A Critical Reappraisal of Cross-Collateralization in Bankruptcy

Abstract

Public attention has focused several times in recent years on alleged abuses perpetrated under chapter 11 of the federal bankruptcy laws, such as solvent companies filing for bankruptcy to deal with the avalanche of asbestos-related claims against it. A pervasive chapter 11 practice largely escaping notoriety, however, is the court-authorized preferential treatment of certain unsecured creditors of the debtor, in apparent conflict with the fundamental bankruptcy premise of equality of distribution. This article examines the issue of court-authorized post-petition preferences by considering the specific case of cross-collateralization, and concludes that in this context such preferential treatment is improper and impermissible.