Circumvention of the Bankruptcy Process: The Statutory Institutionalization of Securitization Transactions

The Article 9 changes address two fundamental issues relevant to securitization transaction participants: (i) the characterization of the asset transfer, and (ii) the clarity and certainty of the process taken to perfect the transferee's interest in the assets. These changes will eliminate some of the uncertainty that asset-backed security investors and securitization originators face. What the Article 9 changes will also do, however, when read in conjunction with the amendments to the Bankruptcy Code, will be to allow certain financial market participants to avoid participation in the bankruptcy process, notwithstanding their provision of financing to a debtor in bankruptcy. A consequence of these changes is our unwitting abandonment of two socially desirable objectives inherent in the bankruptcy process: (i) the reorganization of potentially viable businesses, and (ii) the equality of distribution of a debtor's assets among creditors. Accordingly, securitization, under the combined Revised Article 9/Bankruptcy scheme, may become the most effective judgment proofing mechanism for those debtors able to take advantage of it. Unfortunately, the impact of such a mechanism will not be felt merely by the parties consenting to the securitization transaction, but by all the participants in the credit markets, as well as all those affected by a firm's business. The Bankruptcy Code amendments affirmatively carving out from the definition of the debtor's estate certain securitized assets, notwithstanding the circumstances surrounding their transfer, will result in fewer assets available for distribution to a bankrupt firm's other creditors. The significance and substantive importance of the definition of what assets are included in the debtor's bankruptcy estate to the commercial markets cannot be overstated.