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Furthermore, under all three of the partial priority rules we consider, a secured creditor would continue to enjoy full priority in its collateral over the claims of subsequent secured creditors, transferees, nonordinary course purchasers, and unsecured creditors that had consented to subordination. Finally, none of these priority rules would have any effect on the secured creditor’s rights outside of bankruptcy. That is, none of the rules would require modifying Article 9 of the UCC or the state laws governing transactions in real property Here.

Third, there is no need to apply the same partial priority rule in every context. Some symposium participants expressed concern that imposing a partial priority rule in certain contexts (e.g., securities loans among financial institutions) would achieve little benefit and give rise to potentially large costs. To the extent that there are particular transactions that should not be subject to partial priority, they could be exempted. In general, secured creditors could be given different degrees of priority in their collateral depending on the type of collateral, the size of the loan, and the type of the lender.

Under the fixed-fraction priority rule, a secured creditor would receive full priority with respect to a certain percentage of its secured claim. The collateral backing the rest of the claim would be made available to pay unsecured claims (including that portion of the secured creditor’s secured claim that was made unsecured by operation of the rule). Thus, under a rule giving secured creditors 75% of their secured claim, the other 25% of the collateral would be distributed to pay unsecured claims—including the unsecured claims of all secured creditors. The fixed-fraction priority rule would always leave secured claims partially unsecured, even if the value of the collateral exceeds the amount owed to them.

To illustrate the operation of the fixed-fraction partial priority rule, we will consider the version in which the secured creditor receives priority with respect to 75 % of its secured claim. Assume that when the borrower goes bankrupt, it has $1.2 million in assets and owes $1 million to each of three creditors: the secured creditor, an adjusting creditor, and a nonadjusting creditor.

This post was written by , posted on September 9, 2014 Tuesday at 4:27 pm