Is Secured Debt Used to Redistribute Value from Tort Claimants in Bankruptcy? An Empirical Analysis

Abstract

Many scholars question the priority enjoyed by secured debt in bankruptcy. They fear that secured debt will be used to inefficiently redistribute value away from preexisting unprotected creditors of a firm. These scholars advocate a host of legal innovations, such as "superpriority" for tort claimants with respect to other creditors, to mitigate the redistributional problem. Other scholars minimize the redistributionapl roblem, however, and argue that priorityf or secured credit is efficient. To help resolve this debate, this Article examines the redistributional theory from an empirical perspective. In particular, it focuses on secured debt usage by publicly traded firms facing large tort liabilities ("high-tort" firms). In theory, secured debt should be attractive for high-tort firms because they have a large class of unsecured and uncovenanted creditors (tort claimants) exposed to redistribution in bankruptcy through the use of secured credit. The Article's empirical analysis contradicts the redistributional theory's prediction, however. High-tort firms have unusually low amounts of secured debt. Although this result is very difficult to explain under the redistributional theory, it can readily be explained according to other theories of secured debt. Several important policy implications for bankruptcy priorities follow from these findings.