Reforming the True-Sale Doctrine
Abstract
The true-sale doctrine is central to the multi-trillion dollar asset-backed securities (ABS) market. The assets backing ABS are only bankruptcy-remote if they were assigned in a true sale, rather than as collateral for a loan, and it is the true-sale doctrine that distinguishes sales from loans. Despite its importance, the doctrine is inconsistent, lacks normative direction, and is under-theorized. Negotiations regarding the status of securitized assets in bankruptcy affecting creditors such as employees, retirees, and tort claimants happen in the shadow of the law. This Essay argues that state lawmakers should formulate true-sale rules that codify the relevance ofprice in true-sale analyses. The price that a company receives in exchange for securitized assets represents value with which to distinguish between problematic judgment-proofing on the one hand, and, on the other hand, assignments that isolate assets from bankruptcy in a way that is fair and produces efficiencies. Reforming the true-sale doctrine to ensure economic substance-based determinations that consider price terms could fortify unsecured creditors' positions. In addition, such reform would reinforce appropriate boundaries between state commercial laws and federal bankruptcy policy.