Thomas Jackson, in his iconic book, The Logic and Limits of Bankruptcy Law, seeks to establish both a distributional baseline for bankruptcy reorganizations and a normative set of limits for bankruptcy policy. Nonbankruptcy entitlements should establish both the distributional priorities and the distributional floor in a bankruptcy case. A number of normative prescriptions follow. Equity should not seek reorganization on the backs of the unsecured creditors. Bankruptcy-specific priorities should be avoided, to the extent possible to avoid “forum shopping” into bankruptcy (unless, of course, bankruptcy is a more efficient forum). Most importantly, however, the rights of secured creditors should be respected. Professor Janger argues that, paradoxically, bankruptcy courts have become the preferred venue for realizing value on a secured creditors’ collateral, and that Jackson’s rhetoric has allowed secured creditors to capture bankruptcy created value that is not necessarily allocated to them by the statute. Specifically, undersecured creditors argue that they have a blanket lien on all of the debtor’s assets and should have the power to determine their disposition. This article first seeks to reestablish the Jacksonian balance by arguing that state law security schemes do not provide for the creation of blanket liens that capture enterprise value, but instead create asset specific security devices that are limited in scope, and are not calculated to maximize value. It then seeks to establish three key points, and develop their implications. The points are (1) an ownership rule, (2) a realization rule, and (3) an equitable tracing—or “no moving up”—rule. The ownership rule is that baseline entitlements of a secured creditor in bankruptcy are established by what could have actually been realized by that creditor outside of bankruptcy. The realization rule is that, unless the statute specifies otherwise, the baseline entitlement is valued as of the petition date. The equitable tracing rule recognizes the limits of the state law definition of proceeds and the limits of equitable tracing to freeze the relative position of creditors on the date of the bankruptcy filing, and limit the ability of secured creditors to use their property-based claims to “roll up” all of the bankruptcy-created value. These three rules, if applied consistently, should encourage efficient value-maximizing governance of the debtor firm and fair allocation of bankruptcy-created value among its creditors.
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