BANKRUPTCY ACT CRITICIZED

An address by CHARLES H. TUTTLE, U. S. Attorney, Southern District of New York, at the annual convention of the National Association of Credit Men, Minneapolis, June, 1929.

Three fundamental principles underlie the Bankruptcy Act; and, in my judgment, they all have failed to stand the test of experience. The first is the imposition upon the courts of the administration of bankrupt estates. The task is in its essence non-judicial, and belongs rather to the executive department. The principal questions involved are business questions for the decision of which the judges have few qualifications.

Furthermore, this burden brings upon the courts the additional responsibility of distributing patronage with the consequent entanglements with politics, personal friendships, and possible self-interests. The proper function of the courts is the decision of controversies, and whenever they step or are forced out of that function, they lose in prestige, effectiveness and public confidence. If the State of New York can efficiently liquidate an insolvent bank through its Banking Departments as a branch of the executive, there can be no good reason for thrusting upon the courts the work of salvaging the wreckage of a corner grocery store.

A second fundamental principle in the Bankruptcy Act is its reliance on active participation by creditors in the liquidation of the affairs of the bankrupt estate. Such reliance is proven unjustified by experience in the average bankruptcy.

The individual creditor is usually unwilling to send good money after bad; he accepts the first compromise which is offered to him; and control drifts into the hands of some attorney expert in bankruptcy, who gathers up claims and directs the trustee. What the law intends to be a democratic administration becomes a dictatorship by one or two individuals whose personal interests are adverse to the creditors and lie in the fees and pickings. Property when divorced from the protection of active leadership speedily becomes a prey of the parasites which the law allows to fasten upon it.

A third fundamental principle of the Bankruptcy Act is separate administration for each estate. Today except in several judicial districts each bankrupt estate must carry the overhead expense of a completely separate and independent management its separate complement of receivers, trustees, appraisers, custodians and attorneys. As a result, the wastage is enormous. Ten people are hired and paid to do the work of one.

Any sensible view of the interests of the creditors and of the business community would recognize that bankruptcy is an inevitable charge upon industry as a whole; that vast economies can be effected by pooling management; and that the cost should be borne either by the state or be distributed among the estates as a whole.

The breakdown in practice of these three fundamental principles of the Bankruptcy Act have forced trade associations and credit organizations to take over increasingly the work of supervising the administration of bankrupt estates. This new and growing movement recognizes that in every bankruptcy the interest of the business community as a whole is superior to that of the particular creditors.

The business community as a whole, or the particular trade as a whole, has a vital interest in maintaining policies which will prevent bankruptcies, suppress fraud, enforce economy and honesty in the work of salvage, and seek reconstruction rather than dissolution; whereas individual creditors are apt to think only of the immediate pecuniary

return.

In other words, in this country the trade associations by agreement among their members and without sanction of the law itself are gradually coming to do what in England the British Board of Trade does by sanction of the law, namely, supervise the administration of bankrupt estates. This extra legal development is sound because it recognizes the bankrupt estate as an economic and not a judicial problem, as the concern primarily of the trade as a whole and not of the individual creditors, and as part of collective rather than separate management.

The breakdown of these three fundamental principles of the Bankruptcy Act has also forced the judges in the second Judicial District to concentrate all receiverships in the hands of a single banking institution. This is a frank attempt to treat bankruptcy salvage as an administrative and not a judicial function; to put it and its entanglement with patronage and favoritism out of the courts as far as possible under the present law; and to obtain the economies and the increase in skill and integrity which comes from concentrating management and responsibility in a single competent and trustworthy authority.

The device, while not contrary to the statute, bears no resemblance to the methods which the statute contemplates and which are still in use elsewhere. That the device is steadily winning its way into public confidence and approval shows how fallacious were the methods which formerly prevailed and the principles of the Bankruptcy Act which those methods were supposed to reflect. Courtesy of The Credit Monthly, August, 1929.

REFEREE VETOES CREDITORS' CHOICE TRUSTEE

A decision of unusual interest to Referees which involves the right of a Referee to veto the selection of a trustee by the creditors is Matter of Leader Mercantile Co. (D. C. Texas) 13 Am. B. R. (N.S.) 40; 29 F. (2d) 570.

This case is now pending before the Circuit Court of Appeals for the Fifth Circuit and it is understood that the attorneys taking the appeal will argue that General Order XIII. giving the right of veto to the Referee is contrary to the Act. Inasmuch as the District Judge upheld the veto of the Referee on the ground that the trustee was disqualified by reason of the fact that he was manager of an Interchange Bureau, this case will be watched with interest by the National Association of Credit Men under whose direction this and many other bureaus operate.

ATTENDED C. L. L. A. CONVENTION Referee Richard Marlowe and Mrs. Marlowe, of Elmira, N. Y., attended the annual convention of the Commerical Law League of America in Montreal last July.

REFEREE THOMSON ASCENDS BENCH

Appointed by the Governor of California as a judge of the Superior Court for Fresno County, Referee T. R. Thomson, of Fresno, is closing his work and resigning. Judge Thomson is one of four judges of this Court, which is the court of general original jurisdiction in civil and criminal cases. Referee Thomson was born in Paterson, New Jersey, March 26th, 1882, and was admitted to practise in October, 1910. He was appointed Referee in November 1925 and is a member of the Commercial Law League of America and the California State Bar Association and has served as president of the Fresno County Bar Association.

HON. T. R. THOMSON

In severing his membership in this Association, Mr. Thomson says:

I have enjoyed very much my membership in this organization and the literature and correspondence received from the officers of the Association. The pleasure of assuming my new duties as Superior Judge will be mingled with regret because it will be necessary to give up my work as Referee in Bankruptcy, an office which I have greatly enjoyed during the past four years.

APPOINTED COMMISSIONER COURT OF APPEALS Owing to his appointment as a Commissioner of the Kansas City (Missouri) Court of Appeals, Referee John S. Boyer, St. Joseph, has resigned his federal position effective October 1st. Mr. Boyer served as Referee for several years. There are three Courts of Appeals in Missouri, being intermediate appellate Courts, one at St. Louis, another at Springfield, and the third at Kansas City serving the western portion of that State. This Court consists of a presiding judge, two associates and two Commissioners.

Mr. Boyer is succeeded as Referee by Col. John D. McNeely, St. Joseph of the law firm of Eastin & McNeely.

CHOSEN STATE COURT JUDGE

Upon his selection as Judge of the Fourth Judicial District in Idaho, former Referee Doran H. Sutphen, of Gooding, resigned as such in April last. He is succeeded as Referee by Ross Haddock, of Shoshone. Judge Sutphen has been engaged in practice since 1907. He is one of sixteen District Judges in the state of Idaho and is empowered to fix the dates for the terms of court which he holds. He was appointed a Referee in 1927.

BAR ASSOCIATION PRESIDENT After a year's service as president of the North Dakota Bar Association, Referee John H. Lewis, of Minot, N. D., a charter member of this Association retired at the close of the annual meeting of that organization at Valley City, N. D., September 5th and 6th. The president, Referee Lewis delivered the annual address. President Lewis declared:

Many of the technicalities of our criminal law could be repealed with little loss of safety to the innocent, and much improvement in the punishment of the guilty, at the same time retaining such substantial saefguards as are not in their essence technicalities, but provisions against a sort of mob justice.

MINNESOTA REFEREES HONORED

Three Minnesota Referees in Bankruptcy have been elected members of the Board of Governers of the Minnesota State Bar Associations by their respective affiliated Judicial District Associations. Referee Ernest W. Campbell, Litchfield, who has served as Referee since 1899, is a new member of the Board. Referee Horace W. Roberts, of Mankato, was re-elected, and Referee Herbert M. Bierce, of Winona, was again returned. Mr. Bierce's service on the Board commenced in 1925.

IS ON INSTITUTE COUNCIL

U. S. District Judge Arthur J. Tuttle, of the Eastern District of Michigan was elected a member of the Council of the American Law Institute at its seventh annual meeting in Washington last May.

JUDGES ON NATIONAL BODY

Among the members of "The National Commission on Law Observance and Enforcement", appointed by President Hoover, are U. S. Circuit Judge William S. Kenyon, of Iowa, and U. S. District Judges William I. Grubb, of the Northern District of Alabama, and Paul J. McCormick, of the Southern District of California.

NEW REFEREE ENJOYS JOURNAL

The appointment of John T. Taylor of State College, Pennsylvania as a Referee in Bankruptcy for Centre County was made three months after his admission to the bar. He is a graduate of Alleghany County and a Rotarian. In speaking of the Journal of the Association, Referee Taylor said:

I have read your Journal which you so kindly sent me from cover to cover and have found in it a great deal of useful information. The fact of the matter is I found the answers to several questions that were bothering me just a bit in the copy you sent me. I personally would like to have a Journal of this kind come to me monthly but I notice that it is published on a quarterly basis.

F ETHICS

THE

(a) With the Judge

He shall promptly hear, determine and report upon matters referred to him by the Judge.

(b) With the Department of Justice

He shall willingly and cheerfully give every assistance to the Department of Justice in making its examinations of his offices as provided by law, and shall give to the Department from time to time such information as it may require. (c) With the other Officers and the Employes of the Court (1) He shall cooperate courteously and effectively with the other officers of the Court in expediting the work of his office.

(2) He shall in the appointment of receivers, and in authorizing the employment of auctioneers, investigators, auditors and others, be governed by no other consideration than the speedy and economical administration of estates and shall exact of them efficient service and complete and prompt reports.

(3) In the employment of clerical assistants he shall exercise the same care, show the same consideration, require the same service and pay the same compensation, as he would as a fair, considerate and just employer in any other capacity.

(d) With Attorneys –

(1) He shall not authorize the employment of counsel unless actually necessary.

(2) He shall not tolerate divided or "split" fees, so-called, between attorneys, (except between attorneys appearing jointly of record), between attorneys and officers and employes of the Court, or between such officers and employes or either of them.

(3) He shall discourage the solicitation of claims for the purpose of attempting improperly to control the adminis

tration of estates.

(4) He shall do everything in his power to break up any combinations, which have for their object the improper control of the administration of bankrupt estates.

(e) With Creditors —

(1) He shall administer estates with absolute impartiality as between claimants in accordance with their legal rights as they may be made to appear, and pursuant to his oath of office, "do equal right to the poor and to the rich,"

constantly having in mind that each estate is before him for rightful disposition and that it is of no concern to him whether it goes to secured, priority, or general creditors, to reclamation petitioners or to others, as long as it is distributed in accordance with rights prescribed by law.

(2) He shall always remember that the property he is administering is, generally speaking, the property of the creditors; that he is in a sense their steward and bound to handle it for them as expeditiously and economically as possible; and that this means that he shall not receive himself nor permit anyone else to receive from any estate under administration anything more than is honestly, fairly and legally deserved.

BACK NUMBERS OF THE JOURNAL Fifteen copies of each issue of the Journal have been set aside in a permanent file. There is a sufficient number of copies of previous issues to supply those Referees in Bankruptcy who are interested in preserving a complete file of the Journals. Therefore, if you are interested in this, please check up on your present file and wherein issues are not found write the Secretary for the missing numbers. Newer appointees may be interested in procurring the earlier issues of the Journal As a matter of information it may be stated that there were two issues each of Volumes One and Two and Four issues of Volume Three.

THE BANKRUPTCY INQUIRY

The recent inquiry which has been made into bankruptcy practice and procedure which has been conducted in New York City, is fraught with consequences of considerable moment to the future of the bankruptcy law and its administration. This investigation was commenced by U.S. District Attorney Charles H. Tuttle and a grand jury in the Southern District of New York, and has been completed before U. S. District Judge Thomas D. Thacher of that bench by Colonel William J. Donovan and staff under the auspices of the bar associations of New York. The inquiry has been completed as far as public hearings are concerned but at this writing the report of Colonel Donovan has not been made.

This inquiry resulted from the disclosures made to a federal grand jury several months ago incident to the defalcations of one David Steinhardt, a member of the New York bar, who acted as receiver of various bankruptcy estates under judicial appointment and who was found to be seriously in default. Mr. Steinhardt was indicted by the Federal grand jury along with others. He was later apprehended in Philadelphia but was successful in taking his own life before he could be returned to New York. Just prior to this act he mailed to Mr. Tuttle an extended statement relative to bankruptcy affairs which was used by the latter in further grand jury inquiry. During the grand jury inquiry charges against then U. S. District Judge Francis A. Winslow of New York were preferred in the national House of Representatives, who, in consequence tendered his resignation to President Hoover on April first. This general inquiry, at its commencement, was conducted in private for several weeks giving particular attention to the administration of specific bankruptcy estates. The purpose was to enable parties interested in the particular estates investigated to explain their conduct without being embarrassed by publicity, but all irregularities justifying a reference to the grand jury were so made. Among the disclosures coming to light and given some publicity were the actiitcvies of the so-called "bankruptcy ring".

In the course of his investigation Colonel Donovan sent out to 600 lawyers who in the last two years have handled several thousand bankruptcy cases, a printed questionnaire calling for answers under oath, which questionnaire the recipient was required to answer or to respond to a subpoena for questioning. It is understood that a ready response was made by all recipients.

In this public inquiry, examination was first made into the conduct of individual estates where it was believed that the best results would be achieved through publicity and into the general practice of lawyers and trade associations in the handling of bankruptcies. Later it took on a more general aspect and included the expression by interested parties as to bankruptcy administration generally and the Canadian system, as well as into the methods adopted by adjustment bureaus.

In referring to prior investigations made by the National Association of Credit Men, the Commercial Law League of America, the Merchants Association of New York, the American Bar Association, and other organizations, Colonel Donovan pointed out that none of these organizations had the power to subpoena witnesses, hence in his opinion their findings were largely based upon hearsay.

Colonel Donovan revealed that he had written to officials

having bankruptcy cases in their jurisdiction in twenty-five American cities of more than 250,000 population. Referees in fifteen smaller cities also had been asked to tell their experiences and to make recommendations.

Further continuing his statement, he said:

Under the direction of Prof. William O. Douglas of the Yale Law School who is both a teacher and student of bankruptcy law, a group of investigators has undertaken the project of preparing an analysis of English, French, Canadian and German bankruptcy systems, a history and analysis of various bankruptcy acts adopted from time ot time in this country and an analysis of the principle court rules in all the different districts of this country.

In explaining his procedure Colonel Donovan stated that a statistical record was made of some 5,000 bankruptcy cases which had been compiled under the supervision of the National Association of Credit Men instituted in the New York district since January 1, 1927. From this it was ascertained that some 23 lawyers controlled the great bulk of the bankruptcy practice in that district. An examina