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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 amend. ment.

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 sobre 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 respect 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 that 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 Comptroiler 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)).

The Conservator must study whether the plan of reorganization or composition is fair and equitable. If approved, the Conservator's certificate is filed in the proceeding. If disapproved, the Conservator files his objections, taking further action not inconsistent with the provisions of the section. In deciding whether any such plan of proposal is fair and equitable, the Conservator shall take into consideration the initial investment of any creditors or stockholders to be effected by the plan or proposal if, in his opinion, such investment and provision therefor materially affected the fairness of the plan (subdivision (d)).

Under section 77B, the Conservator is a party in interest within the provisions of section 77B (f) (subdivision (e)).

No person may solicit or allow the use of his name to solicit any proxy, consent, acceptance, authorization, power of attorney, deposit, or dissent in respect of a plan unless each such solicitation is accompanied or preceded by a copy of a report on a proposal or plan made by the Conservator after an opportunity for hearing on a proposal or plan and such other proposals as have been submitted or sponsored by it, or by an abstract of such report made by the Conservator or approved by him as accurately setting forth its substance. Solicitations are not to contravene rules issued by the Conservator to insure against misleading (subdivision (f)).

No petition to institute any proceeding referred to in subdivision (b) of this section may be filed by any person after a receiver or trustee of all or any part of the property of the person who would be the debtor in such proceeding has been appointed (other than a proceeding under sec. 74 or 77B) by any court, State, Federal, or Territorial, unless there is attached to such petition a certificate of the Conservator that further proceedings in such State, Federal or Terriorial Court will be of no substantial benefit to the creditors and stockholders (subdivision (i)).

The Conservator may petition the court within 180 days after the date of designation of the Conservator by the President to reopen any proceeding involving the debtor corporation or an individual debtor in which a plan of reorganization or a proposal for composition or extension has, since July 1, 1934, and prior to such date of designation, been finally confirmed, if in the opinion of the Conservator, material facts which would have effected such confirmation were not brought to the attention of the court (subdivision (j)).

Generally 77C includes as a debtor corporation within 77B or as an individual debtor within section 74 those whose liabilities include obligations in the total amount of $50,000, or over, evidenced by at least 10 credit instruments, severally owned by not less than 10 persons (subdivision (1)).

The Conservator is entitled to and the court may allow him a reasonable fee for services performed in connection with the plan of reorganization or proposal for composition or extension in order to defray expenses in connection with such services (subdivision (m)).

Subdivision (a) of section 77B is amended by adding at the end thereof the following:

"As used in this section the term 'equity receivership’ includes a proceeding, to foreclose a lien on property, a final decree in case of such a proceeding means an order or decree finally confirming a sale of such property” (section 5).

If any provisions of this act or the application thereof to any person or circumstances is held invalid, the remainder of the act and the application of such provisions to other persons or circumstances, shall not be affected thereby (sec. 7).

Mr. BENNITT. Let me introduce next Mr. H. H. Haylett, business manager of the Chicago Real Estate Board.

a

STATEMENT OF H. H. HAYLETT, BUSINESS MANAGER, CHICAGO

REAL ESTATE BOARD

Mr. CHANDLER. Are you a member of the bar?
Mr. HAYLETT. I am not.
Mr. CHANDLER. You are a layman?

Mr. HAYLETT. I am a layman, but have had opportunity to give a great deal of observation to the operation of 77 (b) in Chicago.

Real estate in Chicago has shown some indication of turning a corner. There is somewhat of a market; not in the large properties as yet. The vacancy percentages are still high in our downtown business structures and in some of our larger apartment buildings. But in Chicago and in Cook County generally there has been quite a demand evident in the smaller types of homes and an interest on the part of not only the investing public, but an interest to some extent on the part of those contemplating building:

There has been considerable money in the market for financing purposes; more so in the last 3 months than the market has been able to absorb.

I have brought with me some facts and figures to give to you as indicative of our situation in Cook County. Not being a member of the bar, I have no knowledge as to the form or constitutionality of this bils. But there are certain figures that I think will be impressive to you members of the committee.

Mr. MICHENER. Bearing on what?

Mr. HAYLETT. Bearing primarily on the number of foreclosures during the past 4 years, the amount involved in the foreclosures, the number of cases that have been thrown into 77 (b) in the Chicago courts.

Mr. MICHENER. Pardon my interrupting you, but I think we are primarily interested in the formation of the remedy rather than a diagnosis of the case.

Mr. HAYLETT. I wanted to read one observation from the figures, if I might.

Mr. MICHENER. I think that the Sabath committee has very well diagnosed the necessity for something being done in the case, and has also diagnosed the case itself. If we go in this hearing, into that, and let man after man or the State board in each community give the reasons why this should or should not be remedied, I think that it would be just a waste of time.

Mr. McLaughlin. Perhaps this is just the basis for a particular observation.

Mr. HAYLETT. I wanted to draw attention primarily to four sets of figures, and I think I can state them very briefly.

During the past 4 years in Cook County there have been approximately 70,000 foreclosures in the county. The amount involved in those foreclosures has run into the figure of one-billion-eight-hundred-and-some-odd million dollars.

Out of that number of foreclosures up to February 29 of this year 963 have gone through or have entered 77 (b) in the Federal courts. Of that 963 approximately 391/2 are completed.

Mr. DUFFY. What does that figure of 963 relate to?

Mr. HAYLETT. The number of cases that have gone into the courts on 77 (b).

Mr. DUFFY. Relating to what?
Mr. HAYLETT. The foreclosures in Cook County.
Mr. DUFFY. What number of foreclosures ?
Mr. HAYLETT. Seventy thousand.

There was a great deal of delay occasioned when many of these cases were taken out of the State courts and turned into the Federal courts under 77 (b). There was considerable expense involved. It is the judgment of those in the real-estate business in Chicago that

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