which the present test strikes down against the trustee but which would again become good against him under the proposed new test. Only a processing of the proposed test through the courts would disclose the area of such revivals. Therefore, it is submitted that in this economic conflict of interests, the arsenal of remedies of the unsecured creditors-the defenseless group, should not be depleted. It is broadly contended that the "bona fide purchaser' test puts in jeopardy the validity, as against a trustee in bankruptcy, of certain security devices, namely, trust receipts, factors' liens, motor vehicle mortages, chattel mortages and conditional sales where by the security instrument the "trustee," mortgagor, or vendee, as the case may be, is permitted to sell, in the ordinary course of business, the property which is security for the obligation. It is argued that in such situations the transaction is tainted from its inception with invalidity. Of course, the present test was not intended to strike down this type of transaction, since a transfer is not "secret" where otherwise there is compliance with applicable local law requirements with respect to recordation, change of possession, or the like. There is authority for this view. See Collier, op. cit.: as to chattel mortgages, 924, 931 to 934; as to conditional sales, 934, 942 to 945; as to trust receipts, 953, 957 to 958; see also, McGowen, Banker Says Trust Receipts Not Voidable Preferences Under Section 60a, Credit and Financial Management (February 1948) 4. There is as yet no reported case in which the feared contention has been made, but in a recent unreported case, which has come to my attention, Referee Paul R. Kach, of Baltimore, Md., filed a memorandum in explanation of an order entered by him ratifying a settlement by the trustee in bankruptcy with a finance company, involving a trust receipt transaction. The referee was of the opinion that, where the trust receipt is acquired and recorded pursuant to, and complies with, the provisions of the Uniform Trust Receipts Act, the "bona fide purchaser" test of section 60a did not invalidate the transaction as against the trustee in bankruptcy. A valid recording under such act charges all persons with notice and it is the manifest legislative intent of such act "to give those persons who comply therewith priority against all but an actual bona fide purchaser." However if, nevertheless, it is deemed desirable to remove the cloud from such transactions, a simple amendment to section 60a, by way of a proviso, could readily be drafted. I am attaching to my statement, as appendix A, a proposed draft for such purpose (the first underlined proviso).

While the attack on the present test is generally premised on the ground that it impairs desirable and legitimate security devices, in fact, the proponents of the amendment are principally persons interested in the assignment of accounts receivable on a nonnotification basis. This security device of financing is, generally speaking, not undesirable or objectionable. However, if such financing is done on a nonnotification or nonrecordation basis, it becomes a "secret" transaction which should not be favored or encouraged. The scope of the present test of $60a can be preserved and yet full protection given to this type of security device by requiring a simple form of recordation as proposed in §70i of H. R. 5834, drafted by the National Bankruptcy Conference.

H. R. 2412 and $1 of H. R. 5834 also include provisions with regard to the "grace period" for recording transfers. Under some State statutes, a specified time is provided for recording the instrument of transfer or encumbrance. Where no fixed time is specified, the courts resort to the rule of "reasonable time". In such situations, the question has been raised whether, where the instrument is recorded within the period of 4 months before bankruptcy or after the bankruptcy of the transferor, but within the required statutory time or within a reasonable time, as the local law may be, such recordation meets the present test of §60a. This question is not new to the existing test of the Chandler Act; it was equally present under the prior tests. There is authority for the view, with no decision to the contrary, that where under applicable local law recordation has been made within the “grace period," whether within the time fixed by applicable statute or within the decisional "reasonable time," the transaction is deemed to have been made at the time of its execution. See Collier, op. cit., 903 to 905. In this aspect, the bankruptcy court would and should follow the State law. However, if clarification is deemed desirable, a simple proviso can also be drafted for that purpose without reducing the scope of the present test. See attached appendix A, second proviso, for a proposed draft which incorporates the substance of subparagraphs I and II of H. R. 2412, page 3, lines 20-25 and page 4, lines 1-13 (duplicated on p. 4 of H. R. 5834).

In re David D. Wallace and Rose S. Wallace, individually and copartners trading as the Lovely Beauty Shop, etc., U. S. District Court for the District of Maryland, in Bankruptcy, No. 9974.

In conclusion, it should be noted that where secrecy is imposed upon a transfer of property, whether the transfer be outright or by way of a security title, it is usually done because a public disclosure (as by recordation) or notoriety (as by a change of possession) may affect the credit position of the transferor with his unsecured creditors. And that is the very vice of the secrecy against which unsecured creditors should be protected when the transferor is thereafter declared a bankrupt. Therefore, the need of an effective standard by which to test the transfer at a level which is most favorable to the unsecured creditors and yet not inequitable to the transferee. The present test deprives the transferee of nothing except the freedom from disclosing the transfer to which he is not necessarily entitled, and certainly not at the expense of the unsecured creditors.

It is therefore respectfully submitted that, except for the clarifying changes above indicated if deemed desirable, the step down in the level of the test proposed in H. R. 2412 and § 1 of H. R. 5834 should be disapproved and that the present test of $60 a should not be disturbed.

JACOB I. WEINSTEIN, Chairman, Bankruptcy Committee, Commercial Law League of America.

PHILADELPHIA, PA., May 5, 1948.

APPENDIX A

"SECTION 60. Preferred creditors.-a. A preference is a transfer as defined in this act, of any of the property of a debtor to or for the benefit of a creditor for or on account of an antecedent debt, made or suffered by such debtor while insolvent and within 4 months before the filing by or against him of the petition initiating a proceeding under this act, the effect of which transfer will be to enable such creditor to obtain a greater percentage of his debt than some other creditor of the same class. For the purposes of subdivisions a and b of this section, a transfer shall be deemed to have been made or suffered at the time when it became so far perfected that no bona fide purchaser from the debtor and no creditor could thereafter have acquired any rights in the property so transferred superior to the rights of the transferee therein, and, if such transfer is not so perfected prior to the filing of the petition initiating a proceeding under this act, it shall be deemed to have been made immediately before bankruptcy: Provided, however, That whereby or under the terms of a transfer the creditor retains or reserves title to the property transferred, or obtains a security interest therein, and the debtor is given or retains possession of the property with power to sell the same in the ordinary course of his business, such transfer, if valid under applicable Federal or State law against all persons except a bona fide purchaser in the ordinary course of business and if made for or on account of a new and contemporaneous consideration shall, to the extent of such consideration, be deemed to have been made at the time when it was actually made: And provided further, That where a transfer is required to be recorded by Federal or State law and is so recorded within the period fixed in such law, or within 30 days after the transfer was actually made, whichever first expires, or, if no period is fixed in such law, within 30 days after the transfer was actually made, then, in any such case, the transfer shall be deemed to have been made at the time when it was actually made."

Mr. REED. On behalf of the American Finance Conference, we have Mr. Thomas W. Rogers, executive vice president, Chicago.

STATEMENT OF THOMAS W. ROGERS EXECUTIVE VICE PRESIDENT, THE AMERICAN FINANCE CONFERENCE, CHICAGO

Mr. ROGERS. Mr. Chairman and gentlemen, I have a prepared statement which did not arrive in time to file with you. We could not control weather in Chicago and I arrived this morning after you began.

I will try not to infringe on your time by repeating what is said here. It is a very short statement and I think to the point.

Our association is composed of some 250 independent sales finance companies who do business all over the United States. These companies have, perhaps, around 1,300 separate offices and branch offices. and do business with automobile dealers and other retail dealers who are handling consumer durable goods.

The position of our association with respect to H. R. 2412 is that we think it should be enacted. There is need for clarification of the language of section 60a and this, of course, is of significance to our group because it extends wholesale credit to these retail dealers. That is to say, credit which enables the retail dealers to purchase their inventory from manufacturers and carry it on their floor until it is sold at retail.

Our association members have a second function. That is to purchase installment sales contracts and to extend credit effectively to

consumers.

The technical side of this bill, H. R. 2412, has been explained to you by those who have preceded me and I shall not go into that. I simply want to say that, as an association representative of small business organizations who do business in a county to an organization involved in several States involving millions and billions of exposure, that our association feels H. R. 2412 should be reported favorably and we would urge that it be enacted into law.

Insofar as H. R. 5834 is concerned, I think those companies among our conference who are engaged in the accounts receivable business, and we do have a fairly substantial segment of them, would feel that the matter of recordation should be treated at the State level. As has been said before, this morning, there are differences of opinion on that with reference to attitudes in local States and it is, in the opinion of our group, I am sure, a matter which should be treated at that particular level.

I think also that those groups would feel that if it were enacted at a national level it would be a burden on smaller business organizations possibly cumbersome, unwise and would retard the expansion of credit to the smaller business organizations.

In that connection, I might again comment very briefly on a statement made by the speaker who preceded me, viz, that the reason for recordation should be that the debtor does not want his creditors to know he is in debt. I would suggest that the reason, the greater reason, perhaps, is that the debtor does not want his competitors to have information which they can use to his disadvantage.

That point, perhaps, was suggested earlier. But whatever the reason, the small business organization that of necessity has to have credit upon the assignment of his accounts receivable is at a disadvantage from the larger creditor who operates on an unsecured basis. Frequently, that creditor either by innuendo, if not by direct statement, suggests that the customer should get his merchandise from an organization which is sound financially, by inference saying the individual is not sound financially because he does have to assign his accounts receivable.

So, summing up very briefly. I would say that our group representing largely small independent organizations, would favor the enactment of H. R. 2412 and would suggest that H. R. 5834 be deferred and treated as a separate matter because it is in the nature of a controversial issue.

I believe that is all I have to say.

Mr. HOBBS. May I ask you about your attitude on H. R. 5693? Mr. ROGERS. I am not a technician in terms of draftsmanship. So, in terms of interrelation of what would be required, or not required, to do certain things, I would answer that generally, Judge Hobbs, by

saying that our group feel that this matter of clarification of section 60a with reference to this bona fide test should be enacted and the segment of our group that does accounts receivable financing would not be favorable to recordation. I am not sufficiently informed on the technical side of that to make a statement on it.

Whatever technical procedure would be required to effect that would be favored by our group.

Mr. HOBBS. I would like to draw your attention to section 13 on page 11 of H. R. 5693, "A preference is a transfer." We do not see any substantial objection to that and it certainly clarifies it. If there is no real reason to object to it, we think it is beneficial and should go in. Mr. ROGERS. I would like to study the language and the technical side of it more before I would make a yes or no answer.

Mr. HOBBS. I do not want you to "shoot from the hip" but I wish you would study that if you will. We conceive that to be proper and we think this whole bill is noncontroversial. If we can get together on it we can study all the written statements. Then we want to get either one of the other two bills through before we recess.

I will appreciate very much if you study the language on page 11, on section 13 (a) and see if your judgment is that there is any objection to it.

Mr. ROGERS. I will be glad to do that.

(Statement of Mr. Rogers referred to is as follows:)

STATEMENT OF THOMAS W. ROGERS, EXECUTIVE VICE PRESIDENT, THE AMERICAN FINANCE CONFERENCE, CHICAGO 3, ILL.

My name is Thomas W. Rogers. I am executive vice president of the American Finance Conference with headquarters located at 176 West Adams Street, Chicago, Ill.

The American Finance Conference is a national trade association composed of some 350 independent sales finance companies, which companies, collectively, operate some 1,300 independent home and branch offices located in all parts of the United States. These companies range in size from those operating in a single city or county to those operating in many States. The principal business of these companies is that of extending credit to retail dealers in consumer durable goods and, in turn, through these dealers, to millions of consumers.

Sales finance companies supply credit to retail dealers and to consumers in two ways: (1) by supplying funds with which retail dealers purchase goods from manufacturers at wholesale, and to maintain inventory; (2) through the purchase of retail installment sales contracts from retail dealers, which contracts have been entered into between retail dealers and installment buyers.

This wholesale credit is extended in some form at some time to substantially all of the approximately 150,000 retail dealers in consumer durable goods in the United States. These retail dealers handle such items as automobiles, refrigerators, washing machines, stokers, electrical appliances and the like. In normal times millions of retail installment contracts are purchased each year from these dealers. Wholesale credit covers the first step in the distribution process and the purchase of these installment contracts covers the second step. These steps involve millions of individual items of consumer durable goods.

Under the present language of section 60a of the National Bankruptcy Act (52 Stat. 840, 869), there is great uncertainty, due to interpretation by the courts, in the event of bankruptcy of a retail dealer, with respect to the validity of trust receipts, conditional sales agreements and other security instruments commonly used in connection with the extension of wholesale credit to these retail dealers. This uncertainty has impeded the flow of this credit to these dealers. The reasons for this are numerous. The principal reason, however, is that, as interpreted by the courts, the test of "preference transfer" is too broad. When applied to certain factual situations the present wording may have the effect of invalidating lien instruments bona fide entered into in the due course of business, and may give effect to subsequently created interests in such way as to penalize normal bona fide transactions which have no relation whatsoever to an attempted preference by the debtor of one creditor over another.

In short, the present language of this statute, under given situations, as now interpreted by the courts, may have the effect of making a bona fide lien creditor a general creditor and therefore relegate him to a secondary position, even though this were not the situation in the original instance or the intention of either the debtor or creditor at the time of the original transaction.

With this uncertainty and doubt existing, many retail dealers of small resources are penalized and their credit funds materially restricted. The effect of this is to place a burden on the small independent retailers and to restrict the credit resources available to them because the creditor cannot be sure that in the event of bankruptcy, he can look to his lien upon the merchandise financed as a primary source of security.

The companies comprising the industry for which I speak do not oppose language which will prevent hidden or secret liens, designed to work fraud upon creditors by preference through collusion. However, they are strongly of the opinion that any applicable language which defines a "preference transaction" should be so clear and unambiguous as to mark clearly the distinction between "preference" transfers designed to prefer creditors and those arising out of normal and bona fide business transactions entered into in the course of normal operations. The present language of section 60a, as interpreted by the courts, does not make this distinction clear; hence, the doubt and uncertainty which exists.

We believe that the amendments proposed by the wording of H. R. 2412 will eliminate this present doubt and uncertainty and will remove the impediments to wholesale credit created by this present doubt. We hope that your committee will report this bill favorably to the Congress and urge that it be enacted into law. Your committee also has before it H. R. 5834. This bill, while including many features of H. R. 2412, provides for the compulsory recordation of assignments of accounts receivable. In our opinion, the subject of recordation is a matter which should be treated separately and should not be injected into and confused with the urgent need for clarifying the language of Section 60a as proposed in H. R. 2412. The reasons for this opinion, among others, are these: (1) The matter of recordation is an entirely different subject, poses an entirely different problem and raises entirely different issues from that involved in clarifying the wording of section 60a. (2) It seems to us that the policy of whether or not there should be recording, nonrecording, validation, etc., in reference to these assignments, is entirely a matter for State legislation and should be treated at the State level.

Also, I believe that it is the opinion of the companies among the membership of our association engaged in accounts-receivable financing, that compulsory recordation of the assignments of accounts receivable would be cumbersome, unwise, undesirable, a burden to business, would deter the flow of credit to worthy small business, and would add nothing to the security information or position of a general creditor, over and above that which may now be obtained by these creditors through the normal and accepted practices of securing credit information.

We hope, therefore, that your committee will defer action on H. R. 5834, will report favorably H. R. 2412, and urge that the Congress enact it into law. Mr. REED. Mr. Deneen Watson of the American Finance Conference?

Mr. WATSON. I do not wish to say anything.

Mr. REED. Mr. Frank A. Dudley of Portland, Oreg., representing the National Association of Credit Men.

STATEMENT OF FRANK A. DUDLEY, NATIONAL ASSOCIATION OF CREDIT MEN, PORTLAND, OREG.

Mr. DUDLEY. On behalf of our national association I thank you for the opportunity of speaking before you.

Our particular interest lies in H. R. 5834 which approves a policy of recordation of assignment of accounts receivable.

I have been with the credit men for the last 9 years and have been chairman of the committee studying the question of recordation of accounts receivable.

I speak from a layman's point of view and if there are any technicalities of law that you wish to ask questions on as to our point of