74TH CONGRESS 1st Session

SENATE

Calendar No. 1455

REPORT No. 1386

TO AMEND THE BANKRUPTCY ACT

JULY 29 (calendar day, AUGUST 19), 1933.-Ordered to be printed

Mr. BURKE, from the Committee on the Judiciary, submitted the

following

REPORT

[To accompany H. R. 7858]

The Committee on the Judiciary, to whom was referred the bil (H. R. 7858) to amend an act entitled "An act to establish a uniform system of bankruptcy throughout the United States", approved July 1, 1898, and acts amendatory thereof and supplementary thereto, after consideration thereof, report the bill favorably with an amendment to the Senate with the recommendation that be passed.

A COMPARATIVE ANALYSIS OF S. 2744 AND H. R. 7858, COMPANION BILLS AMENDING SECTION 77B OF THE BANKRUPTCY ACT

S. 2744 was passed by the Senate in the form in which it was presented by the Treasury Department; H. R. 7858, the companion bill, was amended by the House Judiciary Committee in a manner open to grave objection, and as amended, was passed by the House. S. 2744 provides:

If the United States of America, or any agency thereof, or any corporation the majority of the stock of which is owned by the United States of America, is & creditor or stockholder of the corporation seeking reorganization under this section, the Secretary of the Treasury is hereby authorized to accept or reject a plan in respect of such interests or claims of the United States which shall be deemed to be affected by the plan. As long as the United States of America, er any agency thereof, or any corporation the majority of the stock of which is owned by the United States of America, is a creditor or stockholder of the corporation seeking reorganization under this section, no plan of reorganization which does not provide for payment in full of such interests or claims of the United States within ninety days after confirmation by the judge shall be confirmed in any proceeding under this section except upon the acceptance, as foresaid, by the Secretary of the Treasury, certified to the court.

The parallel provision in II. R. 7858 reads:

If the United States of America is a creditor on claims for taxes, the claims thereof shall be deemed to be affected by the plan, and the Secretary of the

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Treasury is hereby authorized to accept a plan in respect of such claims; and no plan which does not provide for the payment thereof shall be confirmed by the judge except upon the acceptance of a lesser amount by the Secretary of the Treasury certified to the court: Provided, That if the Secretary of the Treasury shall fail to accept or reject a plan for more than sixty days after written notice so to do, his consent shall be conclusively presumed.

The Treasury Department proposed this measure in the first instance for the reason that the language of the present reorganization section is being interpreted in some of the lower courts (the Supreme Court not having passed on the point to date) as placing the Government in the status merely of a general creditor. The present language reads:

If the United States of America is a creditor or stockholder, the Secretary of the Treasury is hereby authorized to accept or reject a plan in respect of the interests or claims of the United States.

The differences between the two bills are:

1. Under the Senate bill the Secretary of the Treasury is continued as the agent of the United States to accept or reject plans of reorganization relative to all Government claims; the House bill limits his authority to accept or reject plans only as to tax claims and fails to designate who shall be the agent as to the rest of the Government claims. 2. Under the Senate bill no plan of reorganization can be confirmed by the court unless payment in full of all Governmnt claims (including claims of any agency of the United States or any corporation the majority of the stock of which is owned by the United States) is provided for, or unless the Secretary of the Treasury accepts less. The House bill limits this preference to tax claims of the United States. 3. The Senate bill has no time limitation during which the Secretary of the Treasury must accept or reject a plan of reorganization. The House bill gives him 60 days in which to do so, or else his consent is conclusively presumed.

Although the Treasury Department has no objection to some of the changes in the House bill, it believes that others are seriously defective:

1. The House bill makes no provision as to who shall be the agent of the United States for the acceptance or rejection of plans insofar as they relate to claims of the Government and of Government-owned corporations for other obligations than taxes. This does not involve the question of granting a preferred status to Government claims. but relates simply to the designation of an agent of the United States in these cases, that agent at present being the Secretary of the Trensury. Under the House bill, which limits his authority to tax claims, every Governinent agency, bureau, or corporation having a claim against a reorganizing corporation will have to act on its behalf with respect to a plan of reorganization. This is highly undesirable, since

(a) The merits of a plan can be determined only after study of the reorganizing companies' records, books, and financial statements. and few Government agencies have field forces of sufficient size or qualification to make such investigations, while the wide-spread field force of the Bureau of Internal Revenue is on the scene and is familiar with the set-up of the reorganizing companies, by reason of having reviewed their tax returns.

(b) Twenty-five percent of the reorganizing companies are indebted to 1 or more of the 54 governmental agencies. It would be a

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crushing burden on the company if it were required to negotiate separately with each agency and would result in considerable duplication of effort both on the part of the company and the Government.

(c) The Government may be both a creditor and debtor of the reorganizing company, and if there is centralization of administration in the hands of one agent of the Government, set-offs may be effected which in the absence of such centralization would not be, because of the ignorance of the existence of claims in favor of other agencies of the Government. At the present time, because the Secretary of the Treasury is the Government's reorganization agent, the Bureau of Internal Revenue contacts all other Government agencies in the course of a reorganization, and thus the Secretary has before him a complete picture of the true debit and credit balance of all Governinent claims against the company.

2. The House bill limits the Government's preferred status to "tax" claims. Although the Treasury Department would agree to a compromise restricting the Government's preferred status, it urges that claims for customs duties be added to "tax" claims, since the word "taxes" is not broad enough to comprehend customs duties, and obviously all revenues should be placed in the same category for this

purpose.

3. The Treasury Department is particularly concerned over the 60-day time limitation which has been written into the House bill. There is no such limitation in the present law, and it is believed that to allow the Government only 60 days in which to examine and pass on the merits of a plan would prove inimical to the best interests of the reorganizing company, the United States, and the other creditors and stockholders:

(a) Many of the cases are extremely complicated. Thus, in the case of one company, tax returns for 4 taxable years were up for consideration, involving over 200 important tax issues; in another, although the papers submitted to the Secretary indicated only one company as being involved in the reorganization, diligent investiga tion revealed that over 46 subsidiaries, many of them separately engaged in proceedings of reorganization, equity receivership, or bankruptcy, were involved and that considerable tax claims were outstanding against practically all of them.

The 60-day provision in these fairly typical cases would have resulted either in a superficial investigation, with resulting serious financial loss to the Government, or the Government would have been compelled to reject the plan regardless of its merit, simply because of lack of time to investigate. Indeed, it is feared that the latter action would necessarily become recurrent, thereby causing considerable hard feeling toward the Government, and even discouraging the use of section 77 B.

(b) If the Secretary is given the agency power over all Government claims, as he logically should be, 60 days is an inadequate time in which to contact all Government agencies and the various branches of the Internal Revenue Service. It should be borne in mind that reorganization cases are coming in at the rate of 200 a month and that each necessitates an intense and comprehensive investigation.

(c) Other creditors are not restricted by a time limitation. As a matter of fact, experience has shown that about 9 or 10 months are

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usual for the completion and acceptance of a plan, and the Government's claims are never the cause for this lapse of time.

However, because of the urgent need for this measure, the Treasury Department would agree to a 90-day limitation on acceptance or rejection by the Secretary of plans of reorganization. The additional

30 days would materially assist in the intelligent consideration of these plans.

As a result of these considerations, the Treasury Department desires urgently to recommend that the following compromise measure be adopted:

If the United States of America is a creditor or stockholder, the interest or claims thereof shall be deemed to be affected by the plan, and the Secretary of the Treasury is hereby authorized to accept or reject a plan in respect of the interests or claims of the United States. If, in any reorganization proceeding under this section, the United States is a creditor on claims for taxes or customs duties (whether or not the United States has any other interest in, or claim against, the debtor, as creditor or stockholder), no plan which does not provide for the payment thereof shall be confirmed by the judge except upon the acceptance of a lesser amount by the Secretary of the Treasury, certified to the court: Provided, That if the Secretary of the Treasury shall fail to accept or reject a plan for more than ninety days after receipt of written notice so to do from the court to which the plan has been proposed, accompanied by a certified copy of the plan, his consent shall be conclusively presumed.

If this provision is adopted, the Treasury believes that the serious problem now confronting the Government as a result of the adverse lower court holdings will be successfully solved. Millions of dollars of the taxpayers' money are at stake, their recoverability depending upon the passage of this amendment by Congress.

74TH CONGRESS. SESS. II. CHS. 185-187. APRIL 10, 1936.

[CHAPTER 186.]

AN ACT

To amend chapter 9 of the Act of July 1, 1898, entitled "An Act to establish a uniform system of bankruptcy throughout the United States", approved July 1, 1898, and Acts amendatory thereof and supplementary thereto.

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That section 79 of chapter 9 of the Act of July 1, 1898, entitled “An Act to establish a uniform system of bankruptcy throughout the United States", approved July 1, 1898, and Acts amendatory thereof and supplementary thereto, be, and the same is hereby, amended to read as follows:

"SEC. 79. ADDITIONAL JURISDICTION.-Until January 1, 1940, in addition to the jurisdiction exercised in voluntary and involuntary proceedings to adjudge persons bankrupt, courts of bankruptcy shall exercise original jurisdiction in proceedings for the relief of debtors, as provided in this chapter of this Act." Approved, April 10, 1936.

1 So in original.