A predecessor of the defendant (“BC Tel”) raised $150 million by transferring receivables to a securitization trust (“RAC”) in consideration for an advance and the receipt of deferred amounts. RAC funded its payments in the commercial paper market and BC Tel serviced the receivables for no fee. The plaintiffs were bond holders who alleged that the use by BC Tel of the advance to redeem the bonds (which bore a high rate of interest) violated a Trust Deed covenant not to redeem the bonds “by the application, directly or indirectly, of funds obtained through borrowings, having an interest cost to the Company of less than 11.35% per annum.”
In finding that the transfer of the receivables was a true sale rather than a secured loan, so that this covenant was not violated, Ground J stated
- (at para. 40) that “the wording of the Agreement throughout clearly indicates the intention of both parties that the transaction be a true sale,”
- (at para. 43) that although “for all practical purposes the only risk of uncollectibility assumed by RAC was the possibility of an insolvency of BC Tel and accordingly, the inability to be compensated by BC Tel in the event of Purchased Receivables in excess of the amount of the Reserve being uncollectible,” nonetheless “because of that possibility, however remote, RAC did assume some risk with respect to the collectibility of the Purchased Receivables,”
- (at para. 56) that “it does not appear…that the absence of a right in RAC to retain the surplus from the collection of accounts receivable is fatal to a determination that the securitization transaction between BC Tel and RAC was a true sale,”
- (at para. 63) that “the fact that the Agreement contemplated that a particular receivable may, under certain circumstances, be reconveyed to BC Tel, does not…derogate from…[satisfaction of the requirement that] the subject matter of the sale must be ascertainable,” and
- (at para. 67) that “the ultimate test to be applied to determine whether a particular transaction should be interpreted as a secured loan or as a true sale” is that in “a secured loan transaction… the borrower, upon repayment of the debt, [can] require the lender to reassign to it all of the lender’s interests in the assets secured to pay the debt” whereas here (para. 69) “nowhere in the Agreement is BC Tel given any right at its option to repurchase or redeem the Purchased Receivables upon payment of a specified amount to RAC.”