another railroad coming in under this law? Would they receive like treatment?

Mr. FLETCHER. I am not sure that they would. It would depend on the plan set up by the railroad, and whether the creditors agreed to it or not.

Mr. MICHENER. Would there be any constitutional objection in case creditors of one class did not receive the same treatment received by creditors of another class?

Mr. FLETCHER. A man might be a creditor of the Milwaukee, and he might be a creditor of another railroad which would seek relief under a different plan.

Mr. MICHENER. I am speaking about bankruptcy. I am wondering whether, under the statute-and it necessarily must be under the statute how you fix bankruptcy for similar creditors of different corporations engaged in exactly the same function?

Mr. FLETCHER. I think the distinction lies in the question of that to which the creditors agree. Each class of creditors would have to be handled separately.

Mr. MICHENER. Let us see.

One class is 75, and the other 85 percent. Take the Nickel Plate, for instance. They can organize and they must get 75 percent; and the B. & O. want to organize and they must get 85 percent. They are both railroads serving the public, and they are similar corporations. They are both controlled and operated under the same regulatory agency. I am wondering if there is anything to my suggestion.

Mr. FLETCHER. I do not follow the distinction between 75 and 85 percent. This statute which we propose requires the consent of 75 percent of the creditors. The general bankruptcy law, section 77, does not require the consent of the creditors at all, except as

Mr. MICHENER. Bankruptcy must be useful. We have gotten a long way away from fundamental bankruptcy as you and I have always understood it.

Mr. FLETCHER. You mean depending on insolvency?

Mr. MICHENER. Yes. Now, we are dealing with railroads. Under those circumstances we set up a law to reorganize a railroad. How can you treat the minority stockholders in the railroad, under the Constitution, any different from the way in which you treat the minority stockholders in another railroad, when they must all come in under bankruptcy?

But

Mr. FLETCHER. I think the distinction is clear with reference to section 77, which is the regular bankruptcy law, and which requires all of the painful processes of bankruptcy to be resorted to. You get the consent of 66% percent of the creditors. If you do not get that consent, the court can approve the plan without anybody's consent. in dealing with similar classes of creditors under this bill, if you can get 75 percent of the creditors to agree, and that plan is approved by the court as being fair, and in the public interest, that would seem to justify that treatment.

Mr. MICHENER. If the question was just a question of fairness to be determined by the court, that might be one thing; but if you set up a specific 66% percent in one case, and 75 percent in the other, I am just wondering what the result will be.

Mr. FLETCHER. This 75 percent is the percentage that is involved in this bill that is now before the committee. Insofar as minority

stockholders are concerned, this bill would be more liberal than the terms of the Bankruptcy Act, section 77.

Mr. MICHENER. I should think anyone would have a right to complain if you provided class legislation within a class.

Mr. FLETCHER. It depends upon whether you have a constitutional basis for the distinction.

Mr. CHANDLER. This, of course, is voluntary. It means any railroad corporation that is similarly situated, and it does not deprive any railroad corporation that can avail itself of the privileges from coming into court under the terms of this bill, if it becomes a law. Mr. FLETCHER. That is right.

Mr. CHANDLER. Of course, section 77 would meet situations which would not be cognizable under this bill.

Mr. FLETCHER. Where they could not get the consent.

Mr. CHANDLER. And there, again, you have involuntary proceedings under section 77; whereas this is entirely voluntary.

Mr. FLETCHER. I was about to say that while railroads undergoing reorganization under section 77 could not avail themselves of this procedure, it is expressly provided that railroads in equity receivership may invoke this bill, which would invoke, I might say, the dismissal of the equity receivership. You will remember that under section 77 it is entirely voluntary, whether a road transfers from section 77 to the equity receivership, or whether it continues under that receivership.

Mr. MICHENER. The point, as I gather it, is that railroads already under section 77 might conceivably take advantage of this bill.

Mr. FLETCHER. Not unless the proceeding under section 77 is dismissed.

Mr. MICHENER. There are two methods. When you are considering railroads you could not use the same method you use when you are considering the problem of grocers or farmers.

Mr. FLETCHER. I may not be a very expert bankruptcy lawyer, but I suppose that if a grocer could get 75 percent of the creditors to consent, he could get his composition in court; whereas, otherwise he might be unsuccessful in his efforts for a composition. Here you have a different deal, and you have a different composition. This

is a

Mr. MICHENER. I am talking about the minority.

Mr. FLETCHER. Mr. Michener, let us suppose this case: Let us suppose that I am the creditor of a grocer. There are two grocers in the same town. Both of them go into bankruptcy. In the case of grocer A, he has been able to get the consent of 75 percent of the creditors to a certain plan of composition. I am one of the creditors, maybe, but I am bound by the composition under the act. The other grocer, of whom I am also a creditor, is not able to secure 66% percent of his creditors, and in that case the composition is denied by the court, because of failure to agree. There is a technical difference in the treatment that I, as a creditor, received with respect to these two debtors, but would you say that was not perfectly proper and legal?

Mr. MICHENER. If I may add something on the grocer A and grocer B proposition, I am just wondering if later Congress may set up a law in the settlement of those things that will operate differently so far as different creditors are concerned.

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Mr. FLETCHER. You can set up a law which would have the effect of having the result turn out differently, but you would lose more of your money in the one case and less of your money in the other, depending upon the composition.

Mr. MICHENER. This is what I am getting at. Widow A invests, and widow B invests. They are not interested together at all. There is no unity of interest between the two investors; and each invests in a security under the existing law. I am just wondering if, in the settlement of those obligations, you can write one rule for widow A and another rule for widow B?

Mr. FLETCHER. I do not think you could, if they were creditors of the same concern. But, if they were creditors of different concerns, and one concern is able to effect a composition by securing the consent of a large majority of creditors, and the other is not, there might be a different result. That is one of the chances you have to take. Suppose this were written in as part of section 77? Then you have one plan for those who can accomplish the composition by securing the consent of 75 percent of the creditors, which fulfills every requirement of due process. But if you cannot do that, and cannot bring about a composition of that percentage of creditors, then you have to go through the more expensive and long-drawn-out process.

Mr. CHANDLER. Chapters X and XI present an analogous example now. You have a remedy under chapter X if you are not entitled to relief under chapter XI.

Mr. FLETCHER. That is right. May I detail what the machinery of this bill is, as compared with the existing machinery of the law? The first thing that takes place when a railroad finds itself in difficulties is to prepare a plan. That is the initial step. The plan is presumably prepared by the railroad itself, making a proposition for the modification of interest, or modification of debt, modification of principal, and the treatment of interest, leases, and all these thingsa complete plan under which the railroad believes it can get along and be saved from bankruptcy.

Now, that plan, of course, having been worked out, the next step in the process is to submit that plan to the Interstate Commerce Commission, and the reason why it is necessary to submit it to the Interstate Commerce Commission is that every one of these plans inevitably contemplates the issuance of new securities in some form or another; and under section 20-A of the Interstate Commerce Act, those securities cannot be issued except with the consent and approval of the Interstate Commerce Commission. There, a necessary step is to make certain that the plan of the railroad has the approval of the Interstate Commerce Commission, which involves the consent of the Commission to the issuance of whatever securities would have to be issued in order to carry the plan out. The bill which is before the committee, and which I think the chairman says is satisfactory, does not provide that they are to go to the Interstate Commerce Commission to get consent under section 20-A, if there is an agreement of a certain number of creditors. That fact has been emphasized by some of our friends who are interested in the ownership of railroad securities. They think that even after the plan has been made, there ought to be secured, before you go to the Interstate Commerce Commission, the consent of a certain percentage of the creditors. The theory was, as I understand, that if you allow the matter to go to the Commission

without taking it up with the creditors at all, or securing the consent of a substantial number of them, it might have the effect of impairing the credit of the railroad, and raising an unnecessary disturbance, when there is no rational possibility that the plan will go forward. We have no objection to having an amendment written into this section of the law that deals with going to the Interstate Commerce Commission.

Mr. CHANDLER. Section 710.

Mr. FLETCHER. Section 710-an amendment which will provide that before you go to the Commission you must have obtained the approval of 25 percent of the creditors. Some of our friends thought it ought to be higher; but it seems to me that 25 percent is a fair number of consents to obtain, and which would insure a fair probability of the thing going forward to a successful conclusion.

Therefore I think it may be perfectly fair to precede section 710 with an amendment which would read substantially like this:

Any railroad corporation not in process of reorganization under section 77 of the Bankruptcy Act, which either before or after the effective date of this Act shall have (a) prepared a plan of adjustment and secured approval of such plan from creditors affected thereby holding at least 25 per centum of the aggregate amount of the claims

And so forth.

I will be glad to give the exact language to the reporter for the record.

Mr. CHANDLER. Please do.

(The language referred to above is as follows:)

Amend the first sentence of section 710 so as to make it read:

'Any railroad corporation not in process of reorganization under section 77 of the Bankruptcy Act, which, either before or after the effective date of this Act, shall have (a) prepared a plan of adjustment and secured approval of such plan from creditors affected thereby holding at least 25 per centum of the aggregate amount of the claims affected by said plan: Provided, That such approval shall not be necessary as to plans submitted to the Commission under section 20 (a) of the Interstate Commerce Act prior to the effective date of the Act."

Mr. HOBBS. Does that meet the objection?

Mr. FLETCHER. I am not quite sure; but I think it will go a long way toward meeting the objection.

Now, after the Interstate Commerce Commission has the facts upon the question whether the securities shall be issued, the next step and let me digress for a moment to say that the act provides that the Commission must act within 90 days after the petition has been filed. That results from the fact that no railroad corporation should be allowed to get under the shelter of the act and delay the thing to an unreasonable extent. So the act does provide that the Commission must act within 90 days.

After the Commission has approved the issuance of securities, the next step is to file a petition in the court, and the essential averment must be found in that petition in order to confer jurisdiction upon the bankruptcy court, that the railroad company is unable to meet its debts theretofore matured, or about to mature, and desires to carry out an adjustment. That is an essential allegation of the petition, of course.

That petition is to be filed in the district court where the railroad company, during the preceding 6 months prior to the filing of the petition, has had its principal executive or principal operating office.

In that respect, it is just like section 77. I should say, too, that if the railroad company is in receivership, and it elects to abandon the receivership and take advantage of this act, it shall file its petition in the court where the receivership is pending.

There is a provision here, section 711, that subsidiary corporations which are themselves entitled to proceed under the provisions of this act shall file their petitions to be made a party in the same district court where the parent corporation's reorganization is taking place. That is to protect these subsidiary and auxiliary corporations, in cases of receivership, and provides that they may file their petitions in the particular court the petition of the parent company has been filed in, and they go in that proceeding. It is like section 77.

This act has this novel feature which has not heretofore been present in railroad reorganization legislation, that when the petition is filed the judge of the district court shall thereupon call in to his assistance two other judges, thereby organizing a three-judge court. One of the judges so called in must be a circuit-court judge. In other words, it is an application of the general method of procedure that applies to other classes of litigation where three-judge courts are required. That is a situation which I think this committee will probably confront in connection with the proposed amendments to section 77, because there is a general feeling that in matters so important as this the district-court judge should have the benefit and assistance of his colleagues, and for the same fundamental reasons that controlled Congress in creating three-judge courts for other purposes.

Now, this three-judge court thereupon takes complete control of the proceedings, and is really the reorganization court for all practical purposes. The first duty of this three-judge court is to decide whether the petition has been filed in accordance with law; whether it has gone to the Interstate Commerce Commission and has received their approval for the issuance of securities; whether the petition is sufficient; whether jurisdiction is clear; and matters of that kind. Then it has the specific right to classify claims-the claims of creditors— so that there may be a rational determination of whether each class of claims has given the necessary assent.

I should have said earlier in my statement that before you can file this petition with the court, after you have secured the consent of the Interstate Commerce Commission, you have got to have the assent of

Mr. CHANDLER. That is on page 4.

Mr. FLETCHER. Yes. You have got to have the assent of 66% percent of the creditors as a whole, and you have to have the assent of a majority of the creditors of each class. That is jurisdictional. You cannot proceed in court otherwise; and if we accept the amendment I suggested awhile ago, you have to have 25 percent of the creditors before you can go to the Commission. But in order to go to court you have to have the assent of 66% percent of the creditors as a whole, putting all of the claims together, and that must include at least a majority of each class.

It has been suggested that there may be some incongruity and inconsistency in the fact that there must be some classification of claims, prior to the time the court is organized and before it can exercise its function. But there must be some sort of preliminary