169, 95 Eng. Rep. 748 (K.B. 1763), yet a brickmaker was
included if he did not own the land but merely enjoyed a license to extract clay, Ex parte
Harrison, 1 Bro. C.C. 173, 28 Eng. Rep. 1062 (1782). Land speculators who, one would
think, would raise all the traditional concerns about absconding debtors, were originally ex-
cluded because of their ties to land. Clarke v. Wisdom, 5 Esp. 147, 170 Eng. Rep. 767 (1804).
Later cases somewhat incoherently finessed the personalty requirement by including builders
but not developers who hired others to build on their land, or landowners who built to im-
prove their own property. Ex parte Edwards, 1 Mont. D. & D. 3 (1840); Ex parte Neirinckx, 2
Mont. & Ayr. 384 (1835). The law continued to exclude those, like fleet victualers, who sold to
limited markets. Ex parte Lewis, 2 Deac. 318 (1837).
108. The rule was essentially repealed by 24 & 25 Vict., ch. 134, ? 69 (1861).
109. The nineteenth century political developments leading to the virtual abolition of
imprisonment for debt also reflect on the notion of class distinctions in bankruptcy. The
tortuous legal history of the trader rule delineates the expansion of the middle class and mid-
dle class values, and the demise of the trader rule reflects the triumph of a
supposed consen-
sus on the social value of mercantile trade and credit.
In the early nineteenth century in Britain, a person could enter
bankruptcy, and thus
enjoy discharge and avoid imprisonment, only if he were a trader and only if his debts ex-
ceeded 100 pounds. See Kercher, The Transformation of Imprisonmentfor Debt in England, 1828 to
1838, 2 AUSTRALIANJ.L. & SOC'Y60, 61 (1984). Nontraders and small traders faced imprison-
ment both before ("on the mesne process") and after judgment ("on the final
process"), the
latter persisting under English law for thirty years after the former was abolished. If the
debtor could not pay, his only hope to escape prison was to obtain some charitable
help to
pay off the debt, and the charitable organizations that paid debtors' ways out of jail also
helped form the political campaign for abolition of imprisonment for debt. Id. at 61, 69-70.
Most imprisoned debtors were thus fairly poor people, including small-time traders who
could not meet the minimum debt amount for bankruptcy. Some
wealthy debtors neverthe-
less ended up in prison, but for them imprisonment was an ineffective sanction since
were able to live very comfortably in jail or were even free to leave the they
prison walls while
technically incarcerated, all the while retaining their property. Id. at 64-65. The move toward
abolition was to be balanced by increased alternative powers of collection,
including greater
the trader rule nevertheless remains crucial to the history of bankruptcy
because the rule had lent bankruptcy law its enduring moral and legal
rhetoric.
3. Actsof bankruptcy.
Theneedforan act-basedrule. The early English statutes viewed com-
mercial status as a necessary but insufficient condition for susceptibility
to bankruptcy. Once proved a trader, a person was still only subject to
bankruptcy if he performed certain prohibited acts. 10 Of course, the
law was therefore somewhat redundant because the difficulty of defin-
ing the status of trader caused the interpreting courts to import into the
definition a conduct element anyway, as if a trader was someone who
committed himself to the unstable world of commercial trade. The law
could logically have declared anyone a bankrupt who met that defini-
tion of trader and became insolvent according to some mathematical
measure of insolvency.
That sort of rule would still have accommodated fault principles,
although only in a very overbroad way: If you were insolvent, and if
you had run the special risk of insolvency inherent in a life of unstable
trade, you merited the punishment of bankruptcy. Indeed, a status-
plus-insolvency test would have sufficed equally well when the moral
posture of English bankruptcylaw began to reverse itself at the time of
the Statute of Anne. One could imagine the law saying that if you have
remedies against real property, and against intangible personalty such as negotiable instru-
ments. So, in this sense, the gentry favored imprisonment, even though they were rarely
creditors of imprisoned debtors. Ironically, much of the opposition to abolition came from
fairly small traders, since they tended to be the major creditors of the poor people who were
not eligible for bankruptcy. Id. at 65. These small-time trade creditors often favored impris-
onment for debt precisely because they feared that, if they were unpaid, they would become
imprisoned debtors themselves. Larger middle class trade creditors were less concerned with
imprisonment because their own debtors were usually large enough to qualify for bankruptcy
anyway.
Ultimately, middle class, mercantile, pragmatic attitudes, not humanitarian impulse, won
the day for abolition. Imprisonment might have been a general deterrent to getting into debt
but it certainly did not help the actual imprisoned debtors pay their debts if they were insol-
vent; if it was meant to punish fraud, it failed, since the clever frauds avoided prison, and
mainly the unsophisticated filled the jails. Id. at 74. Moreover, imprisonment contradicted
bankruptcy policy because it rewarded a single aggressive creditor. Finally, imprisonment
actually enabled some comfortably incarcerated propertied debtors to avoid handing over
their wealth. Thus, a law that may have begun in a moralistic sentiment that excessive debt
was a crime had become subject to conflicting instrumental arguments, all subject to an as-
sumed, if unstable, normative consensus that commercial credit benefited British society. In-
deed, one of the strongest arguments for imprisonment was a sort of cultural efficiency: Even
if it was counterproductive with respect to specific debts, it taught the poor people "stern
the debate
principles of commercial morality" essential to proper socialization. Id. at 83. But
over imprisonment reflected an extremely confused class picture in England, marked by er-
ratic self-identifications of classes as debtor classes and creditor classes. We will see similar
confusion in the early history of American bankruptcy legislation. See notes 204-231 itnfraand
accompanying text.
110. SeegenerallyG. BILLINGHURST, supra note 69, at 91-98; Treiman, Acts of Bankruptcy:A
Medieval Conceptin ModernBankruptcyLaw, 52 HARV.L. REV. 189 (1938).
gone insolvent, and if that insolvency is likely due to the special, inevi-
table perils inherent in the contingent and fragile life of the noble
tradesman, you merit the special privileges of discharge. But the fault
principle in the historical core of the law demanded a conduct-based
law as well.
The concept of "acts of bankruptcy" is hinted at even in the 1542
statute, which mentions people who "make bankrupt" and flee from
sight or retreat into their homes. i Thus, the bankruptcy law assumes
an image of intrigue, of escape, an image associated, of course, with the
negative imagery of the merchant character type. Flight as a self-help
debtor's remedy seemed to originate on the Continent, and indeed in
England it was largely associated with foreign traders. The foreign as-
sociation helps explain the image of insolvent debtors as absconding
men without countries and the infection of this image into the efforts to
interpret the trader rule."2
The norm captured in the image of "making bankrupt" was roughly
translated in the 1570 Act to an enumerated list of acts-in effect, crim-
inal provisions: betaking oneself to sanctuary, making an alienation in
fraud of creditors, or voluntarily procuring arrest to avoid execution on
one's property-all with the mental state of intending to defraud and
hinder one's creditors."3 The movement to the enumerated list re-
flects the law's somewhat clumsy assumption that the immoral state of
risky trading must find representation in specific acts of conduct. It
also probably represents at least a temporary tropism toward strict leg-
islative rules, grounded in the very persistent principle that statutory
law was an unfortunate excrescence on the common law and that strict
rules permitted limited incursion of statute on common law. 14
But ironically, the criminal-law style scheme of formal rules describ-
ing illicit commercial conduct created problems for creditors. It did
not protect them from the honest debtor who was falling hopelessly
into debt with their property (though for many decades it could be ar-
111. 34 & 35 Hen. 8, ch. 4, ? 2 (1542); see Treiman, supra note 110, at 193-94.
112. The earliest Lombard insolvency laws spoke not of"banca-rottie" but of"fugitivi."
Treiman, Escaping the Creditorin the Middle Ages, 43 LAWQ. REV. 230, 230-31 (1927). The
medieval treatises apparently contain elaborate rules for evidentiary proof of flight or with-
drawal from the marketplace. Id. Indeed, the first relevant English law is a 1350 law explicitly
directed at fleeing Lombards. 25 Edw. 3, stat. 5, ch. 23 (1350). Flight had to be covered by
the law of bankruptcy, because by fleeing the debtor escaped or undid the creditor's common
law remedies. If flight was a general crime and if the debtor was an outlaw, his goods would
not go to his creditors but would escheat to the state. Treiman, supra, at 236-37.
113. 13 Eliz., ch. 7, ? 1 (1570). English law added to the Italian concept of flight and
secretion the purely indigenous act of keeping to one's home (the home was not as much a
legal sanctuary in Italy as it was in England). In an ironic historical reversal, Continental
creditors came to complain of English debtors escaping to their homes. Treiman, supra note
112, at 233-34. As for sanctuary, the places deemed to be official sanctuaries were numerous
and large; they included the entire part of London known as Westminster and entire smaller
cities as well. Sanctuary became a sort of inverse of market overt, expanding
equally beyond
its original conceptual and geographic limits.
114. 2 W. BLACKSTONE, supra note 103, at 479.
gued that the bankruptcy laws were not concerned with those honest
debtors anyway). And the formality of its criminal-law style provisions
made it easy for dishonest debtors to avoid crossing the line into acts of
bankruptcy: A creditor had little recourse if his debtor did not flee, so
the legislature and courts faced pressure to create fictions of construc-
tive flight. '5
From the start, as with the trader rule, the effort at statutory
rulemaking to capture the moral norm led the courts to bizarre inter-
pretations. The courts tried to refine Parliament's formal rulemaking
by amazing efforts at parsing physical actions, mental states, and their
concurrent or discrepant relationship."16 The 1604 statute added to
the 1570 list, shifting the focus from outright absconding to a wider
and subtler range of fraudulent behavior. For example, where the 1570
statute punished the fraudulent receipt of a debtor's assets before or
after an independent act of bankruptcy, the 1604 statute made any
fraudulent conveyance an act of bankruptcy. And the 1604 statute took
the first step toward constructive or "passive" acts of bankruptcy by
making it an "act" to lie in prison for at least six months after being
115. Precise rules of commercial behavior were simply more subject to manipulation
than normative standards. Hence Dekker's acerbic criticism of dishonest merchants who
could avoid their creditors while stopping short of technical acts of bankruptcy:
Strong and cunning nets were spread by those Parliaments to catch these foxes. Yet
how many of them have been since, and at this hour are, earthed in the King's Bench,
the Fleet and that abused sanctuary of Ludgate! Here they play at bowls, lie in fair
chambers within the Rule, fare like Dives, laugh at Lazarus, can walk up and down
many times by habeascorpisand jeer at their creditors.
T. DEKKER, ENGLISH VILLAINIESDISCOVEREDBY LANTERNAND CANDLELIGHT275 (1637).
116. For example, keeping to one's house had to be consistent behavior; if you went
inside erratically to avoid process, you could escape bankruptcy. Even if a trader was consist-
ently secreting himself at his house, he could escape bankruptcy by appearing occasionally at
market. Anon. Cro. Eliz. 13, 78 Eng. Rep. 279 (1582); see W. JONES,supra note 61, at 24.
Bankruptcy could stand or fall on the spoken word of a servant: If the servant said "the
master is not home," there might be an act of bankruptcy, but the result would be different if
he said, "the master only does business at his office in the city." See Welbourne, supra note
106, at 56. Some old cases held that a debtor did not commit an act of bankruptcy by staying
at home unless he specifically denied a creditor an overdue debt while at home. E.g., Garret v.
Moule, 5 T.R. 575, 101 Eng. Rep. 322 (1794). But eventually the courts construed the rule to
find the debtor had committed an act of bankruptcy whenever in staying home he evinced in
some way his intent to delay or defraud his creditors. Dudley v. Vaughan, 1 Camp. 271, 170
Eng. Rep. 954 (1808); Heylor v. Hall, Palm. 325, 81 Eng. Rep. 1105 (1622). The courts also
had to constructively define the debtor's home as all places other than his regular place of
business: The statutory provision for "otherwise absenting himself" was extended to being
absent from his counting-house or other regular place of business. Gillingham v. Laing, 6
Taunt. 532, 128 Eng. Rep. 1142 (1816); Holroyd v. Gwynne, 2 Taunt. 176, 127 Eng. Rep.
1044 (1809). If a trader upon notice of process kept to his house, went out, and then went
home again after getting another notice of process, he was not within the statute, because he
"used" to go at large, and he may have suffered the bad luck of being hit with process while in
public. See G. BILLINGHURST,supra note 69, at 92-93. If a man without a home simply failed to
appear abroad in any normal place of business as he did formerly, he did in fact commit an act
of bankruptcy. See id. at 93. The courts also had to interpolate where a debtor first left Eng-
land and then incurred debts he could not pay, holding that the statute did not require any
concurrence of departure with intention to delay creditors. Robertson v. Liddell, 9 East 487,
103 Eng. Rep. 659 (1808); G. BILLINGHURST,supra note 69, at 92; J. STONE, Supia note 76, at
133.
arrested for an unpaid debt. 7

The 1623 statute repeated and extended the definitions of acts of
bankruptcy, including such acts as procuring protections and inducing
compositions that reduced debt or extended time.118 More impor-
tantly, it confirmed the disingenuous process of converting conduct-
based acts of bankruptcy into "passive acts" of getting oneself into
legal trouble for one's debts. And the new doctrine of what might be
called "constructive absconding" led the courts to continue their for-
malist tinkering throughout the seventeenth century.
The balance between condition and act became elusive. The "act of
bankruptcy"of getting arrested captures the problem very subtly: One
had to willfully procure one's arrest, perhaps by inducing a friend to
arrest one on a fictitious claim via a capiasad satisfaciendum.119
A passive
"procurement" of arrest-passively subjecting oneself to prison by
simply failing to pay one's debt, was insufficient, because it would have
amounted to bankruptcy upon a condition of insolvency, rather than
bankruptcy by antisocial manipulation of the property of others. But
even if one failed to meet the mens rea requirements for suffering im-
prisonment or arrest, one could still "commit" an act of bankruptcy
merely by remaining in confinement or in debt long enough to meet
the statutory periods.120
4. Theinstabilityof the act-basedrule.

The manipulative interpretation of the statute and the tortured rela-
tion of formal rule and normative standard reflected the developing
117. 2Jac., ch. 15, ? 2 (1604). According to Blackstone, this provision captured the idea
that if a debtor could not procure bail, the law could, in effect, presume the debtor was defi-
cient in credit because of poverty or ill character, or that his neglect to procure bail arose from
fraudulent intention. 2 W. BLACKSTONE,supra note 103, at 478.
118. 21Jac., ch. 19, ? 2 (1623).
119. Treiman, supra note 110, at 194. If a trader absented himself for fear of arrest by a
writ of de excommunicatocapiendo,and a chancery decree was issued against him to make a con-
veyance, he was not a bankrupt. But if the decree ordered him to pay money, then he was a
bankrupt because that would be fraudulent avoidance of debt. See G. BILLINGHURST,supra
note 69, at 92.
120. G. BILLINGHURST,supra note 69, at 95. A debtor might be arrested
upon a bond
before the debt matured because the creditor could hold him hostage in a
prophylactic effort
to find the debtor's sureties. Id. at 96; see also Tynan v. Bridges, Cro.
Jac. 301, 79 Eng. Rep.
257 (1612). If the debtor then lay in prison for the required time, he "committed" an act of
bankruptcy, since the imprisonment still derived from the debt. Id. One might semi-actively
"yield" oneself to prison if one thereby exhibited an amorphous form of intent to avoid debt.
Exparte Barton, 7 Vin. Abr. (Eng.) 61, 62, pl. 15; Robertson v. Liddell, 9 East 487, 103 Eng.
Rep. 659 (1808). Yielding oneself to prison was an act of bankruptcy only where voluntary,
and the courts avoided finding a voluntary yielding where a debtor acted
willfully merely in
getting into serious debt and so, in effect, recklessly or negligently incurred prison. See G.
BILLINGHURST,supra note 69, at 95. One might be in prison passively and only briefly, and
yet
act by escaping. Escaping from prison was an act of
bankruptcy, because that again showed
the debtor could not procure bail. Yet if one "escaped" from
prison by procuring "hired" or
common law bail, he committed an act of bankruptcy anyway. Id. at 97.
on a private bail might amount to a kind of preference, since it was a side dealGetting oneself out
cut with a single
creditor.
ideological conflict about trade and credit and left the fundamental
purpose of the "acts of bankruptcy" rules utterly ambiguous: Was an
act of bankruptcyprecisely the conduct that the bankruptcylaws sought
to punish? Or was it, as in Continental law, evidentiary-a reflex action
of insolvency, an image of the inevitable, fragile condition of even hon-
est, virtuous merchants?121
The extension and softening of the acts of bankruptcy seem to have
served several purposes. Merely by dropping the requirement of spe-
cific absconding actions, the law closed loopholes and made it easier to
capture elusive dishonest debtors. But this loosening of the law inevi-
tably, if inadvertently, moved the law closer to a condition law than a
conduct law-in effect, captured various images of insolvency and char-
acterized them as constructive forms of willful flight or secretion of as-
sets. Creditors thereby received the double benefit of greater ease in
capturing the elusive dishonest debtors as well as the use of bankruptcy
process to prevent squandering by honest debtors.
But in an ironic parallel to changes in the trader rule, the change in
the law of "acts of bankruptcy" also paved the way for the historic re-
versal under the Statute of Anne, whereby the new generous bank-
ruptcy process could become available to honest debtors who fell
helplessly into a condition of insolvency. The law had started as a crim-
inal law and, aiming to become a broader and more effective criminal
law, made itself susceptible to the paradoxical concept of the merchant
and English mercantile credit culture which had fully developed by the
start of the eighteenth century. Bankruptcycould be a form of relief to
the honest debtor as well as a punishment of the absconding crook, and
the flexibility of the "passive" acts of bankruptcy enabled the English
statute to accommodate both parts of the paradox.'22
An "act" of bankruptcy was thus transformed into a condition of
being. This change in the concept may have made it easier for a credi-
tor to prove a rule-manipulating debtor a bankrupt. In the long term,
however, it enabled the bankruptcylaw to absorb the more sympathetic
121. Treiman, supra note 110, at 212-13. Treiman describes the acts of bankruptcy as a
sort of probable cause standard permitting the state or the creditors to at least engage in
fuller discovery of the debtor's finances. Id.
122. Of course, the nature of the "reversal" under the Statute of Anne is subject to some
was
dispute. The contemporary evidence from Defoe and others suggests that discharge
something less than an attractive privilege offered to deserving insolvent merchants; bank-
ruptcy was still only involuntary. Rather, discharge was simply a means of making the bank-
95-
ruptcy less frightening to an honest debtor who might be willing to cooperate. See notes
96 supra and accompanying text. In short, it mitigated the anguish of involuntary process.
The sympathetic description of the bankrupt offered by Blackstone in rationalizing the limita-
tion of bankruptcy "privileges" to the categorically deserving class of merchants, see text ac-
companying notes 102-103 supra, ignores the real intention of the discharge provision-the
intention to make a law originally designed to protect creditors even more effective. Duffy,
others
supra note 69, at 288-89. Nevertheless, the rationalizations offered by Blackstone and
are themselves important historical data, reflecting how English jurisprudence had absorbed
and perhaps exaggerated the affirmative ideology of trade and the affirmative imagery of the
merchant.
view of the merchant, designed to make bankruptcy less frightening:

the shift from status to conduct to condition may have first made a con-
dition a crime. But no condition, so conceived, can remain a crime for
long, and it soon makes the person exhibiting the condition the benefi-
ciary of state relief.'23
The concept of "acts of bankruptcy,"in its utterly diluted form, sur-
vived far into English law, where today a debtor "commits an act of
bankruptcy" if "execution against him has been levied by seizure of his
goods under process and the goods have been either sold or held by
the sheriff for twenty-one days."124 As we shall see, the concept also
survived in America, in its most comically constructive form, until the
middle of the twentieth century.'25 For centuries, it remained in bank-
ruptcy law as a sort of cultural palimpsest, a reminder of the moral con-
flict inherent in even the most seemingly scientific regulatory
legislation. In that sense, the concept of "acts of bankruptcy" helps
explain the other very curious element of early English bankruptcy
law-the law of the preferential transfer.
C. TheOriginsof EnglishPreference
Law
Though the preference has little visible history for the first two hun-
dred years of English bankruptcy law, its evolution bears an important
relationship to the principles of the trader rule and acts of bankruptcy,
a relationship virtually ignored in scholarship on the subject. All three
legal notions are rooted in the cultural ambivalence about the moral
status of the character type of the merchant and the phenomenon of
credit. And all three demonstrate the moral issue underlying the legal
choice between rules and standards for governing commercial
behavior.
Early English law barely apprehended the concept of the preferen-
tial transfer. Unlike the fraudulent conveyance, the preference was not
illegal at common law.126 And because it benefited at least one credi-
tor, it did not seem the sort of antisocial act that inspired the original
criminal form of bankruptcy. Once English law evolved toward viewing
bankruptcy as a debtor's condition, rather than his crime, the preferen-
tial transfer became more visible: English law came to view the bank-
123. In his wonderfully quaint 1719 treatise, Thomas Goodinge reminds merchants that
debt is the inevitable consequence of trade: "For it is morally impossible to think that a
Merchant can make a solemn Protestation in this sort; I owe no Body, and no Body owes to me.
Affairs of this Nature, cannot admit of such even Ballances." Thus, every merchant should be
aware that he may have committed or be about to commit acts of bankruptcy, "which
they
never understood would bring them within the Compass of the Statutes, but have
thought
that it only consisted in Absconding, or downright running." T GOODINGE, THE LAWAGAINST
BANKRUPTS: OR A TREATISE WHEREIN THE STATUTES AGAINST BANKRUPTS ARE EXPLAIN'D BY
SEVERALCASES 3-4 (1719).
124. 4 & 5 Geo. 5, ch. 59, ? 1(e) (1914); see Treiman, supra note 110, at 197.
125. See Treiman, supra note 110, at 197-210; notes 403-407 infra and accompanying
text.
126. 2 G. GLENN, FRAUDULENTCONVEYANCESAND PREFERENCES654 (1940).
ruptcy process more as a fair settlement or adjustment of claims among

worried parties than as a crime or a tort. But the fault-based view of the
debtor has never really disappeared from English law. The English
trustee has never been able to void a preferential transfer without prov-
ing the debtor possessed a strange sort of criminal mens rea, a state of
mind so oddly defined as to produce some wonderfully metaphysical
doctrine similar to the familiar doctrinal excesses of the substantive
criminal law.
1. Theadventof the "relation-back"

doctrine.
To the extent that English law drew on the Roman law, it found
nothing to forbid an insolvent person from paying a legitimate debt to
a preferred creditor, though the history contains vague hints that the
law could reach such a payment if the debtor acted fraudulently.'27
But by 1584, the courts had come to recognize what might loosely
be called a preferential transfer. Assuming that the Commissioners at
least had the power to stay or avoid any transfers by the debtor to a
creditor after the commission was sued out, the question was whether
the "preference period," or, more strictly, whether the Commissioners'
title to the bankrupt's property, related back to the original act of bank-
127. Id. at 653-54.

The two Jacobean revisions of the bankruptcy statute punished by ear-clipping and pil-
lory a fraudulent transfer of property. This might include a payment to an otherwise legiti-
mate debtor if done with the effort to evade the commissioners. But the statutes do not
clearly describe transfers to true creditors, and in any event they gave the trustees no power to
avoid these transfers. Nor do they illuminate precisely how a payment of a bona fide debt to a
creditor-as opposed to a fraudulent conveyance-can be a fraud. See 21 Jac., ch.19, ? 7
(1623); 1Jac., ch. 15, ? 1 (1603).
Malynes attributed to the civil law the principle that if a "fraudulent man" engages in
"any bargain or sale made two or three days before his breaking, by goods sold good cheap,"
the transfer might be voided as a fraud on the other creditors, and "recalled for the general-
ity." G. MALYNES, supra note 81, at 159. The rhetorical references to fraud do not help much
to distinguish a fraudulent conveyance from a preference, because they do not explain how it
can be a fraud to pay a real debt. The references to the somewhat ill-named "fraudulent
preference," arise in scattered places in early English law, perhaps intimating that some credit
that looks legitimate on its face may really be collusive.
The vague efforts made by English law to apprehend the issue of the preference thus
reflect the persistent difficulty Parliament and the courts had in disentangling the preference
from the fraudulent conveyance. Indeed, as Robert Clark has shown, one of the great ironies
of the history of commercial law is that the most famous English case on fraudulent convey-
ances, Twyne's Case, 3 Coke 80b, 76 Eng. Rep. 809 (Star Ch. 1601), apparently involved not a
fraudulent conveyance at all, but a preference. Clark, The Duties of the CorporateDebtorto its
Creditors,90 HARV.L. REV.505, 513 (1977). Pierce owed money to both Twyne and others,
and secretly conveyed all his property to Twyne to pay off that debt. This would seem to be a
preference, despite the secrecy, since even if secret, the payment was for a legitimate debt,
and the principle that the debtor also owed a generalized duty of ratable payment to his gen-
eral class of creditors was relatively immature in English law. As Clark suggests, there may
really have been a fraudulent conveyance under the facts, since the opinion hints that Pierce
retain
might have had a kickback arrangement with Twyne whereby Pierce would actually
possession of the assets and possibly ultimately retain full ownership. Pierce and Twyne
would thereby have deceived the other creditors into pursuing their efforts longer than was
worthwhile. Id. at 514.
ruptcy that had precipitated the commission.'28 Lord Coke, in dictum

in TheCaseof Bankrupts,'29said that the bankruptcy law imported a dis-
trust of a bankrupt's handling of his own assets and a principle of equal
division among creditors that justified the voiding of the transfer.'30
This was the maximum interpretation the courts would give to the Eliz-
abethan statute's order that the Commissioners distribute the estate to
the creditors "rate and rate alike."131 Coke said that "if, after the
debtor becomes a bankrupt, he may prefer one it would be unequal and
unconscionable, and a great defect in law, if after he hath utterly dis-
credited himself by becoming a bankrupt, the law should credit him to
make distribution of his goods ...."132 This interpretation itself was a
considerable advance in the law of preferences and began to develop
the central theme of early English preference law as it would be ex-
pounded by Lord Mansfield: The debtor must not supplant the Com-
missioners and set himself up as the law-giver in bankruptcy
distribution, the judge of the relative worthiness of creditors.
But the relation-back doctrine also invited a good deal of uncer-
tainty in the application of the statutory rules. It put great pressure on
the "acts of bankruptcy,"which themselves were becoming increasingly
"constructive," to define the point at which the Commissioners owned
the debtor's goods. The relation-back doctrine made sense as a pun-
ishment for the debtor who abused or evaded the bankruptcy process,
or as a regulation of a debtor who ipso facto was incompetent to man-
age his assets, only so long as the act of bankruptcy was a manageable
concept for measuring the debtor's crime or condition.
Indeed, a century and a half after The Caseof Bankrupts,Parliament
expressly recognized the problems inherent in the relation-back doc-
trine, problems that reflect yet another episode in the history of the
rules/standards debate in English bankruptcy law. Strictly applied,
Coke's dictum gave the courts the power to avoid any transfers made by
a debtor to a creditor after the debtor had committed an act of bank-
ruptcy. But this rule-like approach turned out to be unfair to creditors
since, as the drafters of the 1746 statute recognized, bankrupt debtors
often "commit secret acts of bankruptcy unknown to their creditors,"
thereby discouraging trade and commerce. 33
Parliament thereby created a new bona fide creditor law, protecting
such payments from avoidance where the payment was to an innocent
creditor "in the usual and ordinary course of trade," where the creditor
128. The Case of Bankrupts, 76 Eng. Rep. 441 (K.B. 1584). The
general notion that the
commissioners' title related back to the time of an act of bankruptcy derives from 13 Eliz., ch.
7, ? 2 (1570).
129. 76 Eng. Rep. 441 (K.B. 1584).
130. Id. at 473.
131. 13 Eliz., ch. 7, ? 2 (1570).
132. 76 Eng. Rep. at 473.
133. 19 Geo. 2, ch. 32 (1746); see T. COOPER,THE BANKRUPT LAWOFAMERICA COMPARED
WITH THE BANKRUPT LAW OF ENGLAND 330
(1801).
neither knew nor had reason to know that the debtor was insolvent or
faced bankruptcy.134 The relation-back doctrine was an overbroad
rule, insensitive to the commercial reality that many creditors in the
ordinary course of business accepted payments without knowing their
debtors were bankrupt. Creditors, of course, often could not know
this, because Parliament had compounded the problem of the subtle,
elusive bankrupt by legislating highly constructive acts of bankruptcy,
subject to manipulation by debtors. Thus, Parliament had to soften the
relation-back rule with a normative standard.
The standard looks ahead to American law in two important ways:
It tests a suspect payment against some intuited sense of the ordinary
course of commerce, and it looks to the mental state of the creditor to
discern the commercial morality of the payment. But in this latter
sense, the 1746 statute is anomalous135 because, as we will see, when
the courts later addressed the more difficult preference problem-the
payment before an act of bankruptcy-the mental state of the creditor
became subordinate, if not irrelevant, and all moral scrutiny focused on
the debtor.
For decades after Coke's dictum, the Commissioners themselves
had a good deal of trouble with the relation-back doctrine, especially
where favored creditors had arranged unusually subtle forms of
credit.'36 General creditors often had to appeal to Chancery when the
Commissioners proved impotent to reverse technically legal payments
to creditors under subtle arrangements.'37 As at least one early case
134. 19 Geo. 2, ch. 32, ? 1 (1746).

135. The provision for bona fide creditors went through various transformations in Eng-
lish legislation, and eventually disappeared in the nineteenth century after Parliament began
to measure the preference period according to a strict time zone rather than by reference to
acts of bankruptcy. See M. HUNTER& D. GRAHAM,WILLIAMS ANDMUIRHUNTERON BANK-
RUPTCY 346-47 (19th ed. 1979) [hereinafter WILLIAMS ON BANKRUPTCY].
136. See In re Hall, 4 A.B. Rep. 671, 679-80 (1900); 2 G. GLENN,supra note 126, at 528.
The famous Allen's Case involved an aggressive creditor who manipulated the Commis-
sioners to obtain a special deal on the debtor's land, and then fought for ten years to block the
Commissioners from retaking the land to distribute the proceeds of a full-value sale among all
the creditors. SeeW. JONES,supranote 61, at 43 & n.64 (for a detailed description of this case).
Allen managed to obtain some sort of judgment on the full debt even after the Commission
was sued out, and it took heroic efforts by Chancery to stop him. Ironically, it took Chancery
to enforce the strict and least controversial rule-that creditors could not evade the process
after the Commission was sued out. Thus, the law struggled to act where the problem lay not
with the debtor but simply with the partial and aggressive action of one creditor against the
others, perhaps because that is precisely not the problem that bankruptcy law conceived as its
essential target.
In the revealing case of Bird v. Carrellin 1600, see id. at 42-43, a debtor named Nicholson
had consigned much of his estate to a single creditor through some sort of floating lien with
an after-acquired property clause. The 1571 statute seemed to leave the commissioners pow-
erless when the creditor took all the debtor's assets after the debtor committed an unpub-
licized act of bankruptcy. Certainly until the eighteenth century, the bankruptcy law seemed
as unconcerned with these maneuvers that preceded acts of bankruptcy as much as it was
impotent to deal with them.
137. The problem lay especially with the common types of recorded security interests
which the debtor technically acknowledged before he committed an act of bankruptcy, but
which the secured creditor then executed later. Jones notes that the most important contract
recognized, the metaphysical subtleties of secured credit arrangements

could combine with the equally metaphysical subtleties of English civil
procedure to help a transaction escape the rather uncertain grasp of
early preference law.138 But in any event, even where the bankruptcy
law was successful in carrying out the technical mandate of Coke's dic-
tum, it was not attacking preferences in the modern sense at all. Even if
the act of bankruptcy proved a measurable, administrable point of ref-
erence, the Commissioners had little power to constrain the creditors
and debtors who established some legal basis for a transfer beforethe act
of bankruptcy. 39
mechanisms in the infancy of the common law's treatment of commercial transactions were
recorded and enrolled bonds, conditional or future judgments, confessions ofjudgment, and
other so-called "pocket" judgments which were often accorded the same status as court judg-
ments. See id. at 44-45.
138. In Audley v. Halsey, 3 Car. 1 Roll 943, 4 Cro. Car. 149, 20 Eng. Rep. 731 (1629),
two traders, John Hill and Alice Squire, owed Halsey a debt on some purchased goods se-
cured by a statute staple. The debt matured, and on October 30, Halsey obtained an "extent"
upon the statute, a writ ordering the sheriff to appraise the goods. The sheriff apparently
executed that writ on October 31. On November 3, the debtors committed some unnamed
act of bankruptcy. On November 6, Halsey obtained a liberate,a secondary writ ordering the
sheriff to actually seize the goods. The other creditors did not sue out the bankruptcy com-
mission until November 8, and the commissioners purported to sell the goods to Audley on
November 23.
Audley argued that the goods lay in custodialegis, held by the King for the protection of
the debtor, and hence were part of the latter's estate. But the court decided instead that the
property was quasi in custodialegis, gaged or distrained as a pledge for the purportedly pre-
ferred creditor, Halsey. It rationalized the limbo status of the goods in a curious way: The
conveyance to the creditor was conditional, and so the creditor had no absolute power over
them- but this rule served only to benefit the creditor. That is, the levying creditor would
want to retain the power to reject the valuation as excessive. So the court treated the goods in
limbo as pledged to the creditor, and in a wonderful reversal of the commissioners' own
power, the creditor's title under the writ of liberate "related back" to his title under the writ of
extent.
139. In his (perhaps revisionist) historical treatment, Blackstone hardly thought prefer-
ential transfers of this modern sort merited discussion. He notes that French law developed
an extended version of the doctrine of relation back, voiding as presumptively fraudulent any
merchant transaction within ten days before the act of bankruptcy.
But with us the law stands upon a more reasonable footing: for as these acts of bank-
ruptcy may sometimes be secret to all but a few, and it would be prejudicial to trade
to carry this notion to its utmost length ... no money paid by a bankrupt to a bonafide
or real creditor, in the course of trade, even after an act of bankruptcy done, shall be
liable to be refunded.
2 W. BLACKSTONE,supra note 103, at 486. The goal of preference law is to capture fraud, "not
to distress the fair trader," and thus a preference in the ordinary course of business was not at
all illegal. As we shall see, Blackstone fairly accurately portrays the very modest preference-
avoiding powers emerging during his era, and correctly notes the theme that the bankruptcy
process will only intervene in that rather elusive area where a debtor pays a legitimate debt in
an illegitimate way or for an illegitimate motive. But the especially interesting point in Black-
stone's brief discussion is the idea that the secrecy, or indeed the perceptual elusiveness, of
the act of bankruptcy is something of which a preferred creditor may be the innocent "vic-
tim," not the manipulator. The focus of ethical inquiry remains on the debtor, not the credi-
tor, as will be true throughout English preference law. Where one might expect to find
collusion between the debtor and the preferred creditor, the only moral impulse here is to
blame, if anyone, the debtor.
2. Themensrea of thepreference.
The courts and Parliament, as I have shown, tried to bind the con-
140 It
cept of acts of bankruptcyin a fragile, tortured set of formal rules.
would have put an even greater strain on the fragile rule-boundedness
of the bankruptcy law to invent a debtor's duty before he committed
the rather constructive act of bankruptcy in the first place. It is one
thing to impose a duty on debtors after they commit acts of bankruptcy
but before the commission is sued out. But it is another thing to en-
gage in moral scrutiny of the debtor's mens rea before he commits what
is in any event a "constructive" action.
If the key to bankruptcy law is some sort of statutory certainty, it
faces a problem of infinite regress in controlling transactions outside
the rules.'14 Yet something in commercial reality put a counterstrain
on bankruptcy law to create just that duty. Parliament fitfully retained
the concept of acts of bankruptcy as triggers to the bankruptcy process
in part because its intuitive, moralistic view of bankruptcy required
some imagery of bad action by the debtor, rather than just his state of
insolvency. But Parliament in its ambivalence rendered these acts less
visible and public, and more constructive, and so undid their legal
value. Precisely because the acts of bankruptcywere technical and con-
structive, and so very subject to manipulation, creditors must have per-
ceived some need to regulate collusive or fraudulent actions by debtors
before they decided to officially go broke.142
Moreover, the problem English culture faced in perceiving and ap-
prehending elusive forms of credit and tying them to formal rules is
140. See text accompanying notes 110-120 supra.
141. At the beginning of the eighteenth century, in his moral exhortation to debtors,
Defoe recognizes this indirectly when he urges the honest failing debtor to break early. See
note 90 supra and accompanying text. Doing so not only preserves one's assets; it also trig-
gers the bankruptcy law. Indeed, Defoe shows an interesting twist in the concept of an act of
bankruptcy. Though it may still be a willful act technically, it is a very technical legal act that
the debtor can manipulate after his condition can be described in economic or normative
terms as "bankrupt." In short, Defoe implicitly recognizes the lag between the rule-defined
act and the condition it sought to describe.
142. Defoe, ever the capturer of the moral ambivalence of the law, recognizes the prob-
lem even under the less controversial form of preference recapture covered by Coke:
where some creditors, by . . . judgments or by other attachments of debts, goods
delivered, effects made over, or any other way, have gotten some of the estate into
their hands, or securities belonging to it, whereby they are in a better state, as to
payment than the rest....
DEFOEESSAY,supra note 8, at 204. But Defoe laments:
For perhaps some Creditor honestly receiv'd in the way of Trade a large sum of
money of the Debtor for goods sold him when he was sui juris; and he by consent
shall own himself a bankrupt before that time, and the Statute shall reach back to
bring in an Honest Man's Estate, to help pay a Rogue's debt.
Id.
One irony of the confused relationship between preferences and acts of bankruptcy is
that under the somewhat vague authority of the 1603 statute, 1 Jac., ch. 15, ? 1 (1603) (mak-
ing a fraudulent conveyance with the intent to defeat creditors an act of bankruptcy), the
courts began to treat certain very collusive preferences as acts of bankruptcy themselves. See
Worsley v. Demattos, 31 Geo. 2, at 467, 470, 96 Eng. Rep. 1160 (K.B. 1758).
inseparable from the moral issue. If people in commerce cannot always

discern the subtle indicia of credit and insolvency, who is to blame, and
who is the victim?'43 Once widespread credit combined with abstract
credit instruments to create an epidemic of "invisible commerce," the
question arose as to who is the exploiter and who is the victim of the
invisibility. Once English law and literature began to accept the ideol-
ogy and imagery of the merchant as a respectable and sympathetic fig-
ure, and indeed an important strand in national and international
community, preference law might have become the means of securing
the bond of intermerchant moral duty. Yet the concept of commercial
interdependence seems to have remained a sentiment, and one that the
law could adopt only slowly and unsystematically.'44
On the other hand, if bankruptcy law is seen chiefly as punishing or
143. This issue receives interesting treatment in the crucial case of Harman v. Fishar, 1
Cowp. 117, 98 Eng. Rep. 998 (K.B. 1774); see notes 157-166 infra and accompanying text.
144. The virtual impotence of English preference law before the era of Lord Mansfield
has perplexed legal historians. Referee Hotchkiss, in his famous judicial historical review of
preference law, In re Hall, 4 A.B. Rep. 671, 679 (1901), says that it was "hardly conceivable"
that for a century and a half after the Jacobean statute, the modern form of the preferential
transfer was not avoidable. The major historian of preference and fraudulent conveyance law,
Garrard Glenn, offers one intriguing explanation of the lag between bankruptcy process gen-
erally and the legal regulation of preferences. Glenn turns us again to the Statute of Anne
and the major transition it wrought in English bankruptcy law. A preferential transfer was
actionable only on the theory that it was a breach of a debtor's duty to his creditors, but until
he had a right of discharge the debtor had no such duty, because he received no quid pro quo
for it. Moreover, a preference law was unnecessary before 1705. So long as creditors had
complete discretion whether to forgive the debtor's post-bankruptcy debts, they could refuse
discharge to a preferring debtor. See Glenn, supra note 4, at 529.
Glenn's explanation is helpful, but incomplete. Glenn assumes a rather abstract premise
that the devisers of the bankruptcy laws either were trying to be roughly equitable to debtors,
or at least wanted to avoid overly discouraging debtors from openly submitting to bankruptcy.
But if anything, the problem with the pre- 1705 bankruptcy laws lay in their unfair or counter-
productive punitive treatment of debtors. Nor is it clear that creditors, at least without the
erratically available help of Chancery, could manage to get together to engage in some sort of
systematic deterrence of pre-act of bankruptcy preferences that the Commissioners had no
legal power to touch. Indeed, the instrumental arguments offered by Defoe and others, see
notes 95-100 supraand accompanying text, in favor of discharge suggest that the creditors had
little power over a debtor who could manipulate and delay his official act of bankruptcy until
he had emptied his estate. Moreover, one must not overestimate the generosity toward debt-
ors Parliament showed in creating the right of discharge; for almost 30 years after the original
law granting discharge, Parliament erratically tinkered with it, setting harsh limits on the
right
of discharge and granting creditors some power to block discharge. See Duffy, supra note 69,
at 286-88.
Glenn also fails to apprehend the place of the preference in the broader cultural context
of English bankruptcy law, with its morally ambivalent view of trade and credit. And he does
not address the moral and economic assumptions of the oddly asymmetrical scheme of reme-
dies for a preference under English law: The debtor may be punished by suffering a denial of
discharge, see WILLIAMSON BANKRUPTCY,supra note 135, at 123, 131-32; 5 Anne, ch. 22, ? 2
(1706), while the preferred creditor only makes restitution of the transferred payment.
Glenn also seems to argue that once debtors had a right to discharge, they would face no
disincentive to preferring creditors unless the law forbade them. That argument oddly as-
sumes that debtors, rather than creditors, have a very strong economic interest in
engaging in
preferential transactions. That is an empirical or psychological speculation, but Glenn simply
assumes the English posture of blaming the problem of preferences on the debtor, not the
preferred creditor, without examining that posture.
regulating the debtor's behavior, it is not intuitively clear why a prefer-

ring debtor has violated the norm. A preferring debtor hurts some
creditors individually, but does not necessarily hurt creditors in the ag-
gregate. So to "blame" him for a preference, which is exactly what the
still morally-bound English law did, is to assume an established princi-
ple of intercreditor equity based on some moral theory of a duty of a
debtor to the general class of his creditors, or some economic theory
that, moral concerns aside, preferences encourage wasteful extensions
of credit or cause an inefficient dismemberment of the estate.
Of course, Coke at least vaguely implied these principles in TheCase
of Bankrupts, but they took hold only partially, given the paradoxical
view of the merchant in seventeenth century England. Even as the
bankruptcy law had by then accommodated the image of the debtor as
the victim of a commercial crisis rather than an absconding criminal, it
took even longer to treat the preferential transfer as simply an arith-
metically unfair distribution of assets, or at least as a violation of some
relatively abstract duty of debtor to the creditor class.
As Lord Mansfield ultimately developed the idea, the debtor com-
mits a preferential transfer before he commits an act of bankruptcyonly
if he exhibits a very strange sort of moral will. If the creditor puts great
pressure on the debtor, the transfer does not meet that test. Rather, it
is only a preferential transfer when, in effect, the debtor tries to create
his own scheme of distribution. The sin of the debtor to violate a norm
of commercial fellowship is captured in the idea of ratable distribution,
an idea intimated in Defoe's vision of a utopian commercial fellow-
ship145and in Blackstone's view of the community of noble, dependent
merchants.'46 Yet the obligation of loyalty to this commercial fellow-
ship remains in the debtor, not the creditor. The creditor may hold on
to the preference where he puts pressure on the debtor, as if he is not
fully responsible to the commercial fellowship, but the debtor is. And
of course, the only sanction for a technically preferred creditor was loss
of the payment, while the debtor could suffer the true punishment of
denial of discharge. Lord Mansfield thereby sets in motion a historical
confusion about states of mind in preference law which later vexes
American bankruptcy law.
Worselyv. DeMattos,147in 1758, the first Mansfield case to explicitly
address the legality of a preferential transfer in the modern sense, sets
the moral form of early bankruptcy law in its two aspects: Though it is
hard to imagine any illegality in merely paying off a bona fide debt, a
preference is void where it reflects some deliberate effort by the debtor
to undo the concept of political and economic community imagined by
modern bankruptcy law.148 Slader, the bankrupt, had delivered almost
145. See notes 90-94 supra and accompanying text.
147. 31 Geo. 2 at 467, 96 Eng. Rep. 1160 (K.B. 1758).
148. As Lord Mansfield says at the end of the case: "The policy of the bankrupt law
all his land and personalty to Demattos in a sort of bulk sale, but stayed
in possession and then committed a deliberate act of bankruptcy.'49
Interestingly, the lawyer for Slader argued that the statute should be
construed in his favor under the rule of lenity, since this was still nomi-
nally a criminal statute. But Lord Mansfield subtly recast the argument
that preference law involves moral scrutiny of the debtor's conduct.
The debtor may have anticipated he was going broke and intended to
skew the distribution rules in favor of one creditor. Indeed, he may
have hastened his commercial demise by paying all precipitously to one
creditor.
"But if a bankrupt may, just before he orders himself to be denied,
convey all, to pay the debts offavourites;the worst and most dangerous
priority would prevail, depending merely upon the unjust or corrupt
partiality of the bankrupt."'50 Though the debtor and creditor argued
the commercial necessity of this sort of transfer, Mansfield stressed the
theme that "credit" is reputational. A trader's credit depends on "visi-
ble commerce." Slader had drawn other creditors in on false appear-
ances-he had "imposed on mankind."'51 Mansfield thus invokes the
negative imagery of trade from the century before, the imagery revived
in the eighteenth century when Quesnay spoke of the "scattered and
secret securities, a few warehouses, and passive and active debts, whose
true owners are to some extent unknown, since no one knows which of
them are paid and which of them are owing."152
The original evil merchant character punished by the bankruptcy
laws was the trader who was invisible in the most concrete sense-who
was invisible in the marketplace because he had absconded from Eng-
lish society, or had secreted himself with his goods in his house or in a
sanctuary. Now that "invisibility" takes more abstract, constructive
shape in the form of complex security interests, Mansfield intuits that
the debtor may manipulate invisible property while the general credi-
tors haplessly await a tangible store of assets.153
introduced by 21 Jac. 1, ch. 10, and followed ever since, is to level all creditors, who have not
actually recovered satisfaction, or got hold of a pledge which the bankrupt could not defeat."
31 Geo. 2 at 483.
149. The problem for the other creditors of Slader was that Slader really was
paying off
a debt, so there was no fraudulent conveyance here. The lawyer for the creditors even
argued
that the deed itself was fraudulent enough to be an act of bankruptcy,
hoping to bring the case
within the established relation-back doctrine. That argument says
something about the tem-
poral elusiveness of the preference concept. Id. at 470.
150. Id. at 478.
151. Id. at 483.
152. See note 49 supra and accompanying text.
153. Iord Mansfield acknowledges that if we look for moral
culpability in an act that
constitutes, on its face, the morally unobjectionable payment of a legitimate debt, we face
serious doctrinal problems. The problems of illusion and reality created by invisible com-
merce create mens rea issues that bear an interesting analogy to the later difficulties the com-
mon law of crimes faced with inchoate attempts. Here, I,ord Mansfield finds that the late
delivery of the deed and other suspicious signs of consultation between debtor and creditor
prove the debtor had an illicit motive, especially where Slader had no other reason for the
3. Thecomplexethicsof thepreference.
The themes Lord Mansfield introduces in the Worsleyopinion illumi-
nate all of English preference law. Ten years later, in Aldersonv. Tem-
ple,154 he defined the mens rea of a preferential transfer more explicitly.
A payment on a debt is a preference only when it lies outside the nor-
mal course of trade: It is still a fraudulentpreference. But Mansfield
defines the fraudulent intent in a somewhat circular fashion: The
debtor must "intend to give a preference."'55 Thus begins the concept
of mens rea with respect to preferences, but it is a very curious mens
rea. Most obviously, it focuses on the state of mind of the debtor and
"punishes" the debtor who volitionally sets himself up as a private arbi-
ter of the creditor's class. The focus on the debtor's state of mind
might, of course, be an indirect way of getting at creditor misbehavior.
But Mansfield seems curiously hesitant to recognize any intercreditor
moral responsibility. Indeed, quite the opposite: His doctrine rewards
the nasty creditor who put pressure on the debtor, because then the
transfer would not be a preference. A creditor who imposes duress on
a debtor to pay a preferred debt wins the payment out of the estate-
and that may be the really important incident of the preference doc-
trine.'56 Aldersonseems to give later courts a vague moral mandate to
police debtor payments for intuited signs of collusion or departure
from an intuited sense of trade practice.
Harmanv. Fishar,157in 1774, gave a more colorful sense of the com-
mercial and moral issues: Fishar was a creditor who got paid just
before the debtor absconded. The debtor is nicely described as having
"set up all night settling his books and affairs in contemplation of ab-
sconding." When the debtor sent notes to pay the debt, he gave his
agent an explicit message to the preferred creditor: that he (the
debtor) "has the honour to shewhimthatpreference which he conceives is
certainly his due."'58 The debtor, of course, absconded to the Conti-
nent. According to the court, the payment was certainly "voluntary,"
delivery, since no default had occurred to give DeMattos a new reason to grab assets. 31 Geo.
2, at 484. For a general discussion of this theme of "ostensible ownership" in the law of
secured transactions, see Baird &Jackson, Possessionand Ownership:An Examinationof the Scopeof
Article9, 35 STAN.L. REV. 175 (1983).
154. 96 Eng. Rep. 384 (K.B. 1768).
155. "If [the creditor] demands it first, or sues [the debtor], or threatens him, without
fraud, the preference is good. But where it is manifestly to defeat the law, it is bad." Id. at
385.
156. Lord Mansfield adds:
[I]f a bankrupt, in a course of payment pays a creditor, this is a fair advantage in the
course of trade; or, if a creditor threatens legal diligence, and there is no collusion;
or begins to sue a debtor; and he makes an assignment of part of his goods; it is a fair
transaction, and what a man might do without having any bankruptcy in view.... if
done in the course of trade, and not fraudulent may be supported.
Id.
157. 1 Cowp. 117, 98 Eng. Rep. 998 (K.B. 1774).
November 1986] HISTORY OF PREFERENCE LA W 49
not the result of pressure,159 thus making the ethics of this apparently
unilateral act the issue.
Lord Mansfield accepts Fishar's generous characterization of the
payment as a sort of testamentary act of a debtor about to commercially
die. But Mansfield must then invoke the standard trope of the emerg-
ing preference law to denounce the transfer: It is "a fraud upon the
whole system of the laws concerning bankrupts."160 Or, as the winning
lawyer says, upon the "general spirit of the bankrupt laws."'16
Yet the debtor's lawyers, Dunning and Alleyne, deserve an impor-
tant footnote in the history of bankruptcy law. They offer a wonderful
opposite moral argument about preferences: In some situations, pref-
erences are not only morally permissible but required-
[T]heremaybe ajust reasonfor a sinkingtraderto give a preferenceto
one creditorbefore another;to one thathas been a faithfulfriend,and
for ajust debt lent to him in extremity; when the rest of his debts might
be due from him as a dealer in trade,whereinhis creditorsmay have
been gainers:whereasthe othermaynot only be ajust debt, but all that
such creditor has in the world to subsist upon: in this case, and so
circumstanced, the trader honestly may, nay ought to give a
preference.162
This argument ironically inverts the moral presumptions of the emerg-
ing, robustly realistic English commercial law. A debt out of the ordi-
nary course may be worthier than one in the ordinary course, where the
debtor can demonstrate some noble justifying goal that makes the pre-
ferred creditor worthy for reasons independent of the assumed worthi-
ness of the common merchant. The debtor's personal loyalty to a
particular creditor outweighs any abstract loyalty to the general class of
his creditors.
Dunning and Alleyne's argument, moreover, suggests an interesting
moral criterion that bankruptcy law could have adopted, but has never
adopted, at least in any general sense: that the legality of a preference
depends on the worthiness of the preferred debt.163 The debtor here
was arguing that he could be the arbiter of the relative moral value of
debts. If this hypothetical rule seems fanciful in a scheme of economic
regulation, we can forgive the lawyers for thinking they were actually
adhering to Lord Mansfield's preference principles. Though this hypo-
thetical rule seems impractical because it requires courts to make ad
hoc moral judgments, Mansfield's commitment to a mens rea test for
preferential transfers suffers from the same weakness. In fact, Dunning
159. The creditor apparently did not even know about the payment, since the notes and
the message of honored preference were delivered among agents. Id.
160. Id. at 120.
161. Id. at 119.
162. Id. at 121. The argument is actually quoted from an earlier fraudulent conveyance
case, Small v. Oudley, 2 P. Wms. 427 (1727).
163. Of course, the modern bankruptcy law does do some ranking, though according to
supposedly objective rules. See notes 481-494 infra and accompanying text.
and Alleyne merit historical note because they nicely snare Mansfield in
the rules-standards dilemma.
Though Lord Mansfield, ironically, invites treatment of the prefer-
ence under a broad moral norm, he retreats to the purported rule-
boundedness of the bankruptcy scheme of distribution and the as-
sumed implicit rules of ordinary course trade to govern these transac-
tions. Lord Mansfield is then forced to acknowledge that his effort at
rule-making begins to look like arbitrary formalism. If he wants to treat
the debtor here as a fraud, he must define fraud not as against a credi-
tor or any specific creditors, but as against a legal system that is suppos-
edly the image of a morally bound community.164
The notable lawyers in Harman also raised the timing question:
It has been insisted that no inconvenience can arise if the line were to
be drawn at the beginning of an insolvency. That is not so; for then all
the creditors subsequent to the time when the court determines that
the line of distribution should be drawn, must be involved in the wreck.
The contemplation of becoming bankrupt, is equally difficult to ascer-
tain: but neither the point of insolvency nor the resolution to become
bankrupt is the period of bankruptcy; nor can the contemplation of
bankruptcy be the true line to be drawn: for each is so indefinite and
uncertain, that the rule in either case would tend to endless
litigation.165
The uniquely elusive nature of commercial capital makes victims of
debtors and creditors if they must be able to discern something so
amorphous as the moment of the debtor's insolvency. The 1746 stat-
ute had resolved a similar but somewhat easier problem: It had pro-
tected a good faith creditor who took payment from a debtor after the
debtor committed a secret act of bankruptcy. But Parliament had left
unresolved the even greater difficulty a creditor faces in telling when a
debtor has fallen to the brink of bankruptcy before he has technically
committed an act of bankruptcy. If the bankruptcy creates moral duties
upon the moment of insolvency, the victim of the invisibility of capital
may be the innocent creditor who takes a payment not realizing the
debtor was already under the mandate of ratable distribution.
the
By explicitly tying the perceptual to the moral issues that impale
law on the rules versus standards dilemma, Dunning and Alleyne thus
exposed the problems that then vexed preference law for two centuries.
As the liberal ideology of the eighteenth century struggled to develop a
theory of individual unitary property rights, bankruptcy struggled with
the question of when, along a vaguely bounded continuum, the wealth
164. Iord Mansfield even acknowledges that the creditor was a honest fellow who had
done the debtor a "great act of friendship," and says he is sorry to rule as he does. IHarmnl,1
not
Cowp. at 122. But ironically, this transfer must fail precisely because the debtor was
acting under creditor pressure to save his neck. Rather, it is the raw willfilness of the pay-
ment that undoes it: The payment is a deviant act of a morally independent merchant pre-
tending to be a bankruptcy law unto himself. Id. at 123.
165. Id. at 121-22.
of the debtor ceased to be his and began, in some abstract sense, to be

the wealth of his creditors. The emerging complexity of preference law
in England, and even more so in the United States, may reflect the
breakdown of a unitary principle of property rights, a breakdown asso-
ciated with the growth of large, complex, capitalist institutions.166
Preference law always invites an infinite regress from any legally
measurable point of bankruptcy-whether the state's formal declara-
tion of the debtor's insolvency or the debtor's own declaration in his
act of bankruptcy-precisely because neither the economic moment
(when a man is actually insolvent) nor the moral moment (when a
debtor might fall prey to the antisocial tendencies of the dying
merchant described in Defoe's exhortations) captures its target pre-
cisely. The morally equivocal act of paying a debt that, in retrospect,
seems to violate a scheme of rules, must be examined for indicia of
moral culpability, and hence to questions of illusion and reality.167
4. Englishpreference law afterMansfield.

English bankruptcy law contained only this common law definition
of preference for decades after Mansfield, and the definition invited the
most exquisite moral and psychological metaphysics from the courts.
Perhaps the most revealing case is Fidgeonv. Sharpein 1814, which
reveals the Mansfield doctrine as a complex moral norm rooted in a
cultural ambivalence about merchant behavior.168 The debtors, Becher
and Barker, were cotton brokers who bought in England and sold in
Russia. They bought supplies from an English seller on October 8,
1812, but when military and political events appeared to end their busi-
ness in Russia, they sensed that they would not be able to meet their
obligations, and they returned the goods to that seller-creditor. On
October 19, their general creditors tried to force them into bankruptcy.
Becher and Barker resisted because they thought they were still worth
almost twenty-thousand pounds, but all that capital was tied up in
goods in Russia that they might not recover.169
The general creditors argued that the debtors automatically invoked
the preference law when they returned the goods knowing they were on
the brink of insolvency. The debtors, on the other hand,
argued that
they had evaded preference liability because they sincerely had hoped
they would not go bankrupt-that they in fact had intended to resist
166. See Grey, The Disintegrationof Property,22 NOMOS69 (1980); Donahue, The Futureof
the Conceptof Propertyas PredictedfromIts Past, 22 NoMos 28 (1980).
167. This criminal law approach to preference law is
apparent in Thompson v. Freeman,
1 T.R. 155, 99 Eng. Rep. 1026 (K.B. 1786).
Thompson,for no articulated economic reason-
Lord Mansfield provided none in the earlier cases-excused a
preferring payment on what
can only be described as a mistake of fact that
negates the required mens rea: the debtor
feared (incorrectly, but reasonably, one supposes) that a creditor
threatening execution of a
capias writ against his body was really serious.
168. 5 Taunt. 539, 128 Eng. Rep. 800 (1814).
169. Id. at 800-01.
bankruptcy, whatever their technical state of insolvency. Thus, the

debtors were suggesting that preference doctrine is a moral norm, not
a technical rule. To resolve the issue, the court in effect has to resort to
a criminal-law style analysis in which it must decide whether "bank-
ruptcy" or "insolvency" is the objective element of the crime of prefer-
ence-giving and whether "contemplation" is a mens rea of purpose or
knowledge, or perhaps of mere recklessness or negligence.170 Underly-
ing these doctrinal questions was a fundamental moral one: If a prefer-
ence is to be in some sense "fraudulent," did these debtors commit a
preference when they honestly returned goods because they thought it
was the commercially responsible thing to do? Did it make a difference
that, having used the goods, they did not pay back the debt in money,
but rather retained the goods because they could not put them to their
intended use?
The jury found that the debtor had not acted "in contemplation of
bankruptcy,"'17 though it is not clear whether the jurors had any no-
tion of what those terms meant or simply had made a normative deci-
sion that this debtor was a fundamentally honest person. The
arguments on appeal are a perfect study in the rules versus standards
dilemma, invoking both the procedural and substantive aspects of the
issue. In particular, the losing lawyer for the general creditors illumi-
nates the normative choice made by English bankruptcy law by pre-
cisely articulating the modern, amoral view of preference law which the
English courts firmly and finally reject in this case.
The lawyer for the general creditors argued against any subtle, sub-
jective moral scrutiny of the debtor's state of mind, even if the debtor
showed "the nicest sense of moral duty." He argued for a fixed, auto-
matic duty of a debtor facing possible bankruptcy to act solely for the
benefit of the general creditors. Even if the debtor hopes he faces no
more than a temporary suspension of trade, he necessarily "contem-
plates bankruptcy." Thus, preference law demands that he serve as his
own temporary bankruptcy trustee, placing a preliminary injunction on
himself not to favor any creditors. He need not subjectively anticipate
bankruptcy;he need only realize "one of the consequences which tem-
perate and dispassionate persons of superior judgment might
anticipate."172
170. Id. at 802-03.
171. Id. at 801.
172. Id. at 801. The debtors had urged the creditors that they had "no doubt whatever
of being able to make good our payments, if the creditors would give us time." Id. at 802.
But "contemplation of bankruptcy" can be something short of a "fixed determination to com-
mit an act of bankruptcy," especially since, as the doctrine of "act of bankruptcy" has evolved,
it can take the wholly constructive form of falling deeply into long-term debt. Id. at 801.
bank-
Ironically, the argument runs that a debtor can passively or inadvertently "contemplate
constructive,
ruptcy" precisely because he may have no control over the trigger-if the act is
so can be the contemplation.
If he contemplates ["adverts" to the possibility] that with their indulgence he can pay
all, he therefore necessarily also contemplates the other alternative, that if they re-
The court rejected this argument by the general creditors and found
no preference. It thereby sealed English preference law in its Mans-
fieldian form. It reverted to the rhetoric that the debtor must intend a
fraud on the bankruptcy laws. And, once again, the moral question in-
corporated the themes of reality and illusion in the world of credit and
identified the most deserving commercial characters as those who are
most subject to loss because of the invisibility of commercial transac-
tions. A more objective test of preference "would place all the com-
mercial world in greater difficulty to investigate the rule of action, and
would rescind even more payments than hitherto has been the conse-
quence of the doctrine that has been followed."'73 But the problem is
the circularity of the concept of bankruptcy that English law created
when it changed acts of bankruptcy from willful criminal acts to passive
indicia of morally sympathetic economic distress.
The post-1813 insolvency laws contained a definition of preference
that legislated a specific rule on the time zone of debtor moral duty. 74
In search of some rule, the courts adapted this definition to bankruptcy
cases, except that they added the moral theme that the "sole moving
cause" of the transfer had to be the debtor's intent to go bankrupt.'75
Then, in 1861, the trader rule finally disappeared from bankruptcylaw.
The insolvency laws thereby lost their independent purpose, and the
modern preference definition entered the bankruptcy statute: a pay-
ment by a person unable to pay his debts when due with a view to giv-
ing such creditor a preference over others if a bankruptcy adjudication
followed within three months.176 English law, however, hardly di-
verged from Mansfield's decision to focus solely on the state of mind of
the debtor.177 The English courts were soon back on their metaphysi-
fuse that indulgence, he, being without funds in England, must become a bankrupt,
either by some voluntary act of his own, or in consequence of their arresting him.
Id. at 802. In addition, the depth and cause of insolvency, and questions of the individualized
moral worth of debt and credit, are irrelevant.
173. Id. at 803.
174. A preference was a voluntary transfer by an insolvent who intended to seek a dis-
charge from prison, within four months of the beginning of his imprisonment. See 5 Geo. 4,
ch. 61 (1824); 7 Geo. 4, ch. 92 (1826).
175. See In re Hall, 4 Bankr. 671, 681 (W.D.N.Y. 1900). The interrelation of the laws is
curious: For decades, the insolvency law, like a legislative act of Chancery, had softened the
purported rule-boundedness of the bankruptcy law's trader rule, which denied poor nonmer-
chant debtors any bankruptcy relief. Yet it was the insolvency laws that provided an arithme-
tic definition of the moral danger zone of insolvency.
176. See Bankruptcy Act of 1868, 32 & 33 Vict., ch. 71, ? 92. For a comprehensive study
of the political and economic relationship between bankruptcy and insolvency laws in nine-
teenth century England, see I. DUFFY,BANKRUPTCY & INSOLVENCY IN LONDONDURINGTHE
INDUSTRIAL REVOLUTION (1985).
177. The only moment of divergence came with Butcher v. Stead, 9 L.R.-Ch. App. 595
(1874), which over-interpreted the bona fide creditor immunity clause derived from the origi-
nal 1746 statute. See note 133 supra and accompanying text. After Parliament codified the
preference doctrine and measured the preference period according to a fixed time from the
petition, rather than from any act of bankruptcy, it left unclear whether the bona fide creditor
clause could immunize otherwise preferential payments where the preferred creditor could
claim reasonable ignorance of the debtor's imminent bankruptcy. Butcherreads the bona fide
cal track, examining alleged preferences according to the subtle mens
rea principles inspired by Mansfield.'78 And a whole new century of
creditor rule just that way, as if to import the emerging American rule: The debtor's state of
mind becomes a necessary but insufficient condition for avoidance. But, as if to prevent
courts from opening up normative questions of creditor behavior, Parliament neatly over-
ruled the case in 1883 and restored the common law rule. The savings clause was left to serve
the much narrower purpose of protecting bona fide purchasers from the preferred creditor.
See WILLIAMS ON BANKRUPTCY, supra note 135, at 347.
178. In Ex parte Taylor, 18 Q.B. Div'l Ct. 295 (1886), the court acknowledged that if the
issue is the motive with which a debtor performed the facially neutral act of paying a creditor,
then the jury has a complex task. Taylorposed perhaps the subtlest case for applying Lord
Mansfield's mens rea test. The facts suggested that the debtor paid the favored creditor not
exactly out of an aggressive desire to set up his own scheme of distribution, nor to prefer the
creditor in any normative sense, nor in response to a firm threat of legal process by the credi-
tor. Rather, the debtor had acted out of a vaguely intuitive fear of public infamy if he did not
pay. Here was the jury's instruction:
You have to perform the metaphysical operation of finding out what a man's intent
was, surely then you ought not to throw away all the tests which have been adopted
by great and careful judges for the purpose of doing this .... You must take into
account the man's own kind, and see whether, if he has done a very wicked and
abominable thing, he may not afterwards have been doing that which, if he had a
scrap of conscience left, he ought to have done-repair his former evil deed. If you
can come to the conclusion that that was the dominant motive in his mind, you must
hold that he made the payment, not with a view of preferring the person to whom he
made the debt, but in order to satisfy his own conscience.
Id. at 300.
In Sharp v. Jackson, 1899 A.C. 419, 68 LJ.Q.B. 866 (1899), the court faced the problem
of divergent jury behavior under the criminal model of preference law. Though the jury,
perplexed by these metaphysics, might invoke some sort of overly objective test of mens rea
to avoid the amorphous, undefined question of intent to prefer: It must be instructed to look
to what the debtor really intended, not just to "the natural and probable consequences" of
the act of paying a creditor on the eve of bankruptcy.
In Ramsay v. Deacon, 2 K.B. 80 (1913), the morality play of English preference law turns
to comic opera. We see the hapless complexity into which the doctrine falls when the court
tries to identify the key element of the debtor's wrongful volition in a rather typical instance of
debtor-creditor negotiation where individual human volitions blur. Ramsay, an insolvent
manufacturer, asked a creditor-supplier for a renewal. He knew he was broke and had been
frantically trying to stave off other creditors. The debtor had a number of other favored credi-
tors, so the trustee sought admission of these facts, as if by analogy to the pattern of "other
crimes" evidence. But the court had to recur to the raw question of the debtor's voluntary
intent to prefer. The court admits the evidence conditionally: The debtor had frantically
engaged in transactions with other creditors, asking for extensions, returning some goods,
borrowing on his wife's property and guarantee, and selling stock (some unpaid for) to cancel
the loan. Id. at 84-87. When they met, the creditor did not threaten legal proceedings, but
insisted that unless Ramsay offered a substantial payment or return, he would make it "hot"
for him. The debtor arranged for return and payment, and the creditor picked up the goods
himself. Ramsay then went bankrupt.
The trustee had concluded that the return was voluntary, not the result of pressure, so
the mens rea question came down to this: As long as the debtor could negotiate, he showed
he was legally subject to the "pressure" that would defeat the preference claim. The court
either
posits a rather elusive distinction in considering Ramsay's possible motives: He was
a
trying to protect himself from the creditor's threatened legal action-which would not be
preference-or he was "trying to gain an advantage"-which would be a preference.
The question in Ramsay revolved around the most exquisitely formalistic analysis of a
credi-
morally equivocal moment: At the precise moment when the transfer occurred, which
tor had supplied the decisive pressure? Since Ramsay had been negotiating with all his credi-
tors, it was just a fortuity, not a "willful" preference, for him to pay this particular creditor,
the one who had the good luck to bring home to Ramsay most forcefully at the right moment
taken
just how bad his situation was. But the court finds it important that Ramsay himself had
English preference law can be summarized in the statement that it con-

tinues to treat the debtor's culpable mental state as the decisive is-
sue179-a case of arrested doctrinal development in comparison to the
tortuous modern history of the preference in the United States.
III. THE DEVELOPMENT OF AMERICAN PREFERENCE LAW: THE

NINETEENTH CENTURY
A. TheNew AmericanCommercial
Ideology
1. Ideologyand the needfora bankruptcy
law.
The early American ideologists of commerce inherited the British
ambivalence about the ethics, ontology, and politics of credit. But
probably the major intellectual strategy of American and European
writers who played a role in American ideology was to invert the moral
and perceptual elusiveness of credit that characterized much of the ear-
lier British thinking. The emerging bourgeois ideology conceded that
commerce was an expression of self-interest, but argued that though
self-interest might seem a vice in private, it could become a public vir-
tue in the aggregate.180 The ideology of the commercial republic was
that the older heroic virtues, rooted in allegiance to land, king, and
church, were indeed "unreal" because they located moral reality in ab-
stract symbols, faiths, and fantasies.18l Indeed, the commercial ideo-
logues thought the older version of public virtue dangerous because it
encouraged men to fanatical physical violence in the pursuit of intangi-
the initiative in the meeting and had wanted to stop the onward pursuit of the wolves, and the
creditor hardly had to press him further. Moreover, the court finds that Ramsay was moti-
vated not exactly to avoid legal action on the debt, but rather to avoid the
infamy in the
market that legal action might bring. Id. at 86-87.
This odd view of volition seems to look back all the way to the eighteenth
century ideol-
ogy and the image of the helpless trader as one deserving bankruptcy protection. The
merchant's fragile and sympathetic condition rests on a complex form of
invisibility: His as-
sets are intangible because they consist wholly of elusive and unreachable credit and
yet, for
the same reason, they depend on sheer commercial reputation. Here the
only new creditor
threat was that of exposing the merchant to further reputational infamy, not
legal action. The
creditor's threat not to supply more goods was irrelevant, since the debtor was
giving up the
goods anyway. The court supplies a useful epigraph for this interpretive history of English
preference law, holding that Ramsay's wrongful motive was simply to "diminish the sort of
moral threat against his commercial honour which men do not like." Id. at 87.
179. See, e.g., In re Cutts, 1 W.L.R. 728, 733-34 (C.A. 1956) (burden on
party alleging
preference to prove debtor's "requisite state of mind, his intention" to prefer); 1n re Wroe,
205 E.G. 1103, D.C. (1968) (absent evidence of any other intention, debtor's intention to
prefer a payee-creditor can be inferred from suspicious surrounding circumstances); In re Al-
len Fairhead & Sons, Ltd., 115 Sol. J. 244 (1971) (unreality of
alleged pressure by director-
creditors of bankrupt company supports finding of intent to prefer).
180. See Lerner, Commerce and Character.TheAnglo-Americanas .Vew-ModelMan, 36 WM. &
MARYQ. 3 (1979); see also J. CROWLEY, THIS SHEBA,SELF:THE CONCEPTUALIZATION OF ECO-
NOMICLIFE IN EIGHTEENTH-CENTURY AMERICA(1974); L. DUMONT,FROMMANDEVILLE TO
MARX: THE GENESIS AND TRIUMPH OF ECONOMIC IDEOLOGY (1977).
181. Lerner, supra note 180, at 5-7.
ble goals.182 The commercial republic created a more solid, if duller,

form of public virtue rooted in private interest. Men pursuing raw eco-
nomic self-interest achieved benign peace, if not grandiloquent hero-
ism. They were reliable and predictable because the objects of their
self-interest, utility and pleasure, were "real."'83 The old feudal ties
were gone, and the linkage of men now lay in the interdependence of a
credit economy. 84
The commercial man sought temperance, industry, and frugality.185
He reflects Tocqueville's "standards of prudent and conscious medioc-
rity."'86 It was the trader mentality that could properly assess the real
and reliable value of things. The ideology leveled all social character
types into a world of burghers where private preoccupations and quiet
virtues became the core of a new system of honor. The new commer-
cial man, above all, would fall into line naturally and could be trusted
not to aspire to be a law unto himself.'87 This man did not live without
risk and adventure, but it was risk inherent in economic reality, and it
supplied the energy for economic progress rather than threatened the
social order in the name of abstract ideals.'88
The ideologists of trade recognized that new commercial order
might entail the sacrifice of beauty and nobility,189 that commerce
might infect "the souls of men" and might "sink[] the man into a
machine,"190or diminish the "feast of reason and the flow of soul."'19
But the resulting benefit was a kind of universal brotherhood of physi-
cal need and vulnerability. The condition of contingency that the Eng-
182. Id. at 7, 11-12; see D. HUME,ESSAYSMORAL,POLITICAL ANDLITERARY 347-48, 405,

484-85 (1963).
183. Hence the new man of Franklin, Smith, Benjamin Rush, and Tocqueville, the famil-
iar character type of the American bourgeois, is a special rationalization of the troubled char-
acter type of the English merchant. The old order of virtue supposedly rooted in land, and
hence reality, is seen as rooted in fantastic intangibles. Thus Montesquieu noted:
charm
"[I]maginary needs are what the passions and foibles of those who govern ask for: the
of an extraordinary project, the sick desire for a vain glory, and a certain impotence of mind
against fantasies." 3 THE SPIRITOFTHELAWS7 (T. Nugent trans. 1900) (orig. publ. 1748).
The commercial ideology denounced the past as Sparta, rather than glorify it as Athens. Her-
oism was vanity and rashness. The sane economic man might fight over interest or family, but
never over faith or principle. Lerner, supra note 180, at 12.
184. See Pocock, Virtueand Commerce in the EighteenthCentury,3J. INTERDISCIPLINARY HIST.
119, 132-33 (1972).
185. A. SMITH,THE THEORYOF MORALSENTIMENTS 350-53 (1976).
186. A. DETOCQUEVIILE, DEMOCRACY IN AMERICA 45-46, 372, 433-34, 591 (.P. Mayer &
M. Lerner ed. 1966).
187. See Lerner, supra note 180, at 13.
188. Id. at 8-9. For Hume, the happy sovereign was the one who accommodated "the
common bent of mankind, and [gave] it all the improvements of which it is susceptible. Now,
the
according to the most natural course of things, industry, and arts, and trade, increase
note 182, at
power of the sovereign, as well as the happiness of the subjects." D. HUME,supra
262-69.
189. A. SMITH,LECTURES ONJUSTICE,POLICE,REVENUE ANDARMS259 (E. Cannan ed.
1896).
190. 1 LETTERS OFBENJAMIN RUSI-85, 285 (L.H. Butterfield ed. 1951) (orig. publ. 1782).
191. Id. at 85 (quoting A. POPE,2 IMITATIONS OF HORACE:SATIRESsat. 1, line 127).
lish commercial ideology attributed to merchants became, in the
inversion that came to dominate American thinking, truly a universal
condition, so the merchant became the model for all modern citizens.
Thus the new ideology in America, in a sense, saw the domestic sphere
according to the image the English ideology had developed for interna-
tional relations: Commerce blurred national as well as international
lines, since all people could belong to the general category of buyers
and sellers, and commerce was chiefly a traffic in "movables" that are
untied to land and nation.'92 The ideology assumed that men's mutual
sense of vulnerability would drive them to cooperative behavior;
merchants saw themselves as mirrors of each other's selfishness. The
ideology rationalized away fears of commercial warfare among nations,
as well as the danger that commercial people would isolate themselves
in private spheres. 193
The new commercial ideology had essentially three intellectual bar-
riers to overcome. The first was the charge that American commerce
would, like British commerce, corrupt political life. The response here
was aggressive: American commercial republicanism would be differ-
ent. The American revolution would be a revolution in the culture of
trade, replacing the corrupt mercantilist habits of England with free,
natural, commercial vigor. 94
The second barrier lay in the special role that land came to play as a
political and moral symbol in America. The English ideology roughly
opposed merchant capital and culture to land-based capital and culture,
192. A. SMITH, AN INQUIRY INTO THE NATURE AND CAUSES OF THE WEALTH OF NATIONS
412, 800 (E. Cannan ed. 1937) (orig. publ. 1776); see Lerner, supra note 180, at 10-11.
193. Priestley on commerce as peacekeeper:
By commerce we enlarge our acquaintance with the terraqueous globe and its in-
habitants, which tends greatly to expand the mind, and to cure us of many hurtful
prejudices, which we unavoidably contract in a confined situation at home. The ex-
ercise of commerce brings us into closer and more extensive connexions with our
own species, which must, upon the whole, have a favourable influence upon benevo-
lence; and no person can taste the sweets of commerce, which absolutely depends
upon a free and undisturbed intercourse of different and remote nations, but must
grow fond of peace, in which alone the advantages he enjoys can be had.
J. PRIESTLEY, LECTURES ON HISTORY AND GENERAL POLICY 327-28 (1788), quoted in D. McCoY,
THE ELUSIVE REPUBLIC: POLITICAL ECONOMY INJEFFERSONIAN AMERICA 87 (1980).
194. D. McCoY, supra note 193, at 76. Indeed, the very cause of British mercantile cor-
ruption was the set of artificial political restraints on trade, which in its unrestrained American
form would necessarily achieve public virtue, replacing idleness with
industry, and making
trade a noble calling.
This version of the Protestant ethic assumed that men had to be induced to
produce
commodities far in surplus of their needs, lest idleness lead to moral sloth. Id. at 78-83. This
would be the result if farms predominated over agriculture with domestic
consumption as the
only goal. If America was not ready for specialized manufacture, it at least had to produce
large agricultural surpluses for foreign markets.
The robust optimism of the commercial republicans met difficulty around the time of the
Revolution. Treaties for free trade failed to prevent the United States from
suffering terrible
trade losses before 1793. And, ironically, part of the trade deficit was due to America's vain
consumption of European luxury goods. Thus, the new mercantile ideology faced the criti-
cism that it could not overcome the tendency of a credit-based society toward corruption. Id.
at 90-95.
and tried to create a model of the merchant citizen whose private inter-
est might mirror a larger public interest. But one of the American ad-
aptations of Augustan cultural theories looked to land ownership as the
basis of virtue and stability. Thus, commercial republicanism faced a
competing Protestant ethic-the view that the landed man had the lei-
sure and autonomy, and the anchor in reality, to pursue public virtue.
What Pocock calls the "country" ideology had the advantage over the
commercial ideology that land was an attractive symbol of reality, and
thus a better basis for public virtue than the contingent and corruptible
forms of mercantile wealth and credit.195 Some ideologists of com-
merce tried to accommodate the emerging figure of the merchant gen-
tleman into this model, but the country ideology, in its effort to
denounce the stockjobber and speculator, remains in sharp contrast to
the commercial republican vision. In particular, the country ideology
assumes that public virtue depends on the individual, conscious public
interest of the citizens, not on a rather blind aggregation of individual
economic interests.196
The country ideology is in a sense the right-wing, conservative mir-
ror of the third major barrier to the commercial ideology-the Jackso-
nian opposition to banking interests. If the commercial ideology
portrays credit as a healthful, robust force in a modern, rationalized
society, the Jacksonian position is, in a sense, an American atavism of
the murkiest moral suspicions about the credit culture from the earliest
days of English bankruptcylaw.197 In theJacksonian view, the good are
the farmers, mechanics, and others who actually earn their property.198
The less worthy are the promotional, financial, and commercial people.
The enemies are money power, paper money, and credit, which induce
uncertainty and speculation. The National Bank thus becomes the fo-
cus of theJacksonian moral campaign, and it is always expressly a moral
195. See Pocock, supra note 184, at 120-29. The land-rooted gentleman of the country
had the leisure and autonomy to directly practice the arts of public citizenship and could
defend against the corruption and patronage that the Americans decried in the England of
Charles II, with its professional army and massive public debt. The country citizen was a
patrician of Renaissance humanism, whose public virtue was ensured by his economic secur-
ity, but was independent of his economic interest.
196. Id. at 128-30. When America began to fare better in trade in the 1790s, as the
European wars fueled an increase in demand for resources and created a great boom in ex-
port profits, the debate over virtue and commerce only intensified. The booming yet precari-
ous success of American trade illuminated the virtues and vices of a credit, trade-based
economy. Some celebrated the triumph of American popular government, free of mercantil-
ist restrictions, and the new active, public-spirited American character, a republican order that
169
produced a system of mutual dependencies in prosperity. D. McCoy, supra note 193, at
(quoting T. TUCKER,AN ORATION GIVENIN ST. MICHAEL'S CHURCH14 (1795)). Some feared
that European democratic revolutions would eventually decrease American foreign markets
and thereby force the United States to enter diversified manufacturing. Id. at 167. America
faced the problem of becoming prosperous without becoming luxurious and corrupt. The
commercial republican ideology, with its dull virtues, had to be proof against speculation,
which inspired a belief in wealth without labor and hence without any virtue.
197. M. MEYERS,THEJACKSONIAN PERSUASION: POLITICS ANDBELIEF108-16 (1966).
198. Id. at 138-39.
campaign. It is ironic that though credit is associated with instability,

the Bank is an enemy chiefly if it is fixed and permanent. Its paper
money is the "mere spectre of palpable value" and represents a "false,
rotten, insubstantial world."199
The Jacksonians saw the blending of the merchant character into
the general citizen as a contamination.200 William Leggett denounced
merchants who infected society by spreading the disease of paper
money and described them in comparison to the noble ploughman as
"lank and sallow accountants," inferior morally, physically, and intel-
lectually, yet richer.201 Trade is a phony aristocracy, peopled by fly-by-
night "creatures of the paper credit system."202
Thus, underlying bankruptcylaw is a deep cultural division over the
moral worth of a credit economy as well as more fundamental questions
about reality and illusion in which money and credit become epistemo-
logical symbols.203 By the beginning of the nineteenth century, the is-
199. Id. at 24-28. As Meyers quotes from James Fenimore Cooper:
Extravagant issues of paper-money, inconsiderate credits that commence in Europe
and extend throughout the land, and false notions as to the value of their posses-
sions, in men who five years since had nothing, has completely destroyed the usual
balance of things .... All principles are swallowed up in the absorbing desire for
gain; national honour, permanent security, the ordinary rules of society, law, the con-
stitution . . . are forgotten, or are perverted.
M. MEYERS, supra note 197, at 117-18 (quoting 1 J.F. COOPER,HOMEAS FOUND(1838)).
200. The familiar rationalization of the trade ideologists-that all men can become
merchants- receives an ironic Jacksonian twist in the writing of James Fenimore Cooper:
The man who sells his inland lots at a profit, secured by credit, fancies himself en-
riched, and he extends his manner of living in proportion; the boy from the country
becomes a merchant-or what is here called a merchant, and obtains a credit in Eu-
rope a hundred times exceeding his means . . . and thus is every avenue of society
thronged with adventurers, the ephemera of the same wide-spread spirit of reckless
folly. Millions in value pass out of these streets, that go to feed the vanity of those
who fancy themselves wealthy, because they hold some ideal pledges for the payment
of advances in price like those mentioned by the auctioneer, and which have some
such security for the eventual repayment, as one can find in a calling a thing, that is
really worth a dollar, worth a hundred.
Id. at 120.
201. 2 A COLLECTION OF THE POLITICAL WRITINGS OF WILLIAM LEGGETT 164 (T.
Sedgwick ed. 1840).
202. Id. at 107. TheJacksonians wanted, in Hammond's words:
to clip the wings of commerce and finance by restricting the credit that paper money
enabled them to obtain. There would then be no vast debt, no inflation, no demoral-
izing price changes, ... no fluctuat[ing] or disappearing values, .. . The precious
metals would impose an automatic and uncompromising limit on the volatile tenden-
cies of trade.
Hammond, Jackson, Biddle, and the Bank of the United States, 7 J. ECON.HIST. 1, 6 (1947).
Later, Van Buren maintained this theme, praising the agrarian stability of our economy as
a "sure reward which is vainly sought in visionary speculations." 3 A COMPILATIONOF THE
MESSAGESAND PAPERS OF THE PRESIDENTS, 1789-1897, at 530 (J. Richardson ed. 1896). His
banking policy is more moral than economic, blaming all our problems on credit and bank
paper. Credit has infected the morals of the people with "luxurious habits ... founded on ...
fancied wealth." Id. at 326.
203. One form of commerce-the carrying trade-became the central symbol in the ide-
ological dispute. The carrying trade is a paradigm of commerce-it is the pure business of
moving goods, never owning, making, or using them. It is therefore similar in its symbolic
usefulness to the general image of the broker in goods who figured so heavily in the imagery
sue of whether to have a national bankruptcy law became one of the
major questions in the general division over the moral validity of a
commercial culture. Bankruptcy law supplied the political imagery
upon which people would draw in expressing their view of the stage of
capitalist cultural development they wished to see the United States
achieve.204
The trade ideologists saw the need for a rationalized bankruptcy
system in uniform, predictable, market-serving terms. Bankruptcy
would facilitate credit and limit liability.205 The argument for the new
bankruptcy law is an argument for the historical necessity of expanded
capitalism and credit and for recognizing that the merchant, as a crucial
participant in this historical progress, merits protection from the risks
he takes in its name:
Debtsof greatmagnitudemustbe contracted;and the most honestand
prudentmanmay,by accidentsand misfortunesincidentto commerce,
be deprivedof the meansof makinggood his engagements. In a state
of society, chiefly agricultural,a bankruptsystem is not wanted, be-
cause creditsof so great an extent are not given, nor are persons en-
gaged in pursuitsliable to so manyunforeseenaccidents.206
Assuming we had reached the same stage of capitalist development
as England, we needed to create a bankruptcy law on their model.207
And though the proponents did not argue strongly for a trader rule
that would limit the right of bankruptcy to merchants, they did argue
that we needed a bankruptcylaw because merchants had become major
figures in American economic life. To the argument that the English
bankruptcy law was in fact a very bad law, with uncertainties and loop-
holes that permitted manipulative or fraudulent behavior by merchants,
they responded that our new bankruptcylaw would be a modern, com-
mercially scientific advance on the English law.
The argument opposing bankruptcy took a number of forms. Some
conceded that a bankruptcy law is necessary in a modern trading na-
tion, but denied that the United States had reached that stage of capi-
talist development208 or that it had actually developed a special class of
professional merchants as had England.209 Others argued that bank-
ruptcy was a bad thing in itself. Some took their view of bankruptcy
from its ancient English origins and argued that it was a cruel punish-
of early English bankruptcy law. The purest form of merchant is indeed the most morally
the
suspect, the most unmoored from any solid reality. Moreover, the carrying trade was
most corrupting form of commerce because it required a large and expensive navy for protec-
tion; in a sense then, a whole society could be dangerously leveraged on it. D. McCoy, supra
note 193, at 174-78.
204. Id. at 178.
205. Id. at 179.
206. ANNALSOF CONG.2656 (1797) (statement of Rep. Bayard).
207. Id. at 2675.
208. 6 THE WRITINGSOFTHOMAS JEFFERSON 145 (P.L. Ford ed. 1895).
209. See ANNALSOFCONG.2649-51 (1797) (statement of Rep. Gallatin).
ment for unfortunate debtors. In particular, some characterized bank-

ruptcy in political terms by using poor people as the prototypical
debtors. They then complained that under a new bankruptcy law,
wealthy, distant creditors would be able to seize a debtor's land, while
local insolvency and attachment laws-which were denounced as an-
ticommercial anachronisms210-greatly restricted creditors' access to a
debtor's land. Yet other opponents of a new bankruptcy law managed
to make a dramatically different argument at the same time: that bank-
ruptcy was an inherently corrupting force in society because it only ex-
acerbated the corrupting effects of commerce. It did not punish
debtors so much as reward, or deceptively encourage, excessive credit
investment, and thus infected all of society-even farmers-with the in-
stability and illusion of a trading economy.211 In effect, this argument
conceded that all men could indeed become merchants, but found this
a fact to lament as a sign of the moral decay of society.
2. Therhetoricof the new bankruptcy

debate.
The wild struggles over the bankruptcylaw reflect a conceptual con-

fusion about the essential purposes of bankruptcy law, which in turn
reflects the wonderful plasticity of bankruptcy as a medium for debate
over a wide variety of moral and political issues in a changing economy.
Charles Warren's somewhat tarnished classic proves, in an ironic
way, to be a wonderful history of these struggles.212 Warren unwit-
tingly reveals the irrationality of political argument over bankruptcy
laws, and the tortured moral form the debates often took. At almost
every phase of historical debate, parties seem arbitrarily to identify
themselves with debtor or creditor interests (or merchant or nonmer-
chant interests) and express contradictory views of their self-interest.
The confusion seems to stem in part from inarticulate moral qualms
about the idea of credit and the social value of the merchant. Though
the first constitutional and congressional debates are perfect examples
210. Id.
211. D. McCoY, supra note 193, at 182-83.
212. C. WARREN,BANKRUPTCY IN UNITEDSTATESHISTORY(1935). McLaughlin has de-
rided the book as failing to treat serious ideas, but offering instead a "myriad of
quotations
from little noisy men who have repeated misinformation and appeals to passion at short inter-
vals for nearly a century and a half." McLaughlin, Book Review, 49 HARV.L. REV.861, 862
(1936). If short on intellectual analysis, Warren's book is nevertheless a useful source, be-
cause it reads like a raw primary document, a sort of social Rorschach test of the instinctive
attitudes the various economic, regional, and moral constituencies held toward
bankruptcy.
One reason the debates became such wild Dunciads of political
posturing is that they
usually were inspired by a sense of emergency after some speculation crisis and panic. Jeffer-
son and others denounced the paper bubble of the stockjobbers in the 1790s, and a
major
impulse behind the first bankruptcy law was to solve the speculation problem. C. WARREN,
supra, at 10-13. But the solution one chose depended on what precisely one thought the
problem was. Was it to punish and deter the speculators, or relieve the honest people who
had gone down with them?
by themselves, every episode in the decades-long legislative history em-

bodies the whole range of debate.
The thematic background to Warren's history is the tortuous efforts
of the states to define and execute the sorts of debtor-creditor laws ap-
propriate to their self-perceived states of capitalist development. Most
of the states went through an oscillating series of laws recapitulating
the British confusion over ethical and instrumental goals of bankruptcy
and over the choice between rules and standards to carry out those
goals. American legislatures tried out carrots and sticks, discharge laws
and cruel imprisonment laws, reenacting all the permutations of bank-
ruptcy and insolvency laws in England.213
When it came to the debate over a national bill, every constituency
seems to have had its own best-case or worst-case assumption about the
form the bill would take. Some focused on discharge and complained
that discharge would be an abusive tool for large merchants or Eastern
debtors against Southern or Western creditors, or that discharge would
be unavailable to debtors from the rural West.214 Others feared moral
infection rather than abuse from a discharge law, predicting that dis-
213. SeegenerallyP. COLEMAN, DEBTORS ANDCREDITORS INAMERICA: INSOLVENCY, IMPRIS-

ONMENT FORDEBT,ANDBANKRUPTCY, 1607-1900 (1974).
Coleman offers an exhaustive history of the cycles of short-lived legislation in the United
States. In 1725 the General Court of Massachusetts repealed a nondischarging anti-imprison-
ment law, declaring it "a shelter to vicious and improvident persons, a great encourage[me]nt
to idleness and ill-husbandry, and too much a temptation to perjury, as well as injurious and
oppressive to many honest creditors." Id. at 41 (quoting 2 ACTSAND RESOLVES, PUBLIC AND
PRIVATE,OF THE PROVINCE OF THE MASSACHUSETTS BAY 363 [hereinafter ACTS AND RE-
SOLVES]). Yet the General Court reenacted the law, and in 1757 it passed a new law, saying
the attachment acts frightened debtors into keeping their houses to escape arrest or wasting
their assets, or inviting preferences. But the Crown struck down the law, fearing it would hurt
English creditors. P. COLEMAN, supra, at 46; see also 4 ACTSANDRESOLVES, supra, at 29-44. In
1765, New Hampshire, responding to a depression in the mast and lumber trades, adopted a
debtor relief law permitting a defaulter who owed no more than 100 pounds to exchange
property for freedom, but allowed a creditor to keep the debtor in prison by paying the ex-
penses of imprisonment. In 1767, the legislature tinkered with this law, deciding that after 60
days in prison, a debtor who swore he had less than 3 pounds other than clothing could be set
free, unless the creditor paid 5 shillings a week toward support, thus forcing the creditor to do
his own cost-benefit analysis. P. COLEMAN, supra, at 56; see 2 LAWSOF NEWHAMPSHIRExvi (A.
Batchellor ed. 1913); 3 id. at 370, 471-73. The New York legislature tinkered endlessly with
adjustments in debt limits for nonimprisonment, weekly support fees, indentured labor as
means of freedom, and so on, all creating uncertainty for lenders and borrowers. P. COLE-
MAN,supra, at 105-29. Ultimately, the state legislation seemed to fail of any coherent instru-
mental purpose. The debtor's jail ceased to be a good deterrent because of humane
modifications, and dividends to creditors remained low. Id. at 119-23. Chancellor Kent said
of a liberal 1811 version of the New York law that "[t]here never was a law that held out more
alluring and more dangerous temptations to debtors to forget what they owed to good faith,
and to disregard the moral obligation of contracts. Its effects upon the community were rapid
and deplorable." Id. at 128 & n.47. Yet Coleman's history reveals an important undercurrent
to this Dunciad of legislation: In states like New York and Pennsylvania, debtors and creditors
resolved disputes sublegally through informal adjustments during hard times, with merchants
often carrying accounts over from season to season. Though these arrangements often re-
sulted in preferential payments to helpful local creditors, state law flexibly accommodated
them. Id. at 112, 144. And supporters of the law that Kent denounced argued that it helpfully
attracted immigrants and enhanced the state's economy. Id. at 129.
214. C. WARREN, supra note 212, at 13-16.
charge would seduce small-time economic actors into dangerous lever-

aging and ultimate ruin.215 The Southern interests thus reflected the
whole history of English ambivalence about the moral status of the
trader and of the ironically shifting purpose of the trader rule in
bankruptcy.
Those who saw the purpose of bankruptcy law as preventing fraud
may have supported the national bill because they thought it would suc-
ceed, while others opposed the law precisely because they thought it
would encourage fraud.216 Those who saw the national law as a means
of preventing preferences either supported it because they opposed
anachronistic provincial preferences, or opposed it because they ap-
proved of the preferences that resulted from customary local commer-
cial settlements and did not want to yield greater creditor rights to
distant creditors. The national bill had narrower exemptions than the
state insolvency laws, so proponents saw bankruptcy as a means of
eliminating commercially inefficient exemptions as well as the prefer-
ences permissible under state laws, while Southern opponents saw
bankruptcy as an attack on the social welfare principles of the state
laws.217
The proposed bill was only for traders and was essentially a credi-
tor's law.218 Generally, Northern Federalists supported it, and South-
ern and Western interests opposed it, thinking it would oppress
country traders and encourage, rather than curb, speculation. One sce-
nario was that farmers frequently would make late payment to country
traders, who would then be late in paying city merchants, who would
then throw the country trader into bankruptcy, who would throw the
farmer into insolvency.219 The opponents could thus invert the vision
of a great mercantile chain of being that was adopted by the commer-
cial ideologues.
Each party seemed to have a different theory of the relationship
among all the parties. The bill's supporters said it would relieve honest
debtors and restore them to active trade; the dishonest speculators
would rise again even without help from the bankruptcy laws, but the
honest debtors and their widows and orphans were doomed without a
federal discharge right, and in any event, the bankruptcylaw would give
honest creditors control over the property of the wicked debtors.220
Indeed, bankruptcy law would preventexcessive credit and panic by giv-
215. Id. at 15. In fact, in the debate over the 1800 bill, the Southerners moved that the
bill be construed not to apply to farmers, graziers, drivers, tavernkeepers or manufacturers,
even though they complained that merchants would use bankruptcy to evade the demands of
farmer and mechanic creditors under the actual operation of the bill. Id. at 19.
216. Id. at 17, 20-21.
217. Id. at 21 & n.26; see T. COOPER, THE BANKRUPTLAW OF AMERICA, COMPAREDWITH
THE BANKRUPTLAWOF ENGLAND (Philadelphia1801).
218. C. WARREN, supra note 212, at 13-14.
219. Id. at 15-16.
220. Id. at 16-18.
ing creditors control over the wicked speculators who borrow with no
intention to repay. Thus, the federal law would fulfill Daniel Defoe's
dream of the ideal scheme of rules that could reflect precisely the natu-
ral moral taxonomy of actors in the credit culture.
The 1800 law lasted only three years. Like every bankruptcy law in
the nineteenth century, it apparently managed to displease every-
one.221 The complaint was again that the rich and wicked used it to
evade debt, while the honest man went down as a result of the wicked
man's extravagance. Even though the law was technically involuntary,
collusion and fictitious demands ensured that merchants could use it
voluntarily.222 Congress faced pressure for a bill in 1820223and began
a full 40-year battle over the same questions. A few new complicating
additions to the moral imagery appeared each time, such as the elimina-
tion of the trader rule224 and the first provision for truly voluntary
bankruptcy.225These changes only further stimulated the imagination
of the moral scenario-makers.226
The Panic of 1836-1837 led to new legislative efforts, with the usual
conflicts.227 The cycles of political and moral debate over the bank-
ruptcy law seemed to parallel cycles of the credit culture generally.
Throughout the nineteenth century, America followed a cycle in which
favorable conditions encouraged too much credit, and sensible busi-
ness people reined in their borrowing, and then denied credit to those
who had failed to rein in their borrowing, and left the latter hanging
and insolvent.228 In 1840, Senator Daniel Webster introduced a bill
offering voluntary bankruptcy to all debtors, but providing compulsory
221. Id. at 19-20.

222. Id. at 20.
223. Id. at 27.
224. Id. at 27-35; 9 ANNALSOF CONG.(1821).
225. Some Southern, nonmerchant interests wanted open voluntary bankruptcy. C.
WARREN, supra note 212, at 28-35. These interests denounced any purely involuntary law as
hypocritical because it favored merchants who could engage in collusive "involuntary" ma-
neuvers. Id. at 34. Yet these nontrader interests also attacked any compulsory bill that would
apply to farmers or mechanics, because at the same time they viewed bankruptcy as punishing,
not rewarding, debtors. Id. at 31. Some Northerners simply replied patronizingly that farm-
ers were too powerful and important to ever suffer discrimination. Id. at 34-36; 9 ANNALSOF
CONG.(1822); 7 ANNALSOF CONG.(1818). And the Northern interests argued in any event
that the great chain of mutual contingency united the supposedly diverse trader and non-
trader interests. C. WARREN, supra note 212, at 34-35.
226. In the debate over the 1822 bill, James Buchanan spoke of the moral problems of
permitting nontraders any discharge. In his view, if farmers remained pure and uncorrupted,
they would be the backbone of the nation's morality, but discharge would lead them to think
light of the solemn obligation of contracts. It would spread a moral taint throughout society.
C. WARREN,supra note 212, at 31. Meanwhile, the Southerners were opposed anyway, be-
cause they did not conceive of the United States as a commercial society and, in any event,
thought the law simply was a privilege for merchants. Id. at 33; 7 ANNALSOF CONG.907-18
(1818).
227. For a complete recapitulation of the earlier debate, see C. WARREN, supra note 212,
at 52-92.
228. E.g., id. at 52-54. For a fascinating history of commercial credit relations in one
industry, see H. WOODMAN, KINGCOTTONANDHIS RETAINERS (1968).
bankruptcy only for traders,229and the ritual debate was reenacted.230

Shortly after the bill was enacted, the ritual complaints recurred.231 In
1842, the Fifty-Third Congress repealed the law.
B. Credit, Morals, and Preferencesin America

I have argued that the history of bankruptcy law reveals a persistent
debate over a few fundamental moral and political issues about com-
mercial culture, but that the debate takes form in different specific leg-
islative issues at different times. In Renaissance England the major
question was the trader rule and the definition of the bankrupt charac-
ter. In the early eighteenth century, the major question was the right of
discharge, with a mild shift of focus later in the century to the prefer-
ence. After the Revolution in the United States, the right of discharge
as an element in bankruptcy was essentially assumed, though of course
opponents of the concept of discharge could attack that concept simply
by acknowledging that it was an essential feature of bankruptcy, and
then for that reason attack any bankruptcy bill. The early legislative
struggles also reveal a revival of the old English trader rule issue, and a
great deal of energy was spent on the very novel issue of providing for
voluntary as well as compulsory bankruptcy. But the debate also
shifted with unprecedented energy to the issue of preferences.
Assuming that one major purpose of any bankruptcy law is to re-
strict preferences, opponents of a bankruptcy bill viewed the preferen-
tial payment as a healthful expression of local trust, family ties, and
personal moral commitment. For the proponents of a modern bank-
ruptcy law, preferences might be evil in at least two polar ways (with, of
course, the whole range of views in between), the differences depend-
ing on the particular image one chose of the preferring debtor. If the
image was one of the small-time local tradesman, then preferences
229. C. WARREN, supra note 212, at 60, 67-68.
230. The voluntary provision was roundly attacked as encouraging profligacy. Yet many
Northern Democrats and Whigs supported the bill only with the voluntary provisions, and
indeed Senator Henry Clay actually moved to strike the compulsory part, arguing that credi-
tors had all the advantage they needed under state laws. Id. at 63. The bill passed with both
parts in 1840, the North and East besting the South and West. Id. at 68-69. A Tennessee
Senator complained of the compromise that "the voluntary bankrupt is to be allowed to es-
cape from his creditors upon condition that creditors may be allowed to oppress a particular
class of debtors. . ." Id. at 69. In the House, some Whigs opposed the compulsory part, while
Northern Democrats thought the voluntary provision simply encouraged profligacy, and that
"voluntary bankruptcy" was a contradiction in terms. Id. at 72-73. Northern supporters told
farmers that they would benefit from a bankruptcy law, since they sold more than they
bought,
and usually to distant points, often to Northern traders who might prefer local creditors. Id.
at 74-75.
231. Creditors complained that debtors were getting off too easily and dividends were
too low, and debtors complained that the exemptions were too narrow. Many
people com-
plained that the language was too technically complex, too hard to construe. The Charleston
Chamber of Commerce complained that the law hastened the demise of debtors who would
survive with extensions. Banks and corporations, which were exempted under the law, could
throw the merchant into bankruptcy, having ruined him with their phony
paper, and then
escape themselves. Id. at 82-85.
were bad because they were at best inefficient, provincial, and perhaps
sentimental anachronisms that blocked the development of an efficient
national machine of credit and commerce. If one's image of the prefer-
ring debtor was that of the devious speculator and absconder (the im-
age derived from early English bankruptcy law), then the preference
was one of the most nefarious, fraudulent leveraging tricks of the cor-
rupt speculator. It was not an expression of homespun (if inefficient)
trust and honor, but a horrible distortion of the whole concept of trust
and honor; not a sentimental impediment to a modern paper economy,
but the worst possible sin, and a sign of the moral instability of a credit
economy.
1. Someearlyviewson mercantilemoralsand the need
law.
for a preference
Examination of a few documents from the nineteenth century helps
capture the complexity of the moral and cultural problems of credit and
bankruptcy and the pretense of their resolution. One of the most re-
vealing is Samuel Sewall's article in the 1829 American Jurist,232an arti-
cle which represents the pretenses of the "scientific" approach to credit
and bankruptcy associated with the proponents of a uniform national
bankruptcy law. Once again, the arguments over bankruptcy in gen-
eral, and about preferences in particular, reflect deeper concerns about
the relationship between a credit society and moral and political virtue.
The argument for a national bill generally viewed bankruptcy law as a
robust, economical, and scientific instrument of commercial efficiency.
Yet the documents also reveal, if not acknowledge, a murky, persistent
moral anxiety about the credit culture they purport to celebrate.
Sewall boldly asserts his progressive stance in these matters. "The
march of truth is ever onward," he states.233 To adopt a bankruptcy
law is essentially to ratify our image as an enlightened modern nation.
Bankruptcy law "is to be found in the legal code of most commercial
and civilized communities: it is a measure dictated by the plainest prin-
ciples of justice, humanity, and economy;-we say economy, for its ob-
ject is to unfetter and promote the industry and enterprise of our
population."234 Sewall thus argues for a wholly rational, uniform fed-
eral law that will make the market more predictable.235 A uniform law
helps collect credit at a distance, to pierce the veil of local custom. It
makes men better friends by making them better strangers. "No one
232. Sewall, On a National BankruptLaw, 1 AM.JURIST35 (1829).

233. Id. at 35.
234. Id. at 49.
235. Sewall states:
Admitting these laws to be all good, founded on correct principles, and correctly
administered, yet the very want of uniformity is itself a serious evil. The law which
regulates commercial contracts, is substantially the same throughout the United
States,-we might almost say, the civilized world. In every part of our country the
law of insurance, bills of exchange, partnership, principal and agent, is nearly the
can transact business with a stranger residing at a distance, with safety

and confidence, unless he has some knowledge of the peculiar laws and
usages by which his rights may be affected."236
The general stance is one of highly rational moral enlightenment.
Bankruptcy law has overcome its punitive, moralistic past-it will leave
the punishment of fraud to the criminal law. The moral goal of a mod-
ern bankruptcy law is an instrumental or regulatory one: Simply re-
ward honest debtors with discharge, and Defoe's goal of a scheme of
rules that will distinguish the honest from the dishonest debtor will take
care of itself. A scheme of clear rules can capture the moral goals of a
credit culture without deep normative inquiries into the character of
actors or their transactions. Thus Sewall defends the concept of a for-
mal right of discharge, as opposed to the older concept of trusting to
the good faith and customs of local credit markets in which creditors
determine which debtors are morally and financially worthy of dis-
charge. The law must be independent of the caprice or good will of
individual actors.237
Sewall concedes that the faulty operation of English bankruptcy
laws might argue against their adoption here. But the American pre-
tense is that we can succeed at scientific rationalism in commercial mat-
ters where England has failed, because of our self-evident superiority in
understanding the principles of commercial law and in conducting our
affairs efficiently.238 He finds irrational those who approve the general
principle of bankruptcy, but fear any particular law because "in some
unknown manner [it operates] for the exclusive benefit of one class of
same. The diversities of the law ... materially affect the nature of the contract. The
obvious advantages of this uniformity are felt and acknowledged by every merchant.
Id. at 36.
He knows his own rights, and the rights of those with whom he is dealing, and he
regulates his proceedings accordingly. If uniformity be in these instances an advan-
tage, would it not be equally so with regard to the law of debtor and creditor?
Id. He offers a detailed criticism of state insolvency laws, lamenting that the stop, replevy,
attachment, and relief laws are not true bankruptcy bills at all. They permit solvent men to
escape with less than full payment, and hence "sap the foundations of commercial credit." Id.
at 39. They do not meet the legitimate needs of creditors to seize land, negotiable instru-
ments, and choses in action. On the other hand, they are inadequate to the demands of a
commercial culture, because they afford debtors no discharge against creditors, but only indi-
vidual bargains. Id. at 37-39.
236. Id. at 36.
A bankruptcy bill would also give equal rights to foreign creditors:
The time has long passed since every stranger was an enemy. The whole civilized
world now forms but one community of nations. And while we profess to carry on
commerce on principles of reciprocity and equality, it becomes us in all our inter-
course with foreign nations, to give their citizens the same rights in our country
which we enjoy in theirs.
Id. at 47.
237. Id. at 39-45. The author approves of the principle of neat, modern fixed rules in
praising the development-or dilution-of English law defining acts of bankruptcy to include
a mere declaration by the debtor of his insolvency, if properly filed and advertised. Id. at 52-
53.
238. Id. at 48.
men at the expense of others," or that it assists absconders and rogues,
or that it benefits only merchants.239 To argue that bankruptcy has a
particular constituency is to misconstrue its essence. Even if bank-
ruptcy law did benefit merchants, it would not therefore hurt anyone
else, and in any event, the author has no investment in the trader rule,
and would be pleased to spread the benefits of bankruptcy to farmers
and others. Credit per se is a great benefit to society. But the real
point is that the Blackstonian image of the vulnerable merchant, whose
contingent economic life entitles him to state protection through bank-
ruptcy, is something like a universal condition. Of course, the
merchant may suffer
loss or destructionof propertyby the perilsof sea or land;a fall in the
valueof property;the failureor fraudof his debtors,or those for whom
he is responsible.... But is not the cultivator of land exposed to simi-
lar chances? His barns,his houses, and his granariesmay be burned;
his flocksand herdsmayperishby disease;his cropsmaybe destroyed
by droughtor inundation,or devouredby insects. In whateverwayhe
maydispose of his produce,he is liable to loss from the unfaithfulness
or misfortunesof those whomhe trustsor employs.240
Sewall thus invokes a crucial idea in the history of the debate over com-
mercial culture-an idea interpreted by all sides in this debate in their
own ways: The notion that once a society has adopted commercial val-
ues, all people can be merchants. Those who favor the enlightened,
progressive rationalization of society embrace the concept. Those who
regret that process as a form of moral infection lament it. And those
who believe that the commercial integrity of the society can survive
only if the mercantile life remains a professional calling, rather than a
universal condition, fervently deny the idea.
Sewall then describes his worst vision: Pressured by the absence of
discharge, the debtor makes a side-deal with one or a few of his credi-
tors in depreciated paper. The quiet settlement between debtor and
creditor is not a laudable act of trust and humanity, but a crooked and
coercive form of preference, violating an assumed moral duty the
debtor bears to the general class of his creditors. Such deals "tend to
break down the distinctions between right and wrong. The weak, the
ignorant, and the interested, the great mass of the community, will not
practise a morality which the laws disregard.'241 Sewall thus cannot
avoid a great moral investment in bankruptcy law. The valuation, set-
off, and exemption provisions under local law permit corrupt debtors
to escape, having spent all their personalty. And the worst of it is the
true preference, which is actually encouraged in statutory form by the
first-in-time rules. "To give one creditor the benefit of his debtor's ef-
fects to the exclusion of the rest, seems only suited to a barbarous age,
239. Id. at 49-50.

240. Id. at 51.
241. Id. at 39.
in which the seizure of property gives the right of possession."242 The

debtor may fear coercion into a preference, and so dilute his assets to
avoid that. Or he hides his property, hoping to stall and work out some
furtive compromise, perhaps blackmailing his creditors into a private
discharge. If the compromise is not struck, the debtor wastes his assets.
Either the creditors give up for a few cents on the dollar or the debtor
"retires to some distant region, as bankrupt in character as in fortune,
his spirit embittered by ill success, and skilled in every art of defeating
and delaying creditors."243 The preference becomes the key symbol of
the general moral degradation that only a bankruptcy law can cure.
The mere thought of it invokes in Sewall, the rational, scientific plan-
ner, fearful images of the murky, morally and perceptually elusive side
of the world of credit, images which scientific rationalism tries to
suppress:
This evil of [preferential] assignments is really the natural fruit of our
present laws [which have] given birth to assignments in a thousand dif-
ferent shapes. Instead of one uniform, unbending rule for dividing the
estate of an insolvent among his creditors, it is left to be disposed of by
accident or caprice. One man prefers his father, brothers, and uncles,
because they are his relations; another prefers his endorsers and cus-
tom-house sureties, because that is the general practice....244
The scientific view of preferences thus takes a moralistic tone, re-
jecting the argument that what seems to be an illegal preference may
indeed be an admirable gesture of personal trust and confidence that
should be sustained against the pressures of impersonal, rationalized
commerce. But Sewall, as if uncomfortable in this punitive, moralistic
discourse, shifts to a much more rationalistic approach. He next argues
that the problem lies not in the moral characters of debtors so much as
in the legal and economic system that tolerates preferences:
[F]or while the system prevails, it seems the duty of the debtor to give
such preferences as are generally expected. If he neglects to do so, it is
as great a fraud as it would be to conceal any of his property for his
own use. Those creditors whose demands are considered confidential,
who have lent money to a merchant, or endorsed his notes, under a
confidence or understanding that he will make them secure in case of
failure, have a claim on him which he cannot in conscience
disregard.245
Sewall recognizes the nonscientific argument that the preference often
arises from a transaction in which a debtor feels he must fulfill a confi-
dential bond of honor with a favored creditor. Yet he finds the system
of preferences leaves the law of commerce "uncertain and
fluctuating"
because "[n]o two men can agree exactly as to what debts ought to be
242. Id. at 40.

243. Id. at 41.
244. Id. at 45.
245. Id.
considered confidential."246 Whenever a debtor gives a preference,
nonpreferred creditors will complain that the transfer was unjust or
even collusive and fraudulent. But though no legislative enactments
can prevent all preferences by men on the verge of insolvency, a ra-
tional bankruptcylaw can disregard all confidential debts and honorary
engagements, avoid all transactions made with a view to bankruptcy,
and place all creditors on an equal footing.247
Hence the more scientific argument against preferences takes the
familiar form of an abstract choice between rules and standards. It rec-
ognizes that a preference may be an expression of moral honor, but
laments that matters of moral honor are not wholly susceptible to mod-
ern rational predictable regulation. We cannot trust private assign-
ments among debtor and creditors to ensure ratable distribution any
more than we can trust private bargains to ensure discharge in the right
cases.248 Sewall concedes that in the shady, blurry universe of credit,
one cannot confidently distinguish honorable trust from dishonorable
fraud-the blurring is perfectly captured in the ambiguous notion of
"confidence"-and lawmakers must accept an irreducible moral inde-
terminacy that inhibits their scientific rulemaking.
An obscure lecture by a Philadelphia Congressman and lawyer (and
later federal judge) named Joseph Hopkinson demonstrates the deep
moral confusion in early nineteenth century America over credit, pref-
erences, and the merchant character. Hopkinson asserts that the
merchant class plays a central moral role in society: "There is no class
of our citizens on whose conduct the reputation of our country, for pro-
bity and honour, so immediately depends, as our merchants."249 The
moral stature of our politicians, lawyers, and doctors, are purely do-
mestic concerns, argues Hopkinson, but the commercial character of
our merchants essentially determines whether the world views Ameri-
cans as a moral people. The moral pressure on merchants is intense.
The merchant holds "the character of his country ... in a sacred trust."
246. Id. at 45-46.

247. Id.
248. As for the particular rule the author chooses: He notes with approval the 1826
between
congressional proposal to protect bona fide transferees from the debtor in the time
the debtor's act of bankruptcy and the filing of the petition. He thus rejects what he perceives
as the English "strict rule of avoiding all transactions of the bankrupt subsequent to the act of
mon-
bankruptcy, which is frequently secret, finding that rule often productive of the most
strous injustice." Id. at 54. Indeed, he admires the neat French rule, which presumes as
fraudulent all debtor transfers 10 days before insolvency, finding the French rule to be
"founded on the correct principle of regarding with jealousy the transactions immediately
Id.
preceding an avowal of insolvency, and yet respecting the fair dealings of other persons."
So he proposes a very modern, formal rule that would protect any transfers to a bona fide
transferee within two months before the petition, regardless of any earlier act of bankruptcy.
Id. at 53-55.
249. Hopkinson, Lecture Upon the Principles of Commercial Integrity and the Duties
Defects
Subsisting Between a Debtor and His Creditors with Suggestions of the Causes of the
in These Respects in the American Commercial Character 3 (Mercantile Library Company,
Philadelphia, Pa., Mar. 2, 1832).
According to Hopkinson, our merchants must regard themselves "as

the men by whom the great operations of the world are sustained, by
whom the intercourse of the human family, however scattered and re-
mote, is kept up.... Such high functions cannot be performed by ordi-
nary men; and those who do perform them faithfully are the noblest
benefactors of mankind."250 Hopkinson thus reflects an ironic inver-
sion or sublimation of the traditional moral doubts about the merchant
character in an emerging capitalist culture. Yet that character has be-
come widely suspect abroad. American merchants should be chastened
by our "looseness of principle and practice in contracting and paying
debts.... [Our] disposition to contract debts becomes eager and reck-
less; the obligation to pay them is but faintly felt, and the failure to do
so hardly produces a sensation of shame in the defaulter ... ."251
Moreover, Hopkinson recognizes that bankruptcy often derives from
"inevitable misfortune, and is met with fidelity and honour. The life of
a merchant is, necessarily, a life of peril . . . [of] vicissitudes [that] de-
pend on causes which no man can control ... that no calculation could
anticipate."252 But as if to resist too easy an assumption that mercan-
tile disaster is an external, natural contingency, he complains that we
too readily and generously treat "criminal extravagance" and "desper-
ate speculations" as if they were mere misfortune.253 In short, our laws
and customs have failed at sharp moral line-drawing. And Hopkinson
cites the preference as perhaps the key element in our legal and moral
failings.
In describing the preference, Hopkinson's ruling image is, once
again, the debtor as the rogue who makes a cynical compact with "his
friends or favourites, at his will and pleasure."254 He denounces the
preference with moral intensity even greater than anything we have
seen in English law: "Debtor and creditor retire from this dishonest
mockery, mutually dissatisfied; the one to resume his business, his sta-
tion in society, his pride and importance, his manner of living, without
any visible degradation or retrenchment, and the other to repeat the
same system of credit, with the same disastrous credulity."255
Hopkinson's diagnosis involves a remarkable twist on the now-fa-
miliar idea that, in American society, all men can conceive of them-
selves as merchants. Hopkinson at once acknowledges this levelling
effect in American democracy, and yet denounces it as a perversion of
the special moral vocation that should define the character of the
merchant. Every man thinks himself qualified to be a merchant, as if by
intuition:
250. Id. at 8.
251. Id. at 5.
252. Id. at 6-7.
253. Id. at 5.
254. Id.
255. Id. at 5-6.
A successfulmechanicwho, by his industryand skill,has accumulateda
few thousanddollars, scorns the honest means by which he has ac-
quiredhis wealth,and must be a merchant;as if the mysteriesof com-
merce could be unfolded on a shop-board .... Why should it not be
necessary for one who aims at the honours and profits of trade ... to
undergoa processof preparation,to obtaina knowledgeof his art?256
In America, unlike other countries, entering trade is an act of pure voli-
tion: "A man but says, I will bea merchant-and he is a merchant."257 The
moral supervisors of the commercial profession can hardly sustain their
efforts at sublimating the moral complexities of the merchant character;
as the life of trade becomes available for democratic distribution, the
profession suffers a kind of entropy from honor to fraud. And Hopkin-
son sees ruin as the inevitable destiny of this ersatz character, the self-
created merchant. Either he will quickly fall to commercial casualty, or
he may get lucky, swell with pride and conceit, borrow widely, but then
fall "into irretrievable ruin."258
Hopkinson then offers a more specific evil scenario for the prefer-
ence: The worst form of preference is the cross-exchange between
drawers and indorsers, "these mutual assurance gentlemen." In the
moral literature on bankruptcy and credit, the device of the accommo-
dation party or suretyship seems to be a specially invested symbol. To
those morally and epistemologically suspicious of credit, creating credit
out of a mere signature purporting to represent a person's raw, inher-
ent honor, is the worst of the elusive phantoms of the credit world. He
warns of "the facility of obtaining credit on the faith of merenames,and
the contrivances and deceptions which are resorted to, to keep up the
false and hollow credit ... ." The sinking trader props himself up with
indorsements, "draw[ing] his confiding friends into his difficulties."259
In Hopkinson's commercial paranoia, drawers and indorsers are linked
in a murky conspiracy of ruin, and exemplify the alienation of the credit
world from any substantial reality that could support social virtue:
"CREDIT! CREDIT! is the fatal bane of commercial prosperity-of
commercial honour and honesty. The transactions of business are little
better than fictions. Goods are sold which have never been paid for-
and a note is taken for them which will never be paid."260 But perfectly
capturing the moral theme of preference law implicit in Lord Mans-
256. Id. at 9-10.

257. Id. at 10-11.
258. Id. at 12.
259. Id.
260. Id. at 13. Hopkinson then narrates the predictable life cycle of this corrupt debtor.
The sinking trader briefly enjoys the "proud splendour, the heedless extravagance, the un-
bounded luxury, in which these ephemeral princes indulge themselves." But then the trader
sinks in increments. He has warnings but he "shuts his eyes upon it; he strives to deceive
himself, and continues to deceive others." Id. at 14-16. Like Defoe a century before, Hopkin-
son exhorts the honest trader to break early. Once broken, even if late, the honest trader
should surrender all his property for ratable distribution.
field's opinions, Hopkinson notes that the dishonest, preferring debtor

is a law unto himself.
The debtor constitutes himself the sole judge between him and his
creditors; he sits down to make, at his pleasure, what he calls an assign-
ment; he deals out his estate in such portions and to such persons as he
may deem most expedient or find most agreeable; . . . he selects the
persons, of course his kindest friends, who shall execute these trusts;
and when every thing is thus prepared, he summons his creditors to
meet him: not for consultation; . . . not to ask them what heshall do, but
to tell them whathe has done,to pronounce his judgment upon them.261
In this arrangement, the preferred creditor, usually an accommodation
indorser, plays a key role. The indorser, if anything, should have low
priority-he took a risk knowingly, and asked no security himself.
And yet this indorser is to be preferred to the man who has delivered
his goods, his labour, his money, on the faith, probably, of the false
credit, of the unsubstantial display of wealth, made by the aid of the
indorser, whose name and promise have thus been the instruments of
deception, the lures to entice the unsuspecting into a vortex of ruin
.... And the case is aggravated ... when this indorser, after putting his
preference into his pocket, never pays the engagement for which it was
given, but settles with his creditors in the same way.262
Hopkinson infers that we must have a national bankruptcy law to
counteract the existing law's bias in favor of willful debtors. We need a
bankruptcy law that can draw moral distinctions among debts where the
state laws have failed, to separate one "in the fair and regular pursuit of
his business" from one "in the indulgence of flagrant immoralities and
vices." He describes the scheme of bankruptcy discovery as a "purify-
ing process."263
2. The advent of a formalist Americanpreferencelaw.

The early history of American preference law reflects the general
effort of American bankruptcy and commercial law to achieve formality,
abstraction, and scientific precision. But that movement nevertheless is
marked by a continuing struggle with the underlying moral questions
about preferences, depicted in the Hopkinson and Sewall documents.
As we have seen, the ideological battle over preferences involves
contrasting images or scenarios of the preferential act. To the oppo-
nents of any national bankruptcy law that would restrict preferences,
insolvency laws properly accommodated debtor payments to favored
creditors as a socially healthful attribute of local custom. The favored
creditor was in fact the local creditor who generously carried the sea-
sonally insolvent debtor. Though the relationship might be between
farmer and factor, customer and storekeeper, small tradesman and
261. Id. at 17-18.

262. Id. at 18-19.
263. Id. at 20-21.
bank, the image of the informal honorable preference was also applied
to the international sea trade, where the agents of custom were such
intermediaries as factors, correspondents, and supercargoes.264 These
relationships assumed that debt collection was inevitably slow, and that
seasonal irregularity in the cash flow of debtors required their creditors
to be tolerant and to rely on a mutual sense of honor to efficiently re-
construct debts.
The counter-scenario, of course, proffered by the supporters of a
national bankruptcy bill, showed the preferring debtor as a conniving,
colluding criminal, making cynical side deals, and often on cross-in-
dorsement surety contracts with other equally conniving debtors. And
just as the image of the preferring debtor differed drastically, so did the
image of the social significance of the preference. Where the older,
"local" view saw the preference as a flexible instrument of social bond-
ing, the view of those who sought national regulation of preferences
saw the preference as a pernicious disease in the economy.
Statelaw. During the long battle over federal bankruptcylegislation,
the states had the power to regulate preferences under their insolvency
laws. The fairly sparse state case law on preferences illuminates the
issues that prompted the federal debate. Though some states enforced
statutory restrictions on preferential payments, the state cases reveal a
flexible tolerance of favorable arrangements between debtors and par-
ticular creditors. Underlying this tolerance is an odd mixture of moral
confusion and sophisticated moral agnosticism about the feasibility or
wisdom of highly formal legislative regulation of preferences.
Delaware is perhaps the best example. Before and after the Revolu-
tionary War, Delaware experimented with versions of a highly complex
relief law.265 It also had an express statutory restriction on preferences
and, as a starklyconcise opinion from 1797 suggests, was quite capable
of enforcing it to deny a debtor discharge.266 But throughout the nine-
264. P. COLEMAN, supra note 213, at 288-91. If the loser in this scenario was the North-
ern or Eastern creditor, that was a tolerable cost. In any event, Coleman suggests that distant
urban creditors normally had excellent intelligence about the affairs of their small-town debt-
ors. Id. at 288.
265. Id. at 208-14. Unmarried debtors under 40 who owed less than 20 pounds could
if
get out of jail by assignment and indenture. Married and older debtors could do so only
they owed less than 2 or between 20 and 40 pounds. Id. at 208.
266. The opinion reads:
Dawson prayed by his petition to be discharged under the insolvent law, but,
upon being interrogated, it appeared that he had, to the great injury of his creditors,
made a voluntary sacrifice of [375 pounds] (by releasing so much), which was the
one-half of the purchase money of a brig he had sold. He acknowledged that he had
some
given up half of the purchase money that he might get the rest in cash to satisfy
favorite creditors.
The Court remanded him to prison on account of the fraud appearing in this
transaction against his creditors, but made an order that those creditors who wished
to keep him in confinement should maintain his family ....
land-
Jonas Dawson's Case, 1 Del. Cas. 502 (1797). Yet Delaware law created preferences for
lords and lienholders, and "in regulating servitude for debt it ranked creditors according to
preferences." P. COLEMAN, supra note 213, at 212.
teenth century, the courts and legislatures of Delaware, and in other

states, floundered over the subtler question of whether a preference,
beyond denying the debtor discharge, could be avoided,267 and also
over complex mens rea issues, such as voluntariness, diligence, and
pressure, that Lord Mansfield had invoked to decide when a payment
was indeed an illegal preference. The Delaware courts invoked the
Mansfieldian principle that we can define a category of transfers to fa-
vored creditors which are in some sense "voluntary," and coherently
distinguish them from transfers that legitimately result from creditor
diligence.268
The state courts thus evolved a preference doctrine that was superfi-
cially consistent with an abstract principle of intercreditor equity, but
which in operation would void very few payments to favored creditors.
Moreover, the doctrine reflected a serious doubt about the moral ne-
cessity of regulating preferences. This doubt arose especially in that
historically controversial form of debtor-creditor relationship, the
surety transaction, where, depending on the moral predisposition of
the observer, the relationship was one of either cynical collusion or inti-
mate personal trust and faith. Indeed, late in the nineteenth century,
while Congress and the federal courts were struggling to devise and
sustain a highly formal rule for restricting preferences, one still finds in
the state case law a fascinating undercurrent of moral agnosticism
about preference rulemaking.
In Stockleyv. Horsey,269for example, the court had to scrutinize an
extremely complex variant of the suretyship transaction, which the gen-
267. Cf Manro v. Gittings, 1 H. &J. 302, 492 (Md. 1804).

268. Thus, in Tunnell v.Jefferson, 5 Del. (5 Harr.) 206 (1849), the debtor had issued a
bond to his sureties, who were accommodating him on debts to minor wards. The court read
the state law bar on preferences very narrowly as applying only to an assignment of all the
debtor's property, rather than, as in this case, the giving of security for a single debt. The
court's conditions for upholding the payment are a very subtle variation on the Mansfieldian
formula. The debtor did not act voluntarily; rather he gave the bond "with much reluctance,"
at the creditor's "instance and urgent solicitation." Id. at 212. Thus the creditor is rewarded
for being diligent and aggressive. In fact, the court admonished the complaining general
creditor:
The complainant in this case was guilty of great neglect. He might by ordinary dili-
gence have secured his debt, which he held without even entering judgment, for a
period of more than eighteen months, during which time, or before the respondents
entered their judgment, no other creditor so much doubted George Tunnell's sol-
vency, as to enter any judgment against him. If during this time he was thriftless and
improvident... the diligent creditor who first took warning, is entitled to the benefit
of his diligence ....
Id. at 220; cf. Waters v. Comly, 3 Del. (3 Harr.) 117 (1840) (debtor committed illegal prefer-
ence when he arranged trust to pay off a group of creditors without communicating with
them, and without diligence on their part). But the Tunnellcourt introduced the issue of the
creditor's-rather than the debtor's-mental state, an issue essentially irrelevant to English
law, but one that became dominant in nineteenth century American law. Obviously, the fa-
vored creditor acted aggressively because he recognized that the debtors's "affairs were be-
coming embarrassed." But his concern for his money fell short of any actual recognition that
the debtor was insolvent. Tunnell, 5 Del. (5 Harr.) at 216-17.
269. 9 Del. (4 Houst.) 603 (1874).
eral creditors tried to recharacterize as a virtual fraud. Under the state
insolvency scheme, in the "pre-assignment" period, the court would
not invalidate payments unless it found something like blatant fraud.270
In an essay on the moral indeterminacy of many commercial transac-
tions, the court noted that the mens rea of commercial transactions
"lies exclusively within [the party's] own breast, and all that can be
known of it independently of, or contrary to his answer, is by inference
only from his acts or conduct."271 State preference law thus sustained
a keen sense of the subtle disguises that fraud can wear, and of the
limited ability of legal authorities to draw relevant moral distinctions in
the elusive world of credit.272
Congressandpreferences.The 1800 BankruptcyAct, a rather close imi-
tation of the English law, did not mention preferences,273 but the
courts did infer, from the mere passage of a national bankruptcy bill, a
vigorous principle of ratable distribution. They articulated an aggres-
sive preference doctrine, firmly condemning eve-of-bankruptcy trans-
fers that constituted bona fide payments of bona fide debts.274 The
courts thus ignored the rhetoric of the English cases that required some
suspicion of fraudulent collusion, and embarked on a more categorical,
objective preference theory. But the 1800 law lasted only three years,
and the spirit of ratable distribution was in limbo for decades while
Congress fought over a new bankruptcy bill. As Congress moved to-
270. The favored creditor in Stockleyhad helped the insolvent by paying half his debts to
creditors, in full satisfaction, without taking an assignment of them, and in return took ajudg-
ment bond from the debtor for the full amount of the debts. The creditor then executed on
the bond, and the other creditors thereafter sought to recover their deficiencies. The techni-
cal issue in this bizarre transaction was whether the favored creditor had induced the other
creditors to grant the debtor a full discharge, or had merely purchased the debts from them.
The court held the former, and made clear that there was no illegal preference so long as the
favored creditor did not intend to defraud or coerce creditors into compromise. The court
treated an assignment for the benefit of creditors as the equivalent of a formal bankruptcy
petition under the state insolvency law, and held that normally, before the debtor makes that
assignment, he may prefer any honest creditor and thereby reward the creditor's diligence.
Ironically, the court treated the insolvency law as a highly penal statute and invoked the prin-
ciple that penal statutes must be construed in favor of the potential offender. It then noted
that a preference restriction triggered by the debtor's insolvency, rather than by the technical
moment of assignment, would be unfair because neither debtor nor creditor can accurately
measure the moment of insolvency. Id. at 608-09.
271. Id. at 615.
272. "Fraud almost invariably veils itself under exactness in legal forms. Then the sub-
sequent conduct and declarations of these parties lack the circumspection which a fraudulent
purpose can hardly fail to inspire." Id. at 616. "The circumstances must be in a good degree
demonstrative and not suspicious only." Id. at 620.
273. Act of Apr. 4, 1800, ch. 19, 2 Stat. 19 (repealed 1803).
274. The major case, Locke v. Winning, 3 Mass. 325 (1807), might seem relatively easy,
since both debtor and creditor apparently knew that the debtor was about to commit an act of
bankruptcy. But unlike an English court, the American court used the imagery of fraud only
to denounce a general sort of disloyalty to the rather abstract redistributional "spirit of [the
bankruptcy] laws," id. at 326, rather than any concrete collusive fraud. And though the credi-
tor importuned the debtor to secure him, the American court utterly ignored the issue that
would have been central in an English case-whether the debtor acted under "pressure" from
a "diligent" creditor. See also McMechen v. Grundy, 3 H. &J. 148, 185 (Md. 1810).
ward the 1841 Act, Daniel Webster revived the campaign for a categori-
cal national regulation of preferences, invoking many of the arguments
laid out in the Sewall and Hopkinson documents that preferences were
weakening the economy and moral fiber of the nation.
Senator Webster repeated the now familiar argument that the eco-
nomic fragility of the nation rests on false credit, and that false credit
rests on an insidious scheme of indorsement and preference. He la-
mented that immoral debtors break too late and conceal their assets,
repeating the ritualized Defoe exhortation from more than a century
before. He exhorted them to break early:
Men get trust upon the strength of other men's names .... [through]
pure accommodation . . . of the discount of paper representing no
transaction of sale or purchase .... Endorsement and suretyship,
therefore, are the means by which excessive and false credit is
upholden. And how is this endorsement obtained? ... It is by promis-
ing to secure endorsers at all events. It is by giving an assurance that, if
the party stops, a preference shall be made, and the favored creditors
shall be his endorsers .... This has become a sort of honorary law. A
man that disregards it is in some measure disgraced. We hear daily of
honorary debts, and we hear reproaches against those who, being in-
solvent, have yet pushed on, in the hope of retrieving their affairs, un-
til, when failure does come ... they have not enough left to discharge
these honorary obligations. Now, at the bottom of all this is prefer-
ence. The preference of one creditor to another, both debts being
honest, is allowed by the general rules of law; but is not allowed by
bankrupt laws. And this right of preference is the foundation on which
the structure rests.
On the legal right or power of preference lies the promise of
preference.
On the promise of preference lies endorsement.
On endorsement lies excessive and false credit.
On excessive and false credit lies over-trading.
[If anything] endorsers should be paid last [not first].275
Webster's argument was the key legislative signal for a broader, more
categorical restriction on preferences and another central document in
American bankruptcy culture. It revealed the gnawing anxiety about
the insidious social effects of the abstracted world of commercial credit,
yet expressed confidence that a formal, categorical legislative rule
could solve the problem.
The 1841 statute was boldly original in its breadth. It created the
concept of voluntary bankruptcy and, as if following the commercial
ideologues' vision of the merchant as the Everyman of American de-
mocracy, it extended the new privilege to nontraders as well as trad-
275. CONG.GLOBE,26th Cong., 1st Sess. 814 (1840). Indeed, Webster focuses
specifi-
cally on bank endorsement and accommodation as the source of the profligate paper which
threatens the health of the republic, urging that we "keep the issues of
paper nearer to the
real wants of society." Id. at 816.
ers.276 The 1841 Act was also the first bankruptcy statute in English or
American history to expressly forbid preferences, and the first great
legislative expression of a broad, formal policy of ratable distribution
according to objective rules. It introduced to Anglo-American bank-
ruptcy law the notion of a determinate time period for measuring the
legality of a payment.277 The statute did include pregnant language
about the debtor's mens rea, somewhat clumsily absorbed from the
English case law and the American insolvency statutes: A preference
was illegal where the debtor created one "for the purpose of giving ...
preference or priority" to a creditor, "in contemplation of bank-
ruptcy."278 But during the brief life of the the 1841 Act, the courts
aggressively renewed their campaign to remove from American prefer-
ence law the vestiges of the subtle parsing of mental states that had
characterized English law and American state law.
Judicialdevelopmentof aformalistpreferencelaw. The key designer of the
new formal, objective American preference doctrine was Justice Story,
who, in a rather ironic way, worked within and inverted the mens rea
approach to preference law.279 Even if the trustee or general creditors
had to prove that the debtor intended to give a preference, the courts
could finesse the issue by using a doctrinal trope developed in the crim-
inal law, and in the law of homicide in particular: the rebuttable, or
even conclusive, presumption that a person intends the natural and
probable consequences of his acts.280 If a debtor pays a particular
creditor shortly before bankruptcy, the natural and probable conse-
quence is a preference that depletes the entitlement of the general
creditors. Justice Story finessed the obscurity, and potential circularity,
of the notion of "contemplating bankruptcy" by essentially translating
it into the more determinate notion of "contemplating insolvency."
Cleverly adapting and manipulating criminal law doctrine, Justice Story
held that if a debtor knew he was insolvent or on the verge or insol-
vency, the court could infer that the debtor intended this natural and
probable consequence of his conduct.281
276. Act of Aug. 9, 1841, ch. 9, 5 Stat. 440 (repealed 1843).

277. Id. ? 2, at 442. The fixed time period entered the law indirectly, in the clause ex-
the
cepting from the preference prohibition any bona fide "dealings or transactions" between
debtor and any person lacking notice of the debtor's act of bankruptcy or intention to go
bankrupt occurring more than two months before the filing of the petition. Section 2 also
adapted English doctrine by denying discharge to a preferring debtor who is a voluntary
bankrupt, unless a majority of the nonpreferred creditors assent.
278. Id.
279. See Arnold v. Maynard, 1 F. Cas. 1181 (C.C.D. Mass. 1842) (No. 561); Everett v.
Stone, 8 F. Cas. 898 (C.C.D. Me. 1844) (No. 4577).
280. See Commonwealth v. Chance, 174 Mass. 245, 54 N.E. 551 (1899) (Holmes, CJ.).
281. The most important opinion is Arnold v. Maynard, 1 F. Cas. 1181 (C.C.D. Mass.
1842) (No. 561), wherein Justice Story broadly construed the 1841 statute's act-of-bankruptcy
clause to include a preference as well as a fraudulent conveyance. Ar.old presents one of the
classic situations in Anglo-American preference law: 'he debtor acknowledged that he
seemed to be broke when he paid the favored creditor, but argued that he had every hope of a
financial revival, and so had no actual intent or expectation to enter bankruptcy. Justice Story
Thus the vague normative standard of Mansfield was twisted to be-

come a virtual rule forbidding the payment. Justice Story acknowl-
edged the problem discerned in the common law of preferences-that
the subtle mental states of debtor and creditor might lie beyond all dis-
cerning or interpretation. But he used that very premise to invert the
common law, since sustaining the common law approach
wouldput it in the powerof the debtorto availhimselfof all the bene-
fits of the act, and yet wouldenablehim at the sametime,upon his own
secret and unknownintention-inscrutableto others,and admittingof
no possible certainty-to do the very acts, which the statute was
designed to prevent.282
Henceforth, the bankruptcy courts were to examine the objective situa-
tion of the debtor, not the elusive facts of his motive or the subtleties of
Mansfield's "pressure" doctrine. The new American preference law
thus purported to remove some of the moralistic intensity of English
law: Relying on what is almost an automatic rule to establish the
debtor's "fault," it diluted the very concept of culpability in the
preference.
firmly rejects this argument from subjective intention, declaring that the debtor's "mere pri-
vate intention cannot overcome the legal intention ... of the act." Id. at 1183. So long as the
debtor knew he was insolvent when he paid a creditor, the law will simply infer the ultimate
legal fact that the debtor intended to go bankrupt and prefer the creditor.
Justice Story manipulates criminal law doctrine to make his point. He attributes to the
debtor a sort of mistake-of-law mens rea defense, imagining the debtor to say disingenuously
that he never dreamed bankruptcy, and the legal advantages of bankruptcy, would follow from
his temporary insolvency. Justice Story then simply invokes the doctrine that ignorance of the
criminal law cannot excuse. He also warns that if a debtor could escape the preference prohi-
bition by proving his mental innocence at the moment he paid the creditor, the debtor could
nevertheless shortly thereafter form the intention to go bankrupt, and manipulate the bank-
ruptcy law anyway. Justice Story thus fends off the debtor's attempted invocation of the crimi-
nal law analogy that a culpable act must reflect a concurrence of act and mens rea. Id. To
"contemplate bankruptcy" really means to advert to one's insolvency. Justice Story even does
an etymology on "bankrupt"-it means the raw fact of having one's bench broken, not neces-
sarily any conscious intent to manipulate the law.
Justice Story also tried to use his strict liability theory to resolve the confusion between
the English "pressure" theory of the preference and the American doctrine of the
equitable
lien. Our colonial law had awarded specific performance of promises to creditors who had
received unexecuted promises of security transfers, even after the debtor went bankrupt. See
Glenn, supra note 4, at 533-34. This concept of the equitable lien logically overlapped with
the English doctrine that permitted a preferential transfer to a creditor where the debtor did
not act "voluntarily," and some courts construed the 1841 bankruptcy act to
uphold this very
large exception to the preference prohibition. E.g., Smoot v. Morehouse, 8 Ala. 370 (1845).
Justice Story, however, insisted that his objective view of the mental state of the preferring
debtor would invalidate these specific performance decrees as well. Arnold, 1 F. Cas. at 1184-
85. For a fuller discussion of the equitable lien in preference law, see notes 413-450
infra and
accompanying text.
282. Arnold, 1 F. Cas. at 1183. Justice Story also notes that the English mens rea doc-
trine of preferences became inapposite to American law once we adopted a broad, democratic
notion of voluntary bankruptcy for nonmerchants. Id. Once it abolished the trader rule,
American bankruptcy law had to regulate a much wider universe of debtors and transactions,
and, in a sense, had already automatically incorporated the principle of willful, volitional
debtor conduct in the very definition of voluntary bankruptcy. One reason
why American law
diverged was simply that the bankruptcy clause covered all debtors, and hence had to capture
a larger universe than English traders.
The advent of a formal, mechanistic preference doctrine in Ameri-

can bankruptcy law may derive, of course, from more general legal and
political forces in early nineteenth century American law. A mechani-
cally applicable preference rule might serve the professed needs of
"market certainty" like other commercial law rules, as for example the
ones concerning the negotiability of instruments, which we associate
with emerging market capitalism in the nineteenth century. The efforts
of Justice Story and others to replace the obscurities and subtleties of
Mansfield's preference doctrine with a new, lean, clarifying rule also
may reflect the influence of the general movement toward legal codifi-
cation.283 The "codification movement" had complex and even para-
doxical sources. Even if we can call it a coherent movement, it
borrowed strength from several diverse sources which, for different
reasons, converged in attacking the elitist encrustations of the English
common law: Jacksonian radicalism, concerned with replacing arcane
feudal doctrines with clear rules for the common citizen and with re-
moving legal power from elitist judicial discretion;284capitalist legal in-
strumentalism, concerned generally with supposedly uncontested goals
such as market certainty and legal adaptability; and more generally,
Benthamite, utilitarian concerns with law reform.285 Indeed, Justice
Story's important role as a mediating figure between political radical-
ism and legal elitism in the history of codification286suggests a strong
connection between the forces of codification and specific develop-
ments in bankruptcy law.
After the repeal of the 1841 Act, there was no great pressure for
new legislation because of prosperity, and because of the passage of
state stay and insolvency laws-until the Panic of 1857 prompted calls
for yet another law.287 The debate again became a confusion of fault-
finding and contradictory interest-claiming.288 Eastern interests spon-
sored a bill in 1864 to relieve the disease of speculation, and Western
interests immediately denounced the bill as a symptom and a cause, not
a cure.289 The 1866 edition of the debate, spurred by a serious depre-
283. See generallyGordon, Book Review, 36 VAND. L. REV. 431 (1983).

284. C. COOK,THE AMERICAN CODIFICATION MOVEMENT: A STUDYOFANTEBELLUM LEGAL
REFORM 158-68 (1981).
285. Gordon, supra note 283, at 445-52.
286. Id. at 434, 446.
287. C. WARREN, supra note 212, at 87-88. James Buchanan, in 1827 and 1841, had op-
would
posed any national bankruptcy legislation because he apparently thought such a law
punish or constrain debtors. In 1857, however, as President he recommended a law, applica-
ble to banks, whose experimenting with paper he blamed for the panic. Id. at 95-96. Conk-
ling sought a broader bill, arguing that suretyship and preferences were creating a phony
credit system that was wrecking the country. Id. at 101. On Conkling's complaints about
see E. JAMES, SUGGESTIONS FOR AN ACT TO ESTABLISH A UNIFORM SYSTEM OF
preferences,
BANKRUPTCY (1864).
288. C. WARREN,supra note 212, at 101-02.
289. Warren nicely summarizes the four ritualized congressional factions: "those who
opposed any bankruptcy law at all, those who opposed any bill providing for involuntary
bankruptcy, those who favored a bill largely for the benefit of creditors, those who advocated
ciation in currency, revived the various permutations of conflict, and

resulted in an unstable compromise bill largely promoted by Northern
creditors of Southern debtors.290
The 1867 Act291was the next erratic step in establishing formal cat-
egorical rules for bankruptcy process in general. It fulfilled the man-
date of the commercial ideologues of the late eighteenth century,
removing the last vestige of the trader rule by encompassing "any per-
son" within the sweep of involuntary as well as voluntary bank-
ruptcy.292 And it took another step toward the formal rationalization of
preference doctrine, expressly establishing the preference as an act of
bankruptcy and fixing the time period for the danger zone of prefer-
ences in its technical modern form.293 In defining the debtor's mental
state in a preference, it offered yet another verbal formula, declaring a
preference where "any person, being insolvent, or in contemplation of
insolvency, within four months before the filing of the petition [makes
payment to a creditor] with a view to give a preference ...."294
Borrowing from state law to replace "in contemplation of bank-
ruptcy" with the fact or contemplation of insolvency,295 the 1867 stat-
ute avoided the conceptual muddle that Story had to solve earlier, and
thus represented a further step toward objectifying the mental state of
the preferring debtor. And despite potential for mens rea scholasticism
in the new phrase "with a view to give a preference," the courts took
the occasion of a new short-lived bankruptcyact to reinforce the notion
that the intent to prefer was a legal vestige, to be almost automatically
a complete and permanent bill for both debtor and creditor." Id. at 103. The new law al-
lowed state exemptions, and, for one year, offered discharge conditional on assent of a major-
ity of creditors. The supporters of voluntary bankruptcy opposed it because the involuntary
section applied to nontraders and thus might force the farmers and mechanics of America into
bankruptcy. Soon after the law passed, people pressed for further debtor relief. The credi-
tor's vote on discharge was postponed another year. The law generally proved a failure-a
huge number of voluntary bankruptcies seemed to result in corruption and low dividends. Id.
at 112. See Dunscomb, Bankruptcy:A Study in ComparativeLegislation,in 2 COLUMBIA COLLEGE
STUDIESIN HISTORYANDECONOMICS 146 (1892-1893). There was much fighting over the
creditor assent provision, which many saw as a device to be used by crooked businesses and
an opportunity for collusion. The interests who fought to suppress voluntary bankruptcy
were criticized for just inviting debtors to increase their preferences. C. WARREN, supra note
212, at 121.
290. Id.
291. Act of Mar. 2, 1867, ch. 176, 14 Stat. 517 (repealed 1878).
292. Id. ? 39, at 536.
293. Id. ? 39, at 536, ? 35, at 534. The statute established a zone of four months before
the date of the petition, the measurement used by American bankruptcy law until 1978. The
1867 Act disqualified a preferring debtor from discharge, id. ? 29, at 531, but unlike the 1841
Act, extended the disqualification to involuntary bankrupts.
294. Id. ? 35, at 534. The preference rule also required proof that the preferred credi-
tor had reasonable cause to believe that the debtor was insolvent, an issue I address in detail
below. See notes 316-341 infra and accompanying text.
295. The Massachusetts insolvency law, the model for the 1867 Act,
required proof that
the debtor contemplated insolvency. See 1841 Mass. Acts 402, ch. 124, ? 3. The courts, how-
ever, soon transformed that into a Story-like inference from the debtor's mere awareness of
his insolvency. See Denny v. Dana, 56 Mass. (2 Cush.) 160 (1848).
presumed296 from the mere fact of the debtor's insolvency.297 The

courts recognized the conceptual futility of basing a preference doc-
trine on fastidious questions about creditor "pressure" on the
debtor.298 They also warned of the dangers to progressive modern
commerce if clever debtors and creditors could escape the preference
prohibition, by disingenuously declaring their innocence of the
debtor's imminent disaster, while they played with other people's
money.299
Finally, the Supreme Court in 1871 firmly adopted Justice Story's
objective rule that the debtor's culpable intention inheres in the natural
and probable consequences of his conduct. Holding that payment
would remain with the favored creditor only if the insolvent debtor
could bear the rather overwhelming burden of proving he was wholly
ignorant of his insolvency,300 the Court essentially removed the princi-
ple of debtor culpability from American preference law.
The pretense of formal rationality of American preference law was
thus well established in the preference cases decided during the erratic
life of the national bankruptcy act, in the latter half of the nineteenth
century. Yet a strong undercurrent of legal agnosticism persisted, sus-
taining the view of preferences established under the English bank-
ruptcy law and the American insolvency laws. The old skepticism about
296. American law ultimately waffled on whether the presumption was "conclusive," see
Toof v. Martin, 80 U.S. (13 Wall.) 40 (1871), or "prima facie," see Wager v. Hall, 83 U.S. (16
Wall.) 584 (1872).
297. Though the 1867 Act did not define insolvency, the courts inferred the traditional
notion of "equitable" insolvency-whether the debtor was able to pay his debts in due course.
Buchanan v. Smith, 83 U.S. (16 Wall.) 277 (1872); Toof v. Martin, 80 U.S. (13 Wall.) 40
(1871). This definition itself is part of an important undercurrent of controversy in the devel-
opment of preference law. The rule of "equitable insolvency," though supported by urban
merchants, was denounced by farmers and country merchants who found it antipathetic to
their rather relaxed business methods. C. WARREN, supra note 212, at 113-14. Yet when Con-
the
gress later shifted to the "balance-sheet" rule of insolvency, which measures whether
debtor's assets exceed his liabilities, it only managed to underscore one of the fundamental
issues in the rules-standards debate in preference law.
The balance-sheet rule seems a logical step in developing a formalist, technical prefer-
ence law, yet allegedly preferring debtors and their favored creditors both argue that when
the debtor's business is unstable, they have no ready way of knowing whether insolvency has
occurred. For a discussion of whether preference law should revert to equitable insolvency,
see notes 555-561 infra and accompanying text.
298. E.g., In reJackson Iron Mfg. Co., 13 F. Cas. 260 (E.D. Mich. 1877) (No. 7153).
299. Forbes v. Howe, 102 Mass. 427 (1869); In re George, 1 Lowell 409, 10 F. Cas. 193-
94 (D. Mass. 1869) (No. 5325) (starkly confirming Story by emphasizing that "every sane
person is presumed to intend the well-known consequences of his acts").
300. The transfer, in any case, by a debtor, of a large portion of his property, while
he is insolvent, to one creditor, without making provision for an equal distribution of
its proceeds to all his creditors, necessarily operates as a preference to him, and must
be taken as conclusive evidence that a preference was intended, unless the debtor
can show that he was at the time ignorant of his insolvency....
Toof v. Martin, 80 U.S. (13 Wall.) 40, 48 (1871). The debtor in Toof claimed English-style
innocence about the preference because he knew he had assets, if not liquid money, with
which he might revive his credit, but the Court invoked the equitable insolvency test with a
vengeance.
the ability of lawmakers to draw sharp and categorical moral distinc-

tions among debtor-creditor transactions continued to appear in the
form of the imperious opinion that essentially ignored the categorical
rules about preferences where the transaction did not match the
judge's negative moral imagery of the collusive preference.30l Some
judges claimed simply to know illegal preferences when they saw them.
Of course, the more overt subversion of the American campaign for
permanent, formal bankruptcyregulation happened in Congress, as the
cyclic ritual of destruction of national bankruptcy legislation recurred.
Denounced as an "assault upon public morals, in its violations of good
faith, in its craft, its falsehoods and frauds," the 1867 Act was repealed
in 1878.302 A year later, however, commercial organizations sought a
new bill, the Dunciad of moral and economic arguments was reenacted,
and the struggle toward the great 1898 Act began.303
The century-long battle over a bankruptcy law in America might be
seen as part of the general conflict in American law between the self-
perceived forces of rationalization, abstraction, and formalism against
the sentiments of cooperation, informality, and local and personal loy-
alty. Generally, the forces that resisted the bankruptcy law were re-
301. E.g., Mundo v. Shepard, 166 Mass. 323, 44 N.E. 244 (1896) (Holmes,J.). In this
state insolvency case, Holmes concedes that the debtor, a milliner, knew she could not pay her
debts when due, but he notes that she deemed it indecorous for a fashionable milliner to press
her own customers and that she reasonably believed that she was balance-sheet solvent. Once
again, we have the scenario of the debtor who is legally insolvent but who believes that paying
a favored creditor might actually get the business back afloat. Holmes declares the debtor's
position to be perfectly sound and ethical under the specific circumstances, and so he archly
nullifies any statutory rule to the contrary in favor of his self-defining customary standard.
302. C. WARREN, supra note 212, at 122 (statement of Sen. McCreery); see 7 CONG.REC.
2416-20, 2512-16, 2954-65 (1878) (discussion of bill to repeal bankruptcy law). The clamor
for repeal, though, came chiefly from creditors. Senator Sherman greeted the repeal by
saying
there would be an end to bankruptcies and profligacy and that "we will all stand upon a better
basis-on the basis of our property and our deserved credit." C. WARREN, supra note 212, at
127.
303. C. WARREN,supranote 212, at 128. Opponents included wholesale merchants in
big
cities, because their collection and information network ensured that they could get prefer-
ences. Id. at 129; see 14 CONG. REC. 38-49, 77-87, 109-17, 144-51, 164-72 (1882) (debate on
bankruptcy system). Southerners still opposed it as an invitation to evil and profligacy. Mid-
western jobbers supplying small Western traders feared that Eastern manufacturers, whose
access to easy money enabled them to buy Western paper, would throw them into
bankruptcy
when they were on the borderline. C. WARREN, supra note 212, at 131. The
populist South
still opposed it all, id. at 135-37, but the speculators in the West were attracted to a new
provision for voluntary bankruptcy. Id. at 134. The usual conflicts arose. The Northerners
invoked the trope that all commercial actors are united in a great chain of trade:
There is no fixed class of debtors and creditors. The largest body of creditors are the
working men, with savings in the banks. The largest debtors are men of means in
large business corporations, obliged constantly to hire money.
Id. at 137 (statement of Rep. Dingley). Reflecting the confusion further, one Missourian even
argued in 1896 that preferences are not necessarily bad, and that while a law is
not necessary on those grounds, it is necessary to relieve poor debtors. Id. bankruptcy
at 139 (statement
of Rep. DeArmond). Others argued that preferences
might simply be a way for the poor
Southern farmer to honor his special obligation to his local bank and denounced the bank-
ruptcy law as a way for grasping Northern creditors to snare their share. Id. (statement of
Rep. Terry).
sisting the expansion and abstraction of the credit culture, the shift
from a world dependent on a debtor's reputation to a world dependent
on formalized paper.304 Only at the end of the century did the forces of
rationalization succeed in enacting a relatively durable national bank-
ruptcy law. The turn-of-the-century posture was perfectly captured by
Professor James Olmstead, who summarized in 1902 the purportedly
robust, unsentimental, scientific view of bankruptcy that seemed to pre-
vail. Professor Olmstead firmly asserted that the "true" functions of
bankruptcy are distribution and administration, not moral governance:
[S]ound statesmen and legislators in Congress have ascribed to the
regulation of commerce the true reason for bankruptcylegislation ....
In America, unfortunately, bankruptcy has come to be regarded as a
sort of poor-debtor law, as a species of clearing house for the liquida-
tion of debt, or, as some have expressed it, a "Hebrew Jubilee,"
whereby the people at intermittent periods receive emancipation from
their debts, are rehabilitated, and the "dead wood" of the community
is thereby eliminated.305
In short, moral impulses, whether punitive or humanitarian, have no
place in bankruptcy law. Senator Lindsay of Kentucky in 1897, speak-
ing of the new bankruptcy law, confidently asserted the law's scientific
pretense:
This measure is the most thoroughly analyzed piece of proposed legis-
lation I have ever examined. Every conceivable contingency seems to
have been thought out and carefully provided for. It is my judgment,
that if enacted it will be a conspicuous example of matured legislation
and remain for all time as an example of how laws should be prepared
before being placed upon the statute books.306
IV. THE SCIENTIFIC TRIUMPH OF 1898
The scientific pretenses of the 1898 Act were manifest in its elabo-
rate scheme for regulating preferences. As if to emphasize that prefer-
ence law had become an amoral, nonpunitive regulatory scheme, the
statute no longer made the giving of a preference grounds for denying
the debtor a discharge,307 and, as if to underscore the formalist spirit of
304. P. COLEMAN, supra note 213, at 282-93; M. HORWITZ,THE TRANSFORMATION OF

AMERICAN LAW,1780-1860, at 228-29 (1977).
305. Olmstead, Bankruptcy:A Commercial Regulation, 15 HARV.L. REV.829, 834-35 (1902).
Professor Olmstead offers endless quotes from post-Civil War Congressmen, saying that the
modern commercial character of the nation demanded a bankruptcy law.
The notion of cyclical, emancipating "jubilees" for debtors is still alive. In the Midwest,
where thousands of farmers now face punishing insolvency, an evangelical movement has
them-
sprung up invoking the Biblical concept of a "land Sabbath" at which farmers declare
selves "common-law free men" and at which all land is relieved of mortgages. N.Y. Times,
Feb. 18, 1986, at 2, col. B9.
306. Olmstead, supra note 305, at 842.
307. Act of July 1, 1898, ch. 541, 30 Stat. 544. Since the fraudulent conveyance re-
mained a ground for denial of discharge, Congress had taken a firm step toward disentangling
the old notion of the "fraudulent preference." See Feder v. Goetz, 264 F. 619 (2d Cir. 1920).
the new national law, it replaced the old and controversial equitable
insolvency test for bankruptcy with the new balance sheet test, suppos-
edly more mathematically determinate, but in the end equally contro-
versial.308 Under the complex new preference scheme, the various
sanctions for and consequences of the preference appear in sections
scattered throughout the statute.309 The formal rationality of the
scheme, however, quickly proved an almost comic failure. Though
Congress, as discussed below, utterly failed to grasp the difficulty of
applying formal time zone rules to state-created security interests, it
created a more immediate confusion as well: None of the sections ex-
pressly purported to define a preference, and the courts ultimately
foundered over whether the elements of the preference in the most de-
tailed provision, section 60(b), were supposed to apply to the others.310
A. TheNew RationalPreference
Law
There was one near-certain thing about the statute: It confirmed
the theme of nineteenth century preference law that subjective ques-
tions about the debtor's mental state were virtually irrelevant to the
definition of an illegal preference. Indeed, the crucial provisions about
preferences did not directly mention the debtor's state of mind.311
Thus, the deeply-rooted English concept of the debtor's commercial or
moral culpability for making a preference disappeared from American
lawat least as a visible and distinct concept.312 One of the subtle
308. Act of July 1, 1898, ch. 541, ? l(a)(15), 30 Stat. 544.

309. Id. ? 3(a) (preference is an act of bankruptcy); id. ? 60(b) (preference is voidable by
the trustee under certain conditions); id. ? 60(c) (a preferred creditor may set off against any
voidable payment any new credit he extends to the debtor after the preference); id. ? 57(g)
(any creditor filing a claim against the estate must first surrender any preference it has re-
ceived); id. ? 68(b) (by implication, in the case of mutual credits, forbidding a debtor of the
bankrupt estate to use a preference as a set-off).
310. See notes 313, 326, 332 infra and accompanying texts.
311. Only in one place does the statute even directly refer to the debtor's state of
mind-section 3(a), which makes a payment to a creditor "with intent to prefer" an act of
bankruptcy. This provision is innocuous, since the creditors seeking to throw the debtor into
bankruptcy could normally rely on the other, more "constructive," acts of bankruptcy in the
section, and, in any event, the act-of-bankruptcy rules are irrelevant in voluntary bankruptcies.
The debtor's mental state receives no direct mention in ? 57(g) on surrender of preferences
by claiming creditors or in ? 60 on voidable preferences.
312. Alexander v. Redmond, 180 F. 92 (2d Cir. 1910). The odd language of ? 60(b)
might seem to permit the debtor's mens rea to sneak back in as an issue indirectly, by a kind of
renvoi through the creditor's "reasonable cause to believe that [a preference] was intended."
In Alexander,though, "all the parties suspected that it was an illegal preference, and the bank-
rupt corporation was in hopes that, by the help of its other creditors, it might weather the
storm ...." Id. at 95. Nevertheless, the court read ? 60 as conclusively presuming an intent
to prefer from the effect of a preference and from mere knowledge of the debtor's insolvency.
The 1910 amendment clarified the issue by speaking of the creditor's reasonable cause to
believe that the effect of the payment would be a preference. Act of June 25, 1910, ch. 412,
? 11, 36 Stat. 838, 842. But the courts later stated that the amendment had merely clarified
what had always been the rule. Hewitt v. Boston Straw Bd. Co., 214 Mass. 260, 101 N.E. 424
(1913). Indeed, under the 1898 Act, the morally admirable motive of a preferring debtor
would not undo the illegality. See Clarke v. Rogers, 228 U.S. 534 (1913) (embezzling trustee
who restored funds to trust just before he went bankrupt committed illegal preference).
atavisms of the suppressed principle of debtor culpability was the ef-

fort-stubborn or erroneous-of lawyers and some courts to revive the
familiar old image of the "fraudulent preference." In fact, Congress
had unfortunately left a home for this legal anachronism in the vague
provision for fraudulent conveyances in section 67(e). The Supreme
Court quickly suppressed this maneuver with a stern lecture on the fun-
damental differences between the preference and the fraudulent con-
veyance.313 It then tried to cap the issue with a firm pronouncement
that the former was malumin se while the latter was malumprohibitum.314
The notion that the preferring debtor could persist in litigating his
moral innocence continued to erupt erratically in the lower courts,315
but the old cultural debate over guilt and innocence in preferential
transfers had mostly moved to another arena-the mind of the creditor.
1. Thenew rulesof creditorbehavior.

The 1898 statute illuminates a slow but dramatic shift in American
law, from the notion of the debtor's moral duty to his creditors, to the
313. Coder v. Arts, 213 U.S. 223 (1909). This case presented a difficult permutation of
debtor-creditor mens rea for the trustee or general creditors to litigate. When the debtor
made an eve-of-bankruptcy mortgage to the mortgagee, the debtor knew he was insolvent, but
the mortgagee was wholly innocent. Thus, though the debtor was sufficiently culpable, the
transfer could not be avoided under ? 60(b) because the creditor had no reasonable cause to
suspect a preference. The trustee thus had to try to avoid the transfer under ? 67(e), which
threatened with avoidance any transfers to creditors who had not given fair present considera-
tion. But the Court firmly read ? 67(e) as incorporating only the common law of fraudulent
conveyances, not the modern law of preferences. Thus, to win under that section, the trustee
had to prove the debtor's aggravated moral culpability-his actual intent to "hinder, delay,
and defraud" the other creditors-rather than his mere preference for one creditor over the
others. Finessing the subtle distinctions among these mental states, the Court insisted that it
had cleanly disentangled preferences from fraudulent conveyances. Id. at 241.
314. Van Iderstine v. National Discount Co., 227 U.S. 575 (1913). Here again, the
debtor knew he was insolvent, but the transaction did not meet the elements of a preference.
The transferee was actually a new financer lending money to the debtor to help pay other
creditors while taking an assignment of the debtor's accounts. The trustee thus had to
recharacterize the transaction as a fraudulent conveyance, but once again could not prove the
debtor's aggravated mens rea required by ? 67(e). The Court acknowledged that the notions
of preference and fraudulent conveyance might overlap, but:
The statute recognizes the difference between the intent to defraud and the in-
tent to prefer, and also the difference between a fraudulent and a preferential con-
veyance. One is inherently and always vicious; the other innocent and valid, except
when made in violation of the express provisions of a statute. One is malumper se and
the other malumprohibitum,-and then only to the extent that it is forbidden. A fraud-
ulent conveyance is void regardless of its date; a preference is valid unless made
within the prohibited period.
Id. at 582.
315. In re Steininger Mercantile Co., 107 F. 669 (5th Cir. 1901); Sherman v. Luckhardt,
67 Kan. 682, 74 P. 277 (1903); Webb's Trustee v. Lynchburg Shoe Co., 106 Va. 726, 56 S.E.
581 (1907). These deviant cases were supposedly overruled and rebuked years later in Irving
Trust Co. v. Chase Nat'l Bank, 65 F.2d 409 (2d Cir. 1933). In Irving Trust,the court acknowl-
edged that the distinction between the debtor's intent to prefer and intent to "hinder, delay,
and defraud" was often elusive but rejected the trustee's effort to revive the notion of the
"fraudulent preference," fearing that resort to ? 67(e) in these cases would essentially under-
mine the entire scheme of preference avoidance in ? 60. Id. at 411-12.
notion, essentially irrelevant under English doctrine,316 of the pre-
ferred creditor's moral duty to his fellow creditors.
The first American preference statute, enacted in 1841, contained
an obscure provision suggesting that the good faith of the favored cred-
itor might render a preferential payment legal.317 But Justice Story
quickly moved to drain that provision of any subjective moral content
as firmly as he had done on the debtor's side.318 The more elaborate
preference scheme in the 1867 statute reintroduced a form of creditor
mens rea as an element of the voidable preference.319 This time the
courts exploited the occasion to invest the purportedly formalistic new
preference concept with old-fashioned normative content,320 though
Congress, hinting at what would later become the ritual pas de deuxof
American bankruptcy law, was engaged simultaneously in enhanced
formalistic counterpoint.321
316. Under English doctrine, the focus was almost wholly on the debtor, and the credi-
tor could actually retain his payment if he obtained it through diligence and pressure, though
England did tinker with a savings clause for "ordinary course" transactions. See text accompa-
nying note 177 supra.
317. Act of Aug. 19, 1841, ch. 9, ? 2, 5 Stat. 440, 442. The statute first defined a prefer-
ence as a payment to a creditor other than a bona fide creditor without notice. It then ex-
cluded from the definition any bona fide transactions with the debtor made more than two
months before the petition, if the other party had no notice of the debtor's act of bankruptcy
or intent to become a bankrupt.
318. See Everett v. Stone., 8 F. Cas. 898 (C.C.D. Me. 1844) (No. 4577).Judge Story held
that where the creditors had reason to know the debtor was insolvent, they were legally
pre-
sumed to know they would soon have a legal right to induce involuntary bankruptcy. "[The
creditors] must be presumed to know the law, and cannot set up their ignorance as a justifica-
tion." Id. at 901.
319. Act of March 2, 1867, 14 Stat. 517. Under ? 35, a payment was void if the creditor
had "reasonable cause to believe [that the debtor] is insolvent" and that the transfer "is made
in fraud of the provisions of this act." Id. at 534.
320. E.g., Grant v. National Bank, 97 U.S. 80 (1877). Grant is an early
example of an
American decision trying vigorously to preserve some normative standard which would
pro-
tect morally plausible transactions in an increasingly formalistic preference scheme. The
Court acknowledged in dicta that the "reasonable cause" provision in ? 35 means
only reason
"to suspect" that the debtor is insolvent, but insisted that the test must be stricter:
To make mere suspicion a ground of nullity in such a case would render the business
transactions of the community altogether too insecure. ... A man may have
many
grounds of suspicion that his debtor is in failing circumstances, and yet have no
cause for a well-grounded belief of the fact. He may be unwilling to trust him fur-
ther; he may feel anxious about his claim, and have a strong desire to secure it,-and
yet such belief as the act requires may be wanting...
The debtor is often buoyed up by the hope of being able to get
through with his
difficulties long after his case is in fact desperate; and his creditors, if they know
any
thing of his embarrassments, either participate in the same feeling, or at least are
willing to think that there is a possibility of his succeeding.
Id. at 81-82. In Grant, the creditors "were alarmed; but they were not without
hope." Id. at
82. They thought they knew that the debtor "borrowed money; that he had to renew his
note;
that he overdrew his account; that he was addicted to some incorrect habits; that he was some-
what reckless in his manner of doing business; that he seemed to be
pressed for money ... ."
Id.; cf. Shelley v. Boothe, 70 Mo. 74, 77 (1881) (creditor under state law can take transfer from
a debtor, knowing that other creditors are attaching those, so
long as transfer is not "mere
screen to secure the property to [debtor]" and creditor did not "desire" to aid the debtor in
defeating other creditors).
321. Act of June 22, 1874, ch. 390, ? 11, 18 Stat. 178, 180
(preference voidable only
The scholarship has offered little explanation as to why this shift to
a focus on the creditor's state of mind occurred in the United States.
One answer may lie in the American invention of voluntary bankruptcy.
Voluntary bankruptcywas inspired by the "democratization" of the cul-
tural role of the merchant encouraged by the commercial ideo-
logues322-though later denounced by critics like Hopkinson.323 Once
American commercial law made the intellectual breakthrough of con-
ceiving voluntary bankruptcy, it divorced bankruptcy from the English
model of the culpable act of the debtor. But when instead American
bankruptcy law aggressively took on the spirit of equality as equity, the
suppressed moral questions about bankruptcy shifted to the creditor's
collegial duty to uphold this rather abstract collectivist spirit.
In any event, the 1898 Act sustained the principle of requiring some
culpable mental state in the creditor. Inevitably, it tinkered with the
older verbal formula, using a phrase that suggested Congress had not
yet wholly disentangled itself from at least the language of the older
English concern with the debtor: The trustee could now avoid a pay-
ment only if the favored creditor had "reasonable cause to believe that
it was intended . . . to give a preference."324 A 1910 amendment
tinkered further to remove this debtor-focused vestige, and the ques-
tion became whether the favored creditor had reasonable cause to be-
lieve the payment "would effect a preference."325
Meanwhile, however, the persistent ritual of judges undoing Con-
gress' effort to drain the moral content from the preference law took a
quirky but revealing turn. Assuming that the courts could properly
construe the statutory definition of the creditor's mens rea under the
voidability clause of section 60(a), Congress, in its supposedly system-
atic plan to lay out the incidents of preferences, forgot to decide, or at
least to say, whether the section 60(b) mental state requirement applied
elsewhere in the statute. Most notably, section 57(g), which required
creditors filing claims against the bankrupt's estate to first surrender
any preferential payments they had enjoyed, simply used the word
"preference" without either defining it or incorporating any defini-
tional elements from elsewhere in the statute.326
2. The agnostic view reappears.

This statutory gap soon caused a great deal of lower court division
where creditor has actual knowledge that transfer was made fraudulently in violation of Act);
see also Burdick v. Jackson, 7 N.Y. Sup. Ct. 488 (1876).
324. Act of July 1, 1898, ch. 541, ? 60(b), 30 Stat. 544, 562.
325. Act of June 25, 1910, ch. 412, ? 11, 36 Stat. 838, 842.
326. Act ofJuly 1, 1898, supranote 324, at 560. The equivalent "surrender" clause in the
1867 Act, supra note 319, ? 23 at 528, had only put the choice on creditors who had "reason-
able caused [sic] to believe" that the debtor gave the payment "contrary to any provision of
this act."
and is the basis for one of the most remarkablejudicial opinions in the
entire history of bankruptcylaw. Referee Hotchkiss' 1901 opinion in In
re Hall327 is justly famous for containing perhaps the best scholarly
summary of the twisted history of Anglo-American preference law.328
What has escaped attention, however, is that the Hotchkiss opinion also
contains one of the most illuminating episodes in the long moral and
intellectual battle over the conflict between technical rules and norma-
tive standards in bankruptcy.
As Hotchkiss sets up the morality play, the victim-protagonist is the
ordinary course trade creditor of the debtor, who has been extending
rather conventional credit for supplies and accepting regularly sched-
uled and modest payments. The debtor suddenly goes into voluntary
bankruptcy, and the event is a total surprise to the creditor-and appar-
ently even to the debtor.329 The trustee concededly had no unilateral
power to recover the payments, because the creditor plausibly had no
reason to believe the debtor was insolvent or facing collapse. But the
creditor still had a large claim against the estate, the late payments be-
ing only partial. The trustee argued that the creditor had to surrender
the modest late payments regardless of his innocence, since section
57(g) speaks baldly of "a preference," and does not limit itself to a sub-
jectively culpable one.330 Hall thus presents one of the standard
themes in preference law with remarkable prescience. Hotchkiss un-
covers in the scientistic scheme of the 1898 Act a destabilizing problem:
the fate of the "ordinary course" creditor. This was one of the key fac-
tors that eventually undermined the purportedly scientific structure of
the great successor Bankruptcy Code of 1978.331
Treating the issue as a rather technical one of legislative intent,
Hotchkiss offers a clever reading of the legislative history to hold that
the section 60(b) mental state test for the favored creditor must be read
into section 57(g).332 But, in reaching this conclusion, Hotchkiss does
not rely primarily on legal process arguments about interpretation.
Rather, he relies on a firm belief in the moral basis of bankruptcy law
and a disbelief that Congress intended to go as far as some courts had
suggested in turning the preference prohibition into a harshly categori-
cal rule of strict liability. For Hotchkiss, to read the statute as requiring
surrender of any innocuous payment the debtor innocently received af-
327. 4 AM. BANKR.REP. 671 (W.D.N.Y. 1900).

328. Glenn, supra note 4, at 528.
329. Hall, 4 AM. BANKR.REP. at 672-73.
330. Id. at 674.
331. See notes 506-525 infra and accompanying text.
332. Hotchkiss notes the general assumption that ? 57(g), though silent on any time
zone for preferences, is generally assumed to incorporate the 4-month rule from ? 60(b).
Thus Hotchkiss sees no barrier to incorporating the ? 60(b) "reasonable cause to believe"
element as well. Hall, 4 AM. BANKR.REP.at 686-88. He also provides evidence that the draft-
ers intended ? 60(a) to be the general definition of preference in the statute, and that ?? 60(a)
and 60(b) were to be read as a unit. Id. at 690-92.
ter the debtor went insolvent would be to "charge the bankruptcy law
and its framers with the paternity of a commercial Frankenstein."333
Hotchkiss concedes that any mental state requirement will impinge on
perfectly ratable distribution, but views this fact with Burkean toler-
ance: "Creditors will insist that their receipts were in due course-this
they have been doing ever since there was a bankruptcy law, and some
guilty creditors will escape with more than their share."334
The alternative is far worse. The categorical reading would mean
that no creditor who innocently receives a payment would know for
four months whether he could keep it. To file his claim against the
estate, he would have to surrender his payment to get into court on his
claim. Yet at the same time, his wholly "guilty" colleague who had ac-
cepted a full, truly (culpably) preferential payment could stay away
from bankruptcy court and likely escape with his money while the
trustee pondered the difficulty of litigating against him under section
60(b).335
Hotchkiss expresses bitter cynicism about the shibboleth that
"equality is equity"336and outrage at the notion of creditors suffering
any sanction from payments on legitimate debts when the payments
evince no aspects of moral culpability: "Innocent of guile, they are
guilty."337 From "time immemorial" the preference had been a moral
as well as a legal wrong. If section 57(g) did not require proof of culpa-
bility, it had invented "a fraud with none of the elements of fraud in
it."338 In a sense, Hotchkiss demonstrates that if we do not retain at
least a negligence principle in preference law, we have, in a sense,
fallen prey to the fallacy of the infinite regress in the preference law
time zone, where bankruptcy always begins four months before bank-
ruptcy begins.339
333. Id. at 678.

334. Id.
335. Id. The partly preferred innocent creditor would also suffer in comparison to an-
other creditor who was equally innocent but who, by the grace of the debtor, had received full
payment.
336. Id. at 685-86. Hotchkiss decries "the senseless purpose of creatong [sic] a fraudless
fraud, to the confusion of business and the lasting hurt of our credit system," id. at 692,
insisting that his reading of the statute "draws a right distinction between the guilty creditor
and the innocent creditor," id. at 693.
337. Id.
338. Id. at 688.
339. Id. at 689-90. The immediate fate of the Hall decision has some special ironies.
The Supreme Court, in a relatively rare expression of harmony with the progressive, regula-
tory spirit of the 1898 Act, quickly overruled the technical holding in Hall in Pirie v. Chicago
Title & Trust Co., 182 U.S. 438 (1900). The Court analyzed the posture of the partly pre-
ferred, ordinary-course creditor as a straightforward matter of rational cost-benefit analysis,
devoid of any moral significance. The Court confidently asserted that the statute is "plain" in
sec-
defining a preference in ? 60(a) and in distinguishing its various consequences in other
tions. Section 57(g) gives the partly paid creditor a simple choice-to keep or surrender his
preferences. "That is the favor of the law to his innocence, but, aiming to secure equality
between him and other creditors, can the law indulge farther?" Id. at 447. Rejecting the
of
argument that the preference law is penal, the Court said it puts the creditor "to an election
A final footnote to the early twentieth century history of the pre-

ferred creditor's mens rea comes fromJudge Learned Hand. Hotchkiss
had attacked the categorical preference prohibition because it wrongly
ensnared the ordinary course creditor. Judge Hand invoked the paral-
lel traditional theme in preference law-that of the admittedly extraordi-
nary creditor who was fully aware of the dismal facts of the debtor's
financial state, but who deserves to escape the preference prohibition
because of his honorable effort to help the debtor survive. Where Hall
exploits the statutory uncertainty about where in the scheme the mental
state element applies, Judge Hand's decision in Kennardv. Behrer340ex-
emplifies the line of cases that exploit the issue of just what that culpa-
ble mens rea is when it is relevant.
In Kennard,the bankrupt head of an insolvent business assigned
some rights under his father's will as security for a debt. The creditor
certainly knew of the debtor's miserable condition and of the latter's
frantic efforts to buy time. But the creditor had sincere, if quixotic,
faith in some unfinished contracts of the debtor, and shared the
debtor's guarded optimism. When he took the alleged preference, the
creditor took some new notes on a repayment schedule so protracted
that he must have hoped the debtor would revive. Of course the credi-
tor was, in a strict sense, effecting a preference to protect himself from
the debtor's insolvency. But Judge Hand refused to believe that the
statute could be so strict. He wrote that the statute did not
compel creditorsto overturnall shaken debtors while they have an
honest hope of regaininga firm foundation. That creditoronly the
comparative and debatable courses.... Business life has many such examples ...." Id. at
453. Moreover, the creditor does not have to make his election until the debtor has gone
bankrupt, and at that point, in a sense, the creditor is no longer "innocent" at all. Id. at 449-
53.
In an unusual role reversal, Congress soon overruled the Court and settled the issue in
the way Hotchkiss desired. Congress simply overruled Pinreand said that a creditor only had
to surrender a payment that constituted a preference under the reasonable cause test of
? 60(b). Act of Feb. 5, 1903, ch. 487, ? 12, 32 Stat. 797, 799. The new rule found amusing
confirmation in In re First Nat'l Bank 155 F. 100 (6th Cir. 1907). Noting that Congress
changed the law "upon a recognition of the embarrassments which business men might suffer
upon that rule of law in the collection of their debts," id. at 103, the court then overreacted in
a strange atavism of the old English mens rea doctrine: The creditor is culpably negligent
under ? 60(b) only if in fact the debtordid really, subjectively, intend a preference:
[T]he construction which treats the motive of the debtor as indifferent seems artifi-
cial and awkward. But it is enough to say that a belief that the debtor is insolvent is a
very different thing from a belief that he intends a preference; for it would often, and
probably generally, happen that a person, though in fact insolvent, would while con-
tinuing his business in the usual way make payments without a thought of disparage-
ment of other creditors and with confidence in his ability to pay them all. And upon
like considerations the creditor may share in the confidence of his debtor ....
Id. at 104. Thus the court essentially purported to repeal all that Justice Story had wrought.
Nevertheless, we can see that by re-invoking the theme of the ordinary-course creditor un-
fairly trapped by a misguidedly formal prohibition, Hotchkiss helped sustain the cultural force
of the antiformalist view of bankruptcy law that continues to undermine congressional efforts
today.
340. 270 F. 661 (S.D.N.Y. 1920).
92 STANFORD LAW REVIEW [Vol. 39:3
statute proscribes who dips his hand in a pot which he knows will not
go round. Hence it follows that, while there is an honest chance of
continued life, he need not quench it at his own peril. The only test is
the honesty of his purpose. Nor is it an answer here to argue with the
plaintiff that the defendants' unwillingness to advance more money is
proof of bad faith. It was precisely because they were too doubtful of
their debtor's position to leave their money longer unsecured that they
required the security. ... I think the test should be whether the chance
was one whose success good judgment would forecast; it need not be a
business certainty; it must not be a gambler's cast.... A contractor's
business is in any case one of feast or famine, in which that might be no
more than an exhilarating episode which to a bank, for example, would
be a despairing gasp.341
Long after Kennard, in the 1938 Chandler Act, Congress made yet
another effort to take the subjectivity out of the creditor's mental
state.342 It purported to take the absolutely final step in 1978 when it
removed the very language of reasonable cause to believe from the key
part of the Bankruptcy Code.343 But the spirit of Hand's and Hotch-
kiss' legal agnosticism persists.
B. The Breakdownof the ScientificBankruptcyLaw

1. The timing issue.
While the conflict between technical rules and normative standards

played itself out on the issue of mental states in preferences, it was only
beginning on another, more abstract plane. Congress recognized that
apart from the balder issue of mens rea, a debtor and favored creditor
could undermine the abstract principle of ratable distribution by cyni-
cally creating surreptitious liens. These liens might lie dormant and
invisible to the general creditors, but if the debtor faced insolvency, the
creditor might suddenly perfect them. If the debtor went bankrupt, the
creditor would enjoy priority. Yet these liens could escape the prefer-
ence prohibition because they technically were created well before the
statutory danger zone. The 1898 Act made a novel, if incomplete, ef-
fort to solve the amorphous problem of the "secret lien" by adjusting
the national preference scheme to particular forms of technical security
devices created by state law. The result was the long judicial and legis-
lative battle over the timing rules for coordinating national preference
law and state commercial law.344
In addressing secret liens, Congress was, in effect, returning to the
theme of Coke's 1584 decision in The CaseAgainst Bankrupts-the theme
341. Id. at 664.

344. See generally McLaughlin, Defining a Preferencein Bankruptcy,60 HARV.L. REV. 233
(1946); Morris, BankruptcyLaw Reform.Preferences,SecretLiens and Floating Liens, 54 MINN. L.
REV. 737 (1970).
of "relation back." It recognized that the preference rules should strike

down at least some of these liens by treating them as coming into being
at the later time of their manipulated perfection or at the moment of
bankruptcy itself, thus subjecting them to the prohibition. Congress
probably failed to realize the potential technical complexity of this ef-
fort, with its innumerable permutations of timing sequences and re-
cording devices. But Congress even more surely did not realize that
this technical complexity might become the occasion for a new dis-
placement of all the deeper, persistent doubts of judges and various
political constituencies about the wisdom or virtue of a categorical na-
tional bankruptcy law.
Congress partly addressed the secret lien in a provision making a
preference an act of bankruptcy. Section 3(b) of the 1898 Act mea-
sured the date of the act of bankruptcyas four months after the record-
ing or registering of a transfer of a security interest in the debtor's
property if state law either required or permitted the recording or re-
gistration.345 Thus, if a transferee failed to avail himself of a state right
to record, the time for filing a bankruptcy petition which could make
the transfer a preferential act of bankruptcy might be extended indefi-
nitely. But section 60(b), describing voidable preferences, contained
no such reference to recording, and so was impotent to strike down
secret liens. The result was that a debtor might fall into bankruptcy
because of a preference, and yet the creditor would keep the payment,
even though the creditor failed the reasonable-cause-to-believe test.
The problem may have been a simple error in draftsmanship, and
the 1903 Congress quickly responded with the first in a series of hap-
less efforts at technical tinkering. The 1903 amendment purported to
resolve the discrepancy between the preference as an act of bankruptcy
and the voidable preference. The House tried to add the "required or
permitted" language of section 3(a), but the Senate deleted "or permit-
ted" so the result was the following proviso in section 60(a):
Wherethe preferenceconsistsin a transfer,suchperiodof fourmonths
shall not expire until four months after the date of the recordingof
registeringof the transfer,if by law such recordingor registeringis
required.346
But the soon-to-be-ritualized problem was that the courts were still in-
345. Act of July 1, 1898, supra note 324, ? 3(b), at 546. Congress also addressed the
secret lien in ? 67(a) of the Act, which voided liens that, because unrecorded, would not be
good under state law against other creditors of the bankrupt. Id. at 564. But that clause was
useless if the state recording law only protected other creditors who obtained a judicial lien,
or if the preferred creditor snuck in a recording on the eve of bankruptcy. SeeJackson, supra
note 1, at 740-41.
346. Act of Feb. 5, 1903, supra note 339, at 799-800. For the
legislative history, see 35
CONG. REC. 6938 (1902); 36 Id. at 1270 (1903).
Though it only hinted of what would erupt in the 1910 debates, the 1903 debates over
the preference amendment did invoke some fundamental emotional and moral issues of na-
tional bankruptcy legislation. Congressmen who remained unreconciled to the 1898 Act took
the occasion to denounce it as "a Federal collection law"
containing "machinery to crush out
dined to protect transfers to favored creditors despite the apparent leg-
islative intent to capture more preferences.347 In a sequence of
decisions that soon alerted Congress to the problem, the courts made it
clear that they were going to be very strict in reading the legislation.
The new rule poorly captured the normative standard of invalidating
secret liens. In this new version of the morality play of preference law,
the loser was the trustee. In YorkManufacturingCo. v. Cassell,348the
Supreme Court showed it would put the trustee through a brutal agony
before he could undo a creditor's state-law advantages, even where the
creditor utterly failed to record his mortgage.349 And in the grand ag-
nostic tradition of American preference cases, the famous Claridgev.
Evans350case showed that the courts would virtually ignore or nullify
the purportedly strict, technical preference rules where, according to
their moral instinct, a creditor recording on the eve of his debtor's
bankruptcy nevertheless deserved the payment.
and oppress the merchants of the country," and called for total repeal. Id. at 1270 (statement
of Rep. McRae).
But the debate was also sparked by another controversial provision. The courts had con-
strued the Act as permitting a voluntary bankrupt to claim his statutory exemptions even
though he had previously waived those exceptions under state law when he had contracted
with his creditors. Id. at 1371 (statement of Rep. Underwood). Congressmen supporting the
new legislation argued that the courts were thus allowing debtors to defraud their creditors,
and offered an amendment barring the debtor from reviving his waiver. Opponents of the
1898 Act also opposed the amendment on the ground that it exacerbated the cruelties which
the Act imposed on distressed debtors: "The law is too severe, and this amendment adds to
its severity." Id. at 1373 (statement of Rep. Clayton). The opponents argued, as they did in
1910, that complex bankruptcy rules were unnecessary and that the country was better off
that
giving its merchants moral education that would "inspire a spirit of commercial integrity
will give confidence, that will secure credit to honest men, that will make the American trades-
man cautious, respectable, and honorable. . ." Id. at 1374 (statement of Rep. McRae.)
347. For a case that obeyed this legislative intent, see First Nat'l Bank v. Connett, 142 F.
33 (8th Cir. 1905). In this case, the creditor first lent money to the debtor. Then, knowing the
debtor was insolvent, the creditor took a mortgage from the debtor for the antecedent debt,
and then later, during the four-month preference period, recorded the mortgage. The court
held that the mortgage constituted a voidable preference.
348. 201 U.S. 344 (1906).
349. The state law would only protect a mortgagee who had "taken steps to 'fasten upon
the property.' " Id. at 351. The court held that under ? 67(a), the trustee had no more and
no less title to the transferred property than the debtor. The debtor, of course, lost to the
nonrecording lienholder.
350. 137 Wis. 218, 118 N.W. 198 (1908). Here the creditor did record his lien as re-
quired under Wisconsin law, but only six days before the petition was filed. The court simply
ignored the late recording and thus archly rendered irrelevant the whole statutory preference
scheme. The court reasoned that the transfer essentially occurred when the debtor originally
executed the mortgage, so the transfer was neither for an antecedent debt nor within the
preference period. The Claridgecourt thus used circular reasoning to steer clear of the prefer-
ence prohibition, but the court was obviously struck by the sheer equity of the situation: The
lienor had nobly lent money to the corporation of which he was an officer, in order to revive
it, fully knowing about its insolvency. He apparently completely forgot to check to see if the
a
mortgage on the debtor's real estate was recorded. The mortgage was recorded late by
lienor
lawyer who was innocent of the company's insolvency. In fact, the court praised the
here because he might have achieved "a practical enlargement of the estate, and enable[d] the
insolvent to rescue his business from threatened ruin, and thus save all his creditors from
loss." Id. at 225, 118 N.W. at 200.
The next step in the ritual was for Congress to terminate this ad hoc
moral scrutiny by firming up the technical strictness of the prohibition.
The sponsors of the 1910 bill complained that the courts were ignoring
the clear intent of the 1903 amendment to regulate liens, and lamented
that the 1903 amendment had failed to achieve its purpose.351 Con-
gress took a double approach to the problems. It negated Yorkby ad-
ding the section 47(a) strong-arm clause, thus making the trustee a
levying creditor.352 And it overruled Claridgeby rewriting section 60 so
that a preferential-looking lien was to be tested from the time of re-
cording.353 The amendment thus changed section 60(b) to enable the
trustee to avoid a transfer "if... the transfer ... or ... the recording or
registering of the transfer if by law recording or registering thereof is
required . . . [occurs] within four months before the filing of the peti-
tion in bankruptcy."354
2. Theoriginaldebaterevived.
But the legislative discussion in 1910 turned out to be far more than
a debate over the timing of mortgage recording. It was an almost
scripted, ritualized reenactment of the historical debate over the legal-
ity and morality of preferences, and indeed over all the fundamental
questions about the need for a bankruptcy law in our culture. Once
again, the technicalities of rule-making for voidable preferences
reawakened deep moral ambivalence over the role of credit in our cul-
ture. Though the subject in 1910 was a technical amendment, the pro-
ponents faced a renewed attack on the whole 1898 Act, and indeed on
the very premises of national bankruptcy legislation. Turning defense
into offense, they elaborated a modern version of the classic American
commercial-republican ideology. They adopted a progressive, scien-
tific, and regulatory tone, urging that Congress complete the final re-
finement of the credit market by removing the last clearly identifiable
abuse.
The proponents proclaimed the new legislation in the spirit of "sci-
entific classification."355 The task at hand then was merely one of"sim-
plification and clearing up of obscurities" resulting from careless court
decisions attributed to misapprehension about the purpose of bank-
ruptcy from 1542 to the present.356 The proponents' ideological ma-
neuvering essentially involved three steps. The first step was to narrow
the terms of the debate by establishing the purportedly uncontroversial
general purpose of bankruptcy law as virtually a Platonic truth. Bank-
351. H.R. REP. No. 511, 61st Cong., 2d Sess. 7 (1910).
352. Act of June 25, 1910, ch. 412, 36 Stat. 838, 840.
353. 45 CONG. REC. 2278-79 (1910) (statement of Rep. Sherley) (amendment aimed to
strike at secret liens).
354. Act of June 25, 1910, supra note 352, at 842.
355. 45 CONG. REC. 2275 (1910) (statement of Rep. Sherley).
356. Id. at 2263 (statement of Rep. Tirrell).
ruptcy law had nothing to do with discharge, but all to do with the
power of creditors to prevent absconding and with the rights of credi-
tors to a ratable share. This had been its essential purpose since it be-
gan in 1542, and any notion of bankruptcy as a means to relieve
distressed debtors was secondary and incidental.357
The second step was to combine the Platonist view of the essential
purposes of bankruptcy with a bit of Whiggish revisionist history. The
proponents had to explain the somewhat discomforting course of nine-
teenth century bankruptcy legislation, in which no statute was able to
survive violent controversy. The revisionist view was that this history
did not reflect any fundamental doubts in our culture about the wisdom
or justice of national bankruptcylaw. If the early American laws lasted
only briefly, the explanation lay in such mundane facts as the logistics
of long-distance litigation and the relative primitiveness of the credit
economy that made the laws less workable and less necessary in the last
century.358 According to the proponents, to read that history as sug-
gesting anything more fundamental would reverse our steady moral
and economic progress.359 To subject the ultimate moral principles of
bankruptcy to the vagaries of political life would be unjust, indeed al-
most sacreligious.360 The problem had only been one of progressive
finetuning of the administrative machinery of bankruptcy, and in that
regard the 1898 law was a triumph.361 It had "obviated the objections"
lodged against all other bankruptcy laws, it had achieved "efficient and
economical administration," and it had "secure[d] fair play to the
bankrupt."362 To the charge that the national bankruptcy law was
nothing but a cruel collection act, the proponents responded that it was
indeed essentially a collection act, but that collection was the ultimate
purpose of bankruptcy, and this was the most efficient and equitable
collection act in history.363
The third ideological maneuver was to treat the restriction of pref-
erences as the central instrument, "the real fundamental purpose," for
357. Id. at 2263-64.

358. Id. at 2263. The laws also failed because of administrative problems and excessive
fees. Id. at 2263-64.
359. To repeal this law "would be a step backward in morals as well as business." Id. at
2267 (statement of Rep. Diekema).
360.
I am not in favor of intermittent justice. The laws of nature-the laws of God-are
equitable because they are eternal, and the law that makes the right of man depen-
dent upon the chance of his embarrassment, his need of it occurring during the lim-
ited period of its aperation, is not, to my mind, a good law.
Id. at 2272 (statement of Rep. Sherley). Indeed, Sherley argues: "If we repeal the national
bankrupt law, we take ourselves out of the galaxy of the great nation of the world, and put
ourselves in the class with China and the small backward nations of the earth." Id. at 2274.
361. Id. at 2264 (statement of Rep. Tirrell).
362. Id. The law "gives a square deal to all, and encourages commercial activity ..."
Id.
363. Id.
carrying out the eternal moral principles of bankruptcylaw.364 Indeed,

the proponents, extending their revisionist history far into the recesses
of early English bankruptcy law, proclaimed confidently, if incorrectly,
that preference regulation existed at bankruptcy's creation.365 This
maneuver even included a myth, discovering in our bankruptcyhistory
a recurrent nightmare of preferences ruining the health of the economy
and the culture. Before the great 1898 Act:
Men selected their aunts or cousins, theirrelativesof everyname and
nature,theirbanks,as preferredcreditors. They gave them mortgages
which were unrecorded, liens and evidences of indebtedness that the
public knew nothing about, and then finally when the outside creditors
endeavored to secure their rights all the assets of these debtors were
distributed among their relatives, who had been made preferred credi-
tors, and if they failed today the relatives sold out their property to-
morrow, and the day after tomorrow they were back in business under
an assumed name, with all of their assets intact, and with their legiti-
mate creditors defrauded out of every cent due them.366
The bankruptcy law ensured that we were all healthfully bound in the
great chain of commercial being, and statutory loopholes in the prefer-
ence prohibition represented the one clear threat to the stability of this
unity.
You wipe away the bankruptcylaw and the shoe manufacturer of Mas-
sachusetts will consider the additional risk he runs under the state laws,
which give preferences, where friends and relatives can be favored,
where he can not ascertain, being so far away, what the financial condi-
tion of the debtor may be.367
The manufacturer, a general creditor as symbolic victim-hero, would
price his goods too high, fearing he could not recover in a distant place
where no one could protect his interest. So all people in the chain
needed a bankruptcy law that prevented the debtor from
preferring his
friend or relative over the distant creditor who may have
supplied most
of his capital.
The proponents thus repeated the theme announced
by Hopkinson
and Webster almost a century before,368 but with a bold moral confi-
dence that our progress in preference rulemaking had
properly identi-
fied, and would soon fully cure, the moral disease in the marketplace.
364. Id. at 2274 (statement of Rep. Sherley).

366. 45 CONG. REC. 2267 (1910) (statement of
Rep. Diekema). Here is more of the
scenario:
There are those that are willing to make money in
any way that is Men who
are willing to make false statements in order to establish credit possible.
secure all the mer-
chandise possible, in some instances knowing they are insolvent and will be unable to
pay at maturity. Men who send their goods untouched to the auction rooms to be
disposed of for cash, or to friends or relatives, who give preference to favored ones
to defraud their creditors ....
Id. at 2267 (statement of Rep. Young).
367. Id. at 2264-65 (statement of Rep. Tirrell).
368. See texts accompanying notes 254-262, 275 supra.
The 1898 Act had properly deterred and restrained the "dishonest fail-
ures" and had been a "guardian and a refuge" for the faultless unfortu-
nate ones.369 With the brutal confidence in moral clarity imagined by
Defoe over a century earlier,370the proponents asserted that, "[T]hose
who are dishonest and those who fail for the advantages that shall come
to them tremble, for they know they are to be held to strict
accountability . ."371
Finally, the new bankruptcy law revised in 1910 was a great engine
of social welfare and moral improvement. It finally took a nonmoralis-
tic, nonpunitive view of the embattled American debtor:
Sucha man, bowed down by a weightthat can not be lifted, subjectto
an attackfroma creditorwheneverhe maymakethe least starttoward
his own uplift,presentsone of the most patheticpicturespossible...
But all men know that insolvencycomes more often from accidentor
froman inferiorendowmentof thattalentneeded in the keen competi-
tion of modernlife than from actualwrongdoing.372
A bankruptcylaw enhances credit because it ensures equal and uniform
treatment of creditors, and is a blessing for debtors: The law benefits
the poor debtor, by encouraging the distant Northern creditor to lend
to him, offering the creditor protection from local preferences. And it
permits a failing debtor to be honest about his condition without fear of
a single creditor stepping in and grabbing the whole estate. The
debtor can appeal to the utopian brotherhood of merchants, saying, "I
am temporarily embarrassed, but if given an opportunity, I can get on
my feet; I can go forward and pay all my debts."373
The opponents of the 1910 preference amendment quickly an-
nounced that the issue was much larger: "[T]here is no amendment
that can remove all the evils, all the wrongs" of bankruptcy;only total
repeal, "root and branch," will achieve moral and economic justice.374
A bankruptcy law was inherently a "standing invitation to dishonesty
... an incentive to fraud."375 They struck at the proponents' ideology
with a remarkable maneuver of their own. Instead of stressing the ar-
gument that the 1898 Act is a cruel creditor's bill, they recharacterized
it as a cynical debtor's bill. They argued that there is no eternal moral
principle that bankruptcy law is needed to carry out. Indeed, the cate-
gorical imperative of the marketplace is that men must pay their debts,
and bankruptcy law violates this principle.376 There is no moral norm
369. 45 CONG.REC. 2266 (1910) (statement of Rep. Young).
371. 45 CONG.REC. 2267 (1910) (statement of Rep. Young).
372. Id. at 2274 (statement of Rep. Sherley).
373. Id. at 2273 (statement of Rep. Sherley). "[I]t makes confidence between the embar-
rassed debtor and his creditors possible; it enables honorable creditors to unite in help to the
honest debtor, and it removes from the avaricious any motive for oppression." Id. at 2274
(statement of Rep. Sherley).
374. Id. at 2265 (statement of Rep. Brantley).
375. Id.
376. Id.
that justifies freeing a man's future income stream from his creditors.
Creditors, in extending credit, rely on more than the debtor's current
ostensible property:
There is alwaysa moral risk that is consideredin extending credit.
Credithas been givenand is givento men who haveyouthand strength
and who are believedto have honesty,even though they have little or
no property. They are given creditupon the faiththat they have earn-
ing capacityand powerand that theirfutureearningswill enable them
to pay.377
It may seem illogical that the opponents of the law criticized the rule
of discharge. But the opponents' explanation is that discharge is a per-
fectly acceptable aspect of bankruptcy, indeed it is the most admirable
distinguishing feature of American bankruptcy,378so long as we regard
bankruptcy legislation in its proper perspective: It has no permanent
role to play in our culture or our economy. The best purpose of a
bankruptcy law is in fact the relief of distressed debtors, but that pur-
pose only arises in times of economic panic. So the opponents offered
their agnostic, anti-revisionist-and probably more accurate-history
of the erratic course of nineteenth century bankruptcylegislation. The
early bankruptcy acts lasted only briefly because they were inspired
only by brief panics, and had no sound basis in our culture for a longer
duration, "for the only reason in law or excuse in morals for a bank-
ruptcy act is the relief of unfortunate debtors in time of general or
wide-spread calamity."379
The opponents argued that we did not need a bankruptcy law to
enhance credit collection, because in normal economic times, we can
feel secure that the debtors of America will honorably pay their debts,
and where they cannot or will not pay their debts, the flexible sanctions
of state insolvency laws and local commercial custom can provide all
the sanction needed.380 Thus we return to the old, virtuallyJacksonian
theme of a century earlier: "[W]e ought to go back to the old-fashioned
primitive doctrine that requires the payment of all honest debts. If any
forgiveness is sought the creditors will be ready to make a composition
377. Id. at 2266 (statement of Rep. Brantley). The opponents expressed a populist con-
fidence that the commercial morals of their states required no federal instruction: "Now, the
creditors down where I live-the merchants in my town, the wholesale merchants, the retail
merchants, the big merchants and the little merchants-all appeal to me to vote for the re-
peal .. ." Id. at 2269 (statement of Rep. Bartlett).
378. Id. at 2268-69 (statement of Rep. Bartlett).
379. Id. at 2270 (statement of Rep. Clayton); see also id. at 2268 (statement of
Rep. Bart-
lett); id. at 2265-66 (statement of Rep. Brantley).
380. Id. at 2270 (statement of Rep. Clayton).
My State [Georgia] and its people are honest. They do not need to be dragged
into the federal court in order to pay their debts. The merchants and
people that
built up that section until it has blossomed like the rose, until it is
today attracting
the amazement and wonder of the world, are unanimous almost in
denouncing that
law, which is a law not for the keeping of contracts or for the collection of debts, but
for the violation of contracts and for defrauding honest merchants of their dues.
Id. at 2269 (statement of Rep. Bartlett).
with the honest debtor even without the permission of any bankruptcy
act."381 The repeated efforts at amendment even by the supporters of
bankruptcy only prove the futility of legislative tinkering and "tempo-
rizing corrective methods":382
[I]nstead of attempting to correct the incorrigible, it would be wiser to
pursue the Spartan method of destroying this worse than cripple, this
hunchback, this legislative monstrosity which has served its purpose,
and remove it altogether from the statute books, and let all the people
conform their business transactions-buyers and sellers, debtors and
creditors-to honest laws and honest methods of administration in the
courts.383
As one might expect, the opponents then renewed the counter-ide-
ology of preferences as friendly gestures of honor and trust, rather than
collusive violations of some abstract moral duty to creditors. They re-
versed the symbolic imagery of the proponents, and the new symbolic
hero-victim became the preferred creditor, who will nobly save the
debtor from disaster if he is not undone by the harsh national prefer-
ence rules. Where a debtor falls behind, he may be forced into bank-
ruptcy "because his friends who stood ready and willing to put up the
money to save him could not do it by reason of this law that made it
dangerous to him and to them to go to his assistance."384
Under the flexible state insolvency laws, a man's neighbors and his
friends have been able to save him .... But ... under this [bank-
ruptcy] law . .. let a man's credit be questioned and his doom is
sounded. Let him be honest with his friend and reveal his insolvent
condition and the friend stands to lose protection for the money he
advances to save. Let him transfer or assign property with which to
secure his friend and this may be the act that makes him a bankrupt.385
Exploiting the rich moral ambiguity of the word "confidence," the op-
ponents addressed the issue of the supposedly immoral "secret lien" by
viewing it rather as an intimate act of social bonding.386
381. If the people-that is, the honest little merchant in your small town and in your
ad-
great city, who has been "beaten" frequently out of his money by people taking
of this law-if those who are not benefited by the law, in short, who are
vantage
robbed by this law, were banded together like the beneficiaries of its provisions, this
statute would not stand upon the books thirty days.
Id. at 2272 (statement of Rep. Clayton).
382. Id. at 2270 (statement of Rep. Clayton).
383. Id.
384. Id. at 2266 (statement of Rep. Brantley). Rep. Clayton adds in sarcastic response to
one of the proponents:
man
[D]oes the gentleman think that any man who in failing circumstances goes to a
who has money, within four months of his failure, and says to him: "I am about to
fail; I am in an embarrassed position; let me have a thousand dollars and I will prefer
books,
you." Do you think that any sane man, if this bankruptcy law remains on the
will let him have that thousand dollars?
Id. at 2273.
385. Id. at 2266 (statement of Rep. Brantley).
386. It may be that a business man may find himself sorely in need of ready cash.
can
Although he may be abundantly solvent, yet, with this amendment as the law, he
3. The tinkeringcycle.
The 1910 amendment purported to be the final step in the scientific
regulation of the secret lien. But it solved the secret lien problem only
incompletely, and, as the opponents warned,387the amendment proved
to be merely the next minor stage in the historical ritual. Like the pref-
erence rules before and after it, the 1910 amendment faced undoing by
the imagination of judges who would not strike down a transaction as a
preference unless it violated some intuitive norm of commercial
conduct.388
Each new stage of the cycle seems to bring some infamous prefer-
ence-denying cases, and the 1910 amendment produced a memorable
trio. In Baileyv. BakerIce MachineCo., the Court simply declared the
entire preference scheme irrelevant to a conditional sale by a creditor,
because a conditional sale, however much it resembles a chattel mort-
gage, did not constitute a "transfer" from debtor to creditor.389 In Ca-
rey v. Donohue,390the Court narrowly read the regulation on late-
recorded liens, holding it inapplicable where the state recording law
protected only bona fide purchasers, not general or lien creditors. But
the most important case in the trio was Martin v. Commercial National
Bank,39' where the Court managed to uphold what must have seemed
like virtually a "classic" preference-an old chattel mortgage which the
creditor bank recorded the day before bankruptcy when it knew the
debtor was insolvent. Martin derogated the trustee's status as against
secret lienors with an almost vindictively narrow construction of the
statutory language.392
not obtain the ready cash from a confidential friend and give that friend a valid lien
unless the lien be then recorded, and this recordation would probably ruin the credit
of the business man. This amendment may be supported by sound commercial mo-
rality, but it may work hardship to honest men who need ready cash to tide them over
temporary difficulty.
Id. at 2271 (statement of Rep. Clayton).
387. "Let me predict here and now that conflict in the decisions of the courts in constru-
ing the bankruptcy law will continue to multiply ..." Id. at 2270 (statement of Rep. Clayton).
388. McLaughlin noted that the amendment "would seem to have been well adapted to
achieve its purpose [testing all the elements of a preference at the time of a required record-
ing], had not the perseverance [sic] of the tradition of judicial strict construction brought
about the contrary result." McLaughlin, supra note 344, at 241.
389. 239 U.S. 268, 274 (1915). The Court was unimpressed by the very broad definition
of "transfer" in section 1 of the Bankruptcy Act of 1898, ch. 541, 30 Stat. 544, 545 (1898).
While the distinction between a conditional sale and chattel mortgage
may be literally and formally correct, the construction was a strict one, for in sub-
stance a conditional sale is like a chattel mortgage, and whether the security interest
was made or only suffered to exist by the debtor might be regarded as merely a
matter of form insufficient to defeat the policy of the amendment to test a security
transaction at the time of its recording.
McLaughlin, supra note 344, at 241.
390. 240 U.S. 430 (1916).
391. 245 U.S. 513 (1918).
392. The state statute said that a late-recorded mortgage lost to liens that were gotten
before recording. Id. at 516-17. The trustee thus logically argued that the late recording here
was "required," so that the transfer would be treated as occurring the day before bankruptcy.
The cycle of response was predictable. In 1926 Congress offered
another tinkering amendment that proved comically incompetent to
solve the problem, and the courts quickly showed that when it came to
restricting credit devices valid under state law and not showing any dra-
matic signs of fraud, they would not give well-intended, bumbling fed-
eral legislation the slightest margin of error. The 1926 amendment
added the phrase "or permitted" back into the description of recording
in section 60(a),393 thereby clearly intending to reverse Martinand Ca-
rey.394Unfortunately, though section 60(a) purported to define a pref-
erence, Congress neglected to amend section 60(b), the section that
defined voidability and determined the date as of which a transfer
should be tested. The courts thus felt unobstructed in upholding se-
cret liens in bankruptcy on the theory that the 1926 amendment had
changed nothing of substance,395and cooly informed Congress that it
would have to keep trying until it got it right.396
C. The ChandlerAct
1. Thenewpretense,and the cureof the 1898 Act.
The Chandler Act of 1938 is the next great episode in the history of
the scientific pretense in American bankruptcy law. As some of the
contemporary commentary shows, its supporters were not too shy to
call it "one of the most 'scientifically' created pieces of legislation ever
penned by the hand of man."397 "In the broad field of commercial law
'scientific' legislation is especially possible and especially important.
For here there can be calm, dispassionate judgment, removed from the
fervor and pull of politics."398
In the proponents' view, the law could be purely apolitical, based in
hard-headed empirical sensibility about the needs of the man in the
But the Court read the state law to "require" registration only in favor of a creditor who fixed
a lien on the property before the recording, id. at 519, and the trustee obviously did not meet
this test. In that sense, the trustee would lose if he were simply asserting the power of a
lienholder under the strong-arm clause of ? 47(a). But the Court's narrow reading of "re-
quired" seems to have ignored the independent role of the preference prohibition in ? 60,
and thus ended up essentially eviscerating the 1910 refinement of ? 60. To make things
worse, the Court suggested that the trustee could only claim the rights of actual existing cred-
itors, not the power of a hypothetical lien creditor, id., thus again nullifying the trustee's pref-
erence-restricting powers in favor of a much weaker power-in this instance, the ? 70 power.
See Bankruptcy Act of 1898, ch. 541, ? 70, 30 Stat. 565-66.
393. Act of May 27, 1926, Pub. L. No. 69-301, 44 Stat. 662, 666.
394. HearingsBeforethe House Comm.on theJudiciaryPursuantto H.R. Res. 353, 68th Cong.,
2d Sess. 20 (1925) (statement of Randolph Montgomery, National Credit Men's Association).
395. E.g., First Nat'l Bank v. Live Stock Nat'l Bank, 31 F.2d 416 (8th Cir. 1929).
396. In Hirschfeld v. Nogle, 5 F. Supp. 234 (E.D. Ill. 1933), the judge upheld against the
trustee an eve-of-bankruptcy grab by a creditor whose earlier recording had expired under
state law, "[h]owever persuasive the report of the judiciary committee may be as to the intent
of Congress in 1903, 1910, and 1926 in amending the Bankruptcy Act in the regards men-
tioned, in view of the fact that the Supreme Court has decisively held that the ills intended to
be cured have not been reached .. ." Id. at 238.
397. Mulder, Ambiguitiesin the ChandlerAct, 89 U. PA. L. REV. 10-11 (1940).
398. Id. at 10.
street, abetted by experts, combines of lawyers, professors, economists,

and businessmen. The experts would formulate purposes, be available
after enactment to guide administrative interpretation and to suggest
refining amendments. The 1898 Act had become a "sordid picture of
inefficiency, dishonesty, and inadequacy of administration," but "[a]n
unselfish group of men, all experts," convened to draft the new act.399
Their reports led to rich legislative history which now permitted sensi-
ble purposive construction, and the "National Association of Credit
Men" was already monitoring first year administration of the Act.400
In the crucial provision of the Chandler Act, Congress amended
section 60 to declare that for the purpose of avoiding preferences
a transfershall be deemed to have been made at the time when it be-
came so far perfectedthatno bona-fidepurchaserfromthe debtorand
no creditorcould thereafterhaveacquiredanyrightsin the propertyso
transferredsuperiorto the rightsof the transfereetherein .. .401
Here, finally, was the body blow to secret liens. If a creditor took secur-
ity for a loan-even if simultaneously with the loan and hence for ap-
parently present value-if he delayed publicizing the mortgage under
state law, the bankruptcy law would treat the mortgage as occurring
just before bankruptcy.
The new preference rule was the key element in the new progressive
reform. Its advocates happily received it as recognition of the clear-
headed modern view that the quintessence of bankruptcy is ratable eq-
uity among creditors. The encrusted, sentimental historical view of
bankruptcy had wrongly focused on its sources in economic distress,
and thus had misconceived the role of bankruptcy law as debtor relief.
Bankruptcy law had thus been influenced "by uninstructed debtor psy-
chology," and the result had been wrong-headed preference legisla-
tion.402 But the Chandler Act properly set aside any issues of the
stigma of bankruptcy and aimed for rational distributional rules among
creditors, "based upon sound economics and sound sociology."403
In the 1938 version of the Whiggish history of American preference
law, we find a clear-headed acknowledgement of the defects of the 1898
Act. Its "[b]asic defects in form" and "[e]xasperating problems [arose]
out of the defective correlation" among the provisions for preferences,
acts of bankruptcy, voidable liens, and the trustee's title.404 The 1903
and 1910 laws were merely "repair services undertaken by
people not
intimately acquainted with the articulation or with the operation of the
bankruptcy machine," and the 1926 law was just an "absurd climax to
399. Id. at 11.
400. Id. at 11-12.
401. Ch. 575, 52 Stat. 840, 869 (1938).
402. McLaughlin, Aspectsof the ChandlerBill to Amendthe BankruptcyAct, 4 U. CHI. L. REV.
369, 371-73 (1937).
403. Id. at 371-73.
404. Id. at 388.
the history of dislocated amendment."405 The Chandler Act helped
solve a major problem-the vexing confounding of preferences and
voidable liens arising from judgments. By eliminating the "nebulous
test of permission to record" established in 1926, it ensured a "clear-
cut federal criterion" for testing state laws.406 As for the consistent
prejudice in favor of manipulative secured creditors evinced by the
courts in their wilfully narrow reading of section 60, these decisions
would "encounter as flat a contradiction in the Chandler Bill as statu-
tory English permits."407
Where the contemporary commentators criticized the new statute,
they did so in a scientific "spirit of reform" and with regard to "the
natural evolution of the law," praising its enlightened "teleology" but
noting where it just lapsed slightly in its effort to cure bankruptcylaw of
anachronism and moral equivocality.408
The commentators also expressed fears that the courts might yet
again undermine Congress' progressive reforms, and might subvert the
clear new mandate to apply the preference prohibition widely and vig-
orously.409 But it should not discourage the scientific-minded that fur-
ther refinement may prove necessary: "Man's limitations are ever made
405. Id. at 389.

406. Id. at 390-94. The Chandler Act clarified the distinction by referring solely to
transfers in ? 60, treating the voidable liens arising from legal proceedings solely in ? 67. Id.
at 391.
407. Id. at 393.
408. See Treiman, supra note 110, at 189-91, 200-01, 206-07, 212-15. Treiman decried
in particular the retention of the act-of-bankruptcy rules in the 1938 Act as a troubling ata-
vism. Id. at 199-200. Of course, the old notion that a debtor triggers bankruptcy by violating
some rule of conduct had been a fiction for a couple of centuries, since the acts became "pas-
sive," see notes 110-125 supra and accompanying text, but Treiman argued that the retention
of this nominal doctrine caused confusion and undermined the rights of creditors. Treiman,
has wrought
supra note 110, at 197-99, 201-205 (describing how acts-of-bankruptcy provision
linguistic confusion throughout bankruptcy statute); id. at 208-09 (act-of- bankruptcy require-
ment unnecessarily protracts "critical period" during which aggressive creditors can "rapidly
[hack] to pieces" the estate before the trustee can step in). Moreover, by reinforcing the
bank-
imagistic association of insolvency and fraud, the act-of-bankruptcy doctrine prevented
ruptcy law from fully cleansing itself of its irrational moral implications. Id. at 189-91, 200-01.
409. Mulder, supra note 396, at 24. Mulder feared that even if the new statute had over-
ruled Martin, the courts could nevertheless circumvent the statute by using once again the
maneuver they used in Bailey-excluding a wide variety of security transactions from the defi-
nition of "transfer." See notes 389-394 supra and accompanying text. Mulder also very
liens
presciently feared that the courts would not construe the statute to void various floating
in accounts receivable financing. Anticipating what indeed became the next great episode of
had
legislative disaster in the history of preference law, he warned that some commentators
ex-
already argued against voidability and that some legislators had proposed a federal bill
pressly to protect such liens. Mulder noted the argument that accounts receivable financing
was a crucial device in modern commerce, but insisted that it must give way to the new scien-
tific scheme of preference law. Mulder, supra note 396 at 25-26. Ironically, McLaughlin, on
the other hand, recognized the force of this argument in favor of accounts receivable
financers, but expressed confidence that courts would not disregard the demands of modern
commerce. He adopted a defensive tone in justifying the absence of any provision in the
Chandler Act protecting accounts receivable financers on "the general theory that the state-
ment of one detail invites another and that bankruptcy laws should not undertake detailed
codification concerning business transactions." McLaughlin, supra note 403, at 394.
manifest when his handiwork is submitted to the practical test."410 Any

defects in the new law were "by no means fatal"-the Chandler Act was
"indeed a work of art," and a statute "worthy of a happy fate."411
2. Thedownsideof the cycleagain: the "equitablelien."

Thepersistenceof the equitablelien. To appreciate why the scientific
pretensions of the Chandler Bill suffered the ritual fate of preference
legislation, we must take a step back to see another major preference
issue that had been relatively dormant for a century-the equitable lien.
The name "equitable lien" is itself part of the history, because the fuzz-
iness of the phrase reflects the fuzziness of the concept.412 In a sense,
many of the preference issues I have been discussing involve "equita-
ble" liens-that is, transfers of security to creditors which might seem
to fall within the legal prohibition of the preference statute, but which a
judge might uphold because they nevertheless do not violate his nor-
mative standards for debtor-creditor transactions. But the name has
been applied to a more specific doctrine-though, as we will see, even
that doctrine applies to an amorphous and varied set of transactions.
In fact, "equitable lien" came to be a catch-all term for such things
as a promise to execute a mortgage that was not carried out, or a mort-
gage that was defectively recorded, or a security contract covering
property that fell outside the mortgage laws.413 Early in the nineteenth
century, the courts began to face the special preference problem raised
by the unexecuted mortgage. At common law, if a debtor promised to
give a mortgage but failed to do so, the creditor might be able to get a
court of equity to award a kind of specific performance of execution of
the mortgage.414 The actual pledging or execution of the mortgage
nunc pro tunc made the original promise an executed promise, so the
transfer would be from the earlier date.
410. Mulder, supra note 396, at 13. In the Chandler Act, "weak spots which had long
gone unnoticed have been repaired; serious efforts have been made to curb dishonest bank-
ruptcies; clarity of expression and uniformity of terminology have been attempted; and proce-
dural provisions have been altered in the interests of speed and efficiency." Id. at 13-14
(footnotes omitted).
411. Id. at 38.
412. As numerous historians have wryly noted, many things called "equitable liens" are
neither equitable nor liens. E.g., Glenn, The "EquitablePledge," Creditors'Rights, and the Chandler
Act, 25 VA. L. REV. 422, 422-23 (1939); McLaughlin, Amendments (1926) of the BankruptcyAct, 40
HARV. L. REV. 341, 389 (1927). The equitable lien is not so much a right related to trust or
specific performance, as a term for unjust enrichment. The equitable lienor has a right to get
the collateral or his money back, but it is less of a right than that held by a cestui
que trust or
vendee of land, and he loses to a bona fide purchaser orjudgment lienholder, who at least has
a state-sanctioned interest. Glenn, supra, at 423-30.
413. 1 G. GILMORE,SECURITYINTERESTSIN PERSONALPROPERTY,? 7.2, at 198-99, ? 11.1,
at 336 (1965). The term was also occasionally applied to unrecorded mortgages or to
floating
liens on after-acquired property. See Friedman, The BankruptcyPreferenceChallengeto After-Ac-
quiredPropertyClauses Underthe Code, 108 U. PA. L. REV. 194, 196-200 (1959).
414. Glenn, supra note 4, at 533-35. The creditor could not get specific performance
where the agreement to give security did not mention specific property. In re Jackson Iron
Mfg. Co., 13 F. Cas. 260 (E.D. Mich. 1877) (No. 7153).
One might think that such an equitable lien, if legally executed
within the preference time-zone, would be a preference, but the equity
doctrine had a great deal of independent force. Indeed, it seemed to
resist statutory preference prohibitions precisely because it was as
much an inchoate sentiment as a legal doctrine.415 It created a tension
between the general concern to prevent preferences and the specific
concern to protect a good faith creditor who had made an unsecured
enabling loan before the preference period and then took security in
the goods within the preference period.416
Despite Justice Story's pioneer effort at a scientific, categorical pref-
erence rule, some of these equitable liens escaped the preference
trap.417 The 1898 Act did little to resolve the question whether this
basic form of the equitable lien was a preference.418 The case law
quickly split over the predictable problems of categorizing subtly differ-
ent transactions and construing an inadequate statute, "but underneath
was a conflict of ideas, and a dogged determination as to every point
where the letter of the law did not force surrender."419 The Supreme
Court early upheld one version of what was called an "equitable lien"-
the after-acquired property clause- where it found that the creditor
was merely carrying out a perfectly good faith security transaction after
a helpful enabling loan to the debtor.420 Williston objected that the
preference prohibition spoke categorically, whatever the limpid views
of "natural equity" judges might hold,421 and some courts stringently
proclaimed the formal, categorical nature of the equality-is-equity
principle.422
415. Glenn, supra note 412, at 438 (describing the equitable lien as more a "sympathy"
than a doctrine).
416. Glenn, supra note 4, at 533-35.
417. E.g., McMechem v. Grundy, 3 H. &J. 185 (Md. 1810); Burdick v. Jackson, 14 N.Y.
Sup. Ct. (7 Hun.) 488 (N.Y. App. Div. 1876). Perhaps the equitable lien was tied up with the
notion that a creditor's equity fastened upon a specific piece of property, so that the later legal
execution was not even a transfer, or perhaps it at least represented the sort of creditor "pres-
sure" which might have appealed to an American judge loyal to Mansfield. Or perhaps
judges tended to find equitable liens where the creditor had given a crucial "enabling" loan to
the debtor, and therefore relied on their sense of raw moral equity to uphold the transaction.
Glenn, supra note 4, at 533-35, 540-41; Glenn, supra note 412, at 450.
418. The Effectof Insolvencyon Contractsto Give Security,51 HARV.L. REV. 135, 139 (1937)
(student author).
419. Glenn, supra note 412, at 441.
420. E.g., Thompson v. Fairbanks, 196 U.S. 516 (1905). The favored creditor in Thomp-
son gave the debtor an "enabling" loan and took a validly recorded chattel mortgage in float-
ing inventory. Later, the creditor took the inventory, knowing the debtor was insolvent and
considering bankruptcy, but without any intent to defraud other creditors. Holding that this
was nothing like "the bald creation of a lien within the four months," id. at 525, the Court
invoked the relation-back doctrine to deny the trustee's claim of a preference. Accord
Humphrey v. Tatman, 198 U.S. 91 (1905).
PersonalProperty,19 HARV.L. REV.557, 572
421. See Williston, Transfersof After-Acquired
(1906) ("[t]here is no natural equity which should protect payments which do in fact prefer
and which were known to prefer, because the debtor was serving some end of his own in
making the payment").
422. E.g., In re Great Western Mfg. Co., 152 F. 123 (8th Cir. 1907):
But the Supreme Court's tolerance of equitable liens culminated in

the famous case of Sextonv. Kessler,423where Justice Holmes acknowl-
edged that the "equitable lien may not carry the reasoning further or
do much more than express the opinion of the court that the facts give
a priority to the party said to have it."424 Sextonconfirmed a long
Supreme Court effort to enhance personal property security, but it was
quickly denounced425 and followed by decades of controversy in the
commentary and the courts.
As one commentator noted, the equitable lien in bankruptcy pro-
duced a conflict between a "generalistic" and a "particularistic"view of
preferences, roughly paralleling the conflict between the formal rule
favoring categorical ratable equity and a looser normative standard per-
mitting inquiry into the commercial ethics of individual credit deals.426
But the theory and purpose of the bankruptcy act were to distribute the unex-
empt property which the bankrupt owned four months before the filing of the peti-
tion ..., share and share alike, among the creditors of the same class .... Any other
course of decision opens a new and enticing way to secure preferences, nullifies
every provision of law to prevent them, and invites fraud and perjury. Hold that
transfers within four months in performance of agreements to make them before that
time do not constitute voidable preferences, and honest debtors would agree with
their favored creditors before the four months that they would subsequently secure
them by mortgages or transfers of their property, and just before the petition in
bankruptcy were filed they would perform their agreements .... The great body of
the creditors would be left without share in the property ... This court will hesitate
long before it approves a rule so fatal to the most salutary provisions of the bank-
ruptcy law.
Id. at 127.
423. 225 U.S. 90 (1912). The debtor had pledged a shifting mass of stocks and bonds to
the creditor but had retained possession. The Court treated the interest as an equitable lien
immune to the preference rules, because the debtor had at least segregated the paper from
his other assets.
424. Id. at 98-99.
425. See 2 G. GILMORE, supra note 413, ? 45.3.3, at 1301.
426. Validityof Liens Against a Trusteein Bankruptcy,34 YALEL. J. 891 (1925) (student
author). The first tendency explains all our bankruptcy acts, and the second explains why they
do not work very well. The result in the case law was a wide variety of ad hocjudicial
scrutiny
of credit arrangements. Thus in In re Dier, 296 F. 816 (3d Cir. 1924), the creditor had loaned
the debtor some public bonds, with the understanding that the collateral was equity in some
real estate subject to a first mortgage. The debtor then created a corporation to own the
property, and the creditor got stock in the corporation. The court treated the security interest
as an equitable assignment in an intangible, awaiting its hypothecation in the
corporation, and
recognized it as a metaphysical question whether the original promise was of a present or a
future thing. Upholding the transfer, it found the creditor to be naive and generous,
stressing
his sympathetic performance at trial. See also Massachusetts Trust Co. v. MacPherson, 1 F.2d
769 (lst Cir. 1924). The debtor car dealer had transferred warehouse
receipts on cars to
secure the transferee's loan of 80% of price of cars, and transferee later took
possession of
the car. The facts suggest a vaguely sleazy deal between debtor and creditor in the form of a
field-warehousing arrangement, and when the creditor took the cars he clearly knew the
debtor was insolvent, but the court found no fraud and upheld the transfer. The bitter dis-
sent, complaining that the case will "go far to destroy the wholesome provisions of the Bank-
ruptcy Act" and the "fundamentally important principle of equality of treatment of creditors
in bankruptcy," observed that the credit papers were vague forms that misdescribed the
prop-
erty. Id. at 773-74 (Anderson, J., dissenting).
The key moral criterion in the cases seemed to be whether the creditor had
given what
might loosely be called an enabling loan, advancing the money necessary for the debtor to get
The particularistic view was denounced as "emasculating" the prefer-
ence statute,427leaving the law to the whim ofjudges, and the call went
out for a new scientifically rational regulation428of this "dangerous and
elusive" enemy of preference law.429
Congressionalbackfire.The Chandler Act of 1938430was supposed to
kill Sextonby making the transfer good as of the time when a bona fide
purchaser could defeat the lienholder. The old statute had said that the
4-month preference period ran from the time the transfer was recorded
if recording was required under state law. The Chandler Act instead
ran the clock from the time the favored creditor could defeat a bona
fide purchaser. Moreover, it said that if the transfer remained un-
perfected at the time of the petition, it was deemed to have been made
just before the petition. Hence the newly empowered trustee could de-
feat the relation-back ploy and the "equitable liens" that ploy had
sustained.431
But Congress' effort to create a formal rule quickly proved a disas-
ter, and, ironically, prompted calls for a legislative standard more sensi-
tive to commercial custom. In Corn ExchangeBank v. Klauder,432the
Supreme Court, for once, construed the preference statute in favor of
the trustee, and against a creditor bank that had loaned money on ac-
counts receivable.433 Though it is not clear that the drafters of the
the assets in the first place. To use a later phrasing of the same sentiment in a different
context, a late transfer to the creditor would escape the preference prohibition if it did not
indicate a diminution of the estate. Validityof Liens, supra, at 895. Another commentator ar-
gued that to deny relief when the creditor suffered the very contingency he foresaw would be
unfair, and that in any event the general creditors in modern commerce tend to rely on finan-
cial statements, not visible assets. Effectof Insolvency,supra note 418, at 136-37.
427. EquitableLiens and Pledges:A Studyin Securityand BankruptcyLaw, 37 COLUM. L. REV.
621, 630 (1937) (student author).
428. See Validityof Liens, supra note 426, at 897 ("Although encouragement of enabling
loans may be sound economic policy, it would seem to be more properly made subservient to
predictability of legal relations resulting from a given state of facts.").
"[T]he body of law established with respect to equitable liens has become increasingly
intricate, until preferential treatment based on a contract to give security has become a matter
of chance, depending upon the practice of a particular forum administering the debtor's es-
tate ...." Effectof Insolvency,supra note 418, at 143.
429. McLaughlin, supra note 412, at 389.
430. Ch. 575, 52 Stat. 840, 869. The equitable lien was now to lose in bankruptcy, since
the Chandler Act was "designed ... to aid the trustee, and in the process to sweep away not
only a lot of intervening case law, but also the last vestiges of a theory-and of a sympathy."
Glenn, supra note 412, at 438.
431. Glenn, The ChandlerAct and the TrusteeAs a Bona Fide Purchaser,25 VA. L. REV. 885,
888 (1939). But the new provision did not literally make the trustee a bona fide purchaser.
Such a provision would be "dangerous" and "revolutionary," giving the trustee too much
still
power to cut off a wide range of equitable rights. Id. Moreover, the newly armed trustee
could not defeat various subtler interests designated by state law as pledges, and the trustee
could still lose to unrecorded interests where there was a good excuse for nonrecording-
such as fraud, accident, mistake, or imperfect instruments. Glenn, supra note 412, at 447-49.
432. 318 U.S. 434 (1943).
433. Id. at 434. Under state law, the creditor would have lost to a later assignee of the
accounts because the former had not given notice of the assignment to the debtor's debtors.
That fact, whether relevant or not to the policies of preference law, would have enabled a
bona fide purchaser to defeat the bank. Thus, the Court agreed that the Act literally made the
Chandler Act had even contemplated this possibility, everyone immedi-

ately recognized that the result was brutal for non-notification
financers, who were lending nearly a billion dollars a year.434 Thus, a
new line of commentary appeared, denouncing the Chandler Act as
mindless overkill. Klauderhad upset vital security arrangements, and
had "no relation at all to the legitimate purposes of a preference
statute."435
Even the strongest supporters of the Chandler Act's bona fide pur-
chaser test had to acknowledge that, at least as construed, the Chandler
Act bludgeoned a wide variety of state-ratified financing schemes. Iron-
ically, however, the key drafter, Professor McLachlan,noted defensively
that, at the time of its ratification in 1938, any fears raised before Con-
gress that the test would go too far "were quieted by contemplation of
what was deemed to be the established tradition of strict construc-
tion."436 In a further irony, when Professor McLachlan conceded the
assignment a voidable preference. Justice Jackson acknowledged that "for thirty-five years
Congress has consistently reached out to strike down secret transfers, and the courts have
with equal consistency found its efforts faulty or insufficient to that end." Id. at 438.
434. Congress had apparently never adverted to the issue of the accounts receivable
financer, see McLaughlin, supra note 344, at 245, but the Chandler Act effectively undermined
accounts receivable financing because it had always been assumed that an accounts receivable
financer would lose to a bona fide purchaser. See G. GILMORE, supra note 413, ? 8.6, at 273.
Accounts receivable financing had increased greatly at the end of the Depression; it was
the most liquid asset after cash and marketable securities. McLaughlin, supranote 344, at 247-
48. Klauder might have been a narrower decision if it had distinguished incidental, post-
purchase acts from more burdensome acts like recording. But the Court seemed to assume
that a hypothetical bona fide purchaser would do all sorts of burdensome things after
purchase. The equally notorious case of In re Vardaman Shoe Co., 52 F. Supp. 562 (E.D. Mo.
1943), showed that the lower courts would not draw the line. In Vardaman,the trustee voided
the transfer of accounts to a creditor who had complied with all state publication rules be-
cause, in the court's view, a hypothetical bona fide purchaser might have performed such
things as novation, collection, or judgment against the account debtor. Id. at 565; see also
McLaughlin, supra note 344, at 249-50.
435. Ireton, A Proposalto AmendSection60A of the BankruptcyAct, A6 CORP.REORGANIZA-
TION 257, 264 (1947). For criticism of the Court's (rare) literal construction of the statute, see
ProposedAmendmentto Section60 of the BankruptcyAct, 57 YALELJ., 828, 835 (1948). Commenta-
tors voiced fear that the aggressive new bona fide purchaser rule even threatened the princi-
ple that tort judgment creditors had super-priority in bankruptcy. See Morris, supra note 344,
at 750.
The commentators' fears were probably exaggerated, since many states soon effectively
evaded Klauderby changing state law to nullify the rights of subsequent, notice-giving assign-
ees of accounts receivable. Id. at 751; G. GILMORE,supra note 413, ? 8.6, at 273-74. The state
law changes did not, however, protect inventory financers from Klander,since it was an irre-
ducible principle that they lost to buyers in the ordinary course of business in regard to the
tangible property. Morris, supra note 344, at 751-52.
436. McLaughlin, supra note 344, at 245. He insisted that a strict reading of the Act
would have given the trustee only the power that he earned by actually performing the acts
that a bona fide purchaser might perform, and that to rely, as the courts did, on what a hypo-
thetical purchaser might do, was to enter an "uncharted sea of speculation." Id. at 246-47.
Klauderand Vardamnan seemed to send creditors toward "byways of finance where legal risks
are written off through higher interest and carrying charges." Id. at 251. Indeed, this was not
an area where one would have expected any judicial activism, because, in McLaughlin's view,
one would have assumed preference and security law was an area without political implica-
tions unlike, for example, labor law or criminal law. Id. at 247.
need for a new revision of the statute to weaken the trustee's power, his
major reason was his fear that courts might eventually resort to their
old maneuvers and respond to the Chandler Act by reviving secret eq-
uitable liens. He feared they would thereby magically "turn secret con-
tracts into conveyances, with a view to doing equity between the
parties, but with the consequence of defeating equitable distribution of
the assets of the bankrupt transferor."437
Thetinkeringrecurs.The solution, of course, was to propose yet an-
other very mild adjustment in the statute. The idea now was to reduce
the bona fide purchaser status of the trustee to that of a "creditor hold-
ing a lien without special priority, obtained . . . on a simple con-
tract."438 But the fight would nevertheless continue between those
who saw helping secured creditors "to have liberated the beneficent
forces of nature" and those who described the movement as one "back
to the jungle."439 Proponents applauded the change because, in their
view, the drafters of the Chandler Act had simply ignored the develop-
ment of modern commercial financing, and had foolishly forgotten that
the trustee was supposed to protect creditors as well as purchasers.
The Chandler Act punished a secured creditor for the irrelevant reason
that he did not intend his interest to prevent the debtor's continuing in
business, and made it impossible for lawyers to counsel their clients in
accord with desirable and customary business practices.440
Other commentators, however, recognized the historical frustration
of legislators in striking down secret or equitable liens and lamented
that "the proposed lien creditor test [revives] with unimpaired vigor
the inequities of the secret lien."441 This side of the debate found se-
cret liens were "usually deliberate and closely guarded both by the fa-
vored creditor and the panicky debtor on the brink of insolvency."442
The commentary imagined the horror of Sexton arising from its
437. MacLachlan, PreferenceRedefined,63 HARV.L. REV. 1390, 1393 (1950). The spelling
of the author's name was changed by decree of court, Jan. 21, 1948, correcting an error made
in Scotland about 1835. Id. at 1390 n.2.
438. McLaughlin, supra note 344, at 253 (emphasis omitted). McLaughlin conceded that
the trustee was wrongly characterized as a purchaser, and better treated as a levying creditor.
The bona fide purchaser test, however, was to remain for interests in real estate, since realty
did not pass through commercial chains and was rarely conveyed to pay off debts in ordinary
course. Id. at 254-56.
439. Id. at 258. The supporters of the liens argued that they were not really secret at all,
since they were informally communicated through credit agencies and other channels. Id. at
258-59.
440. See Hanna, Preferences in Bankruptcy,15 U. CHI. L. REV.311 (1948) (noting that mod-
ern business is characterized by large production and distribution on small profit margin, so
that it relies heavily on credit; creditors want security over other creditors, not purchasers in
due course).
441. Keeffe, Kelly & Lewis, Sick Sixty:A ProposedRevisionof Section60.4 of the BankruptcyAct,
33 CORNELL L.Q. 99, 106 (1947) ("equitable" liens are essentially the same as secret liens;
trade creditors loosely rely on visible assets, not financial condition).
442. Id. at 107. This argument departs from the "formal logical parallelism" of the "sta-
tus" argument, which holds that if the trustee is a judgment creditor he should not have
preferred status for the 4-month period, but it does serve ratable equality. Id. at 109.
grave.443
In 1950 Congress did replace the powerful bona fide creditor test
with the more moderate lien creditor test. Creating a new 8-layer
scheme, the new law used the 4-month rule to test the elements of a
preference from the time the favored creditor had perfected his interest
against the lien creditors.444 But the drafters realized that the switch to
a creditor test might swing back so far that it would revive the equitable
lien issue. So it added a bizarre provision in section 60(a)(6) expressly
condemning, without defining, "equitable liens" as "contrary to the
policy of this section," and retaining for those liens only a form of the
bona fide purchaser test from the Chandler Act. But this remarkable
subsection then made an exception to that exceptional power for pur-
chasers in the ordinary course of trade, arguably to protect inventory
financers.445 Along with other minor provisions, the result was an in-
comprehensible, elephantine law, a perfectly ambivalent statute that
incoherently mixed supposedly sensitive new formal rules with hope-
lessly vague normative standards.446
Professor McLachlan somewhat embarrassedly conceded that the
expansive new legislative prose was "less condensed" than his original
proposal, but insisted that the inherent complexity of preference law
was not conducive to a simpler style. And he expressed confidence that
443. One suggestion was to retain the Chandler test on the theory that it fully accorded
with the regulatory spirit of equality as equity. ProposedAmendment,supra note 435, at 836-37.
The author suggests that Klauder served the healthy purpose of forcing the practice of ac-
counts receivable financing out into the open for scrutiny:
But bankruptcy substitutes for the race of diligence achievement of its own objec-
tive-preservation of the estate, during the period of insolvency preceding bank-
ruptcy, for equitable distribution to all creditors. The secret transfer, regardless of
its validity apart from bankruptcy, is inimical to this purpose. If such a transaction,
unpublicized until immediately before bankruptcy, is subsequently validated as
against the trustee, there is a real diminution of the assets upon which other credi-
tors have relied in dealing with the debtor and in refraining from prosecuting claims
to judgment.
Id. at 837.
But a bolder suggestion was that if Congress was dissatisfied with the overbreadth of the
formal rule in the Chandler Act, the solution might be a candidly normative standard: a pro-
viso that "for the purposes of this section such a creditor shall be deemed to have an interest
superior to that of any equitable lienor." Keeffe, Kelly & Lewis, supra note 441, at 112.
444. 64 Stat. 24, ch. 70 (1950). The drafters retained, however, the bona fide purchaser
test for realty, since state recording acts protected only purchasers.
The 1950 amendment is too long for full quotation here. The revision of old ? 60(a)
became ? 60(a)(l), and old ? 60(b) became ? 60(a)(2), containing the new lien creditor test.
Subsections (3), (4), and (5) are detailed glosses on the lien creditor test. Subsection (6),
described below, denounces equitable liens, but provides that it is subject to subsection (7),
which elaborates on how transfers must meet state recording requirements. It offers a 21-day
grace period to circumvent the preference prohibition. Subsection (8) protects certain trans-
fers made for new and contemporaneous consideration. See G. GILMORE, supra note 413,
? 45.4, at 1303-04.
445. 64 Stat. at 25-26; see Morris, supra note 344, at 752.
446. Gilmore makes an admittedly futile attempt to reconcile the subsections, but con-
cludes: "These are not mysteries which are easily unraveled. Perhaps they cannot be unrav-
eled at all." G. GILMORE, supra note 413, ? 45.4, at 1305.
the new law would cease to waste attention on the "unpredictable an-
tics of hypothetical persons," and redirect it in a hard-nosed way to the
actual effects of purchases and liens.447 But, of course, this ultimate
refinement quickly proved to be just the next episode.448 Gilmore of-
fered a typically wry view of this next episode in the moral history of
preference law, suggesting that neither the 1950 amendment nor the
simultaneous effort of the drafters of Article 9 to simply flatly ban the
equitable lien would make much difference:
It is submitted that that the answer to the question just posed
should be with emphasis, No. We might say that if the equitable lien-
or at any rate this aspect of the equitable lien-had not existed, it
would have been necessary to invent it; if the Code in some sense abol-
ishes the equitable lien, it will have to be invented all over again.449
V. THE MODERN PHASE
A. The Infamy of the Floating Lien
Despite some confidence that the 1950 Act had solved the problem
of the equitable lien,450 there still lurked anxiety that one variant, the
floating lien in after-acquired property, might remain troublesome.
Ironically, the problem lay not so much in the Bankruptcy Act itself, but
in the relationship of the Bankruptcy Act to the triumphant modern
revision of security law in Article 9 of the U.C.C. Looking back later,
Gilmore noted that the issue raised:
questions which can be asked on the level of reason but answered only
on the level of faith. ... It is not merely difficult to fit the language of
? 60(a)(6) with the language of Article 9, it is impossible; they are in
447. MacLachlan, supra note 437, at 1390-91.

448. It soon produced the ritual, notorious agnostic case, in this instance, Porter v.
Searle, 228 F.2d 748 (10th Cir. 1955), to show that, given a tiny bit of play in the joints, courts
would read any new preference rules with highly creative disdain to uphold morally unchal-
lengeable transfers as equitable liens. The debtor bought retail merchandise from Searle on
installment and promised, but never executed, a chattel mortgage. Shortly before he went
bankrupt, the debtor got Searle to agree to a release, whereby the creditor took the goods
back and cancelled the agreement. The court found that the debtor's promise had created an
equitable lien, for which Utah law did not require perfection. It then offered the following
prestidigitation:
The stock of merchandise was not surrendered to the Searles by [the debtor] to
perfect their lien, but to satisfy the debt secured by the lien and to discharge the lien.
It was an enforcement device and not a perfecting device that the Searles employed.
Id. at 755. The court reviews the 1950 amendment and notes a legislative purpose not to
faith-
impede and choke the flow of credit to small businesses. The court also purports to be
ful to the view that Klauderand Vardamanwere dangerous judicial overreadings of the prefer-
ence prohibition. Id. at 754-55.
For a critique of Porter that blames its outcome on the hapless obscurity of the 1950
statute, see Morris, supra note 344, at 753.
449. G. GILMORE, supra note 413, ? 11.1, at 336. Section 9-203 of the U.C.C. was sup-
posed to put the equitable lien to rest. But see Warren rool Co. v. Stephenson, 11 Mich. App.
274, 161 N.W.2d 133 (1968).
450. Morris, supra note 344, at 753.
differentuniversesof discourse.451
But no one anticipated that the floating lien would become the subject
of perhaps the most famous episode in the ritualized conflict between
confident mechanical rules and agnostic normative standards in bank-
ruptcy law.
The unbelievably complex debate over this narrow point of com-
mercial law suggests that larger questions are at stake. Preference law
was again to be used and abused as an instrument to reflect various ill-
articulated views of virtue in the marketplace, and to reconcile the prin-
ciple of debtor or creditor self-interest with the duties of these actors to
the abstracted community of creditors. The history of the floating lien,
in a sense a microcosm of the history of bankruptcy generally in the last
four decades, is yet again a history of legal attempts to fashion formal
rules on the pretense that we have drawn the relevant moral distinc-
tions about debtor-creditor behavior. It is also a history of the undoing
of those rules by judges who find them unharmonious with their stan-
dards of commercial custom and ethics, by political forces that see large
issues of power ill-resolved by these rules, and by commentators who
are skeptical of the feasibility of such rulemaking in the face of the
moral indeterminacy of commercial behavior.
The 1950s and 1960s saw an effort by legislators, judges, and aca-
demics to reach some consensus over the legality of the floating lien, to
fill the awkwardgap left by the old BankruptcyAct. But the easy toler-
ance of security interests in after-acquired property was highly unsta-
ble, as witnessed by the incredible efforts at intellectual rationalization
needed to keep the floating lien concept legally alive in the case law.
Underneath this tolerance was the vague sentiment that a court could
exploit the gap in the statute to protect a security interest that seemed
to accord with the judge's sense of the ordinary course of commerce.452
The issue is, in a sense, the commercial virtue of a very distinct com-
mercial actor. This character is the lender who takes and files a security
interest in after-acquired inventory and accounts receivable, and who
therefore has done all that the U.C.C. could require of a secured credi-
tor-long before bankruptcy and indeed long before any hint of insol-
451. G. GILMORE, supra note 413, ? 45.7, at 1320.

452. The legal and political history of the floating lien in the dying years of the old
Bankruptcy Act has enjoyed so much scholarly attention that it has become a ritual to merely
summarize the issue with a string citation to the articles. I shall do that too. Compare,Gordon,
The SecurityInterestin InventoryUnder Article 9 of the UniformCommercialCodeand the Preference
Problem,62 COLUM. L. REV. 49 (1962) and Kennedy, The Trusteein Bankruptcyunderthe Uniform
CommercialCode:SomeProblemsSuggestedby Articles2 and 9, 14 RUTGERS L. REV.518 (1960) and
King, Section9-108 of the UniformCommercialCode:Does it Insllate the SecutritInterestfromAttackby
a Trusteein Bankruptcy?,114 U. PA. L. REV. 1117 (1966) and Krause, The Codeand the Bankruptcy
Act. ThreeViewson Preferencesand After-AcquiredProperty,42 N.Y.U. L. REV.278 (1967) (the float-
ing lien offends the preference prohibition) with Friedman, supra note 413 and Henson, "Pro-
ceeds"Underthe U1iformCommercialCode,65 COLUM.L. REV.232 (1965) and Schwartz, TheEffect
of the UniformCommercialCodeon SecuredFinancing Transactionsand Banktruptcy, 38 ST. JOHN's L.
REV. 50 (1963) (the floating lien does not offend the preference prohibition).
vency. The creditor might have acted less than ideally-it might not
have systematically policed the accounts-but that is a minor and toler-
able defect in commercial vigilance under the U.C.C.453 Of course, sec-
tion 60(a) required the creditor to perfect his lien so he could defeat a
lien creditor and, hence, the trustee. The problem, then, is that the
creditor could not perfect the security interest until the debtor acquired
rights in the collateral. The debtor could not acquire rights in the col-
lateral until it acquired the collateral itself, which might be during the
preference period or right on the eve of bankruptcy.454In the technical
language of the statute, the issue was framed in two related ways: Did
the "transfer" occur when the security agreement was made and filed
or when the debtor obtained the collateral? Or, did the debtor's late
acquisition of the collateral create a payment for an antecedent
debt?455
What followed, as colorfully described by William Hogan, was the
jurisprudence of game and metaphor offering question-begging im-
agery to resolve the statutory problem instead of candidly acknowledg-
ing the moral or economic issues.456 The trustee could invoke the
"atoms and molecules" model: Each piece of property is separate, and
so the security interest in a piece is not perfected until the debtor actu-
ally acquires it.457 The favored creditor could respond to the "atomiz-
ers" with the model of "tit for tat": Each new piece of secured property
exactly substituted for a released piece, and hence did not effect any
late increase in the collateral.458 The favored creditor also had the
model of "fat pig": The corpus of accounts or inventory is an entity,
and if it swells during insolvency, it nevertheless remains one entity.459
Or the creditor had the more sophisticated version of "fat pig"-the
model of the security interests as "rivers or streams." Here the "onto-
logically oriented secured creditor" claims that though individual
453. U.C.C. ? 9-205 (1977) ratified the death of the old policing requirement first estab-
lished in Twyne's Case, 3 Co. Rep. 806, 76 Eng. Rep. 809 (Star Ch. 1601), and imposed on
American law in Benedict v. Ratner, 268 U.S. 353 (1925). See G. GILMORE, supra note 413,
? 11.6, at 358.
454. See G. GILMORE, supra note 413, ? 45.7, at 1323.
455. See Hogan, GamesLawyersPlay Withthe BankruptcyPreferenceChallengeto Accountsand
InventoryFinancing, 53 CORNELL L. REV.553, 555 (1968).
456. Id.
457. Id. at 556-57. The creditor had a counter-argument-that an aggressive lien credi-
tor attaching accounts as they came into existence could tie but not defeat the financer, as-
into
suming state law did not permit attachment or garnishing until the account came
existence. Id. at 557.
458. Id. at 561-62. Hence the transfer is really for current, not past, consideration. But
"tit for tat" seems to revive the supposedly dead issue of the policing of accounts. Id. at 563.
459. Id. at 558-59. The entity theory, Hogan points out, is too crude to resolve the
issue, as are all such metaphors. It still puts heavy pressure on defining "ordinary course"
conduct to prevent a creditor from manipulating the size of his entity.
can
Though seemingly too good to be true, a recent case shows that life, or at least law,
imitate art. See In re Fairchild, 31 Bankr. 789 (Bankr. S.D. Ohio 1983) (increase in value of
farmer's hogs due to their fattening does not create a preference to financer).
pieces of collateral change, the Heraclitean river remains the same.460

When the clever legal arguments work both ways, they are probably
suppressing intractable political or moral questions, and rulemaking is
probably futile. Indeed, that has been the history of the various stub-
born mutations of the "equitable lien" throughout the course of scien-
tifically pretentious bankruptcy legislation in this century. And as
Hogan argues, though the much-derided U.C.C. section 9-108 became
infamous for its supposedly cynical attempt to constrain federal law, it
might well have been the most mature solution to the problem.46' Sec-
tion 9-108's overlooked requirement that the transfer be in the ordi-
nary course was a prescient recognition, grounded in Mansfieldian
wisdom, that any more ambitious effort at technical rulemaking might
break down into a vague norm anyway, but a norm distorted by the
need to conform to apparently technical rule language.462
In rejecting U.C.C. section 9-108, the lawmakers and writers were
adopting a rather hopeful and vague form of egalitarianism. They
would leave metaphors behind, examine the relative virtue of credit
schemes in the marketplace, and devise precise criteria for determining
when floating-lien creditors have offended fairness and efficiency.
Meanwhile, in the famous cases of DuBay v. Williams463and Grain
Merchantsof Indiana,Inc. v. UnionBankand SavingsCo.,464 the courts con-
fidently resolved the whole issue in favor of the secured creditor. The
courts, of course, had only questionable jurisdiction to engage in the
subtle line-drawing that would show up in new legislation. But they
also, ironically, rejected the case-by-case normative approach, adopting
instead a virtually categorical rule in favor of the financer. In DuBay,
the Court archly surveyed and disdained the metaphors and finessed
the elegant confusions of the new version of section 60(a). It then sim-
ply declared that the floating lien was not a "true preference," since it
did not look like either the secret liens or the anticommunal last-minute
460. Id. at 559.

461. U.C.C. ? 9-108 (1977) provides:
Where a secured party makes an advance, incurs an obligation, releases a perfected
security interest, or otherwise gives new value which is to be secured in whole or in
part by after-acquired property his security interest in the after-acquired collateral
shall be deemed to be taken for new value and not as security for an antecedent debt
if the debtor acquires his rights in such collateral either in the ordinary course of his
business or under a contract of purchase made pursuant to the security agreement
within a reasonable time after new value is given.
This section was widely denounced as a "laughably naive attempt to perpetrate a fraud on the
Bankruptcy Act." G. GILMORE,supra note 413, ? 45.6, at 1309.
462. Hogan, supra note 455, at 569-70. For skeptics like Hogan, the "ordinary course"
test can police commercial morals far better than a mechanical rule like the 2-point tracing
test later established by Congress. See text accompanying note 476 infra. Moreover, ? 9-108
also clearly leaves unprotected the truly manipulative creditor who creates an after-acquired
property scheme to secure an old debt, without giving some new value at the time of the
agreement. See Hogan, supra note 455, at 569.
463. 417 F.2d 1277 (9th Cir. 1969).
464. 408 F.2d 209 (7th Cir. 1969).
seizures that offended the principles of preference law.465 Grain
Merchantsglided over state law definitions of transfer, and blithely
adopted just those metaphors that favored the secured lender.466
Moreover, the court there employed the political trope that a more re-
strictive preference rule would
impedeand chokethe flowof credit,principallyto small-businessmen,
and the object of the bill is to free its channels .... [Preference law
should not invalidate]normal and accepted business and financial
relationships.467
It therebyjustified what might have seemed like a cynical power cession
to sophisticated financers by granting these creditors the high moral
ground of commercial custom. DuBay and GrainMerchantscould then
be seen, to those so inclined, in the great tradition of breezy judicial
tolerance of loose credit arrangements, or even as political payoffs to
secured creditors. Legislators then went on a "rescue mission" for un-
secured creditors.468
B. TheBankruptcyReformAct of 1978
1. Thenewscientificpretense.
What followed was another decade of legislative and scholarly tink-
ering, grounded in the hope of drawing firmer lines in a modern scien-
tific statute that would draw all the relevant distinctions in preference
law. But, as always, that effort in section 547 of the 1978 Bankruptcy
Reform Act quickly proved a failure if measured against its pretenses.
It was quickly subjected to academic criticism that its scientific goal was
either wrong or unachievable. Courts continued to find play in the stat-
utory joints to uphold transfers that seemed morally unassailable, and
political critics found its resolution of debtor-creditor politics prejudi-
cial to those they perceived as the underclass of the credit markets.
The legislative response to DuBayis one of the most interesting ex-
periments in bankruptcyhistory in the art of morally confident scientific
rulemaking. As if by return to the hopes of Daniel Defoe, the drafters
of section 547 of the Bankruptcy Reform Act of 1978 believed they
could erect a complex set of rules that would draw the relevant moral
and economic distinctions that the previous statutes had failed to draw,
and to which the DuBay court had been blissfully indifferent.
The drafting history was long, elaborate, and hopeful. The early
efforts suggest some wizened wariness about the project. A 1967 draft-
ing committee of the National Bankruptcy Conference recognized the
465. 417 F.2d at 1287-89.
466. 408 F.2d at 212-19 (noting entity and substitution-of-collateral theories).
467. Id. at 214 (quoting 2 U.S. CODE CONG. SERV., 81st Cong., 2d Sess. 1985, 1986-87
(1950)).
468. See NATIONAL BANKRUPTCY CONFERENCE, REPORT OF THE COMMITTEE ON COORDINA-
TION OF THE BANKRUPTCY ACT AND THE UNIFORM COMMERCIAL CODE 6 (1970) [hereinafter
1970 REPORT].
ritualized failure of previous legislative reforms,469 and the inherent

difficulty of solving the large complex problems of liens in bankruptcy
through the fragile, abused medium of preference law.470 Indeed the
1970 committee report eschewed comment on the wisdom of the rea-
sonable-cause-to-believe test because it was skeptical about the empiri-
cal bases for the various sides in the controversy, and felt it had "no
special expertise in these matters."471 The 1970 report also recognized
the potential instability of the project caused by the changing political
premises.472
Nevertheless, by 1973, the Commission assisting Congress in draft-
ing the 1978 Act clearly stated its guiding philosophy: Preference law is
designed to capture secret liens and eve-of-bankruptcy grabs, to pre-
vent rewards to "favored creditors or to friends or relatives or simply to
those creditors who exert the most pressure on the debtor." The 1898
Act had become "encrusted over the years with amendments and judi-
cial interpretations," its provisions "intolerably complicated in their
terms and subject to qualifications for which there is no policy justifica-
tion."473 The new law would afford clean rationality. It had three
goals-to lessen the scramble among creditors, to promote equality,
and to eliminate any incentive for debtors and creditors to arrange un-
wise loans.474
The drafters of the new statute seemed to enjoy considerable moral
clarity in their vision of the credit market, and that vision contained one
prototypical villain: the undercollateralized financer who increases his
469. NATIONAL BANKRUPTCY CONFERENCE, REPORT OF THE COMMITTEE ON COORDINATION
OF UNIFORM COMMERCIALCODE AND BANKRUPTCYACT 3 (1967) [hereinafter 1967 REPORT].
The 1898 drafters wisely avoided a detailed treatment of security interests because security
law was:
in a state of violent and rapid flux. The old categories were breaking down; the new
categories had not yet emerged. It is in the highest degree unlikely that even the
most gifted and prescient draftsmen could have imposed anything like a workable
pattern on such a swirling chaos of law.
Id. The timing of the 1950 amendment was unfortunate, because the chaos had just begun to
resolve itself under the U.C.C. Id. at 5.
470. The committee recognized the artificiality of determining the validity of liens
through preference law rather than doing so directly through a federal lien-in-bankruptcy
law-but it was too late to take that approach. Id. at 6. This is even clearer in the 1970
Report, where the committee acknowledged it was taking on a more limited mandate than it
would have hoped for and was sorry it had to solve the whole problem through preference
law. 1970 REPORT,supra note 468, at 1.
471. 1970 REPORT,supra note 468, at 8.
472. The committee explained that when it began its work, its goal was to save secured
creditors from the preference-snaring reach of the 1950 amendment, but that when Dubayand
Grain Merchantsshowed that the courts would give floating-lien financers all the
protection
they could hope for, the new mission of the committee became to save unsecured creditors
from the courts. Id. at 5-6.
473. REPORT OF THE COMM'N ON THE BANKRUPTCY LAWS OF THE UNITED STATES, PART
I,
93d Cong., 1st Sess. 18-19 (1973) [hereinafter 1973 REPORT,PARTI]. After DuBav, the
pros-
pects for working out a sensitive intermediate position through case law were dismal, and the
situation demanded a "fair and sensible resolution of the policy issues
[through] statutory
revision." Id. at 206.
474. Id. at 202.
collateral in the preference period and thus commits a "classic prefer-
ence."475 Whether by fraudulent manipulation or undeserved fortuity,
this character offends the equality-is-equity principle, and the new stat-
ute contained two key innovations to deny him his undeserved or ill-
gotten gains. First, the statute would contain a clean, arithmetic 2-
point net improvement test, which would obviate "essentially meta-
physical speculations about the nature of a transferee's interest in a
constantly changing mass or aggregate of collateral."476 Second, Con-
gress would relieve the trustee of his evidentiary burdens in proving the
debtor insolvent at the time of the preferential transfer, and in proving
the creditor had a culpable mental state.477 It would be an economic
wrong per se for any creditor, for any reason, to improve his position at
the expense of other creditors within the suspect period.478
2. The elegantsubtletiesof section547.

The new section 547 mixed new "carefully measured concepts with
familiar definitional language from old section 60."479 If section 60
was an overly abstract definition of preference, inviting "qualifications
imaginatively grafted by the judges," section 547 was to be "a new and
radical intergation of definition and exception." The exceptions were
new and enumerated, and did not merely codify the case law. Thus,
475. Harris, A Reply to TheodoreEisenberg'sBankruptcy Law in Perspective, 30 UCLA L.

REV.327, 335-37 (1982).
476. In the 2-point test, the proposal "sacrifices a great deal to simplicity of administra-
tion" and seeks to avoid "tedious, asset-exhausting litigation." 1970 REPORT, supra note 468,
at 16-17. As finally articulated in the statute, the 2-point test protects from the preference
recapture rule floating lien collateral in inventory and accounts receivable, except:
to the extent that the aggregate of all such transfers ... caused a reduction, as of the
date of filing ... and to the prejudice of other creditors holding unsecured claims, of
any amount by which the debt secured by such security exceeded the value of all
security interests [90 days before the petition is filed].
11 U.S.C. ? 547(c)(5) (1982). The principle, then, is that if a floating lienor's collateral is
greater the day the petition is filed than it was precisely 90 days earlier, then bankruptcy law
presumes the increase is wrongful, except where the increase does not prejudice the estate
because it is due to such natural factors as crop harvests, completing work in progress, and
seasonal fluctuations in value. See 1973 REPORT,PARTI supra note 473, at 210. This crucial
new formal element in the preference law was soon attacked on two different grounds. Some
critics complained that, like many formal, mechanical rules, it was insensitive to its underlying
norm. Yet others complained that the rule's "mechanical advantage" was illusory, because it
proved unbearably complex in application. See note 533 infra and accompanying text.
477. See 1973 REPORT,PARTI supra note 473, at 201, 203.
478. The Commission cited with approval a Canadian study arguing that:
intention should be irrelevant. No creditor should, for any reason, improve his posi-
tion, at the expense of the other creditors, within the suspect period immediately
prior to bankruptcy.
Id. at 203, quotingREPORT OFTHESTUDYCOMMITTEE ONBANKRUPTCY ANDINSOLVENCY LEGISLA-
TION-CANADA 118 (1970).
479. Ward & Shulman, In Defenseof the BankruptcyCode'sRadical Integrationof the Preference
Rules AffectingCommercialFinancing, 61 WASH.U.L.Q. 1, 4 (1983).
For an exhaustive study of the statutory complexities of ? 547, concluding with a dyspep-
tic rejoinder to commentators who have questioned its assumptions, see Countryman, The
Conceptof a VoidablePreferencein Bankruptcy,38 VAND.L. REV. 713 (1985).
section 547 attacks the old abstract "conceptual" approach which left
the common law courts with room to roam.480
Section 547(b) lists the elements of a preference, largely tracking
section 60 but for the crucial new presumption of insolvency and the
crucial absence of a reasonable-cause-to-believe test in regard to the
creditor.481 Section 547(e) revises the lien creditor test for determin-
ing the timing of a transfer affected by state recording laws, aban-
doning the "artificial devices" associated with the old case law
corollaries to section 60(a)(2).482 Section 547(c) contains cleanly enu-
merated exceptions for nonpreferential transfers, using formal rules to
capture the norm of respecting transfers that exhibit uncontroversial
moral innocence and effectively provide equivalent value so that they
do no harm to the estate. The key exceptions are for short-term pay-
ments made in the ordinary course of business that resemble cash more
than credit schemes, and for those after-acquired property arrange-
ments that do not reflect increases in collateral as measured by the new
2-point net improvement test.483
The 1978 Act was drafted in a spirit of confidence that "the new
structure should herald a tighter, more literal construction of the famil-
iar definitional language."484 The goal of interpretation should be "a
more efficient, mechanical integration."485 This integration would em-
phasize equality of distribution and provide a "more efficient system of
recapture."486 Limiting protected transfers to the statutory list was
"critical," since "[t]he cornerstone of the new preference section is the
principle of equality of distribution based on fairness and perhaps eco-
nomic utility."487 Unlike section 60, section 547 does not merely arm
the trustee with the power to avoid transfers to creditors who have "be-
haved badly" by accepting payments with notice of the debtor's insol-
480. Ward & Shulman, supra note 479, at 5-6.

481. See 11 U.S.C. ? 547(b) (1982). The trustee must prove a transfer of property of the
debtor to a creditor, for or on account of an antecedent debt, while the debtor is insolvent.
This must occur within 90 days of the filing of the bankruptcy petition (or within a year if the
creditor is an "insider" with respect to the debtor), where the creditor thereby receives more
than he would have received in bankruptcy had the transfer not been made. See Ward &
Shulman, supra note 479, at 13-14.
482. See 11 U.S.C. ? 547(e) (1982); see also Ward & Shulman, supra note 479, at 14-15.
The statute dates the transfer at the time of perfection, or at time of the actual transfer if
perfection is within 10 days. Perfection is defined as the time after which a simple contract
creditor could not under state law get a judicial lien superior to the claim of the transferee.
483. See 11 U.S.C. ? 547(c) (1982); see also Ward & Shulman, supra note 479, at 15-16.
The exceptions are for (1) substantially contemporaneous exchanges; (2) ordinary course
pay-
ments for like-cash obligations incurred in the ordinary course; (3) enabling loans that would
otherwise be preferences by virtue of ? 547(e); (4) credit against preferences for
subsequent
new value the creditor gives the debtor; (5) transfers of floating lien collateral in
inventory
and receivables that satisfy the 2-point no net improvement test; and (6) statutory liens under
state law unless elsewhere invalidated.
484. Ward & Shulman, supra note 479, at 9.
485. Id. at 11.
486. Id.
487. Id. at 16-17.
vency or by participating in the race of diligence. Instead, section 547

comes closer to the principle that "all creditors ought to be treated
equally."488
Yet soon after this confidently scientific scheme became the law, it
drew attack as a classically failed, quixotic effort to prescribe formal
rules in an area that could only sensibly be left to the more modest
regulation of flexible norms. This agnostic position received its sharp-
est articulation from Theodore Eisenberg, whose argument ran essen-
tially as follows:489 Section 547 unnecessarily preempts unanimous
state law, with a federal rule being at best marginally superior. No co-
herent moral or economic theory supports any of the traditional firm
positions on the controversial preference issues, so we gain nothing by
overruling state law. Section 547 goes far beyond prohibiting aggres-
sive eve-of-bankruptcy "grabs" and secret liens to exaggerate equality
is equity, and the result is an arbitrary, mechanical rule.490 The new
rule aids unsecured creditors, but there is no empirical basis for assum-
ing the unsecured creditors need the protection.491 Even if there were
evidence that section 547 redistributed the risk of bankruptcy, it is not
clear that the social effect is positive, since the more ambitious prohibi-
tion of preferences may simply create a domino effect of serially col-
lapsing debtors.
In the face of philosophical and empirical indeterminacy,492 the
only clear effect of adding an extra set of rules is a wasteful increase in
litigation over the gaps in the pretentious new statutory scheme. Nor-
mative standards might seem to invite more litigation than rules, but
rules that threaten to treat many transactions as preferences increase
488. Id. at 17-18.

489. Eisenberg, BankruptcyLaw in Perspective,28 UCLA L. REV.953 (1981).
490. Id. at 963-66. Eisenberg also argues that the 2-point net improvement test in
? 547(c)(2) does not sensitively capture manipulation of collateral by a floating lienor, and
that the limitation of that safe harbor to inventory and receivables is wrong. Id. at 962 n.27,
964 n.33. Moreover, all the redistribution happens at the expense of secured lenders whose
collateral fortuitously increases during the preference period. If unfair treatment of un-
secured creditors is the problem, a better solution would be to give unsecured lenders a mini-
mum percentage of the estate. Id. at 969.
Indeed, Eisenberg is skeptical that the drafters of ? 547 were really concerned with polic-
ing immoral creditor behavior, suggesting instead that their mission was an abstract redis-
tributional goal in favor of unsecured creditors. Eisenberg, BankruptcyLaw in Perspective:A
Rejoinder, 30 UCLA L. REV.617, 631-32 (1983). In short, the drafters had a broader, if ill-
articulated, political agenda, and abused preference law in order to achieve it.
491. Unsecured creditors deserve little sympathy since they know about the system and
know not to rely too much on inventory or receivables. Unsecured creditors with notice can
protect themselves every bit as much as undersecured creditors. If the estate on the whole
benefits from more unsecured credit, the unsecured creditors will simply charge higher inter-
est and still lend, or secured lenders will take up the slack. One needs to know more than is
now knowable about elasticity of demand to know whether the rule makes any difference.
Eisenberg, supra note 489, at 966.
492. I claim no great insight into what secured and unsecured creditors deserve in
bankruptcy. They seem to deserve what the law promises them, for they lend on the
basis of a legal structure that, in most cases, is known in advance.
Eisenberg, supra note 490, at 628.
litigation the most.493 If there really are moral concerns in preference

law, they are just as well addressed through accommodating the moral
vision of state law, or at least through a flexible federal norm that in-
vokes the "ordinary course" theme of U.C.C. section 9-108.494
C. The Unravelingof Section547

1. Thecase law.
The skeptical position quickly found confirmation in the new case
law, which both deliberately expressed and inadvertently confirmed the
futility of preference rulemaking.495 One of the most interesting issues
proved to be the floating lien in the statutory gap that Congress had
ignored.
In Riddervoldv. SaratogaHospital,496Judge Friendly faced a very nar-
row issue under the bold new BankruptcyReform Act of 1978. In 1977
and 1978, a hospital where Riddervold had received medical treatment
filed and recorded a garnishment order on Riddervold's employer, the
State of New York, for the amount of an unpaid medical bill. The hos-
pital thus had a species of floating lien on Riddervold's income. On
December 3, 1979, Riddervold filed a voluntary bankruptcypetition. In
the 90 days preceding the petition-the statutory period during which
Riddervold's trustee could avoid any preferential payments Riddervold
made to a creditor-the state made two monthly payments to the hospi-
tal under the garnishment order.497
The rather ministerial, involuntary transfer of money under the gar-
nishment order hardly seems like the sort of manipulative side-deal be-
tween a debtor and a favored creditor that bankruptcy law has
normally-if erratically-associated with the sin of preference. But the
trustee nevertheless had a perfectly straightforward argument under
section 547 of the new BankruptcyCode that the payments were prefer-
ential. They certainly met the technical definitions of transfer, whether
involuntary or not, to a creditor, by a bankrupt debtor, in the period
just before bankruptcy, giving the creditor more than it would have got-
ten in bankruptcy. Section 547(e)(3), which states that a "transfer is
not made until the debtor has acquired rights in the property trans-
ferred," might seem to settle the issue. And the safe harbor for floating
liens in section 547(c)(5) quite explicitly protects from avoidance only
floating liens in inventory and accounts receivable.498
493. See Eisenberg, supra note 489, at 968-69.
494. Eisenberg, supra note 490, at 633-34.
495. See Ward & Shulman, supra note 479, at 9 (lamenting
discouraging signs that judges
are failing to respect the new, tightly formal structure of ? 547).
496. 647 F.2d 342 (2d Cir. 1981).
497. Id. at 343.
498. See note 483 supra and accompanying text. Ironically, the
drafting committee delib-
erately dodged this issue. Inventory and receivables were the "heart of the matter," and
"[t]here is much to be said for the principle of statutory drafting which counsels that only real
Judge Friendly, however, seemed utterly uninterested in anything

so mundane as the rules contained in the new Bankruptcy Code.
Rather, he leaped back to the presumably forgotten days of legal fic-
tions under the old bankruptcy law, and relied on some turn-of-the-
century decisions about property rights in garnished income.499 He
drily noted:
To be sure, these cases were decided under the Act of 1898 but we find
nothing in the language or the policy of the 1978 Code that forbids
their continued application.500
Friendly found what he wanted in a 1910 Learned Hand opinion.
Adopting Hand's "continuing levy" imagery, Friendly easily decided
that there was no preferential transfer to worry about in the case:
This is not because Riddervold took no action to cause the payments to
be made, since "transfer" is defined to include an involuntary transfer.
It is rather because after the sheriff has taken the step .... the debtor
has no property or interest in property subject to the levy which can be
transferred.501
Friendly, of course, showed that he had little regard for formal rules
restricting commercial conduct when his moral sense, presumably tem-
pered with commercial wisdom, told him that there was nothing wrong
with the conduct. The Riddervold opinion is a small but revealing in-
stance of the general instability of the new Bankruptcy Code's formalis-
problems be dealt with and that sleeping dogs should be left undisturbed." 1970 REPORT,
supra note 468, at 15-16.
499. Riddervold,647 F.2d at 344-46. Judge Friendly acknowledges that ? 547 completely
rewrote ? 60, and removed or changed material dealt with under the old ? 67 lien provision.
He also quotes the broad ? 101(40) definition of transfer: "every mode, direct or indirect,
absolute or conditional, voluntary or involuntary, or disposing of or parting with property or
with an interest in property, including retention of title as a security interest." Judge Friendly
nevertheless says "there is a dearth of authority" on the preference question here, and latches
on to a Learned Hand opinion, In re Sims, 176 F. 645 (S.D.N.Y. 1910). See note 501 infra.
500. Riddervold,647 F.2d at 347.
501. Id. at 346. In Sims, the garnished salary within the 4-month period belonged to the
creditor under a "continuing levy" theory. See In re Sims, 176 F. 645 (S.D.N.Y. 1910); cf. In re
Wodzicki, 238 F. 571, 572-73 (S.D.N.Y. 1916). But see In re Beck 238 F. 653, 654 (S.D.N.Y.
1915). Judge Friendly says flatly that there was no ? 547(b)(4)(a) transfer during the 90-day
is defying it,
period. In a sense, Judge Friendly is not relying on the state label; indeed he
since the New York statute, as he acknowledges, pretty clearly requires the garnishee to pay
the installments over to the sheriff, and the employer is under no obligation until the debtor
earns the wages-indeed the levy is ineffective if the debtor leaves his job. See Riddervold,647
F.2d at 345-46. But he does not smell a preference and simply declares that the income
execution works a novation whereby the employer owes 10 percent of the salary to the judg-
ment creditor. Id. at 346.
Simswas a one-page opinion, baldly describing the pre-four month income execution as a
"continuing levy" until thejudgment was paid. SeeIn re Sims, 176 F. 645, 646 (S.D.N.Y. 1910)
Judge Mayer in Wodzickiagrees with Hand, saying that if the trustee won,
the result would be that the bankrupt would ultimately obtain money collected for
account of the judgment creditor during 4 months when the execution and levy
under section 1391 of the New York Code were valid and outstanding, and the judg-
ment creditor would be deprived of the fruits of his diligence, all to the benefit of the
debtor-a result which I think was not contemplated by the bankruptcy statute....
Wodzicki,238 F. at 573.
tic scheme, and some of the criticism it has received reflects the distress
the advocates of the new Bankruptcy Code feel about any threat to the
Code's formalist, scientific pretensions.
Some courts read the statute with ceremonial respect, paying fealty
to the new categorically formal spirit of the Code.502 But several others
followed Judge Friendly's approach (if not with his arch, insouciant dis-
dain for the statute) allowing state law labels to define away the prefer-
ence problem, thus committing the BankruptcyAct to a role of policing
commercial ethics, rather than imposing abstract redistributional the-
ory.503 And in other situations, courts managed to manipulate the
amorphous definition of the debtor's property, in order to protect a
favored creditor who did not meet the imagery of the aggressive manip-
ulator, at times even invoking the old spirituality of the equitable
lien.504
502. See, e.g., In re Tabita (Tabita v. IRS), 38 Bankr. 511, 513-15 (Bankr. E.D. Pa. 1984)
(in garnishment case where creditor is IRS, government ambitiously argues that Ridderuoldhas
settled issue, but court says Judge Friendly simply ignored the statute); In re Eggleston (Eg-
gleston v. Third Nat'l Bank), 19 Bankr. 280, 283-84 (Bankr. M.D. Tenn. 1982) (nothing in
legislative history suggests ? 547(e)(3) is limited to after-acquired clauses; under state law,
transfer occurs when the wages are earned; garnishee gives money to court, so debtor retains
interest in wages until court redirects it); In re Emery, 13 Bankr. 689, 690 (Bankr. D. Vt. 1981)
(under ? 547(e)(3) a transfer is not made until the debtor has rights in the property, and the
debtor has no rights in the wages until he earns them); In re Diversified World Invs., Ltd., 12
Bankr. 517, 519 (Bankr. S.D. Tex. 1981) (assignment of rental payments due debtor is com-
plete when made; ? 547(e)(3) was enacted to overrule DuBay and GrainMerchants,and applies
here, and ? 101(40) defines transfer broadly; payments to creditor were indirect transfers
made to reduce debt); In re Cox, 10 Bankr. 268, 271-72 (Bankr. D. Md. 1981) (? 547(e)(3) is a
significant departure from the old Bankruptcy Act, expressly intended to overrule Grain
Alerchants,and garnishment is like an after-acquired property clause; though garnishment is a
perfected lien on wages such that a simple contract creditor could not acquire a judicial lien
superior to the rights of the judgment creditor, ? 547 avoidance powers extend to avoidance
of transfers, not perfection of liens, and the transfer of wages cannot occur until the wages are
earned).
503. E.g., In re Coppie, 728 F.2d 951 (7th Cir. 1984) (under Indiana law, garnishee is
accountable from date garnishment summons is served for any money owed debtor; like New
York law, this works novation; after court order, debtors no longer had property interest in 10
% of their future income; situation not analogous to after-acquired property clauses, since
here full ownership in income stream transferred at time of summons); In re Woodman
(Woodman v. L.A. Olson Co.), 8 Bankr. 686, 687-88 (Bankr. W.D. Wis. 1981) (earned wages
cease to be property of debtor after garnishment summons which creates equitable lien on
employer's debt to employee).
504. See In re Gurs, 34 Bankr. 755 (Bankr. 9th Cir. 1983). The creditor claimed a con-
structive trust on the debtor's title to real estate, and filed a lis pendens within 90 days of the
debtor's bankruptcy, giving the debtor constructive notice of the claim. The question was
thus whether the filing was equivalent to perfection of a security interest for an antecedent
debt. The court held that to find a preference in this situation would be to confuse avoidance
of a transfer of an interest in the debtor's property with avoidance of an act that perfects a
claim of ownership as against potential bona fide purchasers, and that ? 547 avoids the for-
mer, not the latter. To make this an illegal transfer under ? 547, the trustee must argue that
? 544(a)(3), giving the trustee a bona fide purchaser's lien-preempting power over realty,
transforms the creditor's equitable interest into the debtor's property. But as a prerequisite
to the operation of ? 544(a)(3), this argument requires that we first negate the effect of the lis
pendens under ? 547, so the trustee's argument is circular. See id. at 756-57.
As for the question of antecedent debt, the creditor is really an equitable owner, not a
creditor. The trustee argues under the broad definition of "claim" in ? 101(4) that the credi-
But the judicial subversion of the new statute was not limited to
floating liens. It was equally evident in the application of what is per-
haps the most revealing subsection of the statute in the context of the
rules-standards conflict. Subsection 547(c)(2) was the drafters' effort to
capture the norm of protecting innocuous, like-cash, ordinary course
payments to garden-variety trade creditors. The drafters loaded up the
provision with the rhetoric of ordinariness to ensure that the normative
goal was clear.505 Purely normative or customary language would have
created an inherent instability in a preference law that had purported to
make moral innocence irrelevant. But it seemed a political necessity
when so many threatened creditors were holders of small, regular debts
whose billing cycles made most payment antecedent, but who were not
aggressive creditors in any intuitive, normative sense of the term. The
drafters then sought to avoid this instability by constraining the norma-
tive language with a clear-cut rule: If, and only if, payment were within
45 days of the incurrence of the debt, it could be treated as if it were an
exchange for present consideration.506
The drafters may have had a clear image of the sort of transaction
covered by this rule, and they may have been confident that the 45-day
image of the billing and collection cycle effectively reflected the
norm.507 But the sudden eruption of case law showed how unstable
this mixed rule-standard was. How should a court establish the "ordi-
nariness" of every aspect of the credit arrangement? And how can a
court apply that norm to the diverse range of consumer purchases,
when the elusive line between necessities and luxuries makes "ordinari-
ness" impossible to discern? And most subtly, how does a court tell
when the debtor has incurred the debt? What of doctors and lawyers
tor is really asserting a claim for a debt, and indeed under California law the holder of the lis
pendens can get damages as well as specific performance, but this is a non sequitur. As if to
imitate, clumsily, Judge Friendly's reference back to hoary old case law, the Gurs court relies
on some faulty dictum in Cunningham v. Brown, 265 U.S. 1, 11-12 (1924) (in Ponzi scheme,
equitable owners only become creditors where trust res could not be traced to specific prop-
erty in hands of debtor). See Gurs, 34 Bankr. at 758. But cf In re AJ. Nichols, Ltd., 21 Bankr.
612, 614-16 (Bankr. N.D. Ga. 1982) (where bankrupt debtor took oriental rugs on "sale or
return" consignment under Georgia's U.C.C. ? 2-326, debtor's return of rugs to consignor
just before bankruptcy is a preference; for bankruptcy purposes, rugs became property of
debtor, and return was payment to a creditor on an antecedent debt).
505. The trustee may not avoid . .. a transfer-
(2) to the extent that such transfer was-

(A) in payment of a debt incurred in the ordinary course of business or financial
affairs of the debtor and the transferee;
(B) made not later than 45 days after such debt was incurred;
(C) made in the ordinary course of business or financial affairs of the debtor and
the transferee; and
(D) made according to ordinary business terms ....
11 U.S.C. ? 547(c)(2) (1982).
506. See Ward & Shulman, supra note 479, at 83-85.
507. Congress chose 45 days as the measure because it assumed that number repre-
sented the normal business cycle-a 30 day billing cycle plus 15 days for payment. Levin, .ln
Introductionto the TrusteesAvoiding Powers, 53 AM. BANKR. L.J. 173, 186-87 (1979).
rendering intangible services and billing over a long period of time?

Are credit card debts incurred when the card is issued, when the debtor
makes a purchase, or when the issuer's billing cycle begins? How can a
court stop a creditor from contriving its "due dates" just to evade the
preference prohibition?508
Some courts were quick to argue the importance of the categorical
preference-finding goal of section 547 and the jealously guarded nar-
rowness of any exceptions. They acknowledged that the statute was un-
clear, and that the Code policy was to recognize "normalcy" and
to leave undisturbednormalfinancialrelations,becauseit does not de-
tractfrom the general policy of the preferencesection to discourage
unusualactionby eitherthe debtoror his creditorsduringthe debtor's
slide into bankruptcy.509
But these courts denied creditors any freedom to exploit the ambigui-
ties of section 547(c)(2), insisting that under the new regime, intent and
motive are irrelevant, and only effect is controlling. The old reason-
able-cause-to-believe standard was concerned with deterring race-to-
diligence behavior, but the new Code is concerned with the more ab-
stract policy of equality of distribution.510 These courts, however,
could not resolve the question of how we define incurrence of the debt.
Thus, some courts quickly started exploiting the ambiguity of "in-
currence" to so recharacterize a transaction that it could fall within the
section 547(c)(2) exception on dubious technical grounds, because it
seemed nevertheless to meet the "ordinariness" norm. And even if the
statute could tolerate a little manipulation of the "incurrence" provi-
sion in the case of truly "ordinary" trade creditors like utilities, the
courts extended their tolerance to commercial lenders. In In re Iowa
PremiumServiceCo.,511 the court agreed that the debtor's liability on a
promissory note occurred sequentially as the interest accrued, rather
than all at once when it wrote the note, and so the transaction essen-
tially met the substantial contemporaneity norm that helped it escape
508. Kaye, PreferencesUnder the New BankruptcyCode, 54 AM. BANKR.LJ. 197, 202-03
(1980).
509. Barash v. Public Fin. Corp., 658 F.2d 504, 510 (7th Cir. 1981), quoting H.R. REP.
No. 595, 95th Cong., 1st Sess. 373-74 (1977).
510. In Barash, the trustee sought to recover payments the debtor voluntarily made, via
direct payment or payroll deductions, to various consumer trade creditors on installment
loans. The payments were made within 90 days of bankruptcy, and far more than 45 days
after the debt was originally "incurred" (at the time of the consumer contracts). The court
conceded the "normalcy" of the transaction, but held that the debt was incurred "whenever
the debtor obtains a property interest in the consideration exchanged giving rise to the debt,"
see Barash, 658 F.2d at 509, quoting4 COLLIER ON BANKRUPTCY ? 547.38 (15th ed. 1980), and
hence far more than 45 days before the payment. The moral innocence of the creditor has
become irrelevant under the firm, rule-like boundaries of ? 547(c)(2). See Barash, 658 F.2d at
509; CfIn re Ray W. Dickey & Sons, Inc., 11 Bankr. 146, 147-48 (Bankr. N.D. Tex. 1980) (debt
on a phone bill is incurred when calls are placed, not when bills are sent); In re McCormick, 5
Bankr. 726, 730-32 (Bankr. N.D. Ohio 1980); In re Bowen, 3 Bankr. 617 (Bankr. E.D. Tenn.
1980); In re Keeling, 11 Bankr. 361 (Bankr. D. Minn. 1981).
511. (Iowa Premium Serv. Co. v. First Nat'l Bank), 695 F.2d 1109 (8th Cir. 1982).
the preference prohibition.512 As a matter of policy, a contrary result
would prejudice commercial bank lenders as compared to trade credi-
tors.513 A similar result occurred in the payment of rent for real estate,
where the court inferred that rent was only due as the land was monthly
consumed.514 These metaphysical questions proved an excellent op-
portunity for courts to pierce through the rules to get to norms.
The norm underlying section 547(c)(2) can be characterized as a
mens rea standard: The creditor should be protected for his
nonculpable mental state, even if the reasonable cause standard has
been eliminated, where the situation suggests he engaged in no true
creditor grabbing at all, but has received payment simply resulting from
an automatic schedule. This norm would, of course, reflect the Ameri-
can inversion of the old English pressure rule. But the notion of simul-
taneity offers another way to view that norm. If the creditor put
something into the estate essentially at the same time that he took
something out, his payment is really a wash, and so it does not truly
diminish the estate. Like the equitable lien, "diminution of the estate"
is, in a sense, a very vague moral theme that runs through much of the
antipreference case law. But it is also a much more specific doctrine
512. The court reasoned that the debt was contingent in the sense that the debtor was
only obligated to pay interest for the time it retained the use of the money. The Bank thus
would not have had a cause of action for the unpaid interest until the interest accrued because
the debtor, after all, had a choice to prepay the loan. Moreover, though not decisive, the rate
of interest was variable-prime plus one and a quarter. The Code did not define incurrence,
but it does define debt in ? 101(11) as liability on a claim, and it defines a claim as a right to
payment or remedy. Thus, the court treats payment on an installment loan like a rental pay-
ment which depends on use, not possession of the property. Id. at 1111-12. But see id. at
1112-15 (Ross,J., dissenting) (? 547(c)(2) was never intended to cover this case; debtor here
had received the full consideration for loan, and interest was not really contingent since even
at time of issuance interest could be readily calculated).
513. Id. at 1112; see also In re Ken Gardner, Ford Sales, Inc., 10 Bankr. 632, 646-48
(Bankr. E.D. Tenn. 1981) (interest is a debt payment on a new service in the ordinary course,
which is nonpreferential because it helps keep the debtor alive).
514. In re Mindy's, Inc., 17 Bankr. 177, 179-80 (Bankr. S.D. Ohio 1982). The debtor,
Mindy's clothing retailer, rented land, and the question was whether its monthly rental pay-
ments were for an antecedent debt incurred when it signed the lease. The court held that the
consideration was consumed each month, so the payments were not preferential, particularly
because here the rental debt was based in part on a percentage of the debtor-lessee's gross
sales receipts.
In In re Thomas Garland, Inc., 19 Bankr. 920 (Bankr. E.D. Mo. 1982), the debtor in pos-
session, in a Chapter 11 proceeding, sought to recover electricity payments paid several weeks
after the billing statement was mailed. Union Electric relied on the judicially created net re-
sult rule that when payments are made on a running account in the regular course of business,
within 90 days, without the creditor knowing of the debtor's insolvency, and where the net
result of the transactions is to enrich the estate, no preference exists. Here the value of the
electricity exceeded the payments, and the estate thus enjoyed a net gain during the 90-day
period. The court rejected the view that the debt is incurred at the time of consumption,
since this would present for utilities the practical problem of identifying when each kilowatt or
business
pound of steam is consumed. In the absence of a rule, the court resorted to sensible
custom, since "[t]he court should not require unnecessarily the parties to rearrange their
accounting practices and financial dealings with one another." Id. at 927. The trade practice
here was to read the meter's usage every 30 days, so that the debt was incurred on the last day
of each 30-day period.
that has its roots at the very birth of the 1898 Act. Its specific source
connects it with the general principle we have seen that a creditor
should receive some reward or protection if he has played an unusually
helpful role in trying to sustain the estate, even where his actions meet
all the technical elements of a preference.515
The true "diminution of estate" doctrine arose at the turn of the
century to protect running account creditors who engaged in a series of
debit-credit transactions when the debtor fell into peril, but who were
unfairly punished by a strict reading of the preference rules.516
Though an early amendment was supposed to have removed any need
for a common law doctrine, that doctrine nevertheless survived under
the authority of the old "greater percentage" test of preferences.517 In
its most specific surviving form under the old Bankruptcy Act, the
"greater percentage" test would enable the generous creditor to net
out all the payments and credits during the preference period to reduce
his preference liability, even though the statute technically said that
preference liability could only be reduced by the advances made after
the allegedly preferential payments.518
One can obviously treat the 1978 Code as so sweeping and formal a
515. Of course, one particular type of "enabling loan," the purchase money security
interest, does receive special treatment. A creditor who either sells the debtor goods and
immediately reserves a security interest in them, or who lends the debtor money which the
debtor immediately uses to buy specifically identified goods, may gain super-priority against
other secured creditors under U.C.C. ? 9-312, and may also circumvent the preference provi-
sion under 11 U.S.C. ? 547(c)(3). However, the rules defining purchase money security inter-
ests require very strict tracing between the loan money and the collateral, seeJ. WHITE& R.
SUMMERS, HANDBOOK OF THE LAW UNDER THE UNIFORM COMMERCIAL CODE 1042-47 (1980), so
that this special category of protected credit cannot be expanded to cover the wide variety of
"enabling loans" which often receive favored treatment under the 1898 Act.
516. The net result rule developed from judicially perceived inequities in the 1898 Act.
In Pirie v. Chicago Title & Trust Co., 182 U.S. 438, 449-56 (1901), the Supreme Court con-
strued ? 57(g) to require surrender of all preferences, whether or not they were voidable
under ? 60(b). The creditor could retain the preference or receive a claim, but not both.
Later, courts in running account cases alleviated this result with the net result rule, under
which payments and credits could, in accord with business custom, be treated as one com-
bined transaction in a mutually interdependent relationship. See Kimball v. E.A. Rosenham
Co., 114 F. 85, 88-89 (8th Cir. 1902); see alsoJaquith v. Alden, 189 U.S. 78, 82-83 (1903). In
1903, Congress amended ? 57(g), applying it only to void or voidable preferences, see note
339 supra, so the surrender rule did not apply to a creditor who lacked the reasonable-cause-
to-believe that would make the payment voidable. This change might have eliminated the
theoretical foundation for the net result rule, but numerous courts kept applying it anyway.
E.g., In re Fred Stern & Co., 54 F.2d 478, 480 (2d Cir. 1931); Walker v. Wilkinson, 296 F. 850,
854-55 (5th Cir. 1924); In re Stewart, 233 F. Supp. 89 (D. Or. 1964).
517. SeeWard & Shulman, supranote 479, at 47-51. Under the greater percentage test in
? 60(a)(1) of the old act, a transfer was preferential only if it enabled the creditor to get a
percentage of his debt greater than that received by other creditors of the same class. This
test has been accused of creating grave statutory confusion and of reviving the murky
phan-
tom of the "diminution of the estate" norm. See Ward & Shulman, supra note 479, at 51.
Several courts have been condemned for upsetting the "clean, mechanical" operation of the
rule, id. at 48, 51, by recurring to the anachronistic language of this test. See, e.g..,In e Music
House, Inc., 11 Bankr. 139 (Bankr. D. Vt. 1980); In re Conn, 9 Bankr. 431, 433-34 (Bankr.
N.D. Ohio 1981).
518. See Farmers Bank v.Julian, 383 F.2d 314 (8th Cir. 1967).
revision of the preference laws that no engrafted common law excep-
tions should apply, and indeed section 547(c)(4) of the Code expressly
bars a preferred creditor from "netting out" all advances and pay-
ments, regardless of their sequence.519 Yet soon after it was passed,
the Act invoked concern that its scientific ambitions were threatened by
the embers of the diminution of estate doctrine. As courts implicitly
reinvoked the doctrine,520 they raised a concern that equitable senti-
ment might undermine the whole Code. So morally compelling and
flexible was the diminution doctrine that "[a]ny court can extend these
devices to any set of facts if it desires to save a transaction it deems
worthy."521 The doctrine could protect any transaction that is crucial
to the "ability of a business to operate and thereby, at a minimum, pre-
serve the value of its assets for all creditors."522
A good number of cases flatly reject the diminution of estate doc-
trine-or its underlying sentiment.523 Yet, ironically, in one area where
the doctrine in technical form has been rejected, the rejection took the
form of a normative sentiment that runs quite contrary to the suppos-
edly unassailable equality-among-creditors principle of the Code.
Some courts said that even where recapture of a preference from a
creditor would do nothing to enhance the estate for the benefit of the
other creditors, the Code permits the debtor to recover the preference
in order to enhance the utterly different policy of the fresh start and the
generous new Code exemptions.524 Of course, this is neither the first
nor the last instance of preference law serving as the instrument for a
519. See 11 U.S.C. ? 547(c)(4) (1982).

520. See, e.g., In re Bullen (Ryen v. General Motors Acceptance Corp.), 11 Bankr. 440,
441-42 (Bankr. W.D.N.Y. 1981). General Motors Acceptance Corporation, an undersecured
installment creditor, took installment payments during the 90-day period. The court found
no preference on the theory that had the payments not been made, GMAC would have been
allowed to repossess the car earlier, when it would have been worth more. But seeIn re McCor-
mick, 5 Bankr. 726, 730-32 (Bankr. N.D. Ohio 1980) (opposite result on same facts).
521. Ward & Shulman, supra note 479, at 57.
522. In re National Home Prods., Inc., 4 Bankr. Ct. Dec. (CRR) 1295, 1298 (E.D. La.
1978) (footnote omitted).
523. E.g., In re Fulghum Constr. Co., 706 F.2d 171, 173 (6th Cir. 1983) (common law
"net result rule" to protect creditor who had engaged in a series of loans and repayments with
debtor did not survive the 1978 Act); see In re Garland, 19 Bankr. 920, 922-25 (Bankr. E.D.
Mo. 1982) (if Congress had wanted to fully recodify the old net result rule it would have said
so explicitly).
524. See Deel Rent-A-Car, Inc. v. Levine, 721 F.2d 750 (llth Cir. 1983). The debtor,
Levine, had guaranteed a third-party's debt to Deel, and Deel obtained a judgment lien
against Levine shortly before the latter's bankruptcy. The trustee did not try to recapture the
property taken under the lien, since it would have been exempt in Levine's hands and thus
unavailable to the estate, but Levine himself tried to avoid the transfer under ? 522, which
enables the debtor to void a transfer that falls within the trustee's normal avoiding powers.
Deel's argument was thus that the transfer to him did not diminish the estate, since only the
debtor, not the general creditors, could benefit from recapture. The court acknowledged that
preference law is designed to protect creditors, but noted the enhanced fresh start and ex-
emption policies under the 1978 Act. Id. at 757. The preference provisions "are designed
not to punish the debtor but to defend him from the ravenous maw of creditors during the
preference period." Id. at 758; see, e.g., In re Faganl,26 Bankr. 212, 214-15 (Bankr. W.D. Ky.
1982) (debtor used ?? 522 and 547 to recover garnished wages); In re Roberson, 7 Bankr. 34,
political agenda, but it is an especially ironic instance, considering the

historical origin of preference law as an instrument for punishing cul-
pable debtors.
2. Reformand instantre-reform.
If section 547 was designed as a scientific and precise new rule that
would condemn all undeserving transfers as manipulative and that
would enhance the estate for the general creditors, then it was quickly
denounced as a failure in both premise and execution. Indeed, the
convergence of several different and contradictory criticisms of the new
law suggest that it only revived fundamental political and moral con-
flicts about credit and bankruptcy in our political economy.
One criticism was that the elimination of the "reasonable cause"
mens rea test for creditors has resulted in preference-finding overkill
for creditors as a class. The argument is that the new statute unfairly
shifts the burden of preference litigation from debtor to creditor.525 In
that sense, the criticism has brought the preference issue into a larger
conflict between perceived debtor and creditor interests that has more
directly concerned Chapter 13 personal bankruptcies and other con-
sumer law issues.526 The first Congressional report calling for re-re-
form of the 1978 Act made restoring the reasonable-cause-to-believe
test the highest priority in order to re-establish "the delicate balance of
equity between debtors and creditors, particularly with respect to con-
sumer credit transactions."527
Another version of this argument was that eliminating the test of
creditor culpability was not so much a political strike against creditors
as a misguided effort at compromise that resulted in a cumbersome,
poorly integrated set of definitions and exceptions. Rather than being
brilliantly coordinated, the exceptions are a clumsy device designed to
morally compensate for the elimination of the mens rea standard.528
35-36 (Bankr. D. Idaho 1980) (debtor used ?? 522 and 547 to avoid sheriff's levy and sale of
property).
525. S. REP. No. 446, 97th Cong., 2d Sess. 23-24 (1982).
526. See id. at 48 (statement of Sen. Mathias) (proposal to deny Chapter 7 discharge to
individual debtors who can repay some portion of their debts out of future income "would be
a basic departure from bankruptcy policies our country has embraced for nearly 100 years");
id. at 49-68 (statements of Sens. Metzenbaum & Kennedy) (proposed changes to constrain
individual Chapter 7 bankruptcies unfairly punish debtors and violate traditions of fresh start
principle).
527. Id. at 2.
The purpose of bankruptcy relief is to enable the honest but unfortunate debtor to
obtain relief from burdensome debt ....
At the same time, it is essential to public acceptance of the Bankruptcy Reform
Act that the law be seen to fairly balance the legitimate interests of all parties to
bankruptcy proceedings, so as to insure that the structure of the law itself does not
encourage the filing of petitions which are not justified by economic necessity....
The bill ... seeks to restore balance and efficiency to the Bankruptcy Code ....
Id. at 6-7.
528. The legislative history suggests that the reasonable-cause-to-believe standard was
Critics viewed the 45-day rule, for example, as an ill-designed effort to
capture the moral norm: The 45-day rule proved to be the paradigm of
the bad rule, overbroad and underbroad, both too vague and too pre-
cise.529 And the principal victims of the elimination of the reasonable-
cause-to-believe test were not creditors in general, or any particular
class of creditors, but rather an important group of debtors-those who
customarily issue commercial paper backed by letters of credit.530
A more striking criticism was that rather than limiting the overreach
of DuBay and GrainMerchantsand achieving a "rescue mission for gen-
eral creditors,"531the statute proved immediately impotent against se-
cured inventory and accounts receivable financers, yet was used cruelly
against nonculpable general creditors.532 If the application of the rules
of section 547 reflected a moral norm, it was not the condemnation of
manipulative secured creditors. The trustee has an almost insuperable
burden to prove manipulation under the 2-point net improvement test,
which has proved more a parody than a paradigm of the precise formal
rule.533 Moreover, trustees have exercised their discretion not to go
after preferred secured creditors, while some such creditors have essen-
irrelevant to the goals and elements of preference law. See Fortgang & King, The 1978 Bank-
ruptcyCode:SomeWrongPolicyDecisions,56 N.Y.U. L. REV. 1148, 1165-66 & n.63 (1981) (citing
BankruptcyAct Revision. Hearings on H.R. 31 & H.R. 32 Beforethe Subcomm.on Civil and Constitu-
tional Rights of the House Comm.on theJudiciary, 94th Cong., 1st & 2d Sess., pt. 3, at 1855-56
(1975-76)). According to this argument, when Congress first eliminated the standard, it real-
ized that it had made virtually every 90-day transfer a preference. It then created so many per
se exceptions that the only preference would be actual payment by a debtor to an installment
lender. The final version was a screwy compromise, not a radical and coherent integration.
Fortgang & King, supra, at 1166.
529. See Fortgang & King, supra note 528, at 1167-70. The arguments ran as follows:
The rule was vague because it is too difficult to tell when a debt is incurred; it was too precise
because though it was designed to reflect the 30-day billing cycle plus the 15-day invoicing
cycle, it was rigidly insensitive to variations in business practice. The result would be to dis-
tort rather than accommodate business practice, because businesses would simply alter their
cycles to fall within the period.
530. Id. at 1169. A debt taking the form of commercial paper backed by a letter of credit
is usually rated by the bank's creditworthiness, not by the debtor's. But under the Code,
rating agencies are now looking to the debtor. Payments by the debtor on the commercial
paper may get voided, but only after the letter of credit expires, so the creditor may get noth-
ing. Thus, preference law has failed "to leave undisturbed normal financial relations." Id. at
1167.
532. See Ross, The Impactof Section547 of the BankruptcyCode upon Securedand Unssecured
Creditors,69 MINN.L. REV.39, 51-57 (1984). Ross notes that the "avalanche" of filings under
the new law makes early generalization from the emerging case law plausible. Id. at 51.
533. Here is the argument: The combination of an initial deficiency and a decrease in
deficiency within the 90-day period is rare, because most after-acquired property financers
ensure themselves a "cushion," and late increases in collateral merely increase the cushion.
Id. at 62. Of course, a deficiency arising late in the 90-day period will ensure the creditor
protection under ? 547(c)(5) even if the collateral then dramatically increases at the last mo-
ment. Id. Moreover, inventory and accounts financers can finesse a deficiency by quickly ar-
ranging an increase just after a late deficiency occurs and then helping invoke a filing. Id. at
63. For an extensive discussion of how Congress' failure to define the "value" of accounts
receivable in ? 547(c)(5) may cause great uncertainty for financers, see Cohen, "I'alue"Judgg-
ments:AccountsReceivableFinancing and VoidablePreferences(Underthe .ewz BankruptcyCode, 66
MINN.L. REV.639 (1982).
tially escaped the preference net when the debtor goes into Chapter 11
or 13.534 Rather, the moral pattern, if anything, has been to punish
relatively innocuous creditors who have been merely careless in record-
ing their interests, but who can no longer escape the preference prohi-
bition under the old reasonable-cause-to-believe standard.535 It has
essentially worked to the detriment of unsecured creditors, who have
received no trickle-down in preference redistribution,536yet have suf-
fered the avoidance of their own payments, which are important to
them but are trivial to the estate as a whole.537
The instant re-reform movement thus aimed either directly at re-
storing the reasonable-cause-to-believe standard538or more broadly at
using the statute to express a flexible moral norm.539 But any effort to
restore some moral flexibility on behalf of creditors was quickly de-
nounced as a conspiracy against debtors by those who saw the 1978
statute as a victory in a Manichean class struggle. In that struggle, the
virtuous victors had been consumer debtors and small-time good faith
creditors, and the temporarily thwarted enemy had been consumer fi-
nance lenders. Now the preference debate absorbed moral energy
from the parallel battle over debtor's rights.540
534. See Ross, supra note 532, at 66-67 (trustees' heavy burden of proof in litigating
against inventory and receivable financers will discourage them from claiming preferences);
id. at 63-64 (trustee in Chapter 11 and 13 less likely to avoid preferences for fear of offending
creditors needed to rehabilitate debtor).
535. See id. at 51-54. The complaint is thus that ? 547 has not been used at all against
inventory and receivables financers, but is being used against careless creditors who are slow
to perfect their security interests-in short, that the Bankruptcy Reform Act is being con-
strued to parallel the U.C.C. filing theme. See In re Arnett, 731 F.2d 358 (6th Cir. 1984)
(creditor who waited 33 days to file interest, due to Christmas holidays and employee ab-
sences, lost security priority in bankruptcy); In re Davis, 22 Bankr. 644 (Bankr. M.D. Ga. 1982)
(creditor who inadvertently waited more than 20 days to file interest lost security priority in
bankruptcy); In re Butler, 3 Bankr. 182 (Bankr. E.D. Tenn. 1980) (creditor who filed only
locally and not with central office lost security priority in bankruptcy).
536. Ross, supra note 532, at 54.
537. For a comprehensive list of recent cases in which unsecured creditors have been the
prime victims of ? 547, see id. at 54 n.59. E.g., In re Advance Glove Mfg. Co., 25 Bankr. 521
(Bankr. E.D. Mich. 1982) (unsecured creditor's payment by check from debtor falls inside
preference period because of delay in payment by drawee bank). Ross blames these disasters
to the unsecured creditors on the elimination of the reasonable-cause-to-believe test,
though
he rightly notes that the Code may be having an invisible or subjudicial deterrent effect on
secured creditors.
538. See Fortgang & King, supra note 528, at 1165-66 (summarizing
congressional testi-
mony before passage of the 1978 Act complaining that it is too difficult for trustees to prove
reasonable-cause-to-believe).
539. See id. at 1171 (suggesting "ordinary course" standard).
540. See generally Ginsberg, The ProposedBankruptcyImprovementsAct: The CreditorsStrike
Back, 3 N. ILL. U.L. REV. 1 (1982) [hereinafter Ginsberg I]. Ginsberg argued that the pro-
posed elimination of the reasonable-cause-to-believe test was part of a "blatant" conspiracy of
creditor interests against poor debtors. Id. at 46. That larger conspiracy focused
primarily on
another issue: whether to force consumer debtors to go bankrupt
through Chapter 13, and
thereby surrender some of their future income, instead of receiving complete discharge
through Chapter 7. See Sullivan, Warren & Westbrook, LimitingAccessto BankruptcyDischarge:
An Analysisof the Creditors'Data, 1983 Wis. L. REV. 1091. The
preference issue thus has been
caught up in a larger political and economic debate over whether the 1978 Act unfairly per-
But restoration of a creditor culpability test, or deregulation of the

statutory scheme, was attacked on another ground as well. Critics
charged that re-reform would revive, if anything, insuperable proof
problems for the trustee or lead to vastly increased wasteful litigation
where the section 547 rules had spoken clearly and categorically,541es-
sentially validating the worst forms of aggressive creditor behavior.542
Ironically, the opponents of re-reform attributed to the re-reformers
the view that the 1978 Act was too generous to debtors, and so claimed
that the re-reformers wanted to punish all debtors. The anti-re-reform
solution was then to "target" the truly immoral debtors by restoring,
not the traditional American creditor mens rea test, but the old English
debtor mens rea test.543
But when the 1984 BankruptcyAmendments and FederalJudgeship
Act was finally enacted, it did not restore the reasonable-cause-to-be-
lieve test at all.544 Instead, it undermined the formality of the 1978
statute and restored normative flexibility in an unforeseen way. It fo-
cused on the very formal 45-day rule in the ordinary course trade-credit
exception under section 547(c)(2). In an amusing new permutation of
mitted large numbers of consumer debtors to escape from paying their debts out of their
income. See id. at 54-66; see also Ginsberg, TheBankruptcyImprovements Act-An Update,3 N. ILL.
U.L. REV.235 (1983) [hereinafter Ginsberg II]; Morris, SubstantiveConsumerBankruptcyReform
in the BankruptcyAmendmentsAct of 1984, 27 WM. & MARYL. REV.91, 116-24 (1985).
541. See Ginsberg I, supra note 540, at 47. Moreover, reasonable-cause-to-believe is
even harder to prove when insolvency is defined by the balance-sheet test, see 11 U.S.C.A.
? 101(2g) (West Supp. 1986), rather than the "equitable" test of inability to pay current
debts, because the trustee might lose even where the creditor knowingly had to extract pay-
ment or tolerate late payment from the debtor. In addition, the proposed revived reasonable-
cause-to-believe test would have been irrationally overbroad, because it would have applied to
business reorganizations and liquidations as well as to consumer cases. Ginsberg I, supra note
540, at 48. The drafters of the 1984 law even considered eliminating the 1978 law's presump-
tion that the debtor was insolvent during the 90 days preceding the petition. As Ginsberg
notes, that change would have contradicted the very premise of the 1984 law-that consumer
debtors' assets are normally less than liabilities, that creditors know this when they lend, and
that creditors therefore can rightly look to debtors' future income streams under Chapter 13.
Id. at 47 n.198.
542. "The equity of the individual claimant must yield to the collective equity of the
creditors as a whole in the spirit of fair and equal treatment of creditors." Ginsberg I, supra
note 540, at 46.
543. Thus Ginsberg complains that restoring the reasonable-cause-to-believe test would
be wrong not because it would reintroduce moral equity into the preference rules, but be-
cause it would look solely to the creditor's, not the debtor's, moral equity. Id. at 46-47. If the
law only looked to the creditor's state of mind, debtors on the verge of bankruptcy would be
tempted to use nonexempt assets to pay a few favored creditors who could claim innocence.
It might be easy to show the debtor's moral culpability, but far harder to prove the creditor's
culpability. See In re Gruber Bottling Works, 16 Bankr. 348 (Bankr. E.D. Pa. 1982) (demon-
strating difficulty of proving creditor culpability even where creditor is an insider of debtor).
544. See Bankruptcy Amendments and Federal Judgeship Act of 1984, Pub. L. No. 98-
353, 98 Stat. 333 (codified primarily in 11 U.S.C. and scattered sections of 28 U.S.C.). See
generallyDuncan, Loan Paymentsto SecuredCreditorsas PreferencesUnderthe 1984 BankruptcyAmend-
ments,64 NEB. L. REV. 83 (1985). Indeed, the new law even eliminatedthe reasonable-cause-to-
believe clause from the special provision for payments to insider-creditors, 11 U.S.C.
? 547(b)(4)(B)(ii) (1982) (current version at 11 U.S.C. ? 547(b)(4)(B) (Supp. III 1985)), the
only place it had been retained in the 1978 Code.
the rules and standards conflict, the 1984 Act eliminated the 45-day
rule altogether, so that the narrow formal exception now became a po-
tentially huge normative standard capable of turning the entire section
547 into an antiformal statute.545 But it compensated for whatever in-
jury it dealt to the trustee's avoiding powers by explicitly retaining the
burden of litigation on the transferee.546 And Congress also tinkered
further with a few utterly arbitraryformalistic rules, apparently reflect-
ing lobbyist interests,547 and added a new per se rule to protect trans-
fers by small consumer debtors.548
The next great statutory episode in preference law may then, ironi-
cally enough, be an essentially common law effort to create some crite-
ria for determining when credit transactions meet the norm of "the
ordinary course."549 The previous cases under section 547(c)(2) were
too narrowly rooted in the formalities of the 45-day rule and the mean-
ing of"incurrence" to be of help under the 1984 revision.550 We may,
indeed, at least briefly recur to traditional doctrines-or sentiments-
about generous enabling creditors who act equitably, and whose late
transfers do not diminish the estate.551
545. See 11 U.S.C. ? 547(c)(2)(B) (Supp. III 1985) (45-day rule in old ? 547(c)(2)(B)
repealed); see also Duncan, supra note 544, at 88; Dunham & Price, TheEnd of PreferenceLiability
for UnsecuredCreditors:New Section547(c)(2) BankruptcyCode, 60 IND. LJ. 487 (1985).
546. 11 U.S.C. ? 547(g) (Supp. III 1985) ("the creditor ... against whom recovery or
avoidance is sought has the burden of proving the nonavoidability of a transfer under subsec-
tion (c) . . .").
547. 11 U.S.C. ? 546(d) (Supp. III 1985) (granting special reclamation
rights against
trustee to creditors who are either grain sellers or fishermen) (commonly referred to as the
new "fish or loaves" rule).
548. 11 U.S.C. ? 547(c)(7) (Supp. III 1985) (if debtor is an individual whose debts are
"primarily consumer debts," transfer is nonavoidable so long as aggregate value of property
"that constitutes or is affected by such transfer is less than $600"); see also Duncan, supra note
544, at 87-88 (new ? 547(c)(7) exception raises messy questions of aggregation, as where
debtor within 90-day period makes three separate installment payments of $300 each).
549. 11 U.S.C. ? 547(c)(2)(A),(B) (Supp. III 1985) (both incurrence of
underlying debt
and payment must be "in ordinary course" to prevent avoidance). See Dunham & Price, supra
note 545, at 510-11.
550. See Duncan, supra note 544, at 89 & n.26. The Barash line of cases
generally re-
jected the argument that ? 547(c)(2) protected creditors receiving regular installment pay-
ments on long-term debt. See notes 509-513 supra and
accompanying text. But most of these
cases turned on the meaning of the 45-day rule, rather than the
meaning of "ordinary
course," so we have little judicial guidance on what now may prove the crucial issue in
ence law. But see Duncan, supra note 544, at 89 n.26 prefer-
(citing cases finding payments to be
outside "ordinary course" where payment was by cashier's check to
prevent transferee from
joining in involuntary petition, where payment made after debtor had closed business, or
where last monthly payment was more than ten times greater than
previous installments).
551. The line might be drawn between long-term and short-term debt, on the
that long-term creditors deserve less protection because theory
they do not continually replenish the
estate as short-term suppliers of goods and services do, and because
payments to them in-
volve greater sums. Duncan, supra note 544, at 89-90. Moreover, the distinction
long/short
accords with the legislative history of the 1984 law: Senator Dole stated that the elimination
of 45-day rule was designed to aid buyers of short-term commercial
paper that matured in
slightly more than 45 days. See In re Independent Clearing House Co., 41 Bankr. 985 (Bankr.
D. Utah 1984); S. REP. No. 65, 98th Cong., 1st Sess. 60 (1983) (the
45-day rule "places undue
burdens upon creditors who receive payment under business contracts
providing for billing
VI. CONCLUSION
The effort to develop rational criteria for applying the "ordinary

course" principle in preference law is not quixotic. If we are indeed
destined to recur to this norm, there are some rational guidelines avail-
able, though they are likely to find expression in economic, not moral,
terms.552 These criteria may apply directly in the case of the floating
lien to help distinguish unfairly manipulative behavior by the secured
creditor from legitimate gain deriving from the creditor's inherent ex-
pectation as a holder of a perfected security interest.553 Once devel-
oped, the criteria may prove more widely applicable.
But of course both common law and legislative efforts at such subtle
moral and economic distinctions have ritually proved futile. Indeed,
the contemporary thinking about preferences reveals two extreme ten-
dencies that reflect the inherent instability of rulemaking in a world
where norms are intensely embraced, yet are elusive and controversial.
One solution might be described as the super-rule. The premise of a
super-rule is that rulemaking efforts in preference law fail when they try
to draw subtle moral distinctions. The result is not refined moral ele-
gance, but arbitrary complexity, like that of the 2-point net improve-
cycles greater than 45 days"); 130 CONG. REC. S8889 (daily ed. June 29, 1984) (statement of
Sen. Dole).
552. See generallyJackson & Kronman, VoidablePreferencesand Protectionof the Expectation
Interest,60 MINN. L. REV. 971 (1976).
553. Jackson and Kronman focus on the question of when a secured creditor with an
interest in after-acquired property can legitimately retain in bankruptcy the benefits of an
unusually large increase in the value of collateral during the preference period. They ap-
proach the normative question of defining "ordinary course" transfers by distinguishing "or-
dinary course" changes in collateral value from "windfall" changes. An "ordinary course"
gain is a gain that parties might predict on the basis of "objective factors," such as general,
anticipated increases in business, especially in seasonal or cyclical industries. The objective
foreseeability of a gain makes it a gain "in the 'ordinary course' of business." Id. at 992-93.
Conversely, "ordinary course" losses are those decreases in the value of collateral that might
be predicted from objective criteria, such as seasonal or cyclical business trends or the depre-
ciation or obsolescence of equipment. Id. at 995. On the other hand, "windfall" gains or
losses are those whose occurrence cannot be predicted by any factors based on objective con-
sensus, but are due to such "unpredictable" factors as export embargoes, sudden technologi-
cal innovation, or government monetary policy.
The authors stress that under their definition, the ordinary course/windfall distinction is
not the same thing as a distinction between foreseen and unforeseen events. Id. at 996. A
particular contracting party will subjectively foresee some events that are insufficiently pre-
dictable by objective means to be called "ordinary course" events, and so the actual expecta-
tions of a contracting party will include both ordinary course and windfall changes. Id. Thus,
if the only issue were protecting a secured creditor's expectation interest, the law
might grant
him all his gains, both ordinary and windfall, and similarly make him suffer all his losses. Id. at
1001. Indeed, that was essentially the result under old ? 60. Id. But the 2-point net improve-
ment test under the new Code is different: It deprives the creditor of both types of gains,
yet
dooms him to suffer both types of losses, presumably on the theory that
bankruptcy law must
deny creditors some of their bargained-for expectation to serve the independent goal of pro-
tecting unsecured creditors. The authors argue that the 2-point test thereby throws the bal-
ance too far in the direction of the unsecured creditors, and they therefore
propose a
modified test: The creditor should retain only his ordinary course gains, and none of his
windfall gains, but must suffer both kinds of losses. See id. at 1002-10.
ment test. Scientific rulemaking fails when it is less than totally

committed to its mission of eliminating all fault-based distinctions.
The reasoning behind the super-rule runs as follows: The key for-
mal element of traditional preference statutes has been the fixed-time
zone. It may appear to approximate the normative concept of the "eve
of bankruptcy," and it may seem to provide certainty because it is fixed.
But the certainty is only after-the-fact, and thus proves illusory. No
creditor taking a transfer can know at the time he receives it whether it
will prove voidable, so his tendency will be to grab it and hope, and
perhaps even to manipulate his relationship with the debtor to delay
the inevitable bankruptcy, and thus avoid the 4-month snare. There is
an inherent circularity in using technical rules to describe the bounda-
ries of ethical commercial behavior when the actor will have the power
to keep his action just within the boundary.554 Similarly, the balance-
sheet rule of insolvency seems to provide cold hard formality, but, like
the time-zone rule, it suffers from an ironic inversion of the void-for-
vagueness problem-it is void for its false precision, because its preci-
sion is untestable at the moment when the creditor needs to test it.
Once again, in the face of this uncertainty, the creditor will tend toward
aggressive, inefficient behavior.555 The various efforts at sub-rule ex-
ceptions for worthy transactions cause similar problems.556
A super-rule would almost categorically prohibit transfers from
debtor to creditor during the entire period of time, readily discernable
to all, that the transfer can cause any of the harms traditionally con-
ceived by preference law. Its premise would be an almost absolute
principle of ratable equality.557 It would have no mens rea test, be-
cause it would not purport to encompass questions of culpability at all,
and it would thereby enormously reduce the trustee's burden of proof.
It is truly only concerned with effects. One commentator has offered
just such a rule, with the following elements: First, the debtor's insol-
554. See Kraus, PreferentialTransfersand the Valueof the InsolventFirm, 87 YALE LJ. 1449,
1455, 1457-58 (1978) (student author).
555. See id. at 1456-57. Any financial analyst can detect equitable insolvency before the
debtor becomes balance-sheet insolvent, and a commercial bank can monitor a firm's account.
Thus, creditors who suspect imminent balance-sheet insolvency can obtain payment before
the preference rules are triggered.
556. Id. at 1458-59. Exceptions for short-term trade credit, like 11 U.S.C.A. ? 547(c)(2)
(West Supp. 1986), compel creditors to demand prompt payment even when a creditor's flexi-
bility might enhance the value of the firm.
557. See Kraus, supra note 554, at 1459. The super-rule would assume that the obvious
function of preference law is to enrich the estate in the name of equity. But preference law is
also designed to control creditor behavior during insolvency. So the goal of a super-rule
would be more than equality-it would also be to induce creditors to act in such a way as to
enhance the value of the debtor. Only the equality goal, however, can carry out the enhance-
ment goal. Preference law is designed to encourage cooperative behavior. But it can best do
so where absolute equality is the goal. If it is, then all creditors collectively would act like the
single creditor-pressing for payment only where continued operation of the debtor might
reduce its value. Under absolute equality, individual action might not help the debtor, and
might make the creditor a disfavored party later if the debtor survives. Where there is no
absolute equality, creditors will exploit the gaps. See id. at 1450-55, 1459-60.
vency would be conceived in the old equitable sense, not the modern
balance-sheet sense. Second, the fixed time-zone would be eliminated.
Third, the law would contain no mens rea test at all, for debtor or cred-
itor.558 The result would be to allow the trustee to recapture virtually
all transfers from debtor to creditor from the moment that the debtor
has suffered equitable insolvency.559 The super-rule would solve the
problem of the infinite regress of the preference period simply by ac-
cepting it.560
The super-rule may seem unjust in its categorical extremity, sweep-
ing away most of the distinctions among creditors and credit schemes
with which preference law has tinkered. But the benefits might be con-
siderable: Preference law would be wholly loosed from its moral, stig-
matic moorings. The gain in certainty would be considerable-
assuming that equitable insolvency is in fact readily discernable, after
and before the fact.561 The super-rule might achieve significant redis-
tribution from sophisticated to less sophisticated creditors,562while re-
moving from all creditors any disincentive to act for the communal
good of all the creditors of the debtor, or of the credit economy in
general.563 It would, in short, be the ultimate in codifications of the
long-imagined abstract duty of a creditor-or debtor-to the entire
class of creditors.
The alternative consequence of disbelief in the effectiveness of sub-
tle rulemaking distinctions is the abolitionist position.564 Under this
view, the costs of rulemaking are too great, in political controversy,
legal uncertainty, and the expense of litigation.565 Moreover, any pref-
558. Id. at 1458-59. The old reasonable-cause-to-believe test protected the "vast major-
ity" of transfers under the old Act.
559. One exception to this rule would be to protect transfers made during a period of
equitable insolvency when that particular period of insolvency was not the one that actually
overthrew the debtor. See id. at 1461-63. This "relatedness proviso" would apply only if a
firm went solvent for a long time in between equitable insolvencies. But the "relatedness"
standard might be hard to apply, and might subvert the objective predictability of a super-
rule: It might increase before-the-fact certainty, but only at the cost of reducing the after-the-
fact certainty of a fixed time-zone.
560. See text accompanying note 167 supra.
561. See Kraus, supra note 554, at 1460-61.
562. Id. at 1463.
563. See id. at 1464-65. Increasing voidability might seem to harm the debtor's ability to
buy secured credit. But one might argue that bankruptcy law should increase the cost of
credit advanced in reliance on the possibility of a preference, to prevent an overextension of
credit and illusory wealth that would trap unwary creditors. Credit would be instantly secured
and perfected. The result might be fewer unencumbered assets for general creditors, but a
loose preference law might cause those assets to be grabbed anyway.
564. See McCoid, Bankruptcy,Preferences,and Efficiency:
An Expressionof Doubt, 67 VA. L. REV.
249 (1981).
565. For preference law to deter creditor misbehavior, it must ensure that the creditor
knows of the debtor's insolvency, or at least the debtor's financial difficulty. Preference law
can induce inquiry, but it may not ensure knowledge. See id. at 261-62. Moreover, preference
law must bear the administrative cost of recapture. The trustee's costs are administrative
priority expenses, so if the taxpayers do not lose, the general creditors do. Then there is the
cost creditors pay in monitoring potential preferential behavior of others. Some of this is
erence law that tries to protect transactions that have any strong polit-
ical constituency is doomed to produce trivial economic benefits. The
exceptions will be so great as to make the amount recaptured trivial,566
and our lack of moral consensus about anticommunal behavior pre-
vents us from adopting the only legal posture that might effectively de-
ter creditor aggression-a truly criminal-style law that imposes a
penalty on preferred creditors. We cannot seem to escape the essen-
tially restitutionary recapture remedy that, combined with the trustee's
legal burden and legal uncertainty, imposes on creditors no disincen-
tive to seek preferences.567
In the abolitionist view, no effort at refinement is worth the costs.568
For the abolitionist, deregulation would eliminate uncertainty costs, as
well as the unfair retroactive effects of bankruptcy-effects that are es-
pecially unfair under modern preference law, which captures many
nonfraudulent transfers. The abolitionist, however, might retain a
fraud exception-striking down transfers where debtor and creditor
collude, knowing they are giving the creditor an unfair share of the
assets.569
merely redistributed among creditors, but some may prevent dismemberment of the debtor,
and is thus socially valuable. There is also the cost to any transferee who is in financial limbo
waiting to learn whether a payment will prove preferential. Obviously, creditors bear this cost
in many cases that do not end in bankruptcy. See id. at 265-68.
566. The empirical evidence is sparse, but it suggests that relatively little is recaptured.
See id. at 262-65. Recapture probably does little to enhance the estate, since the estate is
probably beyond rehabilitation by that point. The greater value of preference law would lie in
predisaster deterrence of creditor misconduct, but, again, the actual deterrent effect is
questionable.
567. See id. at 264-65. A number of factors reduce the deterrent effect of preference
avoidance. The creditor may rightly calculate that the debtor will not actually go bankrupt, or
at least might postpone bankruptcy for 90 days, or that the trustee might simply find it too
difficult, legally or financially, to gain recapture. The creditor knows that even if he suffers
recapture, the worst possible sanction will be payment of interest measured from the time of
demand for return or the start of recapture proceedings. Of course, some deterrence
may
result from the debtor himself reporting a preference if he has been offered a beneficial
workout by the honest creditors. Moreover, the preferred creditor may have to
litigatejust to
get the preferential transfer, and he may waste those expenses if the payment is recaptured. If
the enhancement theory is good, the creditor will see his ultimate share reduced.
In these terms, the typical exploiting creditors are large,
monitoring secured lenders,
while the losers are the nonprofessionals-for example, tort claimants, consumers, and em-
ployees. Id. at 266.
568. McCoid doubts that we can increase the effectiveness of preference law. See id. at
268-70. We can eliminate or lengthen the fixed time period-it is too short to reflect the true
danger zone-but we would thereby increase the uncertainty costs of bankruptcy. We could
also assess a damage penalty on preferred creditors. But unless we were to create strict liabil-
ity for preferred creditors, a damage penalty would require us to invent and litigate rules or
standards of culpability.
569. What would somewhat mitigate the effects of abolition is the
greater ease of filing
and flexibility of chapter shifts under the Code, since a quick filing increases the chances of
equal distribution, the stay barring further dismemberment. But prompt filing is not ideal:
The sly creditor might still seek quick payment if he did not think others were
trying to do the
same. But if he thought others might seek payment, he would have to file fast, because
prefer-
ences to others could not be recaptured. Moreover, increased
filings would cause a wasteful
excess in formal bankruptcy litigation. Id. at 269-70.
Both the super-rule and abolitionist positions remain, however, no
more than whimsical academic speculations. Preference law seems des-
tined to continue in its cycles of regulatory pretense. If anything, the
political, economic, and moral debates of the last decade seem like a
modern revival of the original confusion depicted by Charles Warren in
his history of our earliest bankruptcy statutes. The cycles seem inevita-
ble in a world in which the phenomena of debt and credit seem to defy
clear moral categories, stump economic theorists,570 and trouble em-
pirical observers.571
This is a world where the creditor warding off mechanical applica-
tion of preference rules to "ordinary course" payments may be the
small local trade supplier, interruption of whose regular collection may
throw him into bankruptcy, or may be AT&T; the "creditor class" may
include workers thrown into unemployment as well as manipulative se-
cret lienors. This is a world where the "debtor" may turn out to be the
poor consumer needing federal relief from the cruel finance company,
the foolish wastrel,572or the manipulator absconding from just debts
under an overly generous bankruptcylaw; the honest fragile new enter-
prise needing protective encouragement, or the asbestos or contracep-
tive manufacturer escaping liability for homicidal recklessness, or the
oil and gas speculator573whose debts consist of artificial inflated cur-
rency that can bring down billion-dollar banks. In this world, we can-
not readily tell the virtuous from the villainous, and the various
temporary constituencies of debtor and creditor interests never seem to
align themselves for very long with any more familiar categories of
political or economic interest, or with any consistent moral view of our
credit culture.
570. For a discussion of how the very existence of secured debt seems to present an
insoluble problem for microeconomics, see Schwartz, The ContinuingPuzzleof SecuredDebt, 37
VAND.L. REV. 1051 (1984).
571. For a discussion of the conflict in the empirical literature over the effect, if any, that
the Bankruptcy Reform Act of 1978 has had on bankruptcy filings, see Marsh & Cheng, The
Impactof the BankruptcyReformAct on BusinessBankruptcyFilings, 36 ALA.L. REV.515 (1985).
572. See Macaulay, Lawyersand ConsumerProtectionLaws, 14 LAW& SOC'YREV. 115, 141,
149 (1979) (lawyers involved in consumer cases tend to reflect norm of capitalist culture that
debtors who fall into trouble are at fault for carelessness at the outset of transactions, and that
consumer protection laws undermine the ethics of promise keeping and debt payment).
573. Concern with bankruptcy, and with preferences in particular, has begun to strike
the oil and gas industry. See McDaniel, PreferenceLitigation-Let the Seller Beware, 36 INST.ON
OIL & GAS L. & TAX'N4-1 (1985).

Commercial Morality The Merchant Character and The History of The Voidable Preference

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Commercial Morality, the Merchant

Character, and the History of the

American bankruptcy law has never decided what to do about the

* Professor of Law, Stanford

The perennial-and continuing--debate over preferences has usu-

I. INTRODUCTION: RULES, STANDARDS, AND MORALS

Bankruptcylaw has been playing out a ritualized dance between for-

A. Defoeon the Law and Moralsof Bankruptcy

merchant character. Where bankruptcy law had once stereotyped the

10. DEFOEESSAY,supra note 8, at 192.

B. DrawingMoral and Legal Categories

15. Id. at 200.

rigid set of rules, a purely involuntary, essentially criminal law without

21. Seetext accompanyingnotes 60-125 infra.

D. The Themesof PreferenceLaw

assumption of preference law is that we can establish a category of

29. Eisenberg, BankruptcyLaw in Perspective,28 UCLA L. REV.953, 966 (1981); McCoid,

II. ENGLISH BANKRUPTCYLAW AND THE ADVENT OF THE PREFERENCE

Renaissance and Restoration English culture developed a morally

The imagery of the merchant derives from English culture's percep-

33. T. DEKKER, THE SEVENDEADLY SINNESOFLONDON16 (1606) (emphasis in original).

mained that trade, if not morally admirable, was nevertheless socially

cording to measurable economic self-interest, rather than variable or

B. EnglishBankruptcy: A Historyof CompulsiveClassification

yond the lively imagery of character and conduct in the preamble, it

The trader rule is thus the legal instrument designed to distinguish

relatively undeveloped means of translating moral and economic goals

69. See G. BILLINGHURST, THEJUDGESRESOLUTIONS UPONTHESEVERAL STATUTES CON-

sion of a Scrivener, receiving other Mens Moneys or Estates into his

73. 21Jac., ch. 19, ? 2 (1623).

the military could not be a bankrupt, because he operated under a government-regulated

statutory rules created loopholes.87 Indeed, one result of the harsh-

Here Defoe introduces a crucial theme in English bankruptcy law. The

94. Id. at 196.

ahistorical rationalization of the trader rule's ironic history.'02 For

arrested for an unpaid debt. 7

4. Theinstabilityof the act-basedrule.

view of the merchant, designed to make bankruptcy less frightening:

ruptcy process more as a fair settlement or adjustment of claims among

1. Theadventof the "relation-back"

127. Id. at 653-54.

ruptcy that had precipitated the commission.'28 Lord Coke, in dictum

134. 19 Geo. 2, ch. 32, ? 1 (1746).

recognized, the metaphysical subtleties of secured credit arrangements

inseparable from the moral issue. If people in commerce cannot always

regulating the debtor's behavior, it is not intuitively clear why a prefer-

of the debtor ceased to be his and began, in some abstract sense, to be

4. Englishpreference law afterMansfield.

bankruptcy, whatever their technical state of insolvency. Thus, the

English preference law can be summarized in the statement that it con-

III. THE DEVELOPMENT OF AMERICAN PREFERENCE LAW: THE

ble goals.182 The commercial republic created a more solid, if duller,

182. Id. at 7, 11-12; see D. HUME,ESSAYSMORAL,POLITICAL ANDLITERARY 347-48, 405,

campaign. It is ironic that though credit is associated with instability,

ment for unfortunate debtors. In particular, some characterized bank-

2. Therhetoricof the new bankruptcy

The wild struggles over the bankruptcylaw reflect a conceptual con-

by themselves, every episode in the decades-long legislative history em-

213. SeegenerallyP. COLEMAN, DEBTORS ANDCREDITORS INAMERICA: INSOLVENCY, IMPRIS-

charge would seduce small-time economic actors into dangerous lever-

221. Id. at 19-20.

bankruptcy only for traders,229and the ritual debate was reenacted.230

B. Credit, Morals, and Preferencesin America