Senator HEBERT. Following up the inquiry of Senator Bratton, I think it is rather important to include this compilation, beginning on page 155 of the printed copy of the President's message, and continuing down to the end of page 156. It is the data from which Mr. Garrison is quoting, and answers quite fully, I think, the question that Senator Bratton had in mind. Senator HASTINGS. Mr. Reporter, you will copy that in the record. (The compilation referred to is as follows:) RATIO OF ASSETS TO UNSECURED LIABILITIES (EXCLUDING SECURED AND PRIORITY CLAIMS) A compilation showing the ratio of assets realized to unsecured liabilities only, in the cases of merchants closed in the southern district of New York (New York City and 10 large up-State counties) in 1930 is as follows: Out of the 96 no-asset mercantile cases— Eight had unsecured debts of $1,500 to $3.000. Three had unsecured debts between $50.000 and $75,000. Eight had unsecured debts between $12,500 and $15,000. Out of the 139 cases with assets of $1,500 to $5,000— Three had unsecured debts between $100,000 and $200,000. Detail tabulations for other districts have not been made, but it is believed by inspection and rough tabulations that approximately similar results would be found in other districts. Mr. GARRISON. Just to wind up that branch of the discussion, we concluded that the first main purpose of the bankruptcy law had failed to be successfully achieved. When we came to the second purpose, relating to discharges, we found these figures Senator HEBERT. You are reading from what page? Mr. GARRISON. From page 12 of the report to the President. That in the fiscal year 1930 less than 1 per cent of those bankrupts who applied for discharge were denied a discharge. If we take the merchants and manufacturers alone we find that about 2 per cent of the discharge applications were denied, and that in the remaining cases in bankruptcy, about one-half of 1 per cent of the discharge applications were denied. In wage-earners' cases the percentage was 0.004. Now, these statistics on that page and on the preceding page show that these figures have been more or less constant ever since the adoption of the bankruptcy act in 1898. The discharge provisions have been amended in 1903, 1926; also in 1910. In each case an endeavor was made to strengthen the discharge provisions and to prevent the wholesale discharge of bankrupts. Senator HEBERT. Pardon me. I take it it is not so much the need of some law on the subject, but the fact it is nobody's business to inquire into the situation and find out whether the discharge was justified? Mr. GARRISON. That is right, Senator. If, in fact, 99 per cent of all bankrupts who applied for a discharge were, in fact, entitled to a discharge, there would be no criticism of the law, but we find that no one in bankruptcy has been placed under any duty to examine into the bankrupts' conduct of affairs. That is left entirely to the initiative of private individuals. 114075-32-2 Senator BRATTON. How is it proposed to correct that? Mr. GARRISON. We propose to correct that by setting up a staff of examiners under the Department of Justice, and I think, perhaps, I had better cover that when I come to the remedies. Let me give you a few figures on the examination of bankrupts. These figures are on page 14, and are from referees' reports on cases actually before them during a 10 weeks' period. These are commercial bankruptcies only. Out of 2,171 commercial bankruptcies, cases all over the country, about 75 per cent of the bankrupts were examined at the first meeting of the creditors only. These examinations are generally inadequate and perfunctory, with, of course, exceptions in certain cases. Över half of these bankrupts who were examined at the first meeting were examined by the referee only. Now, certainly, in commercial bankruptcies, the referee has no background of knowledge about the case by which he can go into the actual conduct of the bankrupt. About all his examination can consist of would be to ask the bankrupt if his schedules are true, and if he has, in fact, turned over all of his property to be administered. The referee can not go back into the history of the failure. Now, we find 15 per cent of these commercial bankrupts were not examined at all by anyone, and that only 10 per cent of the entire number were examined under section 21 a of the bankruptcy act, which is the section availed of when examinations in earnest are to be made. Now, not only do we find no one under any duty to inquire into the bankrupt's conduct, but no one under any duty to oppose his discharge, no matter what his conduct may have been, and we have some striking figures on opposition to discharge. For instance, turn to pages 15 to 17. In 8,804 cases closed by the referees, their reports show that only 294 meetings of creditors were called to authorize the trustee to oppose the discharge. Two hundred and nineteen of these meetings out of the 294 were unattended by anyone. Only 75 were attended by creditors, chiefly by proxy, so that out of 8,804 cases we had 75 cases in which the creditors took an interest in opposing the discharge. Now, the vice in leaving oppositions to discharge entirely to the initiative of creditors is not only that the creditors having lost everything they have are unwilling to throw good money after bad, and to perform a public function at their private expense, but also when they do make opposition to a discharge, they frequently may use that as a secret means of extorting money on the side, in order that they may be bought off from their opposition. Senator HEBERT. You mean extorting money from the bankrupt, or some of his friends, or something like that? Mr. GARRISON. Exactly. Let me give you some figures on what appears when creditors do oppose the discharge. These figures are from the district court clerks, page 16. In the fiscal year 1930, 27,426 applications for discharge were disposed of. These are figures from 72 districts. In a little over 1,000 of these 27,000 cases did creditors file notices of appearances, stating they wished to oppose the discharge. In 330 of these thou sand cases, the creditors did not follow up these notices of appearances by going forward with specifications of opposition. Something happened from the date they put in their notices of appearances until the time went by for them to go forward and follow up with opposition. Now, out of 820 cases in which the creditors did file specification, in 208 of them they withdrew, and here again something must have happened. That left 612 cases in which the issues were presumably tried, and 283 bankrupts were denied a discharge. In other words, out of over 27,000 applications, only 283 were denied, and over 26,000 were granted without inquiry because unopposed. Now, the further objection to the discharge provisions is the lack of any power and discretion given to the court. In the absence of opposition by creditors, which is conducted like a litigation, almost like prosecution of a criminal; in the absence of that the court is bound to grant the discharge, no matter how notoriously fraudulent the bankrupt may have been, and not only that, but there is no middle ground between the outright granting of the discharge and the outright denying of the discharge. The court has no power or discretion to temper the action to suit the equities of each case. In England and Canada that power has been given the courts, to suspend discharges or grant them upon conditions, so that they may suit their action to the degree of culpability of the debtor and the circumstances of each case. To bring this discussion to a head, we concluded that the second main purpose of the bankruptcy act was not being achieved, because what it actually amounts to in practice is that except in a handful of cases each debtor is practically guaranteed an automatic discharge, quite without regard to what his conduct may have been, and the whole result of the breakdown of these two main purposes of the law is that this law is virtually nothing more than a means of a wholesale cancellation of debts without any payment to amount to anything to creditors. Senator HEBERT. When you speak of the two main purposes-it is some time since reference has been made to them, and for the record, if I understood you, they are, first, the distribution of assets, and, second, his discharge from bankruptcy. Mr. GARRISON. Yes; with this corollary to a discharge in cases of honest misfortune; namely, that commercial fraud and dishonesty should be discouraged by attaching some penalty to such acts. That was clearly in the minds of the framers of the law. The third main conclusion we arrived at was that so far as the administration of the act is concerned, there are numerous directions in which it is inefficient and could be vastly improved. I want, however, to stress the fact that this is not an attempt merely to patch up the administrative machinery of the act. We feel very strongly that unless the main problem is attacked, first, of making the act effective as a medium of distribution, and, secondly, making the discharge provisions effective, that mere patching of administrative machinery will be of little use-I am rather tempted, in view of time, I am consuming too much time--I say I am rather tempted, in view of the time, not to go into the details of administration; it is perhaps better to leave that for another time; to go now into the remedies proposed in this bill for making the two main purposes of the act effective, and when I have done that, you wish me to continue with the administrative features, I shall be glad to do so. if Senator HASTINGS. I think we shall want you to do that also, but I agree with you this is the time to explain the remedies. Mr. GARRISON. We have set up a new Chapter VIII to be added on at the end of the bankruptcy act, entitled "Provisions for the Relief of Debtors." This is directed toward making the act effective as a medium of distribution. This new Chapter VIII contains four sections, each one of which provides a method of procedure for an insolvent debtor who genuinely wishes to make some settlement with his creditors and offers him a method of proceeding without being adjudged a bankrupt, or placed under the stigma of bankruptcy. Senator HEBERT. But relieving him of his liability. Mr. GARRISON. I will come to that in a moment. The whole purpose of these four new sections of Chapter VIII is to write into the bankruptcy law some constructive features that will make the law useful to failing debtors and creditors alike, and give them a means of composing their difficulties, inducing them to do so, and making it worthwhile for them to do so, before all the assets have been consumed and wasted. Senator HASTINGS. Will you tell me where to begin in this committee print? On page 109 is Chapter VIII. Where do your new provisions begin? Mr. GARRISON. They begin right there. Senator HASTINGS. The whole of Chapter VIII? Mr. GARRISON. The whole of Chapter VIII. Just a word about each of these four new proceedings. I will not go into them in detail, because I think they are largely noncontroversial. There may be valuable suggestions as to detail, but, as far as I have sensed the reaction to them, they are noncontroversial. The first section, 73, provides a revised proceeding for compositions under which, without going into detail, the debtor can get his settlement through, if it is a satisfactory one, with far greater speed and saving to himself, and with far less threat of opposition by minority creditors than he can to-day. The chief change is giving the power to the referee instead of to the judge, to confirm or reject the composition, putting the whole proceeding in the hands of the referee, subject to review. The advantage of that is that you obviate the long delays which now occur when the offer has been made and accepted, and all of the hearings have been held before the referee. The case then goes up to the judge for confirmation and hearing, and if one creditor files a notice of appearance in opposition, it goes back to the referee and further hearings are held on that opposition, and then it goes back to the judge for final disposition, and this upstairs and downstairs business absolutely destroys the value of the proceeding, so far as the debtor is concerned, because it consumes weeks, often months, of time, during which the business he is trying to get back may absolutely go to pot. Speed is essential to the debtor in working out a |