ARTICLE: A CRITICAL REAPPRAISAL OF CROSS-COLLATERALIZATION IN BANKRUPTCY. Skip over navigation
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Copyright (c) 1986 Southern California Law Review
University of Southern California

ARTICLE: A CRITICAL REAPPRAISAL OF CROSS-COLLATERALIZATION IN BANKRUPTCY.

November, 1986

Southern California Law Review

60 S. Cal. L. Rev. 109

Author

CHARLES J. TABB *

Excerpt

Public attention has focused several times in recent years on alleged abuses perpetrated under chapter 11 of the federal bankruptcy laws. 1 The most notable example is the rejection of collective bargaining agreements in bankruptcy. The Supreme Court decision in N.L.R.B. v. Bildisco & Bildisco, 2 permitting such rejection and permitting unilateral interim modification of the collective bargaining agreement by the debtor-in-possession, prompted Congress to add section 1113 to the Bankruptcy Code in 1984 to deal with those issues. Another chapter 11 case in the spotlight has been the one involving Johns-Manville Corporation, which filed chapter 11 despite apparent solvency in order to deal with the avalanche of asbestos-related claims against it.

A pervasive chapter 11 practice largely escaping notoriety, however, is the court-authorized preferential treatment of certain unsecured creditors of the debtor, in apparent conflict with the fundamental bankruptcy premise of equality of distribution. 3 This preferential treatment, which occurs in a variety of situations, 4 has become generally accepted in the context of financing a debtor in reorganization pursuant to the practice of "cross-collateralization." In cross-collateralization the debtor's partially-secured pre-bankruptcy lender is given a preference over other creditors as to its unsecured prepetition claim in return for providing financing in the reorganization.

This Article examines the issue of court-authorized postpetition preferences by considering the specific case of cross-collateralization, and concludes that in this context such preferential treatment is improper and impermissible. Part I sets the stage, describing a typical factual and legal situation ...
 
 
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