against fraud through the easy sale by a debtor of his negotiable notes and acceptances received from his customers, which can much more readily be disposed of than open accounts and installment obligations.

Usually when the rare case of fraud resulting from the assignment of open accounts or installment obligations does occur, the largest loss is sustained by the concern acquiring such receivables and not by unsecured creditors. Our experience shows that generally any money received from us through fraud has been used to pay unsecured commercial creditors.

We are definitely opposed to the filing in any central place of the contract, or even a notice thereof, under which receivables are to be transferred, as this adds more trouble and expense to all concerned and, in our opinion, can serve no good purpose. It would furnish one central place in each State where competitors could easily find the names and addresses of concerns who are selling or borrowing money on their accounts receivable from other financing institutions and then solicit the business of such concerns by offering concessions.

We firmly believe that a thorough and impartial hearing of this whole subject before a group of fair-minded bankers and businessmen would result in their being opposed to any new legislation to regulate the assignment of open accounts or loans upon inventories. It would be almost impossible to obtain such consideration from members and committees of a legislature, as they are usually subject to strong political and other pressure by those definitely in favor of or opposed to any proposed legislation.

Our best judgment and the result of our experience of many years, therefore, justify us in actively opposing any proposed new legislation to regulate the assignment of open accounts or loans upon inventories wherever such legislation may be introduced.

Mr. REED. IS Mr. Clarence O. Holten of Minneapolis here? He represents the Minnesota Association of Sales Finance Companies.

STATEMENT OF CLARENCE O. HOLTEN, MINNESOTA ASSOCIATION OF SALES FINANCE COMPANIES

Mr. HOLTEN. Mr. Chairman and members of the committee, I have filed a written statement on behalf of the clients for whom I appear as attorney. There are four finance companies whom I represent, the State Association of Finance Companies and the Minnesota Automobile Association, and I know you have many other witnesses who wish to be heard, so I shall make my remarks short.

I would like to emphasize that this committee give consideration to that vast number of businessmen who are not here represented, viz, the borrower. To be sure, I do represent the lenders. But I think the committee's consideration should be directed to the borrower's welfare because the finance companies and the banks can stay in business if they cannot lend money to the people who must employ the type of securities we are talking about. But the little fellow cannot stay in business unless he can get the money.

The most serious effect of this Klauder case and the Vardaman case is that they strike down the effectiveness of the trust receipt acts adopted in many States, the factors' liens which have been adopted in a number of Western States and similar instruments.

I represent a number of clients in Minneapolis and St. Paul who are small-business men-businessmen whose capital investment may range from fifty thousand to a hundred or two hundred thousand, or three hundred thousand. These people have been in business many years, long before the war and were adequately financed and capitalized before the war. But it takes a good deal more money today to do business than before the war. They haven't any source of risk capital except from the finance companies and banks. It is hard for

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the little fellow to sell stock or debentures to the public so he must rely on a bank or finance company for credit to add to his capital to do business on this inflated price situation.

Within the last 2 weeks I have had the personal experience of aiding or attempting to aid a couple of clients in Minneapolis who are endeavoring to secure risk capital-small, to be sure, in relation to their business, but nevertheless it is not the kind of credit that the bank can lend them for a period of a year or 2 or 3 years. They cannot do it without collateral security. I am thinking of one company with whom I sat in conference at Minneapolis which needs about $50,000 risk capital. They have been in business 25 years. They have discounted their bills for all these years. They did a business last year of $600,000 and paid out $75,000 in pay roll. Yet, with that record the bank says, "Well, we have been into your company for about 14 months with a 25- to 35-percent secured loan and the examiners say you ought to have the type of loan where the borrower can get out for about 30 to 60 days. What kind of security can you give us?" "We can give you a factor's lien." "Our attorneys tell us that is pretty risky unless there is a change made in the Bankruptcy Act resulting from the Klauder case interpretation."

That is a typical illustration and a concrete example of the impact of this law decision that has operated on section 60a.

Now, I would like to say something also about this proposition of requiring recordation of a notice of an assignment of accounts receivable.

In Minnesota we adopted in 1945 the so-called validation statute and that was adopted after long hearings before the respective committees of the house and senate of the Minnesota Legislature. Everybody had an opportunity to be heard. The choice in our State was not a choice between recordation or validation, but a so-called bookmarking statement which would require the borrower to mark all his accounts receivable showing them to have been assigned.

After extensive hearings before our committees, they concluded with the validation statute as the one most desirable. I know a good many credit men in the Twin Cities and have occasion to meet them frequently. Nobody complains about the operation of our validation statute and we would be unhappy if the Federal Government saw fit to invade our State and strike down the statute which has been adopted after an opportunity was offered all interests to be heard, including the credit men's association of our two cities.

Moreover, it has no practical value. I speak now of the recording statute. It has no practical value in my judgment for this reason. If a borrower is required to employ the use of his accounts receivable for credit purposes and because of the adoption of a recording statute he files a notice with the clerk of the United States district court that he is about to engage in that type of financing, either his creditor gets no knowledge of that urless he has a reporting service of som.e type or unless he makes a periodic trip to the clerk's office to find out what his creditors are doing.

The credit man, if he is sufficiently alert to make the trek, would call on the United States district court once a week or more often to find out who is borrowing money on accounts receivable and require a financial statement. That financial statement discloses this man is borrowing money on his accounts receivable if it is truthful. The

instant the argument begins, that is to say, the man is not truthful, my experience tells me that the vast majority of business people are absolutely honest, and the credit men will get reliable and truthful information if he is sufficiently alert.

The objection to it is the same objection raised by the person with whom I sat in a bank yesterday. The bankers mentioned the employment by him of his accounts receivable for financing. The very first question he asked was, "Do you have to file that?" The banker said, "No." The thing uppermost in his mind was, "I have to publish publicly that I am going to borrow money in that manner.” Curiously, I thought he asked his credit man what he thought about this recording statute. He is in favor, but apparently he had not talked to the boss about it.

So, I would like to point out to you gentlemen that while the credit man is the representative of this association which in turn is represented here today, he lives in the credit end of the business. But I wonder how many of the people in the small business field who have to worry about financing may be victims of the action of the credit men in securing the Recordation Act; how many of them are going to be unhappy to find they have to publish this notice to the world because believe it or not, it is a very potent weapon in the hands of larger and stronger competitors. If any man of the vast majority of our businesses in this country-I think it exceeds ninety percent who employ less than 50 people in small business-has to compete with the big fellow, he will find it easy for the big fellow to say, "Joe Doakes is an honest fellow but he is in hard financial circumstances because he has to assign his accounts receivable to get business." The little fellow finds competition tough enough without having some more added through that medium.

I thank you for the opportunity of appearing here.

Mr. HOBBS. I would like to ask you if you would be kind enough to look through 60a of H. R. 5693 and give me your opinion about it. Mr. HOLTEN. I will be glad to do that.

Mr. HOBBS. I do not see how it can hurt anybody.

Mr. HOLTEN. I am in receipt of a letter from the vice president of the Northwestern National Bank of Minneapolis in which he expresses his views on H. R. 5834. I would like to offer this for the record. Mr. REED. It will be admitted.

(The matter referred to above is as follows:)

NORTHWESTERN NATIONAL BANK OF MINNEAPOLIS,

May 6, 1948.

Re H. R. 5834.

CLARENCE O. HOLTEN,

Attorney, Minneapolis, Minn.

DEAR CLARENCE: You expect to appear as a witness before a Judiciary subcommittee of the House of Representatives in Washington at a hearing to consider H. R. 5834; and you asked me to give you a letter, stating our views in respect to this House bill.

We think there is a very definite need for an amendment to section 60. Since the decision in the so-called Klauder case, it has been extremely difficult to properly secure loans to small-business men. We frequently feel obliged to refuse applications for loans due to the uncertainty as to whether the collateral will be good or not.

We note that a suggestion has been made that the proposed amendment to section 60 of the Bankruptcy Act carry with it a requirement for compulsory filing of pledges of account receivable. To my mind, this would be very unwise.

In 1945 our State legislature adopted the so-called validation statute relating to assignments of accounts receivable. At the time this Minnesota statute was adopted, the writer, personally, made quite an exhaustive study of the question of notification or nonnotification in connection with collateral assignments of accounts receivable. It was the writer's conclusion, based upon this study, that notification served no useful purpose but did result in considerable detriment to the borrower.

If public notice is given of each account-receivable borrowing, the borrower's standing and reputation in the trade is affected adversely, and it becomes that much more difficult for him to successfully conduct his business.

Very truly yours,

GRANT W. ANDERSON, Vice President.

APRIL 30, 1948.

Re H. R. 2412 and S. 826, amendment to section 60a of the Bankruptcy Act. The Honorable CHAUNCEY W. REED, Chairman, and the honorable members of the Judiciary Committee of the House of Representatives, Washington, D. C. The undersigned, Clarence O. Holten, appears as attorney in support of H. R. 2412, proposed amendment to section 60 of the Bankruptcy Act. Such appearance is made in behalf of the following companies operating in the State of Minne

sota:

First Acceptance Corp.

Minnesota Association of Sales Finance Companies.

Northern Finance Corp.

Minneapolis Securities Corp.

Republic Acceptance Corp.

Minnesota Automobile Dealers Association.

The proposed amendment is intended to remove the hazard devolving upon lenders resulting from the effect of the Klauder case (Corn Exchange National Bank v. Klauder, 318 U. S. 434, 63 Sup. Ct. 679, 87 L. Ed. 884 (1943)) and the Vardaman case (In re Vardaman Shoe Company, 52 F. Supp. 562 (E. D. No. 1943)).

The hazard resulting from the present language of section 60 of the Bankruptcy Act, as construed in the Klauder case and the Vardaman case, is that a lender making a loan on a security basis may, in the event of bankruptcy, lose the benefit of his security even though he has done everything required or permitted by applicable law to give notice of his lien to existing and subsequent creditors.

The Klauder case held in substance that where a transfer does not immediately become effective against good faith purchasers of the property from the transferror, the transfer is for an antecedent debt and, therefore, a preference, even though the transfer was made to secure a loan of new money, and the loan and transfer were made simultaneously.

The finance companies for which I am appearing are engaged largely in furnishing risk capital to small businesses, particularly to new enterprises which have not established credit over a period of years. These companies need financing to obtain raw materials or merchandise intended for sale and must necessarily borrow money on the security of their inventory of raw materials or merchandise, or upon the accounts receivable resulting from the sale of their merchandise.

To aid Minnesota businesses needing this type of financing, the Minnesota Legislature at the last three sessions, 1943, 1945, and 1947, enacted four laws designed to assist such new businesses to obtain risk capital. The laws I refer to

are:

1. Laws 1943, chapter 433, generally known as the Uniform Trust Receipts Act. 2. Laws 1945, chapter 503, known as the Assignment of Accounts Receivable Act.

3. Laws 1947, chapter 590, known as the Factors Lien Law.

4. Laws 1947, chapter 282, prohibiting corporations from interposing the defense of usury.

This legislation, particularly the laws dealing with uniform trust receipts and the factors lien, were designed to overcome the difficulties arising from decisions holding that a chattel mortgage on merchandise intended for sale, or on property which could not be completely described in the mortgage, was invalid as against subsequent purchasers or creditors, by authorizing the creation of a lien upon raw materials or on inventory of merchandise. However, the legislation specifically provides that a good-faith purchaser buying the merchandise in the ordinary

course of business takes title free of the lien of the lender, who then obtains a substitute lien upon the proceeds of the sale of the property.

Since under the Minnesota legislation the rights of the lender on specific property covered by trust receipt or factors lien are inferior to the rights of a good-faith purchaser, it is believed that in the event of bankruptcy the bankruptcy court would hold the transfer to the lender either in the form of a trust receipt or a factors lien to be a "preference" under the Bankruptcy Act, in view of the decision in the Klauder case and the Vardaman case. Consequently, the object of the Minnesota Legislature in enacting the various legislation referred to above is largely nullified by the present definition of preference in the Bankruptcy Act. Lenders hesitate to make loans to new businesses even on a security basis where they cannot be reasonably sure that they will be entitled to the security if the loan is not repaid.

It is believed that the proposed amendment before your committee will remedy the injustice of depriving creditors of their security, in the event of bankruptcy.

As a consequence the proposed amendment will aid small business, particularly new and expanding enterprises, to obtain risk capital, and thereby help to realize the aim sought by the Minnesota Legislature in enacting the Trust Receipts Act and the factors lien law.

For these reasons, the Minnesota Automobile Dealers Association, whose members frequently need a source of risk capital to finance inventories and sales, join in urging the adoption of the amendment to the Bankruptcy Act before your honorable committee.

Respectfully,

CLARENCE O. HOLTEN.

Mr. REED. The committee would like to get an idea of the length of time necessary to complete the hearing today and I would like to ask some of these witnesses now long they estimate their oral statements will be?

(Discussion off the record.)

Mr. KUPFER. Mr. Needham (general counsel for the American Bankers Association) was here and said he did not know whether he could come back this afternoon. He authorized me to say that the American Bankers' Association is in favor of H. R. 2412 and is opposed to H. R. 5834.

Mr. WEINSTEIN. May I ask whether Mrs. A. S. Musgrave can be heard before the committee adjourns. She has an appointment to go to.

Mr. REED. She can be heard right now.

Mrs. Musgrave, we will hear you now.

STATEMENT OF MRS. A. S. MUSGRAVE ATTORNEY, MEMBER OF BANKRUPTCY COMMITTEE, COMMERCIAL LAW LEAGUE OF AMERICA

Mrs. MUSGRAVE. I am a member of the bar of the District of Columbia and Maryland with offices in the Southern Building, Washington; in the Fidelity Building, Baltimore, Maryland; and on Washington Boulevard, Laurel, Maryland. I am a member of the bankruptcy committee of the Commercial Law League of America, succeeding as a member of that committee the late G. W. S. Musgrave, whose wife I had the honor to be. Mr. Musgrave for many years was a member of that committee and of the National Bankruptcy Conference.

I came today after having filed a very short statement to say "Me too." to what Mr. Weinstein has presented to you. His written statement is a very able explanation and his remarks before you today have very ably carried the position of the Commercial Law