This Article reconceptualizes the relationship between floating liens and static liens in order to refine the theoretical and practical treatment of floating liens under the Bankruptcy Code. This reconceptualization in turn lends clarity to the regulation of asset securitization as a form of financing. Traditionally, floating liens, such as security interests in inventory or accounts receivable, have been controversial because they appear to involve debtors granting interests in property they do not own. This Article contends that this argument is misguided because most, if not all, liens involve the debtor granting interests not yet owned. However, the concern surrounding floating liens is justified because of the unique principles of individuation involved in fluid assets, which grants fluid assets a unique degree of dynamism and makes floating liens ideal vehicles for preferential behavior. Understanding the differences between the principles of individuation unifying what are traditionally conceived of as fluid assets and static assets not only permits an accurate understanding of the true difficulties in policing floating liens but also provides a theoretical basis for differentiating between preferential transfers between the debtor and creditor and what this Article refers to as "recuperative transfers" (which should be permitted) from the debtor to the creditor. This Article leverages these theoretical insights to fashion the Matrix Test, an alternative to the current Two-Point Net Improvement Test under the Bankruptcy Code. This new test holds significant advantages in accommodating the dynamism of fluid assets and detecting preferential behavior. This Article then argues that asset securitization provides a first best solution to the problems created by the unique dynamism of fluid assets because asset securitization severs a fluid asset from the originating business, the source of a fluid asset's dynamism. The current jurisprudential concern that asset securitization is actually a form of floating lien is misguided because it fails to recognize the fundamental economic differences between floating liens and asset securitization, and the current jurisprudential restrictions on asset securitization, expressed in the true sale requirement, are self-defeating because they ultimately restrict an ideal alternative to the difficulties of policing floating liens.
Minh V. Ngo,
Getting the Question Right on Floating Liens and Securitized Assets,
Yale J. on Reg.
Available at: http://digitalcommons.law.yale.edu/yjreg/vol19/iss1/4