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The CHAIRMAN. Yes?

Mr. CHANDLER. There is already machinery provided. The machinery is already in existence. This bill, Mr. Chairman, does provide for the appointment of a Conservator by the President and, as written, it really creates quite an organization. The bill which the gentleman from Arkansas is speaking about simply placed in the Comptroller of the Currency the work which would be done by what I would call, under this bill, a separate bureau, but you do not need any new organization.

Mr. FULLER. I am not saying that I would oppose any plan that the committee would set up for the Conservator, but if it is set up in some other department, it would have to be self-liquidating, just the same. That is my idea that it would be better for everybody concerned, so that it is taken out of politics. They have had experience and they have got men skilled in that line of work.

Mr. CELLER. Which bill is your committee recommending?

Mr. FULLER. They recommend the same argument that I do, except that this bill—the bill that is submitted by the committee, in lieu of the one last year, provides for the President to appoint a Conservator, instead of making the Comptroller of the Currency the Conservator.

The CHAIRMAN. Does your committee approve this bill?
Mr. FULLER. Absolutely.
The CHAIRMAN. I mean this last bill ?
Mr. FULLER. Yes.
The CHAIRMAN. I thought you said you have not seen it?
Mr. FULLER. No; I said I have not studied it since last year.
Mr. HEALEY. It is only as to that change that I am talking about.

Mr. FULLER. I think it is one of the most meritorious bills I ever saw in my life. I challenge anybody to show there was ever an investigating committee that has done as much good for the people of this country as this committee has and got as little credit for what they have done. This is for the people who are needing relief, and a lot of them are in the poorhouse and are being taken care of by old-age pensions. It would shock this committee if they knew the horrible conditions that exist all over the country.

The CHAIRMAN. Will you suspend just a moment? (Here followed discussion off the record.)

Mr. SABATH. We have a gentleman here from New York to answer the inquiry of the chairman whether there is a need for this legislation, a gentleman here who has lived with it, who has been in charge of the New York office, and I believe there is no man that is in a better position to explain the need for this bill better than he

can.

The CHAIRMAN. Will you excuse me just a minute?
(Here followed discussion off the record.)
The CHAIRMAN. We will take a recess until 2 o'clock.
(Thereupon, a recess was taken in the hearing until 2 p. m.)

AFTERNOON SESSION

The CHAIRMAN. The committee will come to order, please.

Mr. FULLER. Mr. Chairman, like some men I know, I am getting a little old and forgetful, and I have forgotten about the record we made last year. I conferred with the chairman of the subcommittee, and he tells me that we have exhaustive hearings, in which we set up the facts and authorities and everything that you could really anticipate, and he suggested that it be made a part of this hearing and do away with what we have said and done here; and I, therefore, concur in what Mr. Chandler says, that that be the record in the case, if you are going to have it printed, and we will put on one or two gentlemen who are familiar with this bill to explain the minute details and answer questions.

I might say, in this connection, that I sat in with two attorneys from the Treasury Department and one from the Department of Justice, besides our legal staff, in drawing this bill 2 years ago. But to my surprise, I see that I forgot about the matter of the reasons and facts and explanation of it, and I would like to proceed as I have suggested, if it is satisfactory to the committee.

The CHAIRMAN. Well, I think it would be a good idea if you have some other witness whom you would like to put on, and let that witness direct his own discussion to the things that are in the minds of the committee they are having difficulty about.

May I make this suggestion at this time, that the committee, you know, has had a good deal to do with bankruptcy matters, we have had a good deal to do with impeachment matters, and we know, in a general way, of the abuses which you gentlemen are trying to reach, so it is not profitable for you to devote very much time to it. Get right down and put this bill right on the table and let us know why you think this procedure would be better than that which we are accustomed to observing, and so on.

Mr. FULLER. Mr. Garsson, you may come around here.

The CHAIRMAN. Mr. Chandler, you are more familiar, having been the chairman of the subcommittee, with the bill than the rest of us, and I would like for you to have some responsibility in developing the testimony.

Mr. CHANDLER. Very well, sir, I will be glad to follow along.

The CHAIRMAN. I believe you know, from the questions this morning, what are the main things about which the committee is concerned.

STATEMENT OF HENRY M. GARSSON, ANALYST FOR SABATH

COMMITTEE

Mr. GARSSON. Mr. Chairman and gentlemen of the committee, I had the honor and privilege, a year ago, of appearing before the subcommittee, of which Representative Chandler was chairman. At that time, I attempted to explain in detail the various provisions of H. R. 12064, which was the predecessor of H. R. 9. The features of that bill have not been changed in any material detail. At that time

The CHAIRMAN. I think it might be just as well for you to a little better identify yourself.

Mr. GARSSON. Mr. Chairman, I have been the analyst for the Sabath committee for the past 2 years. I am an engineer and accountant. I also studied law. I have two law degrees. I have made a careful study of this bill and have actually participated in reorganizations that have taken place in and around New York, includ

ing northern New Jersey. I have actually analyzed several hundred plans of reorganization, and I have examined several hundred members of various committees purporting to represent security holders.

During that time we had the opportunity to observe the acts of these committees and also to find out what abuses and evils were prevalent in the present system.

The purpose of this bill is to provide corrective and remedial legislation to cover the specific evils which we found were not adequately protected by the present law.

I might start by saying that the present law, 77B, has two provisions which attempt to do some of the things which this bilì now provides. I want to read those two provisions, because this bill is really the complement of those provisions. The first one is, that there is in 77B a provision to this effect:

For all purposes of this section, any creditor may act in person, by attorney at law, or by duly authorized agent or committee, provided that the judge shall scrutinize and may disregard any limitation or provision of any depository agreement, trust indenture, committee, or other authorizations, affecting any creditor acting under this section, and may enforce an accounting thereunder, or restrain the exercise of any power which he finds to be unfair or not consistent with public policy and may limit any claim filed by such committee member or agent to the actual consideration paid therefor.

That you see gives to the judge a certain amount of power. The question that has come up continuously in the past reorganizations is whether the judge really has before him the facts which would enable him to properly use this power. For example, it says in this provision, that the judge shall scrutinize and may disregard any limitations or provisions of any depository agreements. Now, there are a great number of judges in the United States who have had many reorganizations before them, but I doubt that any two judges in the United States have read a dozen of these depository agreements, in spite of the fact that there are thousands of them in existence.

Now, he may disregard the limitations in these agreements which he finds to be unfair. The fact is that they are never called to the judge's attention until generally after it is too late and generally by someone who, you might say, really represents very few security holders. The real reason is obvious, that if a bondholders' committee is formed--and even a stockholders' committee is in the same category-generally, because of previous affiliations or connections, pei sons connected with the issuing house—having available to them the lists of the security holders, are able to send out requests for proxies and requests for deposits, and no outsider has available to him any such lists. The result is that, if anyone else comes in that represents a few bonds, these people purport to represent the great majority of the holders and get more consideration.

The people who get letters from such committees look at the names of the membership of the committee, who seem to be persons who are reputable in the community, and they do not know these persons permit themselves to be used as figureheads. They do not know that the persons who purport to represent them are not really active at all, but that the only one person active is the secretary or maybe a lawyer, and they sign these proxies and sign the depository agreements, without even reading them.

The question then is, Does the judge really exert the power given to him under 77B, under the present system, or is it necessary to provide some means to give him that power! I have actually dis

? cussed with many judges that question and most of them welcome the idea that some agency, some other means, would be given to examine the various documents which they have not either the opportunity to examine or the time to examine, so that they may have the information upon which to base their decisions which affect these particular proceedings. These particular provisions I will point out as I go along. There is in the bill itself, however, this particular provision that I have referred to, which is covered very adequately by H. R. 9.

In addition to that a judge, according to another provision of 77Bmay allow reasonable compensation for service rendered and reimbursement for actual and necessary expenses incurred in connection with a proceeding and plan by the officers, parties in interest, depositories, reorganization managers and committees, or other representatives of creditors or stockholders, and attorneys or agents of any of the foregoing.

Now, that provision relates naturally to compensation for those who act in the reorganization proceedings. Petitions for allowances are filed in every case by a great number of individuals, committees, attorneys, reorganization managers, and others, all of whom staté that they did the work. Now, the judge has no real means of knowing who really did the work. He knows, of course, that when a case comes up in court, after the party who has proposed the plan presents it, an objector gets up and says, “I don't like this and I don't like that”, and he may also hear a great number of attorneys argue on the various phases of the case, but he does not often realize that many of these attorneys have never taken the trouble to draw up a single paper, never taken the trouble to investigate a single fact, but use the information that they gather in court on that day to make a lot of noise, to put in more words, build up the record, so that they may later claim compensation in that case.

The judge has no real means, from his observations in the court, of determining how much of the actual work was done and what contribution in any case was rendered by persons who claim the compensation. I have seen petitions by five or six different persons asking compensation for the very same thing, each one of them claiming that they contributed a certain part of the plan of reorganization.

Mr. CELLER. Did they all get their compensation ?

Mr. Garsson. In any number of cases the judge may or may not grant the compensation.

Mr. CELLER. You do not want to give the impression to this committee that all of those applicants for compensation received that compensation? For example, you know the judges in New York have been very vigilant, particularly in the last 2 years, as to the fees that have been granted. You take in the Paramount case, for example, they have any number of applicants, but very few received compensation. You take in the Twentieth Century-Fox, United Cigar Stores, and many others, they have been denied right and left of these applications for allowances and fees. The judges have been

very vigilant in that in New York City. You must not leave that impression with the committee.

Mr. GARSSON. No; I was going to amplify the New York situation as one of the real reasons for this bill. We have had a fortunate condition in New York, I may say, that may be different from the rest of the country. I am not certain. In New York we have found the judges to be very cooperative and they have been glad to learn any additional facts that have not been presented to them by those who purported to represent the various interests. In fact, a number of the judges in the New York district and in the New Jersey district did not pass upon allowances unless they asked the representatives of the Sabath committee if they have made an investigation into these petitions. In many instances they have actually postponed the granting of these allowances when no representative of the Sabath committee appeared.

The Sabath committee was unusual in that respect, because House Resolution 354, which amended the original House Resolution creating the Sabath committee-in that resolution, authority was given to the representatives of the committee to appear before the courts, to give those courts the benefit of the knowledge obtained during the investigations.

You see, some of the judges had originally objected to the fact that, after a case was over, certain facts in the possession of the committee have not been called to their attention, and so the question was asked: “Why don't you come to us before we have completed the case and tell us about it?"

In other cases we have had the opposite objection from judges, that before the judge does anything and we offer to give the judge information, one of the attorneys—not the judge, but one of the outsiders, generally come in and say: "Now, why are you examining this case now? We have not finished the case.

How do you know something is going to be done that you will be able to criticize?” And so we have the problem as to whether we should find fault afterwards or before, whether to remedy some defect afterward or lock the stable door before the horse is stolen.

Now, the judges, as I said before, have been very cooperative, and they have actually sought information from the Sabath committee, and we have been very happy to give it to them, because we looked into the cases and could get a very clear picture by examining the facts. In fact, we could get a clearer picture by examining the facts while the case is going on than you can in retrospect, looking at it afterwards, because, as many people say, second thought is always better than the first thought; it is much easier for you to give a suggestion after it was all over, but you might not give the same suggestion when it is occurring.

I will give you an example of a case of that kind in the district court in New Jersey, of the Bayway Terminal Co. This company went under 77B before that court, where the claims involved amount to several millions of dollars. It had $600,000 or $700,000 of liquid assets when the proceedings started. But due to conditions in that particular industry, which was a warehouse, they lost money in operating it for several years between the time the petition was was filed and the time the plan of reorganization was completed.

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