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SECURED CLAIMS IN BANKRUPTCY: Principles of Property Law

C. Is Full Priority Required by Principles of Property Law?

Two types of property-rights arguments have been raised, in the discussion during the Symposium, in favor of full priority, and against partial priority. One focuses on the secured lender’s property rights and the other focuses on the borrower’s property rights.

The lender-based argument is that a partial priority rule would take from the secured creditor something for which it paid. However, as the lender-based argument carries no weight if the partial priority rule under consideration applies only to security interests created after its adoption. In this case, the secured creditors will enter into the arrangement knowing that they will receive partial priority, and partial priority will not defeat their.

The borrower-based argument is that the borrower has the right to alienate its interests in its property in any way it sees fit. However, in granting a security interest in collateral under the rule of full priority, the borrower is alienating an interest not only in its own property, but also in the property of the bankruptcy estate, which the law considers to belong to the borrower’s creditors as a group (and not to the borrower). Because the law does not permit a borrower to otherwise transfer or allocate its insolvency assets to third parties or to prefer certain creditors, the law is not required to permit the borrower to do so through the use of a security interest giving the secured creditor full priority. Of course, one is free to take the position that the assets of the bankruptcy estate belong to the debtor and that the debtor should have the right to allocate them however it likes. But this would imply that fraudulent conveyance law, preference law, and the rule of mandatory pro rata sharing all impediments to the exercise of this right and shall be eliminated.

This post was written by , posted on July 9, 2014 Wednesday at 3:30 pm