True Sale of Receivables: A Purposive Analysis
Kenneth C. Kettering
Visiting Professor at Large
American Bankruptcy Institute Law Review , Vol. 16, pp. 511-562, 2008
NYLS Legal Studies Research Paper No. 08/09 #23
An enormous market exists in securitized debt backed by receivables. For the product to achieve its intended purpose, it is essential that the receivables be conveyed by the beneficiary of the financing to its securitization vehicle in a "true sale" - that is, a conveyance that courts will respect as being a sale, in accordance with its form, and not recharacterize as a loan secured by the receivables. Article 9 of the Uniform Commercial Code declines to provide guidance on the proper conditions for recharacterization, and cases have been incoherent. This paper analyzes the purposes of the recharacterization doctrine, inside and outside of bankruptcy, and the conditions for recharacterization that follow from those purposes. Different conditions for recharacterization may apply in different legal settings. The paper concludes that cases have been more aggressive in recharacterizing sales under Article 9 than is justified by the purpose of the doctrine. By contrast, the true sale status for bankruptcy purposes of the conveyance of receivables made in a typical securitization transaction is inherently doubtful under current law. Assurance that the typical securitization structure would survive legal challenge in bankruptcy therefore rests largely upon nondoctrinal factors.
Number of Pages in PDF File: 53
Keywords: true sale, secured transaction, security interest, securitization, equity of redemption, contract penalty, property of the estate, recharacterization
Date posted: February 19, 2009
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