The Enduring Distinction Between Business Entities and Security Interests

60 Pages Posted: 9 Sep 2018 Last revised: 4 Apr 2019

See all articles by Ofer Eldar

Ofer Eldar

Duke University School of Law; Duke University - Fuqua School of Business; Duke Innovation & Entrepreneurship Initiative

Andrew Verstein

University of California, Los Angeles (UCLA) - School of Law

Date Written: August 28, 2018


What are business entities for? What are security interests for? The prevailing answer in legal scholarship is that both bodies of law exist to partition assets for the benefit of designated creditors. But if both bodies of law partition assets, then what distinguishes them? In fact, these bodies of law appear to be converging as increasing flexibility irons out any differences. Indeed, many legal products, such as securitization vehicles, insurance products known as captive insurance, and mutual funds, employ entities to create distinct asset pools. Moreover, recent legal innovations, such as “protected cells,” which were created to facilitate such products, further blur the boundaries between security interests and entities, suggesting that convergence has already arrived.

This Article identifies and defends a central distinction between business entities and security interest. We argue that while both bodies of law support asset partitioning, they do so with different priority schemes. Security interests construct asset pools subject to fixed priority, meaning that the debtor is unable to pledge the same collateral to new creditors in a way that changes the existing priority scheme. Conversely, entities are associated with floating priority, whereby the debtor retains the freedom to pledge the same assets to other creditors with the same or even higher priority than existing ones.

The distinction is valuable in understanding financial products, such as securitization, captive insurance, and mutual funds. We show that such products are driven by an appetite for assets pools with a fixed priority scheme, and recent legal innovations are primarily designed to meet this need. This distinction is consistent with the intuitive view of entities as managed going concerns and security interests as mere interests in assets. The distinction is also enduring. Despite the apparent convergence of forms, we predict that the distinction we offer will survive legal and technological innovations.

Keywords: Entities, Security Interests, Creditors, Debt, Priorities, Securitizations, Captive Insurance, Mutual Funds, Article 9, Bankruptcy Remoteness

JEL Classification: D23, K22, K11

Suggested Citation

Eldar, Ofer and Verstein, Andrew, The Enduring Distinction Between Business Entities and Security Interests (August 28, 2018). Southern California Law Review, Vol. 92, No. 2, Available at SSRN:

Ofer Eldar (Contact Author)

Duke University School of Law ( email )

210 Science Drive
Box 90362
Durham, NC 27708
United States

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States

Duke Innovation & Entrepreneurship Initiative ( email )

215 Morris St., Suite 300
Durham, NC 27701
United States

Andrew Verstein

University of California, Los Angeles (UCLA) - School of Law ( email )

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
PlumX Metrics