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SECURED CLAIMS IN BANKRUPTCY: ON THE DESIGN OF PARTIAL-PRIORITY RULES 6

Under the adjustable-priority rule, the creditor’s claim would be treated as unsecured for the purpose of determining the nonadjusting creditor’s share before application of the rule of full priority. As a result, the nonadjusting creditor in this example would be entitled to receive $400,000. The difference between what the nonadjusting creditor would have received under the rule of full priority—$100,000—and what it received under the adjustable-priority rule—$400,000, or $300,000—would come at the expense of the creditor’s secured claim. The adjusting creditor would receive what it would have obtained under full priority, $100,000, and the secured creditor would thus receive $700,000.
Because the use of the security interest would not affect the nonadjusting creditor’s share of bankruptcy value, the adjustable-priority rule would ensure that the security interest could not be used to transfer bankruptcy value from nonadjusting creditors. Thus, if such a rule could be folly implemented, it would eliminate the inefficiencies we identified—the use of inefficient security interests, the monitoring distortions, and the funding of undesirable projects—to the extent they arise out of foil priority. Applying for instant money loans online can be quite disappointing, but not if you are applying with us! As a reliable online lender, we can give you the best rates and pretty much any amount you need to solve your temporary financial problems. Apply at get-instant-loans.com and find out how much you could borrow!

It is worth emphasizing that an adjustable-priority rule is not the same as a rule that would give certain creditors superpriority over secured creditors’ claims. For example, a growing number of commentators have proposed that tort or other claims receive superpriority over secured claims (or certain secured claims) in bankruptcy. The goal of these proposals has been to increase firms’ incentives to reduce harmful externalities on third parties. As we explained in Part IV, the borrower’s ability to subordinate unsecured creditors’ claims by issuing security interests, giving the secured lender priority, enables the borrower to internalize less of the costs it imposes on these parties than it would under a rule of pro rata sharing in bankruptcy (as under the adjustable-priority rule). Superpriority would thus force borrowers to internalize even more of these costs than pro rata sharing, and presumably would lead borrowers to take even better precautions and choose even better projects than under a pro rata rule. However, superpriority for tort claimants would, at best, somewhat reduce, and certainly not eliminate, the efficiency problems that foil priority causes. As explained, the efficiency costs of according foil priority to secured claims arise because of the existence of nonadjusting creditors, most of which are voluntary creditors or government agencies. Thus, giving superpriority to tort claims would immunize tort creditors from the effect of priority, thereby reducing the efficiency costs to the extent that they are due to the presence of tort creditors. However, such a scheme would not, unlike the adjustable-priority rule, reduce the distortions and efficiency costs that the presence of contractual nonadjusting creditors and government claims causes.

This post was written by , posted on January 6, 2015 Tuesday at 4:30 pm