that if there was some way whereby the fee for the attorney for the debtor could be fixed by the court, I believe that a great deal of the looting of assets before the creditors can get at them would then be obviated. I have cases in mind where exorbitant fees were demanded and received by attorneys for debtors and then, when they came to the creditors, I think they got 10 cents on the dollar and, in one case I happen to think of, 6 cents on the dollar. I then went so far as

to prefer charges before the Bar Association of New York.

Mr. MICHENER. Were the fees allowed by the courts?

Mr. MOSESSOHN. No, they were not. They were demanded by the attorney and received by him. In other words, I suggest having the attorney for the alleged bankrupt placed in the same position as the attorney for the others participating.

I have another little notation, and that is with respect to some method of compelling referees to act promptly in matters of bankruptcy. To-day the thing is allowed to drag as long as the law permits and a little beyond perhaps, and, for one reason or another-you take during the summer months particularly-it is very, very hard to close any estate. At least, I find that in my experience. Mr. MICHENER. How long would you give him?

Mr. MOSESSOHN. Any reasonable length of time, but the point that I have in mind is that it should not be allowed to continue and continue until it becomes a positive disgrace, and it gets to the point where the creditors ask, "What is the use of filing any proof of claim when it takes such a long time before we get anything and then we forget all about it."

Mr. MONTAGUE. Could you not ask the judge to expedite the case? Mr. MOSESSOHN. I presume it could be done, but it usually is

not.

Gentlemen, we now come to the point we are particularly interested in, and that is that to-day is burden of proof is on the creditor. Today it is the creditor who has to hail the alleged bankrupt up in proceedings known as 21 (a), as you gentlemen well know, in order to find out what the man's assets and liabilities are. We believe that is all wrong.

The suggestion has been made by us, by the chairman of our committee, from whom you will hear, to this effect, that within 10 days of the filing of the petition in bankruptcy, schedules showing the assets and liabilities should be filed by the alleged bankrupt showing just exactly where the deficiencies occur.

As I stand before you, I think of numerous cases where letters were sent out by attorneys for alleged bankrupts, and they inclosed a statement of assets and liabilities and it was a most beautiful statement, but somehow or other those assets do not pay over 15 or 20 cents on the dollar.

Mr. MONTAGUE. But those letters show they will pay much more than that?

Mr. MOSESSOHN. The letters give you the impression that the estate is almost solvent, and you wonder why a petition is being filed. I am going to rest now in order to permit Mr. Schwartz to continue on this point, which we consider very, very important. In our experience we handle hundreds of cases of bankruptcy every year, and we try to handle them on a constructive basis, and we be

lieve that a great deal of delay and fraud would be obviated if such a provision is carried as is suggested.

I am going to yield to Mr. Schwartz, who is considered one of the best credit men in the garment industry.

STATEMENT OF MR. NATHAN SCHWARTZ, NEW YORK, N. Y.

Mr. MICHENER. Will you please state your name and residence? Mr. SCHWARTZ. My name is Nathan Schwartz, and I live in New York. I occupy the very peculiar position of being, besides a credit man, also a member of the bar and have been such for the past 18 years. I am affiliated with and am interested in waist concerns, dress concerns, and textile concerns financially, so that I have had some experience on this bankruptcy proposition.

That is

I feel that there is just one salient point that has never been touched upon by any of the organizations' investigating committees, and that is the assets of the estate. Subdivision 8 of section 7 as it at present reads says that the bankrupt must file in court within 10 days after adjudication if an involuntary bankrupt and with the petition if a voluntary bankrupt a schedule of his property, showing the amount and kind, its money value in detail, referring to the assets. the practice that we claim is the bugaboo of all bankruptcy frauds and failures. What is the money value of his property in detail? From a practical standpoint, as you gentlemen know, in nine hundred and ninety-nine out of a thousand cases the average bankrupt in his schedule merely puts in shoes valued at $3,000, dresses valued at $1,000, just this round figure, but he does set forth in detail the merchandise liabilities.

So you approach this subject from a twofold proposition as it is prescribed in the statute at the present time, namely, the voluntary case or the involuntary case. If the involuntary case, then the bankrupt, before he goes to the state of becoming bankrupt, is very, very certain as to whether he is a bankrupt or not. In other words, he becomes satisfied himself by possibly taking an inventory at cost prices as a rule and then figuring up the amount of his bills, and he knows he is insolvent.

With this state of affairs, he usually goes to his lawyer and the usual procedure of calling a meeting of the creditors and filing & voluntary or, as it has been termed by my predecessor, a "voluntary involuntary petition," and the assets all start to dwindle, say from $20,000 down to nothing with the result that when the meeting of the creditors is called, we have the supposed appointment of investigation committees and auditors with one idea, and that is to try to find out what the bankrupt already knows. If we do not have the meeting of creditors, then we have this wonderful fishing excursion called 21 (a).

Mr. MONTAGUE. What is that?

Mr. SCHWARTZ. The examination of the bankrupt. Then we have to start spending at the rate of 10 cents per folio at the present time and we have special masters' fees and so on extending over a period of weeks and subpoena fees and witness fees and everything else in order to try to find out what the bankrupt already knows; in other words, we should throw the burden, as my learned colleague

says, on the man who knows it rather than on the creditor who does not.

So, I say that if the bankruptcy act were amended in that respect so that, instead of using the general terms of his money value in detail we substituted the words "showing its cost value," we would then get to some basic idea of trying to get the bankrupt to explain what became of the difference and the creditors would not have to go on that fishing excursion, because my actual experience in my legal practice as well as my business life has shown that in possibly 95 per cent of the cases the average bankrupt's liabilities for merchandise never go beyond six months and very rarely go beyond four months.

So that, if we took the merchandise liabilities as a criterion of what the man was supposed to have, if he had nothing when he started, we then put the onus where it should be, on the bankrupt to explain the difference.

Let us assume that an estate has $20,000 worth of merchandise liabilities, the first bill being four months and the last one being within the month prior to the filing of the petition; then, as the act stands, he merely says, "I have assets of $2,000," and we can not gainsay that or ascertain what the true facts are. But, on the other hand, if he says, "At cost I have assessed at $3,000," the very natural inquiry for a creditor to make would then be the creditor having done away with these investigating committees "What became of the difference?" Then I suggest that in the failure to furnish that, there are remedial grounds for the creditor.

But let us just stay on this point for a short time. If he says, "I only have $3,000 at cost and I have $17,000 worth of liabilities, why the question would naturally be, "How much do you pay for your overhead, living, and so on, and what became of the difference?". That would obviate the frauds now being perpetrated under the bankruptcy act.

Mr. MICHENER. Suppose you do give the cost can he conceal his assets?

Mr. SCHWARTZ. He could not very well unless he committed perjury. If he said that his rent for the entire period is so much, there is no way for the poor creditor who is on a fishing excursion to find out, whereas this way we would have just to trace the overhead he has, and possibly running expenses, and possibly his own expenses, and then possibly the money that he deposited in the bank on the supposed sales, because, as you gentlemen know, in bankruptcy matters if you go to the bank account of the bankrupt you can almost tell to a day when he contemplated the bankruptcy. Before a certain period, the deposits are regular, and after that

Mr. MICHENER (interposing). Your mind is now on the dishonest bankruptcy?

Mr. SCHWARTZ. On the honest and dishonest bankruptcy. My mind is for the benefit of the creditor, so that the creditors shall be able to say, if he says there is $3,000 worth of stock there, "I know that on Tuesday of last week there was in the store $14,000 estimated assets, because I know his business.'

So that between last week and to-day there is a disposition of assets which we can not trace; and bear in mind that any bankrupt that tries to conceal or does conceal assets is guilty of larceny, and you know how hard it is to prove larceny in a criminal case unless

you approach him with the goods. It is the same way here. We have had it time and time again where they would not proceed against the bankrupt because they could not place it.

I have a decision here on that very question, where we went into it very laboriously and finally tried to get an explanation of the difference between his assets and liabilities, so I say that nothing that I have been able to find on this proposition has ever got to the basic part of the assets, so that subsequently the very wonderful ideas suggested by the National Credit Men's Association and also by the Merchants' Association could then come into play, but the first and foremost things relate to the question, "What are the assets?" and who know better than the bankrupt himself?

At the present time under the practice the bankrupt files a schedule and months transpire while these fishing excursions are going on by the creditors and in the meanwhile something happens; whereas, on the other hand, things could be unearthed and found if this provision were made obligatory on the part of the bankrupt. Then, as is often the case where a composition is confirmed, the bankrupt who formerly had only $2,000 worth of assets issues a financial statement, possibly one week after the confirmation, showing these self-same assets at $64,622.22. He has had this all the time, but he has concealed it; but, from a composition standpoint, you can readily appreciate the fact how valuable it would be to the court to determine as to whether or not the creditors are getting their full share of what they are entitled to, because if a man has that much money he can come forward and say, "I have $2,000 in assets, estimated, and I am going to offer" -which is generally done in New York-"the regular 20 or 25 cents on the dollar"; but if he says, "I have $10,000 as against $25,000 liabilities," the court can then see whether it is to the interest of the creditors to accept or reject that composition.

If that were inserted in the act itself, then we could go to that fund of the bankrupt. It might be a ground to oppose the discharge and it might be a ground to oppose the composition and, in turnover proceedings it might be a ground for making out prima facie evidence for the trustee, throwing the burden on the bankrupt who knows— and the trustee does not know what became of the difference; and I also say that in a thing of this kind you can make the bankrupt divulge the thing by orders of contempt, by making him tell and not shield himself as at present. It is a matter of opinion for which he can not be held for contempt, and very few referees will issue the certificate.

Let

If the statute is enacted he must tell what the cost value is. us not go on a fishing expedition and say, "It is estimated," because, as you gentlemen know, we all can differ about values, especially if we do not value the article itself. Some man may say, "My suit is worth $50," and the next man might come along and say it is only worth $10, and the same with an article like shoes or dresses or coats. It is a matter of what it is worth.

I have in mind a case where the accountants that were employed at the time of the failure by the bankrupt issued a certified statement within one week of the filing of the schedule of $36,000 and, when the receiver was appointed, he filed an inventory that they had $16,000 worth of assets and then, when the sale actually took place, there was $22,000 realized. When the appraisers in that same case made

known the result of their appraisal, it was $10,000. That is only

one case.

So, you see, it is a case of everybody guessing what is or what is not there. That is the reason, I say, why this matter should receive some attention by Congress, so as to get away from the uncertainties and give creditors what they really are entitled to know. It is nothing: more than saying, "You say you are bankrupt. You consent to an adjudication, whether voluntary or involuntary. Please tell us how much you have at cost prices of this particular merchandise, so that the creditors can judge what became of the rest if they need to have an investigation.'

I say that if this is put into the bankruptcy act we can then get to the point, some day in the future, of compelling the bankrupt to explain the differences and we would have less investigations and less.

crime.

Mr. MICHENER. Have you an amendment drawn?

Mr. SCHWARTZ. I have it drawn. I expect that Mr. Mosessohn will submit it in due form. It is with regard to those words in section 7, subdivision 8, by substituting the words "showing its cost. value" in preference to "showing its money value in detail."

Mr. MONTAGUE. Why do you use the words "in preference to"? Mr. SCHWARTZ. Well, at the present time the words "its money value," as I tried to explain, bring about a condition where nobody can tell the real value.

Mr. MONTAGUE. Why do you use the words "in preference to"? You are required to state the cost value.

Mr. SCHWARTZ. I use the word "preference" synonymously with the words "in substitution of" the words as they are now in the statute.

Mr. MICHENER. Is there anything else, gentlemen? Do you gentlemen know of anyone else who wants to be heard?

Mr. Cook. I know of no one, Mr. Chairman.

Mr. MICHENER. Well, I think this concludes the hearing for to-day. Mr. MICHENER. Communications have been received from several persons throughout the country suggesting amendments to the national bankruptcy law and with the permission of the committee these suggestions will be inserted in the record.

Mr. Jasper F. Rommel, attorney at law, Chicago, Ill., writes: Much as I would like to do so, it is absolutely impossible for me to appear personally before the subcommittee of the Judiciary Committee now holding hearings relative proposed amendments to the bankruptcy law.

The only suggestion or recommendation I will make relative any change in the present bankruptcy act is such as would give wage claimants of bankrupt estates a preference over all other creditors, including claims for Federal, State, and municipal taxes. If the committee does not see fit to go as far as that, then I would suggest and recommend that the claims of wage claimants be placed upon an equality with the claims for Federal, State, and municipal taxes, so that they would participate equally with the Federal, State, and municipal governments in distribution prior to any distribution made to general creditors.

As I am not experienced in drafting laws to be passed by Congress, I hesitate to forward to you my idea of an amendatory section. However, I will inclose two forms which embody my ideas on the matter, viz:

Section 64 should be amended to read as follows:

"(a) The court shall order the trustee to pay, in advance of any payment to any creditor whatsoever, wages due and owing by the bankrupt to workmen, clerks, traveling or city salesmen, or servants, which have been earned within three months before the date of the commencement of the proceedings, not to exceed the sum of $300 to each claimant."