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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

Yet other observers were not so sure. Writing in Credit Monthly, Randolph Montgomery, who served as counsel to the National Association of Credit Men, pointed out that the Donovan investigators had examined several other cities in addition to New York. “It is difficult to reconcile the statements in the report of the American Bar Association to the effect that ‘the only place where flagrant abuses and grossly illegal practices were found to exist…was in the Southern District of New York,’” Montgomery wrote, “with the same committee’s conclusion that the primary reason for dissatisfaction with bankruptcy administration lies in the abuse and misuse of proxies…[If the abuse of proxies] is prevalent ‘in the larger communities,’…then the conclusion would seem to be inescapable that the conditions found by Colonel Donovan in the Southern District of New York are not unique, but are typical of those which exist in the larger communities everywhere.”11

As Montgomery’s comments suggest, although the level of corruption seems to have been extreme in New York, the system of selecting trustees through proxy voting reinforced the unsavory reputation of bankruptcy practice throughout the nation. In most cities, a small group of lawyers dominated the practice, a problem that had bedeviled general bankruptcy practice since the earliest years of the act.

To remedy the ills uncovered by the Donovan investigation, the Thacher report proposed a wide range of reforms to U.S. bankruptcy law. The most important of the reforms would have significantly altered bankruptcy’s administrative structure, conforming it much more to the English approach. The Thacher report called for Congress to create “a staff of 10 full-time salaried administrators under the Attorney General.”12

The ten administrative overseers would hire, as civil service employees, a cadre of examiners to conduct a searching examination of each bankrupt who filed a bankruptcy petition. Another of the administrators’ responsibilities was to police the appointment of trustees. Although creditors would retain their right to select a trustee (in larger cases, at least – no trustee would be appointed in small cases),13 the administrators would help the court to assemble a list of authorized trustees and would report on the trustees’ performance. The theme of the administrative changes was quite clear: lawmakers should shift a large dose of control from the parties and their lawyers to governmental administrators.

In addition to the administrative proposals, the Thacher report also recommended that the courts be authorized to suspend or delay a debtor’s discharge, much as they do under English bankruptcy law. Courts must be “given power to discriminate between the different classes of bankrupts,” the report concluded. Otherwise, “vast numbers of people for whom the law was never designed will continue to pervert its objects without the slightest hindrance, all to their own demoralization and the injury of the public interest.”14 Permitting courts to tailor to debtor’s discharge to his or her specific circumstances would assure that debtors were discharge only from debts that they genuinely could not pay.

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