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competitors of the small businessmen have not the slightest hesitancy in saying, "Don't buy from this small fellow. He is assigning his accounts. Buy from me. I only borrow from the big banks. My loans will not be called. I will be able to fill your order. He will not."
So, we know from the discussions we have had all over the country, not as a committee, of course, but individual members of the committee, that your chief objection is on the part of the inarticulate small unorganized businessman. He is placed in an inferior competitive position and finds it difficult to borrow money to meet his working capital and for rotating needs.
The matter was gone into very thoroughly by the State Law Revision Commission of the State of New York which does not require recording in any form, at hearings at which most of the people in this room were represented 2 years ago.
As a result, they decided to recommend that the law of New York be left precisely as it was and that no recording be required. I suppose there are more accounts receivable assigned in the city of New York than in any other city in the country with the exception probably of Chicago. I imagine they are pretty much neck and neck.
New York is satisfied with its law on the subject and our committee takes the position that Congress should not be invading State laws by providing for Illinois or any other State what its local public policy with respect to the law of property should be.
The Law Revision Commission study embraces about 300 pages and it is possibly the best documented and best historical treatment on this subject that anyone will see anywhere. That body is a nonpartisan body composed equally of Republicans and Democrats and has an administrator, Professor McDonald of Cornell University, who worked up this study, and while it is not bulky, it would be too much to ask you to read.
From the economic standpoint, there is this to say about it, that the effect, as we see it, of H. R. 5834 would be simply to choke credit at the time when its flow should be kept free.
It is said in support of H. R. 5834 that the financial statements that merchandise suppliers customarily require from their customers are not enough; that they ought to have a place of record.
Well, our position with respect to that is that financial statements are customarily required. They furnish much more information than any such simple matter of record suggested by H. R. 5834 would supply. But it will be said to the committee that the financial statements that are current today may not be current tomorrow. The same thing, of course, can be said of a statement of intention to record.
In addition, everybody is agreed that it is not feasible to require a recording of the assignment of every specific account but only of a general notice of assignment which contains very little of the desired information. There are, moreover, all sorts of administrative and fiscal and physical objections to the proposal.
Take a State like Texas, where the Federal district court office is in one corner of the district and the lender and borrower in another corner. It may require a day's trip to find out where a statement is recorded and would require every business man to sit down and have before him a map of the Federal Judicial Districts and the divisions of those districts to ascertain to what clerk he should resort in order to find out what the proper recording office was.
Then, there is this to say about it: H. R. 5834 provides that if a given State, one of the 12 I have mentioned, has a recording act, there need be no compliance with the national recording provision. So every businessman would need a lawyer at his elbow to find out where he stood whether the State had a recording act or not. Twenty-nine States have taken action on the matter.
I believe I have taken too much time of the committee except to say this in conclusion. The position of the American Bar Associs.tion, which is the result of all of this discussion and consideration, is supported by a number of resolutions of all sorts of groups, interested and disinterested. Seeing this thing as we do from every standpoint, I have attached a few of these resolutions only and I think, very largely, they speak for themselves.
We very much favor the enactment of H. R. 2412 either with or without the slight amendments that have been suggested to it. We oppose H. R. 5834.
I am very grateful to the committee for the patience with which it has listened to me.
Mr. REED. Thank you, Mr. Kupfer.
Mr. HOBBs. I am very much interested in your statement and I am very much interested in its clarity. How do you differentiate from your 30-day provision as to the comparison with State law?
Mr. KUPFER. Between that and what, Judge Hobbs—I do not quite understand your question.
Mr. HOBBs. You say this will impinge slightly on the statutes of the States. Your bill said it must be done irrespective of State statutes within 30 days.
Mr. KUPFER. No. Our bill says that if a State statute requires recording, it must be complied with. If the State recording requirement is for a period of 30 days or less then the secured creditor must comply with that statute. If the statute permits a longer period than 30 days, he must comply with the 30-day provision.
Mr. Hobbs. That is what I say. If they agree with you. If they do not, then to hell with it.
Mr. KUPFER. I do not know just what that means except to say this: What our bill does is to leave the matter to the determination of the States in accordance with their poli
Mr. Hobbs. To a certain extent. Mr. KUPFER. To every extent, except as to the 30-day provision. Mr. Hobbs. Because if they provide a longer recording period than 30 days, then forget it.
Mr. KUPFER. That is true and if the committee wishes to leave it to the State law altogether, even though the State law provided i year, it would be all right with us. We put in that 30-day provision only on the insistence of the unsecured creditor group.
Mr. Hobbs. Do you object to any interference with State law in the other bills that you oppose? Did you favor interference with the State law to the effect that it impinges on your theory?
Mr. KUPFER. You appreciate, Judge Hobbs, that in order to work out our original bill we had to meet the views of other groups.
The unsecured creditors said, "Some State laws permit a period of 30, some 60, 90, or 120 days. That is too long." So we adopted a
short cut-off date. To that extent, a very minor extent, it is an impingement on the State law.
Mr. Hobbs. The other question I had in mind is in regard to our chairman's bill, if we voted it out of this committee. Section 13a of H. R. 5693 relates to the same subject matter. Is there any objection from any of your clients or agencies which you represent to that section of that bill?
Mr. KUPFER. Judge Reed was good enough to discuss that with me before the hearing this morning. I am not a legislative draftsman and I think it is more a matter of legislative draftsmanship than otherwise.
Section 13 makes a very minor conforming amendment in section 60a. Of itself, there is no objection to it.
But our objection to section 60a goes deeper. It is substantial. So, I suggested to Judge Reed that it would be very bad if H. R. 5693 went through after H. R. 2412, or after your bill, because then it would restore section 60 in effect to its present form.
So, I suggested to him that one of two things should be done, and I think to this we all agree. Either that section 13 should be taken out of H. R. 5693, so that this matter we have before us this morning might be determined on the merits or, alternatively, that you make sure that Mr. Reed's bill or your bill is passed after the bill that contains merely the conforming amendment.
My own feeling would be, without being at all expert on the subject, and there are legislative draftsmen here who know more about it than I do, that the cleanest amputation would be to eliminate section 13 from H. R. 5693, and then the main matter can be determined on its merits.
Mr. Hobbs. I think the subcommittee is at one on this proposition. We have no idea of bypassing neither Judge Reed's bill nor mine and we are going to plump for prompt passage.
But our idea was, in supporting the two, that there was nothing controversial in H. R. 5693 and if we could get that through it would cure a large part of the disease in section 60. Then, we could quarrel over the details of the two bills that would go further and whatever is determined we would have the benefit of H. R. 5693. That may be wrong
Mr. KUPFER. It is a matter of draftsmanship. My own idea would be that as long as section 60 has to be amended in the manner that Judge Reed's bill (H. R. 2412) or your bill (H. R. 5834) prescribes, and will be so amended, I suggest you take section 13 out of H. R. 5693 altogether because you might get into the curious situation that the omnibus bill (H. R. 5693) passes after one of your two bills, and that is what I am worrying about.
Mr. Hobbs. The omnibus bill to which you refer is H. R. 5693?
Mr. Hobbs. It would be just the reverse as we conceive it. But I am glad to have your idea on it.
Mr. KUPFER. That is purely a matter of legislative timing, of course.
(Statements and resolutions referred to by Mr. Kupfer are follows:)
STATEMENT OF THE AMERICAN BAR ASSOCIATION IN SUPPORT OF IDENTICAL S.
826 (SENATOR FERGUSON) AND H. R. 2412 (REPRESENTATIVE CHAUNCEY W. REED)—To AMEND SECTION 60A OF THE BANKRUPTCY ACT-SUBMITTED ON BEHALF OF THE AMERICAN BAR AssociATION
Officers: Tappan Gregory, president, Chicago, Ill.; Howard L. Barkdull, chairman, House of Delegates, Cleveland, Ohio; Benjamin Wham, chairman, section of corporation, banking, and mercantile law, Chicago, Ill.
Special committee on the revision of section 60a of the Bankruptcy Act: John Hanna, professor, School of Law, Columbia University, N. Y.; J. Francis Ireton, Baltimore, Md.: Homer J. Livingston, vice-president, First National Bank of Chicago, Ill.; James A. MacLachlan, professor, Law School of Harvard University, Cambridge, Mass.; Milton P. Kupfer, New York, chairman.
I. INTRODUCTORY NOTE
These identical bills were introduced at the request of, and are sponsored by, the American Bar Association, consequent upon a 2-year study made by a special committee created by its section of corporation, banking, and mercantile law to deal with their subject matter.
As appointed in 1945, this committee consisted of Homer J. Livingston, vice president of the First National Bank of Chicago, and chairman of the Bankruptcy Committee of the American Bankers Association, as chairman; Prof. John Hanna of the Columbia University Law School; J. Francis Ireton, of the Baltimore bar; Milton P. Kupfer of the New York bar; and W. Leslie Miller of the Detroit_bar. Its personnel has remained unchanged except that, during its second year, Prof. James A. MacLachlan, of the Harvard Law School, replaced Mr. Miller. Mr. Livingston and Mr. Kupfer have been the successive chairmen of the committee.
IJ. HISTORICAL BACKGROUND OF SECTION 60A
Traditionally, it is the primary office of the Bankruptcy Act to protect creditors, both secured and unsecured; to marshal the bankrupt's assets; and to distribute them among this creditors, equitable and equally, in accordance with their respective rights and interests. The trustee is the statutory instrumentality charged with the performance of these duties.
It follows from these broad general principles, as well as from the basic provisions of the Bankruptcy Act itself, that
(a) A trustee occupies the position of a universal judgment-creditor with all such a creditor's remedies, and
(6) Except as may be necessary to avoid preferences or fraudulent transfers, he takes the bankrupt’s assets subject to all valid liens and encumbrances thereon, as conferred by applicable State law. (See, illustratively, secs. 57 (e) and (h), 67 (b), and 70 (a) of the act.)
To put it another way, a trustee in bankruptcy had never been doctrinally placed upon the level of a bona fide purchaser, actual or potential, of any portion of the debtor's assets. Since it is the office of the Bankruptcy Act to protect creditors, this, of course, is as it should be, and such has been the holding of our courts ever since a bankruptcy statute first came into our law.
This consistent pattern would probably never have been disturbed but for a series of unfortunate decisions, of which two are illustrative, of the United States Supreme Court, in the earlier decades of this century.
In Sexton v. Kessler (225 U. S. 90), a loan was made, upon the security of stocks and bonds, more than 4 months prior to the borrower's bankruptcy. However, the lender permitted the borrower to remain in possession and control of the Security, and reduced the subject matter of the pledge to his (the lender's ) possession virtually on the eve of bankruptcy. Despite good argument that was made to the contrary, the Supreme Court held that this death-bed reduction to possession related back to the date of the original loan, and refused to declare the transfer preferential. The doctrine of the Sexton case, accordingly, became known as the "relation back" doctrine.
Another equally unfortunate result was reached in Carey v. Donohue (240 U. S. 430). In that case, the creditor took a deed to Ohio real estate, and did not record it at all. The recording statutes of Ohio invalidated an unrecorded deed against a bona fide purchaser for value, but not as against a judgment-creditor.
For that reason, the Supreme Court held that the trustee had no right to attack the grantee's title, and the doctrine of this Carey case, accordingly, came to be known as the “pocket lien” doctrine.
Other cases to substantially the effect of one or the other of these two are Bailey v. Baker Ice Machine Co. (239 U. S. 268), Martin v. The Commercial Bank (245 U. S. 513), and Bunch v. Maloney (246 U. S. 658).
III. THE PRESENT LANGUAGE OF SECTION 60A
The "pocket lien" and "relation back” doctrines were obviously pernicious, and required correction in the interests of unsecured creditors, resulting in the amendment, in 1938, of section 60a to its present form.
As the principal draftsmen of the amendment have freely admitted, it was felt necessary, in view of the then conservative attitude of the Supreme Court as manifested by the foregoing cases, to use strong language in order to be sure of obtaining even moderate results. Availing oneself of the benefit of hindsight in view of the change in the personnel of the Court, it may be observed in passing that this precaution was, perhaps, unnecessary.
In any event, what was done was not only to place a trustee in bankruptcy upon the level of a bona fide purchaser for value so far as determining the time of a preference was concerned, but, even further, to place the trustee for that purpose in the position not merely of an actual but of a potential bona fide purchaser for value. This was accomplished in 1938 by amending the second sentence of section 60a so as to read:
For the purposes of subdivisions (a) and (b) of this section, a transfer (to a secured creditor) shall have been deemed to have been made 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 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 in bankruptcy
it shall have been deemed to hav been made immediately before bankruptcy. [Italics supplied.)
As has also been frankly admitted, the present language of the amendment has also brought in its train entirely unanticipated results, equally unfair to secured creditors. In brief, as so frequently happens, the pendulum was swung too far to the other side. The object of the present bills is to retain the basic objectives of the 1938 amendment, and restore the proper balance.
IV. THE KLAUDER AND VARDAMAN CASES
(a) Their practical hardships
It did not take long for the basic injustices of the 1938 amendment to become apparent, and its unanticipated results to be realized.
The first intimations came with Klauder v. Corn Exchange National Bank & Trust Co. ((1943), 318 U. S. 434, 63 S. Ct. 679, 87 L. Ed. 884.) In that case, the Corn Exchange Bank & Trust Co. made advances to the Quaker City Sheet Metal Co. upon the security of specific assignments of certain of its accounts receivable. Concededly, the advances were made and the assignments were taken long prior to the beginning of the 4 months' period, not only in good faith and for full value, but at the very request of the overwhelming majority of Quaker City's unsecured creditors. Much more than 4 months later, Quaker City was petitioned into bankruptcy. The Supreme Court, applied the present language of section 60a, and struck down the assignment on the sole ground that, under the Pennsylvania law (which, itself, had not been too certainly declared by its own courts), a bona fide purchaser of the accounts could have prevailed against the assignee, solely because notice of the assignments had not been given to the respective accountdebtors.
If the impact of this decision had been solely on accounts receivable, and if it had not been extended even in that field, the situation might have been borne. But, in the first place, it immediately became clear that the same rule might well be held to apply to all manner of security, on both tangibles and intangibles, where a potential bona fide purchaser of its subject-matter could acquire rights superior to the grantor or assignee, even though the security is given for a present consideration and in good faith, and the transaction is good against creditors.
This would be true in any case where the applicable State law, in order to facilitate the conduct of industry and trade, and in furtherance of common justice, permits the borrower to sell and pass good title to the mortgaged property to an innocent purchaser for value. Illustratively, such a situation exists under the factors' lien acts in force in a number of States; trust receipts under the Uniform