Is Secured Debt Used to Redistribute Value from Tort Claimants in Bankruptcy? An Empirical Analysis
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 pre-existing 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 redistributional problem, however, and argue that priority for secured credit is efficient. To help resolve this debate, this paper examines the redistributional theory from an empirical perspective. In particular, the paper 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 paper’s empirical analysis contradicts the redistributional theory’s prediction, however. High-tort firms have unusually low amounts of secured debt. While 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.