a Comptroller in Bankruptcy should be created with a suitable staff and with the duty, among other things, of auditing the trustees' accounts and compiling full and accurate statistics. These principles were adopted by the English Bankruptcy Act of 1883 and have continued in force until this day.

Under the present law in England the bankrupt is required, after the commencement of the proceedings, to fill out and swear to a "statement of affairs”, giving a description of the assets and liabilities. The bankrupt submits a statement of affairs to the official receiver and is subjected to an informal but thorough private examination. This statement is checked with his books. The official receiver then prepares a report of the examination and sends it to the creditors with a request for their comments. Thereafter, a date for a public examination before the court is fixed, and the bankrupt is publicly examined by the official receiver on the basis of the facts ascertained in the private examination. The court has the power in cases of fraud, concealment, and other culpable or unconscionable acts to withhold discharge or approval of composition for an indefinite period.

On the administrative side the law gives to the Comptroller various supervisory functions, such as auditing the trustees' accounts and investigating and certifying the fitness of managing trustees elected by the creditors. Another section provides for the summary administration by the Comptroller of small estates with assets of £300 or less.

There has been very little criticism of the administration of bankrupt estates in England since the passage of this act. Changes made since the passage of the act involve mainly the strengthening of the criminal provisions and allowing for the sharing of creditors in after-acquired property.

The Canadian Bankruptcy Act was adopted in 1919. It was the first act applicable to the Dominion as a whole. It was based on the British law but provided for some changes in the administration of the act. It adopted the principle of administration by a public officer; but, instead of administration by trustees supervised by public officials of the Board of Trade or the National Government as in England, it provided for appointment of trustees by the Provincial Government.

Political abuses followed. The law was amended in 1923 to provide for the appointment of trustees by creditors. The supervision by the court of administrative details was provided for; and in general, from the standpoint of administration, an attempt was made to copy the system used in the United States.

The results of this change in administration were soon apparent and paralleled our own experience and that of England prior to 1883. Incompetent, dishonest, and irresponsible persons managed to get themselves elected as trustees; and fraud, malpractice, and embezzlements became current practice.

Abuses became so serious that in 1930 the Canadian Bar Association appointed a special committee to study the whole question. After a year of study the committee recommended an amendment of the law to provide for the licensing of trustees and the setting up of a bankruptcy department by the national government with functions corresponding to those of the Board of Trade of England. In other words, after attempting various forms of control, the solution was found in Federal control of administration.

The proper administration of bankrupt estates in American law has been a source of considerable difficulty to the legislatures, which were required to devise a method for the equitable administration and distribution of the estates of insolvent persons. In this country very little attention was paid in drafting the Constitution or in the Constitutional Convention to proper bankrupcy legislation. Bankruptcy at that time was looked upon fundamentally as a regulation of commerce and not from the standpoint of relief for the debtor.

Madison comments in the Federalist :

The power of establishing uniform laws of bankruptcy is so intimately connected with the regulation of commerce, and will prevent so many frauds where the parties or their property may lie or be removed into different States, that the expediency of it seems not likely to be drawn in question.

The first exercise of its bankruptcy powers by Congress was in 1800 when an act was passed based upon the then English statute. This act applied only to traders, merchants, and brokers. Discharge was made highly difficult. This act was repealed in 1802. Subse. quent efforts to enact proper legislation were defeated, and the next bankruptcy act was not adopted until 1841.

It is interesting to note that changes in bankruptcy legislation have inevitably followed periods of national financial stress; and the bankruptcy act of 1841, following the panic of 1937, was no exception.

A novel feature of the act of 1841 was that for the first time it provided for the filing of voluntary petitions. This act was repealed in 1843 after a life of less than 14 months.

The next act was that of 1867. It was unsatisfactory for the reason that it provided that the mere failure to pay debts was made an act of bankruptcy.

The panic of 1873 aroused considerable agitation for changes in the law, and particularly its involuntary features. Because of the acute economic conditions this act was amended and for the first time in American bankruptcy a clause was included permitting compositions whether an adjudication in bankruptcy had been had or not and providing that only in the event of failure of the composition offer was the debtor to be classified as a bankrupt.

The administrative machinery of the act of 1867 caused much dissatisfaction and led speedily to repeal. The difficulty was that the election of a trustee by creditors was subject to the approval of the judge and that the judge might appoint trustees in addition to the trustee or trustees elected by the creditors. This power of appointment was apparently abused.

The main complaint against the act, and of far more importance to the creditors, was the fee system. Referees were compensated by an elaborate schedule of fees, which led to the multiplication of the steps taken to liquidate; and corresponding exhorbitant fees were allowed to referees. The trustees were allowed 5 percent of the first $5,000 of the assets and a sliding scale downward on assets above that amount; but were, in addition, allowed to be reimbursed for all expenses, which provision led to considerable abuse.

So great was the administrative confusion which these provisions caused and such was the outcry against fees and expenses that in

1874 an amendment was passed cutting all fees in half, and, as a measure of desperation, directing the marshals to compile and submit periodically to the courts voluminous statistics of the proceedings thereafter to be had.

The bill, being from the administrative standpoint unworkable and inequitable, was repealed the same year (1874). Throughout the debates in regard to the bill one may trace the general dissatisfaction with the administrative machinery. Reference is made to the Congressional Record (45th Cong., 2d sess., pp. 2860 and 3186 to 3188).

In 1881 Judge Lowell, of Massachusetts, at the request of the Boston Merchants

Association, drafted a bill to provide for a new bankruptcy act, using some of the provisions of the law of 1867 and combining some new features, some of which were borrowed from English and Canadian laws.

For 17 years the provisions of this bill were debated and opposed by those whom Senator Ingalls, of Kansas, classified as follows:

First. The great wholesale merchants who through power and vigilance can obtain preferences.

Second. The old army of referees and professional trustees and receivers of estates who wish a return of the old system.

Third. Those who desire a criminal code and a thumb-screw machine for the collection of doubtful and desperate debts.

Fourth. Timid conservatives.

Fifth. Uninformed commercial organizations who are misled by avaricious creditors and rapacious attorneys.

This bill also provided for a supervisor in bankruptcy (borrowed from the English law), whose duties it would be to examine sonally into the administration of bankruptcy proceedings, to advise the referees and trustees in administrative matters, and in general to supervise the conduct of all parties to the bankruptcy case.

Finally, after the panic of 1897 caused some considerable pressure to be placed on the Federal legislature for remedial bankruptcy legislation, a new act was passed in 1898. The motive force behind the passage of the act was the National Association of Creditmen, which was opposed within its own membership by certain merchants and bankers who were still opposed to any bankruptcy legislation whatsoever. Sporadic efforts to repeal the law have been made from time to time since its adoption.

On March 21, 1929, the New York County Lawyers Association, the Bronx County bar, and the bar of the city of New York filed a formal petition in the court of the Honorable Thomas D. Thatcher, judge of the United States District Court for the Southern District of New York, stating that these associations had

Learned from the report and presentment of the grand jury of the district and from disclosures in other proceedings heretofore taken in this court that the administration of the bankruptcy law in the southern district of New York has been characterized by serious abuses and malpractices on the part of attorneys, receivers, and trustees, appraisers, custodians, auctioneers. Your petitioners feel that these abuses have impaired public confidence in the standards of professional conduct of the bar, tend to lessen respect for the courts and the administration of justice, and are sufficiently grave to call for investigation by this honorable court.




4509_37—ser. 104-10

The associations appointed a joint committee, which retained Col. William J. Donovan, of Buffalo, as counsel; and a thorough investigation was conducted.

In the report to the court it was shown that 21 law firms controlled the bankruptcy business; attorneys pursued persons they thought could be induced to become petitioners in bankruptcy; collection agencies furnished information to attorneys concerning insolvent debtors and were prominent in promoting bankruptcy cases. The attorneys in the cases usually split fees with the collection agencies. Fees were also split with the employees of the clerk of the bankruptcy court for advance information on the filing of involuntary petitions, and creditors were bribed to permit the use of their names on involuntary petitions. Creditors had no control of the bankruptcy proceedings and usually were controlled by the lawyers. Laxity, inefficiency, and corruption became the rule. There was evidence which indicated perjury, conspiracy to defraud creditors, the withholding of dividend checks, collection of assets, and failure to account, and fraudulent consignment agreements. Receivers and trustees were delinquent in their accounts. Appraisers were often inexperienced, being as a usual thing clerks in the offices of the bankruptcy lawyers.

As a result of the investigation 12 attorneys were indicted, 1 absconded and committed suicide, 2 pleaded guilty and received jail sentences, 4 attorneys resigned from the Federal bar, orders to show cause why they should not be disciplined were served on several more, and the clerk in the bankruptcy court record room attempted to commit suicide.

The investigation was extended to include six other large cities.

The conclusion of the committee was that the abuses were general and the fundamental defects in the administration of bankrupt estates were general throughout the country. The report stated [reading from p. 7] :

p Administration has become not only a burden to the courts but legalistic, long drawn out, expensive, and incoordinated. It has developed on the part of businessmen an attitude toward the bankruptcy system of distrust and even disgust.

The report of the committee shows that these conditions proceed from two features of the act which are not adapted to modern business conditions: First, the slow-moving procedural machinery laid down by the act; and, second, the theory upon which the whole administrative structure rests—that the creditors in each particular case will control, supervise, and successfully manage the administration. In actual practice it was noted that the creditors were impotent and rarely had any control in the case.

The report stated :

We are faced with this situation : Bankruptcy is administered by over 140 district judges, over 530 referees in bankruptcy, and an army of shifting and changing individuals consisting of some 50,000 trustees a year, together with a multitude of receivers, appraisers, attorneys, accountants, watchmen, and others. These groups exist, supposedly, to aid the creditors of whom there are at least several millions a year. They fail in that purpose because responsibility is divided. The judges have neither the time, the facilities, nor the training to exercise the administrative duties which have been thrust upon them. They must rely greatly upon the referees whom they appoint. The referees, in turn, look to the receivers and trustees whose actions they can watch only to a limited extent. The receivers think they owe nothing to the creditors

since their appointments come from the judges or referees. The trustees in most cases feel no obligation to the creditors because the election machinery is generally controlled by others. Receivers and trustees, besides being inexperienced and engaged in other occupations, are underpaid and rely upon their attorneys to do the work. The great creditor body, which under the act was supposed to control, delegates its duties to unknown collection agencies and attorneys who have solicited claims and proxies in order to obtain control for their own ends of this vast unregulated machinery.

The results of the above condition in dollars and cents, according to the report of the committee as taken from the statistics in the Attorney General's annual reports, indicates beyond doubt that something is radically wrong in the administration of bankrupts' estates. The report shows that [reading from p. 10]

Nearly two-thirds of all bankruptcy cases in the country are cases in which no assets are recovered for creditors. The average return to creditors on their claims has amounted in the last 4 years throughout the country as a whole to a little more than 8 percent. In these circumstances creditors, as businessmen, prefer to write off their claims rather than spend valuable time in the apparently fruitless endeavor to salvage something from the wreck.

The record for the entire United States, as taken from the aforementioned official sources, for the period 1925–29, is as follows:

[blocks in formation]

Average disbursed to creditors of total assets, 75 percent, approximately.

It is to be noted that this report was made and the condition portrayed existed at a time which was probably the most prosperous period in American history. This was long before the first defaults in mortgages on a national scale. If this is a fair picture of bankruptcy administration during comparatively prosperous years, it is reasonable to suppose that the losses to creditors from the maladministration of bankrupt estates during the depression will run into hundreds of millions of dollars.

The Donovan report makes certain recommendations for remedial legislation and suggests the creation of a Federal bankruptcy commissioner with an independent investigation staff, with power to appoint or license trustees, investigate abuses in bankruptcy administration throughout the country and the principal cities for the examination of bankrupts, control of their assets, and so forth. The report points out that this would segregate judicial functions from administrative functions and permit the courts to carry on their judicial functions without the necessity of handling administrative matters.

The recent amendments to the bankruptcy acts have thrown upon the Federal courts the burden of administering at least potentially hundreds of thousands of cases, including trust mortgage foreclosures,

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