14 AMENDING THE BANKRUPTCY LAW 4. PROVISIONS FIXING REFEREES AND ADMINISTRATORS' SALARIES AND PERCENTAGE CHARGES AGAINST ESTATES A proposed amendment to section 40 provides that the referees shall be compensated by salaries to be fixed by the Attorney General for the terms for which they are appointed, at reasonable rates not more than $10,000 per annum, to be determined in each instance with relation to the volume of business likely to be transacted in the district. A proposed amendment to section 53 provides that the Attorney' General shall appoint administrators in bankruptcy, not exceeding 10 in number, fix their salaries, not exceeding $7,500 per annum A proposed amendment to section 51 provides that the clerks shall collect certain filing fees and percentage charges against estates, to be annually fixed by the Secretary of the Treasury at not exceeding certain specified maximum rates and amounts. The purpose of this amendment is to defray the cost to the Government of the salaries of referees and the salaries and expenses of the administrators and examiners. All three of these amendments, it is argued, are unconstitutional because they provide an unlawful delegation of legislative power to executive officers. Since 1922 the Attorney General has been authorized to fix the salaries, not exceeding $5,000, and to approve the office expenses, of the clerks of the circuit courts of appeals. (U. S. C. A., title 28, sec. 544.) Since 1919 he has been authorized to fix the salaries of the district court clerks "at not less than $2,500 nor more than $5,000, based in each instance upon the amount of business transacted * *" (Sec. 558.) Ile may also increase or decrease these salaries, within the prescribed limits, as the increase or decrease of the business may justify. (Sec. 559.) He may also fix a per diem in lieu of subsistence, at not exceeding $4, when such a clerk travels on official business. (Sec. 561.) Since 1919 the Attorney General has been authorized to fix from time to time the compensation of deputy clerks and clerical assistants to clerks of the district courts, no maximum or minimum being specified. (Sec. 562.) He allows the necessary office expenses of the clerks. (Sec. 563.) Since 1923 he has been authorized to fix the salaries of the United States attorneys and marshals, within certain prescribed minimum and maximum amounts, "to be based in each instance upon the business transacted *" He may also in crease or decrease these salaries, within the prescribed limits, as the increase or decrease of the business may justify. (Sec. 579.) Since 1896 he has been authorized to fix the salaries of assistant district attorneys in such amounts (within a prescribed maximum) "as the Attorney General may from time to time determine as to each." (Sec. 580.) He fixes the per diems of the district attorneys and their assistants at not exceeding $4. (Sec. 581.) Since 1896 he has been authorized to fix the salaries of the deputies and clerical assistants of the marshals, no limits being prescribed. (Sec. 582.) Since 1906 he has been authorized not only to fix the salaries (without prescribed limits) but to designate the number of the clerks and AMENDING THE BANKRUPTCY LAW 15 United States Attorney for the messengers in the office of the The true distinction " between a lawful and unlawful delegation, said the Supreme Court in Field v. Clark (1891), 143 U. S. 619 (adopting the language in another case) is between the delegation of power to make the law, which necessarily involves a discretion as to what it shall be, and conferring authority cr discretion as to its execution, to be exercised under and in pursuance of the law. The first can not be done; to the latter no valid objection can be made. Accordingly the court upheld a statute which, in permitting the free entry of certain foreign goods, authorized the President, when satisfied that a foreign government exporting such goods imposed duties upon American products which "he may deem to be reciprocally unequal and unreasonable," to suspend the right of free entry " for such time as he shall deem just." The constitutionality of the following statutes has been similarly upheld: (1) A statute authorizing the President to raise or lower tariff duties to equalize differences in cost of production of foreign and domestic goods, upon investigation and ascertainment of these differences. Hampton v. United States (1927), 276 U. S. 394, in which the court said that Congress had declared what its policy and plan was and then authorized a member of the executive branch to carry out its policy. What the President was required to do was merely in execution of the act of Congress. It was not the making of law. (2) A statute empowering the Secretary of the Treasury to estab lish standards, upon recommendation of a board of experts, by which should be determined the purity, quality, and fitness for consumption of foreign teas, and to exclude from importation such teas as did not satisfy these requirements. (Buttfield v. Stranahan (1904), 192 U. S. 470.) (3) A statute authorizing the Secretary of War to require changes in bridges over navigable waters if satisfied, after a hearing of the parties interested, that the structure as erected or contemplated had caused or would cause an unreasonable obstruction to navigation. (Union Bridge Co. v. United States (1907), 192 U. S. 470.) (4) A series of statutes conferring large powers upon the Interstate Commerce Commission in such matters as the fixing of reasonable rates, the prescribing of accounting methods, the valuation of property, the prescribing of routes, the pooling of freights, the Issuance of securities, the approval of consolidations, and so on. For the many Supreme Court cases construing and upholding these and other powers of the commission. (See 2 Willoughby on the Constitution of the United States (2d ed.), pp. 799 to 857.) It would be needless to cite further authorities. The extent of the powers delegated to the executive in these various statutes was much broader, and the criteria upon which the executive should act A distinctively legislative function. Munn v. Illinois (1876), 94 U. S. 113. 16 AMENDING THE BANKRUPTCY LAW less precise, than under the proposed amendments. The constitutionality of the latter can not be questioned. 5. THE PROVISION FOR CORPORATE REORGANIZATIONS This proposed amendment (section 76) permits a corporation to file a voluntary petition, or before adjudication in an involuntary proceeding an answer, stating that it is insolvent "or unable to meet its debts as they mature " and that it desires to effect a plan of reorganization. Procedure is then laid down for the formulation of a plan, for its acceptance by two thirds in amount of the different classes of security holders who are to be bound by the plan, and for its confirmation if the court deems it to be equitable; with provisions for liquidating the corporate assets in case the plan is not seasonably proposed or accepted, or is not confirmed. A plan of reorganization must, under the proposed section, modify the rights of creditors generally, or of any class of them, and may in addition modify the rights of stockholders generally, or of any class of them; it may also provide for the transfer of the assets to a new corporation, and the issuance of securities for cash, or in exchange for existing securities, or in satisfaction of claims or rights. The constitutionality of section 76 has been questioned on the theory that the word "bankruptcies " in section 8 of Article I of the Constitution, has received a legislative interpretation which may reasonably be said to limit it to cases in which the debtor is insolvent as defined in the present bankruptcy act, and that therefore debtors who are insolvent merely in the equity sense may not constitutionally be afforded relief in bankruptcy. If legislative precedent could be relied upon in limitation of constitutional authority it would suffice to say, in answer to this argument, that three of the four bankruptcy acts in this country have adopted and applied, without successful constitutional objection, the definition of insolvency" which is recognized in the courts of equity. Even under the present act a debtor may voluntarily go into bankruptcy while actually solvent. Two of the six acts of bankruptcy prescribed by the present law (sec. 3a, clauses 1 and 5) do not require proof of insolvency in any sense, and proof of either of these acts is sufficient to support an involuntary petition. Similar provisions in the three previous bankruptcy laws show that the basis of bankruptcy jurisdiction does not now, and never has, rested upon the definition of "insolvency " contained in section 1 of the present act. Sec. 1 (a) (15), which defines insolvency as, in substance, an excess of liabilities over assets taken at a fair valuation. That is, unable to pay their debts as they mature. Hanover National Bank v. Moyses, supra, at pages 190, 191: In re Montevalleo Min. Co. (C. C. A. Ala. 1923), 294 Fed. 171 (reversed on other grounds in 267 U. S. 467); People's Nat. Bank . Foltz (C. C. A. Ohlo, 1928), 25 F. (2d) 295; In re Vadner (D. C. Nev., 1918), 259 Fed. 614; In re People's Warehouse Co. (D. C. Miss., 1921), 23 Fed. 611; In re Jehu (D. C. la. 1899), 94 Fed. 638; In re Ives (Mich.. 1902), 113 Fed. 911, 51 C. C. A. 541; In re Carleton (D. C. Mass., 1902), 115 Fed. 246. It should also be noted that in computing the fair valuation of the assets under the existing definition of insolvency assets which have been concealed or transferred with Intent to hinder, delay, or defraud creditors are excluded. Thus, if a debtor owes $5,000 and has $20,000 worth of assets which he has concealed for the purpose of hindering creditors, and has $4,000 worth of other assets which can be immediately reached, he is considered "Insolvent." even though when the estate has been collected there will be more than sufficient assets to pay all creditors in full. AMENDING THE BANKRUPTCY LAW 17 The purpose of our bankruptcy laws has not been confined to the liquidation of insolvent estates. Since 1874 such statutes have authorized compositions, which could be confirmed without adjudication in bankruptcy and the obvious purpose of which was to save embarrassed debtors from liquidation and to enable them to continue in business after an adjustment of their liabilities by agreement with a majority of their creditors. These provisions, as now drawn, are obviously unavailable for the adjustment of the claims of creditors and security holders involved in the reorganization of a large corporation, not because the principle of composition is inapplicable to such cases but merely because the statute is not drawn to meet the complexities of the situations presented. Section 76 merely extends to corporate debtors, their creditors and shareholders, the benefits of composition through the enactment of provisions for the confirmation of the composition and adjustment of corporate indebtedness in accordance with a plan of reorganization approved by a large majority of the creditors, and, if the corporation is not insolvent, of the shareholders. The proposed amendment is therefore quite in line with the historical development of our bankruptcy law. The constitutionality of section 76 has been further questioned on the theory that since it permits a plan of reorganization to be made binding upon stockholders (where two-thirds in amount consent) as well as upon creditors, it is not a law "on the subject of bankruptcies." As stated in Kunzler v. Kohaus (supra, p. 7), to cite only one of the series of similar cases, a law "on the subject of bankruptcies," within the meaning of the Constitution, is a law "on the subject of any person's general inability to pay his debts." Clearly, if, in connection with a reorganization, a rearrangement of the stockholders' rights was essential to the consummation of a settlement between the corporation and its creditors, the law, in enabling minority stockholders to be bound by the majority, would be dealing with the "subject of bankruptcies" as defined by the courts. Such reorganizations are frequent, if not typical, new capital must be found in order to enable the corporation to settle with its creditors and to continue in business, and such capital may not be procured, either from the stockholders themselves or from outside sources, without some modification of the rights of stockholders. Moreover, in cases of this sort, where the majority stockholders consent to the plan, the plan in substance is nothing but a composi tion agreement between the creditors and the debtor, for though technically the corporation is the debtor, actually the creditors are dealing with its stockholders, and the interposition of a fictitious entity does not alter the real nature of the transaction. The analogy of a composition between an individual debtor and his creditors is an exact one. In a composition procedure under the present act, the debtor is in bankruptcy and entitled to a discharge, so that the creditors' claims can be satisfied, if at all, only out of the assets brought into court. The debtor wishes, however, to get these assets back. Therefore, he raises cash from other sources, negotiates with the creditors, reaches an agreement which is made binding by court order, gets the assets back, and continues in business. 18 AMENDING THE BANKRUPTCY LAW Similarly, in the case of a corporate failure, the creditors can seek satisfaction only from the assets. The stockholders, like the individual debtor, wish to get these assets back so that the business may continue. Therefore, they undertake to raise or procure the needed cash, negotiate with the creditors, and reach an agreement which is made binding. The two cases are in substance alike, and if Congress can constitutionally legislate with respect to the one, it can constitutionally legislate with respect to the other. Both relate to the "subject of bankruptcies.' But it might be urged that a plan of reorganization could theoretically be proposed under which, for example, the claims of creditors were to be extended for a year and then paid in full, and the dividend rate on the preferred stock was to be reduced from 7 to 5 per cent, the latter provision having no necessary relation to the former, and being instigated by common stockholders holding a controlling interest in the preferred stock and availing themselves of section 76 for the primary purpose of reducing the returns on the preferred stock. But section 76 (f) provides that the judge shall confirm the plan only if satisfied that it is equitable, and manifestly such an attempt by dominating stockholders to impose their will on a minority under the guise of a reorganization plan would not be equitable. The mere fact that attempts might theoretically be made to abuse the law-attempts with which the court has both the right and the duty to deal-does not raise any constitutional doubt as to the power of Congress to enact such a law, where the law itself, having for its object the settlement of claims and the continuation of a debtor's business in the interest of the debtor and the creditors alike, is clearly a law on the subject of bankruptcies. The case of Canada Southern Railway Co. v. Gebhard (1883), 109 U. S. 527, supports the contentions which have just been made. In that case a Canadian railway having outstanding securities, of which some were held in the United States by citizens of the United States, became unable to pay its debts as they matured. A reorganization plan was proposed and assented to by the great majority of bondholders and stockholders providing for the issuance of new bonds and the obligatory conversion of the old bonds for the new. The Canadian Parliament then passed a special act making the reorganization plan (referred to as a "scheme of arrangement") binding upon all the bondholders and all the stockholders. Certain holders of bonds in the United States asserted that the scheme of arrangement thus ratified by law could not be made binding upon them. The court held that it was binding upon them. After stating the facts, the court observed that in 1867 England had adopted the "railways companies act" under which "schemes of arrangement" (reorganization plans) would be binding upon all creditors and stockholders when consented to by the holders of threefourths in value of each class of securities. This act was the forerunner of similar statutes in England applying to industrial as well as railroad corporations. |