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Volume 11, Number 6 ­ July/August 2002
Two views on asset securitization and bankruptcy
reform
Is this about Enron?
By Jonathan B. Lurvey
Related Articles:
Section 912 is
Dangerous
By Jonathan Lipson
About Securitization
By David Gray Carlson
On Jan. 23, 2002, Rep. F. James Sensenbrenner and Sen. Patrick Leahy, as
respective chairmen of the Judiciary Committee in the House and Senate, received a
letter from a group of 35 law school professors concerning Section 912 of a bill
known as the Bankruptcy Reform Act of 2001, H.R. 333. The letter raised a variety
of concerns about Section 912, a relatively technical piece of legislation related to
asset securitizations, including the suggestion that the legislation would open the
floodgates to more Enron­like bad acts, but this time sheltered by a legislative safe
harbor. President Clinton had previously pocket­vetoed the bill. The Bush administration,
however, was perceived to be friendly to the bankruptcy changes. Expectations for
the bill's passage, including Section 912, were high. The House and Senate versions
of the legislation were in conference to resolve differences when Enron filed for
bankruptcy.
Section 912 is now dormant and maybe dead. The story of Section 912 involves
bankruptcy policy, high finance, the securities industry, a group of vocal bankruptcy
and commercial law professors and, depending on whom you ask, Enron. The
legislation raised basic policy questions about the balance between certainty in the
application of bankruptcy laws benefiting some companies and creditors directly as
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against the power of courts to police the bankruptcy estate and exercise equitable
powers for the benefit of a variety of constituencies. The story of Section 912 also highlights the strange interplay of sensational events
and legislative process. Section 912 was part of the broader reform of the Bankruptcy Code that has been
working its way through Congress since 1997. In particular, Section 912 was
intended to provide bright­line clarity that financings structured to effect a "true
sale" of assets for purposes of bankruptcy would be given this effect by a bankruptcy
court. If a sale is not deemed a "true sale," but is instead re­characterized as a
secured financing, then the assets in question are considered to be part of the
debtor's estate in bankruptcy. Effecting a "true sale" — as opposed to a secured lending — is fundamental to
securitization and has generated almost 20 years of reasoned legal opinions. That is
to say, one cannot assert a "clean" opinion that a transaction is a "true sale," but
instead must refer to the pool of mixed precedent. Effecting a "true sale" is one of
the necessary conditions to taking cash flow generating assets from an originator
and converting them into the raw material for securities to be issued based on the
value of those assets. In simplified form, a true sale occurs when ownership of an asset changes hands;
the owner of an asset is someone who bears the risk of loss of an asset and enjoys
the benefits of ownership. For example, if I sell a car on installment and the car is junk, the buyer would still
be required to pay me the full agreed price for the car (subject to warranty, lemon
laws, fraud claims and the like). The buyer bears that the car loses value or has less
value than the buyer thought. On the other hand, if the car appreciates in value
(because it becomes a collector's item, for example), I cannot try to claim some
portion of this increase in value. If I lease the car and the car is a lemon, I've breached the lease agreement and the
lessee is not obligated to make any further payments. I bear the risk of loss. On the
other hand, if, at the end of the lease term, the car has some residual value, I get
the benefit of that residual value. It seems like a binary choice, but just as the conceptual boundaries between debt
and equity can be blurred with hybrid instruments that have characteristics of both,
the question of who bears the risk of loss or enjoys the benefits of ownership in
connection with a transferred asset is not always clear. Historically, courts have
approached the question by applying a multi­factor fact­based analysis, including an
inquiry into the intent of the parties.
Defining a true sale is not just an academic question. The issue was given new
urgency last year when a large steelmaker, LTV Steel Co. Inc., filed for bankruptcy.
LTV asked the U.S. Bankruptcy Court for the Northern District of Ohio to permit LTV,
as debtor­in­possession, to use its receivables and inventory as part of LTV's post­
petition operations. The only problem was that rights to these receivables and
inventory were previously transferred in two pre­petition securitizations! In the world of corporate finance and bankruptcy, it passed for big news when the
court entered an interim order authorizing LTV to use the securitized assets in the
interim period prior to the date set for a hearing on LTV's motion. Entities involved
in the securitizations and a host of friends of the court filed motions seeking to have
the interim order modified to recognize the validity of the true sale of securitizied
assets and have these assets removed from the reach of the bankruptcy estate. The court, however, refused to modify the interim order. In order to avoid the
court's potential adverse ruling, before the hearing, the pre­petition financiers
settled for taking priority post­petition financing claims that carried a higher cost for
LTV.
Against the background of this always­lingering, sometimes­ compelling, definitional
uncertainty, Section 912 would have provided brighter lines. It included a partial
safe harbor from the definition of the bankruptcy estate by providing that certain
transferred assets were to be deemed truly sold, and therefore insulated from the
bankruptcy estate. This partial safe harbor would have applied to pre­petition sales of eligible assets to
eligible parties according to bona fide securitization transactions in connection with
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the issuance of at least one tranche of securities rated investment grade by a
nationally recognized statistical rating organization (of which there are three:
Moody's, Standard & Poor's and Fitch). The safe harbor would only be partial because the bankruptcy court would still have
had power to police certain fraudulent transfers, according to Section 548(a) of the
Bankruptcy Code. Transactions that did not meet the safe­harbor requirements
would continue to be reviewed under the traditional fact­based, multi­factor true
sale/secured lending analysis. Critics of Section 912 charge that the limited scope of
review permitted bankruptcy courts would permit parties to easily recharacterize
loans as securitizations solely for the purpose of favoring one class of creditors over
other constituencies in bankruptcy.
One more point of background interest is the massive scope and scale of affected
transactions. The growth of securitizations backed by cash flows in all of their many
flavors (mortgages, credit­card loans, auto loans, commercial loans, high­yield
bonds, franchise loans, music royalties, lottery winnings, utility stranded costs and
on and on) currently represents an approximately $6 trillion global market that has
been active and growing for more than 20 years. For comparison, the annual GDP of
France is $1.4 trillion. The vast majority of securitizations still occur in the United
States and the vast majority of U.S. securitizations are backed by mortgages.
On Jan. 23, 2002, the group of 35 professors (the G35) sent a letter to
Sensenbrenner and Leahy raising issues with Section 912. The G35 included
another data point in their discussion of Section 912 — Enron. Spurred by recent events, the G35 rejected the conclusion that the benefit of lower
capital costs and increased volume of securitizations outweighed the cost of limiting
the historical powers of the bankruptcy court to police this definitional boundary.
The G35 rejected the proposed test for screening transactions eligible for the Section
912 safe harbor, and at least some signatories indicated that the question of any
bright­line determination would be ill considered. Among other things, the G35 raised the following issues with the proposed
amendments to the code:
The securitization market is a whale that has thrived without, and does not now need, a harbor.
Section 912 would reduce the oversight of the bankruptcy court in policing sham secured loans
designed to favor one creditor, or class of creditors, over other constituencies in bankruptcy.
Using determinations by rating agencies as a critical element in the definition of an eligible
transaction is like having a bear watch over your picnic.
Off­balance­sheet securitization financing generates opaque financial information and the safe
harbor, by generating more securitizations, will muddy the waters of financial information further.
The safe harbor, by limiting the reach of the "strong arm" provisions of the code, would facilitate
fraud by not requiring securitizers (or the special­purpose entities set up to effect the structural
true sale) to perfect security interests in assets sold.
These issues existed long before Enron's bankruptcy. Indeed, Congress had passed on them.
Both the House and Senate passed versions of the bankruptcy reform legislation including Section
912. In light of Enron, however, the G35 letter prompted Leahy to write the acting attorney
general in charge of Enron at the Department of Justice for the DOJ's views, specifically in light
of Enron, on the issues raised by the G35 about Section 912. The G35 letter also generated a response from a securities industry trade group, the Bond
Market Association (BMA). The BMA responded directly to the G35's issues the next week, Jan.
30, 2002. Among other things, the BMA wrote:
Securitizations are here to stay, get used to it (although couched in language about overarching
public policy goals associated with the benefits of securitizations to the economy and the
importance of giving effect to the parties' intent in commercial transactions).
Securitizations do not favor one creditor over another, but rather transfer cash to the originator
for otherwise illiquid assets.
To the extent that financial reporting for off­balance­sheet financing may be opaque, Section 912
would not make the situation any worse.
There is sufficient disclosure available under current regulatory and accounting regimes for public
and private issuers. Creditors can do their own due diligence and most securitizers file
precautionary financing statements anyway.
Fraudulent conveyance law is specifically carved out of the scope of the Section 912 amendments
to the code, and a bankruptcy court would still have the power to police intent to defraud the
bankruptcy estate.The bankruptcy reform legislation is still in front of its conferees, but Section
912 is considered likely to be deleted. It is not hard to see that politicians would be reluctant at
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the moment to amend the code to facilitate securitizations, a family of transactions within a
larger class of off­balance­sheet financings. In the current economic environment, the entire
package of bankruptcy reform legislation has stalled on legislation that is deemed pro­creditor.
Given that Section 912 still has zealous advocates on its behalf, the section and the
issues its raises are expected to be back. In the meantime, keep the reasoned
opinions coming.
Professor Lipson, writing a complementary piece to this article, labels me a
proponent of Section 912 for calling into question the connection between the
legislation and events at Enron. There surely is a connection between Enron and
Section 912 in that they both implicate off­balance­sheet financing. However, as more information comes out, it looks like what gave rise to the
problems at Enron was a failure to disclose material liabilities, top management's
taste for self­dealing transactions and critical failures in corporate governance
controls and board of directors' oversight. To say that Section 912 would have given
other entities license to easily ape Enron's bad acts does not do justice to either the
operation of Section 912 or the real effort it took to topple Enron.
The better question is how the critique of a safe harbor defining "true sale" for
bankruptcy purposes weighs in the balance against the real economic benefits
generated by such a provision. The BMA and the G35 letters provide a good
summary of the point/counterpoint on these issues and it is not necessary to
restate them here. The full text of the letters can be found on the Web site of the
American Bankruptcy Institute at http://www.abiworld.org/legis/legisnews.html. Lurvey practices corporate law in New York City. His e­mail is [email protected].
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Volume 11, Number 6 ­ July/August 2002
Two views on asset securitization and bankruptcy
reform
Section 912 Is Dangerous
By Jonathan C. Lipson
Related Articles:
Is this about Enron?
By Jonathan C. Lurvey
About Securitization
By David Gray Carlson
Jonathan Lurvey asks a good question: What does Enron have to do with the effort
by 35 law professors (myself included) to derail Section 912 of the Bankruptcy
Reform Bill of 2001? The short answer is that this complex provision, buried in the several hundred pages
of the reform bill, would probably encourage more transactions like those apparently
misused in Enron. Worse, it would severely restrict courts from undoing these
transactions, no matter how harmful they were to the debtor or its creditors or
shareholders.
Section 912 would do this in two steps. First, it would prevent courts from treating a
securitization as a loan, even if the debtor bore the same economic risk as in a loan.
This may enable the parties to mask the debtors' true liabilities, an obvious problem
in Enron. Second, it would prevent courts from avoiding and recovering transfers in an asset
securitization under many well­established avoidance powers. For example, if
Section 912 were law today, many of the questionable transfers to Enron's
partnerships would appear to be immune from avoidance.
Given these connections, it is not surprising that members of the Conference
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Committee reconciling the House and Senate versions of the Reform Act have pulled
Section 912, at least for the time being. In other words, even if Mr. Lurvey does not
see the connection, Congress does. And it apparently does not like what it sees.
Although billed as a "technical" fix to the Bankruptcy Code, Section 912 would have
two principal effects. First, it would foreclose bankruptcy courts from
recharacterizing asset securitizations as loans, regardless of the true economics of
the transaction. Second, Section 912 would bar bankruptcy courts from avoiding
transfers in a securitization, except through the fairly narrow window of Section 548
of the Bankruptcy Code. Thus, Section 912 would apparently gut all other avoidance
actions typically available at state or federal law as to a securitization. In order to qualify for this treatment under Section 912, two things would have to
be true: (i) the transaction was one where financial assets (such as accounts
receivable) were "sold . . . with the intention of removing them from the estate of
the debtor," (Section 912(2)(f)(5)), and (ii) at least one tranche or class of securities
to be issued in the securitization was rated "investment grade" by one or more
nationally recognized statistical rating organizations (NRSRO), when the securities
were initially issued. Section 912(2)(f)(1). These two features are common to most legitimate securitizations. As indicated in
the sidebar, the "originator" of financial assets in a securitization transfers those
assets to a "special purpose entity" (SPE), which is usually owned completely or
substantially by the originator. When it works — and it appears to work much of the
time — securitization is attractive because it eliminates the risk that these financial
assets will be subject to the claims of the originator's other creditors. In theory,
reduced risk results in cheaper financing.
For risk to be truly reduced, the transfer of financial assets must be a "true sale."
The problem for securitization providers is that courts have struggled for many years
and in many different contexts to determine when a transfer of financial assets is a
"true sale." Variants of the true sale problem animated decisions such as Benedict v. Ratner,
268 U.S. 353 (1925), Octagon Gas Sys. Inc. v. Rimmer (In re Meridian Reserve
Inc.) , 995 F.2d 948 (10th Cir. 1993), and In re LTV Steel Co., 2001 Bankr. Lexis
131 (Feb. 5, 2001). In all three cases, the courts held that the transfers were not
what they purported to be. Thus, the financial assets remained property of the
debtors' (that is, originators') bankruptcy estates, and the debtors' creditors had
access to these financial assets after all.
Section 912 would apparently foreclose such decisions in the future. It would
require bankruptcy courts to accept the parties' characterization of the transaction
so long as it satisfied the basic statutory criteria set forth above. There are good reasons to be concerned about Section 912's solution to the true
sale problem. The professors' letter argued that stripping courts of this power would
seriously impair the ability of many debtors to reorganize because it would permit
parties to place assets beyond the reach of unsecured creditors, such as employees
and tort claimants. It may also place too much power in the hands of the NRSROs, such as Moody's.
These organizations work for the parties to the transaction, and do not have the
interests of the originator's other creditors in mind. For example, until shortly before
its collapse, the NRSROs were generally rating Enron favorably.
Perhaps the most disquieting aspect of Section 912's treatment of the true sale
problem is the so­called "put" feature: A transaction would qualify as a statutory
securitization even if the originator retained the obligation to repurchase defaulted
assets from the SPE. This follows from Section 912's definition of "transfer." Under
912, a "transfer" occurs "irrespective and without limitation of . . . (B) whether the
debtor had an obligation to repurchase . . . eligible assets." Section 912(2)(f)(5). This creates two problems. First, it defies economic reality. Section 912 would treat
a securitization transfer as a "true sale" even if the originator bore risks typically
associated with a loan, because the SPE could "put" defaulted assets back to the
originator.
As Mr. Lurvey points out, if I lease you my car, or grant you a security interest in it,
I retain the risk that it may break down or otherwise lose value. If, instead, I sell
you the car, you assume these risks, absent fraud or breach of warranty on my
part. Contrary to Mr. Lurvey's claim, however, Section 912's definition of "transfer"
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would permit us to characterize as a "sale" what is, economically, a lease or loan.
Defying reality (economic otherwise) is not, however, necessarily a problem. Our law
is generally indifferent to a contract where you and I agree to call my cat a dog.
Rather, the second, and more troubling, aspect of the "put" would flow from the fact
that third parties would undoubtedly rely on the (misleading) contractual
characterization rendered by the parties. Although Section 912 is not an accounting rule, it would doubtless encourage
parties to book the revenue of an asset securitization as if it were a sale, even if the
originator retained the obligation to repurchase the assets when they did not
perform. This, of course, smacks of Enron, which, according to the Report of Investigation by
the Special Investigative Committee of the Board of Directors of Enron Corp. (the
Enron Report), apparently made a business out of booking revenue without
disclosing liabilities concealed by the use of SPEs.
If Section 912 had simply dispatched the true sale problem, without more, it
probably would have elicited much less opposition. After all, reasonable minds can —
and do — differ about what constitutes a true sale, and about the merits of
securitization. But Section 912 would go much further than true sale. Its second, perhaps more
insidious, feature would eliminate most judicial powers to avoid (that is, undo) asset
securitization transfers, such as unperfected or fraudulent transfers. By eliminating
these avoidance powers, Section 912 would scuttle important checks and balances
in the financial system. It would thereby permit — perhaps even encourage —
financial misconduct of the sort apparent in Enron.
Mr. Lurvey and proponents of Section 912 might object that the provision would not
eliminate all avoidance actions. It would still permit a bankruptcy court to avoid a
transfer in an asset securitization under Section 548 of the Bankruptcy Code. This is true. The problem, however, is that a transfer is avoidable under Section 548
only if it was a fraudulent conveyance that occurred within one year of bankruptcy.
All other judicial powers to avoid and scrutinize transactions would apparently be
neutralized by Section 912. What are these powers, and why do they matter? Consider first the "strong arm"
power to avoid unperfected transfers under Bankruptcy Code Section 544(a). Under
Section 544(a), a bankruptcy trustee may avoid any transfer that is unperfected at
the start of the bankruptcy case. Section 544(a) is designed to deter secret transfers, because unperfected transfers
are usually ones that have not been publicly disclosed. For example, Section 544(a)
was used in the Octagon case, where the court avoided an unperfected transfer of
securitized assets. Section 912 would eliminate Section 544(a), and thus permit
secret transfers, so long as they were a part of a statutory securitization. Section 912 would also do away with the many state­law avoidance powers
incorporated via Bankruptcy Code Section 544(b). Section 912 would, for example,
eliminate the use of state fraudulent conveyance law, which usually carries much
longer limitations periods. Longer limitations periods likely inspire greater financial
prudence, because the parties understand that any given transaction will be subject
to a longer look­back. Section 912 would eliminate this incentive to be prudent.
Finally, it would eliminate other avoidance powers available under the Bankruptcy
Code, such as the turnover power under Section 542. This avoidance power was
apparently used in the LTV case.
Although he does not make the point, Mr. Lurvey might also argue that Section 912
preserves "substantive consolidation" as a remedy for abusive securitizations.
Proponents of Section 912 made this claim.
Substantive consolidation is an equitable remedy, much like veil piercing, whereby
the assets and liabilities of nominally separate, but related, entities are merged.
Under this doctrine, creditors of an originator might claim that they should have
recourse to financial assets transferred in an asset securitization because the SPE —
which purchased these assets — should be consolidated with the originator.
There are two problems with this argument. First, substantive consolidation
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addresses different abuses than those remedied by the other avoidance actions
discussed above. Substantive consolidation is typically invoked when the corporate
form is misused or when corporate formalities are not observed. These problems
may or may not coincide with a failure of perfection or a fraudulent conveyance.
Second, and more important, one reading of Section 912 suggests that it would, in
fact, eliminate substantive consolidation actions. That is because Section 912(2)
would exclude all securitized assets from the debtor's estate, unless recoverable
under Bankruptcy Code Section 548. Section 548 obviously does not state a cause
of action for substantive consolidation. Thus, there appears to be no way securitized
assets could become property of the estate under any other theory, including
substantive consolidation. Finally, Mr. Lurvey may object that these avoidance powers should not apply to
asset securitizations, since they are simply a tax on "bona fide" transactions. The
problem, of course, is that this assumes its own conclusion. Whether or not a
transaction is "bona fide" can follow only from compliance with the law. By changing
the law, all statutory securitizations would become bona fide — but that does not
necessarily mean that they really are.
If securitizations and SPEs were always used for legitimate purposes, it would be
hard to be excited about Section 912. Enron, however, demonstrates how SPEs
(and securitization) can be misused. According to the Enron Report, Enron used hundreds of SPEs to hide assets and
liabilities from public scrutiny. An article in the New York Times explained the
problem concisely: "The same financial tools used to create asset­backed securities
[securitizations] were also used to construct the elaborately camouflaged and booby­
trapped partnerships that have been blamed for Enron's collapse." Diana B.
Henriques, "The Brick Stood Up Before. But Now?," New York Times (March 10,
2002).
Enron's Chewco, JEDI and LJM partnerships, for example, all appeared to involve
SPEs and financial transfers or sales of Enron financial assets in what were
characterized as "true sales" by Vinson & Elkins, Enron's law firm. Enron Report at
185. What is unknown is whether any of these transactions were rated investment
grade by an NRSRO. A recent story in the New York Times suggested that some may
have been. "Enron's Deals Were Marketed to Companies By Wall Street," New York
Times, C1, C9, Feb. 14, 2002. If so, then at least some of the Enron partnership transactions would meet the two
statutory criteria for securitization treatment under Section 912: They would have
involved (i) "true" sales, in (ii) transactions rated (presumably investment grade) by
an NRSRO. Does this mean that, if it became law today, Section 912 would actually apply to the
Enron transactions themselves? That could not be what Congress intended with
Section 912. However, this might be the result of the effective date provisions of the Reform Act.
Under Section 913, the Reform Act is generally effective on enactment, "but shall
not apply with respect to cases commenced . . . before the date of enactment of this
act." A careful reader will immediately recognize that avoidance actions are not "cases" —
they are "adversary proceedings" — a different species of judicial action. The argument would therefore go as follows: While Enron's bankruptcy case
preceded the effective date, the adversary proceeding would be commenced after
the Reform Act's effective date. Thus, while Section 912 would not apply to the
Enron case, it would apply to adversary proceedings — avoidance actions —
commenced after its effective date. There is ample precedent to support the distinction between cases and adversary
proceedings for jurisdictional purposes. See, for example, In re Porges, 44 F.3d 159,
163, n.2 (2d Cir. 1995) (an adversary proceeding and the companion bankruptcy
case constitute two distinct proceedings). There is no apparent reason why the
same distinction would not apply for purposes of the Reform Act's effective date.
For whom would this matter? For any of the participants in the partnerships who
received Enron property in asset securitizations that fit within the statutory criteria
of Section 912. They may include people like Andrew Fastow, who appears to have
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acted as the managing member of the general partner of certain of the
partnerships, as well as financial institutions like J.P. Morgan Chase and Citigroup,
who are investors in the limited partnerships, and direct creditors of Enron.
For such a technical matter, Section 912 has elicited strong, sometimes
exaggerated, claims. For example, the Bond Market Association, a principal
proponent of Section 912, attempted to cast all 35 law professors who wrote to
Congress as undifferentiated opponents of securitization. The claim is simply false. I, for one, practiced corporate and commercial law for eight
years, and worked on a number of securitizations that were, so far as I could tell,
good for my clients, and all others concerned. Moreover, I doubt I am the only
opponent of Section 912 who also believes that securitization may, under proper
circumstance, be an effective and legitimate financing vehicle.
Nevertheless, the heat is understandable when one considers the amounts
involved: The securitization industry purportedly reflects several trillion dollars in
assets, a fact the BMA cited in support of Section 912. The problem, however, is that this statistic cuts both ways. After all, if securitization
has become a multi­trillion dollar business under current law, why is a change
necessary — especially one that would appear to invite more problematic
transactions, and then immunize them from judicial scrutiny?
But Mr. Lurvey may have the last word. While Congress may not approve Section
912 today, the provision reflects a concept promoted by a wealthy and powerful
constituency that undoubtedly continues to enjoy quiet legislative support. It seems
highly likely that another version of Section 912 will make the rounds on Capitol Hill
in coming years.
And if — or when — that happens, memories of Enron and its apparent misuse of
SPEs will have faded. Probably, the law professors won't have killed Section 912 —
they will just have put it, like so many law students, temporarily to sleep.
Lipson is an assistant professor of law at the University of Baltimore and the chair of
the ABA Task Force on Forms under Revised Article 9 of the Uniform Commercial
Code. His e­mail is [email protected].
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Volume 11, Number 6 ­ July/August 2002
About Securitization
By David Gray Carlson
Related Articles:
Is this about Enron?
By Jonathan C. Lurvey
Section 912 is
Dangerous
By Jonathan Lipson
The goal of securitization is for a debtor (called an "originator") to sell accounts,
chattel paper, general intangibles or instruments to a bankruptcy­remote
corporation (sometimes called a "special purpose vehicle" or SPV) set up for the sole
purpose of buying this property. The SPV raises funds by selling debt or perhaps
equity participations in financial markets. The only obligation of the SPV is the debt or equity obligation that the SPV issued to
raise funds. The assets that secure that obligation are precisely what the SPV has
bought from originator, often heavily guaranteed by the originator's promise to buy
back or replace bad accounts. The form of the transfer from the originator to the
SPV — a sale — is supposed to prove that no bankruptcy court can ever claim
jurisdiction over the income again.
To be more precise, Section 541(a)(1) of the Bankruptcy Code indicates that the
bankruptcy estate includes "all legal or equitable interests of the debtor in property
as of the commencement of the case." If a debtor were to convey to the SPV a
mere lien on accounts or chattel paper to secure financing, the assets would not
have escaped bankruptcy jurisdiction. In such a case, the debtor would retain an
equity interest in the collateral — enough to justify bankruptcy jurisdiction. But in a
securitization transaction, since the debtor has sold the accounts, the debtor
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supposedly retains nothing.
Section 912 of the new bankruptcy bill tried to improve the theory of securitization
by stating that property of the bankruptcy estate did not include certain designated
securitized assets, provided that the transaction was structured as a securitization
transaction. Section 912 seems to be dead in Congress but, as Professor Lipson
suggests, it may not be dead for long.
Meanwhile, in a related development, Delaware and a few other states have
amended their version of Revised UCC Article 9 to provide the equivalent, at the
state law level, of Section 912. The synopsis to Delaware's version, 73 Del. Laws, c.
214 says:
Currently, the Financial Accounting Standards Board has determined that sale treatment for
financial accounting purposes would not be appropriate for a securitization transaction if the
transferor, its creditors or, in an insolvency proceeding, a bankruptcy trustee, receiver, debtor,
debtor in possession or similar person could recover the transferred assets, except under very
limited circumstances. Existing Delaware laws do not specifically address the circumstances under
which assets transferred in a securitization transaction can be recovered. This bill would clarify
that, under Delaware law, no such right would exist to the extent provided in the securitization
transaction documents.
Whether this state enactment will have its intended effect in a federal
bankruptcy court remains to be seen.
Carlson is a professor at the Benjamin N. Cardozo School of Law, at Yeshiva
University, in New York City. His e­mail is [email protected].
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