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. 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. We 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 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 feet. According to the terms of the lease no adversquare tising 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. to the trustee and his attorneys, or for motives of an even more questionable nature. To say that the creditors are to blame for the situation does not meet the issue. The law should recognize the situation which it has created, and should, itself, provide means of insuring to creditors the rights and privileges which it permits them. All of these factors combined, the cumbersome legalistic mechanism, the delay, red tape and expense, the chicanery and fraud thus fostered, have led business men quite generally throughout the country to seek means of liquidating insolvent estates out of court whenever possible. Bankruptcy has come to be looked upon only as a last resort when every other means of liquidation or settlement has failed. Your committee is firmly of the opinion that the theory of the democratic control of bankruptcy by creditors is sound, and that no safe substitute for this theory can be found. In the face of proposals from many sources in recent years for the disfranchising of creditors and setting up of an official system of liquidation through the courts, the National Association of Credit Men have stood squarely and unequivocally against the elimination of creditors' rights. Your committee is more than ever convinced of the correctness of this position, but it believes that radical changes in the existing methods of administration are necessary to make creditors' control a fact and not a theory. One of the most glaring deficiencies in the present system is the lack of any appropriate tribunal by which complaints against those charged with the administration of bankrupt estates may be considered. Judicial supervision of trustees and receivers has, in your committee's judgment, been a dismal failure, as is made abundantly evident by the disclosure of irregularities in the accounts of receivers and trustees, which came to light in the Southern District of New York last Spring. Had there existed at that time such machinery as your committee believes should be created for the direction and supervision of bankruptcy, no such scandal could ever have developed, for the irregularities would have become the subject of prompt complaint, and the offenders would have been speedily and summarily disciplined. It would seem unnecessary to point out the far-reaching consequences of the revelation of such conditions as were revealed in this district, and which will, it is safe to assume, be duplicated in other large cities and in other federal districts if the present system continues. Confidence in the bench and bar is impaired, honorable and conscientious judges are subjected to unwarranted criticism, and impetus is given to the efforts of unthinking persons to seek to repeal the Bankruptcy Act. The National Association of Credit Men was organized in 1896, at a time when there was no federal bankruptcy statute, and immediately upon its organization, the association adopted as one of its principal objects, the enactment of such a law. It has ever since been an unfailing supporter of the statute and has resisted every effort for repeal, every movement which might impair its efficiency. Economic conditions in the United States, have, however, changed materially since 1898. Business is today transacted on a nation-wide scale, and a system of administration, which was adapted to business as it was transacted at the time of the Spanish-American War, is no longer practical or satisfactory. With the substantive provisions of the Act, your committee finds no serious dissatisfaction. The amendments to the criminal provisions, and to the provisions with respect to discharges, which were sponsored by the National Association of Credit Men in 1926, have, in the main, proven effective. We do not recommend that any immediate change be made in the substantive provisions of the law, but feel that they may properly be the subject of future consideration with a view to meeting some problems still unsolved. A ADMINISTRATIVE REFORMS We are, however, strongly in favor of a sweeping revision of the act with a view to accomplishing the following results: (a) Taking away from the courts the responsibility for the selection of the administrative officers, and vesting the same in the Executive Branch of the Government; (b) Speeding up the administration of the act by eliminating cumbersome and unnecessary machinery; (c) Increasing the effectiveness of creditors' control (1) by giving official recognition to committees of creditors, to be charged with the duty of advising and assisting the trustee in the performance of his duties; and (2) by safeguarding the exercise of the creditors' franchise in such manner that they may, when they desire, have an actual voice in the selection of the trustee; (d) Eliminating the dual system of administration first by a receiver and then by a trustee, by consolidating these functions in a single officer to be selected by the creditors; (e) Placing upon the trustee and the creditors' committee the joint responsibility for determining questions of business policy, and taking from the courts the decision of such questions except in case of disagreement between the creditors' committee and the trustee; (f) Providing an adequate and effective means of investigation of administrative defects and abuses; and (g) Securing for bankruptcy the economies of time. and money which have been proved possible in liquidations out of court. In the opinion of your committee, these ends can be accomplished by the adoption of a program, such as that recommended by Colonel Donovan in his report. Specifically, we recommend: I-FEDERAL BANKRUPTCY COMMISSION. That there be created a permanent Federal Bankruptcy Commission, to be appointed by the President of the United States, which would have the following powers. and duties: (a) Supervising and co-ordinating of the whole field of bankruptcy administration; the making of rules to regulate administrative procedure; the compiling and publishing of statistics and other data relating to administration; and investigating complaints by creditors and others against liquidating officers, judges and referees. (b) The issuing of licenses to individuals or corporations to act as Trustee in Bankruptcy in the several federal districts. Such licenses, in your committee's judgment, should be issued without limitation as to number, to such applicants as might comply with certain standard qualifications to be fixed from time to time by the Commission. We would recommend that, in New York and Chicago, these qualifications should include the filing of a bond in an amount to be fixed by the Commission, but not less, in any event, than $100,000. in the case of any individual, and the Commission should be satisfied of the moral integrity, efficiency and capacity of the applicant. Public hearings should be held by the Commission with respect to the qualifications of applicants before licenses are granted, and the Commission should set up in each district an advisory committee of business men and bankers to serve without pay, and whose advice should be sought with respect to each applicant. Such licensed trustees should be subject to removal for cause and after proper opportunity to be heard. Creditors and other parties in interest should be |