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However, a substantial number of creditors can neither consent nor be assumed to implicidy agree, let alone know about, the creation of every security interest that subordinates their claims. Tort creditors, for example, would be unlikely to implicitly agree to have their claims subordinated by a security interest giving the secured lender full priority. Indeed, under current law, a security interest could be used to subordinate the claim of an unsecured creditor that had explicitly refused to subordinate its claim. Consider a borrower’s agreement with creditor C2 that creditor C2’s claim would not be subordinated to that of any other creditor. Borrowers and creditors widely use such agreements. However, under foil priority, a security interest created by the borrower in violation of the borrower’s nonsubordination agreement with creditor C2 will give the secured creditor priority in the collateral over the claim of creditor C2. Thus, in the case of any given security interest, there is not necessarily implicit consent.

The second possible implicit consent argument is that all unsecured creditors are better off if the borrower has the ability to subordinate their claims without obtaining their explicit consent, and therefore, all unsecured creditors would prefer a rule of foil priority to one in which such consent would be required to create a security interest subordinating their claims. If so, foil priority would efficiently provide a subordination regime to which all unsecured creditors would agree (at least ex ante). But for this implicit consent argument to succeed, those advancing it must show that all unsecured creditors would be better off under foil priority than under any feasible alternative. The analysis we offer in the next two Parts suggests that while many unsecured creditors would be no worse off under foil priority than under a rule of partial priority, many unsecured creditors would be worse off. These unsecured creditors could not be presumed to implicidy consent to foil priority.
Finally, even if one could show that there is implicit consent to subordination, the rule of foil priority is still inconsistent with the general requirement that consent to subordination be explicit. Thus, those in favor of full priority must explain why subordination through the use of a security interest under full priority should not, like all other means of subordination, require the explicit consent of the subordinated party.

This post was written by , posted on July 3, 2014 Thursday at 3:27 pm