point of Federal tax claims which would be very seriously affected. Section 4-405would also abolish all priority of payment insofar as the Government's non-tax claims are concerned.

Currently the claims of the United States, which the Department represents in these bankruptcy proceedings, have a priority by virtue of section 3466 of the Revised Statutes, 31 U.S.C. 191. The level of the priority accorded the Government's non-tax claims, a fifth priority, is fixed in straight bankruptcy and in wage earner and arrangement proceedings by sections 64a, and 659 (6) and 302 of the Bankruptcy Act, 11 U.S.C. 104a and 1059 (b) and 702.

In corporate and railroad reorganization proceedings, as well as proceedings for the composition of indebtedness of certain taxing agencies and instrumentalities, section 3466 of the Revised Statutes controls and provides for a first priority for both the Government's tax and non-tax claims.

The public policy expressed in section 3466 is an important protection to the Government as it endeavors to collect moneys from those indebted to it with which to fund an ever-expanding array and volume of programs and activities prescribed by the Congress, including revenue sharing with local governmental bodies on a major scale. In suggesting that "When the Federal Government enters into business transactions, it should be prepared to deal upon a basis of equality with other creditors of the bankrupt business.", the Commission was proceeding upon an erroneous assumption. The Government makes loans and guarantees and insures loans to marginal and submarginal credit risks, to the disadvantaged and to disaster victims for social purposes. As the United States Court of Appeals for the Fourth Circuit has noted, but for the massive Federal investment through the Government's lending programs the competing creditors might recover even less. H. B. Agsten & Sons, Inc. v. Huntinton Trust and Savings Bank, 388 F. 2d 146, 159 (C.A. 4), cert. den., 390 U.S. 1025. A parity of reasoning supports the Government's priority when it makes advance payments to defense contractors and injects major quantities of Federal funds into states and localities thus providing employment and financial benefits that would not be possible but for its participation.

Section 3466 of the Revised Statutes would continue to give the United States a priority in State insolvency proceedings. The policy thus established by the Congress should be retained as to claims under the Bankruptcv Act. This is consistent with recent action by the Congress. Indeed, in section 701 of the Rail Passenger Service Act of 1970, 45 U.S.C. 621(c)(2), Congress established, a priority for the loan guaranty claims of the United States over that of competing creditors including secured creditors. Congress has also assured a special priority for non-tax Government claims in the New York Seasonal Financing Act of 1975 and in legislation dealing with guaranteed loans to Lockheed Aircraft. In addition, H.R. 10624 recently passed by Congress, recognizes the Government's priority position in municipal debt adjustment proceedings.

Section 4-405 (f) would permit creditors of a partnership to share in the distribution of the proceeds of the estate of a general partner in the same manner and to the same extent as other creditors of that individual partner. Currently the Uniform Partnership Act provides that the creditors of the individual general partner who is insolvent have a priority in the distribution of that partner's assets over creditors of the partnership. This is also the result under current bankruptcy law. While the Congress can provide a different priority in bankruptcy from that obtaining under the Uniform Partnership Act, that Act has been adopted in forty-seven states and it will continue to control in State insolvency proceedings. Uniformity of treatment should not be overturned in the absence of compelling reasons.

SUBORDINATION OF CLAIMS

Section 4-406 of H.R. 32 provides for the subordination of certain claims such as fines, penalties, forfeitures and multiple damages to the claims of general creditors in the distribution of estate assets. In its draft bill the Commission on the Bankruptcy Laws also provided that the claims of principal officers, directors, and affiliates of a debtor and members of the immediate family of the debtor should be subordinated. We agree with the Bankruptcy Commission that the arms-length creditor deserves preference over "insiders." If H.R. 32, the "judges' bill" is the vehicle chosen by the Congress for the revision of the bankruptcy laws, we recommend that the language of the Commission bill on this point be inserted in H.R. 32. Fines, penalties and multiple damage claims

are placed in the lowest subordinated category and they would only be paid if all other claims are paid in full. Fine judgments represent a solemn judgment rendered against a debtor for a crime against society. The fine debtor has not paid his debt to society until the fine is satisfied. As a matter of public policy such judgments should at least share priority with the Government's non-tax claims and not be subordinated.

Civil penalties and civil monetary forfeitures are frequently used as an alternative to criminal sanctions. H.R. 32 would not only subordinate these claims, it would provide for their discharge so that such debts to society would rarely if ever be collected if the debtor takes bankruptcy or is petitioned into bankruptcy by other creditors. In our view these claims should have a priority equal with that of criminal fine judgments.

From time to time the Government is defrauded and through it the longsuffering taxpaying public is defrauded. Congress has provided in such cases for the recovery of double damages and penalties. See 31 U.S.C. 231-235 and 40 U.S.C. 489. In such fraud cases it is very frequently impossible to reconstruct the facts so as to establish the full extent of the Government's actual pecuniary loss. Rer Trailer Co. v. United States, 350 U.S. 148. Thus in reality these recoveries are primarily compensatory and not penalties. Such claims should have the same priority as other Government claims for money.

DISCHARGES

H.R. 32 is widely regarded as a "debtors' bill." It is one thing to relieve a debtor who has suffered misfortune from causes largely beyond his control. However, solicitude for such debtors should not blind us to the need to prevent the bankruptcy process from being prostituted by those who have cheated and defrauded others and those who simply choose not to pay their just debts. More thought needs to be given to the inclusion of provisions in the Bankruptcy Act to deny relief to those who are undeserving. Failure to do this can lead to a further deterioration of public confidence in the bankruptcy process and to a substantially higher cost of doing business at a time when inflationary pressures are already the bane of our society.

One point of focus in the endeavor to deny relief in bankruptcy to the undeserving necessarily involves the discharge provisions of the Act. Section 4-505 deals with the discharge of an individual debtor from further obligation to pay his pre-petition debts. Conspicuous in its absence from section 4-505 is the ground for denial of discharge found in section 14c (3) of the present Act, 11 U.S.C. 32c (3), involving the debtor's use of a materially false written financial statement to obtain money or goods. The Commission's draft bill goes so far as to deny the creditor who relied on such false financial information to his detriment the protection of excepting the particular debt from discharge if the debt was a "consumer debt," a term not defined in the bill. We are glad to see that section 4-506 (a) (2) in H.R. 32 would except all such debts, "consumer" and other, from discharge if the false financial statement was reasonably relied upon by the creditor. We also recommend deletion of the requirement that the creditor must show that the false statement was "made or published in any manner whatsoever with intent to deceive." It is enough that the creditor relied upon a materially false statement. It would not be necessarily to prove the debtor's state of mind as in a criminal case.

Section 4-505(a)(3) requires a showing that the debtor "knowingly and fraudulently" committed certain acts in a bankruptcy case for there to be a denial of discharge under this subsection. The words "knowingly and fraudulently" may be appropriate in the context of a criminal statute such as 18 U.S.C. 152. However, use of the same test in a civil context places a heavy burden on those seeking to impose the less serious sanction of denial of discharge. The words "and fraudulently" should be omitted.

Subsection (a) (7) of section 4-505 would reduce the waiting period for discharge in a second or subsequent bankruptcy proceeding involving the same debtor from six to five years with the addition of an escape clause permitting frequent and repeated discharges in the event of "undue hardship on the debtor and his dependents." The quoted language leaves too much to the subjective judgment of the bankruptcy judges and widely varying results will obtain from district to district. In our view the escape clause should be dropped or carefully reworded to include objective standards to preclude abuse. Possible objective standards will be provided in our written comments.

One of the difficulties we have found with respect to denial of discharge, and subsection (b) would continue the Attorney General's special responsibilities in this regard, is that the rules allow insufficient time to develop facts with which to oppose discharge. A practical solution to this problem may be the modification of the first ground for revocation of discharge found in section 4–505 (c)(1) to include "or knowing concealment of material facts" after each use of the word "fraud" therein.

As section 4-506 is currently worded fine judgments would be discharged in bankruptcy unless the Government were to file a petition seeking the denial of discharge. Such judgments represent a solemn debt to society and should be excepted from discharge automatically without the necessity of filing a petition with the court. The addition of reference to subsection (a) (9) on line 14 at page 134 would accomplish the change which we recommend.

Section 4-508, seeking to protect debtors discharged in bankruptcy from "discriminatory treatment," is too broadly worded. Section 4-507 preventing revival or reaffirmation of a discharged debt provides all the protection needed except for the unusual situation presented by the denial or suspension of licenses cited by the Commission on the Bankruptcy Laws. That situation can be covered by language in 4-507 prohibiting the withholding or suspension of a license for failure to pay a discharged debt, if Congress wishes to go so far. Section 4-508 should be deleted lest it give rise to a flood of discrimination suits brought to harass those who sell, lend and contract.

OFFSET

We recommend that sections 4-716 and 6-604 should also be stricken from the bill. Any creditor, including the United States, currently has the right to offset moneys owed the debtor which are in hand against sums owed to that creditor by the debtor. Section 4-716 and 6-604 would permit the court to compel creditors to continue to help finance the debtor's activities and the administration of his estate by requiring them to pay such moneys into court. If there is need of current financing, the trustee's issuance of debt certificates is the appropriate means of obtaining such financing. Creditors of the debtor should not be forced to wait still longer for their money with consequent risk of their own bankruptcy.

REDEMPTION OF PROPERTY SUBJECT TO A LIEN

Section 4-504 provides a redemption right not known in bankruptcy law heretofore and goes beyond the proposal of the Commission on the Bankruptcy Laws. The Commission's proposal would permit the debtor's redemption of consumer items which are subject to a lien and which are either exempt or abandoned by the trusee. H.R. 32 eliminates the word "consumer" found in the Commission's draft. If there has been overpricing it has been in the area of consumer items and any such relief measure should be limited to that field. Experience shows that appraisals of property are widely divergent and often unreliable. The difficulty with the instant proposal is compounded further by the fact that the "fair market value" of the security property may be unreasonably low because the debtor or others have abused the property badly. For redemption purposes value should be the value that the property would have had if the property had received normal care and treatment.

Redemption rights in property may substantially depress market values. Thus, any appraisal obtained would need to fix the value of the property as if there were no redemption rights to avoid further detriment to lenders. In addition, any such redemption should be required to be exercised within two months of the petition or the right of redemption would seriously and adversely affect the creditor's or the trustee's ability to resell the property and the price that could be obtained for it. The debtor should be required to bear the cost of any appraiser selected by the Directors, if one is required to fix the value of the securtiy property for redemption purposes. This is not a cost which the creditor of the estate should bear. If section 4-504 is retained, careful thought will need to be given to barring assignment or use of the debtor's redemption rights to give others the advantage of a lower purchase price for the property involved.

JURISDICTION OF THE BANKRUPTCY COURTS

Section 2-201 and other provisions of H.R. 32 would substantially expand the jurisdiction of the bankruptcy courts. Far too many controversies are already being thrust on the Federal courts. The Department is opposed to the further

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expansion of that jurisdiction. The Commission on the Bankruptcy Laws had no known reliable survey of plenary litigation to support its proposal. H.R. 32 would channel cases away from the courts with expertise and experience in handling the disputes involved. It would also override existing jurisdictional limitations on suits against the United States. Thus, for example, the United States district courts, courts of general jurisdiction, have jurisdiction over Tucker Act suits against the United States, including contract matters, only to the amount of $10,000. The instant proposal would invest the bankruptcy courts, which are inferior to the district courts, with unlimited jurisdiction. Any change in the Government's consent to be sued should be by amendment of existing jurisdictional statutes and suit should continue to lie in the courts therein provided.

As presently worded, section 2-201 read in conjunction with section 2-202 on removal would permit the removal of divorce actions to the bankruptcy courts. Thus the bankruptcy courts would become another channel for forum shopping. Such results are clearly to be eschewed. The jurisdiction of the bankruptcy courts should be carefully limited and spelled out to avoid misunderstanding.

ARRANGEMENTS AND REORGANIZATIONS CHAPTERS VII, VIII, AND IX

Both H.R. 32 and the draft bill of the Commission on the Bankruptcy Laws eliminate the current chapter of the Bankruptcy Act dealing with real estate arrangements. This chapter is little used and we agree that appropriate relief is available under other chapters.

The draft legislation prepared by the Commission attempted to consolidate arrangements and reorganizations in one chapter. We agree with the bankruptcy judges that arrangements should continue to be governed by a separate chapter of the Bankruptcy Act. Reorganization proceedings are peculiarly adapted to the restructuring of businesses owned by corporations having public securities which are widely held. Compare SEC v. United States Realty & Improvement Co., 310 U.S. 434. Arrangements are generally better suited for the smaller more closely held business entity .We will discuss the detail of the two chapters dealing with reorganizations and arrangements in our written comments.

One change which should be made is a provision eliminating the issuance of securities in payments or compromise of claims of the United States and its agencies. It is unseemly for the Government to hold stock in competitive private corporations. Acceptance of capital stock in compromise of Government claims is generally prohibited by 4 C.F.R. 103.9. If the Government were to receive such securities in payment of its claims, competitors of a debtor or its successor would be concerned that the Government might favor the debtor or the successor corporation with contracts in order to enhance the value of the securities in its hands. Even the appearance of impropriety should be avoided. Government claims should only be paid in money or property.

In view of recent testimony and Congressional action concerning municipal debt adjustment proceedings, we believe that further testimony concerning Chapter IX at this time would not be useful.

RAILROAD REORGANIZATIONS

Railroad reorganization proceedings are major undertakings involving vast empires and major public interest. These proceedings should continue to be handled in the United States district courts as at present and as recommended by the Commission on the Bankruptcy Laws. The importance of these proceedings clearly justifies utilization of a constitutional court.

The Department of Transportation is preparing detailed comments on Railroad Reorganization as they pertain to the Bankruptcy Act. Because of the Government's heavy involvement in supporting rail transportation, we believe that both the Secretary of Transportation and the ICC should be referred to as having explicit authority to submit proposed plans of reorganization if they wish to do so. In our opinion notice of proposed track abandonments should be given to the Governors of the states affected so that they can take such steps as may be indicated including the offer of a transportation subsidy to help retain rail service.

COLLECTION FROM CO-DEBTOR

Section 6-403 would prevent collection of a debt by a creditor of the debtor from a co-debtor during the pendency of the proceeding. The debtor can suffer no detriment from such collection action since the debtor's discharge absolutely

extinguishes the debt. There can be no pressure on the debtor himself as a result of the creditors collection against the co-debtor and the Commission's rationale fails. Thus there is no sound reason justifying this provision. It is just because some debtors may become bankrupt that creditors insist on co-signers. If the co-debtor pays he is subrogated to the creditor's rights and can pursue the claim in the bankruptcy as easily as the creditor.

IMMUNITY

Section 4-316 would permit the bankruptcy court to grant immunity to "any person" in connection with "a case." The Department is of the view that such immunity should be limited to the debtor himself and the grant of immunity should be limited to the debtor himself and the grant of immunity should be limited to those proceedings which have as their purpose the ascertainment of the debtor's estate and this entitlement to relief or discharge. Grants of immunity which may serve the private interest of a creditor should not be permitted Reference to 18 U.S.C 6004 should be dropped as that reference is inapposite unless a separate bankruptcy administration is to be established. 18 U.S.C. 6001(4) will need to be amended to add "and any United States bankruptcy court," at the end thereof.

U.S. MARSHALS

Section 205 of the bill would amend 28 U.S.C. 569 to add bankruptcy courts to those which may require the attendance of the U.S. Marshal at "any session of court." The Marshal's Service is far too limited in manpower to provide this service. It would appear that deputizing the court clerk would be a sufficient precaution insofar as the bankruptcy courts are concerned.

CONCLUSION

I appreciate the courtesy of the Committee. The Department's more detailed written views will be submitted as soon as possible.

DEPARTMENT of Justice OVERVIEW COMMENTS ON H.R. 32, A BILL TO ESTABLISH A UNIFORM LAW ON THE SUBJECT OF BANKRUPTCIES

Segregation of judicial and administrative functions.-The segregation of judicial and administrative functions agreed upon in principle by both the Commission on the Bankruptcy Laws and the Bankruptcy Judges is a reform long overdue. This reform, including the appointment of trustees by an authority other than the judges who are so intimately involved in the subsequent handling of adversary proceedings involving these same trustees, should contribute significantly to the public's confidence in the bankruptcy process.

Appointment of bankruptcy judges.-Bankruptcy judges should be appointed by an authority other than the judge or judges who may subsequently review their decisions on appeal. Presidential selection should be had on the basis of merit, ability, integrity and experience from the bar of the territory to be served by the particular court. We agree with the Bankruptcy Commission's proposal that judges now serving should continue to serve through the end of their current appointive terms. Obviously bankruptcy judges now serving should be given serious consideration for appointment to positions in any reformed bankruptcy system.

Bankruptcy administration.-The time is ripe for administrative innovations to computerize accounting, disbursements and statistical reporting functions to achieve the economies and efficiencies which the public has a right to expect of the bankruptcy system. Funds collected should be aggregated and deposited at interest to the extent feasible in the light of the operating needs of the estates involved. It seems desirable to test use of an enlarged role for the Administrative office of U.S. Courts, as proposed by the bankruptcy judges, coupled with the use of salaried standing trustees for all no-asset and limited-asset estates in districts where the volume of bankruptcies justify such a standing trustee, before trying the more radical proposal of a separate Bankruptcy Administration in the Executive Branch as proposed by the Commission on the Bankruptcy Laws. If the results and economies of the former approach do not meet expectations, consideration can then be given to the more extreme suggestion of a separate Bankruptcy Administration.

Uniform exemptions.-We fully agree with the Commission on the Bankruptcy Laws that the archaic and widely-varying state exemption laws for individual