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COMPARATIVE ANALYSIS OF H. R. 6968 (THE COMMITTEE ACT OF 1937) AND

H. R. 6963 (REPT. No. 1042) The following is a comparative analysis of the committee act of 1937 (H. R. 6968) introduced by Congressman Lea on May 11, 1937, and of H. R. 6963, introduced by Congressman Sabath on May 11, 1937, as reported from the Committee on the Judiciary under date of June 17, 1937.

PROCEEDINGS AFFECTED H. R. 6963 applies to all proceedings under sections 74 and 77B of the Bankruptcy Act, wherein the liabilities of the individual debtor or debtor corporation, as the case may be, include obligations in a total amount of $250,000 or over. In the case of proceedings under section 74, such obligations must be evidenced by at least 10 credit instruments severally owned by not less than 10 persons.

The committee act is not intended to apply at all to proceedings under section 74 involving individual debtors. It does apply to committees acting in proceedings under section 77B, but only if those committees solicit proxies or deposits by use of the mails or means or instrumentalities of interstate commerce, and if such solicitation is not exempted under section 3. In addition, it applies to committees acting in receivership and foreclosure proceedings in State or Federal courts, voluntary readjustments, and municipal or foreign debt arrangements.

The following discussion will therefore be limited to a comparison of the two bills with respect to their effect on proceedings under section 77B, that being the only type of proceeding affected by both bills.

INTERVENTION BY THE COMMISSION

Under subsection (c) of H. R. 6963 (p. 24), the Commission may intervene by filing a notice of appearance, and is entitled to be heard on all questions with respect to which the debtor, any creditor or shareholder, or any intervening party may be heard.

The committee act confers a like power upon the Commission in section 14 (a). It makes intervention mandatory where the indebtedness of the debtor corporation is $5,000,000 or more.

PROPOSAL OF PLANS BY THE COMMISSION

The last sentence of subsection (c) of H. R. 6963 authorizes the Commission to propose plans. The committee act does not confer that power upon the Commission.

PROPOSAL OF PLAN BY DEBTOR CORPORATION Under subsection (d) of H. R. 6963, the debtor corporation must file a plan within 6 months after the petition or answer is approved, but the judge may grant extensions for further periods of not more than 90 days each.

Under section 7 (9), 11 (a) (2), and 11 (a) (3) of the committee act, the Commission may refuse effectiveness to a declaration covering solicitations in respect of the support, proposal, adoption or approval of a plan if it finds that any person proposing such plan or causing the same to be proposed is the issuer, or that any such person is a director or officer of the issuer, unless the proponents of the plan have a substantial security interest in the issuer, i. e., 10 percent of any class of its securities or 5 percent of all of its securities.

Under subsection (e) of H. R. 6963, the Commission must be given notice of all steps taken in any proceeding to which the bill applies, and there must be transmitted to the Commission copies of the more important papers in such proceedings. The committee act contains no such provision, reliance being placed upon the information contained in the declaration required to be filed with respect to the solicitation of proxies or deposits.

REPORTS ON PLANS; SOLICITATION OF ACCEPTANCES THEREOF Under subsection (f) of H. R. 6963, all plans in proceedings under section 77B in which the liabilities include obligations of $250,000 or more, must be referred to the Commission, and the Commission must be allowed a reasonable time for the thorough study of such plans. The court may not confirm any such plan until the expiration of that time, unless the Commission has rendered a report or has notified the court that it will not render a report. Subsection (g) (1) is apparently designed to prohibit the solicitation of acceptances or rejections of a plan, or of authorizations so to do (whether evidenced by a proxy or deposit), unless the period specified in the preceding sentence has expired. By subsection (g) (2), violations of subsection (g) (1) are made a criminal offense, and acceptances or authorizations given, procured, or received in violation thereof are invalidated.

The comparable provisions of the committee act are to be found in section 6 (a) (5). That paragraph prohibits the use of the mails or means or instrumentalities of interstate commerce to solicit any proxy or deposit in respect of support, adoption, or approval of a plan, unless the following conditions have been complied with:

(1) The plan must have been approved as fair and equitable by the court. This requirement does not appear in H. R. 6963.

(2) Unless the court has determined that the indebtedness of the issuer is less than $5,000,000, the court must, in advance of such approval, have submitted the plan to the Commission for an advisory report thereon pursuant to section 13. The Commission is not required to render such report, however, if it deems that by reason of its status as intervener, it can otherwise advise the court of its views.

The committee act does not operate directly on the court, but merely prohibits solicitations by the use of the mails or means or instrumentalities of interstate commerce, unless the requirements of the act are complied with. Thus in the smaller cases of a local nature, where the solicitations can be and are made in person, without the use of the mails or means or instrumentalities of interstate commerce, the committee act does not apply.

Subsection (g) (1) (ii) of H. R. 6963 also prohibits the solicitation of acceptances or rejections of a plan or of authorizations so to do unless there have been transmitted to the creditors and stockholders (A) a copy of the plan, (B) the opinion, if any, of the court approving the same, or summary thereof, (C) a copy of the report, if any, filed by the Commission, or summary thereof, and (D) such other “matters' as the court may require. These information requirements find their parallel in the prospectus requirements of section 8 of the committee act.

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Subsection (h) (1) of H. R. 6963 requires the Commission to approve or disapprove the provisions or limitations of any "committee agreement” and the membership of any committee, and to file a notice of its approval or disapproval in the section 77B proceeding. Provision for review of the Commission's action is made in subsection (h) (4).

A committee agreement must be approved unless the Commission finds that it (A) unduly restricts the right of depositors to withdraw, or (B) gives the committee the power to pledge the deposited securities for purposes other than the payment of the reasonable expenses of the committee, or (C) gives the committee the right to dispose thereof without the affirmative consent of the depositors, or (D) entitles the committee to an unreasonable amount for fees and expenses, or (E) otherwise prejudices the formulation or acceptance of a fair plan.

The membership of a committee must be approved by the Commission unless it finds (A) that its membership includes persons whose connection with the debtor, issuer, underwriters, or guarantor of the securities in question prejudices the formulation or acceptance of a fair plan, or (B) that such membership otherwise gives rise to a prejudicial conflict of interest, or (C) that any member has violated the provisions of subsection (g), or (D) that any letters of solicitation, etc., are or have been misleading.

Disapproval by the Commission of a committee agreement or of the membership of a committee does not, under H. R. 6963, prevent such committee from soliciting, although presumably the court itself could, under the next to the last sentence of section 77B (b), disregard the objectionable provisions of the committee agreement. Section 77B gives the court no control over the personnel of protective committees, however.

Under the committee act, on the other hand, if the Commission finds that a committee fails to conform to the statutory requirements as to membership or as to the terms on which it proposes to solicit proxies or deposits, the declaration is subject to a refusal order which makes it unlawful for the committee to solicit by use of the mails or means or instrumentalities of interstate commerce. In addition the statutory standards for committee membership and "committee agreements” are more specific and more pervasive.

The requirements of the committee act (sec. 10) with respect to the terms of proxies and deposits cover a broader field. The requirement with respect to independent scrutiny of fees and expenses would, of course, be satisfied by & provision for review by the 77B court. An annual report and accounting must be rendered. Trading or otherwise profiting from the fiduciary relationship must be prohibited. Provision must be made for the termination of the authority conferred by the proxy or deposit under certain circumstances, including the suspension of the effectiveness of the declaration with regard thereto. Limitations are imposed upon the purposes for which deposits may be solicited. Further requirements are imposed by section 10 (b).

The provisions of section 6 (a) and section 7 (3) to 7 (6), inclusive, of the committee act are also more specific in their application. Section 6 (a) contains what is in effect a flat statutory disqualification of the issuer; of underwriters of any of its outstanding securities (not merely underwriters of the securities to be solicited); and of officials of the issuer or such underwriter. Section 7 (3) and 7 (4) are roughly comparable to subsection (h) (3) (B) of H. R. 6963.

FEES AND EXPENSES

In addition, H. R. 6963 contains certain provisions which have no analogue in the committee act.

Under subsection (i), the court may not, with certain exceptions, make any allowance or payment of compensation or reimbursement out of the estate unless the Commission has been allowed a reasonable time for investigation thereof, and the Commission is required to make a report thereon within such time. The committee act contains no such specific requirement, although the Commission may, of course, as intervener, express its views with regard to any proposed allow

ances.

LIMITATIONS ON TRUSTEES FEES By subsection (j) of H. R. 6963, the aggregate annual compensation of any one person for services as trustee, custodian, or receiver in all proceedings under section 74 or 77B in which he has been appointed as such is limited to $10,000. This restriction is outside the scope of the committee act.

ALLOWANCES TO COMMISSION

Under subsection (k) of H. R. 6963 the Commission is entitled to costs, to be allowed out of the estate. The committee act contains no such express provision.

The CHAIRMAN. Mr. Sabath is with us, and we shall be glad to hear bim at this time.

STATEMENT OF HON. ADOLPH J. SABATH, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF ILLINOIS

Mr. SABATH. In connection with what you have just said, Mr. Chairman, I also have had prepared an analysis of my bill, the bill that is before you, and the other bills that are pending before the Judiciary Committee.

Let me state that I am heart and soul for the principle embodied in your bill, which also is expressed in my bill, H. R. 6978, now before your committee; and nothing I may say should be construed to mean that in any way I wish to delay consideration or favorable action on the bill, because I believe it is of utmost importance that early legislation be had.

If you will bear with me for a few minutes, I want to qualify as a witness; not as chairman of the select committee which has devoted 3 long years to investigation of this subject.

In 1929 I started my crusade against the stock exchange and its manipulations. Later I obtained a great deal of information about millions and billions of dollars worth of securities, real estate, and other, that were fast going into default. I urged immediate legislation, but unfortunately was not successful in obtaining a hearing until, I think, in 1932, before your own committee, Mr. Chairman.

The CHAIRMAN. Was it not 1933?

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Mr. SABATH. You may be right, Mr. Chairman.
The CHAIRMAN. We can verify that and correct it in the record.

Mr. SABATH. When your committee was considering the Securities Act, that was in 1933. At that time, if you recollect, I pleaded we should embody in that act a provision which would apply to realestate securities; and that we should give the Securities Commission jurisdiction over defaulted real-estate securities.

But a few gentlemen, whom I did not know, but who claimed to represent the Real Estate Board of New York and other real-estate organizations, came here and convinced your committee, by their arguments, that that would be detrimental to real-estate securities and to real estate in general; and upon their plea my suggestions were not accepted.

Later on I obtained information that these very men represented the so-called protective committees which then were being created by many houses of issue in 1929, 1930, and 1931—so as to give them complete control of all defaulting outstanding securities for the marketing of which they were responsible, and which they had unloaded upon the trusting public.

Had I then had that information I think I could have had convinced your committee that provisions suggested by me were absolutely necessary; that those who objected to them were not honest with your committee when they claimed them detrimental instead of beneficial if made applicable to real-estate securities.

There were then many other matters claiming my attention. Inasmuch as we passed the securities bill, I devoted no more time to my studies and efforts in that direction. However, I think in the latter part of 1933, a petition signed by 500,000 people of my cityall bondholders, some of our best citizens-was presented to the President and leaders of the House pleading for investigation of the foreclosure and reorganization racket then in full operation by protective committees, law firms, trust companies, and others in that line of business.

In consequence, several resolutions were prepared; finally, on urgent request of Speaker Rainey, I introduced another which was passed, authorizing appointment of a select committee to investigate conditions relating to defaulted securities. It was the first time in 28 years of my service here that I accepted membership on a congressional investigating committee, because requested by Speaker Rainey.

I was made the chairman of that committee. Immediately we started penetration of the complaints and reported abuses. And ever since then I have devoted nearly all my time to that work and to putting an end to the deplorable conditions and practices surrounding defaulted investments prevalent throughout the United States.

In that connection we found a great many abuses in our courts-in bankruptcy proceedings and receiverships. I supported a resolution which finally was passed to investigate court conditions, and to some extent I have been helpful to the Judiciary Committee in bringing out evidence of these abuses in Chicago. They were shameful. Subsequently the subcommittee of the Judiciary Committee made a report criticising Chicago court practice. It then was believed generally that it would urge impeachment of one judge; but consideration of that proposal was postponed until the committee had time further to investigate and to obtain added evidence about two other judges in expectation of bringing impeachment proceedings against them all.

After investigation on the part of that committee, in 1934, I prepared a bill in hope of bringing about legislation that would eliminate those abuses. That bill went before the Banking and Currency Committee; and although hearings were had on it, unfortunately it was not reported out. That committee was busy with other, and what they believed to be more important, matters.

In the following session I introduced bill H. R. 10634, which was referred to the Judiciary Committee. I desired it referred there in order to eliminate any question of jurisdiction. It was in the nature of an amendment to the Bankruptcy Act. Under the Bankruptcy Act we have broad-almost unlimited-powers to deal with matters relating to reorganization of defaulted securities and with inequitable activities of protective committees. I obtained a hearing on that bill; and finally in the last session of Congress, after many trials and tribulations, it was reported out by the Committee on the Judiciary, after I was requested to amend it in certain respects. As amended it was known as H. R. 12064. The Judiciary Committee's report was dated June 17, 1936, and I have here a copy of it.

H. R. 12064 was a broad bill, with adequate powers, creating a conservator and providing for assistance in bankruptcy matters to the courts; and it attempted to eliminate excessive fees, prevent fraudulent leases, rigged sales of properties, and other fraudulent practices.

Right here I wish to say that when attention was called to the existing abuses in bankruptcy proceedings, and as soon as courts indicated that some relief should be given, certain gentlemen prepared an amendment to the Bankruptcy Act which was passed as sections 74 and 77 (b). I, myself, had the utmost confidence that they would go far in curing the abuses so many were complaining of, in addition to giving relief to debtors and protection to security holders. Too late I learned, to my sorrow, that as the bill was drafted, passed by the House, and made into law—without the vast majority of Members knowing that was its main object-it was mainly to release restrictions on fees in bankruptcy proceedings. That was admitted by former Judge and Solicitor General Thacher on the stand at one of our public hearings in New York. Previously in bankruptcy proceedings there were limitations on fees; but under 77 (b) these restrictions were left open, and the sky became the limit.

I will come back to that, Mr. Chairman; I just want to make a record of these various bills introduced upon the findings and experience of our select committee.

After that bill, H. R. 12064, was reported there remained but 3 days before we adjourned the Seventy-fourth Congress, and there was no way for me to secure final action on it, or any chance of having it passed by the Senate.

Immediately on the first day of this session, I introduced-on January 5 of this year—my bill H. R. 9. Hearings were had on the bill. Finally, it was suggested that some changes should be made, and I agreed to them. The bill was reintroduced as H. R. 6963. After a great deal of effort on my part it was likewise reported out favorably; then it was withdrawn, more hearings held, and again it was re-reported; and now it finally finds itself on the Calendar of the House. The Judiciary Committee's report on it was filed June 17,

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