Learning the Parol Evidence Rule from Chief Justice John Marshall - in a Bankruptcy Case

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By Jonathan Hayes

Ah . . . how is that?  One of the earliest Supreme Court cases addressing bankruptcy is Sturges v. Crowninshield, 17 U.S. 122 (1819).

It seems that prior to the constitution being adopted, each of the colonies maintained some form of bankruptcy process, often referred to as "insolvency laws" and those regimes largely continued after the new federal government was formed. Congress created a limited bankruptcy statute in 1800, repealed it in 1803, and didn’t try again until 1841 with another short-lived bankruptcy act.  

In the meantime, New York created a bankruptcy-like process which not only provided for the release of the debtor from jail, common in those days, but also a discharge of all debts.  James Crowninshield filed bankruptcy in New York and received a discharge. When John Sturges sued him in Massachusetts to recover on a loan, Crowninshield pled the New York discharge as a defense.

Sturges argued that the New York law was unconstitutional because the Constitution gave Congress the power to create "uniform laws on the subject of bankruptcies."

Writing for the Court, the great Chief Justice John Marshall, ruled first that giving Congress the power to enact bankruptcy laws did not take the power away from the states. He explained:

These [state] powers proceed, not from the people of America, but from the people of the several states; and remain, after the adoption of the constitution, what they were before, except so far as they may be abridged by that instrument.

But (and it's a big but), Marshall further explained, the discharge is different. The constitution provides that states cannot create laws which "impair the obligations of contracts." See Article 1, section 10.  The state-issued bankruptcy discharge impairs the obligations of contracts, thus violating the impairment clause (still good law).

Crowninshield disagreed and argued that bankruptcy by necessity includes the discharge therefore the founders did not intend the impairment clause to apply to the discharge.  He argued that the founders knew that states were granting discharges prior to adoption of the Constitution, thus they must have intended the impairment clause not apply there. 

And that brings us to the parol evidence rule. 

It has been said many times that the Constitution is a contract created by the American people.  This is a dispute over the meaning of certain language in that contract: what did the framers mean when they agreed that states could not pass laws which impair the obligations of contracts?  To Marshall, the answer lay it the text.  The words were “express and incapable of being misunderstood. They admit of no variety of construction, and are acknowledged to apply to that species of contract, an engagement between man and man for the payment of money, which has been entered into by these parties.”

So no ambiguity; end of discussion, the contract is enforced as written.  As Marshall put it, “The plain and simple declaration that no state shall pass any law impairing the obligation of contracts includes insolvent laws . . . . “  

But Marshall acknowledged that he was not infallible.  He noted that those who disagreed with his interpretation “are entitled to great respect” as their arguments “deserve to be seriously considered.”  But when is it okay to conclude that the drafter meant something other than what he said?

Here’s Marshall’s answer (and the punch line):

[I]f, in any case, the plain meaning of a provision, not contradicted by any other provision in the same instrument, is to be disregarded, because we believe the framers of that instrument could not intend what they say, it must be one in which the absurdity and injustice of applying the provision to the case, would be so monstrous, that all mankind would, without hesitation, unite in rejecting the application.

I love reading that paragraph to my students. The parol evidence rule is not just a rule someone made up that students need to "memorize." It's the very nature, the very essence of our system of law.