independent commercial finance companies who are engaged principally in the business of lending on accounts receivable. I have filed here a resolution, a short resolution, two pages, which covers succinctly the position of our group. (The resolution referred to is as follows:) RESOLUTION OF MIDWEST CONFERENCE OF ACCOUNTS RECEIVABLE COMPANIES Resolved by Midwest Conference of Accounts Receivable Companies, in general meeting assembled at Chicago, Ill. 1. That we approve and recommend to the Congress of the United States the prompt enactment of the amendment to section 60a of the National Bankruptcy Act as proposed by identical bills (S. 826 and H. R. 2412) introduced by Hon. Homer Ferguson in the Senate and by Hon. Chauncey W. Reed in the House of Representatives. 2. That since the best interests of small and medium-sized business concerns, who need to borrow on security, requires relief from the impediments to the free flow of credit which will be removed by said amendment, we respectfully urge that favorable action on said amendment be not delayed by reason of any further proposal to make any other amendment to the Bankruptcy Act. 3. In particular, we strenuously oppose any proposal to amend the Bankruptcy Act to require recording of assignments of accounts receivable; our reasons being, briefly: (a) To require public notoriety of assignments of accounts imposes damaging and unnecessary hardships on business concerns who periodically need to raise funds by pledging or selling their receivables in order to pay bills, meet payrolls or otherwise carry on their current business operations, or in order to be able better to compete with concerns who enjoy adequate lines of open bank credit; (b) Such business concerns rightfully object to giving such public notoriety, particularly in the smaller communities, because of fear of its deleterious effect on its public reputation and its customer relations, and the misuse to which it can be put by competitors; (c) The question of requiring recording of assignments is highly controversial and should, for the good of trade and commerce, be left a subject matter for each State to determine for itself, and should not be a subject for Federal legislation. The legislature of Illinois, as is true of a number of other States, has heretofore flatly rejected attempts to require such recording; and (d) It has never been demonstrated, statistically or otherwise, that general creditors fare better in bankruptly cases in States which have enacted recording statutes than they do in those States which do not require recording. 4. Further resolved, That the president or other officer or general counsel of this conference are authorized to lodge copies of these resolution with the chairmen and members of the committees before whom said bills are pending. Adopted this 10th day of February 1948. Mr. LIVINGSTON. First, there is definite need for the amendment to section 60a, to eliminate innocent purchaser tests, and to revert to the adjustment-creditor test, along the line of the Reed bill. Next, we are very anxious that that bill be passed promptly, as soon as it can be, without any delay, in connection with the consideration of any other proposed amendment to the Bankruptcy Act, except such matters as may be noncontroversial, because that does, in its present form, wholly aside from accounts receivable, affect, as has been mentioned here, trust-receipt transactions and any other number of several other kinds of security transactions. Next, so far as the recording features are concerned, we are strenuously opposed to that. We feel, in the first place, that it is a matter that had best be left to the several States for treatment, as we have done in Illinois, and as has been done in a number of other States. The requirement for recording, we believe, and confidently believe, is a detriment to the small businessman in his capacity to borrow. The conviction that the businessman has to be required to give public notoriety of a transaction like that is founded upon the fear, not only, as has been mentioned here, of the misuse to which it may be put by competitors, but also in that it destroys-or tends to injure, at least the reputation of the concern, and even disturb or distort or affect his customer relations, I was down in Springfield in 1943, shortly after a decision in the Klauder case, attending the hearings there, when the Illinois Bankers Association sponsored the validating act which had been preceded by a bill that had been introduced in the house at the sponsorship of the Chicago Credit Men's Association, to require recording. I think I can get down to the grass roots of the thing if you will indulge me just for a moment or two, to tell you what happened in Springfield, our capital. When the credit men's recording bill was introduced first, before the other type of validating bill was introduced, both bills were referred to a Subcommittee of the House Judiciary, consisting of five members. There were two different hearings, two successive hearings, before the subcommittee, and statements filed, both pro and con, on the question of recording. The subcommittee saw fit to report to the full committee its recommendations for the enactment of the adoption of the recording bill, and to table the validating bill. The matter came on before the full Judiciary Committee some 2 weeks later, and I take it that both sides were prepared for quite an extensive argument and discussion before the full committee. Mr. Allen Ashcraft, whom Congressman Reed may know, of Chicago, headed the subcommittee and had introduced the recording bill. When he made the report, briefly esplaining what it was about, it developed that very little argument was required subsequently, because Representative Davis of Rock Island broke in before any body else had a chance to talk and said: "Mr. Ashcraft, let me see if I understand what this bill means. Does this mean that, if a merchant in my small town goes to a bank and needs some money to meet his pay roll, to pay some bills of taxes or what not, and the banker says to him, 'Jim, you have about exhausted your line of credit but you have some good accounts here. I can advance you against them for a while,' do you mean to say, Mr. Ashcraft, that that has to be published to God Almighty and the whole world?" Mr. Ashcraft said, "I guess that is just what it does mean," to which Mr. Davis said, "I never heard of such a ridiculous piece of legislation in all my life. What business is it to the whole community in my little town, and to the gossips of that community, that this man has to hock his accounts to get some money, or that he even has to go out and borrow money? He doesn't have to give it public notoriety when he borrows on his own insurance or when he wants to put up his Government bonds, if he has any. Why should he be required to do it when he hocks his accounts?" It was a rather telling observation. With that, Homer Harris, of Lincoln, Ill., who had been a member of the subcommittee, got up and said: "I was a member of this subcommittee and I listened to these arguments, and the recording, I thought, was proper. It has an appeal But since our hearings in the subcommittee I have talked to some of the people in my town-merchants and bankers and the like and they have told me the bad features of this, as Mr. Davis to me. has said, and I am sorry that I must reverse my position, and I must be opposed to this." With that, another member of the subcommittee got up and said he was going to stick by his guns, as a matter of deference to the chairman of the subcommittee, but he felt very much the same way about it. There you have the grass roots reaction of the little fellow in a little town of what this recording means. I do not want to dwell upon it much further. Let me also make mention of one or two other things. A great deal has been said here about recording working in 12 States satisfactorily, the validating bills working in other States. I do not think anyone has demonstrated that general creditors are any better off in bankruptcy in the recording States than they are in the validating States. Certainly, there are no statistics to show it, and one would assume that there is really no difference so far as bankruptcy is concerned. After all, we are dealing here with the exercise of constitutional power to enact uniform bankruptcy laws, and this thing of making inroads into what in the past has been considered the proper province for State jurisdiction is one that can be carried pretty far. What is asked to be done here is to ask to start a precedent for the enlargement wholly aside from any pure constitutional questionat least an enlargement of the exercise or attempted exercise of the power under the bankruptcy section of the Constitution. It is a new philosophy to my way of thinking. I only have one further thing to mention. I am not sure that all the members of this committee may know what accounts receivable financing is. Maybe I am a little too presumptuous in making that statement, but briefly let me point out this: Accounts receivable financing, whether in the way of a pledge or factoring along the lines Mr. Yankauer has spoken of, merely means the character of a receivable. And what does the honest merchant do with those proceeds? Well, he uses them in his business the same as though he had made a cash sale and used the proceeds of the cash sale. We are not, I take it, disturbed about the exceptional cases where actual fraud and conversion is committed. That can be reached under other sections of the bankruptcy act. I think that is all I have to say. Thank you, gentlemen. Mr. HOBBS. I would like to ask him one question. May I inquire if it wouldn't make a considerable difference in bankruptcy if the creditor had not loaned the money? Mr. LIVINGSTON. Advance credit? If the trade creditor, for example, had not advanced credit? Mr. HOBBS. Yes. There wouldn't be any question of getting the money, or any part of it, Mr. Livingston. I imagine there may be some credit men who will refuse credit merely upon the bare assumption, or bare facts, that his prospective customer is selling or pledging his accounts, but in this modern era that credit man is way behind the times. Mr. HOBBS. I realize that, sir; but if he were given the notice, even the meager notice that a filing would be made, he would have no complaint. He risked his money with knowledge, and he had a chance to protect himself by not advancing the credit. Mr. LIVINGSTON. When we were in Springfield, at the time we were discussing the matter with the Chicago Credit Men's Association representatives, we tried to discover just what their complaint against validation was, and what the great necessity for recording was, and, well, the representatives told us, frankly-and I think it may be mentioned here-that they had no objection to a concern assigning its accounts. In fact, in most cases, they would even prefer to do business with certain small concerns that do cash their accounts, for then they feel that they are going to get rather prompt payment of their bills. "But," they say, "we want to know it." Then we pointed out, "Well, you sold and shipped goods today, and the concern hasn't been pledging any accounts. Next week or a month from now it may, and you may get notice of it. What does it boot you?" "Then," they say, "we will go in and want to get payment, or we will go in and ask what they are going to do with the money, and we will want to see that we get paid." To my mind, it is a very inconsistent position. After all, it does seem to me that one ought to be realistic about these things, and realize that for at least the 99.9 percent of the cases, that the business concerns do pledge their accounts and never go into bankruptcy, and the credit man is not hurt. After all, the accounts financing runs up into over between 2 and 3 billion dollars a year, at least, and what percentage of concerns pledge their accounts, that ever get into bankruptcy? A most unusual case, after all. Mr. HOBBS. And the fact that so few do go into bankruptcy, that argument might be supplemented by saying: The very fact that they had a way to pledge their accounts receivable, partially, at least, prevented it, because it did not dry up the spring of credit. Mr. LIVINGSTON. Well, maybe you and I are thinking of the same thing. I think it is true that many concerns that might not have survived had been able to survive by reason of the accommodation they get this way. It is a constructive field of financing and has definitely proved that it serves a sound economic function in our present-day economy. Mr. HOBBS. It is indispensable. We have rejected Shakespeare's theory; his injunction doesn't apply. Mr. LIVINGSTON. "Neither borrower nor lender be." Mr. HOBBS. That is right. Certainly none of us want to do anything that would interrupt the free flow of safe credit, but I do not see why you object to notifying the unsecured creditor that that lien is there. Mr. LIVINGSTON. Judge Hobbs, I think one must be realistic about it. Let's discard any selfish motive on the part of the lending institutions; whether it is bank or financing, for the moment, if we are all charitable enough to do it. Mr. HOBBS. Ör on the part of anybody else. We discard all selfishness. Mr. LIVINGSTON. Yes. I think we in the industry-rather, our clients in the industry, whether they are commercial finance companies or banks, are convinced, from their close contact and experience with businessmen, that they appreciate these problems, what detrimental effect it will have on the borrower, this recording feature. And in a sense, maybe we are championing their cause, which we are, because, as has been mentioned here, they are not represented in person, and it could hardly be expected that they would be, because I suppose some concerns that are borrowing on accounts receivable would feel rather hesitant and exposed to this group here. At least, there are plenty of people around here who might think he would be a good prospect to take away from someone else. May I mention one thing regarding H. R. 5693, section 13? I had lunch today with Mr. Walter Malcolm of Boston, who made a statement here this morning. He asked me to mention to you gentlemen that he is strongly of the opinion that section 13 should be excluded from that bill. That is perhaps the only controversial issue in the bill. He and I discussed it. I don't know whether he influenced me or I influenced him. We both came to the rather same conclusion automatically, that it would be a mistake to enact H. R. 5693 ahead of the amendment to section 60 (a). Members' memories do get short sometimes, and it might be taken amiss. Mr. HOBBS. Thank you very much for giving us his opinion and yours on that point. Mr. REED. I have on my list two remaining witnesses: Mr. Homer Kripke of New York, representing the Commercial Investment Trust, Inc., and Prof. John Hanna of Columbia University Law School. I had an idea that perhaps the professors who love research would perhaps like to hear all the witnesses before they give their ideas. Perhaps it would be well to hear Mr. Kripke first, and then wind up with the professor. STATEMENT OF HOMER KRIPKE, ON BEHALF OF COMMERCIAL INVESTMENT TRUST, INC. Mr. KRIPKE. Mr. Chairman, members of the committee, at this late stage of the hearing I think it would be merely cumulative to argue in detail my views on the merits of these bills. I am assistant general counsel of Commercial Investment Trust Financial Corp., which is one of the largest sales finance companies, and also has factoring subsidiaries. We are in favor of H. R. 2412 and opposed to H. R. 5834. Of course, the first section of H. R. 5834 is identical with H. R. 2412, and we are in favor of that, but we are opposed to the recording statute. I should like to take my time to look at the forest again, after we have examined the trees at great length. We have talked about four types of financing today. The first type is wholesale financing of automobiles, domestic appliances, machinery, hard goods. The second is factors' liens. The third is factoring proper, which is the purchase of accounts receivable with notification, and the fourth is accounts receivable lending on a nonnotification basis. I want to emphasize that the first two of those-wholesale financing and factors' liens-have nothing at all to do with this recording controversy. They are involved in section 1 of both the bills and not in section 2 of the Hobbs bill. |