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“(5) (a) Upon payment to the clerk of a filing fee of $2.00, the clerk shall receive any notice under this subdivision i, marking each with the date of its filing, and each original notice, and, where the original notice was not filed in his office, each amended notice, with a consecutive filing number, and issue a receipt showing the filing number and the date of filing.

"(b) The clerk shall preserve all notices filed in his office under this subdivision and shall prepare and keep a convenient alphabetical index according to the name of the assignor with a notation of the assignor's addresses as given in the original, renewal and amended notices. A renewal notice and a notice of discontinuance shall be given the filing number of the original notice or the amended notice, as the case may require, and the filing of such renewal notice or of such notice of discontinuance shall be noted on the margin of the index, where the original or amended notice, as the case may be, is indexed. The notices and indexes shall at all times be open to inspection and examination by all persons without any fee or charge therefor.

"(c) The clerk shall issue upon the payment to him of a fee of $1.00, to any person requesting it, a certificate of search certifying as to whether or not a notice under this subdivision i has been filed in his office, and, if filed, shall state in such certificate the filing number, the date of filing, the name and address of the assignor in the notice and such other information with respect to such notice as may be requested.

"(6) Where by statute of the State in which the assignor has his principal place of business, or, if he has no place of business therein, then in which he resides, it is provided in effect that the assignment of an account shall be invalid as against subsequent creditors of the assignor unless there be recorded in a public office notice that the assignor has assigned or agreed to assign one or more accounts to an assignee named therein, compliance with such statute by recording within the time, if any, therein required, but not after the latest time specified in subparagraph (b) of paragraph (2) of this subdivision i, shall be deemed to be, and shall have the same effect as, compliance with the provisions of this subdivision i.

(7) The provisions of this subdivision i shall not apply to an assignment of an account against the United States made pursuant to the provisions of any Act of Congress.”

Sec. 3. a. All Acts or parts of Acts inconsistent with any provisions of this amendatory Act are hereby repealed.

b. If any provision of this amendatory Act or the application thereof to any person or circumstances is held invalid, such invalidity shall not affect other provisions or applications of this amendatory Act which can be given effect without the invalid provision or application, and to this end the provisions of this amendatory Act are declared to be severable.

SEC. 4. EFFECT OF THIS AMENDATORY Act.-a. Nothing herein contained shall have the effect to release or extinguish any penalty, forfeiture, or liability incurred under any Act or Acts of which this Act is amendatory.

b. The provisions of this mendatory Act shall govern proceedings so far as practicable and applicable in cases pending when it takes effect; but proceedings in cases then pending to which the provisions of this amendatory Act are not applicable shall be disposed of conformably to the provisions of said Act approved July 1, 1898, and the Acts amendatory thereof and supplementary thereto.

SEC. 5. This amendatory Act shall take effect and be in force on and after three months from the date of its approval.

Mr. REED. Does any member of this committee desire to make a statement at this time in regard to either of these bills?

If not, the chair would like to hear from Mr. Milton P. Kupfer, chairman of the American Bar Association's committee on the amendment of section 60a of the Bankruptcy Act.



Mr. KUPFER. Mr. Chairman and members of the committee, I am an attorney with my office at 29 Broadway, New York, and chairman of the special committee of the American Bar Association on the amendment of section 60a of the Bankruptcy Act. I also appear

here on behalf of the National Conference of Commercial Receivable Companies, to which I am general counsel.

There are here before the committee today, two bills: One introduced by the chairman, H. R. 2412, and the other introduced by Judge Hobbs, H. R. 5834.

H. R. 2412 is sponsored by the American Bar Association and, of course, is supported by us. Its

purpose is to amend section 60a of the Bankruptcy Act in a way I shall presently outline.

Judge Hobbs' bill, H. R. 5834, contains two sections, the second of which is in two subdivisions. The first section of Judge Hobbs' bill is substantially the same as Judge Reed's bill, H. R. 2412, except that it adds an additional sentence suggested by the National Bankruptcy Conference, to which we have no objection.

The first part of section 2 of Judge Hobbs' bill constitutes merely a conforming amendment to section 70, to which we also see no objection on our part. But the second subdivision of section 2 of Judge Hobbs' bill, which would, in effect, prescribe the compulsory national recordation of accounts receivable, we oppose.

So, the issues before the committee this morning are whether Judge Reed's bill or Judge Hobbs' bill shall be favorably recommended, for, at least, as we see it, the two cannot stand together.

As far as H. R. 2412 is concerned, the whole matter arose out of two lines of decisions of the Supreme Court of the United States, going back a quarter of a century ago.

These two lines of decisions were known as the relation-back type of case and the pocket-lien type of case. In Sexton v. Kessler (225 U. S. 90), the Supreme Court had held that if a borrower had promised to give security, in that case a pledge of stock, and did not actually deliver that security until within 4 months of the bankruptcy, the delivery, nonetheless, validated the security because the delivery related back to the original promise and that, of course, was a very undesirable decision. There is no dispute about that.

In the other line of cases, the pocket-lien type of case, there is the case of Carey v. Donahue (240 U. S. 430), and a number of others. The Supreme Court there held that under a recording statute which requires recordation against a bona fide purchaser, no recording was necessary at all as against the trustee in bankruptcy in order to validate the security given. The reason for the holding in these pocket-lien cases was this: That only a lien creditor was protected by section 60 of the Bankruptcy Act as it stood before the 1938 amendment. That also was very vicious judicial doctrine and everybody was agreed that the effect of these relation-back cases and pocketlien cases should be eliminated.

So that when the entire revision of the Bankruptcy Act came before your committee in 1938, various suggestions were made for this amendment and among the more radical was that the trustee in bankruptcy should be placed upon the level of a bona fide purchaser rather than the level of a lien creditor.

It was pointed out by the preponderance of opinion that in the first place that was contrary to the traditions of the Bankruptcy Act under which the trustee protects creditors and not purchasers; and also that it would have a fatal result upon all manner of secured financing.

It was pointed out that although the section related in terms only to preferences, it would invalidate a number of accepted and necessary security methods such as trust receipts, factors' liens, assignments of accounts receivable, conditional sales for resale under the Uniform Conditional Sales Act in the automobile field, and others.

When that hazard was pointed out to the proponents of the amendment, they took the position that in view of the prior decisions of the Supreme Court, we did not need to worry.

As events turned out, there was great need to worry and the decisions since that date have confirmed that fear because when the matter came up the first time before the Supreme Court in the Klauder (Corn Exchange National Bank v. Klauder 318 U. S. 434) case in 1943, this was the effect. Probably I had better state the facts.

There was a firm making sheet metal in Philadelphia, the Quaker Sheet Vetal Co., and they needed money to meet pay rolls and other bills. So, with the consent of the creditors' committee-in fact, at their insistence—the debtor went to the Corn Exchange Bank and borrowed money on a written assignment of accounts receivable made contemporaneously with the advance. It was not a preference at all and was made long before the 4-month period. There was no question as to the good faith of the transaction or that the bank provided value.

At that time, however, the law of Pennsylvania provided that, in order to perfect an assignment of accounts receivable as against a possible subsequent assignee the assignee was required to give notice to the account debtors, that is to the people who owed the accounts, of course, this had nothing to do with the assignor or assignee.

Such notice was not given and yet when the case came to the United States Supreme Court the bank was placed in the position of an unsecured creditor. That immediately affected the extension of all types of secured credit. The basis of the reasoning of the Supreme Court in that case was that the 1938 amendment had placed the trustee in bankruptcy, for the purpose of timing the preference, in the position of a hypothetical bona fide purchaser, even though there was no subsequent bona fide purchaser of the accounts.

A year or so later, there arose the Vardaman Shoe Co. case which went one better than the Klauder case, in this respect. There was a shoe company operated by Commodore Vardaman in Missouri. It needed money, and pretty much on the same basis as in the Philadelphia case, it borrowed money from two banks in East St. Louis which is located in Illinois. Then, the Vardaman Shoe Co. went into bankruptcy and the question arose between the trustee in bankruptcy and the banks who were the secured creditors, as to the validity of their security and it was struck down by Judge Moore in the Eastern District of Missouri on this ground.

He said:

I do not know whether the law of Missouri or the law of Illinois applies. Neither do I know whether the law of one State or the other requires notice of assignments to be given. But, assuming that the law of neither State so requires under the general rules as to assignments existing in this country, nevertheless, if a subsequent assignee gets a judgment against the debtor or makes a novation with the debtor, or gets paid by the assignor, he has a potential rump of a right, and therefore under the Klauder case I must strike down the security.

The banks lost their security to the extent of $200,000 in each case and banks throughout the country are now completely confused over the whole situation.

The pity of the Vardaman case was this: For reasons that do not appear in the decision, the case was ultimately settled.

These reasons are not material and there is no need to mention them. So, the case never went any higher and we never could get any ruling whether the Vardaman case was sound.

The only other case we know of is the Rosen case (In re Rosen (157 Fed. (2d) 997)) by Judge Goodrich, who is an excellent judge. He tried to clear up the situation as far as could be done, but could not override the Klauder case.

There were a number of groups, both interested and disinterested, which gave attention to this matter all over the country. I think the first was the Committee on Bankruptcy and the Committee on Uniform State Laws of the Association of the Bar of the city of New York. The chairman of the former is Mr. Alfred Heuston. It also challenged the attention of the section on Corporation, Banking and Mercantile Law of the American Bar Association, whose committee I here represent and, as a result of months of study, the American Bar Association's committee worked out the amendment that is now Judge Reed's H. R. 2412. The members of that committee are Homer Livingston of Chicago, who was chairman of the Bankruptcy Committee of the American Bar Association; Prof. John Hanna; and Mr. J. Francis Ireton of Baltimore; and Prof. James McLachlan of Harvard.

We consulted with a number of groups and Professor Hanna did most of the work on the draft and we finally worked out this amendment. Although H. R. 2412 may seem somewhat involved in language, it was necessary to give expression to the views of the various interested groups.

Basically, it does three things.

In the first place, for preference purposes, it restores a trustee in bankruptcy to the level of a lien creditor or a judgment creditor holding an execution unsatisfied, and repeals the bona fide purchaser test or hypothetical purchaser test of the 1938 amendment.

But, in the second place, in doing so, it is very careful not to restore the relation-back theory of Sexton v. Kessler or the pocket-lien doctrine of Carey v. Donahue. Everybody recognizes that these decisions were pernicious and wrongful.

In the third place, with respect to transfers made for a bona fide consideration, and in good faith, it provides that they shall not be deemed preferential if the assignee or secured creditor complies with all of the recording provisions or other formal requirements of applicable State law within the time prescribed by the State law. Then, in order to be sure the secured creditor cannot sit on his rights forever, it goes further to provide that if the State law prescribes a longer period than 30 days for the performance of the necessary formal act, the secured creditor must, nevertheless, perform the act within 30 days.

So, if a given State were to say, “It is not necessary to record for 60 days,” nevertheless, under the prescription of Judge Reed's bill, the recording would have to take place in 30 days because unsecured creditors are entitled to know where they stand after that period.

So far as H. R. 2412 is concerned, it was introduced in identical language in the House and in the other body. The bill on the other side was introduced by Senator Ferguson and he and Senator McCarran constitute the subcommittee which we hope will promptly report

it out. There is nothing in the Senate corresponding to Judge Hobbs' bill, H. R. 5834.

So far as I know, there is no great controversy as to the desirability of amending section 60a, as such. One or two little perfecting clauses that are referred to in the statement I have filed here have been suggested. Our committee has no objection to them. The only objection, if it be such, that we have is that it does not delay the passage of H. R. 2412. And I do not assume it will.

The details are highly technical and with the number of witnesses here, I do not think I should take the time to explain them, but they do not affect the basic objects of the bill.

I know of no group that is opposed to H. R. 2412 as such. It was worked out by our committee in conference with many others, including the National Bankruptcy Conference which in 1946 represented it to be a good draft. So far as I am informed, I do not believe there will be any opposition on the part of anybody to it.

Of course, when it comes to H. R. 5834, that is entirely a different matter. The second subdivision of the second section of H. R. 5834 would provide in effect for the compulsory national recording of the assignment of accounts receivable.

On the State level that has been a highly controversial subject for a number of years and the majority of the States have enacted statutes on the subject. The box score, so far as State action is concerned, is 17 States that have deliberately rejected it by enacting the New York law which does not require recording, as against 12 States who favor it. So, the committee can see the sharpness of the division.

The first reason for our opposition to H. R. 5834 is, therefore, that it would completely override State rules of property which have always been respected under the Bankruptcy Act. It is perfectly obvious that conditions as to borrowing and lending money differ among the several States and what may be very good in Missouri or California, which States may have embraced recording, may be very bad in New York or Massachusetts or Illinois, where they have rejected it.

I might say in that connection that the overwhelming majority of the larger commercial States that have taken up this subject with the choice before them have deliberately rejected recording. And I would say to the committee that if anybody says the States did not know what they were doing and did not have both alternatives in front of them, such statements would not be supported by the facts.

An objection to it, and in addition to that emanating from the lending fraternity, comes chiefly from the small borrower. The small borrower, by and large, is unorganized and has not the organization that secured creditors have, who will speak in support of our bil today, nor those represented by the National Association of Credit Men and the Commercial Law League of America which will undoubtedly oppose my position.

The right of the small borrower should not be overlooked and mascerated in the welter of dispute between secured and unsecured lenders.

What is the objection of the small businessman? It is simply this. For better or for worse, assignment of accounts receivable can, and frequently is, used as an adverse competitive sales argument. Larger

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