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bankruptcy statutes made pursuant to the Constitution of the United States may be administered. I think as a matter of history, although I would not like to be pressed on this, I think as a matter of history, there would be no reason why the Congress could not set up administrative agencies rather than courts to administer the bankruptcy statutes. It has always been done through the courts, by the courts, and I see no reason why it should not continue to be done that way.

Mr. COLE. I am talking about intervention in court proceedings.

Commissioner Douglas. If it should happen, I for one would deplore it, at least at this stage. I think that the courts, overworked as they have been are nevertheless competent and adequate to handle the task. I think what they have needed in this reorganization period has been, first, some administrative adjunct or arm of the courts that could render disinterested, expert service and advice. Secondly, I think that the courts have needed more specific legislative standards under which to operate. I think that those two factors point not towards taking powers away from the court, but towards putting the courts into a better position to operate effectively.

Mr. MARTIN. Mr. Chairman-
The CHAIRMAN. Mr. Martin.
Mr. Martin. May I ask a question there?
Commissioner DOUGLAS. Yes.

Mr. MARTIN. I want to know if this intervention here is not something along the line contemplated in the intervening authority given the Attorney General of the United States in an act now pending before Congress-I do not know whether it is along the same line of intervening in the United States courts, where the constitutionality of an act of Congress is involved. It would be something along that line, would it not?

Commissioner Douglas. Those two ideas were not at all related in our deliberations on the needed reforms in the bankruptcy courts. What was felt was that the courts, as I have said, in many situations, really needed and I feel confident that many at least would welcome, some administrative help. Further, from the point of view of investors as distinguished from the point of view of the courts, there were many cases where perhaps just due to incompetency or perhaps due to other reasons, there were oppressive practices prevailing. The courts too far removed from the situation were not apprised of them; but it is imperative that some action should be taken to prevent such practices.

Now, an intervenor in that case, such as the Commission, could perform that function for investors by calling such matters to the attention of the court.

Mr. WOLVERTON. Mr. Chairman-
The CHAIRMAN. Mr. Wolverton.

Mr. WOLVERTON. The explanation that you have given as to the purpose of the act, so far as it relates to the proceedings of the courts would seem very satisfactory to me if it is limited entirely to the position of an adviser or intervenor.

I have had in mind, however, that there may be provisions in the act leading up to the proceeding in the court that may be so restrictive that in the final analysis the court is restricted in what it really has before it to be determined.

Do you consider that the preliminary steps provided for in this bill are of such a character as to restrict or prevent any proposed plan of

reorganization in such a way that there would not be an opportunity for the plan to be presented to a court?

Commissioner Douglas. I do not sir. That is to say, there is only one phase of the Lea bill, as I read it, which touches at all the court proceedings and that is the provision for intervention by the Commission. The second provision is for an advisory report.

Mr. WOLVERTON. That is sections 6—

Commissioner Douglas. Sections 13 and 14 into which are incorporated, I think, parts of section 6.

Mr. WOLVERTON. Section 6 has reference to it.

Commissioner Douglas. Yes. Now, as I have indicated, I do not believe that those sections do usurp the power of the courts. If there is any question of ambiguity in those sections, I think they should be clarified to meet that objective.

Now, as to the protective committees, there is nothing in my judgment which touches at all the function of the courts. That is, a section 77-B proceeding goes on without any let or hindrance from this standpoint. All that this bill requires is that those people who are going out collecting deposits or proxies from security holders represented in that 77-B proceeding must measure up to some minimum standard for fiduciaries. That is the general sense of it.

Mr. WOLVERTON. I am inclined to believe that if the activity of the agency is confined to an advisory capacity for the courts, that it might prove helpful, but if so then why does this bill limit it to cases where $5,000,000 is involved?

In other words, you give advice and you take interest in cases that involve more than $5,000,000; but you do not assume any responsibility for reorganization if the indebtedness is less than $5,000,000.

Commissioner Douglas. Except this, sir, in line 11, page 45.

Sec. 14 (a). The Commission shall have power to intervene in any proceeding for reorganization,

Mr. WOLVERTON. I intended to call your attention to that provision and ask you if the intention was to give general jurisdiction and if so why did you limit it to $5,000,000 in one section and in another section give broad powers so you could intervene in any case?

Commissioner DOUGLAS. Well, that was for this reason: The $5,000,000 is descriptive of the type of cases where, under the Lea bill, the Commission would have to render an advisory report to the court. Now, if the Commission is going to render an advisory report to the court, the Lea bill says that the Commission shall intervene and become a party.

Mr. WOLVERTON. Then with reference to the $5,000,000 cases, it is compulsory upon the Commission to make a report; but it is discretionary as to anything below $5,000,000.

Commissioner DOUGLAS. As below the $5,000,000 then the Commission has discretion. That is it; and certainly in my opinion it would not be desirable for the Commission to be intervening in every single little 77-B case throughout the country. Some of them are merely "hot dog” stands. Some of them involve the run of Main Street businesses, haberdasheries, groceries and what not, a wholly manageable situation by the local creditors, for the most part, and by a judge.

Mr. WOLVERTON. Well, that seems to be the answer, that it is compulsory when the indebtedness is $5,000,000 or above and it is discretionary in the cases that are less than that.

Commissioner Douglas. But, I would like to make it perfectly clear to the committee, Mr. Chairman, that the $5,000,000 as I view it is merely suggestive of the line that ought to be drawn somewhere; it might be $10,000,000, or it might be $2,500,000. That would be something on which we will submit a report.


Mr. KENNEY. What is the effect of subdivision (b) of section 14? You act there as an arbiter only when asked to function?

Commissioner Douglas. Yes, sir; that is a provision which, as I read it, merely gives to the Commission the power, in the sense of capacity, to agree, if the committee so desires, to sit in review on the reasonableness of or determine its fees and expenses.

Mr. KENNEY. Well, you use the words “supervision over declarants” before the beginning of section 14.

Now, that supervision is only granted to you when the declarant is willing to refer the matter to you?

Commissioner Douglas. That is the intention and design, as I read it. If there is a chance that it does not mean that, I think that it should be changed so that it would clearly mean that. That is, just speaking for myself, if that were the law, I think that the Commission should exercise that power sparingly.

The situation envisaged was this, to provide that these deposit agreements that the committees get up should have worked into them specific machinery whereby a designated person, perhaps a judge; perhaps the president of the Bar Association; perhaps the president of the Chamber of Commerce; or what not; is designated as the person to whom reference is made as to the propriety of fees and expenses and other similar things arising under the deposit agreement. That is a system, by the way, that is described in some detail in our real estate report where we set forth the very significant experiment which Judge Mack of the United States District Court for the Southern District of New York inaugurated back in 1926 or 1927 in connection with the G. L. Miller bankruptcy. That is described at page 239 of our real-estate report.

Judge Mack in that situation had placed in the deposit agreements the name of the person who would pass judgment on the fairness of fees and expenses. The agreement took that away from the committee and provided for independent review,

Subsection (b) at the top of page 46 visualizes, as I read it, the kind of a system inaugurated by Judge Mack.

Mr. LEA. I presume that you will not be able to finish your statement this morning.

Commissioner Douglas. I have, as a result, I believe, of the various questions asked regarding the matter of the advisory reports, and the interventions, covered substantially all of the general statement that I was going to make about the second phase of the Lea bill, namely, participation by an administrative agency.

Mr. LEA. So, it will be your purpose when you continue your testimony to complete your further general statement.

Commissioner Douglas. I do not think any further general statement would be necessary.

Mr. LEA. Can you be here tomorrow morning?

Commissioner Douglas. I have been asked tomorrow morning, sir, to appear before the Senate Committee on Banking and Currency at half past 10.

Mr. LEA. I anticipate that the completion of your statement will require some further time. Do you think that you could be here the following morning?

Commissioner DOUGLAS. I think that I will take an hour and a half or 2 hours, perhaps.

Mr. LEA. Then we will adjourn to meet tomorrow morning at 10 o'clock. Perhaps we can have another witness at that time. We will adjourn with the idea of resuming your statement Thursday morning and should it develop that you could be here tomorrow morning, we will proceed with you tomorrow.

Commissioner Douglas. Yes, sir. I will be glad to do so if it is at all possible.

SUMMARY OF COMMISSION'S ROLE IN REORGANIZATIONS As I have said, there are compelling reasons for a Federal administrative agency, such as the Commission, to assume a role in reorganization cases. I have mentioned above not only reorganizations in court proceedings but also reorganizations consummated on a voluntary basis. As I have already stated, these voluntary reorganizations present an anomalous situation for it frequently happens that no committees appear in them. Furthermore, such voluntary plans are not subjected to any scrutiny or review as in case of reorganizations in Federal courts. The management alone is the arbiter of the fairness of the plan. As a result, great inequities have been done to security holders. And, as I have stated, State corporation laws afford little protection since the States have provided no system of administrative supervision. Accordingly, one signal and important function which a Federal administrative agency may perform in this type of case is to undertake for the benefit of investors (or at least to have the power in necessitous cases to make) a careful scrutiny and examination of the plans which managements and bankers seek to have consummated. At least a modest advance towards this objective can be made by vesting such power—if not the duty-in the Securities and Exchange Commission. As I have said, the investor in case of voluntary plans commonly lacks the protection which an honest and qualified protective committee might give him; and since the reorganization takes place out of court, he lacks the protection ordinarily supplied in some measure in judicial reorganizations by the judge's scrutiny and approval of submitted plans of reorganization. The ordinary investor, left in such cases to his own devices, has been easy prey for self-seeking managements and bankers. Administrative review of these plans in the form of reports to security holders on them can go far toward amelioration of that prevailing condition.

This recommendation is equally applicable to reorganizations in the courts, even though protective committees participate actively. In the last analysis, however worthy and necessary the other functions are which I have already enumerated, the ultimate objective of most protective committees' activity should be the accomplishment, expeditiously and economically, of fair and equitable plans of reorganization. In the achievement of this objective, the assistance of a


qualified administrative agency can be of enormous service, both to the courts and to investors.

This administrative assistance, as I have just said, should take on its most important form in the work of preparing advisory opinions on the merits, the faimess, and the feasibility of suggested plans of reorganization. Apart from so-called voluntary plans, the work of preparation of such plans; the arms' length negotiations over their terms between representatives of conflicting classes of securities; the "trading-out” of disputed claims; all these repose traditionally in the hands of security holders and their representatives. In another connection, i. e., the Chandler bill, we have recommended that an officer of the court, an independent trustee, be made an active participant in these processes, in order to supply to them the presence of a disinterested, objective guardian of the interests of all the security holders. That is a matter which goes beyond the scope of the Lea bill. But it seems altogether consistent with the purposes of the Lea bill to make provision for the close and careful scrutiny and examination of reorganization plans—the end-product of any committee's activitiesin order to supply a double-barreled assurance that committees have done their work effectively and honestly.

It is only after an objective determination of the merits of a plan that it can be said that a reorganization has or has not fulfilled its purposes. The identical determination is the decisive factor in deciding whether or not protective committees have sufficiently performed the functions which give them their only excuse for being. In this way the administrative analysis of plans and advisory reports thereon would give to investors increased assurance that their representatives have or have not done their work well; it would give them also protection at the stage when protection is most sorely needed, i. e., before they are compelled to vote upon the plan.

In those cases where reorganization takes place under the aegis of a court, provision for such administrative assistance should be of immeasurable benefit to the courts also. For the growing need for such administrative assistance is the result, from another angle, of the flood of reorganization cases which engulfed the courts in the period of the recent depression. They made unprecedented demands upon the experience, skill, and judgment of judges in complex and intricate financial and business matters. Judges, however, are not, and do not profess to be, financial experts. However great their legal training and native intelligence, they are not always in a position to discharge completely the responsibility, which is theirs, to see that only those plans are approved and consummated which are fair in their allocation of assets and earnings and, among other things, give adequate assurance that honest and competent management will assume control of the reorganized company. This is not to say that the courts have done an inadequate job; though frequently they just do not have the necessary time to spend on these complicated questions. Rather, a better job than they have done could be accomplished if they could avail themselves of expert administrative assistance in unravelling the intricate complexities of the many financial matters that enter into every plan of reorganization for larger corporate enterprises.

Such assistance would not usurp power from the courts, but it would strengthen and implement them in the performance of their onerous and burdensome reorganization functions. It would not

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