Viewing the LTV Steel ABS Opinion in Its Proper Context

I. INTRODUCTION In early 2001, Wall Street was rocked by In re LTV Steel Company, Inc.1 (hereinafter "LTV Steel ABS Opinion"), an opinion issued by the bankruptcy court adjudicating the Chapter 11 cases of LTV Steel Company, Inc.2 and affiliated companies.3 The opinion calls into question the legal foundation for a $6 trillion4 IMAGE FORMULA5 financing industry known as "asset-backed securitization" or "ABS" or "structured finance" (these phrases are used interchangeably throughout this article) and may have invigorated a push for amendments to the Bankruptcy Code5 to protect this industry.6 Through structured finance arrangements, companies avail themselves of less expensive financing by "selling" assets to a special-purpose "bankruptcy-remote" entity that, in turn, pledges the assets as collateral for a loan and then conveys the borrowed funds to the "seller" as consideration for the sale. The transaction is intended to render the assets "bankruptcy-remote" so that, if the seller ever files for bankruptcy, the collateral is removed from its bankruptcy estate and, therefore, the automatic stay7 will not prevent the lender from foreclosing on the assets held by the special purpose entity. In this way, the lender can reduce its repayment risks. Structured financing has, consequently, become an increasingly more common mechanism through which companies with low debt ratings tap into the capital markets. Nevertheless, structured finance is not based on an entirely firm legal platform. It is premised on bankruptcy's general recognition of legal entities created under state law. Even under state law, a transfer of assets to a special purpose entity to enable financing for the "seller" may be attacked as a legal fiction and recharacterized as a secured loan disguised as a sale transaction. Moreover, bankruptcy courts are courts of equity and may rely upon their equity jurisdiction as grounds to deny recognition of a structured finance arrangement. Uncertainty is exacerbated by the fact that ABS is a relatively recent development in the world of corporate finance and, consequently, there does not appear to be any case law directly addressing whether a contested ABS transaction is a sale or a financing.8 Against this backdrop, the LTV Steel ABS Opinion appears to have critical importance. The opinion arose from the Debtors' argument, made on the first days of the Chapter 11 cases, that certain critical assets "sold" to non-debtor special purpose entities in connection with securitization arrangements still belonged to the Chapter 11 estates (and, therefore, could be used post-petition without creditor intervention) because the pre-petition transfers did not result in legally cognizable "true sales," but only artifice to disguise the true nature of the transactions-loans to LTV Steel secured by assets of LTV Steel. The bankruptcy court facially accepted the Debtors' argument and authorized their use of those assets on a post-petition basis. In other words, the bankruptcy court, in the LTV Steel ABS Opinion, collapsed the ABS structure, exerted jurisdiction over assets IMAGE FORMULA8 purportedly belonging to non-debtor special purpose entities and authorized the Debtors to use those assets on a post-petition basis. This Article attempts to place the LTV Steel ABS Opinion in its proper context. Section II is a general discussion of asset-backed securitization and its legal foundation. Section III describes the LTV Steel ABS Opinion and the circumstances out of which it was issued. Finally, Section IV evaluates the importance of the LTV Steel ABS Opinion as precedent. II. ASSET-BACKED SECURITIZATION AND ITS LEGAL FOUNDATION A. The Basic ABS Model The basic model for the asset-backed securitization involves five participants: First, there is the entity with financing needs that has assets that may be used for a structured finance arrangement. …