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It is the same thing, Mr. Chairman, with the Veterans' Bureau, which has imposed orders and rules upon the probate courts all over the country, and has caused no end of trouble.

This can be worked out in some way and written into that amendment.

77 (b), as you know, was passed much against some of the judgment of many bankruptcy lawyers for the reason that it was not considered bankruptcy law at all. But it was passed to avoid among other things three things which had arisen in equity receiverships.

One of them was the failure of the majority to be able to handle the minority of claims of stockholders and creditors in equity receiverships.

The second one-I am just stating the high spots—was, of course, lack of unified control and the number of ancillary receiverships occurring, which had become a great burden.

The third one was the delay which ensued in an equity receivership because of the resort to a fictional sale to finally cut off the junior liens, and the lack of discipline, if you please, that the courts seemed to have to expedite the proceedings. It was thought that by writing this into the Bankruptcy Act, those evils could be overcome.

Following the Rock Island case, it is now good bankruptcy law. Before that time there were many opinions written to the contrary. But since then it is good bankruptcy law.

The evil that Judge Sabath has uncovered, which is largely of a human-nature making, which is largely written into the trust agreements when they are first signed, which it is doubtful whether it is susceptible to any Federal legislation, that evil existed under the old equity practice; and it apparently has been carried into the bankruptcy practice.

If it is necessary to cut that out, assuming the fact for the purpose of the argument, it is our committee's suggestion that it be handled in solne amendment to 77 (b), and not place in between the creditor and the debtor and the court an agency which really almost usurps the power of the court.

It would be such a power that the Federal court, with all due l'espect to their majesty, would hardly want to kick one of these Conservators out of court on one of his recommendations, I am afraid. And yet they are human and might err.

We oppose the bill, as a committee, in this form. We recognize the evils that may exist; and being members of the National Bankruptcy

; Conference, perhaps we can cooperate, Mr. Chairman, with other members to suggest to this subcommittee of the Judiciary Committee something that might carry out Judge Sabath's very fine work.

I believe that that is the expression of our committee. (Information referred to is as follows:)

FEBRUARY 17, 1936. To the special committee on bankruptcy of the Association of the Bar of the

City of New York: The undersigned, who were appointed a subcommittee to examine H. R. 10634, introduced January 27, 1936, by Mr. Sabath, submit the following report:

The bill must be read in its entirety in order that it may be fully appreciated in its several aspects.

The bill adds section 77C to the Bankruptcy Act and creates a new agency of Government, that of Conservator in Bankruptcy, with wide powers to prescribe rules and regulations, conduct investigations, administer oaths, and require the attendance of witnesses and the production of books and papers from any place in the United States or any Territory at any place of hearing.

The bill, while purporting to provide a means of correcting certain abuses, also effectually transfers to the executive establishment, acting through the Conservator, practically complete control over the administration of estates under sections 74 and 77B, with unimportant exceptions. The bill provides for the exclusive appointment of the Conservator as sole trustee, custodian, or receiver, and grants to the Conservator authority to propose plans or be heard on any plan; absolute power of appointment of all attorneys of the Conservator or its deputies, and power to employ and fix the compensation of its or their officers, special experts, examiners, clerks, and other employees, without regard to the civil-service laws; control of committee agreements and personnel and solicitation of deposits, proxies, etc.; absolute power of approval by the Conservator, not the court, of all fees, expenses, and remuneration to whomsoever paid or to be paid in connection with any plan or proposal; provides for the appointment by the circuit court of appeals in each circuit of three or more special masters recommended by the Attorney General at a rate of compensation not exceeding $7,500 per annum; and appropriates $2,000,000 for expenditure by the Conservator in each of the next 2 years, and other provisions for the following years.

The bill also provides for loans by the Reconstruction Finance Corporation in reorganization, extension, or composition cases approved by the Conservator.

The bill also carries amendments to four sections of the Bankruptcy Act. A summary of the bill is attached to this report.

RECOMMENDATION

The subcommittee recommends that the bill be disapproved and opposed because :

The proposed machinery for correcting abuses is of doubtful value and is of a character itself to invite abuse.

Important functions of the courts are proposed to be transferred to an executive bureau under political domination.

It provides for the creation of a needless new bureau and the employment of a host of additional political appointees.

Its administration would involve needless impediments to the proper administration of cases by the courts.

Its administration would involve a waste of public funds and of the assets of creditors and stockholders in the cases affected. Respectfully submitted.

EDWIN L. GARVIN.
G. HERBERT SEMLER.
JAMES C. STEPHENS.
ALLEN R. MEMHARD,

Chairman. Mr. BENNITT. The next speaker will be Mr. Allen R. Memhard.

STATEMENT OF ALLEN R. MEMHARD, REPRESENTING THE BAR

ASSOCIATION OF THE CITY OF NEW YORK

Mr. MEMHARD. I am a member of the special committee on bankruptcy of the Bar Association of the City of New York. I also had the privilege of appearing before this committee in 1926 in connection with the amendments of that year. I shall add just a word to what has been said, if I may.

I feel that Judge Sabath's committee is to be commended for the diligence and zeal with which it has conducted its investigation, and I feel that much good will come from it.

I listened very carefully to what Judge Sabath had to say this morning, and I was impressed by this—that he seemed to be dealing with two distinct categories of cases: One, those that have arisen after cases got into the court under section 77 (b) or 74; and the other category—and I believe it represents by far the majority of the cases—those that never got into the court, where the abuses of which he has found complaint arose in the first instance by the character of the investments that people made unwisely, the character of the agreements into which they entered with so-called protective committees, and the rights that they gave up to those committees, and the agreements that they made to pay those committees.

But those are matters of which the court could not have jurisdiction here even under this section 77 if it should be enacted as a part of the law. It seems to me that those are matters that are properly the subject of jurisdiction of State blue-sky commissions, or in very special jurisdictions matters for the S. E. C.; that so far as 77 (b) proceedings in the Federal court are concerned, it seems to me thati if Congress has jurisdiction to enact section 77 (c), by the same token it has adequate jurisdiction to amend section 77 (b) so as to meet these abuses so far as they have arisen in connection with cases in the court.

And, as I understand, there is a bill pending before this committee which contemplates substantial amendments to the Bankruptcy Act. It seems to me that is really properly a matter that should be dealt with in connection with those amendments so as to avoid unbalancing the plan of the act. This bill would certainly unbalance the plan of the act, it seems to me, in some fundamental respects.

Mr. BENNITT. Mr. Coffman, of the New York County Bar, is unable to be here. He would like the permission of the committee to make a part of the record a report of the committee which he represents. Mr. CHANDLER. Very well. (The report referred to is as follows:)

MARCH 5, 1936.

Re the Sabath bill (74th Cong., 2d sess., H. R. 10634), to be known as the

Conservator in Bankruptcy Act, January 27, 1936-Section 770

The act provides that the President may confer on the Securities and Exchange Commission, the Comptroller of the Currency, or some other agency, the power to act as Conservator under sections 74 and 77B of the Bankruptcy Act, or the President may establish by Executive order a new agency if he finds that the establishment of the new agency will be a more economical and efficient means of carrying out provisions of this section than the use of an existing agency. The Conservator is authorized to act as trustee, custodian, or receiver (subdivision (a)).

In any proceeding under sections 74 or 77B involving a debtor corporation or an individual debtor, the court shall appoint the Conservator a sole trustee, custodian, or receiver without bond, whether or not a trustee, custodian, or receiver shall theretofore have been appointed, and in any such proceeding, no other person than the Conservator is to be appointed trustee, custodian, or receiver (subdivision (b)).

A copy of the petition of answer must be filed with the Conservator and a hearing granted him before there may be an approval of the petition or answer. The plan must be either proposed by the Conservator, or prior to being filed in the proceeding or submitted to the court for any performance, have been submitted to the Conservator; if the Conservator disapproves, he must be given a hearing. Fees, expenses, and remunerations to whomever paid, unless fixed by section 48 of the Bankruptcy Act, must be approved by the Conservator as fair and reasonable, but this does not prohibit the allowance of fees in a lesser amount than those approved by the Conservator (subdivision (c)).

It

provisions upon which he has not touched and which I think ought to be considered by this committee.

This bill provides that where there is pending an equity receivership, before that debtor can be brought into 77 (b), the Conservator must pass upon the advisability of so doing.

as one of the important factors incorporated in 77 (b) to permit the lifting of an equity receivership and to bring it into the bankruptcy court so that the provisions of 77 (b) could be made applicable and many of the abuses which had arisen in equity receiverships could be corrected. By interjecting this premilinary examination, it merely makes that proceeding that much more difficult.

There is a provision regarding reopening closed cases —
Mr. DUFFY. Will you state what section you are referring to now?
Mr. WEINSTEIN. Subdivision (j) in this bill.

That section provides that a conservator may petition the court to reopen any proceeding of reorganization or any proceeding of composition or extension filed since July 1, 1934, even though finally confirmed by the bankruptcy court, if in its opinion material facts which would have affected the confirmation were not brought to the attention of the court, and if the Conservator files such petition within 180 days from the date of its designation by the President.

It seems to me that this provision is an exceedingly disturbing and dangerous one. There are cases under 74 and 77 (b) which have been closed. Many new interests have come into the picture. There would be this threat of unsettling all of these closed cases.

Now, if the ground for doing it were fraud in the case, there might be some reason for it, at least in theory, if not a good reason in practice.

But this is not predicated on the ground of fraud. It is predicated on the judgment of the Conservator. If in his opinion there are material facts which would have affected the confirmation; and just what that would mean would depend a good deal upon the judgment of the particular deputy conservator who may be examining that particular case.

Mr. CHANDLER. Of course, the purpose of that is very obvious—to try to right as many wrongs as possible, such as this committee discovered, and to restore wrongful withdrawals of funds to the people who rightfully ought to have those funds.

Mr. WEINSTEIN. I think that is true. I think I understand what was intended, which was that the Sabath committee in making its investigations has found instances of wrongdoing; and that this is an effort to bring those facts into court again on these requests.

But that is a provision which reaches out and extends to any case. It may be applied to any case. It is certainly disturbing to write into the law a provision which may unsettle all of these closed cases.

Mr. Duffy. Couldn't you simply qualify that by limiting it to cases of fraud ?

Mr. WEINSTEIN. I think so. I think that that is the intendment of the act.

For example, under the Bankruptcy Act, section 13, it provides that where a fraud has been discovered within 6 months, application may be made to vacate the composition. But I don't know that there are as many as half a dozen cases in the bankruptcy books in which that has occurred.

Under section 15 a discharge that has been obtained may under similar circumstances be vacated within 6 months. There is not a single case in the bankruptcy books in which that has been attempted.

Mr. POWERS. Would you repeat that last statement !

Mr. WEINSTEIN. I say, there has not been a single vacation of a discharge within 6 months on account of fraud.

Now, bearing in mind that not every case which comes within sections 74 and 77 (b) is fraudulent, that possibly the vast majority are cases in the ordinary course, in which the problems are not difficult or involved, it does seem to me that if you write into law this conservator provision, we would be delaying the ordinary proceeding under 74 and 77 (b) by reason of all of these preliminary investigations, so that the very benefit that is expected to be derived from a settlement or adjustment or reorganization would be lost.

Then, again, under this bill the Conservator must be the trustee in every case. If a trustee has been appointed and has been functioning, that trustee is displaced by the Conservator.

One of the important features of 77 (b) is that in the proper case the debtor may be retained in possession of its business so that its operation would be uninterrupted.

Now, practically that is exceedingly important to the ordinary debtor. There are questions of policy of business, questions of contracts, there are questions of experience, questions of peculiar knowledge of the business; and this is bringing into these cases new people, people who have had no familiarity with that at all, and practically destroying the very purpose which inspired this provision in 77 (b) permitting a debtor to be retained in possession.

I fully agree with Mr. Montgomery that if this bill is written into law, a great many debtors would go back to the equity receivership proceedings, with its disadvantages, preferably to being subjected to the delay and to the other disadvantages which would result from this appointment of a conservator.

As I view this bill—and I may be wrong—it seems to me that it was written primarily with the purpose of correcting abuses resulting from these appointments of protective committees.

If that is the only purpose to be accomplished, I think it can be accomplished very simply by making some provision in 77 (b) for the investigation into these protective committees and their control er supervision exactly in the same way in which it is now being done in section 77 (b) in connection with landlords' claims.

The section provides that the court shall scrutinize any claim that is filed in which there has been an assignment of a claim, and allow the claim only to the extent of the amount actually paid under the assignment.

While I cannot at the moment very scpecifically indicate just how it should be done, I feel reasonably satisfied that it can be done; and that we can give all the protection necessary under a 77 (b) proceeding and remove the abuses which I believe are attempted to be removed or are aimed at by this bill.

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