participate in reorganizations only to the extent of the value remaining in the debtor's properties after the satisfaction of prior claims. The Commission has not considered a plan as fair which accords recognition to junior interests unless there is a residuum of value for such interests or such recognition is based on a fresh contribution made in money or money's worth.

The Commission's position in this regard was fully sustained by the decision of the United States Supreme Court in Case v. Los Angeles Lumber Products Co., Ltd., decided November 6, 1939.2

3

Consistently with the foregoing, the Commission has considered a determination of the value of the debtor's properties essential in evaluating the fairness of reorganization plans. Its view in this regard was recently upheld in a significant decision of the Circuit Court of Appeals for the Third Circuit in the Philadelphia & Reading Coal & Iron Co. case, in which the court held that solvency, and by that token, value, is appropriately to be determined in advance of approval of any plan of reorganization. It may be added, in connection with the complex problem of determining value for the purposes described, that the Commission shares the view of financial experts generally and of most courts, that an appropriate capitalization of reasonably foreseeable earning power is the most reliable guide to value in reorganization cases.

Although limitations of space preclude any summary in this report of the varying fact situations in which the question of the fairness of plans has been presented to the Commission, a typical instance is briefly outlined in the following paragraphs, which serves also as an indication of the expedition with which the Commission must consider and act upon these matters as presented.

In the case in question, the debtor owned and operated a cold storage warehouse and had outstanding $1,646,000 of first mortgage bonds, $598,500 of second mortgage bonds, $470,000 of unsecured indebtedness, $550,000 of preferred stock, and 30,000 shares of common stock. The reorganization proceedings had been pending before the court for several years and several plans of reorganization had proved abortive. In order to expedite the proceedings, the judge, on October 21, 1938, ordered the trustees to file; on or before November 10 of that year, a plan of reorganization or a report of their reasons why a plan could not be effected, pursuant to Chapter X. It was further ordered that a hearing on the plan should be held on November 18. On November 2, 1938, the judge entered an order, pursuant to Section 208 of Chapter X, requesting the Commission to file a notice of its appearance.

In this case, the Commission's position was presented to the Court in a brief filed for the United States as amicus curiae and in argument by the Solicitor General. The Commission participated in the preparation of the brief and argument.

The opinion of the court is referred to infra, pp. 20-21.

edness aggregated over $3,000,000 and in 5 instances it exceeded $25,000,000. The distribution of cases by amount of indebtedness is shown in the following table:

Distribution by amount of individual indebtedness of cases under Chapter X and Section 77B in which the Commission was a party to the proceedings-Fiscal year 1939

• Does not include one company whose indebtedness was not ascertained.

STATISTICS ON REORGANIZATIONS UNDER CHAPTER X

In order to determine in which cases its participation would, in the light of the public interest involved, be desirable and practicable, and in order that it might be in a position to respond to the requests of judges seeking its advice and assistance in connection with specific cases, the Commission has endeavored to keep informed as to the nature of all pending cases. Accordingly, the Commission has investigated or examined during the fiscal year a total of 1,104 reorganization cases, including the cases in which it became a party. Of this number, 527 were proceedings commenced under Section 77B prior to enactment of the Chandler Act, and the remaining 577 were instituted under the provisions of Chapter X of the amended Act.

As an aid to the Commission in the performance of its duties under the Act, it was provided in Section 265a of Chapter X that the Clerks of the various Federal District Courts shall transmit to the Commission copies of all petitions for reorganization filed under that Chapter, as well as copies of various other specified documents filed in the proceedings. Thus, the Commission possesses files or records of the more important papers in all Chapter X cases and is in a position to make available to many users information otherwise practically inaccessible to them.

With a view to dissemination of this information, the Commission has inaugurated a series of statistical surveys presenting data on the total number of proceedings under Chapter X and the aggregate assets and indebtedness of the companies involved, classified according to industry, location of principal assets, location of principal place of business, Federal judicial district in which proceedings were instituted, amount of individual indebtedness, and type of petition filed. The first of these statistical analyses, covering the period from September 22, 1938, to March 31, 1939, inclusive, was released on May 8, 1939. A statistical analysis in similar form covering the period from June 22, 1938 to June 30, 1939, inclusive, is contained in Appendix IX of this report.

THE COMMISSION AS A PARTY TO PROCEEDINGS

In general, it may be said that the Commission's activities in reorganization proceedings in which it participates may be as extensive as the issues arising in the proceedings and as varied in their scope. As a party in interest, the Commission is represented at all important hearings in the proceedings. It participates in the discussions on all major issues and on appropriate occasions files legal or factual memoranda in support of its views. In addition, its views with respect to the fairness and feasibility of reorganization plans are fully discussed with all interested and proper parties, and proposals as to plans are fully examined in connection with the Commission's views. In many cases this has led to extensive amendment and improvement in such proposals in advance of the hearings thereon before the court. The range of matters with which the Commission has been concerned is outlined in the following paragraphs.

The Commission has encountered a number of instances of violation of, and noncompliance with, the procedural provisions of Chapter X. In many cases where such situations came to the Commission's attention, a conference with the parties was sufficient to dispose of the matter. In other cases, it was necessary to file a formal motion in court.

Insuring Adequate Notice of Hearings to Security Holders.

Among the more important of such violations of the Act were those connected with the provisions for notice which must be given of the various hearings required by the statute. Occasionally, for example, the Commission has advised the parties of their failure to give notice to the various parties entitled thereto, or of the inadequacy of the notice even when given, as relating to the hearings on the question of continuance in possession of the debtor or the retention in office of the trustee. The Commission has similarly objected to failure to give notice of the statutory hearings for the approval of a plan. In a

number of instances applications for interim allowances to the trustees and their counsel were made without the requisite hearing on notice to all creditors, security holders, and parties. In all of these instances it was possible to accomplish a correction of the violations without undertaking any formal court action. Many other examples of procedural noncompliance with the statute could be adduced as to which the Commission has taken remedial action. It is to be emphasized that these matters, though procedural in nature, are of significance to security holders in safeguarding their rights to be heard on all matters arising in reorganization proceedings under the statute. Securing Compliance With Provisions Regarding Trustees.

A most important phase of the Commission's activity in discerning and correcting noncompliance with the Act dealt with the appointment of independent trustees. As an essential element in the proper conduct of reorganizations, the statute prescribes certain standards of disinterestedness which must be met by trustees appointed under Chapter X. Wherever there was any doubt as to the qualifications of the trustees, the Commission undertook thoroughgoing examinations into the facts. In three cases, for example, sufficient evidence of conflicting interests was developed to warrant an appearance in court for the purpose of urging the removal of trustees. In one of these cases, where it appeared that the trustee had been in charge of the debtor's operations at the time of his appointment, the trustee resigned after the Commission filed its motion and before testimony was to be taken at the court hearing. In the second of these cases, the court removed the trustee after hearing. In the third case, the Commission was of the opinion that both the trustee and his attorney were disqualified under the statute, but the court overruled its objection and continued them in office.

In a few cases, independent trustees were not appointed although the indebtedness of each of the several debtors was in excess of $250,000, the point above which the statute makes their appointment mandatory. However, in all such instances, the omission was promptly cured when attention was directed to the violation. In other cases questions arose concerning the powers of the disinterested trustee as distinguished from those of the interested trustee. Under the statute the court can, in unusual cases, designate as an additional co-trustee an officer, director, or employee of the debtor, but only for the purpose of assisting in the operation of the business. Accordingly, the Commission objected to an order directing both the disinterested trustee and the co-trustee to prepare and file a plan. The Commission likewise objected to an order depriving the disinterested trustee of the power to participate in the operation of the business and confining his functions to the formulation and submission of the plan.

In both instances, the Commission's views were approved and the orders amended.

Securing Compliance With Provisions Regarding Protective Committees and Indenture Trustees.

Another general phase of the Commission's efforts to remedy noncompliance with the provisions of Chapter X related to the activities of protective committees and indenture trustees. The Commission has constantly been alert to secure compliance with the provisions of the statute which require disclosure by committees and indenture trustees of relevant information concerning their appointment, affiliations, and security holdings. Considerable attention also has been given to the controversial question whether formal intervention should be granted to committees and indenture trustees in proceedings under Chapter X. The position advanced by the Commission in the courts has been that, since the new statute affords committees and indenture trustees an unqualified right to be heard, such intervention is unnecessary as a general rule. In only one of the many cases dealing with the question was this view rejected.1

In connection with the activities of protective committees, the Commission was also concerned with the problem of solicitation of the assents of security holders to plans of reorganization prior to approval of such plans by the courts. The provisions of Chapter X were designed to assure to creditors and stockholders the information essential to the exercise of an informed judgment concerning the plan before their vote thereon is exercised, and also to remove from the courts the pressure which customarily attended "support" of plans that were frequently neither fair and equitable, nor feasible. Consistently with the purpose of these provisions, the Commission in a number of cases objected to such solicitations prior to the court's consideration and approval of the plan under consideration.

PLANS OF REORGANIZATION UNDER CHAPTER X

Many of the more complex problems which confronted the Commission as a party in reorganization cases were concerned with the failure of proposed reorganization plans to conform with the standards of fairness and feasibility required by Chapter X. As a preliminary to consideration of all plans of reorganization, it was necessary to assemble the essential information bearing on the physical and financial condition of the company, the causes of its financial collapse, the quality of its management, its past operating performance and future prospects, and the reasonable value of its properties. Information on

The numerous cases in which this view was upheld include The Philadelphia and Reading Coal and Iron Co. case which was appealed to the Circuit Court of Appeals for the Third Circuit. The opinion of the

appellate court in that case is summarized infra, pp. 20-21.