Debt’s Dominion: A History of Bankruptcy Law in America, an excerpt from a new book by Prof. David A. Skeel, Jr.

To make matters worse, bankruptcy lawyers sometimes short-circuited the process altogether by arranging to be appointed as receiver of the debtor’s assets. Although the receiver’s only job was to oversee the assets until a trustee could be appointed, bankruptcy professionals, acting as receiver, often delayed the appointment of a trustee until they had completed nearly all the tasks of administering the bankruptcy estate. These were practices that outsiders bitterly attacked as the “bankruptcy ring.”

In the late 1920s, the complaints about bankruptcy practice in New York City grew so loud that a federal grand jury issued a report concluding that bankruptcy practice had been “characterized by serious abuses and malpractices upon the part of attorneys, receivers, trustees, appraisers, custodians, auctioneers and other persons, associations or corporations within and subject to the jurisdiction of the United States District Court.”⁶ The Association of the Bar of the City of New York, which included the most the elite New York bar, then filed as formal petition with Judge Thomas Thacher asking to participate in an extensive investigation under the auspices of the district court. The judge agreed, and the association took charge. Heading up on the investigation on behalf of the association was Colonel William Donovan. By Donovan’s count, “Over 1,000 court files of cases, and some 4,000 witnesses were examined” during daily hearings that lasted from June to September 1929.

Even as chronicled by a defender of existing practice, the findings of the Donovan investigation were dramatic and shocking and suggested a wide-ranging conspiracy to control bankruptcy administration:

As a result of this investigation, twelve attorneys were indicted; one absconded and committed suicide; two pleaded guilty and received jail sentences; one was already serving sentence for subornation of perjury; four other attorneys resigned from the Bar of New York; four others were disbarred; another was censured, and disciplinary action was taken against other attorneys. The United States auctioneer and two custodians were indicted; a clerk of the Bankruptcy Record Room was dismissed an attempted to commit suicide, and during the progressive of investigation one Federal Judge resigned.⁷

In July 1930, in the wake of the Donovan report, President Hoover appointed Thomas Thacher, who had recently given up his district court judgeship to become solicitor general, “to undertake an exhaustive investigation into the whole question of bankruptcy law and practice.”⁸ Thacher’s investigators then gathered extensive statistical data on every bankruptcy case closed during the fiscal year ending June 30, 1930, and visited the bankruptcy courts in twenty-one cities in a total of sixteen states.