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July, 2014

SECURED CLAIMS IN BANKRUPTCY: Prior Voluntary Creditors 2

Second, even when a negative pledge covenant would not be too broad, the unsecured lender and the borrower may not use it if they cannot capture enough of the benefits that would be generated by the covenant. In particular, to …Continue reading →

SECURED CLAIMS IN BANKRUPTCY: Prior Voluntary Creditors

We have just seen that involuntary creditors cannot adjust and that voluntary creditors with small claims generally do not adjust to the security interests created by a borrower (although some voluntary creditors with small claims may charge an interest rate …Continue reading →

SECURED CLAIMS IN BANKRUPTCY: Voluntary Creditors with Small Claims

Involuntary creditors—tort creditors and government agencies—are not able to adjust the size of their claims against a borrower when it creates a security interest in favor of another creditor, because their claims are fixed by law. But the fact that …Continue reading →

SECURED CLAIMS IN BANKRUPTCY: SECURITY INTERESTS UNDER FULL PRIORITY 6

The size of the government’s claims against a firm is set by statute without regard to the firm’s capital structure and, in particular, without regard to any security interests the firm may have created that subordinate the government’s claims to …Continue reading →

SECURED CLAIMS IN BANKRUPTCY: SECURITY INTERESTS UNDER FULL PRIORITY 5

Some commentators have urged that tort creditors should receive full compensation when the corporate tortfeasor goes bankrupt, either through a program of mandatory insurance or through the imposition of shareholder liability for corporate torts. Others have suggested that the law …Continue reading →

SECURED CLAIMS IN BANKRUPTCY: SECURITY INTERESTS UNDER FULL PRIORITY 4

Our analysis would apply even if all nonadjusting creditors received an interest rate that compensated them, on an expected value basis, for the increased risk of loss associated with the possibility of subordination. For example, our analysis would apply even …Continue reading →

SECURED CLAIMS IN BANKRUPTCY: SECURITY INTERESTS UNDER FULL PRIORITY 3

The rest of this Part provides a detailed analysis of the problem of excessive use. Section A reintroduces the concept of “nonadjusting” creditors—creditors that cannot or do not adjust the size of their claims against a borrower to reflect the …Continue reading →

SECURED CLAIMS IN BANKRUPTCY: SECURITY INTERESTS UNDER FULL PRIORITY 2

The problem of excessive use would not arise if incorporating a security interest into a loan arrangement always added value to the transaction (which, we are assuming for now, would go forward in any event). There are, in fact, a …Continue reading →

SECURED CLAIMS IN BANKRUPTCY: SECURITY INTERESTS UNDER FULL PRIORITY

Those who have expressed concern about full priority in the past have generally done so on fairness and distributional grounds. In contrast, our analysis in The Uneasy Case has focused on the efficiency costs of according full priority to secured …Continue reading →

SECURED CLAIMS IN BANKRUPTCY: Considering the Issue of Priority with an Open Mind

The second important implication of the fact that we are living in a partial priority world is that those who would criticize our analysis by pointing to evidence that the existing system works perfectly well would in fact support our …Continue reading →

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