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

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Debt's Dominion by Prof. David A. Skeel, Jr. 1 - 2 - 3 - 4 - 5 - 6 - 7 - 8 - 9

The New Deal brought two very different sets of bankruptcy reforms. The first set of reforms had its root in the pre-New Deal era. In 1929, at the outset of the Great Depression, simmering complaints about bankruptcy administration erupted into a full-scale scandal in the Southern District of New York. A district court investigation headed by William Donovan and a follow-up investigation launched by the Hoover administration produced a pair of highly critical reports – the Donovan report in 1931 and the Thacher report in 1932.1 Based on the specific proposals outlined in the Thacher report, Senator Hastings of Delaware and Congressman Michener of Michigan introduced a bill (the Hastings-Michener bill) that called for sweeping reform of the administrative process of bankruptcy. At the heart of the bill was a proposal to appoint a staff of administrators to oversee bankruptcy. Although the House and Senate Judiciary Committees sprang into action and held lengthy hearings in 1932,2 they did not send the bill to Congress. The following year, the legislation was reintroduced with many of its most controversial provisions deleted. Congress enacted part of the legislation at the end of the Hoover administration in 1933 – including provisions for individual and farmer rehabilitation and the first codification of railroad reorganization – and lawmakers then added codified large-scale corporate reorganization for the first time in 1934.3 By the time the 1933 and 1934 amendments were enacted, however, the principal Thacher report proposals were long gone.

The second stage of the New Deal reforms commenced even before the first round was finished. After the 1932 hearings, a group of bankruptcy lawyers, academics, and judges banded together to form the National Bankruptcy Conference for the purpose of “perfecting” the bankruptcy laws. By 1935, the conference persuaded Representative Chandler to join the effort, and for the next several years they developed legislation that became known as the Chandler bill.

At the end of 1936, as the process was perking along nicely, William Douglas and the Securities Exchange Commission suddenly crashed the party, urging Chandler and the National Bankruptcy Conference to replace the Chandler bill recommendations that dealt with large corporate reorganizations with a far more dramatic overhaul. Although many members of the conference protested, and several criticized the SEC reforms in the legislative hearings that followed, the conference lent its formal support to the SEC’s reorganization proposals in return for the SEC’s support for the rest of the legislation. Out of this awkward alliance came the Chandler Act of 1938, the most extensive bankruptcy reform since the enactment of the 1898 act.4 The changes to general bankruptcy practice were modest and incremental, the changes to large-scale reorganization revolutionary. The evolutionary changes will be our focus in this chapter, the revolutionary ones in chapter 4. Behind each, of course, lies a remarkable political story.

 
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