because they cannot sit back and wait. They have to get out there, and do something. Mr. BUTLER. Would the gentleman yield? Basically, what you are saying is that you will get more action out of the ICC if they realize this train may leave without them? Mr. MCCAFFREY. Yes; that is right. Mr. BUTLER. Thank you. Mr. DRINAN. Very good analogy. On time, too. [General laughter.] Mr. BUTLER. It is equally applicable to airplanes. Mr. DRINAN. I thank you gentlemen for your comments. They are very helpful. One last question. Along the way, before the Commission and before the judges, did you people appear, giving these sentiments to the Bankruptcy Commission? Mr. SHARFMAN. Yes, Congressman Drinan. I personally appeared in November of 1972, and naturally, as time has elapsed since then, we have refined our ideas somewhat, but we did give our basic ideas to the Commission, and we are very pleased that many of our basic approaches, I think, were adopted by the Commission. Mr. DRINAN. You say you refined your ideas. But that is almost ancient history, now, since 1972. That was before ConRail and the Revitalization Act. Have you changed any views? Mr. MCCAFFREY. I do not think significantly. I think we were urging, at that time, both the same fix with respect to mergers that we urge today, and with respect to abandonments. We at that time also felt that the ICC's role should be about as it is placed in these proposed bills. Mr. DRINAN. Have the ICC and you people ever tried to get together with a compromise recommendation? It is kind of painful for us here, sitting as people who are just trying to learn. You people are the experts. You have been in this all your lives. And the ICC and you people are recommending something that is substantially different. Has there been any attempt to have a compromise on the two proposals? Mr. MCCAFFREY. I personally am not aware of any discussions we have had directly with the ICC on this point, but there is certainly no reason why we should not have those kind of discussions to see whether we can narrow any of the differences. Mr. DRINAN. We recommend togetherness. Mr. EDWARDS. Mr. Levin. Mr. LEVIN. Thank you, Mr. Chairman. Mr. McCaffrey, can a bankruptcy law, enacted under the Congress' bankruptcy power and designed to deal with debt reorganization problems also deal with the transportation problems that this country faces, such as dealing with the public interest and providing rail service to various localities? Mr. MCCAFFREY. Go ahead, Jerry Mr. SHARFMAN. I was wondering whether you were asking that as a legal matter, or as a policy matter. Mr. LEVIN. A little of both; the legal matter is a question of combining two powers of the Congress in a Federal judge in a single case; 59-591-76-pt. 446 and the policy matter, whether the judge has the expertise to handle the nonlegal matters, the transportation problem matters. Mr. SHARFMAN. Let me hit the legal one, if I may, first, because that one has been recently considered by the courts. A similar contention was made in the litigation on the constitutionality of the Regional Rail Reorganization Act in 1974, I believe it was. My recollection is that the special court certainly held, and I think that the Supreme Court also held, that there is no reason why the Congress cannot combine two powers in one statute, why it cannot use both the bankruptcy power and the commerce power to deal with a complicated question that is really in both the areas of bankruptcy and commerce. Mr. LEVIN. If the Congress were to include intrastate railroads under the railroad reorganization section of the new Bankruptcy Act, would you then say that they could not combine the powers with respect to those railroads? Mr. SHARFMAN. Well, when you deal with intrastate railroads, you have a more complicated problem than you have at first blush, because it is rare that you have a railroad, even if its lines are intrastate, which does not carry traffic interstate, because that is the way that freight travels in this country. So, it has been held that the reach of the ICC's power over railroads under the Interstate Commerce Act does extend to interstate traffic which goes on intrastate railroads. Mr. MCCAFFREY. I want to add, from a policy standpoint, we do not know of any reason why-and indeed, it was encouraged in the Regional Rail Act litigation-a court cannot have both of those powers jointly and feel very strongly that it would have the capability to exercise those powers, particularly where the Department of Transportation and the Interstate Commerce Commission are both parties to the proceedings and can present evidence on public interest. Mr. LEVIN. You suggested a few moments ago that the court be allowed to look at abandonments as a whole, as a part of an overall plan to reorganize the debtor, and put it on an income-producing basis again. How can the ICC consider an abandonment without considering its effects on the solvency of the railroad? Mr. MCCAFFREY. How can it consider an abandonment without considering its effects? Mr. LEVIN. Yes. You suggested that the ICC does not consider those factors when it was considering abandonment applications. I cannot quite understand how it could not consider those factors. Mr. SHARFMAN. It does to some extent consider it. But it considers it under the same standard of public convenience and necessity which is the framework under which it considers any railroad line abandonment, so that this is only one of maybe four or five factors under the general public convenience and necessity standard that have to be considered. It seems to us that where you have an insolvent railroad with a danger of not continuing at all, it is more important to really focus on the needs of that railroad and preserving the system as a whole and see where this line fits in than the Commission does under its usual standard. Mr. MCCAFFREY. I would add, I would think that the Commission's piecemeal approach tends to minimize that impact of a particular, abandonment, quite obviously, whereas the collective problem of 2,000 miles of abandoned lines, say, in the Penn Central case, can be quite serious with respect to reorganization. Mr. LEVIN. Thank you, Mr. Chairman. Mr. KLEE. Thank you, Mr. Chairman. Mr. McCaffrey, on page 7 of your supplemental statement, you recommend retaining the District Court of the United States as a forum for railroad reorganizations unless the bankruptcy judges are upgraded to the level of the United States district judges and the bankruptcy court is similarly upgraded. You note that such an upgrading would require equal salaries, Presidential appointment, and life tenure. Then you go on to say: "If such an upgrading were accomplished, little justification for the present division of labor would remain,' that the "familiarity and the expertise of the bankruptcy judges in dealing with debtor-creditor matters would render them more qualified than district judges to supervise railroad reorganizations." On page 5 of that supplemental statement, you also note that chapter X cases are traditionally litigated in the district court, because of their complexity. Is it your recommendation, since all corporate reorganization cases in H.R. 31 and H.R. 32 will be litigated in the bankruptcy court, including those resembling present chapter X cases, that perhaps the Bankruptcy Court should be upgraded to an article III court? Mr. MCCAFFREY. No; I do not think we were going that far. At least, we did not consider it from that perspective. Our point was that, all things considered, we felt that the district courts were the better forum between the two. We recognized, however, the strides that were being made by this legislation, or would be made, to upgrade the quality and incentives for quality within the bankruptcy judge system. I do not think we have considered, and I really do not have a personal opinion concerning upgrading the bankruptcy judges themselves to an article III court. Mr. SHARFMAN. May I just add a note from personal experience, to try to bring home to you the situation that I think exists now. It did before I came to Washington, in 1968. I practiced in New York in the bankruptcy court. I used to come into the courts quite frequently. They called the bankruptcy judges referees in those days. They used to sit on a calendar, from 8:30 in the morning until 5:30 in the afternoon, hearing cases. They did not have a single law clerk, and if issues of legal complexity arose, the bankruptcy referees used to have to work at night by themselves to try to research and resolve those issues and write any opinions they wanted to write. Now, unless that situation were radically changed, and they got some staff, as well as getting higher salary and better tenure, and so forth, I think you would really run into serious trouble in railroad reorganizations, where the amounts of money are enormous and constitutional issues are rife. Mr. KLEE. Your statement on pages 10 and 11 deals with the requirement for filing a voluntary petition and notes that section 9-202 of H.R. 31 and 10-202 of H.R. 32 delete the requirement that the rail road be insolvent. You then appear to ratify the new requirements for filing an involuntary petition, and you note that the same showing of economic distress should be required for a voluntary petition that is required for an involuntary petition. I would call your attention, though, to the alternate insolvency requirements for filing an involuntary petition, the first one of which is that the debtor will generally be unable to pay its current liabilities as they become due. That requirement seems to provide that, if there is a reasonable chance that a corporation will be insolvent, then that entity may file a bankruptcy petition. Do you endorse that standard? Mr. MCCAFFREY. Personally, I feel that that standard presents many problems. First of all, it seems to me that we could have a situation where a creditor or anyone allowed to file a petition under this bill, in asserting that future prospective insolvency, that that is referring to, that that could turn out to be a valid argument, and could do great harm to the debtor, and that harm would be realized notwithstanding the cure that is provided under the statute. So, from our standpoint, I think we would support simply limiting the condition to that consistent with 77, which is that the debtor is unable to pay, or has shown he is unable to pay his debts. In the second provision-that he has gone into receivership, as we cite there we do not consider that, either, to be a Mr. KLEE. But by incorporating this first standard of section 9-203 (b) into the voluntary context, are you not allowing a railroad voluntarily to file a petition for reorganization if it alleges that it might become insolvent in the future? Mr. MCCAFFREY. I cannot see any problem that would present, if it elected to do so. I am not sure why I see the need for it, though. Mr. KLEE. Well, you posed the relevant inquiry in pages 10 and 11 of your supplementary statement, that it would be wrong to allow a solvent railroad to file a voluntary petition. Yet, by incorporating the first standard of section 9-203 (b), you allow for that contingency. Mr. SHARFMAN. There is this problem, let me say, that if you do the kinds of things we would like to do with the whole chapter, and that is, allow much more expeditious merger procedures, much more expeditious abandonment procedures, and then if you allow solvent railroads to come in and take advantage of these things, you may have really gone a little beyond the basic purpose. We are advocating these other things, because we are in a situation of an emergency. We are in a situation of dire necessity, and we want to try to save what we can, under the traditional system of reorganization. But if you are talking about railroads that are not really in that kind of distress, I do not know whether you would want to go that far, with all these other measures. Mr. KLEE. Thank you, Mr. Chairman. I have no further questions. Mr. DRINAN. One question, Mr. Chairman. One page 32 of your fuller statement, you seem to be stronger on the abandonment question. It seems stronger that the ICC should be out of this completely. In the middle of the page, you say that DOT recommends that the Commission eschew this charade and eliminate duplicative proceedings by empowering the court to order abandonment, and allowing the Commission to advise the court on the matter. Would you have statutory language an where that you would be proposing for that? Mr. MCCAFFREY. First of all, I think that should have read not "Commission" but "Congress," I would assume. Mr. DRINAN. What is that? Mr. MCCAFFREY. In other words, we are recommending that Congress Mr. DRINAN. Oh, no. You have changed it. It takes all the fun out of it. You mean, DOT recommends that the Congress Mr. MCCAFFREY. Right, eliminate duplicate proceedings by empowering the courts to order abandonment, and allowing the Commission to advise the court on the matter. Mr. DRINAN. Maybe that was an intended mistake. All right, that evaporates the question. I still would like to have some statutory language just to set forth exactly how the ICC interacts with the court. Thank you very much. Thank you, Mr. Chairman. Mr. EDWARDS. I have no further questions, but we thank both of you gentlemen for very helpful testimony, and we will appreciate your suggestions as to statutory language. Finally, we will hear from our good friend, Judge John Copenhaver of Charleston, W. Va., who is president of the National Conference of Bankruptcy Judges. Judge Copenhaver will address the problems of transition from the current bankruptcy system to the new system. Judge, it is a pleasure to have you with us today. Without objection, your prepared statement will be made a part of the record. [The prepared statement of Judge John Copenhaver follows:] STATEMENT OF JOHN T. COPENHAVER, JR., U.S. BANKRUPTCY JUDGE, TRANSITION AND THE COURT Mr. Chairman, members of the Committee and members of the Committee staff, my name is John T. Copenhaver, Jr. I am the United States Bankruptcy Judge for the Southern District of West Virginia. I appear today at the invitation of the Committee in my capacity as President of the National Conference of Bankruptcy Judges. Introduction Of the many problems confronting the Congress in devising a new substance and system for the field of insolvency law, none merits more thoughtful consideration than transition. If chaos is to be avoided and stability maintained in the transfer from the old to the new, it is essential that the experienced corps of bankruptcy judges on hand at the date of enactment be retained as judges of the newly-created court. Unlike the draft bill proposed by the National Conference of Bankruptcy Judges (H.R. 32), the bill drafted by the Commission on the Bankruptcy Laws of the United States (H.R. 31) is virtually devoid of any provision to meet the problems of transition. This omission on the part of the Commission becomes understandable when one considers the earlier testimony before this Subcommittee of the Commission chairman, Harold Marsh, Jr. Mr. Marsh acknowledged the fairness of the judges' criticism respecting transition, noting in defense of the Commission that it had only two years in which to rewrite the entire Bankruptcy Act and that, in the natural course of things, the Commission considered transition last at a time when the deadline for its existence was rapidly approaching. Indeed, one need not agree with all of the Commission's findings and conclusions to stand in awe of the remarkable amount of work otherwise performed by it in such a limited time and with such a modest budget. With the luxury of adequate time for contemplation, the difficulties of transition have not escaped the attention of others whose credentials in this specialized field are readily recognized and highly respected. The National Bankruptcy |