either required notification to the account debtors-a rule which, incidentally, is the minority rule of this country. The court "solved" the problem with a crude simplicity that was alike arresting and, in the view of all students of the problem, most unfortunate. It simply held first, that it made no difference which law applied, and secondly, even on the assumption that the applicable rule was the non-notification one, the provisions of section 173 of the restatement of the law of contracts required the nullification of the bank's security. This, for the reason that section 173 permits in certain highly restricted situations, a second assignee to obtain title to the proceeds of assigned accounts, even in a non-notification state. Few students of the problem believe that the Klauder case required the holding in Vardaman, but it cannot be said that, under the present language of section 60a, the conclusion was altogether without basis, and there is always the hazard of similar holdings as long as section 60a remains in its present form. (c) And conflicts True it is that there is one case on the subject (Matter of Rosen (1946), 157 Fed. (2d) 997 (certiorari denied 330 U. S. 835)) in which the court, while necessarily following the Klauder doctrine, has, at least inferentially, disapproved its extension in the Vardaman case. Even here, the original holding of the Referee followed Vardaman. Moreover, well-reasoned as is the ultimate opinion in the Rosen case, it did not purport to repudiate the Vardaman case. Even giving it full effect, it merely sets up one case against another, and there are eight circuits still to be heard from. Obviously, businessmen and credit-extension agencies cannot conduct their affairs with lawyers constantly at their elbows, and the lawyers themselves are unable, under the present language of section 60a to tell them what the law is. And all of this is particularly grievous at a juncture in our economic life when the flow of credit must be kept free. V. THE BAR ASSOCIATION'S STUDY, AND THE OBJECTIVES OF THE PRESENT BILLS Naturally, the situation with which the industrial business and banking communities were thus faced came to the attention of the American Bar Association, not only by direct representations made by a number of businessmen and lawyers, but also as the result of an independent consideration of the matter made by its instrumentality charged with these matters-its section of corporation, banking and mercantile law. Accordingly, at the first postwar convention of the association held in Cincinnati in December 1945, the section created a committee, manned as above stated, to deal with it. In the ensuing months, this committee proceeded with its work; consulted a number of outside experts; and reported to the council of the section at its meeting in New York on May 24, 1946. The following action, as set forth in its minutes, was accordingly taken: "Professor John Hanna reported, in the absence of Homer J. Livingston, Chicago, chairman for the committee on the revision of section 60a of the Bankruptcy Act, outlining, in detail, its activities and the draft of a proposed amendment that had been worked out in correspondence and conferences among the committee members, the last of which had been held at the New York office of the American Bankers Association on May 8, 1946. He further outlined the difficulties that had arisen under the Chandler Act amendment to section 60a, and stated that after considering all aspects of the problem, the committee had determined to draft a proposed amendment along the following lines: "(a) to eliminate from the section the so-called hypothetical bona fide purchaser test and substitute therefor the judgment creditor test, as determinative of the existence of a preference; and "(b) to provide that no transfer, made in good faith for a present consideration, shall constitute a preference if the provisions of applicable State law governing such transfer are complied with. "A round-table discussion of Professor Hanna's report then ensued, participated in, among others, by Referee Olney, Mr. Bartlett, Mr. Gerdes, Mr. Kearns, and Mr. Kupfer. In the course of this discussion, it was pointed out that the section had been giving continuous consideration to this matter for more than 3 years, since the decision of the United States Supreme Court in the Klauder case (Corn Exchange National Bank & Trust Co. v. Klauder, 318 U. S. 434, 87 Law Ed. 484, 63 Sup. Ct. 440), and had kept current with the opinions of the lower Federal courts that had followed it. At the conclusion of this discussion, Mr. Gerdes moved (1) that the council record its approval of the amendment of section 60a of the Bankruptcy Act in the sense proposed by Professor Hanna, namely— "(a) to eliminate from the section the so-called hypothetical bona fide purchaser test and substitute therefor the judgment creditor test, as determinative of the existence of a preference; and "(b) to provide that no transfer, made in good faith for a present consideration, shall constitute a preference if the provisions of applicable State law governing such transfer are complied with; and (2) that the section's committee on the revision of section 60a of the Bankruptcy Act be instructed to frame an act to effectuage the foregoing purposes and, if possible, to cooperate with the National Bankruptcy Conference in an endeavor to obtain its early amendment. "The motion was seconded by Mr. Kearns and, after discussion was unanimously adopted." Pursuant to these terms of reference, and over the summer, the committee worked out a draft; circulated it widely; and incorporated in it various suggestions that were made for its improvement, culminating in a joint meeting of the committee with the National Bankruptcy Conference on October 26-27, 1946, at the latter's Atlantic City convocation. Various suggestions, theretofore and then made by members of the National Bankruptcy Conference, were incorporated in the draft and, as thus placed in final form, the Conference approved it in principle and resolved that it was "a good draft." At the ensuing convention of the American Bar Association, the final draft was submitted successively for the approval of the Association's section (which consists of approximately 7,500 members) and the house of delegates, which is its policy-making instrumentality. Upon the unanimous recommendation of the former, it was approved by the latter, and the following resolution adopted on October 31, 1946: "Resolved, That the American Bar Association recommends to the Congress of the United States that section 60a of the Bankruptcy Act be amended so that said section read as follows: (There then follows the text of S. 826 and H. R. 2412, in virtually the identical form subsequently respectively introduced by Senator Ferguson and Representative Reed.)" In March of 1947, at the first session of the current Congress, the bills were introduced in both Houses; referred to their respective Judiciary Committees; and the opinion of the Attorney General was obtained by the Senate committee thereon. Due to the press of other legislation of national and international nature, they were not further acted upon in that session, and, of course, were not germane to the two subject matters (interim foreign aid and domestic controls) of the special session. They are, accordingly, now before your honorable bodies for action. Stated in a word, the purposes of the present bills are: (1) to retain unimpaired the basic object of the 1938 amendment, which eliminated the "relation back" doctrine of Sexton v. Kessler (supra) and the "pocket lein" doctrine of Carey v. Donohue (supra); (2) to eliminate the evils of allowing the trustee to take the position of a bona fide purchaser and to restore him to the position of a holder of a lien by legal proceedings, in harmony with his functions under the Bankruptcy Act. Creditors are the claimants in bankruptcy, and they certainly have no legitimate complaint if they are allowed all of the assets that they might have obtained, irrespective of actual notice and other bars against principal creditors, if they had taken advantage of every remedy that they might conceivably have invoked under applicable State laws. (3) in effectuation of said policy, to provide that no transfer made in good faith, for a new present consideration, shall constitute a preference to the extent of such consideration actually advanced, if the provisions of applicable State law govern ing the perfection of such transfer are complied with, with an appropriately rigid time limitation (30 days) for such perfection if such limitation (is not itself prescribed by the applicable State law. In the bills, the protection accorded the transfers is rigidly restricted to those made for a "new and contemporaneous consideration." Since such transfers add to the debtor's assets, they should not be subject to attack by the trustee under any hypothetical test unless there are definite State restrictions for recordation or other perfection, and these requirements have not been complied with. For example, the mere fact that a tort claimant, a distraining landlord, or a garnishee might have come in ahead of a transferee for value and in good faith should not be permitted inequitably to add to the assets of the bankrupt estate to the prejudicial expense of the transferee, if the latter has done everything necessary under State laws. VI. TWO SUPPLEMENTAL SUGGESTIONS (a) Since the bills were introduced, it has been called to our attention that, while the proviso in subdivision (2) (H. R. 2412, p. 2, lines 23–25 to p. 3 lines 1-4; S. 826, p. 2, lines 23-25, p. 3, lines 1-4) specifically continues the outlawing of Carey v. Donohue, subdivision (3) does not contain a specific provision to the same effect. While the whole intent is clear enough and the caution is, perhaps, unnecessary, the matter can easily be disposed of by the simple insertion, after the word "creditor" (H. R. 2412, p. 3, line 10; S. 826, p. 3, line 11), of the phrase "or purchaser of real property," before the phrase "described in paragraph (2)" in the next line. In order to make assurance doubly sure, we therefore recommend that this minor addition be made. (b) We are also advised that the executive committee of the National Bankruptcy Conference has approved additional language, for insertion in the section, so as to draw the line between an analogy to the Klauder case and an analogy to the Vardaman case with reference to the rights of the trustee, when restored for these purposes to the position of a holder of a lien by legal proceedings. We of the committee are all agreed that, while there may be something to be said for such clarification, the problem will be less acute, because the holders of liens by legal proceedings are less likely than bona fide purchasers to improve their standing by action subsequent to their acquiring their crucial status. Therefore, largely because the attempt to draw the line might unduly complicate the present proposal, four of the five members of the committee would refrain from urging that the attempt be made. However, Professor MacLachlan (the fifth member of the committee) has found cases where lien holders can take such subsequent action, and therefore believes that the evils of the potential part of the test should be specifically eliminated. He accordingly recommends the addition of the following language at the end of paragraph (2) of the bill (H. R. 2412, page 3, line 3, and S. 826, page 3, line 4): "The rights that such a lien creditor or bona fide purchaser could acquire shall include the rights acquired by the mere fact of obtaining such a lien or making such a purchase, and any further rights that might be obtained by recording any document, or giving notice to any person, or taking any step solely within the control of such a lien holder or purchaser, with or without the aid of ministerial action by public officials, but such creditor's or purchaser's rights shall exclude those acquired by any acts or transactions subsequent to his obtaining such a lien or making such a purchase which require the agreement or concurrence of any third party, or which require any further judicial ruling.” The remaining four members of the committee have no objection to the incorporation of this suggestion if it will not delay the enactment of the bill itself. VII. ENDORSEMENTS BY BOTH INTERESTED AND DISINTERESTED GROUPS (a) Because of the importance of their subject-matter, both before and since the introduction of the bills, they have received wide publicity, and a number of groups, both interested and disinterested, have taken action upon them which has been, with virtual unanimity, favorable. Dealing first with interested groups, they have received the endorsement of the bankruptcy committee of the American Bankers Association; the New York Credit Men's Association; the Factors Legislative Committee; the American Finance Conference; the National Conference of Commercial Receivable companies; the Minnesota Association of Sales Finance Companies; the association of Commercial Discount Companies of New York; and the Bank of America, the Nation's largest banking institution, with the greatest diversity of business. For illustration, at its meeting on March 25, 1947, the bankruptcy law committee of the New York Credit Men's Association, resolved as follows: "The bankruptcy law committee of the New York Credit Men's Association recommends to the board of directors that it approve the proposed amendment to section 60a now pending before the Congress * * At its annual convention held at the Waldorf-Astoria Hotel on November 19, 1946, the National Conference of Commercial Receivable Companies, Inc., a Nation-wide group of over 60 organizations principally engaged in the extension of credit on all kinds of security to small and medium-sized borrowers, took the following action: "Resolved, That the National Conference of Commercial Receivable Companies, Inc., in annual meeting assembled, recommends to the Congress of the United States that section 60a of the Bankruptcy Act be amended in principle in accordance with the draft of the proposed amendment recommended by resolution adopted by the house of delegates of the American Bar Association on October 31, 1946, subject to such changes in phraseology as the executive committee of this Conference may deem necessary or desirable." The National Association of Credit Men has also endorsed it, conditioning such endorsement upon the contemporaneous enactment of a new section 70j to the Bankruptcy Act, which would provide for the national recordation of the assignment of accounts receivable. Solely because we regard any such proposal as not germane to the fundamental purpose of the bill, we refrain from discussing its merits, but it should be pointed out that the subject of national recordation is a highly controversial one, and, in the opinion of the majority of this committee, need not be considered in connection with these bills, because it would not only (1) badly overcomplicate the bills (which, unavoidably, are not too simple at best), but also (2) because of its controversial character, greatly delay (if not indefinitely prevent) the much-andimmediately-needed amendment to the preference section. There have now been nearly 5 years of confusion and uncertainty. (b) The bills have also received the endorsement of a number of disinterested groups and legal writers. The disinterested groups include the State bankers associations in California, Massachusetts, Michigan and New York; the Association of the Bar of the city of New York; the Chicago Bar Association; the New York County Lawyers Association; the Bronx County Lawyers Association; and, in all probability, a number of others that have not come to our notice. Illustratively, the resolution of the bankruptcy committee of the Association of the Bar of the city of New York, adopted on December 3, 1946, reads as follows: "Resolved, That the committee approve and recommend the adoption of section 60a of the Bankruptcy Act in accordance with the proposed amendment, as recommended by the American Bar Association on October 31, 1946, and by the National Bankruptcy Conference, subject to the next succeeding resolution; and "Further resolved, That the committee feels at this time that it is preferable to eliminate the word 'fair' in the expression 'new and present fair consideration' at the beginning of paragraph 3 of the proposed amendment; and "Further resolved, That the amending of Section 60a along the lines referred to above is of such importance to the business world that it should be presented by way of a separate bill rather than by inclusion with other amendments which might cause delay." The amendment suggested in the second paragraph of this resolution was made in the bills prior to their introduction in Congress. It has also received the endorsement of a number of individual experts and students, illustratively, of George B. McGowan, author of the authorative treatise on Trust Receipts (Ronald Press, 1947), he writes: "Competition by dealers and merchants is one means of keeping prices down. The more people who can obtain goods to sell in competition with others, the less chance there is of prices moving upward. Congress should not delay amendment of section 60a so as to resolve all doubt as to the effectiveness of the security devices by which honest men with limited resources obtain credit from lenders who are satisfied as to the borrowers' honesty but only desire to be protected against other creditors in the event that bankruptcy or insolvency occurs." Copies of the foregoing resolutions and endorsements are annexed as an appendix to this statement. VIII. BIBLIOGRAPHY Finally, few subjects have received as much treatment in legal periodicals over the past several years. Among the many articles that have appeared in our law reviews and journals, most of them authored by outstanding experts in the field, are: Defining a preference in Bankruptcy, by Prof. James A. MacLachlan, in the December 1946 issue of the Harvard Law Review (vol. LX, p. 233); A Proposal to Amend Section 60a of the Bankruptcy Act, by J. Francis Ireton, Esq., in the January and April 1947 issues of the American Bankruptcy Review; Assignments of Accounts Receivable and the Bankruptcy Act, by Alan V. Lowenstein, Esq., in the spring 1947 issue of the Rutgers University Law Review; Proposed Revision of Section 60a of the Bankruptcy Act: A Step Backward, by Mr. Stephen Ogelbay, in the December 1946 issue of the Commercial Law Journal; two articles respectively entitled, "Corn Exchange National Bank and Trust Company v. Klauder Revisited: The Aftermath of its Implications," and "Corn Exchange National Bank and Trust Company v. Klauder Revisited: A Supplemental Note," coauthored by Irvin I. Livingston, Esq., and Milton P. Kupfer, Esq., in the October 1946 and January 1947 issues of the Virginia Law Review (XXXII Virginia Law Review, p. 910, and XXXIII Virginia Law Review, p. 1); Some Unsolved Problems Under Section 60a of the Bankruptcy Act, (43 Columbia Law Review 58, (1943), the foreword to an article entitled, "Assignment of Accounts Receivable: Confusion of the Present Law, the Impact of the Bankruptcy Law, and the Need for Uniform Legislation (by Maximilian Koessler, 333 California Law Review 40, (1945), and Preferences in Bankruptcy (15 University of Chicago Law Review 311, (1948), by Prof. John Hanna; an article entitled, "Sick Sixty" in the September 1947 issue of the Cornell Law Quarterly (vol. XXXIII, No. 1, p. 99), by Prof. Arthur John Keeffe, and Messrs. John J. Kelly, Jr., and Myron S. Lewis, embodying the results of a year's study of the present law, conducted under Professor Keeffe's supervision. With a single exception (Mr. Oglebay's), which dealt with an earlier draft of the bills, all of these articles endorse them, both in principle and terms. Of course, a number of suggestions for refinement, principally in language, have been made. We do not claim perfection for our effort, nor would we wish to oppose any suggestions, consistent with the basic objectives of the identical bills, that would improve them. On the other hand, every effort has been made to meet all approaches to the subject, and it is largely as a result that the bills have become so lengthy and involved as they are. It is our respectful submission that their enactment is urgently needed, and we so recommend to your honorable committees. JOHN HANNA, J. FRANCIS IRETON, Special Committee of the Dated March 25, 1948. APPENDIX-RESOLUTIONS AND ENDORSEMENTS 1. American Finance Conference. 2. National Conference of Commercial Receivable Companies, Inc. 3. California Bankers Association. 4. Massachusetts Bankers Association. 5. Michigan State Bankers Association. 6. New York State Bankers Association. 7. Bank of America. 8. Minnesota Association of Sales Finance Companies. 9. New York Credit Men's Association. 10. Association of Commercial Discount Companies, Inc. (of New York). 11. American Bar Association. 12. Chicago Bar Association. 13. Association of the Bar of the city of New York. 14. Endorsement of Frederick T. Kelsey, Esq., former chairman of the Committee on Uniform State Laws of the Bar Association of the city of New York. 15. Endorsement of New York County Lawyers Association, as contained in statement of the chairman of its Bankruptcy Committee, before Senate subcommittee. 16. Bronx County Bar Association. 17. Endorsement of George B. McGowan, author of Trust Receipts. 18. Endorsement of Hon. William B. Henderson, revisor of statutes of the State of Minnesota. |