number of the members of the Bar Association Committee is that the committee print-this was printed for the use of the Committee on the Judiciary has a section 13 which substantially incorporates as section 13 not the 13 that is printed in H. R. 5693 but substantially H. R.

2412.

It was our supposition that that was the recommendation of the National Bankruptcy_Conference and was in accordance with the understanding of the Bankruptcy Conference in 1946.

Mr. WEINSTEIN. It seems that the answer to that is rather obvious. In the committee print we included all of the amendments that had been approved by the National Bankruptcy Conference. That included the ABA draft because the National Bankruptcy Conference had opposed it, as amended.

But in the noncontroversial bill, because therein we attempted to include what we believed were unopposed amendments, we went back to the original text and made the couforming changes in 60a and did nothing more.

Mr. IRETON. Judge Hobbs, you did not aske me about that section 13. I would like to say that I am afraid that the enactment of that noncontroversial bill with section 13 in there, in effect, to anyone, other than those who have been here present today, and to the other members of the Judiciary Committee when they act on that noncontroversial bill, will be a reaffirmation of the 1938 amendment.

There is the danger of that section 13a.

Mr. WEINSTEIN. The committee report should explain why it was done, and I understand it will so explain it.

Mr. HOBBS. There is no idea in the world for believing that except that we think it would be somewhat disadvantageous to report a bill which we had stated was thoroughly noncontroversial, and then have to strike out something, and ask that it be put in the next day or the next week.

There is no idea in the committee at all not to enact one or the other of the two pieces of legislation.

Mr. IRETON. I think my point could be cleared in the committee report. That is the only thing that bothers me, is the effect that it would have.

Mr. REED. If there is no objection, the clerk then will be authorized to file in the hearings the statements already submitted to her, and we will hold the record open for 1 week.

The committee will then adjourn.

(Whereupon, at 4:45 p. m., the committee adjourned.)

(The following was subsequently submitted for the record:)

STATEMENT OF BENJAMIN WHAM, CHAIRMAN OF THE SECTION OF CORPORATION, BANKING AND MERCANTILE LAW OF THE AMERICAN BAR ASSOCIATION, IN SUPPORT OF S. B. 826 AND H. R. 2412, SPONSORED BY THE ASSOCIATION

MARCH 24, 1948.

Over a period of years prior to 1938, the Supreme Court, in interpreting section 60 (the preference provision) of the Bankruptcy Act, had handed down two lines of unfortunate decisions which unfairly restricted the rights of unsecured creditors. These cases embodied what became known as the relation back and pocket lien doctrines. The relation back cases, of which Sexton v. Kessler, 225 U. S. 90, was representative, held that, where a borrower promises to furnish security (in that case, a pledge of stock) for moneys loaned prior to the 4-months' preference period, but did not actually deliver it to the lender until shortly before the borrower's bankruptcy, the trustee could not recover it from the lender.

The second line of cases, of which Carey v. Donohue, 240 U. S. 430, was representative, held that, where a lender failed to comply with applicable State recording requirements (as in the case of deeds to real estate), a trustee in bankruptcy could not successfully attack his title to security acquired within the 4-months' period, unless the local law specifically provided that failure to record would invalidate the security as against lien creditors.

These decisions were patently unfair to general creditors, and the 1938 amendment attempted to correct them. It did so by the imposition, in section 60a, of a new test, which has become known as the hypothetical bona fide purchaser test. However, the authors of the 1938 amendment (as they have now, frankly and to their credit, admitted) did not realize the full extent and import of this radical change, which has resulted in harmful consequences which they did not foresee and which are not merely correspondingly unfair to secured creditors, but have seriously interfered with the free flow of necessary credit accommodation to small business.

It did not take long for these consequences to be realized. In Corn Exchange National Bank & Trust Co. v. Klauder, 318 U. S. 434, by reason of the new language, the Supreme Court felt compelled to invalidate the title to assigned accounts receivable acquired long before the 4-months' period and in good faith and for value, because the local law (in that case, Pennsylvania) required that notation of the assignment be made upon the debtor's books.

And an even more unfair and unfortunate result was reached by a district court in re Vardaman Shoe Co., 52 Fed. Supp. 562 (Eastern District of Missouri), where a similar result was reached, even though, in that case, the local law imposed no such formal requirement at all. A view contrary to the Vardaman case was taken by the Third Circuit Court of Appeals in re Rosen, 66 Fed. Supp. 174, 157 Fed. (2d) 997, certiorari denied March 10, 1947. However, as the result of all of the foregoing, confusion has become worse confounded, and there are eight judicial circuits still to be heard from.

Accordingly, at its Cincinnati convention in 1945, the section of corporation, banking, and mercantile law of the American Bar Association initiated a study of the problem, and appointed a committee to deal with it, with instructions to consult the representatives of all interests, and to submit the draft of a remedial amendment that would be fair to all concerned. That committee consists of Prof. John Hanna of the Columbia Law School; J. Francis Ireton, Esq., of the Baltimore bar; Homer J. Livingston, chairman of the bankruptcy committee of the American Bankers Association; Prof. James A. Maclachlan of the Harvard Law School, who was one of the authors of the original 1938 amendment; and Milton P. Kupfer, Esq., of the New York bar. After studying the problem for more than a year, and holding the discussions directed, the committee evolved an amendment. After being reworked and approved by a number of other groups, it was successively approved by the section, and respectfully recommended for enactment by resolution of the Association's house of delegates, unanimously passed at the Association's 1946 convention.

The objects of the amendment are threefold:

(1) To aliminate the evil of allowing a trustee in bankruptcy, for the purpose of timing his status for preference purposes, to assume the position of a hypothetical bona fide purchaser and, in harmony with his functions under the Bankruptcy Act, to restore him to the position of a potential holder of a lien by legal proceedings.

(2) In effectuation of the above policy, to provide that no transfer made in good faith, for a new and present consideration, shall constitute a preference to the extent of such consideration, if the provisions of applicable State law governing the perfection of such transfer are complied with, with an appropriately rigid time limitation (30 days) for such perfection if such time is not itself prescribed by the applicable State law, or if a longer one is so prescribed.

(3) While accomplishing the purposes set forth above, to retain unimpaired the basic objects of the 1938 amendment, which were to eliminate the relation back and pocket lien doctrines of such cases as Sexton v. Kessler and Carey v. Donohue, above-mentioned.

With minor modifications, the committee's draft was introduced as identical bills S. 826 (Senator Ferguson of Michigan) and H. R. 2412 (Representative Chauncey W. Reed of Illinois).

It is respectfully urged that their passage is badly needed, not merely in the accounts-receivable field, but because the present language of section 60a is at least as harmful in such areas as trust receipts, conditional-sales agreements, oil leases, cattle loans, airplane-equipment financing, factors liens, etc.

A simple illustration is the normal trust receipt transaction, under which an automobile or domestic appliance dealer finances the acquisition of his inventory. Under the Uniform Trust Receipts Act, the trust receipt must necessarily (as is only right) confer upon the borrower the right to convey good title to the merchandise to a retail purchaser. Under the present language of section 60a, it is impossible to perfect the lien of a trust receipt against such a purchaser. Therefore, under the present artificial hypothetical bona fide purchaser test, it can well be argued that no safe or valid security can be acquired by trust receipt at all. This has throttled the use of a security device that has proved most beneficial, alike on the manufacturing, wholesale, and retail levels, in the conduct of our Nation's business-large and small. The same result would follow in connection with conditional sales contracts for resale, and, quite possibly, in some or all of the other types of transactions above enumerated.

The overwhelming number of automobile and domestic appliance dealers, as well as many other types of retailers in this country, do not have sufficient capital to carry the necessary inventory of new and used automobiles or other products sold at retail. They likewise are not strong enough financially to demand unsecured credit to enable them so to do. These retailers, numbering in the hundreds of thousands, need some means of secured credit in order to carry the goods they sell. In the present state of the law, they cannot obtain that credit with any reasonable degree of certainty or safety to those who would otherwise be ready to extend it to them.

If credit can only be extended to them on an unsecured basis, then the great majority of retailers will be unable to remain in business because of an inability to carry an adequate stock of merchandise.

This matter is not only of grave concern to those retailers who may be forced out of business, with attendant losses upon them and a substantial decrease in employment, but it is of vital concern to everyone, because such a shrinkage in retail outlets would considerable impair our system of marketing and distribution of manufactured products to such an extent that the manufacturers of those products and their employees would be bound to be considerably and adversely affected.

Since the introduction of S. 826 and H. R. 2412, they have received the endorsement of nearly a dozen public and private groups, and the overwhelming majority of such endorsements is unqualified.

It is respectfully urged that your committee report in favor of their early passage, and that your consideration not be involved with other controversial proposals that may have been brought forward for the amendment of other and unrelated or only incidentally related, provisions of the Bankruptcy Act. BENJAMIN M. WHAM,

Chairman, Section of Corporation, Banking, and Mercantile Law of the
American Bar Association.

STATEMENT OF GEORGE KENNAN HOURWICH, ESQ., CHAIRMAN OF THE COMMITTEE ON BANKRUPTCY OF THE NEW YORK COUNTY LAWYERS' ASSOCIATION

I am appearing here on behalf of the bankruptcy committee of the New York County Lawyers' Association of which I have the honor to be the chairman.

The New York County Lawyers' Association is the largest local bar association in the United States, with a membership of 6,900. The committee on bankruptcy is one of its 42 standing committees empowered by the articles of the association to consider and to make recommendations with respect to legislation relating to the field of bankruptcy.

The 21 members of the committee on bankruptcy who were appointed by the president of the association are lawyers of experience, specialists in the field of bankruptcy and reorganization and related matters, whose experience encompasses the range from the smallest to the largest of cases.

It is not my desire nor intention to elaborate upon the very clear statements which have been made as to the nature and purpose of the amendments comprised within H. R. 2412. I am here today because our committee held several meetings to consider this legislation and concluded that it was in the public interest that this bill to amend section 60a of the Bankruptcy Act be enacted into law. We so advised the president and directors of the association. The board of directors of the association of which the Honorable Joseph M. Proskauer is president and Terence J. McManus, Esq., is secretary, on May 14, 1947, authorized me to

advise you of adoption of the following resolution by the committee on bankruptcy:

"Resolved, That the chairman of the bankruptcy committee of the New York County Lawyers' Association advise the Hon. Chauncey W. Reed, Member of the House of Representatives from the State of Illinois and the Honorable Homer Ferguson, United States Senator from the State of Michigan, that in the opinion of the committee early hearings in respect of H. R. 2412 and S. 826 are urgently needed so that the amendments to the Bankruptcy Act of 1898 contained therein may be enacted into law at the earliest possible date."

Our committee has not had an opportunity, as yet, to consider and make any recommendation with respect to H. R. 5834. I feel constrained, however, to point out that insofar as H. R. 5834 provides for the amendment of section 60a, it is almost word for word identical with H. R. 2412 and that section 2 of 5834 represents an entirely unrelated amendment to section 70 of the Bankruptcy Act, dealing with the highly controversial subject of recordation of assignments of accounts receivable. In my opinion it is unfortunate that a bill should be proposed dealing with these two subjects, particularly since the support for the amendment of section 60a of the Bankruptcy Act is almost unanimous, whereas the subject of recordation is highly controversial and has only limited sponsorship.

Under the circumstances, I would be derelict in my duty to the bankruptcy committee of the New York County Lawyers' Association were I not to point out that the urgency of passage of H. R. 2412 must necessarily dictate opposition to H. R. 5834. The former bill ought to be enacted into law immediately. H. R. 5834, in my personal opinion, ought not to be acted upon until an opportunity shall have been extended to the bar of the Nation to consider its provisions. GEORGE KENNAN HOURWICH.

THE AMERICAN BANKERS ASSOCIATION,
Washington 5, D. C., May 12, 1948.

Hon. CHAUNCEY W. REED,
Old House Office Building, Washington, D. C.
DEAR MR. REED: Supplementing my conversation with you as of this date I
am pleased to advise you that the American Bankers Association favors the
enactment of H. R. 2412. The problem involved in H. R. 2412 has been under
consideration for many years by the National Bankruptcy Conference and others.
A year ago the Conference and others came to what I understood to be a practically
unanimous agreement on the language set forth in the bill. Since that time I
understand some people have taken some minor exceptions as to the language.

I have followed this problem personally since 1940 or 1941 and in my opinion this bill is now in first-class condition and needs no alterations. The American Bankers Association favors the enactment of this bill.

The

Regarding H. R. 5834, the American Bankers Association is opposed to the procedure outlined in the bill, particularly regarding the reference to filing notice of assignment of accounts receivable. Some time ago the American Bankers Association approved in principle a recording statute which might be used by the various States provided the States decided it was what they wanted to do. Association has at no time urged the adoption of the recording statute in the various States but did approve a general statute which of course would be subject to such amendments which any State would want to make. The principle embodied in State recording is entirely different from the problem set forth in H. R. 5834.

The Association is of the opinion that the Federal Government should not step in and attempt to lay down the law for any State. That is a problem for the States to handle and they should do it by the enactment of their own laws without the interference of the Federal Government.

The chairman of the Federal legislation committee of the American Bankers Association is Mr. C. Francis Cocke, president, First National Exchange Bank, Roanoke, Va. He is cognizant of this legislation and has the authority to advise on these matters with the cooperation of the other officers of the Association. This letter is being filed with you for the record at the request of Mr. Cocke. We will appreciate it if you will be good enough to put this in the record at your convenience.

Sincerely yours,

D. J. NEEDHAM,

General Counsel.

Re: H. R. 2412 and H. R. 5834

Hon. SAMUEL HOBBS,

THE CLEVELAND TRUST CO.,
Cleveland, Ohio, May 13, 1948.

The House of Representatives, Washington, D. C.

DEAR MR. HOBBS: May I be permitted to state very briefly my views on the pending legislation requiring a public notice under the Bankruptcy Act in connection with borrowings on accounts receivable, as set forth in the proposed section 70i.

I think I can claim to have had considerable experience with the public notice or recording statute with respect to accounts receivable which is now the law in 12 states. When I became a member of the National Bankruptcy Conference in 1940, it was realized that section 60a had increased the hazards in lending on accounts receivable. This section had the very worthy objective of outlawing secret liens, an abuse which so frequently attended borrowings on accounts receivable which due to their highly intangible nature, lend themselves to secret assignments. I became aware that in many States the question of how an assignment of receivables valid as against a Trustee in Bankruptcy could be obtained, was in a fog of legal obscurities and uncertainty-so much so that banks which must protect their depositors as well as their stockholders, could not safely lend on receivables, particularly to the small-business concerns.

Notification to the borrower's debtor was obnoxious to the latter, and the rule of the State of New York (now embodied in the validation or secret-lien statutes of a number of States) seemed in giving no protection whatsoever to the innocent second assignee (who had no reliable means of discovering a prior assignment), unreasonably harsh. In fact, under the secret-lien statute an assignee may think that he is the first assignee, but has no means of being certain that he isa situation unthinkable in mortgage lending.

Accordingly, as chairman of the legislative committee of the Ohio Bankers Association, I sponsored in the Ohio Legislature a public notice or recording statute which has been in effect since August of 1941. It has worked successfully in Ohio and has made available to small struggling business concerns a source of credit at low rates. Surely, lenders on such highly intangible security as receivables should have the protection which public recording acts give to mortgagees. Just as surely the borrower who has a good list of accounts should be able to obtain at reasonable rates loans which have been available only at the high rates charged by lenders who enjoyed an almost complete monopoly.

Public recording has been furiously assailed in certain quarters where it is either not properly understood or where the making of such credit available at low rates is opposed for selfish reasons. It is nonsense to argue that if public notice is required as to receivables, it should also be required with respect to collateral and unsecured loans. The lender on collateral can get possession of the security and therefore does not need public recording, and the unsecured lender is not dealing with anything which is recordable. He knows he has no lien on any property. The lender on receivables lends because he thinks he has a first lien on the assigned accounts, but short of notice to the debtor (which is obnoxious to the borrower) he does not know under the New York rule (now the secret lien or validation statute) that he has the first lien.

It will not do for the enemies of public notice to say that a financial statement tells the whole story. These very people would not make mortgage loans without recording the mortgage, and they have been widely promoting within the past few years a statute protecting inventory loans by a public-notice requirement in which statute it is provided that when the inventory is translated into receivables the pledge of these receivables is protected by the public notice.

Just why a public-notice statute respecting receivables not yet born is a worthy member of commercial society, whereas a public-notice statute respecting receivables already in existence is to be disfigured by the bar sinister, they have never been able to explain satisfactorily.

The acquisition of good accounts receivable is the goal toward which every manufacturer, processor or merchant is pressing. Such assets are next to cash in importance. The owner of good accounts who may be undercapitalized should be able to borrow on such assets at reasonable rates. His ability to borrow at reasonable rates will be greatly restricted unless the lender has the protection which public notice affords. I therefore commend to your thoughtful consideration the idea of a Federal recording requirement in the Bankruptcy Act applicable to all jurisdictions which do not have public recording acts of their own, to the end that—