4

AMEND THE BANKRUPTCY ACT

debtors could be relieved of overwhelming burdens and thus be enabled to make a new start under favorable conditions which generally followed periods of great depression. This bill has a 3-year limitation. That is considered ample time to effect necessary com positions. Permanent legislation of this character would tend to affect adversely the financial problems of taxing agencies, and the committee, while not expecting unfailing foresight by public officials, cherishes the view that public contracts, especially, should be scrupulously performed whenever possible.

As an aid to insolvent taxing districts, Congress has authorized the Reconstruction Finance Corporation to make loans to such instrumentalities within safe limits as to security and duration. Through this channel, districts and agencies eligible for relief under the pending legislation can apply to the Reconstruction Finance Corporation for sufficient funds to compose their debts. Many acceptable applications are now pending, and others will be made if this bill is enacted into law. Many defaults in public obligations can be removed, and the welfare of thousands of citizens can be promoted by the passage of the bill.

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

following

REPORT

[To accompany H. R. 5969]

The Committee on the Judiciary, to whom was referred the bill (H. R. 5969) to amend the Bankruptcy Act, after consideration thereof, report the bill favorably to the Senate with the recommendation that it do pass.

The committee adopts as its report the following statement from House Report No. 517, Seventy-fifth Congress, first session:

GENERAL STATEMENT

This bill is the outgrowth of public hearings by the Subcommittee on Bankruptcy of the Committee on the Judiciary on H. R. 2505, H. R. 2506, and H. R. 5403, dealing with the same subject, namely, the composition, through proceedings in bankruptcy, of the indebtedness of insolvent taxing agencies such as drainage, levee, water, irrigation, sewer, road, school, port, and similar improvement districts, and certain towns, cities, boroughs, and townships.

Compositions are approvable only when the districts or agencies file voluntary proceedings in courts of bankruptcy, accompanied b plans approved by 51 percent of all the creditors of the district or agency, and by evidence of good faith. Each proceeding is subject to ample notice to creditors, thorough hearings, complete investigations, and appeals from interlocutory and final decrees. The plan of composition cannot be confirmed unless accepted in writing by creditors holding at least 66% percent of the aggregate amount of the indebtedness of the petitioning district or taxing agency, and unless the judge is satisfied that the taxing district is authorized by law to carry out the plan, and until a specific finding by the court that the plan of composition is fair, equitable, and for the best interests of the creditors.

The jurisdiction conferred in the bill terminates on June 30, 1940. One of the primary purposes of the measure is to enable, under proper safeguards, the rehabilitation and reorganization of those taxing districts and agencies which were in process of rearranging and refinancing their obligations under chapter 345 of the Public Acts of the Seventy-third Congress, sections 78, 79, and 80 (48 Stat. 798; title 11, U. S. C., secs. 301, 302, and 303, as amended), when the United States Supreme Court declared that act unconstitutional in the case of Ashton v. Cameron County Water District (298 U. S. 513). However, any insolvent taxing district

2

AMENDING THE BANKRUPTCY ACT

or agency may apply for composition under the provisions of this bill, and the need for the legislation is clearly shown by the testimony presented at the hearings. The Committee on the Judiciary is not unmindful of the sweeping character of the holding of the Supreme Court above referred to, and believes that H. R. 5969 is not invalid or contrary to the reasoning of the majority opinion in the 5-to-4 decision. The act which was declared unconstitutional designated the instrumentalities included in its provisions as political subdivisions of the State, and the Supreme Court determined that it was beyond the power reposed in Congress by article I, section 8, clause 4, of the Federal Constitution, "to establish uniform laws on the subject of bankruptcies", to pass an act to interfere with the States in the control of their fiscal affairs.

*

The bill here recommended for passage expressly avoids any restriction on the powers of the States or their arms of government in the exercise of their sovereign rights and duties. No interference with the fiscal or governmental affairs of a political subdivision is permitted. The taxing agency itself is the only instrumentality which can seek the benefits of the proposed legislation. No involuntary proceedings are allowable, and no control or jurisdiction over that property and those revenues of the petitioning agency necessary for essential governmental purposes is conferred by the bill.

As the statute which was declared unconstitutional was held to be within the subject of bankruptcies and uniform in its application, a fortiori, the present bill is adequately related to the general subject of bankruptcies, and does not conflict with the fifth amendment of the Federal Constitution as to due process of law. Ashton v. Cameron County District (298 U. S. 513); Continental, etc., Co. v. C. R. 1. & P. Ry. (294 U. S. 648); Louisville Joint Stock Land Bank v. Radford (295 U. S. 555).

The constitutional provision authorizing Congress to establish uniform laws on the subject of bankruptcies contains no exceptions. It is only because the bankruptcy power was authorized in the same section of the Constitution which confers the Federal power to lay and collect taxes that the former power is impliedly limited by the judicial construction placed on the latter power for the purpose of preserving the independence and sovereignty of the States. Granted the limita tion of the Federal taxing power, if the pending bill does not and cannot restrict the control of a State agency over its fiscal affairs, the statute would not be invalid. The States themselves are subject to taxation by the Federal Government except as to operations which are essentially governmental in their nature, and "the immunity of the States from Federal taxation is limited to those agencies which are of a governmental character." South Carolina v. U. S. (199 U. S. 437); Ohio v. Helvering (292 U. S. 36-60).

In other words, "the implied limitation on the Federal taxing power, springing from the necessity of maintaining our dual system of Government, does not extend beyond" that necessity; and the bankruptcy power is subject to like interpretation. Board of Trustees of Illinois v. United States (289 U. S. 48).

In construing the implied limitation on the Federal taxing power, the cases have been determined on their facts, and if there was no actual interference with essential governmental functions of a State or its agencies, the exercise of the taxing power has been sustained. This rule of construction applies with equal force and effect to the power to establish uniform laws on the subject of bankruptcies, and, in itself, justifies the passage of the pending bill to meet conditions deserving legislative assistance.

Therefore, the applicability of the pending bill to any taxing district or agency rests on the corporate character of each petitioner and depends on the actual interference, if any, with its essential governmental functions; and the saving clause in section 81 of the bill is designed to sustain the measure as to others if any one or more of the taxing agencies classified therein should be held to be political subdivisions exercising sovereign powers.

This bill is intended to remove an apparent impasse, and the committee believes that it will be welcomed by debtors and creditors. When a municipality or a taxing district is insolvent, the creditors cannot foreclose their mortgage, or cause public property to be sold and the proceeds distributed. They must look to the exercise of the taxing power over a period of years, or, in cooperation with the debtor dist ict, must grant extensions. This often involves reorganization of part or all of the debt structure, and hinges upon agreement by debtor and creditor, or on the existence of a Federal statute which may force recalcitrant minority creditors into agreement. Otherwise the creditors of a municipality or a taxing district must resort to mandamus proceedings, which have not been adequate remedies. In fact, the trend of recent decisions has been to deny the writ of

AMENDING THE BANKRUPTCY ACT

3

mandamus wherever sound judicial discretion justifies denial. Hence, creditors have been unable to obtain unjust advantage, but the problem of the municipality or taxing district has remained unsolved. Christmas v. City of Asbury Park (78 Fed. (2d) 1003). For an embarrassed debtor without the remedy afforded by thi bill, the only effective recourse is the repeal of its charter by the State legislature, in which event creditors are generally left without any remedy. Meri-. wether v. Garrett (102 U. S. 472, 501).

There is no hope for relief through statutes enacted by the States, because the Constitution forbids the passing of State laws impairing the obligations of existing contracts. Therefore, relief must come from Congress, if at all. The committee are not prepared to admit that the situation presents a legislative no-man's land. The power to deal with bankruptcies was given by the Constitution to Congress without express limitation. and, at the same time, the States deprived themselves of the power to deal adequately with the conditions which have arisen. Only analogous judicial construction has blocked the way thus far. It is the opinion of the committee that the present bill removes the objections to the unconstitutional statute, and gives a forum to enable those distressed taxing agencies, which desire to adjust their obligations and which are capable of reorganization to meet their creditors under necessary judicial control and guidance and free from coercion, and to effect such adjustment on a plan determined to be mutually advantageous.

Historically the early bankruptcy statutes were of limited duration, and were intended to provide methods whereby insolvent and failing debtors could be relieved of overwhelming burdens and thus be enabled to make a new start under favorable conditions which generally followed periods of great depression. This bill has a 3-year limitation. That is considered ample time to effect necessary compositions. Permanent legislation of this character, would tend to affect adversely the financial problems of taxing agencies, and the committee, while not expecting unfailing foresight by public officials, cherishes the view that public contracts, especially, should be scrupulously performed whenever possible.

As an aid to insolvent taxing districts, Congress has authorized the Reconstruction Finance Corporation to make loans to such instrumentalities within safe limits as to security and duration. Through this channel, districts and agencies eligible for relief under the pending legislation can apply to the Reconstruction Finance Corporation for sufficient funds to compose their debts. Many acceptable applications are now pending, and others will be made if this bill is enacted into law. Many defaults in public obligations can be removed, and the welfare of thousands of citizens can be promoted by the passage of the bill.

84

[CHAPTER 41]

PUBLIC LAWS-CHS. 39-41-MAR. 2-4, 1838

AN ACT

[52 STAT.

farch 4, 1938 (S. 2215] [Public, No. 430]

1898, amendments.

Agricultural compositions and extensions.

30 Stat. 544; 47 Stat.

1470.

11 U. S. C. § 203; Supp. III, 203.

Petition by farmer;

fee.

Conciliation

com

missioner, compensa

tion.

Post, p. 939.

lation commissioner, compensation.

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.

Be it enacted by the Senate and House of Representatives of the Bankruptcy Act of United States of America in Congress assembled, That subsections (b) and (c) of section 75 of an Act entitled "An Act to establish a uniform system of bankruptcy throughout the United States", approved July 1, 1898, as amended, are amended to read as follows: (b) Upon filing of any petition by a farmer under this section there shall be paid a fee of $10, to be transmitted to the clerk of the court and covered into the Treasury. The conciliation commissioner shall receive as compensation for his services a fee of $25 for each case submitted to him when a composition or extension proposal has been effected and confirmed, or $10 in each case submitted to him in which there is no confirmation, to be paid out of the Treasury upon Supervising concil. final disposition of each case. A supervising conciliation commissioner shall receive, as compensation for his services, a per diem allowance to be fixed by the court in an amount not in excess of $5 per day, together with subsistence and travel expenses in accordance with the law applicable to officers of the Department of Justice. Such compensation and expenses shall be paid out of the Treasury. If the creditors at any time desire supervision over the farming operations of a farmer, the cost of sucli supervision shall be borne by such creditors or by the farmer, as may be agreed upon by them, but in no instance shall the farmer be required to pay more than one-half of the cost of such supervision. Nothing contained in this section shall prevent a conciliation commissioner who supervises such farming operations from receiving such compensation there for as Additional fees, etc., may be so agreed upon. No fees, , or other charges shall be charged or taxed to any farmer or to his creditors by any conciliation commissioner or with respect to any proceeding under this sec Office space, equip- tion, except as hereinbefore in this section provided. The conciliation commissioner may accept and avail himself of office space,

Supervision over farmer; division of

farming operations of

cost.

forbidden.

ment, etc.