Daniel Mosayov

Document Type

Research Memorandum

Publication Date




Receivables are debts owed to a company for goods or services. A company seeking liquidity may sell the future interest in receivables generated through operations or use the future interest in receivables as collateral to secure a loan. The parties’ rights will vary depending on whether the receivables are sold or used as collateral. If sold, the buyer holds absolute ownership of the acquired receivables protected from other interests. If the transaction is a loan, the lender holds a security interest in the receivables, which may be junior to other interests.

A bankruptcy court can recharacterize a transaction as a sale or loan irrespective of the language used in the contract. This memorandum explores the present question by assessing the different approaches used to determine if a transaction is a sale or loan. The memorandum addresses the tests used in three bankruptcy cases by bankruptcy courts applying Montana, New York, and Illinois law. The cases chosen illustrate the current landscape of the true sales doctrine. Courts use different multi-factored tests and key factors but irrespectively courts focus on the substance of a transaction above form.


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