ADDRESSES LOCAL CREDIT MEN In March, 1930, Referee in Bankruptcy Rupert B. Turnbull, Los Angeles, a member of this Association, addressed the thirtieth anniversary meeting of the Los Angeles members of the National Association of Credit Men. He said in part: O. Henry, the famous writer of short stories, tells in his book "The Green Door" of the young man strolling down Broadway in New York. The stroll was interrupted by a hand being laid upon his arm and the young man turned to find himself looking into the eyes of a beautiful lady, dressed in the height of fashion and ornamented by Russian sables and bedecked by diamonds. The stranger dropped a hot-buttered roll into his right hand, reached suddenly into her vanity case and taking a small paid of silver scissors, snipped off the second button of his coat, whispered the word "parallelogram" into his ear and then dashed down a side street, looking apprehensively behind her as she ran. O. Henry says such things can happen, but they don't. Of course, he was writing fiction, and he apparently had no experience as a Referee in Bankruptcy, for such officers are expected to believe stories much more fantastic. We A short time ago a young Canadian came to Los Angeles to promote an oil company. This young man had an overpowering belief in the power of the press, particularly thru the display advertising columns. were assailed daily with double and triple column blackfaced type ads, promising us that if we intrust this young man with our funds, to be invested in oil promotions, that he would defend these funds with the last drop of his blood. This corporation was organized with an authorized. capital of five million dollars, and when this capital had been entirely subscribed the young man sold his holdings to another man from Kansas City and middlewest way stations. This newcomer took up with one of our residents who had graduated from the junk business and they became great respectors of the power of the press. These two new ones, however, who took over the control of this oil company believed in a different press. This time the printing press. By the use of that instrumentality they increased the authorized capital of five million. dollars into an unauthorized capital of thirty million dollars. This, of course, without any application to the corporation commissioner of the State of California or without the inconvenience of increasing either the authorized capital or the number or the denomination of shares. By my description you have recognized the Julian Petroleum Corporation, which has caused a loss of upwards of thirty million dollars from forty thousand stockholders, a scandal which has rocked the financial and political circles of Southern California. The loss of the thirty million dollars has changed the political situation and the financial situation and many personal situations in this county. Realize for a moment, however, if you can, that for a period of many years there has been an average of two hundred fifty million dollars taken from merchants and manufacturers through the medium of commercial frauds. in bankruptcy proceedings. I do not refer to losses in bankruptcy from legitimate sources, honest failures, but the losses from fraudulent failures in bankruptcy. (Here the speaker illustrated from his own experience of twenty years practice as an attorney, specific instances of widely differing types of fraud.) You are asking, "How can the commercial fraud in bankruptcy be prevented?" I say to you that it cannot be prevented without the cooperation of the credit men. When the fraud is discovered it has already occurred and we are merely investigating it in the bankruptcy proceedings. We are merely salvaging the loss. In my humble opinion the prevention is dependent upon several vital factors. First The Credit Department and the Sales Department must cooperate. Second The "no compromise with crooks" policy must be strictly adhered to. If these commercial thieves know that when they steal ten thousand dollars, that if caught, they can compromise by giving up fifty cents or sixty cents on the dollar of it, there is no relief. STATISTICAL DATA ON BANKRUPTCY It has been the practice of this Journal to bring to the attention of its readers all available bankruptcy statistics which may be of interest to them. Such publication during the past year has been delayed until this issue of the Journal by other pressing material. Adjoining is published the statistical data of bankruptcies for the fiscal year which closed June 30, 1929. That for the fiscal year ending June 30, 1930 will not be available until the annual report of the Attorney General of the United States is made to Congress in December. From this report it will be observed that 57,280 cases were filed during the year as compared with 53,064 for the previous year and 48,758 for the year ending June 30th, 1927. The remainder of the report is based upon the number of cases concluded during the year regardless of the time when such cases originated and is prepared from the reports made by the Referees and filed with their respective clerks. In this instance 57,039 cases were concluded during the year. Of this number 25,576 are classified as wage earners, 14,025 as merchants, 4,946 as farmers, 1,448 as manufacturers, 1,354 as professionals and 9,690 as other classes. The total liabilities as shown by such concluded cases amounted to $883,605,665.86. Of the liabilities, $237,047,511.10 were represented by priority, secured and lien claims, $343,118,129.49 by unsecured claims proved and allowed, and $303,440,025.27 by unsecured claims shown in the schedules but not proved. The total amount realized or received by officials of bankruptcy estates amounted to $111,691,304.23 but deducting the amount disbursed in the conduct of businesses left, as a net amount realized, $88,964,116.16, or a trifle in excess of 10% of the liabilities proved. Of this amount $30,570,021.35 was paid to priority, secured and lien creditors, and $35,753,343.18 was paid as dividends to general creditors. Expenses of administration amounted to $19,949,406.26. During the past year, Referees in Bankruptcy received as commissions, and as fees for claims filed, including compensation as special masters, $929,097.92, and as the fee deposited with the clerk at the time of filing $768,687.21. Total compensation was $1,697,785.13. Bankrupts were paid on account of or in lieu of exemptions $728,223.69 and property of the appraised value of $18,080,161.04 was set aside to bankrupts as exempt. Property of the appraised value of $26,401,127.90 which secured debts of bankrupts was not administered in the bankruptcy courts. The leading position in number of new cases during the year was taken by the Northern District of Ohio with 2680 and in order the other Districts showing at least 1,000 or more new cases are: Northern District of Alabama, 2621, District of Massachusetts, 2523, Southern District of New York, 2094, Northern District of Illinois, 2085, Southern District of California 1938, District of Minnesota, 1873, Northern District of California, 1652, District of Oregon 1539, Eastern District of Virginia 1431, Southern District of Ohio 1409, Eastern District of New York 1339, Northern District of Georgia 1242, Eastern District of Wisconsin 1140, District of New Jersey 1136, Western District of Washington 1123, Western District of Missouri 1105, and Western District of New York 1055. The judicial district showing the fewest number of new cases during the year is the District of Nevada with 17. The other Districts reporting less than 100 filings are: District of Delaware 40, District of New Mexico 46, Northern District of Florida 48, District of Arizona 68, Western District of South Carolina 71, District of Wyoming 73, and the Eastern District of South Carolina 91. Inasmuch as the several judicial districts vary in size probably a better method of designation is to report the total number of new petitions by states. In this particular New York, with four judicial districts, heads the list with 5499; and is followed by Ohio, two districts, 4089; California, two districts, 3590; Illinois, three districts, 3362; Alabama, three districts, 3219; Tennessee, three districts, 2937; Massachusetts 2523; Georgia, three districts, 2475; Virginia, two districts, 2294; Pennsylvania, three districts, 1960; Minnesota, 1873; Wisconsin, two districts, 1741; Missouri, two districts, 1671; Washington, two districts, 1439, and Michigan, two districts, 1391. Through the courtesy of Past president Paul H. King, of Detroit, tables very graphically indicating the results attained in bankruptcy administration throughout the country are again published. These tables have been so thoroughly prepared that they speak for themselves. (For statistical data see pages 130 and 131.) 100% CASES In the administration of the bankruptcy estate of the Halaby Galleries, Inc., which was closed in June, 1929, and was pending before Referee E. Monroe Baker, Dallas, Texas, all priority, secured and unsecured creditors were paid in full, the latter amounting to about $110,000.00, and $41,000.00 was returned to the corporation. The stock of merchandise consisted of oriental rugs, tapestry, imported furniture and decorative objects. The property was very high grade, as, for example, there were breakfast suites which would retail for $2,500.00. This merchandise was located in a department store and occupied about 100 square feet. According to the terms of the lease no advertising could be done except through the owner of the store, who would not permit any advertising to the effect that the assets were in bankruptcy. A retail sale was decided upon and all goods were marked at cost price plus 15%, and the trustee conducted an extensive telephone campaign to prospective buyers. This anomalous advertising worked so well that many people receiving the telephone messages naturally imagined that they were getting in before the regular sale would take place so that it was necessary to augment the sales force for a period of three months during which time the entire stock was disposed of. At one time 60% of the creditors had signed an agreement to accept 50c on the dollar but this was not carried into effect as bankruptcy intervened. In the efforts to dispose of the stock in its entirety the highest offer was but 33% of the cost price. In the proceedings of E. B. Millar and Co. pending in Chattanooga before Referee Sam J. McAllester, under the administration of the manager of an adjustment bureau, dividends of 100% were paid. This is the third large insolvent estate handled by the manager of this bureau within the last five years where creditors were paid in full. In this instance, merchandise was sold at 81.16 of the inventory value and 78.67% of the book accounts were collected. The estate was closed immediately after the expiration of the six months period. The total receipts amounted to $107,767.47 and among the disbursements $4,200.00 was paid to attorneys. The article "Personal Reminiscences of Chief Justice Taft" by President Charles Theodore Greve, published in the last issue of this Journal, was reprinted in the June, 1930, issue of the Journal of the Commercial Law League of America. Reports of Bankruptcy Committees During the year national organizations interested in the bankruptcy law, speaking through their respective committees, have made their reports which are of interest. NATIONAL ASSOCIATION OF CREDIT MEN That made by the special Bankruptcy Committee of the National Association of Credit Men at its convention at Dallas, Texas, last May, is as follows: During the past several months your Committee on Bankruptcy has been actively co-operating with the Hon. William J. Donovan in an investigation of the administration of the Bankruptcy Law throughout the United States. Colonel Donovan was retained in the Spring of 1929 by the Association of the Bar of the City of New York, the New York County Lawyers Association and the Bronx County Bar Association, to intervene in a proceeding then pending in the United States District Court for the Southern District of New York, for an investigation into certain abuses which had appeared in bankruptcy practice in that District. The New York Credit Men's Association contributed $10,000 to assist the Bar Associations in financing the investigation and recommending that a comparative study be made of the machinery of administration in bankruptcy, and of the machinery of administration of insolvent estates out of court through the adjustment bureaus associated with the National Association of Credit Men; and that a further study be made of the Canadian system of bankruptcy. It was believed that such an investigation and comparative study would reveal that the true causes of dissatisfaction with the administration of the law in this country have their root in the administrative provisions of the act itself, and particularly in the machinery set up by Congress, the United States Supreme Court and the District Courts for carrying the act into effect. Colonel Donovan assembled an able staff of attorneys to assist him in his work, and the results of his investigation, incorporated in a report of some three hundred pages published by the Bar Associations above named, is unquestionably the most exhaustive and scholarly study of bankruptcy administration that has ever been made in this country. Your committee has met on several occasions with members of Colonel Donovan's staff, and the Association's Counsel have been in almost daily conference and consultation with Colonel Donovan and his associates since the beginning of the investigation. All of the material gathered by Colonel Donovan has been made available to your committee, which takes this opportunity to acknowledge its appreciation of the friendly and cooperative spirit exhibited by the gentlemen above named, of their spirit of fairness, their intelligent grasp of the problem, and their evident desire to formulate recommendations which, so far as may be done by law, will effectually eliminate the evils which have been inherent in bankruptcy these many years. In considering the problem as revealed by the investigation, your committee quickly reached the conclusion that the primary and fundamental defect in the administration of the Bankruptcy Act under the existing system, is that the liquidation of a bankrupt estate is regarded by the law as primarily a legal problem and, therefore, one to be handled by judges, referees and attorneys, rather than a business problem to be worked out by business men. The judges have been charged with the responsibility of selecting for the preliminary administration of the estate, a receiver, who, as an officer of the court, was charged with the temporary custody of the assets pending the election of the trustees. Unfortunately, politics and personal considerations sometimes actuated the making of these appointments, and the qualifications of the individual appointed properly to administer his trust was too frequently disregarded. Theoretically, the judge appointing a receiver assumes responsibility for the receiver's acts, but it appears to your committee as self-evident that, with the vast volume of business annually passing through the bankruptcy court in the great metropolitan centers, it is impossible for the judges. to exercise any real supervision over their appointees or intelligent understanding of the wisdom or folly of the recommendations of the receiver. This is particularly true in view of the fact that often a judge sits in bankruptcy only for a short period and is then replaced by another judge, who sits for the same length of time, only to return to bankruptcy many months after the original appointment of the receiver. As a consequence, the supervision of the receiver passes from one judge to another, and the result is that there is neither genuine supervision nor continuity of responsibliity. Both while the receiver is in control and after the election of a trustee, the courts and the referees are called upon to decide, upon the presentation of a petition or the making of a motion, such questions as whether a particular offer for the assets should or should not be accepted, whether or not a business should be continued, whether attorneys, accountants, custodians, etc., should be employed, whether a particular controversy should or should not be compromised, and countless other similar problems, upon which, in the nature of things, neither the referee nor the judge can, amid the press of other duties, be expected to render a considered opinion. It is the conviction of your committee that the theory of judicial control of the business end of bankruptcy is fallacious. The adjustment bureaus affiliated with the National Association of Credit Men, have learned through long experience that the creditors, themselves, are far better qualified to decide such questions of business administration than anyone else. It is their money which is at stake, it is they who are best able to determine what course of procedure will yield the largest returns in liquidation, and it is they who have extended credit to the insolvent debtor. In a word, these problems are business problems of the kind which business men are meeting in connection with their daily affairs, and with which the courts and lawyers are usually ill fitted to cope. As a result of the theory of judicial supervision of the liquidation of insolvent estates, creditors find themselves, when they take the pains to attend creditor's meetings, confronted with a procedure which partakes primarily of the nature of a law suit and they find that their personal presence is of little benefit, either to themselves or to the administration of the estate. They find, also, (and the results of Colonel Donovan's investigation subsubstantiate the conclusion which they have reached from practical experience), that the cost of administering an estate in bankruptcy is disproportionately high. They have found, furthermore, that the system of voting proxies sanctioned by the law and the practice in bankruptcy frequently deprives them of an effective voice in the election of a trustee. Collection agencies and attorneys have not hesitated to solicit proxies, and to vote them with a view to receiving the fees, which are payable Bankruptcy Commission, and no attorneys' fees should. be allowed for the preparation of any such appliaction. VIII - NOTICES TO CREDITORS. The numerous notices which are now sent to creditors could very well be done away with, with material saving in the cost of administration. There appears to your committee to be no necessity for notifying creditors generally of such matters as examinations of the bankrupt, proposed sales of property, the declaration and time of payment of dividends, and the proposed compromise of controversies. A simpler and better method, in your committee's judgment, would be to permit any creditor desiring to receive notice of any of the above to file with the trustee a demand that he be notified, in which event the trustee should be required to mail to such creditor at least five days' notice of each such step. Notice of the trustee's final account should, however, in all cases, be sent to each creditor on a form to be prescribed by the Federal Bankruptcy Commission, and such notice should be accompanied by a summarized statement of the account, setting forth the prinicpal features thereof, including the amount to be distributed to creditors and the allowances paid or to be paid to the trustee, attorneys, accountants, investigators and appraisers. IX-SPEEDING UP ADMINISTRATION. The various recommendations contained in Colonel Donovan's report with respect to changes in the Act and Rules for the purpose of eliminating the delays in administration. have carefully been considered by your committee and are endorsed and adopted without qualification. Your committee recommends that the Donovan report be studied in its entirety by the Adjustment Bureau Managers and by credit men, and that this association assume the leadership in drafting and presenting at the next session of Congress a bill fo embody substantially the recommendations hereinabove outlined. It is further recommended that the directors of the association make provision in the Budget for 1930-31 for a sufficient sum to defray the expenses of seeing this matter through to an early conclusion. Your committee records its conviction that a federal bankruptcy system is essential to the transaction of modern business and that under no circumstances should the National Association of Credit Men countenance any attempt to repeal the act or impair its usefulness and efficiency. COMMERCIAL LAW LEAGUE OF AMERICA The following report was made by the Committee on Bankruptcy of the Commercial Law League of America at its annual convention at Mackinac Island July 15th. If, as the publicists contend, the spotlight is possessed of purifying properties, then the subject of bankruptcy has, during the year last past, been in the process of a thorough cleansing, for most assuredly during such period bankruptcy has had its full share of public attention. Investigations of one sort or another, and in one place or another, have been conducted. Of these investigations, one of them was by far the most monumental task of its kind yet attempted - amply financed, competently, efficiently and capably directed although withal it had to do primarily, and, indeed, almost wholly, with conditions prevailing in one district. And, as is ever the case when an investigation is in prograss, an eager press sordidly snatched at the sensational morsels to feed to those with sensational bents, always ignoring those findings which were favorable to that institution which we must all regard as one of the most beneficient ever established for the fostering and developing of our credit relations and the extension of our commerce our bankruptcy system. So in this manner bankruptcy was portrayed during the year to the bench and bar and to the lay alike. Those of us who have watched with keen interest the progress of the year's activities must view with renewed pride the sufficiency of that which we now have. This we intend only as a general characterization, for we full well know that there are certain features of the law as it now stands, and having to do principally with the practice under the law, which are sorely in need of correction. But these desirable corrections are all of such negligible nature, when compared to the great benefits which the public receives under the law as it exists, that we regard them only as so much tinkering to be done towards improving and perfecting the mechanism of a most excellent machine. And these views we unhesistatingly advance after a mature and impartial consideration of all the adverse criticism we have recently heard and of all the amendatory recommendations which have from time to time been submitted. Among the criticisms we have heard is that the present law is too "legalistic" — a charge which will indisputably arouse the interest of those of the original framers of the law who are still with us, for most certainly they sedulously endeavored to avoid that very condition by placing the responsibility of the administration upon creditors with the very least amount of judicial supervision. And then, too, there are those who would deprive creditors in interest from a voice in the selection of receiver and trustee in many, if not in all, bankruptcy causes. In the report of this committee for the year 1929, we there said: "The mere fact that creditors have in the past shown themselves indifferent to the rights so vested in them, or that some of us may feel that these rights have at times been improperly exercised by them, offers but slight excuse for any of us to attempt to take away from this great group of substantial taxpayers the right of franchise the right to determine, in the fashion countenanced by this great democracy of ours a majority who should administer the property which is theirs. Any scheme or plan which opposes this part of our present system of bankruptcy, and which has for its purpose the creation of official receivers or trustees and the denial to the creditors of the right to determine who shall administer their property, is fundamentally unsound in that it presumes incapacity on the part of the creditors in interest and in a sense places them, and in the absolute places that part of their property affected, under a guardianship." And we now see no reason to modify this declaration. vote But we shall not undertake to discuss all of the proposed amendments which have come to our attention. Suffice it to say that every suggestion which has come to our ears has had our most earnest consideration, and in the main we can not say that they offer enough more over that which we now have, if indeed as much, to warrant the effort in making the switch, and incurring the uncertainties which would result therefrom. We do, however, believe and assert that the proposal of an official receiver or trustee can not and will not further the interests of the creditor body. On the other hand, we believe that any such amendment would be subversive of the interest of the creditors and of the nation in that it would take the administration of bankruptcy causes out of the hands of those who are interested in economy, in expeditious liquidations and in the prosecution of crime and place that administration in the hands of those whose only interest would lie in the personal benefits which they would derive. During the year, and perhaps as a result of conditions disclosed in the Southern District of New York, the United States Supreme Court promulgated a new general order, numbered XLVI, and also made an important |