League which, of course, is the one I am interested in embracing this morning. I would like to say that as a practicing attorney I have represented the small-business man and the financier who is lending money and the merchandise creditor. In the bankruptcy field we represent about 80 percent, the merchandise creditor, because that is about the ratio as a rule. I would like to make one comment on what I heard this morning. That is to the effect that I believe a simple notice to the United States court would be very much easier for everyone concerned than any other type of notice because it is so much easier to find the United States court than any in the 24 counties in Maryland. It seems to me that the suggestion of a notice, and a notice in the United States court, is a very fine suggestion. The little buyer does not need to be concerned with hunting for the notice but the merchandise creditor selling on an open account does. It has been said that he should be on a parity with the lender who, in exchange, gets a pledge of accounts receivable. I could not see that. If a man lends his money and gets something as security he is not on a parity with a man who sells his merchandise and has nothing but the apparent worth of the debtor. To put both on a parity I think we should have this notice. Naturally, all of us are concerned with the facility of credits in this country because that is the backbone of our business life and it seems well to adopt the simple method of notice so as to put the merchandise creditor on notice of any change in the worth he believes the debtor to have or not to have. Mr. REED. Thank you, Mrs. Musgrave. (Statement referred to follows:) STATEMENT OF A. S. MUSGRAVE, OF WASHINGTON, D. C., AND LAUREL, MD., MEMBER OF BANKRUPTCY COMMITTEE OF THE COMMERCIAL LAW LEAGUE OF AMERICA, IN OPPOSITION TO H. R. 2412 AND SECTION 1 OF H. R. 5834 I am A. S. Musgrave, a member of the bar of the District of Columbia and the State of Maryland, with offices at 400 Southern Building, Washington, D. C.; 1520 Fidelity Building, Baltimore, Md.; and 315 Washington Boulevard, Laurel, Md.; and 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 the said committee and of the National Bankruptcy Conference. I appear today on behalf of the Commercial Law League of America as a member of the bankruptcy committee of which Mr. Jacob I. Weinstein, of Philadelphia, is its very able chairman. The league, at its annual convention in Atlantic City last fall, adopted a resolution disapproving H. R. 2412 and authorizing and directing the committee to appear and oppose the same on behalf of the league. Apparently the recent hearing before the Senate Judiciary Committee on the companion bill seemed to disclose that opinion is divided somewhat in the categories of financial or banking creditors as proponents of the proposed amendment versus merchandise open account creditors as opponents of the proposed change. As a practicing attorney for about 18 years, we have represented both types of creditors, although the latter being about 80 percent in the usual situation, naturally we have more often represented the same. Mr. Weinstein has thoroughly discussed the intentions of Congress in the adoption of section 60A in its present form and it seems to us that all should agree at least upon the view that Congress intended to strike down secret transactions, which would substantially deplete the assets of the debtor without any notice to the creditor who is relying on the apparent worth of the debtor. Certainly in the normal healthy course of business in our Nation, there should be facility in obtaining the benefits of easy financing and at the same time affording to the creditor every opportunity to readily obtain information of the worth of the debtor to whom he is extending credit, and certainly the Congress did not intend and should not now provide an easy means of hiding from these creditors the true situation regarding the assets of the debtor. The discussions have included many ramifications, but apparently the crux of the problem before you is whether Congress shall change from the position it took at the time of the adoption of section 60A and now say that the general creditors shall be deprived of the protection given by the enactment of that section because it impairs the facility of pledge assets secretly. The Commercial Law League of America takes a position that to do so would be a greater jeopardy to the commercial life of the Nation, and certainly we feel that it would not be too much to impose upon the financing institution some simple method of notice. Submitted: A. S. MUSGRAVE, Mr. REED. Mr. T. E. Sime, assistant vice president of the Bankers Trust Company, New York. STATEMENT OF T. E. SIME, ASSISTANT VICE PRESIDENT, BANKERS TRUST CO., NEW YORK Mr. SIME. I am an assistant vice president of the Bankers Trust Co. now doing administrative work. Prior to this assignment I was a lending officer of the bank and, as such, was empowered to commit the bank up to its legal limit, at present approximately $16,000,000. At one time prior to 1940 we had outstanding transactions of approximately $25,000,000 under trust receipts most of which covered commodities. At the present time that figure is greatly reduced. In view of the opinion given us by counsel in 1940 with respect to the amendment passed in 1938 we would consider a trust receipt facility to a prospective borrower as an unsecured risk. In the event it was a border line credit risk, it would undoubtedly be refused if it involved trust receipt facilities. We consider trust receipt facilities as unsecured. As to recording, I do not believe any purpose would be served. We always consider the financial statement itself, gather additional information from the proposed borrower, his competition, his suppliers, and his bank. We have never gone to any office to my knowledge to check on any recordings. Thank you. Mr. HOBBS. May I ask if you would consult with your counsel and advise us as to your attitude toward section 13a of H. R. 5693? Mr. SIME. I will be happy to do that. Mr. REED. We have one more witness who states that it will take him about 5 minutes to make his statement. Mr. Walter D. Malcolm on behalf of the Massachusetts State Bankers Association, Boston. STATEMENT OF WALTER D. MALCOLM ON BEHALF OF Mr. MALCOLM. Mr. Chairman, and gentlemen: I have here a statement that I did not prepare in time to give you before and I can deliver it now. I am an attorney practising in Boston and am authorized today to speak on behalf of the Massachusetts Bankers Association and the First National Bank. With respect to House Resolution 2412, the Massachusetts Bankers Association favors its adoption and as rapidly as possible, or as rapidly as Congress might decide they could do it. With respect to H. R. 5834, the association is opposed to the enactment of that legislation. The banking fraternity or industry in Massachusetts have been aware of the problems created by section 60a since at least 1939. In my experience in advising the First National Bank of Boston with respect to loans during all that period we have found it to be a very, very serious problem. It affects decisions with respect to loans of many types and varieties and in existence after lending institutions have reduced credit loans by reason of the effect of the impact of 60a and the potential effects of it. So, there is no question in our judgment about the very, very strong necessity of consideration of that and, we hope, favorable consideration, of the amendment to correct the problem created by section. 60a. With respect to the proposal for national recordation. The situation in Massachusetts was affected by the decision in the Vardaman Shoe Co. case which has been referred to. It affected lending on accounts receivable particularly. It was considered necessary to enact State legislation in order to continue a substantial amount of accounts receivable financing that had taken place. The Bankers Association there considered objectively validation as against recordation and decided in favor of validation. A statute of that type was enacted in 1945 and, in the judgment of everyone I know of, has worked entirely satisfactorily since. It is the very strong feeling of the lending institutions in Massachusetts and, I think, certainly of the business community as a whole that that type of accounts receivable financing is entirely satisfactory. Recordation is not necessary and there is a very considerable and strong feeling, shall we say, irritation, that that group of people who favor the conflicting view as to the desirability of recordation should insist on pressing the issue State by State as they can, and have done, and at this particular time attempt to impose their view upon particular States which have decided otherwise. Consequently, these are the particular views I should like to express on behalf of these people, on behalf of H. R. 2412 and in opposition to H. R. 5834. Mr. HOBBS. May I make the same request of you with regard to section 13a of H. R. 5693? Mr. MALCOLM. I will be very glad to examine it and give my comments to the committee. I have not seen it, but I have it here. (Statement of Mr. Malcolm referred to reads as follows:) STATEMENT OF WALTER D. MALCOLM IN SUPPORT OF IDENTICAL S. 826 (SENATOR FERGUSON) AND H. R. 2412 (REPRESENTATIVE CHAUNCEY W. REED) AND IN OPPOSITION TO H. R. 5834 (REPRESENTATIVE HOBBS) TO AMEND THE BANKRUPTCY ACT I. SENATE BILL 826 (SENATOR FERGUSON) AND HOUSE RESOLUTION 2412 (REPRESENTATIVE CHAUNCEY W. REED) The Massachusetts Bankers Association and the First National Bank of Boston strongly endorse and respectfully recommend to the Congress the prompt enactment of Senate bill 826 and House Resolution 2412. The action of the Massa chusetts Bankers Association, of which the First National Bank of Boston is a member, in support of these bills is evidenced by conformed copies of a resolution adopted by the executive council of the Massachusetts Bankers Association on February 11, 1948, copy of which is annexed hereto marked A. Since at least 1939 the banks of Massachusetts have been aware of the doubt cast upon security transactions by the 1938 amendment of section 60a of the Bankruptcy Act and have been forced to keep these doubts in mind in considering requests for loans and in making secured loans of many different kinds. In the personal experience of the undersigned, acting as counsel for the First National Bank of Boston, the risks imposed by the 1938 amendment of section 60a have been taken into account in loan policies and decisions in the following types of financing: Loans upon real estate; loans upon the security of conditional sale contracts or chattel mortgages on machinery, automobiles, airplanes, household equipment, appliances, store merchandise; trust receipt financing; factors lien financing; accounts receivable financing; and financing of interstate carriers by truck. For a period of time after the decision of In re Vardaman Shoe Co. (E. D. Mo. 1943) 52 Fed. Supp. 562, new accounts receivable financing in Massachusetts was substantially suspended by the majority of banks until the Massachusetts accounts receivable statute was enacted in 1945. In other instances substantial restrictions upon the amount of loans were made because of concern as to the effects of the 1938 amendment of section 60a. In view of the fact that during the war Government purchases constituted a major part of business transactions and to date since the war general credit conditions have been favorable, the contraction of loans caused by section 60a has been limited. In the event of a depression, however, where bank loans must be scrutinized on the basis of approximate certainty of security, the doubts cast by section 60a, if it remained in its present form, would very materially affect and reduce the amount of loans made and credit extended. If, in addition to existing doubts, a court decision were handed down applying the reasoning of Klauder v. Corn Exchange National Bank & Trust Co. (1943) 318 U. S. 434, to some new type of security transaction, the resulting curtailment of secured bank loans might well reach catastrophic proportions. For these and other reasons which have been more extensively covered in other statements, the banks of Massachusetts consider that the present form of section 60a of the Bankruptcy Act constitutes a very serious defect in the business law of the country. They approve the proposed correction of this defect embodied in S. 826 and H. R. 2412. II. HISTORY OF MASSACHUSETTS LEGISLATION IN REGARD TO ACCOUNTS RECEIVABLE FINANCING AS BEARING UPON THE PROPOSED ENACTMENT OF SECTION 70J OF THE BANKRUPTCY ACT PROVIDING FOR FEDERAL RECORDING OF ACCOUNTS RECEIVABLE FINANCING During the period from 1939 to 1943 banks in Massachusetts engaging in accounts receivable financing were aware of the doubts cast by the 1938 amendment of section 60a upon security obtained in the assignments of accounts receiable. Although restricted largely by war activities, a certain amount of accounts receivable financing continued during the war years. The possibility that the courts might go as far as Klauder v. Corn Exchange National Bank & Trust Co. (1943), 318 U. S. 434, was recognized, but it was hoped that they would not extend the doctrine of the Klauder case to the extent evidenced by In re Bardaman Shoe Co. (E. D. Mo. 1943), 52 Fed. Supp. 562. However, when the latter decision was handed down in 1943, many banks in Massachusetts substantially ceased lending on the security of accounts receivable except in the case of Government contracts, where notice to the Government or contractor was required or customarily given. Because of the unlikelihood of any amendment of section 60a, the Massachusetts banks considered the sponsoring of State legislation to permit the resumption of accounts receivable financing. A special committee of the Massachusetts Bankers Association was appointed to study the problem and recommend State legislation. In undertaking this task the committee had no prejudices whatsoever as to the type of legislation favored and in fact had an initial disposition in favor of some form of a recording statute, primarily because a committee of the American Bankers Association favored recording legislation. However, in making a completely independent study of the problem including the careful consideration of the arguments advanced by the proponents of recording legislation and also the arguments advanced by the proponents of so-called validation legislation. the committee in due course concluded that the arguments in favor of validation legislation heavily outweighed those in favor of recording. Consequently, the committee of the Massachusetts Bankers Association and the association itself decided as a matter of policy to sponsor validation legislation and caused to be drafted a bill of this type which was enacted by the Massachusetts Legislature in the spring of 1945. After the enactment of the Massachusetts statute, the undersigned, who had the principal responsibility for the drafting of the bill, was requested to prepare an article explaining the background of the 60a problem as applied to accounts receivable financing and the policy considerations influencing the committee and the association in the decisions made. This was done in an article printed in the United States Investor under date of June 2, 1945, a reprint copy of which is annexed marked B. The policy arguments respectively favoring recording and validation types of legislation and why the Massachusetts Bankers Association decided in favor of validation legislation are set forth in this article. It is submitted that these arguments are as germane to the present proposal to provide for Federal recording as they were in 1945 in connection with the Massachusetts legislation. OPPOSITION OF MASSACHUSETTS BANKERS ASSOCIATION TO PRESENT PROPOSAL FOR FEDERAL RECORDATION OF ACCOUNTS RECEIVABLE FINANCING Since 1945 banks and other lenders in Massachusetts have done a substantial volume of accounts receivable financing under the Massachusetts validation statute. As a matter of fact accounts receivable financing in Massachusetts since the enactment of the 1945 statute simply involves a continuance of financing that had gradually developed prior to the war-on the part of banks as well as finance companies and factors. The 1945 statute permitted the continuance of the routines and practices that have been evolving since before 1910. It has been estimated that the present volume of this business in Massachusetts aggregates at least $100,000,000 of assigned accounts a year. The Massachusetts banks, their customers and the business community generally in Massachusetts are satisfied with the routines and practices of accounts receivable financing developed prior to the war and continued under the 1945 statute. At least the banks and their customers (and probably also the business community generally) now object, with all the vigor at their command, the proposal that these practices and customs be changed at the behest of a group favoring a theory that Massachusetts has already considered and rejected. This point of view and a brief summary of the reasons for it are set forth in a second resolution of the executive council of the Massachusetts Bankers Association passed on February 11, 1948, conformed copy of which is annexed marked C. Respectfully submitted. WALTER D. MALCOLM, On Behalf of the Massachusetts Bankers Association and the First National RESOLUTION ADOPTED BY THE EXECUTIVE COUNCIL OF THE MASSACHUSETTS BANKERS ASSOCIATION, BOSTON, MASS., ON FEBRUARY 11, 1948 Whereas the language of section 60a of the Bankruptcy Act as presently interpreted by the courts impedes the free flow of credit by casting unintended doubt and uncertainty upon the validity of the title, acquired in good faith and for value, to such documents of security as trust receipts, factor' liens, accounts receivable assignments, chattel mortgages, conditional sales and other like instruments, and Whereas identical bills, known as S. 826 by the Senator from Michigan, Hon. Homer Ferguson, and H. 2412 introduced by Hon. Chauncey W. Reed of Illinois, have been framed to remove such doubt and uncertainty; to clarify the law; and, by remedying the situation, to make possible the continuance of the free flow of credit, particularly to the small- and medium-sized borrowers most in need of such form of credit, and Whereas the legislative committee of the Massachusetts Bankers Association has approved the proposals covered by said bills amending said section 60a of the Bankruptcy Act and has recommended that this association support said legislation: Now, therefore, be it Resolved, That the executive council of the Massachusetts Bankers Association hereby endorses said bills and respectfully recommends to the Congress of the United States the prompt enactment of the same; and be it further |