view, I would prefer that you ask them of Mr. Randolph Montgomery, our counsel.

From an organization point of view and for my fellow credit men, we have 28,000 members in our association, the overwhelming majority of whom feel there should be a place of recordation of the assignment of accounts receivable as there are of the other assets of the customers. We look at it this way: If a man is in business and he has merchandise, fixtures, accounts receivable and real estate; on his fixtures and real estate, if he operates on them, the lien must be recorded. We can see no reason why a lien on the most vital part of his assets should not also be made of record.

We feel it is a hole in our ability to tell what credit we should extend because of this lack of knowledge we feel we are entitled to.

I know from practical experience that our opposition has come entirely from the lending companies. In the many years I have been active on the subject, the only valid reason given for the objection to recordation was the fact that their customers would be known to their competition and I do not know of any other line of business in which the customers of the competition are not known. We are in business, successfully or unsuccessfully, to get those customers if we can.

The movement was started because of the canon of ethics set up by the National Association of Credit Men to govern business men in the use of credit. This is set out in my written statement and I ask you to read it. We have been successful over the years in having recordation acts passed at the State level in 12 instances and in spite of the dire prophecies of the opposition, the laws are working successfully. We are satisfied that we receive knowledge that the account is assigned. That may be the best thing for the man to do in his business. All we wish to know is that it has been assigned and we will know whether he understands credit or not.

In the first analysis we credit men create the accounts receivable. which are assigned. We are the ones who start the accounts receivable and we feel we have a vital interest in them and want to know when they have been unencumbered.

I have, as you know, filed with you a statement and, as you have suggested, I will not cover that fully. But I do want to comment on statements made that many States have rejected recordation; also the fact that it is something new and novel and should not be discussed at the same time as H. R. 2412.

In the past 10 years I know it has been thoroughly discussed in every State and has been cussed and discussed. Twelve States have passed it. Other States have passed a validation act. I can say that the validation act was passed at the instance of the lending companies to counteract the recording legislation.

The reason we oppose H. R. 2412 without accompanying recordation is because the Supreme Court and Congress have arrived at a place where we are protected in those States where we have not been protected and we do not want to recede from that position where it is not taken care of by another amendment.

I may have been somewhat rambling in my remarks and I will just sum up again if I may have a few minutes.

We feel that any asset of a customer of ours which is encumbered should be a matter of record so we may exercise our judgment as to whether we shall extend credit to him or not. We have no quarrel

with methods of financing with accounts receivable and no quarrel with a man encumbering accounts receivable. All we require is knowledge of the fact that it is done. We are not designing a cumbersome system because it has worked successfully in 12 States.

It is not detrimental to the customer. It may have been in the past. But if it was, it was caused by the lending companies themselves. We know that in the States it is operating successfully. It is not detrimental to small business-which is a relative term. Credit managers are satisfied with it and the lending companies have lost no business because of these laws and we respectfully request that, if possible, H. R. 5834 be substituted for H. R. 2412. It will enable us to avoid going back to the State level in those States which do not have such a law and resuming the fights that have been going on in every State legislature.

I think that is all I need to say.

Mr. REED. Thank you.

(Statement of Mr. Dudley referred to reads as follows:)

TESTIMONY OF FRANK A. DUDLEY REPRESENTING THE NATIONAL ASSOCIATION OF CREDIT MEN

My name is Frank A. Dudley, credit manager of the General Grocery Co., Inc., Portland, Oreg., a member of the National Association of Credit Men. I have been appointed by that association to present to you the views of the majority of the members of the association on this proposed amendment to section 60a of the Bankruptcy Act, H. R. 2412.

The National Association of Credit Men is an organization of over 28,000 manufacturers, wholesalers, jobbers, and bankers throughout the United States. These members belong to 122 local associations established in the principal cities of the United States and affiliated together as the National Association of Credit Men with headquarters at 1 Park Avenue, New York, N. Y. The association was organized in 1896.

The overwhelming majority of these members are commercial grantors of credit who, with a large number of bank members, are opposed to this amendment. The National Association of Credit Men, as an organization, on May 1, 1945, approved a policy of recordation of intent to assign accounts receivable and of rendering aid to such States as desired to have such a statute by providing a model bill. The proposed amendment would directly contravene that policy unless a further amendment were included requiring such a recordation in a State or Federal office. Within our association are some lending companies who are supporting this amendment, and for a very special reason issuing from their own special needs and desires. With a view to reconciling these opposing views within our association, a meeting of our national legislative committee was held in New York in May 1947, at which time a compromise resolution was adopted by a 7 to 3 vote, which resolution was adopted by the board of directors on the following day. Following is the resolution:

"That the amendment to section 60a of the National Bankruptcy Act incorporated in H. R. 2412 and S. 826 be approved, provided that there be added to the amendment, or in some other provision of the Bankruptcy Act, a requirement that the title of an assignee of accounts receivable, or other choses in action, shall be perfected by filing or recording a notice of intention to assign accounts in a Federal or State office, and that failure to so perfect the title shall, under the conditions specified in section 60a, invalidate the assignment as against a trustee in bankruptcy."

I shall first consider the proposed amendment itself and then the reasons for our insistence that the recording stipulation should be included if any change is made in the existing section 60a of the Bankruptcy Act.

Prior to 1943 the lending companies were opposed to any legislation being enacted by the several States on the matter of accounts receivable. (See article by A. E. Duncan, chairman of the board of the Commercial Credit Co. in the magazine Credit and Financial Management, the publication of the National Association of Credit Men, in the issue of June 1942 (appendix A attached). I believe the decision of the Supreme Court of the United States in the case of the

Corn Exchange National Bank & Trust Co. v. Klauder, in 1943 changed their attitude and they immediately sponsored before the State legislatures, whenever they convened, legislation to preserve their secret liens on assigned accounts receivable. In 15 States since that year they have succeeded in having passed what is known as a validation statute which is a very short law affirming that title to an assigned account is perfected at the time of transfer and hence cannot be upset in bankruptcy. In the opinion of many this procedure was considered expensive and not conducive to good relations with the commercial grantors of credit throughout the country who reacted vigorously in opposition to this legislation. (Twelve States now have statutes requiring that an intention to assign accounts receivable be recorded or filed in the places where recordation of all liens and transfers is required.)

What seemed to most mercantile credit grantors an expedient was then hit upon of gathering the balance of the States in which there is no definitive law on the subject in one fell swoop by this present attack upon section 60a of the National Bankruptcy Act. To enlarge the number of their supporters they state that the present interpretation of the act jeopardizes the position of chattel mortgages, conditional sales contracts and trust receipts under the Uniform Trust Receipts Act. To date no such instrument has been so invalidated in any court of the country. There are learned lawyers who hold a contrary opinion and believe section 60a of the Bankruptcy Act should not be tampered with.

As I have said at the beginning of this statement, the overwhelming majority of the members of the National Association of Credit Men are opposed to this amendment unless at the same time the recordation feature is incorporated in the act, and for the following reasons:

To start with, canon 4 of the canons of commercial ethics, adopted in convention assembled by the National Association of Credit Men, reads as follows: "The use of credit in the process of exchange demands utmost frankness of him who promises future value for present value received. Our whole credit structure rests upon confidence on the part of the creditor and good faith on the part of the debtor. This delicate structure is seriously injured if the debtor disposes of the values received or their equivalent out of the ordinary and well established courses of business without some form of notice to those who have extended him credit.

"The sale, assignment or transfer of open accounts receivable without some form of publicity readily accessible to those who hold the obligation of the seller, assignor, or transferer constitutes a character of transaction perilous to the foundations of credit, and, therefore, unethical."

We commercial grantors of credit extend the credit to concerns which enable them in turn to do a credit business and create accounts receivable. These accounts they may wish to borrow money on. This in itself is not a nefarious practice and we have no quarrel with it. What we do insist upon is knowledge that it is being done. This borrower assigns or attempts to assign to a lending company his accounts receivable or even accounts not yet in existence as security for the loan and the usual practice is to assign accounts double in value of the loan.

We grant the credit relying on the assets of the debtor as basis for the credit extended. Should he mortgage his real estate, or his fixtures, or his stock of merchandise, such lien must be recorded in a designated place of recording which gives constructive notice of the fact to the whole world. It seems to us but logical that a lien placed upon so important a part of the assets of a debtor as his accounts receivable should also be published. There is no other way in which we can know of it. The debtor retains possession of the accounts. He collects them from his customers in the usual course of business and remits the proceeds or a portion thereof to the lending company. The customers of the borrower never know their accounts have been assigned to a third party. If the borrower sends his customers' checks to the lending company, that company when it deposits them in its own bank account does not endorse its name thereon; only a number recognized by the bank as an endorsement.

The lending companies who unanimously oppose the recordation theory, insits that accounts receivable are in a different category from tangible physical assets and are intangibles, known in the common law as choses in action, and not subject to being handled nor regarded as are physical assets. But there has grown up a relatively modern invention of business, the lending on accounts as security which treats accounts receivable in reality the same as tangibles. Logically, then, recording should follow. Through the years the public knew there was something wrong with all this secrecy. Attempts were made to make it necessary to mark

the ledgers of the borrowers, designating the accounts assigned. Some States made it necessary to notify the customers of the borrowers that their accounts had been assigned. Such devices were unwieldy and have in the main been discarded but the lenders are not willing that a workable solution be adopted. They want complete secrecy surrounding their transactions. They claim recording is not fair to the borrower. It is not so regarded when a mortgage against his real or personal property is recorded. Then what is the unfairness? Is it that such type of brorowing in the past may have been regarded as a last gasp type of financing? That would be unfair in this present day and in any event has no place in the arguments herein presented for recording statutes. In those States in which recording statutes have been enacted the business of lending on accounts receivable has continued with no interruption and with no detriment to the business of the lending companies and great satisfaction to the commercial grantors of credit. Further, the lending companies have promoted the factors' lien acts throughout the country which require public notice. These acts provide that when the merchandise subject to the factor's lien is translated into an account the lien shifts to the receivable. This seems to be a glaring inconsistency with their attitude on the present question.

For 10 years, or before any legislation at all had been made, I have been striving for the principal of the recording of notice of intent to assign accounts receivable and I have never been presented with any reason against it that could be sincere other than that the lending companies did not want the names of their customers known to their competitors. To my mind this is a very feeble reason as I know of no other legitimate business where competitors do not know each others' customers. Mr. Justice Jackson, in handing down the decision of the Supreme Court of the United States in the Klauder case, has stated our case perfectly as follows:

"The committee of the House of Representatives which reported 60a was fully aware of the vicissitudes of its predecessors. For 35 years Congress has consistently reached to stike down secret transfers, and the courts have with equal consistency found its efforts faulty and insufficient to that end. Against such a background 60a was drawn."

Now that the Congress in the National Bankruptcy Act, in the drawing of which our association had an honorable part, has finally clarified the matter of secret transfers to the satisfaction and agreement of the Supreme Court, let us not again throw the law into uncertainty and turmoil by the passage of this amendment, the effects of which are incomprehensible to the lay business mind and vague and uncertain in the minds of experts on bankruptcy legislation. Only if an accompanying amendment requiring recordation of intent to assign accounts receivable is adopted can we feel certain that unsecured creditors will receive their just dues and secret transfers to their detriment be once and for all done away with, as so long has been the intent of the Congress of the United States.

FRANK A. DUDLEY

APPENDIX A. IS ANY LEGISLATION ADVISABLE TO REGULATE THE ASSIGNMENT OF OPEN ACCOUNTS RECEIVABLE?

(By A. E. Duncan, Chairman of the Board of Commercial Credit Co.) During the past year or two there has again been some agitation for new legislation to regulate the assignment of open accounts receivable. This comes principally from a few banks in certain States which take assignments of open accounts as collateral security for loans, and either do not know how or don't take the precaution to exercise proper dominion and control over such open accounts where the debtors are not notified of the assignment thereof. There is also some demand from some credit men in commercial houses, in some cases at the suggestion of such banks, who still believe that such a statute would reduce the hazard of fraud upon creditors through the assignment of open accounts, even though such fraud cases are very rare indeed.

Commercial Credit Co. and its subsidiaries are most vitally interested from every angle in sound ways and means of safeguarding the extension of credit, but without unduly handicapping the normal conduct of business and finance. There are mighty few banks or business concerns in the United States whose experience in the extension of credit and in the handling of receivables is as large or as varied as that of our company and its subsidiaries. We, therefore, feel that our judgment and experience of many years are worthy of most serious consideration by others interested in the extension and safeguarding of credit.

During 1941 our company and its subsidiaries acquired more than $1,000,000,000 of current receivables, of which over $700,000,000 was open accounts, notes, acceptances, etc., and over $300,000,000 represented installment lien obligations.

MANY MILLIONS HANDLED

During the past 30 years we have acquired some $1,750,000,000 of current receivables on the so-called nonnotification plan, under which firms are permitted to continue to pass their own credits and collect their receivables from their customers, who are not notified of the assignment of the accounts owing by them. In 1941 our volume included more than $100,000,000 of receivables factored by our subsidiaries, Textile Banking Co., Inc., and Edmund Wright Ginsberg Corp., New York, who investigate and approve the credits and collect the accounts direct from the debtors and assume all risk of credit loss thereon.

Our subsidiary, American Credit Indemnity Co. of New York, Baltimore, through credit insurance, guarantees manufacturers and wholesalers that loss on their covered accounts will not exceed an agreed percentage based upon their annual sales, and also guarantees the payment of specific accounts by individual debtors whose credit they approve. This service also covers annual sales of several hundred million dollars in addition to the above.

With the background of such a large and varied experience in the extension and safeguarding of credit, it is our well-considered opinion that no further legislation is needed to regulate the assignment of open accounts receivable. We believe

that a valid lien can generally be established by the lender if he will only take the precaution to exercise proper dominion and control over the open accounts assigned to him, as well as over the inventory upon which he has made loans. If such lender does not or fails to exercise such dominion and control, we do not believe he should be entitled to sustain a lien or expect a statute to relieve him of using his own ingenuity to protect his loans.

A RECORD OF 30 YEARS

Our company and its subsidiaries buy and make loans upon thousands of open accounts receivable and extend unsecured credit in large amounts to thousands of debtors to cover their purchases from mills, manufacturers and wholesalers, and assume credit losses either in whole or in part on such business. For 30 years our company has kept well within proper limits its losses by fraud and otherwise on our vast volume of receivables scattered throughout the United States. We do not see why others cannot also do the same without expecting new legislation to take the place of the exercise of their own ability and experience.

Any further legislation to regulate the assignment of open accounts or loans upon inventories is certain to handicap many desirable concerns in the sale or assignment of their current receivables when shipments are made. This business

is perfectly sound and legitimate and enables such concerns to buy for cash and discount or pay their bills promptly. The result of such legislation would be merely to relieve a few lenders of the necessity of exercising proper dominion and control over the receivables and inventories covered under their loans. If such lenders do not already know the various ways and means of exercising such dominion and control, they had better find out as, otherwise, they can very easily sustain large losses either with or without additional legislation.

Any so-called model bill for any legislative purpose can be introduced with the best of intentions before a legislature, but, too often, if finally passed, a complicated and undesirable statute may easily result. An outstanding example of this is the bill passed last year in Ohio, largely at the instigation of one bank, regulating the assignment of open accounts. This Ohio bill is long and complicated and its intent is by no means clear. There are still too many people who think "there ought to be a law" to cover almost every contingency or to relieve them of due diligence. Most top executives in business and finance feei that there are already far too many laws, restrictions, and regulations and are opposed to any new legislation not vitally needed.

WHO SUFFERS THE BIG LOSS

If there need be any new legislation to regulate the assignment of open accounts, it most certainly should also embrace all other obligations, installment or otherwise, other than those covered by the Negotiable Instruments Acts, including all loans upon inventories or under trust receipts, unless they are already provided for. Even then, lenders and creditors would have no knowledge of or protection