In 90 percent of the cases all over this country the dealers do not have the money to pay for the cars they get. That purchase by the dealer from the manufacturer is financed by a bank or a finance company or someone else. What happens is that the lender or the bank pays the sight draft, picks up the bill of lading and gives the bill of lading to the dealer to get the cars and the dealer gives the lending institution a trust receipt. He puts the cars into his showroom and sells them to the general public. That is the normal automobile wholesale financing arrangement. And 90 percent of the dealers finance all their automobiles wholesale.

Under the Trust Receipts Act, and the same is true in States where that transaction is covered by conditional sales contract or a chattel mortgage, under any one of these three arrangements a good-faith purchaser can walk in off the street and buy that automobile free of the lender's lien, even where the lender has complied with the recording law. That is as it should be.

Purchasers should buy commodities in the ordinary course of business from a dealer who apparently owns the property. He should not be required to go around to the court house to see if there is something on that automobile exhibited for sale. We have no argument with that at all.

Because of that, all these loans provide that the good-faith purchaser can get a good title. Now apply that to section 60 and see what happens. He takes free of the lender's lien. There is simply no security available in this wholesale financing that is being done today in the automobile industry. The domestic appliance industry, where there is a commodity on which a lien is put and the dealer has the right to sell in the ordinary course, is the same.

There is the difficulty.

What I would like to do is to translate that into what it means in dollars and cents. In the automobile industry there are over 500,000 businesses in commodities in this country engaged in business relating to the automobile. These employ more than 8,000,000 people. The automobile industry is the second largest industry in this country in terms of production and employment.

We have in this country, it has been variously estimated, from 40,000 to 45,000 new automobile dealers. It is estimated that there are approximately 35,000 used automobile dealers, or a total of about 75,000 automobile dealers. That is 75,000 people engaged solely in the business of retailing new and used automobiles and they employ on the average about 8 or 9 each, a total of 750,000 people.

The average assessment in these businesses is very small. It has been estimated by people who are supposed to know that the average investment is probably not more than $5,000 per dealer. But to be conservative, let us say it is $10,000 per dealer.

Anybody with an investment of $10,000, or you can double it, $20,000, cannot carry the inventory of cars that a successful dealer must carry. Many times their stock of cars will run anywhere from $50,000 up to $300,000, $400,000, or $500,000. Ninety percent of these dealers finance that stock pile on their inventories and it is all financed under these trust receipts, chattel mortgages, and conditional sales, all of which are of no benefit against the purchaser or the trustee in bankruptcy.

So far, there has been no case on this question of the validity of these security transactions. There was a case in Baltimore about 2 months ago where some domestic appliances were held under a trust receipt and the question was raised, and there is so much doubt about it that in that case, the matter was settled.

The referee in approving the settlement felt that there was much question about this thing that he should write some kind of a memorandum explaining why he approved the settlement. Let us suppose that within the next week or two-and we are having an increase in bankruptcies the situation should arise. Is a trust receipt of any value over against a trustee in bankruptcy? And suppose some court decides that the trust receipt is not security against a trustee in bankruptcy? If you take the language of the Klauder case that conclusion is inescapable. It is a shocking thing that a court can obliterate this uniform trust receipts doctrine adopted in 24 States. But, if you apply the language of the Klauder case no other conclusion can be reached.

Then, what will happen? The lending institutions will have to say to the 75,000 automobile dealers, "We cannot give you any secured credit. Your security is no good. You have to operate on an unsecured basis. We will lend you the money but we will look upon it as an unsecured loan." Who would lend $100,000 on a business investing $5,000, $10,000, or $20,000? Your 75,000 automobile dealers are going to shrink. You cannot do anything. You come down to 20,000 or 30,000 dealers which is unreasonable. You have possibly 30,000 or 50,000 thrown out of business.

At the present time there is this concentration of power now disbritued over 75,000, concentrated in 20,000 and when you reach that point, what happens to your marketing and your distributing system in the automobile industry? Retail outlets are so cut down that it is bound to back up into the factory.

Let us take another side of this picture.

The banks do a considerable volume of this wholesale financing. The finance companies who do it also operate from the banks. Finance companies can, as a rule, borrow from banks on a ratio of 4 or 5 to 1 and the reason they can borrow on such a high ratio is because their balance sheet shows secured wholesale notes, and secured retail notes. They hold security.

If you walk into a bank to get a loan it is put on a 1 to 1 ratio but a finance company can operate on a 4 or 5 to 1 ratio. This is standard practice.

If we have to take the word secured out of the finance company's balance sheet, what is the bank going to do? The bank must say, we will lend you on a 1 to 1 basis. The banks will squeeze the finance companies and the finance companies the dealers. Then what happens? When you reach that point you reach the manufacturers and you have 500,000 businesses in an industry employing 8,000,000 people affected.

That is just the automobile industry. The same is true in the domestic appliance field. You have more dealers, but because of the small unit cost, you have less dollar amount involved.

Let me give you the dollar amount involved in the automobile business. Last year, the companies put out about four to five million units. This year they expect to put out five and a half million.

Let us take the unit value of $1,000 and I think that is conservative on today's market. There is then an investment of $5,000,000,000 of value at wholesale prices. Last year there were more used cars sold retail than new cars. For every used car sold retail-it was on some dealer's floor and being financed.

Suppose we just have the value of the used cars. There is a total volume of business of pretty close to $3,000,000,000. That applies to used cars. That plus the five or five-and-a-half billion is $8,000,000,000 and 90 percent of it is financed, so you have a volume of financing business done of over $5,000,000,000 a year, pretty close to $6,000,000,000.

In the domestic appliance field the dollar amount is much lower. The wholesale financing amounts to approximately $2,000,000,000 a year. So, there is between seven and eight billion dollars a year volume of business handled through banks and finance companies on security they hold.

If you put on top of that your crop loans, your agriculture loansbecause in many instances the farmer has the right of harvesting his crop and selling it-if you put on top of that your importing business, and many of our imports come in under trust receipts, you have a huge volume of business. The bank in this country handles through correspondence abroad payments for sugar, coffee, olive oil, molasses, and many other products, and that merchandise is consigned by ocean bill of lading. When the bank gets that it turns the product over to the buyer on a trust receipt and that has been going on in this country for over 70 years. I do not know just what the situation is now because the war disrupted a lot of that. But before the war nearly all the olive oil that came into Baltimore came in under trust receipts and a considerable amount of coffee comes in under trust receipts.

So, you have a staggering volume of merchandise that hangs directly on this section 60. The present section 60 might and could upset this entire business.

There is this to bear in mind, that there are some who do not think a court ever would reach a conclusion that section 60 would void all these security transactions.

But we have been here today. We were over in the Senate and this very point has been argued and if something if not done about section 60 now, I think a court, a year from now, would be more than justified in saying, "Congress had all this before them and they considered it and definitely turned it down." So, there is a reason for the amendment of the section. The amendment that has been proposed has been practically universally accepted. I do not think, so far as I know, that anyone has opposed it except that the National Association of Credit Men have conditioned their approval on the enactment of this recording legislation at the same time.

So, I am not going to spend any time in making an analysis of the proposed amendment. Mr. Kupfer has already pointed out its salient features and I would just like to say a few words now on the recording position.

Of course, many here today will discuss that far better than I can on its doctrinal and practical problems which it creates. I would like to point out a few of these at random.

First of all, why is this national recording wanted? What necess ty exists for it? What is the evil it is trying to cure?

We are running somewhere around an average of 15,000 to 17,000 bankruptcies a year. There were about 10,000 2 years ago and I think the peak in this country was back in 1931 when it ran as high as 50,000.

There were 50,000 bankruptcies in 1931 and 17,000 today. How many of these involve assignments of accounts receivable that operate to the detriment of general creditors? We have no figures presented From my own personal observation, and that is not too broad, my guess would be that very few bankruptcies involve an assignment of accounts receivable.

to us.

The evil is practically nonexistent, if it is an evil, that this bill attempts to cure.

Another thought is this. This strikes me as being a sort of down-toearth reason for not having a recording of assignment of accounts receivable bills. A person who lends money is a supplier of material just like the manufacturer or assembly man who sells a commodity. Here is Tom Brown who buys his materials and supplies from merchandisers and he borrows money from a bank. They are all in the same position. The seller of raw material sells merchandise and the bank sells money. It is just as much merchandise.

The bank can lend money and the seller of raw material can sell for cash or credit. They both have the same opportunity. Either can do what he wants. The seller of money gets a return in the form of interest. The seller of merchandise gets a return in the form of profit and in many cases that profit is a long way over the interest which the lender gets.

Now, why does one class, a supplier of material, have to be obligated to go through this proceure when the other class is not. The borrower's, Tom Brown's, financial standing can be affected just as seriously by overbuying merchandise as he can by borrowing money. These people are all on a plane to begin with, so why should one group be pushed ahead of the other?

The other point is that here is an attempt by Congress to enact a substantive rule of law so as to make the Bankruptcy Act apply, not only geographically uniformly, but personally uniformly, which has never been attempted before.

If this is done, why not require recordation of contracts of conditional sales in about 12 or 14 States where such a requirement does not exist? Why not require recordation of pledges? I do not know any State outside of the States that have enacted the uniform trust receipts? act that have any legislation at all of the pledges of merchandise. How about filing a notice respecting financing on warehouse receipts Suppose the borrower pledges life insurance. A substantial company in Philadelphia went into bankruptcy with $1,000,000 life insurance on two of its auditors. Its cash surrender value was $200,000 and they had pledged that with a Philadelphia bank for $175,000.

These points on the recording bill argue for its rejection. It places an unwarranted burden on business which the difficulty does not

warrant.

The difficulty is apparent when you have to pick the district and division in a district and I do not know who knows where the boundary lines of the Federal courts in some districts are.

But aside from all that, this recording provision is something fairly recent. We have been struggling with section 60 for 3 or 4 years and

widespread publicity has been given this matter, and there has been a widespread discussion by everybody who is interested.

It is this matter of recording, while thought of for some time, has only really come into the open in the last couple of months. The States that have rejected a recording principle had not had an opportunity to get themselves together to make themselves heard. For example, there are many States that have no law with respect to assignment of accounts receivable where recording bills have been introduced and defeated.

Arizona last year had a recording bill in its legislation and the bankers' association opposed it. Delaware had one in 1945. The banking commissioner and his advisory committee were opposed to it. By a little mistake, the bill passed and got to the governor, but he vetoed it upon the advice of his banking commissioner.

Iowa had a recording bill last year and a validation bill also. Neither bill passed.

In addition to the fact that we have 15 or 16 States that have rejected the recording theory and adopted the validation statute, Michigan, Illinois, Massachusetts, Connecticut, and Virginia-these people have not had an opportunity to make their voices heard with respect to this recording requirement and I do not believe that the recording requirement should be tied in with section 60. They can just as well be separated.

Section 60 is a very urgent matter and we would not want section 60 to be delayed because of the controversial nature of the recording bill.

I think that covers about all I have to say. courtesy and kindness in listening. If there shall be happy to deal with them.

I thank

I thank you for your are any questions I

Mr. REED. Any questions? Thank you. Mr. Jacob I. Weinstein, chairman of the Committee on Bankruptcy, Commercial Law League of America.

STATEMENT OF JACOB I. WEINSTEIN, CHAIRMAN, BANKRUPTCY COMMITTEE, COMMERCIAL LAW LEAGUE OF AMERICA,

PHILADELPHIA

Mr. WEINSTEIN. I have filed a statement with this committee in which I have set forth very briefly the objections by the league to H. R. 2412 and the first section of H. R. 5834 which substantially enbraces what is now contained in H. R. 2412.

I come from Philadelphia and I am a member of the Philadelphia bar.

I do not want to repeat what I have said in my statement and I will try as far as I can to add to it rather than cull from it. I do want to correct statements made by prior speakers who say they know of no objection to the repeal of the bona fide purchaser test of section 60 which is substantially the objective of H. R. 2412. The Commercial Law League of America does very vehemently oppose that repeal.

The Commercial Law League of America is a national organization of about 3,800 members, distributed all over the country who reflect the cross section of the views of the country as do some of the other national organizations, but whose membership is largely engaged

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