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Proposed Securitization Amendments to the Bankruptcy Code Have Broad Implications Weil, Gotshal & Manges, LLPBy Walter G. filing taxes Ny state tax forms. McNeill and Richard J ReillyOn February 2, 2000 the U. S. Senate, by a vote of 83-14, passed an amendment (S 625) to the Bankruptcy Code which, if enacted, could significantly affect the way in which asset-backed and mortgage-backed securitizations are structured, and could eliminate or at least simplify the "true sale" opinions currently required by rating agencies in such transactions. filing taxes Tobacco taxes. The Senate securitization amendment is substantially similar to the amendment overwhelmingly adopted by the House last year (HR 833). 1 Thus, eventually when a final bill is enacted, it seems certain to include the new securitization provision to Section 541(b) of the Bankruptcy Code. 2 (Since passage of the amendment by the Senate, the bill has stalled due to disputes concerning unrelated items such as a minimum wage hike and tax cuts for business. filing taxes Wisconsin-state-tax-forms. )The amendment excludes from the property of the estate of the debtor "eligible assets" "transferred" to an "eligible entity" prior to bankruptcy in connection with a securitization, the most senior tranche of which is rated investment grade by one or more rating agencies. A qualifying transfer occurs simply by the transferor stating in writing that eligible assets were sold, contributed or otherwise conveyed with the intention of removing them from the transferor''s estate. The transfer is deemed effective even though there is recourse back to the transferor or the transferor has an obligation or option to repurchase the eligible assets. Moreover, the characterization of the transfer for accounting, tax or regulatory reporting purposes will not change this result. After the amendment is enacted, the traditional "true sale" analysis of ascertaining whether the transferor retains the risks and benefits of ownership of a transferred asset could become moot for federal bankruptcy purposes in the case of investment grade issuances. (For unrated offerings, the current true sale analysis would continue, thereby potentially creating a double standard. ) As discussed below, however, the amendment does not purport to alter state property laws governing what constitutes a sale; rather, by excluding from property of the estate of the debtor financial assets which have been transferred in accordance with certain formalities, the amendment generally seeks to avoid application of the automatic stay provision contained in Section 362(a)(4) of the Bankruptcy Code. Moreover, for accounting purposes, there is considerable uncertainty as to what evidence will be required to support the conclusion that a sale has occurred under FAS 125 since the amendment satisfies only the isolation requirement of FAS 125 and makes no pretense of addressing whether the transferor retained control over the transferred property. BackgroundThe principal purpose of the amendment is to eliminate any uncertainty that may exist as to whether assets that have been transferred to a special purpose vehicle in a securitization will be excluded from the estate of a debtor under the Bankruptcy Code. Such uncertainty results from the fact that currently, property owned by a debtor that is purported to have been transferred to a special purpose vehicle is considered excluded from the debtor''s estate only when a "true sale" of the assets has occurred under state property law (i. e. , the risks and rewards of ownership of such property have been transferred to such special purpose vehicle). As a result, law firms are now required to opine as to whether the facts and circumstances of a given securitization qualify as a "true sale. " Such opinions are based on numerous factual assumptions and an extensive analysis of the case law that has developed in analogous situations over the years; typically, counsel is careful to point out in such opinions that there are no cases directly on point. Consequently, "true sale" opinions are heavily qualified, read more like a legal research memorandum than an opinion normally rendered in a financial transaction and lack the definitiveness which investors typically expect in a securities offering. In addition, there is the danger that a court could wrongly decide whether a sale has occurred. For example, it is the prevailing view that this is exactly what happened in Octagon Gas Systems v. Rimmer,4 when the Tenth Circuit held that, because a sale of accounts is subject to Article 9 of the Uniform Commercial Code, a seller of accounts always retains a "legal or equitable interest" in the accounts sold for purposes of Section 541 of the Bankruptcy Code.
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