Mr. FULLER. Mr. Chairman, I recall that we appeared here, but I do not recall making any argument or any real explanation of much consequence. I want to be heard on this bill.

Now, I realize what the committee is up against, but when it comes to introducing testimony before this committee, I do not know where you are going to get your testimony of much consequence without you get it from the members of this committee. We are familiar with the facts as to why this bill should be enacted. Then when it comes down to the time of the real merits of the bill, if you feel that there is such pressure that you ought to do it, then it would be well, it seems to me, for the committee to have it explained by those who are in a position to explain it.

But as far as I am concerned, I do not know what you gentlemen will say. I am not in position to take the responsibility to have this bill explained in detail.

I believe that the subcommittee is as familiar with it as we were, and I think the gentlemen from Tennessee is as familiar, and more familiar with the working of this bill than any member of this committee, because he has gone into it.

I would like to have the opportunity of presenting the real necessity for some kind of bill like this. I am not going to appear as a witness, unless I appear in my capacity of a member of the committee.

We could bring judges here. I know a lot of judges that will come here, who might be considered as witnesses. But when you go out and get witnesses, I do not know where you are going to get them, except from our investigations, which are in the printed form.

The CHAIRMAN. What we are trying to do now is to clarify those points about this thing, and Judge Sabath has made some very definite and clarifying statements as to the motive that has prompted the introduction of this bill.

Now, as I understand, in addition to what Judge Sabath has said, we would like to be permitted to bring some judges here, who will testify to the waste and delay in the administration of estates under the existing law. This committee, from time to time, has made some examinations from various angles in connection with impeachment proceeding, and so on, and I think they do know a good deal about the expense of administering estates in Federal courts. So as one member of the committee, I am interested, and I think all the committee are interested, in having made clear why we might reasonably expect either more abuses or fewer abuses in the administration of estates under this law than under existing law, and those things stand right out, they lie right on top of the table.



Mr. DIRKSEN. Mr. Chairman and gentlemen of the committee, I think the question that the chairman asked just a moment ago requires an answer.

I think you are confronted with two questions this morning: First, whether this legislation is necessary; and secondly, if such legislation is necessary, whether the bill that is offered by the proponents will do the work? The CHAIRMAN. Now, just a minute. You are right, I think.

. Now, whether you might reasonably hope to have the abuses now existing eliminated, without changing the set-up is the first proposition. The second proposition is—and Judge Sabath touched on it-whether or not you might expect, under this set-up, to have a better administration, and also prevent the same abuses from creeping into its administration that are now complained about in the present set-up. It seems to me those are concrete questions that lie right on the top of the table.

Mr. DIRKSEN. I believe so, and I believe that is in line with what has been said by Mr. Chandler and Mr. Miller.

I wonder if I might take about 7 or 8 minutes before I hop off to another committee meeting? I address myself rather reluctantly to so many distinguished lawyers on this committee, who probably have a far better understanding and better background than I, but it can be generally conceded that, prior to June 1934 estates of corporate debtors were disposed of either through the normal bankruptcy channels or by equity receivership proceedings; and then in June of 1934, under the Federal Corporate Reorganization Act, known as 77B. That has been on the books about 3 years. It has been approached rather cautiously, I should say, by lawyers and the courts, but there have been enough cases filed and there has been a sufficient volume of litigation under 77B to make possible some observations, perhaps, as to whether or not some administrative agency is necessary in order to help the courts do justice and equity in connection with corporate reorganizations.

There are two questions. The first is: Is it necessary to give the Federal courts an administrative arm, in order to do the proper thing by these parties in the form of bondholders and creditors, who are scattered over all of the 48 States?

The CHAIRMAN. Will you excuse me a minute ?
(Here followed discussion off the record.)
Mr. DIRKSEN. Shall I continue?
The CHAIRMAN. Yes; go right ahead.

Mr. DIRKSEN. Who are scattered in all of the 48 States of the Union; and if such an administrative agency is necessary, I believe the provisions of the pending bill will do the work and do it satisfactorily.

Now, my answer to the question as to whether an administrative agency of some kind is necessary is most emphatically yes; and in seeking to come to that answer, I think we ought to go back, for instance, and take a single hypothetical case. John Jones goes out into a fine suburb and buys a parcel of ground, for which he pays $100,000. He promptly marks it up to $200,000, so there is $100,000 of water. He engages a contractor and on that ground he builds a building to cost about $1,000,000. He writes up the building cost $250,000. So you have got $350,000 of water in the structure. The conditions are good; the tenants in this apartment or hotel pay their bills, so it is possible to pay interest upon the first-mortgage issue.

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But just the minute when conditions develop as back in 1931 and 1932, tenants break their leases and move out, they claim that they cannot pay the rent, and the result is that the mortgage issue goes into default. As you know well, it becomes a job for the trustee under the indenture.

Here is what we learned in all of the cities where we made any investigation of that practice: The trustee, instead of following the old concept of liquidation under the Bankruptcy Act, which are equity receiverships, does not try to liquidate the property; he seeks, first of all, to set up a so-called bondholders' protective committee. Those committees are never, in my judgment, selected by the bondholders.

Mr. CELLER. Are you speaking of the 77B proceedings?

Mr. DIRKSEN. I am speaking of the protective committees. They are either selected by the houses of issue, or selected by the trustees.

That is no. 1. Then, of course, you have the trustee's lawyer, and if the trustee has available a bondholders' protective committee, the chances are absolutely inevitable that some members of the firm of attorneys for the trustee is also attorney for the bondholders' committee. The third in the picture are the houses of issue who issue the bonds. We have some very few cases in which the issuing houses were not represented on the bondholders' protective committee. They forthwith set up a management corporation, which is usually an auxiliary of the bondholders' protective committee, consisting usually of dummy law clerks for the most part.

So you start out with the trustee, who has his hand in this pie from the beginning, to operate in the collection of fees and in the administration of the property, so that the bondholders, as a matter of fact, have little or no representation, notwithstanding the equities that they are supposed to have.

Now, to show you how that thing works out, I can most graphically bring it to your attention by showing you what happened in Detroit. That is a situation that you will find paralleled in almost every other large city. The largest trust company in Detroit is the Detroit Trust Co. They were handling, as a result of the debacle that came in 1932, $204,000,000 worth of property. They were trustees for $204,000,000 worth of theatres, apartment houses, hotels, and other kinds of property; $164,000,000 of the $204,000,000 was in default. Now, you take a look at this chart and see how the Detroit Trust Co. operated. Here they are, right up at the top [indicating].

In the first place, they were the receivers for the United States Mortgage Bond Co.,

for the Federal Bond & Mortgage Co., and for the Guaranty Trust Co., three of the largest issuing houses in Detroit. The Detroit Trust Co. were the receivers for all of the properties that were in default. Secondly, they were looking after the management of all of these properties through a small auxiliary corporation.

The CHAIRMAN. Appointed receivers by the court!

Mr. DIRKSEN. They started out as trustees and they usually were appointed as receivers by the court.

The CHAIRMAN. How many Federal judges in the Detroit district ?

Mr. DIRKSEN. I do not remember whether there are three or four. Four, I think.

The CHAIRMAN. Anyone an appointee of the Detroit Trust Co.?


Mr. DIRKSEN. I shall not reflect upon any member of the judiciary, but the fact of the matter is they were handling just about everything that was not nailed down. You see, there is not any other way for them to become receivers than to be appointed by the court.

The CHAIRMAN. Just a minute. We amended the Bankruptcy Act to prevent monopolies of receiverships in Federal courts. Were these receiverships prior to that amendment ?

Mr. DIRKSEN. I could not say offhand, but mention merely that for the most part thes eran from the time they were first designated as trustees under the trust indenture

The CHAIRMAN. We have a remedy for that, though.

Mr. DIRKSEN. And as for the receiverships, it does not run in my mind when the appointments were made. But I do not believe that is so material to the question that I want to present to the committee.

Now, then, you have got your bondholders' committees representing 649 bond issues. The Detroit Trust Co. was either representing, , in one capacity or another, 218 of those committees through either some of their division heads, a bureau head or department head, or through their affiliated law firms, and were actually determining the policies of over 218 bondholders' protective committees in the Detroit



Now, over here [indicating], you will find them acting in a fiduciary capacity for $204,000,000 worth of property and, finally, you find them acting as depositories for the bonds.

What I want to submit to the committee this morning is this: When you go into court before a Federal judge with a plan for reorganization, for instance, under 77B, you can see from that chart · the conflict of interest that is involved and that is associated around a single corporate entity in the form of the Detroit Trust Co.

The question comes up when a receivership is involved. They are there through their representatives. Is there something that pertains to the equity holders? If so, there they are. Is it something that pertains to the trustee? Then there is the Detroit Trust Co. If it is something in connection with the management corporation, it is the same Detroit Trust Co. There is not a single interest of any kind involving rehabilitation of the corporate structure when the same identical trust company does not stand in the breach.

Mr. HEALEY. You are talking about real estate now!

Mr. DIRKSEN. Yes. Now, under those circumstances, what is a Federal judge going to do about it, a Federal judge who has to act in the capacity of accountant and lawyer and economist and everything else, in order to deal with the corporate reorganization? He has to depend either upon a special master, he has to depend upon a trustee as an arm of the court, or he has to depend upon the information and material and documents that are submitted by the bondholders' protective committee, by the trustees, or by the receivers, or by the equity holders. It does not make any difference who submits them, you always get back to the same source in the form of a central trust company, that has grabbed off most of the trusteeships in that town. Now, where is there any conflict of interest?

Mr. CELLER. Is not the blame somewhat on the part of the judges giving this Detroit Trust Co. this tremendous amount of business?

The CHAIRMAN. In the matter of receiverships and trusteeships, the court has control of those appointments, has it not?

Mr. DIRKSEN. I do not believe so, in the first place.

The CHAIRMAN. In the first instance, if there is to be a receivership appointed, the court makes the appointment?

Nr. DIRKSEN. That is true, but the court does not make the appointment of the trustee under the trust indenture.

Mr. MICHENER. The trouble is that the people have had such explicit confidence in the Detroit Trust Co. and still have

Mr. DIRKSEN. I think that is right.

Mr. MICHENER. That they were willing to give them the indenture; and as a matter of fact, I think you probably found that the Detroit Trust Co. is executor of more wills than


other company in the country, for the reason that the people who live there have confidence in them and designate them as the people to dispose of or administer their estates. Now, did you find anything wrong in connection with the Detroit Trust Co.? Answer that right out, please.

Mr. DIRKSEN. I prefer to make no reflections. But I am going to say this, by way of answer to the question: There is not any doubt in my mind that they rank high in public esteem in Detroit and in Michigan, so long as things were normal and conditions were prosperous, but just the minute that they or their clients were in position where they were going to lose some money, just as soon as these trusts were about to be impaired, it was a case of everybody for himself and the devil take the hindmost, and the result is that you

get into all sorts of sharp practices. I shall not reflect upon the Detroit Trust Co., because I think, under similar circumstances, so many have done the same thing. It is a case of trying to recapture your white alley when everything seem black.

Mr. MICHENER. The courts were not going out of their way to appoint the Detroit Trust Co.

Mr. DIRKSEN. Not necessarily, but that gets us right to the thing that I think ought to be brought home to this committee, and that is that you have a set-up of this kind in Philadelphia, you have it in Chicago, you have it in San Francisco, you have it everywhere, and it is absolutely impossible, under such ramifications of corporate entities acting as trust companies, and also acting as trustees for the courts, in my opinion, to get all of the facts that are necessary to determine the equities in the situation in the reorganization of corporate structures. It is not, in my judgment, the fault of the courts.

Mr. HEALEY. Was not this particular trust company designated as the representative of the creditors?


Mr. HEALEY. And the majority of the creditors delegated this trust company as their representative, as trustees?

Mr. DIRKSEN. Yes. Maybe you are thinking of entirely after reorganization under 77B. I was reciting the background before we really got to that time, to show how that got into the picture, and what has happened afterward. Now, I submit to you that no matter what question might be presented to the court you are going to get the answer from the same trust company, through one of its affiliates, through one of its groups, or through some subsidiary. You just cannot miss it, because they are identified with almost

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