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.C:\inetpub wwwroot\results\4381-text.native.1091721321.doc; 8/5/2004 11:50 AM\http://law.bepress.com/expresso/eps/314 ExpressO Preprint SeriesThe End of Notice Page 39 of 74property of the debtor s estate,186 permitting the debtor to use cash collateral,187and to cram-down secured claims in a plan of reorganization.188 Indeed, it issometimes claimed that the efficiency of securitization derives, in part, fromseparating the debtor (and the debtor s other creditors) from these assets.189Although estimates of the value of the securitization market vary, it is generallyviewed as involving in excess of two trillion dollars at any given point in time.190If securitization transactions always involved arms-length, fair-value sales ofpayment rights (e.g., receivables), they would likely present few problems.191However, securitization transactions are often structured in such a way that theoriginator retains the risk that there will be a default (or other problem) with theunderlying assets.For example, the originator may be required to repurchasethese assets from the SPE in the event the underlying account obligor defaults.As and to the extent there is recourse to the originator, the transaction looks lesslike a true sale and more like a secured financing.192Although asset securitization is a comparatively recent development incommercial finance, the true sale problem has been around in one form or anotherfor many years.193 On the one hand, our law has long permitted a buyer to put defective assets back to a seller on, e.g., a breach of warranty theory withoutcalling into question the sale character of the transaction.194 On the other hand,18611 U.S.C.§ 362(a)(3) & (6).18711 U.S.C.§ 363(c)(2)18811 U.S.C.§ 1129(b)(2).189See generally Minh Van Ngo, Agency Costs and the Demand and Supply of Secured Debt andAsset Securitization, 19 YALE J.ON REG.413, 458 (2002); Claire A.Hill, Securitization: ALow-Cost Sweetener for Lemons, 74 WASH.U.L.Q.1061 (1996); See also Lynn M.LoPucki, TheDeath of Liability, 106 YALE L.J.1, 24 (1996) (discussing benefits of asset securitization wherecompany keeps valuable assets separate from entities at risk).190A recent symposium issue of the Cardozo Law Review suggests that securitization may beovertaking and displacing secured lending as the dominant form of commercial finance.Symposium: Threats to Secured Lending and Asset Securitization: The Bankruptcy Code, 25CARDOZO L.REV.[] (2004).191If, in other words, they were not judgment proofing devices.See LoPucki, supra note [], at [].192Peter V.Pantaleo et al., Rethinking the Role of Recourse in the Sale of Financial Assets, 52BUS.LAW.159, 161 (1996); Thomas E.Plank, The True Sale of Loans and the Role of Recourse,14 GEO.MASON L.REV.287, 307-08 (1991) (arguing that payment of the full value, not theexistence of recourse, should constitute the border between sales of and security interests inaccounts and chattel paper); Schwarcz, Structured Finance, supra note [], at 621-27; Peter L.Mancini, Note, Bankruptcy and the U.C.C.as Applied to Securitization: Characterizing aMortgage Loan Transfer As a Sale or a Secured Loan, 73 B.U.L.REV.873, 876-77 (1993).193See Pantaleo et al.supra note [], at 164 ( Recharacterization [true sale] cases are centuries old.They illustrate that the law may not treat a transaction as a sale just because the buyer and sellerlabeled it a sale. )(footnote omitted).194In re Grand Union Co., 219 F.353 (2d Cir.1914) (seller of accounts agreed that if the accountswere of poor quality, it would repurchase them or pay buyer so as to guarantee a certain rate ofreturn for the buyer); Comm.on Bankr.& Corp.Reorganization of the Ass n of the Bar of theC:\inetpub wwwroot\results\4381-text.native.1091721321.doc; 8/5/2004 11:50 AM\Hosted by The Berkeley Electronic Press ExpressO Preprint SeriesThe End of Notice Page 40 of 74transactions in which the seller guarantees payment,195 or a particular return oninvestment,196 or the buyer has full recourse to the seller are generally viewedas loans, and not sales.197 At the margins it is and has for many years beendifficult to distinguish sales from secured loans.198The recent history of true sale is dotted with cases in which courts werereluctant, for one reason or another, to recognize the putative sale of paymentobligations.In 1993, for example, the United States Court of Appeals for theTenth Circuit, in Octagon Gas Systems v.Rimmer (In re Meridian Reserve,Inc.),199 held that financial assets sold by the debtor prior to its bankruptcy should,City of New York, Structured Financing Techniques, 50 BUS.LAW.527, 543-44 (1995)(describing forms of recourse that may be permissible in structured finance transactions).195See Ratto v.Sims (In re Lendvest Mortgage, Inc.), 119 B.R.199, 200 (B.A.P.9th Cir.1990)( Where the risk of loss is shifted from the investor to the debtor through a contractual guaranteeof repayment by the debtor, the transaction is a loan and not a sale ).196See Ables v.Major Funding Corp.(In re Major Funding Corp.), 82 B.R.443, 445 (Bankr.S.D.Tex.1987); Castle Rock Indus.Bank v.S.O.A.W.Enters, Inc.(In re S.O.A.W.Enters, Inc.), 32B.R.279 (Bankr.W.D.Tex.1983) (seller originated mortgages, sold certain interests in them tobuyer, guaranteed the buyer s recovery on the mortgages and the buyer s rate of return on itsinvestment, indicating the transaction was a loan for security and not a sale).See also Fireman sFund Ins.Cos.v.Grover (In re Woodson Co.), 813 F.2d 266, 271 (9th Cir.1987) (holding therewas no true sale where investors with the debtor, who were alleged to own mortgages originatedby the debtor, were paid interest monthly regardless of whether the original borrower paid [thedebtor].In the event of default, [the debtor] paid the investor the interest and the principal owingon the investor s [original deposit]) ; Merchant s Transfer &Storage Co.v.Rafferty (In re GothamCan Co.), 48 F.2d 540, 541-42 (2d Cir
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