have failed to meet the situation. To a certain extent that is true. There has been no formulation of rules to guide them, and they have been swamped by the large number of proceedings suddenly dumped into them. But assuming that you do have to have additional judges to meet the situation, you are then confronted with the fact as to which would be the more likely to do a better job, a judge appointed for life and who has a position of honor in the community and who gets a good salary and is selected from the leading practitioners in the community, a man of integrity and ability. On the other hand, in the organization of an agency like this, what would happen? Clearly the Comptroller or the Conservator or someone else, and the man at the top cannot give personal attention to the problems presented; they must rely upon clerks and upon men who receive comparatively small salaries. In addition to that, we all know that clerks, attorneys, and officers of that sort are not looking for future progress in the Department. We see that in the tax department and in other departments of the Government. They are looking for connections in other law offices. Now, the question is, Mr. Chairman, is it reasonable to suppose that men of that type are going to be better qualified to pass upon the intricate problem which is presented by a plan of reorganization, or whether it is not true that the judge is better qualified to pass upon it.

Certainly the judge may refer this to a special master. He may select a man thoroughly cognizant of the conditions in the particular industry in which this particular concern has been doing business. And with the recommendation of a special master in those circumstances, it seems to me that we are much more likely to get a satisfactory solution of the problem through the action of the judge than by some employee in a bureau.

I would like to suggest that the committee consider this as a possible solution or, rather, to assist in the solution of the problem. The act now provides for a summary appeal on questions of allowances. Actually in practice, so far as I know, that provision has been carried out almost in the same manner as an ordinary appeal is taken. There has been no so-called summary appeal on the original record, but it has usually been a printed record.

If this is left in the hands of the court and it is desirable that there should be quick supervision in the matter of committees and other matters of a similar nature, it seems to me that we might make very clear in the act that on the summary appeal it is not necessary to make an ordinary record but go on up on the record and have a quick hearing and determination. In that way you will have the circuit courts of the various circuits practically acting in all cases on these questions and you will get uniformity and more direct responsibility in the matter of fixing fees and other similar matters. I think that provision might be extended to other portions of the act. It does seem to me that that might assist. Then, it seems to me that the ultimate solution, no matter what you have, must be publicity. We ought to provide a mechanism by which the activities of committees such as those which have been criticized should have the floodlight of publicity thrown upon them so that the courts will be thoroughly familiar with the activities and so that everybody else passing upon their acts or trying to carry out their recommendations will know the background of those recommendations.

Therefore, it seems to me that those provisions in this bill which do provide for thorough publicity of the acts of these committees should, perhaps, be enacted into law.

There is another suggestion that I would like to make, and that is where a protective committee is operating under an agreement it might be well to provide that it should not have the power after the initiation of 77B proceedings to borrow on these securities, even though their contract gives them that right, without getting the consent of the court.

Mr. FULLER. That is in there.
Mr. GERDES. Is it in there?

Mr. FULLER. Yes; it is in there.

Mr. GERDES. I read through the bill rather hastily and did not see that provision. It seems to me that is a very desirable provision. In other words, there should be publicity on that very transaction. We should not depend entirely upon the contractual power. There should be an opportunity on the part of the depositors and the others interested in the reorganization to have passed upon the question as to whether or not the committee is acting properly in the exercise of that power. Of course, that would only be effective after the initiation of 77B proceedings, because under 77B the court would have no jurisdiction until the initiation of such proceedings.

I did not mean to take quite as much time as I have taken. These are a few random thoughts on the subject.

I understand that Mr. Douglas is making a special study of this entire problem of the protective committees, and I believe he is about ready to make his report. It seems to me that all of us ought to have the benefit of that report before any definite action is taken. Mr. CHANDLER. Who is Mr. Douglas? What Mr. Douglas do you have in mind?

Mr. GERDES. It is William O. Douglas, who is connected with the Securities and Exchange Commission. Mr. Douglas is making a special study of this entire question of the protective committees, and I understand he is about ready to make a report suggesting remedies of the evils existing in that connection. He has been working on that matter for about 6 months. All of us should have the benefit of his recommendations, if they are ready, or we ought to have some knowledge of what he finds and recommends before any definite action is taken on any proposal.

Mr. CHANDLER. We are very much obliged to you, Mr. Gerdes. I did not mean to call on you without your having had an opportunity of making some preparation, but I thought you could shed some light on the subject.

Mr. GERDES. I thank you very much.

STATEMENT OF BRACE BENNITT, REPRESENTING NATIONAL ASSOCIATION OF CREDIT MEN

Mr. BENNITT. Mr. Chairman, I would like to ask if there will be an opportunity in a public hearing later on to present a more detailed statement on this bill?

Mr. CHANDLER. The committee has not had any discussion of the question. I suppose we will take up that section later. This is

4509-37-ser. 10- -14

just a "committee print", which, as I understand, has been submitted as a suggestion and will take the form of a bill, perhaps, after our committee has had an opportunity to look at it and make such further suggestions as we may want to make to the Sabath committee.

Mr. BENNITT. All I wanted was an opportunity for our people to present in some form their ideas on this question because, of course, this is not known to them, and they will want to know about it. It is a matter of moment not only to businessmen but to bondholders also.

Mr. CHANDLER. I will say that as soon as the bill is presented we will be glad to see that you get some notice of it, and if we do find that further hearings are necessary, we will notify you. At the present time I doubt whether there will be any further public hearings.

Mr. BENNITT. If you prefer, Mr. Chairman, we can make an addendum to the present committee minutes.

Mr. CHANDLER. We would be glad to have you do so.

STATEMENT OF W. RANDOLPH MONTGOMERY, REPRESENTING THE NATIONAL ASSOCIATION OF CREDIT MEN

Mr. MONTGOMERY. Mr. Chairman, I, like Mr. Gerdes, have not had an opportunity to study this bill. However, I have glanced over it and have heard the comments made on it this morning.

I do not think the bill is objectionable as it was in its original form, but I still feel that the placing of any part of the administration of the ordinary 77B case in the hands of such an agency as the Comptroller of the Currency with the mandatory provision that the Comptroller of the Currency or his deputy or some person placed on a panel of trustees by the Conservator, shall be appointed trustee, custodian, or receiver is distinctly undesirable. I think we elaborated on that sufficiently at the last hearing, and I do not think I need go into that part of it any further now.

The placing of this new agency in the picture, as Mr. Gerdes has pointed out, will simply mean, so far as I can see, additional expense. I do not think there is any question but that the present machinery is adequate. It seems to me what is needed here is a requirement that the bondholders' protective committee, both with respect to its activities before and after a 77B proceeding, shall file an accounting, and that no disbursements of expenses incurred by that committee shall be allowed unless the same are found by the court, after hearing, to be fair and reasonable, and that the committee shall be surcharged with any expense not found fair and reasonable by the court.

If such an accounting is required at the time the committee intervenes in the proceeding, and also at the time the plan of reorganization comes on for consideration, or before any compensation shall be allowed to the committee, it seems to me that the full light of publicity should be thrown on the accounting, and with the power and duty on the special master to disallow any improper expense, that that is all the protection the public is entitled to and all the protection that need be given.

A special master appointed by the court has the full power of subpena. The Conservator going into a case of reorganization under 77B, an intricate corporate structure, will require a great amount of time before he will even know what the case is all about. The proposition that he may or shall propose a plan of reorganization in a complicated case, I think is absurd on the face of it. It will take him months before he is qualified to offer a plan of reorganization. Anyone who has acted as counsel to a committee in any of these cases knows that you cannot within a short period of time and in many cases actually formulate any kind of a plan that has any sense to it. A Conservator going into a reorganization proceeding of a complicated nature where he is under the duty or has the power to propose a plan of reorganization is very likely to propose a plan of reorganization without proper knowledge of the facts, which will require hearings and consideration, putting the estate to a considerable amount of expense.

It was suggested this morning that there should be a mandatory time within which plans of reorganization should be suggested and filed. I doubt the wisdom of that. I think 77B has two purposes. It has taken the place of equity receiverships in the first place. Equity receivership was primarily a moratorium during which the receiver appointed for the corporation had the duty of conserving the assets and operating the business. If the trend of business is upward, there is no reason why that operation should not continue, perhaps, for a considerable period of time before a plan of reorganization is proposed. It is not possible to get new capital interested in an enterprise that is losing money, nor is it possible to get new capital into an enterprise which has had a record of losing money but is just starting upward. New capital wants a demonstration of the ability of that corporation to make money. I know that is the case with respect to the Federal Reserve banks in making loans. They say, "Show us operating statements for this month, next month, and the month thereafter, and the month after that, and then we will tell you whether or not we will lend you the money."

That cannot be done within any mandatory period of time. So I think it is much wiser to leave that to the discretion of the judge to say when he thinks the time comes, with full knowledge of the facts, whether he will limit the time within which the plan shall be filed.

I hope before any bill on this subject is enacted that there will be full opportunity for public hearings. I think it is a matter of the utmost importance to the business interests of the country, and I do not think any bill should be enacted unless the bill has had mature consideration not only by the businessmen but by the bar of the Nation.

Mr. CHANDLER. In your practice with the 77B reorganizations, have you had any experience in cases in which the Sabath committee has intervened?

Mr. MONTGOMERY. I have one case right now, the James Butler Grocery Co., which is a chain of retail grocery stores, where I am representing the creditors' committee. There are no secured creditors except the Federal Reserve bank and the Manufacturers Trust Co.

and the mortgagee. The morgagee is not being affected by the reorganization plan at all. The clerk of the court in Brooklyn wrote in an order a direction that notice of the hearing and confirmation of the plan be given to the Sabath_committee. And that notice was given to the Sabath committee. The president of the company was served with a subpena to meet at the office of the Sabath committee in New York for examination. He had nothing to conceal. I concealed nothing in the case that affects the public interest directly or indirectly, and the creditors are fully represented by an active committee composed of the leaders of their own industry. There was nobody else involved. The rights of the stockholders were not involved because the stock is closely held by the Butler family. Yet Mr. Butler was required to appear before that committee at its office in New York and submit to examination which lasted the better part of 2 days, and at a time when it was of the utmost importance that he be on the job working at the plan of reorginaztion of that company, which at the present time is in a very crucial stage.

I cannot see any justification for that kind of thing myself. It seems to me it was nothing short of meddling in the private affairs of the creditors of that company. No harm has been done, to be sure, except that it has taken the president of the company away from his duties at a time when he was needed on the job.

Mr. CHANDLER. In your opinion have the abuses which have arisen under 77B been normal abuses under any law of that kind, or have they been abnormal?

Mr. MONTGOMERY. I think the abuses that have arisen under 77B are due primarily to two things; first, the novelty of the statute, the unfamiliarity of the courts with the powers granted to the judges under the law, the fact that 77B does not permit the judge to delegate to a referee or special master the power to attend to the interlocutory matters in connection with the proceedings but requires the judge to do everything himself, and the fact the United States Supreme Court at the present time has issued no general orders applicable to 77B.

Mr. CHANDLER. Do you know whether they are preparing some special orders on 77B now?

Mr. MONTGOMERY. The Southern District Court of New York has promulgated some rules and has under consideration some additional rules which, if adopted, will very largely meet the situation which has been discussed here. They deal with bondholders' protective committees and require full disclosure.

Mr. CHANDLER. We thank you, Mr. Montgomery. The hearing is now adjourned.

(Thereupon the subcommittee adjourned.)