CONSERVATOR IN BANKRUPTCY

TUESDAY, MARCH 30, 1937

HOUSE OF REPRESENTATIVES,
COMMITTEE ON THE JUDICIARY,

Washington, D. C.

The committee met at 10:30 a. m., Hon. Hatton W. Sumners (chairman) presiding.

The committee had under consideration H. R. 9, which is as follows:

[H. R. 9, 75th Cong., 1st sess.]

A BILL To amend the Bankruptcy Act of July 1, 1898, to prevent loss of assets and excessive charges in connection with certain reorganizations, compositions, and extensions under such Act, to aid the district courts in the administration thereof, to provide for the registration of protective committees, and for other purposes

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That chapter VIII, as amended, of the Act entitled "An Act to establish a uniform system of bankruptcy throughout the United States", approved July 1, 1898, is amended by adding at the end of such chapter the following new section:

"SEC. 77C. CONSERVATOR IN BANKRUPTCY.-(a) (1) There is hereby created the office of Conservator in Bankruptcy, at the head of which shall be a conservator in bankruptcy (hereinafter referred to as the 'Conservator'). The Conservator shall be appointed by the President, by and with the advice and consent of the Senate, and shall hold office for a term of ten years. The Conservator shall not engage in any other business, vocation, or employment. The Conservator shall receive compensation at the rate of $12,000 per annum. "(2) The principal office of the Conservator shall be located in the District of Columbia, but the Conservator may establish branch offices in any city or cities of the United States or of any Territory. The Conservator shall be entitled to the free use of the United States mails in the same manner as the executive departments of the Government. The Conservator, with the consent of any board, commission, independent establishment, or executive department, or bureau of the Government, including any field services thereof, may avail himself to the use of information, services, facilities, officers, and employees thereof in carrying out the provisions of this section. The Conservator shall make a report to Congress at the beginning of each regular session.

"(3) The Conservator is authorized to appoint and fix the compensation of such officers and employees, and to make such expenditures, as may be necessary for carrying out his functions under this section. Appointments of attorneys and experts may be made without regard to the civil-service laws. Any power, function, or duty authorized by this section or by any other law to be exercised or performed by the Conservator may be exercised by any deputy under the direction of the Conservator. During any vacancy in the office of the Conservator and pending the appointment of his successor, or during the absence or inability of the Conservator, the Acting Conservator shall exercise and perform all powers, functions, and duties of the Conservator. The Conservator shall designate the order in which deputies shall be Acting Conservators. Any attorney or attorneys appointed by the Conservator may be designated to act as counsel for the Conservator in connection with the performance by him of any power, function, or duty authorized by this section, or by any other law.

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"(4) The Conservator is authorized to prescribe and publish such rules and regulations as are necessary and appropriate, in his opinion, for carrying out and enforcing the provisions of this section. The rules and regulations prescribed by the Conservator shall be published in the Federal Register, and they may be altered, amended, or revoked by the Conservator.

"(5) For the purpose of any investigation or examination which, in the opinion of the Conservator, is necessary and proper for the enforcement. of this section, the Conservator, or any officer or employee designated by him, is empowered to administer oaths and affirmations, take evidence, and require by subpena or otherwise the attendance of witnesses and the production of any books, papers, or documents which the Conservator deems relevant or material to the inquiry. Such attendance of witnesses and the production of such books, papers, or documents may be required from any place in the United States or any Territory at any designated place of hearing. In case of contumacy by, or refusal to obey a subpena issued to, any person, any district court of the United States (including the District Court of the United States for the District of Columbia) within the jurisdiction of which such person guilty of contumacy or refusal to obey is found or resides, upon application by the Conservator may issue to such person an order requiring such person to appear before the Conservator, or officer or employee designated by him, there to produce books, papers, or documents, if so ordered, or there to give evidence touching the matter in question; and any failure to obey such order of the court may be punished by such court as a contempt thereof. No person shall be excused from attending and testifying or from producing books, papers, or documents in obedience to the subpena of the Conservator, or officer or employee designated by him, on the ground that the testimony or evidence required of him may tend to incriminate him or subject him to a penalty or forfeiture; but no individual shall be prosecuted or subjected to any penalty or forfeiture for or on account of any transaction, matter, or thing concerning which he is compelled, after having claimed his privilege against self-incrimination, to testify or produce evidence, except that such individual so testifying shall not be exempt from prosecution and punishment for perjury committed in so testifying.

"(b) In any proceeding involving an individual debtor or a debtor corporation, wherein the judge does not determine to continue the debtor in possession, the judge (1) may appoint the Conservator as sole trustee, custodian, or receiver, or (2) shall appoint one or more individuals whom the Conservator has certified to the Circuit Court of Appeals for the circuit within which the proceeding is pending, and whom such court has found and by appropriate order designated, as qualified to serve as trustee, custodian, or receiver in such proceeding. In the case of proceedings pending on the date of enactment of this section, the provisions of this subdivision shall apply only to appointments of trustees, custodians, and receivers after such date.

"(c) Pursuant to appropriate orders or rules of procedure which shall be prescribed by the court, the Conservator shall be given due notice of all steps taken in connection with any proceeding involving an individual debtor or a debtor corporation, and there shall be transmitted to the Conservator a copy of the petition in such proceeding, the answer, if any, the order approving or dismissing a petition, any order determining the time in which claims or interests of creditors may be filed or evidenced and allowed, any order for the division of creditors and stockholders into classes according to the nature of their respective claims and interest, all orders extending the time in which such claims may be filed or evidenced, any order for a hearing issued upon the report of a special master, any order fixing the time for confirming the plan of reorganization or proposal for a composition or extension, or dismissing the proceedings, any order adjudging the corporation to be solvent or insolvent, any order confirming the plan or proposal or directing the liquidation of the assets, and such other papers filed in the proceedings as the Conservator may request be transmitted to him. The Conservator shall have the right to be heard upon all questions with respect to which the debtor, any creditor or stockholder, or any intervening party, in any such proceeding, may be heard.

"(d) (1) No composition or extension proposal of reorganization plan in any proceeding involving an individual debtor or a debtor corporation shall be confirmed by the judge unless such proposal or plan has been proposed by the Conservator, or the following provisions have been complied with

"(A) The proposal or plan shall be filed in the proceeding, and a copy thereof transmitted forthwith to the Conservator.

"(B) In accordance with such rules of procedure as the court may prescribe, the judge shall allow the Conservator a reasonable time (and may grant extensions thereof) for the study, and investigation and examination provided for in paragraph (2) of this subdivision.

"(C) The judge shall not approve such proposal or plan as fair and equitable until after such time has expired, nor, in case such proposal or plan is disapproved by the Conservator, until the provisions of subdivision (e) of this section have been complied with.

"(2) The Conservator shall during such time make a thorough study of the proposal or plan, and a complete examination and investigation with respect thereto, and, before the expiration of such time, either approve or disapprove such proposal or plan. The Conservator shall not approve such proposal or plan unless he finds that it is fair and equitable. The Conservator shall so far as possible determine what, if any, claims against or interests in the debtor (including certificates of deposit therefor) have been purchased or transferred after the commencement or in contemplation of the proceedings, and what consideration was paid therefor, and if in his opinion the provision made for such claims or interests in the proposal or plan is unfair or inequitable in any material respect, he shall disapprove such proposal or plan. In case of an approval by the Conservator he shall file a certificate of approval in the proceeding. In case of a disapproval by the Conservator he shall state his objections to the proposal or plan, and he shall make such recommendations with respect thereto, and take such further action not inconsistent with the provisions of this section, as may be necessary, in order that a fair and equitable proposal or plan may be developed. The Conservator shall file the objections and recommendations in the proceeding.

"(e) In the case of a proposal or plan which has been disapproved by the Conservator, after the statement of objections and recommendations with respect thereto have been filed in the proceeding, or after the acceptances of such proposal or plan have been filed in the proceeding, whichever occurs later, the judge shall prescribe a reasonable period within which any creditor or stockholder who has theretofore accepted such proposal or plan shall be allowed to withdraw his acceptance, and shall direct the trustee, custodian, or receiver, or, in case no trustee, custodian, or receiver has been appointed, the debtor, to transmit to each such creditor and stockholder a copy (which shall be furnished by the Conservator) of such statement of objections and recommendations, together with a notice stating that such creditor or stockholder has the right to withdraw his acceptance within such period.

"(f) In any proceeding under section 77B of this chapter, as amended, for the reorganization of a debtor corporation the Conservator shall be deemed to be a party in interest within the provisions of subdivision (f) of such section 77B. A composition or extension proposal or a reorganization plan in any proceeding involving an individual debtor or a debtor corporation, may be proposed to the court in the first instance by the Conservator.

"(g) (1) No committee shall solicit, or permit the use of its name to solicit, from any creditor or stockholder of an individual debtor or debtor corporation (A) any proxy, authorization, or power of attorney to represent any such creditor or stockholder in a proceeding involving such individual debtor or debtor corporation, or in any matter relating to such proceeding, or to vote in his behalf for or against, or to consent to or reject, any proposal for a composition or extension or a plan of reorganization in connection with such proceeding, or (B) the deposit by any such creditor or stockholder of any claim against or interest in such individual debtor or debtor corporation under a committee agreement, or (C) the acceptance or consent of any such creditor or stockholder to, or rejection of any such creditor or stockholder of, a proposal for a composition or extension, or a plan of reorganization, in connection with such proceeding, unless—

"(i) There have been filed with the Conservator the committee agreement under which such committee is acting, or proposing or purporting to act, a statement regarding the membership of such committee and the affiliations of the members thereof and counsel therefor, a statement of the reasons for and the circumstances surrounding the selection of each member of such committee and counsel therefor, and a statement of any changes in such agreement, membership, or counsel made prior to such solicitation, and of the reasons for and the circumstances surrounding such change;

"(ii) The provisions or limitations of such agreement and the membership of such committee, together with any such changes in such provisions or limitations or such membership, have been approved by the Conservator, or the order disapproving such provisions, limitations, or membership, or any such changes, has been set aside by the Circuit Court of Appeals;

"(iii) There have been filed with the Conservator at such times as the Conservator may direct, but not more frequently than once every thirty days, a statement of the activities, receipts, and expenditures of the committee for the period not covered by previous statements (including, in the case of the first statement, the period since the date of formation of the committee), and a statement showing the interests in and claims against the debtor (including certificates of deposit therefor) directly or indirectly acquired or sold by the committee or any member thereof during such period, the dates of any such acquisition or sale, the amounts paid in pursuance of any such acquisition, and the amounts received in pursuance of any such sale; and

"(iv) There have been filed with the Conservator copies of advertisements, letters of solicitation, and all other communications addressed to depositors either before or after the commencement of the proceeding. "(2) Whoever aids, abets, counsels, commands, induces, or procures any committee to violate any provision of this subdivision shall upon conviction be fined not more than $5,000 or imprisoned for not more than two years, or both.

"(h) No court of bankruptcy shall have jurisdiction (1) to entertain, or to take any action in respect of, any petition praying for leave to intervene in any proceeding involving an individual debtor or a debtor corporation, filed by or on behalf of any committee, or (2) in any proceeding involving a debtor corporation, to approve or allow the payment to a committee, or to any member or employee thereof, or attorney therefor, in his capacity as such, of any compensation, reimbursement, or other amounts for services or expenses incident to the reorganization or in connection with the proceeding, whether or not such payment is to be made by the debtor or by any corporation acquiring the debtor's assets, unless

"(A) There have been filed with the Conservator the committee agreement under which such committee is acting, or proposing or purporting to act, a statement regarding the membership of such committee and the affiliations of the members thereof and counsel therefor, a statement of the reasons for and the circumstances surrounding the selection of each member of such committee and counsel therefor, and a statement of any changes in such agreement, membership, or counsel made prior to such solicitation, and of the reasons for and the circumstances surrounding such change;

"(B) The provisions or limitations of such agreement and the membership of such committee, together with any such changes in such provisions or limitations or such membership, have been approved by the Conservator, or the order disapproving such provisions, limitations, or membership, or any such changes, has been set aside by the Circuit Court of Appeals;

"(C) There have been filed with the Conservator at such times as the Conservator may direct, but not more frequently than once every thirty days a statement of the activities, receipts, and expenditures of the committee for the period not covered by previous statements (including, in the case of the first statement, the period since the date of formation of the committee), and a statement showing the interests in and claims against, the debtor (including certificates of deposits therefor) directly or indirectly acquired or sold by the committee or any member thereof during such period, the dates of any such acquisition or sale, the amounts paid in pursuance of any such acquisition, and the amounts received in pursuance of any such sale: and

"(D) There have been filed with the Conservator copies of advertisements, letters of solicitation, and all other communications addressed to depositors either before or after the commencement of the proceeding. "(i) (1) The Conservator shall either approve or disapprove the provisions or limitations of a committee agreement and the membership of such committee. If the Conservator disapproves such provisions or limitations, or such

membership, he shall issue an order of disapproval which shall be subject to review as provided in subdivision (m) of this section.

"(2) The Conservator shall approve the provisions or limitations of a committee agreement (including any changes therein) unless he finds that such provisions or limitations (A) deny, or place undue restrictions upon, the right of depositors to withdraw their interests in or claims against the debtor from such committee; (B) deny to depositors the right to withdraw their acceptances to a proposal or plan in accordance with the provisions of subdivision (e) of this section; (C) give to such committee power to hypothecate such interests or claims of depositors for any purpose other than that of paying actual, necessary, reasonable, legitimate expenses of the committee (as such expenses may be defined by rules and regulations of the Conservator); (D) give to such committee the right to dispose of such interests or claims of depositors without notice and affirmative consent subsequent to such notice; (E) entitle such committee to an unreasonable amount for the purpose of paying fees, expenses, or other remuneration to members of such committee, attorneys for the committee, or any person performing services for such committee; (F) otherwise prejudice, may prejudice, or have prejudiced the formulation and acceptance of a fair and equitable plan or proposal.

"(3) The Conservator shall approve the membership of a committee (including any change therein) unless he finds (A) that any member of such committee is or has been directly or indirectly connected with the issuer of the interests in or claims against the debtor deposited with the committee, the underwriter of such interests or claims, the debtor, or any guarantor of such interests or claims, and that such connection prejudices, may prejudice, or has prejudiced the formulation and acceptance of a fair and equitable plan or proposal; (B) that the membership of such committee otherwise gives rise to a conflict of interest, and that such conflict of interest prejudices, may prejudice, or has prejudiced the formulation and acceptance of a fair and equitable plan or proposal; (C) any member of such committee has previously violated any of the provisions of subdivision (g) of this section; or (D) that any advertisements, letters of solicitation, or other communications addressed to depositors are or have been false or misleading.

"(j) (1) No allowance or payment of compensation, reimbursement, or other amounts, to whomsoever paid or to be paid, whether or not by the debtor or any corporation acquiring the debtor's assets, for fees or expenses in connection with any proceeding involving an individual debtor or a debtor corporation, or in connection with or incident to a reorganization, or composition or extension of the debts, of any such debtor, shall be made or approved by the judge unless the following. provisions have been complied with—

"(A) In accordance with such rules or procedure as the court may prescribe, the judge shall allow the Conservator a reasonable time (and may grant extensions thereof) for the investigation and examination in respect of the proposed allowance or payment provided for in paragraph (2) of this subdivision.

"(B) No such allowance or payment shall be made or approved by the judge until such time has expired.

"(2) The Conservator shall before the expiration of such time either approve or disapprove the proposed allowance or payment, either in whole or in part. During such time the Conservator shall conduct an investigation and examination in respect of each item of the proposed allowance or payment, and if he finds as a result of such investigation and examination that any such item (A) in case it is to be paid by the debtor or any corporation acquiring the debtor's assets, should not be charged against the debtor or such corporation, or (B) whether or not it is to be so paid (i) exceeds the value of the services rendered, or is otherwise unreasonable, or (ii) constitutes reimbursement for expenses not actually incurred, or compensation for services not actually rendered, or (iii) is to be or has been paid to any person or committee which has purchased or sold interests in or claims against the debtor (including certificates of deposit therefor) during the pendency of the proceeding, he shall disapprove such item. In case of an approval by the Conservator he shall file

a certificate of approval in the proceeding. In case of a disapproval by the Conservator he shall state his objections to the item disapproved, and shall make such recommendations with respect thereto as in his opinion may be necessary. The Conservator shall file his objections and recommendations in the proceeding.