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Voluntary Involuntary reorganizations.

Subdivision (C) on page 7 I think is extremely important. This is the section that is designed to take care of the voluntary reorganization that ends up in bankruptcy or receivership. One of the very oppressive practices which has prevailed has been the following: A company on the eve of default, sensing that it has to go through reorganization or in an effort to avoid default, forms a committee and gets in deposits of securities with the committee; then it goes into reorganization, goes into 77B. Very frequently it goes in with perhaps 80 percent, or 70 percent or even 90 percent of the security holders who have already given a deposit or proxy in support of the particular plan.

Under section 77B as presently constituted-not the Chandler bill as proposed, but 77B as presently constituted—that plan, cooked up. outside of the court, stands as the plan which meets the requirements of 77B so far as the consent of security holders is concerned. The result of that has been this: That most of the work of reorganization under 77B has not been performed by the court but has been done outside of the court by a committee which has proxies with a stated vote in favor of the plan. And the hands of the court, in many cases of that kind, are tied, although the approval of the plan by the court is necessary; for to require the committee to turn back securities to the security holders and to start all over again is a difficult thing for the court to do. The result has been a streamlined procedure, with the court doing little more than putting into effect a plan that has not been really supervised or scrutinized by the court in any realistic sense. That is the practical result where the plan first comes before the court after the required number of votes in favor of the plan has been received. Section 10 (a) (4) (C) of the Lea bill would require that the authority conferred by proxies, deposits, or assents in respect of a plan of voluntary readjustment shall cease and any deposited securities shall be returned to the respective depositors (1) if reorganization proceedings are instituted by or against the issuer, and (2) if, in the case of such proceedings instituted against the issuer and not consented to by the issuer, such proceedings have not been dismissed within 60 days.

Mr. WOLVERTON. Is it your assumption that under the condition you have just referred to that the court has no jurisdiction in the matter under 77B?

Commissioner DOUGLAS. Oh, the court has jurisdiction; the court has to approve the plan.

Mr. WOLVERTON. You spoke of a "streamlined" procedure.

Commissioner DOUGLAS. It is.

Mr. WOLVERTON. I gathered from your remark you felt that the court was precluded from doing anything as to effectively supervising the plan by reason of the fact that proxies had been filed by individual security holders.

Commissioner DOUGLAS. Well, the votes in favor of the plan are in. Mr. WOLVERTON. Yes; and that precludes the court

Commissioner DOUGLAS (interposing). Of course, the court has jurisdiction, and could upset the plan and start over again, certainly. Mr. WOLVERTON. In the final analysis, does it require the court's approval?

Commissioner DOUGLAS. That is correct.


Mr. WOLVERTON. My experience in these matters has been that the court action is anything but a streamline procedure.

Commissioner DOUGLAS. I am speaking of one type of case. Mr. WOLVERTON. I have not had an experience of the kind you are relating. My experience has been quite the contrary. The courts have been very vigilant in their supervision of reorganization. Commissioner DOUGLAS. I am talking of this type of case. I am talking about the type of case where in advance of the filing of the petition under 77B the committee has got together and prepared a plan and has gotten the security holders lined up for that plan; they have submitted that one plan to the court (the only plan that is before the court) only after they have gone out and got the security holders lined up for that plan.

Mr. WOLVERTON. That does not preclude the court from supervising the reorganization.

Commissioner DOUGLAS. As a theoretical matter you are right; but as a practical matter, in this type of case, the result has been a streamlined proceeding.

Mr. WOLVERTON. I am saying that as a practical matter, and not as a theoretical matter, the courts with which I have had experience have been very careful in their examination of the agreements. Maybe you have had some experience with courts that were not as careful and of course, our observations must be based upon the experience which we each have had in this matter.

Commissioner DOUGLAS. My observation has been that in this type of voluntary-involuntary reorganizations, plans have been somewhat of low proportion in the history of reorganization in this country. They have, as a practical matter, been pretty much beyond the supervision and scrutiny in a realistic sense on the part of the court. But that is a matter of judgment on the basis of cases before us.

We have summarized that matter (pp. 871-872 of pt. I of our report) as follows:

Conservation receivership proceedings have constituted the bulk of reorganizations in equity receivership. Yet occasionally a receivership has been employed which outwardly had the same general features of the more customary conservation receivership but which functionally operated quite differently. This was the so-called short receivership. It had as its sole objective the use of judicial machinery to consummate a plan substantially completed before the proceedings were instituted. Such a plan would have previously been submitted to security holders by the management or the bankers as a so-called voluntary plan. If the assents of less than 100 percent of the security holders were obtained, the management might experience difficulty and embarrassment in consummating the plan. Hence, by necessity or by preference the management would sometimes resort to receivership.

One important aspect of this procedure was the pressure that the inside group was thereby enabled to exercise upon the court's approval of such voluntary plans of reorganization. The plan was presented to the court with the support of a substantial number of assents already behind it. There was little likelihood that the court would disapprove the plan, or would require material alterations in its terms.

In effect, where the receivership proceedings have been preceded by the submission of a voluntary plan, the reorganization process is largely free from any judicial supervision. The machinery of the law is reduced to convenient mechanics for effectuating the plan of the management and its bankers. And under section 77B of the Bankruptcy Act this sanction of voluntary plans is not only preserved-it is strengthened. A debtor intending to utilize section 77B in the last stages of effecting an otherwise voluntary plan, as a means of binding dissenters and, by that token, dispensing with the necessity of cash payment to them, will find in the statute express sanction for the practice. Proponents of

voluntary debt readjustments should not be permitted to have the imprimatur of Federal courts placed on their plans so easily and so expeditiously.

Deposit agreements.

Subdivision (5) of section 10 (a), at the bottom of page 37, is a legislative standard for deposit agreements. Our observations, as revealed in part I of the report to Congress, are to the effect that by and large deposit agreements should be outlawed; that deposit agreements, by and large are unnecessary, costly and oppressive; that the vital work of the committee can be performed without deposit agreements but with the use of proxies. Our recommendations in part I were that deposit agreements be outlawed except in necessitous situations, except where the use was necessary or where the use was approved in the interest of the investor. (Pt. I, p. 907; for a discussion of the abuses of deposit agreements see pp. 585 et seq. of pt. I.) There are some cases where the use is necessary and approved.

Municipal committees.

Take the case of the municipal committee. The municipal committee has one legal remedy against the municipality and that is a mandamus proceeding. Now to maintain a mandamus proceeding in the Federal court and to establish the necessary jurisdiction, the committee has to be a trustee of an express trust, as decided by the Supreme Court in the Cisco case; to be a trustee of an express trust it has to have the bonds in its possession; it has to be the holder of the legal title (290 U. S. 179). Those deposit agreements have to be very carefully drawn. See pages 44 et sequentia of part IV of our report. So to outlaw deposit agreements 100 per cent would create an injustice and be unnecessary.

Deposits Bidding at judicial sales.

Subdivision (5) of section 10 (a) sets forth the various conditions under which a deposit agreement can be used. The first relates to the tender of the deposited securities in order to bid for or purchase assets of the issuer at a judicial sale, as may be necessary under some State laws. Commonly the tender can be made with the bonds. In such case the deposit of securities for that purpose could be used so as to give the committee the benefit of their purchasing power. Subdivision (B) provides

Mr. HOLMES (interposing). They would have to get the permission of the Commission before they could solicit deposits.

Commissioner DOUGLAS. If this bill were law today, the Congress would have said that the committee could solicit deposits for the purpose of bidding in the assets at a judicial sale and that the Commission would have no jurisdiction except the jurisdiction to look at that deposit agreement and see that it gave only permission to do what Congress authorized.

Mr. HOLMES. The law is the same as this?

Commissioner DOUGLAS. It is commonly necessary for municipal committees to use deposit agreements. Railroad and every other committee would have that right unless

Mr. HOLMES (interposing). Under the Chandler bill railroads are exempted.

Commissioner DOUGLAS. Railroads are exempted under this.
Mr. HOLMES. It does not say so.
Commissioner DOUGLAS. I believe so.

Mr. HOLMES. You need not go back. Under the Chandler bill, section 4, under who may be-any person, except municipalities, railreads, banks, loan associations, insurance companies, and so forth. Commissioner DOUGLAS. Yes, that is correct. Now if you will turn back to page 15, section 3 (a) (2) of this bill you will see the exemptions of sclicitation in connection with the reorganization of railroad corporations, as such term is defined in subsection (m) of section 77 of the Bankruptcy Act. Section 3 describes the other solicitations that are


Mr. WOLVERTON. Are municipal securities exempted under the present legislation?

Commissioner DOUGLAS. From registration under the Securities Act; that is right.

Mr. WOLVERTON. Why do you include them within this act when they are exempted from the other act?

Commissioner DOUGLAS. There are two different things. Under the Securities Act if X town or municipality wants to sell some bonds, it does not have to register. And under this act the same exemption as respects X town prevails. The exemption that is not permitted is where you and I, for example, are not working for X town; but you and I are speculators, or bankers, or qualified bondholders who are trying to get deposits.

Now, then, that relates not to the issuance of securities by X town but to the issuance of certificates of deposits or the obtaining of proxies by a committee. Hence the exemption of X town from this act is not enjoyed by you and me in the solicitation of deposits or proxies from the holders of the securities of X town.

Mr. WOLVERTON. Mr. Chairman, I would like to bring up at this time the question of municipal securities and refinancing for the reason that tomorrow I will be compelled to be absent, attending the funeral of a relative.

The CHAIRMAN. Very well. Is that agreeable with you, Mr. Douglas?

Commissioner DOUGLAS. Oh, yes.

Mr. WOLVERTON. I have before me a communication from Mr. J. H. Thayer Martin, the tax commissioner for the State of New Jersey, who is a member of the Municipal Finance Commission of the State of New Jersey. He states that the State auditor, the attorney general, and himself constitute in New Jersey a commission called the Municipal Finance Commission, which has jurisdiction over insolvent municipalities. He states in a letter to me [reading]:

We have about one dozen under our wing, and have acquired a great deal of information and experience in connection with municipal refinancing.

Then he adds this further statement [reading]:

We feel this bill goes very much too far in an effort to cure the admitted evilsHe is referring to the bill under discussion [continuing reading]:

It infringes very seriously on the power and authority of the State in connection with its municipalities, and it would put municipal refinancing altogether too much at the mercy of a Federal bureaucracy.

We do not believe that this bill is the sound method of attempting to cure the evils complained of. We believe we have worked out a very much more effective method in New Jersey based on court supervision on the municipal refinancing with the advice of a State commission such as we have in New Jersey, and we, therefore, think it would be much better to strike out of the bill completely all reference to municipal financing or refinancing and limit its operations to corporate reorganizations.

Commissioner DOUGLAS. Now, I do not have at my fingertips the details of the finance commission, that is, the jurisdiction that is referred to there, but we have made some study of that commission and we discussed that phase of the whole problem in our municipal protective committee report. See part IV, pages 103 et sequentia. And certainly as I read this bill it is the intent not to interfere one iota with a municipality, or one iota with any State agency such as the New Jersey commission, which, as you probably well know, is rather a rare type of commission in this country. The Lea bill does not interfere with the work of such a commission. As I read this bill the only power that the commission would have, if this bill became law, would be to look at the personnel of committees, and to look at the proxies, or look at the deposit agreement of the municipal protective committees, and apply the statutory standards in this bill. When that was done then the jurisdiction of the commission would cease.

Mr. WOLVERTON. Would the bill preclude a municipality from selecting the agency it pleases?

Commissioner DOUGLAS. The bill, on page 16, exempts any solicitation of municipal securities, where the solicitation is made by the issuer, by the municipality, or by the guarantor (sec. 3 (a) (8)). Mr. WOLVERTON. What line on page 16?

Commissioner DOUGLAS. It goes on to say, beginning with line 11: This exemption shall not apply to any such solicitation by any person who occupies the position of independent contractor with respect to, or agent not in the regular employ of such issuer or guarantor.

Mr. WOLVERTON. What is meant by "independent contractor"? Commissioner DOUGLAS. Independent contractor is the conventional legal phrase that means—well, it is a long definition, and has a distinct and generally accepted meaning.

Mr. WOLVERTON. Does "independent contractor" have any different meaning as used in this bill than the generally accepted meaning?

Commissioner DOUGLAS. I do not think so.

Mr. WOLVERTON. Suppose then that a municipality employs a bonding house in New York City for the purpose of refinancing its indebtedness, and in compliance with that contractual relationship existing between the municipality and the brokerage house in New York it became necessary to obtain consents from holders of the municipal securities. Would that independent contractor come within the provisions of this bill?

Commissioner DOUGLAS. I should think so; I think he would be included within the phrase "independent contractor" as used in section 3 (a) (8).

Mr. WOLVERTON. That is my opinion, too.

Commissioner DOUGLAS. I should think so.

Mr. WOLVERTON. So to that extent it precludes the municipality from selecting by contract any individual to do the things which are necessary to bring about refinancing of its obligations.

Commissioner DOUGLAS. I am not sure that I would agree with its being necessary to bring about refinancing.

Mr. WOLVERTON. The independant contractor comes within the provisions of the bill and to that extent the municipality is governed by the provisions of this bill.

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