"Busts"

In Manhattan, last week, a long-simmering Bankruptcy Scandal boiled over. Charges of nepotism, favoritism in awarding receiverships, intimidation of witnesses, were made in Congress against U.S. District Judge Francis Asbury Winslow. Congressman La Guardia of New York called for the kind of investigation, by the House Judiciary Committee, that generally precedes impeachment. Countering, Judge Winslow said it was all "a diabolical plot." The chief citation against him was that he had suspended sentence on a ''crooked bust'' named Meyer Kaplan in return for an "understanding" which, when subsequently not fulfilled, caused Buster Kaplan to be jailed for the full sentence.

Bankruptcies became front-page news in New York early in January when an attorney named David Steinhart, receiver and Republican politician, fled, leaving bankruptcy books $50,000 short. Judge Winslow had sponsored his appointment many times. Steinhart was indicted. Officials chased him; disguised in red whiskers, through Canada. Charles Shongood, U. S. auctioneer, was removed from office, indicted for conspiracy and embezzlement. Panicky, the Federal judges in Manhattan switched bankruptcy cases from personal receivers to the American Exchange Irving Trust Co. A grand jury gathered more evidence.

As President of the Association of the Bar of the City of New York, Charles Evans Hughes named a special committee to scrutinize bankruptcy law administration, "a matter of very grave concern."

Bankruptcy. A business man possesses $50,000. He owes $200,000. He goes, or is thrown, into bankruptcy. A U. S. court takes over his $50,000 assets, turns them into cash at auction, equitably distributes the proceedings among the bankrupt's creditors in extinguishment of all claims, at the rate of 25-c- (less court costs) on the dollar. He is discharged free of debt, but with his credit badly blotted.

Bankruptcies are of two kinds.

1) Straight Bust: A business man, through bad commercial judgment or bad markets, overstrains his credit, owes more than he can pay, gives up all assets to the Court, conscientiously assists in settling his debts.

2) Crooked Bust: A business man deliberately uses his credit to obtain excessive loans or merchandise, conceals his assets from the court, defrauds his creditors.

Only a thin line of intention divides the two classes. The Crooked Bust is a criminal offense.

The Court. Bankruptcy cases strain the integrity of the best U. S. courts. Countless dollars are held in trust by the court, countless assistants are named to administer them. The judicial machinery is cumbersome and complex, understood only by legal experts. Large are the potentialities for graft and corruption.

In theory the court guards the bankrupt's assets, with all the moral rigor of the U. S. behind it. In practice the judge appoints a supposedly disinterested and trustworthy person as receiver who does the actual work, subject only to final court review. The Federal law fixes the service charges a receiver may make upon the assets, ranging from 6% on $500 or less, down to 1% on $10,000 or more. In effect the creditors pay the receiver from funds they would otherwise get. Thus receiverships are profitable political plums whereby many a lawyer swells his income.

The Judge may be dishonest. He may be leagued with his appointees to abstract and share a larger percentage of the assets than the law allows, thus cheating legitimate creditors. Politics largely controls Federal judicial appointments in the lowest courts and old political debts can be quietly discharged by appointment of a small group of the judge's friends as receivers. A judge's old law partner may likewise be overfavored with such assignments from the court. A good Federal judge scatters his receiverships; a bad one uses them for political or personal profit.

The banking of assets is another method whereby U. S. judges may profit in bankruptcy cases. Deposits can be made in a bank in which the jurist has a private stock holding. He collects the interest rather than the creditors.

The Receiver. If the judge is honest, the receiver may not be. He may juggle assets and disbursements to creditors to his own benefit. He may abscond with pockets stuffed with ready cash. He may appoint a small army of assistants, attorneys, experts and examiners who do nothing more effective than materially reduce the fund for creditor distribution.

The Court Auctioneer is likewise in a position where graft can be a sore temptation. By forced sale he turns possessions into cash. He may conspire with a few choice buyers to undersell assets to them at a bountiful profit which they graciously and secretly split with him. He may rig his auction books to show low sale prices, pocketing money that should go to creditors.

The National Association of Credit Men blames the apathy and ignorance of unorganized creditors for bankruptcy malpractices.