{ REPORT No. 1679 74TH CONGRESS HOUSE OF REPRESENTATIVES S 1st Session } AMEND THE BANKRUPTCY ACT (SEC. 77B) JULY 30, 1935.-Referred to the House Calendar and ordered to be printed Mr. SUMNERS of Texas, from the Committee on the Judiciary, submitted the following REPORT [To accompany H. R. 8940] The Committee on the Judiciary, to whom was referred the " (H. R. 8940) to amend an act entitled "An act to establish a uniforma system of bankruptcy throughout the United States", approved July 1, 1898, and acts amendatory thereof and supplementary thereto, after consideration, report the same favorably to the House with amendments with the recommendation that the bill as amended do pass. The committee amendments are as follows: 1. Page 4, line 23, strike out "in brief description," and insert in lieu thereof "a general description of". 2. Page 7, line 22, beginning with the word "That", strike out the remainder of the line, and all of lines 23, 24, and 25, and on page 8, strike out all of the first 11 lines, and on line 12 strike out "of the appeal: And provided further,”. Under present law three or more creditors of a corporation who are able to get together claims against it aggregating as much as $1,000, which the corporation cannot meet as they mature, are able to throw the corporation into reorganization. This may constitute an insig nificant fraction of the indebtedness of a large corporation. Yet this power may be and frequently has been used as a club by such minorities unfairly to coerce debtor corporations to their advantage in cases where the majority of the creditors may desire to go along with the corporation and give it more time in which to work out its financial difficulties. This bill amends the existing law by denying creditors the right to place a corporation in reorganization unless they hold 5 percent of the total indebtedness of the company. The claims of sucl. creditors in any event must aggregate $1,000. Also, under present law managers of a corporation may, in the discretion of the judge, be retained as trustees when the corporation 2 AMEND THE BANKRUPTCY ACT (SEC. 77B) seeks reorganization. Instances have come to the attention of the committee where managers have been retained as trustees and paid one compersation in the form of salary as managers and another compensation as trustees. This results in greatly increasing the compensation of the management of the corporation at the very time it is in financial stress, the increased compensation going to the same management who headed the company at the time it encountered financial difficulties. This bill adds a proviso to existing law which will prohibit the payment of such increased compensation and provides that in the event the management is retained as trustee the compensation shall not be greater than that received by the management at the time the petition for reorganization is filed. In compliance with clause 2a of Rule XIII H. R. 8940 is printed below with existing law in roman type, with matter proposed to be stricken out in black brackets, and new matter proposed to be inserted printed in italics. SEC. 77B. CORPORATE REORGANIZATIONS.-(a) Any corporation which could become a bankrupt under section 4 of this Act, and any railroad or other transportation corporation, except a railroad corporation authorized to file a petition or answer under the provisions of section 77 of this Act, and except as hereinafter provided, may file an original petition, or, before adjudication in an involuntary proceeding, an answer, or in any proceeding pending in bankruptcy, whether filed before or after this section becomes effective, provided the present operations of such corporation do not exclude it hereunder, and whether or not the corporation has been adjudicated a bankrupt, a petition stating the requisite jurisdictional facts under this section; the nature of the business of the debtor; in brief description, the assets, liabilities, capital stock, and financial condition of the debtor if a prior proceeding is pending, the name of the court in which it is pending and the nature of such proceeding; facts showing the need for relief under this section; and that the corporation is insolvent or unable to meet its debts as they mature and that it desires to effect a plan of reorganization. The petition shall be filed with the court in whose territorial jurisdiction the corporation, during the preceding six months or the greater portion thereof, has had its principal place of business or its principal assets, or in any territorial jurisdiction in the State in which it was incorporated. The court shall, upon petition, transfer such proceedings to the territorial jurisdiction where the interests of all the parties will be best subserved. The petition or answer shall be accompanied by payment to the clerk of a filing fee of $100, which shall be in addition to the fees required to be collected by the clerk under other sections of this Act. Upon the filing of such a petition or answer the judge shall enter an order either approving it as properly filed under this section if satisfied that such petition or answer complies with this section and has been filed in good faith, or dismissing it. If the petition or answer is so approved, an order of adjudication in bankruptcy shall not be entered and the court in which such order approving the petition or answer is entered shall. during the pendency of the proceedings under this section, have exclusive juris diction of the debtor and its property wherever located for the purposes of this section, and shall have and may exercise all the powers, not inconsistent with this section, which a Federal court would have had it appointed a receiver in equity of the property of the debtor by reason of its inability to pay its debts as ther mature. The corporation shall be referred to in the proceedings as a 'debtor Any corporation the majority of the capital stock of which having power to vote for the election of directors is owned, either directly or indirectly through an intervening medium, by any debtor, or substantially all of whose properties are operated by such debtor under lease or operating agreement, may file, with the court in which such debtor had filed its petition or answer, and in the same proceeding, a petition stating that it is insolvent or unable to meet its debts as they mature and that it desires to effect a plan of reorganization in connection with, or as a part of, the plan of reorganization of such other debtor; and thereupon such court, if it approves such petition, shall have the same jurisdiction with respect to such corporation, its property, and its creditors and stockholders as the court has with respect to such other debtor. Three or more creditors who have provable claims against any corporation which amount in the aggregate to AMEND THE BANKRUPTCY ACT (SEC. 77B) 3 not less than 5 per centum of the total amount of all indebtedness of such corporation as shown by a balance sheet, as of a date within the preceding twelve months, of the corporation or by its latest annual report or by its books and which amount in the aggregate, in excess of the value of [securities] secured debts held by them, if any, to $1,000 or over may, if such corporation has not filed a petition or answer under this section, file with the court in which such corporation might file a petition under this section, a petition stating the requisite jurisdictional facts under this section, the nature of the business of such corporation, in brief description, its assets, liabilities, capital stock, and financial condition, if a prior proceeding in bankruptcy or equity receivership is pending, the name of the court in which it is pending and the nature of such proceedings, facts showing the need of relief under this section, that such corporation is insolvent or unable to meet its debts as they mature, and if [a prior proceeding in bankruptcy or equity receivership is not pending] the corporation has not been adjudicated a bankrupt or a receiver of the corporation has not been appointed by any court of competent jurisdiction, that it has committed an act of bankruptcy within four months preceding the date of the filing of the petition, and that such creditors propose that it shall effect a reorganization; and such corporation shall, within ten days after the service of a copy of such petition upon it, answer such petition. If such answer shall admit (a) the jurisdiction of the court, and (b) the material allegations of the petition, the court shall enter an order approving the petition as properly filed under this section if satisfied that it complies with this section and has been filed in good faith, or dismiss it if not so satisfied. If such answer shall deny any material allegation of the petition, the judge shall determine summarily the issues presented by the pleadings, without the intervention of a jury, and if the material allegations of the petition are sustained by the proofs and the court is satisfied that the petition complies with this section and has been filed in good faith it shall approve the petition; otherwise the court shall dismiss the petition; and if any such petition shall be so approved, the proceedings thereon shall continue with like effect as if the corporation had itself filed a petition or answer under this section. In case any such petition or answer or proceedings shall be dismissed in the manner provided in this subdivision (a) or in subdivision (c), clause (8), of this section, the san shall not constitute an act of bankruptcy or an admission of insolvency or be admissible in evidence, without the consent of the debtor, in any proceedings then or thereafter pending or commenced under this Act or in any Federal or State court. If three or more creditors who have provable claims which amount in the aggregate in excess of the value of securities held by them, if any, to $1,000 or over, or if stockholders holding 5 per centum in number of all shares of stock of any class of the debtor outstanding shall, prior to the hearing provided for in subdivision (c), clause (1), of this section appear and controvert the facts alleged in the petition or answer, the judge shall determine as soon as may be the issues presented by the pleadings, without the intervention of a jury, and unless the material allegations of the petition or answer are sustained by the proofs, the proceedings shall be dismissed." SEC. 2. Subdivision (c) of section 77B of the Act of July 1, 1898, entitled "An Act to establish a uniform system of bankruptcy throughout the United States", as amended, is amended to read as follows: "(c) Upon approving the petition or answer or at any time thereafter, the judge, in addition to the jurisdiction and powers elsewhere in this section conferred upon him, (1) may, after hearing upon notice to the debtor and to such others as the judge may determine temporarily continue the debtor in possession or appoint a trustee or trustees of the debtor's estate, and shall require the debtor, or such trustee or trustees, if appointed, to give such notice as the order may direct to creditors and stockholders and to cause publication thereof to be made at least once a week for two successive weeks of a hearing to be held within thirty days after such appointment, or, if no such appointment, within thirty days after the approval of the petition or answer, at which hearing or any adjournment thereof, or at any subsequent hearing after notice, the judge may make permanent any such appointment, or terminate it and restore the debtor to possession, or, if no trustee has been appointed, may appoint a trustee or trustees, ani may remove any such trustee or trustees and continue the debtor in possession or appoint a substitute trustee or trustees and may appoint an additional trustee or trustees: Provided, however, That no trustee shall be appointed or continued, except in cases of proved incompetency, mismanagement, or fraud on the part of th has been s auditors and nagement of the debtor; and in determining whether or not there competency, mismanagement, or fraud, the judge may employ ntants at the expense of the estate; and appeals, as in equity cases, 4 AMEND THE BANKRUPTCY ACT (SEC. 77B) may be taken as a matter of right, and as to matters of both law and fact, to the circuit courts of appeals and to the United States Court of Appeals for the District of Columbia, from orders appointing a trustee, within thirty days after the entry of the order and shall be heard summarily, and if notice of intention of taking an appeal is given to the judge at the time of the entry of the order, the order shall be stayed pending the determination of the appeal: And provided further, That if the debtor is continued in possession, or if the management of the debtor is appointed trustee, no compensation shall be allowed the management as trustere in addition to the compensation of the management as salary, which salary shall not be in an amount greater than the salary of which the management was in receipt at the time of the approval of the petition or answer; (2) shall fix the amount of the bond of every such trustee, and every such trustee, upon filing such bond, shall have all the title and shall exercise, subject to the control of the judge and consistently with the provisions of this section, all the powers of a trustee appointed pursuant to section 44 of this Act, and if authorized by the judge, the same powers as those exercised by a receiver in equity to the extent consistent with this section, and, subject to the authorization and control of the judge, the power to operate the business of the debtor during such period, fixed or indefinite, as the judge may from time to time prescribe; (3) may, for cause shown, authorize the debtor or the trustec or trustees, if appointed, to issue certificates for cash, property, or other consideration approved by the judge for such lawful purposes, and upon such terms and conditions and with such security and such priority in payments over existing obligations, secured or unsecured, as may be lawful in the particular case; (4) shall require the debtor, or the trustee or trustees if appointed, at such time or times as the judge may direct, and in lieu of the schedules required by section 7 of this Act, to file such schedules and submit such other information as may be necessary to disclose the conduct of the debtor's affairs and the fairness of any proposed plan; and may direct the debtor, or the trustee or trustees if appointed, to prepare (a) a list of all known bondholders and creditors of, or claimants against, the debtor or its property, and the amounts and character of their debts, claims, and securities, and the last known post-office address or place of business of each creditor or claimant, and (b) a list of the stockholders of each class of the debtor, with the last known post-office address or place of business of each, which lists shall be open to the inspection of any creditor or stockholder of the debtor, during reasonable business hours, upon application to the debtor, or to the trustee or trustees, if appointed, and the contents of such lists shall not constitute admission by the debtor or the trustees in a proceeding under this section or otherwise; (5) may direct the rejec tion of contracts of the debtor executory in whole or in part; (6) shall determine a reasonable time within which the claims and interests of creditors and stockholders may be filed or evidenced and after which no such claim or interest may participate in any plan, except on order for cause shown, the manner in which such claims and interests may be filed or evidenced and allowed, and, for the purposes of the plan and its acceptance, the division of creditors and stockholders into classes according to the nature of their respective claims and interests; and may, for the purposes of such classification, classify as an unsecured clain, the amount of any secured claim in excess of the value of the security therefor, such value to be determined in accordance with the provisions of section 57, clause (h), of this Act; (7) shall cause reasonable notice of such determination and of all hearings for the consideration of any proposed plan, or of the dismissal of the proceedings, or the liquidation of the estate, or the allowance of fees of expenses, to be given creditors and stockholders by publication or otherwise: (S) if a plan of reorganization is not proposed or accepted within such reasonable period as the judge inay fix, or, if proposed and accepted, is not confirmed, may after hearing, whether the proceeding be voluntary or involuntary, either extend such period or dismiss the proceeding under this section or, except in the case a railroad or other public utility or of a debtor which has not been found by the judge to be insolvent, direct the estate to be liquidated, or dir et the trustee of trustees to liquidate the estate, appointing a trustee or trustees if none shall previously have been appointed, as the interests of the creditors and stock holders may equitably require; (9) may allow a reasonable compensation for the services rendered and reimbursement for the actual and necessary expenses incurred in connection with the proceeding and the plan by officers, parties in interests, depositaries, reorganization managers and committees or other repres sentatives of creditors or stockholders, and the attorneys or agents of any of the foregoing and of the debtor, but appeals from orders fixing such allowances may be taken to the Circuit Court of Appeals independently of other appeals in the of proceeding and AND THE BANKRUPTCY ACT (SEC. 77B) 5 all be heard summarily; (10) in addition to the provisions of section 11 of th Act for the staying of pending suits against the debtor, may enjoin or stay. commencement or continuation of suits against the debtor until after final decree; and may, upon notice and for cause shown, enjoin or stay the commencement or continuance of any judicial proceeding to enforce any lien upon the estate until after final decree; and (11) may refer any matters to a special master, who may be one of the referees in bankruptcy, for consideration and report, either generally or upon specified issues, and allow such master a reasonable compensation and reimbursement for his services and actual and neccssary expenses. The debtor shall have the right to be heard on all questions. Any creditor or stockholder shall have the right to be heard on the question of the permanent appointment or any trustee or trustees, and on the proposed confirmation of any reorganization plan, and upon filing a petition for leave to intervene, on such other questions arising in the proceeding as the judge shall determine. In case a trustee is not appointed, the debtor shall continue in the possession of its property, and, if authorized by the judge, shall operate the business thereof during such period, fixed or indefinite, as the judges may from time to time prescribe, and shall have all the title to and shall exercise, consistently with the provisions of this section, all the powers of a trustee appointed pursuant to this section, subject at all times to the control of the judge, and to such limitations, restrictions, terms, and conditions as the judge may from time to time impose and prescribe. While the debtor is in possession (a) its officers shall be entitled to receive only such reasonable compensation as the judge shall from time to time approve, and (b) no person shall be elected or appointed to any office, to fill a vacancy or otherwise, without the prior approval of the judge." |