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There would not have had to be paid too much by way of rent for it to pay out. So that only in abnormal and catastrophic circumstances would there be a reduction of the value of the bonds to a point where they had almost no value.

But after the war our troubles began. The sky lines in every town were pierced with apartment buildings, business buildings, hotels, theatres, and other properties, and this committee has found-and I say this very briefly—that in Milwaukee and Detroit,

— in Chicago and St. Louis, in Cleveland and San Francisco, in virtually every other large city in the United States, they were booming these pieces of property, and in many, many instances, they had 100-percent coverage. They would sell a million dollars worth of bonds against a building that was only worth $1,000,000. So the person who built it had no equity either in the land or in the building

That was all right. That continued to pay out in 1921 and 1922, so long as the employment index was high and wages were substantial. Why, you could get any kind of money for an apartment; you could get any kind of money for space in an office building. But when the collapse of 1929 came along, here is what happened. People began to look around. They began to break their Teases. They began to double up. And so the increment on these properties went down and they finally found that there was not enough with which to pay the interest on the outstanding bonds.

These trust deeds against which the bonds were issued always nominated the trustee and under the indenture it was incumbent upon the trustee to go in and handle that property, foreclose it, look after it, do any number of things, because he held in trust the beneficial interest of the bondholders in that property.

Well, then, the conniving and the collusion started. We found, for instance, that banks were interested. We found that the houses of issue everywhere in the country were trying to save some of these equities and trying to salvage some of their interest in the property. So what did they do? Even the best of the houses of issue—and I shall not name them, nor shall I impugn their motives—but even the best of them, those who operate from one coast to the other, began at once to make selections in the hope that they could set up a bondholders' protective committee of three or five or seven men for the purpose of salvaging their equity perhaps and continuing to draw some of the emoluments of the property. And that is where all the trouble started.

You can examine all these cases, especially the larger ones in Chicago and Detroit and New York and elsewhere, and you will find almost invariably that a few men who constitute the bondholders' protective committee were in the background and whether they came into the picture for the purpose of phenagling, an income, I shall not say, except I do know that almost invariably it was done.

I will take only one illustration out of the State of our colleague, Mr. Michener. Take, for instance, the Detroit Trust Co., in Detroit. They stood right in the center of this picture and did all of the handpicking, if you please. We elicited that testimony when we had their vice president and others on the witness stand.

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The Detroit Trust Co., first of all, had its hand in the receiverships. Secondly, it had its hand in all the properties that were in default through property management, by the setting up of a little separate corporation, oftentimes composed of office clerks and they drew a fee for managing these defaulted properties. The Detroit Trust Co. was represented directly or indirectly on committees. much to say about the selection of trustees and acted as trustee themselves, and finally they had much to say about the designation of the depositaries.

So that we found $204,000,000 worth of bonds that were being represented in all of these multifarious capacities by the Detroit Trust Co.

When they went into court and indicated that they were acting as trustee for the purpose of having their fee set, it was so difficult for a judge to know of all these ramifications. And to prove that it is difficult, let me say that this committee had a session with eight Federal judges in New York after dinner one evening, during the course of our investigation there, and Judge Coxe came out and showed us one of the 77B files in a single property case.

It had 3,300 typewritten pages in it.

Now, you will remember, when the House and the Senate concurred and finally passed section 77B you threw a very personal responsibility upon the judge. The language of the law is not that the court shall do this, so that some of those functions might be alienated to some arm of the court. Invariably the law says that the judge shall do so and so. And so the judges have assumed a very personal responsibility. And these judges said to us, “Why, we have got to go through all of that”, and you can readily appreciate the onerous burden that is placed upon the courts where a judge must personally examine into all of that.

How, then, is it going to determine whether a fee is reasonable or unreasonable, whether it is fair or unfair, without getting some friendly advice from some instrumentality?

Getting back to the bondholders committee for just a moment, in getting in the bonds, what did they do? First of all, they fabricated what was known as a deposit agreement, 50 or 60 pages long, couched in very prolix language. I swear, I have read them time and time again and I am not sure that I understand them. And I thought I had a reasonable amount of discernment. I know the average bondholder could not understand it.

They went then to the houses of issue who were interested in doing a lot of hand-picking, along with the banks, and they said, “Here, you used to have salesmen; they have got lists; they know to whom the bonds were sold. Suppose we pay them a dollar a thousand to go out and get these bonds back?” And they went out and got them back and they averaged about 95 percent of the entire issue. And the only thing that the bondholder had to show for it was this prolix deposit agreement, the terminology of which he did not understand. And what did it recite? It said first of all that the fees of the committees should be reasonable. Now, what is a reasonable fee! It might be 5 percent, it might be 10 percent.

But if you take a one-million-dollar issue, where the par was $1,000,000, and gave them a 5-percent fee, why, you gave them $50,000 where too often they had not done a great deal of good.


The deposit agreement says that the bondholders' attorney shall have a fee. And usually the attorney get as much as all the members of the bondholders committee put together.

The trustee shall have a fee; the trustee's attorney shall have a fee. There must be a fee for the managing of the property through a separate little corporation.

And so this thing has become so complicated, with fees, that something has to be done about stopping it, because, as Judge Sabath pointed out, these properties are gradually being concentrated in the hands of a few people who have got the money and who can camp on the sidelines until the picture is set up properly and who will go in and grab it out and squeeze the bondholders out of the picture.

Speaking of fees, let me recite just a few of these in connection with the Paramount case in New York, that involved some 700 theaters.

Here is our old friend, Charles D. Hilles, equity receiver, paid $10,000. Then as trustee of the debtor, $118,000.

Mr. DUFFY of New York. Were these fees allowed ?

Mr. DIRKSEN. These were asked for; no. There was $4,000,000 asked and they were very substantially curtailed by the court.

Here is Eugene Leak, trustee of the debtor, $118,000.
Charles E. Richardson, as trustee of the debtor, $87,000.

Root, Clark, Buckner & Ballantine, as the attorneys for the equity receivers, $700,000.

And then they came in with an auxiliary bill for $270,000.

Mr. SABATH. They were allowed $250,000 first and then they came back for $700,000.

Mr. DIRKSEN. Yes. I was alluding only to the aggregate fee there that they requested.

Booth, Hall & Stewart, of Boston, special attorneys for the trustee, $25,000.

Adolph Zukor, as equity receiver, $18,000.
Price, Waterhouse & Co., as accountants, $10,484.

Cook, Nathan & Lehman, as attorneys and counsel for the debtor, $200,000.

Gentlemen, there are four or five pages of these and they all run that way.

Where is all this money coming from? It must come out of the property. There is not any other place where these fees can be gotten. And if it comes out of the property it simply cuts down the increment that can ultimately be paid to the bondholders after the reorganization has been completed. That is the picture that this bill seeks to correct.

Very roughly, first of all, it sets up a Conservator. There may be some disagreement as to how he shall be appointed. But the purpose of the Conservator is to have somebody in the picture when the time comes when a building boom starts and we again have this picture that we had from 1915 to 1929. It is so that someone can qualify, can hold himself out as an expert; so that some governmental agency can step in as a friend of the court with the

power of subpena and the power to appoint all the necessary employees in order to do a good job of conserving the interests of millions of people

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who cannot otherwise get representation. They get no representation through the bondholders protective committee. Ostensibly they do; in reality they do not.

The Conservator is supposed to be an arm of the court. The language of the bill is that he shall be appointed receiver, trustee, or custodian under 74 and 77B. That is to get away, if possible, from the private trustee racket. We realize, of course, that courts are human, as Judge Fuller pointed out. This seeks to stabilize those fees at a reasonable level.

It confers upon the Conservator also certain power over the petitions and the answers that are filed in these reorganizations. It does not confer upon him an absolute and arbitrary authority to complete a reorganization or to keep a reorganization from taking place just because he does not agree. But it does say that the plan has to be filed with him, the answer and the petition have to be filed with him.

If he does approve, he conveys his approval to the court; if he disapproves, he conveys that disapproval, together with his recommendation, to the court, and the court is, after all, the court of last resort. It can do as it likes. But there, before the court, is at least the recommendation of some friend of the court, some friend of the bondholders who, having gone through the matter very meticulously, is making his recommendation.

Then, as I say, it seeks to stabilize these fees at what I believe is a kind of reasonable level. Finally it provides that where there is any corporate reorganization under 77B, they are going to stop these persons from going out and soliciting proxies and soliciting this, that, and the other thing, hoodwinking the bondholders too often by smart talk.

The Conservator has been apprized of the facts and he can give approval to the report that accompanies any proposed plan, and he has some notion about the persons who are doing all this.

Finally, it confers some authority upon the Conservator with respect to the personnel, and the practices of the bondholders protective committee. I think that is absolutely necessary. You cannot get away from it. We are going through this kind of a period again in the future unless those practices can be stabilized.

I profess and make no pretensions to expert knowledge on the subject of constitutionality. Certainly the Government has the right to do this insofar as those bonds are concerned that have been in the current of interstate commerce. But when it comes to bonds that have been issued and sold wholly within the confines of a State, there you get into a difficulty.

The State of Michigan tried to cure it and they set up a State bondholders' protective committee. They went so far as to say that nobody could serve upon a private bondholders' protective committee unless the State committee first gave approval. Sometimes they disapproved and so these people either were not appointed or they had to come off the committee.

But there you have in a rought way, the foundation, the purport of this bill. Having seen all of this grief, having seen these frightful losses that have sadly impaired the purchasing power of this country and made our depressed condition somewhat static because of the ruination of that purchasing power, I think it is incumbent upon Congress to do something. And if this bill in its details is not satisfactory to this subcommittee of the Judiciary Committee, I am satisfied, of course, that you will do something to iron out the kinks so that a presentable bill ultimately will come to the floor of the House for its consideration.

Thank you.

Mr. CHANDLER. Thank you, Mr. Dirksen.

Mr. SABATH. Mr. Chairman, I should like Mr. O'Malley, another member of our committee, to be given an opportunity to make a brief statement. Mr. CHANDLER. We shall be glad to hear Mr. O'Malley.



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Mr. O'MALLEY. Gentlemen, it is unnecessary to refer to the background. That has already been referred to by Mr. Dirksen, Mr. Fuller, and Mr. Sabath.

I attended most of the hearings held by our committee. I think I missed only one out of the nine. The need for this bill is amply demonstrated in the voluminous record which we have compiled as a result of these hearings.

Personally, I will be frank and say that I do not think this bill goes nearly as far as it should go. This only reaches those protective committees—the Conservator under this bill can only reach those protective committees that have sought to reorganize their property under the terms and provisions of sections 74 and 77B.

There are a great many committees that have millions of dollars worth of bonds on deposit with them that have been in existence for 5, 6, and 7 years, that have made no attempt to reorganize in the Federal courts, and insofar as the testimony shows, do not propose to make any attempt because it has been a profitable, a lucrative racket for the professional committee members who are on those committees.

I have one of those committees in my town. I know one big property that a committee was organized to take over in 1929. That committee is still functioning and those members are still earning a fine living from the operations of it and the management of the building.

It is impossible for the few bondholders who have not deposited their bonds with that committee to come into court under 77B because there are not enough of them under the terms of

that act. Our original bill, the bill that we had before the Banking and Currency Committee, contemplated setting up a conservator who would have the authority to go in and investigate and prescribe regulations for those committees; the committees that have not attempted to reorganize under the Federal laws. Of course, that bill is not under discussion.

I am inclined to concur with Mr. Fuller that the Treasury Department would be the department to administer the provisions of this bill. In my opinion, they know more about the property that has had securities issued on it than any other department of the Government.

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