ABSTRACT
This Article addresses a complex and critically important issue that lies at the intersection of contract, property, commercial, and bankruptcy law and is crucial to corporate wealth production: what constitutes the sale of intangible rights to payment, or ‘receivables’. Courts often refuse to enforce contracts that purport to sell such rights if, notwithstanding being designated a sale, some of the substantive terms of the transfer are characteristic of a loan. The jurisprudence on this sale-versus-loan problem is muddled and inconsistent. The confusion is compounded by the intangibility of receivables, subverting the old adage that ‘possession is nine-tenths of the law’. About the only well-established legal principle is that a court may sometimes, though it is unclear when, recharacterize a transaction that parties deem a sale to be a secured loan. The resulting uncertainty has serious real-world consequences. A recharacterization means that a purported buyer would not own, but merely would have a security interest in, the receivables and their collections, with the relatively limited rights and remedies associated with that interest. The risk of recharacterization thereby impairs receivables financing as a tool to unlock the growing segment of the world’s money – currently estimated at trillions of dollars – and, in developed countries, the bulk of corporate wealth that is locked up in receivables. To reduce that uncertainty and mitigate its costs, this Article seeks to build a rational, consistent, and cost-effective legal framework for resolving the sale-versus-loan problem.
Schwarcz, Steven L, Recharacterizing Contracts: The Sale-versus-Loan Problem of Receivables Financing (June 13, 2025), Duke Law School Public Law & Legal Theory Series Forthcoming.
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