Beyond True Sales - Securitization and Chapter 11

Abstract

In this paper I mediate between the reality that securitizations serve useful, efficient purposes and the goal of preventing unnecessary corporate liquidations. Starting from the premise that the decision to include any party in a chapter 11 reorganization involves line drawing, I explain a principled reason for excluding some securitizations from the scope of chapter 11, while including other transactions - such as many of those at issue in Enron. Specifically, by considering the reasons why we ignore formalities in other related situations - under veil piercing, equitable subordination, and fraudulent transfer law - I explain why a line can be drawn that excludes typical securitizations from the chapter 11 estate. In the process, I suggest a functional analysis that would be more useful in making these types of determinations than the present reliance on whether or not there has been a true sale of assets as part of the securitization.

Keywords: Securitization, Structured Finance, Chapter 11, Bankruptcy, Corporate Finance