Conservator in Bankruptcy

ously been appointed by any court, State, Federal, or Territorial, unless there is attached to such petition a certificate of the Conservator that further proceedings of such State or Federal court will be of no substantial benefit to creditors and stockholders.

This section imposes as condition to future resort to bankruptcy courts where relief under section 77B or 74 is sought that the Conservator certify that no benefit will result in the continuance of a receivership. The true criterion should be whether it will be more beneficial to have the receivership continue than to go into bankruptcy. If the real import of the section is that the Conservator is to ascertain which insolvency proceeding is likely to result in greater benefit to the debtor, it is inaptly worded.

To restrict the haven of bankruptcy proceedings to debtors for whom the Conservator is willing to let down the barriers, entails a very exceptional delegation of power to an administrative agency and conditions access to the bankruptcy courts upon the approval of the Conservator. No review of the Conservator's determination is provided for, and thus there is no assurance that a new agency of despotism will not be created. It is doubtful whether limitations on the jurisdiction of the Federal courts of this nature are permissible.

The bill confers on the Conservator the power of contempt. Compare, however, the dictum in Interstate Commerce Comm. v. Brimson (154 U. S. 447, 485), to the effect that a statute conferring the contempt power on a Federal administrative agency is invalid under the fifth amendment.

Subdivision J of the Sabath bill provides that the Conservator may petition the court within 180 days after the date of designation of the Conservator by the President, to reopen any proceeding involving the debtor corporation or an individual debtor, in which a plan of reorganization or a proposal for composition or extension, since July 1, 1934, and prior to such date of designation, has been finally confirmed, if, in the opinion of the Conservator, material facts which would have affected such confirmation were not brought to the attention of the court. This section not only is almost certainly unconstitutional, but would also lead to a chaotic situation under which the stability of completed transactions would be upset and the Conservator would be encouraged to go on a fishing expedition of no utility to any of the interested parties. The section authorizes the Conservator within half a year after he has been designated to petition the court to reopen any proceeding from the date of the enactment of the Corporate Reorganization Act, without inquiry into whether any of the creditors feel aggrieved by the plan as consummated. The source of derivation of the requisite interest in the Government is difficult to perceive. It is inconceivable that the finality of the many reorganizations that have been effected since July 1, 1934, is to be withdrawn and opened to indiscriminate attack by the Conservator. From the time of Fletcher v. Peck, it has been recognized that completed contracts cannot be impeached by retroactive legislation.

Section 5 of the Sabath bill provides that the term "equity receivership" as used in section 77B includes a proceeding to foreclose a lien on property. This provision was occasioned by the decision of the Supreme Court in 2168 Broadway case. Here too, it is probable that Congress is overstepping the bounds of its power for a proceeding to foreclose a lien has never been regarded as one indicating insolvency.

STATEMENT OF JACOB I. WEINSTEIN, MEMBER OF THE PHILADELPHIA BAR, MEMBER OF THE BANKRUPTCY COMMITTEE OF THE COMMERCIAL LAW LEAGUE OF AMERICA

Mr. WEINSTEIN. I am a member of the Philadelphia bar and a member of the Bankruptcy Committee of the Commercial Law League of America.

I may say that the Commercial Law League of America has a membership of approximately 5,000 members. It represents lawyers and laymen who are interested in commercial law.

There is very little that I can add to what Mr. Montgomery has said in outline. If I may, I should like to supplement some of the

provisions upon which he has not touched and which I think ought to be considered by this committee.

This bill provides that where there is pending an equity receivership, before that debtor can be brought into 77 (b), the Conservator must pass upon the advisability of so doing.

It was one of the important factors incorporated in 77 (b) to permit the lifting of an equity receivership and to bring it into the bankruptcy court so that the provisions of 77 (b) could be made applicable and many of the abuses which had arisen in equity receiverships could be corrected. By interjecting this premilínary examination, it merely makes that proceeding that much more difficult. There is a provision regarding reopening closed cases

Mr. DUFFY. Will you state what section you are referring to now? Mr. WEINSTEIN. Subdivision (j) in this bill.

That section provides that a conservator may petition the court to reopen any proceeding of reorganization or any proceeding of composition or extension filed since July 1, 1934, even though finally confirmed by the bankruptcy court, if in its opinion material facts which would have affected the confirmation were not brought to the attention of the court, and if the Conservator files such petition within 180 days from the date of its designation by the President.

It seems to me that this provision is an exceedingly disturbing and dangerous one. There are cases under 74 and 77 (b) which have been closed. Many new interests have come into the picture. There would be this threat of unsettling all of these closed cases.

Now, if the ground for doing it were fraud in the case, there might be some reason for it, at least in theory, if not a good reason in practice.

But this is not predicated on the ground of fraud. It is predicated on the judgment of the Conservator. If in his opinion there are material facts which would have affected the confirmation; and just what that would mean would depend a good deal upon the judgment of the particular deputy conservator who may be examining that particular case.

Mr. CHANDLER. Of course, the purpose of that is very obvious-to try to right as many wrongs as possible, such as this committee discovered, and to restore wrongful withdrawals of funds to the people who rightfully ought to have those funds.

Mr. WEINSTEIN. I think that is true. I think I understand what was intended, which was that the Sabath committee in making its investigations has found instances of wrongdoing; and that this is an effort to bring those facts into court again on these requests.

But that is a provision which reaches out and extends to any case. It may be applied to any case. It is certainly disturbing to write into the law a provision which may unsettle all of these closed cases.

Mr. DUFFY. Couldn't you simply qualify that by limiting it to cases of fraud?

Mr. WEINSTEIN. I think so. I think that that is the intendment of the act.

For example, under the Bankruptcy Act, section 13, it provides that where a fraud has been discovered within 6 months, application may be made to vacate the composition. But I don't know that there

are as many as half a dozen cases in the bankruptcy books in which that has occurred.

Under section 15 a discharge that has been obtained may under similar circumstances be vacated within 6 months. There is not a single case in the bankruptcy books in which that has been attempted.

Mr. POWERS. Would you repeat that last statement?

Mr. WEINSTEIN. I say, there has not been a single vacation of a discharge within 6 months on account of fraud.

Now, bearing in mind that not every case which comes within sections 74 and 77 (b) is fraudulent, that possibly the vast majority are cases in the ordinary course, in which the problems are not difficult or involved, it does seem to me that if you write into law this conservator provision, we would be delaying the ordinary proceeding under 74 and 77 (b) by reason of all of these preliminary investigations, so that the very benefit that is expected to be derived from a settlement or adjustment or reorganization would be lost.

Then, again, under this bill the Conservator must be the trustee in every case. If a trustee has been appointed and has been functioning, that trustee is displaced by the Conservator.

One of the important features of 77 (b) is that in the proper case the debtor may be retained in possession of its business so that its operation would be uninterrupted.

Now, practically that is exceedingly important to the ordinary debtor. There are questions of policy of business, questions of contracts, there are questions of experience, questions of peculiar knowledge of the business; and this is bringing into these cases new people, people who have had no familiarity with that at all, and practically destroying the very purpose which inspired this provision in 77 (b) permitting a debtor to be retained in possession.

I fully agree with Mr. Montgomery that if this bill is written into law, a great many debtors would go back to the equity receivership proceedings, with its disadvantages, preferably to being subjected to the delay and to the other disadvantages which would result from this appointment of a conservator.

As I view this bill-and I may be wrong-it seems to me that it was written primarily with the purpose of correcting abuses resulting from these appointments of protective committees.

If that is the only purpose to be accomplished, I think it can be accomplished very simply by making some provision in 77 (b) for the investigation into these protective committees and their control er supervision exactly in the same way in which it is now being done. in section 77 (b) in connection with landlords' claims.

The section provides that the court shall scrutinize any claim that is filed in which there has been an assignment of a claim, and allow the claim only to the extent of the amount actually paid under the assignment.

While I cannot at the moment very scpecifically indicate just how it should be done, I feel reasonably satisfied that it can be done; and that we can give all the protection necessary under a 77 (b) proceeding and remove the abuses which I believe are attempted to be removed or are aimed at by this bill.

provisions upon which he has not touched and which I think ought to be considered by this committee.

This bill provides that where there is pending an equity receivership, before that debtor can be brought into 77 (b), the Conservator must pass upon the advisability of so doing.

It was one of the important factors incorporated in 77 (b) to permit the lifting of an equity receivership and to bring it into the bankruptcy court so that the provisions of 77 (b) could be made applicable and many of the abuses which had arisen in equity receiverships could be corrected. By interjecting this premilinary examination, it merely makes that proceeding that much more difficult. There is a provision regarding reopening closed cases