Mr. GARSSON. Well, they have, but, unfortunately, sometimes they do not get a chance to look into some of the details. That is not a very important part of the bill. It could be left out and the bill could work just the same.

Mr. FULLER. The bill does not require the Reconstruction Finance Corporation to loan money, but authorizes them, or gives them the authority to loan money, and there are hundreds of cases which come up where you cannot get individual money, but where it would save all of the money involved if they could

get the Reconstruction Finance Corporation to come along and help out, that just gives them that authority.

Mr. CHANDLER. Now, on page 24 you have "registration of protective committees.” That is a new section, since the other bill. Just

. where does that work directly into the scheme of things that you provide for?

Mr. GARSSON. Actually, we find that there are thousands of defaults that are now in existence that are not before any courts, at all. As a matter of fact, I made an analysis of these existing defaults, we found hundreds of thousands of them, amounting to billions of dollars, that are not before the court yet, but they will be. The time will come, maybe after the Sabath committee no longer functions—maybe they are waiting for other things—but these cases will come before the court. Every day you see new cases coming up before the court that have been in default for years, and in each of these cases there are protective committees functioning.

Mr. CHANDLER. You seek them to give the bankruptcy court jurisdiction over those protective committees to the extent of requiring them to register?

Mr. GARSSON. That is right; registered before the Conservator if the securities are held outside of the State where they are issued. In other words, to avoid the possibility of having an intra-state situation, we exempt any security held within that State. Second, that an issue of United States Government bonds, or some others that are exempt by the Securities and Exchange Commission, but if the security is supposed to be under the court's protection, whether it is a State court or Federal court, there is no registration required in the S. E. C. That means that hundreds of protective committees are functioning today, taking advantage of security holdings, without having anybody to look into their activities. The purpose of this is to be able to see what the activities of these protective cominittees are, to supplement the work of the Conservator as, if, and when a case does come under 77B. We must consider that a great number of cases not now under 77B are not there because there is no present procedure by which they could be put there, and we have attempted in another part of this bill to widen the scope of 77B to include that type of case. I will try to explain that case: That case is an average foreclosure and not when the securities are held by the public.

Mr. GARSSON. Let us assume a $5,000,000 mortgage, or a $2,000,000 mortgage held by the public in the form of bonds, and there is a foreclosure of the bonds. Now if the bondholders or creditors holding them can bring that under section 77B in order to get advantage of that section, if they are seeking to preserve the assets and avoid

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litigation, they cannot do it under the present law because the Supreme Court of the United States held that 77B does not apply to such cases.

The present 77B does apply to any equity receivership. The court has decided a foreclosure is not an equity receivership: Therefore the provisions of this bill provide that if a substantial part of the property of a corporation is under foreclosure that shall be considered an equity receivership. And it seems that if there is one piece of property they cannot come in, if it is only a part of the property of the corporation, under 77B. If substantially all of the property of a corporation is in equity receivership in the State then they can bring that case into the Federal court under 77B just the same as it brings cases that are now before the Federal court in equity receivership before 77B.

Mr. MICHENER. Suppose, Mr. Garsson, one of the methods of foreclosure here on one unit of the property is by advertising the property.


Mr. MICHENER. And that corporation owns property consisting of large real-estate holdings, covered by a mortgage.


Mr. MICHENER. And the mortgage is being foreclosed by advertising.


Mr. MICHENER. What effect would your suggestion have upon that situation ?

Mr. Garsson. Here is the situation: Let us assume on that property that you have $5,000,000 involved in the piece of property being foreclosed, and the bondholders looking around to see if they can find money to buy it in; they cannot get any money anywhere and somebody outside is going to buy that property in because the bondholders cannot get the money. Now, they will bid perhaps $200,000 or $250,000 on that $5,000,000. Now we have an example of what happened in Philadelphia. There was a case where the Roosevelt Hotel, I believe it was, was being sold, and somebody bid $7,900, which was just enough to pay the tax and expense because the bondholders could not get the money. Here is a foreclosure bill that is actually going to protect the bondholders, that is going to conserve the assets and prevent a liquidation from which the bondholders get nothing from the various mortgaged property that is owned by the corporation, and in view of the fact that most of the State courts do not fix an upset price—some of them have an upset price—and if the bondholders get the upset price they will get about 10 percent.

Mr. CHANDLER. You could not have an upset price under Mr. Michener's question

Mr. CHANDLER. Where there is a sale through advertising.
Mr. GARSSON. Although they sometimes do what they want-

Mr. MICHENER (interposing). You could not possibly do that; you cannot possibly fix the upset price in a foreclosure proceeding by advertising

Mr. Garsson. No, you cannot; but in New York and some other States

Mr. MICHENER. You are referring now to contracts, I suppose. You can foreclose if the parties agree, and you can foreclose by advertising if it is agreed in the contract, and the only real difference in most States, where there is foreclosure by advertising, you cannot get a deficiency judgment.

Mr. GARSSON. Well, suppose in either case
Mr. MICHENER. You could not get a deficiency judgment.

Mr. GARSSON. But in either case you are leaving the bondholders at the mercy of anybody who can get the money; the individual bondholders do not have the money to go out and buy in that property at an amount that is even equal to 50 cents or sometimes 20 cents on the dollar, and sometimes all they get is a certificate of cremation following such sale. The only way you can protect them, in view of the fact that they are not sufficiently protected under 77B today, is to afford this additional protection so that they can reorganize for the benefit of all those who have an interest in the property. Now, this bill, as amended, will permit those persons who today are being clearly affected by a lack of adequate procedure in the State courts and give them the benefit of 77B, and in many instances now the reorganization committee or the protective committee is running wild; the management of the property is sometimes placed under an incompetent supervisor. And in many instances they never take the trouble to actually, hold the sale, and in some cases some of the properties have been under foreclosure for 4 years, 3 years, or for 2 years and there should be some committee which can really operate the poperty for the benefit of the bondholders, and sometimes they want to keep it under a receivership as long as they can without having a sale, in order to have the fee.

Mr. McLAUGHLIN. Referring to foreclosure sale; you have mentioned the set-up in this act which would put all of the property under 77B?

Mr. McLAUGHLIN. What would be the mechanics of that?

Mr. Garsson. Well, under 77B, as it is worded at the present time, any creditor, any group of creditors, holding $1,000 of claim against the assets may put the property of the corporation under 77B if an equity receivership is pending; and under some decisions the foreclosure is not an equity receivership and it cannot be included in that kind of a case.

The CHAIRMAN. If it will not interrupt you, I would like to ask you a question.


The CHAIRMAN. You are assuming, and this bill, it seems to me, assumes that in reference to these contracts between private persons, one the owner of stocks and bonds, and the others those who are going to tie it up, that that contract can be set aside—and I am not using the exact language—by somebody other than the persons themselves who have the aggressiveness to complain. Is there any question about that particular thing!

Mr. GARSSON. No; as a matter of fact, although the States are forbidden by the Constitution of the United States from passing any act which would impair the obligation of contracts, there is no restriction against the Government passing such a law. As a matter of fact, the bankruptcy act does that very thing with regard to obligations in contract rights throughout. It actually impairs the obli

gations of contracts through a bankruptcy action, every time it is put into effect.

The CHAIRMAN. Yes; I understand.

Mr. GARSSON. Now, this is a part of the Bankruptcy Act. As a matter of fact, this present law provides specifically for that, and the agreement would be set aside

The CHAIRMAN (interposing). I did not want you to go into details;

I simply wanted to find out how you felt about it. Mr. GARSSON. And that would merely carry it into the act. Mr. CHANDLER. You are worried about the protective committee?

Mr. GARSSON. Yes; and, the present law, 77B, does not provide for that. There is a subdivision in 77B, as it now stands, and that nobody has found any objection to that, because the authority is given to the United States Congress to pass just such legislation under the Constitution, although the States cannot pass it.

Mr. CHANDLER. There seems to be a very serious question in section 3 with respect to the protective committee; it seems to me you have to consider that part.

Mr. GARSSON. I will say that you will find in the present section, 77B under subdivision (b) a provision that nobody has ever questioned; the constitutionality of that has never been questioned.

The CHAIRMAN. I do not care to express an opinion about it now; I thought it was of sufficient importance to ask you a question about it.

Mr. GARSSON. You will find that in the decision rendered yesterday, Monday, by the Supreme Court of the United States and some others in connection with 75.

The CHAIRMAN. We thank you, Mr. Garsson. We have one or two others.

Mr. GARSSON. Thank you.

Mr. FULLER. Mr. Chairman, we want to ask you to hear one or two others. One is a member of this committee, who has been a judge, a member of the bar, and he wants to say just a word.




Mr. CULKIN. Mr. Chairman and members of the committee: I am a member of this famous Sabath committee. I am strongly impressed, Mr. Chairman, with the legislation of last year and the report that Mr. Chandler made on it. Unfortunately I was not at the committee meeting where this hearing on H. R. 9 was reported, and if I had been I would have objected to the suggestion that a new office be created. However, Mr. Chairman, I just wish to say generally that the legislation of last year appeals to me very strongly and rather than have any controversy, so far as I am concerned, I would recommend that the other bill be reported because that has been thoroughly considered by the committee.

The CHAIRMAN. By the legislation you refer to the bill that was reported ?

Mr. CULKIN. The bill reported last year. I think that is all I wish to say. I wish to add merely this, that some legislation is


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necessary in this situation, absolutely necessary, and the integrity of the country really depends upon adequate legislation of this character.

Thank you, Mr. Chairman.
The CHAIRMAN. Thank you.

Mr. FULLER. Now, Mr. Chairman, you have been very courteous to us. Our good friend and colleague, Mr. Church just wants to say one word.



Mr. CHURCH. Mr. Chairman and gentlemen of the committee, I shall not prolong the hearings. I appreciate the opportunity of appearing before you, and I simply want to say that I am very, very anxious that some legislation of this kind will be reported; I am relying upon the good judgment of every member of this committee to give us some legislation that will do something for the bondholders.

The CHAIRMAN. You are talking about this particular bill?

Mr. CHURCH. I have looked over this particular bill, and I will be anxious to vote for this bill when perfected, if this committee reports it out. I have some suggestions which I have made in the Congressional Record, found on page 3568, which I hope this committee will look over. That contains the suggestions which I want to put before this committee.

The CHAIRMAN. Do you want to put that in the record now?

Mr. CHURCH. Yes; I will be glad to. As I view the situation in connection with bondholders' reorganizations we have, among other things, two difficulties that have arisen, whether they begin the State courts or under 77B of the Bankruptcy Act. One is the failure of so-called protective committees to keep the bondholders themselves advised as to the work being done as it progresses, their problems and reasons why a particular plan of reorganization was adopted.

What has been happening is simply this: A committee representing bondholders is established, and after 2 or 3 years it produces its reorganization plan.

The bondholders themselves know nothing about what has transpired during the 2 or 3 years. They do not have any idea as to why such and such a reorganization was adopted. Naturally they are skeptical and wonder where money represented in the bonds they hold has gone.

This difficulty can be met if these committees were required to report at reasonable intervals to their bondholders, advising each as to the status of the reorganization work, the problems to be solved, the decisions made, and the reasons for the decisions. By such reports the bondholders would be apprised of the developments, be in a position to protect their interests, and understand the final reorganization plan the committee adopts. Such procedure not only helps the bondholders but it also saves the committee from criticism which may not always be justified.

The second difficulty which should be met in connection with bondholders' reorganizations is the burden that is on the judge in each case. Under 77B of the Bankruptcy Act the judge is not

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