Regulating the Recovery of Portal-to-portal Pay, and for Other Purposes

(g) Paragraph (4) of subdivision d of such section is amended to read as follows: "(4) Every transfer of partnership property and every partnership obligation incurred within one year prior to the filing of a petition initiating a petition under this Act by or against the partnership, when the partnership is insolvent or will be thereby rendered insolvent, is fraudulent as to partnership creditors existing at the time of such transfer or obligation, without regard to actual intent if made or incurred (a) to a partner, whether with or without a promise by him to pay partnership debts, or (b) to a person not a partner without fair consideration to the partnership as distinguished from consideration to the individual partners." (h) Paragraph (5) of subdivision d of such section is amended to read as follows:

"(5) For the purposes of this subdivision d, a transfer shall be deemed to have been made at the time when it became so far perfected that no bona fide purchaser from the debtor could thereafter have acquired any rights in the property so transferred superior to the rights of the transferee therein, but, if such transfer is not so perfected prior to the filing of the petition initiating a proceeding under this Act, it shall be deemed to have been made immediately before the filing of such petition."

SEC. 17. Subdivision d of section 69 of such Act, as amended, is amended to read as follows:

"d. Upon the filing of a petition under this Act, a receiver or trustee, appointed in proceedings not under this Act, of any of the property of a bankrupt, an assignee for the benefit of creditors of a bankrupt, or an agent authorized to take possession of or to liquidate any of the property of a bankrupt shall be accountable to the bankruptcy court, in which the proceeding under this Act is pending, for any action taken by him subsequent to the filing of such bankruptcy petition, and shall file in such bankruptcy court a sworn schedule setting forth a summary of the property in his charge and of the liabilities of the estate, both as of the time of and since becoming receiver, trustee, assignee, or agent, and a sworn statement of his administration of the estate. Such receiver, trustee, assignee, or agent, with knowledge of the filing of such bankruptcy proceeding, shall not make any disbursements or take any action in the administration of such property without first obtaining authorization therefor from the bankruptcy court."

SEC. 18. (a) The introductory sentence of subdivision a of section 70 of such Act, as amended, is amended to read as follows:

"a. The trustee of the estate of a bankrupt and his successor or successors, if any, upon his or their appointment and qualification, shall in turn be vested by operation of law with the title of the bankrupt as of the date of the filing of the petition initiating a proceeding under this Act, except insofar as it is to property which is held to be exempt, to all (1) * * * 11

(b) Paragraph (2) of subdivision e of such section is amended to read as follows:

"(2) All property of the debtor affected by any such transfer shall be and remain a part of his assets and estate, discharged and released from such transfer and shall pass to, and every such transfer or obligation shall be avoided by, the trustee for the benefit of the estate: Provided, however, That the court may on due notice order such transfer or obligation to be preserved for the benefit of the estate and in such event the trustee may enforce the rights of such transferee or obligee. The trustee shall reclaim and recover such property or collect its value from and avoid such transfer or obligation against whomever may hold or have received it, except a person as to whom the transfer or obligation specified in paragraph (1) of this subdivision e is valid under applicable Federal or State laws."

(c) Subdivision h of such section is hereby repealed and subdivision "i" of such section is relettered to read subdivision "h".

SEC. 19. Section 221 of such Act, as amended, is amended by inserting "a" after "SEC. 221." and before "The judge * * *", and by inserting at the end of such section a new subdivision:

"b. The judge shall, in the order confirming the plan, fix the time when the trustee or debtor in possession shall cease to operate the business and manage the property of the debtor after which time such business and property shall be operated and managed by the debtor or other corporation or corporations provided for by the plan. Notice of the time fixed shall be given, in such manner and to such persons as may be specified by order of the judge, at least ten days before the expiration of such time. If such time is extended, like notice shall be given at least ten days before the expiration of the period of extension."

Sec. 20. Section 222 of such Act, as amended, is amended to read as follows: "SEC. 222. A plan may be altered or modified, with the approval of the judge, after its submission for acceptance and before or after its confirmation, and before

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or after the final time fixed under section 221b of this Act, if, in the opinion of the judge, the alteration or modification does not materially and adversely affect the interests of creditors or stockholders. If the judge finds that the proposed alteration or modification, filed with his approval, does materially and adversely affect the interests of creditors or stockholders, and if the proposed alteration or modification is filed before the final time fixed under section 221b of this Act, he shall fix a hearing for the consideration, and a subsequent time for the acceptance or rejection, of such alteration or modification, and the requirements in regard to notice of hearing, to submission to the Securities and Exchange Commission, to acceptance, to filing and hearing of objections to confirmation and to the confirmation, as prescribed in article VII of this chapter in regard to the plan proposed to be altered or modified, shall be complied with."

SEC. 21. Paragraph (3) of section 238 of such Act, as amended, is amended to read as follows:

"(3) only such claims as are provable under section 63 of this Act shall be allowed, and claims not already filed may be filed prior to the expiration of six months after the first date set for the first meeting of creditors as provided in section 55 of this Act, or, if such date has been previously set, then prior to the expiration of three months after the mailing of notices to creditors of the entry of the order directing that bankruptcy be proceeded with." SEC. 22. Chapter X of such Act, as amended, is amended by inserting at the end of article XI of such chapter the following new section:

"SEC. 239. Where, after the final time fixed under section 221 (b) of this Act, the judge shall enter an order directing that bankruptcy be proceeded with

(1) the unsecured debts incurred by the debtor in the operation of its business and the management of its property after the time fixed in such order shall, unless and except as otherwise provided in the plan or in the order confirming the plan, share on a parity with the prior unsecured debts of the same classes, provable in the ensuing bankruptcy proceeding, and for such purpose the prior unsecured debts shall be deemed to be reduced to the amounts respectively provided for them in the plan or in the order confirming the plan, less any payment made thereunder: Provided, however, That if the plan is grossly inequitable because of fraud, the extent to which such prior unsecured debts shall share in the ensuing bankruptcy proceeding shall be adjusted to cure such inequity; and

(2) the provisions of chapters I to VII, inclusive, of this Act shall, insofar as they are not inconsistent or in conflict with the provisions of this section, apply to the rights, duties, and liabilities of the creditors holding debts so incurred after the time fixed under section 221b of this Act, and, for the purposes of such application, the date of bankruptcy shall be taken to be the date of the entry of the order directing that bankruptcy be proceeded with." SEC. 23. Paragraph (11) of subdivision a of section 265 of such Act, as amended, is amended, to read as follows:

"(11) the orders directing that bankruptcy be proceeded with, or adjudging the debtors bankrupt and directing that bankruptcy be proceeded with or dismissing proceedings;".

SEC. 24. Section 355 of such Act, as amended, is amended to read as follows: "SEC. 355. Upon the entry of an order under the provisions of this chapter directing that bankruptcy be proceeded with, only such claims as are provable under section 63 of this Act shall be allowed and, except as provided in section 354 of this Act, claims not already filed may be filed within six months after the first date set for the first meeting of creditors, held pursuant to section 55 of this Act, or, if such date has previously been set, then within three months after the mailing of notice to creditors of the entry of the order directing that bankruptcy be proceeded with."

SEC. 25. Chapter XI of such Act, as amended, is amended by renumbering "SEC. 379" to read "SEC. 380." and "SEC. 380." to read "SEC. 381.", and by inserting in its numerical order the following new section:

"SEC. 379. Where, after the confirmation of an arrangement, the court shall enter an order directing that bankruptcy be proceeded with

"(1) the trustee shall, upon his appointment and qualification, be vested with the title to all the property of the debtor as of the date of the entry of the order directing that bankruptcy be proceeded with;

in the ensuing bankruptcy proceeding, and for such purpose the prior unsecured debts shall be deemed to be reduced to the amounts respectively provided for them in the arrangement or in the order confirming the arrangement, less any payment made thereunder; and

"(3) the provisions of chapters I to VII, inclusive, of this Act shall, insofar as they are not inconsistent or in conflict with the provisions of this section, apply to the rights, duties, and liabilities of the creditors holding debts incurred by the debtor after the confirmation of the arrangement and before the date of the final order directing that bankruptcy be proceeded with, and of all persons with respect to the property of the debtor, and, for the purposes of such applications, the date of bankruptcy shall be taken to be the date of the entry of the order directing that bankruptcy be proceeded with." SEC. 26. Section 459 of such Act, as amended, is amended to read as follows: "SEC. 459. Upon the entry of an order under the provisions of this chapter directing that bankruptcy be proceeded with, only such claims as are provable under section 63 of this Act shall be allowed, and claims not already filed may be filed within six months after the first date for the first meeting of creditors, held pursuant to section 55 of this Act."

SEC. 27. Chapter XII of such Act, as amended, is amended by renumbering "SEC. 484." to read "SEC. 485." and "SEC. 485." to read "SEC. 486.", and by inserting in its numerical order the following new section:

"SEC. 484. Where, after the confirmation of an arrangement, the court shall enter an order directing that bankruptcy be proceeded with

"(2) the unsecured debts incurred by the debtor after the confirmation of the arrangement and before the date of the entry of the final order directing that bankruptcy be proceeded with shall, unless and except as otherwise provided in the arrangement or in the order confirming the arrangement, share on a parity with the prior unsecured debts of the same classes, provable in the ensuing bankruptcy proceeding, and for such purpose the prior unsecured debts shall be deemed to be reduced to the amounts respectively provided for them in the arrangement or in the order confirming the arrangement, less any payment made thereunder; and

SEC. 28. Section 644 of such Act, as amended, is amended to read as follows: "SEC. 644. Upon the entry of an order under the provisions of this chapter directing that bankruptcy be proceeded with, only such claims are are provable under section 63 of this Act shall be allowed and, except as provided in section 643 of this Act, claims not already filed may be filed within six months after the first date set for the first meeting of creditors, held pursuant to section 55 of this Act, or, if such date has previously been set, then within three months after the mailing of notice to credi ors of the entry of the order directing that bankruptcy be proceeded with."

SEC. 29. Chapter XIII of such Act, as amended, is amended by renumbering "SEC 668." to read "SEC. 669." and by inserting in its numerical order the following new section:

"SEC. 668. Where after the confirmation of a plan, the court shall enter an order directing that bankruptcy be proceeded with

"(2) the unsecured debts incurred by the debtor after the confirmation of the plan and before the date of the entry of the final order directing that bankruptcy be proceeded with shall, unless and except as otherwise provided in the plan or in the order confirming the plan, share on a parity with the prior unsecured debts of the same classes, provable in the ensuing bankruptcy proceeding, and for such purpose the prior unsecured debts shall be

deemed to be reduced to the amounts respectively provided for them in the plan or in the order confirming the plan, less any payment made thereunder; and

(b) If any provision of this amendatory Act or the application thereof to any person or circumstances is held invalid, such invalidity shall not affect other provisions or applications of this amendatory Act which can be given effect without the invalid provision or application, and to this end the provisions of this amendatory Act are declared to be severable.

SEC. 31. EFFECT OF THIS AMENDATORY ACT.—(a) Nothing herein contained shall have the effect to release or extinguish any penalty, forfeiture, or liability incurred under any Act or Acts of which this Act is amendatory.

(b) The provisions of this amendatory Act shall govern proceedings so far as practicable and applicable in cases pending when it takes effect; but proceedings in cases then pending to which the provisions of this amendatory Act are not applicable shall be disposed of conformably to the provisions of said Act approved July 1, 1898, and the Acts amendatory thereof and supplementary thereto. SEC. 32. This amendatory Act shall take effect and be in force on and after three months from the date of its approval.

[From the Yale Law Journal, March 1948]

PROPOSED BANKRUPTCY AMENDMENTS: IMPROVEMENT OR RETROGRESSION?

(James William Moore and Philip W. Tone 2)

Congress is now considering a revision of that portion of the Bankruptcy Act 3 covering the major area of ordinary bankruptcy, corporate reorganization, and arrangements. This area was revised by the Chandler Act of 1938,1 after approximately 6 years of study by bankruptcy specialists and 2 years of study by Congress. In that constructive effort the National Bankruptcy Conference played a leading role by coordinating and articulating technical bankruptcy thought. Undoubtedly more study, experience, and careful draftsmanship went into the Chandler Act than into any other amendatory bankruptcy bill, and that act was, and has continued to be, a fine tribute to both Congress and the conference. After a 10-year interim the conference has again undertaken an extensive revision of the act and Congressmen Reed and Hobbs have quite properly re1 Professor of law, Yale Law School.

2 Graduate fellow, Yale Law School.

330 Stat. 544 (1898), as amended 11 U. S. C. (1940), as amended, 11 U. S. C. A. (Supp. 1947). Hereinafter cited by section only.

4 52 Stat. 840 (1938), 11 U. S. C. secs. 1, 11, 21-29, 32, 33, 35, 41-52, 54, 55, 62, 63, 65-70, 72-81, 91-96, 101-112, 501-676, 701-799, 801-926, 1001-1080, 1086, 1101-1103 (1940). The Chandler Act amended secs. 1-11, 14, 15, 17-29, 31, 32, 34, 35, 37-42, 44-53, and 55-72. Secs. 12, 13, 73, 74, 77A and 77B were amended and incorporated as chs. X-XIII. 52 Stat. 840 (1938). Two slight changes were made in sec. 75. Id. at 939. Sec. 76 was repealed. Id. at 940. Ch. X was renumbered ch. IX and a new subdivision 83j added. Id. at 939. Ch XIV on Maritime Commission liens was added. Id. at 938.

H. Rept. No. 1409, 75th Cong., 1st sess., 1-3 (1937).

sponded by sponsoring bills to effectuate that objective. Both the Congress and the conference are to be congratulated for undertaking a reexamination of the act and its functioning. Legislation, like court rules, demands a continuing attention to the end that ambiguities may be removed, structural defects cured, and new problems faced.

But basic structural changes should be made only where the proponents clearly establish the need, and major revisions should not be hurried through Congress. A case in point is the promulgation and subsequent revision of the Federal Rules. The rules were formulated over a period comparable to the incubation time of the Chandler Act, were the cooperative product of many specialists, and became operative at almost the precise time in 1938 as the Chandler Act. Amendments to the Federal Rules have just become effective, but a 5-year study by the advisory committee, the bench and the bar preceded their promulgation; even more significantly, the amendments made no basic changes, since the need for alteration was not clearly demonstrated. Comparable care is equally imperative in dealing with the complex Bankruptcy Act, and, here too, the proponent of basic change should clearly establish the need.

This

Since the Chandler Act of 1938 the major developments in the field of bankruptcy and reorganization are several. The enactment of the referee's salary bill, following several years of study and debate, properly incorporated the referees into the federal judiciary as salaried employees of the government, increased their term of office, and generally strengthened their tenure. decided gain was made without changing the underlying policy that bankruptcy administration must pay its own way out of the estates liquidated and reorganized. The major contribution by the Supreme Court was in two fields-reorganization and preferences. In reorganization, the Court resolved the conflict in theory between corporate reorganization under chapter X and corporate arrangements under chapter XI. Corporations of substantial size with publicly held securities may not use chapter XI, the Court ruled, even though literally within its terms, because their reorganization should be subject to the safeguards of chapter X and because chapter XI's ban on interference with stockholders' interests forestalls achievement of fair and equitable arrangements. 10 The other judicial contribution to reorganization regulation was to establish that valuation must be based upon a fair capitalization of prospective earnings," and that the absolute priority rule must be carefully and faithfully followed for a reorganization plan to be considered fair and equitable.12 The Court's addition to the law of preference 6 For a summary of this legislation see pp. 685-6 infra, and notes 12-17 infra. The National Bankruptcy Conference, organized in 1932, is composed of representatives of the National Association of Referees in Bankruptcy, the American Bar Association, the Commercial Law League of America, the National Association of Credit Men, the American Bankers Association, and the American Institute of Accountants, as well as otherwise unaffiliated lawyers and law professors. The conference has been continually active since the time of its formation in investigating and formulating improvements in bankruptcy law. In addition to playing a leading role in the preparation of the Chandler Act of 1938, the conference collaborated in the revision of the general orders and official forms in bankruptcy by the Supreme Court in 1939, collaborated with representatives of Attorney General's Committee on Bankruptcy Administration in the preparation of the bill which was eancted as the Referee's Salary Act (see note 7 infra), and has prepared other bills now pending before Congress. The present members of the conference's drafting committee are Jacob I. Weinstein, chairman, Peter B. Olney, ex officio (chairman of the conference), Watson B. Adair, Carl D. Friebolin, Fred II. Kruse, James A. McLaughlin, W. Randolph Montgomery, and John Gerdes.

Also pending or recently enacted are, among others, an act relating to railroad reorganization, e. g., Public Law No. 478, 80th Cong., 2d sess. (April 9, 1948); and competing bills on agricultural composition and extensions, the McCarran-Lemke bill, H. R. 463, 80th Cong., 1st sess. (1947), and a bill prepared by the National Bankruptcy Conference and introduced by Congressman Reed, H. R. 2451, 80th Cong., 1st sess. (1947). See Comment, 56 Yale L. J. 982 (1947). Because of the specialized nature of these fields and their severability from the other provisions of the act, we confine this article to the area covered by the Chandler Act of 1938.

7 The Chandler Act became effective on September 22, 1938, and the Federal Rules of Civil Procedure on September 16. 1 Collier, Bankruptcy 21 (14th ed., Moore and Oglebay, 1941), hereinafter cited as Collier; 3 Moore, Federal Practice 3447 (1938). 8 Federal Rules of Civil Procedure, 86.

60 Statutes 323 (1946), 11 U. S. C. A. sections 62, 63, 65, 67 (b), 68, 71, 79 (2), 79 (5), 80 (a), 81, 82 (repealed), 102 (a), 102 (b), 104 (a), 112, 517, 1024 (3), 1033 (2), 1059 (1), 1059 (3) (Supp. 1947). See The Administrative Office Reports to the Conference 21 J. N. A. Ref. Bankr. 90 (1947).

10 Securities and Exchange Commission v. United States Realty & Improvement Co., 310 U. S. 434 (1940). 11 Group of Institutional Investors v. Chicago, M., St. P. & P. R. R., 318 U. S. 523 (1943); Consolidated Rock Products Co. v. Du Bois, 312 U. S. 510 (1941): 6 Collier, par. 11.05.

12 Case v. Los Angeles Lumber Products Co., 308 U. S. 106 (1939); 6 Collier, par. 11.06.

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