A Sea Change in Creditor Priorities
46 Pages Posted: 1 Aug 2014 Last revised: 16 Dec 2014
Date Written: July 29, 2014
This Article argues that the operation of maritime law undermines a primary justification for creditor priorities under U.S. law. Under current law, when a debtor becomes insolvent, its secured creditors will be paid the full amount of their debt to the extent of their security interest, even if it means there is nothing left to pay unsecured creditors. This is controversial with respect to involuntary unsecured creditors, particularly those with tort claims against the debtor. Defenders of this scheme of priorities have argued that allowing greater priority to involuntary creditors would hinder the availability or increase the cost of credit. However, involuntary creditors have long enjoyed priority over secured creditors under maritime law, and it does not appear that firms subject to maritime law have experienced these predicted negative effects. Experience with the priority scheme under maritime law may thus provide support for efforts to reform current U.S. law to give greater priority to involuntary creditors more generally.
Keywords: Secured Transactions, Article 9, Uniform Commercial Code, Commercial Law, Admiralty Law, Comparative Law
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