The Uneasy Case for the Priority of Secured Claims in Bankruptcy

Abstract

allocation of bankruptcy value among creditors is significant.If, as is usually the case, the business debtor is immediately or eventually liquidated, 7 general unsecured creditors can expect to receive only a few cents on the dollar. 18 Even in the relatively few cases where a business debtor successfully reorganizes under Chapter 11,19 the mean recovery by general unsecured creditors is typically only 200 to 30¢ on the dollar. 20 The principle of according full priority to secured claims in bankruptcy is firmly established in the law. 2 ' And although some commentators have questioned the fairness of permitting a debtor to encumber its assets in favor of secured creditors at the expense of unsecured creditors, 22 the predominant view of those who have examined full priority from an economic approach is that it is desirable to respect the state-law "priority right" of secured creditors to the greatest extent possible in bankruptcy.'It is this view-sometimes claims, up to $18,000, (7) claims for alimony or child support, (8) government tax claims, and (9) claims of the FDIC and other financial regulatory agencies.11 U.S.C. § 507(a) (1994).These priority claims are, in principle, subordinated to secured claims; all other unsecured claims then share pro rata in any remaining assets.See id.§ 726(b).17.The overwhelming majority of bankruptcies end in liquidation.See