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In writing this paper we have two aims. First, our analysis in The Uneasy Case has attracted various reactions from the contributors to this Symposium and others, and we wish to address the objections that have been raised. Second, we wish in the paper to develop further some of the main elements of the analysis in The Uneasy Case.

The four main arguments that have been raised against our analysis—and to which we respond in this paper—appear to be as follows: (1) that full priority is required by fundamental principles of contract and property law (and therefore that a rule of partial priority would be inconsistent with these principles); (2) that the economic costs of full priority are lower than we suggest; (3) that even if the economic costs of full priority are high, the costs associated with a partial priority rule, such as the ones we consider, would be even higher (in particular, a partial priority rule would reduce financing for desirable activities, resulting in an economic cost that would far outweigh any benefits); and (4) that parties could circumvent the partial priority rules we put forward, and, therefore, that adoption of these rules would have little beneficial effect. Critics suggest two ways in which borrowers and their lenders could circumvent a rule of partial priority in bankruptcy: (1) through the use of arrangements that have the same effect as a security interest under full priority but which are beyond the reach of a partial rule; and (2) by the secured creditor recovering its collateral outside of, or prior to, bankruptcy.
The analysis of this paper is organized as follows. We begin in Part П by explaining why the issue of priority should be considered with an open mind. To that end, Part П first offers a set of intuitions regarding why, in contrast to views expressed by our critics, full priority is not required by (and in some cases is inconsistent with) important principles of contract, property, and insolvency law. Part П then discusses two important implications of the fact that the current system is one of de facto partial priority. The first is that a formal rule of partial priority would not necessarily be a radical change. The second is that those who defend full priority by arguing that the existing system works well are in fact providing evidence in support of partial priority.

This post was written by , posted on June 23, 2014 Monday at 3:22 pm