Divergences and Convergences of Common Law and Civil Law Traditions on Asset Partitioning: A Functional Analysis

The purpose of this study is to bring some insights from the civil law tradition to the corporate debate on asset partitioning, which has developed over the last decade in the common law literature. Exposing common law scholars to legal solutions that are rooted in civil law systems has the potential to transform the traditional approach taken by comparative civil law scholars in this field. In fact, it is a well-known fact that civil law scholars have produced an extensive body of literature on the feasibility of transplanting one of the most successful products of equity - trust law - to the civil law tradition. In comparative law study, the possibility that the common law legal system could benefit from solutions developed under the civil law tradition with respect to the partioning of assets has been essentially overlooked. Therefore, the purpose of this research is to create a two-way dialogue between the common law and civil law traditions regarding this particular area of law, and to reveal efficient solutions developed in continental Europe. Asset partitioning can be defined either as the segregation of an owner’s assets from a firm’s creditors, or the segregation of an organization’s assets from its owners’ personal creditors. The latter aspect, in particular, has been emphasized by H. Hansmann and R. Kraakman, who suggest that an organization is truly characterized by such a protection of its assets. These authors have noticed that this legal effect cannot be effectively achieved by contract alone, and that a special rule of law is necessary in order to exclude claims by owners’ personal creditors on a firm’s assets without those creditors’ consent. This study aims to identify, from a functional perspective, the costs and benefits of different legal substitutes used to partition assets. The comparative analysis of these various partitioning devices is being conducted in order to help understand the economics of achieving affirmative asset partitioning through the creation of a new legal entity, as opposed to doing so through a property law which grants asset separateness within the boundaries of the same entity. While American legal scholars conceive asset partitioning exclusively through the formation of a new legal entity, the civil law tradition allows this legal effect to be achieved within the boundaries of the same legal subject, thereby avoiding the creation of multiple legal entities. The tentative thesis of this study is that in the former system (common law), there is a sharp trade-off between the costs avoided due to asset partitioning (e.g. lower monitoring costs for specialized creditors), and the benefits lost by not having legal integration take place within a single entity (e.g. information economies of scale). In contrast, the asset separateness doctrine of the civil law tradition, by allowing a legal subject to partition these assets not only outside but also within the boundaries of the same legal subject, successfully overcomes this trade-off. The analysis is organized as follows. Part I provides a description of the current debate on asset partitioning in the U.S. Part II describes the doctrine of “asset separateness” rooted in the civil law tradition. Part III provides the historical evolution of asset partitioning in civil and common law traditions. Part IV examines the costs and benefits of civil and common law regulations on asset partitioning, with regard to different business transactions (including asset securitization and the organization of a mutual fund). Part V offers concluding remarks describing how financial transactions are the driving power behind the current convergence between civil and common law traditions on asset partitioning.