Security Interests and Bankruptcy Priorities: A Review of Current Theories

N recent years, finance economists have begun to study several prac tices that the law traditionally regulates. Examples include attempted explanations of the variety of debt and equity instruments that firms is sue, 1 the nature of bond covenants, 2 the fu nctions that trade credit serves3 and the likely actions of creditors when their debtor becomes insolvent. 4 These studies are illuminating and provocative, but represent only the beginning of coherent explanations of the phenomena. Also, the norma tive implications of this relatively incomplete understanding have been unexplored. Lawyers assume these financial practices to be well under stood and, consequently, have erected regulatory structures that presup pose the truth of what now seem preliminary or questionable positivist theories. This paper explores a particular financial practice-the issuance of debt secured by personal property-and a regulatory scheme relevant to this practice-the setting of distributional priorities when an insolvent firm is liquidated. My principal purpose is to illuminate the unresolved