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burden is really shifting onto the creditors themselves to prove various items like need and so forth.

We think this is wrong.

Mr. EDWARDS. Didn't you say a moment ago that now in most States the companies are going to go under anyway and you really should get the money?

Mr. INGRAHAM. In my own experience in out-of-court workouts, you have a very broad spectrum of cases. As you get closer to the end of the road of that out-of-court workout, for a variety of reasons, business reasons or related reasons, you may finally reach the conclusion that it is very clear that the company is not going to make it.

This could be after a protracted period of time, and that is usually the case. At that point in time, it may be the better part of wisdom to exert one's right of setoff or proceed against collateral.

Mr. EDWARDS. In what percentage of the cases do you think the banks immediately exercise the right of setoff!

Mr. INGRAHAM. You mean in the latter phase?
Mr. EDWARDS. At the beginning when the petition is filed.

Mr. INGRAHAM. Very few. I would like to have the other members here speak to the question, but my own experience is that banks prefer out-of-court reorganizations. To me, they are far more efficient, and both the customer and the bank can try to accommodate each other during the troubled period.

Mr. EDWARDS. We would like to hear your responses, too, but it is after the petition that I am talking about.

Mr. JEROME. I think that generally speaking, it is correct that at least in my experience, when a bank exercises right of setoff, it is clear that in a rehabilitation proceeding the debtor needs the money to function.

It is generally my experience, and perhaps this is what Mr. Ingraham meant when he said it is not generally taken, it is generally lent back on a priority administration expense basis, and it is negotiated back.

Again our objection is given what the practice is, don't take away from the banks the ability to return the money on a negotiated administration expense claim basis. The present act also eliminates well, does not speak to the standard and the burden of proof for the debtor in respect to which setoffs are required to be returned.

Mr. POWERS. Normally, No. 1, in our case, we do not realize a great deal of money through setoffs. There are a couple of reasons.

One, when a company gets into a workout posture prepetition, we get into a cash management situation. We watch the deposits. We work with him, and basically it works out so they don't have that much money in their bank account anyway. The person that gets tapped on a bankruptcy proceeding is the lender who does not know what is going on.

He gets a surprise petition and suddenly there is some money there. In that instance, you get some incentive for the debtor to be devious with his lender and other creditors and pull a surprise. I think the enactment of this bill would precipitate that kind of conduct.

That is perhaps one of the reasons for not getting rid of the setoff. Mr. INGRAHAM. To place this in context, as indicated on the first page of my prepared statement, this was one of seven points, not the only point by any means. There are additional points where, in my opinion, the commercial bank lending experts are deeply troubled with the legislation in the proposed form, either H.R. 31 or H.R. 32.

Mr. EDWARDS. Well, gentlemen, I am sure the committee would be in agreement with most of the points that you made. We are going to, I am sure, have further discussions on the issues that we have discussed in some detail this morning.

We might want to hear from you further on them, but most of your suggestions, I think, will be looked upon favorably.

Are there further questions?
Mr. PARKER. No.
Mr. KLEE. No, Mr. Chairman.
Mr. EDWARDS. We thank you very much.
Mr. INGRAHAM. Thank you, Mr. Chairman.
Mr. EDWARDS. The subcommittee is adjourned.

(Whereupon, at 12:24 p.m., the subcommittee adjourned, subject to call of the Chair.]

[Subsequent to the hearing the following correspondence was received for the record :]

GERALD M. FEDER,

Washington, D.C., April 16, 1976. RICHARD LEVIN, Esq., Committee on Judiciary, U.S. House of Representatives, Rayburn Building,

Washington, D.C. DEAR MR. LEVIN : Enclosed please find a copy of the survey referred to by Mr. Georgine in his testimony Monday, April 12, 1976. If additional copies are needed, I will be happy to provide them.

I also wish to note that the National Coordinating Committee for Multiemployer Plans urges that the definition of “antecedent debt" in the section on voidable preferences (Section 4-607) be amended to include among the exemptions debts which are entitled to priority under Section 4405 (a) (4) for the sa me public policy reasons supporting the inclusion of such claims in the list of priorities.

Inadvertently a paragraph reflecting this position was omitted from Mr. Georgine's prepared testimony. Sincerely,

GERALD M. FEDER. [The survey referred to in above letter is on file with subcommittee.]

BANKRUPTCY ACT REVISION

MONDAY, APRIL 26, 1976

HOUSE OF REPRESENTATIVES,
SUBCOMMITTEE ON CIVIL AND CONSTITUTIONAL RIGHTS
OF THE COMMITTEE ON THE JUDICIARY,

Washington, D.C. The subcommittee met, pursuant to notice, at 9:37 a.m. in room 2226, Rayburn House Office Building, Hon. Don Edwards (chairman of the subcommittee] presiding.

Present: Representatives Edwards, Drinan, and Butler.

Also present: Alan A. Parker, counsel; Richard B. Levin, assistant counsel; and Kenneth N. Klee, associate counsel.

Mr. EDWARDS. The subcommittee will come to order.

We begin the final segment of our hearings on the revision of the bankruptcy laws this morning. We have four more hearings-on railroad reorganizations and on transition from the current bankruptcy system to the new one.

This morning we are privileged to have with us several experts in the field of railroad reorganizations-section 77 of the Bankruptcy Act, and chapters IX and X of the Commission and Judges bill, respectively. First, we will hear from former Bankruptcy Judge Joseph Patchan, now in private practice in Cleveland. Judge Patchan is appearing on behalf of the National Conference of Bankruptcy Judges. With him is Mr. Maurice M. Sayre. Judge Patchan, it is nice to have you back with us today, and we welcome both of you gentlemen.

Next, we will hear from Mr. Paul Tierney, president of the Transportation Association of America. Mr. Tierney is accompanied by Mr. Joseph Simpson, vice president and investment counsel of Metropolitan Life Insurance Co. in New York. Mr. Tierney and Mr. Simpson, it is also a pleasure to have you with us today.

We would like both of you gentlemen to proceed with your remarks and then sit as a panel for our questions.

Without objection, all of the prepared statements will be included in the record.

Judge Patchan, will you proceed first.
[The prepared statement of Joseph Patchan follows:]

SUMMARY OF STATEMENT OF JOSEPH PATCHAN AND MAURICE M. SAYRE

REPRESENTING THE NATIONAL CONFERENCE OF BANKRUPTCY JUDGES

Mr. Chairman, members of the committee, and members of the committee staff :

I am Joseph Patchan, an attorney from Cleveland, Ohio. With me is my colleague, Maurice M. Sayre. We are both members of the firm of Baker, Hostetler & Patterson in Cleveland.

We appear at the invitation of the Committee and at the instance of The National Conference of Bankruptcy Judges in support of the provisions in House Bill No. 32 (the Judges' Bill).

Although our law firm is engaged in the general practice of law, Mr. Sayre and I have, for many years, specialized in bankruptcy law. For me, my bankruptcy law activity has been on both sides of the bar rail: before the bench and on the bench. I recently served a term as Bankruptcy Judge for the Northern District of Ohio, Eastern Division.

Our firm is Special Reorganization Counsel to the Trustees in the Erie Lackawanna Railway Company reorganization case. Mr. Sayre has been heavily engaged in that matter since its inception four years ago. In the course of our representation of the Trustees, a number of partners and associates of the firm have rendered services to the Trustees. Mr. Sayre has had overall supervision of our firm's representation of the Trustees. The major work done by us was particularly in the critical, early stages of the case.

Throughout the Erie Lackawanna case we, of course, have been in constant touch with the proceedings.

I

Differences between H.R. 31 (Commission Bill) and H.R. 32

Although the provisions in both bills applicable to railroad bankruptcies run on parallel tracks in most instances, the tracks do diverge at critical junctions :

1. The forum for the case is the District Court in the Commission Bill; it is the Bankruptcy Court in the Judges' Bill.

For reasons to be expressed, we believe the Bankruptcy Court to be the more appropriate forum.

2. Both bills give the ICC, Department of Transportation, and state regulatory commissions standing in the case. But the Commisison Bill limits them to advisory roles only and denies them any right of appeal.

The Commission would have Congress say that neither Federal nor State agencies may appeal rulings of the court. The Federal agencies may be precluded, but efforts to preclude State agencies seem constitutionally questionable.

Eliminating the right to appeal in the interest of expediency may be going too far. Therefore in due protection of the public interest we are of the opinion that the ICC and Department of Transportation be accorded either the right to appeal or at least the statutory right to participate in appeals where brought by other parties in the case. State and local agencies we feel should not be limited in their right to appeal orders and findings adverse to their interest.

3. An involuntary petition against a railroad may be brought under the Commission Bill on the ground that the railroad "will be generally unable to pay its current liabilities as they become due.” Such a ground is not available in the Judges' Bill.

We believe such a shifting ground should not be available to petitioning creditors.

4. The Commission Bill, for cases pending in different districts or before different district judges of the same district, permits transfer of the proceedings of the Trustee or other party in interest to the judicial panel on multi-district litigation, or to a judge before whom one of the cases is pending. The Judges' Bill has no similar provision.

Consolidation of cases is already sufficiently available to the Court, and a reference to MDL would only serve to delay administration.

With your consent I ask leave for Mr. Sayre to participate in the discussion, because his first-hand experience in a current railroad bankruptcy case should be of interest. Although we represent the Erie-Lackawanna Trustees in the matter before the Court, we do not appear here in that capacity. Neither do we purport to speak their view but speak only our own and support generally the provisions of the Judges' Bill where they are measured against similar provisions in Chapter X of H.R. No. 31, the Commission Bill.

We have submitted to the Committee a written summary of our statement and ask leave to replace it later with a full statement for the record. Unfortunately, the full written statement was not available to us today.

We are of the opinion that the Judges' Bill is the better reasoned of the two. The Commission Bill in Section 9–101 provides that Section 5–201 of Chapter V of the proposed new Bankruptcy Act is specifically applicable to proceedings under Chapter IX. Section 5-201 grants a creditor the right of set-off under certain circumstances. The Judges' Bill does not make 5–201 a part of the proposed new Chapter IX.

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