The Case for Symmetry in Creditors' Rights

Abstract

Using an original framework for evaluating bankruptcy rules, this Article casts doubt on the efficiency of legal arrangements that give some creditors an absolute advantage over others in the division of a debtor's assets. Such arrangements - which I classify as asymmetrical - are widely used in the modern economy, and include the secured loan, American general partnership and guaranty contract. In contrast, symmetrical arrangements - which include the corporation and common-law partnership - confer no absolute advantage, because they give each creditor group a prior claim to a distinct asset pool. I demonstrate that symmetrical arrangements produce lower debt appraisal costs, more efficient creditor monitoring, and speedier bankruptcy proceedings; they also are less conducive to exploitation of creditors such as tort victims who do not adjust to subordination of their claims. These results reveal that lawmakers could create social wealth by reforming asymmetrical arrangements to be symmetrical. I conclude by showing how symmetry is superior to previous proposals for reforming the secured loan.

Keywords: bankruptcy, asset partitioning, secured transactions, corporations, partnership

JEL Classification: G33, K22, K12