ARTICLE: The Negative Pledge Clause and The Classification of Financing Devices: A Question of Perspective * FIRST INSTALLMENT. Skip over navigation
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Copyright (c) 1986 National Conference of Bankruptcy Judges
The American Bankruptcy Law Journal

ARTICLE: The Negative Pledge Clause and The Classification of Financing Devices: A Question of Perspective * FIRST INSTALLMENT.

* 1985, Thomas C. Mitchell.

Spring, 1986

60 Am. Bankr. L.J. 153


Thomas C. Mitchell **


The Bankruptcy Code 1 and Article 9 of the Uniform Commercial Code appear to neatly divide the world of personal property financing devices into two categories - "secured" and "unsecured" - with only a very few esoteric devices on the fringes. 2 The dividing line is established by the definition, in section 1-201(37), 3 of a "security interest" as an interest in property securing an obligation. It is the thesis of this article that such a view is a misleading perspective on personal property security. It would be far more helpful and accurate to view personal property financing devices as being spread along a broad continuum: Article 9 is no more than a domain with vaguely defined boundaries, located at one end of the continuum. This thesis is developed through a study of one of the devices thought to be on the fringes of Article 9: the absolute negative pledge clause, which requires the debtor not to encumber in any way a stated group of his assets. The general conclusion of most commercial lawyers is that the clause, while superficially resembling an Article 9 security interest, does not in fact create a security interest under section 1-201(37), 4 but there has been very little serious study of whether this is the correct conclusion. 5

Part I of this article explains the terms of a negative pledge clause, as well as its use in the modern commercial world. In part II it is shown that section 1-201(37) ...
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