Priority Matters

52 Pages Posted: 20 Apr 2016

Date Written: April 15, 2016

Abstract

Chapter 11 of the Bankruptcy Code is organized around the absolute priority rule. This rule mandates the rank-ordering of claims. If one creditor has priority over another, this creditor must be paid in full before the one junior receives anything. Many have suggested various modifications to the absolute priority rule. The reasons vary and range from ensuring proper incentives to protecting nonadjusting creditors. The rule itself, however, remains the common starting place.

This paper uses relative priority, an entirely different priority system that flourished until the late 1930s, to show that using absolute priority even as a point of departure is suspect. Much of the complexity and virtually all of the stress points of modern Chapter 11 arise from the uneasy fit between its starting place (absolute instead of relative priority) and its procedure (negotiation in the shadow of a judicial valuation in-stead of a market sale). These forces are leading to the emergence of a hybrid system of priority that may be more efficient than one centered around absolute priority.

Suggested Citation

Baird, Douglas G., Priority Matters (April 15, 2016). 165 University of Pennsylvania Law Review, Forthcoming; University of Chicago Coase-Sandor Institute for Law & Economics Research Paper No. 754. Available at SSRN: https://ssrn.com/abstract=2767055

Douglas G. Baird (Contact Author)

University of Chicago Law School ( email )

1111 E. 60th St.
Chicago, IL 60637
United States
773-702-9571 (Phone)
773-702-0730 (Fax)

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