XIII

Finally, the lumping, at the end of the letter of the "public at large, represented by borrowers and unsecured creditors" [italics supplied], on the one hand, versus "the special interests of the secured creditor," on the other, is nothing short of touching. Quite to the contrary, it is the borrowers who have aligned themselves with the secured creditors in opposition to recording proposals, and it is the unsecured creditors and by no means all of them-who stand alone as special interests in sponsoring it.

In a recent speech before the Consumer Bankers Association, Mr. John L. Kelly, Director of the Office of Small Business in the Department of Commerce, made the following observation: "Approximately 98 percent of all business establishments in the United States employ less than 50 wage earners and therefore may be considered small business. This group represents the small pieces of which our commercial and industrial life is made.

"The credit resources of small business are so limited that even a slight disturbance in the national economy, easily weathered by big business, may spell disaster."

On this same subject, the Research Institute of America, in its report of August 22, 1947, has this to say:

"Bank credit practices have undergone significant changes recently-tighter, more careful. This comes at just the time when more and more companies are facing higher inventory costs, bigger pay rolls, slower collections, and will therefore need extra cash to tide them over. Accounts receivable financing is particularly good in certain cases: as where small or medium sized companies are looking for short-term loans, especially where the companies are growing fast and need working capital.

"However, many banks aren't interested in lending money on this basis. The loans are often for small amounts and involve a lot of handling. In such cases you might do better to check on available factoring firms. Factors take over the collection of accounts, which banks cannot do * * * they may even stand the loss for accounts in the event of defaults. Also, the borrower is freed of considerable bookkeeping expense."

CONCLUSION

We trust that we do it no injustice when we say that, in the last analysis, the NACM would not be averse to outlawing accounts receivable financing altogether at least as presently conducted to the satisfaction of the overwhelming majority of the banking and commercial communities.

To inject this parochial matter of laying down a substantive prescription, covering only accounts receivable, as a condition to the enactment of the badly needed general amendment to section 60a is either (a) an attempt to tie together two things which have nothing to do with each other, or (b) an effort to defeat the amendment altogether by overcomplicating it.

It seems fairly apparent that some credit men, disappointed at the failure of so many States to adopt recording, are, for their own special interest, seeking Federal legislation to bypass the wishes of the States, without, be it said, too much regard for their sovereign rights in this matter.

We are moved to make these observations because such attempts as this are not at all new. A quarter of a century ago, there was a rash of demand, made by the same interests, for statutes requiring notice to the account debtors for perfection. When the utter uselessness of that proposal was exposed, it died out, and now we are confronted by a flank attack whose objective is blanket recording. The most reasonable view that we can take of the matter is that what is here sought is a mechanism that will furnish to credit men not more information but less than they customarily and can easily obtain from their purchasers, and that their real desire is to impede or curtail the volume of accounts receivable financing, if they do not succeed in abolishing it altogether.

And finally, if past experience is any guide, the inevitable effect of such restrictive legislation will be to raise rather than lower the rates of such financing, and, where the borrower is really necessitous, to drive it underground. Neither result, it seems to us, is socially desirable, particularly at this time, when depression is (with or without good reason) so much talked of, and when, resultantly, the flow of credit should be kept free.

JOHN HANNA.
J. FRANCIS IRETON.
MILTON P. KUPFER.
HOMER J. LIVINGSTON.

DECEMBER 19, 1947.

AMERICAN BAR ASSOCIATION SECTION OF CORPORATION, BANKING AND MERCANTILE LAW-REPORT OF SPECIAL COMMITTEE ON THE REVISION OF SECTION 60A OF THE BANKRUPTCY ACT

At the annual section meeting, held at the Atlantic city convention on October 28, 1946, your committee filed a written report and its suggested amendment to section 60a of the Bankruptcy Act.

The essentials of this amendment had been worked out at prior meetings of your committee, some of which had been attended by representatives of other interested groups, and the last of which was a joint meeting of a majority of the members of your committee with the National Bankruptcy conference, which also met at Atlantic City immediately prior to the convention.

The principles, and essentially the language, of the suggested amendment, as so agreed upon at this last mentioned joint meeting, were, on October 28, 1946, presented to the section for its approval with your committee's written report. The need for this remedial legislation, in the light of the rulings and intimations in Klauder v. Corn Exchange Bank & Trust Company, 318 U. S. 434, 63 Sup. Ct. 679, 87 L. Ed. 884 (1943), Re Vardaman Shoe Company, 52 Fed. Supp. 562, and the Referee's opinion in Matter of Rosen (subsequently reversed in 66 Fed. Supp. 174 and 157 Fed. (2d) 997, certiorari denied March 10, 1947, 91 L. Ed. 787), as well as the necessity of guarding against the revival of the doctrines of 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, are summarized in your committee's prior report and therefore will not here be repeated.

At its October meeting, the section unanimously approved your committee's report and the draft of amendment, and recommended confirming action to the House of Delegates. On October 30, 1946, Chairman Teiser presented and explained the section resolution and the amendment-draft to the House, and at the conclusion of his presentation, the House unanimously adopted the following resolution: "Resolved, That the American Bar Association recommends to the Congress of the United States that section 60a of the Bankruptcy Act be amended so that said section read as follows: (There then follows the amendment-draft as approved by the section.)"

At the joint meeting of your committee members with the National Bankruptcy Conference, a majority of them expressed considerable doubt as to the wisdom of the phrase, "new and present fair consideration", at the beginning of subdivision (3) of the suggested amendment, but in view of time pressure that did not permit of further prolonged debate if the matter were to be presented to the section with the approval of the National Bankruptcy Conference, it was impossible then to work out more apt or fairer language. However, criticism was soon justifiably directed by others against injecting this notion of fair consideration into the preference section.

It was observed that, on the one hand, no one wishes to validate the creation of a security interest in property or accounts of a value of $10,000 against a disproportionate advance of $250 under circumstances that would invite evasions of a most unsavory sort in favor of so-called secured creditors whose relationship to the debtor is, to say the least, frequently not above suspicion. On the other hand, numerous instances of nonpreferential and perfectly legitimate security transactions occur daily where the advance might not withstand the test, applied a priori, of fair consideration. For example, in the case of inventory advances, it is not only sound banking practice but recognized trade custom (in the shoe, furniture, heavy machinery and textile fields, for illustration) to limit inventory advances to 50 percent of the appraised value of the merchandise. In such situations, it is by no means inconceivable that, upon the supervention of bankruptcy, some special master or referee, applying arbitrary percentage ideas of his own invention, might strike down the whole security interest, acquired for present value and in good faith, upon the ground that because of the apparent overamplitude of the coverage, the consideration was not fair. Furthermore, the creation of this danger was not necessary, because section 67d of the Bankruptcy Act provides the trustee with amply effective weapons against fraudulent conveyances where the amount of the advance is so disproprotionately small as to constitute a fraud on creditors.

Alternative solutions would have been either to eliminate the word "fair" or to substitute for the quoted language the phrase "new value," which is the language used in the Trust Receipts Act.

Basically, the question of "fairness" of consideration would seem to have little, if any, actual or doctrinal bearing on the primary purpose of section 60a, which is to define a preferential transfer and to fix the point of time when the transfer is to

be deemed effective. While subparagraphs (2) and (3) of the suggested amendment refer to different situations, and it was obviously not intended that the latter should enlarge the trustee's rights under the former, subparagraph (2) does make specific reference to subparagraph (3). Because of that reference, a court might be very apt to be led in to reading the language of subparagraph (3) into subparagraph (2) and thus (unless the language had been changed along the lines indicated), to give to subparagraph (2) a construction which its draftsmen did not intend.

Without unduly extending this report by going into all of the details of your committee's subsequent consideration of this subject, it will suffice to say that the phrase "new and contemporaneous consideration" was ultimately substituted for the phrase "new and present fair consideration" in the draft. This constitutes a satisfactory solution, and met the views of all concerned on the point.

Several other suggestions were subsequently made, both by individual members of your committee and others, and the draft was placed in final shape at a meeting of some of the members of your committee with Delos J. Needham, general counsel to the American Bankers Association in Washington on January 9, 1947.

As so finally worked out, it was, during the 1946-47 Congressional session, introduced as H. R. 2412 in the House of Representatives on March 6 by Congressman Reed of Illinois, chairman of the Subcommittee on Bankruptcy of the Judiciary Committee of the House of Representatives. In identical form, it was introduced as S. 826 by Senator Ferguson of Michigan. The bill was thereupon referred to the Judiciary Committees in both Houses, and to the Attorney General for his opinion, and your committee offered to appear before the Congressional committees to explain the provisions of the bill, and to submit such portions of its assembled material as they might find necessary in their deliberations upon it. The bill evoked much congressional interest but, unfortunately, due to the mass of legislation of a nationally controversial character that claimed the attention of Congress during the last months of its session, it was impossible for committee meetings upon it to be scheduled. Of course, since the 1948 session will be a continuation of the present Congress, the bill did not die, but retains its present committee status, and, unless otherwise instructed by the section, it is the intention of your committee to renew its tender of cooperation to the Judiciary Committees of both Houses upon the reconvention of Congress in January.

Since the introduction of the bill, several suggestions for further refinements of language have been made, among others by Professor McLaughlin; Mr. Walter Malcolm, and Mr. Charles C. Craig (both of the Boston bar); and Mr. Irvin I. Livingston of the Chicago bar. Mr. William B. Cudlip, a member of the council, has also suggested the making of correlative amendments in sections 3 (b) and 67 (d). All of these suggestions, emanating, as they do, from outstanding experts in the field, have merited and received your committee's consideration. Without wishing to seem arbitrary with respect to them, your committee can only repeat the observation on page 5 of its report of October 28, 1946 that the draft became unavoidably long and involved in order to harmonize many conflicting views, but it closely approaches the destination to be reached, and if further refinement or amendment is deemed necessary or desirable, ample opportunity will exist therefor in the course of its consideration by the congressional committees. The present confused and unsatisfactory state of the law demands immediate improvement, and everything is to be lost and nothing gained by any further effort, in advance of such consideration, to achieve perfection in, or by the continued discussion of, the niceties and shadings of language. The draft has received the endorsement of a number of public and interested groups, among them the bankruptcy committee of the Association of the Bar of the City of New York; the corresponding committee of the New York County Lawyers Association; the bankruptcy committee of the American Bankers Association; and the factors' legislative committee. Illustratively, the resolution of the committee of the Association of the Bar of the City of New York, adopted on December 3, 1946, reads as follows:

"Resolved, That the committee approve and recommend the adoption of section 60a of the Bankruptcy Act in accordance with the proposed amendment, as recommended by the American Bar Association on October 31, 1946, and by the national bankruptcy conference, subject to the next succeeding resolution; and

"Further resolved, That the committee feels at this time that it is preferable to eliminate the word 'fair' in the expression 'new and present fair consideration' at the beginning of paragraph 3 of the proposed amendment; and

"Further resolved, That the amending of section 60a along the lines referred to above is of such importance to the business world that it should be presented by way of a separate bill rather than by inclusion with other amendments which might cause delay."

Within the past several weeks, the members of your committee have received from W. Randolph Montgomery, Esquire, a letter dated September 5, 1947, a copy whereof is annexed to this report as exhibit A. The comparatively short time that has elapsed between their receipt of Mr. Montgomery's letter and the preparation of this report has precluded the holding of a meeting upon it. However, it has been carefully considered by all of the members of your committee, and discussed both in correspondence and long-distance telephone conversations among them. Mr. Montgomery's suggestion is by no means new, and was considered by your committee, both in its preliminary deliberations, and at its joint meeting with the national bankruptcy conference at Atlantic City last October. Since the fact that a suggestion may lack novelty is no argument against it, the members of your committee have, as above stated, given it renewed and recent consideration, with the following result:

1. Your committee is unanimous that, for the reasons stated in its 1946 report, there is a basic and urgent necessity for the amendment of section 60a in accordance with the 1946 resolutions of the section and the house of delegates, whether or not a Federal recording or filing statute is to be ultimately enacted.

2. All but one of the members of your committee are also opposed to the enactment of a national recording or filing act for accounts receivable, either by itself or in connection with the proposed amendment to section 60a. It would unwarrantedly extend this report to state at length the reasons underlying this majority conclusion. In brief summary, these reasons are:

(a) Whether or not the assignment of accounts receivable should be subject to a statutory recording or filing requirement is a highly controversial subject which has been hotly debated for at least the past 5 years. While, like so many other subjects, it has some collateral bearing on section 60a, the necessity for the amendment of that section is an independent matter which should not be delayed or confused by the injection of an issue so highly debatable.

(b) Passing the questions (1) of constitutionality, and (2) of the desirability of Federal, as distinguished from State, legislation covering accounts receivable, it is to be noted that even the many States which have enacted legislation on the subject are by no means unanimous in their prescriptions. Fifteen of the enacting States, including the larger commercial ones, have flatly rejected any recording or filing requirements. These States are: Arkansas, Connecticut, Illinois, Indiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, New Hampshire, Oregon, Rhode Island, South Dakota, Virginia, and Wisconsin.

Several additional States have rejected the idea. Among them is New York, whose law revision commission, after an exhaustive study and the hearing of all interests, declined to adopt it. (See legislative document (1946) No. 65K, dated December 5, 1946.)

A minority of 12 States have adopted it. These States are: California, Colorado, Florida, Idaho, Missouri, North Carolina, Ohio, Oklahoma, South Carolina, Texas, Utah, and Washington.

Two additional States, Pennsylvania and Georgia, have, at least inferentially, rejected it by enacting a bookmarking requirement.

These differences are, of course, due to differing conceptions of local economic needs, and represent the considered practical judgment of the respective business communities involved. To say the least, it is debatable whether local desires on this subject should be overriden, and it certainly should not be done as an appendix to a necessary remediation of the National Bankruptcy Act, which covers a multitude of business activities other than accounts receivable. In any event, the proposed amendment to section 60a, as heretofore approved by the section, requires compliace with applicable State recording or filing acts, if any, as suggested at the end of the second paragraph of Mr. Montgomery's letter.

(c) From a purely doctrinal standpoint, there is little, if any, weight to the argument that since recording or filing is required with respect to chattel mortgages, conditional sales, and trust receipts, the same prescription should be enacted with respect to accounts receivable. The former type of transaction deals with tangibles, in respect of which, as Justice Brandeis pointed out in Benedict v. Ratnor, 268 U. S. 353, deception is possible because of the reliance that can justifiably be placed upon ostensible ownership arising out of the retention of physical possession, whereas accounts receivable, being intangible, are not susceptible of physical possession.

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(d) Unless one is prepared to require publicity for the extension of all types of credit, secured or unsecured, there seems no more reason to single out credit accommodation on the security of accounts receivable than for the discount of notes or any other type of ordinary banking accommodation.

(e) Passing all doctrinal features, the basic practical objection to the imposition of a recording or filing requirement comes chiefly from the small businessmen, who are most in need of this type of financing; who are not highly organized; and whose interests are, therefore, all too apt to be overlooked in the welter of dispute that exists on this subject. We can put our views no better than did the law revision commission of the State of New York in the last paragraph of its recommendation to the legislature on December 5, 1946:

"In 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 speculation 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 in the study made under the direction of the commis

sion."

After this paragraph, there follows a 300-page study, embracing a historical treatment of the subject, an analysis of the statute and decisional law in all of the States and in a number of foreign countries, and the minutes of the hearing before the commission.

In the interests of completeness, this report should note the following: The subject of section 60a has been dealt with in a number of law review articles and notes, the more extensive being those of Professor McLaughlin entitled "Defining a Preference in Bankruptcy" in the December 1946 issue of the Harvard Law Review (vol. LX, p. 233); of Mr. Stephen Oglebay, entitled "Proposed Revision of Section 60a of the Bankruptcy Act: A Step Backward," in the December 1946 issue of the Commercial Law Journal; of J. Francis Ireton, Esq., entitled "A Proposal to Amend Section 60a of the Bankruptcy Act," in the January and April 1947 issues of the American Bankruptcy Revew; of Alan V. Lowenstein, entitled "Assignments of Accounts Receivable and the Bankruptcy Act," in the spring 1947 issue of the Rutgers University Law Review; and of Irvin I. Livingston and Milton P. Kupfer in two articles in the October 1946 and January 1947 issues of the Virginia Law Review, respectively entitled "Corn Exchange National Bank & Trust Co. v. Klauder Revisited: The Aftermath of its Implications," and Corn Exchange National Bank & Trust Co. v. Klauder Revisited: A Supplemental Note" (XXXII Virginia Law Review, p. 910, and XXXIII Virginia Law Review, p. 1).

It has also received the most thorough judicial consideration in Judge Goodrich's opinion for the unanimous Third Circuit Court of Appeals in Matter of Rosen, 157 Fed. (2d) 997, certiorari denied by the Supreme Court on March 10, 1947, 91 L. Ed. 787. A reading of that opinion is virtually a "must" to anyone who wishes to remain informed on this subject. Seldom, if ever, has so much learning, so incisively expressed, been packed into such a short space. Respectfully submitted.

Dated: SEPTEMBER 17, 1947.

HOMER J. LIVINGSTON, Chairman.
JOHN HANNA.

J. FRANCIS IRETON.

MILTON P. KUPFER.

JAMES A. MCLAUGHLIN.