Referees’ Salary Act of 1946

One of the goals of the Bankruptcy Act of 1898 was to prevent excessive fees and expenses, which had been a major complaint against previous bankruptcy laws. Under the 1898 Act, referees were paid under a fee and commission system. Referees collected a fee from the case filing fee when a bankruptcy case was closed. Referees collected a commission on disbursements to creditors by the case trustee and a commission on amounts to be paid to creditors upon confirmation of a composition (plan). Additional fees paid to referees varied from district to district and included such things as collection of fees for investigating and allowing claims, per diem charges for hearings, and additional charges for serving as a special master
in cases not involving bankruptcy issues.

Under the fee and commission system, there was wide disparity in the earnings of referees and their staff. Referees and their staff had no federal retirement benefits. Referees had to pay for their own office space and furnishings outside of federal courthouses. Referees presided over cases under a referral system from district court judges. In many larger cities, it was more or less customary for district judges to use referees for typical bankruptcy proceedings, but to refer special proceedings, like corporate reorganizations, which yielded large fees, to special masters who were not referees.

The fee and commission system for compensating referees was a fundamentally flawed system. Referees had a financial stake in their decisions. A decision resulting in a greater distribution to creditors would increase the referee’s compensation. Closing a case sooner would accelerate payment of a fee to the referee.

A bill was introduced in the House on January 2, 1943 to reform the referee system. It was drafted largely by the National Bankruptcy Conference and actively supported by the Judicial Conference. NARB was conspicuously silent in taking a position on the issues addressed by the bill. The bill would substantially reduce the number of referees by fostering a policy of more full-time referees. By replacing the fee and commission system of compensation with salaried referees, many referees would earn more but some would earn substantially less. The President’s Address in the October 1944 issue of the NARB Journal does not even mention the referees’ bill, although that issue and subsequent issues of the Journal contain a detailed summary of the bill and debates surrounding it.

Although prior referee reform efforts failed, the bill was enacted with some changes. When passed, the statute became known as the Referees’ Salary Act of 1946. The Act abolished the fee and commission system for compensating referees and replaced it with fixed salaries. Referees and their staff, for the first time, had federal retirement benefits. With limited exceptions, district judges were required to refer corporate reorganizations to referees, not special masters. Although referees continued to serve at the will of district judges, their terms increased from two years to six years. Because many district judges opposed provisions in the bill designed to guarantee stability in tenure of referees, those provisions were eliminated. That was a source of keen disappointment to many referees. Referees remained at particular risk when a district judge who referred cases to the referee retired. Although not in the Act, the Judicial Conference committed that it would provide office space in federal courthouses to referees, rent free.

After passage of the Referees’ Salary Act, over half of the nation’s referees lost their jobs. The number of referees declined from 334 in 1946 to 163 the next year, comprising 49 full-time referees and 114 parttime referees. In 1942, there were 271 NARB members. In 1948, membership totaled 132. Although that represented a high percentage of the remaining active referees, it negatively affected membership dues that funded the organization.