tion is entirely satisfactory as it is, but the association itself has taken no position, or has not taken a position as between those two groups, and I find myself in a rather embarrassing position. "I have studied the subject a considerable length, and as an attorney I personally would favor no legislation at all * * *(New York Law Revision Commission report, legislative document, supra, p. 254). (b) Passing these schisms within his own group, let us now test the NACM's reference to its "demand" as "the considered opinion of businessmen and bankers throughout the country." What "businessmen"? And what "bankers"? It certainly does not represent the considered opinion of the borrowers on accounts, who are largely unorganized, and those interests are altogether too apt to be overlooked in the welter of dispute that surrounds this subject. Where they have been articulate, they have opposed the recording principle almost to a man, because of the obvious competitive disadvantage at which it places them vis-à-vis their richer and more fortunate competitors, who be it said, do not hesitate to tell the potential customers of both that borrowing on accounts receivable is an indicium of financial weakness. And it is those very large competitors who would raise their hands in holy horror if their own unsecured bank loans or discounted notes were to be made matters of public record. Indeed, it is largely due to the position of the small-business man that the validation principle has been embraced, and the recording principle rejected, in the 15 States above mentioned. And what "bankers"? Recording certainly was not favored by the Illinois Bankers Association, which sponsored and obtained the passage of the Illinois validation statute, after a recording bill had been introducd in the legislature of that State, and both types of bills were, therefore, before it. Neither can it represent the considered opinion of the bankers in Maryland, Massachusetts, Michigan, and Minnesota, in each of which the local bankers' associations sponsored their present validation statutes. Indeed, we believe that it can be safely said that, in the overwhelming majority of these 15 States, it was the bankers who achieved the passage of the legislation, and, of course, had they opposed it, the wishes of finance companies would have been quite unavailing. And finally, we are not told that, at the hearing before the New York Law Revision Commission, Mr. Leo Dorsey and Mr. Irving Reynolds, the latter a vice president of the Chase National Bank, appeared for the New York State Bankers Association and declined to take a stand in favor of recording. The New York bankers who principally engage in accounts receivable financing flatly opposed it, and not a single New York banker appeared in its support. Accordingly, the law in New York remains as it always was. (c) The action of a number of other disinterested bodies is also not without significance. In 1943, the National Conference of the Commissioners on Uniform State Laws gave study to it through a committee consisting of Messrs. L. Barrett Jones, chairman; James C. Dezendorf, Harold C. Havighurst, and Sidney Teiser. This committee held several days of hearings upon it in Chicago, and, after 6 months of consideration, by a vote of 3 to 1, reported in favor of validation against recording. A similar study was undertaken by the committee on uniform State laws of the Association of the Bar of the City of New York, chairmaned by Frederick T. Kelsey, with the same result. (Parenthetically, it may be noted that Mr. Montgomery and one of the authors of this memorandum, Mr. Kupfer, were on the subcommittee, with whose aid this study was conducted, and that Mr. Montgomery stood alone in his advocacy of recording.) True it is that these actions related to State legislation, but the principle is the same. In any event, now that the contest has been transferred to the Federal area, the bankruptcy committee of the New York City Bar Association recently considered it, and on October 1, 1947, resolved as follows: "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." Finally, the September 1947 issue of the Cornell Law Quarterly, in an article by Prof. Arthur John Keefe, John J. Kelly, Jr., and Myron S. Lewis, entitled "Sick Sixty," reports the result of a year's study of this entire matter, conducted under Professor Keefe's supervision. Subject to two minor suggestions not here material, it approves our amendment, and concludes with this observation: 38 "Many other suggestions for amendment to section 60 were tested, ranging all the way from retention of the present section 60 with specific exceptions for named security devices to a suggestion for a statute detailing specifically each security device with Federal recordation provided for perfection. These, likewise were found to be sick and ultimately discarded." [Italics supplied.] Completely eliminating our own section 60a committee, all of these authorities certainly cannot be wrong. III At the bottom of page 1 of the letter, it is stated that the present language of section 60a affords protection against-"secret liens arising by virtue of the assignment of accounts receivable on a nonnotification basis." This is simply not so. If there is one thing that the opinion of Justice Jackson and Circuit Judge Goodrich in the cases of Corn Exchange National Bank & Trust Co. v. Klauder, 318 U. S. 434, 63 S. Ct. 679, 87 L. Ed. 884 (1943), and In re Rosen, 157 Fed. (2d) 997, 91 L. Ed. 787 (certiorari denied March 10, 1947) make clearer than anything else, it is that the command of section 60a of the Bankruptcy Act is to test the validity of the transaction by applicable State law. (Klauder case, at pp. 437-3; Rosen case, at pp. 998, 1002.) "Secrecy" so-called-a somewhat unfair use of language at best-has nothing If the State law requires recording, bookto do with it, one way or the other. marking, or notice to debtors as a condition to perfection, and such condition is not complied with by the assignee, the trustee naturally prevails over him: if the State law imposes no such requirement, his attack fails. And that brings us right back to the initial point that what is here sought to be accomplished is the prescription of a Federal rule of property in a restricted field under the cloak of an amendment to the Bankruptcy Act. True it is that in the Klauder case, the Supreme Court, by way of dictum-and solely by way of dictum-indicated that it was the intention of Congress, in adopting the bona fide purchaser test, to strike down secret liens. Distinguishing what was decided from what was said, its holding was certainly not to that effect. What it more probably had in mind was such secret or pocket liens as were approved in Sexton v. Kessler (225 U. S. 90), Carey v. Donohue (240 U. S. 430), and Bailey v. Baker Ice Machine Co. (239 U. S. 268), whose doctrines the amendment to section 60a clearly continues to prescribe. Professor McLaughlin, who is the author of the present language of section 60a, has, with characteristic forthrightness, freely asserted that his creature has produced unfortunate results which he did not anticipate and, in any event, that matter is foreclosed for all of us by the actions of our section and House of Delegates. IV A bit further, on page 2, we are told that if section 60a is to be amended, "it should not be at the expense of reestablishing secrecy in connection with the assignment of accounts receivable". No such reestablishment is either intended or accomplished. It a State wishes On the other hand, to prescribe recording, it can do so, and an unrecorded assignment will not withstand the test of the amendment suggested by our committee. if another State, in consonance with its local public policy, wishes to eschew recordation, we do not believe that Congress has the right, even if it has the constitutional power, to impose the requirement upon it. Would not the Suppose, to reverse the matter, that the many of us who are on the other side of this validation-recording matter were to urge that there be engrafted onto the Bankruptcy Act an endorsement of the validation principle and that the recording rule in those States which have adopted it be thus overthrown? NACM then contend that we were urging the most flagrant Federal inroad upon States' rights? Undoubtedly, a number of pressure groups, seeking to serve only their own interests, could suggest the imposition by Federal legislation, of recording requirements with respect to any number of specific types of transfers, which the States do not wish to impose. If the wedge enters in the field of accounts receivable, where will the matter end? V The third paragraph on page 2 of the letter, referring to the 15 States that have In most of the enacted, but on the contrary the finance companies were successful in persuading the legislatures of the so-called validation States to enact validating statutes * * *" To the contrary, in most of these States, the legislation that was finally enacted represented a deliberate choice between the two alternatives of validation or recording. The legislatures in five, at least, of the validation States (Connecticut, Illinois, Minnesota, Oregon, and Virginia) also had recording bills before them when their validation statutes were enacted. In fairness, it should be added that some of the recording States (Colorado, South Carolina, Texas, Utah, and Washington) correspondingly rejected contemporaneous validation bills. Probably neither list is complete; our only point is that nowhere has the matter as claimed, gone by default. In this connection, and illustratively, the Maryland Validation Statute (which, incidentally, was the first that was enacted) had the united support of the Maryland State Bankers Association, and the Association of Commerce (Chamber of Commerce) of Baltimore City. In Delaware, a recording bill was vetoed by the Governor, upon the recommendation of his own bank commissioner. In Arizona, Pennsylvania, and Tennessee, recording bills were, in recent legislatures, withdrawn, either because of lack of unanimity among, or the outright opposition of, the bankers and bankers' associations in those States. In 1947, Iowa had both recording and validation bills before it, and passed neither. On the very face of things, it must be apparent that if, in any of these States, the majority sentiment among bankers and businessmen had been for recording, the opposition of finance companies would have been like aiming a cap pistol at Gibraltar. VI Would Mr. Montgomery suggest that whenever a merchant draws a substantial check for merchandise or pay roll, that a public record be made of it? Or, if he discounts a note or trade acceptance, would either he or his banker wish it to be published to the world? From the economic standpoint, either can affect a merchant's credit position quite as much as the assignment of his accounts. A credit man can, if he wishes, obtain information as to all of this including the assignment of his customer's accounts receivable-on the financial statements which all careful credit men customarily and periodically require. And, since the recording of notices of specific assignments is a patent practical impossibility, neither the NACM nor any other proponent of the recording principle has ever suggested anything more than the filing of a general notice of intention to assign, which obviously would furnish the credit men much less, rather than more, information than they can easily obtain by such financial statements as their requirements may dictate. In its last analysis, the position of the NACM boils down to the wholly unwarranted assumption that only by public recording can a credit man learn that his customer is assigning his accounts receivable. Is the NACM unaware of the fact that the forms of financial statements, which its local associations sponsor, contain, usually with typographical emphasis, specific inquiries not only as to whether the customer has assigned his accounts, but also as to the amount which he is borrowing on them? One of two things must be true-either (a) the credit men do not take the time or the trouble to analyze these financial statements, or (b) when furnished, they are customarily false, and the average American merchant is a dishonest man. Solely on one or the other of these two hypotheses can it be contended that only by public recordation can a credit man learn that his customer is assigning his accounts. We decline to embrace either alternative. But let us assume that the extender of merchandise credit, either through carelessness or otherwise, does not inform himself as to whether his prospective customer has assigned his accounts. Does it at all follow that the asset has vanished, or that the unsecured creditor is, from a basic economic standpoint, really hurt? Unless the assignment is fraudulent, for which the Bankruptcy Act provides ample remedy, the assignor receives cash for his accounts. this cash either to buy merchandise, meet his pay roll, or for any one of many other business purposes. He uses Modern accounts receivable financing simply means that a manufacturer or merchant who sells on credit has converted the credit sale into cash. Certainly a credit man has no complaint if his customer sells for cash, and no one has ever suggested that such matters be subject to recording requirements. Why should there be complaint when the customer, in effect, accomplishes the same result by converting the sales account into cash, which all agree is the most liquid asset in the world? VII Toward the bottom of page 3 of his letter, Mr. Montgomery tells us: "The unfavorable reaction to accounts receivable financing is the direct result of two factors which are closely related: First, the high discount rates which are, or have been, charged by finance companies, and second, the secrecy attending the transactions." Considering the interest that Mr. Montgomery represents, it is strange indeed that it should set itself up as either the arbiter or the guardian of the public reaction to accounts receivable financing. We should think that that would more properly concern the innumerable banks, factors, and finance companies engaged in it, who, despite its jeremiads, oppose recording. In any event, as Professor Llewellyn has repeatedly observed, such a reaction has virtually disappeared. Little remains of it except as the recording folk create and continue to foster it. So, too, with respect to the matter of rates. We should suppose that competition in this field, as in all others, would take care of this matter. And it is indeed strange doctrine to assert that it should be done by Federal legislationand in the form of an amendment to the Bankruptcy Act, at that. Since we have already discussed at length the matter of secrecy, we shall not repeat what has been above said on that subject. VIII In the last paragraph on page 3, Mr. Montgomery states that: "such validation statutes impose upon the lender the risk of being an innocent second assignee who may * * * find himself with no security * * *"" As anyone who has the slightest familiarity with accounts-receivable financing knows, factually this risk is virtually nonexistent. Apart from the fact that the overwhelming majority of businessmen are honest, the criminal statutes furnish ample deterrents, and no law on the civil side-not even a recording statutecan ever convert an outright crook into an honest man. IX In three paragraphs at the top of page 4, the letter concerns itself with the position of the banks, claiming that they cannot afford to take the risks of nonnotification financing; that they are, therefore, reluctant to enter the fiela; and, resultantly, that the enactment of his proposal would encourage them to do so. Probably for the good reason that there is none such, no supporting evidence is adduced to demonstrate either that the banks in recording States do more accounts-receivable financing than do the banks in validation States, or that their charges are less. The probabilities are that, at least in respect of the volume of business done, the converse is true. Surely the NACM knows that innumerable banks in New York, Chicago, Boston, Detroit, and elsewhere throughout the country, are engaged in it in a large scale, and are quite satisfied with the validation statutes and rules of those States. To the extent to which banks keep out of the field, or charge higher than minimum commercial rates for the accommodation, it has nothing whatever to do with the matter of recording. It is due solely to the fact that this type of financing requires a highly specialized organization and the rendition of extra and nonbanking service, which such nonparticipating banks either do not wish to set up and furnish, or if they do, for which they find it obviously necessary to make an additional charge in order to meet the increased overhead involved. X The argument that the present state of the law would encourage the Federal Government to go further into the field of lending money (letter, page 4) completely escapes us. Certainly, the NACM proposal is nothing if not restrictive in character, and therefore would obviously accelerate rather than arrest any such tendency. But that apart, no one has yet claimed that the banks, the factors, and the finance companies are not able, willing, and anxious to provide any amount of such credit-accommodation that the business community may need. Indeed, the competition in the business, which is most healthy, is so keen, that despite the recent rise in general interest rates, the cost of the accommodation showed and still shows a steady decline. Furthermore, the statistics compiled by Pro fessors Saulnier and Jacoby in their standard work on Accounts Receivable Financing clearly disprove any fears along this line. XI On page 4 of the letter, it is stated: "The Canadian Bankruptcy Act expressly provides that an assignment of book debts shall be void against a trustee in bankruptcy so far as the same have not been paid on the date of the filing of the petition in bankruptcy." This, we regret to say, misstates the law. The applicable Canadian statute (Revised Statutes of Canada, Chapter 11, Part IV, s. 63, as amended by statute of 1932, Chapter 39, s. 27) is quoted in the footnote.5 It will be noted from subdivision 3, which is directly applicable, that the Canadian statute specifically excepts from its operation, the assignment (a) of book debts, due at the date of the assignment from specified debtors, and (b) of debts growing due under specified contracts. In other words, the Canadian statute is aimed only at blanket assignments, and it has been so construed by its highest court (Royal Bank of Canada v. Eastern Trust Co. (1923) 1 D. L. R. 498). The validation statutes heretofore enacted by our States confer no different protection. They do not-as they should not-protect the blanket assignments of accounts to be created in the future, and, in this respect, they follow the New York common law (Fortunato v. Patten (147 N. Y. 277), State Factors v. Sales Factors, 257 App. Div. 101; 12 N. Y. Supp. (2d) 12). Two additional observations with respect to the Canadian statute are relevant. In the first place, even where the assignments are prescribed, the assignee, as Mr. Montgomery frankly admits, is protected to the extent of collections effected prior to bankruptcy. Secondly, the "authorized assignment" referred to in subdivisions 1 and 3 constitute what, in our law, is known as a "general assignment for the benefit of creditors." XII The attempted analogy to the recording of the muniments of title to real estate is so fallacious as to fall of its own weight. In the case of tangibles such as real property, as well, incidentally, as chattels, possession is, in the very nature of things, a prima facie indicium of ownership, and a prospective purchaser of them is entitled to rely thereon in the absence of the recording of a muniment of title. On the other hand, as Justice Brandeis so well pointed out in Benedict v. Ratner, 268 U. S. 353, 362, an account receivable, which is in its nature intangible, is not susceptible to possession at all, in any fair interpretation of that word. 5 Revised Statutes of Canada (1927), Chapter 11, Part IV, s. 63, as amended in 1932 by Statutes of Canada, Chapter 39. s. 27: "1. Where a person engaged in any trade or business makes an assignment of his existing or future book debts or any class or part thereof, and is subsequently adjudicated bankrupt or makes an authorized assignment, the assignment of book debts shall be void against the trustee in the bankruptcy or under the authorized assignment, as regards any book debts which have not been paid at the date of presentation of the petition in bankruptcy or of the making of the authorized assignment. "2. This section shall not apply if, in the province where the assignor has his principal place of business, there is a statute providing for the registration of such assignments, and if the assignment is registered in compliance therewith. "3. Nothing in this section shall have effect so as to render void any assignment of book debts, due at the date of the assignment from specified debtors, or of debts growing due under specified contract, or any assignment of book debts included in a transfer of a business made bona fide and for value, or in any authorized assignment. "4. For the purposes of this section 'assignment' includes assignment by way of security and other charges on book debts.' 6 On this point, William F. Ryan, Esquire, a barrister at the Canadian Bar, advises us: "As to paragraph 5, of section 63, a few words of explanation may be in order concerning the 'authorized assignment' under the Canadian Bankruptcy Act. "Section 9 of the Bankruptcy Act provides that an insolvent debtor, more broadly defined than in the American Act, under certain conditions, may make an assignment of all his property for the general benefit of his creditors. The assignment is offered to the official receiver in the locality of the debtor, to be filed. On filing, the property is deemed to be under the authority of the court, and the debtor ceases to have any capacity to dispose of or otherwise deal with it. "As soon as the authorized assignment is accepted, the official receiver appoints a licensed trustee as custodian. The custodian is selected as far as possible with reference to the wishes of the most interested creditors. "On appointment of a trustee by the creditors, the official receiver inserts his name in the assignment as grantee. All the property of the debtor is thereby vested in the trustee as of the date of filing of the assignment, subject of course to the rights of secured creditors. "Every assignment of his property-other than an authorized assignment-made by an insolvent debtor for the benefit of his creditors is null and void. "Under Sec. 3 of the act an authorized assignment is an act of bankruptcy." |