ment buildings and on this and on that; that they never have had any experienec with them.

They say that under the present situation we did not give them any aid or any assistants on whom to draw or anyone to aid them in examining these reports when they are filed with the judge; and that they were obliged, there being no one to examine the reports or pass upon them, to approve them, not realizing that these committees in many instances had been imposing on them and putting in a report which was a fraud upon the court.

So, if you gentlemen will permit, I simply want to give you perhaps a little history as to the bankruptcy law as it is now in Canada and in England. I will call on Mr. Powers to do that.

STATEMENT OF WILLIAM J. POWERS, CHICAGO, ILL., MEMBER OF THE ILLINOIS AND MICHIGAN BARS, CHICAGO COUNSEL FOR THE SABATH COMMITTEE

Mr. POWERS. I am a member of the Illinois and Michigan bars and Chicago counsel for this committee.

I would like to answer first some objections that have been raised by the gentlemen who have been speaking here in opposition to the bill.

The gentleman from Chicago, Mr. Haylett, has mentioned the rising condition of Chicago in regard to real property. I am going to quote from the Sunday Tribune of March 1, 1936, in regard to the equity system that is going to be instituted in the courts down there. I will quote only the part that is material [reading]:

Since an examination of the docket of the superior court was begun last November it has been discovered that there are between 30,000 and 40,000 receiverships pending, Judge Steffen said. Without an indexing system it has been impossible to determine the number of these receiverships settled or the status of the pending cases.

The judges also have found it almost impossible under the old chaotic system to exercise control over the receivers appointed by them.

With the new control system in effect, however, Judge Steffen hopes to compel receivers to make regular reports on collections, expenditures, and the condition of the properties they are managing and to pay delinquent taxes on receivership properties, with a consequent increase in revenue accruing to the county.

The new system also will enable the courts to close thousands of cases pending in the courts.

Judge Steffen will begin hearing a special call today of all receivership cases in which no report has been made to the court since January 1, 1933.

The reason for that rather good condition in Chicago is this: There have been many cases investigated by this committee where the deal has been completed and no fraud has been perpetrated due to the fact that they did not dare to perpetrate any fraud while this committee was in town. In the meantime the appellate court has ruled that the court on the equity side has no right to sponsor or approve the organizations.

The reason that a lot of thess cases have not gone into 77 (b) was because they were afraid of this committee functioning there and checking the cases. They have been lying dormant in the State courts between the stage where the decree of foreclosure has been interrupted and the courts have been holding them, with the result that in the last 4 or 5 years the situation has been even worse than

chaotic. In view of the fact that the organizations cannot be approved by the courts, it is necessary to qualify under the Securities Act.

So this clean-up is for the purpose of evading both things, the Bankruptcy Act and the Securities Act, by putting the properties in liquidation trust.

Now, these liquidation trusts are probably the most vicious method that I have ever heard of of stealing property. It is a method by which a group of gentlemen in the picture may emerge from this depression owning some three or four thousand pieces of property outright without a cent of investment on their part, all of that with the approval of the courts.

The housing situation is such in Chicago that, according to the last figures that I have received, on February 1, there was 97 percent of occupancy.

There have been test cases filed to my knowledge for the purpose of testing out the occupancy conditions in this area in Chicago. I defended one case where 420 tenants received a 5-day notice to pay $15 more rent or move. That was a test case to find out what the housing situation was. Counsel in that case told me that the purpose was to test out the housing condition to see how much of an increase could be put upon the public.

As soon as the housing situation shows up-and all of this scheme was planned back in 1930, to my personal knowledge as one gentleman said to me, the thing to do is to watch for the time when the housing situation matures-it is bound to mature, because Chicago at this time is increasing by some 30 or 40 marriages alone, some 30 or 40 families-in 8 years there has been no construction in Chicago. Obviously they need more housing space. There has been no new construction of residential property. The banks will not tie up $150,000 or $200,000 to build a 24- or 36- or 64-flat building. There are no other stores or other property that can be converted. Therefore the possibility of any new building construction is negligible.

As soon as that situation matures, a deal is made. The gentleman from the insurance company will probably be interested in this. A dummy corporation is created, which goes to an insurance company and says, "Gentlemen, we would like to have you pass your approval for a loan on such and such an apartment house."

The insurance company says, "We will lend you $100,000."

The dummy corporation, created by the bondholders committee or their parent corporation, says "All right. Let us escrow this money in the bank."

Then they go through a foreclosure proceeding, and the dummy corporation will bid $100,000 for the property. So all they do is to go to this money that is escrowed in the bank, and the funds are exchanged. The holders of the beneficial interests in turn get the $100,000 or what is left of it after the trustee has taken out his fee and the insurance company takes out its underwriting fee, and so forth; whereas the dummy corporation receives the legal title to the property without any investment on their part, having merely switched a new mortgage for the old one. Just multiply that process three or four thousand times and you emerge the landlord of Chicago.

In regard to the attitude of the Chicago Real Estate Board may I cite to you the first case that was presented at the last meeting of

the court in Chicago. That was the case of an elderly German spinster whose mortgage was not in default, although her taxes were partially in default, but had not been settled by the court as yet. By the old trick of getting a deed to the property in the guise of a bill of sale to the furniture, the bondholders' committee emerged with the legal title to that property. That is all a matter of public record. The woman was put out of possession under threat of throwing her furniture into the street. Since that time there has never been any reorganization. The chairman of that bondholders' committee, who is also the president of the Chicago Real Estate Board, is named John C. Bowers.

Again, in regard to this bill I have noticed one consistent view that has been shown here this afternoon; and that is that you may do anything that you want to in regard to amending the old bill, but you must not appoint anybody to keep a check on what is done.

May I recall to the committee the investigation conducted by your committee in regard to the receivers in bankruptcy in which the Milwaukee-St. Paul case was investigated and a series of other cases.

I ask you this question: Would it have been possible for those frauds to have been committed had there been an officer from an executive department or some other officer whose sole duty it was to investigate the filing of that bill? Would that collusive receivership have been possible? It would not, because immediately he would have discovered, as we have discovered numerous cases since then, that the whole thing was collusive; that the railroad had in fact millions of dollars with which they could have paid off this small debt.

The same thing was true of the street-taxi system of Chicago. It was discovered that they had plenty of ready cash on hand with which they could have paid up this bill, instead of filing this equity receivership.

Mr. SABATH. How long was that in receivership? Seven or eight years?

Mr. POWERS. Yes; 7 or 8 years. They are still collecting their enormous fees.

I would like to go back and look at this picture from the national angle, because, after all this is the National Legislature. Perhaps I can answer along the line some of the arguments that have been raised here.

The beginning of this situation, I believe, was during the period after the World War, when great amounts of gold began to flow into this country from abroad in settlement of foreign trade balances and the war debts. I don't want to go into the monetary situation here except to point out this: Every student of trade, every man who has studied international financial monetary situations-and I speak with some authority, because I have spoken with some of the leading authorities on money in the country and in the world-have come to the same conclusion; and that is that our present difficulties have been due to the mishandling of the gold that came into this country. The gentlemen in charge apparently understood that it would be unwise to raise the prices of commodities in this country and cut off our foreign markets. So they decided to do something else. They decided to put that gold up with the Federal Reserve banks and use it as the basis for currency. The result of that was that we embarked

upon a great campaign of credit inflation. The end of that campaign was in 1929, of course.

During the course of that period in the running of that inflation some sixty-three billions of securities were issued. Those were in all classifications of securities, out of which twenty-two billion were corporate securities alone.

I don't need to go into the underwriting of those issues. It has been conservatively stated by students of the problem that at least 75 percent of the bonds issued in Chicago were on properties where the owner never had an equity. In perhaps 20 percent they had never even bought the land. They would build a building and furnish it and set it up completely with the proceeds of the bond issue. That was the general method used in handling the financing of properties. When the crash came in 1929, the question immediately arose as to what we were going to do with those properties. They included not only real estate in the cities but farms and industrial corporations, whose revenue was cut off.

Of course, the insurance companies began a Nation-wide campaign of foreclosures. When the farm debt was raised from three billion in 1910 up to $9,800,000,000 in 1927 or 1928, that campaign of foreclosures would have increased except for the fact that investigators for the insurance companies found that some ten or twelve million acres of the best farming land in the country were involved; that that had reduced the sale value of the mortgages; that most of them were either in default or potentially in default; and that difficulty would arise if they attempted to foreclose on all of them in that it would destroy the value of that farm land. They found that they could not collect any income from those farms unless they left the tenant farmers on the farm.

So gradually it became apparent that it was going to be a Nationwide proposition. And so there was some seeking around to find some way of rationalizing the situation to prevent this rising tide of political antagonism that was being occasioned by the excessive foreclosures.

I had some part in the writing of the original bills that were used to sustain the foreclosures, in the drafting of them; and I think that there was a great suspicion that if these foreclosures were kept up, they would result in a political revolution. I myself was in a city in Wyoming on one court day when the judge told us that the whole populace was riding in with Winchesters across their saddles and guns on their hips; and that there were not going to be any more foreclosures of ranches in that part of the country.

That same situation also applied in Michigan. I saw them take a judge off the bench and throw him into a snow bank, and even go so far as to put a halter around his neck and threaten to hang him.

Mr. MICHENER. That was not a general situation. You just happened to be in those two places when those things happened. Those were the only two instances that occurred.

Mr. POWERS. Yes.

Mr. MICHENER. You are trying to give that as a picture of the general conditions. That was not the general condition in Michigan, and you know it.

Mr. POWERS. No. It was not the general condition in Michigan, but it was indicative of the condition.

Mr. MICHENER. A few irresponsible people did those things, and you happened to be at both places with them. I don't know why. Mr. POWERS. The situation at least had developed to the point where the farmers had exhausted their patience, and it was found necessary that something further should be done to rationalize the situation. The Federal district courts were insisting upon a campaign to clean up the whole problem. Those who were following the situation felt that it was highly speculative to use the district courts in the beginning, and I believe that there was considerable correspondence back and forth in regard to using that procedure.

I should like at this time to give up something of a historical analysis of the administration of bankrupt estates as cited in Prentice Hall, or you can find it in the report itself.

The proper administration of bankrupt estates has been a major problem in the law of England, Canada, and the United States. Various methods of controlling the collection of assets and the payment of dividends to creditors have been tried in all three nations, with the result that two of these nations, namely England and Canada, have adopted the same method of administration after many previous attempts to regulate the problem. The method used in both of these countries as a result of their previous experience has been the regulation by a public officer appointed by the national gov

ernment.

Since the proposed Conservator bill has for its purpose the appointment of a Federal officer who, through deputies, will administer the estates now in the hands of the Federal district courts in bankruptcy, a brief historical résumé of the status of the law in each country is in order.

In England equally unsatisfactory results from the standpoint of administration of bankrupt estates had been a source of considerable public criticism and legislative debate.

In 1876 a special committee of Parliament was created to inquire into the bankruptcy law. Part of the report of this committee sounds familiar:

The power of creditors is necessarily, to a great extent, exercised by proxy, and we find the carelessness of creditors in delegating authority has led to great abuses. We are informed that, in a certain class of cases, the common practice is for proxies to be held by persons who at the meeting apparently represent the views of independent creditors, but who are in reality paid or retained by the debtor or a candidate for the trusteeship; and that wherever there are assets out of which heavy costs may be paid, there is much canvassing, and what has been commonly called "touting", for proxies. Proxies are, it is also said, often bought and sold where required to turn the scale in favor of some resolution. It happens, not occasionally but so frequently as almost to form a rule, that a stranger, so far as appears on the face of the proceedings, is enabled by the proxies he has obtained to vote himself trustee, to fix his own remuneration, to nominate the committee of inspection, to order the payment of costs, and, finally, to vote in liquidation cases the debtor's discharge. The report also dealt with the expense of administration due to the excessive fees of attorneys and trustees, and the committee recommended "that some central authority" should be created to supervise the allowance of fees and expenses of attorneys and other similar payments out of the estates.

This report of the special committee appointed to study the working of the Bankruptcy Act of 1869 was dated July 28, 1875, and was printed by order of the House of Lords on May 26, 1876.

In a supplementary report by the same committee, in addition to the recommendation of official trustees, the suggestion was made that