Federal court clerk of his district, to travel for all or most of a day or two to examine the assignment of accounts receivable records in a distant city. Of course, there will be agencies to search and report which will be utilized by the sophisticated. But, in the great bulk of the cases all of the transactions will be local-have few interstate aspects-and local people should not be required to travel to a distant Federal clerk's office or employ a service to search the records. The State legislature may have voted down overwhelmingly a proposal that the State require recording.

Difficulties in determining where notices are filed.-H. R. 5834 provides that the notice of the assignment of accounts receivable is to be filed with the clerk of the United States district court of the district or division of a district within which the assignor has his principal place of business. This is very difficult to determine in many instances. Must businessmen be required to operate with maps of the districts and divisions of the Federal courts? In my city, we have two Federal districts, the southern district of New York, which embraces Manhattan, the Bronx, and a few suburban counties, and the eastern district of New York, which embraces Brooklyn, Queens, and other suburban counties. Across the river is the district of New Jersey. Many corporations have plants and places of business in two or more districts in this locality. The chief executive's office may be at one location, the accounting department at another, the sales department at a third, and the principal manufacturing plant at a fourth. It is wellnigh impossible to know which of these qualifies as the "principal place of business" of the assignor in such a situation.

The same thing is true of many corporations operating nationally. They will have places of business of equal importance in many different parts of the country. For example, in New York City they will have a small office, which is the eastern sales office and the place where the board of directors meet. At the manufacturing plant, hundreds of miles away, there will be the executive offices and perhaps the research division. The officers will spend a good deal of time in New York and out at the great plants of the company, each of which may be located in a different State. I venture to say that few reading this statement can name the principal place of business of most, if not all, of the nationally known corporations whose names first come to mind. And then if you ask yourself, "How can I know in what Federal district clerk's office to look?" in the case of any of these corporations, you will appreciate to some extent the difficulties which will arise out of the provision of the bill that the notice is to be filed in the district or division where the assignor has his principal place of business.

Much more justification for Federal recording of liens on automobiles, busses and railroad equipment.-Either this is an instance of the Federal Government stepping in to do by indirection what it cannot do directly-make people in a wholly state transaction file, where the majority of the legislatures have repudiated the ideaor it is an instance of the Federal Government dealing with the problem, because of the interstate aspects which often exist.

If the former, there is no supporting argument to justify this interference with the wholly domestic affairs of a State.

If it is interstate aspects that make the national recording desirable, then there is a thousand times more reason for a Federal Recording Act for chattel mortgages and conditional sales and trust receipts covering automobiles, trucks, busses, railroad equipment (now subject to State recording only). Even in the field of personal relations, because of the interstate features, there is a widely stated demand for Federal legislation as, for example, in the case of divorce. Fortunately, it has not come to pass, but the same "interstate" argument is made for it. If Congress lends encouragement to paternalistic argument in entering any of these fields either in the property or personal areas, where will the matter end? Let us not set a dangerous precedent as an entering wedge.

The basis of the demand for Federal recording of accounts receivable is the same as that for State recording, except on a grander scale. But interstate aspects are thousands of times more frequent in conditional sales, mortgages and leases of automobiles, busses, trucks, and railroad equipment. If this is a sufficient reason

for the Federal Government to take over, we are in for an extension of control from Washington to a degree never before dreamed of.

Lenders not demanding this legislation. But, underlying it all is the academic supposition and it is solely a supposition-that lenders and others will be better protected if recording is required for assignments of accounts receivable. The demand is of the same nature and stems from much the same source as that which caused all the trouble resulting from the 1938 revision of section 60.

Despite the glib assumption to the contrary, lenders do not depend upon any formality with respect to a borrower's accounts, which are, in their nature,

intangible. They rely upon financial statements furnished by the prospective borrower and upon his reputation for integrity. If the borrower's statement that he has not pledged or assigned his accounts receivable is false, he is liable criminally. Our criminal laws, State and Federal (including use of the mails to defraud), constitute sufficient deterrents, and no legislation that the wit of man has ever devised will transmute an outright crook into an honest man. The plain fact is that lending and financing is done in a manner entirely different from that imagined by the proponents of this bill.

Numerous witnesses expressed the foregoing views before the Senate subcommittee. The testimony that this bill is not desired was nearly unanimous. There were only two witnesses in opposition, both representing one organization.

Who are the proponents of this legislation? The National Association of Credit Men and a number of individuals who favor the legislation as an academic matter. The National Association of Credit Men at their last annual convention only voted in favor of the Federal recording of accounts receivable by the narrowest of margins. Mr. W. Randolph Montgomery, general counsel for the Credit Men, appeared with an associate before the Senate subcommittee and testified in favor of the proposal. There were no other witnesses in favor of it. Mr. Jacob I. Weinstein, an attorney of Philadelphia, and Mr. Peter B. Olney, one of the referees in bankruptcy in the Southern District of New York, and the chairman of the National Bankruptcy Conference, also favor it. Prof. James A. MacLachlan, of the Harvard Law School is, I believe, a supporter of the bill. Mr. Richard S. Douglas, counsel for the Cleveland Trust Co., has long been an advocate of State recording. There may be a few, but not many, more proponents of the measure.

I have heard it said that the National Bankruptcy Conference is in favor of the bill. That simply is not true. I am a member of the conference and have attended all of its meetings in the last 10 years. The last was held at Atlantic City in October 1946. At that meeting a Federal Recording Act was presented and referred to a special committee. The special committee has, so far as I know, never taken any action on the matter. In any event, the conference has never taken any action at all, one way or the other on the bill.

Opposed to these men are the leaders, almost without exception, in every branch of banking and commercial financing. Borrowers surely do not want it. I think that the Committee on the Judiciary will find that those whose business it is to deal with these matters daily, and who risk hundreds of millions of dollars of their depositors' or stockholders' money annually by making loans on and purchasing accounts receivable-not to mention those to whom they lend-oppose the proposal, almost to a man.

The prevailing rule works.-The fact is that the prevailing rule of absolute assignment-the law of New York State and of 28 others-works. It works because most people are honest, and businessmen are of necessity even more honest. It is simple. The doctrinaire approach of H. R. 5834 is simply inconsistent with business as it is done. Experience shows that it is unnecessary. Those who do business under the prevailing rule want to keep it. It works.

Our committee opposed to Federal recording.—When the proposal was first broached to our committee, it was discussed, and the motion made to disapprove and recommend against its adoption was unanimously passed. I have been told subsequently by Mr. Olney and Mr. Montgomery that had they been present at the meeting, they would have voted against the motion of disapproval.

Our committee believes that the federal recording of accounts receivable is a separate subject from the amendment of section 60a, and that controversy over it should not be allowed to further delay the correction of the manifest error that was made in revising section 60 in 1938.

MAY 5, 1948.

ALFRED HEUSTON.

Mr. HEUSTON. I did not know until Mr. Weinstein said it today, that there was any doubt in anybody's mind but that we made a mistake in 1938. When I say "we" I mean the National Bankruptcy Conference, and Congress followed our lead.

I was there, and I am chargeable with the mistake along with the rest of them. Just nobody was smart enough to see what was going to happen. We did not dream that trust receipts were going to be affected. We did not dream that chattel mortgages and conditional

sales agreements, where there was a power of resale, were going to be affected. We did not dream that crop mortgages were going to be affected. We did not dream that day loans, such as we have under our statute in New York were going to be affected. And we had no idea that the accounts receivable in about a dozen States were going to be affected.

It was never mentioned here or in the conference, and yet, shortly after the Chandler Act became law we began to realize we had made a bad mistake. There was a grave doubt whether trust receipts were going to be valid and all the rest of these things.

We started in to try to do something about it. In my committee we started a draft. The American Bar Association, the American Bankers Association, but of course, the war was on, the lush days of the war was on. It was not very important and you gentlemen certainly would not listen to us on that down here. You had much more important things.

But now people with plenty of funds are getting fewer and fewer. Secured financing is becoming more and more necessary if enterprises are going to keep going. And when we say, as we say to banks that inquire, or other lenders, "Yes, there is a very real doubt as to whether trust receipts are valid; whether conditional sales agreements with the power of resale are valid; doubt as to whether chattel mortgages with power of resale are valid," they just say, "Well, if there is a big doubt, we will have to treat it as an application for an unsecured loan." And that means that the man whose credit only justifies a secured loan just does not get it.

The drafts that we were all working on finally were all put into one which is now H. R. 2412. They were taken up by the American Bar Association's committee at Atlantic City at its conference 18 months ago. The National Bankruptcy Conference had a meeting there at the same time, and worked on the same thing. The subcommittees worked together. That is the last conference we have had.

Mr. Weinstein's bill that he suggests now was put before the National Bankruptcy Conference. It was perfectly obvious that there was no support whatever for it, except maybe one or two members.

They approved the draft of H. R. 2412 as a good draft subject to possible improvement. That is where the National Bankruptcy Conference stands on the matter today.

Federal recording was mentioned. It was obvious to me that only a small minority of the conference was for it, and I am one of the most surprised persons in the world-so are some others here today-to learn that the executive committee has sought to decide the matter for the conference. I believe that I can name the majority of the conference opposed to it. The fact is that in the last 18 months there has not been any conference.

Right from the beginning our association-that is, the New York City Association, its committee on bankruptcy and corporate reorganizations voted on making the necessary change in section 60a. It voted several times, both before the bill was finally introduced on the form that we had then, and afterward. It has always been unanimous. We have all sorts of interests represented on that committee, and it changed twice, I think, since we first started to consider changing

section 60a-a third of the committee went out of office and a new third came in twice, and they have always voted unanimously in favor of H. R. 2412.

So much for that bill.

Now, turning to the other one, H. R. 5834, is it not, Congressman Hobbs? If you enact that bill here requiring Federal recording of accounts receivable you are going to reverse the laws of about twothirds of the States. My understanding is that there are 29 States that have the New York rule, the validation rule, 2 that have a bookmarking rule, and then I believe 12 that have the recording.

They can change their laws, any one of them, any time. If they do not like validation they can change any time to recording. If they do not like recording they can change the other way or they can pass book-marking statutes.

Then what is the connection between H. R. 5834 and H. R. 2412, which was filed some time before? The only connection that I know is that actually, back in 1938 as I said, we affected the law of accounts receivable in about 12 States. When we were trying to draft H. R. 2412 one of the people who was in favor of Federal recording came to me and said "If you want to get your section 60a bill through you had better go for this Federal recording of accounts receivable."

I said, "What is the connection?"

He said, "You had just better."

I said, "That is blackmail."

He said, "Certainly that is blackmail."

That is the only connection that I know between the two bills. They are entirely separate and distinct bills. And one of them invades the field, throughout the United States, that you gentlemen have never yet invaded.

I say there are a thousand times more reason for a national recording act covering chattel mortgages and conditional sales agreements on automobiles, trucks, busses, railroad equipment-even as to railroad equipment all over the United States the recording is done under State laws-than there is under this account receivable bill.

I suppose there are infinitely more transactions involving moving property of that kind than there is assignments of accounts receivable. Mostly assignment of accounts receivable is a local matter, local accounts pledged or assigned to local people.

Insofar as it is national in scope I say the question of security instruments on busses and trucks is much more important. Insofar as it is local it seems to me that the States ought to be left to decide whether or not they want to have recording.

It was testified here this morning that there are some States that recognize conditional sales agreements without recording. That falls under the same criticism as is leveled against the prevailing assignment rule; but you gentlemen are not purporting to make a national act to govern that.

So it seems to me that unless you are prepared on all these things that have interstate aspects, thousands of them, to invade the field and to say to all the States what kind of chattel mortgage laws they shall have, what kinds of conditional sales laws they shall have, that you should not take the next step on the other type and say what kind of assignments of accounts receivable laws they should have.

This matter, too, came up before our bar association committee in New York and all the members present at that time-this is, when the proposal to have a Federal accounts receivable assignment law was discussed-voted against it. I was told later that if Mr. Montgomery were present, and Mr. Olney, they would have voted for it. But as the record stands our committee was unanimously opposed to that.

That is all I have to say, gentlemen.

Mr. DEVITT. Do you think the Supreme Court decision in the Klauder case is a correct interpretation of the law?

Mr. HEUSTON. Yes. I thought it was coming ahead of time. There was a big dispute, but it seemed to me it was inescapable from the language of 60a as it now stands.

Mr. DEVITT. Then this concern you speak of in banking in commercial circles was prevalent

Mr. HEUSTON. Among those of who are interested in the subject. But the Klauder case was what spread alarm.

Mr. HOBBS. I would like to ask just exactly what difficulties that you regard as serious are, with recordation. Of course, it only applies in bankruptcy cases.

Mr. HEUSTON. You would have to comply in all States that did not have a recording act with two things: You would have to comply with the Federal, to protect yourself against the most likely thing, bankruptcy, and you would have to comply with the State laws just in case creditors started to attach, such as in the States where you have to give notice, or bookmark, or something like that.

But the big point that I have is that we have this so-called validation situation in New York. We have always had it. It seems to work perfectly. That is the real reason that the bankers in New York favor leaving it alone. It works. Most people are honest, and most businessmen are just a little bit more honest. And we do not have the troubles that have been imagined here. That is the reason that we like it as it is.

People do not go to recording offices to find out what has been recorded, the way I feel you would think they did, if you did not know about it otherwise, from the testimony that has been given here. They ask for statements, financial statements. That is pretty near everything. That is what they make up their minds on nearly always. When they ask for a financial statement and are told there are no liens, except those shown there, they accept such statement as the truth. They will always be told the truth. I know of no cases where it turned out otherwise.

Mr. REED. Thank you, Mr. Heuston.

Mr. HEUSTON. Thank you.

Mr. REED. Mr. Livingston?

STATEMENT OF IRVIN I. LIVINGSTON ON BEHALF OF THE MIDWEST CONFERENCE OF ACCOUNTS RECEIVABLE COMPANIES

Mr. LIVINGSTON. My name, sir, is Irvin I. Livingston, of Chicago, a practicing attorney.

I appear here on behalf of the Midwest Conference of Accounts Receivable, which is an organization in Chicago made up of local,