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D. What Lessons Can We Learn from the World Around Us?

In the Symposium and elsewhere, Steve Harris and others have argued that a partial priority rule would require radically changing a system that in their estimation works well. One implication of this argument is that the adoption of a partial priority rule is unlikely to offer much improvement while creating a significant degree of risk. Another argument is that advocates of a partial priority rule bear the burden of proof in this debate.
To begin, participants on both sides of the priority debate recognize that we are already operating under a system of de facto partial priority. In particular, there are a number of doctrines, practices, and rules that tend to erode secured creditors’ priority in bankruptcy, some of which we briefly discussed in The Uneasy Case.™ For example, because a secured creditor usually cannot seize its collateral once a firm has filed for bankruptcy, the creditor is subject to the risk that the value of the collateral will fall during the course of a multi-year Chapter 11 proceeding. Other countries have gone further, imposing formal rules of partial priority in bankruptcy.

The fact that we are already living in a world of partial priority has two very important implications. First, the adoption of a formal rule of partial priority would not necessarily be a radical change. Whether the rule would represent a radical change would depend on the degree of priority the rule accords secured claims in bankruptcy. For example, suppose that the aggregate effect of the erosion of priority currently is, on average, to reduce priority to 90%. In that case, a regime which imposes a formal partial priority rule of 90% and eliminates the ad hoc erosion would not significantly differ from the current system. Indeed, the adoption of such a rule might represent a less radical change than moving from the current system of de facto partial priority to a system of de facto 100% priority. Thus, advocates of partial priority do not necessarily bear a greater burden of proof than those favoring full priority.

This post was written by , posted on July 11, 2014 Friday at 3:31 pm