dise, the bill H. R. 2412 is of great interest to us because many of these factors' liens statutes provided that upon the sale of merchandise which is subject to the factors' lien the buyer of the merchandise takes the same free of the lien of the factor, and therefore, under the present 60a section as we view it there is a very serious cloud upon our title to merchandise upon which we hold security under a factors' lien.

That has gone so far that at the present time very few of the factors are looking for merchandise loans, and very few of them are taking them even if they are offered to them, because we are fearful that in the event of bankruptcy we can not maintain and sustain that lien. It seems to me that all those who have appeared before your committee today, with the exception of Mr. Weinstein, have supported H. R. 2412, and therefore I do not wish to dwell upon that very much except to say this, that all of the businessmen who have appeared before you, as distinguished, perhaps, from lawyers, have supported 2412.

So that the only question, as I see it, which is before us now, is whether 5834, which includes the recording provision, is sound or unsound legislation.

I believe that Referee Olney stated, when he spoke this morning, that 5834 only applies in the event that a borrower should go into bankruptcy. In other words, that this notice which is contained in your bill, Judge Hobbs, only has to be filed more than 4 months before a bankruptcy. That may be perfectly true. But theoretically it is not necessary to file the Federal recording notice if the borrower is not going into bankruptcy within 4 months. But unfortunately none of us in the lending business, I should say, would be wise enough to be able to determined just when that 4 months period is going to start. The result would be that in order to maintain a valid lien on assigned accounts receivable it would be necessary for us to file the notice.

I do not know if I mentioned at the outset, in our business when we buy these accounts receivable we notify the debtors that the accounts are assigned to us, and we collect those accounts. Therefore the publicity argument is of no significance to us whatsoever because there is the publicity that the debtor knows that the account is assigned to us, and we could operate under a recording statute or under a recording principle, if you will, just as well as under a validation principle.

But we think that the recording idea is unsound in principle, not so much in our own business as in the allied businesses of the finance companies and the banks.

We also think-and our credit departments think and those credit department executives are members of the National Association of Credit Men, and they constitute a very important segment of that membership that the filing of a recording notice is of no benefit or value whatsoever in determining whether a merchant or factor, as ourselves, should grant under secured credit to a customer.

I think perhaps I ought to dwell on that a little bit. Forgetting for a moment the legal aspect that it is possible to go to a recording office, whether it be Federal or State, and find out whether a particular customer has assigned his accounts receivable, how does the average businessman, as distinguished from a lawyer, obtain that information?

I would say that the usual manner is by drawing a Dun & Bradstreet report, and the usual manner in which the grantor of unsecured credit would find out whether a recording notice had been filed would be to draw a Dun & Bradstreet report and find out whether Dun & Bradstreet has received and recorded the fact that such a recording notice has been filed.

He is certainly not going to be in the position every time that he wants to sell a $500 or $1,000 bill of goods to a customer to call up his lawyer and have his lawyer charge him a fee for the purpose of checking up in a recording office whether a notice has been filed.

At the same time that this Dun & Bradstreet report comes in, that Dun & Bradstreet report should, and normally does contain, a financial statement. Now that financial statement we will assume to be an honest one, because after all nobody is going to be able to protect himself against a crook. If that financial statement is an honest one it will show whether the proposed customer has or has not assigned his accounts receivable because if he fails to note on his financial statement that he has assigned his accounts receivable he is making a false statement.

Therefore, it would seem to me that we get down to the point, from a practical point of view, that in the very selfsame place that the businessman, as distinguished from the lawyer, would find out whether a recording notice has been filed, he would also find out from the customer's financial statement whether or not he has assigned his accounts receivable.

I think it was Mr. Weinstein who, in his statement, made the comment that the present 60a has worked out satisfactorily so far as this bona fide purchaser test is concerned, because there is no problem or litigation involving it to speak of. I think in that connection we must bear this in mind. The Chandler Act, which enacted the bona fide purchaser test was passed in 1938. Since 1938 and up to the present time there have been very very few bankruptcies. And the result is that there simply has not been the opportunity for these cases to come before the courts.

But I feel very definitely certain that if we do run into a recession, and if there are bankruptcies, and if this law is not promptly amended, that we will find a great deal of litigation and a great many different and diverse decisions in different circuits as to the effect of section 60a in its present form.

Also with regard to the statement that Mr. Weinstein made that he has suggested an amendment to the present section 60a which would cure the effect of the bona fide purchase test I was told by Mr. Ireton that that proposal was submitted to the National Bankruptcy Conference and rejected by them.

In answer to the question which perhaps you may ask, Judge Hobbs, as to H. R. 5693, section 13, I would like to say that we feel that section 13, or 13 (a), should be eliminated from the noncontroversial bill, and for this reason: If by any chance the noncontroversial bill should pass, and neither of these other bills should pass, then we would have a reaffirmation by Congress of the bona fide purchaser test in new legislation, and in the event that another committee should see this in a year or two from now they might wonder why Congress reenacted the bona fide purchaser test in 60a in view of all that has been said here today.

Insofar as what is accomplished by section 13 of H. R. 5693, I think it is merely a change in language to the effect that a preference shall be considered in connection with a situation which has arisen where there has been filed a petition in bankruptcy or any other petition initiating a proceeding under the Bankruptcy Act instead of referring to a petition in bankruptcy or a proceeding under articles 9, 10, 11, 12, and so forth of the Bankruptcy Act.

That same language is carried along both in H. R. 2412 and in H. R. 5834. And by that I mean the language of section 13 of H. R. 5693.

So that if Congress sees fit to pass either H. R. 2412, or H. R. 5834 it will have accomplished exactly what is contained in section 13 of H. R. 5693.

Thank you very much.

Mr. REED. Thank you, Mr. Yankauer.

Mr. YANKAUER. Thank you, sir.

Mr. REED. Mr. Heuston?

STATEMENT OF ALFRED HEUSTON, CHAIRMAN, COMMITTEE ON BANKRUPTCY AND CORPORATE REORGANIZATIONS OF THE ASSOCIATION OF THE BAR OF THE CITY OF NEW YORK

Mr. HEUSTON. Mr. Chairman, gentlemen: Could I state one thing before starting on this matter that I feel very strongly on? I think it is a fine thing to put Judge Sumners' portrait up just there. He was a great chairman of a great committee, and it is a sort of a welcome to come down here I was here very many times before-and see Judge Sumners here in portrait, if not in person.

My name is Alfred Heuston. I am here as chairman of the committee on bankruptcy and corporate reorganizations of the Association of the Bar of the City of New York. I wish we had a short title for that. I am also a member of the National Bankruptcy Conference and a member of the law firm of White & Case in New York.

(The statement is as follows:)

STATEMENT OF ALFRED HEUSTON RE H. R. 2412 AND H. R. 5834 (BILLS TO AMEND SECTION 60A OF THE BANKRUPTCY ACT AND TO REQUIRE THE FEDERAL RECORDING OF THE ASSIGNMENT OF ACCOUNTS RECEIVABLE)

My name is Alfred Heuston. I am chairman of the committee on bankruptcy and corporate reorganizations of the Association of the Bar of the City of New York. I am also a member of the National Bankruptcy Conference and a member of the law firm of White & Case, 14 Wall Street, New York. I am here testifying on behalf of the Committee on Bankruptcy and Corporate Reorganizations which I will refer to herein as "our committee.'

Discovery of mistake made by Chandler Act of 1938.—The damage which was done in 1938 to many types of security transactions, created and approved by State statutes, such as trust receipts, day loans, crop mortgages, and the like, by the adoption of the present wording of section 60a, was called to the attention of our committee as far back as 1941. We undertook to prepare a revision of the section which would undo the harm, and did considerably work on it. But the war was on, and no one had much time to give to such a matter. Also, during the lush war period, it was easy for borrowers to obtain unsecured loans, and there was little call for secured financing.

Movement to rectify error.-After the war ended, the American Bar Association took up the subject and, working with the National Bankruptcy Conference and a number of other organizations including our committee, prepared drafts, and eventually a bill which became the identical H. R. 2412 and S. 826.

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Our committee has considered and reconsidered this bill a number of times. In each instance we approved the bill unanimously.

Our committee also gave careful consideration to the additional sentence which the drafting committee of the National Bankruptcy Conference recommended be inserted at the end of line 3, on page 3, of H. R. 2412, as indicated in a letter dated March 24, 1947, from Peter B. Olney to Congressman Reed. It was the unanimous belief of our committee that such additional language should be added to H. R. 2412.

Demand for 1948 revision was purely doctrinaire.—How did all this trouble arise? It arose out of a mistake made by the National Bankruptcy Conference which drafted the revision of section 60 which became law with the enactment of the Chandler Act of 1938. The whole thing sprang from purely doctrinaire notions. In a case named Sexton v. Kessler, the United States Supreme Court held that an equitable lien on securities which was not made a legal lien until within 4 months of bankruptcy could not be upset under section 60 as it stood prior to 1938. The Supreme Court had also in Carey v. Donohue and other cases held that "pocket mortgages" in some States could not be invalidated under section 60. Most students regarded the results reached in these cases as unfortunate. Of course, the States could have nullified these results by changing their laws, but it seemed unlikely that they would do so. Hence the 1938 revision of section 60. However, the Sexton v. Kessler and Carey v. Donohue situations were rare indeedas was demonstrated by the fact that, at a subsequent meeting of the National Bankruptcy Conference, none of those present, including a number of referees in bankruptcy and bankruptcy practitioners, could ever recall encountering in their practices either of the situations involved in the cases just mentioned. I have never found anyone who has actually had any such encounter.

Realization of seriousness of the mistake.-The first evidence that a bad and unexpected mistake had been made in the language of the amendment came to light in connection with assignments of accounts receivable. It developed that the 1938 amendment had unwittingly invalidated the pledging of accounts receivable in about a dozen States. Although, under the amendment, the Supreme Court could not have ruled otherwise, the famous Klauder case finally achieved this result, which was never intended or dreamed of by those who sponsored the amendment.

This case raised justified fears all over the country that, quite possibly, trust receipts, issued under the Uniform Trust Receipt Act which has been adopted in about half of the States, were also invalid. Trust receipts form an important part of secured financing in all commercial centers. The legislatures of all of the most important commercial States ahve enacted the Uniform Trust Receipt Act-including California, Illinois, Massachusetts, Michigan, New York, Pennsylvania, and Wisconsin. In addition, a survey disclosed that it was also likely that the change in section 60 had rendered invalid chattel mortgages, conditional sales agreements, factors' liens, day loans, crop mortgages, and a whole list of security transactions where the mortgagor or borrower has the power of sale, in most instances created under State statutes.

Section 60a now provides that a transfer of a debtor's property (by way of security or otherwise), regardless of when actually made, shall be deemed to have been made only when so far perfected that no bona fide purchaser (and no creditor) can get a better title (or, if never so perfected, then immediately before bankruptcy). In the situations just enumerated, the transactions can never be so far perfected as to be good against bona fide purchasers, are never intended so to be; and are created for the most part under State statutes specifically authorizing such transactions. Even though security of such type was actually given at the time the loan was made and, accordingly, this preference section should have no application whatever to them (there being no antecedent debts), and even though transferred a year prior to bankruptcy, the present language of section 60, by providing that the giving of the security shall be deemed to be immediately before bankruptcy, artificially creates, first, an antecedent debt, and, second, a transaction artificially deemed to have been made within 4 months of bankruptcy.

As Prof. John Hanna of the Columbia Law School so aptly said (43 Columbia Law Review, p. 69):

"If the sponsors of the act failed to change the law in certain intended directions, they seem to have had better success in directions in which there is little evidence they were looking."

I am aware that a few people are convinced that trust receipt transactions and some of the others mentioned above have not been invalidated. There may be a good chance that this is so. But the same people predicted that the Klauder case

I would be decided the other way. At any rate, financing institutions, including bankers who have the responsibility of lending other peoples' money, are not much interested in the pros and cons of this academic dispute among lawyers. Their lawyers cannot tell them that they will have valid security if they lend on trust receipts or chattel mortgages with the power of sale. On the contrary, they areas they must be told that there is great doubt as to the validity of such security. And it is all because of section 60 as revised in 1938.

Increasing importance to borrowers of being able to give valid security.-At the hearing on S. 826 (which is identical with H. R. 2412) before Senator Ferguson's subcommittee, an officer of one of the large New York banks testified that instructions had to be given to the loan officers of his bank to treat applications for loans on trust receipts as applications for unsecured loans, because of the serious doubts cast on the validity of trust receipts by section 60. He also testified that while the volume of trust receipt business is not large at the present time, his bank had had loans outstanding on trust receipts totalling over $25,000,000 at various times in the past, and that, with the recent decline in the number of borrowers whose financial condition and prospects justified unsecured loans, it was becoming more and more important for concerns needing to borrow to be able to give valid security. He pointed out that since trust receipts and other types of security had now become of doubtful validity, serious difficulties faced people who needed such loans.

Unanimous approval by our committee of H. R. 2412.-Our committee represents all types of law practice and interests in a great commercial city. Its personnel has changed between votes on the draft of bills which preceded H. R. 2412, and on H. R. 2412. All of our meetings have been well attended. All of the motions which approved and recommended the adoption of H. R. 2412, right up to its final draft and introduction, were unanimously adopted. No one voted against any such motion.

So, on behalf of the Association of the Bar of the City of New York, I urge the adoption of H. R. 2412. I also urge that the additional sentence recommended by the National Bankruptcy Conference (mention on p. 2 above) be included in the bill.

Now as to H. R. 5834.

Federal recording is an entirely separate problem.-Federal recording of assignments of accounts receivable is an entirely separate and distinct matter. It is a highly controversial subject. Serious problems are raised by some of the provisions of the bill. By coupling this matter with the correction of an error which everyone admits was made, and which is seriously hampering legitimate business transactions, the whole thing is thrown in jeopardy. There is no necessary connection between the two.

State security devices were heretofore recognized by Congress.-In enacting bankruptcy legislation, Congress has always recognized that the States are entitled to create or recognize the type of security transactions they prefer, and that the Bankruptcy Act should and will honor them. Many aspects of real estate mortgage laws differ markedly between the States. Most States provide for chattel mortgages. A few do not. In some States, it is legal for a chattel mortgagor, under some circumstances, to sell. In others, it is not. Some States recognize conditional sales agreements, without recording. Some require recording. Some deny validity to conditional sales entirely. Twenty-four of the States have adopted the Uniform Trust Receipt Acts. Some of the others undoubtedly recognize trust receipts by common law. Twenty-nine by statute or common law have the same law dealing with the assignment of accounts receivable as does my State, New York. Within the last 3 years 15 have, by statute, deliberately rejected recording. Twelve have adopted it. Two have adopted book marking.

Bill in effect reverses law in two-thirds of States.-Why should Congress now single out this one type of security and say to all of these States that have, as a declaration of their local public policy, rejected recording, that they must now embrace it? Of course, in form, the States are not told to change their laws; but if the citizens of those States want to have protection against the most likely disaster-bankruptcy-they will, if H. R. 5834 is passed, have to comply with requirements which many of them have rejected through their legislatures. This would be just another instance of the central government ousting the State governments from dealing with matters formerly left to them-a part of the tremendous centralized accumulation of power and authority in Washington. It would, to say the least, be unpopular. And it should be unpopular to compel a citizen in the far corner of a State having but one Federal district, or at a distance from the office of the