Mr. REED. The subcommittee will recess until 2:30 this afternoon. (Whereupon at 1 p. m. the subcommittee recessed till 2:30 p. m. of the same day.)

AFTERNOON SESSION

The committee met at 2:30 p. m., upon the expiration of the recess, Hon Chauncey W. Reed presiding.

Mr. REED. Mr. Montgomery?

STATEMENT OF W. RANDOLPH MONTGOMERY, ATTORNEY, REPRESENTING NATIONAL ASSOCIATION OF CREDIT MEN, NEW YORK CITY, N. Y.

Mr. MONTGOMERY. My full name is W. Randolph Montgomery. I am a member of the bar of New York and Connecticut; I am a member of the National Bankruptcy Conference; counsel to the National Association of Credit Men; member of the committee on reorganization and bankruptcy of the Association of the Bar of the City of New York; member of the committee on bankruptcy of the American Bar Association; and a member of the committee on bankruptcy of the New York County Lawyers Association.

Mr. Dudley has appeared here officially for the National Association of Credit Men and has expressed briefly the contents of the formal written statement that he filed on behalf of the association. I want to merely supplement some of the statements that Mr. Dudley made and perhaps to explain a little more fully the exact position of the association.

The association, of course is made up preponderantly of persons who extend unsecured credit: Bankers, manufacturers, wholesalers, and some retailers. Some of the finance companies also belong to the association.

I have been in touch with the activities of the National Association of Credit Men in connection with their desire to have public notice given of assignments of accounts receivable since the very first year I was admitted to the bar, which was 1916. I recall very distinctly that as far back as that the National Association of Credit Men was agitating for legislation on this subject. And also it was being opposed at that time by the Commercial Credit Co. and all of the other finance companies that are opposed to it today.

At that time I do not think the bankers, any bankers, were appearing in opposition to it. In that connection I want to point out this: the opposition here today comes from bankers and from finance companies. There has been no one who has ever appeared or has ever expressed an opinion, so far as I know, who is a borrower on accounts receivable.

If this proposed recording statute were injurious to borrowers I am sure the borrowers would be here to object. On the contrary, I am certain that this legislation is not injurious to borrowers but is helpful to borrowers.

The reason I say that is this: That certainly in the States-and there are at least 20 of them-in which there is no legislation on the subject

of assignments of accounts receivable, bankers lending money at ordinary rates of interest cannot afford to take the chances involved in those jurisdictions at the present time.

If this statute that we are talking about here, this recording statute, is enacted it will be a protection to the lenders in all of the States in which the law is not presently there, and there are at least 20 of them.

Why the bankers should oppose this legislation I cannot understand. It was stated here today that Mr. Needham, general counsel of the American Bankers Association, stated that the American Bankers Association is opposed to this Federal recording statute. I am sorry Mr. Needham is not here in person. I tried to get him during the recess on the telephone, and found he had left his office for the day. I happen to have been in touch with the office of the American Bankers Association repeatedly over the last 5 years and have discussed with that office the subject that we are here to discuss today, and the information that I have gotten has been that the American Bankers Association had not taken any official position either for or against this legislation.

However, I do know that in 1944 the board of directors of the American Bankers Association, officially approved a recording statute. Of course, at that time they were talking about State and not national legislation.

I wish Mr. Needham were here because I would like to know exactly upon what authority that statement was made that the American Bankers Association is opposed to this legislation. I would like to know whether the American Bankers Association has ever brought it before a convention, or whether their board of directors has ever taken a position on it. I would be surprised to find that that is the case.

I happen to know also that the Washington State Bankers Association was the sponsor of the recording statute that was enacted in the State of Washington. And I know that other bankers, lots and lots of them throughout the country, are in favor of this legislation, not only because they believe that it is helpful to the borrower but because they believe it is a protection to the banks and because they realize that it is a matter of fair play to have transactions of this kind laid on the table where everybody can know what is going on.

Now, they talk about the stigma attached to the assignment of accounts receivable. There has been a stigma in the past, and that stigma was occasioned by one thing, and that one thing is the secrecy that attaches to it, because the secrecy is the thing that enables certain finance companies to charge excessive rates of interest, carrying charges and finance charges of one kind or another, that have bankrupted a great many people who have borrowed from those particular companies.

It is a result of those practices and the secrecy that engenders those practices, that this type of financing has, in the past, had a bad odor. But then the banks came into the situation and the rates came down. And where the banks are lending on accounts receivable I have never heard of any complaints, nor have I heard of any complaints from the banks in the States which have enacted recording statutes.

On the contrary, the information that I get from the Cleveland Trust Co. in Cleveland, from Mr. R. S. Douglas of that companyand I asked him to come here today but unfortunately he could not is to the effect that the situation in Ohio has been vastly improved as a result of their recording statute.

I think in considering this problem of the recording statute the committee should give consideration to the fact that neither the bankers nor the finance companies have advanced one single reason why they cannot carry on their business on top of the table. They talk about the damage that this legislation will do to borrowers, but the borrowers are not complaining.

They say that the credit men do not need it. Well, they are not the credit men. The credit men say they do need it.

I talked off the record to some of these gentlemen who are opposing this legislation and I will not use their names because it would not be fair. I asked "Why do you oppose this thing? Could you not do business if the Federal recording statute was enacted?" They said "We could get along all right, but we would rather not have it."

That is the answer. And the reason and I do not think there is any question about it-that validation statutes have been enacted in so many States, is because there has been a lobby working actively and well financed, and that lobby extends back to my knowledge, as far as 1916, that has fought this type of legislation because they did not want to interfere with the secrecy upon which some of that business has been based.

It seems to me that it is about time that Congress did something to protect the public interest in connection with this type of financing. It did it when it enacted section 60a in 1938. It was a bold step and it was a wise step.

As the United States Supreme Court pointed out in the Klauder decision, quoting from the report of this committee, the purpose of that legislation was to strike down secret liens, and the Supreme Court said that it was desirable to strike down secret liens.

I do not think there can be any quarrel with the proposition that secret liens are not good for the general economy of the country. If secret liens are good in connection with accounts receivable then they are good in connection with chattel mortgages and conditional sales and real-estate mortgages, and every other transaction that is required to be recorded for the purpose of the protection of the public.

I cannot see any validity to their arguments whatsoever. Those who have a vested interest in maintaining the secrecy of liens created by the assignment of accounts receivable, and by that I refer principally to the finance companies, immediately started an intensive campaign to nullify the effectiveness of section 60a as interpreted by the Supreme Court. Seizing upon the fact that the Supreme Court held that the steps necessary to be taken to perfect title as against a bona fide purchaser depend upon the law of the State where the assignment is made, the finance company lobby besieged the State legislatures with bills which provide in substance that an assignment of accounts receivable is valid as against all the world by the mere execution and delivery of the instrument of assignment without notification to the obligors of the assigned accounts and without the

filing or recording of any public notice of the assignment. The opponents of this type of statute were neither as well organized nor as well financed as the proponents, and a substantial number of State legislatures yielded to the pressure and enacted so-called validation statutes, thereby nullifying the expressed object of this committee to strike down secret liens arising in those jurisdictions.

Now, what happened when the Klauder case came down?

The Klauder case never could have come up if the Corn Exchange Bank of Philadelphia had followed the advice of its counsel or had sought legal advice, because they would have known, by just reading section 60a, that that transaction in which they indulged was not safe as against a trustee in bankruptcy unless they complied with the Pennsylvania law and established their title by notification to the obligors of the accounts.

The fact that they made that error is no reason for changing this law. There is a reason for changing it, perhaps, with respect to trust receipts, and chattel mortgages and conditional sales on shifting stocks of merchandise. There is a cloud-and it is a very thin cloud but it is a cloud-attaching to those transactions as a result of the bona fide. purchaser test. But that cloud can easily be removed without Congress reversing itself on its policy with respect to striking down secret liens. It can be done in either one of two ways: It can be done as proposed in these two bills that are before the committee today, or it can be done by the adoption of the simple amendment that Mr. Weinstein proposed.

That will protect trust receipts, chattel mortgages and conditional sales. But it will not protect as against secret assignments of accounts receivable unless the proposed Federal recording amendment is enacted. The secrecy of assignments of accounts receivable, if either one of these bills is enacted without the Federal recording statute, will be put back where it was before 1938.

We were not particularly concerned about trust receipt transactions, but when it was pointed out that there was a cloud hanging over them we immediately said that cloud ought to be removed. But it ought not to be removed at the expense of the sound policy which Congress adopted in 1938, and which the Supreme Court has approved.

So far as the Vardaman case is concerned, I want to say this and then I am going to quit: That was a decision by one district judge. It never went up on appeal. Since the Vardaman case was decided there was the Rosen decision in the third circuit which has completely undermined the authority of the Vardaman case.

I submit, gentlemen, that there is no valid argument against the recording statute. The bankers can live under it; it will protect the bankers. The finance companies can live under it; and it will protect them in the States where there is no State legislation.

So far as the borrowers are concerned it will create greater competition and result in a lower rate of interest on their loans. So far as the general public that extends unsecured credit is concerned, it is necessary for their protection, and there is no substitute for it.

It is not an infringement upon the authority of the States, it is merely a rule of distribution in bankruptcy. And the bankruptcy law

is replete with other instances of the same thing which are mentioned in the statement filed by Mr. Olney on behalf of the National Bankruptcy Conference.

Thank you.

Mr. REED. Any questions?

Mr. DEVITT. Why do you think the banking fraternity and the finance companies are opposed to the recording statute?

Mr. MONTGOMERY. Only for this reason: that if they do not have it they do not have to change their way of doing business. The only change that they have to make in their way of doing business, if it is enacted, is to file a simple notice, but bankers and lenders are notoriously timid about any legislation that changes or requires any change in what they are accustomed to.

I cannot go beyond that. I cannot explain beyond that. I cannot see any reason why they should be opposed. All they have to do is to file a simple 10-line notice once in 3 years, or not at all if they are satisfied of the solvency of the borrower.

Mr. DEVITT. You do not attribute any improper motive to them. Mr. MONTGOMERY. None at all. Certainly not.

Mr. McCULLOCH. I have one question.

Mr. REED. Mr. McCulloch.

Mr. McCULLOCH. Do you have available the list of 12 States that require recordation of such instruments before they become effective as liens?

Mr. MONTGOMERY. I am sure it is in the statement filed by Mr. Olney but I cannot put my finger on it.

Mr. DEVITT. While that is being searched for I have another question.

Did I understand you to say that you discussed this at some length with Mr. Richard Douglas of Cleveland, Ohio?

Mr. MONTGOMERY. I have.

Mr. DEVITT. What was his general reaction to the Hobbs proposal? Mr. MONTGOMERY. Mr. Douglas is emphatically in favor of the recording statute.

Mr. DEVITT. Did he tell you how long Ohio had had the recording statute?

Mr. MONTGOMERY. It was the first of the recording statutes enacted. He never told me the date but I think it was around 1940. Mr. MCCULLOCH. Did he tell you, or did you inquire of him whether or not it had had any bad results in Ohio?

Mr. MONTGOMERY. I have asked him that and he has said that he has observed none.

Mr. McCULLOCH. Do you know whether or not the bankers generally in Ohio supported the recordation act in Ohio?

Mr. MONTGOMERY. I cannot answer that question of my own knowledge.

The statement that you wanted with respect to the names of the States is included in this memorandum on page 10.

Mr. McCULLOCH. One further question: Do you advocate in addition to complying with the State recordation act the filing of notice with the clerk of the United States district court of the district in which the debtor resides?

Mr. MONTGOMERY. Not in addition. In one or the other.