TheTRE Value Proposition #3: The "True Sale" Issue

Trivia Question: What is the only State in the US whose civil law code is NOT based on English Common Law?

Answer: Louisiana.

One of the incorrect bits of trivia often attributed to Louisiana is that its civil law system is based on the Napoleonic Code. That, I’m told, is not actually true. It is true, though, (for you trivia lovers) that the first version of the Louisiana code was written in French.

I am not a lawyer but if you have spent any time in the financing business, especially working on problem situations, you do tend to become quite sensitive to legal “technicalities”.

Consider the following scenario: A business is owed money by a customer. It sells the right to receive that payment to a 3rd party. The seller unconditionally agrees to re-purchase the receivable from the buyer if the buyer is not paid by a stated date.

Question: Is this transaction truly a sale of the receivable or is it really a financing? Does the absolute commitment to repurchase give the transaction the character of a loan more than a purchase?

Answer: It depends on the law that governs the transaction.

Question: Where does the governing law hold that such a transaction is unquestionably a sale of the receivable and not a financing transaction?

Answer: Louisiana.

The Receivables Exchange is based in Louisiana and Buyers and Sellers of receivables traded on TRE agree to accept Louisiana law as the controlling law for disputes.

Louisiana has adopted the Uniform Commercial Code, which attempts to standardize business law across the country. But Louisiana modified a critical section of the UCC that deals with buying and selling of receivables. The modification is critical.

In Louisiana the scenario outlined above, of a sale with an unconditional re-purchase agreement, is by law a “True Sale”. That is: it will not be considered a financing regardless of the re-purchase commitment.

Why is that of critical importance? Because it takes disputes out of the realm of the laws related to loans or financings; including questions of usury, for example; and contains those disputes within the realm of laws relating to the purchase and sale of assets.

There is tremendous advantage to the clarity of position that this brings to those, especially the Buyers, who trade on TRE.

Knowing that a broad range of potentially difficult and costly legal disputes can be avoided because of the Louisiana “True Sale” language, removes an element of risk from the process of trading on TRE.

And reduction of risk has value!