wages as and when paid. Every employer must make a return in the month following the close of each quarter of the calendar year, showing and remitting the amounts withheld.86 In the case of withheld income tax, if the employer withholds more than $100 each month, he is required to pay the funds withheld to a depositary, authorized by the Secretary of the Treasury, within 10 days after the close of each calendar month.87 In administering these taxes and others where computation is simple and the likelihood of disputed assessments is slight, returns could be processed within 1 year from the due date. As applied to taxes of this nature the conference bill may well be a workable improvement on the present law. And where the bankrupt's income had been wholly or largely subject to withholding, the Government would lose little by the conference bill.

The desirability of some sort of limitation on tax priorities in bankruptcy has become increasingly evident in recent years. Under the much criticized 8 section 64a (4) of the present act, tax arrearages frequently reach so high a total that they far exceed the value of the estate, and leave nothing for general creditors. The likelihood of this result is partially responsible for the indifference frequently shown by general creditors toward bankruptcy administration-an indifference inimical to a bankruptcy administration bottomed upon creditor control. Where taxes far exceed assets, it is small wonder that creditors will not advance money for the investigation of concealment and fraud, even in such a fantastic case as the one in which a bankrupt with debts totaling a quarter of a million dollars reported assets of two hundred dollars, and claimed these as exempt. 89 The confernce hopes that the effect of the limitation on tax priority will be that tax officials will attempt to collect their claims promptly, will thus reveal the debtor's tax delinquency before it becomes too serious, and so enable other creditors to take protective steps. Money and goods supplied by creditors who, unaware of the debtor's tax arrearages, continue to extend credit, are oftentimes used by the bankruptcy trustee to pay prebankruptcy tax claims.90 While all priorities may reap a similar benefit from a kindred use of a creditor's money and goods, priorities other than taxes are more easily discoverable, can be antitipcated, and are not so disproportionate to the value of the estate to be distributed.

Elimination of priority for taxes accrued before a certain date would improve bankruptcy administration and would effect a more prompt disclosure of the financial skidding that ends with bankruptcy. A corresponding limitation on the present immunity from discharge is probably advisable, since limiting priority alone would often leave the discharged debtor with a heavier tax load than he now bears. But the proponements of a bill which effects such a drastic change have the burden of showing their measure to be not only desirable from the bankruptcy standpoint but administratively feasible taxwise as well. An act to accomplish this alteration in existing law should be preceded by a careful study of auditing, assessment and other problems of both Federal and State taxing authorities in dealing with a. variety of taxes. An estimate, based upon available statistics, should be made of the amount of Federal and State income which would be lost by the change. Finally, attention should be given to safeguarding Government from the use of bankruptcy for tax avoidance. Among the desiderata such a study would reveal would probably be that of providing different time limitations for different kinds of taxes. If the tax is relatively simple to compute, as it is where the bankrupt is liable as a tax collector, the 1-year period may give tax officials adequate time for assessment and collection. For more complex taxes, such as the Federal income tax, the period should be longer, and probably suspended during the time the taxpayer is making use of administrative or judicial machinery to dispute the assessment. The conference has not successfully carried this burden of showing the feasibility of its bill from the standpoint of tax collection and a revision of the tax provisions of the Bankruptcy Act should accordingly be postponed.

$6 U. S. Treasury Regulation 116, sec. 405.601 (1944); U. S. Treasury Regulation 91, sec. 401.402 (1936), as amended 26 Code Federal Regulations sec. 401.402 (1939). The employer who must use a depositary (note 87 infra and accompanying text) attaches receipts issued by the depositary in payment of withheld funds. U. S. Treasury Regulation 111, sec. 405.605 (1944).

87 U. S. Treasury Regulation 116, sec. 405.605 (1944).

8 Olive, Taxes in Bankruptcy Proceedings, 25 Taxes 5 (1947); Montgomery, Recent Developments and Proposed Reforms in Respect to Tax Claims in Bankruptcy, 19 J. N. A. Ref. Bankr. 31 (1944); Musgrave, The Tax Priority Bugaboo, A6 Corp. Reorg. 43 (1945); Furst, Tax Problems in Bankruptcy and Reorganization, 66 N. J. L. J. 173 (1943), reprinted with introductory comment sub nom. Tax Situation in Bankruptcy, 18 J. N. A. Ref. Bankr. 17 (1943).

Referee M. W. O'Reilly Retires, 18 N. J. A. Ref. Bankr. 63 (1944).

90 Furst, op. cit., supra note 88 at 173, 18 N. J. A. Ref. Bankr. at 18.

THE BORAH ACT REPEAL BILL, H. R. 5828

The Borah Act of 1937: (a) Prohibits agreements between parties in interest or their attorneys fixing the amount of fees or other conpensation to be paid such persons in Federal receivership, reorganization or bankruptcy proceedings when such costs are to be paid from the assets of the estate; (b) prohibits the judge from approving such fixed allowances; (c) makes it unlawful for the judge to appoint as receiver or trustee any person related to him by consanguinity or affinity within the fourth degree, and (d) makes a violation of any of these provisions a crime. The conference by H. R. 5828 proposes to emasculate that act by striking out provisions (a) and (b), retaining (c),92 and so sharply limiting the criminal provisions of (d).

Senator Borah, when introducing his bill, epitomized the need for the measure as follows:

"We have found out through investigation that the heart of the misdoings with reference to receivership cases was that attorneys get together and agree upon large fees, agree upon a receiver, agree upon receivers' fees, agree upon the compensation of all parties concerned, and the result is that they simply divide up the carcass and there is nothing left for creditors or anybody else." 23

Congress had attempted to cure these "crying evils" " in 1934, by including in section 77B,95 the new corporate reorganization statute, a provision requiring the court to regulate the amounts of compensation paid out of the estate in 77B proceedings.96 Prior to that time interested parties, by employing a deposit agreement or by providing in the plan that the reorganization manager should fix the amounts of compensation,97 made it extremely difficult, if not impossible, for courts to control the fees paid from the estate. Although the provision in section 77B limited the effectiveness of deposit agreements and fee provisions in plans by making it the duty of the judge to disregard them if he found that the compensation provided for was excessive, fee-fixing agreements were generally still successful. Because "petitions for allowances were presented at the last stage of the proceeding when conflicting factions had united in support of the successful plan," ,"99 and because there was little or no opposition to assist the court in valuing the services performed,1 judges tended to acquiesce in the recommendations of the parties. In 1937, Congress attacked this evil of exorbitant allowances by striking at its root, the fee-fixing agreement.

The need for the measure was thought by its sponsors to be apparent in 1937, and its retention has since been recommended by the Judicial Conference of Senior Circuit Judges and the SEC.2 If substantial repeal of the Borah Act is justified now it must be either because the reform was unnecessary in 1937 or because conditions have changed since that time to such an extent that the restriction is no longer necessary. Neither proposition has been established. The conference now asserts that the primary purpose of the Borah Act was to prevent a judge from allowing fees without giving all persons interested in the estate notice and opportunity to be heard, a purpose now effected by section 58a (8), which, applicable to chapter X, makes adequate provision for notice and hearing. But the stated purpose of the Borah Act is to reach the private agreements between the parties which were regarded as "the heart of the misdoings." While Congressman Chandler mentioned the evasion of hearings as one facet of the problem, his report to the House, as well as Senator Borah's 91 50 Stat. 810 (1937), 28 U. S. C., secs. 531, 572a (1940).

The conference bill also amends subdivision (c) to make it applicable to referees, as well as to judges. 98 81 Congressional Record 8393 (1937).

See Realty Associates Securities Corp. v. O'Connor, 295 U. S. 295, 299 (1935); 83 Congressional Record 8681 (1938); 81 Congressional Record 9517 (1937).

95 48 Stat. 912, as amended, 11 U. S. C. A. sec. 207 (Supp. 1935).

96 Former secs. 77B (c) (9).

Medill, Fees and Expenses in a Corporate Reorganization Under Section 77B, 34 Michigan Law Review 331, 340-341 (1936).

United States v. Chicago, M., St. P. & P. R. R., 282 U. S. 311 (1931); Note, 49 Harvard Law Review 1111, 1199 (1936).

99 SEC, Memorandum: Proposed Legislation for the Repeal of the Borah Act 6 (unpublished 1944), submitted to the Judicial Conference of Senior Circuit Judges in 1944.

1SEC, Report on the Study and Investigation of the Work, Activities, Personnel, and Function of Protective and Reorganizatoin Committees, 244-245 (1940).

2 Report of Judicial Conference of Senior Circuit Judges, 10 (1944). The SEC filed a memorandum with the Judicial Conference. See note 99, supra.

N. B. C., Committee Print, 65. See also Williston, Black, and Kurtz, Fees in Reorganization Proceedings, 18 J. N. A. Ref. Bankr. 36, 38 (1944).

H. Rep. No. 1524, 75th Cong., 1st sess. 1 (1937).
H. Rep. No. 1524, 75th Cong., 1st sess. (1937).

76863-48- -12

description of the bill, show a much broader purpose than that now suggested by the conference. When the congressional purpose was merely to require notice and hearing, precisely that was achieved in the Chandler Act. Moreover, Senator O'Mahoney, who sponsored the Chandler bill in the Senate, made it clear that the Borah Act still had a function." A short answer to the argument of the conference is that if Congress meant only to require notice and hearing it chose a strange way of stating its meaning. The conference does not state in the comment to its bill that reform was unnecessary in 1937. But that proposition is implicit in its second argument. The so-called agreement, says the conference would be merely a recommendation to the court, binding on no one, and an aid to the court in fixing fees, as are the recommendations of the SEC. This argument overlooks the pre-Borah Act history that demonstrates the coercive effect of such agreements upon the courts. Nothing in the Borah Act prohibits individual recommendations as to the amounts of compensation properly allowable. In fact, it promotes individual, instead of agreed-upon advice to the court. The plea for freedom of recommendation misses the mark.

The Borah Act continues to perform a useful function in forbidding fee-fixing agreements that make it difficult for the court to scale down excessive demands. While public opinion no longer spotlights the problem of excessive reorganization expenses, it is partly because the Borah Act has done much to mitigate the evil. The need for the law is as great now as when enacted.

ADDITIONAL AMENDMENTS NEEDED TO SUPPLEMENT CONFERENCE'S

NONCONTROVERSIAL BILL

The conference aptly characterizes its proposed bill, H. R. 5693, as noncontroversial in character. But it is too limited. Summarizing its coverage in an appendix, we now deal with matters not within its scope-many of them noncontroversial and all proper to be dealt with by an extensive revision of the act. The definition of insolvency in section la (19) should be amended to exclude all of the debtor's exempt property in determining the aggregate value of his assets. No sound reason can be advanced for including exempt property, which creditors cannot reach either in or out of bankruptcy, in determining the insolvency of a person for bankruptcy purposes.10 The definition would then accord with insolvency as defined in section 67d (1) (d), the Bankruptcy Act's spearhead against fraudulent transfers.

Section 2, which deals with courts of bankruptcy and their jurisdiction, should be amended in two respects. Introductory paragraph (a) should be expanded to give the bankruptcy court jurisdiction in admiralty in addition to the jurisdiction at law and in equity which it now has. Failure to give the bankruptcy court admiralty jurisdiction is an anomaly that results in confusion or is disregarded by the Federal judge who has power to sit as an admiralty court regardless of the mysteries that surround him when sitting as a court of bankruptcy." (1) dealing with venue should provide that improper venue is not ground for dismissal and, in addition, that any proceeding may be transferred to a more convenient forum.12 This latter suggestion would be in line with section 118 of chapter X; both suggestions follow the treatment accorded venue in civil actions by the proposed Judicial Code revision.13

Clause

While acts of bankruptcy have been criticized as anachronistic," they have been imbedded in our bankruptcy jurisdiction so long that their displacement by some other standard, such as financial status, would be a novel cure worse than the evil. If instead the acts of bankruptcy are meshed more carefully with the avoiding sections of the act 15 they will serve a useful purpose in setting

681 Congressional Record, 8393 (1937).

783 Congressional Record, 8681 (1938).

8 N. B. C. J. Committee Print, 65-66.

P. 717, infra.

10 See 1 Collier, 71-72.

11 See 1 Collier, par. 2.10.

12 Sec. 32 does not fill this need. It provides for the transfer of cases pending in different courts of bankruptcy which involve the same person or different members of a partnership, where each court has jurisdietion, to another court having jurisdiction. There is not power to transfer cases to a more convenient forum which does not have venue, as there is in ch. X cases by virtue of sec. 118.

13 H. R. 3214, 80th Cong., 1st sess., sees. 1404, 1406 (1947). Sec. 1404 (a) permits transfer of a civil action to any other district or division where it might have been brought, "for the convenience of parties and witnesses in the interest of justice." Sec. 1406 (a) requires the district court to transfer a case where venue is laid improperly to "any district or division in which it could have been brought."

See Treiman, Acts of Bankruptcy: A Medieval Concept in Modern Bankruptcy Law, 52 Harvard Law Review, 189 (1938).

15 See 3 Collier, 749-750 and notes 69 and 70, for a discussion of the failure of the acts of bankruptcy to mesh with the avoiding sections.

* *

*

rather objective standards as to when a debtor is fit for involuntary bankruptcy. To accomplish this end the first three acts of bankruptcy should be revised. The first act, insofar as it deals with a fraudulent transfer, should not be restricted, as it now is, to an "intent to hinder, delay, or defraud his creditors or any of them." It should denounce as fraudulent any transfer coming within the purview of sections 67d and 70e, the avoiding sections of the act dealing with fraudulent transfers. And the intent of the debtor to prefer should be eliminated from the second act. Such an intent is not an element of a preferential transfer as defined in section 60a. While the courts have used an objective standard in defining "intent to prefer," 16 this element in the second act of bankruptcy remains needlessly troublesome, and from the point of view of an equitable distribution among creditors the debtor's intent is wholly irrelevant. If these changes were made, a conforming change would be needed in the last sentence of section 3b insofar as it deals with intent as related to the first and second acts of bankruptcy. Some change is also needed in the second sentence of section 3b, which provides that the 4-month period, within which an involuntary petition may be filed with respect to the first and second acts of bankruptcy, "shall not expire until 4 months after the date when the transfer * * * became so far perfected that no bona fide purchaser from the debtor and no creditor could thereafter have acquired any rights in the property so transferred superior to the rights of the transferee." Language paralleling this creditor and bona fide purchaser test is found in section 60a, which deals with preferences, and in section 67d (5) which deals with fraudulent transfers. As to the latter section, the conference's noncontroversial bill proposes to eliminate the creditor test, since a fraudulent transfer is never perfected as against a creditor until the applicable statute of limitations has barred creditor relief-which may be many years-although the transfer is a matter of public record and good as against a bona fide purchaser.17 Certainly a conforming change needs to be made in section 3b. And if the test of perfection relative to preferences is changed in section 60a a like conforming change must, of course, be made in section 3b. Under section 67a a judicial lien obtained within 4 months of bankruptcy while the debtor is insolvent is voidable by the trustee. The third act of bankruptcy deals with judicial liens but is so drafted that the act of bankruptcy may not be committed until 30 days after the judicial lien has attached. If a bankruptcy petition is filed more than 3 months thereafter, although within 4 months, as literally it may be under section 3b, the debtor may be adjudged a bankrupt because of his failure to vacate the judicial lien, although it is evident that the trustee cannot invalidate the lien. This incongruity has led many courts to bold that the bankruptcy petition alleging the third act of bankruptcy is not timely unless the lien is within the avoiding time limit of section 67a.18 This matter should be clarified in line with these holdings.19 While revising section 3 and in the interests of certainty the fifth act of bankruptcy should be clarified in line with the great weight of authority that the receivership there dealt with is a general equity receivership.20

The 1938 revision of section 5 on partnerships quite generally adopted the entity theory of partnership, the result being a more workable section.21 But the question as to when a partnership is insolvent is still an unsettled one, important in two situations: (1) Where a voluntary partnership petition is filed by fewer than all of the general partners; 22 and (2) where an involuntary petition is filed against the partnership alleging an act of bankruptcy of which insolvency is an 16 E. g., Shingleton v. Armour Poulevard Corp., 107 F. 2d 440 (C. C. A. 8th, 1939); In re Pichenell Fabric Mfg. Co., 31 F. Supp. 645 (E. D. Pa. 1940).

17 Lind v. O. N. Johnson Co., 204 Minn. 30, 282 N. W. 661 (1938) (statute of limitations does not begin to run until time of creditor's judgment against debtor). But cf. Buttles v. Smith, 281 N. Y. 226, 22 N. E. 2d 350 (1939) (statute begins to run at time of fraudulent conveyance).

18 E. g., Storrie v. McAlester Fuel Co., 133 F. 2d 1003 (C. C. A. 10th, 1943); 1 Collier, par. 3.313, and cases cited note 10.

19 The third act should not be available unless the lien can be avoided under sec. 67a, although corresponding provisions should not be made in the first and second acts. It is fairly simple to determine whether a lien will be voidable under sec. 67a, but attempting to show that a fraudulent transfer or a preference could be avoided as against an alleged fraudulent transferee or preferee would inject controversial issues into the determination of whether an act of bankruptcy has been committed.

See, e. g., Elfast v. Lamb, 111 F. 2d 434, 436 (C. C. A. 2d 1940) (suffering appointment of receiver under New York Martin Act to administer property fraudulently obtained for purpose of returning it to persons defrauded does not constitute fifth act of bankruptcy): "That to constitute an act of bankruptcy the receiver must be a general one has been the rule laid down in numerous decisions." "A receivership in foreclosure does not constitute an act of bankrputcy." 1 Collier, par. 3.502 211 Collier, par. 5.03; cf. Comment, 49 Yale Law Journal, 908 (1939).

22 Secs. 5b and 18b.

element.23 If the aggregate theory of partnership is followed the partnership is not insolvent, despite the excess of partnership liabilities over partnership assets, so long as there is one solvent general partner. If the entity theory is followed the partnership is insolvent when its liabilities exceed its assets. While the weight of authority and the more recent decisions adhere to the aggregate theory, 24 we feel that the entity theory should be followed. This does not mean that the substantive liability of the general partners is affected in the slightest; their personal liability will remain unaffected. It merely means that the partnership is a fit subject for bankruptcy when the assets devoted to its business are less than its debts unless the partners are willing to cure the deficiency by additional contributions of capital.

Both original and appellate jurisdiction need attention. While section 23, which deals with plenary jurisdiction, might well be clarified, 25 a much more important problem is how to deal adequately with summary jurisdiction and integrate it with plenary jurisdiction. The bankruptcy court has summary jurisdiction (1) where given it by the act; (2) where the controversy involves property which is in the actual or constructive possession of the bankruptcy court; and (3) where the defendant consents.26 On a consent rationale, summary jurisdiction was early sustained where, in a proceeding brought by the trustee, the defendant, although in possession of property under a substantial adverse claim, did not object to the jurisdiction either by a prepleading motion or in the answer. He was held to have consented to jurisdiction by first proceeding on the merits.27 This salutary principle was largely destroyed by Cline v. Kaplan,28 which seems to hold that where summary jurisdiction must rest upon consent of the defendant, he may litigate on the merits, and his formal objection to jurisdiction is timely if made before entry of the final order by the bankruptcy court. This rule should be repudiated by statute and the earlier judicial rule adopted. In addition, provision should be made for transfer of the summary proceeding to the civil docket and disposition of the case there whenever (1) the defendant's objection to summary jurisdiction is or should have been sustained, and (2) there would be Federal jurisdiction, as provided in section 23, were the proceeding an original plenary action.

One other related matter needs attention. Under section 57g the trustee may object to the allowance of a claim on the ground that the creditor has received a voidable preference or a fraudulent lien or transfer. Since there is summary jurisdiction in the bankruptcy court to allow or disallow the creditor's claim, it is held that the court has summary jurisdiction to determine whether the creditor is the recipient of a voidable preference or fraudulent transfer or lien, but that the court does not acquire jurisdiction to enter an affirmative judgment in favor of the trustee for the recovery of the preference or the property fraudulently conveyed.29 This rule, which makes two lawsuits grow where one would amply suffice, should be repudiated in either of two ways: Give summary jurisdiction to enter an affirmative judgment; or allow the creditor to have the matter transformed into a plenary suit and transferred to the civil docket.

The 1938 revision of sections 24 and 25 greatly simplified appellate jurisdiction and procedure.30 Section 24, however, still requires a difficult distinction to be drawn at times between a proceeding in bankruptcy and a controversy arising in a proceeding in bankruptcy, since as to the former both interlocutory and final

23 The act complained of must be a partnership act, an application of the entity theory. Mills v. J. H. Fisher & Co., 159 Fed. 897 (C. C. A. 6th 1908).

24 Mason v. Mitchell, 135 F. 2d 599 (C. C. A. 9th 1943); Tom v. Sampsell, 131 F. 2d 779 (C. C. A. 9th 1942), cert. denied, 318 U. S. 786 (1943); see Francis v. McNeal, 228 U. S. 695, 700 (1913); 1 Collier, par 5.06, note 3. 25 Sec. 23 was originally drafted to deal with district courts and circuit courts, subsecs. a and c dealing exclusively with the latter. Although circuit courts were abolished in 1911, the section retained its original peculiar cast, which tends to be confusing. However, the meaning of the section has been largely settled by decision. Schumacher v. Beeler, 293 U. S. 367 (1934). Still in need of clarification is the question of jurisdiction over causes of action arising after the petition is filed, as where the bankruptcy receiver or trustee sues or is sued on a contract made by him or for some act committed by him. 2 Collier, par. 23.16. 26 2 Collier, pars. 23.05-23.08.

27 Moonblatt v. Kosmin, 139 F. 2d 412 (1943). General Order 37 makes the Federal Rules generally applic able in bankruptcy proceedings. Oglebay, Some Developments in Bankruptcy Law, 18 J. N. A Ref. Bankr., 9, 13 (1943): “It must be remembered that the jurisdiction' we are now discussing can be conferred by consent; it does not go to jurisdiction of the subject matter over ordinary civil actions, formerly at law or in equity, which cannot be conferred." 2 Collier, par. 23.08, note 68 (supp. 1946).

28 323 U. S. 97 (1944). The case is criticized in Oglebay, op. cit. supra, note 126 at 75.

20 2 Collier 514-517. This is the usual holding, although a few cases seem to say that the court does acquire such jurisdiction. Florance v. Kresge, 93 F. 2d 784 (C. C. A. 4th 1938); Flora Realty & Investment Co. v. Steem Electric Corp., 128 F. 2d 338 (C. C. A. 8th 1942); In re Gillespie Tire Co., 54 F. Supp. 336 (W. D. S. Car. 1942). Even though it is held that filing a claim does not confer jurisdiction, the referee's order is res adjudicata as to the fact that a preference was given. 3 Collier 193-194 n. 38, 1030-1032. But that order does not establish the amount of the preference. Feiring v. Gano, 114 Colo. 567, 168 P. 2d 901 (1946). 30 Weinstein, The Bankruptcy Law of 1938, 64-68 (1938).