the litigation; and any creditor who dares to oppose a composition at the present time, even if successful, has to pay so much out of his own pocket in necessary expenses, stenographer's fees, witness' fees, accountant's fees, investigator's fees, attorney's fees, that such creditor is lucky if his expenses do not exceed his bankruptcy dividend, besides which he takes all the risk of defeat and its consequent obloquy. Even if the composition offer is the regulation 25 per cent, and, through this creditor's opposition to its confirmation, the composition is defeated and dividends of 40 or 50 per cent are distributed to creditors, the creditor who has brought about such a financial benefit, can not, as a rule, be reimbursed for any part of his expenses out of the estate, and thus loses all dividends; whilst the other creditors, all of whom have profited by his efforts, and all of whom ought to be interested equally with him in putting down fraudulent compositions, reap the benefit of the added dividends without bearing any of the burden and risk of obtaining them. Moreover, there are many cases where a composition ought to be denied for the benefit of the business community and as a lesson to wrong doers, because of flagrant fraud perpetrated on creditors, even though the bankrupt has not left enough in the estate recoverable by the trustee to give a dividend as high as the composition percentage offered by the bankrupt. Every business man, every lawyer, every referee in bankruptcy and every Federal judge will appreciate the truth and force of these statements, and each one of them can expand the statements with illustrations drawn from his own experience. NO OTHER METHOD OF CONCERTED ACTION AVAILABLE Concerted action by creditors, as we have seen, is the only practical way in which creditors can protect themselves against fraud and chicanery in bankruptcy. But it is impossible to have this concerted action, in the case of improper compositions, through the ordinary representative of the creditors, the trustee, upon majority vote of creditors; for no petition for confirmation of a composition can even be filed until a majority of the creditors have approved the offer; so it would be foolish legislation, an inconsistency and paradox, indeed, for the law to be amended to provide that the same majority that permitted the filing of the bankruptcy composition should later authorize the trustee to oppose its confirmation. Therefore the opposition to compositions must be accomplished through the concerted action of creditors in other ways than by that of authorizing the trustee, on vote of creditors, to oppose. What ways are avilable? Of course, in some States, creditors may form associations or corporations to employ attorneys and accountants and investigators to go out on every bankruptcy. But such a method is cumbersome. Moreover, in some States, notably in the State of New York, such a method of concerted action by creditors is forbidden by statute. There remains, therefore, only one way for creditors to act in concert to prevent bad compositions. A PROPOSED AMENDMENT TO THE BANKRUPTCY ACT TO PREVENT FRAUDULENT COMPOSITIONS To meet this situation it is proposed to amend section 64 (b) of the bankruptcy act, relating to "Debts which have priority," and prescribing that "the debts to have priority * * * and to be paid in full out of the bankrupt estate, and the order of payment" by the insertion between subdivision (3) and subdivision (4) thereof the following subdivision, to be designated as subdivision (32), to wit: "In the discretion of the court, where a composition offered by the bankrupt has been denied on any of the grounds mentioned in section 12, subdivision (d) of this act, by the efforts and at the expense of one or more of the creditors, themselves not guilty of attempting to extort directly or indirectly a voidable preference, the reasonable expenses of such creditors in defeating the composition. PROPOSED AMENDMENT CAN NOT BE ABUSED There can be little opportunity for this amendment to be abused. In the first place, reimbursement at all, as well as its amount, is within the discretion of the court. Being a "judicial" discretion, the reasons for granting or withholding it will be subject to review for abuse of discretion. Nor can it be used as an instrument of revenge by a disappointed creditor who has sought to get a preference. Much less can it be used as a club for acquiring a preference, for the reimbursement can only be given where the opposition is successful. It is precisely here, moreover, that the court's discretion would come into play. The framing of the amendment is such as to permit the gradual development of rules as to when such reimbursement should be allowed. Again, the amendment is exceedingly moderate in another regard. In all the matters where concerted action of the creditors is brought about through the trustee, wherever the trustee acts in behalf of the creditors, he acts at their expense, whether successful or not, whilst in the proposed amendment the creditors bear the burden of the expense only in the event that the opposition to the composition is declared by the court to have been justified, and even then the reimbursement still remains within the discretion of the court. Mr. PERLMAN. Does that suggestion strike at the root of the evil of collusive bankruptcy? Mr. REMINGTON. Yes; because most of these collusive bankruptcies takes the form of compositions. Mr. PERLMAN. I mean collusive in the filing of them. How do you meet that? Mr. REMINGTON. That is by court rule which has been adopted with, unfortunately, a tail piece in our southern district and our eastern district, as a uniform rule. I have been advocating that for years and ain happy to say that we have it now. It is a joint rule. Mr. MICHENER. You mean that is the rule which is now enforced? Mr. REMINGTON. In the last two weeks. Mr. MICHENER. But just what effect will that have upon what we are after here? Mr. REMINGTON. That will have the effect, if it is carried outand it has got to be carried out-of preventing the appointment of attorneys. Here it is: No attorney for any of the petitioning creditors nor any attorney shall be appointed attorney for the receiver, or trustee, nor receive any compensation for professional services rendered to such receiver or trustee, unless such attorney, before his appointment, shall make and file his affidavit that he did not become attorney for any of said petitioning creditors, or any creditor nor become attorney in any other capacity in the proceedings at the suggestion or through the influence, direct or indirect, exercised in any form or guise, of any of the bankrupts or of any relative or attorney of any of the bankrupts, bankrupt in this instance including officers, directors, and stockholders of bankrupt corporations, save and except, for good cause shown by such attorney's affidavits, the court may notwithstanding allow the receiver or trustee to retain as his attorney, the attorney for the petitioning (eastern district, or other) creditors. Mr. PERLMAN. That deals only with the payment of fees. Mr. REMINGTON. Well, that deals with the appointment, and the attorney who makes that affidavit, because heretofore the affidavits have been required of bankrupts. Now, there are lots of honest and straight bankrupts. I have defended them myself. But the ordinary bankrupt will find anything, won't he? And so they will make any kind of affidavit. But it is the attorney at the barMr. MICHENER. Do you suggest legislation Mr. REMINGTON (interposing). No legislation to that. Mr. MICHENER. Well, let us confine ourselves as much as we can here to proposed legislation and not to discussion of individual rules affecting individual courts, excepting as those rules should be embodied, or the substance of them embodied, in substantive law, or we won't get through. Mr. REMINGTON. Well, I was only answering honorable members' questions there, Mr. Perlman, when he asked me how I would effect the collusive starting feature, and that is how I would effect that. But the legislation that I would propose is just this one with regard to composition. Mr. PERLMAN. I would like to ask another question in regard to legislation. When you meet the people that may exist, tell me whether you recommend legislation or rules? As a rule the evil of collusive bankruptcy has been the evils of the bankrupt or his attorney acting with some other attorney, giving him a list of creditors, and that attorney canvassing the list and getting three petitioning creditors, and believing that the case was sent to him by the bankrupt perhaps might not be as diligent as he should be. You cover that by this rule, you say? Mr. REMINGTON. Yes. Mr. PERLMAN. Please tell me how you cover this case. A bankrupt advises, suggests to three of his creditors that he go to a particular attorney and retain him to file a petition. The attorney does not know that the bankrupt has suggested his name and there is no wrong on the part of the attorney; but he is counsel for these three creditors; how can you reach those three petitioning creditors who in collusion with the attorney have brought about this petition? Mr. REMINGTON. Well, in the first place, the case is a little strong. The fact is that case is very close to this very case I mentioned where I happened to be a receiver, and I employed an attorney for the petitioning creditors, until I found out that they had been sent out that these creditors had been sent to that petitionong creditor's attorney for the bankrupt, and then I said to the attorney, "That doesn't look just right.' He said, "No, it doesn't." "All right, then," I said, "we will just take the resignations." And so they resigned and got out of it. Mr. PERLMAN. Can we not remedy it by legislation by making it a crime or something for creditors to be in collusion with the bankrupt and bringing about the filing of a petition? Why could not the bankrupt file a voluntary petition? Mr. REMINGTON. He could, and that brings me to another point. Mr. PERLMAN. Well, can not we amend the bankruptcy act or the penal statute by reaching criminally those engaged in such conspiracy, the creditors, some of them perhaps not real creditors? Mr. REMINGTON. In anything I have proposed I have got to be mild, and I am afraid that we would have a big job on our hands to frame up a criminal statute that would work. Mr. HAYS. It is criminal under the State law of course. Mr. REMINGTON. That will help put down the collusive part of bankruptcy and has my hearty support. Now there are certain measures in addition to that particular one that I advocate, and I would like to say have the support of all the judges of the southern district, and I would like to read a letter from Judge Knox, addressed to me under date of September 28. Mr. MICHENER. If there are a number of articles to read why not insert them? We will have to go on the floor of the House pretty soon. Mr. REMINGTON. Very well, I will insert these. AN ACCOUNTANT'S VIEWPOINT OF THE BANKRUPTCY SITUATION By David Berdon, C. P. A., New York City Conditions with respect to professional services in bankruptcy cases by accountants have within recent years been such that many accounting firms have been reluctant to accept engagements in bankruptcy matters at all. From the standpoint of accountants the objections against the engagements in such matters are primarily the following: 1. Too frequently thorough and constructive work by the accountant goes for naught because of the lack of necessary initiative and driving force on the part of creditors in utilizing the weapons available in the irregularities existent and disclosed in most bankruptcies. 2. The fact that accountants are often not assured of their compensation. The writer's experiences in this matter have been such he will under no consideration entertain bankruptcy engagements without the proper court order authorization, or without the fee being guaranteed by some of the responsible creditors. Frequently, should an accountant turn in a report giving the merciless facts without mincing words he will find payment of his fee strangely held up and often objections made to its reasonability. It will also be found that very undesirable conditions exist with respect to the manner in which accountants are recommended and because of the fact that every bankruptcy investigation will generally be made by one of a very limited number of accounting firms. Concerning the recent attempts by trade and other interested bodies to remedy and eliminate evils disclosed in the tremendous number of bankruptcies of the past few years, the writer who has given some thought and study to the subject, believes that the adoption of some or all of the following suggestions would greatly help to avoid bankruptcies in the first place and minimize losses from the administration of bankrupt estates in the second place. A. TO AVOID LOSSES FROM DEBTORS PRIOR TO BANKRUPTCY In addition to the proper utilization of all credit facilities before checking the account, i. e. general mercantile agency information, trade agency data, trade references, ledger experience, etc., I believe the following suggestions would prove helpful: 1. Insistence wherever possible upon submission of balance sheets certified to by reputable certified or chartered accountants; or where a debtor submits a statement on a creditor's form or on his own stationery, permission should be secured to communicate with his accountants directly for information concerning the accuracy of the figures submitted. 2. Organization in each industry of a "committee for prevention of trade losses," which committee will offer cooperation to any trade debtor finding himself in difficulties, such cooperation to include thorough examination of the embarassed debtor's affairs by accountants so that the true cause or causes for the debtor's condition may be ascertained. Whether overhead or other costs be excessive, or whether costs be improperly computed or whether purchasing or selling methods be faulty, undoubtedly the advice of a trade committee consisting of successful men in the industry, could help many debtors avoid actual bankruptcy; or at least minimize such losses. 3. Proper cooperation should be had with accountants preferably through the New York State Society of Certified Public Accountants, which includes in its membership more than 80 per cent of the practicing certified public accountants of this State, whereby uniformity in the preparation of financial statements would be secured and standard terminology adopted so that no room for ambiguity or misunderstanding could exist between the accountant preparing the balance sheet, and the merchant or banker depending upon the same as a basis for extending credit. Furthermore, bankers and merchants should exert their efforts and lend their assistance toward securing a proper State licensing law to all accountants guilty of culpable negligence or willful misrepresentation. 4. Creditors should have facilities through proper organization among themselves for appearing before the court in all cases where an attempt is made to have a receiver appointed for an embarrassed debtor; and where the creditors feel that such appointment of a receiver is not desirable or necessary, they should be prepared to emphatically oppose the application. It is interesting to note in this connection that a decision was recently issued by the United States Circuit Court of Appeals in the matter of E. H. Walsh (Inc.), of New York City, whereby the right of creditors to oppose the appointment of a receiver was upheld in the following language used by the court: "The power to appoint receivers is one to be exercised not as a matter of course, but only upon proof that the appointment is absolutely necessary." Unquestionably, substantial savings could be secured for creditors if the appointment of receivers was avoided wherever possible. Such savings arise first through the avoidance of the heavy expenses common to most receiverships; secondly, through the disposition of assets at maximum values; and thirdly, through carrying on operations at minimum expenses and maximum profits. In a recent case with which the writer is familiar, creditors appeared in opposition to the appointment of the receiver, secured permission that decision on the matter be withheld for a few days, and in the interim got together with the debtor and arranged for a 75 per cent settlement. Had the case been handled in the ordinary bankruptcy receivership manner creditors would unquestionably have realized less than 25 per cent. 5. Creditors should insist (and if necessary secure legislation to make such insistence effective) that bankruptcy petitions and applications for appointments of receivers should only be acted upon by the courts if requested by bona fide creditors. It is undoubtedly true that in many bankruptcy cases the petitions are filed by "dummy" creditors acting upon the strength of claims assigned to them by certain creditors who have either been grossly misled as to the necessity for such action, or who have been tempted to assent to lending their assistance in the matter by being promised payment of their claims in full or upon a substantially better basis than that which other creditors are to receive. 6. Bankers and merchants should actively advocate legislation which would make it mandatory for every seeker of credit to keep certain essential and proper records, and credit should emphatically be denied to any firm or individual failing to state in writing that such records are being kept. Where essential records are not available in the course of investigation of any bankruptcy the bankruptcy laws should provide that such an omission be proper cause for refusing a bankruptcy discharge to any bankrupt, and it may even be advisable that the law provide additional penalties for such unwarranted condition. The income-tax authorities give scant consideration to taxpayers who negligently or deliberately "lose" or fail to keep essential records, and unquestionably such offenses should not be permitted to go unpunished in bankruptcy cases where the interests of many creditors are so often at stake. 7. All extenders of credit should support the use of a standardized form of financial statement to be submitted by all seekers of credit, and there should be absolute insistence that every question or requirement in such standard form be satisfactorily answered and met. It is of timely interest to note in this connection that the district attorney's office of New York County has been actively advocating the use of such a standard form which would facilitate prosecution of violators of the law, and that at a meeting held some time ago in the district attorney's office the standard form suggested by that office was unanimously adopted by merchants, bankers, credit men, and credit association representatives representing, it is stated, directly and indirectly, industries and firms having an aggregate capital in excess of $9,000,000,000. B. TO MINIMIZE LOSSES FROM THE ADMINISTRATION OF BANKRUPTCY ESTATES 1. In all cases where the appointment of receivers becomes necessary the courts should be requested to appoint as receiver preferably an experienced merchant of the industry or a certified public accountant of repute and wide experience. In larger estates, appointment of two such receivers, as suggested, would undoubtedly result in more efficient, economic, and reliable administration. 2. Where assets of the estate are to be disposed of (and in this connection no secret or private sale of any substantial part of the assets should be held without advance notice to all creditors giving itemized list of merchandise available for sale) creditors should make it an invariable rule to participate in such sales, first from the angle of the moral effect of such activity, and secondly, with actual intent and determination to bid on and buy in for themselves any merchandise offered for sale at attractive prices. Not only would such interest and activity on the part of creditors bring maximum dividend results for the bankrupt estate, but it may also frequently enable a creditor to recoup some of his losses in the bankruptcy, through the medium of buying in some of his own or similar |