Mr. McCULLOCH. Thank you. Mr. HOBBS. I would like to ask you a question, if you please, sir. I think that your testimony is perfectly clear with the exception of one thing, and that was that it might be construed as your advocacy of the adoption of both bills, both the Reed and the other. Mr. MONTGOMERY. No. If I gave that impression I want to say that I think your bill is the one that should be adopted. Mr. HOBBS. And you are not advocating both? Mr. MONTGOMERY. I am not advocating both bills. Mr. MONTGOMERY. That is included in your bill. That is what I referred to as the Federal recording statute. That is what I am in favor of. Mr. HOBBS. I want you to comment on that particular feature of it. Mr. MONTGOMERY. We are in favor of that. Mr. HOBBS. Cordially or Mr. MONTGOMERY. Enthusiastically. Mr. HOBBS. Thank you. Now then, I want to ask you another question, if you would differentiate for the purpose of the record between the validating method and the recordation. Mr. MONTGOMERY. As to what it means? Mr. HOBBS. Yes. Mr. MONTGOMERY. The validation statute Mr. HOBBS. Nobody has defined it at all for the record. Mr. MONTGOMERY. I might say that the validation statute is a codification of the law as it is in the State of New York. It is a statutory enactment of the New York rule. The New York rule is that an assignee of an account receivable gets a title good as against all the world by the mere execution and delivery of an assignment without filing or recording or notification of the obligors of the accounts. Mr. HOBBS. And do they define what they mean by validation? Mr. MONTGOMERY. What they mean is that they validate as against all the world assignments of accounts receivable. Mr. HOBBS. They just do it by the rule of doing it. Mr. MONTGOMERY. That is right. Mr. HOBBS. The other question I want to ask is with regard to your opinion as to H. R. 5693, including section 13a. Do you think that 13a or any other section is controversial in the slightest degree? Mr. MONTGOMERY. In my opinion there is nothing controversial in that entire bill. Mr. HOBBS. Thank you. Mr. REED. Mr. Montgomery raised a question about whether the American Bankers Association had taken any action on this proposition, which I do not know. Mr. Needham has not filed any statement. In that regard, probably if Mr. Needham comes here or files a statement we will ask him that question. Mr. MONTGOMERY. I think it would be very desirable to find out about that, definitely. Mr. REED. That also calls to my mind that one of the gentlemen who was here this morning questioned whether or not the National Bankruptcy Conference had taken any official action in regard to either of these bills. Perhaps Mr. Olney can answer that question. Mr. OLNEY. Our statement is there. Mr. REED. I know your statement is there. But I have not had a chance to read the statement yet and I wondered whether they had taken official action. Mr. OLNEY. Yes. I thought I stated this morning. We had a conference in Atlantic City in October 1946. That followed some conferences between members of the National Bankruptcy Conference and the American Bar Association with regard to the proposed elimination or change from the bona fide purchase test to the one in this H. R. 2412 at the present time. The matter was the subject of a great deal of discussion at the National Bankruptcy Conference in Atlantic City in 1946, and the result was that what had been presented at that time, as stated by Mr. Kupfer, was, by majority vote-it was not unanimous, but it was a good majority-found to be a good draft, subject to possible draftsmanship. Thereafter that provision was put in, limiting what was meant so as to exclude a case like the Vardaman case. That has been referred to. At that time it was also a matter of discussion, but no action at the Conference then, with regard to recording. Thereafter the drafting committee of the National Bankruptcy Conference, in conjunction with Mr. Montgomery, who is a member of the drafting committee as a matter of fact, proposed the 701; 70i was thereafter approved, together with the proposed new 60a, (the present bill spoken of as the Judge Hobbs' bill) by the executive committee of the National Bankruptcy Conference. So that at the present time the National Bankruptcy Conference is on record as approving 5834. Is that what you wanted, sir? Mr. REED. That is it. Mr. OLNEY. That statement that is up there as the National Bankruptcy Conference statement was prepared in that connection for this committee. Mr. REED. Thank you very much, Mr. Olney. Mr. REED. Is Mr. Yankauer here? STATEMENT OF WALTER D. YANKAUER, EXECUTIVE VICE PRESIDENT, MILL FACTORS CORP., NEW YORK CITY, N. Y. Mr. YANKAUER. My name is Walter D. Yankauer. I am executive vice president of Mill Factors Corp. in New York City and chairman of a committee of the factors of New York City which has had under consideration various legislative proposals, including this one. I am also a member of the bar of the State of New York; I am chairman of the committee on factors liens and pledges of the American Bar Association; I am also a member of the National Credit Men's Association; and I am a member of the legislative committee of the New York Credit Men's Association. Factors may be distinguished from finance companies in this respect: We purchase accounts receivable rather than merely loan upon the security of the accounts receivable. (The statement is as follows:) STATEMENT IN SUPPORT OF H. R. 2412, TO AMEND SECTION 60A OF THE BANKRUPTCY ACT, AND IN OPPOSITION TO H. R. 5834. THIS STATEMENT IS SUBMITTED ON BEHALF OF THE FACTORS OF NEW YORK CITY BY THEIR LEGISLATIVE COMMITTEE 1. INTRODUCTORY This statement is submitted on behalf of the following: Commercial Factors Corp., William Iselin & Co., Inc., Meinhard Greeff & Co., Inc., Textile Banking Co., Edmund Wright Ginsberg Corp., John P. Maquire & Co., Inc., Mill Factors Corp., James Talcott, Inc., L. F. Dommerich & Co., H. A. Caesar & Co., C. A. Auffmordt & Co., Century Factors, Inc., Coleman & Co., Crompton Richmond Co., Inc., Hubshman Factors Corp., Rusch & Co., Shapiro Bros. Factors Corp. The above-named finance sales, chiefly in the textile industry, to the extent of an annual volume approximating $2,000,000,000. Their chief function consists in the purchasing of and advancing upon accounts receivable, and the making of loans against inventories of merchandise. They, therefore, are vitally interested in protecting the validity of their security. II. R. 2412 would amend Section 60a of the Bankruptcy Act by changing the present bona fide purchaser test in determining the existence of a preference, and reverting back to the judgment creditor test which obtained prior to the passage of the Chandler Act, without, however, restoring the pocket lien type of mortgage and the relation back theory with regard to pledges. H. R. 5834 is divided into two sections. Section 1 is substantially the same as H. R. 2412. Section 2 would add to the Bankruptcy Act a new subdivision, to be known as 701, which would be a Federal recording statute having to do only with assignments of accounts receivable. We shall here omit consideration of the technical aspects of the proposed amendment to section 60a of the Bankruptcy Act, as this will have been fully covered in exhaustive memoranda which will be submitted to this committee by a special committee appointed by the American Bar Association to consider the proposed amendment to section 60a of the Bankruptcy Act, and by other interested groups. II. THE PROPOSED AMENDMENT TO SECTION 60A OF THE BANKRUPTCY ACT REMOVES A CLOUD UPON THE VALIDITY OF FACTORS' LIENS UPON MERCHANDISE H. R. 2412 and section 1 of H. R. 5834 are identical with the exception that lines 1 to 12, inclusive, on page 3 of the committee print of H. R. 5834 is not included in H. R. 2412. This sentence does not affect the substance, so that we may, for the purpose of this discussion, consider H. R. 2412 and section 1 of H. R. 5834 together. Factors' lien acts have been enacted in the following 21 States: Alabama, Connecticut, Delaware, Maine, Maryland, Massachusetts, Michigan, Minnesota, Missouri, New Hampshire, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Rhode Island, South Carolina, Texas, Vermont, Virginia, West Virginia. In essence they grant to a lender a lien upon a stock of merchandise remaining in the possession of the borrower, provided that statutory requirements, including the filing of a notice in a public recording office, and in some cases the posting of a sign at the entrance to the borrower's premises, are complied with. Most of the statutes shift the lien from the merchandise to the proceeds of sale in the event that the goods are sold. Some of the statutes free the merchandise from the lien upon its sale. In all cases, however, the merchandise itself can be acquired by a bona fide purchaser for value, free of the lien, and, therefore, under section 60a in its present form the lien is subject to attack and possible invalidation in a bankruptcy proceeding involving the borrower. We do not assume it to have been the intent of Congress to eliminate all security transactions from protection in the administration of a bankrupt estate, yet that is the extent to which the courts have actually gone in some cases in interpreting section 60a of the Bankruptcy Act. We do not assume it to have been the intent of the draftsmen of the Chandler Act, nor of any of the opponents of H. R. 2412 to remove security transactions from all protection in bankruptcy, but that may be what will happen with respect to all loans upon merchandise unless H. R. 2412. becomes law. The proposed amendment to section 60a, among other things, protects a lien acquired by a factor in good faith, for a present consideration. In the critical state of world affairs the extension of secured credit to growing businesses should be encouraged. It is vital that production be not crippled through unnecessary, unfair, and inequitable legal obstacles. Translating the proposition into its simplest terms, what we advocate is this: If a merchant borrows money and pledges his merchandise as security in accordance with a recognized form of procedure validated by the laws of the State where the loan is made or the merchandise is located, that lien should not be stricken down and the lender placed in the position of an unsecured creditor because a hypothetical, not an actual, bona fide purchaser for value could have acquired title to the merchandise free of the factor's lien, and yet under the construction placed by the courts upon section 60a of the Bankruptcy Act in its present form, just such a result might occur. H. R. 2412 would correct this situation without restoring the evils of the "pocket lien" and "relation back" cases, to repeal the effect of which the present section 60a was enacted. III. THE ENACTMENT OF A MUCH-NEEDED AMENDMENT TO SECTION 60A OF THE BANKRUPTCY ACT SHOULD NOT BE CONDITIONED UPON ANY OTHER AMENDMENT, SUCH AS IS CONTAINED IN SECTION 2 OF H. R. 5834. MOREOVER, SECTION 2 OF H. R. 5834 SHOULD BE DEFEATED ON ITS MERITS Section 2 of H. R. 5834 would set up a system of Federal recording for assignments of accounts receivable. It would condition the validity of an assignment of an account receivable against a trustee in bankruptcy upon the recording of a notice of intention to assign in the office of the clerk of a Federal district court. We shall not consider the technical vices of a Federal recording system, because that will be done by others in sufficient detail. We shall confine our opposition to objections to the general purpose, effect, and scope of the proposed amendment. The National Association of Credit Men and other supporters of the proposed section 70 of the Bankruptcy Act, which would set up Federal recordation of assignments of accounts receivable, admit that section 60a should be amended. Their admission goes so far as to include the amendment in the proposed bill, H. R. 5834, sponsored by them. They have, however, attempted to tie in the much-needed amendment to section 60a of the Bankruptcy Act with a new section 701. They have blandly stated that they will support the 60a amendment but only if 701 is simultaneously enacted. The two sections actually have nothing whatsoever to do with each other. The important effect of the amendment to section 60a is to validate liens upon tangible personal property, properly perfected under State law, secured by factors' liens, chattel mortgages, trust receipts, or other security devices which enable a lender to obtain a lien upon tangible personal property, but which, despite State laws validating them, may nevertheless be set aside by a trustee in bankruptcy. Assignments of accounts receivable fit into a somewhat different category. They now can be perfected under the provisions of various State laws and their validity sustained against a trustee in bankruptcy in several ways: By the making of a written assignment of the accounts, the marking of the borrower's books, the recording of a notice of intention to assign, or by notification of the assignment sent to the debtor. Most of the leading commercial States have provided by statute, or it is their common law, that assignments of accounts receivable may be perfected by a simple written assignment of the accounts themselves. The following States have enacted such statutes: Arkansas, Connecticut, Illinois, Indiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, New Hampshire, Oregon, Rhode Island, South Dakota, Virginia, Wisconsin. In addition, States such as New York and New Jersey have adopted a similar rule by judicial decision. Two States, Georgia and Pennsylvania, have adopted bookmarking statutes, and 12 States have enacted so called recording acts. None of the other States have expressed themselves through legislation. The effect of the proposed amendment to section 70 of the Bankruptcy Act would be to abrogate the declared legislative policy of 17 States and the declared judicial policy of 19 States, and to substitute as a universal system for the validation of assignments of accounts receivable a form of recording notice adopted in only 12 of the 48 States, having substantially less than one-fourth of the population of the country. The National Association of Credit Men, which has gone on record in favor of the enactment of section 70 of the Bankruptcy Act, although a very substantial minority in that Association opposes it, takes the position that Federal recording of assignments of accounts receivable would be helpful to merchants who extend unsecured credit. We factors differ with the majority view of the National Association of Credit Men as to any assistance which recording of assignments of accounts receivable would furnish in connection with the extension of unsecured credit. Although we purchase accounts receivable, we buy them without recourse against the assignor in the event of the insolvency of the debtor. Therefore, we in fact extend unsecured credit to the merchants of America to the extent of almost $2,000,000,000 per year. Certainly our voice should, therefore, be heard in connection with an amendment to the Bankruptcy Act, the effect of which is supposed to be to assist those who extend unsecured credit. We most vigourously oppose any Federal recording statute for assignments of accounts receivable. We believe that the genesis of the proposed section 70i is unsound in principle: 1. It sets aside the policy of 36 States (including most of the large commercial ones) which have declared themselves either through legislation or by judicial decision on the matter of the validation of assignments of accounts receivable. 2. It extends the area of Federal jurisdiction beyond any point to which it has previously gone by requiring recording offices to be set up in the Federal courts for purely intrastate transactions. 3. It would hamper, not simplify, the flow of business across State lines, because it would be almost impossible for a lender on accounts receivable to know whether he has properly complied with all of the various State and Federal technicalities imposed by law. 4. It would tend to increase rather than to lower the cost of money to needy but worthy borrowers, because of the greater hazards involved and the greater complications imposed. 5. It would completely disregard the views, so difficult of expression, of the public, represented and typified by the borrower of money. Enlarging on this last statement, we would, by carrying the Federal recording principle to its ultimate conclusion, reach the startling result that if a storekeeper or a merchant in a small community desired to obtain a small loan from a local bank and to assign his accounts receivable as security therefor, the bank would have to go posthaste to the nearest Federal district court, the same place where a petition in bankruptcy is filed, and file a notice for all the world to see that this small-business man needs a loan on his accounts receivable. Surely this would not help the merchant of modest means, of whom there are so many thousand in this country, to obtain a small amount of credit when he needs it. Instead it would hold him up to his fellow townsmen as a poor credit risk, whereas in fact he is the best credit risk that this country has. H. R. 5834 should, therefore, we submit, not be enacted into law. FACTORS' LEGISLATIVE COMMITTEE, JOSEPH S. FECHTELER, JOHN GRIMES, MARTIN J. KEOGH, JAMES TALCOTT, MAY 7, 1948. WALTER D. YANKAUER, Chairman. Mr. YANKAUER. In the event that the account receivable is not paid by the debtor at its maturity for credit reasons, the loss falls upon us and not upon the seller of the account or the borrower upon the account, if you want to call him that. As a result of that, we are in effect extenders of unsecured credit. There are about 17 factors in New York on behalf of whom I am now speaking, and between them I should say that they handle a volume of unsecured credit transactions in each year approximating at least two billions of dollars. And therefore I think that our voice should have some weight in determining whether a national recording act should be or would be beneficial to extenders and granters of unsecured credit. In addition to this function of buying accounts receivable we also make loans on inventories secured by factors' liens in those 21 States which have adopted the Factors' Lien Act. The Factors' Lien Act in effect grants to a factor or any bank or other lender a lien upon merchandise remaining in the possession of the borrower provided that certain filing requirements are complied with. Insofar as our business is concerned with lending on merchan |