2. Conditions relating to the assignment of accounts receivable vary greatly in different sections of the country, as is manifested by the fact that, of the 29 States that have enacted statutes on the subject, 17 of them have rejected the recording requirement, as against 12 that have adopted it. In addition, the majority of the States that have no statutes on the subject have, by court decision, rejected the imposition of any formal and obstructive requirement upon the assignment of accounts receivable. 3. The imposition of a recording requirement would principally hurt the smallbusiness man in obtaining necessary working capital for his current business needs. These small units in our economic structure have not attained the financial stature that enables them to borrow from large banks on an unsecured basis. Since these smaller men and concerns are not well organized, their essential interests are all too apt to be overlooked in the welter of dispute that has raged around this recording proposal. 4. In the minority of States which have enacted a recording requirement, it is frequently used unfairly, principally by larger economic units, as an argument with prospective customers, that borrowing upon the security of accounts receivable is an indication of financial weakness. On the last two points, the Law Revision Commission of the State of New York, in the last paragraph of its recommendation to the legislature on December 5, 1946 (Legislative Document No. 65 (K) (1946), p. 6) thus stated its views: "In the view of the commission, a recording or public notice requirement for assignments of accounts receivable has disadvantages which outweigh its advantages. The rapid collection of assigned accounts and substitution of new accounts as security precludes any specification of particular accounts as subject matter in the recording of assignments, and thus any recording or public notice would operate as notice of the assignor's practice of assigning his accounts, rather than as a notice of lien on particular assets. The practice has, in the past, been regarded as indicative of financial distress, and a public notice that accounts are being assigned might frequently give to the assignor's customers and employees (who do not ordinarily have other credit information) an erroneous and unfavorable impression of the assignor's financial position. Creditors and prospective creditors, on the other hand, who do have other and more reliable sources of credit information, would not derive sufficient benefit from a public notice requirement to justify its enactment, for their protection, in view of the hardship to assignors which would result. In the future, when the practice of borrowing upon the security of accounts receivable has become more widespread and the tendency to regard it as an indication of financial difficulty has been overcome, the commission may resume study of the topic and may present recommendations for legislation. "Submitted herewith is the study made under the direction of the commission." After this paragraph, there follows a 300-page study, embracing a historical treatment of the subject; an analysis of the statute and the decisional law in all of the States and in a number of foreign countries; and the minutes of the public hearing before the Commission. 5. As a result of all of the foregoing, the imposition of a recording requirement in this field would have the inevitable effect of choking the availability of credita consequence which would be particularly undesirable at a time like this, when every consideration of the national interest requires that the flow of credit be kept free. 6. The proposal is highly discriminatory in that it selects for special treatment one relatively small field of credit extension, and places it at a competitive disadvantage with all of the others. Basically, there is no more reason for singling out this method of financing for obstructive treatment than there would be for compelling a businessman to notify all the world of his borrowings on the discount of his commercial paper, or, for that matter, even on an unsecured basis, which, if it be unbalanced in amount, may adversely affect his credit quite as much as, if not more than, a reasonable amount of secured borrowing. 7. From an administrative standpoint, the proposal would impose additional burdens upon the clerks and machinery of the United States district courts, which are already badly overworked, and would result in bureaucratic increases. 8. The prescriptions of H. R. 5834 would not accomplish even the object which its proponents desire. They urge it for the protection of merchandise and other unsecured creditors. However, they frankly admit the manifest impracticability of requiring the recording of notice of the assignment of each specific account. In H. R. 5834, therefore, would require the recording only of a general notice of intention to assign, which would furnish to a general creditor far less, rather than more, information than he customarily receives by the usual financial statements. 9. Finally, business and financial sentiment is overwhelmingly against it. addition to the opposition of small-business men, it is opposed, with virtual unanimity, by the banks, the factors, and the finance companies, despite the fact that these three groups are sharply competitive among themselves. Illustratively, there have come to our attention the annexed copies of resolutions opposing it, of the Massachusetts Bankers Association; the board of directors of the New York Credit Men's Association; the National Conference of Commercial Receivable Companies, Inc.; the Association of Commercial Discount Companies, Inc.; and the bankruptcy committee of the Association of the Bar of the City of New York. And we are advised that a number of other independent groups will express similar views at the hearing. For all of the foregoing reasons, we respectfully urge upon the committee (1) the approval of H. R. 2412, and (2) the disapproval of H. R. 5834. JOHN HANNA. MAY 5, 1948. RESOLUTION ADOPTED BY THE EXECUTIVE COUNCIL OF THE MASSACHUSETTS BANKERS ASSOCIATION, BOSTON, MASS., ON FEBRUARY 11, 1948 Whereas the executive council of the Massachusetts Bankers Association has today passed a resolution endorsing identical Senate and House bills, S. 826 and H. R. 2412, providing for the amendment of section 60A of the Bankruptcy Act, but has been informed that certain groups propose to oppose the enactment of these bills unless concurrently therewith the Congress amends section 70 of the Bankruptcy Act to provide for Federal recording of accounts receivable financing, and Whereas for many years banks and other lenders in Massachusetts have done a substantial volume of accounts receivable financing, particularly for small businesses on a nonrecording basis and in 1945 the Massachusetts Legislature enacted legislation providing for the continuance of such business and the codification of common law rules under which such business was done, which practices, common law rules and statute are now working satisfactorily; and Whereas it is the strong belief of banks in Massachusetts that an amendment of the Bankruptcy Act requiring Federal recordation of accounts receivable financing would not work satisfactorily in practice; would substantially decrease the volume of accounts receivable financing; would be productive of substantial litigation on matters of technical detail related to recording requirements; would produce only an illusory and superficial solution to the "secret lien" problem; would change long established principles that property rights in bankruptcy proceedings as well as otherwise should be determined by State law; and would constitute substantial and objectionable interference with States' rights and the wishes of the people and the Legislature of Massachusetts: Now, therefore, be it Resolved, That the executive council of the Massachusetts Bankers Association hereby registers its strong objection to any amendment of the Bankruptcy Act or any other enactment of Congress providing for Federal recordation of accounts receivable or similar types of financing; and be it further Resolved, That the President of the association in its behalf be and he hereby is empowered to advise the members of the appropriate committees and subcommittees of the Congress before whom the foregoing matters are pending of the considered position of the members of this association as expressed herein. I, Sidney S. Ayers, of Boston, Mass., hereby certify that I am the secretary of the executive council of the Massachusetts Bankers Association, and that the foregoing is a true copy of a resolution unanimously adopted at a duly called meeting of the executive council of the Massachusetts Bankers Association held in Boston, Mass., on February 11, 1948. SIDNEY S. AYERS, Executive Secretary. RESOLUTION OF THE NEW YORK CREDIT MEN'S ASSOCIATION Extract from minutes of board of directors meeting held on May 22, 1947. RESOLUTION OF BANKRUPTCY LAW COMMITTEE RE AMENDMENT TO SECTION 60A OF THE NATIONAL BANKRUPTCY ACT A resolution adopted by the bankruptcy law committee, requesting that the association's board of directors express approval of a pending amendment in Congress to section 60a of the bankruptcy law, was presented. In the discussion of this resolution it was pointed out that consideration of the amendment had been given at the recently held convention of the N. A. C. M., and that the national legislative committee voted in favor of the pending amendments and recommended that a Federal Recording Act relating to accounts receivable be included. After a complete discussion, it was moved, seconded, and voted that the amendment relating to section 60a now pending in Congress and as approved by our bankruptcy law committee, be and the same is hereby approved by this board of directors without any reference to the inclusion of a Federal recording statute, and that this action of the board be reported to the N. A. C. M. It was the consensus of opinion during the discussion that the subject of a Federal Recording Act be considered by this board of directors and by the N. A. C. M., separately, and not in conjunction with the present pending amendment to section 60a. RESOLUTION OF THE EXECUTIVE COMMITTEE OF THE NATIONAL CONFERENCE OF COMMERCIAL RECEIVABLE COMPANIES, INC., ADOPTED AT ITS MONTHLY MEETING OF MAY 4, 1948 Whereas it has been brought to our attention that a hearing will be held on May 7, 1948, before the Bankruptcy Subcommittee of the Judiciary Committee of the House of Representatives on H. R. 5834, and Whereas said bill would couple the much needed amendment to section 60a of the Bankruptcy Act, as embodied in H. R. 2412, with a proposal for the compulsory national recordation of the assignment of accounts receivable, and Whereas such proposal is an independent matter and is only collaterally, if at all, related to the amendment to section 60a, and Whereas such proposal would restrict the flow of credit upon legitimate business security, and, in operation, would be detrimental to the interests of smaller economic units, which constitute the principal group that avails itself of the financial facilities furnished by our membership, and would interfere with the rights of the States to prescribe their own rules of property: Now therefore be it unanimously Resolved, (1) that this conference record its opposition to the enactment of H. R. 5834, and, particularly, to the provisions of section 2 thereof, either in conjunction with the amendment of section 60a of the Bankruptcy Act, or independently; and be it further Resolved, (2) that this conference reaffirm its endorsement of H. R. 2412, and respectfully urge upon the Bankruptcy Subcommittee of the Judiciary Committee of the House of Representatives that its enactment be not delayed by controversy over H. R. 5834; and be it further Resolved, (3) that the chairman and president of this conference be authorized to prepare and submit to said honorable committee a statement of the views of this conference, implementing the sense of these resolutions. RESOLUTION Adopted DecemBER 11, 1947, OF THE ASSOCIATION OF COMMERCIAL DISCOUNT COMPANIES, INC. (OF NEW YORK) Whereas it has been brought to the attention of this association that, in connection with the amendment of section 60a of the Bankruptcy Act (which amendment constitutes the subject matter of a prior resolution adopted at this meeting), it has been proposed that the national recording of the assignment of accounts receivable be required as a condition to and as part of said amendment; and Whereas it is the sense of this association that such proposal is contrary to the best interests of the industrial, commercial, and banking community, and par ticularly of the small and medium sized borrowers to whom members of this association extend credit accommodation and whom they principally serve; and Whereas the undesirable consequences of the enactment of such proposal are well summarized in the report, dated September 17, 1947, of the American Bar Association's committee on the amendment of section 60a of the Bankruptcy Act to its section on corporation, banking, and mercantile law; be it Resolved, That this association records its disapproval of the proposal for the national recording of the assignment of accounts receivable, either as an amendment to the identical bills S. 826 and H. R. 2412 now pending in Congress, or independently. EXCERPT FROM THE ANNUAL REPORT OF THE COMMITTEE ON BANKRUPTCY AND CORPORATE REORGANIZATIONS OF THE ASSOCIATION OF THE BAR OF THE CITY OF NEW YORK, DATED OCTOBER 1, 1947 "It has been suggested that the pledge of accounts receivable aspects of the problem raised by the present wording of section 60a might be solved by the enactment by Congress of some sort of a national recording statute relating to the assignment of accounts receivable. Your committee was opposed to that suggestion." MEMORANDUM FOR THE COMMITTEE ON BANKRUPTCY IN OPPOSITION TO THE PROPOSAL FOR NATIONAL RECORDING INTRODUCTORY NOTE This memorandum is occasioned by, and is in reply to, Mr. Montgomery's letter of November 5, 1947, written on behalf of the National Association of Credit Men (hereinafter called NACM), to Chairman Olive of the bankruptcy committee. It followed his prior letter of September 5 on the same subject to Chairman Homer J. Livingston of the section's committee on the amendment of section 60a of the Bankruptcy Act. Although the proposal to require the national recordation of the assignment of accounts receivable is not novel, and therefore received the mature consideration of the section 60a committee, on several occasions both before the September letter and upon its receipt, we join in Mr. Montgomery's suggestion that its determination "should not be unduly influenced by the report of the special (60a) committee, but that the proposed amendment should be considered on its merits." As stated in his letter of September 5, the position of the NACM is in opposition to the enactment of the amendment, heretofore approved by the section and the house of delegates, to section 60a "unless special treatment be given in the Bankruptcy Act to the matter of publicity for accounts receivable financing" by requiring national recordation, thus singling out for discriminatory treatment one, but by no means the largest, area of secured credit. Our basic reasons for disagreement with the views expressed in that letter are set forth in our report to the section dated September 17, and a proper regard for the time of the members of this committee precludes their restatement. Copies of both are accordingly annexed hereto as an appendix. Pages 6 to 9 thereof constitute the relevant portion. The issues will, we think, be best focused if, after a brief discussion of the States' rights aspects of the matter, we discuss the points of the subsequent letter of November 5 in the order in which they are stated. I. STATES' RIGHTS ASPECTS (a) Passing constitutional questions, we have always believed that, except to guard against preferences and fraudulent conveyances, it is the office of the Bankruptcy Act to recognize titles conferred or liens acquired in compliance with State law (Commercial Credit Co. v. Davidson, 112 Fed. (2d) 54) and that, generally speaking, a trustee's title is subject to valid outstanding liens and equities as so conferred. At the very least, anything else simply rides roughshod over State rules of property, based, as we must assume, upon their respective considered public policies. (b) Specifically with respect to the accounts receivable situation, where does this leave us? Within the past 3 or 4 years, 29 States-more than a majority-have enacted statutes on the subject. Of these, 15, by the enactment of validation statutes embodying the prevailing American common-law rule, have rejected recording as a prerequisite to the perfection of the assignment of an account; 1 12 have embraced the recording principle; 2 and 2 have, at least inferentially, rejected recording by the enactment of a law requiring the marking of the debtor's books for the perfection of the assignee's title.3 After a hearing conducted by its law revision commission, at which all interests were represented, and a subsequent exhaustive 300-page study made by it (legislative document (1946) No. 65 (K)), New York rejected the principle of recording, and 5 other States followed its lead.1 In end result, therefore, of the 35 States (including all of the large commercial ones) that have declared themselves on this subject, 23 have rejected the recording principle, while only 12 have embraced it. Is it the proper office of Federal legislation to defy the wishes of the 23; wipe out their rules of property; and impose upon them the contrary view of the minority of 12? (c) An analysis of the proposal discloses the radical nature of its attempted reach. Its aim is not simply to restore or preserve the present status of the assignments of accounts under section 60a in its present form. It goes much further, since it would confer upon the trustee title to all assigned accounts in all instances where the notice is not recorded. And this would be so, whether accounts are sold, or transferred merely as security, whereas at present the trustee's rights (except in the case of fraudulent transfers) arise only if there is an actual or constructive preferential transfer for an antecedent debt within the meaning of section 60a, and recoverable under section 60b. Under the present section 60a, even if the assignment is not initially perfected as required by local law, if the assigned accounts are collected more than 4 months prior to the bankruptcy, the trustee is quite properly precluded from recovering the collections. But if, as proposed, "no assignment of an account shall be valid as against a trustee in bankruptcy of the assignor" in the absence of recording, not only would uncollected accounts pass to the trustee, but he could recover any collections received by the assignee in good faith at any indefinite time prior to the commencement of the 4-month period. Certainly, this goes far beyond anything that has ever been attempted in the Bankruptcy Act or that is within its proper office, and, we submit, unfairly so. (d) As we shall presently demonstrate, this matter has by no means gone by default, nor do these expressions of State public policy reflect, as the NACM claims, solely the wishes or activities of a single pressure group. With this general introduction, we shall now address ourselves seriatim to the contents of the letter of November 5. II (a) On page 1, it states that the "demand for the enactment (of national recording) voiced by the board of directors of the National Association of Credit Men reflects the considered opinion of businessmen and bankers throughout the country." It neglects to tell us that even in the NACM, this "voiced demand" of its board of directors met vigorous opposition, as yet unreconciled at its 1947 convention. And what is perhaps even more significant, the bankruptcy law committee of the New York Association of Credit Men, which Mr. Montgomery also represents and which is one of the most important component parts of the national association, by resolution adopted on March 25, 1947, declined to approve it. And what is perhaps most important, at a hearing on this subject before the New York Law Revision Commission on September 21, 1945, Mr. Montgomery, appearing as general counsel for both the National and New York Credit Men's Associations, stated: "Representing the New York Credit Men's Association, I think I should make this clear, that there is a division of opinion among the members of the credit associations as to whether or not there should be any legislation. "There is a very vocal group in the credit associations who believe that there should be some kind of public notation. There is another very vocal group, composing most of the factors and finance companies, and some of the banks, who are members of the credit men's associations, who feel that the New York situa 1 These 15 States are Arkansas, Connecticut, Illinois, Indiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, New Hampshire, Oregon, Rhode Island, South Dakota, Virginia, and Wisconsin. These 12 States are California, Colorado, Florida, Idaho, Missouri, North Carolina, Ohio, Oklahoma, South Carolina, Texas, Utah, and Washington. 3 These States are Pennsylvania and Georgia. These 5 States are Alabama, Kentucky, New Jersey, North Dakota, and West Virginia. |