Pulling a Rabbi Out of His Hat: The Bankruptcy Magic of Dick Posner

19 Pages Posted: 26 Feb 2007  

Randal C. Picker

University of Chicago - Law School

Abstract

This essay was written for a volume celebrating Judge Richard Posner's 25 years on the bench. The article considers his opinion in Bank of America v. Moglia, which addresses the status of rabbi trusts in bankruptcy. The rabbi trust is first and foremost a tax device, a way to ensure a contigent delayed payment and yet do so without incurring current tax income to the beneficiary of the trust. But the key condition that delays the receipt of income - namely that the assets of the trust remain available to the general creditors of the entity creating the trust - means that the trust operates as an asset partitioning device and a way to protect assets for unsecured creditors from potential invasion by secured creditors. Asset partitioning is ubiquitous, and we see it in many forms, such as limited liability corporations and securitization. It is rare to see a device that works to the benefit of a changing group of general creditors. The rabbi trust, as seen in Moglia, emerges as superior to the negative pledge, which may be its closest cousin.

Keywords: Richard A. Posner, Judge Posner

Suggested Citation

Picker, Randal C., Pulling a Rabbi Out of His Hat: The Bankruptcy Magic of Dick Posner. University of Chicago Law Review, Vol. 74, 2007; University of Chicago Law & Economics, Olin Working Paper No. 330. Available at SSRN: https://ssrn.com/abstract=965574

Randal C. Picker (Contact Author)

University of Chicago - Law School ( email )

1111 E. 60th St.
Chicago, IL 60637
United States
773-702-0864 (Phone)

HOME PAGE: http://www.law.uchicago.edu/Picker/

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