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1976/04/08 HR10624 Bankruptcy Act Amendments
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The original documents are located in Box 42, folder "1976/04/08 HR10624 Bankruptcy
Act Amendments" of the White House Records Office: Legislation Case Files at the Gerald
R. Ford Presidential Library.
Copyright Notice
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photocopies or other reproductions of copyrighted material. Gerald R. Ford donated to the United
States of America his copyrights in all of his unpublished writings in National Archives collections.
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domain. The copyrights to materials written by other individuals or organizations are presumed to
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copyright claim, please contact the Gerald R. Ford Presidential Library.
Exact duplicates within this folder were not digitized.
Digitized from Box 42 of the White House Records Office Legislation Case Files at the Gerald R. Ford Presidential Library
APPROVED
84/8/16
ACTION
THE WHITE HOUSE
APR8-197
WASHINGTON
Last Day: April 9
April 5, 1976
Postad 4/9/76 330 pm
To ARCULUSS 4/9/76
MEMORANDUM FOR
THE PRESIDENT
FROM:
JIM CANNON Jun
SUBJECT:
H.R. 10624 - Bankruptcy Act
Amendments
Attached for your consideration is H.R. 10624, sponsored
by Representative Rodino and five others. The enrolled
bill amends the Bankruptcy Act to provide revised
procedures under which a financially distressed
municipality or other subdivision or agency of a State
may seek the protection of the Federal courts while
negotiating a plan of reorganization and adjustment of
its debts with its creditors.
A discussion of the provisions of the bill is provided
in OMB's enrolled bill report at Tab A.
OMB, Max Friedersdorf, Counsel's Office (Lazarus),
Bill Seidman, Alan Greenspan and I recommend approval
of the enrolled bill.
RECOMMENDATION
That you sign H.R. 10624 at Tab B.
FORD LIBRARY DEPART
OF THE
PRESIDENT
EXECUTIVE OFFICE OF THE PRESIDENT
UNITED
OFFICE OF MANAGEMENT AND BUDGET
SERVICE
SERVIS
WASHINGTON, D.C. 20503
APR 2 1976
MEMORANDUM FOR THE PRESIDENT
Subject: Enrolled Bill H.R. 10624 - Bankruptcy Act amendments
Sponsor - Rep. Rodino (D) New Jersey and 5 others
Last Day for Action
April 9, 1976 - Friday
Purpose
To amend chapter IX of the Bankruptcy Act to establish revised
procedures for municipalities filing for bankruptcy.
Agency Recommendations
Office of Management and Budget
Approval
Department of Justice
Approval
Department of Health, Education
and Welfare
Approval
Department of the Treasury
No objection
Department of Commerce
No objection
Advisory Commission on Intergovernmental
Relations
No objection
Securities and Exchange Commission
No objection (Informally)
Discussion
The enrolled bill provides revised procedures under which a
financially distressed municipality or other subdivision or
agency of a State may seek the protection of the Federal courts
while negotiating a plan of reorganization and adjustment of
its debts with its creditors. It establishes the rules by
which a Federal district court may protect a municipality from
creditor action and sets forth the conditions under which law
suits against a city may be tried in an orderly fashion.
H.R. 10624 is similar in intent to legislation submitted by the
Administration to the Congress in October 1975 when it appeared
that New York City was facing imminent financial collapse. The
Administration's bill was prepared because the existing
2
legislation relating to municipal bankruptcy procedures
(chapter IX of the Bankruptcy Act) was outdated and ineffec-
tive for cities the size of New York; it was designed to
ensure the eventual solvency of the affected city as well
as to protect the interests of its creditors.
The major provisions of H.R. 10624 would
-- eliminate the requirement in current law that 51
percent of a city's creditors give prior consent
before a bankruptcy petition could be filed.
This was proposed by the Administration since this
requirement effectively precludes cities such as
New York from seeking relief before a bankruptcy
court. Even assuming that 51 percent of New York
City's creditors would consent to a bankruptcy
filing, it would be impossible to locate this
number of creditors since much of the city's debt
is in the form of bearer bonds and the identity
of the creditor is unknown.
-- provide a detailed description of the powers, limita-
tions and jurisdiction of the court in which a bankruptcy
petition is filed. Among other powers, the court may,
after a bankruptcy petition has been filed, permit the
petitioner to reject executory contracts (including
collective bargaining agreements) and unexpired leases.
The court may also permit the issuance of certificates
of indebtedness; such certificates are obligations of
the petitioner which generally have priority in payment
over other debts. Unless the petitioner consents, or
the plan for the adjustment of the petitioner's debts
so provides, the court may not interfere with the
political or governmental powers or with the property
or revenues of the petitioner.
protect the power of the States to control the govern-
mental functions of their political subdivisions. The
intent of this provision is to clarify and reaffirm
the sovereignty of the States, pursuant to the Tenth
Amendment, in any municipal bankruptcy proceeding.
However, the bill also preserves the rights of the
creditors to consent to any plan of adjustment a State
may prescribe for one of its agencies seeking bankruptcy
relief.
&
3
--- require a distressed petitioner to meet one of four
conditions before it is eligible for bankruptcy
relief. A petitioner would not be eligible for
relief unless
(1) it successfully negotiated a plan of adjust-
ment of its debts with its major creditors; or
(2) it negotiated in good faith but has failed to
obtain the agreement of its major creditors; or
(3) such negotiation is impracticable; or
(4) it has a reasonable fear that a creditor may
attempt to obtain a preference.
This provision would limit access to the bankruptcy
court without restricting such access so severely
as to preclude relief in cases where the petitioner
is confronted with stubborn or overly hasty creditors,
or creditors whose identity is unknown because of the
existence of a large number of bonds in bearer form.
The Administration bill restricted access to bank-
ruptcy relief to cities with over 1 million residents.
The enrolled bill would permit any State's political
subdivision or public agency, to petition for bank-
ruptcy relief if it is authorized to do so by State
law.
prescribe the rules governing the filing of a petition
and the procedures to be followed in the administration
and adjudication of a bankruptcy case by the court.
Such rules and procedures involve the preparation and
filing of a list of the names, addresses and claims
of all creditors, the payment of a $100 filing fee, and
the notification of the parties concerned that a
petition has been filed and the nature of such petition.
The filing of a petition would operate as an automatic
stay of any judicial or other proceeding against the
petitioner and its property. The court is required
to designate classes of creditors, based on the
similarity of their claims, and to define the priorities
in the payment of claims with respect to each class of
creditors. Prior to the payment of any creditor's
claim, the administrative costs incident to filing the
petition, debts owed for services and materials
4
actually provided within 3 months of the filing of
the petition, and debts which have priority under
Federal statute must be first paid in full.
-- require that the petitioner file a plan of adjust-
ment of its debts. Within 90 days creditors are to
accept, modify or reject the plan. Such plan may
be confirmed by the court only if it is accepted
by creditors holding at least two-thirds of the
amount of claims in each class and by creditors
holding more than 50 percent in the number of claims
in each class. Objections to the confirmation of
the plan may be filed prior to ten days before the
date of the hearing on the plan set by the court.
The court must confirm the plan if six conditions,
dealing with the fairness and reasonableness of the
plan, have been met.
Legislative history made during the floor debate on
the enrolled bill clarified the congressional intent
that these conditions of confirmation encompass the
requirement that the petitioner's budget be in balance
within a reasonable period after adoption of the plan.
This requirement was explicitly stated in the Adminis-
tration's bill.
As the attached Justice Department views letter notes, the
enrolled bill differs from the Administration bill in five
major regards:
the enrolled bill would replace chapter IX of the
Bankruptcy Act as the exclusive remedy available
for all municipalities. The Administration bill
left standing the existing provision of chapter
IX and added a new chapter XVI (incorrectly cited
as chapter XI in the attached Justice letter)
limiting access to bankruptcy to cities with over
1 million residents.
the enrolled bill would require that a city make a
good faith attempt at negotiating a plan of composi-
tion; the Administration bill required that the
municipality file a good faith plan of composition
with its petition.
5
-- the enrolled bill contains no explicit balanced
budget requirement, although, as noted before,
legislative history on the bill indicates that
such a requirement is "implicit" in the bill's
provisions. The Administration bill contained
an explicit balanced budget requirement.
--- the enrolled bill does not require that a muni-
cipality must be specifically authorized by a
State to file a petition of bankruptcy. The
Administration bill included such an explicit
provision.
-- the enrolled bill would require for confirmation
of a plan of composition the approval of two-
thirds in amount and half by number, of each
class of affected creditors voting. The Adminis-
tration bill simply required the approval of two-
thirds in amount of each class of creditors.
Despite these differences between the Administration bill and
the enrolled bill, the Justice Department notes that H.R. 10624
is "fundamentally sound" and recommends approval. We concur in
that recommendation.
James m. Trey
Assistant Director
for Legislative Reference
THE CHAIRMAN OF THE
COUNCIL OF ECONOMIC ADVISERS
WASHINGTON
April 6, 1976
MEMORANDUM FOR JAMES M. CANNON
SUBJECT: H.R. 10624 - Bankruptcy Act Amendments
This is in response to your request for the Council's
comments on enrolled bill, H.R. 10624, to amend Chapter IX
of the Bankruptcy Act. The changes in bankruptcy pro-
ceedings for municipalities contained in H.R. 10624 would
on the whole be beneficial for three reasons. First, it
would allow distressed municipalities to seek relief more
quickly, so that economic uncertainty of the sort which
attended the drawn-out New York City crisis would likely
be less severe. Second, the role of Federal assistance
to municipalities required by prolonged financial trouble
might be reduced. Finally, increasing the probability
of bankruptcy is likely to cause the financial markets to
be more careful in assessing a municipality's credit
worthiness, which in turn should encourage more prudent
financial management by municipalities.
ARR Alan Greenspan
FORD LIGRART
AMERICAN REVOLUTION
1776-1976
ASSISTANT ATTORNEY GENERAL
Department of Justice
Mashington, D.C. 20530
APR 2 3.21 NH'76
OFFICE OF
MANAGEMENT & BURGET
Honorable James T. Lynn
Director, Office of Management
and Budget
252 Old Executive Office Bldg.
17th & Pennsylvania Ave., N.W.
Washington, D.C. 20503
Dear Mr. Lynn:
This is in response to your request for the comments
of the Department of Justice on the enrolled bill, H.R.
10624, to amend Chapter IX of the Bankruptcy Act.
The bill contains alterations from the Administration's
proposal on this subject (H.R. 10457) which are too numerous
to bear mention. Only the following are in our view suffi-
ciently fundamental as possibly to warrant consideration of
a veto or a reservation in the signing statement:
1. The Administration bill was framed as a new Chapter
XI of the Bankruptcy Act, which would be available (in addi-
tion to the existing Chapter IX) only to cities with a popu-
lation in excess of 1,000,000. The present enrolled bill,
on the other hand, would replace Chapter IX as the exclusive
bankruptcy remedy available for all municipalities. The
latter course was thought undesirable by the Administration
for a number of reasons. First and foremost, facilitation
of bankruptcy--which was the principal objective of the
Administration's proposal--was not thought necessarily
desirable with regard to smaller governmental units, since
the existing provisions, though in some respects cumbersome,
were feasible for them, and since further liberalization
might have the effect of impairing the marketability of
their securities. Second, it was feared that extension of
the legislation to small municipalities would make it impos-
sible to include certain protections deemed necessary only
with respect to major municipalities--for example, the
requirement for specific State consent to the bankruptcy
petition, discussed below. Third, it was felt that a full
revision of Chapter IX would consume more congressional time
than New York City had available to wait. Finally, there was
REVOLUTION
AMERICAN
BICENTENNIAL
1776
1976
the marginal consideration that commerce clause justification
for the somewhat expanded bankruptcy powers which the bill
created could more easily be sustained if the bill applied
only to major cities, rather than to all water districts.
2. The Administration bill (Sec. 804 (b) (1)) required
the municipality to file a good faith plan of composition
with its petition. It was felt that this would impose some
discipline upon the municipality, and create an atmosphere of
hard reality at the very outset of the proceeding. This
requirement has been eliminated in the enrolled bill, although
the city must establish that it has attempted the negotiation
of such a plan or that such negotiation is impracticable (Sec.
84).
3. The Administration bill required that the petition
be accompanied by a statement of the municipality's projected
revenues and expenditures adequate to establish that its bud-
get would be in balance within a reasonable time after adop-
tion of the plan (Sec. 804 (b) (2) ) ; and required a specific
finding that the municipality's budget would be in balance
within a reasonable time as a condition to court approval of
the final plan (Sec. 816 (d) (7) ) The enrolled bill eliminates
both these requirements. Its legislative history, however,
might be read to establish the latter of them. The version
of the bill adopted by the Senate originally contained a
"balanced budget" requirement for confirmation of the plan;
it was eliminated in conference; and an exchange on the Senate
floor between Senator Burdick, who headed the Senate's con-
ference committee delegation, and Senator Hruska, indicates
that the deletion was agreed to because it was felt that the
requirement would in any event be imposed by the bill's re-
quirement that no plan can be confirmed unless it is "feasible."
See Attachment A. If this legislative history is accepted at
face value it would achieve the same result as the Administra-
tion's bill; it is in our view doubtful, however, whether on
the basis of this history alone the courts would impose quite
such rigorous conditions as they would if the statute specifically
referred to a "balanced budget."
4. The Administration bill (Sec. 803 (a) ) required as a
condition of filing that the municipality be "specifically
authorized by the State to file a petition." As indicated in
testimony by Administration spokesmen, this was meant to require
-2-
explicit State approval for the particular filing. Such a
requirement was thought desirable both because, in the case
of a city over 1,000,000, a step of such enormous consequence
to the State should not be taken on the basis of an old and
general authorization; and because, with respect to the
insolvency of such a large city, no final composition would
be feasible without active State assistance and cooperation.
This provision has been eliminated in the enrolled bill. It
is, of course, unnecessary with respect to the smaller munic-
ipalities which this bill now covers, and indeed would probably
be entirely infeasible with respect to them.
5. The Administration bill (Sec. 814 (a)) required for
confirmation of a plan the approval of two-thirds in amount,
by class, of all affected creditors voting. The enrolled
bill (Sec. 92) requires the approval of two-thirds in amount
and half in number, by class, of all affected creditors voting.
We believe this change is not objectionable to the Administra-
tion, since our object in requiring two-thirds rather than
(as some had proposed) merely one-half in amount was to render
approval more difficult and thus enhance the attractiveness
of municipal securities. The additional requirement merely
increases the difficulty of approval and strengthens the secu-
rity of the small stockholder in particular. It could be
urged that this additional requirement of 50 per cent in num-
ber will render approval extraordinarily difficult with respect
to municipalities whose shares are widely held in small amounts;
but since the percentage only applies to those voting rather
than all those who hold stock, this fear is probably exag-
gerated.
Apart from these basic policy issues, and some essenti-
ally technical improvements which we had urged, we believe
the bill is fundamentally sound. There is in our view no
prospect of sustaining a veto with respect to this bill.
Moreover, if a veto did succeed, we would be left with the
pressing need to obtain some legislation of this sort to
meet the problems of New York City. It is extremely unlikely
that our support on the Hill--which worked hard to preserve
as much as possible of the Administration bill-would be able
-3-
to fare any better in a second go-round. We recommend that
the bill be signed without comment.
Sincerely,
Michael Uc
Michael M. Uhlmann
Assistant Attorney General
Office of Legislative Affairs
Enclosure
-4- -
March 25, 1976
CONGRESSIONAL RECORD-SENATE
4377-
After July 1, 1940, membership in my pen-
report has similar language on pages 8-9.
Mr. BURDICK. No. In the context of
ston or retirement system of the State or of
The bill provides in section 82(b) (1) that
chapter IX the petitioner is as much a
3 civil division thereof shall be a contractual
the court shall have the power to permit
new entity as the debtor in possession in
relationship. the benefits of which shall not
the rejection of executory contracts by
chapter XI. The bill recognizes this in
be diminished or impaired.
the petitioner. It is contemplated that all
section 85(h) where the avoiding powers
That is the State constitution.
continuing obligations of the petitioner
are given to the petitioner to set aside its
The section in question seeks, I be-
including collective bargaining agree-
own previous transactions. In any case
lieve-of course, the Senator from North
ments will be considered executory con-
where the labor laws conflict with the
Dakota will give us the answer-to pre-
tracts.
powers of the petitioner under this Act.
serve that right by its language which
Mr. HRUSKA. But, does not the House
it is the intent of the legislation that the
reads as follows:
report imply that local laws, such as
Federal, State, and local labor laws
Nothing contained in this chapter shall be
those governing the negotiation and re-
should be overridden.
construed to limit or-impair the power of any
negotiation of collective bargaining laws,
Mr. HRUSKA. As a practical matter
State to control by legislation or otherwise
might apply in such a case?
do you not expect that the petitioning
any municipality or any political subdivision
Mr. BURDICK. I am familiar with the
municipality will renegotiate most re-
of or in such State the exercise of its po-
language to which you refer. To use an
jected collective bargaining agreements
litical or governmental powers, including ex-
example, it is my understanding that
much in the same manner of its pre-
penditures thereof, provided, however, that
some States have laws which require the
bankruptcy experience?
no State law prescribing a method of com-
pensation of indebtedness of such agencies
negotiation or renegotiation in good faith
Mr. BURDICK. Yes, but I want to
shall be binding upon any creditor who does
of all collective bargaining agreements
make it clear that it will not be obligated
not consent to such composition-an no
and that during the period of negotia-
to follow State or local law in that regard
judgment shall be ordered under such State
tion and renegotiation the employees
Mr. HRUSKA. Thank you for clarify-
law which will bind the creditor to such com-
must remain on their jobs at the same
ing this matter.
position without his consent
salaries, conditions and terms. It is the
Mr. BURDICK. Will the distinguished
The meaning it seems to me, clearly.
intent of this legislation that any such
Senator from Nebraska answer a ques-
then, of that section-and that is what
laws should not be allowed to frustrate
tion about the intent of another portion
I would like the confirmation of the Sen-
the purposes of the bankruptcy proceed-
of the legislation?
ator about-will preserve the right of an
ings.
Mr. HRUSKA. Yes. I would be pleased
individual pensioner drawing his pension
Mr. HRUSKA. Would these statutes
to do SO.
30 that it will not be subjected to the
be given no weight because of the bank-
Mr. BURDICK. The Senate version of
Bankruptcy Act and one whose pension
ruptcy and supremacy clauses of the
the legislation, S. 2597, required the
is vested in terms of the State law or
Constitution?
court to find as a condition to confirma-
State Constitution not being affected by
Mr. BURDICK. I think that is certain--
tion that "it appears from petitioner's
the bankruptcy of that particular gov-
ly the case but it should be made clear
current and projected revenues and ex-
ernmental entity
that notwithstanding the constitutional
penditures that the budget of the peti-
Mr. BURDICK. The due process clause
considerations it is the intent of the leg-
tioner will be in balance within a reason-
of the U.S. Constitution, of course, pre-
islation that if a State has such laws they
able time after adoption of the plan."
serves the rignts of a person which have
"would not apply to the petitioner nego-
What is the intent of the legislation in
become vested in his pension plan, if the
tiating or renegotiating any collective
this regard?
pension plans is fully executed. Under
bargaining agreement during the bank-
Mr. HRUSKA. The balanced budget
New York law it would be, at the very
ruptcy proceedings.
requirement as an enumerated require-
least, a paramount claim on any assets
Mr. HRUSKA Does the distinguished
ment was deleted in conference between
of the bankruptcy.
Senator read section 83 of the chapter to
the House and Senate on the bill. This
Mr. JAVITS I thank my colleague
limit section 82(b) (1) ? Section 83 is the
was done upon the premise that the fair,
very much. His answer will give great
section which states that no provision of
equitable and feasible requirement
assurance to many employees who have
this chapter shall limit a State in the
which is enumerated requirement sec-
served faithfully and thought they had
exercise of its political or governmental
tion 94(b) (1) will encompass the bal-
something until they ran into the present
powers. Could a State labor law passed
anced budget requirement. The court
financial problems.
before the enactment of this bill and
will be required to consider whether the
I thank him further.
which prohibits the rejection of a collec-
petitioner's plan will balance its budget
Mr. BURDICK. Mr. President, I move
tive bargaining agreement of a munici-
within a reasonable time after adoption
that the Senate agree to the conference
pality as an unfair labor practice be
of the plan as an essential part of its
report in disagreement.
deemed to supersede the power of rejec-
finding that the plan is fair, equitable,
The PRESIDING OFFICER. The
tion in section 82(b) (1)?
and feasible.
question is on the motion of the Senator
Mr. BURDICK. Definitely not. The
Mr. BURDICK. The House bill did not
from North Dakota.
power to reject executory contracts in
contain such a requirement and the
The motion was agreed to.
section 82(b) (1) is an integral part of
House report at pages 32-33 contained
Mr. CURTIS. Mr. President, I move to
the legislation and is not in any way
citations to cases interpreting the "fair,
reconsider the vote by which the motion
limited by section 83. The latter section
equitable and feasible requirement." Is
was agreed to.
is merely being carried over in this bill
it the intent of the legislation to limit
Mr. JAVITS. I move to lay tha motion
in deference to the Supreme Court's deci-
the court to those cases in applying the
on the table.
sions in Ashton V. Cameron Water Im-
balanced budget requirement of the
The motion to lay on the table was
provement District No. 1, 298 U.S. 513
legislation?
agreed to.
(1936) and Bekins V. United States, 304
Mr. HRUSKA. No. The intent is that
Mr. HRUSKA. Will the distinguished
U.S. 27 (1938) and is intended to have no
the court should make the determina-
Senator from North Dakota yield for a
new application because of this bill and
tion on a case-by-case basis and not be
question about the intent of a portion of
to be construed as narrowly as possible.
limited by any prior case law. The court
the legislation?
Mr. HRUSKA. It is my understanding
probably will be required to have the
Mr. BURDICK. I will yield to the ques-
that there are some recent cases which
benefit of expert testimony as to the pro-
tion from the distinguished Senator from
hold that in chapter XI cases a debtor in
jected balance or inbalance of peti-
Nebraska.
possession may reject collective bargain-
tioner's budget, based upon generally
Mr. HRUSKA. The conference report
ing agreements on the grounds that there
accepted accounting principles.
and statement of managers are silent on
is no conflict in the bankruptcy and labor
Mr. BURDICK. The distinguished
the rejection of a collective bargaining
laws because the debtor in possession is
Senator will remember that the Senate
agreement by a municipality. Could you
a new entity and not a party to the col-
receded from its position which would
explain the intent of the legislation in
lective bargaining agreement. Would the
have permitted the court to enforce the
that regard?
holdings of those cases limit the power
conditions attached to certificates of in-
Mr. BURDICK. Yes. The Senate re-
of the petitioner in chapter IX to reject
debtedness as in section 805(g) of the
port in its version of the bill, S. 2597,
any contract or collective bargaining
Senate bill. What is the intent of the
makes this clear on page 15. The House
agreement?
legislation with respect to enforcement
HEALTH.
OF
DEPARTMENT OF HEALTH, EDUCATION, AND WELFARE
OFFICE OF THE SECRETARY
U.S.A.
OFFICE OF CONSUMER AFFAIRS
WASHINGTON, D.C. 20201
March 31, 1976
MEMORANDUM FOR:
James M. Frey
Assistant Director for
Legislative Reference
Office of Management & Budget
FROM:
Michael A. Sterlacci
Office of Consumer Affair MAS
General Counsel
SUBJECT:
Enrolled Bill H.R. 10624, an act
to amend chapter IX of the Bank-
ruptcy Act to provide by voluntary
reorganization procedures for the
adjustment of the debts of munici-
palities
Donald Hirsch has asked me to respond for the
Department of Health, Education, and Welfare to your
request for views on the Enrolled Bill, H.R. 10624.
Although the Office of Consumer Affairs has not
been deeply involved in the legislative development
of this bill, we do support the concept it embodies
and would recommend that the President approve the
legislation.
OF
DEPARTMENT THE TREASURY
THE
THE GENERAL COUNSEL OF THE TREASURY
WASHINGTON. D.C. 20220
1789
MAR 30 1976
Director, Office of Management and Budget
Executive Office of the President
Washington, D. C. 20503
Attention: Assistant Director for Legislative
Reference
Sir:
Reference is made to your request for the views of this Department on
the enrolled enactment of H.R. 10624, "To amend chapter IX of the Bankruptcy
Act to provide by voluntary reorganization procedures for the adjustment
of the debts of municipalities."
The enrolled enactment would permit any political subdivision or public
agency or instrumentality that was authorized by a State to file a
petition for relief if it were insolvent or unable to meet its debts as
they mature. To be eligible for relief, the entity must have attempted to
negotiate a plan of adjustment with its creditors unless such negotiation
was impracticable, or there was a reasonable fear that a creditor would
attempt to obtain a preference.
Section 89 as added by the enrolled enactment would enumerate priorities
and require to be paid in full in advance of any distribution to creditors
under the plan for the adjustment of the entity's debts, the following debts
in order: (1) costs of administration subsequent to the filing of a petition;
(2) debts for services and materials provided within 3 months before the date
of the filing of the petition; and (3) debts which other laws of the United
States entitle to priority.
The Department would have no objection to a recommendation that the
enrolled enactment be approved by the President.
Sincerely yours,
General Counsel
DEPARTMENT OF COMMERCE
GENERAL COUNSEL OF THE
UNITED STATES OF AMERICA
UNITED STATES DEPARTMENT OF COMMERCE
Washington, D.C. 20230
MAR 31 1976
Honorable James T. Lynn
Director, Office of Management and Budget
Washington, D. C. 20503
Attention: Assistant Director for Legislative Reference
Dear Mr. Lynn:
This is in reply to your request for the views of this Department
concerning H.R. 10624, an enrolled enactment
"To amend chapter IX of the Bankruptcy Act to
provide by voluntary reorganization procedures
for the adjustment of the debts of municipalities."
This Department would have no objection to approval by the
President of H.R. 10624.
Enactment of this legislation will not involve the expenditure of
any funds by this Department.
Sincerely,
AAMERICAN REVOLUTION INFONTENNAL
1776-1976
@
SORY COMMISS PERFECT'S UNION
ADVISORY
ACIR
COMMISSION ON INTERGOVERNMENTAL RELATIONS
WASHINGTON, D.C. 20575
STATE
March 30, 1976
Mr. James M. Frey
Assistant Director for
Legislative Reference
Office of Management and Budget
Washington, D.C.
Dear Mr. Frey:
The Advisory Commission on Intergovernmental
Relations recommended in its study, City Financial
Emergencies, that the Federal bankruptcy provisions
relating to local governments be updated and clarified--
which is the apparent intent of the enrolled bill amend-
ing Title IX of the Bankruptcy Act.
The Commission has not considered the language of
the amendments contained in the enrolled bill, but
they deal with several issues the Commission specifically
recommended, namely, the definition of "creditor,"
parties and conditions of involuntary filings, and the
duration and scope of court supervision.
On the whole, the enrolled bill incorporates the
Commission recommendations. The amendments do not
authorize the appropriate State agency supervising
local government operations to initiate an involuntary
filing. They do not provide for a written annual progress
report on the status of the plan for the adjustment of the
petitioner's debt. These two items were specifically
mentioned by the Commission as desirable.
Nevertheless, considering the importance the
Commission attached to the updating of Title IX, it is
assumed that the Commission would want the President to
sign the enrolled bill.
-2-
Perhaps as experience is gained with the operation
of this legislation, the merits of the Commission's
specific suggestions about the appropriate State
supervisory agency initiating an involuntary filing
and the provision of annual reports of progress on the
confirmed plan will be recognized.
Sincerely,
John Shannon
Assistant Director
OFFICE OF MANAGEMENT AND BUDGET
ROUTE SLIP
Take necessary action
TO Mr. Linder
Approval or signature
Comment
Prepare reply
Discuss with me
For your information
See remarks below
Dottie Evans
FROM
DATE 4/5/76
REMARKS
Securities & Exchange Commission views letter
on Enrolled Bill H.R. 10624, for inclusion in
the file sent to you Friday, 4/2/76.
OMB FORM 4
REV AUG 70
AND
SECURITIES
COMMISSION*
SECURITIES AND EXCHANGE COMMISSION
MCNXXXJV*
WASHINGTON, D.C. 20549
OFFICE OF
THE CHAIRMAN
AFR 3 16
MANAGEMENT&GUBGET
April 1, 1976
The Honorable James T. Lynn
Director
Office of Management and Budget
Washington, D.C. 20503
Dear Jim:
This is in response to the March 29, 1976 request
for the Commission's views on H.R. 10624, a bill to
amend Chapter IX of the Bankruptcy Act, dealing with the
adjustment of municipal debts. The Congress recently
passed this legislation, and we understand that your
office will shortly advise the President whether he
should sign or veto it. We realize that your advice
to the President depends upon your assessment of the
merits of the legislation as a whole, and that the
Commission's expertise in bankruptcy reorganization
does not extend to adjustment of the debts of munici-
palities.
While the Commission for that reason is not in a
position to suggest a veto of H.R. 10624, we are concerned
about the possible effect of some of its provisions on
the trading markets for municipal bonds and on the persons
who underwrite offerings of those securities.
A principal shortcoming of the bill is its failure
to restrict and safeguard access by municipalities to the
bankruptcy courts. The bill does not appear to require
the states to determine whether a proposed municipal
bankruptcy petition filing is both necessary and appro-
priate. This omission is all the more serious in light
of the restrictions placed upon the bankruptcy courts
under the bill.
As a result, a bill with a salutary purpose may
be utilized by some municipalities as an expedient remedy
for problems that could be corrected less drastically.
- 2 -
In view of the present uncertainties regarding the
stability of municipal issues, we are concerned that
this consequence would adversely affect the ability
of underwriters to perform their appropriate roles.
Two other sections of the bill, which relate to
the public interest, also are matters that merit comment.
Section 85 (d) provides in pertinent part that a
creditor may file a request for notices of any matter
arising in the proceeding in which the creditor "has a
direct and substantial interest," a provision similar to
those in the pending legislative proposals to amend
present Chapters X and XI of the Bankruptcy Act (S. 235
and 236; and H.R. 31 and 32). In its report to the
Subcommittee on Improvements in Judicial Machinery of
the Senate Committee on the Judiciary, the Commission
noted that it is difficult for the ordinary investor to
identify at the beginning of a case the issues that
might arise or the possible importance of those issues
to him. The same is true in cases involving investors
in municipal securities.
Under Section 85 (e) (4), the commencement or
continuation of any other legal proceeding may be stayed
or enjoined by the bankruptcy court, "upon notice to the
person against whom such order would apply, and for
cause shown." We assume that, as in present practice
under Chapter X reorganizations and Chapter XI arrange-
ments, the Commission would be able to file an injunctive
action against a municipality subject to a Chapter IX
proceeding if that were necessary to the effectuation of
its enforcement responsibilities. Since the burden of
enjoining the Commission's filing of an injunctive action
would rest on the municipality, we would not anticipate
that it would unduly interfere with our enforcement of
the federal securities laws.
With best regards,
Sincerely,
Roderick M. Hills
Chairman
EXECUTIVE OFFICE OF THE PRESIDENT
OFFICE OF MANAGEMENT AND BUDGET
WASHINGTON, D.C. 20503
Cat-2-76 5:30pm.
APR 2 1976
MEMORANDUM FOR THE PRESIDENT
Subject: Enrolled Bill H.R. 10624 - Bankruptcy Act amendments
Sponsor - Rep. Rodino (D) New Jersey and 5 others
Last Day for Action
April 9, 1976 - Friday
Purpose
To amend chapter IX of the Bankruptcy Act to establish revised
procedures for municipalities filing for bankruptcy.
Agency Recommendations
Office of Management and Budget
Approval
Department of Justice
Approval
Department of Health, Education
and Welfare
Approval
Department of the Treasury
No objection
Department of Commerce
No objection
Advisory Commission on Intergovernmental
Relations
No objection
Securities and Exchange Commission
No objection (Informally)
Discussion
The enrolled bill provides revised procedures under which a
financially distressed municipality or other subdivision or
agency of a State may seek the protection of the Federal courts
while negotiating a plan of reorganization and adjustment of
its debts with its creditors. It establishes the rules by
which a Federal district court may protect a municipality from
creditor action and sets forth the conditions under which law
suits against a city may be tried in an orderly fashion.
H.R. 10624 is similar in intent to legislation submitted by the
Administration to the Congress in October 1975 when it appeared
that New York City was facing imminent financial collapse. The
Administration's bill was prepared because the existing
THE WHITE HOUSE
CTION MEMORANDUM
WASHINGTON
LOG NO.:
Date: April 2
Time:
FOR ACTION:
Bill Seidman
CC (for information): Jim Cavanaugh
Max Friedersdorf
Ed Schmults
Steve McConahey
Paul Leach
Ken Lazarus
Alan Greenspan
Dawn Bennett
FROM THE STAFF SECRETARY
DUE: Date:
Time:
April 5
500pm
SUBJECT:
H.R. 10624 - Bankruptcy Act Amendments
ACTION REQUESTED:
For Necessary Action
For Your Recommendations
Prepare Agenda and Brief
Draft Reply
X
For Your Comments
Draft Remarks
REMARKS:
Please return to Judy Johnston, Ground Floor West Wing
Recommend approval. Ken Lazarus 4/5/76
PLEASE ATTACH THIS COPY TO MATERIAL SUBMITTED.
If you have any questions or if you anticipate a
delay in submitting the required material, please
James H. Canner
telephone the Staff Secretary immediately.
For the Presid :
THE WHITE HOUSE
ACTION MEMORANDUM
WASHINGTON
LOG NO.:
Date: April 2
Time:
FOR ACTION: Bill Seidman
CC (for information): Jim Cavanaugh
Max Friedersdorf
Ed Schmults
Steve McConahey
Paul Leach
Ken Lazarus
Alan Greenspan
Dawn Bennett
FROM THE STAFF SECRETARY
DUE: Date:
Time:
April 5
500pm
SUBJECT:
H.R. 10624 - Bankruptcy Act Amendments
ACTION REQUESTED:
For Necessary Action
For Your Recommendations
Prepare Agenda and Brief
Draft Reply
X
For Your Comments
Draft Remarks
REMARKS:
Please return to Judy Johnston, Ground Floor West Wing
Recommend President sign. Ideally, I would like the provisions
relating to a plan of composition, a balanced budget and
eligibility to be more strict and explicit along the lines
of the Administration's bill. However, the differences do
not justify a veto in my judgment.
Called into Judy 4/5
4:05 P.M.
PLEASE ATTACH THIS COPY TO MATERIAL SUBMITTED.
If you have any questions or if you unlicipate a
delay in submitting the required material, please
James X. Capuch
telephone the Staff Secretary immediately.
For the Presid
THE WHITE HOUSE
WASHINGTON
April 5, 1976
MEMORANDUM FOR:
JIM CAVANAUGH
FROM:
MAX L. FRIEDERSDORF M.G.
SUBJECT:
H.R. 10624 - Bankruptcy Act Amendments
The Office of Legislative Affairs concurs with the agencies
that the
subject bill be signed.
Attachments
THE WHITE HOUSE
ACTION MEMORANDUM
WASHINGTON
LOG NO.:
Date: April 2
Time:
FOR ACTION: Bill Seidman
CC (for information): Jim Cavanaugh
Max Friedersdorf
Ed Schmults
Steve McConahey
Paul Leach
Ken Lazarus
Alan Greenspan
Dawn Bennett
FROM THE STAFF SECRETARY
DUE: Date:
Time:
April 5
500pm
SUBJECT:
H.R. 10624 Bankruptcy Act Amendments
ACTION REQUESTED:
For Necessary Action
For Your Recommendations
-
Prepare Agenda and Brief
Draft Reply
X
For Your Comments
Draft Remarks
REMARKS:
Please return to Judy Johnston, Ground Floor West Wing
Approval gw5
PLEASE ATTACH THIS COPY TO MATERIAL SUBMITTED.
If you have any questions or if you anticipate a
delay in submitting the required material, please
James M. Canner
telephone the Staff Secretary immediately.
For the Presid et
94TH CONGRESS
-
HOUSE OF REPRESENTATIVES
REPORT
2d Session
No. 94-938
MUNICIPAL BANKRUPTCY LAW REVISION
MARCH 22, 1976.-Ordered to be printed
Mr. EDWARDS of California, from the committee of conference,
submitted the following
CONFERENCE REPORT
[To accompany H.R. 10624]
The committee of conference on the disagreeing votes of the two
Houses on the amendments of the Senate to the bill (H.R. 10624) to
revise chapter IX of the Bankruptcy Act, having met, after full and
free conference, have been unable to agree.
DON EDWARDS,
JOHN SEIBERLING,
ROBERT F. DRINAN,
HERMAN BADILLO,
CHRISTOPHER J. DODD,
M. CALDWELL BUTLER,
THOMAS N. KINDNESS,
Managers on the Part of the House.
QUENTIN BURDICK,
PHILLIP A. HART,
JIM ABOUREZK,
ROMAN L. HRUSKA,
HIRAM L. FONG,
Managers on the Part of the Senate.
57-006 0
JOINT EXPLANATORY STATEMENT OF THE
COMMITTEE OF CONFERENCE
The managers on the part of the House and the Senate at the con-
ference on the disagreeing votes of the two Houses on the amendments
of the Senate to the bill (H.R. 10624) to revise chapter IX of the
Bankruptcy Act, report that the conferees have been unable to agree.
The House bill and the Senate amendments make access to the court
of bankruptcy by a municipality that is unable to pay its debts as they
mature virtually limitless. The managers have concluded that access
to the court of bankruptcy should be limited, by requiring a distressed
municipality to meet one of four conditions before it may petition a
court of bankruptcy for relief. This requirement is discussed in the
analysis of section 84, infra. However, addition of this provision is
beyond the authority of the managers on the part of the House and the
Senate, because it is not within the scope of the matters committed to
conference.
On all other matters, the managers on the part of the House and the
Senate have agreed. The substance of the agreement is contained in a
draft of House amendments to the Senate amendments, set forth in
full below. The managers on the part of the House will offer a motion
to agree to the amendments of the Senate with these amendments.
The motion will be: That the House agrees to the amendments of the
Senate to the bill (H.R. 10624) entitled "An Act to revise chapter IX
of the Bankruptcy Act," with the following
HOUSE AMENDMENTS TO SENATE AMENDMENTS:
In lieu of the matter proposed to be inserted by the Senate engrossed
amendment to the text of the bill insert: That chapter IX of the
Bankruptcy Act is amended to read as follows:
"CHAPTER IX
"ADJUSTMENT OF DEBTS OF POLITICAL SUBDIVISIONS AND PUBLIC AGENCIES
AND INSTRUMENTALITIES
"SEC. 81. CHAPTER IX DEFINITIONS.-As used in this chapter the
term-
"(1) 'claim' includes all claims of whatever character against
the petitioner or the property of the petitioner, whether or not
such claims are provable under section 63 of this Act and whether
secured or unsecured, liquidated or unliquidated as to amount,
fixed or contingent;
"(2) 'court' means court of bankruptcy in which the case is
pending, or a judge of such court;
(3)
4
5
(3) 'creditor' means holder (including the United States, a
"(c) LIMITATION.-Unless the petitioner consents or the plan SO
State, or political subdivision or public agency or instrumentality
provides, the court shall not, by any stay, order or decree, in the case
of a State) of a claim against the petitioner;
or otherwise, interfere with-
'(4) 'claim affected by the plan' means claim as to which the
"(1) any of the political or governmental powers of the
rights of its holder are proposed to be materially and adversely
petitioner;
adjusted or modified by the plan;
"(2) any of the property or revenues of the petitioner; or
(5) 'debt' means claim allowable under section 88 (a) ;
'(3) the petitioner's use or enjoyment of any income-producing
(6) 'lien' means security interest in property, lien obtained
property.
on property by levy, sequestration, or other legal or equitable
(d) DESIGNATION OF JUDGE.-After the filing of a petition, the chief
process, statutory or common law lien on property, or any other
judge of the court in the district in which the petition is filed shall
variety of charge against property to secure the performance of
immediately notify the chief judge of the circuit court of appeals of
an obligation;
the circuit in which the district court is located, who shall designate
(7) 'person' includes a corporation or a partnership, the
the judge of the district court to conduct the proceedings under this
United States, the several States, and political subdivisions and
chapter.
public agencies and instrumentalities of the several States;
"SEC. 83. RESERVATION OF STATE POWER To CONTROL GOVERNMENTAL
"(8) 'petitioner' means agency, instrumentality, or subdivsion
FUNCTIONS OF POLITICAL SUBDIVISIONS.-Nothing contained in this
which has filed a petition under this chapter;
chapter shall be construed to limit or impair the power of any State
'(9) 'plan' means plan filed under section 90;
to control, by legislation or otherwise, any municipality or any politi-
'(10) 'special tax payer' means record owner or holder of title,
cal subdivision of or in such State in the exercise of its political or
legal or equitable, to real estate against which has been levied
governmental powers, including expenditures therefor: Provided,
a special assessment or special tax the proceeds of which are the
however, That no State law prescribing a method of composition of
sole source of payment of obligations issued by the petitioner
indebtedness of such agencies shall be binding upon any creditor who
to defray the costs of local improvements; and
does not consent to such composition, and no judgment shall be entered
(11) 'special tax payer affected by the plan' means special
under such State law which would bind a creditor to such composition
tax payer with respect to whose real estate the plan proposes to
without his consent.
increase the proportion of special assessments or special taxes
"SEC. 84. ELIGIBILITY FOR RELIEF.-Any State's political subdivision
referred- in paragraph (10) of this section assessed against that
or public agency or instrumentality, which is generally authorized to
real estate.
file a petition under this chapter by the legislature, or by a govern-
"SEC. 82. JURISDICTION AND POWERS OF COURT.-
mental officer or organization empowered by State law to authorize the
'(a) JURISDICTION.-The court in which a petition is filed under
filing of a petition, is eligible for relief under this chapter if it is in-
this chapter shall exercise exclusive original jurisdiction for the ad-
solvent or unable to meet its debts as they mature, and desires to effect
justment of the petitioner's debts, and for the purposes of this chapter,
a plan to adjust its debts. An entity is not eligible for relief under this
shall have exclusive jurisdiction of the petitioner and its property,
chapter unless—
wherever located.
"(1) it has successfully negotiated a plan of adjustment of its
"(b) Powers.-After the filing of a petition under this chapter
debts with creditors holding at least a majority in amount of
the court may-
the claims of each class which are claims affected by that plan;
"(1) permit the petitioner to reject executory contracts and
(2) it has negotiated in good faith with its creditors and has
unexpired leases of the petitioner, after hearing on notice to the
failed to obtain, with respect to a plan of adjustment of its debts,
parties to such contracts leases and to such other parties in interest
the agreement of creditors holding at least a majority in amount
as the court may designate;
of the claims of each class which are claims affected by that plan;
'(2) during the pendency of a case under this chapter, or after
"(3) such negotiation is impracticable; or
the confirmation of the plan if the court has retained jurisdiction
(4) it has a reasonable fear that a creditor may attempt to ob-
under section 96 (e), after hearing on such notice as the court may
tain a preference.
prescribe and for cause shown, permit the issuance of certificates
"SEC. 85. PETITION AND PROCEEDINGS RELATING TO PETITION.-
of indebtedness for such consideration as is approved by the court,
"(a) PETITION.-An entity eligible under section 84 may file a peti-
upon such terms and conditions, and with such security and prior-
tion for relief under this chapter. In the case of an unincorporated
ity in payment over existing obligations, secured or unsecured,
tax or special assessment district having no officials of its own, the
and over costs and expenses of administration, not including oper-
petition may be filed by its governing authority or the board or body
ating expenses of the petitioner, as in the particular case may be
having authority to levy taxes or assessments to meet the obligations of
equitable; and
the district. Any party in interest may file an answer to the petition
(3) exercise such other powers as are not inconsistent with
with the court, not later than 15 days after the publication of notice re-
the provisions of this chapter.
quired by subsection (d) is completed, objecting to the filing of the
6
7
petition. Upon the filing of such an answer, the court may dismiss the
published as soon as practicable after the filing of the petition, and the
petition after hearing on notice if the petitioner did not file the petition
mailing of copies of the notice shall be completed as soon as practicable
in good faith, or if the petition does not meet the requirements of this
after the filing of the list required by subsection (b).
chapter. The court shall not, on account of an appeal from a finding of
(e) STAY OF ENFORCEMENT OF CLAIMS AGAINST PETITIONER.-
jurisdiction, delay any proceeding under this chapter in the case in
(1) EFFECT OF FILING A PETITION.-A petition filed under this
which the appeal is being taken; nor shall any court order a stay of
chapter shall operate as a stay of the commencement or the con-
such proceeding pending such appeal. The reversal on appeal of a
tinuation of any judicial or other proceeding against the peti-
finding of jurisdiction shall not affect the validity of any certifi-
tioner its property, or an officer or inhabitant of the petitioner,
cate of indebtedness authorized by the court and issued in such case.
which seeks to enforce any claim against the petitioner, or of an
(b) LIST.-The petitioner shall file with the court a list of the peti-
act or the commencement or continuation of a judicial or other
tioner's creditors, insofar as practicable. The list shall include for each
proceeding which seeks to enforce a lien upon the property of the
known creditor, to the extent practicable, the name of the creditor,
petitioner or a lien on or arising out of taxes or assessments due
the address of the creditor so far as known to the petitioner, and a de-
the petitioner, and shall operate as a stay of the enforcement of
scription of any claim of the creditor, showing the amount and char-
any set-off or counterclaim relating to a contract, debt, or obliga-
acter of the claim, the nature of any security for the claim, and
tion of the petitioner.
whether the claim is disputed, contingent or unliquidated as to amount.
(2) DURATION OF AUTOMATIC STAY.-Except as it may be termi-
If an identification of any of the petitioner's creditors is impracticable,
nated, annulled, modified, or conditioned by the court under the
the petitioner shall state the reason such identification is impracticable
terms of this subsection, the stay provided for in this subsection
and the character of the claims of the creditors involved. The peti-
shall continue until the case is closed or dismissed, or the property
tioner shall supplement the list as creditors who were unknown or
subject to the lien is, with the approval of the court, abandoned
unidentified at the time the list was filed become known or identified
or transferred.
to the petitioner. If the list is not filed with the petition, the petitioner
(3) RELIEF FROM AUTOMATIC STAY.-Upon the filing of a com-
shall file the list at such later time as the court, upon its own motion or
plaint seeking relief from a stay provided for by this section, the
upon application of the petitioner, sets.
court shall set a hearing for the earliest possible date. The court
"(c) VENUE AND FEES.-The petition and any accompanying papers,
may, for cause shown, terminate, annul, modify, or condition such
together with a filing fee of $100, shall be filed with a court in a district
stay.
in which the petitioner is located.
(4) OTHER STAYS.-The commencement or continuation of any
"(d) NOTICE.-The petitioner or such other person as the court des-
other act or proceeding may be stayed, restrained, or enjoined by
ignates shall give notice of the filing or dismissal of the petition to the
the court, upon notice to each person against whom such order
State in which the petitioner is located, to the Securities and Exchange
would apply, and for cause shown. The court may issue an order
Commission, and to creditors included in the list of creditors required
under this paragraph without requiring the petitioner to give se-
by subsection (b) or in any supplement to that list. The notice shall
curity as a condition to that order.
also state that a creditor who files with the court a request, setting forth
(f) UNENFORCEABILITY OF CERTAIN CONTRACTUAL PROVISIONS.-A
that creditor's name and address and the nature and amount of that
provision in a contract or lease, or in any law applicable to such a con-
creditor's claim, shall be given notice of any other matter in which
tract or lease, which terminates or modifies, or permits a party other
that creditor has a direct and substantial interest. The notice required
than the petitioner to terminate or modify, the contract or lease be-
by the first sentence of this subsection shall be published at least once
cause of the insolvency of the petitioner or the commencement of a case
a week for three successive weeks in at least one newspaper of general
under this chapter is not enforceable if any defaults in prior perform-
circulation published within the jurisdiction of the court, and in such
ance of the petitioner are cured and adequate assurance of future
other papers having a general circulation among bond dealers and
performance is provided.
bondholders as may be designated by the court. The court may require
(g) RECOVERY OF SET-OFF.-Any set-off which relates to a contract,
that it be published in such other publication as the court deems
debt, or obligation of the petitioner and which set-off was effected
proper. The court shall require that a copy of the notice required by
within four months prior to the filing of the petition, is voidable and
the first sentence of this subsection be mailed, postage prepaid, to each
recoverable by the petitioner after hearing on notice. The court may
creditor named in the list required by subsection (b) at the address of
require as a condition to recovery that the petitioner furnish adequate
such creditor given in the list, or, if no address is given in the list
protection for the realization by the person against whom or which
for a creditor and the address of such creditor cannot with reason-
recovery is sought of the claim which arises by reason of the recovery.
able diligence be ascertained, then a copy of the notice may, if the
"(h) AVOIDING POWERS.-Sections 60a, 60c, 67a, 67d, 70c, 70e (1), and
court SO determines, be mailed, postage prepaid, to such creditor ad-
(2), and the first three sentences of section 60b shall apply in cases
dressed as the court may prescribe. All expense of giving notice re-
under this chapter as though the petitioner were the bankrupt, debtor,
quired by this subsection shall be paid by the petitioner, unless the
or trustee. If the petitioner refuses to pursue a cause of action under
court for good cause determines that the cost of notice in a particular
a section or sentence made applicable to this chapter by this subsec-
instance should be borne by another party. The notice shall be first
8
9
tion, the court may, upon the application of any creditor, appoint a
sums, if any, as may be provided for in the plan. An appeal may be
trustee to pursue such cause of action.
taken from any order allowing compensation to the United States
"SEC. 86. REPRESENTATION OF CREDITORS.-
court of appeals for the circuit in which the case under this chapter is
"(a) REPRESENTATION AND DISCLOSURE.-Any creditor may act in
pending, independently of any other appeal which may be taken in
that creditor's own behalf or by an attorney or a duly authorized agent
the case. The court of appeals shall hear and determine such appeal
or committee. Every person, not including governmental entities, rep-
summarily.
resenting more than one creditor shall file with the court a list of the
(c) JOINT ADMINISTRATION.-If two or more petitions by related
creditors represented by such person, giving the name and address of
entities are pending in the same court, the court may order joint
each such creditor, together with a statement of the amount, class, and
administration of the cases.
character of the claim held by that creditor, and shall attach to the
"SEC. 88. CLAIMS.-
list a copy of the instrument signed by the holder of such claim show-
"(a) ALLOWANCE OF CLAIMS.-In the absence of an objection by a
ing such person's authority, and shall file with the list a copy of the
party in interest, or of a filing of a proof of claim, the claim of a credi-
contract or agreement entered into between such person and the credi-
tor that is not disputed, contingent, or unliquidated as to amount, and
tors represented by that person. Such person shall disclose all com-
that appears in the list or in a supplement to the list filed by the pe-
pensation incident to the case, received or to be received, directly or
titioner under section 85 (b) shall be deemed allowed. The court may
indirectly, by that person. That compensation shall be subject to
set a date by which proofs of other claims shall be filed. If the court
modification and approval by the court.
does not set a date, such proofs of other claims shall be filed before
"(b) MULTIPLE COMPENSATION.-The court shall examine all of the
the entry of an order confirming the plan. Within thirty days after
contracts, proposals, acceptances, deposit agreements, and all other
the filing by the petitioner of the list or any supplement to the list
papers relating to the plan, specifically for the purpose of ascertaining
under section 85 (b), the court shall give written notice to each per-
if any person, not including governmental entities, promoting the plan,
son whose claim is listed as disputed, contingent, or unliquidated as
or doing anything of such a nature, has been or is to be compensated,
to amount, informing each such person that a proof of claim must be
directly or indirectly, by both the petitioner and any of its creditors,
filed with the court within the time fixed under this subsection. If
and shall take evidence under oath to determine whether any such
there is no objection to such claim, the claim shall be deemed allowed.
compensation has occurred or is to occur. After such examination the
If there is an objection, the court shall hear and determine the
court shall make an adjudication of this issue, and if it be found that
objection.
any such compensation has occurred or is to occur, the court shall
(b) CLASSIFICATION OF CREDITORS.-The court shall designate classes
dismiss the petition and tax all of the costs against the person promot-
of creditors whose claims are of substantially similar character and
ing the plan or doing anything of such a nature and receiving such
the members of which enjoy substantially similar rights, consistent
multiple compensation, or against the petitioner, unless such plan is
with the provisions of section 89, except that the court may create a
modified, within the time to be allowed by the court, SO as to eliminate
separate class of creditors having unsecured claims of less than $250
the possibility of such compensation, in which event the court may
for reasons of administrative convenience. If there is a controversy
proceed to further consideration of the confirmation of the plan.
over the classification of a creditor, the court shall, after hearing on
"SEC. 87. REFERENCE, EXPENSES, AND JOINT ADMINISTRATION.
notice, summarily determine such controversy.
"(a) REFERENCE.-The court may refer any special issue of fact to a
(c) DAMAGES UPON REJECTION OF EXECUTORY CONTRACTS.-If an ex-
referee in bankruptcy for consideration, the taking of testimony, and
ecutory contract or an unexpired lease is rejected under the plan or
a report upon such special issue of fact, if the court finds that the con-
under section 82(b), any person injured by such rejection may assert a
dition of its docket is such that it cannot take such testimony without
claim against the petitioner. The rejection of an executory contract or
unduly delaying the dispatch of other business pending in the court,
unexpired lease constitutes a breach of the contract or lease as of the
and if it appears that such special issue is necessary to the determina-
date of the commencement of the case under this chapter. The claim of a
tion of the case. A reference to a referee in bankruptcy shall be the
landlord for injury resulting from the rejection of an unexpired lease
exception and not the rule. The court shall not make a general refer-
of real estate or for damages or indemnity under a convenant con-
ence of the case, but may only request findings of specific facts.
tained in such lease shall be allowed, but shall be limited to an amount
"(b) EXPENSES.-The court may allow reasonable compensation for
not to exceed the rent, without acceleration, reserved by such lease
the actual and necessary expenses incurred in connection with the case,
for the year next succeeding the date of the surrender of the premises
including compensation for services rendered and expenses incurred in
to the landlord or the date of reentry of the landlord, whichever first
obtaining the deposit of securities and the preparation of the plan,
occurs, whether before or after the filing of the petition, plus unpaid
whether such work has been done by the petitioner or by a representa-
accrued rent, without acceleration, up to the date of such surrender or
tive of creditors, and may allow reasonable compensation for an attor-
reentry. The court shall scrutinize the circumstances of an assignment
ney or agent of any of them. No fee, compensation, reimbursement, or
of a future rent claim and the amount of the consideration paid for
other allowances for an attorney, agent, or representative of creditors
shall be assessed against the petitioner or paid from any revenues,
such assignment in determining the amount of damages allowed the
property, or funds of the petitioner except in the manner and in such
assignee of that claim.
10
11
"SEC. 89. PRIORITIES.-The following shall be paid in full in advance
and any modification of the plan within the time set by the court.
of any distribution to creditors under the plan, in the following order:
Notwithstanding an objection to a claim, the court may temporarily
"(1) The costs and expenses of administration which are in-
allow such claim in such amount as the court deems proper for the
curred subsequent to the filing of a petition under this chapter.
purpose of acceptance or rejection under this section.
(2) Debts owed for services or materials actually provided
(b) GENERAL RULE-Except as provided in subsection (d), the
within three months before the date of the filing of the petition
plan may be confirmed only if it has been accepted in writing by or
under this chapter.
on behalf of creditors holding at least two-thirds in amount of the
"(3) Debts owing to any person, which by the laws of the
claims of each class allowed under section 88 and more than 50 per-
United States (other than this Act) are entitled to priority.
cent in number of the claims of each class allowed under section 88.
"SEC. 90. FILING AND TRANSMISSION OF PLAN AND MODIFICATIONS.-
(c) COMPUTING ACCEPTANCE.-The two-thirds majority required
"(a) FILING.-The petitioner shall file a plan for the adjustment of
by subsection (b) is two-thirds in amount of the claims allowed under
the petitioner's debts. If such plan is not filed with the petition, the
section 88 of creditors who file an acceptance or rejection within
petitioner shall file the plan at such later time as the court, upon its
the time fixed by the court, but not including claims held or con-
own motion or upon application of the petitioner, sets. At any
trolled by the petitioner, or claims of creditors specified in subsec-
time prior to the confirmation of a plan, the petitioner, or any creditor,
tion (d). The more than 50 percent required by subsection (b) is more
if the petitioner has consented in writing to the modification to be
than 50 percent in number of the claims allowed under section 88 of
filed by the creditor, may file a modification of the plan; but the
creditors who file an acceptance or rejection within the time fixed by
modification shall comply with the provisions of this chapter.
the court, but not including claims held or controlled by the petitioner,
"(b) TRANSMISSION OF PLAN AND MODIFICATIONS.-As soon as prac-
or claims of creditors specified in subsection (d).
ticable after the plan or any modification of the plan has been filed,
"(d) EXCEPTION.-It is not requisite to the confirmation of the plan
the court shall set a time, which shall be ninety days from the filing of
that there be such acceptance by any creditor or class of creditors—
the plan or any modification of the plan, unless the court, for good
"(1) whose claims are not affected by the plan;
cause, sets some other time, within which creditors may accept or reject
"(2) if the plan makes provision for the payment of their
the plan and any modification of the plan. The petitioner or such other
claims in cash in full or
person as the court designates shall transmit by mail a copy of such
"(3) if provision is made in the plan for the protection of
plan or modification, or a summary and any analysis of such plan or
the interests, claims, or lien of such creditor or class of creditors.
modification, a notice of the time within which the plan or modification
"(e) ACCEPTANCE OF MODIFICATION.-If the court finds that a pro-
may be accepted or rejected, and a notice of the right to receive a
posed modification does not materially and adversely affect the in-
copy, if it has not been sent, of such plan or modification, to each
terest of a creditor, the modification shall be deemed accepted by that
creditor whose claim is affected by the plan, to each special tax
creditor if that creditor has previously accepted the plan. If the court
payer affected by the plan, and to any party in interest that the
determines that a modification does materially and adversely affect
court designates. Upon request by a recipient of such summary and
the interest of a creditor, that creditor shall be given notice of the
notice, the petitioner or such other person as the court designates shall
proposed modification and the time allowed for its acceptance or
transmit by mail a copy of the plan or modification to that recipient.
rejection. The number of acceptances of the plan as modified required
The court shall, after hearing on notice, determine any controversy as
by subsection (b) shall be obtained. The plan as modified shall be
to whether a claim of a creditor or class of creditors is a claim affected
deemed to have been accepted by any creditor who accepted the plan
by the plan and as to whether a special tax payer is a special tax payer
and who fails to file a written rejection of the modification with
affected by the plan.
the court within such reasonable time as shall be allowed in the notice
"SEC. 91. PROVISIONS OF PLAN.-A petitioner's plan may include
to that creditor of the proposed modification.
provisions modifying or altering the rights of creditors generally, or
"SEC. 93. OBJECTION TO PLAN.-A creditor who holds a claim
of any class of them, secured or unsecured, either through issuance
affected by the plan or a special tax payer affected by the plan may
of new securities of any character, or otherwise, and may contain such
file with the court an objection to the confirmation of the plan. The
other provisions and agreements not inconsistent with this chapter
Securities and Exchange Commission may also file with the court an
as the parties may desire, including provisions for the rejection of
objection to the confirmation of the plan, but in the case of an objec-
any executory contract or unexpired lease.
tion filed under this section, the Securities and Exchange Commission
"SEC. 92. ACCEPTANCE.-
may not appeal or file any petition for appeal. An objection to the
"(a) WHO MAY ACCEPT OR REJECT.-Unless a claim of a creditor
confirmation of the plan may be filed with the court any time prior to
who is included in the list or in a supplement to the list filed under
ten days before the hearing on the confirmation of the plan, or within
section 85 (b) or who files a proof of claim and whose claim is not then
such other time set by the court.
disputed, contingent, or unliquidated as to amount, or of a security
"SEC. 94. CONFIRMATION.-
holder of record as of the date of the transmittal of information under
(a) HEARING ON CONFIRMATION.-Within a reasonable time after
section 90 (b), has been disallowed or is not a claim affected by the
the expiration of the time set by the court within which the plan and
plan, that creditor or security holder may accept or reject the plan
any modifications of the plan may be accepted or rejected, the court
12
13
shall hold a hearing on the confirmation of the plan and any modifi-
petitioner and other necessary parties to execute and deliver or to
cations of the plan. The court shall give notice of the hearing and of
join in the execution and delivery of any instrument required to
the time allowed for filing objections to all parties entitled to object
effect a transfer of property under the plan and to perform such
under section 93. The court may, for cause shown, permit a labor
other acts including the satisfaction of a lien, as the court determines
union or employees' association, that represents employees of the peti-
to be necessary for the consummation of the plan.
tioner, to be heard on the economic soundness of the plan affecting
"(c) DISTRIBUTION.-Distribution shall be made in accordance with
the interests of the represented employees.
the provisions of the plan to creditors whose claims have been allowed
'(b) CONDITIONS FOR CONFIRMATION.-The court shall confirm the
under section 88. Distribution may be made at the date the order
plan if-
confirming the plan becomes final to holders of securities of record
"(1) the plan is fair and equitable and feasible and does not
whose claims have not been disallowed.
discriminate unfairly in favor of any creditor or class of creditors;
"(d) COMPLIANCE DATE.When a plan requires presentment or
(2) the plan complies with the provisions of this chapter;
surrender of securities or the performance of any other action as a
(3) the plan has been accepted as required by section 92;
condition to participation under the plan, such action shall be taken
'(4) all amounts to be paid by the petitioner or by any person,
not later than five years after the entry of the order of confirmation.
not including other governmental entities, for services and ex-
A person who has not within such time presented or surrendered that
penses in the case or incident to the plan have been fully disclosed
and are reasonable;
person's securities or taken such other action required by the plan
(5) the offer of the plan and its acceptance are in good faith;
shall not participate in any distribution under the plan, and the
and
consideration deposited with the disbursing agent for distribution
(6) the petitioner is not prohibited by law from taking any
to such person shall become the property of the petitioner.
action necessary to be taken by it to carry out the plan.
"(e) CONTINUING JURISDICTION.-The court may retain jurisdiction
"SEC. 95. EFFECT OF CONFIRMATION.-
over the case for such period of time as the court determines is neces-
"(a) PROVISIONS OF PLAN BINDING.-The provisions of a confirmed
sary for the successful execution of the plan.
plan shall be binding on the petitioner and on any creditor who had
(f) ORDER OR DECREE AS EVIDENCE AND NOTICE.-A certified copy of
timely notice or actual knowledge of the petition or plan, whether or
any order or decree entered by the court in a case under this chapter
not such creditor's claim has been allowed under section 88, and
shall be evidence of the jurisdiction of the court, the regularity of the
whether or not such creditor has accepted the plan.
proceedings, and the fact that the order was made. A certified copy
'(b) DISCHARGE.-
of an order providing for the transfer of any property dealt with by
"(1) The petitioner is discharged from all claims against it pro-
the plan shall be evidence of the transfer of title accordingly, and, if
vided for in the plan except as provided in paragraph (2) of this sub-
recorded as conveyances are recorded, shall impart the same notice
section as of the time when—
that a deed, if recorded, would impart.
"(A) the plan has been confirmed;
"SEC. 97. EFFECT OF EXCHANGE OF DEBT SECURITIES BEFORE DATE
'(B) the petitioner has deposited the money, securities, or other
OF THE PETITION.-The exchange of new debt securities under the
consideration to be distributed under the plan with a disbursing
plan for claims covered by the plan, whether the exchange occurred
agent appointed by the court; and
before or after the date of the petition, does not limit or impair the
(C) the court has determined—
effectiveness of the plan or of any provision of this chapter. The
(i) that any security SO deposited will constitute upon
written consents of the holders of any securities outstanding as the
distribution a valid legal obligation of the petitioner; and
result of any such exchange under the plan shall be included as ac-
"(ii) that any provision made to pay or secure payment of
ceptances of such plan in computing the acceptance required under
such obligation is valid.
section 92.
"(2) The petitioner is not discharged under paragraph (1) of this
"SEC. 98. DISMISSAL--
subsection from any claim-
'(a) PERMISSIVE DISMISSAL.-The court may dismiss the case after
"(A) excepted from discharge by the plan or order confirming
hearing on notice-
the plan; or
(1) for want of prosecution;
"(B) whose holder, prior to confirmation, had neither timely
(2) if no plan is proposed within the time fixed or extended by
notice nor actual knowledge of neither the petition nor the plan.
the court;
"SEC. 96. POSTCONFIRMATION MATTERS.-
(3) if no proposed plan is accepted within the time fixed or
(a) TIME ALLOWED FOR DEPOSIT UNDER THE PLAN.-Prior to or
extended by the court; or
promptly after confirmation of the plan, the court shall fix a time
"(4) where the court has retained jurisdiction after confirma-
tion of a plan-
within which the petitioner shall deposit with the disbursing agent
appointed by the court any consideration to be distributed under the
"(A) if the petitioner defaults in any of the terms of the
plan.
plan; or
"(b) DUTIES OF PETITIONER.-The petitioner shall comply with the
"(B) if a plan terminates by reason of the happening of
plan and the orders of the court relative to the plan, and shall take
a condition specified therein.
all actions necessary to carry out the plan. The court may direct the
14
15
'(b) MANDATORY DISMISSAL.-The court shall dismiss the case if
Paragraph (1) defines what claims are included in a chapter IX
confirmation is refused.".
case. The House bill defined "claim" in general terms, H.R. § 81 (1)
SEC. 2. SEPARABILITY.-If any provision of this chapter or the appli-
H. Rep. 15.3 The Senate amendment defined "claim" by enumeration of
cation thereof to any agency, instrumentality, or subdivision is held
examples of claims. S. § 802(2). The proposed text adopts the House
invalid, the remainder of the chapter, or the application of such pro-
language. Because of the broad definition, all claims against the peti-
vision to any other agency or instrumentality or political subdivision
tioner generally will be included, with one significant exception. Munic-
shall not be affected by such holding.
ipalities are authorized, under section 103 (c) of the Internal Revenue
SEC. 3. If the amendment made by this Act is judicially finally deter-
Code of 1954, as amended, to issue tax-exempt industrial development
mined to be unconstitutional then chapter IX of the Bankruptcy Act,
revenue bonds to provide for the financing of certain projects for pri-
as such chapter IX existed on the day before the date of enactment
vately owned companies. The bonds are sold on the basis of the credit of
of this Act, is revived and shall have full force and effect with respect
the company on whose behalf they are issued, and the principal, interest
to cases filed after such determination.
and premium, if any, are payable solely from payments made by the
In lieu of the amendment to the title contained in the Senate en-
company to the trustee under the bond indenture and do not constitute
grossed amendment insert:
claims against the tax revenues or other funds of the issuing munici-
Amend the title SO as to read "An Act to amend chapter IX of the
palities. The municipality merely acts as the vehicle to enable the
Bankruptcy Act to provide by voluntary reorganization procedures
bonds to be issued on a tax-exempt basis. It is not the intent of the
for the adjustment of the debts of municipalities.".
Committee of Conference to include these industrial development
bonds in a chapter IX case. Claims that arise by virtue of these bonds
DESCRIPTION OF THE PROPOSED AMENDMENTS TO
are not among the claims defined by this paragraph and amounts owed
THE SENATE AMENDMENTS
by private companies to the holders of industrial development revenue
bonds are not to be included among the assets of the municipality that
The first proposed amendment amends the text of the bill. The sec-
would be affected by the plan. See Cong. Record, 94th Cong., 1st Sess.
ond proposed amendment accepts the third Senate amendment, which
H. 12073 (Statement by Mr. Don Edwards, Floor Manager of the bill
amended the title of the bill, with an amendment to conform it to the
in the House).
amendment proposed by the first House amendment. There is no
The House bill defined "debt". H.R. § 81 (5) ; H. Rep. 16. The Senate
amendment to the second Senate amendment, which inserted a pre-
amendment did not define the term. The proposed text adopts the
amble after the title of the bill, because the Managers on the part of
House language.
the House propose to recede from the House's disagreement with the
The Senate amendment defined "lien" in sweeping terms designed to
Senate on the preamble.
cover all types of liens and security interests. S. § (5). The House
bill did not define the term. The proposed text adopts the Senate
DISCUSSION OF FIRST PROPOSED HOUSE AMENDMENT
definition.
TO THE SENATE AMENDMENTS
The House bill did not define "person". The Senate amendment
defined "person" to include governmental entities. S. § 802 (7). The
The first Senate amendment struck out all after the enacting clause
proposed text adopts the Senate definition.
of the bill, H.R. 10624. and inserted in lieu thereof the text of a Senate
The House bill defined "petitioner". H.R. § 81 (6) ; H. Rep. 16. The
bill, S. 2597, as amended. This first proposed amendment adopts this
Senate amendment did not define the term. The proposed text adopts
Senate amendment with an amendment. The amendent is the proposed
the House language.
text of a compromise bill, set out above. What follows is a section-by-
The House bill defined "special taxpayer affected by the plan".
section analysis of the proposed text.
H.R. § (8), (9) H. Rep. 16. The Senate amendment did not define
the term S. § 809 (b). The proposed text adopts the House language.
PREAMBLE
The Senate amendment contained a preamble. The House bill had
SECTION 82
no comparable provision. The proposed text adopts the Senate
language.
The House bill allowed certificates of indebtedness such priority
CHAPTER
over existing obligations as was equitable. H.R. § (2) H. Rep.
17. The Senate amendment allowed such priority over existing obliga-
The House bill amended current Chapter IX of the Bankruptcy
tions, and "other expenses of administration" as the court approved.
Act. The Senate amendment added a new Chapter XVI to the Bank-
S. § 811; S. Rep. 19.4 The proposed text allows such priority over exist-
ruptcy Act. The proposed text adopts the House version.
ing obligations and over costs and expenses of administration, not
including operating expenses of the petitioner, as is equitable.
SECTION 81
The Senate amendment defined "attorney." S. § 802 (1) The House
2 This citation, and all others beginning "H.R." are to the sections of the House bill.
3 This citation, and all others beginning "H. Rep." are to the committee report that
bill did not define the term. The proposed text adopts the House
accompanied the House bill, H. Rep. 94-686, 94th Cong., 1st sess. (1975).
position.
This citation, and all others beginning "S. Rep." are to the committee report that
accompanied the Senate bill, S. 2597, whose text became the text of the Senate amend-
ment to the text of the House bill, S. Rep. 94-458, 94th Cong., 1st sess. (1975).
1 This citation, and all others beginning "S." are to the sections of the Senate amend-
ment to the text of the House bill.
16
17
The Senate amendment permitted the court to enforce the condi-
20. The Senate amendment required that the entity be "specifically
tions attached to certificates of indebtedness, notwithstanding the
authorized to file by the chief executive, the legislature or such other
limitation on the court's power prohibiting it from interfering with
governmental officer or organization empowered under State law to
municipal powers in § 82 (c) ; S. § 805 (g) ; S. Rep. 17. The House bill
authorize filing". S. § 803 (a) ; S. Rep. 16. The proposed text requires
had no comparable provision. The proposed text adopts the House
general authorization by the legislature, or by a governmental officer
version. The deletion of this provision from the Senate amendment is
(which includes the chief executive) or governmental organization
not meant to remove from the court of bankruptcy the jurisdiction or
(such as a Municipal Finance Commission) empowered by State law
power to hear and decide disputes over noncompliance with certificates
to authorize filing.
of indebtedness. Rather, because certificates are generally issued as
The House bill assumed the possibility of a filing by an entity sub-
short-term obligations, payable before or at confirmation of the plan,
ordinate to one already in a Chapter IX case. H.R. § 84, 85 (a), 87 (c) ;
because the court is given exclusive personal jurisdiction over the pe-
H. Rep. 20, 25-26. The Senate amendment made this explicit. S. § 803
titioner for the purposes of this chapter under subsection (a), and
(b). The proposed text adopts the House version, because of the elimi-
because all judicial proceedings in other courts are stayed under sec-
nation from both bills of any restriction on the size of the entity that
tion 85 (e) (1), it is contemplated that the court of bankruptcy will be
is eligible for relief under this chapter.
the only forum in which such disputes are determined.
An additional eligibility requirement is inserted in the proposed text.
The House bill vitiated the limitation on the court's power when
It requires that the petitioner meet one of four conditions before it
the petitioner consented to a court action. H.R. § 82(c) H. Rep. 18.
may seek relief under the chapter. The purpose of the provision is to
The Senate amendment contained no comparable provision. The pro-
limit accessibility to the bankruptcy court somewhat, as does current
posed text adopts the House version.
law, without making the accessibility requirement SO stringent as to
The House bill prohibited any "order or decree" of the court from
preclude relief in a situation in which the petitioner is confronted with
interfering with the petitioner's governmental powers. H.R. § 82
stubborn or overly hasty creditors, or creditors whose identities are
H. Rep. 18. The Senate amendment prohibited any "stay, order or
unknown because of the existence of a large number of bonds in bearer
decree" from so interfering. S. § 805 (g). The proposed text adopts
form.
the Senate version as a clarification that the limitation on the court's
SECTION 85
power includes a limitation on the automatic stay of section 85 (e) (1),
which is not imposed by a court "order or decree".
The House bill gave the governing body of an entity with no officials
The House bill prohibited court interference with "property of the
of its own the power to file a petition under this chapter. H.R. § 85 (a) ;
petitioner". H.R. § (2) ; H. Rep. 18-19. The Senate amendment
H. Rep. 20. The Senate amendment made no comparable provision. The
prohibited court interference with "property of the petitioner neces-
proposed text adopts the House provision.
sary for essential governmental services". S. § 805(g). The proposed
The House bill allowed 15 days from the completion of the publica-
text adopts the House version.
tion of notice for filing a complaint objecting to the petition. H.R.
The House bill prohibits court interference with any "income pro-
§ 85(a) ; H. Rep. 20-21. The Senate amendment allowed 30 days from
ducing property". H.R. S ; H. Rep. 18-19. The Senate amend-
the filing of the petition. S. § 806(a) ; S. Rep. 18. The proposed text
ment prohibits court interference with "the petitioner's use or enjoy-
adopts the House provision.
ment of any income producing property". S. § 805 (g). The proposed
The House bill required the court to hear any objections to the peti-
text adopts the Senate version. See H. Rep. 18-19.
tion in a single proceeding to the extent practicable. H.R. § 85 (a) ; H.
Rep. 21. The Senate amendment contained no similar requirement. The
SECTION 83
proposed text adopts the Senate version.
The Senate amendment allowed dismissal of the petition if it did
The House bill deleted the proviso in current § (i) that prohibits
not meet the provisions of the chapter, or if the petitioner did not file
state composition procedures. H.R. § 83; H. Rep. 2, 19. The Senate
the petition in good faith. S. § 806(1) ; S. Rep. 18. The House bill
amendment retained the proviso. S. § ; S. Rep. 15. The pro-
had no comparable provision. H.R. § 84; H. Rep. 20. The proposed
posed text adopts the Senate version.
text adopts the Senate language.
The Senate amendment prohibited interlocutory appeals from a
SECTION 84
finding of jurisdiction, in order to prevent delay in the proceedings
and increase the marketability of certificates of indebtedness. The
This section defines which entities are eligible for relief under this
House bill had no comparable provision. S. § 806(c) ; S. Rep. 18. The
chapter. The House bill included a "political subdivision or public
proposed text includes compromise language designed to achieve the
agency or instrumentality". H.R. § 84; H. Rep. 20. The Senate amend-
same result. It prohibits any delay of the proceedings because of an
ment included the same terms, plus "municipality". S. § 803
appeal from a finding of jurisdiction, and any stay pending such an
S. Rep. 16. The proposed text adopts the House version.
appeal. It also specifies. in an attempt to codify the result currently
The House bill required only that an entity not be "prohibited by
achieved in chapter X, that the reversal on appeal of a finding of juris-
state law from filing a petition under this chapter". H.R. § 84; H. Rep.
18
19
diction shall not, in and of itself, affect the validity of any certificate
Subsection (g) allows recovery of set-offs effected before the filing
of indebtedness.
of the petition. The House bill made set-offs within four months of
Subsection (b) describes the requirements of the list of creditors.
the petition recoverable. H.R. § 85(g) H. Rep. 2. The Senate amend-
The House bill required a list of all of the petitioner's creditors. H.R.
ment set the time at three months. S. § 805 (2) S. Rep. 17. The
§ 85(b) H. Rep. 21. The Senate amendment required a list of only
proposed text adopts the House provision.
those creditors who would be affected by the plan; S. § ; S. Rep.
This subsection also specifies the protection the court may require
17; and added the requirement that the list of creditors contain the
the petitioner to furnish as a condition to recovery of a set-off. The
name, address, and character of the claim of each creditor; S. § (a).
House bill allowed "protection for the realization by the person
The proposed text adopts the House position plus the Senate addition,
against whom recovery is sought of the claim which arises by reason
but eliminates the requirement in the House bill that the petitioner
of the recovery". H.R. § (g) H. Rep. 3. The Senate amendment
state in the petition the reason an identification of a creditor is
allowed "such protection as will adequately protect the person who is
impracticable.
asserting the right of set-off". S. § (b) (2). The proposed text
The Senate amendment also required that the list of creditors con-
adopts the House version.
tain the character of the claims of unidentified creditors; S. § 809 (a)
Subsection (h) makes some of the avoiding powers of the Bank-
and required that the list of creditors be supplemented as the petitioner
ruptcy Act available in Chapter IX. The Senate amendment made ap-
became able to identify previously unidentified creditors. S. § 809 (a).
plicable sections 60a, 60b, 60c, 67, 70c, and 70e. S. § 801 (e) S. Rep. 16.
S. Rep. 19. The House bill contained no similar requirement. H. Rep.
The House bill contained no comparable provision. The proposed text
21. The proposed text adopts the Senate language, in order to accom-
makes only sections 60a, 60c, 67a, 67d, 70c, 70e(1), and 70e (2), and
modate the identification of holders of bearer bonds.
the first three sentences of section 60b apply. The exclusion of
The House bill made the list and notice requirements mandatory,
only the last sentence of section 60b and of section (3)
H.R. § (8), (9), 85(b), (d), 90(b) H. Rep. 21, 22, 29. The Senate
is meant to confer exclusive jurisdiction of actions under the
amendment permitted the court to modify these requirements. S.
applicable sections on the federal district courts, and to with-
§ ; S. Rep. 19. The proposed text adopts the House version.
draw concurrent jurisdiction from the State courts. These sections
The House bill required the court to give all notices. H.R. § (d)
apply as though the petitioner were the trustee, debtor or bank-
H. Rep. 22. The Senate amendment required the petitioner, or such
rupt, thus transferring the avoiding powers to the petitioner it-
other person as the court designated, to give notice. S. § (a) ; S. Rep.
self, without the need for the appointment of an independent trustee.
18. The proposed text adopts the Senate language.
However, if the petitioner refuses to pursue a cause of action based on
The Senate amendment required mailing of notice to creditors who
those sections, this section permits the court, on the application of a
were identified after the initial mailing of notice. S. § The
creditor, to appoint a trustee to pursue the cause of action. The trustee
House bill had no comparable provision. The proposed text adopts
is given no other powers. The definition of person in section 81 (7) is
the Senate version.
not intended to enlarge the scope of the avoiding powers when applied
Subsection (e) grants an automatic stay of actions seeking to enforce
in Chapter IX. The definition of person found in section 1 (23) of the
claims. The House bill stayed "a proceeding against the petitioner, its
Bankruptcy Act continues to be the proper definition in the construc-
property or any officer or inhabitant of the petitioner, which seeks to
tion of those sections when applied in this chapter.
enforce any claim against the petitioner." H.R. § (e) (1) ; H. Rep.
22-23. The Senate amendment stayed a "proceeding against the peti-
SECTION 87
tioner, its property or any officer or inhabitant of the petitioner, or
which seeks to enforce any claim against the petitioner"; S. § 805 (a)
Subsection (a) allows special reference of certain matters. The
S. Rep. 17; or which seeks to enforce a lien on taxes or assessments; id.
House bill allowed reference only to a referee in bankruptcy. H.R.
The proposed text adopts the House provision for the first portion, but
§ (a) H. Rep. 25. Reference is to be the exception and not the rule,
adds and amplifies the second portion on taxes.
id. The Senate amendment allowed reference to referees and to special
The House bill and the Senate amendment required a hearing on a
masters, S. § 822 (a) ; S. Rep. 22; and allowed compensation for special
complaint seeking relief from the automatic stay. H.R. § (e) (3)
masters, id. The proposed text adopts the House version.
H. Rep. 23. S. § 805(d). Only the Senate amendment required the
The Senate amendment provided that appeals from orders granting
hearing at the earliest possible date. S. § (d). The proposed text
or denying compensation in the case should be heard summarily. S.
adopts the Senate provision.
§ (b) S. Rep. 22. The House bill contained no comparable provi-
Subsection (e) also specifies conditions to additional stays. The
sion. The proposed text adopts the Senate language.
House bill prohibited the court from requiring the petitioner to post
Subsection (e) allows joint administration of cases filed by related
security as a condition to an additional stay. H.R. § 85(e) (4) H. Rep.
entities. The House bill allowed such joint administration. H.R. § 87
23. The Senate amendment made security discretionary with the court.
(c) H. Rep. 25-26. The Senate amendment allowed joint administra-
S. § 805 (e) ; S. Rep. 17. The proposed text adopts the Senate version.
tion only of cases filed by subordinate entities. S. § ; S. Rep. 16.
The proposed text adopts the House version.
20
21
SECTION 88
SECTION 92
Subsection (b) requires classification of creditors. The House bill
Subsection (b) specifies the acceptances required to confirm a plan.
provided the criteria of substantially similar claims and rights. H.R.
The House bill required acceptances of creditors holding two-thirds
$ 88 (b) ; H. Rep. 27. The Senate amendment used the existing chapter
in amount of the claims of each class with respect to which an accept-
XI criteria. S. § ; S. Rep. 20. The proposed text adopts the
ance or rejection was filed. H.R. § 92(b) ; H. Rep. 30. The Senate
House language.
amendment required acceptances by two-thirds in amount, and 51%
Subsection (b) also allows classification of small claims in a single
in number. S. § ; S. Rep. 20-21. The proposed text requires two-
class for administrative convenience. The House bill allowed such
thirds in amount and "more than fifty percent in number". S. Rep. 21.
classification for claims under $100. H.R. $ (b) ; H. Rep. 27. The Sen-
The House bill permitted temporary allowance of claims for the
ate amendment allowed no such classification. S. § 814(c). The pro-
purpose of accepting or rejecting the plan. H.R. § ; H. Rep. 30.
posed text adopts the House version, but compromised the amount
The Senate amendment did not permit temporary allowance. The
at $250.
proposed text permits temporary allowance, as in the House bill, but
The Senate amendment required a court hearing and determina-
does not permit acceptances or rejections filed for such temporarily
tion of any dispute over the classification of creditors. S. § 814 (d).
allowed claims to be counted in computing the acceptances required for
The House bill had no comparable provision. The proposed text adopts
confirmation unless the claim has been finally allowed under section 88.
the Senate provision.
See § 92 (b) and (c).
SECTION 89
Subsection (d) describes those creditors whose acceptances are not
required. The House bill followed the current Chapter IX provision.
Paragraph (2) gives a priority to debts owed for services and ma-
H.R. § 92 ; H. Rep. 31. The Senate amendment adopted the Chap-
terials provided shortly prior to the petition. The House bill gave the
ter X provision. S. § ; S. Rep. 21. The proposed text adopts the
priority for "debts or consideration owed for services and materials
House version.
actually provided within four months" before the date of filing the
SECTION 93
petition. H.R. § 89(2) H. Rep. 28-29. The Senate amendment gave
the priority for "debts owed for services and materials directly pro-
The House bill allows the S.E.C. to object to a plan. H.R. § 93; H.
vided within two months" prior to the petition. S. § 812 (2) ; S. Rep.
Rep. 31. The Senate amendment did not permit the S.E.C. to object.
20. The proposed text allows a priority for "debts owed" (Senate lan-
S. § 816. The proposed text adopts the House provision.
guage), in order to make clear that the claim involved must be liqui-
The Senate amendment required service of a complaint objecting to
dated; for "services and materials actually provided" (House lan-
the plan on the petitioner and others designated by the court. S. § 816.
guage) "within three months" (compromise language).
The House bill had no comparable provision. The proposed text adopts
the House version.
SECTION 90
SECTION 04
The House bill allowed only the petitioner to modify the proposed
The Senate amendment required the court, for cause shown, to per-
plan. H.R. § 90(a) ; H. Rep. 29. The Senate amendment allowed the
mit a labor organization to be heard on the economic soundness of a
petitioner or any creditor, with the petitioner's consent, to propose a
plan affecting employees. S. § S. Rep. 18. The House bill had
modification of the plan, and required a court hearing. S. § 815; S. Rep.
no comparable provision. The proposed text adopts the Senate ver-
21. The proposed text allows the petitioner or any creditor, with the
sion, but makes the hearing permissive.
petitioner's consent, to modify, but does not require a court hearing.
The House bill required the plan to be "fair and equitable and feas-
Subsection (b) specifies the time within which creditors must ac-
ible". H.R. § (b) (1) ; H. Rep. 32-33. The Senate amendment re-
cept or reject the plan. The House bill directed the court to set a time.
quired that it appear "from the petitioner's current and projected
H.R. § 90(b) ; H. Rep. 29. The Senate amendment set the time at
revenues and expenditures that the budget of the petitioner will be
90 days from the time of filing the plan, unless the court, for good
in balance within a reasonable time after adoption of the plan".
cause, set some other time. S. § 807(b). The proposed text adopts the
S. § 817 (c) (7) S. Rep. 21. The proposed text adopts the House ver-
Senate provision.
sion on the premise that the Senate's balanced budget requirement
The Senate amendment required that the court hold a hearing and
will be a factor that must be considered by the court as part of the
determine any dispute over whether a claim is affected by the plan.
court's determination that the plan is "fair and equitable and feasible".
S. § 814(d). The House bill had no comparable provision. The pro-
The House bill required that the petitioner not be prohibited by
posed text adopts the Senate provision.
law from taking any action required to be taken under the plan. H.R.
§ (5) H. Rep. 33-34. The Senate amendment required that the
22
23
petitioner be authorized by law to take such action. S. § 817 (c) (6) ; S.
OTHER MATTERS
Rep. 21. The proposed text adopts the House version.
The Senate amendment invalidated all State laws which would have
SECTION 95
had the effect of depriving a petitioner of the effect of confirmation.
S. § 824. The House bill made no comparable provision. The proposed
The House bill required the court to appoint a disbursing agent.
text deletes the Senate provision, and instead relies on the case of
H.R. § 95 (b) ; H. Rep. 34. The Senate amendment made no comparable
Perez V. Campbell, 400 U.S. 818 (1971).
provision. The proposed text adopts the House provision.
The Senate amendment allowed conversion of a case from a chapter
The House bill discharged the petitioner from its debts. H.R.
IX to a chapter XVI case. The House bill has no comparable provi-
§ 95 (b) ; H. Rep. 34. The Senate amendment extinguished the peti-
sion. The proposed text adopts the House version.
tioner's debts. S. § 818 (b) ; S. Rep. 21-22. The proposed text adopts
DON EDWARDS,
the House language.
JOHN SEIBERLING,
The House bill granted a discharge only after confirmation of the
ROBERT F. DRINAN,
plan, deposit of consideration, and court determination of the validity
HERMAN BADILLO,
of the consideration. H.R. § 95 (b) (1) ; H. Rep. 34. The Senate amend-
CHRISTOPHER J. DODD,
ment granted a discharge at the time of confirmation. S. § 818 (b) ;
M. CALDWELL BUTLER,
S. Rep. 21-22. The proposed text adopts the House version, but ex-
THOMAS N. KINDNESS,
pands the deposit requirement to "money, securities or other consid-
Managers on the Part of the House.
eration".
QUENTIN BURDICK,
The House bill did not discharge claims of creditors who had neither
PHILLIP A. HART,
actual knowledge nor constructive notice of the case. H.R. § 95 (b)
JIM ABOUREZK,
(2) (B) ; H. Rep. 34. The senate amendment discharged such claims.
ROMAN L. HRUSKA,
S. § 818 (b). The proposed text adopts the House version.
HIRAM L. FONG,
Managers on the Part of the Senate.
SECTION 96
o
The House bill required the court to fix a time for deposit of the
consideration to be distributed under the plan. H.R. § 96 (a) ; H. Rep.
34. The Senate amendment contained no similar requirement. The pro-
posed text adopts the House provision.
The Senate amendment permitted the court to direct the petitioner
to take certain actions to execute the plan. S. § 819 (e). The House bill
had no comparable provision. H. Rep. 34. The proposed text adopts
the Senate language.
Subsection (e) allows the court to retain jurisdiction of the case
after confirmation of the plan. The House bill allowed retention only
to assure successful execution of the plan. H.R. § 96 (e) ; H. Rep. 35.
The Senate amendment also allowed retention to assure discharge of
securities issued under the plan. S. § 821; S. Rep. 22. The proposed text
adopts the House version with the understanding that the court retain
jurisdiction over any action on any security issued under the plan or
certificate of indebtedness issued in the case.
SECTION 97
The House bill validated the pre-petition exchange of debt secu-
rities under a proposed plan. H.R. § 97; H. Rep. 35. The Senate
amendment made no comparable provision. The proposed text adopts
the House provision.
94TH CONGRESS
HOUSE OF REPRESENTATIVES
REPORT
1st Session
No. 94-686
CHAPTER IX BANKRUPTCY REVISION
DECEMBER 1, 1975.-Ordered to be printed
Mr. EDWARDS of California, from the Committee on the Judiciary,
submitted the following
REPORT
together with
SEPARATE AND SUPPLEMENTAL VIEWS
[To accompany H.R. 10624]
The Committee on the Judiciary, to whom was referred the bill
(H.R. 10624) to revise chapter IX of the Bankruptcy Act, having con-
sidered the same, report favorably thereon with amendments and
recommend that the bill as amended do pass.
The amendments are as follows:
Page 4, immediately after line 12, insert the following new
subsection:
(d) DESIGNATION OF JUDGE.-Upon the filing of a petition
the chief judge of the court in the district in which the peti-
tion is filed shall immediately notify the chief judge of the cir-
cuit court of appeals of the circuit in which the district court
is located, who shall designate the judge of the district court
to conduct the proceedings under this chapter.
Page 4, line 19, strike out the colon and all that follows down through
but not including the period in line 25.
Page 5, line 16, strike out "mailing" and insert "publication" in lieu
thereof.
Page 7, line 10, insert "as soon as practicable after the filing of the
petition" after "published" and before the comma.
Page 8, line 17, strike out "of" and insert "to" in lieu thereof.
Page 9, immediately after line 3, insert the following new
subsection:
(g) RECOVERY OF SET-OFF.-Any set-off which relates to a
contract, debt, or obligation of the petitioner and which set-
off was effected within four months prior to the filing of the
petition, is voidable and recoverable by the petitioner after
57-006
2
3
hearing on notice. The court may require as a condition to
Set-off also may give a creditor an unfair advantage over other credi-
recovery that the petitioner furnish adequate protection for
tors,and could subvert the fair and equitable requirement of section
the realization by the person or entity against whom or which
94(b) (1).
recovery is sought of the claim which arises by reason of the
The court may require as a condition to recovery that the petitioner
recovery.
provide adequate protection for the realization by the creditor against
Page 14, line 16, strike out "or times".
whom recovery is sought of the claim which arises by reason of the
Page 14, line 20, insert "affected by the plan" after "creditors" and
recovery. That is, a creditor that offset amounts owing prior to the
before the comma.
filing of the petition would have a claim against the petitioner for the
Page 16, beginning in line 22, strike out ", if entitled to accept or
amount of the pre-set-off claim, minus the amount offset. After re-
reject the plan,".
covery, the creditor's claim would increase by the amount of the
Page 21, line 21, strike out the close quotation mark and the period
recovery. The court may require that the petitioner protect the increase
which follows.
in that creditor's claim that arose by reason of the recovery. Such pro-
REASONS FOR AMENDMENTS
tection might be appropriate where the creditor set-off an amount that
was held under a compensating balance agreement that was a term of a
The first amendment specifies that the Chief Judge of the circuit
loan to the petitioner. The compensating balance held by the creditor is
in which the district in which the petition is filed is located shall
essentially collateral for the loan, SO that any recovery of set-off by the
designate the judge that will hear the case. For an especially large
petitioner under this amendment would amount to use by the petitioner
case, this allows greater flexibility in selection of a judge, for the Chief
of its creditors' collateral. Such a result is permitted in reorganization
Judge of the circuit may appoint a judge that is retired, or does not
cases,³ but the courts have generally required that the secured creditor
sit in the district in which the petition was filed. The Chief Judge may
be given some protection for the realization by him of the security or
thus manage the flow of judicial business better, because he may select
its value where the security may, because of its nature, be diminished in
from any judge in the circuit, depending on the volume of business
value or depleted by the petitioner's use. That is the purpose of the
pending in various parts of the circuit.
power granted to the court here. In other cases, such as where the
The second amendment deletes the proviso found in current section
creditor is a creditor by virtue of the purchase of the petitioner's
83(i), which was added in 1946 to overrule Faitoute Iron and Steel
securities on the open market for its own portfolio, and is at the same
Co. V. City of Asbury Park.1 Though it is desireable to have a proce-
time a depository of the petitioner's funds, recovery of the amount
dure that adjusts the rights of security holders be uniform throughout
offset would not be a recovery of collateral held by the creditor, and
the country, the Committee feels that the Contracts Clause of the Con-
adequate protection of the claim that arises by reason of that recovery
stitution places such close restrictions on what the States may accom-
might be neither required nor appropriate. The decision in each case is
plish through their own composition procedures, that any nonuniform-
left to the sound discretion of the court.
ity that might result from the deletion of the restriction would be
The seventh amendment is purely technical in nature. It deletes "or
minimal and would not outweigh the interests of the States in the man-
times" from the phrase "time or times," as unnecessary, because under
agement of their own fiscal affairs, where they are able to manage
Title I of the United States Code, the singular includes the plural.
effectively without the aid of a Federal municipal adjustments statute.
The eighth amendment delimits the creditors to which the plan and
The third and fourth amendments fix the time within which credi-
any modifications are to be transmitted. The amendment specifies that
tors may object to a petition more precisely than is currently in the
the plan and any modification be transmitted only to creditors who are
bill, and expedite the publishing of notice required by section 85 (d).
affected by the plan. The phrase added by the amendment was inad-
They also expedite the hearing on the petition by preventing any delay
vertently omitted in the drafting of the bill. This conforms the lan-
in the filing of the list of creditors required by section 85(b) from
guage to section 93, which defines who may object to the plan, and to
delaying a hearing on the petition, and the determination of the pro-
section 92 (d) which specifies creditors whose acceptance is not required
priety of the filing.
for confirmation. The change will result in potentially great savings in
The fifth amendment conforms language to bankruptcy style.
time and in printing and postage costs.
The sixth amendment allows the petitioner to void and to recover
The ninth amendment deletes a redundant and confusing phrase
any set-off effected within four months prior to the filing of the peti-
from section 92 (e). No substantive change is intended or accomplished.
tion. The purpose of this amendment is to protect the petitioner from
The final amendment corrects a printing error in the bill.
the creditors' race that often occurs before the filing of a petition. Cred-
itors of the petitioner are put on notice that any set-off which they
PURPOSE OF THE BILL
attempt within four months prior to the filing of the petition is void-
able and recoverable by the petitioner, and are thereby discouraged
The bill amends Chapter IX of the Bankruptcy Act. Chapter IX
from attempting to assert the right of set-off. This subsection accords
provides a procedure for the adjustment of debts of political subdivi-
with section 85 (e) (1), which stays set-off after the filing of the petition.
2 Baker V. Gold Seal Liquors, Inc., 417 U.S. 467 (197).
3 In re Yale Express Systems, Inc., 370 F.2d 433 (2d Cir. 1966) In re Bermec Corp.,
1 316 U.S. 502 (1942).
445 F.2d 367 (2d Cir. 1971). See Regional Rail Reorganization Act Cases, 419 U.S. 102
(1974).
5
4
HISTORY OF THE BILL
sion and public agencies and instrumentalities. The procedure is hope-
lessly archaic and unworkable for all but the smallest entitles. It has
The first municipal debt provisions of the Bankruptcy Act were
not been amended since 1946. In this time of financial crises of many
enacted as emergency legislation for the relief of distressed minor
of the country's cities, most notably New York City, but including
subdivisions of the states and became effective on May 24, 1934.6
others as well, the need for a workable reorganization procedure is
These provisions were to be operative for a two-year period from
vital.
that date but this period was later extended to January 1, 1940, by
The need for and the purpose of the bill have remained unchanged in
an amendment approved April 10, 1936.7 The original enactment con-
the 42 years since the first Municipal Bankruptcy Act was passed. As
tained three sections, numbered 78, 79 and 80, and was denominated as
the Committee on the Judiciary of the House said then:
Chapter IX. This statute, however, was declared unconstitutional in
The controlling purpose of the bill is to provide a forum
its entirety by the United States Supreme Court in Ashton V. Cameron
where distressed cities, counties, and minor political subdivi-
County Water Improvement District No. 1,⁸ and it was to overcome
sions,
of their own volition, free from all coercion, may
the effect of this decision that an amended statute containing sections
meet with their creditors under the necessary judicial control
81, 82, 83, and 84 was added by the Act of August 16, 1937.9 Originally
and assistance in an effort to effect an adjustment of their fi-
the amended statute constituted Chapter X of the Bankruptcy Act.
nancial matters upon a plan deemed mutually advantageous.
This, however, was changed to Chapter IX by the Chandler Act of
The Committee that reported the second Municipal Bankruptcy
June 22, 1938.10
Act explained further:
Chapter IX was amended again twice in 1940, and once in 1946.
It has not been revised or updated since then. The first attempt at
This bill is intended to remove an apparent impasse, and the
a major revision of Chapter IX came in 1970, when Congress estab-
committee believes that it will be welcomed by debtors and
lished the Commission on the Bankruptcy Laws of the United States,
creditors. When a municipality or a taxing district is insol-
by Public Law 91-354, effective July 24, 1970. Mr. Edwards of Cali-
vent, the creditors cannot foreclose their mortgage, or cause
fornia and Mr. Wiggins were appointed by the Speaker to serve on
public property to be sold and the proceeds distributed. They
the Commission. It became operational June 1, 1970, and on July 30,
must look to the exercise of the taxing power over a period
1973, filed its final report with the President, the Congress and the
of years, or, in cooperation with the debtor district, must grant
Chief Justice of the United States. The result of the Commission's
extensions. This often involves reorganization of part or all,
efforts was introduced by Mr. Edwards and Mr. Wiggins in this
of the debt structure, and hinges upon agreement by debtor
Congress as H.R. 31. The National Conference of Bankruptcy Judges
and creditor, or on the existence of a Federal statute which
also proposed a major revision of the bankruptcy laws. Their bill
may force recalcitrant minority creditors into agreement.
was also introduced by Mr. Edwards and Mr. Wiggins as H.R. 32.
Otherwise the creditors of a municipality or a taxing district
They are both presently before the Subcommittee on Civil and Con-
must resort to mandamus proceedings, which have not been
stitutional Rights.
adequate remedies. In fact, the trend of recent decisions has
The Subcommittee has spent much time over the past two years
been to deny the writ of mandamus wherever sound judicial
studying and developing ways to modernize the Bankruptcy Act.
discretion justifies denial. Hence, creditors have been unable
It expects to complete a major and total revision and report out
to obtain unjust advantage, but the problem of the munici-
recommendations and a bill to the full Committee in the spring of
pality or taxing district has remained unsolved. Christmas V.
next year. A part of its work on the total revision of the Bankruptcy
City of Asbury Park (78 Fed. (2d) 1003). For an embar-
Act has of course been the consideration of a mechanism to manage
rassed debtor without the remedy afforded by this bill, the
the financial troubles of a municipality.
only effective recourse is the repeal of its charter by the State
It now seemed appropriate, in light of recent developments con-
legislature, in which event creditors are generally left without
cerning prospective financial difficulties of some municipalities, to
any remedy. Meriwether V. Garrett (102 U.S. 472, 501).
separate one chapter of the bills dealing with a major revision of
There is no hope for relief through statutes enacted by the
the Act and deal with it in advance of the rest. This is the chapter
States, because the Constitution forbids the passing of State
on municipal financial adjustments, Chapter IX of the existing Act.
laws impairing the obligations of existing contracts. There-
The bill, which the Committee reported out on November 18, 1975,
fore, relief must come from Congress, if at all.
by a recorded vote of 32 ayes, 0 nays, is the product of those years
ankruptcy statutes were
intended to provide
of study on the revision of the Bankruptcy Act in full; of the
methods whereby insolvent and failing debtors could be
relieved of overwhelming burdens and thus be enabled to
thoughts of the Commission on the Bankruptcy Laws of the United
make a new start under favorable conditions.
5
6 48 Stat. 798.
7 49 Stat. 1198.
4 H.R. REP. No. 207, 73d Cong., 1st Sess. 1 (1933).
8 298 U.S. 513 (1936).
5 H.R. REP. No. 517, 75th Cong., 1st Sess. 3-4 (1937).
0 50 Stat. 654. The former provisions. however, were not repealed. See § 83(h).
10 Additional Provisions, section 3(a), 52 Stat. 839.
6
States; of the two bills, H.R. 9926 and H.R. 9998, introduced by
The elimination of the requirement also allows Chapter IX relief
Badillo of New York; and the thoughts of the National Conference
to a petitioner who is sorely besieged by its creditors, but who is unable
of Bankruptcy Judges.
to obtain the required consents, perhaps because of recalcitrant bond
holders, or because its creditors are holders of bearer bonds and are
DESCRIPTION OF THE BILL
unknown to the petitioner.
The prior consent requirement worked well when municipal bond
The bill amends Chapter IX of the Bankruptcy Act to provide a
refundings were accomplished with the assistance of the Reconstruc-
workable procedure SO that a municipality of any size that has en-
tion Finance Corporation, which bought a large portion of the out-
countered financial difficulty may work with its creditors to adjust its
standing bonds at the proposed composition rate directly from their
debts. Though the bill amends the Bankruptcy Act and is proposed
holders, and then voted those bonds in favor of the plan. With one
under the bankruptcy power,¹¹ the term "bankruptcy" in its strict sense
entity in control of such a large block of votes, obtaining the 51% prior
is really a misnomer for Chapter IX proceedings.
consent was not difficult. Now, however, the requirement makes little
Chapter IX provides essentially for Federal court supervision of a
sense, and prevents a petitioner from seeking the shelter of a bank-
settlement between the petitioner municipality and a majority of its
ruptcy court while it attempts to negotiate with its creditors a plan of
creditors. A municipal unit cannot liquidate its assets to satisfy its
adjustment. Without that shelter, it is not unlikely that set-offs against
creditors totally and finally. Therefore, the primary purpose of a Chap-
a petitioner or other creditor actions, both judicial and otherwise, or
ter IX is to allow the municipal unit to continue operating while it
actions by its suppliers or employees could prevent the performance of
adjusts or refinancies creditor claims with minimum (and in many
governmental functions. A similar requirement was eliminated from
cases, no) loss to its creditors.
§ 323 of Chapter XI in 1958 because it was found to be "unrealistic
Because Chapter IX is a procedural mechanism, most of the changes
and has resulted in either a pro forma compliance by the filing of a
in the proposed revision center on procedural matters. An effort has
hastily drafted plan, or the adoption by some judges of extralegal
been made throughout the drafting of this statute to follow current law
practices permitting the filing of the petition without an accompany-
as much as possible, in order that the bill not be such a departure from
ing plan. It takes time and careful study to work out a realistic appro-
settled principles that the changes would have an unsettling effect on
priate plan
13
other municipalities and their bondholders.
The filing of the petition operates as an automatic stay of all actions,
The bill and the changes proposed from current law may be best
judicial or otherwise, and of the commencement or continuation of any
understood by a description of what occurs when Chapter IX, as it is
action which seeks to enforce a lien against the petitioner, its property,
proposed to be amended by the bill, is utilized. This section reviews in
its officers, or its inhabitants. This feature is new as well. It gives the
summary form the steps taken and the process which occurs after the
petitioner the breathing spell it may need to get back on its feet finan-
filing of a petition for relief under Chapter IX.
cially, and the time it needs to negotiate and develop a plan of adjust-
A political subdivision or public agency or instrumentality that is
ment with its creditors.
eligible for relief may file a petition for relief under this chapter with
The filing of a petition also makes unenforceable certain contractual
a district court in whose jurisdiction it is located. It is eligible if it is
provisions, such as those that terminate or modify, or permit a party
not prohibited by State law from filing, is insolvent or unable to meet its
to a contract other than the petitioner to terminate or modify, the con-
debts as they mature, and desires to effect a plan of adjustment of its
tract for the reason that the petitioner is insolvent or has filed a peti-
debts. The requirement of obtaining consent from 51% in amount of
tion for relief under the Bankruptcy Act. These clauses, known gen-
its creditors to a plan of adjustment prior to filing a petition for relief
erally as ipso facto clauses, are often found in the commercial context.
that exists in current law has been eliminated. This is perhaps the most
Their existence and enforceability may severely hamper a successful
major change from current law. It is reflected in three sections of the
reorganization or arrangement proceeding under Chapter X or XI,
bill-section 84, which describes eligibility requirements, section 90,
so they are made unenforceable in those chapters. It is unknown how
which specifies when a plan must be filed, and section (b), which
widespread such clauses are in the municipal context, because they are
specifies when the petitioner must file a list of its creditors. The reason
usually included only when there is some suspicion on the part of one
for the change is two-fold. First, as the Commission on the Bankruptcy
contracting party that the other may become insolvent, and seldom is
Laws stated in its Report
such an occurrence found in the municipal context. Nevertheless, it is
The Commission is of the opinion that [the prior consent]
felt that their existence could be detrimental to a successful municipal
requirement is unwise. It allows the petitioner to submit a
adjustment, and they are made unenforceable in Chapter IX in the
fait accompli to the judge, thereby creating substantial pres-
same way as in Chapter x and XI-only if past defaults in perform-
sure on the judge to confirm the plan. It also gives those who
ance are cured and adequate assurance of future performance is pro-
would seek to depress the market price of the securities of an
vided. This gives protection to the other contracting party, who may
eligible petitioner for improper purposes an excuse for doing
have entered into the contract relying on the petitioner's credit, which,
so.¹²
after a filing, is markedly reduced.
11 U.S. Constitution, Art. I, sec 8. cl. 4.
13 S. REP. No. 2094, 85th Cong., 2d Sess., 3805 (1958) ; see 8 Collier, Bankruptcy 4.06[6],
12 The Commission on the Bankruntey Laws of the United States, Report, H. Doc. No.
at 390 (14th rev. ed. 1975).
93-137, 93d Cong., 1st Sess. 274 (1973).
8
9
After the filing of the petition, the court must give notice to the
petitioner's creditors. The notice is by publication, and by mailing to
under the bill. That section does not permit Chapter IX to interfere
those creditors whose addresses are known. Notice is also given to the
with or derogate from any State law that regulates the way in which
Securities and Exchange Commission, and to the State in which the
municipalities may execute this governmental function.
petitioner is located. The notice to the S.E.C. is designed to allow
The second power the court is given is the power to authorize the
it to participate in an investor protection role. The municipal bond
petitioner to issue certificates of indebtedness, with such priority and
market is sufficiently interstate in character, involving investors in
security as the court determines to be equitable. The process of the
much the same way that the corporate bond market does, that it is felt
issuance of certificates of indebtedness is a method which enables a
that the S.E.C. may have an investor protection role to play in munic-
financially embarrassed municipality to enter the private credit market
ipal adjustments the same as it does in corporate reorganizations.
again. The municipality seeks out a private lender who is willing to
The state is formally notified for two reasons. First, because the
lend for either a short or long term. Because the petitioner is in a
language of the eligibility section, section 84, allows an entity to file
Chapter IX case, few if any lenders would be willing to lend without
if the state has not prohibited it; and because withdrawal of State
some assurance of payment. The court can supply that assurance by
consent at any time will terminate the case, it is felt that the State
giving the lender security and priority over existing obligations.
should formally be put on notice SO that it may object if it does not
Normally, a priority over a previous secured lender might run afoul of
wish its subdivisions to proceed under a Chapter IX. Second, if the
the Due Process Clause.¹ But as the Supreme Court explained in the
State does permit the municipality to proceed, the State is notified
Regional Rail Reorganization Act Cases,¹⁵ by facilitating borrowing
in order that it may participate with the municipality in formulating
to meet current expenses, the court was actually preserving former
and implementing a plan of adjustment in a case in which the peti-
secured creditors' collateral by preserving the business as a going
tioner is unable to effect a feasible plan without the State's assistance.
entity. Thus, there was no actual or effective taking of property pro-
The intent is to make the proceeding a cooperative one with the State
hibited by the Fifth Amendment in giving new security that would
involved full. to the extent necessary to make the petitioner's plan success.
prime the former liens of secured creditors. In the municipal context,
this reasoning is similarly applicable. While the "business" of govern-
Any creditor or party in interest may file a complaint within 15
ment will continue whether it is insolvent or not, without cash to con-
days after the mailing of notice is completed. The court is directed
tinue to provide essential governmental services, the only asset avail-
a single proceeding, in order to expedite the determination of the
to hear and determine such complaints, to the extent practicable, in
able for the creditors, the municipality's tax base, may be seriously
eroded by flight of the city's businesses and residents. In any case, the
propriety of the petition. The grounds for objection to a petition are
requirement that the court may only give security and priority to the
basically that the petitioner does not meet the eligibility requirement
extent equitable incorporates this constitutional requirement, and ren-
of section 84.
ders it immune from constitutional attack.
The bill grants the court two powers which a bankruptcy court
The powers of the court are subject to a strict limitation-that no
has under Chapters x and XI, and under section 77, but which had
order or decree may in any way interfere with the political or govern-
not to previously been granted under Chapter IX. The first is the power
mental powers of the petitioner, the property or revenue of the peti-
makes the rejection of an executory contract a breach of the contract
permit the petitioner to reject executory contracts. Section 88(c)
tioner, or any income-producing propertv. The purpose of this limita-
tion derives from Ashton V. Cameron Water Improvement District
as of the date of the petition, giving rise to a claim for damages. A
No. 1,¹⁶ which held the first Municipal Bankruptcy Act unconstitu-
landlord's claim for rejection of a lease of real property is limited,
tional on the basis of infringement of State sovereignty. This limita-
however, to the rent reserved under the lease for the year following
tion was included in the second Act, and was relied upon in Bekins V.
surrender of the premises or reentry of the landlord. In some in-
United States,17 which upheld the second municipal adjustments stat-
stances, it will be necessary for the petitioner to renegotiate a contract
ute. The Court quoted extensively from the Committee Report on this
which has been rejected with the approval of the court. Such
point:
tiation and formulation of a new contract would, of course, have renego- to
In Ashton V. Cameron County District, supra the court
be in accordance with applicable Federal, State or municipal law. For
considered that the provisions of Chapter IX authorizing the
example, cable if a collective bargaining agreement had been rejected, appli-
bankruptcy court to entertain proceedings for "readjustment
law may provide a process or procedure for the renegotiation
of the debts" of "political subdivisions" of a State "might
and formation of a new collective bargaining agreement. A rejection
materially restrict its control over its fiscal affairs," and was
would also be sufficiently similar to a termination of such a contract
therefore invalid; that if obligations of States or their politi-
the SO that again, applicable law, if any, would apply to the rights of
cal subdivisions might be subjected to the interference con-
other contracting party between rejection and conclusion of the
14 Louisville Joint Stock Land Bank V. Radford, 295 U.S. 555 (1935) declaring first
bargaining process. For example, if State or other applicable law
Frazier-Lemke Act unconstitutional) Wright V. Vinton Branch of Mountain Bank, 300
requires maintenance of terms and conditions of employment exist-
U.S. 440 (1937) (upholding second Frazier-Lemke Act) ; Wright V. Union Central Life
Ins. Co., 311 U.S. 273 (1940).
that ing under a terminated or rejected contract, during the interim period,
15 419 U.S. 102 (1974).
16 298 U.S. 513 (1936).
applicable law would apply under section 83 to a contract rejected
17 304 U.S. 27 (1938).
H. Rept. 686-75-2
10
11
templated by Chapter IX, they would no longer be "free to
creditors are. The court must also designate classes creditors whose
manage their own affairs."
claims are of substantially similar character and the members of
In enacting Chapter [IX] the Congress was especially
which class enjoy substantially similar rights.
solicitous to afford no ground for this objection. In the report
The classification is designed to facilitate the negotiation process
of the Committee on the Judiciary of the House of Repre-
and the counting of consents to the plan as finally developed. Under
sentatives, which was adopted by the Senate Committee on
current law, two restrictions are put on the classification process-that
the Judiciary, in dealing with the bill proposing to enact
Chapter [IX], the subject was carefully considered. The
claims that are payable out of the same source be placed in the same
Committee said:
class, and that claims for which security has been pledged be placed
in a separate class. This scheme works well for very small entities
"The Committee on the Judiciary is not unmindful of the
whose debt structure is simple. But in the case of a large entity with
sweeping character of the holding of the Supreme Court
many different sorts of notes, bonds, and trade creditors, the power
above referred to [in the Ashton case], and believes that
of the court to classify must be correspondingly expanded and gen-
H.R. 5969 is not invalid or contrary to the reasoning of the
eralized. Indeed, the limits on the present classification scheme could
majority opinion.
actually prevent proper classification by requiring that too many
"The bill here recommended for passage expressly avoids
creditors with different rights be lumped in the same class because
any restriction on the powers of the States or their arms of
their claims are payable out of the same source. What is intended by
government in the exercise of their sovereign rights and
the classification requirements in the bill is the same general rule that
duties. No interference with the fiscal or governmental affairs
applies in Chapters X and XI, expressed in language drafted by the
of a political subdivision is permitted. The taxing agency
Commission on Bankruptcy Laws of the United States.20
itself is the only instrumentality which can seek the benefits
The classification of creditors assists in the negotiation process be-
of the proposed legislation. No involuntary proceedings are
cause it establishes distinct groups with which the petitioner must
allowable, and no control or jurisdiction over that property
negotiate in order to arrive at a plan for the adjustment of its debts.
and those revenues of the petitioning agency necessary for
In a reorganization proceeding, the debtor usually negotiates with
representatives of each class of creditors. To facilitate this purpose,
essential governmental purposes is conferred by the bill.
We are of the opinion that the Committee's points are
the bill specifically authorizes creditors to appear in the case either
well taken and that Chapter [IX] is a valid enactment. The
in person or by duly authorized attorney, agent or committee. For
statute is carefully drawn SO as not to impinge upon the sover-
example, it may be appropriate for bond holders to elect their in-
eignty of the State. The State retains control of its fiscal
denture trustee as their representative if the trustee was not already
affairs.18
SO designated in the indenture, or for employees who have become
creditors of the petitioner in their capacity as employees to elect their
The Supreme Court and the Courts of Appeals have made it very
collective bargaining representative as their representative for the
clear that the jurisdiction of the court "is strictly limited to dis-
Chapter IX case, or for pensioners to elect their pension fund trustee
approving or to approving and carrying out a proposed composi-
as their representative. The creditors' committees that are formed are
tion. 19 The bill follows these holdings and retains the limitation
the usual vehicles for representation of creditors both in court and
on the court's power.
in the negotiations. The court is permitted to allow compensation of
During this entire process, the petitioner negotiates with its credi-
these committees for their actual and necessary expenses incurred in
tors to develop a plan of adjustment of its debts that meets the statu-
connection with the preparation and execution of the plan, and
tory requirements. Because of the flexibility of the process under the
these expenses become administrative expenses under the priorities
Bankruptcy Act, there is no limit to the nature of negotiation that
section, described below.
the petitioner may undertake, save only that the negotiation be volun-
The plan of adjustment must be developed and filed with the court,
tary-the court may not order the petitioner to take any action with-
either with the petition or within such time as the court, upon its
out its consent. The petitioner remains in control of its own opera-
own motion or upon application of the petitioner, determines. The
tions at all times. Of course, if the State has deprived the petitioner
time fixed by the court supplies the necessary incentives to both sides
of certain of its powers, such as under a State law that transfers
in the negotiations to arrive at a mutually agreeable plan within a
fiscal management to a State board upon the filing of a petition or
reasonable time. The court, of course, may extend the time, but it
upon some other event, then the petitioner is subject to such State
is unlikely that the court would tolerate purposeful delay or bad
control. Neither the Bankruptcy Act nor the court may interfere
faith negotiation that resulted in delay. The power to extend would
with the distribution and delegation of power established by State law.
undoubtedly be exercised only when it could be shown that progress
The court, based on the list of creditors filed by the petitioner and
toward a plan was being made, and more time was necessary to com-
on proofs of claims filed by creditors, determines who the petitioner's
plete the process.
18 United States V. Bekins, 304 U.S. at 49-51 (footnotes omitted).
20 Commission on the Bankruptcy Laws of the United States, Report, H.R. Rep. No.
19 Leco Properties V. R. E. Crummer & Co., 128 F. 2d 110, 113 (5th Cir. 1942).
93-137, 93d Cong., 1st Sess., section 7-303, at 241 (1973).
12
13
As soon as practicable after the plan is filed, the court must trans-
tion cases] by the requirement that two-thirds of the creditors
mit copies of the plan or a summary of the plan, along with any anal-
shall actively consent to the adoption of a reorganization
ysis of the plan, to all of the petitioner's creditors and to all special
plan.
tax payers affected by the plan. The latter category is derived from
This two-thirds requirement is not two-thirds of the total amount of
current law, and is defined in section 81. A special tax payer is one
claims of each class, but is two-thirds in amount of the claims with
whose land is subject to a special tax or assessment that is the sole
respect to which an acceptance or rejection has been filed, not including
source of revenue used to defray the cost of a local improvement, such
claims owned, held or controlled by the petitioner. This computation
as a water, irrigation, levee, or drainage district project. A special tax
method is new.
payer is affected by a plan when the plan proposes to change the as-
Another group that is not eligible to vote, and is not included in the
sessment on his property disproportionately to any change in the as-
computation of the requisite majority, is that group of creditors that
sessment of other property in the district. A general change in all as-
is provided for under section 92(d). Under this section, any creditor or
sessments or in the tax rate would not qualify any property holder in
class of creditors (1) whose claims are not affected by the plan, (2) if
the district as a special tax payer affected by the plan.
the plan makes provision for the payment of their claims in cash in
The bill gives broad discretion to the petitioner and the court in de-
full, or (3) if provision is made in the plan for the protection of the
veloping and approving the plan. The plan may include provisions
interests, claims, or lien of such creditors or class, is not required to con-
modifying or altering the rights of creditors generally, or of any class
sent to the plan. This section provides a method of settling with non-
of them, secured or unsecured, and may contain such other provisions
assenting classes. It exists solely to facilitate confirmation of a plan
and agreements not inconsistent with this chapter as the parties may
where consents cannot be obtained. It appears in both Chapter X and
desire, including the rejection of executory contracts and unexpired
in section 77. It is by no means constitutionally required. However, its
leases. The later provisions are governed by the same standards as
content is constitutionally required, and is defined by the Fifth Amend-
rejection under section 82(b) (1), described above in terms of the
ment Due Process and Just Compensation Clauses. In basic outline,
powers of the court. The former provisions, modifying or altering the
the requirement is that the bankruptcy court may not take property
rights of creditors, refers to the rights of pre-petition creditors, and
from a creditor without his consent.2 Since the provision is used only
only to their rights as creditors, not any rights they may have in a
when there is no consent, it must provide for the realization by the
different capacity, such as employee, pensioner, or officer or inhabitant
creditor of his claim, either in cash in full, or by such other method as
of the petitioner. The rights that may be modified include amount,
will protect his interest, claim or lien against the petitioner or its
time, and method of payment, and interest on the obligation, and any
property. Further definition is difficult. The courts have frequently
other rights that may attach to a debt from the petitioner to the credi-
grappled with this language and its counterpart, the fair and equitable
tors. For example, if an employee holds bonds of the petitioner, or is
rule. The bill adopts the language of the current Chapter IX; no
owed back wages, the plan may propose to alter his rights as a creditor,
change is intended from the cases interpreting this standard.
but it could not thereby affect his status as an employee by altering
After the filing of the plan and any modifications, the court must set
terms or conditions of employment merely because he happened to be
a date for a hearing on confirmation of the plan. This date must be
a creditor of the petitioner. Any such alteration would have to be ac-
within a reasonable time after the expiration of the time within which
complished through "such other agreement as the parties may desire,"
the plan many be accepted or rejected. The court notifies all parties en-
but this need not and most likely would not be effected through the
titled to object to the confirmation of the plan of the date of the hear-
plan.
ing. These include creditors and special tax payers affected by the
The petitioner is also permitted to file modifications of the plan with
plan, and the Securities and Exchange Commission. The addition of
the court at any time before the plan is confirmed. These modifications
the Securities and Exchange Commission is new, and is derived from
are transmitted to creditors and to special tax payers the same as the
Chapter X. In this time of nationwide trading in municipal bonds, the
plan.
Committee feel that the S.E.C. has a legitimate public investor pro-
After the plan is filed and transmitted, but before the date set for
tection role when the rights of securities holders are sought to be
confirmation, creditors may file written acceptances or rejections of the
altered, even though the S.E.C. does not currently have any role at
plan and any modifications. Only creditors whose claims have not been
the time of issue of the securities. A complaint objecting to confirma-
disallowed and who are materially and adversely affected by the
tion must be filed before ten days prior to the hearing.
plan may file such acceptances or rejections.
After the hearing, the court must confirm the plan if it is satisfied
In order for the plan to be confirmed, it must have been accepted
of the existence of five conditions: (1) the plan must be fair and equit-
by creditors holding at least two-thirds in amount of the claims of
able, feasible, and must not discriminate unfairly in favor of any
each class. The reason for a two-thirds requirement was thoughtfully
creditor or class of creditors; (2) the plan must comply with the pro-
stated in the Jackson Report of Receivership and Bankruptcy Pro-
visions of this chapter; (3) all amounts to be paid by the petitioner or
ceedings in the United States Courts 21
22 Louisville Joint Stock Land Bank V. Radford, 295 U.S. 555 (1935) (declaring first
The necessity for vigilance and activity of creditors in
Frazier-Lemke Act unconstitutional) Wright V. Vinton Branch of Mountain Bank, 300
U.S. 440 (1937) (upholding second Frazier-Lemke Act) Wright V. Union Central Life
ordinary insolvency proceedings is enhanced in [reorganiza-
Ins. Co., 311 U.S. 273 (1940)) ; Regional Rail Reorganization Act Cases, 419 U.S. 102
(1974).
21 S. Doc. No. 268, 74th Cong., 2d sess. 24-25 (1936).
14
15
by any person for services and expenses in the case or incident to the
SECTION-BY-SECTION ANALYSIS
plan have been fully disclosed and are reasonable; (4) the offer of the
plan and its acceptance are in good faith; (5) the petitioner is not
SECTION 81
prohibited by law from taking any action necessary to be taken by it to
carry out the plan. This has been changed from the current law, which
Paragraph (1), the definition of claims, is derived from Chapter X,
requires that the petitioner be authorized by law to take such action.
section 106 (1). This is a change from current Chapter IX in two ways.
The new requirement is more flexible, and allows the petitioner to pro-
First, current Chapter IX uses the term "securities" in Section 82
ceed without, for example, going to the state legislature for specific
rather than "claim" as a vehicle for defining claims against the peti-
authority to perform under the requirements of the plan. The details
tioner. This was appropriate in the context in which current Chapter
of these five requirements are explained in the section-by-section
IX was written-for the aid of revenue districts and small municipali-
analysis. The best interests of creditors test formerly found in Chapter
ties whose debts weer primarily represented by securities. Yet the
IX is deleted as redundant. The fair and equitable rule in effect in-
definition of securities was rather broad as written, and was further
corporates the best interests test, zoth in Chapter X, where it does not
broadened by Poinsett Lumber Co. V. Drainage District No. 7, F. 2d.
appear explicitly, and in Chapter IX, where it has appeared. The bill
270 (8th Cir. 1941), thus rendering any limitation on scope of claims
conforms the Chapter IX language to that in Chapter X.
resulting from the definition in section 82 virtually meaningless. That
If the court is satisfied that the plan meets these five requirements,
supplies the reason for the second change: the adoption of the Chapter
then it must confirm the plan. The confirmation of the plan is binding
X definition of claims. Rather than use the list in section 82, the Com-
on all creditors who had timely notice or actual knowledge of the peti-
mittee has adopted the broad general definition from Chapter X. The
tion or plan, whether or not their claims were allowed, and whether
Chapter X definition is "sweeping in its scope." 6 Collier, Bank-
or not they accepted the plan. The plan operates as a discharge of all
ruptcy § 2.05, at 311 (14th rev. ed. 1975).
the petitioner's debts, except those excepted from discharge under the
plan, and those whose holders had neither timely notice nor actual
Within its purview is any character of a claim against the
knowledge of neither the petition nor the plan.
debtor or its property
whether secured or unsecured,
After confirmation, the petitioner is directed to comply with the
liquidated or unliquidated, fixed or contingent.
[I]t
terms of the plan, and to take any action necessary to execute the plan.
should be given a broad construction with respect to claims
Distribution of the consideration deposited by the petitioner with the
and creditors in order to dispose of all liabilities of the
debtor.
disbursing agent is made in accordance with the terms of the plan to
those creditors whose claims have been allowed or deemed allowed, and
6 Collier, supra, at 312-13. It includes as well claims arising out of
to security holders of record as of the date of the order confirming the
the rejection of executory contracts under section 88 (c).
plan whose claims have not been disallowed. If participation under
Paragraph (2) defines court as the court of bankruptcy in which the
the plan requires the deposit of securities or other action, creditors
case is pending, or the judge of that court. This incorporates the de-
must take such action not later than five years after the date of the
finition in section 1(10), which defines court of bankruptcy as the
order confirming the plan. Creditors that do not are barred from
United States District Court, and follows the form of the definition
participation under the plan, and the property that was to be dis-
in section 1(9), which defines court to include the judge of the court
tributed to them reverts to the petitioner. The court may retain juris-
of bankruptcy. This definition is necessary to make clear that a case
diction over the case for as long as it determines is necessary to the
under Chapter IX is to be conducted in the district court, before a
successful execution of the plan.
district judge, rather than before a referee in bankruptcy. See section
Finally, at any time during the case, the court may dismiss for
87, infra, which provides for special reference to a bankruptcy referee.
five different reasons: want of prosecution, failure to propose a plan
Paragraph (3) defines creditor as the holder of a claim. This in-
within the time fixed by the court, failure to have a plan accepted
cludes, where applicable, the United States, a State or a subdivision
within the time fixed by the court, failure to have the plan confirmed,
of a State. The language in section 82, paragraph 5, that included the
and where the court has retained jurisdiction after confirmation, de-
United States has been generalized and placed in the definition of
fault on the terms of the plan, or termination of the plan by reason
creditor, and States and their subdivisions have been included. No
of the happening of a condition specified in the plan. Voluntary dis-
change is intended from current law under which a government
missal on the petitioner's own application is always available in a
agency may purchase numerous claims for less than face value and
court of equity, after hearing on notice.
then vote those securities at full face value. West Coast Life Insur-
If the petitioner has attempted to obtain consents from its creditors
ance Co. V. Merced Irr. Dist., 114 F. 2d 654 (9th Cir. 1940), cert.
to a plan of adjustment outside of Chapter IX, any exchange of securi-
denied 311 U.S. 718 (1941). (Reconstruction Finance Corporation
ties incident to that attempt may be counted in the computation of
financed refunding of petitioner's debt by purchasing securities from
acceptances required for confirmation in a case under the chapter.
former holders and voting them in support of plan which proposed to
17
16
inal" is inserted to make clear that the jurisdiction of the court is ex-
pay both the R.F.C. and the security holders who did not sell to the
clusive only with respect to original jurisdiction; the apellate pro-
R.F.C. the same amount that the R.F.C. had paid for its holdings.)
cedures defined in section 24 of the Bankruptcy Act are not disturbed.
In the corporate context, a creditor who acquired a security at less than
Matters arising in a Chapter IX case are appealable to the courts of
face value is still a creditor to the full amount of the obligation. No
appeal and to the Supreme Court, the same as in any other chapter case.
reason is apparent why a different result should obtain in Chapter
The court in which the petition is filed is also given exclusive personal
IX. Language is found in current Chapter IX, section 82, which
jurisdiction over the petitioner and its property, wherever located, for
makes this explicit, but is deleted in this bill as unnecessary.
the purposes of this chapter. This restates prior case law, Poinsett
Paragraph (4) defines claim affected by the plan as a claim as to
Lumber & Mfg. Co. V. Drainage Dist. No. 7, 119 F.2d 270, 272 (8th
which the rights of its holder are proposed to be materially and ad-
Cir. 1941) ("Upon the approval of the debtor's petition as properly
versely adjusted or modified. This paragraph is derived from current
filed the resources of the debtor come within the exclusive jurisdiction
section 82, paragraph 5. The term "adversely" is added to conform the
of the bankruptcy court."). This does not mean that the court has ex-
language to that used in Chapters X and XI (See sections 107, 308).
clusive jurisdiction over the petitioner with respect to all cases, but
By analogy to "claim affected by the plan" and to sections 107 and
rather only for the purposes of this chapter. That might include such
308, "creditor affected by the plan" as used throughout the bill has the
matters as disputes over property subject to a lien, or disputes con-
same meaning-one whose claim is proposed to be materially and ad-
cerning claims against the petitioner that could be dealt with under
versely adjusted or modified by the plan.
Chapter IX. 5 Collier, Bankruptcy § 81.10, at 1572 (14th rev. ed. 1975)
Paragraph (5) defines debt as a claim allowable under section 88 (a).
("
[T]he resources of the debtor come within the exclusive juris-
This definition is primarily for convenience, equating debt and claim,
diction of the bankruptcy court. That court has exclusive and non-
as defined. However, the phrase "allowable under section 88(a)' does
delegable control over the administration of the debtor's estate within
potentially limit the definition. The broad definition of claim, and the
the terms of Chapter IX, and ordinarily, therefore, the court is the
broad allowability rules of section 88(a) make this limitation more
proper place to litigate and adjudicate claims against the debtor.").
theoretical than real. To the extent that it exists, it is a limitation on
The language of this subdivision is virtually identical to that of § 111
the claims which may be dealt with by the plan, see section 91.
(Chapter X) and § 311 (Chapter XI) of the present Act.
Paragraph (6) defines petitioner for convenience only. No substan-
Subsection (b) grants the court powers similar to those granted to
tive or limiting result is intended.
the reorganization court in sections 7(b), (c) (3) ; 116(1), (2) ; and
Paragraph (7) defines plan for convenience only. It makes clear that
313 (1) and 344-to permit the rejection of executory contracts, and
any reference to a plan is to a plan filed under this chapter.
the issuance of certificates of indebtedness after hearing on notice. See
Paragraphs (8) and (9) define special tax payer affected by the
Texas Importing Co. V. Banco Popular de Puerto Rico, 360 F.2d 582
plan. They are derived from section 83 (a), paragraph 2, of the current
(5th Cir. 1966). The powers designated here are considered necessary
law, and are included to provide continuity with that law. The purpose
to the continued functioning and subsequent rehabilitation of the peti-
of their inclusion at all in a case under this chapter is to protect their
tioner. Accordingly, the language of subparagraph (1) is broad in
rights as tax payers against a change without a hearing in the assessed
scope. See generally, Countryman, Executory Contracts in Bank-
valuation of their land. A special tax payer is one who pays a special
ruptcy Part II, 58 Minn. L. Rev. 479 (1974). Certificates of indebted-
tax, that is, a tax the proceeds of which are the sole source of payment
ness are common in debtor-relief cases, see. e.g., In Re Third Avenue
of a bond issue. This form of financing was common prior to the first
Transit Corp., 198 F.2d 703 (2d Cir. 1952) ; In Re Prima Co., 88 F.2d
municipal bankruptcy act, and the inclusion of a provision for special
785 (7th Cir. 1937) ; 8 Collier, Bankruptcy § 6.40 at 970 (14th rev.
tax payers was to meet that need. The financing was done in connec-
ed. 1975) ("Section 344 is usually resorted to where the business is
tion with irrigation, drainage, or other sorts of districts, where the
being operated, but it essentially contemplate transactions of an un-
local improvement that was financed by the bond issue benefited the
usual character, although not actually limited to such."), as is the re-
land served by the district. That is why the revenue for their repay-
jection of executory contracts. The abundant case law surrounding
ment was derived from a tax based on the value of the land. Under
these two provisions is meant to be incorporated into Chapter IX. For
the definition, a special tax payer is affected by the plan only if the
example, the court may permit the rejection only after hearing on
plan proposes to change the assessed value of his land out of propor-
notice, Texas Importing, supra, and only for the reasons that have been
tion to any other changes in assessed value proposed by the plan gen-
established by case law under Chapters X and XI. In summary, these
erally for the owners of land liable for the special tax.
reasons are that the contract is onerous and burdensome, and its re-
jection will aid the petitioner in its reorganization and rehabilitation
SECTION 82
attempt. With respect to labor contracts, the courts have taken a
slightly different position on the grounds for rejection, requiring a
Section 82 delimits the powers and the jurisdiction of the court in a
showing of a greater burden on the petitioner. Shopmen's Local No.
Chapter IX case. Subsection (a), derived from § 81 of the current law,
455 V. Kevin Steel Products, Inc., 1 Bankr. Ct. Dec. 1432 (2d Cir.
gives the court in which the petition is filed exclusive original subject
7-24-75) ; Brotherhood of Railway Employees v. REA Express, Inc.,
matter jurisdiction for the adjustment of the petitioner's debts, that is,
exclusive original jurisdiction over Chapter IX cases. The term "orig-
H. Rept. 686-75-3
18
19
1 Bankr. Ct. Dec. 1237 (5th Cir. 8-27-75) In Re Overseas Airways,
income-producing property that is not necessary for essential govern-
238 F. Supp. 359 (E.D. N.Y. 1965).
mental services, but the existence of that category does not warrant
Under paragraph (3), the court may also exercise such other powers
the potential for litigation that exists with the old language. In any
as are not inconsistent with the provisions of Chapter IX. This para-
case, no constitutional problem is anticipated, because the power of the
graph supplements section 2 of the Bankruptcy Act by giving the
court to interfere with the petitioner is further limited by the change.
court those powers not mentioned in section 2 yet necessary to the
The phrase "any income-producing property" appears broad. It is
disposition of cases under Chapter. IX
copies from current law without qualification, because there exists
Subsection (c) repeats and broadens the limitation in section 83 (c),
some ambiguity in its meaning. Rather than attempting to define
paragraph 1, of current law on the power granted to the court under
it to eliminate the ambiguity, it was left as is SO that the courts might
subsection (b) and elsewhere in the chapter, by prohibiting any inter-
interpret it as they have done in the past consistent with the purposes
ference by the court, by any order or decree, in any of the political or
of Chapter IX and the powers of the court.
governmental powers of the petitioner; any of the property or revenues
of the petitioner, or any income producing property of the petitioner,
SECTION 83
or which is used or enjoyed by the petitioner. The Committee feels that
this limitation is required by Ashton V. Cameron Water Imp. Dist.
The purpose of section 83, copied from present section 83 (i), is the
No. 1, 298 U.S. 513 (1936), and United States V. Bekins, 304 U.S. 27,
same as that of section 82 (c). It is to prevent the statute or the court
rehearing denied, 304 U.S. 589 (1938), which defined the limits of
from interfering with the power constitutionally reserved to the State
Congress' power under the bankruptcy clause, and the extent to which
by the Tenth Amendment. This section makes it clear that the chapter
Congress may grant power to the courts to assist in the management
may not be construed to limit or impair the power of the State to con-
of the affairs of a distressed municipality.
trol, by legislation or otherwise, any municipality, political subdivi-
The changes in this subsection are two; first, the phrase "unless the
sion or public agency or instrumentality in the exercise of its govern-
petitioner consents" is added in order to codify the result of the case
mental functions. Any State law that governs municipalities or
of Leco Properties V. R. E. Crummer, 128 F. 2d 110 (5th Cir. 1942),
regulates the way in which they may conduct their affairs controls
in which a municipality that had failed to have a composition con-
in all cases. Likewise, any State agency that has been given control
firmed was ordered, and consented to, leave the amount deposited with
over any of the affairs of a municipality will continue to control the
the court for distribution under the plan with the court SO that it
municipality in the same way, in spite of a Chapter IX petition.
might distribute that portion to creditors in an orderly fashion; and
The proviso in current section 83(i), retained here, prohibiting state
the case of Ware V. R. E. Crummer & Co., 128 F. 2d 114 (5th Cir.)
composition procedures was enacted in response to, and overruled the
cert. denied, 317 U.S. 644 (1942), in which the Court of Appeals
holding of the Supreme Court in, Faitoute Iron & Steel Co. V. City of
reversed a similar order where the petitioner did not consent. The
Asbury Park, 316 U.S. 502 (1942). In that case, the court upheld a
phrase is not intended, however, to overrule the result of Spellings V.
New Jersey statute that permitted a binding composition of a munici-
Dewey, 122 F. 2d 652 (8th Cir. 1941), in which the Court of Appeals
pality's debts upon the acceptance of a plan by 85% of the municipal-
reversed the District court's injunction against the election of Drainage
ity's creditors. The composition dealt only with unsecured obligations,
District Commissioners upon the allegation of the incumbent Com-
and the state statute prohibited reduction in the principal amount of
missioners that the challengers would not execute the proposed plan,
the outstanding obligations. The Court refused to go beyond the facts
even though the incumbent Commissioners were, in effect, the District
of the case, holding only that the Contracts Clause of the Constitution
itself for the purpose of determining whether the petitioner con-
did not prohibit that particular composition.
sented to an order of the court.
The proviso is retained for the same reason it was enacted by
The second change broadens the limitation by eliminating the phrase
Congress:
"necessary for essential governmental services" from the second para-
State adjustment acts have been held to be valid, but a
graph of the subsection. The phrase was deleted for three reasons.
bankruptcy law under which the bondholders of a munici-
First, the words "necessary" and "essential" were conducive to litiga-
pality are required to surrender or cancel their obligations
tion. Second, and more importantly, the Supreme Court in New York
should be uniform throughout the [United] States, as the
V. United States, 326 U.S. 572 (1946), abolished the distinction be-
bonds of almost every municipality are widely held. Only
tween governmental and proprietary functions. Thus, it is now appro-
under a Federal law should a creditor be forced to accept
priate to prohibit interference by the court in any of the municipalities'
such an adjustment without his consent. H.R. REP. No. 2246,
functions, for they are all equally governmental functions.
79th Cong., 2d Sess. 4 (1946).
Third, the limitation, on interference with any income-producing
property, seems to deprive the qualification "essential for necessary
SECTION 84
governmental services" of any effect. Under one, the court is denied the
power to interfere with property necessary for governmental services;
Section 84 is derived in part from current section 81. It sets the eligi-
under the other. the court may not interfere with any income-producing
bility requirements for relief under Chapter IX. The entity that files
property. There is conceivably a third category of property, non-
must be a political subdivision or public agency or public instrumen-
20
tality of a State. This is not meant to be limiting language, but rather
21
is meant to be a description of general categories that cover all of the
various entities now listed in section 81 of current law. The bill also
complaint. Of course, the court would be bound by all Due Process
omits any limiting reference to the manner by which the indebtness of
requirements, and may, if it decided to pursue such a course, enclose
the entity is payable. The intention of these two changes is to broaden
in the notice to each creditor a notice of the date by which a complaint
the applicability of Chapter IX as much as possible. The entity must
by that creditor against the filing of the petition must be filed.
not be prohibited from filing by state law. The reference to a prohibi-
The grounds for a complaint may generally include only a lack of
tion by state law recognizes a limitation frequently expressed in the
eligibility under section 84 of the petitioner to file, though there may
cases and literature. Faitoute Iron & Steel Co. V. City of Asbury Park,
be other grounds that a court of equity might hear. The section 84 re-
316 U.S. 502 (1942) 5 Collier 81.04 (1964) Biern, A Survey of Muni-
cipal Bankruptcy Law and procedure, 38 Brooklyn L. Rey. 478. 485-
quirements include: insolvency or inability to meet debts as they
mature; lack of a state prohibition against seeking relief under the
87 (1971). It must also be insolvent, or unable to meet its debts as they
Act; the intention of the petitioner to effect a plan of adjustment. Any
mature, and the entity must desire to effect a plan to adjust its debts.
lack of good faith on the petitioner's part in filing the petition would
The decision on whether a petitioner meets these requirements will be
made by the court after the filing of a complaint and a hearing after
undoubtedly be tested under this last requirement. To the extent prac-
ticable, the court must hear and determine all complaints in a single
notice, under section 85 (a). These last two requirements are simple
proceeding. For example, if several complaints allege that the peti-
and, except for insolvency or inability to meet debts, are easily prov-
able in most cases. They are derived from current section 83 (a), para-
tioner is not insolvent or unable to meet its debts, it might be appro-
graph 1.
priate for the court to hear all such complaints in a single proceeding.
More specificity is not stated in the bill and the implementation of
SECTION 85
this mandate, which is intended to help the court expedite the hearings
Section 85 governs the filing of the petition and all events that are
on various complaints, is left to the sound discretion of the court.
triggered by the filing. Subsection (a) describes who may file a peti-
Subsection (b), derived from present section 83 (a), paragraphs 1
tion. It is derived from current section 83 (a), paragraph 1. The peti-
and 2, requires that the petitioner file with its petition a list of all of
tioner itself must file, unless control of the petitioner has been assumed
its creditors. If it is not practicable for the petitioner to file the list with
by some state agency. In the case of an entity with no officials of its
its petition, for example, if the petitioner's creditors are primarily
own, the petition may be filed by its governing authority or the
holders of bearer bonds whose whereabouts or even whose identities
board or body having authority to levy taxes or assessments to meet
are unknown, then the petitioner may file the list at such later time as
the obligations of the district. The petition must allege the facts that
the court, upon application of the petitioner, fixes. If the petitioner
make the entity eligible under section 84 for relief under this chapter.
does not apply to the court to fix a time, then the court may fix a time
Any party in interest may file a complaint objecting to the filing of the
on its own motion. Of course, it is always within the power of the court
petition at any time up to 15 days after the completion of the mailing
to deny the petitioner's application on the grounds that the petitioner's
of the notice required by subsection (d). The deadline obviates the
reason for not filing the list with the petition is inadequate. As the
problem of dilatory creditors who might challenge a petition long
author of the Proposed Bankruptcy Rules and Official Forms under
after negotiations for a plan have been concluded. The possibility for
Chapter IX, the Advisory Committee on Bankruptcy Rules of the
relay exists here, but the court is given adequate flexibility to expe-
Committee on Rules of Practice and Procedure of the Judicial Confer-
dite matters. For example, if the petitioner cannot identify all of its
ence of the United States, said in the note accompanying proposed Rule
creditors reasonably soon, the court may hear and determine a number
9-7, dealing with the filing of the list of creditors:
of complaints that are filed soon after the petition is filed before wait-
[D]ue regard must be given to the constitutional limits
ing for the completion of the mailing of notice. Creditors would still
placed on the court. Bearer bonds would be included on the
be allowed to come in and object to the petition up to 15 days after the
list required to be filed
although the names of the holders
mailing of notice is completed, even though the court may have heard
are unknown. By SO listing, the claim would be deemed filed
and determined earlier complaints on the same subject. Due Process
and allowed [under section 88(a)]
The holder thereof
would appear to require that every creditor that wishes be allowed
would thus be entitled to participate in any distribution with-
his day in court. Nevertheless, the early determination by the court
out filing a claim. One could, however, file a claim if he
that the petition meets certain requirements, even if only a preliminary
desired.
determination on early complaints, and not res judicata as to com-
plaints by later identified creditors, could settle the propriety of the
The court, of course, remains under the Fifth Amendment Due Process
petition adequately to enable the court to proceed to administer the
requirement that governs whether the plan is binding, as is recognized
case as needed. In order to expedite matters further, the court might
in sections 95 (a) and 95 (b) (2) (B).
bar a complaint by a creditor that was filed more than fifteen days
The petition and any accompanying papers, such as the list or the
after the mailing of notice to that creditor, even though the mailing
plan, are to be filed with a court in a district in which the petitioner is
to all creditors had not been completed at the time of the filing of the
located. This is drawn from section 83(a), paragraph 1. Generally, a
petitioner will be located in only one district. In some cases, however,
where the petitioner's jurisdiction covers a very large geographical
area, it may be located in two or more districts. The venue provision
22
23
in this subsection is designed to afford such a petitioner the flexibility
or with the petitioner's consent. It includes a stay of all set-offs and
to file in the most appropriate district, usually the district in which
cóunterclaims relating to any debt, contract or obligation of the peti-
the petitioner's executive's office is located. However, this broad venue
tioner. Baker V. Gold Seal Liquors, Inc., 417 U.S. 467 (1974), supplies
provision is not intended to supersede the transfer provisions otherwise
the authority and the rationale for such a provision. The Court's held
found in the Judicial Code or the inherent power of a court to require
that the right to set-off subverted the twin policy goals of railroad
filing in a different district under the doctrine of forum non conveniens.
reorganization, rehabilitation of a going enterprise, and fair and
The filing fee, set at $100, is the same as under present section 83(a),
equitable distribution to creditors:
paragraph 1.
The notice provisions of the bill are carried forward substantially
The problem of the bankruptcy Reorganization Court is
intact from current law, section 83 (b). Added are the requirements
somewhat different. Liquidation is not the objective. Rather,
of formal notice to the State in which the petitioner is located and to
the aim is by financial restructuring to put back into operation
the Securities and Exchange Commission. The notice must be pub-
a going concern. That entails two basic considerations: First
lished as soon as practicable after the filing of the list of creditors, at
is the collection of amounts owed the bankrupt to keep its
cash inflow sufficient for operating purposes, at least at the
least once a week for three successive weeks in at least one newspaper
survival levels. The second is to design a plan which creditors
of general circulation published within the jurisdiction of the court,
and other claimants will approve, which will pass scrutiny
and in such other papers having a general circulation among bond
of the Interstate Commerce Commission, which will meet the
dealers and bond holders as may be designated by the court. The court
fair-and-equitable standards required by the Act for court
is given authority to require additional publication where the circum-
approval, and which will preserve an ongoing railroad in the
stances warrant. The intent is to meet the constitutional notice require-
public interest. 417 U.S., at 470-71 (footnotes omitted).
ment set out by the Supreme Court in Mullane V. Central Hanover
Bank, 339 U.S. 306 (1950), and Eisen V. Carlisle-Jacquelin, 94 S. Ct.
The Court's concern in Baker with the "fair and equitable" standard
2140 (1974). This requirement assumes even greater importance in
is applicable to Chapter IX as well, section 94 (b) (1), and the public
light of the automatic stay provision of subsection (e). To satisfy the
interest in preserving a viable operating entity is paramount.
constitutional standard, the bill requires that a copy of the notice be
The stay continues in force until the court terminates, modifies,
mailed to each of the petitioner's creditors included on the list of
annuls or conditions it. or the property subject to the lien which is
creditors required by subsection (b). If a creditor is included in the
sought to be enforced, is. with the approval of the court, transferred
list, but his address is not given in the list, and his address cannot with
or abandoned. Anyone subject to the stay may seek relief by filing a
reasonable diligence be ascertained, then the court may, if it SO deter-
complaint with the court, and the court may, for cause shown, after
mines, order the mailing of notice to that creditor addressed as the
hearing on notice, terminate, annul, modify or condition the stay. The
court may prescribe. The notice must include not only the fact that a
"cause shown" requirement is derived from section 116 of Chapter X
and has an abundant case law behind it. Because of the broad nature
case has been filed, but also a notice that the creditor will receive no
further notice unless he files a request with the court, setting forth the
of the automatic stay, the petitioner should inform the court as soon as
nature of his claim, and his name and address. If he files such a request,
possible of those actions with respect to which the petitioner will con-
the court must notify him of all other matters in which he has a direct
sent to relief from the stay, in order to expedite and perhaps obviate
and substantial interest. The petitioner bears all cost of notice, unless
the need for complaints for relief.
The fourth paragraph also permits the stay of other actions or pro-
the court for good cause determines that the cost of notice in a particu-
ceedings, the commencement or continuation of which would be detri-
lar instance should be borne by another party.
mental to the purposes of Chapter IX, such as attempting to enforce
Subsection (e) provides that the filing of a petition under this chap-
a claim against the petitioner by a judicial action or by set-off or
ter operates as an automatic stay of all actions, judicial or otherwise,
counter-claim against a wholly-owned or public corporation of the
against the petitioner, its property, its officers, or its inhabitants, which
petitioner that is. at least for financial purposes, independent, and
seek to enforce a claim against the petitioner, or a lein on the peti-
not liable for the petitioner's obligations. The petitioner, when it seeks
tioner's property. The stay provision is derived from section 83 (c),
this additional stay. is not required to give security as a condtion to
paragraph 1, but, in accordance with the changes made by the Rules
such a stay, as would otherwse be required by Federal Rule of Civil
of Bankruptcy Procedure in Chapters X, XI and XII, Rules 10-601,
Procedure 65 (c). The breadth of this provision is not intended to
11-44, 12-43, and by Proposed Chapter IX Rule 9-4, the petitioner
overrule other, specific Federal legislation that prohibits Federal
need not take affirmative action to obtain the benefit of the stay. The
courts from issuing injunctions, such as the Norris-LaGuardia Act.
stay is made automatic on the filing of the petition. The automatic stay
Subsection (f) makes unenforceable certain contractual provisions,
prevents the creditors' race that often ensures when a debtor fails to
commonly called "ipso facto" or "bankruptcy" clauses, or applicable
meet its obligation, and it requires that all actions against the peti-
nonbankruptcy laws that invalidate or allow termination of contracts
tioner be handled in the bankruptcy court, where they can be con-
or leases upon the insolvency of one of the parties to the contract.
trolled and harmonized. The automatic stay provision of the subsec-
The purpose of these clauses is to protect the solvent contracting party
tion is very broad, including a stay of any action that allows a creditor
from a decline in the quality of the other party's credit when the
to obtain any portion of the claim due him, other than under the plan,
contract establishes a creditor/debtor relationship. The purpose of
25
24
SECTION 87
this section, derived in part from section 70(b) of the Bankruptcy
Section 87 of the bill deals with administrative matters in the case.
Act, is to allow the petitioner to continue to operate in spite of the
Subsection (a) allows special reference of various matters to a referee
filing of the petition, the consequent decline in the petitioner's credit,
in bankruptcy. The reference provision is derived from section 83 (b)
and the possible cessation of delivery of services or supplies by any
of the present law, with two changes. First, references may be made
of the petitioner's suppliers. This subsection requires that past de-
only to referees in bankruptcy, rather than to referees or special
faults in performance be cured, and adequate assurance of future
masters. The bankruptcy bench has grown both in numbers and ex-
performance be provided before the petitioner may insist on further
pertise since the current law was enacted in 1937, such that it is now
performance of the contract. "Adequate assurance" is adopted from
preferable to refer any special matters to referees who are familiar
section 2-609 (1) of the Uniform Commercial Code. What constitutes
with and experienced in the conduct and the problems of bankruptcy
"adequate assurance" must be determined by the facts of each case,
proceedings. The second change adopts a sentence and the substance of
but may, for example, in the case of a lease, be simply the security
form of Federal Rule of Civil Procedure that reference shall
or rental deposit under the lease. In addition, any credit extended
be the exception and not the rule. Though a general test is set out
under the contract after the filing of the petition would be accorded
in the subsection for when a judge may refer a special matter, the
a first priority under section 89(1). These two requirements, adequate
addition of this sentence makes it clear that the judge should make
assurance and first priority, substitute for the ipso facto clause in
every effort to hear each proceeding himself, and not rely on a referee
assuring the solvent contracting party of the other party's ability to
in his district to handle most of the factual matters that arise in a
perform, and prevent the continued performance under the contract
Chapter IX case. The section retains the current limitation that ref-
by the petitioner from becoming burdensome to the solvent party.
erence shall be only for special findings of fact, not of law, and that a
general reference of the case, as is done in Chapter XI or in straight
SECTION 86
liquidation cases, shall not be made.
Subsection (b) allows the court to grant reasonable compensation
This section governs the appearance of creditors before the court,
for the actual and necessary expenses incurred in connection with the
and in negotiations with the petitioner. Subsection (a) permits any
case, including services that relate to developing, obtaining confirma-
creditor to appear in person or by a duly authorized agent, attorney
tion of, and executing the plan. This is normally done in other chapter
or committee. This is derived from section 83(a), paragraph 5. In
cases, and the court will undoubtedly rely on the broad experience and
Chapter cases, it usually happens that creditors of the same class elect
case law in connection with cases under those chapters. The section, de-
committees to represent them for most purposes. This codifies that
rived from current section 83(b), paragraph 4, with only style changes
result. The subsection requires, however, financial disclosure by those
(and the elimination of allowance of compensation for special masters
committees and those who represent the committees, such as the com-
in conformity with the change made in subsection (a)), is directed at
mittee's attorney or agent. This is routinely done in cases filed under
the court's allowing compensation by the petitioner as an administra-
other chapters, and is incorporated here. It is not intended that any
tive expense for the services covered. It is not intended that the court
attorney representing anyone in the case disclose his compensation to
should pass on all fees paid by anyone incident to the case. Where
the court, and that the court have an opportunity to rule on it. In a
private parties and their attorneys or agents arrive at a private com-
large Chapter IX case, the paperwork attendant upon such a result
pensation agreement, the court should not upset it, for it does not bear
would effectively grind the proceedings to a halt. The general lan-
in any way on the plan of adjustment or on the petitioner's expenses.
guage of this subsection is intended merely as a guide to the courts
In accordance with the limitation imposed by section 82 (c), the court
and an indication that the courts should apply the same standards
may only allow the compensation-it may not be assessed against the
currently used in other chapters for disclosure of representation of
petitioner unless the petitioner has made provision for the payment of
and compensation by the petitioner and official creditor representa-
those expenses in the plan.
tives.
Subdivision (c) is new, but is derived from Rule of Bankruptcy
Subsection (b) relates to multiple compensation by both the peti-
Procedure 117 (b), which recognizes the appropriateness of joint ad-
tioner and one or more creditors in the promotion of the plan. It is
ministration in certain kinds of cases, for example, Chapter IX
meant to codify the result of the Supreme Court case of American
filings of both a municipality and one of its wholly-owned public, but
Mutual Life Ins. Co. V. City of Avon Park, 311 U.S. 138 (1940). The
independent, corporations. Joint administration has as its objective
language is derived from section 83(e), paragraphs 1 and 2, and,
the joint handling of purely administrative matters in order to expe-
with style changes, is modernized and streamlined. The substantive
dite the cases. Joint administration should be distinguished from
intent is the same as under current law. It is not intended to upset
consolidation, which is neither prohibited nor authorized by this sub-
other arrangements, whereby a person receives compensation from
section. The appropriateness of consolidation, which results in a pool-
both the petitioner and one of its creditors, not in return for promot-
ing of the assets, revenues, liabilities and expenses of the two entities,
ing the plan, but rather as part of an ordinary employment relation-
ship outside of the Chapter IX case.
H. Rept. 686-75-4
26
27
depends upon substantive considerations which affect the substantive
Subsection (b), derived from present section 83 (b), paragraph 2,
rights of the creditors of the different entities. See Seligson & Mandell,
requires the court to designate classes of creditors whose claims are of
Multi-Debtor Petitions-Consolidation of Debtors and Due Process
substantially similar character and the members of which enjoy sub-
of Law, 73 Com. L. J. 341 (1968).
stantially similar rights. The rights of creditors and the nature of the
claims are determined by State law. It is possible that a single creditor
SECTION 88
with several claims may be placed into multiple classes. The classifi-
cation standards in current law are far too restrictive to accomplish
Subsection (a) specifies how claims against the petitioner are al-
a fair classification of creditors. The new language is intended to al-
lowed, that is, how they are established for purposes of computation
low the court greater flexibility, within the confines of the Due Proc-
of acceptances, distribution under the plan and all other purposes
ess Clause, and greater guidance than the terse "according to the na-
under the chapter. Generally, the list of creditors filed by the petitioner
ture of their claims" standard found in Chapters X and XI, sections
will determine most of the claims against the petitioner.
197 and 351. The substantive result, however, will probably not differ
The Note accompanying Proposed Chapter IX Rule 9-22 describes
from that currently achieved in those chapters. "Differences in treat-
the procedure and its advantages:
ment [will] be just and reasonably necessary to effectuate the [plan]."
The inconvenience and expense to numerous and wide-
Bartle V. Markson Bros. Inc., 314 F.2d 303, 305 (2d Cir. 1963). "Such
spread creditors will be obviated as will the burdens of
classification
must be necessary and proper and made on a rea-
collecting and registering such claims on the part of the court
sonable basis.
Ordinarily, a creditor is not entitled to better
or petitioner. Bearer bonds would be included on the lists
treatment merely because he holds a small claim rather than a large
filed
and the holders thereof would not have to file claims
one." In re Hudson-Ross, Inc., 175 F. Supp. 111, 112 (N.D. Ill. 1959).
to participate since under this rule their claims would be
Also added to the subsection is a sentence which permits the court to
deemed filed and allowed.
classify creditors holding unsecured claims of less than $100 in the
[O]nly creditors whose claims are disputed, contingent,
same class for administrative convenience. This is currently done in
or unliquidated, or creditors as to whom it is determined ad-
Chapter XI cases; this sentence codifies that result. It has the effect
visable, need file proofs of claim. In any event, any creditor
of reducing the size of certain classes of creditors measurably, and
may file a claim. The court may but need not fix a bar date
thus expediting proceedings. These creditors are usually paid in full,
for the filing of proofs with respect to any or all creditors. If
SO that they are not deemed "affected by the plan," 9 Collier, Bank-
a claim is required to be filed, failure to do SO within the time
ruptcy. 9.01, at 230 (14th rev. ed. 1975). Because of the de minimis
fixed precludes that creditor from voting on a plan or partici-
nature of these claims, their placement in a separate class should not
pating in distribution
upset the classification standards set out above.
If the court does not set a date, then proofs of those other claims
Subsection (c) makes clear that the rejection of an executory con-
must be filed before the entry of an order confirming the plan. The
tract under section (b) (1) or under section 91 gives rise to a claim
subsection also specifies that the court must mail notice to each of the
for damages against the petitioner, and that the claim may be asserted
creditors whose claim is listed on the list of creditors as disputed,
in the case SO that the injured party can recover under the plan. It is
contingent or unliquidated, informing him of the time fixed by the
derived from section 202 of Chapter X. The rejection constitutes a
court for the filing of proofs of claims. Of course, if the court does not
breach as of the date of the commencement of the case. This prevents
set a date, then the statutory standard applies, and the creditors are
any claim arising from such a rejection from rising to the status of
on constructive notice that proofs of claims must be filed before the
an administrative claim entitled to priority under section 89, and re-
entry of an order confirming the plan. These creditors presumably
quires that it be dealt with in the plan, if at all. The claim of a land-
will receive notice of the date set for the hearing on conformation,
lord for rejection of an unexpired lease is limited to the rent reserved,
and that should be adequate to alert them to the time within which they
without acceleration, or the damages or indemnity under a covenant
must file their proofs of claim. If for any reason, such as the sheer
in the lease for the year following the date of the surrender of the
volume of notices that must be mailed, the court is unable to com-
premises or the reentry of the landlord, whichever occurs first, plus
plete the mailing within the statutory thirty days, no penalty is pro-
any unpaid accrued rent up to the date of the surrender or reentry.
vided. As long as creditors are given adequate notice of the time within
This provision is a limitation to prevent a landlord with a long-term
which to file proofs of claims, the noncompliance with the thirty-day
lease from consuming a large portion of the estate by a claim for
mandate should present no Due Process problems. The purpose of
damages in a State in which there is no duty to mitigate damages re-
the thirty-day limit is to expedite matters as much as possible.
sulting from the breach of a lease. As the court said in Oldden V. Tonto
If there is no objection to a proof of claim, the claim is deemed
Realty Corp. 143 F.2d 916, 920 (2d Cir. 1944), landlords are "not in
allowed. If there is an objection, the court must hear and determine
the same position as other general creditors" and should not "be treated
the objection. After the hearing, the court allows or disallows the
on a par with them." See Newman, Rent Claims in Bankruptcy and
claim. The reason for the use of the term "deemed allowed" is to reduce
Corporate Reorganization, 43 Colum. L. Rev. 317 (1943). The one
paperwork for the court. The court need not enter an order allowing
year limitation is derived from section 63 (a) (9) of the Bankruptcy
each and every claim if there is no objection or dispute.
Act. There is no corresponding limit on the amount of damages for
the rejection of any other executory contract.
28
29
SECTION 89
Section 89 is new. There is no provision in current law for priorities.
which maintain the business and which are inherently essential to the
However, there are indications, such as in current section 83 (b), para-
protection and preservation of the security." 6A Collier Bankruptcy.
graph 4, and in section 83(e), paragraphs 1, 2, and 3(4), that peti-
9.13, at 250-51 (14th rev. ed. 1975). The same public policy con-
tioners under Chapter IX regularly pay administrative expenses, or
siderations are applicable to a Chapter IX case.
those that are incident to the confirmation and consummation of a
The words "debts or consideration owed" are used instead of "wages"
plan. In keeping with the policy that the court not interfere with the
as in section (a) (2) of the Bankruptcy Act in order to make clear
that the result of United States V. Embassy Restaurant, Inc., 359 U.S.
petitioner in any of its expenditures, it was most likely contemplated
under current law that the petitioner would pay its operating expenses
29 (1959) is not to apply to wages and fringe benefits which fall within
and those incident to the plan either currently or under the plan, and
the second priority in Chapter IX. That case held that "wages" did
thus there was no need for a specific priority section. The addition
not include fringe benefits, such as vacation or sick leave, and pension
or retirement fund contributions owed by an employer on behalf of his
of such a priority section in this bill is more to protect the second and
third priorities rather than the first, administrative expenses, for as
employees. The third priority is not really a priority at all, but is
rather a subordination. Under certain Federal laws, notably Revised
noted, it is most likely that the first would be paid in any event. With-
Statutes section 3466, the United States has a first priority whenever
out some assurance of payment, the petitioner's suppliers, employees
one of its debtors becomes insolvent. The debts owed to the United
and those connected with formulating and executing the plan could
States would prime all other debts, even administrative expenses, with-
not be expected to perform at all. That is why operating and admin-
out this specification that they are to be paid in full before any pay-
istrative expenses (somewhat redundantly) are given a first priority
ments under the plan, but not ahead of administrative expenses and
under this section.
With the petitioner relieved of the burden of debt service by the
second priority debts.
SECTION 90
filing of the petition, in most cases the petitioner will be able to pay all
operating expenses currently, or under credit terms which obtained
Subsection (a) is derived from current sections 83 (a), paragraph 1,
prior to the filing of the petition. If the petitioner cannot meet such
and 83 (e), paragraph 4. The subsection requires that the petitioner file
payments currently, the bill provides in section 82(b) (2) for the
with its petition a plan for the adjustments of its debts. The contents
issuance of certificates of indebtedness to finance any short-fall in
of the plan are specified by section 91. If the petitioner does not file the
revenues. Certificates of indebtedness is the method for such financing,
plan with its petition, then it must file it within such time as the court,
not delay of payment to post-petition suppliers. Such delay could
on its own motion or upon application of the petitioner, prescribes.
seriously-jeopardize the financial position of the suppliers. Their in-
The subsection also permits the petitioner to file a modification of
solvency might similarly jeopardize supplies and services to the peti-
its plan at any time prior to the confirmation of the plan. This is
tioner. For example, the petitioner's utility suppliers must maintain
found in current section 83 (e), paragraph 4. The requirement that the
service if the petitioner is to continue to operate and to provide gov-
petitioner obtain court approval is deleted as unnecessary, because the
ernmental services to its inhabitants. Late payment to the utility
petitioner no longer need obtain consents to the plan before filing, nor
suppliers would be manifestly unfair to a utility that had no effective
the approval of the court that the plan and the petition meet the
choice but to continue service, because discontinuing would paralyze
requirements of present section 83 (a).
the municipality. As under section 85(f), the petitioner should give
Subsection (b) requires that the court, as soon as practicable after
adequate assurances of future performance under the terms of the
the filing of the plan, fix a time within which creditors may accept
pre-petition contract for any suppliers that continue to serve the
or reject the plan. This date becomes important in computing the
petitioner.
requisite number of acceptances of the plan. A notice of this time is
The second priority is to reassure suppliers and employees that any
included with the copies or summary of the plan that the court trans-
arrearages due them will be cured in full. Without such assurance,
mits. The court should consider such factors as the time it will take
these creditors may insist on cash payments for goods and services
to transmit the plan to all who are entitled to receive a copy, and the
prior to the filing of a petition when it begins to appear that the peti-
time within which it is reasonable to expect that a creditor can
tioner is in financial trouble. Such creditor action could precipitate a
examine the plan and make an informed decision. After the court
filing, and even greater financial difficulties. This priority makes clear
fixes the time, it must transmit the plan or a summary of the plan
that they may continue to supply the petitioner with no fear of loss for
to each of the petitioner's creditors, to each of the special tax payers
the four months prior to the filing of a petition. This idea is based
affected by the plan, and to each such other party in interest as the
upon the "six-months rule" which originated in Federal railroad
court may designate. With the copy or summary, the court must in-
receiverships. Fosdick V. Schall, 99 U.S. 235 (1878). "The rule is
clude any analysis of the plan that has been prepared and filed with
grounded on both considerations of public policy, in that there is a
the court, and notice of the time fixed for acceptance or rejection. and
public interest in maintaining uninterrupted the business of a corpora-
of the right of the recipient of a summary to receive a copy of the
tion which is public or semi-public in character, and also on considera-
plan itself, upon request. The procedure for transmission of a modifica-
tions of equity and good conscience, in that secured creditors must be
tion of the plan filed by the petitioner is the same as for transmission
deemed to have agreed to a prior payment of those current expenses
of the original plan itself.
30
31
SECTION 91
ing or rejecting the plan, are controlled by the petitioner. See Ameri-
can Mutual Life Ins. Co. V. City of Avon Park, 311 U.S. 138 (1940).
This section is derived from current section 83 (a), paragraph 3. It
Also excluded in the computation of the two-thirds majority are claims
gives the same broad latitude to a petitioner to formulate a plan to
of creditors who are provided for under subsection (d).
adjust its pre-petition debts as is presently given in Chapter IX
Subsection (d) specifies those creditors whose acceptances are not
petitioner or a Chapter X or XI debtor. There is one substantive
required for confirmation of the plan. The section is taken verbatim
change from current law, along with minor style changes. That is
(except for the introductory clause) from the current section 83 (d)
the addition of a provision that permits the petitioner to reject execu-
proviso. It permits the court to dispense with acceptances from a
tory contracts as part of the plan. Such rejection as part of the plan is
class of creditors (or a single creditor if he is in a class by himself)
permissible in Chapter X, section 216(4), and Chapter XI, section
whose claims are not affected by the plan, if the plan makes provision
357 (2), and is added here in conjunction with section 82(b) (1) of
for the payment of their claims in cash in full, or if provision is
the bill.
made in the plan for the protection of the interests, claims or lien
SECTION 92
of such creditor or class of creditors. This subsection permits the court
to confirm a plan even in the face of a recalcitrant class of creditors,
Subsection (a), derived from current section 83 (d) defines who is
if the petitioner makes provision in the plan for them as specified,
entitled to accept or reject a plan. Every creditor whose claim has been
or if it pays them in cash in full. In essence, the three paragraphs
allowed or deemed allowed under section 88 and who is materially
of the subsection specifying the modes in which the petitioner may
and adversely affected by the plan may file a written acceptance or
dispense with the acceptances of a particular class amount to a
rejection of the plan with the court. That includes all creditors whose
codification of the constitutional Due Process standard for the pro-
claims are included on the list filed under section 85 (b) and whose
tection of the property of a class of creditors that does not consent
claims are not disputed, contingent or unliquidated as to amount; all
to the plan. It is important to recognize that the section does not
creditors who file proofs of claims under section 88(a) and whose
contemplate that a minority of non-assenting creditors within a class
claims are not then disputed, contingent or unliquidated as to amount;
may be bought off. They are bound by the decision of two-thirds
all creditors whose claims are allowed by the court after objection by
of their class. The cram-down instead contemplates that a class of
a party in interest after the filing of a proof of claim; and all security
creditors that does not consent to the plan by the requisite two-thirds
holders of record as of the date of the transmittal of the plan or
(or, if a class consists of only one creditor, that creditor who does
modification under section 90(b) as long as they are materially and
not consent) may be settled with as a whole.
adversely affected by the plan. The subsection also allows the court
Subsection (e) sets out the requirements for the acceptance of a
to allow temporarily any claim over which there is a dispute, in such
proposed modification of the plan. A proposed modification must be
amount as the court deems proper, in order that the ceditor holding
accepted in the same manner as the plan itself. However, the subsec-
that claim be allowed to accept or reject the plan. The provision is
tion posits several presumptions about the acceptance of modifications.
derived from Rules of Bankruptcy Procedure 10-305 (a) and 11-37 (a).
These are designed to save paper work and expedite acceptance. They
It gives the court some flexibility and expedites acceptance of the
are that any creditor who has accepted the plan and is not affected
plan, because it means that the court does not need to determine finally
materially and adversely by the modification (as determined by the
all objections to claims before the plan may be transmitted for ac-
court) is deemed to have accepted the modification; and that any
ceptance or rejection.
creditor who is materially and adversely affected by the proposed
Subsection (b) sets out the general rule for the acceptance required.
modification and who has accepted the plan is deemed to have accepted
In order for a plan to be confirmed, it must have been accepted in
the modification unless he files a written rejection of the modfiication
writing by creditors holding two-thirds in amount of the claims of
within the time fixed by the court. The subjection requires that the
each class. That is, the acceptances and rejections must be computed
court give notice to creditors who are materially and adversely affected
separately for each class of creditors designated by the court under
by the proposed modification of the modification and of the time
section 88(b), and creditors holding two-thirds of the claims of
within which the creditor must file a rejection. The modification must
each class must accept the plan before it may be confirmed.
be accepted as the plan by the same majority of each class affected.
Subsection (c) defines the computation method. The court must
compute the two-thirds required by subsection (b) on the basis of
SECTION 93
the total amount of claims with respect to which a written acceptance
or rejection has been filed. This is a change in two ways from current
Section 93, derived from section 83(b), paragraph 2, specifies who
law, which requires that there be acceptance by creditors holding
may object to the plan. Any creditor affected by the plan, any special
two-thirds of the aggregate amount of all claims of all classes, whether
tax payer affected by the plan, and the Securities and Exchange Com-
or not holders of some claims have filed acceptances or rejections.
mission may object to the plan. The S.E.C. is denied the right to
Subsection (c) also directs the court not to include in the computa-
appeal from any order of the court relating to confirmation of the
tion of the requisite majority any acceptances or rejections filed by
plan, as in § 208 of Chapter X. Objection to the plan is by a com-
the petitioner or a ny person or entity which, for purposes of accept-
32
33
plaint which alleges that the plan does not meet one or more of the
delinquencies, and any general economic conditions of the
statutory requirements set out in section 94(b).
District which may reasonably be expected to affect the per-
centage of future delinquencies
SECTION 94
Fair and equitable has additional consent in Chapter IX. The peti-
Subsection (a) is derived from current section 83 (a), paragraphs
tioner must exercise its taxing power to the fullest extent possible for
1, 2, and 3. It requires the court to hold a hearing on the confirmation
the benefit of its creditors, Fano V. Newport Heights Irr. Dist., 144
of the plan (with any modifications) within a reasonable time after
F. 2d 563 (9th Cir. 1940). The court must find that the amount pro-
the expiration of the time set by the court under section and
posed to be paid under the plan was all that the creditors could reason-
92 (d) for the acceptance or rejection of the plan and any modifica-
ably expect under the circumstances. In addition,
tions. The court must give notice of the hearing to all parties entitled
the fact that the vast majority of security holders may have
to object under section 93. The court will probably find it easiest to
approved a plan is not the test of whether that plan satisfies
fix the time for the hearing before it transmits the plan, in order
the statutory standard (of fairness). The former is not a sub-
that it may include the notice of the hearing with the notice trans-
stitute for the latter; they are independent.
mitting the plan or any modification.
Subsection (b) lists the requirements for confirmation of the plan.
American Mutual Life Ins. Co. V. City of Avon Park, 311 U.S. 138,
It is copied from present section 83 (e), paragraph 3, with minor
148 (1940). Fair and equitable also requires that the plan embody a
fair and equitable bargain, openly arrived at and devoid of over-
style, but no substantive, changes. The first requirement is that the
reaching. Town of Bellair V. Groves, 132 F. 2d 542 (5th Cir. 1942),
plan be fair and equitable, and feasible, and not discriminatory in
cert. denied, 318 U.S. 769 (1943). Other case law that surrounds the
favor of any creditor or class of creditors. There is abundant case law
fair and equitable doctrine in Chapter IX is retained in the bill. This
behind these requirements. Fair and equitable is an equitable doc-
trine. It incorporates the absolute priority rule from Northern Pa-
paragraph also requires that the plan not discriminate unfairly in
favor of any creditor or class of creditors. This is another aspect of the
cific Ry. V. Boyd, 228 U.S. 482 (1912) and from Case V. Los Angeles
fair and equitable rule, more specifically stated. It prohibits special
Lumber Products, 308 U.S. 106 (1939), which requires that senior
treatment of any creditor, such as a fiscal agent or resident of the
creditors be paid in full before any creditor junior to them may be
paid at all. The court determines these priorities based on State
taxing district. See American United Mutual Life Ins. Co. V. City of
law. Fair and equitable in Chapter IX also has included the feasi-
Avon Park, supra.
bility standard expicitly stated in Chapter X and XI, but not pres-
The second paragraph contains the requirement that the plan comply
with all of the provisions of this chapter. This is currently the third
ently found in Chapter IX. Kelley V. Everglades Drainage District,
319 U.S. 412 (1943). It is included in the bill as a codification of the
requirement in section 83 (e) of Chapter IX. The most important of
these is the consent requirement found in section 92, which is the cur-
case law requirement. The feasibility requirement means that there
rent second requirement in section 83 (e). The current second require-
is a reasonable prospect that the petitioner will be able to perform
ment has been deleted as redundant, because section 92 requires that
under the plan. That is, it must appear to the court, based on the pe-
the plan be accepted by the requisite number of creditors before it may
titioner's past and projected future tax revenues and expenses that
be confirmed. No substantive change is intended, in either the current
it will have enough to make the payments required by the plan.
second or third requirements. Equally important is the requirement
[W]here future tax revenues are the only source to which
that the petitioner pay priority creditors in full in advance of any pay-
creditors can look for payment of their claims, considered
ment under the plan under section 89.
estimates of those revenues consitute the only available basis
The third standard for confirmation is copied from current section
for appraising the respective interests of different classes of
83(e), paragraph 3(4), and merely requires that the court determine
creditors. In order that a court may determine the fairness of
that all amounts to be paid by the petitioner incident to the plan or in
the total amount of cash or securities offered to creditors by
the case have been disclosed and are reasonable. The inclusion of the
the plan, the court must have before it data which will
phrase "by any person" is intended solely to prevent the petitioner
permit a reasonable, and hence an informed, estimate of the
from circumventing the requirement of this paragraph by making
probable future revenues available for the satisfaction of
payments indirectly through some third person for the benefit of the
creditors.
petitioner. It is not intended that the court examine all payments made
to all attorneys and agents that are in any way connected with the
Appropriate facts which might have been con-
case. That might take far too much time for the expeditious confirma-
sidered
are the revenues which have in the past been
tion of the plan.
received from each source of taxation, the present assessed
The fourth requirement is copied from current law, and requires
value of property subject to each tax, the tax rates currently
that the offer of the plan and its acceptance be in good faith. The final
prescribed, the probale effect on future revenues of a revision
requirement is derived from current law, but is made more flexible by
in the tax structure adopted in 1941, the extent of past tax
the use of the phrase "not prohibited from" in place of "authorized
34
35
to." The change is meant to make it easier for the court to make the
Subsection (c) governs distribution under the plan. It directs that
requisite finding, for it may be the case that the petitioner proposes to
distribution be made by the disbursing agent in accordance with the
take some action which is not prohibited by law, but is not clearly au-
provisions of the plan to creditors whose claims have been allowed
thorized either. This, along with the requirement of section 95 (b) (1)
(or deemed allowed) under section 88(a). It also permits distribution
(C), that securities issued under the plan be valid, are all that the
to security holders of record "whose claims have not been disallowed.
Committee feel are required to validate the plan.
Subsection (d) establishes a bar date of five years. If the plan re-
quires presentment or surrender of old securities or the performance
SECTION 95
of any other action as a condition to participation under the plan, the
Section 95, derived from section 83 (f), states the effect of the confir-
creditor must take that action within five years after the entry of the
mation of the plan. The provisions of the plan are binding on all of the
order of confirmation. If the creditor does not, then the consideration
petitioner's creditors who had timely notice or actual knowledge of
held by the disbursing agent for distribution to that creditor becomes
the pendency of the case, whether or not they have accepted the plan,
the property of the petitioner, and the creditor is barred from par-
and whether or not their claims have been allowed under section 88.
ticipation under the plan.
Subsection (b) discharges the petitioner from and claims against it
Subsection (e) is new. It allows the court to retain jurisdiction over
that are provided for in the plan as of the time when the plan is con-
the case for as long as it determines is necessary to the successful exe-
firmed, the petitioner deposits the consideration to be distributed under
cution of the plan, and inures that the court may enforce the terms of
the plan with the disbursing agent appointed by the court, and the
any confirmed plan. In some cases, this could be as long as the longest
court has determined that any security SO deposited will constitute,
term of any security issued under the plan, as occurred in the case of
upon distribution, a valid legal obligation of the petitioner, and that
Fort Lee, New Jersey.
any provision made to pay or secure the security is valid. When these
Subsection (f) copies current section 83(g), with minor stylistic
three events have occurred, the petitioner is discharged from the debts
changes. The subsection makes a certified copy of any order or decree in
provided for in the plan. This requires that the court appoint a dis-
the case evidence of the jurisdiction of the court, the regularity of the
bursing agent. The disbursing agent may be any person or entity, in-
proceedings, and the fact that the order was made. It also makes a
cluding the court or the petitioner, that the court chooses. The peti-
certified copy of an order providing for the transfer of property dealt
tioner is not discharged, however, from any claim excepted from dis-
with by the plan evidence of the transfer of title accordingly, and
charge by the plan or the order confirming the plan, or from any claim
specifies that a certified copy of the order, if reordered as deeds are re-
the holder of which had neither timely notice nor actual knowledge
corded, imparts the same notice that a deed, if recorded, would impart.
neither of the petition nor of the plan. It is only fair, and most likely
required by the Due Process Clause, that a creditor's claim not be
SECTION 97
discharged if the creditor knew nothing of the case. Thus, if he knew
Section 97 is copied from current section 83(j). It was originally
of either the petition or the plan, either through timely notice from
added to the statute by the Chandler Act in 1938 to overrule the result
the court or the petitioner, or through his actual knowledge, then his
of In Re City of W est Palm Beach, Fla., 96 F.2d 85 (5th Cir. 1938), in
claim is discharged. Otherwise, it is not.
which acceptances of a plan of composition obtained by the exchange
of debt securities before filing of the petition in Chapter IX were held
SECTION 96
not to count toward the amount of acceptances required for confirma-
This section. largely derived from current section 83 (f), is a catch-
tion of the plan. With the elimination of the 51% prior consent re-
all for rules for post-confirmation matters. Subsection (a) requires
quirement in the bill, this section is even more important than it was
the court to fix a time within which the petitioner must deposit with
when added to present Chapter IX. The section contains minor style,
the disbursing agent appointed by the court the consideration to be
but no substantive changes.
distributed under the plan. This is the same disbursing agent required
SECTION 98
by section 95 (b), and it is the deposit required by this subsection that
meets the requirement of section (b) (1) (B).
Section 98 is derived from, and is an expansion upon, section 83 3(b),
Subsection (h) directs the netitioner to comply with the plan and
paragraph 6, of current law. It also consolidates various other provi-
the orders of the court relative to the plan, and to take all actions
sions in present law. It gives the court power to dismiss the case for
necessary to carry out the plan. The Committee feels that this section
five reasons: 1) want of prosecution; 2) if no plan is proposed within
does not in any way interfere with the sovereignty of the state. nor
the time fixed or extended by the court; 3) if no proposed plan is ac-
the limitation on the court's interference with the petitioner's political
cepted within the time fixed or extended by the court; 4) if confirma-
or governmental functions found in section 82(c). Of course, there is
tion is refused and no further time is granted for the proposal of other
no sanction for failure to comply with this subsection, save dismissal
plans; or 5) where the court has retained jurisdiction atfer confirma-
of the case (see section 98(1)). The subsection merely requires com-
tion, if the debtor defaults on any of the terms of the plan, or if the
plianos, and is subject to all of the limitations found in sections 82(c)
plan terminates by reason of the occurrence of a condition specified in
and 83.
the plan. Reasons two through four are specific examples of want of
prosecution, and are not intended in any way to limit the scope of the
37
36
CHAPTER IX OF THE BANKRUPTCY ACT
first reason. Subparagraph (5) is new, and more adequately provides
for the petitioner's failure to consummate a plan. In addition, the list
[CHAPTER IX
of five reasons is nonexclusive. The court may dismiss for other grounds
as well. Its power there is defined by the inherent power of a court of
[Sec. 81. This Act and proceedings thereunder are found and
equity.
declared to be within the subject of bankruptcies and, in addition to
SECTION 99
the jurisdiction otherwise exercised, courts of bankruptcy shall exer-
cise original jurisdiction as provided in this chapter for the composi-
The last section of the bill is a separability clause. It follows present
tion of indebtedness of, or authorized by, any of the agencies or instru-
section 81. It specifies that if any provision of the chapter is held in-
mentalities hereinafter named, payable (a) out of assessments or taxes,
valid, the remainder of the chapter shall not be affected by that hold-
or both, levied against and constituting liens upon property in any
ing. The section merely restates a rule of construction nearly univer-
of said agencies or instrumentalities, or (b) out of property acquired
sally followed by the court, of. Carter V. Carter Coal Co., 298 U.S. 238
by foreclosure of any such assessments or taxes or both, or (c) out of
(1936), and eliminates any uncertainty as to the legislative intent,
income derived by such agencies or instrumentalities from any income-
United States V. Jackson, 390 U.S. 570, 585 (1968).
producing property, whether or not secured by a lien upon such
property (1) Drainage, drainage and levee, reclamation, water, irri-
COST OF LEGISLATION
gation, or other similar districts, commonly designated as agricultural
improvement districts or local improvement districts, organized or
Pursuant to the requirement of Clause 7 of Rule XIII of the Rules
created for the purpose of constructing, improving, maintaining, and
of the House of Representatives, it is estimated that no additional
operating certain improvements or projects devoted chiefly to the
costs will be incurred in carrying out the provisions of this bill.
improvement of lands therein for agricultural purposes; or (2) local
The bill provides for changes in existing law but does not alter or
improvement districts, such as sewer, paving, sanitary, or other similar
change the existing judicial structure already in place to handle the
districts, organized or created for the purposes designated by their
filings and the various Chapters of the Bankruptcy Act.
respective names; or (3) local improvement districts, such as road,
highway, or other similar districts, organized or created for the pur-
STATEMENTS UNDER CLAUSE 2(1) (3) OF RULE X OF THE RULES OF THE
pose of grading, paving, or otherwise improving public streets, roads,
HOUSE OF REPRESENTATIVES
or highways; or (4) public-school districts or public-school authorities
A. Oversight Statement. No oversight findings or recommendations
organized or created for the purpose of constructing, maintaining,
have previously been filed with respect to this area.
and operating public schools or public-school facilities; or (5) local
B. Budget Statement. Clause 2(1) (3) (B) of rule XI is not appli-
improvement districts, such as port, navigation, or other similar dis-
cable. Section 308 (a) of the Congressional Budget Act of 1974 will
tricts, organized or created for the purpose of constructing, improving,
not be implemented this year. See last paragraph of House Report
maintaining, and operating ports and port facilities; or (6) incor-
No. 94-25, 94th Congress, 1st Session (1975).
porated authorities, commissions, or similar public agencies organized
C. No estimate or comparison from the Director of the Congressional
for the purpose of constructing, maintaining, and operating revenue-
Budget Office was received.
producing enterprises; or (7) any county or parish or any city, town,
D. No related oversight findings and recommendations have been
village, borough, township, or other municipality Provided, however,
made by the Committee on Government Operations under clause 2(g),
That if any provision of this chapter, or the application thereof to any
(2) of rule X.
such agency or district or class thereof or to any circumstance, is held
invalid, the remainder of the chapter, or the application of such
STATEMENT UNDER CLAUSE 2(1) (4), OF RULE XI OF THE RULES OF
provision to any other or different circumstances, shall not be affected
by such holding.
THE HOUSE OF REPRESENTATIVES CONCERNING ANY INFLATION Iм-
PACT ON PRICES AND COSTS IN THE OPERATION OF THE NATIONAL
[SEc. 82. The following terms as used in this chapter, unless a dif-
ECONOMY
follows: ferent meaning is plainly required by the context, shall be construed as
The committee concludes that there will be no inflationary impact
[The term "petitioner" shall include any agency or instrumentality
on prices and costs in the operation of the national economy.
referred to in section 81 of this chapter.
[The term "security" shall include bonds, notes, judgments, claims,
CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED
and demands, liquidated or unliquidated, and other evidences of in-
debtedness, either secured or unsecured, and certificates of beneficial
In compliance with clause 3 of Rule XIII of the Rules of the House
interest in property.
of Representatives, changes in existing law made by the bill, as re-
The term "creditor" means the holder of a security or securities.
ported, are shown as follows (existing law proposed to be omitted is
[Any agency of the United States holding securities acquired pur-
enclosed in black brackets, new matter is printed in italics, existing
suant to contract with any petitioner under this chapter shall be
law in which no change is proposed is shown in roman) :
deemed a creditor in the amount of the full face value thereof.
38
39
The term "security affected by the plan" means a security as to
the time the petition is filed, a list of the record owners or holders
which the rights of its holder are proposed to be adjusted or modified
of title, legal or equitable, to any real estate adversely affected in the
materially by the consummation of a composition agreement.
proceeding shall also be filed with the petition, and such record owners
[The singular number includes the plural and the masculine gender
or holders of title shall be notified in the manner provided in this
the feminine.
section for creditors and be, entitled to hearing by the court upon
SEC. 83. (a) Any petitioner may file a petition hereunder stating
reasonable application therefor.
that the petitioner is insolvent or unable to meet its debts as they
The "plan of composition", within the meaning of this chapter,
mature and that it desires to effect a plan for the composition of its
may include provisions modifying or altering the rights of creditors
debts. The petition shall be filed with the court in whose territorial
generally, or of any class of them, secured or unsecured, either through
jurisdiction the petitioner or the major part thereof is located, and,
issuance of new securities of any character, or otherwise, and may
in the case of any unincorporated tax or special-assessment district
contain such other provisions and agreements not inconsistent with
having no officials of its own, the petition may be filed by its governing
this chapter as the parties may desire.
authority or the board or body having authority to levy taxes or assess-
No creditor shall be deemed to be affected by any plan of com-
ments to meet the obligations to be affected by the plan of composition.
position unless the same shall affect his interest materially, and in case
The petition shall be accompanied by payment to the clerk of a filing
any controversy shall arise as to whether any creditor or class of cred-
fee of $100, which shall be in lieu of the fees required to be collected
itors shall or shall not be affected, the issue shall be determined by
by the clerk under other applicable chapters of this title, as amended.
the judge, after hearing, upon notice to the parties interested.
The petition shall state that a plan of composition has been prepared,
For all purposes of this chapter any creditor may act in person or
is filed and submitted with the petition, and that creditors of the
by an attorney or a duly authorized agent or committee. Where any
petitioner owning not less than 51 per centum in amount of the securi-
committee, organization, group, or individual shall assume to act for
ties affected by the plan (excluding, however, any such securities
or on behalf of creditors, such committee, organization, group, or indi-
owned, held. or controlled by the petitioner) have accepted it in writ-
vidual shall first file with the court in which the proceeding is pending
ing. There shall be filed with the petition a list of all known creditors
a list of the creditors represented by such committee, organization,
of the petitioner, together with their addresses SO far as known to
group, or individual, giving the name and address of each such credi-
petitioner, and description of their respective securities showing sepa-
tor, together with a statement of the amount, class, and character of
rately those who have accepted the plan of composition, together
the security held by him, and attach thereto copies of the instrument
with their separate addresses, the contents of which list shall not con-
or instruments in writing signed by the owners of the bonds showing
stitute admissions by the petitioner in a proceeding under this chapter
their authority, and shall file with the list a copy of the contract or
or otherwise. Upon the filing of such a petition the judge shall enter
agreement entered into between such committee, organization, group,
an order either approving it as properly filed under this chapter, if
or individual and the creditors represented by it or them, which con-
satisfied that such petition complies with this chapter and has been
tract shall disclose all compensation to be received, directly or indi-
filed in good faith, or dismissing it, if not SO satisfied.
rectly, by such committee, organization, group, or individual, which
Whenever the petition seeks to effect a plan for the composition
agreed compensation shall be subject to modification and approval by
of obligations represented by securities, or evidences in any form of
the court.
rights to payment, issued by the petitioner to defray the cost of local
[(b) Upon approving the petition as properly filed, or at any time
improvements and which are payable solely out of the proceeds of
thereafter, the judge shall enter an order fixing a time and place for
special assessments or special taxes levied by the petitioner, or issued
a hearing on the petition, which shall be held within ninety days from
by the petitioner to finance one or more revenue-producing enterprises
the date of said order, and shall provide in the order that notice shall
payable solelv out of the revenues of such enterprise or enterprises,
be given to creditors of the filing of the petition and its approval as
it shall be sufficient if the petitioner aver that the property liable for,
being properly filed, and of the time and place for the hearing. The
or the revenues pledged to the payment of such securities. principal,
judge shall prescribe the form of the notice, which shall specify the
and interest is not of sufficient value, or that the revenues of the enter-
manner in which claims and interests of creditors shall be filed or
prise or enterprises are inadequate to pay same, and that the accrued
evidenced, on or before the date fixed for the hearing. The notice shall
interest on such securities is past due and in default; and the list of
be published at least once a week for three successive weeks in at
creditors to be filed with such petition need contain only the known
least one newspaper of general circulation published within the juris-
claimants of rights based on those securities evidencing the obliga-
diction of the court, and in such other paper or papers having a
tions sought to be composed under this chapter, and such list shall
general circulation among bond dealers and bondholders as may be
include separately the names and addresses of those creditors who
designated by the court, and the judge may require that it may be
have accepted the plan of composition. If the plan of composition
published in such other publication as he may deem proper. The judge
sought to be effected requires a revision of assessments SO that the
shall require that a copy of the notice be mailed, postage prepaid, to
proportion of special assessments or special taxes to be assessed against
each creditor of the petitioner named in the petition at the address of
some of the lands will be different from the proportion in effect at
such creditor given in the petition, or, if no address is given in the
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petition for any creditor and the address of such creditor cannot with
reasonable diligence be ascertained, then a copy of the notice shall be
mailed, postage prepaid, to such creditor addressed to him as the judge
determination or award to the United States circuit court of appeals
may prescribe. All expense of giving notice as herein provided shall
for the circuit in which the proceeding under this chapter is pending,
be paid by the petitioner. The notice shall be first published, and the
independently of other appeals which may be taken in the proceeding,
mailing of copies thereof shall be completed, at least sixty days before
and such appeal shall be heard summarily.
the date fixed for the hearing.
Such compensation of referees in bankruptcy and special masters
[At any time not less than ten days prior to the time fixed for the
shall not be governed by section 40 of this Act.
hearing, any creditor of the petitioner affected by the plan may file an
[On thirty days' notice by any creditor to petitioner, the judge, if
answer to the petition controverting any of the material allegations
he finds that the proceeding has not been prosecuted with reasonable
therein and setting up any objection he may have to the plan of com-
diligence, or that it is unlikely that the plan will be accepted by said
position. The judge may continue the hearing from time to time if the
proportion of creditors, may dismiss the proceeding.
percentage of creditors required herein for the confirmation of the plan
(c) Upon entry of the order fixing the time for the hearing, or at
shall not have accepted the plan in writing, or if for any reason satis-
any time thereafter, the judge may upon notice enjoin or stay, pend-
factory to the judge the hearing is not completed on the date fixed
ing the determination of the matter, the commencement or con-
therefor. At the hearing, or a continuance thereof, the judge shall
tinuation of suits against the petitioner, or any officer or inhabitant
decide the issues presented and unless the material allegations of the
thereof, on account of the securities affected by the plan, or to
petition are sustained shall dismiss the proceeding. If, however, the
enforce any lien or to enforce the levy of taxes or assessments for
material allegations of the petition are sustained, the judge shall class-
the payment of obligations under any such securities, or any suit
ify the creditors according to the nature of their respective claims and
or process to levy upon or enforce against any property acquired by
interest: Provided, however, That the holders of all claims, regardless
the petitioner through foreclosure of any such tax lien or special
of the manner in which they are evidenced, which are payable without
assessment lien, except where rights have become vested, and may
preference out of funds derived from the same source or sources shall
enter an interlocutory decree providing that the plan shall be tem-
be of one class. The holders of claims for the payment of which specific
porarily operative with respect to all securities affected thereby and
property or revenues are pledged, or which are otherwise given prefer-
that the payment of the principal or interest, or both, of such secu-
ence as provided by law, shall accordingly constitute a separate class or
rities shall be temporarily postponed or extended or otherwise read-
classes of creditors.
justed in the same manner and upon the same terms as if such plan
[At the hearing or a continuance thereof the judge may refer any
had been finally confirmed and put into effect, and upon the entry
special issues of fact to a referee in bankruptcy or a special master for
of such decree the principal or interest, or both, of such securities
consideration, the taking of testimony, and a report upon such special
which have otherwise become due, or which would otherwise become
issues of fact, if the judge finds that the condition of his docket is such
due, shall not be or become due or payable, and the payment of all
that he cannot take such testimony without unduly delaying the dis-
such securities shall be postponed during the period in which such
patch of other business pending in his court, and if it appears that such
decree shall remain in force, but shall not, by any order or decree,
special issues are necessary to the determination of the case. Only
in the proceeding or otherwise, interfere with (a) any of the political
under special circumstances shall references be made to a special master
or governmental powers of the petitioner; or (b) any of the prop-
who is not a referee in bankruptcy. A general reference of the case
erty or revenues of the petitioner necessary for essential govern-
to a master shall not be made, but the reference, if any, shall be only
mental purposes; or (c) any income-producing property, unless the
in the form of requests for findings of specific facts.
plan of composition SO provides.
[The court may allow reasonable compensation for the services per-
[Any agency or instrumentality referred to in section 81 of this
formed by such referee in bankruptcy or special master, and the actual
chapter may file a petition for a preliminary stay with the court
and necessary expenses incurred in connection with the proceeding,
referred to in section 83 (a) stating (a) that the petitioner is insolvent
including compensation for services rendered and expenses incurred
or unable to meet its debts as they mature; (b) that it desires to effect
in obtaining the deposit of securities and the preparation of the plan,
a plan for the composition of its debts, a copy of which is filed and
whether such work may have been done by the petitioner or by com-
submitted with the petition; (c) that a creditor of the petitioner
mittees or other representatives of creditors, and may allow reasonable
holding a security affected by the plan or a person claiming to be
compensation for the attorneys or agents of any of the foregoing:
such a creditor (naming him and giving his address and the name and
Provided, however, That no fees, compensation. reimbursement, or
address of his attorney of record, if any), is attempting or threatening
other allowances for attorneys, agents, committees, or other repre-
to obtain payment of said security in preference to other creditors by
sentatives of creditors shall be assessed against the petitioner or paid
means of the commencement or continuation of a suit or process of the
from any revenues, property, or funds of the petitioner except in the
class hereinbefore in this section described; (d) that efforts are
manner and in such sums, if any, as may be provided for in the plan
being made in good faith to the end that creditors of the petitioner
of composition. An appeal may be taken from any order making such
owning not less than 51 per centum in amount of the securities affected
by the plan (excluding, however, any such securities owned, held, or
controlled by the petitioner) shall accept it in writing; (e) that there
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43
is a reasonable prospect of such acceptance within a reasonable time;
the possibility of any such practice, in which event the judge may
(f) that upon such acceptance the petitioner intends to file a petition
proceed to further consideration of the confirmation of the plan. If it
under section 83 (a) of this chapter; and (g) that the petitioner prays
be found that no such practice exists, then the judge may proceed to
that the judge will upon notice enjoin or stay the commencement or
further consideration of the confirmation of the plan.
continuation of said suit or process. A single petition may seek the
[At the conclusion of the hearing, the judge shall make written
preliminary stay of several suits or processes brought or threatened
findings of fact and his conclusions of law thereon, and shall enter
by the same or different creditors or persons claiming to be creditors.
an interlocutory decree confirming the plan if he finds and is satisfied
The petition shall be accompanied by the filing fee required in section
that (1) it is fair, equitable, and for the best interests of the creditors
83(a) of this chapter, unless such fee shall have been paid upon the
and does not discriminate unfairly in favor of any creditor or class
filing of an earlier petition for a preliminary stay involving the same
of creditors; (2) complies with the provisions of this chapter; (3) has
plan, and no further fee shall be required upon the subsequent filing
been accepted and approved as required by the provisions of sub-
of a petition under said section 83 (a). Upon such petition the judge
division (d) of this section; (4) all amounts to be paid by the peti-
shall fix a time and place for hearing and direct that notice thereof
tioner for services or expenses incident to the composition have been
shall be given in such manner as he shall prescribe to said creditor or
fully disclosed and are reasonable; (5) the offer of the plan and its
person claiming to be a creditor and to any other person deemed by
acceptance are in good faith; and (6) the petitioner is authorized by
him to be interested. After such hearings, and upon being satisfied of
law to take all action necessary to be taken by it to carry out the plan.
the truth of the allegations of the petition, the judge may, in his dis-
If not SO satisfied, the judge shall enter an order dismissing the pro-
cretion, except where rights have become vested, enjoin or stay the
ceeding. No case shall be reversed or remanded for want of specific
commencement and continuation of said suit or process until a date
or detailed findings unless it is found that the evidence is insufficient
fixed by him in his order not exceeding sixty days from the date of
to support one or more of the general findings required in this section.
entry thereof. The judge shall retain jurisdiction to vacate said in-
(Before a plan is confirmed, changes and modifications may be made
junction or stay, or to extend the period thereof for one additional
therein with the approval of the judge after hearing upon such notice
period of not exceeding sixty days, upon good cause shown.
to creditors as the judge may direct, subject to the right of any creditor
[(d) The plan of composition shall not be confirmed until it has
who shall previously have accepted the plan to withdraw his accept-
been accepted in writing, by or on behalf of creditors holding at least
ance, within a period to be fixed by the judge and after such notice as
two-thirds of the aggregate amount of claims of all classes affected by
the judge may direct, if, in the opinion of the judge, the change or
such plan and which have been admitted by the petitioner or allowed
modification will be materially adverse to the interest of such creditor,
by the judge, but excluding claims owned, held, or controlled by the
and if any creditor having such right of withdrawal shall not with-
petitioner: Provided, however, That it shall not be requisite to the con-
draw within such period, he shall be deemed to have accepted the plan
firmation of the plan that there be such acceptance by any creditor
as changed or modified Provided, however, That the plan as changed
or class of creditors (a) whose claims are not affected by the plan;
or modified shall comply with all the provisions of this chapter and
or (b) if the plan makes provision for the payment of their claims in
shall have been accepted in writing by the petitioner. Either party
cash in full; or (c) if provision is made in the plan for the protection
may appeal from the interlocutory decree as in equity cases. In case
of the interests, claims, or lien of such creditors or class of creditors.
said interlocutory decree shall prescribe a time within which any
[(e) Before concluding the hearing, the judge shall carefully ex-
action is to be taken, the running of such time shall be suspended in
amine all of the contracts, proposals, acceptances, deposit agreements
case of an appeal until final determination thereof. In case said decree
and all other papers relating to the plan, specifically for the purpose
is affirmed, the judge may grant such time as he may deem proper for
of ascertaining if the fiscal agent, attorney, or other person, firm, or
the taking of such action.
corporation promoting the composition, or doing anything of such a
(f) In an interlocutory decree confirming the plan is entered as
nature, has been or is to be compensated, directly or indirectly, by both
provided in subdivision (e) of this section, the plan and said decree of
the petitioner and the creditors thereof, or any of such creditors—
confirmation shall become and be binding upon all creditors affected
either by fee. commission, or other similar payment, or by transfer or
by the plan, if within the time prescribed in the interlocutory decree,
exchange of bonds or other evidence of indebtedness whereby a profit
or such additional time as the judge may allow, the money, securities,
could accrue-and shall take evidence under oath to make certain
or other consideration to be delivered to the creditors under the terms
whether or not any such practice obtains or might obtain.
of the plan shall have been deposited with the court or such disbursing
After such examination the judge shall make an adjudication of
agent as the court may appoint or shall otherwise be made available
this issue, as a separate part of his interlocutory decree, and if it be
for the creditors. And thereupon the court shall enter a final decree
found that any such practice exists, he shall forthwith dismiss the pro-
determining that the petitioner has made available for the creditors
ceeding and tax all of the costs against such fiscal agent, attorney, or
affected by the plan the consideration provided for therein and is
other person, firm, or corporation promoting the composition, or doing
discharged from all debts and liabilities dealt with in the plan except
anything of such a nature, or against the petitioner, unless such plan be
as provided therein, and that the plan is binding upon all creditors
modified within the time to be allowed by the judge SO as to eliminate
affected by it, whether secured or unsecured, and whether or not their
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44
such claims are provable under section 63 of this Act and whether
secured or unsecured, liquidated or unliquidated, fixed or
claims have been filed or evidenced, and, if filed or evidenced, whether
contingent;
or not allowed, including creditors who have not, as well as those
(2) "court" means court of bankruptcy in which the case is
who have, accepted it. If securities are deposited by the petitioner
pending, or a judge of such court;
with the court or disbursing agent for delivery to the creditors, such
(3) "creditor" means holder (including the United States, a
final decree shall not be entered unless the court finds and adjudicates
State, or subdivision of a State) of a claim against the petitioner;
that said securities have been lawfully authorized and, upon delivery,
(4) "claim affected by the plan" means claim as to which the
will constitute valid obligations of the petitioner, and that the pro-
rights of its holder are proposed to be materially and adversely
visions made to pay and secure payment thereof are valid.
djusted or modified by the plan;
[(g) A certified copy of the final decree, or of any other decree or
(5) "debt" means claim allowable under section ;
order entered by the court or the judge thereof, in a proceeding under
(6) "petitioner" means agency, instrumentality, or subdivision
this chapter, shall be evidence of the jurisdiction of the court, the
which has filed a petition under this chapter;
regularity of the proceedings, and the fact that the decree or order was
(7) "plan" means plan filed under section 90;
made. A certified copy of an order providing for the transfer of any
(8) "special tax payer" means record owner or holder of title,
property dealt with by the plan shall be evidence of the transfer of title
legal or equitable, to real estate against which has been levied a
accordingly, and, if recorded as conveyances are recorded, shall impart
special assessment or special tax the proceeds of which are the
the same notice that a deed, if recorded, would impart.
sole source of payment for obligations issued by the petitioner
[(h) This chapter shall not be construed as to modify or repeal
to defray the costs of local improvements; and
any prior existing statute relating to the refinancing or readjustment
(9) "special tax payer affected by the plan" means a special
of indebtedness of municipalities, political subdivisions, or districts:
tax payer with respect to whose real estate the plan proposes to
Provided, however, That the initiation of proceedings or the filing of
increase the proportion of special assessments or special taxes
a petition under section 80 of this Act shall not constitute a bar to the
referred to in paragraph (8) of this section assessed against that
same agency or instrumentality initiating a new proceeding under
real estate.
section 81 of this chapter.
SEC. 82. JURISDICTION AND POWERS OF COURT.-
[(i) Nothing contained in this chapter shall be construed to limit
(a) JURISDICTION.-The court in which a petition is filed under this
or impair the power of any State to control, by legislation or otherwise,
chapter shall exercise exclusive original jurisdiction for the adjust-
any municipality or any political subdivision of or in such State in
ment of the petitioner's debts, and for the purposes of this chapter,
the exercise- of its political or governmental powers, including expendi-
shall have exclusive jurisdiction of the petitioner and its property,
tures therefor: Provided, however, That no State law prescribing a
wherever located.
method of composition of indebtedness of such agencies shall be bind-
(b) Powers.-After the filing of a petition under this chapter the
ing upon any creditor who does not consent to such composition, and
court may-
no judgment shall be entered under such State law which would bind
(1) permit the petitioner to reject executory contracts and
a creditor to such composition without his consent.
unexpired leases of the petitioner, after hearing on notice to the
[(j) The partial completion or execution of any plan of composi-
parties to such contracts and to such other parties in interest as
tion as outlined in any petition filed under the terms of this Act by
the court may designate;
the exchange of new evidences of indebtedness under the plan for
(2) during the pendency of a case under this chapter, or after
evidences of indebtedness covered by the plan, whether such partial
the confirmation of the plan if the court has retained jurisdiction
completion or execution of such plan of composition occurred before
under section 96(e), after hearing on such notice as the court may
or after the filing of said petition, shall not be construed as limiting or
prescribe and for cause shown, permit the issuance of certificates
prohibiting the effect of this title, and the written consent of the
of indebtedness for such consideration as is approved by the court,
holders of any securities outstanding as the result of any such partial
upon such terms and conditions, and with such security and prior-
completion or execution of any plan of composition shall be included
ity in payment over existing obligations, secured or unsecured, as
as consenting creditors to such plan of composition in determining
in the particular case may be equitable; and
the percentage of securities affected by such plan of composition.]
(3) exercise such other powers as are not inconsistent with the
provisions of this chapter.
CHAPTER IX
(c) LIMITATION.-Unless the petitioner consents or the plan so pro-
vides, the court shall not, by any order or decree, in the case or other-
ADJUSTMENT OF DEBTS OF POLITICAL SUBDIVISIONS AND PUBLIC AGENCIES
wise, interfere with-
AND INSTRUMENTALITIES
(1) any of the political or governmental powers of the peti-
SEC. 81. CHAPTER IX DEFINITIONS.-A8 used in this chapter the
tioner;
term-
(2) any of the property or revenues of the petitioner; or
(1) "claim" includes all claims of whatever character against
(3) any income-producing property.
the petitioner or the property of the petitioner, whether or not
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47
(d) DESIGNATION OF JUDGE.-Upo the filing of a petition the chief
the first sentence of this subsection be mailed, postage prepaid, to each
judge of the court in the district in which the petition is filed shall
creditor named in the list required by subsection (b) at the address
immediately notify the chief judge of the circuit court of appeals of
of such creditor given in the list, or, if no address is given in the list
the circuit in which the district court is located, who shall designate
for any creditor and the address of such creditor cannot with reason-
the judge of the district court to conduct the proceedings under this
able diligence be ascertained, then a copy of the notice may, if the court
chapter.
so determines, be mailed, postage prepaid, to such creditor addressed
SEC. 83. RESERVATION OF STATE POWER TO CONTROL GOVERNMENTAL
as the court may prescribe. All expense of giving notice required by
FUNCTIONS OF POLITICAL SUBDIVISIONS.-Nothing contained in the
this subsection shall be paid by the petitioner, unless the court for
chapter shall be construed to limit or impair the power of any State
good cause determines that the cost of notice in a particular instance
to control, by legislation or otherwise, any municipality or any politi-
should be borne by another party. The notice shall be first published as
cal subdivision of or in such State in the exercise of its political or
soon as practicable after the filing of the petition, and the mailing of
governmental powers, including expenditures therefor.
copies of the notice shall be completed as soon as practicable after the
SEC. 84. ELIGIBILITY FOR RELIEF.-Any State's political subdivision
filing of the list required by subsection (b).
or public agency or instrumentality which is not prohibited by State
(e) STAY OF ENFORCEMENT OF CLAIMS AGAINST PETITIONER.-
law from filing a petition under this chapter is eligible for relief under
(1) EFFECT OF FILING A PETITION.-A petition filed under this
this chapter if it is insolvent or unable to meet its debts as they
chapter shall operate as a stay of the commencement or the con-
mature, and desires to effect a plan to adjust its debts.
tinuation of a judicial or other proceeding against the petitioner,
SEC. 85. PETITION AND PROCEEDINGS RELATING TO PETITION.-
its property, or an officer or inhabitant of the petitioner, which
(a) PETITION.-An entity eligible under section 84 may file a petition
seeks to enforce any claim against the petitioner, or of an act
for relief under this chapter. In the case of an unincorporated tax or
or the commencement or continuation of a judicial or other pro-
special assessment district having no officials of its own, the petition
ceeding which seeks to enforce a lien upon the property of the
may be filed by its governing authority or the board or body having
petitioner, and shall operate as a stay of the enforcement of any
authority to levy taxes or assessments to meèt the obligations of the
set-off or counterclaim relating to a contract, debt, or obligation
district. Any party in interest may file a complaint with the court, not
of the petitioner.
later than 15 days after the publication of notice required by subsection
(2) DURATION OF AUTOMATIC STAY.-Except as it may be ter-
(d) is completed, objecting to the filing of the petition. The court
minated, annulled, modified, or conditioned by the court under
shall, to the extent practicable, hear and determine all such complaints
the terms of this section, the stay provided for in this subsection
in a single proceeding.
shall continue until the case is closed or dismissed, or the property
(b) List.-The petitioner shall file with the court a list of the peti-
subject to the lien is, with the approval of the court, abandoned or
tioner's creditors, insofar as practicable. If an identification of any of
transferred.
the petitioner's creditors is impracticable, the petitioner shall state in
(3) RELIEF FROM AUTOMATIC STAY.-Upon the filing of a com-
the petition the reasons such identification is impracticable. If the list
plaint seeking relief from a stay provided for by this section, the
is not filed with the petition, the petitioner shall file the list at such
court may, for cause shown, terminate, annul, modify, or condi-
later time as the court, upon its own motion or upon application of
tion such stay.
the petitioner, prescribes.
(4) OTHER STAYS.-The commencement or continuation of any
(c) VENUE AND FEES.-The petition and any accompanying papers,
other act or proceeding may be stayed, restrained, or enjoined by
together with a filing fee of $100, shall be filed with a court in a district
the court, upon notice to each person and entity against whom
in which the petitioner is located.
such order would apply, and for cause shown. The petitioner shall
(d) NoTICE.-The court shall give notice of the filing or dismissal
not be required to give security as a condition to an order under
of the petition to the State in which the petitioner is located, to the
this paragraph.
Securities and Exchange Commission, and to creditors. The notice
(f) UNENFORCEABILITY OF CERTAIN CONTRACTUAL PROVISIONS.-A pro-
shall also state that a creditor who files with the court a request, setting
vision in a contract or lease, or in any law applicable to such a contract
forth that creditor's name and address and the nature and amount of
or lease, which terminates or modifies, or permits a party other than
that creditor's claim, shall be given notice of any other matter in which
the petitioner to terminate or modify, the contract or lease because of
that creditor has a direct and substantial interest. The notice required
the insolvency of the petitioner or the commencement of a case under
by the first sentence of this subsection shall be published at least once
this Act is not enforceable if any defaults in prior performance of the
a week for three successive weeks in at least one newspaper of general
petitioner are cured and adequate assurance of future performance is
circulation published within the jurisdiction of the court, and in such
provided.
other papers having a general circulation among bond dealers and
(g) RECOVERY OF SET-OFF.-Any set-off which relates to a contract,
bondholders as may be designated by the court. The court may require
debt, or obligation of the petitioner and which set-off was effected
that it be published in such other publication as the court may deem
within four months prior to the filing of the petition, is voidable and
proper. The court shall require that α copy of the notice required by
recoverable by the petitioner after hearing on notice. The court may
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49
require as a condition to recovery that the petitioner furnish adequate
protection for the realization by the person or entity against whom or
bursement, or other allowances for an attorney, agent, or representa-
which recovery is sought of the claim which arises by reason of the
tive of creditors shall be assessed against the petitioner or paid from
recovery.
any revenues, property, or funds of the petitioner except in the man-
SEC. 86. REPRESENTATION OF CREDITORS.-
ner and in such sums, if any, as may be provided for in the plan.
(a) REPRESENTATION AND DISCLOSURE.-Any creditor may act in
(c) JOINT ADMINISTRATION.-If more than one petition by related
person or by an attorney or a duly authorized agent or committee.
entities are pending in the same court, the court may order a joint
Every person representing more than one creditor shall file with the
administration of the cases.
court a list of the creditors represented by such person, giving the
SEC. 88. CLAIMS.-
name and address of each such creditor, together with a statement of
(a) ALLOWANCE OF CLAIMS.-In the absence of an objection by a
the amount, class, and character of the claim held by that creditor, and
party in interest, or of a filing of a proof of claim, the claim of a cred-
shall attach to the list a copy of the instrument signed by the holder
itor that is not disputed, contingent, or unliquidated, and appears in the
of such claim showing such person's authority, and shall file with the
list filed by the petitioner under section 85 (b) shall be deemed allowed.
list a copy of the contract or agreement entered into between such per-
The court may set a date by which proofs of other claims shall be
son and the creditors represented by that person. Such person shall dis-
filed. If the court does not set a date, such proofs of other claims shall
close all compensation to be received, directly or indirectly, by that
be filed before the entry of an order confirming the plan. Within
person. That compensation shall be subject to modification and ap-
thirty days after the filing by the petitioner of the list under section
proval by the court.
85(b), the court shall give written notice to each person and entity
(b) ULTIPLE COMPENSATION.-The court shall examine all of the
whose claim is listed as disputed, contingent, or unliquidated, inform-
contracts, proposals, acceptances, deposit agreements, and all other
ing each such person or entity that a proof of claim must be filed with
papers relating to the plan, specifically for the purpose of ascertaining
the court within the time fixed under this subsection. If there is no
if any person promoting the plan, or doing anything of such a nature,
objection to such claim, the claim shall be deemed allowed. If there
has been or is to be compensated, directly or indirectly, by both the
is an objection, the court shall hear and determine the objection.
petitioner and any of its creditors, and shall take evidence under oath
(b) CLASSIFICATION OF CREDITORS.-The court shall designate classes
to determine whether any such compensation has occurred or is to
of creditors whose claims are of substantially similar character and
occur. After such examination the court shall make an adjudication of
the members of which enjoy substantially similar rights, consistent
this issue, and if it be found that any such compensation has occurred
with the provisions of section 89, except that the court may create a
or is to occur, the court shall dismiss the petition and tax all of the
separate class of creditors having unsecured claims of less than $100
costs against the person promoting the plan or doing anything of such
for reasons of administrative convenience.
a nature and receiving such multiple compensation, or against the
(c) DAMAGES UPON REJECTION OF EXECUTORY CONTRACTS.-If an ex-
petitioner, unless such plan is modified, within the time to be allowed
ecutory contract or an unexpired lease is rejected under a plan or under
by the court, 80 as to eliminate the possibility of such compensation,
section 82(b), any person injured by such rejection may assert a claim
in which event the court may proceed to further consideration of the
against the petitioner. The rejection of an executory contract or un-
confirmation of the plan.
expired lease constitutes a breach of the contract or lease as of the date
SEC. 87. REFERENCE AND JOINT ADMINISTRATION.
of the commencement of the case under this chapter. The claim of a
(a) REFERENCE.-The court may refer any special issue of fact
landlord for injury resulting from the rejection of an unexpired lease
to a referee in bankruptcy for consideration, the taking of testimony,
of real estate or for damages or indemnity under a covenant contained
and a report upon such special issue of fact, if the court finds that
in such lease shall be allowed, but shall be limited to an amount not
the condition of its docket is such that it cannot take such testimony
to exceed the rent, without acceleration, reserved by such lease for the
without unduly delaying the dispatch of other business pending in
year next succeeding the date of the surrender of the premises to the
the court, and if it appears that such special issue is necessary to the
landlord or the date of reentry of the landlord, whichever first occurs,
determination of the case. A reference to a referee in bankruptcy
whether before or after the filing of the petition, plus unpaid accrued
shall be the exception and not the rule. The court shall not make a
rent, without acceleration, up to the date of such surrender or reentry.
general reference of the case, but may only request findings of specific
The court shall scrutinize the circumstances of an assignment of a
facts.
future rent claim and the amount of the consideration paid for such
(b) Expenses.-The court may allow reasonable compensation for
assignment in determining the amount of damages allowed the as-
the actual and necessary expenses incurred in connection with the
signee of that claim.
case, including compensation for services rendered and expenses in-
SEC. 89. PRIORITIES.-The following shall be paid in full in advance
curred in obtaining the deposit of securities and the preparation of
of the payment of any distribution to creditors under a plan, in the
the plan, whether such work has been done by the petitioner or by a
following order:
representative of creditors, and may allow reasonable compensation
(1) The costs and expenses of administration which are in-
for an attorney or agent of any of them. No fee, compensation, reim-
curred subsequent to the filing of a petition under this chapter.
50
51
(2) Debts or consideration owed for services or materials ac-
(d) EXCEPTION.-It is not requisite to the confirmation of the plan
tually provided within four months before the date of the filing of
that there be such acceptance. by any creditor or class of creditors—
the petition under this chapter.
(1) whose claims are not affected by the plan;
(3) Debts owing to any person or entity, which by the laws of
(2) if the plan makes provision for the payment of their claims
the United States (other than this Act) are entitled to priority.
in cash in full; or
SEC. 90. FILING AND TRANSMISSION OF PLAN AND MODIFICATIONS.-
(3) if provision is made in the plan for the protection of the
(a) FILING.- The petitioner shall file a plan for the adjustment of
interests, claims, or lien of such creditor or class of creditors.
the petitioner's debts. If such plan is not filed with the petition, the
(e) ACCEPTANCE OF MODIFICATION.-If the court finds that a proposed
petitioner shall file the plan at such later time as the court, upon its own
modification does not materially and adversely affect the interest of a
motion or upon application of the petitioner, prescribes. At any time
creditor, the modification shall be deemed accepted by that creditor if
prior to the confirmation of a plan, the petitioner may file a modifica-
that creditor has previously accepted the plan. If the court determines
tion of the plan.
that a modification does materially and adversely affect the interest of
(b) TRANSMISSION OF PLAN AND MODIFICATIONS.-As soon as practi-
a creditor, that creditor, shall be given notice of the proposed modifica-
cable after the plan or any modification of the plan has been filed, the
tion and the time allowed for its acceptance or rejection. The number
court shall fix a time within which creditors may accept or reject the
of acceptances of the plan as modified required by subsection (b) shall
plan and any modification of the plan, and shall transmit by mail a
be obtained. The plan as modified shall be deemed to have been ac-
copy of such plan or modification, or a summary and any analysis of
cepted by any creditor who accepted the plan and who fails to file a
such plan or modification, a notice of the time within which the plan
written rejection of the modification with the court within such reason-
or modification may be accepted or rejected, and a notice of the right
able time as shall be allowed in the notice to that creditor of the pro-
to receive a copy, if it has not been sent, of such plan or modification, to
posed modification.
each of the creditors affected by the plan, to each of the special tax
SEC. 93. OBJECTION TO PLAN.-A creditor affected by the plan or a
payers affected by the plan, and to each such other party in interest as
special tax payer affected by the plan may file a complaint with the
the court may designate. pon request by a recipient of such summary
court objecting to the confirmation of the plan. The Securities and
and notice, the court shall transmit by mail a copy of the plan or
Exchange Commission may also file a complaint with the court ob-
modification to that recipient.
jecting to the confirmation of the plan, but in the case of a complaint
SEC. 91. PROVISIONS OF PLAN.-A petitioner's plan may include pro-
filed under this section, the Securities and Exchange Commission may
visions modifying or altering the rights of creditors generally, or of
not appeal or file any petition for appeal. A complaint objecting to the
any class of them, secured or unsecured, either through issuance of
confirmation of the plan may be filed with the court any time prior to
new securities of any character, or otherwise, and may contain such
ten days before the hearing on the confirmation of the plan, or within
other provisions and agreements not inconsistent with this chapter as
such other time as prescribed by the court.
the parties may desire, including provisions for the rejection of any
SEC. 94. CONFIRMATION.-
executory contract or unexpired lease.
(a) HEARING ON CONFIRMATION.-Within a reasonable time after
SEC. 92. ACCEPTANCE.-
the expiration of the time set by the court within which a plan and any
(a) Who MAY ACCEPT OR REJECT.-Unless a claim has been disal-
modifications of the plan may be accepted or rejected, the court shall
lowed or is not materially and adversely ected, any creditor included
hold a hearing on the confirmation of the plan and any modifica-
on the list filed under section (b) or who files a proof of claim and
tions of the plan. The court shall give notice of the hearing and of the
whose claim is not then disputed, contingent, or unliquidated as to
time allowed for filing objections to all parties entitled to object under
amount, and any security holder of record as of the date of the trans-
section 93.
mittal of information under section 90(b), may accept or reject the
(b) CONDITIONS FOR CONFIRMATION.-The court shall confirm the
plan and any modification of the plan within the time fixed by the
plan if satisfied that-
court. Notwithstanding an objection to a claim, the court may tempo-
(1) the plan is fair and equitable and feasible and does not dis-
rarily allow such claim in such amount as the court deems proper for
criminate unfairly in favor of any creditor or class of creditors;
the purpose of acceptance or rejection under this section.
(2) the plan complies with the provisions of this chapter;
(b) GENERAL RULE.-Except as otherwise provided in this section,
(3) all amounts to be paid by the petitioner or by any person for
the plan may be confirmed only if it has been accepted in writing by
services and expenses in the case or incident to the plan have been
or on behalf of creditors holding at least two-thirds in amount of the
fully disclosed and are reasonable;
claims of each class.
(4) the offer of the plan and its acceptance are in good faith;
(c) COMPUTING ACCEPTANCE.-The two-thirds majority required by
and
subsection (b) is two-thirds in amount of the claims of creditors who
(5) the petitioner is not prohibited by law from taking any
file an acceptance or rejection within the time fixed by the court, but
action necessary to be taken by it to carry out the plan.
not including claims held, or controlled by the petitioner, or claims of
Sec. 95. EFFECT OF CONFIRMATION.-
creditors specified in subsection (d).
(a) PROVISIONS OF PLAN BINDING.-The provisions of a confirmed
plan shall be binding on the petitioner and on all creditors who had
52
53
timely notice or actual knowledge of the petition or plan, whether or
an order providing for the transfer of any property dealt with by the
not their claims have been allowed under section 88, and whether or
plan shall be evidence of the transfer of title accordingly, and, if
not they have accepted the plan.
recorded as conveyances are recorded, shall impart the same notice
(b) DISCHARGE.-
that a deed, if recorded, would impart.
(1) The petitioner is discharged from all claims against it provided
SEC. 97. EFFECT OF EXCHANGE OF DEBT SECURITIES BEFORE DATE OF
for in the plan except as provided in paragraph (2) of this subsection
THE PETITION.-The exchange of new debt securities under the plan
as of the time when-
for claims covered by the plan, whether the exchange occurred before
(A) the plan has been confirmed;
or after the date of the petition, does not limit or impair the effective-
(B) the petitioner has deposited the consideration to be dis-
ness of the plan or of any provision of this chapter. The written con-
tributed under the plan with a disbursing agent appointed by the
sents of the holders of any securities outstanding as the result of any
court; and
such exchange under the plan shall be included as acceptances of such
(0) the court has determined-
plan in computing the acceptance required under section 92.
(i) that any security 80 deposited will constitute upon dis-
Sec. 98. DISMISSAL.-The court may dismiss the case after hearing
tribution a valid legal obligation of the petitioner; and
on notice-
(ii) that any provision made to pay or secure payment of
(1) for want of prosecution;
such obligation is valid.
(2) if no plan is proposed within the time fixed or extended by
(2) The petitioner is not discharged under paragraph (1) of this
the court;
subsection from any claim-
(3) if no proposed plan is accepted within the time fixed or
(A) excepted from discharge by the plan or order confirming
extended by the court;
the plan; or
(4) if confirmation is refused and no further time is granted for
(B) whose holder, prior to confirmation, had neither timely
the proposal of other plans; or
notice nor actual knowledge of the petition or plan.
(5) where the court has retained jurisdiction after confirmation
SEC. 96. POSTCONFIRMATION MATTERS.-
of a plan-
(a) TIME ALLOWED FOR DEPOSIT UNDER THE PLAN.-Prior to or
(A) if the debtor defaults in any of the terms of the plan;
promptly after confirmation of the plan, the court shall fix a time
or
within which the petitioner shall deposit with the disbursing agent
(B) if a plan terminates by reason of the happening of a
appointed by the court any consideration to be distributed under the
condition specified therein.
plan.
SEC. 99. SEPARABILITY-If any provision of this chapter or the
(b) DUTIES OF PETITIONER.-The petitioner shall comply with the
application thereof to any agency, instrumentality, or subdivision is
plan and the orders of the court relative to the plan, and shall take all
held invalid, the remainder of the chapter, or the application of such
actions necessary to carry out the plan.
provision to any other agency or instrumentality or political subdivi-
(c) DISTRIBUTION.-Distribution shall be made in accordance with
sion shall not be affected by such holding.
the provisions of the plan to creditors whose claims have been allowed
under section 88. Distribution may be made at the date the order con-
firming the plan becomes final to holders of securities of record whose
claims have not been disallowed.
(d) COMPLIANCE DATE.-When a plan requires presentment or sur-
render of securities or the performance of any other action as a condi-
tion to participation under the plan, such action shall be taken not
later than five years after the entry of the order of confirmation. A
person who has not within such time presented or surrendered that per-
son's securities or taken such other action required by the plan shall
not participate in any distribution under the plan, and the considera-
tion deposited with the disbursing agent for distribution to such per-
son shall become the property of the petitioner.
(e) CONTINUING JURISDICTION.-The court may retain jurisdiction
over the case for such period of time as the court determines is neces-
sary for the successful execution of the plan.
(f) ORDER OR DECREE AS EVIDENCE AND NOTICE.-A certified copy of
any order or decree entered by the court in a case under this chapter
shall be evidence of the jurisdiction of the court, the regularity of the
proceedings, and the fact that the order was made. A certified copy of
SEPARATE VIEWS OF HON. ELIZABETH HOLTZMAN
ON H.R. 10624
The Committee bill, as far as it goes, is a well-drafted, technically
sound revision of the law on municipal bankruptcy. I supported it,
however, only with the gravest misgivings.
I. THE BILL FAILS To PROVIDE OPERATING CASH
This bill has a serious, if not fatal, flaw. It fails to provide any
effective mechanism for a municipality to raise operating cash while
in bankruptcy.
The Judiciary Committee recognized the need to provide a mecha-
nism for raising operating capital. It understood that operating capital
is essential if a municipability in bankruptcy is to survive-that is, to
provide such services as police and fire protection, garbage pick-ups,
and education. If New York City, for example, had defaulted in early
December, even if it had stopped all payments for debt service, it would
have had a net operating deficit for the subsequent five months of $1.2
billion.
The Judiciary Committee allows a municipality to raise operating
capital through the device of "certificates of indebtedness." Thus, the
Committee contemplates that after bankruptcy, a municipality would
with court approval sell its bonds-now called certificates of indebted-
ness-and thereby raise operating cash. But as a practical matter,
certificates of indebtedness of a bankrupt municipality are not likely
to be marketable in the absence of a federal guarantee.
The Subcommittee on Civil and Constitutional Rights held no
hearings on the marketability of unguaranteed certificates. We do
know, however, that in the 1930's, when the first municipal bankruptcy
provisions were enacted, municipalities needed loans or loan guaran-
tees from the Reconstruction Finance Corporation in order to continue
to operate. More recently, trustee's certificates in the Penn Central
bankruptcy were not salable without a federal guarantee.
A mechanism for guaranteeing bonds of a municipality in bank-
ruptcy is contained in the House Banking and Currency bill, H.R.
10481. If, however, the Judiciary Committee's bill (H.R. 10624)
reaches the floor without any such mechanism provided in an accom-
panying bill, I will offer an amendment to ensure that federal guaran-
tees are available for a bankrupt municipality in need of operating
cash.
Any bankruptcy bill that fails to provide an effective mechanism for
a municipality to raise operating cash during bankruptcy is an illusory
remedy-a court-supervised road to disaster.
(55)
56
II. MUNICIPAL BANKRUPTCY Is UNSOUND NATIONAL POLICY
Bankruptcy does not represent a sensible national policy for dealing
with the fiscal problems of municipalities.
Many large municipalities in this country are in serious trouble.
The basic reasons are: an increasing welfare burden, high unemploy-
SUPPLEMENTAL VIEWS OF MESSRS. BUTLER, KIND-
ment and the steady flight of middle class taxpayers and business
NESS, HUTCHINSON, McCLORY, MOORHEAD OF CALI-
which has eroded the city's tax base. These problems are rooted in
FORNIA, AND HYDE, WITH MR. WIGGINS CONCURRING
national policy and are the direct result of federal action or inaction.
IN PART AND DISSENTING IN PART
While fiscal mismanagement of cities can aggrevate these problems
and bring crises to a head, the economic viability of our cities cannot
H.R. 10624, which revises Chapter IX of the Bankruptcy Act, rep-
be assured until these underlying problems are resolved.
resents a bipartisan effort to modernize a highly technical law.
Bankruptcy provides no answer to the root causes of municipal
Original proposals of the administration and Democrat leadership
fiscal troubles or the problems of mismanagement. In fact, bank-
were melded into a bill that was favorably reported by a unanimous
ruptcy, with its uncertainties and stigma, may well aggravate these
House Committee on the Judiciary on November 18, 1975, the result of
problems. If municipal services continue to deteriorate and taxes
careful deliberations of both the Subcommittee and full Committee.
continue to rise, the departure of business and the middle class will
Forty amendments were offered, of which twenty-five were accepted,
undoubtedly accelerate. Thus, the affected city will become even less
most often unanimously. The finished product contains clearly indi-
capable than before of meeting the needs of its citizens.
cated improvements in the present law and is one in which all Members
Bankruptcy is an exceedingly complex, time consuming, and cum-
of the House Committee on the Judiciary can take pride.
bersome mechanism for resolving a cities problems with its creditors.
While there are areas of disagreement and concern, the need for the
It is reported that the average corporate reorganization case in the
legislation is clear and we urge its immediate adoption. We do think
Southern District of New York takes eight years to resolve. How
it appropriate, however, to point out certain concerns which remain.
much longer will it take to resolve a municipal bankruptcy under a
new and untried bankruptcy law? What assurance is there that the
I
well being of 8 million people will be adequately protected during
this protracted litigation?
RE REJECTION OF EXECUTORY CONTRACTS
Finally, making it easier for municipalities to go into bankruptcy
Chapter X of the Bankruptcy Act concerns corporate reorganiza-
takes us down an unknown and possibly dangerous path. Municipal
tions; Chapter XI concerns arrangements in bankruptcy; and Chapter
bonds may now become a vastly more risky investment. If so, it may
XIII permits wage earner extensions and compositions. In each of
be more difficult and costly for municipalities to borrow money in
these instances the trustee in bankruptcy or the debtor in possession,
order to build schools, hospitals, and other public buildings, or even
as the case may be, is permitted to reject executory contracts. No such
to bridge the seasonal gaps between revenues and expenditures. The
power exists under Chapter IX of the present Bankruptcy Act which
consequences of such a reduction in municipal credit for the nation's
is, of course, concerned with municipal bankruptcy.
economy and taxpayers are potentially enormous.
Section 82(b) (1) of the legislation now before us permits the peti-
Despite all these misgivings, I supported H.R. 10624 because we
tioning municipality, upon filing its petition and thereafter, to reject
on the Judiciary Committee were forced to choose between the wrong
executory contracts with the permission of the court.
answer to the fiscal problems of major municipalities and no answer
Although there are no standards in the legislation for determining
at all. Congress does not face the same choice. I hope it will act
the circumstances under which rejection of executory contracts will
wisely, in the long term interest of all Americans, to produce legisla-
be permitted by the court, existing case law makes it clear that execu-
tion designed to remedy the basic causes of the crisis of our cities—
tory contracts must be burdensome or onerous before they may be
legislation designed to prevent rather than facilitate municipal
rejected. Although there are problems involved in determining exactly
bankruptcy.
what constitutes an executory contract, it is apparent that the term
ELIZABETH HOLTZMAN.
encompasses substantially all contractual obligations of the petition-
ing municipality including vendor contracts and collective bargaining
agreements.
The Committee report indicates that even though executory collec-
tive bargaining agreements may be rejected, certain collective bargain-
ing agreement may have to be renegotiated pursuant to State law and
existing terms and conditions of employment would have to be main-
tained subsequent to rejection because of certain provisions of State
law.
(57)
58
59
Nothing could be further from the truth. No evidence was taken or
court to permit a petitioning municipality to reject an executory
memoranda of law submitted to the Committee for discussion on that
contract.
point. No discussion of this matter took place in the Subcommittee
II
or the full Committee.
We understand that conversations took place between certain mem-
RE POWER To ISSUE CERTIFICATES OF INDEBTEDNESS
bers of the Committee staff and representatives of one or more munici-
pal employee unions of the City of New York in an unsuccessful effort
One of the principal reasons that this legislation could be of par-
to obtain agreement to exclude by amendment collective bargaining
ticular benefit to distressed municipalities is the power of the court,
agreements from those executory contracts which may be rejected.
upon the filing of the petition, to permit the petitioning municipality
The language included in the Committee report with reference to
to issue certificates of indebtedness upon such terms and conditions
the mandatory renegotiation of collective bargaining agreements was
and with such priority as the court finds equitable. This gives the
inserted after this effort failed. We emphasize again, however, that no
court great leverage to encourage the petitioner to comply with condi-
discussion took place in the Committee or Subcommittee with ref-
tions such as rejecting contracts, raising taxes, or cutting expenses,
erence to this point. The language in the report, at the request of the
that the court may feel are necessary and equitable.
union representatives, is most inappropriate, unnecessary, and inac-
This power is new to municipal bankruptcy. It was not included in
curate.
prior legislation and was not included in legislation revising the entire
The legislation before us is authorized by article I, § 8, cl. 4 of the
Bankruptcy Act recommended by the Commission on the Bankruptcy
Constitution empowering the Congress of the United States to estab-
Laws of the United States or by the National Conference of Bank-
lish a uniform system of bankruptcy. The bankruptcy law of the
ruptcy Judges.
United States is a law made pursuant to the Constitution of the
The untested nature of this innovation suggests to the undersigned
United States which is expressly stated in article VI thereof to be the
the wisdom of limiting the applicability of this legislation to the im-
supreme law of the land.
mediate problem before the Congress-the distressed condition of our
It may appear that Sections 82 (c) and 83 of the proposed legislation
largest city. This is discussed more fully in paragraph V below.
indicate that State laws are intended to limit the specific power of the
court to permit the rejection of executory contracts under Section 82
III
(b) (1). This is not the case.
Section 82 (c) provides as follows:
RE A BALANCED BUDGET
Unless the petitioner consents or the plan SO provides, the
The purpose of municipal bankruptcy is to give the municipality an
court shall not, by any order or decree, in the case or other-
opportunity to get its house in order and make whatever adjustments
wise, interfere with-
or arrangements are indicated with existing indebtedness SO that it
(1) any of the political or governmental powers of the
may emerge from the bankruptcy under circumstances in which it can
petitioner;
survive. No municipality can survive unless its projected revenues,
(2) any of the property or revenues of the petitioner;
regardless of source, and projected expenditures, regardless of pur-
or
poses, are in balance. We do not think that Congress intends to make
(3) any income-producing property. (Emphasis
available the extreme remedies of a stay of all adverse proceedings
added.)
and involuntary compositions of the debts of objecting creditors and
It is apparent from the underlined portion of the above that the
of other benefits of Chapter IX in the absence of a clear municipal
limitation in Section 82 is contingent specifically upon the peti-
intent to balance its budget.
tioner's consent. Therefore, when the petitioning municipality con-
We are concerned that the proposed revision of Chapter IX does
sents to an interference with its governmental powers by requesting
not make this absolutely clear. Section (b) (1) requires that a plan
the court to permit it to reject an executory contract, the limitation in
cannot be confirmed unless it is fair and equitable and feasible. We
Section 82 (c) is inapplicable.
are encouraged by Chapter IX case law that has interpreted the fair
Section 83 provides as follows:
and equitable requirement which is currently in Chapter XI to include
Nothing contained in this chapter shall be construed to
findings that a petitioner will be able to meet obligations proposed
limit or impair the power of any State to control, by legisla-
under the plan. Kelley V. Exerglades Drainage District, 319 U.S. 415
tion or otherwise, any municipality or any subdivision of or
(1943). The attention given by the Court to past and projected tax
in such State in the exercise of its political or governmental
revenues and operating expenses is reassuring.
powers, including expenditures therefor.
We are also encouraged by the additional requirement of "feasi-
bility" which is new in the context of municpal bankruptcy but which
The identical language appears in § of Chapter IX of the
has a well defined meaning in Chapters X and XI dealing with cor-
present Bankruptcy Act. It was inserted in 1937 to overcome an earlier
porate reorganizations and arrangements.
determination that the legislation was unconstitutional. It is being
The reservations which we have about the absence of an express
retained because of the Committee's reluctance to remove tested lan-
statutory requirement that the budget be balanced within a reason-
guage from existing law and has no relevance to the power of the
able time has been amplified by the expression of Professor Vern
60
61
Countryman in a supplement to his testimony before the Senate com-
mittee considering municipal bankruptcy legislation wherein he stated
A memorandum prepared by the attorneys for the City of New
that, '[f]easibility, and not budget-balancing, is all that is required
York expressly states that this legislation may be challenged in the
by § 221 (2) of Chapter X for corporate reorganizations."
following language:
The apparent distinction this noted authority makes between "feasi-
There are State constitutional limitations on the amount
bility" and "budget-balancing" is disturbing.
and type of permitted debt. Under the 10th amendment,
We recognize the argument that the terms fair, equitable, and feasi-
contentions may be made that a federal statute cannot pre-
ble when interpreted in light of the case law mean a balance budget,
empt these limitations, and, accordingly, that both the plan
but we cannot understand the reluctance to make perfectly clear the
of composition as well as any interim financing have to
congressional intent to require that a plan for adjustment of munici-
comply with these limitations. This may be a source of
pal indebtedness which is to receive the blessing of a federal court must
litigation.
include a requirement that the budget of the rescued municipality
This is consistent with what was pointed out in paragraph II that
must be in balance within a reasonable period of time after confirma-
the control the bankruptcy court retains over the power of the munic-
tion of the plan.
ipality to issue certificates of indebtedness could be the basis for
Such an amendment was rejected in Committee and Subcommittee.
constitutional challenge.
It may again be offered on the Floor.
The constitutionality of existing Chapter IX has been established.
It is a workable piece of legislation for smaller municipalities. It is
IV
only when we get to the larger and more complex financial structure
of cities such as the size of New York that its shortcomings become
RE DISMISSAL
apparent.
It is well to point out that section 108 of title I of the United
Section 98 of the bill was added during the course of subcommittee
discussion on order to make clear the power of the court to dismiss the
States Code provides that if the new Chapter IX is repealed that it
does not revive the previous legislation. The repeal is effective then
petition under the circumstances therein set forth. This was not in-
regardless of what subsequent constitutional development occurs.
tended to be an exclusive list of the bases for dismissal.
It was clearly established that the petitioner itself may withdraw
Accordingly, if the proposed Chapter IX is enacted and found to
be unconstitutional, the replaced Chapter IX would in all probability
its petition at any time for any reason whether the court permits it
not be revived and the municipalities of the country would be left
or not.
without any available remedy in the bankruptcy court.
An appropriate concern was expressed in Committee and Subcom-
Of greater significance however is the effect of a constitutional
mittee to avoid abuse of the broad privileges granted by this legisla-
challenge during the period of its litigation. We may very well be
tion and to make certain that a frivilous petition could not long
facing a time in which there will be more financial distress of munici-
survive.
palities or other governmental entities than ever before. It would
Section 83 (a) of present Chapter IX requires a determination at
be ironical indeed if our efforts to provide relief for them should
the time of filing that the petition was filed in good faith, and the
place even the present remedies out of reach because of litigation in
judge to approve the petition as properly filed in compliance with
which the powers bestowed by this Chapter are in question. It is un-
Chapter IX. The removal of these jurisdictional and procedural ap-
reasonable to think that certificates of indebtedness issued under pro-
proval requirements was not intended to imply that petitions may be
posed Chapter IX would be marketable as long as their validity was
filed in the absence of good faith. On the contrary, the objection pro-
subject to pending litigation challenging the constitutionality of the
cedure in Section 85 (a) and the dismissal provision in Section 98
new Chapter IX.
were intended to preclude the filing of frivilous petitions.
In view of the almost certain constitutional challenge of the pro-
No one seriously questioned during subcommittee or committee dis-
visions of proposed Chapter IX and the importance of maintaining
cussions the power of the court to dismiss on its own motion a petition
existing remedies, and in further view of the fact that the legislation
not being prosecuted with the appropriate diligence.
which we have before us was created and tailored for the one purpose
of protecting the City of New York, it is most appropriate to limit
V
the exposure to constitutional challenge and to limit the adverse effects
of a successful challenge.
RE SUBSTITUTE
Accordingly, it is our present intention to offer an amendment in
An abundance of innovative provisions are included as proposed
the nature of a substitute which would incorporate all the changes in
changes in this municipal bankruptcy legislation. We can reasonably
the proposed legislation with one addition : instead of revising existing
anticipate that serious questions will be raised as to its
Chapter IX, the legislation would create an additional Chapter XVI
with remedies limited in scope to cities with a population exceeding one
constitutionality.
The membership is assured that all of the undersigned are satisfied
million people.
that what we are undertaking to do is constitutionally permissible and
In addition to limiting exposure to challenge, there are at least two
appropriate, but we are influenced and we are concerned that what
other reasons why it is appropriate that this be done
we are doing is untested and subject to constitutional challenge.
1. The legislation which we are undertaking to enact at this moment
makes it quite easy for a municipality to abrogate either temporarily
62
or permanently, in one way or another, its contractual obligations; and
every municipality that has the potential of receiving the benefits of
this Act also has the comparable benefits of an easy way to get out from
under its indebtedness. Under these circumstances, securities are going
to be less marketable and interest costs greater.
There is no real reason why well managed municipalities should pay
the high costs that will result from changes designed to benefit New
York City. Chapter IX has worked well for municipalities with a
manageable number of creditors and it should continue to do SO.
2. Limiting the availability of this relief to cities with populations
of at least one million persons will allow the constitutionality of this
bill to rest on the commerce power as well as upon the bankruptcy
power.
Cities with populations of at least one million persons clearly impact
the commerce of the country. Such is not the case with many small
sewer or drainage districts eligible for relief under Chapter IX.
The legitimate impact on commerce caused by the bankruptcy of a
major municipality justifies use of the commerce power to infringe
State sovereignty by allowing the rejection of executory contracts and
the issuance of certificates of indebtedness. While it may be argued that
these powers may impair State sovereignty beyond the scope of the
bankruptcy power, they are clearly constitutional under the commerce
power.
VI
RE PREFERENCES
A matter of concern has been the problem of prepetition set-offs and
preferential transfers whereby a creditor is made better off than he
would be in bankruptcy. An amendment was accepted by the Com-
mittee protecting the petitioner against set-offs within four months
of bankruptcy. Subsequent reflection indicates that even this does not
go far enough.
There is no real reason why the power to set aside transfers prior
to bankruptcy under appropriate circumstances should not be the same
in municipal bankruptcy as it is in other bankruptcies. We note with
interest that the Senate Judiciary Committee has SO concluded.
Accordingly, we intend to offer an amendment to incorporate into
the legislation before us the avoiding powers of Sections 60 (a), (b),
(c), 67, 70 (c) and (e) of the Bankruptcy Act. These avoiding powers
are presently available in straight bankruptcy and under Chapters X,
XI, XII, and XIII of the Bankruptcy Act.
The undersigned Members ascribe to the above stated views.
M. CALDWELL BUTLER.
THOMAS N. KINDNESS.
EDWARD HUTCHINSON.
ROBERT McCLoRY.
CARLOS J. MOORHEAD.
HENRY J. HYDE.
The undersigned Member concurs in all but paragraph III of the
above stated views.
CHARLES E. WIGGINS.
O
Calendar No. 447
94TH CONGRESS
SENATE
REPORT
1st Session
No. 94-458
ADDITION OF A NEW CHAPTER PROVIDING FOR
THE ADJUSTMENT OF THE DEBTS OF MAJOR
MUNICIPALITIES
NOVEMBER 18, 1975.-Ordered to be printed
Mr. BURDICK, from the Committee on the Judiciary,
submitted the following
REPORT
[To accompany S. 2597]
The Committee on the Judiciary to which was referred the bill
(S. 2597) to improve judicial machinery by adding a new chapter to
Title II of the United States Code providing for the adjustment of
the debts of major municipalities, having considered the same, reports
favorably on S. 2597, with amendments, and recommends that the
bill, as amended, do pass.
AMENDMENTS
The Committee proposes amendments to the bill as follows:
1. Following the title and prior to the enactment clause insert the
following:
Whereas the Congress finds and declares this Act and proceedings
thereunder providing for the composition of indebtedness of, or au-
thorized by, municipalities to be within the subject of bankruptcies
under Article I, Section 8, Clause 4 of the U.S. Constitution; and
Whereas the Congress finds that the impracticability of existing
Federal bankruptcy remedies for use by municipalities increases the
likelihood of their default and will aggravate the adverse effects
thereof; and
Whereas the Congress finds that the financial disruptions and dis-
locations resulting from default of such municipalities without avail-
ability of a Federal procedure to restructure their indebtedness in such
fashion as to avoid continuing insolvency would have a substantial
adverse effect on interstate commerce within the meaning of Article I,
Section 8, Clause 3 of the U.S. Constitution, by reason of the com-
mercial importance of the municipalities involved.
2. On page 1, line 3, delete "1893" and substitute in lieu thereof
"1898".
57-010
2
3
3. Beginning at page 2, line 1, delete all of the bill through line 2 on
the State in the exercise of its political or governmental powers, in-
page 20, and substitute in lieu thereof the following:
cluding expenditure therefor: Provided, however, That no State law
prescribing a method of composition of indebtedness of such agencies
"CHAPTER XVI-ADJUSTMENT OF INDEBTEDNESSES OF MAJOR
shall be binding upon any creditor who does not consent to such com-
MUNICIPALITIES
position, and no judgment shall be entered under such State law which
"Sec.
would bind a creditor to such composition without his consent.
"801. Jurisdiction, powers of the court, and reservation of powers.
" (e) Subsections 60 (a), (b), (c), section 67 and subsections 70(c)
"802. Definitions.
(e) of this Act shall apply in proceedings under this chapter, except
"803. Eligibility for relief.
"804. Petition for filing.
that all functions of the trustee thereunder shall be assumed by the
"805. Stay of proceedings.
petitioner.
"806. Contest and dismissal of petition.
"DEFINITIONS
"807. Notices.
"808. Representation of creditors.
"SEC. 802. The words and phrases used in this chapter have the fol-
"809. List of claims and persons adversely affected.
lowing meanings unless they are inconsistent with the context:
"810. Proofs of claim.
" (1) The term 'attorney' means an attorney licensed to practice law
"811. Certificates of indebtedness.
by any State and includes a law partnership or corporation.
"812. Priorities.
"813. Provisions of plan and filing.
(2) 'Claims' shall include bonds, notes, judgments, and demands,
"814. Voting on acceptance of plan.
liquidated or unliquidated, and other evidence of indebtedness, either
"815. Modification of plan:
secured or unsecured, and certificates of beneficial interest in property.
"816. Standing to object to plan.
"817. Hearing on confirmation of plan.
" (3) The term 'court' means United States district court sitting in
"818. Effect of confirmation.
bankruptcy, and the terms 'clerk' and 'judge' shall mean the clerk and
"819. Duty of petitioner and distribution under plan.
judge of such court.
"820. Dismissal.
(4) The term 'creditor' means any person who owns a claim against
"821. Retention of jurisdiction.
"822. Reference of issues and compensation.
the petitioner and any person injured by the rejection of an executory
"823. Conversion to chapter XVI.
contract or an unexpired lease pursuant to this chapter or pursuant to
a plan under this chapter, and may include such person's authorized
"JURISDICTION, POWERS OF THE COURT, AND RESERVATION OF POWERS
agent.
(5) The term 'lien' means a security interest in property, a lien
SEC. 801. (a) This Act and proceedings thereunder are found and
obtained on property by levy, sequestration or other legal or equitable
declared to be within the subject of bankruptcies and, in addition to
process, a statutory or common-law lien on property, or any other va-
the jurisdiction otherwise exercised, courts of bankruptcy shall exer-
riety of charge against property to secure performance of an obliga-
cise original jurisdiction as provided in this chapter for the composi-
tion.
tion or extension of the debts of certain public agencies of instrumen-
" (6) The term "plan' means a plan proposed in a case under this
talities or political subdivisions. The court in which the petition is
chapter.
filed in accordance with subsection 804(c) shall exercise exclusive
" (7) The term 'person' includes a corporation or a partnership, the
jurisdiction for the adjustment of petitioner's debts and, for purposes
United States, the several States, and public agencies, instrumentali-
of this chapter, shall have exclusive jurisdiction of petitioner and its
ties, and political subdivisions thereof.
property, wherever located.
(b) Upon filing of a petition the court may, in addition to the
"ELIGIBILITY FOR RELIEF
jurisdiction, powers, and duties hereinabove and elsewhere in this
SEC. 803. (a) Any municipality, public agency, instrumentality or
chapter conferred and imposed upon it (1) permit the rejection. of
political subdivision of the State is eligible for relief under this chap-
excutory contracts of. the petitioner, upon notice to the parties to such
ter, if the municipality is first specifically authorized to file a petition
contracts and to such other parties in interest as the court may desig-
initiating a proceeding under this chapter by the chief executive, leg-
nate; (2) exercise such other powers not inconsistent with the provi-
islature, or such other governmental officer or organization empowered
sions of this chapter.
under State law to authorize the filing of such a petition.
(c) Upon the filing of a petition the chief judge. of the court in
(b) Any public agency or instrumentality or political subdivision
the district in which the petition is filed shall immediately notify
subordinate to such municipality or whose responsibilities are re-
the chief judge of the circuit court of appeals of the circuit in which
stricted to the geographical limits thereof, including incorporated ari-
the district court is located, who shall designate the judge of the dis-
thorities, commissions and districts, for whose debts such municipality
trict court to conduct the proceedings under this chapter.
is not otherwise liable, is eligible for relief as a separate petitioner and
(d) Nothing contained in this chapter shall be construed to limit
a petition seeking relief shall be jointly administered in the same pro-
or impair the power of any State to control by legislation or other-
ceeding in which such municipality seeks relief under this chapter if
wise, any public agency or instrumentality or political subdivision of
such agency, instrumentality, or subdivision is not prohibited from
filing a petition by applicable State law.
4
"PETITION AND FILING
5
"Sec. 804. (a) Any entity eligible for relief under section 803 may
file a voluntary petition under this chapter. The petition shall state
(e) The commencement or continuation of any act or proceeding
that the petitioner is eligible to file a petition, that the petitioner is
other than described in subsection (a) of this section may be stayed,
insolvent or unable to pay its debts as they mature, and that it desires
restrained, or enjoined pursuant to rule 65 of the Federal Rules of
to effect a plan for the composition or extension of its debts. The peti-
Civil Procedure, except that a temporary restraining order or pre-
tioner shall file with its petition, or within such time as the court may
liminary injunction may be issued without compliance with subdivi-
sion (c) of that rule.
prescribe, lists of its creditors and of other persons who may be ad-
versely affected by a proposed plan and if an identification of all the
"(f) A provision in a contract or lease, or in any law applicable to
petitioner's creditors is impracticable, the petitioner shall state the
such a contract or lease, which terminates or modifies, or permits a
party other than the petitioner to terminate or modify the contract or
reason therefor.
"(b) The petition shall be filed with any court in whose territorial
lease because of the insolvency of the petitioner or the commencement
jurisdiction the municipality or any part thereof is located, and shall
of a case under this Act is not enforceable if any defaults in prior
be accompanied by payment to the clerk of a filing fee of $100, which
performance of the petitioner are cured and adequate assurance of
future performance is provided.
shall be in lieu of the fee required to be collected by the clerk under
other applicable chapters of this title, as amended.
'(g) No stay, order, or decree of the court may interfere with (1)
any of the political or governmental powers of the petitioner; or
"STAY OF PROCEEDINGS
(2) any of the property or revenues of the petitioner necessary for
essential governmental purposes; or (3) the petitioner's use or enjoy-
"Sec. 805. (a) A petition filed under section 804 shall operate as a
ment of any income-producing property: Provided, however, That the
stay of the commencement or the continuation of any court or other
court shall enforce the conditions attached to certificates of indebted-
proceeding against the petitioner, its property or any officer or in-
ness issued under section 811 and the provisions of the plan.
habitant of the petitioner, or which seeks to enforce any claim against
"CONTEST AND DISMISSAL OF PETITION
the petitioner; as a stay of any act or the commencement or continua-
tion of any court proceeding to enforce any lien on taxes or assess-
"SEC. 806. (a) Any creditor may file a complaint in the bankruptcy
ments, or to reach any property of the petitioner; and as a stay of the
court contesting the petition for relief under this chapter. The com-
application of any setoff or enforcement of any counterclaim relating
to any contract, debt, or obligation of the petitioner.
petition. plaint may be filed within thirty days following the filing of the
'(b) (1) A petition filed by a petitioner eligible for relief under
(b) The court may, upon notice to the creditors and a hearing
this chapter shall operate to stay recognition or enforcement of the
following the filing of such a complaint, dismiss the proceeding if it
setoff of any claim owing by the petitioner effected or attempted to be
finds that the petition was not filed in good faith or that it does not
effected within three months prior to the date of the petition or there-
meet the provisions of this chapter.
after against any obligation owing to the petitioner until the stay is
'(c) A finding of jurisdiction shall be considered an interlocutory
terminated by the court or the case is dismissed. Such stay shall not
order for purposes of appeal. No appeal pursuant to section 1292 of
affect the right of the creditor to withhold payments to or on the order
title 28, United States Code, shall be allowed.
of the petitioner, except when otherwise ordered pursuant to sub-
division (2).
"NOTICES
"(2) After hearing on notice to the person asserting the right of
setoff, the court may order such persons to pay to the petitioner or to
"Sec. 807. (a) The petitioner or such other person as the court shall
its order the amount of the obligation sought to be offset if the stay
designate shall give prompt notice of the commencement of a proceed-
is not terminated pursuant to subdivision (d). However, the court may
ing or dismissal of the petition under this chapter to the State in which
require as a condition of the order that the petitioner furnish such pro-
the petitioner is located and to the Securities and Exchange Commis-
tection as will adequately protect the person who is asserting the right
sion and to creditors. As creditors and other persons who may be
of setoff.
materially and adversely affected by the plan are identified, the peti-
(c) Except as it may be terminated, annulled, modified, or condi-
tioner or such other person as the court shall designate shall give such
tioned by the court under the terms of this section, the stay provided
persons notice of the commencement of the proceeding, a summary of
for herein shall continue until the case is closed or dismissed or the
the provisions of the plan and any proposed modification of the plan,
property subject to the lien is, with the approval of the court, aban-
and of their right to request a copy of the plan, or modification. The
doned or transferred.
notice required by the first sentence of this subsection shall be pub-
(d) On the filing of a compliant seeking relief from a stay pro-
lished at least once a week for three successive weeks in at least one
vided in this section, the court shall set a hearing for the earliest possi-
newspaper of general circulation published within the jurisdiction of
ble date. The court may, for cause shown, terminate, annul, modify, or
the court. and in such other papers having a general circulation among
condition such stay.
bond dealers and bondholders as may be designated by the court. The
court may require that it be published in such other publication as
the court may deem proper.
6
7
(b) The petitioner or such other person as the court shall designate
shall also give notice to all creditors of the time permitted for accept-
claim sons identification is not practicable, and shall specify the character of
ing or rejecting a plan or any modification thereof. Such time shall
able to identify additional creditors.
involved. The list shall be supplemented as petitioner becomes
be ninety days from the filing of the plan or modification unless the
court for good cause shall set some other time.
"(b) If the proposed plan requires revision of assessments 80 that the
(c) The petitioner or such other person as the court shall designate
proportion of special assessments or special taxes to be assessed against
shall also give notice to all creditors (1) of the time permitted for filing
a complaint objecting to confirmation of a plan, (2) of the date set for
equitable, to such real property shall be deemed persons adversely af-
the date the petition is filed, the holders of record of title, legal or
some real property will be different from the proportion in effect at
hearing objections to such complaint, (3) of the date of hearing of a
complaint seeking dismissal of the petition, and (4) of the date of the
fected and shall be similarly listed.
hearing on confirmation of the plan.
tions (a) and (b) of this section.
(c) The court may for cause modify the requirements of subsec-
(d) All notices given by the petitioner or such other person as the
court shall designate shall be given in the manner directed by the
court; however, the court may issue an order at any time subsequent to
"PROOF OF CLAIM
the first notice to creditors directing that those persons desiring written
notice file.a request with the court. If the court enters such an order
in interest, the claim of a creditor that is not disputed, contingent, or
"SEO. 810. (a) In the absence of an objection made by any party
persons not 80 requesting will receive no further written notice of
proceedings under the chapter.
unliquidated, is established by the list of claims filed pursuant to
"(e) Cost of notice shall be borne by the petitioner, unless the court
unlisted creditors and of creditors whose listed claims are disputed,
section 809. The court may set a date by which proofs of claim of
for good cause determines that the cost of notice in a particular
instance should be borne by another party.
contingent, or unliquidated, must be filed. If the court does not set
confirmation. The petitioner or such other person as the court shall
such a date, the proofs must be filed before the entry of the order of
"REPRESENTATION OF GREDITORS
designate shall give notice to each person whose claim is listed as dis-
"Sec. 808. (a) For all purposes of this chapter any party in interest
puted, contingent, or unliquidated, in the manner directed by the court.
may act in person or by an attorney or a duly authorized agent or
under a plan or under section 801 (b), any person injured by such re-
'(b) If an executory contract or an unexpired lease is rejected
committee. Where any committee, organization, group, or individual
shall assume to act for or on behalf of creditors, such committee, or-
jection may assert a claim against the petitioner. The rejection of an
ganization, group, or individual shall first file with the court in which
executory contract or unexpired lease constitutes a breach of the
the proceeding is pending a list of the creditors represented, giving the
tract or lease as of the date of the commencement of the case under con-
name and address of each and describing the amount and character of
the claim of each; copies of the instrument or instruments in writing
signed by such creditors conferring the authority for representation;
demnity under a covenant contained in such lease shall be allowed,
rejection of an unexpired lease of real estate or for damages or in-
this chapter. The claim of a landlord for injury resulting from the
and a copy of the contract or contracts of agreement entered into be-
but shall be limited to an amount not to exceed the rent, without accel-
tween such committee, organization, group, or individual and the rep-
resented creditors, which contract or contracts shall disclose all com-
of the landlord, whichever first occurs, whether before or after reentry the
of the surrender of the premises to the landlord or the date of
eration, reserved by such lease for the next year succeeding the date
pensation to be received, directly or indirectly for such representation,
which agreed compensation shall be subject to modification and ap-
up to the date of such surrender or reentry. The court shall scrutinize
filing of the petition, plus unpaid accrued rent, without acceleration,
proval by the court.
(b) The judge shall, for cause shown, permit a labor organization
the circumstances of an assignment of a future rent claim and the
or employee association representative of employees of the debtor mu-
amount the of the consideration paid for such assignment in determining
nicipality, public agency, instrumentality, or political subdivision to
amount of damages allowed the assignee of that claim.
be heard on the economic soundness of the plan affecting the interests
of the represented employees.
"CERTIFICATES OF INDEBTEDNESS
"LIST OF CLAIMS AND PERSONS ADVERSELY AFFECTED
"Sec. 811. At any time after a petition has been filed, the court
"SEC. 809. (a) The list of claims filed as required in Sec. (a)
debtedness for cash, property or other consideration, under such terms
upon cause shown, authorize the petitioner to issue certificates of may in-
shall include, to the extent practicable, the name of each known cred-
and conditions and with such security and priority in payment
itor to be materially and adversely affected by the plan, his address so
far as known to the petitioner, and a description of each claim showing
istration as the court may approve. Notwithstanding any other
existing obligations, secured or unsecured and other expenses of admin- over
its amount and character, the nature of any security therefor and if
vision of law including section 821 of this chapter, the court shall have pro-
the claim is disputed, contingent or unliquidated as to amount. With
exclusive jurisdiction of any action which may be brought against
respect to creditors not identified, the petition shall set forth the rea-
of indebtedness.
petitioner to enforce compliance with the terms of any such certificates
9
8
the judge may direct, subject to the right of any creditor who has pre-
"PRIORITIES
viously accepted the plan to withdraw his acceptance in writing, within
a period to be fixed by the judge, if, in the opinion of the judge, the
"SEC. 812. The following shall be paid in full in advance of the pay-
change or modification will materially and adversely affect such cred-
ment of any distribution to creditors under a plan, in the following
itor; and if any creditor having such right of withdrawal shall not
order:
withdraw within such period, he shall be deemed to have accepted the
(1) The cost and expenses of administration which are incurred by
plan as changed or modified: Provided, however, That the plan as
the petitioner subsequent to the filing of a petition under this chapter.
changed or modified shall comply with all the provisions of this chap-
(2) Debts owed for services and materials directly provided within
ter and shall have been accepted in writing by the petitioner.
two months before the date of the filing of the petition under this
"STANDING TO OBJECT TO PLAN
chapter. "(3) Debts owing to any person or entity, which by the laws of the
"SEC. 816. Any creditor or other person materially and aversely
United States (other than this Act) are entitled to priority.
affected by the plan may file a complaint with the court objecting to
the confirmation of the plan. Such complaint may be filed any time up
"PROVISIONS OF PLAN AND FILING
to ten days before hearing on the confirmation of the plan or within
"Sec. 813. (a) A petitioner's plan under this chapter may include
such other time as prescribed by the court. The complaint shall be
provisions modifying or altering the rights of creditors generally, or
served on the petitioner and such other persons as may be designated
of any class of them, secured or unsecured, either through issuance of
by the court.
"HEARING ON CONFIRMATION OF PLAN
new securities of any character, or otherwise, and may contain such
other provisions and agreements not inconsistent with this chapter as
"Sec. 817. (a) Within a reasonable time after the expiration of the
the parties may desire, including, but not limited to provisions for the
time within which a plan and any modifications thereof may be ac-
rejection of any executory contract and unexpired leases.
cepted or rejected, the court shall set a hearing on the confirmation of
(b) The petitioner may file a plan with its petition or at such later
the plan and modifications, and the petitioner and such other persons
time as may be prescribed by the court.
as may be designated by the court shall give notice of the hearing and
time allowed for filing objections as provided in section 807 (c).
"VOTING ON ACCEPTANCE OF PLAN
(b) Before concluding the hearing on confirmation of the plan the
judge shall inquire whether any person promoting the plan or doing
"Sec. 814. (a) A plan may be confirmed only if, of the creditors
anything of such a nature, has been or is to be compensated, directly
voting in writing to accept or reject the plan, those holding two-thirds
or indirectly, by both the petitioner and any creditor, and shall take
in amount and 51 per centum in numbers of each class materially
evidence under oath to ascertain whether any practice obtains. After
and adversely affected have voted to accept: Provided, however, That
such examination the judge shall make an adjudication of this issue,
no such acceptance shall be required from any class which, under the
and if he finds that any such practice obtains, he shall forthwith dis-
plan, is to be paid in cash the value of its claims or is to be afforded
miss the proceeding and tax all of the costs against such person, or
such method of protection as will, consistent with the circumstances of
against the petitioner, unless such plan be modified within the time to
the particular case, equitably and fairly provide for the realization
be allowed by the judge 80 as to eliminate the possibility of any such
of the value of its claims.
practice.
"(b) Unless his claim has been disallowed, any creditor who is in-
(c) The court shall confirm the plan if satisfied that (1) it is fair,
cluded on the list filed pursuant to Section 809 or who files a proof
equitable, feasible, and not unfairly discriminatory in favor of any
of claim pursuant to section 810 is entitled to vote to accept or reject
creditor or class of creditors; (2) it complies with the provisions of
a plan or modification thereof within the time set pursuant to subsec-
this chapter; (3) it has been accepted by creditors and provision has
tion 807 (b). Claims owned, held or controlled by the petitioner are not
been made for nonaccepting creditors as required in section 814; (4)
eligible to vote.
all amounts to be paid by the petitioner for services or expenses inci-
(c) For the purposes of the plan and its acceptance, the court may
dent to the composition have been fully disclosed and are reasonable;
fix the division of creditors into classes and, in the event of controversy,
(5) the offer of the plan and its acceptance are in good faith; (6)
the court shall after hearing upon notice summarily determine such
the petitioner is authorized by law to take all action necessary to be
controversy. "(d) If any controversy shall arise as to whether any creditor or
taken by it to carry out the plan; and (7) it appears from petitioner's
current and projected revenues and expenditures that the budget of
class of creditors shall or shall not be materially and adversely affected,
the petitioner will be in balance within a reasonable time after adop-
the issue shall be determined by the judge, after hearing, upon notice
tion of the plan. If not 80 satisfied, the judge shall enter an order
to the parties interested.
dismissing the proceeding.
"MODIFICATION OF PLAN
"Sec. 815. Before a plan is confirmed, changes and modifications may
be made therein after hearing and upon such notice to creditors as
S. Rept. 94-438-2
10
11
"EFFECT OF CONFIRMATION
"RETENTION OF JURISDICTION
"SEC. 818. (a) The provisions of a confirmed plan shall be binding on
"Sec. 821. The court may retain jurisdiction of a proceeding under
the petitioner and on all creditors, whether or not they are affected
this chapter for such period as it determines it necessary to assure ex-
by it, whether or not their claims have been listed, filed, or allowed,
ecution of the plan and discharge of the securities issued under the plan.
and whether or not they have accepted the plan.
(b) The confirmation of a plan shall extinguish all claims against
"REFERENCE OF ISSUES AND COMPENSATION
the petitioner provided for by the plan other than those excepted from
"SEC. 822. (a) The judge may refer any special issues of fact to a
discharge by the plan or order confirming the plan.
referee in bankruptcy, or special master for consideration, the taking
"DUTY OF PETITIONER AND DISTRIBUTION UNDER PLAN
of testimony, and a report upon such special issues of fact, if the judge
finds that the condition of his docket is such that he cannot take such
"SEC. 819. (a) The petitioner shall comply with the provisions of
testimony without unduly delaying the dispatch of other business
pending in his court, and if it appears that such special issues are nec-
the plan and the orders of the court relative thereto and shall take all
essary to the determination of the case. Only under special circum-
actions necessary to carry out the plan.
(b) Subject to the provisions of subsection (c), distribution shall
stances shall reference be made to a special master who is not a referee
be made in accordance with the provisions of the plan to creditors
in bankruptcy. A general reference of the case to a master shall not be
(1) whose proofs of claim have been filed and allowed or (2) whose
made, but the reference, if any, shall be only in the form of requests
for finding of specific facts.
claims have been listed and are not disputed. Distribution to creditors
holding securities of record shall be made to the recordholders as of
(b) The court may allow reasonable compensation for the services
performed by any such special master who is not a salaried Federal
the date the order confirming the plan becomes final.
(c) When a plan requires presentment or surrender of securities
employee, and the actual and necessary expenses incurred in connec-
or the performance of any other act as a condition to participation
tion with the proceeding, including compensation for services rendered
under the plan, such action must be taken not later than five years
and expenses incurred in obtaining the deposit of securities and the
after the entry of the order of confirmation. Persons who have not
preparation of the plan, whether such work may have been done by
within such time presented or surrendered their securities or taken
the petitioner or by committees or other representatives of creditors,
such other action shall not participate in the distribution under the
and may allow reasonable compensation for the attorneys or agents of
plan. Any securities, moneys, or other property remaining unclaimed
any of the foregoing: Provided, however, That no fees, compensation,
at the expiration of the time allowed for presentment or surrender of
reimbursement, or other allowances for attorneys, agents, committees,
securities or the performance of any other act as a condition to partici-
or other representatives of creditors shall be assessed against the peti-
pation in the distribution under a confirmed plan shall become the
tioner or paid from any revenues, property, or funds of the petitioner
except in the manner and in such sums, if any, as may be provided for
property of the petitioner.
(d) A certified copy of any order or decree entered by the court in
in the plan of adjustment. An appeal may be taken from any order
a case under this chapter shall be evidence of the jurisdiction of the
making such determination or award to the United States court of
appeals for the circuit in which the proceeding under this chapter is
court, the regularity of the proceedings, and the fact that the order was
made. A certified copy of an order providing for the transfer of any
pending, independently of other appeals which may be taken in the
property dealt with by the plan shall be evidence of the transfer of
proceeding, and such appeal shall be heard summarily.
title accordingly, and, if recorded as conveyances are recorded, shall
"CONVERSION TO CHAPTER XVI
impart the same notice that a deed, if recorded, would impart.
(e) The court may direct the petitioner and other necessary parties
"Sec. 823. (a) A petitioner eligible for relief under chapter XVI who
to execute and deliver or to join in the execution and delivery of any
has filed a petition under chapter IX of this Act may at any time file an
instruments required to affect a transfer of property pursuant to the
application to have the case proceed under chapter XVI; Providea,
confirmed plan and to perform such other acts, including the satisfac-
however, that any petition filed by a municipality, public agency, in-
tion of liens, as the court may determine to be necessary for the con-
strumentality or political subdivision of the State after the effective
summation of the plan.
date of this Act must be filed under chapter XVI of the Bankruptcy
"DISMISSAL
Act as added by this Act.
(b) After hearing on notice to the petitioner, the Securities and
"SEC. 820. The court shall enter an order dismissing the case after
Exchange Commission, creditors and such other persons as the court
hearing on notice: (1) for want of prosecution; (2) if no plan is pro-
may direct, the court shall, if it finds that the case may properly pro-
posed within the time fixed or extended by the court; (3) if no pro-
ceed under chapter XVI of the Act, approve the application and order
posed plan is accepted within the time fixed or extended by the court;
the case to proceed under that chapter.'
or (4) if α confirmed plan is not consummated.
12
13
"Sec. 2. The table of organization of title 11, United States Code,
Water Improvement District, 298 U.S. 513 (1936). Since the enact-
is amended by inserting after the reference to chapter 15, the
ment of the present Chapter IX in 1937 some 350 or more cases have
following:
been filed involving over $207 million of admitted debts.
"Chapter 16. Adjustment of Indebtednesses of Major Municipali-
The provisions of the present law have recently received intensive
ties."
study. The Bankruptcy Commission included Chapter IX in its con-
SEPARABILITY
sideration and its recommendations are embodied in S. 236 which was
SEC. 3. If any provision of chapter XVI of the Bankruptcy Act as
first introduced as S. 2565 in October 1973. One year later a legislative
added by this Act, or the application thereof to any agency, instru-
committee of the National Conference of Bankruptcy Judges set forth
mentality, or subdivision is held invalid, the remainder of the chapter,
similar proposals which are included in S. 235. (This bill was first
or the application of such provision to any other agency or instru-
introduced in September 1974 as S. 4049.) A preliminary draft of
mentality or political subdivision shall not be affected by such holding.
proposed bankruptcy rules was submitted for Supreme Court approval
by the Committee on Rules of Practice and Procedure of the Judicial
EFFECTIVE DATE
Conference of the United States in April 1974, Most recently both the
SEC. 4. This Act shall become eff ective as of the date of its enactment.
Senate and House of Representatives have conducted hearings on the
4. Amend the title of the bill to read as follows:
municipal debt reorganization provisions of S. 235 and 236.
To amend the Bankruptcy Act to add a new chapter thereto
NEED
providing by voluntary reorganization procedures for the
adjustment of the debts of major municipalities.
While Chapter IX has no doubt performed a valuable function
during the period of its existence, in recent years it has become clear
PURPOSE OF THE AMENDMENT
that amendment is necessary if it is to provide an adequate vehicle for
1. The purpose of the first amendment is to include in the bill a
reorganization of a troubled municipality. The report of the Commis-
recital of findings by the Congress to the effect that an insolvency of
sion on the Bankruptcy Laws of the United States concluded that while
a municipality affects commerce within the meaning of Article I, Sec-
the concept of municipal reorganization should be retained in the bank-
ruptcy statutes, certain amendments were needed to simplify and ex-
tion 8, Clause III of the United States Constitution.
2. The second amendment merely corrects an error in the original
pedite proceedings under this Chapter.
As witnesses indicated in their testimony on S. 2597 any chapter
bill's reference to the Bankruptcy Act of 1898.
3. The third amendment proposed by the Committee on the Judici-
for public debtors needs certain provisions if it is to accommodate
ary is in the nature of a clean bill which incorporates, in the judgment
municipalities within its scope.
of the Committee, the best features of the several bills studied by the
The provisions of the chapter should provide ready access to the
Committee, to wit, S. 235, S. 236, S. 2579, S. 2586, and S. 2597, all as
bankruptcy courts. It is during the first steps of reorganization that
delay could cause the most permanent harm. Provisions must be made
explained in the body of the report.
4. The fourth amendment changes the title of the bill to more ac-
to insure that the city has the use of existing deposits and can raise
curately describe the bankruptcy proceedings as "a voluntary reorga-
money to meet the ongoing expense for essential city services pending
nization" of the financial affairs of the municipality.
acceptance and functioning of the plan. Uniformity of performance
under the plan must be assured although city administration may
change.
PURPOSE OF THE BILL
None of the above capabilities are contained in the present act. The
The purpose of the Bill as amended is to amend the procedure by
provisions of Chapter IX of the present Bankruptcy Act prevent a
which the debts of municipalities are adjusted. (11 U.S.C. 401.) The
municipal bankruptcy proceeding from being commenced until the city
Bill would add a new Chapter XVI to Title II which would provide
has obtained approval of 51% of its creditors for the proposed plan of
a new, feasible means of enabling a city to function in an orderly
adjustment. Any municipality would ordinarily have a volume and
fashion while an adjustment of its debts is negotiated with its
dispersal of debt obligations which would make merely locating a
majority of creditors within a short period of time very difficult. It is
creditors.
STATEMENT
incomparably harder to then try to obtain the requisite approval of a
majority of creditors.
HISTORY
The notice provisions of Chapter IX are cumbersome when large
numbers of creditors, many of whom have substantial interests, are
The use of debt reorganization proceedings to assist municipal gov-
involved. Chapter IX also requires that the terms of the plan itself
ernments in adjusting their indebtedness is not a new concept. The
be mailed to each creditor and other persons obviously affected. The
first effective municipal bankruptcy statute was enacted in 1937. An
burden caused by the printing, handling and mailing would be stagger-
earlier statute had been declared unconstitutional, Ashton V. Cameron
14
15
ing. Present law requires written proof of each claim by each creditor.
After the city had the opportunity to negotiate with its creditors a
The paper burden in the case of a major city, would be enormous.
final proposed plan would be sent to all creditors for their vote of
The approval of the plan of adjustment is difficult to obtain as the
approval or disapproval. The plan would not be confirmed unless each
present requirement is for approval of two-thirds of all creditors. In
class of creditor approves by a vote of two-thirds in amount and 519
a large city it is quite likely that many creditors would either be un-
in number of the class actually voting.
reachable or uninterested in voting. The two-thirds requirement might
If the city should delay in the filing of the plan or in seeking ap-
under these circumstances, amount to 80 to 85 percent of those voting.
proval of the creditors the court may dismiss the petition.
The present Chapter IX makes no provision for the issuance of
debtors certificates. This is a most serious omission as the municipal
CONCLUSION
debtors must maintain essential city services directed to public safety
and public health during the reorganization proceeding.
Municipal debt reorganization is not impractical. The debt structure
The municipal debtor is constantly faced with problems in main-
of a municipality, while complex in many respects, is no more compli-
taining the necessary cash flow for salaries for essential personnel. The
cated than the debt structure of major corporations. The ability of a
city could not expect to issue fresh bonds as there would be no takers.
city to propose a workable plan in good faith, which is fair, equitable
Neither can quarterly or semi-annual collection of tax monies always
and feasible has not seriously been questioned.
be sufficiently timely to be of assistance.
Nor are the provisions of the Bill untried. The vast majority of the
The issuance of debt certificates can be the key factor maintaining
provisions are derived from the present bankruptcy Act, the Rules of
a city's vital cash flow. The use of these certificates in commercial
Bankruptcy Procedure, S. 235 and S. 236, and recommendations of the
rehabilitation has successfully enabled businesses to operate during the
National Bankruptcy Conference.
pendency of arrangement proceedings. No reason surfaced during the
No member of the Committee welcomes the default and insolvency
hearings held by the Subcommittee on October 31st and November 4th
of any American municipality, but the Committee deems it altogether
which would indicate that certificates of indebtedness would be or
should be any less available to municipalities in need.
machinery to assist any municipality unable to meet its debts.
imperative, in light of recent events, to provide the necessary legal
PROVISIONS OF THE PROPOSED BILL
COST
A municipality desiring to proceed under Chapter XVI would file
lic funds.
This legislation does not involve any additional expenditure of pub-
a petition stating that the petitioner is eligible to file a petition, that
the petitioner is insolvent or unable to pay its debts as they mature,
SECTION-BY-SECTION ANALYSIS
and that it desires to affect a plan of composition or extension of its
debts. The only other requirement that might be imposed is that a list
Section powers 801. Jurisdiction, Powers of the Court, and Reservation of
of creditors be filed.
The filing of the petition would operate as a stay of the commence-
Subsection 801 (a) of the bill provides that proceedings under Chap-
ment or continuation of any court or other proceeding against the
ter XVI are within the subject of bankruptcies and gives the court
debtor. The importance of this provision was stressed by Assistant
receiving a petition broad power to deal with the resulting proceed-
Attorney General Antonin Scalia who appeared before the Subcom-
mittee on Friday, October 31, 1975. He stated
inal jurisdiction is provided for the composition and extension of debts
ings. Compare Section 81 of the Bankruptcy Act, 11 U.S.C. 401. Orig-
under this Chapter.
The indispensable effect of a proceeding is to permit a stay
of all legal actions, in both state and federal courts, and a stay
of private self-help remedies, such as the set-off by banks of
§§ 313 (1) and 344 of the present Act. The powers designated here are
Subsection 801 (b) is based upon § 116(1) and (2) and upon
the value of their claims against city payroll funds on de-
considered necessary to the continued functioning and subsequent re-
posit, which would have the effect of throwing the city into
habilitation of the petitioner. The Committee contemplates that all
disorder.
continuing obligations of the petitioner will be considered executory
contracts, including collective bargaining agreements. Subsection
While the city is negotiating with its creditors SO as to work out a
801 (c) provides that the selection procedure used in 3 judge courts
suitable plan, the city would remain under the management of what-
as provided in 28 USC 2284 would provide an appropriate method of
ever form of government is provided by state law. The court would
selection. In the Committee's opinion the magnitude of the cases under
have no power to interfere with the governmental functions of the
this chapter require that the selection process will be conducted care-
city. The city, in order to offset the fact that its tax revenues are sea-
fully and at the highest level.
sonal while its expenditures are constant could be authorized to issue
Subsection 801(d) reserves to the states the power to control public
certificates of indebtedness to supplement available funds. The Com-
agencies of the states. Such a reservation is desirable to avoid ques-
mittee anticipates, of course, that the court would not authorize the
tions of the constitutionality of the proceedings. See Ashton V. Cam-
issuance of those certificates unless the borrowing was for short term
eron County Improvement District, 298 U.S. 518. This follows the
funding essential governmental services.
language of Section 83 (i) of the Bankruptcy Act, 11 U.S.C. 403
17
16
Subsection 801 (d) allows the petitioner the usual bankruptcy pow-
The petitioner must file lists of its creditors and other persons who
ers, usually exercised by trustees, to set aside fraudulent conveyances
may be adversely affected by a proposed plan. The lists must be filed
either with the petition or as soon thereafter as the court shall allow.
and preferences.
Should it be impracticable for the petitioner to identify all its creditors
Section 802. Definitions
it must file the lists of those creditors it can identify and state that it
This section follows closely the definitions set forth in proposed
is impracticable to identify the remainder, giving the reason therefor.
Chapter XI Rule 9-33 of the Rules of Bankruptcy Procedure; § 82
Subdivision (a) is derived from §83(a) of the present Act and,
of the present act, and the suggested definitions in S. 235 and S. 236.
to the extent it refers to a plan for an extension, is derived from
The Note of the Advisory Committee on Bankruptcy Rules to pro-
§ 8-202(a) of S. 236 and § 9-202(a) of S. 235. See also proposed
posed Chapter IX Rule 9-33 is relevant:
Form No. 9-F1 of the proposed Chapter IX Rules.
Pursuant to the Act and these rules, a Chapter IX case is
Subdivision (b) specifies the court in which the petitioner may file.
not automatically referred to a referee in bankruptcy but
This section differs from § 83(a) of the present Act and from § 9-202
(b) of S. 235 in its venue provisions in that the petition may be filed
proceeds in the United States District Court setting as a
bankruptcy court. This rule indicates the meaning of words
with any court in whose territorial jurisdiction the municipality of
used in the Chapter IX Rules in this regard. The definition
any part thereof is located. It was the Committee's opinion that the
of "court" conforms with Chapter IX of the (present) Act.
petitioner should be allowed to select the court most physically con-
Normally, under the Act, it includes the referee in bank-
venient where the municipality might be located in more than one ju-
ruptcy; in Chapter IX, however, it means only the district
dicial district. The filing fee of $100, prescribed by § 83 (a) of the pres-
ent Act, is retained.
court.
Section 805. Stay of Proceedings
Section 803, Eligibility for Relief
Subsection 3(a) provides that any municipality or other entities
Section 805, subsections (a) and (c) are derived from proposed
named in this subsection are eligible for relief under this Chapter if
Chapter IX Bankruptcy Rule 9-4, provides for an automatic stay of
the petitioner is first specifically authorized by the State to file a peti-
creditor actions, offsets and lien enforcement proceedings. Relief can be
tion under this Chapter. The Committee considered it questionable
obtained from the stay as provided in Subsection (d). Obtaining other
whether the affirmative consent of the state is constitutionally required.
stays would require the showing specified in Rule 65 of the Federal
If not for constitutional reasons, the Committee believed as a policy
Rules of Civil Procedure as modified by Subsection (e). If an auto-
matter that such consent should be obtained. A general statutory pro-
matic stay were not provided for, essential governmental services
vision which may have been enacted prior to this Chapter is thought
might be seriously interrupted by creditors' actions. Section 805, sub-
by the Committee to meet the requirement of specific consent. In the
section (b) is derived from the Report of the National Bankruptcy
Conference, October 1975. This provision (7-204 of said Report) in-
absence of general statutory consent, 803 (a) authorizes the chief execu-
tive, legislature or any other governmental officer or organizations,
sures that the municipality can use its deposits and other assets dur-
ing the debt reorganization proceedings. Subsection (f) provides a
SO empowered under state law, to authorize the filing of such a
method by which the petitioner can be assisted in continuing its opera-
petition.
Subsection (b) would permit any public agency, instrumentality
tions. Under present law certain contract and lease provisions pro-
vide for the automatic termination of a lease or contract because of
or political subdivision subordinate to the municipality, or whose re-
sponsibility are restricted to the geographical limits of the munici-
bankruptcy or insolvency. The cancellation of leases and contracts
pality, for whole debts the municipality is not otherwise liable, to file
would seriously impede the attempt to effectuate the reorganization of
the city's financial affairs.
a petition for debt relief in the same proceeding. While separate plans
of debt adjustments would be required, the bankruptcies would be
The rights of the creditor are protected as the city has certain obli-
jointly administered, before the same judge. This is desirable to enable
gations. Past defaults must be cured and adequate assurance of future
overall consideration of the problems of all local governmental entities
performance must be provided to the court.
which may be affected by the bankruptcy of a city, but which are
The proposed amendment is adopted from 4-602 (b) (2) of S. 236.
The language suggested by the Bankruptcy Commission in S. 236 is
legally autonomous.
adopted from the Uniform Commercial Code § 2-609 (1972 Ed.).
Section 804. Petition and Filing
Subsection (g) is correlated with Section 811 and Subsection 819 (d).
Section 804 requires the petitioner to recite that it is eligible to
Aside from the court authority which the petitioner agrees to in ob-
file a petition under this Chapter, that it is insolvent or unable to pay
taining the benefits of borrowing with court-sanctioned debt certifi-
its debts as they mature and that it desires to effect a plan of composi-
cates, and the court authority to enforce the final plan of composition
tion or extension of its debts. The requirement of Chapter IX of the
or extension which the petitioner agrees to, no court action would in-
current law, that the petitioner have the acceptances of 51% of the
terfere with the political or governmental powers of the petitioner.
creditors to the terms of a proposed plan as a condition of filing is
It is the opinion of the Committee that a finding pursuant to 817 (c)
eliminated, since a municipality could rarely if ever qualify on such
(7) does not interfere with the political or governmental power of the
terms.
S. Rept.
18
19
petitioner. No power is given to the court to compel the petitioner to
together with a characterization of the claims involved. If the lists
do any act to meet that requirement as in subsection 819 (d) but merely
filed with the petition cannot be complete, they can be supplemented
that the court shall decide from the plan voluntarily filed by the peti-
as specified by the court. The court could modify the detail required
tioner that such requirement has been met. If the requirement of sub-
in reporting of creditors claims and persons adversely affected.
section 817 (c) (7) is not met the court has no power to compel the mod-
ification of the plan presented to satisfy that requirement but must in-
Sec. 810. Proofs of Claim
stead dismiss the petition.
Section 810 (a) governs the filing of proofs of claim. Unless there
is objection by a party in interest, the claims listed by the petitioner
Section 806. Contest and Dismissal of Petition
as undisputed would be accepted as valid. This would substantially
Subsection 806 (a) would permit any creditor to contest the petition.
expidite the handling of these proceedings. Proof of claim for claims
However, unlike sec. 8-203, S. 236, this provision only allows the com-
not listed or listed as disputed, contingent or unliquidated, are to be
plaint to be filed within 30 days following the petition. The time pro-
filed by a date set by the court or, if no date is set, before the order con-
vision has been limited SO that all contests to the sufficiency of the
firming the plan.
petition may be promptly resolved.
The procedure prescribed by this section is similar to that provided
Subsection (b) would permit dismissal of the petition for
for and by proposed Chapter IX Rule 9-22. The Note of the Advisory
grounds set forth. An example of a lack of good faith is if the petition
Committee on Bankruptcy Rules is most relevant:
was filed without an intention to ever file a plan as required by this
Chapter.
This rule (9-22) permits the use of the lists filed under
Subsection 806 (c) prevents unnecessary delay in the filing of the
Rule 9-7 (Sec. 804 (a) of this bill) to determine the claims
plan and the consideration of the merits of the plan. Interlocutory
of creditors in place of a formal proof of claim. The incon-
appeals will not be allowed to contest, at that stage, a finding of juris-
venience and expense to numerous and widespread creditors
diction or that the petition is properly filed by the court.
will be obviated as will the burdens of collecting and register-
ing such claims on the part of the court or petitioner. Bearer
Section 807. Notices
bonds would be included on the lists filed
and the holders
Section 807 covers notice requirements. Such notices are to be given
thereof would not have to file claims to participate since under
by the petitioner in the manner directed by the court. Both the State
this rule their claims would be deemed filed and allowed. See
and SEC would be notified in order that necessary State actions can
also definition of "claims" in Rule 9-33 (Sec. 802 of this
be taken and the public interest may be protected. In order to reduce
bill).
the great expense and burden of giving all creditors notice of every
Section 810 (b) provides a measure of damages for landlords. It has
possible matter in which they could conceivably have an interest, Sub-
long been settled in bankruptcy law that landlords are "not in the same
section (d) permits the court, after issuance of an appropriate order, to
position as other general creditors" and should not "be treated on a par
suspend all or some notices to those who do not specify an interest in
with them." Oldden V. Tonto Realty Corp. 143 F.2d 916 (2d Cir. 1944).
receiving them. Compare proposed Chapter IX Bankruptcy Rule
This section is derived from § 63 of the present Act and from § 4-
9-14(e).
602 of S. 235. The one year limitation on a landloard's damage
It should be noted that in subsection (a) provision is made for
claim for the rejection of breach of a real property lease is derived
notice by publication. The Committee anticipates that a large munici-
from § 63 (a) (9) of the present Act and from § 4-403 (b) (6) of S. 235.
pality would find it impossible to give personal notice to many of its
bond holders because the bonds are negotiable and the owners will be
Section 811. Certificates of Indebtedness
difficult to identify.
Section 811 is an important provision not found in existing law
Notice shall in the first instance be given by the petitioner. The
for the adjustment of debts of municipalities. Tax revenues are not
court may designate any other person, including the clerk, to give any
collectible day by day, but are periodic. It is common practice for a
notice required by this section.
municipality to make short-term borrowings, secured by anticipated
tax revenues, to obtain operating funds until the tax receipts are avail-
Sec. 808. Representation of Creditors
able. By permitting the court to authorize the issuance of debt certifi-
Section 808 (a) dealing with the details of representing creditors in
cates on special terms, including priority over existing creditors, this
the proceeding, is derived from Section 83 (a) of the Bankruptcy Act,
necessary means of providing short term funding for essential govern-
11 U.S.C. (a). Section 860 (b) contemplates that a labor organiza-
mental services can be preserved. To enhance the marketability of
tion may be heard on the economic soundness of the plan. No right of
these debt certificates, the court is given exclusive jurisdiction over
contest vote or appeal is granted by this subsection.
disputes involving their enforcement.
Sec. 809. List of Claims and Persons Adversely Affected
Section 812. Priorities
Section 809 describes the contents of the list of claims which must
This section is derived from § 64a of the present Act, which is
be filed under Subsection 804 (a). If some creditors cannot be identi-
applicable to bankruptcy and Chapter XI cases. Section 812 estab-
fied the reasons why identification is not practical will have to be given
lishes priorities for the payment of certain claims. In practice the
21
20
first priority is observed already. Third priority claims currently are
reasonable limitation. Security holders are too widely dispersed and
entitled to a first priority in municipal debt adjustment proceedings
may not choose to vote even when they know of the proceedings. Spe-
by virtue of 31 U.S.C. 191, subject to the practice of paying admin- most
cial attention should be paid the provision in 814(a) that provides
istration expenses first. The second priority is included to cover
that approval of 51% of the voting numbers of each class is necessary
prepetition debt claims of those rending personal services or furnish- able to
for approval. This is intended to balance the power of the large credi-
ing necessary supplies to the petitioner, often those least
tors who could otherwise control the proceeding. The "cram down"
called for by the proviso to Subsection (a) is comparable to Subsection
afford the loss or writedown of their claims.
It should be noted that the second priority is limited to two months.
8-302 (b) of H. Doc. 93-137, Part II. The valuation of claims for pur-
The Committee feels hat two months is sufficient to serve the public
pose of "cram down" would require a considered estimate based on a
policy that provides that there is a public interest in maintaining un-
proper factual foundation of the estimated revenues of the munici-
interrupted the business of a corporation which is public or semi-
pality. Kelley V. Everglades Drainage District, 319 U.S. 415. Consider-
public in character, and also on considerations of equity and good
ation would also have to be given to nonincome producing assets of the
conscience, in that secured creditors must be deemed to have agreed
municipality which could appropriately be made to yield income or
to a prior payment of those current expenses which maintain and the
which, if currently not used, could be sold.
business and which are inherently essential to the protection
Section 815. Modification of Plan
preservation of the security.
Section 815, governing modification of the plan, is taken from exist-
Section 813. Provisions of Plan and Filing
ing law. See the fourth paragraph of Subsection 83 (e) of the Bank-
Section 813 includes standard language concerning the provisions of
ruptcy Act, 11 U.S.C. (e).
a plan for debt adjustment. See the third paragraph of Section 83 (a)
Section 816. Standing to Object to Plan
of the Bankruptcy Act, 11 U.S.C. (a).
This section, based up §§ 8-203 and 8-307 (b) of S. 236 and §§ 9-203
Subdivision (a) also follows closely the language of § 8-302 of
and 9-307 (b) of S. 235 eliminates the provision in the second para-
S. 236 and § 9-302 (a) of S. 235. It goes further, however, by permit-
graph of § (b) of the present Act which permits a creditor to answer
ting the rejection of any executory contract as part of the petitioner's
a petition filed under Chapter IX, but not to object to confirmation.
plan. Such a provision is permissible in a Chapter x reorganization
In contrast, this section permits a creditor to object to confirmation,
plan 216(4) of the Bankruptcy Act) and in Chapter XI plan
thereby giving a creditor affected by the plan a more meaningful
357 (2) of the Bankruptcy Act).
remedy. Because a proposed plan need not be filed with the petition
Subdivision 813 (b) gives the court the discretion to provide for
commencing a Chapter IX case, as provided in Sec. 813 (b) the credi-
the time of filing of the plan based on the situation of the petitioner.
tor's right to object to confirmation, rather than to the petition, is more
Section 814. Voting on Acceptance of Plan
significant under this section. Provision is made to provide that a per-
Subsection 814(a) requires the affirmative vote of two-thirds in
son materially and adversely affected by the plan need not be a credi-
amount of each class of claims for confirmation of a plan, unless a
tor to object to the plan. See also proposed Chapter IX Rule 9-27
particular class is provided for as set forth in the proviso to the Sub-
(a) (1).
section. Compare Section 83 (d) of the Bankruptcy Act, 11 U.S.C.
Section 817. Hearing on confirmation
403 (d). Subsection (c), governing the division of creditors into classes
The language of Subsections 817 (a) and (b) are derived in part
is taken from Sec. 751 Title 11 U.S.C. Under Subsection (b) claims
from Section 8-307 of S. 236. Subsection (c) is adapted from language
listed pursuant to Subsections and 809 (a) or for which proofs
in the first paragraph of Subsection (e) of the Bankruptcy Act,
of claim have been filed pursuant to Section 810 may be voted except
11 U.S.C. setting forth the finding and conclusions which the court
to the extent claims have been disallowed. Claims owned, held or con-
must make before approving the plan, is adapted from the second
trolled by the petitioner, are disqualified from voting, as in existing
paragraph of Subsection 83(e) of the present Act with the addition
law. Also, Subsection (a) limits voting to creditors whose claims are
materially and adversely affected by the proposed plan. Subsection (d)
of protective language in Item (7) to assure that petitioner is making
assures fairness in resolving disputes over whether particular claims
the adjustments necessary to achieve fiscal responsibility. If this is
not done, the petition is to be dismissed.
are in fact materially and adversely affected.
The two-thirds vote requirement of existing law is not reduced in
No restrictions upon the refiling of a new petition following dis-
missal are made. The Committee believes this to be more desirable
Subsecton (a), in order to avoid making municpal bankruptcy too
easy. This could have a drastic effect on the marketability of municipal
than allowing the Court to set a time for the petitioner to propose a
bonds and the cost of borrowing money by municipalities. However,
new plan if confirmation is denied. The dismissal provision insures
under the present bill the two-thirds requirement is computed not on
that the plan proposed by the petitioner will be the best possible
the basis of two-thirds of all eligible to vote, but on the basis of two-
plan in the first instance.
thirds of those eligible who have in fact voted. It would be impossible
Section 818. ffect of confirmation
for most municipalities to obtain the required majority without this
Subsection 818 (a) contains a necessary provision for the binding
effect of an approved plan. Subsection (b) provides for the extinguish-
22
23
ment of claims affected by the approved plan other than those ex-
TITLE 11, UNITED STATES CODE
cepted from discharge by the plan itself. The language of Section 818
*
is substantially the same as that recommended by the Commission on
Bankruptcy Laws. See Section 8-308 of H. Doc. 93-137, Part II.
CHAPTER 16-ADJUSTMENT OF INDEBTEDNESS OF MUNICIPALITIES
Section 819. Duty of petitioner and distribution under the plan
Section 819, governing the duties of the petitioner under the plan
"Chapter XVI-Adjustment of Indebtednesses of Major Municipalities
and distributions which are to be made thereunder, is derived in sub-
"Sec.
stantial part from Section 8-309 of the legislative proposal of the
"801. Jurisdiction, powers of the court, and reservation of powers.
Commission on the Bankruptcy Laws.
"802. Definitions.
"803. Eligibility for relief.
Section 820. Dismissal
"804. Petition and filing.
"805. Stay of proceedings.
Section 820 sets forth the grounds on which a petition can be dis-
"806. Contest and dismissal of petition.
missed. See Proposed Rules of Chapter IX-Bankruptcy, 9-28 (a).
"807. Notices.
"808. Representation of creditors.
Section 821. Retention of jurisdiction
"809. List of claims and persons adversely affected.
Section 821 permits the court to retain jurisdiction to insure proper
"810. Proofs of claim.
"811. Certificates of indebtedness.
execution of the plan. However, the court may terminate jurisdiction
"812. Priorities.
at an earlier date if it is satisfied that the plan will be satisfactorily
"813. Provisions of plan and filing.
completed.
"814. Voting on acceptance of plan.
"815. Modification of plan.
Section 822. Reference of issues and compensation
"816. Standing to object to plan.
Section 822, permitting the reference of fact issues to a special
"817. Hearing on confirmation of plan.
"818. Effect of confirmation.
master and governing the allowance of reasonable compensation, is
"819. Duty of petitioner and distribution under plan.
derived in substantial part from existing law. See the third and fourth
"820. Dismissal.
paragraphs of Section 83 (b) of the Bankruptcy Act, 11 U.S.C. 403 (b).
"821. Retention of jurisdiction.
"822. Reference of issues and compensation.
Section 823. Conversion to Chapter XVI
"823. Conversion to chapter XVI.
Section 823 is provided in the eventuality that a municipality may
already have commenced reorganization proceedings. The provisions
"JURISDICTION, POWERS OF THE COURT, AND RESERVATION OF POWERS
for transfers are similar to those regulating transfer from Chapter XI
to Chapter X.
"SEC. 801. (a) This Act and proceedings thereunder are found and
declared to be within the subject of bankruptcies and, in addition to
Section 2. Table of organization
the jurisdiction otherwise exercised, courts of bankruptcy shall exercise
This section provides for the appropriate amendment of the table
original jurisdiction as provided in this chapter for the composition
of organization of Title 11.
or extension of the debts of certain public agencies of instrumentalities
Section 3. Separability
or political subdivisions. The court in which the petition is filed in ac-
cordance with subection 804 shall exercise exclusive jurisdiction for
Section 825 provides for separability in the event any portion of
the adjustment of petitioner's debts and, for purposes of this chapter,
this chapter or its application is held invalid. Compare the proviso to
shall have exclusive jurisdiction of petitioner and its property, wher-
Section 81 in existing law, 11 U.S.C. 401.
ever located.
Section 4. Effective date
(b) Upon the filing of a petition the court may, in addition to the
The Committee felt that the Act should have immediate effect on
jurisdiction, powers, and duties hereinabove and elsewhere in this
enactment because of the nature of this legislation.
chapter conferred and imposed upon it (1) permit the rejection of
executory contracts of the petitioner, upon notice to the parties to such
CHANGES IN EXISTING LAW
contracts and to such other parties in interest as the court may desig-
nate; (2) exercise such other powers not inconsistent with the provi-
In compliance with subsection 4 of rule XXIX of the Standing
sions of this chapter.
Rules of the Senate, changes in existing law made by the bill as
(c) Upon the filing of a petition the chief judge of the court in the
reported are shown as follows (existing law is shown in roman, mat-
district in which the petition is filed shall immediately notify the chief
ter repealed enclosed in black brackets, and new matter is printed in
judge of the circuit court of appeals of the circuit in which the district
italic):
court is located, who shall designate the judge of the district court to
conduct the proceedings under this chapter.
24
25
(d) Nothing contained in this chapter shall be construed to limit
otherwise liable, is eligible for relief as a separate petitioner and a
or impair the power of any State to control by legislation or otherwise,
petition seeking relief shall be jointly administered in the same pro-
any public agency or instrumentality or political subdivision of the
ceeding in which such municipality seeks relief under this chapter if
State in the exercise of its political or governmental powers, including
such agency, instrumentality, or subdivision is not prohibited from
expenditure therefor: Provided, however, That no State law prescrib-
filing a petition by applicable State law.
ing a method of composition of indebtedness of such agencies shall be
"PETITION AND FILING
binding upon any creditor who does not consent to such composition,
and no judgment shall be entered under such State law which would
"SEC. 804 (a) Any entity eligible for relief under section 803 may
bind a creditor to such composition without his consent,
file a voluntary petition under this chapter. The petition shall state
(e) Subsections 60 (a), (b), (c), section 67 and subsections 70 (c)
that the petitioner is eligible to file a petition, that the petitioner is
(e) of this Act shall apply in proceedings under this chapter, except
insolvent or unable to pay its debts as they mature, and that it desires
that all functions of the trustees thereunder shall be assumed by the
to effect a plan for the composition or extension of its debts. The peti-
petitioner.
tioner shall file with its petition, or within such time as the court may
"DEFINITIONS
prescribe, lists of its creditors and of other persons who may be ad-
versely affected by a proposed plan and if an identification of all the
"Sec. 802. The words and phrases used in this chapter have the fol-
petitioner's creditors is impracticable, the petitioner shall state the
lowing meanings unless they are inconsistent with the context:
reason therefor.
(1) The term 'attorney' means an attorney licensed to practice law
(b) The petition shall be filed with any court in whose territorial
by any State and includes a law partnership or corporation.
jurisdiction the municipality or any part thereof is located, and shall
(2) 'Claims' shall include bonds, notes, judgments, and demands,
be accompanied by payment to the clerk of a filing fee of $100, which
liquidated or unliquidated, and other evidence of indebtedness, either
shall be in lieu of the fee required to be collected by the clerk under
secured or unsecured, and certificates of benficial interest in property.
other applicable chapters of this title, as amended.
" (3) The term 'court' means United States district court sitting in
bankruptcy, and the terms 'clerk' and 'judge' shall mean the clerk and
"STAY OF PROCEEDINGS
judge of such court.
(4) The term 'creditor' means any person who owns a claim against
"SEC. 805. (a) A petition filed under section 804 shall operate as a
the petitioner and any person injured by the rejection of an executory
stay of the commencement or the continuation of any court or other
contract or an unexpired lease pursuant to this chapter or pursuant to
proceeding against the petitioner, its property or any officer or inhabi-
a plan under this chapter, and may include such person's authorized
tant of the petitioner, or which seeks to enforce any claim against the
agent.
petitioner; as a stay of any act or the commencement or continuation of
(5) The term 'lien' means a security interest in property, a lien
any court proceeding to enforce any lien on taxes or assessments, or to
obtained on property by levy, sequestration or other legal or equitable
reach any property of the petitioner; and as a stay of the application
process, a statutory or common-law lien on property, or any other
of any setoff or enforcement of any counterclaim relating to any con-
variety of charge against property to secure performance of an
tract. debt, or obligation of the petitioner.
obligation.
(b) (1) A petition filed by a petitioner eligible for relief under this
(6) The term 'plan' means a plan proposed in a case under this
chapter shall operate to stay recognition or enforcement of the setoff
chapter.
of any claim owing by the petitioner effected or attempted to be effected
(7) The term 'person' includes a corporation or a partnership, the
within three months prior to the date of the petition or thereafter
United States, the several States, and public agencies, instrumentali-
against any obligation owing to the petitioner until the stay is termi-
ties, and political subdivisions thereof.
nated by the court or the case is dismissed. Such stay shall not affect
the right of the creditor to withhold payments to or on the order of
"ELIGIBILITY FOR RELIEF
the petitioner, except when otherwise ordered pursuant to subdivi-
sion (2).
"Sec. 803. (a) Any municipality public agency, instrumentality or
(2) After hearing on notice to the person asserting the right of
political subdivision of the State is eligible for relief under this chap-
setoff, the court may order such persons to pay to the petitioner or
ter, if the municipality is first specifically authorized to file a petition
to its order the amount of the obligation sought to be offset if the stay
initiating a proceeding under this chapter by the chief executive, leg-
is not terminated pursuant to subdivision (d). However, the court
islature, or such other governmental officer or organization empowered
may require as a condition of the order that the petitioner furnish
under State law to authorize the filing of such a petition.
(b) Any public agency or instrumentality or political subdivision
such protection as will adequately protect the person who is asserting
the right of setoff.
subordinate to such municipality or whose responsibilities are restricted
(c) Except as it may be terminated, annulled, modified, or condi-
to the geographical limits thereof, including incorporated authorities,
commissions and districts, for whose debts such municipality is not
tioned by the court under the terms of this section, the stay provided
26
27
for herein shall continue until the case is closed or dismissed or the
the plan, and of their right to request a copy of the plan, or modifica-
property subject to the lien is, with the approval of the court, aban-
tion. The notice required by the first sentence of this subsection shall
doned or transferred.
be published at least once a week for three successive weeks in at least
(d) On the filing of a complaint seeking relief from a stay provided
one newspaper of general circulation published within the jurisdic-
in this section, the court shall set a hearing for the earliest possible
tion of the court, and in such. other papers having a general circula-
date. The court may, for cause shown, terminate, annul, modify, or
tion among bond dealers and bondholders as may be designated by the
condition such stay.
court. The court may require that it be published in such other publi-
'(e) The commencement or continuation of any act or proceeding
cation as the court may deem proper.
other than described in subsection (a) of this section may be stayed,
(b) The petitioner or such other person as the court shall designate
restrained, or enjoined pursuant to rule 65 of the Federal Rules of
shall also give notice to all creditors of the time permitted for accept-
Civil Procedure, except that a temporary restraining order or pre-
ing or rejecting a plan or any modification thereof. Such time shall be
liminary injunction may be issued without compliance with subdivision
ninety days from the filing of the plan or modification unless the
(c) of that rule.
court for good cause shall set some other time.
(f) A provision in a contract or lease, or in any law applicable to
(c) The petitioner or such other person as the court shall designate
such a contract or lease, which terminates or modifies, or permits a
shall also give notice to all creditors (1) of the time permitted for filing
party other than the petitioner to terminate or modify the contract
a complaint objecting to confirmation of a plan, (2) of the date set
or lease because of the insolvency of the petitioner or the commence-
for hearing objections to such complaint, (3) of the date of hearing
ment of a case under this Act is not enforceable if any defaults in prior
of a complaint seeking dismissal of the petition, and (4) of the date
performance of the petitioner are cured and adequate assurance of
of the hearing on confirmation fthe plan.
future performance is provided.
(d) All notices given by the petitioner or such other person as the
"(g) No stay, order, or decree of the court may interfere with (1)
court shall designate shall be given in the manner directed by the
any of the political or governmental powers of the petitioner; or (2)
court; however, the court may issue an order at any time subsequent
any of the property or revenues of the petitioner necessary for essen-
to the first notice to creditors directing that those persons desiring
tial governmental purposes; or (3) the petitioner's use or enjoyment
written notice file a request with the court. If the court enters such
of any income-producing property: Provided, however, That the court
an order persons not 80 requesting will receive no further written notice
shall enforce the conditions attached to certificates of indebtèdness
of proceedings under the chapter.
issued under section 811 and the provisions of the plan.
(e) Cost of notice shall be borne by the petitioner, unless the court
for good cause determines that the cost of notice in a particular in-
"CONTEST AND DISMISSAL OF PETITION
stance should be borne by another party.
"Sec. 806. (a) Any creditor may file α complaint in the bankruptcy
"REPRESENTATION OF CREDITORS
court contesting the petition for relief under this chapter. The com-
plaint may be filed within thirty days following the filing of the
"Sec. 808. (a) For all purposes of this chapter any party in interest
petition.
may act in person or by an attorney or a duly authorized agent or
"(b) The court may, upon notice to the creditors and a hearing fol-
committee. Where any committee, organization, group, or individual
lowing the filing of such a complaint. dismiss the proceeding if it finds
shall assume to act for or on behalf of creditors, such committee,
that the petition was not filed in good faith or that it does not meet the
organization, group, or individual shall first file with the court in
provisions of this chapter.
which the proceeding is pending a list of the creditors represented,
"(c) A finding of jurisdiction shall be considered an interlocutory
giving the name and address of each and describing the amount and
order for purposes of appeal. No appeal pursuant to section 1922 of
character of the claim of each; copies of the instrument or instruments
title 28, United States Code, shall be allowed.
in writing signed by such creditors conferring the authority for repre-
sentation; and a copy of the contract or contracts of agreement entered
"NOTICES
into between such committee, organization, group, or individual and
the represented creditors, which contract or contracts shall disclose all
"SEC. 807. (a) The petitioner or such other person as the court shall
compensation to be received, directly or indirectly for such representa-
designate shall give prompt notice of the commencement of a proceed-
tion, which agreed compensation shall be subject to modification and
ing or dismissal of the petition under this chapter to the State in
approval by the court.
which the petitioner is located and to the Securities and Exchange
(b) The judge shall, for cause shown, permit a labor organization
Commission and to creditors. As creditors and other persons who may
or employee association representative of employees of the debtor
be materially and adversely affected by the plan are identified, the pe-
municipality, public agency, instrumentality, or political subdivision
titioner or such other person as the court shall designate shall give
to be heard on the economic soundness of the plan affecting the interests
such persons notice of the commencement of the proceeding, a sum-
of the represented employees.
mary of the provisions of the plan and any proposed modification of
28
29
"LIST OF CLAIMS AND PERSONS ADVERSELY AFFECTED
"CERTIFICATES OF INDEBTEDNESS
"SEC. 809. (a) The list of claims filed as required in Sec.
shall include, to the extent practicable, the name of each known
"Sec. 811. At any time after a petition has been filed, the court may
creditor to be materially. and adversely affected by the plan, his ad-
upon cause shown, authorize the petitioner to issue certificates of in-
dress so far as known to the petitioner, and a description of each claim
debtedness for cash, property or other consideration, under such terms
showing its amount and character, the nature of any security therefor
and conditions and with such security and priority in payment over
and if the claim is disputed, contingent or unliquidated as to amount.
existing obligations, secured or unsecured and other expenses of ad-
With respect to creditors not identified, the petition shall set forth
ministration as the court may approve. Notwithstanding any other
the reasons identification is not practicable, and shall specify the char-
provision of law including section 821 of this chapter, the court shall
acter of claim involved. The list shall be supplemented as petitioner
have exclusive jurisdiction of any action which may be brought against
becomes able to identify additional creditors.
petitioner to enforce compliance with the terms of any such certificates
(b) If the proposed plan requires revision of assessments 80 that
of indebtedness.
"PRIORITIES
the proportion of special assessments or special taxes to be assessed
against some real property will be different from the proportion in
"Sec. 812. The following shall be paid in full in advance of the pay-
effect at the date the petition is filed, the holders of record of title,
ment of any distribution to creditors under a plan, in the following
legal or equitable, to such real property shall be deemed persons
order:
adversely affected and shall be similarly listed.
"(1) The cost and expenses of administration which are incurred by
(c) The court may for cause modify the requirements of sub-
the petitioner subsequent to the filing of a petition under this chapter.
sections (a) and (b) of this section.
(2) Debts owed for services and materials directly provided within
two months before the date of the filing of the petition under this
"PROOF OF CLAIM
chapter.
"SEC. 810. (a) In the absence of an objection made by any party in
(3) Debts owing to any person or entity, which by the laros of the
interest, the claim of a creditor that is not disputed, contingent, or
United States (other than this Act) are entitled to priority.
unliquidated, is established by the list of claims filed pursuant to sec-
"PROVISIONS OF PLAN AND FILING
tion 809. The court may set a date by which proofs of claim of un-
listed credtiors and of creditors whose listed claims are disputed,
"SEC. 813. (a) A petitioner's plan under this chapter may include
contingent, or unliquidated, must be filed. If the court does not set
provisions modifying or altering the rights of creditors generally, or
such a date, the proofs must be filed before the entry of the order of
of any class of them, secured or unsecured, either through issuance of
confirmation. The petitioner or such other person as the court shall
new securities of any character, or otherwise, and may contain such
designate shall give notice to each person whose claim is listed as
other provisions and agreements not inconsistent with this chapter as
disputed, contingent, or unliquidated, in the manner directed by the
the parties may desire, including, but not limited to provisions for the
court.
rejection of any executory contract and unexpired leases.
"(b) If an executory contract or an unexpired lease is rejected
(b) The petitioner may file a plan with its petition or at such
under a plan or under section 801 (b), any person injured by such
later time as may be prescribed by the court.
rejection may assert a claim against the petitioner. The rejection of
an executory contract or unexpired lease constitutes a breach of the
"VOTING ON ACCEPTANCE OF PLAN
contract or lease as of the date of the commencement of the case under
"SEC. 814. (a) A plan may be confirmed only if, of the creditors vot-
this chapter. The claim of a landlord for injury resulting from the
ing in writing to accept or reject the plan, those holding two-thirds in
rejection of an unexpired lease of real estate or for damages or in-
amount and 51 per centrum in numbers of each class materially and
demnity under a covenant contained in such lease shall be allowed,
adversely affected have voted to accept: Provided, however, That no
but shall be limited to an amount not to exceed the rent, without ac-
such acceptance shall be required from any class which, under the plan,
celeration, reserved by such lease for the next year succeeding the
is to be paid in cash the value of its claims or is to be afforded such
date of the surrender of the premises to the landlord or the date of
method of protection as will, consistent with the circumstances of the
reentry of the landlord, whichever first occurs, whether before or
particular case. equitably and fairly provide for the realization of the
after the filing of the petition, plus unpaid accrued rent, without
value of its claims.
acceleration, up to the date of such surrender or reentry. The court
"(b) Unless his claim has been disallowed. any creditor who is in-
shall scrutinize the circumstances of an assignment of a future rent
cluded on the list filed pursuant to Section 809 or who files a proof of
claim and the amount of the consideration paid for such assignment in
claim pursuant to section 810 is entitled to vote to accept or reject a
determining the amount of damages allowed the assignee of that
plan or modification thereof within the time set pursuant to subsection
claim.
807 (b). Claims owned, held or controlled by the petitioner are not
eligible to vote.
30
31
'(c) For the purposes of the plan and its acceptance, the court may
creditor or class of creditors; (2) it complies with the provisions of
fix the division of creditors into classes and, in the event of contro-
this chapter; (3) it has been accepted by creditors and provision has
versy, the court shall after hearing upon notice summarily determine
been made for non-accepting creditors as required in section 814; (4)
such controversy.
all amounts to be paid by the petitioner for services or expenses inci-
"(d) If any controversy shall arise as to whether any creditor or
dent to the composition have been fully disclosed and are reasonable;
class of creditors shall or shall not be materially and adversely af-
(5) the offer of the plan and its acceptance are in good faith; (6)
fected, the issue shall be determined by the judge, after hearing, upon
the petitioner is authorized by law to take all action necessary to be
notice to the parties interested.
taken by it to carry out the plan; and (7) it appears from petitioner's
current and projected revenues and expenditures that the budget of
"MODIFICATION OF PLAN
the petitioner will be in balance within a reasonable time after adop-
tion of the plan. If not 80 satisfied, the judge shall enter an order
"Sec. 815. Before a plan is confirmed, changes and modifications
dismissing the proceeding.
may be made therein after hearing and upon such notice to creditors
as the judge may direct, subject to the right of any creditor who has
"EFFECT OF CONFIRMATION
previously accepted the plan to withdraw his acceptance in writing,
within a period to be fixed by the judge, if, in the opinion of the judge,
"SEC. 818. (a) The provisions of a confirmed plan shall be biding
the change or modification will materially and adversely affect such
on the petitioner and on all creditors, whether or not they are affected
creditor; and if any creditor having such right of withdrawal shall not
by it, whether or not their claims have been listed, filed, or allowed,
withdraw within such period, he shall be deemed to have accepted the
and whether or not they have accepted the plan.
plan as changed or modified: Provided, however, That the plan as
(b): The confirmation of a plan shall extinguish all claims against
changed or modified shall comply with all the provisions of this chap-
the petitioner provided for by the plan other than those excepted from
ter and shall have been accepted in writing by the petitioner.
discharge by the plan or order confirming the plan.
"STANDING TO OBJECT THE PLAN
"DUTY OF PETITIONER AND DISTRIBUTION UNDER PLAN
"Sec. 816. Any creditor or other person materially and adversely
"SEC. 819. (a) The petitioner shall comply with the provisions of
affected by the plan may file a complaint with the court objecting to
the plan and the orders of the court relative thereto and shall take all
the confirmation of the plan. Such complaint may be filed any time up
actions necessary to carry out the plan.
to ten days before the hearing on the confirmation of the plan or within
(b) Subject to the provisions of subsection (c), distribution shall
such other time as prescribed by the court. The complaint shall be
be made in accordance with the provisions of the plan to creditors (1)
served on the petitioner and such other person as may be designated by
whose proofs of claim have been filed and allowed or (2) whose claims
the court.
have been listed and are not disputed. Distribution to creditors hold-
"HEARING ON CONFIRMATION OF PLAN
ing securities of record shall be made to the recordholders as of the
"Sec 817. (a) Within a reasonable time after the expiration of the
date the order confirming the plan becomes final.
time within which a plan and any modifications thereof may be ac-
'(c) When a plan requires presentment or surrender of securities
cepted or rejected, the court shall set α hearing on the confirmation of
or the performance of any other act as a condition to participation
the plan and modifications, and the petitioner and such other persons
under the plan, such action must be taken not later than five years
as may be designated by the court shall give notice of the hearing and
after the entry of the order of confirmation. Persons who have not
time allowed for filing objections as provided in section 807 (c).
within such time presented or surrendered their securities or taken
(3) Before concluding the hearing on confirmation of the plan the
such other action shall not participate in the distribution under the
judge shall inquire whether any person promoting the plan or doing
plan. Any securities, moneys, or other property remaining unclaimed
anything of such a nature, has been or is to be compensated, directly
at the expiration of the time allowed for presentment or surrender of
or indirectly, by both the petitioner and any creditor, and shall take
securities or the performance of any other act as a condition to partici-
evidence under oath to ascertain whether any practice obtains. After
pation in the distribution under a confirmed plan shall become the
such examination the judge shall make an adjudication of this issue,
property of the petitioner.
and if he finds that any such practice obtains, he shall forthwith dis-
(d) A certified copy of any order or decree entered by the court in
miss the proceeding and tax all of the costs against such person, or
a case under this chapter shall be evidence of the jurisdiction of the
against the petitioner. unless such plan be modified within the time to
court, the regularity of the proceedings, and the fact that the order was
be allowed by the judge 80 as to eliminate the possibility of any such
made. A certified copy of an order providing for the transfer of any
practice.
*
property dealt with by the plan shall be evidence of the transfer of
"(c) The court shall confirm the plan if satisfied that (1) it is fair,
title accordingly, and, if recorded as conveyances are recorded, shall
equitable, feasible, and not unfairly discriminatory in favor of any
impart the same notice that a deed, if recorded, would impart.
(e) The court may direct the petitioner and other necessary parties
to execute and deliver or to join in the execution and delivery of any in-
33
32
file an application to have the case proceed under chapter XVI; Pro-
struments required to affect a transfer of property pursuant to the con-
vided, however, that any petition filed by a municipality, public
firmed plan and to perform such other acts, including the satisfaction
agency, instrumentality or political subdivision of the State after the
of liens, as the court may determine to be necessary for the consumma-
effective date of this Act must be filed under Chapter XVI of the Bank-
tion of the plan.
ruptoy Act is added by this Act.
"DISMISSAL
(b) After hearing on notice to the petitioner, the Securities and
Exchange Commission, creditors and such other persons as the court
"SEC. 820. The court shall enter an order dismissing the case after
may direct, the court shall, if it finds that the case may properly pro-
hearing on notice: (1) for want of prosecution; (2) if no plan is pro-
ceed under chapter XVI of the Act, approve the application and order
posed within the time fixed or extended by the court; (3) if no pro-
the case to proceed under that chapter.".
posed plan is accepted within the time fixed or extended by the court;
SEC. 2. The table of organization of title 11, United States Code, is
or (4) if a confirmed plan is not consummated.
amended by inserting after the reference to chapter 15, the following
"Chapter 16. Adjustment of Municipalities."
"RETENTION OF JURISDICTION
SEPARABILITY
"SEC. 821. The court may retain jurisdiction of a proceeding under
this chapter for such period as it determines is necessary to assure exe-
SEC. 3. If any provision of chapter XVI of the Bankruptcy Act as
cution of the plan and discharge of the securities issued under the plan.
added by this Act, or the application thereof to any agency, instru-
mentality, or subdivision is held invalid, the remainder of the chapter,
"REFERENCE OF ISSUES AND COMPENSATION
or the application of such provision to any other agency or instru-
mentality or political subdivision shall not be affected by such holding.
"SEC 822. (a) The judge may refer any special issues of fact to a
referee in bankruptcy, or special master for consideration, the taking
RECOMMENDATION
of testimony, and a report upon such special issues of fact, if the judge
finds that the condition of his docket is such that he cannot take such
The Committee believes that S. 2597, as amended, is meritorious and
testimony without unduly delaying the dispatch of other business
recommends it do pass.
pending in his court, and if it appears that such special issues are
O
necessary to the determination of the case. Only under special circum-
stances shall. reference be made to a special master who is not a referee
in bankruptcy: A general reference of the case to a master shall not be
made, but the reference, if any, shall be only in the form of requests
for findings of specific facts.
(b) The court may allow reasonable compensation for the services
performed by any such special master who is not a salaried Federal
employee, and the actual and necessary. expenses incurred in connec-
tion with the proceeding, including compensation for services rendered
and expenses incurred in obtaining the deposit of securities and the
preparation of the plan, whether such work may have been done by
the petitioner or by committees or other representatives of creditors,
and may allow reasonable compensation for the attorneys or agents of
any of the foregoing Provided, however, That no fees, compensation,
reimbursement, or other allowances for attorneys, agents. committees,
or other representatives of creditors shall be assessed against the peti-
tioner or paid from any revenues, property, or funds of the petitioner
except in the manner and in such sums, if any, as may be provided for
in the plan of adjustment. An appeal may be taken from any order
making such determination or award to the United States court of
appeals for the circuit in which the proceeding under this chapter is
pending, independently of other appeals which may be taken in the
proceeding, and such appeal shall be heard summarily.
"CONVERSION TO CHAPTER XVI
"Sec. 823 (a) A petitioner eligible for relief under chapter XVI
who has filed a petition under chapter IX of this Act may at any time
GREAT
H. R. 10624
Rinety-fourth Congress of the United States of America
AT THE SECOND SESSION
Begun and held at the City of Washington on Monday, the nineteenth day of January,
one thousand nine hundred and seventy-six
An Art
To amend chapter IX of the Bankruptcy Act to provide by voluntary reorganiza-
tion procedures for the adjustment of the debts of municipalities.
Whereas the Congress finds and declares this Act and proceedings
thereunder providing for the composition of indebtedness of, or
authorized by, municipalities to be within the subject of bank-
ruptcies under article I, section 8, clause 4 of the United States
Constitution; and
Whereas the Congress finds that the impracticability of existing Fed-
eral bankruptcy remedies for use by municipalities increases the
likelihood of their default and will aggravate the adverse effects
thereof; and
Whereas the Congress finds that the financial disruptions and disloca-
tions resulting from default of such municipalities without availa-
bility of a Federal procedure to restructure their indebtedness in
such fashion as to avoid continuing insolvency would have a
substantial adverse effect on interstate commerce within the meaning
of article I, section 8, clause 3 of the United States Constitution, by
reason of the commercial importance of the municipalities involved.
Be it enacted by the Senate and House of Representatives of the
United States of America in Congress assembled, That chapter IX
of the Bankruptcy Act is amended to read as follows:
"CHAPTER IX
"ADJUSTMENT OF DEBTS OF POLITICAL SUBDIVISIONS AND PUBLIC AGENCIES
AND INSTRUMENTALITIES
"SEC. 81. CHAPTER IX DEFINITIONS.-As used in this chapter the
term-
"(1) 'claim' includes all claims of whatever character against
the petitioner or the property of the petitioner, whether or not
such claims are provable under section 63 of this Act and whether
secured or unsecured, liquidated or unliquidated as to amount,
fixed or contingent;
"(2) 'court' means court of bankruptcy in which the case is
pending, or a judge of such court;
"(3) 'creditor' means holder (including the United States, a
State, or political subdivision or public agency or instrumentality
of a State) of a claim against the petitioner;
"(4) 'claim affected by the plan' means claim as to which the
rights of its holder are proposed to be materially and adversely
adjusted or modified by the plan;
(5) 'debt' means claim allowable under section 88(a) ;
"(6) 'lien' means security interest in property, lien obtained
on property by levy, sequestration, or other legal or equitable
process, statutory or common law lien on property, or any other
variety of charge against property to secure the performance of
an obligation;
H. R. 10624-2
"(7) 'person' includes a corporation or a partnership, the
United States, the several States, and political subdivisions and
public agencies and instrumentalities of the several States;
"(8) 'petitioner' means agency, instrumentality, or subdivision
which has filed a petition under this chapter;
" (9) 'plan' means plan filed under section 90;
(10) 'special tax payer' means record owner or holder of title,
legal or equitable, to real estate against which has been levied
a special assessment or special tax the proceeds of which are the
sole source of payment of obligations issued by the petitioner
to defray the costs of local improvements; and
(11) 'special tax payer affected by the plan' means special
tax payer with respect to whose real estate the plan proposes to
increase the proportion of special assessments or special taxes
referred to in paragraph (10) of this section assessed against that
real estate.
"SEC. 82. JURISDICTION AND POWERS OF COURT.-
"(a) JURISDICTION.-The court in which a petition is filed under
this chapter shall exercise exclusive original jurisdiction for the
adjustment of the petitioner's debts, and for the purposes of this chap-
ter, shall have exclusive jurisdiction of the petitioner and its property,
wherever located.
"(b) Powers.-After the filing of a petition under this chapter the
court may-
"(1) permit the petitioner to reject executory contracts and
unexpired leases of the petitioner, after hearing on notice to the
parties to such contracts leases and to such other parties in inter-
est as the court may designate;
"(2) during the pendency of a case under this chapter, or after
the confirmation of the plan if the court has retained jurisdiction
under section 96 (e), after hearing on such notice as the court may
prescribe and for cause shown, permit the issuance of certificates
of indebtedness for such consideration as is approved by the court,
upon such terms and conditions, and with such security and prior-
ity in payment over existing obligations, secured or unsecured,
and over costs and expenses of administration, not including oper-
ating expenses of the petitioner, as in the particular case may be
equitable; and
(3) exercise such other powers as are not inconsistent with
the provisions of this chapter.
"(c) LIMITATION.-Unless the petitioner consents or the plan SO
provides, the court shall not, by any stay, order or decree, in the case
or otherwise, interfere with-
"(1) any of the political or governmental powers of the
petitioner;
"(2) any of the property or revenues of the petitioner; or
'(3) the petitioner's use or enjoyment of any income-producing
property.
'(d) DESIGNATION OF JUDGE.-After the filing of a petition, the chief
judge of the court in the district in which the petition is filed shall
immediately notify the chief judge of the circuit court of appeals of
the circuit in which the district court is located, who shall designate
the judge of the district court to conduct the proceedings under this
chapter.
"SEC. 83. RESERVATION OF STATE POWER To CONTROL GOVERNMENTAL
FUNCTIONS OF POLITICAL SUBDIVISIONS.-Nothing contained in this
chapter shall be construed to limit or impair the power of any State
H. R. 10624-3
to control, by legislation or otherwise, any municipality or any politi-
cal subdivision of or in such State in the exercise of its political or
governmental powers, including expenditures therefor: Provided,
however, That no State law prescribing a method of composition of
indebtedness of such agencies shall be binding upon any creditor who
does not consent to such composition, and no judgment shall be entered
under such State law which would bind a creditor to such composition
without his consent.
"SEC. 84. ELIGIBILITY FOR RELIEF.-Any State's political subdivision
or public agency or instrumentality, which is generally authorized to
file a petition under this chapter by the legislature, or by a govern-
mental officer or organization empowered by State law to authorize the
filing of a petition, is eligible for relief under this chapter if it is
insolvent or unable to meet its debts as they mature, and desires to effect
a plan to adjust its debts. An entity is not eligible for relief under this
chapter unless-
'(1) it has successfully negotiated a plan of adjustment of its
debts with creditors holding at least a majority in amount of
the claims of each class which are claims affected by that plan;
" (2) it has negotiated in good faith with its creditors and has
failed to obtain, with respect to a plan of adjustment of its debts,
the agreement of creditors holding at least a majority in amount
of the claims of each class which are claims affected by that plan;
(3) such negotiation is impracticable; or
(4) it has a reasonable fear that a creditor may attempt to
obtain a preference.
"SEC. 85. PETITION AND PROCEEDINGS RELATING TO PETITION.-
(a) PETITION.-An entity eligible under section 84 may file a peti-
tion for relief under this chapter. In the case of an unincorporated
tax or special assessment district having no officials of its own, the
petition may be filed by its governing authority or the board or body
having authority to levy taxes or assessments to meet the obligations of
the district. Any party in interest may file an answer to the petition
with the court, not later than 15 days after the publication of notice
required by subsection (d) is completed, objecting to the filing of the
petition. Upon the filing of such an answer, the court may dismiss the
petition after hearing on notice if the petitioner did not file the petition
in good faith, or if the petition does not meet the requirements of this
chapter. The court shall not, on account of an appeal from a finding of
jurisdiction, delay any proceeding under this chapter in the case in
which the appeal is being taken; nor shall any court order a stay of
such proceeding pending such appeal. The reversal on appeal of a
finding of jurisdiction shall not affect the validity of any certificate
of indebtedness authorized by the court and issued in such case.
"(b) LIST.-The petitioner shall file with the court a list of the peti-
tioner's creditors, insofar as practicable. The list shall include for each
known creditor, to the extent practicable, the name of the creditor,
the address of the creditor SO far as known to the petitioner, and a
description of any claim of the creditor, showing the amount and char-
acter of the claim, the nature of any security for the claim, and
whether the claim is disputed, contingent or unliquidated as to amount.
If an identification of any of the petitioner's creditors is impracticable,
the petitioner shall state the reason such identification is impracticable
and the character of the claims of the creditors involved. The peti-
tioner shall supplement the list as creditors who were unknown or
unidentified at the time the list was filed become known or identified
to the petitioner. If the list is not filed with the petition, the petitioner
shall file the list at such later time as the court, upon its own motion or
upon application of the petitioner, sets.
H. R. 10624-4
'(c) VENUE AND FEES.-The petition and any accompanying papers,
together with a filing fee of $100, shall be filed with a court in a district
in which the petitioner is located.
"(d) NOTICE.-The petitioner or such other person as the court desig-
nates shall give notice of the filing or dismissal of the petition to the
State in which the petitioner is located, to the Securities and Exchange
Commission, and to creditors included in the list of creditors required
by subsection (b) or in any supplement to that list. The notice shall
also state that a creditor who files with the court a request, setting forth
that creditor's name and address and the nature and amount of that
creditor's claim, shall be given notice of any other matter in which
that creditor has a direct and substantial interest. The notice required
by the first sentence of this subsection shall be published at least once
a week for three successive weeks in at least one newspaper of general
circulation published within the jurisdiction of the court, and in such
other papers having a general circulation among bond dealers and
bondholders as may be designated by the court. The court may require
that it be published in such other publication as the court deems
proper. The court shall require that a copy of the notice required by
the first sentence of this subsection be mailed, postage prepaid, to each
creditor named in the list required by subsection (b) at the address of
such creditor given in the list, or, if no address is given in the list
for a creditor and the address of such creditor cannot with reason-
able diligence be ascertained, then a copy of the notice may, if the
court SO determines, be mailed, postage prepaid, to such creditor
addressed as the court may prescribe. All expense of giving notice
required by this subsection shall be paid by the petitioner, unless the
court for good cause determines that the cost of notice in a particular
instance should be borne by another party. The notice shall be first
published as soon as practicable after the filing of the petition, and the
mailing of copies of the notice shall be completed as soon as practicable
after the filing of the list required by subsection (b).
"(e) STAY OF ENFORCEMENT OF CLAIMS AGAINST PETITIONER.-
(1) EFFECT OF FILING A PETITION.-A petition filed under this
chapter shall operate as a stay of the commencement or the con-
tinuation of any judicial or other proceeding against the peti-
tioner, its property, or an officer or inhabitant of the petitioner,
which seeks to enforce any claim against the petitioner, or of an
act or the commencement or continuation of a judicial or other
proceeding which seeks to enforce a lien upon the property of the
petitioner or a lien on or arising out of taxes or assessments due the
petitioner, and shall operate as a stay of the enforcement of any
set-off or counterclaim relating to a contract, debt, or obligation
of the petitioner.
"(2) DURATION OF AUTOMATIC stay.-Except as it may be termi-
nated, annulled, modified, or conditioned by the court under the
terms of this subsection, the stay provided for in this subsection
shall continue until the case is closed or dismissed, or the property
subject to the lien is, with the approval of the court, abandoned
or transferred.
"(3) RELIEF FROM AUTOMATIC STAY.-Upon the filing of a com-
plaint seeking relief from a stay provided for by this section, the
court shall set a hearing for the earliest possible date. The court
may, for cause shown, terminate, annul, modify, or condition such
stay.
H. R. 10624-5
"(4) OTHER STAYS.-The commencement or continuation of any
other act or proceeding may be stayed, restrained, or enjoined by
the court, upon notice to each person against whom such order
would apply, and for cause shown. The court may issue an order
under this paragraph without requiring the petitioner to give
security as a condition to that order.
"(f) UNENFORCEABILITY OF CERTAIN CONTRACTUAL PROVISIONS.-A
provision in a contract or lease, or in any law applicable to such a con-
tract or lease, which terminates or modifies, or permits a party other
than the petitioner to terminate or modify, the contract or lease because
of the insolvency of the petitioner or the commencement of a case under
this chapter is not enforceable if any defaults in prior performance of
the petitioner are cured and adequate assurance of future performance
is provided.
(g) RECOVERY OF SET-OFF.-Any set-off which relates to a contract,
debt, or obligation of the petitioner and which set-off was effected
within four months prior to the filing of the petition, is voidable and
recoverable by the petitioner after hearing on notice. The court may
require as a condition to recovery that the petitioner furnish adequate
protection for the realization by the person against whom or which
recovery is sought of the claim which arises by reason of the recovery.
(h) AVOIDING POWERS.-Sections 60a, 60c, 67a, 67d, 70c, 70e (1), and
70e(2), and the first three sentences of section 60b shall apply in cases
under this chapter as though the petitioner were the bankrupt, debtor,
or trustee. If the petitioner refuses to pursue a cause of action under
a section or sentence made applicable to this chapter by this subsection,
the court may, upon the application of any creditor, appoint a trustee
to pursue such cause of action.
"SEC. 86. REPRESENTATION OF CREDITORS.-
"(a) REPRESENTATION AND DISCLOSURE.-Any creditor may act in
that creditor's own behalf or by an attorney or a duly authorized agent
or committee. Every person, not including governmental entities, rep-
resenting more than one creditor shall file with the court a list of the
creditors represented by such person, giving the name and address of
each such creditor, together with a statement of the amount, class, and
character of the claim held by that creditor, and shall attach to the
list a copy of the instrument signed by the holder of such claim show-
ing such person's authority, and shall file with the list a copy of the
contract or agreement entered into between such person and the credi-
tors represented by that person. Such person shall disclose all com-
pensation incident to the case, received or to be received, directly or
indirectly, by that person. That compensation shall be subject to
modification and approval by the court.
"(b) MULTIPLE COMPENSATION.-The court shall examine all of the
contracts, proposals, acceptances, deposit agreements, and all other
papers relating to the plan, specifically for the purpose of ascertaining
if any person, not including governmental entities, promoting the plan,
or doing anything of such a nature, has been or is to be compensated,
directly or indirectly, by both the petitioner and any of its creditors,
and shall take evidence under oath to determine whether any such
compensation has occurred or is to occur. After such examination the
court shall make an adjudication of this issue, and if it be found that
any such compensation has occurred or is to occur, the court shall
dismiss the petition and tax all of the costs against the person promot-
ing the plan or doing anything of such a nature and receiving such
H. R. 10624-6
multiple compensation, or against the petitioner, unless such plan is
modified, within the time to be allowed by the court, SO as to eliminate
the possibility of such compensation, in which event the court may
proceed to further consideration of the confirmation of the plan.
"SEC. 87. REFERENCE, EXPENSES, AND JOINT ADMINISTRATION.-
"(a) REFERENCE.-The court may refer any special issue of fact to a
referee in bankruptcy for consideration, the taking of testimony, and
a report upon such special issue of fact, if the court finds that the con-
dition of its docket is such that it cannot take such testimony without
unduly delaying the dispatch of other business pending in the court,
and if it appears that such special issue is necessary to the determina-
tion of the case. A reference to a referee in bankruptcy shall be the
exception and not the rule. The court shall not make a general reference
of the case, but may only request findings of specific facts.
(b) EXPENSES.-The court may allow reasonable compensation for
the actual and necessary expenses incurred in connection with the case,
including compensation for services rendered and expenses incurred in
obtaining the deposit of securities and the preparation of the plan,
whether such work has been done by the petitioner or by a representa-
tive of creditors, and may allow reasonable compensation for an attor-
ney or agent of any of them. No fee, compensation, reimbursement, or
other allowances for an attorney, agent, or representative of creditors
shall be assessed against the petitioner or paid from any revenues,
property, or funds of the petitioner except in the manner and in such
sums, if any, as may be provided for in the plan. An appeal may be
taken from any order allowing compensation to the United States
court of appeals for the circuit in which the case under this chapter is
pending, independently of any other appeal which may be taken in
the case. The court of appeals shall hear and determine such appeal
summarily.
"(c) JOINT ADMINISTRATION.--If two or more petitions by related
entities are pending in the same court, the court may order joint
administration of the cases.
"SEC. 88. CLAIMS.-
"(a) ALLOWANCE OF CLAIMS.-In the absence of an objection by a
party in interest, or of a filing of a proof of claim, the claim of a credi-
tor that is not disputed, contingent, or unliquidated as to amount, and
that appears in the list or in a supplement to the list filed by the peti-
tioner under section 85(b) shall be deemed allowed. The court may
set a date by which proofs of other claims shall be filed. If the court
does not set a date, such proofs of other claims shall be filed before
the entry of an order confirming the plan. Within thirty days after the
filing by the petitioner of the list or any supplement to the list under
section 85(b), the court shall give written notice to each person whose
claim is listed as disputed, contingent, or unliquidated as to amount,
informing each such person that a proof of claim must be filed with
the court within the time fixed under this subsection. If there is no
objection to such claim, the claim shall be deemed allowed. If there is
an objection, the court shall hear and determine the objection.
"(b) CLASSIFICATION OF CREDITORS.-The court shall designate classes
of creditors whose claims are of substantially similar character and
the members of which enjoy substantially similar rights, consistent
with the provisions of section 89, except that the court may create a
separate class of creditors having unsecured claims of less than $250
for reasons of administrative convenience. If there is a controversy
over the classification of a creditor, the court shall, after hearing on
notice, summarily determine such controversy.
H. R. 10624-7
"(c) DAMAGES UPON REJECTION OF EXECUTORY CONTRACTS.-If an
executory contract or an unexpired lease is rejected under the plan or
under section 82(b), any person injured by such rejection may assert
a claim against the petitioner. The rejection of an executory contract
or unexpired lease constitutes a breach of the contract or lease as of the
date of the commencement of the case under this chapter. The claim of
a landlord for injury resulting from the rejection of an unexpired
lease of real estate or for damages or indemnity under a convenant
contained in such lease shall be allowed, but shall be limited to an
amount not to exceed the rent, without acceleration, reserved by such
lease for the year next succeeding the date of the surrender of the
premises to the landlord or the date of reentry of the landlord, which-
ever first occurs, whether before or after the filing of the petition, plus
unpaid accrued rent, without acceleration, up to the date of such sur-
render or reentry. The court shall scrutinize the circumstances of an
assignment of a future rent claim and the amount of the consideration
paid for such assignment in determining the amount of damages
allowed the assignee of that claim.
"SEC. 89. PRIORITIES.-The following shall be paid in full in advance
of any distribution to creditors under the plan, in the following order:
(1) The costs and expenses of administration which are
incurred subsequent to the filing of a petition under this chapter.
(2) Debts owed for services or materials actually provided
within three months before the date of the filing of the petition
under this chapter.
"(3) Debts owing to any person, which by the laws of the
United States (other than this Act) are entitled to priority.
"SEC. 90. FILING AND TRANSMISSION OF PLAN AND MODIFICATIONS.-
"(a) FILING.-The petitioner shall file a plan for the adjustment of
the petitioner's debts. If such plan is not filed with the petition, the
petitioner shall file the plan at such later time as the court, upon its
own motion or upon application of the petitioner, sets. At any
time prior to the confirmation of a plan, the petitioner, or any creditor,
if the petitioner has consented in writing to the modification to be
filed by the creditor, may file a modification of the plan; but the
modification shall comply with the provisions of this chapter.
"(b) TRANSMISSION OF PLAN AND MODIFICATIONS.-As soon as prac-
ticable after the plan or any modification of the plan has been filed,
the court shall set a time, which shall be ninety days from the filing of
the plan or any modification of the plan, unless the court, for good
cause, sets some other time, within which creditors may accept or reject
the plan and any modification of the plan. The petitioner or such other
person as the court designates shall transmit by mail a copy of such
plan or modification, or a summary and any analysis of such plan or
modification, a notice of the time within which the plan or modification
may be accepted or rejected, and a notice of the right to receive a
copy, if it has not been sent, of such plan or modification, to each
creditor whose claim is affected by the plan, to each special tax payer
affected by the plan, and to any party in interest that the court desig-
nates. Upon request by a recipient of such summary and notice, the
petitioner or such other person as the court designates shall transmit
by mail a copy of the plan or modification to that recipient. The court
shall, after hearing on notice, determine any controversy as to whether
a claim of a creditor or class of creditors is a claim affected by the
plan and as to whether a special tax payer is a special tax payer
affected by the plan.
H. R. 10624-8
"SEC. 91. PROVISIONS OF PLAN.-A petitioner's plan may include
provisions modifying or altering the rights of creditors generally, or
of any class of them, secured or unsecured, either through issuance
of new securities of any character, or otherwise, and may contain such
other provisions and agreements not inconsistent with this chapter
as the parties may desire, including provisions for the rejection of
any executory contract or unexpired lease.
"SEC. 92. ACCEPTANCE.-
"(a) WHO MAY ACCEPT OR REJECT.-Unless a claim of a creditor who
is included in the list or in a supplement to the list filed under section
85(b) or who files a proof of claim and whose claim is not then dis-
puted, contingent, or unliquidated as to amount, or of a security
holder of record as of the date of the transmittal of information under
section 90 (b), has been disallowed or is not a claim affected by the
plan, that creditor or security holder may accept or reject the plan and
any modification of the plan within the time set by the court. Notwith-
standing an objection to a claim, the court may temporarily allow such
claim in such amount as the court deems proper for the purpose of
acceptance or rejection under this section.
"(b) GENERAL RULE.-Except as provided in subsection (d), the
plan may be confirmed only if it has been accepted in writing by or
on behalf of creditors holding at least two-thirds in amount of the
claims of each class allowed under section 88 and more than 50 percent
in number of the claims of each class allowed under section 88.
"(c) COMPUTING ACCEPTANCE.-The two-thirds majority required
by subsection (b) is two-thirds in amount of the claims allowed under
section 88 of creditors who file an acceptance or rejection within
the time fixed by the court, but not including claims held or controlled
by the petitioner, or claims of creditors specified in subsection (d).
The more than 50 percent required by subsection (b) is more than 50
percent in number of the claims allowed under section 88 of creditors
who file an acceptance or rejection within the time fixed by the court,
but not including claims held or controlled by the petitioner, or claims
of creditors specified in subsection (d).
(d) Exception.-It is not requisite to the confirmation of the plan
that there be such acceptance by any creditor or class of creditors—
"(1) whose claims are not affected by the plan;
"(2) if the plan makes provision for the payment of their
claims in cash in full; or
"(3) if provision is made in the plan for the protection of
the interests, claims, or lien of such creditor or class of creditors.
"(e) ACCEPTANCE OF MODIFICATION.-If the court finds that a pro-
posed modification does not materially and adversely affect the interest
of a creditor, the modification shall be deemed accepted by that cred-
itor if that creditor has previously accepted the plan. If the court
determines that a modification does materially and adversely affect
the interest of a creditor, that creditor shall be given notice of the
proposed modification and the time allowed for its acceptance or
rejection. The number of acceptances of the plan as modified required
by subsection (b) shall be obtained. The plan as modified shall be
deemed to have been accepted by any creditor who accepted the plan
and who fails to file a written rejection of the modification with the
court within such reasonable time as shall be allowed in the notice to
that creditor of the proposed modification.
"SEC. 93. OBJECTION TO PLAN.-A creditor who holds a claim affected
by the plan or a special tax payer affected by the plan may file with
the court an objection to the confirmation of the plan. The Securities
H. R. 10624-9
and Exchange Commission may also file with the court an objection
to the confirmation of the plan, but in the case of an objection filed
under this section, the Securities and Exchange Commission may not
appeal or file any petition for appeal. An objection to the confirmation
of the plan may be filed with the court any time prior to ten days
before the hearing on the confirmation of the plan, or within such
other times set by the court.
"SEC 94. CONFIRMATION.-
"(a) HEARING ON CONFIRMATION.-Within a reasonable time after
the expiration of the time set by the court within which the plan and
any modifications of the plan may be accepted or rejected, the court
shall hold a hearing on the confirmation of the plan and any modifi-
cations of the plan. The court shall give notice of the hearing and of
the time allowed for filing objections to all parties entitled to object
under section 93. The court may, for cause shown, permit a labor
union or employees' association, that represents employees of the peti-
tioner, to be heard on the economic soundness of the plan affecting
the interests of the represented employees.
" (b) CONDITIONS FOR CONFIRMATION.-The court shall confirm the
plan if-
"(1) the plan is fair and equitable and feasible and does not
discriminate unfairly in favor of any creditor or class of creditors;
"(2) the plan complies with the provisions of this chapter;
(3) the plan has been accepted as required by section 92;
"(4) all amounts to be paid by the petitioner or by any person,
not including other governmental entities, for services and
expenses in the case or incident to the plan have been fully dis-
closed and are reasonable;
(5) the offer of the plan and its acceptance are in good faith;
and
" (6) the petitioner is not prohibited by law from taking any
action necessary to be taken by it to carry out the plan.
"SEC. 95. EFFECT OF CONFIRMATION.-
"(a) PROVISIONS OF PLAN BINDING.-The provisions of a confirmed
plan shall be binding on the petitioner and on any creditor who had
timely notice or actual knowledge of the petition or plan, whether or
not such creditor's claim has been allowed under section 88, and
whether or not such creditor has accepted the plan.
"(b) DISCHARGE.-
"(1) The petitioner is discharged from all claims against it pro-
vided for in the plan except as provided in paragraph (2) of this sub-
section as of the time when-
"(A) the plan has been confirmed;
(B) the petitioner has deposited the money, securities, or other
consideration to be distributed under the plan with a disbursing
agent appointed by the court and
(C) the court has determined-
"(i) that any security SO deposited will constitute upon
distribution a valid legal obligation of the petitioner; and
'(ii) that any provision made to pay or secure payment of
such obligation is válid.
" (2) The petitioner is not discharged under paragraph (1) of this
subsection from any claim-
"(A) excepted from discharge by the plan or order confirming
the plan; or
" (B) whose holder, prior to confirmation, had neither timely
notice nor actual knowledge of neither the petition nor the plan.
H. R. 10624-10
"SEC. 96. POSTCONFIRMATION MATTERS.-
"(a) TIME ALLOWED FOR DEPOSIT UNDER THE PLAN.-Prior to or
promptly after confirmation of the plan, the court shall fix a time
within which the petitioner shall deposit with the disbursing agent
appointed by the court any consideration to be distributed under the
plan.
"(b) DUTIES OF PETITIONER.-The petitioner shall comply with the
plan and the orders of the court relative to the plan, and shall take
all actions necessary to carry out the plan. The court may direct the
petitioner and other necessary parties to execute and deliver or to
join in the execution and delivery of any instrument required to effect
a transfer of property under the plan and to perform such other acts
including the satisfaction of a lien, as the court determines to be
necessary for the consummation of the plan.
(c) DISTRIBUTION.-Distribution shall be made in accordance with
the provisions of the plan to creditors whose claims have been allowed
under section 88. Distribution may be made at the date the order
confirming the plan becomes final to holders of securities of record
whose claims have not been disallowed.
"(d) COMPLIANCE DATE.-When a plan requires presentment or
surrender of securities or the performance of any other action as a
condition to participation under the plan, such action shall be taken
not later than five years after the entry of the order of confirmation.
A person who has not within such time presented or surrendered that
person's securities or taken such other action required by the plan
shall not participate in any distribution under the plan, and the
consideration deposited with the disbursing agent for distribution
to such person shall become the property of the petitioner.
(e) CONTINUING JURISDICTION.-The court may retain jurisdiction
over the case for such period of time as the court determines is neces-
sary for the successful execution of the plan.
(f) ORDER OR DECREE AS EVIDENCE AND NOTICE.-A certified copy of
any order or decree entered by the court in a case under this chapter
shall be evidence of the jurisdiction of the court, the regularity of the
proceedings, and the fact that the order was made. A certified copy
of an order providing for the transfer of any property dealt with by
the plan shall be evidence of the transfer of title accordingly, and, if
recorded as conveyances are recorded, shall impart the same notice
that a deed, if recorded, would impart.
"SEC. 97. EFFECT OF EXCHANGE OF DEBT SECURITIES BEFORE DATE
OF THE PETITION.-The exchange of new debt securities under the
plan for claims covered by the plan, whether the exchange occurred
before or after the date of the petition, does not limit or impair the
effectiveness of the plan or of any provision of this chapter. The
written consents of the holders of any securities outstanding as the
result of any such exchange under the plan shall be included as
acceptances of such plan in computing the acceptance required under
section 92.
H. R. 10624-11
"SEC. 98. DISMISSAL.-
"(a) PERMISSIVE DISMISSAL-The court may dismiss the case after
hearing on notice-
74 (1) for want of prosecution;
" (2) if no plan is proposed within the time fixed or extended by
the court;
" (3) if no proposed plan is accepted within the time fixed or
extended by the court; or
"(4) where the court has retained jurisdiction after confirma-
tion of a plan-
"(A) if the petitioner defaults in any of the terms of the
plan; or
"(B) if a plan terminates by reason of the happening of
a condition specified therein.
"(b) MANDATORY DISMISSAL.-The court shall dismiss the case if
confirmation is refused.".
SEC. 2. SEPARABILITY.-1 If any provision of this chapter or the appli-
cation thereof to any agency, instrumentality, or subdivision is held
invalid, the remainder of the chapter, or the application of such pro-
vision to any other agency or instrumentality or political subdivision
shall not be affected by such holding.
SEC. 3. If the amendment made by this Act is judicially finally deter-
mined to be unconstitutional then chapter IX of the Bankruptcy Act,
as such chapter IX existed on the day before the date of enactment
of this Act, is revived and shall have full force and effect with respect
to cases filed after such determination.
Speaker of the House of Representatives.
Vice President of the United States and
President of the Senate.
March 29, 1976
Dear Mr. Director:
The following bills were received at the White
House on March 29th:
H.J. Res. 857
H.R. 10624
H.R. 12490
Please let the President have reports and
recommendations as to the approval of these
bills as soon as possible.
Sincerely,
Robert D. Linder
Chief Executive Clerk
The Honorable James T. Lynn
Director
Office of Management and Budget
Washington, D.C.