horsemen" rule] comes not from his status as a bona fide purchaser, but from his activities following his belated assignment." 42

Since the trustee's right to avoid secret assignments as preferences depends upon the applicable State law on perfection, the right varies from State to State. The rule applied in the Klauder case has resulted in a spate of State legislation regulating the assignment of receivables.43 Fifteen States have enacted "validation acts," adopting the New York rule validating assignments in favor of the first assignor as against both creditors and subsequent assignees, thereby terminating the operation of the Klauder rule. Other States have adopted recording or filing acts, which make compliance with their provisions a prerequisite to the validity of assigned accounts as against either bona fide purchasers or creditors; under these acts the Klauder rule has vitality. Two States have aodpted bookmarking statutes requiring the fact of assignment to be marked on the assignor's books as a condition to validity; subject to this slight obeisance, the Klauder rule is terminated. In some States which have no applicable legislation, the status of assignments of accounts is not clear.

Under the ABA bill to revise section 60a, secret financing on assigned receivables will be immune except in those States in which a garnishing creditor of the assignor can prevail over the assignee." The same is true under the conference revision of section 60a. Despite the fact that the impetus behind revision of section 60 stems from the Klauder decision, and although the conference is cooperating with the ABA to eliminate the case's principles from the broad field of preferences, the conference bill preserves and fortifies the Klauder rule in just the field of the assignment of receivables, by proposing a Federal accounts receivable filing act as a new section 70i. If State law provides for public filing of notices of assignments, no additional filing is necessary under section 701; but wherever State law does not so provide, the assignee must file a notice of assignment with the clerk of the Federal district court within a stated time. The assignment is invalid against the trustee where there is no compliance with the filing provisions. Various arguments pro and con have been advanced. In support of nonnotification financing it is urged that because of the opprobrium connected with borrowing on accounts, publicity for such borrowing will injure the businessman who secures credit in this way; that definiteness of description for recording purposes is difficult; and that the creditor can always secure accurate information from a financial statement.45 This view has gained considerable currency: some 15 States have enacted validation statutes since the Klauder decision; and apparently the American Bar Association subscribes to it, for its bill, limited solely to section 60, immunizes receivable financing in most States from the preference provision. Advocates of recording statutes insist that experience has shown that publicity for accounts receivable financing reflects but does not injure the borrower's credit standing; and that accurate information of assignments of accounts should be available for public inspection, as in the case of other security transactions, for public records are more reliable than the borrower's statements.46 Since filing statutes have been successfully employed, it is argued that sufficiently definite description of the assigned accounts is possible. While such an eminent authority as Professor Glenn contends that each State should be left to deal with the problem as it sees fit and that imposition of substantive uniformity by the Bankruptcy Act is unjustified,48 for reasons previously stated an equitable distribution often demands that bankruptcy override local law; here it must do so to prevent the last liquid assets of the estate from being secretly encumbered.

Proposed section 70i seems grounded upon the theory of preference in that it requires the notice to be filed within 10 days of the assignment-that done, the security is treated as presently given; or filed before the assignor became insolvent, or more than 4 months before bankruptcy.49 Yet the proposal departs from the

42 Id. at 1001.

43 For summaries and discussions of this State legislation see Comment, 57 Yale L. J. 828, 849-50 (1948); Koessler, Assignment of Accounts Receivable; Confusion of the Present Law, Impact of the Bankruptcy Act and the Need for Uniform Legislation, 33 Calif. L. Rev. 40 (1945); Koessler, New Legislation Affecting Nonnotification Financing of Accounts Receivable, 44 Mich. L. Rev. 563 (1946).

44 Few States allow garnishing creditors to prevail over an assignee at common law. State recordation statutes, however, protect creditors as well as subsequent assignees. Comment, 57 Yale L. J. 828, 850 (1948). 45 Hanna, supra note 28, at 69; American Bar Association Section on Corporation Banking and Mercantile Law, supra note 27, at 17-8; Comment, 44 Yale L. J. 639 (1935).

46 American Bar Association Section on Corporation, Banking and Mercantile Law, supra note 27, at 19; Comment, 57 Yale L. J. 828, 834 n. 28, 847 n. 92 (1948).

47 The fact that both validation and recording statutes have operated successfully outside bankruptcy can perhaps be explained by the recent suggestion that duplicate assignments are so rare among businessmen as to have little economic significance. Martin, supra note 32, at 82.

4 Glenn, supra note 30.

49 The proposed amendment leaves unsettled the rights of the trustee against an assignment recorded within 10 days but made to secure an antecedent debt within 4 months of bankruptcy while the assignor is insolvent.

theory of voidable preferences stated in section 60b, which requires the trustee to show that the preferee had reasonable cause to believe that the debtor was insolvent, by allowing the trustee to invalidate any assignment that is not filed within the stated time. Whether the requirement of present section 60b should be retained is debatable,50 but if it is, why should it be omitted from proposed section 701 which is in effect a preference section aimed solely at one security device?

The proposal also apparently contemplates the validity, as against the trustee, of contracts to assign future receivables, for it speaks of the date when "the assignment is made or the agreement to assign is entered into." The present rule under section 60, which was the better view even before the Chandler Act, is that an assignment made within, but pursuant to an agreement to assign made before, the 4-month period prior to bankruptcy, is a transfer for an antecedent debt and a voidable preference if the other necessary elements exist." reason for changing this rule or adding a cumulative rule that diverges from it is not apparent. But on the whole the provisions of section 70i requiring notoriety in every State for the assignment of accounts is an improvement in the present law under which secret financing on receivables is still possible in many States.

EQUITABLE LIENS

The

Until 1938 it was possible for the holder of an equitable lien-i. e., a secret lien created in equity to further the parties' intent to create a specific interest in identified property-to prevail over the trustee by recording or taking possession immediately before bankruptcy.52 And even where the equitable lienor had not taken one of these steps he prevailed against the trustee in any State where an equitable lienor's status excelled that of a lien creditor.53 A debtor's financial distress often remained undisclosed; a large creditor could be induced to refrain from enforcing his claim or even to extend further credit on the assurance that in case of bankruptcy his claim would be paid in full as "secured"; this gentlemen's agreement remained secret until the eve of bankruptcy. The result was that other creditors were misled into advancing credit to the failing debtor, and a favored creditor was preferred through collusive assertions, often difficult to disprove, that a lien had been given before the 4-month period. This menace to the scheme of equal distribution, which the courts had perpetuated in the face of repeated attempts by Congress to eliminate it, was eradicated by the inclusion in section 60 of the bona fide purchaser test. Both the ABA and conference bills by their lien creditor test reinstate equitable liens in bankruptcy in those States where a lien creditor gets only the rights the debtor had in the subject matter of the lien: where the equitable lienor prevails over lien creditors.54

"RELATION BACK" FOR THIRTY DAYS

Where applicable State law allows no period for perfection, or allows longer than 30 days, the ABA and conference bills propose a 30-day perfection period for transfers made for new and contemporaneous consideration, with the perfection relating back to the time of the transfer. The pernicious doctrine of "relation back," close kin to the equitable lien and with similar potentialities for collusion and overreaching, is permitted to operate within a 1-month period. A secret lien during the critical month preceding bankruptcy may be as dangerous as any existing for a longer period; and the time period is far too long. This sort of legislative detail is usually productive of evil. The courts can be trusted to apply the present section 60a so that a transfer and a subsequent filing, recording, or other perfection, within a time reasonably related to the type of security, will be treated together as a continuing transaction.55 The diligent and honest transferee has nothing to fear from this type of judicial rule. But to determine diligence by legislative fiat is to invite collusive abuse.

50 See 3 Collier 989.

51 Grandison v. National Bank of Commerce, 231 Fed. 800 (C. C. A. 2d 1916), certiorari denied, 242 U. S. 644 (1916); 3 Collier 960.

52 3 Collier 875-91.

3 See cases cited in Comment, 57 Yale L. J. 828, 840 n. 49 (1948). The "strong arm" clause of sec. 700 gave, and still gives, the trustee the rights of a lien creditor as to property in the possession of the bankrupt. 4 See cases cited in Comment, 57 Yale L. J. 828, 839 n. 47 (1948).

35 See In re Coombs, 37 F. Supp. 495 (W. D. Mo. 1940); In re McManus Motors, 27 F. Supp. 113 (D. Mass. 1939). Some State courts have recognized execution and recording as a continuous transaction in applying State recording statutes. 32 Iowa L. Rev. 760, 764 n. 23 (1947).

SECURITY INTERESTS IN GOODS HELD BY DEBTOR FOR RESALE

Recently the fear has been expressed that the bona fide purchaser test will enable the trustee to invalidate properly filed or recorded trust receipts, factor's liens, chattel mortgages on goods held for resale, and similar legitimate security devices.56 Since the debtor's purchaser in the ordinary course of trade can obtain an interest superior to that of the security holder, even though the latter has given full notoriety to the transaction,57 it is said that the trustee, by virtue of the bona fide purchaser test, can prevail. It is highly improbable that any court would reach that result. Section 60a should be interpreted in the light of its legislative history as striking at secret liens, previously protected by the doctrine of "relation back," not at legitimate security devices which have been given the full notoriety prescribed by State law, and which, by their very function, are designed to enable the debtor to have possession and the power of sale and hence are never perfectible as against the ordinary purchaser. Nor would the "plain meaning" rule of interpretation preclude this view, for a distinction can readily be drawn between the traditional concept of the bona fide purchaser and that of the buyer in the ordinary course of trade.58 But if in the business world the fear of another interpretation, unrealized in nearly 10 years of decisions under the act, is real, then the simple solution is to add a clause exempting this type of security from the bona fide purchaser test, and not to recast entire section 60a.59 The uncertainty which would be launched by the proposed statutory language 60 would thus be avoided as would, more importantly, the evils inherent in weakening the preference provision by elimination of the bona fide purchaser test.

61

TAX CLAIMS

A bankrupt's tax liability to the Federal or State Government is now unaffected by his discharge under section 17a (1) or by the confirmation of an arrangement or plan. Tax liens are also unaffected by bankruptcy, except those which are on personal property and unaccompanied by possession, and in this restricted area are only subordinated to administration expenses and wage claims entitled to priority. Under section 64a, which deals with priorities, all current taxes, i. e., taxes which accrue during bankruptcy administration, are entitled to a first priority as one of the expenses of administration,62 and all taxes which became due and owing prior to bankruptcy and are not secured by lien have a fourth priority. Because the expenses accorded a third priority are seldom incurred, 63 prebankruptcy tax claims are usually payable immediately after expenses of administration and wage priorities. And prebankruptcy tax claims may accumulate over long periods of time. Apart from State tax claims, which are barred only by local statutes of limitations, an example from the Federal field will illustrate. The Internal Revenue Code now allows the Federal Government 3 years after a return is filed in which to assess income, estate or gift taxes. The tax may be collected by distraint or by a proceeding in court begun within 56 Hanna, op. cit. supra note 28 at 73; Ireton, op. cit. supra note 26 at 263–5 (1947); Keeffe, Kelly, and Lewis op. cit. supra note 26 at 100-3; McLaughlin, op. cit. supra note 21 at 251.

57 E. g., Uniform Trust Receipts Act sec. 9-2 (a).

59 Cf. Frankfurter, Some Reflections on the Reading of Statutes, 47 Col. L. Rev. 527, 540-5 (1947); Uniform Trust Receipts Act sec. 1 (distinguishes between "buyer in the ordinary course of trade" and "purchaser"). 59 The conference also harbors the fear that courts will test the trustee's right to prevail by the rights of a creditor with special priority, such as one injured by an automobile, under a peculiar State law, who has a right against the vehicle, or a Government unit with a tax priority. The ABA and conference bills accordingly refer to a creditor "without special priority." McLaughlin, op. cit. supra note 21, at 255-6. This fear is largely fanciful, but can be allayed by adding a short limiting clause to the present section. Similarly the fear that other courts will test the trustee's rights by the rights of a purchaser or creditor who has done some further act requiring the concurrence of third parties or the judgment of a court, as did the court in In re Vardaman Shce Co. (52 F. Supp. 562 (E. D. Mo. 1943)) (now discredited, see p. 649, supra), can be put at rest by a qualifying clause added to the present language.

60 Compare with the American Bar Association's present position an earlier recommendation: "The law is clear now. The States are deciding rapidly how to adapt their local law to their particular needs in the light of the Klauder case. To amend this part of the section now will only muddy the waters." American Bar Association Section of Corporation, Banking and Mercantile Law, proceedings at Cincinnati meeting, report of Committee on Bankruptcy and Liquidations 77-9 (1945).

61 Section 67 (c).

62 3 Collier, par. 64.105 n. 36.

62 Given a third priority by sec. 64a (3) are expenses incurred by creditors in successfully opposing a discharge or the confirmation of an arrangement or a wage-earner plan or in collecting evidence which results in the conviction of any person for an offense under the act.

64 Internal Revenue Code, secs. 275 (a), 874 (a), 1016 (a). The income-tax chapter provides periods other than 3 years for certain situations. Id. secs. 275 (b), 275 (c), 275 (d), 275 (e), 275 (g). Also, the taxpayer and the Commissioner may agree in writing upon a time for assessment. Id. sec. 276 (b). All three chapters, income, estate and gift tax, provide that in case of a false or fraudulent return with intent to evade tax or a failure to file a return, collection of the tax "may be begun without assessment, at any time." Id. secs. 276 (a), 874 (b) (1), 1016 (b) (1).

6 years of the date of assessment.65 Upon an adjudication of bankruptcy all deficiencies must be immediately assessed. Claims unpaid in bankruptcy distribution may be collected by distraint or by court action sought within 6 years after the termination of the bankruptcy proceeding.67 Thus the Treasury is normally permitted a maximum of 9 years to assess and collect; if bankruptcy intervenes, an additional 6 years, beginning at the termination of the proceeding, is allowed for a claim unpaid in bankruptcy.

Tax claims, both secured and unsecured, therefore, occupy an excellent position under the present Bankruptcy Act.

Before turning to the more controversial provisions of the bankruptcy conference tax bill, one should note two provisions dealing with the bankruptcy court's power over prebankruptcy taxes. Present section 64a (4) provides "that no order shall be made for the payment of a tax assessed against any property of the bankrupt in excess of the value of the interest of the bankrupt estate therein as determined by the court." This is retained intact in the conference bill. Present section 64a (4) also provides "that, in case any question arises as to the amount or legality of any taxes, such question shall be heard and determined by the court." This provision has been emasculated and its meaning obscured by judicial dicta stemming from a case concerning postbankruptcy taxes, to which section 64a (4) dealing with prebankruptcy taxes clearly does not apply and further involving railroad reorganization, to which the applicability of section 64 in its entirety is questionable. The conference tax bill wisely proposes to eliminate the latter provision from section 64 and would add a paragraph to section 2 empowering the court to hear and determine questions "arising as to the amount or legality of any tax, whether or not previously assessed, which has not prior to bankruptcy been contested before and adjudicated by a judicial or administrative tribunal of competent jurisdiction, or, if such question has been so contested and adjudicated and the time for appeal or review has not expired, to authorize the receiver or trustee to prosecute such appeal or review." Placed in section 2, which deals generally with the powers of courts of bankruptcy, this salutary provision, which protects the estate from erroneous assessments without unduly shifting all tax determinations into the bankruptcy forum, will be applicable to both pre- and post-bankruptcy taxes and to all proceedings under the act. Thus the scope of present section 64a (4) is enlarged and its applicability to railroad and corporate reorganizations-a presently doubtful matter-clarified.

Under the conference bill, current taxes are still entitled to a first priority as expenses of administration, and tax liens will continue to be unaffected by bankruptcy, except those on personal property, unaccompanied by possession. As to these, the principle of present section 67c is continued for the purpose of subordinating them to the first and second priorities, but the conference bill goes further and restricts these liens in the amount of their payment to claims for taxes which have become due and owing within 1 year. The more drastic attack upon the status of tax claims is, however, this: Unsecured tax claims which have been due and owing for more than 1 year prior to bankruptcy are (1) relegated to the status of general unsecured debts and (2) discharged with other claims. Taxes accruing during the year prior to bankruptcy are not affected by the bill; they continue to have a fourth priority, and unpaid portions are not released by discharge.

The present bill is not the first attack upon the status of taxes in bankruptcy. In 1937 the provision in section 17 exempting Federal tax claims from discharge was deleted in the House version of the Chandler bill 69 but was restored by the Senate.70 Urged also to eliminate the exemption from discharge of State taxes, the House apparently felt restrained by constitutional limitations." The same obstacle troubled the conference; although it recognized the desirability of releasing State tax claims by discharge, it did not then recommend the change."

65 Internal Revenue Code, secs. 276 (c), 874 (b), 1016 (b).

66 Id., secs. 274 (a), 1015 (a).

67 Id., secs. 274 (b), 1015 (b).

68 Arkansas Corporation Comm'n v. Thompson (313 U. S. 132 (1941)). The case actually decided that where the tax liability of the estate had been determined by a judicial or quasi-judicial State tribunal, the bankruptcy court could not review that determination. But the court's remark to the effect that "there is nothing in the history of bankruptcy or reorganization legislation to support the theory that Congress intended to set the Federal courts up as superasssesment tribunals over State taxing agencies," id. at 145, has induced doubts as to whether the decision's application would be limited to determinations by judicial or quasi-judicial State agencies. And when the question arose again in Gardner v. New Jersey (329 U. S. 565, 578 (1947)) the court did not dispel these doubts.

H. Rept. No. 1409, 75th Cong., 1st sess. 27, 67 (1937).

76 83 Cong. Rec. 8684 (1938).

71 Hearings before Committee on Judiciary on H. R. 8046, 75th Cong., 1st sess. 67-68 (1937).

72 Id. at 68.

But the basis for the constitutional doubt has been minimized since 1937 by the Supreme Court's repudiation of the cases upon which the doubt was predicated." In the light of the Court's present position on State immunity from Federal action," and because of the paramount nature of the bankruptcy power,75 State taxes could probably be validly discharged. Indeed, the conference's comment to the present bill does not even acknowledge the existence of any constitutional problem. The Senate, when rejecting the House amendment to the Chandler bill discharging Federal taxes, was influenced by the Treasury's contention that discharge of taxes in bankruptcy would permit widespread tax avoidance,76 a contention which the Department has asserted in opposing later proposals for the discharge of tax claims.77 The conference and other critics of the present discharge exception urge that the debtor's discharge does not now enable him to get a fresh start, since unpaid tax claims can be collected at any time within 6 years after bankruptcy; they argue, moreover, that little income is realized by the Government from these stale tax claims in any event." The Treasury has also opposed suggestions that the priority of tax claims be limited to those which became due and owing within 1 year prior to bankruptcy on the grounds that the effect of such a limitation would be loss of needed revenue and imposition on the Treasury of an insurmountable handicap to tax administration.78 The conference bill would undoubtedly have the latter effect on income tax administration, especially in view of its provisions that taxes upon or measured by net income, shall be deemed “due and owing * * * at the time when the amount of such net income * * is ascertainable, whether or not it has been ascertained"; and that tax deficiencies are deemed due and payable "as of the last day of the tax period to which they relate regardless of the date of assessment." 79 By this definition income taxes are due and owing on the last day of the calendar or fiscal year, as the case may be, although returns for that year are not due until 22 months later.80 The Treasury would have to assess all income tax deficiencies within 91⁄2 months of the final date on which returns are due-unless tax liability were admitted by the bankrupt-in order to have a nondischargeable tax claim entitled to a fourth priority. Statistics showing the speed with which returns are now processed by the Treasury disclose the impracticability of assessing all deficiencies within that time.81 Even if such speed were possible, the Government would as a practical matter be able to protect itself only as to deficiencies which the taxpayer did not choose to dispute. In determining the tax liability of any sizable business enterprise, disagreements between the taxpayer and the collector are inevitable. A taxpayer's exhaustion of the intradepartmental remedies for adjustment of differences would usually leave the Government, although successful, with a claim due and owing for more than 1 year, 82 and a taxpayer's election to litigate in the Tax Court would invariably have the same result.83 Such tax claim would be entitled to no priority and would be dischargeable.

On the other hand there are certain kinds of taxes which are relatively simple in their operation. Among these are taxes for which the bankrupt is a collector for the Government, e. g., taxes withheld by the bankrupt employer from his employee's wages, and social-security taxes payable both by him and his em ployees. The Internal Revenue Code's provisions for collection of income tax at the source 4 and the Federal Insurance Contributions Act 85 require the employer to withhold a certain amount, to be computed as prescribed, from the employee's

73 Ibid. Congressman Chandler voiced the fear at the hearings, referring to Collector v. Day (11 Wall. 113 (1870), and Ashton v. Cameron County Water Improvement District No. One (298 U.S. 513 (1936)). The former was overruled by Graves v. New York ex rel. O'Keefe (306 U. S. 466 (1939)), and the latter virtually overruled by United States v. Bekins (304 U. S. 27 (1938)).

74 Cf. New York v. United States (326 U. S. 572, 586 et seq. (1946)).

75 See Warren, Bankruptcy in United States History 9, 154-159 (1935).

76 83 Congressional Record 9106 (1938).

77 See Olive, Taxes in Bankruptcy Proceedings, 25 Taxes 5, 8 (1947).

78 Id. at 6-8.

79 These provisions are included in the conference bill as an amendment to sec. 1, new par. 22. 80 Internal Revenue Code, sec. 53 (a).

81 Annual Report of Commissioner of Internal Revenue 26, 122–7 (1947); Annual Report of Commissioner of Internal Revenue 14-22, 113-7 (1945); Annual Report of Secretary of Treasury 204-6 (1946).

82 9 Mertens, Law of Federal Income Taxation, secs. 49.32, 49.34, 49.36, 49.38, 49.55, 49.63-77 (1943). Normally, an appreciable period passes before the deficiency is discovered. See note 81, supra. The taxpayer is then sent a 30-day letter, giving him 30 days in which to file a protest. If the deficiency is not settled with the internal revenue agent in charge or, on the taxpayer's request, at a hearing before the appropriate office of the Technical Staff Division, the agent in charge issues a 90-day letter (notice of deficiency). If the taxpayer is then unable to settle with the Technical Staff Division he may file an appeal in the Tax Court within that 90 days.

83 Filing an appeal with the Tax Court now suspends the running of the statute of limitations on assessment and collection (53 Stat. 87, Internal Revenue Code sec. 277 (1940)).

84 57 Stat. 126, Internal Revenue Code as amended, secs. 1621-1632 (1943).

85 53 Stat. 175 (1939), 53 Stat. 1381 (1939), as amended, Internal Revenue Code, secs. 1400-1432 (1947).