Death and Resurrection of Secured Credit

The Bankruptcy Reform Act of 1978 (the Code) posed palpable threats to secured creditors. It was drafted by a commission that was at least as concerned with the rights of debtors as with the rights of creditors. It was modified and adopted by a Congress that might have been the most liberal since World War II and signed into law by President Carter at the apogee of the left\u27s power, two years before the Reagan election that marked the rise of the right and the beginning of the left\u27s decline. The power of the left was exerted most forcefully on behalf of consumer debtors who are not the subject of this paper.[...] The thesis of this paper is that the predictions from the Code and the early interpretations of the Code have proved wrong. I believe that chapter 11s of public companies now form a market that facilitates dealings among secured and unsecured creditors, debtors, employees and others. In that market, the secured creditor has achieved a power and status (as this is written in 2004) that at least equals his status prior to the Code and, perhaps, exceeds it. In this paper I consider only secured creditors in chapter 11 cases of public companies. Secured creditors have achieved this resurrection by clever use of the provisions of the Code and, more importantly, by using their economic power to get agreements from debtors and debtors in possession that mitigate the sting of injurious provisions of the Code. Part of the sting of these provisions has been removed by changes in bankruptcy judges\u27 attitudes and by creditors\u27 guiding debtors to courts where judges might be sympathetic to the secured creditors\u27 arguments and to the enforcement of agreements between debtors or DIP\u27s and their secured creditors. I divide the discussion into five major subjects: I. Change in judicial attitude concerning the time that a debtor should be allowed to linger in bankruptcy. II. Securitization and other security substitutes that remove assets from bankruptcy\u27s reach. III. Early liquidation under section 363. IV. Secured creditors\u27 use of creditor protecting provisions in section such as 507(b), 547(c) and 1129. V. Elevation and protection of secured creditors\u27 claims by agreement with the debtor