such shares be voted during such period for the election of more than one-third of the total number of directors of said carrier, unless there are less than one hundred stockholders of such carrier; or shall, at any time after the effective date of this section, vote such shares or cause such shares to be voted for the election of directors, or exercise control over said carrier, without first having obtained the approval of the Commission to vote such stock or to exercise such control.

"(c) No stock of any common carrier to which paragraph (1) of this section is applicable, which stock is owned or controlled directly or indirectly by, or held for the benefit of, or pledged as security by, any other common carrier which filed a petition under section 77 of the Bankruptcy Act and has been reorganized or is in process of reorganization under said section 77, shall be voted for the election of directors during the pendency of proceedings under section 20b, unless at the time of the filing of the petition for the reorganization under section 77 of the Bankruptcy Act of the carrier whose stock is so owned, controlled, held, or pledged, the transaction or transactions by which such stock was acquired, and the ownership and control of such stock, had been approved by the Commission pursuant to the applicable provisions of section 5 of this Act, as amended, or unless the two carriers are debtors in the same proceeding under section 77 of the Bankruptcy Act, as amended. Before any carrier shall attempt to vote the stock of another carrier for the election of directors hereunder it shall first submit to the carrier holding such election a certified copy of the order or orders of the Commission authorizing the acquisition and ownership of such stock by the carrier proposing to vote it.

"(d) In the determination of whether a quorum is represented in attendance at any meeting of stockholders of any carrier to which paragraph (1) of this section is applicable, held during the pendency of proceedings under section 20b, for the election of directors or for other purposes, all voting stock standing in the name of, or held for the benefit of or pledged or assigned by, or directly or indirectly controlled by, any carrier, holding company, individual, corporation or other entity to which subparagraph (b) or (c) of this paragraph (11) is applicable, which voting stock may be not represented at said meeting, shall nevertheless be considered and counted as being represented in attendance at such meeting, notwithstanding any provision of the charter or bylaws of such carrier or the provision of any State law to the contrary.

"(12) Any party having properly filed an application under section 5 of the Interstate Commerce Act to control, or participate in the control of, a carrier to which this section applies, is hereby authorized to intervene generally in and become a party to the proceedings under section 20b affecting such carrier.

"(13) No readjustment of financial structure or other proceeding under section 20b or 20c and no order of the court or Commission in connection therewith shall relieve any carrier from the obligation of any final judgment of any Federal or State court rendered prior to January 1, 1929, against such carrier or against one of its predecessors in title, requiring the maintenance of offices, shops, and roundhouses at any place, where such judgment was rendered on account of the making of a valid contract or contracts by such carrier or one of its predecessors in title.

"SEC. 20d. No provisions shall be incorporated in any alteration or modification of obligations proposed or effected under section 20b or 20c which would direct or authorize the grant, transfer or assignment by any stockholder of the power or authority to vote any stock of any such carrier for the election of directors or otherwise.

"SEC. 20e. During the pendency of proceedings under section 20b, no common carrier which shall avail itself of the provisions of section 20b of this Act, and no common carrier to which paragraph (1) of section 20c of this Act is applicable, shall directly or indirectly cause any funds of such carrier to be used or expended for the purchase or acquisition of any stock of such carrier; and no alteration or modification of obligations proposed or effected under sections 20b or 20c shall directly or indirectly provide funds for, or make any provision for the use or expenditure of funds for, the purchase or acquisition of any stock of the carrier whose obligations are so to be altered or modified: Provided, That nothing herein is intended or shall be construed so as to prohibit or restrict the lawful purchase or acquisition by any such carrier of the stock of any other carrier, or to prohibit or restrict the reacquisition by any such carrier of any of its own stock which it heretofore has pledged or hereafter may pledge to secure the payment of any obligation of or the performance of any undertaking by such carrier, whether such reacquisition of its own stock by any such carrier results (a) from the payment of any part or all of such obligation or the discharge of such undertaking,

or (b) from the purchase in the open market or other lawful acquisition by such carrier of any part or all of such obligation or undertaking and the cancellation or termination thereof.

"SEC. 20f. Nothing in section 20b or 20c is intended or shall be construed so as to authorize the involuntary elimination or forfeiture of (a) any part of the lawful claims of the holders of obligations of any carrier, or (b) of the stock of any carrier: Provided, That no involuntary elimination or forfeiture shall be deemed to occur if such claims are lawfully satisfied by the substitution of securities or otherwise under the provisions of section 20b.

"SEC. 20g. Every order of the Commission approving or authorizing any proposed alteration or modification entered pursuant to the authority of section 20b or 20c shall be subject to judicial review in the manner and to the extent provided by the Administrative Procedure Act, approved June 11, 1946, and the provisions of the Judicial Code and any other applicable statutes: Provided, That in judicial review of any order of the Commission approving or authorizing a proposed alteration or modification entered pursuant to the authority of paragraph (8) or (9) of section 20c, the court (and any court on review thereof) shall not be concluded by any determination or finding made by the Commission as to matters either of law or of facts, and the court shall make full and independent reexamination and review of the issues and of the evidence and thereafter shall arrive at a decision in the exercise of its independent judgment based upon such judicial reexamination and review: And provided further, That any order of a circuit court of appeals relating to any alteration or modification under paragraph (8) or (9) of section 20c shall be reviewed by the Supreme Court of the United States upon appeal made by any party affected by such alteration or modification who deems himself aggrieved thereby, within sixty days after the entry of any such order. The term 'judicial review' as used herein shall be deemed to include, without limitation, any suit authorized by law to enjoin, set aside, annul or suspend in whole or in part any order of the Commission other than for the payment of money. The venue for original judicial review of any order of the Commission approving or authorizing any proposed alteration or modification of the obligations of a carrier to which paragraph (1) of section 20c is applicable, shall be the district in which proceedings are pending as to such carrier under section 77 of the Bankruptcy Act, as amended.

"SEC. 20h. The provisions of sections 1801, 1802, 3481, and 3482 of the Internal Revenue Code and any amendments thereto, unless specifically providing to the contrary, shall not apply to the issuance, transfer, or exchange of securities or the making or delivery of conveyances to make effective any alteration or modification effected pursuant to section 20b or section 20c of this Act. No income, gain, or profit taxable under any law of the United States or of any State, now in force, or hereafter enacted, shall be deemed to have accrued to or have been realized by such carrier by reason of such an alteration or modification, or by reason of any transaction authorized in the last sentence of paragraph (3) of section 20c. "SEC. 201. If any provision of sections 20b, 20c, 20d, 20e, 20f, 20g, or 20h, or the application thereof to any person or circumstances, is held invalid, the remainder of said sections and the application of such provision to other persons or circumstances, shall not be affected thereby.'

Senator REED. It is perhaps worthy of notice that this committee, the full Interstate Commerce Committee, last year reported out favorably unanimously a bill very similar to the bill, plus the amendments which Senator Myers and myself are sponsoring this year and when that report was made last year, the Senate passed the bill without a dissenting vote. The bill went to the House. It was amended to some extent there.

The bill then came back to the Senate, and went into conference, and the conference report had the unanimous approval of the Senate. In other words, here is legislation which began under consideration against which there was not a vote either in the committee or in the Senate last year.

When the bill was passed by the Congress, it went to the President. He withheld his approval in a memorandum opinion, which I will offer for the record at this time.

(The opinion is as follows:)

MEMORANDUM OF DISAPPROVAL

I am withholding my approval of S. 1253, entitled "An act to enable debtor railroad corporations, whose properties during a period of 7 years have provided sufficient earnings to pay fixed charges, to effect a readjustment of their financial structures; to alter or modify their financial obligations; and for other purposes.

Even though I am familiar with the deficiencies and inequities and the evils that exist under section 77 of the present Bankruptcy Act, I fear that this new bill would not accomplish the purpose for which it was intended.

The bill contains two sections, the first of which contemplates the prevention of bankruptcy proceedings where practicable; the second contemplates the reorganization of certain railroad carriers by the institution of proceedings under section 1 of the bill for readjustment of their financial affairs.

Objections which I have to the bill include the following:

The bill fails to direct specifically the immediate reduction of the grossly excessive interest rates now wasting the funds of the railroads in section 77 proceedings. Millions of dollars per year can be saved at once for each of the railroads in section 77 proceedings, by reducing the interest rates on their bonds and other debt down to the level of the interest rates paid by railroads not in section 77 proceedings. I reiterate a statement which I made in my message to Congress on the state of the Union which is as follows, "low interest rates will be an important force in promoting the full production and full employment in the postwar period for which we are all striving."

The bill does not adequately cure the evil, present in reorganizations under section 77, of permitting improper control of railroads after their reorganization. The bill fails to provide full protection against forfeiture of securities and investments.

The level of fees and expenses in reorganization cases under section 77 has been excessive. This is not corrected in this bill. Affirmative provisions to curb this evil and to bring it under strict control should be included in any bill which may be enacted.

The bill excludes from its benefits certain railroads which should be brought within its provisions if it is to become law. In this regard it appears that the $50,000,000 limitation in section 2 of the bill would exclude some railroads for whose exclusion there appears to be no logical justification.

This bill fails to correct a serious abuse which I condemned in the course of the Senate railroad investigation. I refer to the abuse of diverting, under cover of a reorganization plan, the funds of a railroad for the purchase of its own stocks in the market.

On the other hand, the bill does incorporate principles for which I was one of the sponsors in the Senate. I commend particularly the emphasis which the bill places on the principle that reorganizations must give primary consideration to the public interest, and to the best interests of the railroads which are being reorganized.

This requires among other things that reorganizations shall place control of railroads in persons primarily concerned with transportation for the communities served and for the Nation as a whole, without any strings direct or indirect, conditional or otherwise, to institutions or others in distant financial centers.

Such regard for the public interest will also help the stockholders, whether they be railroad employees who have invested in the stocks of companies for which they work, or ordinary investors, desirous of safeguarding their investment, but not of helping any interest to capture control of their railroad. These stockholders, whom the bill justly seeks to protect against forfeiture, can and should get such protection, but without enabling any financial interest to use such legislation to acquire control.

By withholding my signature to this bill I do not intend to indicate that I favor the pending reorganization plans. I am in agreement with those objectives of the bill which prevent undesirable control of the railroads, either immediately or within a few years, and which prevent forfeitures of securities.

I believe that the next Congress can pass a bill which will meet the stated objections and which will be in the best interests of the public, the railroads, the bondholders and other creditors, and the stockholders. HARRY S. TRUMAN.

THE WHITE HOUSE, August 13, 1946.

Senator REED. In considering legislation to be offered this year, we desired to meet the President's objections as far as we could."

Accompanied by Representative Sam Hobbs of Alabama and Chauncey W. Reed of Illinois, with the authority of Senator Myers to speak for him, we called on the President February 3 of this year, and asked him if he would be good enough to ask his legislative assistants to clarify legislatively the President's objections and help us out as far as they could to frame a bill that would meet those objections.

That was done. We wrote this bill in cooperation with the President's legislative assistants so as to meet the objections as far as we could.

I do not want it to be understood that we are suggesting any reference to Presidential action in case the bill is passed again.

Now, the House Judiciary Committee is considering similar legislation. Congressman Reed of Illinois made a statement that covers the history of this character of legislation, both in the Senate and the House. He was to appear this morning and offer his statement here. He is unable to be here, but I will hand a copy of his prepared statement, which appears in the House hearings, to the reporter, for the record here. There is nothing new in that, so far as Mr. Reed of Illinois is concerned.

(The statement is as follows:)

STATEMENT OF CHAUNCEY W. REED

During the Seventy-sixth and subsequent Congresses legislation in various forms was proposed to remedy many imperfections which by then had become manifest both in railroad equity receivership proceedings and in reorganizations under section 77 of the Bankruptcy Act. Some of those legislative proposals were designed to afford a procedure by which railroads facing an anticipated default in the payment of obligations and which were thereby threatened either with an equity receivership or a bankruptcy proceeding, could effect the necessary adjustments in their capital structures and avoid receivership or bankruptcy. Other proposals sought directly to remedy the disclosed defects in section 77 of the Bankruptcy Act (as that act had been construed an applied) and to prevent the further unwarranted forfeiture and complete extinguishment of hundreds of millions of dollars of investments in rail securities which were held by tens of thousands of our citizens throughout the land.

The bill which was passed by the last Congress and subsequently pocketvetoed by the President (S. 1253) was designed (as is the present bill) to accomplish the broad objectives of both types of previous proposals.

It would seem appropriate, therefore, as a prelude to these hearings on H. R. 3237 to review briefly the history of this legislation.

Al

The Chandler Act of 1939 (ch. XV of the Bankruptcy Act) was the first attempt to devise a much needed improvement on section 77 of the Bankruptcy Act. though the Chandler Act was considered by many as an experimental statute (it expired by its terms within 1 year), it worked so well that in 1942 it was extended in substantially the same form until November 1, 1945 by the enactment of the McLaughlin Act.

In the meantime the draw-backs and inequities of reorganizations under section 77 were becoming increasingly apparent, and Congress proceeded to give consideration to those problems.

The Hobbs bill (H. R. 2857) to restore full and independent judicial review of the Commission's actions and to provide standards of capitalization, was introduced in the Seventy-eighth Congress in 1943. Following hearings thereon, certain changes were made and a clean bill (H. R. 4960) was introduced and reported unanimously (H. Rept. 1615). In 1945 the bill was reintroduced as H. R. 37, was again reported unanimously (H. Rept. 48), and was passed by the House with only one dissenting vote.

In November of 1945 H. R. 4779 was introduced by me. This was a bill to give immediate relief to roads then in section 77 proceedings which for 7 years

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had earned their fixed charges, by enabling them to recover possession of their properties for a period of 18 months, and endeavor to work out voluntary agreements with their creditors, subject to the approval of the Interstate Commerce Commission. Hearings were held on this bill in December 1945. On April 2,

1946, a substituted bill (H. R. 5924) was favorably reported (H. Rept. No. 1838). Subsequently, the Committee on the Judiciary concluded that H. R. 5924 should be broadened to include the principal provisions of the Hobbs bill above referred to (which had already been passed by the House) and the McLaughlin Act (ch. XV of the Bankruptcy Act). To so expand the provisions of H. R. 5924, appropriate committee amendments were offered and adopted on the floor when the bill was considered and passed by the House on July 24, 1946.

In the Senate, S. 1253 had been introduced by Senator Wheeler on July 12, 1945. That bill had been drafted by the Interstate Commerce Commission and was introduced at its request. To a considerable extent S. 1253 was patterned on and was designed to replace the McLaughlin Act (ch. XV of the Bankruptcy Act) but included what were felt to be important procedural improvements in the former statute.

While hearings on the original text of S. 1253 were taking place, the Kefauver bill passed the House on November 1, 1945. That bill provided for an extension of the McLaughlin Act to 1950. (By its terms the McLaughlin Act expired November 1, 1945.)

Witnesses before the Senate Committee on Interstate Commerce at the hearings on S. 1253 held during October and November 1945, constantly protested that if the provisions of the bill were good for future railroad reorganizations, they were equally good for present reorganizations, particularly in the light of the vastly improved financial position of those carriers.

The Senate committee conducted an independent investigation of its own into this subject in considering Senate Resolution 192, and on February 7, 1946, issued the first of its two extensive reports (S. Rept. No. 925).

In the light of the facts disclosed in Senate Report No. 925 and in the hearings theretofore held on S. 1253, the Senate committee concluded that railroads presently undergoing reorganization under section 77 of the Bankruptcy Act were entitled to the same opportunity for financial adjustment under the proposed law as railroads not in reorganization. Accordingly, the Senate committee, on February 15, 1946, added to S. 1253 a new section designated "20c", which covered roads in section 77 reorganization proceedings. Subsequently, section “20c" was renumbered section 2. It brought under the bill all roads under section 77 which had gross revenues of more than $50,000,000 in any one of the years 1942-44 (a limitation suggested by the Commission).

The Senate committee then resumed its hearings on S. 1253 and added over 400 pages in testimony and exhibits embracing nearly every phase of the application of the new section. In April 1946 the Senate committee unanimously reported the revised bill S. 1253, and issued a second exhaustive report (S. Rept. No. 1170, to accompany S. 1253).

After extensive debate, S. 1253 was passed by the Senate without objection on June 15, 1946.

The Rules Committee of the House (on June 28, 1946) reported a rule whereby all four of the above pieces of legislation could in effect be brought together in conference-the Senate bill (S. 1253 as amended), the original Reed bill (H. R. 4779), the Hobbs bill and the McLaughlin Act. The essential provisions of the latter three bills by this time had been included by amendments in H. R. 5924. This rule was adopted by the House on July 24, 1946, On the same day the House passed H. R. 5924, as amended; substituted the provisions of that bill for S. 1253; and passed S. 1253 as so amended. The Senate asked for a conference.

The conferees drew upon all four pieces of legislation and embodied the results in their conference report of July 27, 1946 (Rept. No. 2691, to accompany S. 1253). On July 31, 1946 this conference report was adopted by the House by a vote of 176 to 71 and by the Senate without objection.

Congress adjourned on August 2, and on August 13 the President issued a memorandum of disapproval of S. 1253, in which he stated his reasons for withholding his signature to the bill. The President concluded his memorandum with the statement:

"I believe that the next Congress can pass a bill which will meet the stated objections and which will be in the best interests of the public, the railroads, the bondholders and other creditors, and the stockholders.”

H. R. 3237 is essentially the same bill as S. 1253, except that it has been revised in a manner believed to meet the President's objection to the vetoed bill.