74TH CONGRESS HOUSE OF REPRESENTATIVES 1st Session

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REPORT No. 570

AMENDMENTS TO BANKRUPTCY ACT

APRIL 1, 1935.-Referred to the House Calendar and ordered to be printed

Mr. GREGORY, from the Committee on the Judiciary, submitted the following

REPORT

[To accompany H. R. 5452]

The Committee on the Judiciary, to whom was referred the bill (H. R. 5452) 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 thereto and supplementary thereto", reported the same with one amendment, and recommended that the bill as amended do pass.

The only amendment that the committee made in H. R. 5452 was to strike out the word "sold", printed bill page 2, line 16, and insert in lieu thereof the word "conveyed".

This bill amends section 75 of the Bankruptcy Act, and more especi ally amends subsections (n) and (0), and paragraph 3 of subsection (s) of section 75. It has for its object and purpose the clarification of section 75, so that the decisions and the interpretation and construction that the United States district courts have, and may hereafter make, may become and be uniform. The amendments provided for in this bill have become necessary because of the great confusion caused by the diverse rulings of the various United States district courts, in the construction of section 75.

Some courts have held that the farm debtor could not take advan tage of the act after foreclosure sale and during the period of redemp tion. Some of these courts have refused to permit the farmer in that position to file his petition, although under the law of the State he was in possession and full control of the property and could redeem it within the period allowed. Other courts have held that the farmer could not take advantage of the act during the period of a moratorium established by the State; while others have held that the debtor could not take advantage of the act after sale, but prior to confirmation of sale, although in all of these cases, if the debtor had the money and were in a position to pay, he could redeem and save his property, Obviously, these courts are reasoning too technically, and have failed

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AMENDMENTS TO BANKRUPTCY ACT

to carry out the intention of Congress, which was to protect the farmer's property and home.

Again, other courts have held when the farmer's homestead and other exemptions were set aside, that that ended their jurisdiction. under section 75, and the farm debtor was left to the mercy of his mortgagees and lien holders, and the protection of that section withdrawn. In reading section 75, including subsection (s), it is plain that Congress had no such intention. Its object was to protect the farmer in his home and property, and not to desert him and leave him to the mercy of his creditors. Other courts have held that if any of the creditors refuse to consent to sell back the property under the terms and provisions of paragraph 3 of subsection (s) of section 75 of the Bankruptcy Act, that that ended it all, and he had no remedy. Such courts apparently construe only one paragraph of subsection (s), and brush all the rest aside; while others, construing paragraph 3 in conjunction with paragraph 7, and with the whole act, have held that if all the creditors do not consent, they must object in writing, and that then the procedure will be under paragraph 7 of subsection (s). When Congress passed section 75 and amendments, it certainly intended that the act should be construed as a whole, and not merely one paragraph.

It was undoubtedly the intention of Congress that the farmer should pay a fee of $10, and no more. In fact, the act says so. Yet many of the courts have held that when the farmer amended his petition of conciliation to a petition of bankruptcy, he had to pay the usual fees in a bankruptcy proceeding. Some courts again hold that the conciliation commissioner is through with the case when a petition for conciliation is amended to a petition of bankruptcy. Others have held the reverse. In reading the whole act, it is quite apparent that Congress intended the conciliation commissioner to act as referee, because it imposed the same qualifications upon him. The proceedings having been started before the conciliation commissioner, he is on the ground, a resident of the county, and knows the conditions, and is in a far better position to continue in charge of the case than the referee, who in some States is several hundred miles away. Congress intended to place this act within the hands and possibilities of the debtor farmer, and keep down the expense.

Other courts have entered whole-heartedly into the spirit of the act, and construed it liberally, carrying out the intention of Congress. These have held that the farmer can take advantage of the act during the period of redemption, that the conciliation commissioner was to continue to act, and that the farmer could take advantage of the act any time before he was completely divested of title and possession. These courts have interpreted the act as a whole in connection with the times, and the purposes for which it was passed-the protection. of agriculture.

The amended subsection (n), as set forth in H. R. 5452, in fact construes, interprets, and clarifies both subsections (n) and (0) of section 75. By reading subsections (n) and (o) as now enacted, it becomes clear that it was the intention of Congress, when it passed section 75, that the debtor farmer and all of his property should come under the jurisdiction of the court of bankruptcy, and at the benefits of the act should extend to the farmer prior to confirmation of sale, and during the period of redemption; and that no proceedings

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AMENDMENTS TO BANKRUPTCY ACT

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after the filing of the petition should be instituted, or, if instituted prior to the filing of the petition, should not be maintained in any court, or otherwise. Yet there have been a multiplicity of different holdings and conclusions reached by different courts on this subject. The amended subsection (n) as proposed in H. R. 5452 clarifics, construes, and interprets the intent of Congress, so as to bring about uniform decisions and rulings by the courts in the future.

The amended paragraph 3 of subsection (s), as set forth in H. R. 5452, has for its purpose and object the clarification of that paragraph, and brings paragraph 3 of subsection (s) in harmony with paragraph 7 of subsection (s). It is plain, by reading paragraphs 3 and 7 together, and in connection with all of section 75 and of subsection (s), that it was the intention of Congress that the farm debtor should be able to protect and save his home and exemptions. It was not the intention of Congress for the courts merely to set aside the exemptions, and then say to the creditors: "Now, go and take it."

It is also clear that Congress intended that if the creditors would not consent to the property being sold back to the farm debtor, that they should file objections, and then they would come under paragraph 7. Otherwise, subsection (s) would be meaningless. And yet there has been a great diversity of decisions on that point. Some courts hold that if the creditors did not consent, that that ended the proceeding under subsection (s); others holding that consent. would be taken for granted, unless they filed written objections; while other courts have held that when the exemptions were set aside, including the homestead, that the court was through, and the creditors could bring foreclosure proceedings. Such, we are satisfied, was not the intention of Congress when it passed the act. In fact, section 75, and especially subsection (s), when read as a whole, clearly shows that the purpose of Congress in passing this legislation was to protect the farmer's property and his home, and at the same time protect the creditors by giving them the fair value of the property, under the terms and provisions of the act.

Under the original paragraph 3, there also has been some confusion in regard to what was meant by "all taxes shall be paid by the debtor." The amended paragraph 3 has added the word "future", printed bill, page 5, line 6. There should have been no confusion on this point, because the past due taxes were already included as debts of the debtor, and the intention of Congress clearly was to provide that all future taxes should be paid by the debtor. Some courts also seem confused as to whether section 75 should be construed by itself, or in connection with all of the Bankruptcy Act, and how court costs and administration charges should be paid. Of course, section 75 is just a part of the Bankruptcy Act, and should be construed in connection with the whole act, except insofar as it repeals or modifies that act, and these costs always have been and should be paid out of the bankrupt's estate. Therefore this matter has been clarified by adding the following language in the amended paragraph 3, page 5, lines 8 and 9: "After all court costs and administration charges been paid", and so forth.

have

Section 3 of H. R. 5452 clarifies section 75 further, by providing that the conciliation commissioner shall continue to act as referee when the farmer amends his petition from a petition of conciliation to a petition of bankruptcy, and allows such conciliation commissioner an addi

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AMENDMENTS TO BANKRUPTCY ACT

tional fee for such services not to exceed $25, as allowed by the court. It also provides that all additional fees or costs of administration shall be charged to the bankrupt's estate, and provides that the reasonable rental to be charged the farmer debtor under paragraph 7 of subsection (s) shall not exceed 5 percent of the appraised value of the property, or amount of the encumbrances. In other words, if the debt is equal to the appraised value of the property, then the rental must not exceed 5 percent of the appraised value, but if the encumbrance is less than the appraised value, then the rental must not exceed 5 percent of the encumbrances.

It provides further that if a receiver is in charge of the property, the receiver shall be divested of possession, and the property turned over to the farmer under the provisions of section 75, as amended. It also provides that section 75 shall apply to partnerships; common, entirety, joint or community ownership, and that any such parties may join in one petition. It further provides that the term "farmer", as defined in subsection (r) of section 75, shall include any person who is engaged in the production of poultry or poultry products, livestock, and dairy products, as well as products of the soil.

The amendments proposed in section 3 of H. R. 5452 are simply to clarify the present section 75 with amendments, and to bring about a uniform procedure in all courts. On nearly every amendment of amended paragraph 3 of subsection (s), there has been a diversity of rulings and decisions by United States District Courts. Some have held that if a husband and wife were jointly interested, or had interests in common, or were partners in the farming operations, that then neither of them could take advantage of the act, nor could they join. Obviously such was not the intention of Congress.

Others have held that the conciliation commissioner was through when the petition of conciliation was amended to a petition of bankruptcy. Again, some have held that the farmer would have to pay the regular bankruptcy filing fees and referee's fees when he amended. In some cases, the rentals were fixed so high as to actually defeat the purposes of the act, while the amendment under section 3 of H. R. 5452 fixes the maximum limit at 5 percent of the appraised value of the property, or encumbrances. Finally, some courts have given a very technical construction and meaning to the word "farmer", holding that a farmer was one who actually tilled and cultivated the soil, and excluded poultry and livestock farmers from the act.

Of course, this is new legislation, but the intention of Congress was that it was to be liberally construed, to afford the protection given in the act to the farmer debtor during this depression.

NECESSITY OF H. R. 5452

The necessity for enacting H. R. 5452 is more clearly brought out by numerous letters received by Members of Congress from conciliation commissioners, referees, attorneys, attorneys general, farm organizations, and judges, as to the great good that this act has done to date, and as to the necessity of having it clarified, because of the diversity of rulings and decisions, and the financial inability of the farmer debtor to finance appeals from these decisions to the higher courts.

AMENDMENTS TO BANKRUPTCY ACT

CHANGES IN EXISTING LAW

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In compliance with paragraph 2 of Rule XIII of the Rules of the House of Representatives, new matter proposed to be added by H. R. 5452 to section 75 of the Bankruptcy Act is printed below in italics, existing law is shown in roman.

That subsection (n) of section 75 of the Act of July 1, 1898, entitled "An Act to establish a uniform sustem of bankruptcy throughout the United States", as amended, is amended as follows:

"(n) The filing of a petition or answer with the clerk of court, or leaving it with the conciliation commissioner for the purpose of forwarding same to the clerk of court, praying for relief under section 75 of this Act as amended, shall immediately subject the farmer and all his property, wherever located, for all the purposes of this section, to the exclusive jurisdiction of the court, including all real or personal property, or any equity or right in any such property, including, among others, contracts for purchase, contracts for deed, or conditional sales contracts, the right or equity of redemption where the period of redemption has not or had not expired, or where the sale had not been confirmed, at the time of filing the petition; or where, siz months prior to the date that this amendment becomes effective, the conciliation commissioner or court dismissed, refused to accept and file the petition, or take jurisdic tion of such property, prior to the expiration of the period of redemption or confirmation of sale: Provided, That such property has not been conveyed to an innocent purchaser, other than a creditor or lien holder.

"In all cases where, at the time of filing the petition, the period of redemption had not or has not expired, or where the sale has not or had not been confirmed, or where, six months prior to the time this amendment becomes effective, the conciliation com missioner or court dismissed, refused to accept and file the petition or to take jurisdiction of such property, prior to the expiration of the period of redemption or prior to confirmation of sale, the period of redemption shall be extended or the confirmation of sale withheld for the period coincident with the period provided by this Act for the purchase of the property by the farmer debtor, if he so desires or elects, under the terms and provisions of subsection (s) of section 75 of this Act as amended. The word 'redemption' shall include any State moratorium, whether established by legislative enactment or executive proclamation, or where the period of redemption has been extended by a judicial decree. In proceedings under this section, except as otherwise provided herein, the jurisdiction and powers of the courts, the title, powers, and duties of its officers, the duties of the farmer, and the rights and liabilities of creditors, and of all persons with respect to the property of the farmer and the jurisdiction of the appellate courts, shall be the same as if a voluntary petition for adjudication had been filed and a decree of adjudication had been entered on the day when the farmer's petition, asking to be adjudged a bankrupt, was filed with the clerk of court or left with the conciliation commissioner for the purpose of forwarding same to the clerk of court."

SEC. 2. That section 75 of said Act be further amended by amending paragraph (3) of subsection (s) to read as follows:

"(3) If the debtor's exemptions are encumbered by mortgages or liens, he shall pay the appraised value to the lien holders, as their interests may appear, in full satisfac tion and in discharge of the liens, upon the terms and conditions herein stated: Provided further, That upon request of the debtor, unless written objections are filed as provided for in paragraph 7 of subsection (s) of section 75 of this Act as amended, the conciliation commissioner, or the trustee, if one has been appointed, shall sell to the debtor any part, parcel, or all of the remainder of the bankrupt's estate, at the appraised value, upon the following terms and conditions, and upon such other conditions as in the judgment of the court shall be fair and equitable:

"(a) Payment of 1 per centum interest upon the appraised price within one year from the date of said agreement.

"(b) Payment of 21⁄2 per centum of the appraised price within two years from the date of said agreement.

"(c) Payment of an additional 21⁄2 per centum of the appraised price within three years from the date of said agreement.

"(d) Payment of an additional 5 per centum of the appraised price within four years from the date of said agreement.

(e) Payment of an additional 5 per centum of the appraised price within five years from the date of said agreement.

Payment of the remaining unpaid balance of the appraised price within from the date of said agreement.

H