EXHIBIT A HOMER J. LIVINGSTON, ESQ.. Chicago 3, Ill. GERDES & MONTGOMERY, DEAR MR. LIVINGSTON: As counsel to the National Association of Credit Men, I have been requested by Mr. Henry H. Heimann, the executive manager, to bring to the attention of the section of corporation, banking and mercantile law of the American Bar Association, a resolution adopted by the board of directors of the National Association of Credit Men at a meeting held in June 1947 with respect to the proposed revision of section 60a of the Bankruptcy Act. The directors of the National Association of Credit Men, after a careful study of the proposed amendment to section 60a, as approved by the special committee of the American Bar Association, endorsed the amendment, provided that the Bankruptcy Act be further amended to invalidate as against a trustee in bankruptcy assignments of accounts receivable unless a valid and effective notice of intention to assign be on file or of record in a Federal office, or such notice be filed in accordance with the provisions of applicable State law. The National Association of Credit Men recognizes the fact that certain types of security transactions may be jeopardized by the present provisions of section 60a, but it feels that the protection of such transactions by the elimination of the bona fide purchaser test will be detrimental to the interests of general creditors and to the borrowing public in that the amendment will tend to perpetuate what it regards as the evil of so-called secret assignments of accounts receivable. The National Association of Credit Men believes that the time has come when there should be general recognition of the desirability of providing for public notice whenever accounts receivable are pledged, and that, in the absence of effective State legislation, Federal recording of notice of intention to assign accounts should be required. The National Association of Credit Men emphatically rejects the argument that financial statements are an adequate substitute for public recording, and it feels that it cannot acquiesce in the proposed amendment to section 60a unless special treatment be given in the Bankruptcy Act to the matter of publicity for accounts receivable financing. It is hoped that the American Bar Association and the National Association of Credit Men may be able to present a united front before Congress in supporting (a) the proposed amendment to section 60a, and (b) the proposed additional amendment dealing with assignments of accounts receivable. I have been instructed to present this matter to you in the hope that it may be considered by the section at its Cleveland meeting and in order that there may be no misunderstanding between the two associations when the legislation comes before Congress. Very truly yours, W. RANDOLPH MONTGOMERY. Our next witness is Mr. Peter B. Olney, Chairman of the National Bankruptcy Conference of New York City. Mr. Olney. STATEMENT OF PETER B. OLNEY, CHAIRMAN, NATIONAL BANKRUPTCY CONFERENCE Mr. OLNEY. I have nothing to add to what is in the statement submitted. There are so many other people ready to speak that all I would like to say would be this, that the national bankruptcy conference, of which I am chairman, approved the wording of your bill, as they call it, with the addition to which Mr. Kupfer has not objected. Thereafter, after careful consideration, the executive committee. passed and approved what is now the amendment to section 70(i) and linked the two together in one bill. It is my personal feeling, very strongly, that if we are to step down from the bona fide purchaser to the judgment lien creditor status that we should have section 70(i), Federal recording. The statement with regard to this being an impingement upon State rights I think can be very simply answered. There is no impingement upon State rights insofar as it has to do with the rights of creditors and others in the absence of bankruptcy. It is only as bankruptcy comes along that against the trustee in bankruptcy there would be this impingement. And it is well settled in the Constitution that, in regard to insolvency, the bankruptcy law is supreme. Mr. HOBBS. There is no question about your position with regard to the last statement. I was simply enjoying the opportunity of questioning you with regard to his statement. Mr. OLNEY. I was referring to Mr. Kupfer's statement in which the point seemed to be raised that our section 70i was impinging on State rights. Mr. HOBBS. I think that both Mr. Kupfer and I are in perfect. accord as to the fundamental issue of law. Thank you, sir. Mr. REED. You have filed a formal statement? Mr. OLNEY. Yes. (Statement referred to by Mr. Olney is as follows:) STATEMENT ON BEHALF OF THE NATIONAL BANKRUPTCY CONFERENCE MAY 7, 1948. The National Bankruptcy Conference has prepared proposed amendments to H. R. 2412 which are contained in H. R. 5834, introduced by Mr. Hobbs on March 15, 1948. We should like to call to the attention of the subcommittee the changes which we have proposed, and the reasons for those changes. It is only fair to add that there is substantial disagreement among the members of the National Bankruptcy Conference as to the proposed addition of section 701, discussed below. The history of H. R. 2412 and its companion bill S 826 is recorded at some length in the report of the special committee of the American Bar Association on the revision of section 60a of the Bankruptcy Act, and has been expanded at length in a series of law-review articles. See Ireton, A Proposal to Amend Section 60a of the Bankruptcy Act (A. 6 Am. Bankr. Rev. 257, 287); Livingston and Kupfer, Corn Exchange National Bank & Trust Co. v. Klauder Revisited; The Aftermath of its Implications (32 Va. L. Rev. 910), and supplemental note (33 Va. L. Rev. 1); McLaughlin, Defining a Preference in Bankruptcy (60 Harv. L. Rev. 233). The dominating reason for amendment is that liberal constructions of the Chandler Act by Federal courts have had the effect of discouraging legitimate security transactions. It is necessary to take some moderating action to restore the balance necessary to cure this situation, while still giving adequate recognition to the needs of bankruptcy administration. The first change in H. R. 2412 which we have proposed and which, of course, is contained in H. R. 5834, is to make the law of preference applicable to proceedings under chapter IX. The Chandler Act omitted any reference to that chapter upon the theory that such proceedings were not adapted to the recovery of preferences. Since 1938, however, the scope of the chapter has been extended so as to provide for proceedings to adjust the debts of districts and special agencies less distinctively municipal in character than the corporations originally embraced in the bankruptcy legislation on this topic. Questions of preferential transfers may be more likely to arise in connection with the business of such debtors. There is no express provision for avoiding preferences in chapter IX, but it is deemed that the power of a court of bankruptcy passing judgment on a plan under chapter IX to consider the feasibility and propriety of avoiding preferential transfers by the debtor should not be excluded by the language of section 60. The second addition to the language of H. R. 2412 contained in H. R. 5834 involves difficulties of a highly technical order. The validity of a transfer under section 60 depends in part upon determining when a transfer became so far perfected that no bona fide purchaser from the debtor and no creditor could thereafter have acquired any rights in the property so transferred superior to the rights of the transferee. This language might be construed as testing the transfer by the rights that a bona fide purchaser might acquire by the mere fact of making his purchase, or the rights that a creditor might acquire by the mere fact of becoming a creditor without the taking of any further action. The Supreme Court has, however, rejected this strict construction. Corn Exchange Bank v. Klauder (318 U. S. 434, 1943). The fact that the bona fide purchaser of an account receivable might obtain rights superior to a prior assignee of the account by giving prior notice to the account debtor was held to meet the requirements of the element of the law of preference here in question, with the result that a trustee in bankruptcy succeeded in avoiding an assignment of accounts to a creditor who supposed himself to be secured. A district court held in In re Vardaman Shoe Co. (52 F. Supp. 562, E. D. Mo. 1943) that in a case otherwise similar such an assignment was vulnerable to attack by the trustee in bankruptcy, although the hypothetical purchaser could only prevail by obtaining a new direct promise from the account debtor, by getting judgment against him, by getting payment from him, or meeting equally onerous conditions which in no sense followed as a natural consequence from the rights obtained by the mere bona fide purchase of the account. Contra: In re Rosen (157 F. (2d) 997, C. C. A. 3, 1946). The doubt cast upon accounts receivable as good security under these decisions led to a variety of State laws to meet the situation. In the jurisdictions where such laws have been passed, they have ameliorated the condition of uncertainty and promoted financing upon the security of accounts receivable. The National Bankruptcy Conference does not believe that the interests of general creditors are adequately protected under some of this legislation, and proposes in section 70i a Federal recording act to meet this need. Quite apart from the merits of the proposal of section 70i, however, it is desirable to clarify the test of transactions vulnerable to attack under section 60. The provisions of H. R. 2412, substituting for a bona fide purchaser the holder of a lien by legal or equitable proceedings as the hypothetical party whose rights determine whether a transfer is perfected against the trustee in bankruptcy, diminish the urgency of this need without adequately meeting it. There are cases in which the holder of a lien by legal proceedings can better his position by actions subsequent to acquiring his lien. See Mann v. Roberts (11 Lea 59, 1883); Donacher v. Tafferty (147 Ky. 337, 340, 1912); Hulbert v. Hulbert (216 N. Y. 430, 438, 1916); Hammock v. Qualls (139 Tenn. 388, 1917). Adequate protection of a bankrupt estate suggests that a transfer to be valid against the trustee should be so far perfected that no holder of a lien by legal or equitable proceedings could acquire rights superior to the transferee merely by recording or giving notice or taking any steps solely within his control. The fact, however, that such a hypothetical lien holder might invalidate the transfer by getting a judgment in his favor, or getting payment or a new promise from a third party should be insufficient to allow the trustee in bankruptcy to prevail. To codify this distinction the proposed amendment in H. R. 5834 adds what is now the last sentence in paragraph 60a (2). This endeavors to spell out on a rational and practical basis what subsequent action by the lien holder shall be included and what shall be excluded in acquiring the rights against which the validity of a preferential transfer is measured. Since under H. R. 2412 realestate transfers are still to be tested with reference to the rights of a hypothetical bona fide purchaser, the newly added language is also applied to such purchasers Thus, for example, in a jurisdiction where, as between two bona fide purchasers of real estate, the first to record his conveyance prevails, the trustee in bankruptcy will be able to claim the rights a hypothetical bona fide purchaser might acquire through following his purchase by a record of his conveyance, and, consequently, an alleged preferential transfer of real estate will not be deemed to be made until it is recorded. The proposed language will, however, exclude the possibility that the doctrine of the Vardaman Shoe case or any analogous doctrine be invoked to invalidate transactions by reference to unlimited and undeterminable hypothetical acts of hypothetical purchasers or creditors. The proposal to amend section 60 so as to allow the trustee in bankruptcy to attack a preference from the level of a holder of a lien by legal or equitable proceedings involves the introduction of a standard so closely approaching the standard fixing the rights of the trustee under section 70 as to suggest a conforming change, which H. R. 5834 makes in section 70c. Bankruptcy may be regarded as a levy on all the property of the debtor for the benefit of creditors holding provable claims. The broad scope of the proceeding, its notoriety, and considerations of effective administration support the proposal to regard the trustee as obtaining a lien by legal or equitable proceedings on all the property of the debtor wherever situated and by whomsoever possessed. The declaration of such a lien would not in and of itself authorize summary proceedings to reach property held by a third party under a bona fide claim or right, and it is not proposed to deprive such parties of the right to a trial by plenary proceedings. The trustee is, however, entitled to the protection of a holder of a lien by legal or equitable proceedings, not only to take advantage of recording acts or the like but to take advantage of any rules of State law rendering transfers vulnerable to attack by such holders, and the seniority of his lien should date from the date of the petition in bankruptcy. The present law largely achieves this end, but the proposed amendment adds precision. We have also suggested a new section 70i, with a view to promoting uniformity of distribution in bankruptcy, and to make effective the congressional intent of striking down secret liens obtained through the assignment of accounts receivable on the eve of bankruptcy. By the act of June 22, 1938, section 60a, defining a voidable preference, was amended to provide that a transfer as therein defined must be perfected as against bona fide purchasers from the debtor as well as against creditors in order to prevail against the trustee in bankruptcy of the transferor. The purpose of adding the bona fide purchaser test was stated in the report on the bill to the House of Representatives to be "with the contemplated purpose of striking down secret liens" (H. R. Rept. No. 1409, 75th Cong., 1st sess., p. 30). Following the enactment of section 60a, the United States Supreme Court, in Corn Exchange National Bank & Trust Co. v. Klauder (318 U. S. 434, 1943), held that where, by State law, an assignment of accounts receivable may be perfected against creditors and subsequent assignees only by notification of the obligors of the accounts, and such notification was not given within 4 months before bankruptcy, the assignment (the other elements of a voidable preference being present) was voidable at the instance of the trustee in bankruptcy of the assignor. The Klauder decision has, or is claimed to have, thrown a cloud upon certain other types of security transactions, particularly trust receipts and liens on shifting stocks of merchandise. It is now proposed that section 60a be amended to delete the bona fide purchaser test except as to transfers of real estate. While it is believed that the proposed amendment to section 60a is desirable so far as it will remove any doubt as to the validity of trust-receipt transactions and conditional sales and chattel mortgages on shifting stocks of merchandise, the effect of the amendment will be to reestablish the validity of secret assignments of accounts receivable in jurisdictions which still adhere to the rule which prevailed in Pennsylvania at the time of the transaction in the Klauder case; namely, that title of the assignee must be perfected by notification of the obligors of the accounts. However, since the Klauder decision, 15 States (Arkansas, Connecticut, Illinois, Indiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, New Hampshire, Oregon, Rhode Island, South Dakota, Virginia, and Wisconsin) have enacted so-called validation statutes under which an assignment of accounts receivable is valid as against all the world without public notice and without notification of the obligors. Twelve other States (California, Colorado, Florida, Idaho, Missouri, North Carolina, Ohio, Oklahoma, South Carolina, Texas, Utah, and Washington) have enacted statutes providing that an assignment of accounts receivable shall not be valid as against creditors or subsequent assignees unless notice of the assignment, or notice of intention to assign, the accounts has been filed or recorded in a public office. The test as to whether a transfer has been perfected as required by the provisions of section 60a, is to be determined by the requirements of the law of the State where the assignment was made (Corn Exchange National Bank & Trust Co. v. Klauder, supra). The validation statutes were enacted with the express design and purpose of avoiding the impact of the Klauder decision as it affects accounts receivable financing, and were intended to, and do, nullify the intent of Congress as expressed in the section 60a amendment of 1938, by perpetuating secret liens on accounts receivable. It is believed that the objective of Congress in adding the bona fide purchaser test to section 60a was sound in principle, and that if such an assignment of accounts receivable be made at a time when the assignor is insolvent, or within 4 months before his bankruptcy, it is in the public interest that, regardless of State law, the assignment should be recognized as against a trustee in bankruptcy of the assignor only if the transfer has been disclosed. The most liquid asset of a business concern, other than cash in bank, is its accounts receivable, representing merchandise sold and delivered, and the receivables constitute the principal asset upon which unsecured credit is extended. Cash in bank, while, of course, more liquid than receivables, is not a safe basis for the extension of credit because the amount varies from day to day. Trade acceptances receivable cannot be relied upon as a basis for credit because they are customarily discounted. Notes receivable, if made by an ordinary commercial buyer, usually represent a stale account and therefore cannot be relief upon, or, if they represent sales to customers, are, like trade acceptances, ordinarily discounted and not available as a basis for credit. In the case of a stock of merchandise or inventory, which is the third most liquid asset of a business concern, the law of many States requires that, if it is being financed under trust receipt, notice of the transaction must be recorded. It is difficult to see why, if notice of financing by trust receipt is required to be publicized, notice of financing by the pledge of accounts receivable should not likewise be a matter of public record. As pointed out by the Supreme Court in the Klauder case, borrowing on accounts receivable is often regarded as a sign of financial weakness, but this unfavorable reaction is believed to be the direct result of two factors which are closely related: First, the high discount rates which are, or have been, charged by certain finance companies, and second, the secrecy attending the transactions. High discount rates are fostered by secrecy because of the risk imposed upon the lender of being an innocent second assignee who may not only find himself with no security, but who must refund to an undisclosed first assignee anything he may have collected. Banks lending money at commercial rates of interest cannot afford to take the risks which are assumed by finance companies lending at high rates, and consequently have been reluctant to enter the receivables financing field in the absence of protective legislation. Where banks have entered the field, reasonable rates of discount have been made available to borrowers, and accounts receivable financing has achieved respectability. Enactment of the proposed section 70i would, it is believed, encourage more commercial banks to enter the field, and the resulting competition in rates would be of inestimable benefit to borrowers who now pay the price of secrecy in the form of high discount rates and the attendant stigma. Section 701 will impose no hardship upon banks and finance companies, but will merely require that, as a condition of validity as against a trustee in bankruptcy of the assignor, there shall be filed with the clerk of the United States district court, either within 10 days after an assignment of accounts receivable, or before 4 months prior to the bankruptcy of the assignor, or before the assignor becomes insolvent, a simple notice signed by the assignor and the assignee, stating that the assignor has assigned, or intends to assign, one or more accounts receivable to the assignee named therein. Where, however, a State statute provides in effect that an assignment of an account shall be invalid as against subsequent creditors of the assignor unless notice has been filed in a public office, section 70i expressly provides that compliance with such statute shall be sufficient-thus avoiding duplicate filing in the 12 jurisdictions where public notice is presently required. A notice once filed will be valid for a period of 3 years, and may be renewed for successive periods of 3 years each. Filing of an amended notice is required if a change in the name or the principal place of business or, if there be no place of business, the place of residence, of the assignor occurs. Provision is made for the discontinuance of a filed notice of assignment by the assignor or the assignee if either wishes to clear the record. Such a notice on file in a public office will place persons extending credit to the assignor on notice that they cannot, without further investigation, rely upon the customer's accounts receivable as a basis for credit. Without such notice, they may be, and many times have been, deluded into believing that the accounts receivable are available as a basis for credit when, in fact, the accounts are subject to an unrecorded lien which often becomes known only when bankruptcy ensues. In no way, except by public notice, can persons granting credit to an assignor be assured of their position any more than a purchaser of real estate could be assured of the validity of his title if conveyance of real estate were not recorded. It is believed that section 70i is clearly within the bankruptcy power granted to Congress by the Constitution. It does not change, or attempt to change, property rights created by State law, but merely establishes a uniform rule of distribution in bankruptcy. The filing of the notice is required only if the assignment be made within 4 months before bankruptcy, or at a time when the assignor was insolvent, and failure to file invalidates the assignment only as against the trustee in bankruptcy of the assignor. The use of the bankruptcy power to cut down rights created by State law is neither novel nor extraordinary. Under section 57i as construed, a surety who has not paid a principal creditor before the bankruptcy of a principal debtor, in effect loses his right of reimbursement and is remitted to his right of subrogation. |