Security interests and reorganization : a clash of institutions

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Proceedings Chapter

Reference

Security interests and reorganization : a clash of institutions

BAHAR, Rashid

BAHAR, Rashid. Security interests and reorganization : a clash of institutions. In: Peter, Henry, Jeandin, Nicolas & Kilborn, Jason. The challenges of insolvency law reform in the 21st century : facilitating investment and recovery to enhance economic growth . Zurich : Schulthess, 2006. p. 113-138

Available at:

http://archive-ouverte.unige.ch/unige:30940

Disclaimer: layout of this document may differ from the published version.

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RASHID BAHAR

Security Interests and Reorganization:

A Clash of Institutions

Contents

Abstract... 114

1. Introduction... 114

II. Bankruptcy and Security: As Two Different Approaches to Financial Distress.... .. .. . . .. .. .. . . .. . . .. . . . .. . . .. . . .. . .. . . .. . . .. .. . . .. . . 115

A. Collectivization Through Bankruptcy and Reorganization . . . .. . . . 115

B. Appropriation Through Security lnterests ... 117

C. lncompleteness as a Source of Tension . .. . . .. . . 120

III. Failed Attempts to Reconcile Security and Bankruptcy . . . .. . . .. . . 122

A. A Simple but lneffective Solution... 122

B. Swiss Approach: Deference to Property Law... 124

C. U.S. Approach: Protection of the Security's Value... 129

IV. A Few Alternatives... 133

A. Replacement of Specifie Charges by a General Preference... 133

B. Bankruptcy Auctions ... 134

C. Preemption Rights: An Exit Right for the Secured Creditor ... 135

V. Conclusion... 138

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Abstract

The law governing distressed companies is haunted by afundamental tension: On the one hand it seeks to coordinate the actions of the creditors and seeks increas- ingly to preserve firms' capacity to opera te as a going concern. On the other ha nd, through security, it allows sophisticated creditors ta acquire an interest in specifie assets or pools of assets that entitles them to foreclose upon default. The collective need to shield the debtor's as sets from the rea ch of creditors clashes with the as set- based financiers' relia nee on quick and effective means ta realize the collateral.

This paper examines, from a comparative perspective, different strategies used ta reconcile these interests. It concludes however that none were really successful.

Therefore it briefly reviews va rio us alternative institutional settings.

1. Introduction

The law governing distressed companies is haunted by a fundamental tension.

On the one hand, it seeks to coordinate creditors and increasingly to preserve firms' capacity to operate as a going concern. On the other hand, through security, it allows sophisticated creditors to acquire an interest in specifie assets or pools of assets that entitles them to foreclose upon default. This right to force the sale of the collateral encourages cre di tors to compete for the debtor's assets early on.

This tension is conspicuous whenever the security interest charges a key asset of the firm, without encompassing the en tire business. If a creditor holds a security interest in a factory, a pie ce of equipment or machinery, an airplane, and therefore can force these assets, how can the debtor and the other creditors negotiate a renegotiate to preserve any going-concern surplus? To resolve this question, Part II will show how the tension is rooted in the very different approaches to financial distress that underlies these institutions. Part III contrasts how Swiss and U.S.law failed to reconcile them. Part IV provides a few alternative ways to resolve the conflict or at least to mitigate it.

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Security lnterests and Reorganization: A Clash of Institutions

II. Bankruptcy and Security: As Two Different Approaches to Financial Distress

A. Collectivization Through Banlcruptcy and Reorganization

For modern scholars, bankruptcy law has shed away its punitive component:

it no longer seeks to punish and shame failed businessmen.¹Instead, it seeks to resolve financial distress in a forum where the debtor, its creditors and other stakeholders (employees, contractual partners and shareholders) can negotiate. Its complex procedure sets out how to circumscribe the estate of the debtor, how to ascertain daims, how to liquida te the esta te, how to share the proceeds among the claimants and last, but not least, who should carry out these tasks.²In spite of the controversies surrounding its proper policy,³

See e.g. GEORGES RI PERT/RENÉ ROBLOT, Droit commercial, 12ème ed., 3 vols., vol. 2 (Paris:

L.G.D.J., 1990), no 2793-2794, EDWARD A. TOMLINSON, Security for a Commercial Loan: His- torical & International Perspectives, 23 Md. J. Int'L. L. & Trade 77, p. 81, (1999).

See, e.g., DouGLAS G. BAIRD/THOMAS H. JACKSON, Corporate Reorganizations and the Treat- ment of Diverse Ownership Interests: A Comment on Adequate Protection of Secured Credi- tors in Bankruptcy, 51 U. Chi. L. Rev. 97 (1984); THOMAS H. JACKSON, The logic and limits of bankruptcy law, (Cambridge, Mass.: Harvard University Press, 1986), p. 8-9.

Swiss law clearly takes a view that the process should maximize the payout to the creditors.

See LP art. 240; IsAAK MEIER, Die Weiterführung des Unternehmens nach Konkurseriiffnung, BlSchK, p. 1, p. 6 (2003). See also MARC RussENBERGER, in Adrian Staehelin, Thomas Ba uer, and Daniel Staehelin (eds.), Kommentar zum Bundesgesetz über Schuldbetreibung und Konkurs Ill, (Basle/Geneva/Munich: Helbing & Lichtenhahn, 1998), ad art. 240 SchKG, no 7 (admitting the possibility to talee into account the debtor's interest provided it is in line with the goal of the liquidation and the creditor's interest). But see Message du conseil fédéral concernant la révision de la loi fédérale sur la poursuite pour dettes et la faillite du 8 mai 1991, FF 1991 I 1, p. 9 (mentioning that a modern insolvency law would satisfy the needs of creditors, debtors and the economy in general). Under U.S.law, compare DouGLAS G. BAIRD, Loss Distribution, Forum Shopping, and Bankruptcy: A Reply to Warren, 54 U. Chi. L. Rev.

815, p. 818 (1987); BAIRD/JACKSON, supra note 2, p. 102; THOMAS H. JACKSON, Bankruptcy, Non-Bankruptcy Entitlernents, and the Creditors' Bargain, 91 Yale L.J. 857, p. 871 (1982);

JACKSON, supra note 2, p. 8-9 (arguing that collective enforcement is the only purpose of bankruptcy) with KAREN GRoss, Taking Community lnterests into Accmmt in Bankruptcy: An Essay; 72 Wash. U. L.Q. 1031 (1994) (criticizing the methodology of current bankruptcy the- ories as being based on "a belief in an overarching theoretical construct" and offering aspects of ferninist t.l-teory as a corrective); ELIZABETH WARREN, Bankruptcy Po licy, 54 U. Chi. L. Rev.

775, p. 785 (1987) [hereafterWARREN, BankruptcyPolicy]; ELIZABETH WARREN, Bankruptcy Policymaking in an Imperfect World, 92 Mich. L. Rev. 336, p. 344 (1993). See also National Bankruptcy Review Commission, Bankruptcy: The Next Twenty Years: National Bankruptcy Commission Final Report, (1997), p. 303.

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bankruptcy law is essentially a law of collective debt enforcement;⁴a solution to what economists call a "common pool problem".⁵

The classical approach to this issue focused on liquidation: it took a "sal- vage view" of the firm and tried to sell each asset piecemeal to the highest bidder on the "courthouse steps". Doing so, it failed to see that in spite of financial difficulties, ⁶sorne firms rest on sound economie foundations and therefore the who le may be worth more th an the su rn of the pieces. ⁷I nstead, reorganization proceedings try to avoid this pitfall and allow the firm to sur- vive after its assets and liabilities are adapted.⁸To stick to the shipping meta- phor, they set up a "rescue" mechanism;⁹they permit the debtor to reschedule the repayment of his de bts, to get a partial renunciation on the repayment of

Swiss law without contest defines bankruptcy law as a means to enforce collectively daims against a debtor. See Message du conseil fédéral concernant la révision de la loi fédérale sur la poursuite pour dettes et la faillite du 8 mai 1991,FF 1991 I 5 (describing the debt enfor·

cement and bankruptcy act is essentially a law to enforce monetary daims). See also KuRT AMoNN/FRIDOLIN WALTHER, Grundriss des Schuldbetreibungs-und Konkursrechts, 7'h ed.

(Bern: Stampfli, 2003), p. 281, § 35, no 3. The issue is more controversial in the United States.

The law and economies scholars generally tend to analyze bankruptcy law as a collective enforcement proceeding, whereas other scholars think that other dimensions should also be accounted for. See, e.g., BAIRD/JACKSON, supra note 2, p. 102; JACKSON, supra note 2, p. 8-9;

JACKSON, supra note 3, p. 871; WARREN, Bankruptcy Policy, supra note 3, p. 785.

See, e.g., BAIRD/JACKSON, supra note 2; JAcKSON, supra note 2, p. 11-16. For a review of law and economies of corporate insolvency, see JoHN ARMOUR, The law and economies of corporate insolvency: a review, in Comparative and International Perspectives on Bankruptcy Law reform in the Netherlands, ed. Reinout D. Vriesendorp, Joseph A. McCahery, and Frank M.J.

Verstijlen, (The Hague: Boom Juridische uitgevers, 2001), p. 99.

See on the notion of financial distress GREGOR ANDRADE/STEVEN N. KAPLAN, How Costly ls Financial (Not Economie) Distress? Evidence from Highly Leveraged Transactions That Be- came Distressed, J. Fin. 53 (1998), p. 1443, p. 1444; DouGLAS G. BAIRD, Bankruptcy's Uncon- tested Axioms, 108Yale L.J. 573, p. 581 (1998); BAIRD/JACKSON,supra note2, p. 101; ROBERT GERTNER/DAVID SCHARFSTEIN, A Theory ofWorkouts and the Effects of Reorganization Law, J. Fin. 46 (1991), p. 1189, p. 1189; MICHELLE J. WHITE, Corporate Bankruptcy as a Filtering Deviee: Chapter 11 Reorganizations and Out-of-Court Debt Restructurings, J.L. Econ. & Org.

10 (1994), p. 268.

See, e.g., LUCIAN ARYE BEBCHUK, A New Approach ta Corporate Reorganizations, 101 Har- vard L. Rev. 777, p. 776 (1988); LUCIAN AYRE BEBCHUK/JESSE M. FRIED, A New Approach to Valuing Secured Claims in Bankruptcy, 114 Harvard L. Rev. 2386, p. 2395 (2001); RoBERT C. CLARK, The Interdisciplinary Study ofLegal Evolution, 90 Yale L.J. 1238, p. 1252 (1981);

LYNN M. LoPuCKI, The Nature of the Bankrupt Firm: A Response to Baird and Rasmussen's The End of Bankruptcy, 56 Stan. L. Rev. 645, p. 653 (2003); JAMES S. RoGERS, The Impair- ment of Secured Creditors' Rights in Reorganization: A Study of the Relationship Between the Fifth Amendment and the Bankruptcy Clause, 96 Harvard L. Rev. 973, p. 975 (1983).

See BAIRD, supra note 6, p. 581; BAIRD/JAcKSON, supra note2, p. 101; WHITE, supra note 6.

DAVID A. SKEEL, Debt's dominion: a history of bankruptcy law in America (Princeton, N.J.:

Princeton University Press, 2001), p. 238.

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Security Interests and Reorganization: A Clash of Institutions

the principal and interest or even to convert debt into equity. Reorganization should, in other words, allow the debtor to rearrange its capital struch!re and enable it to continue its activities.¹⁰

The main difficulty that the legal system has to face lies in sorting firms and deciding which can be rescued and which should be scrapped. In theory, the question is easy to answer: reorganization should be favored whenever the firm has a going-concern surplus, or, in other words, whenever the continued existence of the firm is likely to yield more than an outright liquidation. How- ever, the real problem lies in obtaining the information to answer this question.U Valuation is a complex and uncertain process, and the insiders, those who are in the best position to know the true state of the affairs, are interested in keeping the firm going even if liquidation would be a better outcome, th us creating an adverse selection problemP Thus reorganization and its collective procedure is far from being a perfect solution to corporate insolvency.

B. Appropriation Through Security Interests

By contrast to reorganization, which sets out a collective procedure, security interest seeks to resolve financial distress through the allocation of proprietary rights in assets. When a creditor takes a security interest in the debtor's property, it acquires a proprietary right to realize the assets given as collateral upon default of the debtor and to use the proceeds to pay off the debt in priority to competing daims of third parties.¹³This interest can be broken down into two components: a property right, linking a daim with an asset and gran ting the creditor with a right to seize the collateral, ¹⁴and a priority right,

10 BAIRD, supra note 6, p. 581; BAIRD/JACKSON, supra note 2, p. 101; WHITE, supra note 6.

11 See JEREMY 1. BuLow/JOHN B. SHOVEN, The Bankruptcy Decision, Bell. J. Econ. 9 (1978), p. 437; MICHELLE J. WHITE, The Corporate Bankruptcy Decision, 3, no. 2 J. Econ. Persp., p. 129, (1989) [hereafter WHITE, The Corporate Bankruptcy Decision]; WHITE, supra note 6; MICHELLE J. WHITE, Does Chapter 11 Save Economically Inefficient Firms, 72 Wash. U.

L.Q.1319, (1994) [hereafter WHITE, Does Chapter 11 Save Economically Jnefficient Firms].

12 See Buww/SHOVEN, supra note 11; WHITE, The Corporate Bankruptcy Decision, supra note 11; WHITE, supra note 6; WHITE, Does Chapter 11 Save Economically Inefficient Firms, supra note 11.

13 BAIRD/ JACKSON, supra note 2, p. 112.

14 DouGLAS G. BAIRD/THOMAS H. JACKSON/RANDAL C. PICKER, Security interests in persona!

property, 3'd ed. (Mineola, N.Y.: Foundation Press, 2001), p. 1; THOMAS W. MERRILL/HENRY E. SMITH, The Property/Contract Interface, 101 Co/um. L. Rev. 773, p. 834 (2001). The civil law tradition and the common law tradition implement quite differently the right to real·

ize the collateral: the common lawyer typically allows the secured creditor to repossess the

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allowing the creditor to be paid off on the secured daim before competing unsecured claims.¹⁵

A security interest can also be conceptualized as an anticipated levy on the debtor's assets. A creditor will usually take security before the debtor's fi nan cial trouble starts. Doing so, it earmarks the assets that it wants to seize and realize upon default of the debtor.¹⁶At first glanee, this does not amount to much more than individual debt-enforcement proceedings: each creditor is responsible to protect its own interests and the legal system lets the devil take the hindmost. However, the key difference between security interests and the "grab law" resulting from individual debt enforcement results from the moment when these actions are taken. The security interest is acquired in advance, prior to insolvency, but it cannot be enforced until default; whereas a levy on property will follow the default and willlead immediately to the sale of the seized assets. The grant of a security interest therefore cannot trigger a run on the property of the debtor. Qui te to the contrary, it will allot in ad vance the estate, in such a way that, upon default, the assets will already be shared

property and sell it himself or through the court. The civil law does not focus on the right to repossess and relies largely on the State to rea !ize the collateral, although the creditor may agree with his debtor that he may sell it direct! y without relying on the judicial system. See Kesselbach und Konsorten gegen Ersparniskasse Uri, ATF 24 II 440, consid. 3, p. 445. See also AMoNN/WAL THER, supra note 4, p. 263, § 32, no 17; BÉNÉDICT FoËx, Le "numerus clausus" des droits réels en matière mobilière (Lausanne: Payot, 1987), no 819-822; KARL ÜPTtNGER/ROLF BAER, Das Fahrnispfand, in Zürcher Kommentar (Zurich: Schulthess, 1981), ad art. 891 CC, n° 48; PIERRE-HENRI STI!tNHAUER, Les droits réels, Tome III, 3'd ed. (Bern: Stiimpfli, 2003), n° 3122b ***; DIETER ZoBL, Das Fahrnispfand, in Berner Kommentar (Bern: Stiimpfli, 1982), ad art. 891 CC, no 28. LP art. 324(1) expressly provides that upon confirmation of a composition agreement, the secured creditor can realize privately the collateral, if it is allowed by the security agreement. See also, for Que bec which combines a civil law system with a U.C.C.

Article 9 inspired security law system; MICHAEL G. BRIDGE/RODERICK A. MACDONALD/RALPH L. SIMMONDs/CATHERINE WALsH, Formalism, Functionalism, and Understanding the Law of Secured Transactions, 44 McGill L.J., p. 567, p. 652 (1999).

JS BAIRD/JACKSON/PtCKER, supra note 14, p. 1; ANTOINE EIGENMANN, L'effectivité des sûretés mobilières (Fribourg: Editions Universitaires de Fribourg Suisse, 2001), ll⁰144; MERRILL/

SMITH, supra note 14, p. 834; PIERRE-HENRI STI!tNHAUER, Les droits réels, Tome !, 3'd ed.

(Bern: Stii.mpfli, 1997), no 26 ***. For the civillawyers, this priority right one of the conse- quences of the proprietary nature of the security interest.

16 Sec ROGERS, supra note 7, p. 992. See LAWRENCE PONOROFF/STEPHEN F. KNIPPENBERG, The immovable object versus the irresistible force: Rethinking the relationship between secured credit and bankruptcy po licy, 95 Mich. L. Rev. 2234, p. 2270 (1997) (arguing that property language does notoperate once the debtor files for bankruptcy).

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among the creditors and the preference order established, hence avoiding any need to race for the assets when the situation deteriora tes Y

Pushing this model to the extreme as English law had done with the float- ing charge, a single creditor can take a charge over an entire business. This security interest will entitle it to appoint an administrative receiver in the event of a default and, until the passing of the Enterprise Act 2002,1⁸thanks to this administrative receiver, decide what to do with the firm during the insolvency. Thanks to this monopoly position, the secured creditor pockets all the benefits of monitoring the debtor's financial situation and avoids the collective action problems that would otherwise plague an uncoordinated group of creditors.¹⁹

ln terms of debt enforcement, the interaction between security interest and bankruptcy is similar to the one between private property and common production described by DEMSETZ in his classical paper on property rights and fur trading. The same way hunters can either eut up the hunting grounds and apportion property rights or share it in common, ²⁰creditors can decide in advance to either appropriate bits and pieces of the debtor's assets through security interests or wait un til insolvency to decide exact how to share the assets.

The first solution has the advantages of avoiding collective action problems and common pool issues, but implies high transaction costs to attribute the property rights. The second route avoids the haggling in good times, assumes thar cash is plentiful, and waits until the firm goes under to share the value among the creditors. Doing so, it tolerates the common pool problems that

17 STANLEY D. LoNGHOFER/STEPHEN R. PllTERS, Protection for Whom? Creditor Conflict and Bankruptcy (cited after working paper), Am. L. & Econ. Rev. 6 (2004), p. 249. See lAN WELCH, Why is bank debt senior? A theory of asymmetry and daim priority based on influence costs, Rev. Fin. Stud. 10 (1997), p. 1203, p. 1204. See a/so RANDAL C. PICKER, Security Interests, Misbehavior, and Common Pools, 59 U. Chi. L. Rev. 645, p. 667 (1992).

18 See generally JOHN ARMOuR/SANoRA FRISBY, Rethinking receivership, Oxford J. Legal Stud.

21, p. 73, (2001) (describing how the receivership works in practice); JoHN ARMouR/Riz- WAAN JAMEEL MoKAL, Reforming the Governance of Corporate Rescue: the Enterprise Act 2004 (2004); available from http:/ /ssrn.com/abstract=567306. See a/so JAY LAwRENCE WESTBROOK, The Control ofWealth in Bankruptcy, 82 Tex. L. Rev. 795(2004).

19 See DouGLAS W. D!AMOND, Financiallntermediation and Delegated Monitoring, Rev. Econ.

Stud. 51 (1984), p. 393, p. 409; SAUL LEVMORE, Monitors and Freeriders in Commercial and Corporate Settings, 92 Yale L.J. 49, p. 53 (1982).

20 See HARow DEMSETZ, Toward a Theory ofProperty Rights, Am. Econ. Rev. 57 (1967), p. 347.

See generally STEVEN SHAVELL, Foundations of Economie Analysis of Law (Cambridge, Ma;

London, England: Harvard University Press, 2004), p. 10-30.

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arise when the debtor's financial conditions deteriorate and although it tries to mitigate these issues through bankruptcy law, it cannat avoid them.

C. Incompleteness as a Source of Tension

A collective scheme is costly once the creditor goes bankrupt. The pay-out structure based on pari passu treatment of all creditors is a powder keg wait- ing to explode: a financier prior to bankruptcy can hardly control the amount of debt the borrower can take on; at most it can accelerate call back its loan once the debtor exceeded contractual thresholds. Even then, its claim will rank pari passu with the new debt.

On the other hand, an insolvency law based exclusively on proprietary security interest fails to carry out its promises for two reasons. First, not all creditors take security, quite to the contrary: most big firms refuse to charge their assets and promise not to do so with a negative pledge clause. In the realm of small and medium enterprises, trade creditors and workers forgo this possibility, because of the excessive costs and therefore accept togo unsecured relying only on the prospect of future cash flows and any statutory lien or privilege they may enjoy. The impossibility to take security is even more patent with involuntary creditor (tort creditors, tax authorities, or social security institutions wh ose daims are defined by law): wanting a negotiation with the debtor, they cannat bargain for collateral.

Second, on the asset sides, few jurisdictions allow a single and ail encompassing security interest. Swiss law sets out restrictions on non-possessory security interests and in charges of future property. ²¹U.S. Article 9 of the Uni-

21 See Code civil du 10 décembre 1907 (RS 210, CC) art. 895(1) for Swiss law. See, general/y PETER ALTORFER, Die Mobiliarhypothek: ein Beitrag zur Reform des Fahrnispfandrechts, Zürcher Studien zum Privatrecht, 12, (Zurich: Schulthess Polygraphischer Verlag, 1981);

EIGENMANN, supra note 15, ll⁰379-430; DANIEL GIRSBERGER, Grenzüberscheitendes Finan- zierungsJeasing: internationales Vertrags-, Sachen-und Insolvenzrecht; eine rechtsverglei- chende Untersuchung (Tübingen, Zurich: Mohr, Schulthess, 1997), p. 140-149, no 256-267;

DANIEL GmsBERGER, Ist das Faustpfandprinzip ooch zeitgemass, 93, no. 6 RSJ, p. 98, (1997);

ÜFTINGER/BAER, supra note 14, SystematischerTeil, n°33-45; ZoBL, supra note 14, Systema- tischer Teil, n° 1093-1707. On the historical roots of this stance, see WOLFGANG HROMADKA, Geschichtliche Beitrage zu Fragen des Faustpfandsprinzips im Schweizerischen Zivilgesetz- buch, 80, no. 1, Revue de droit suisse, p. 117, (1970); WoLFGANG HROMADKA, Die Enrwicklung des Faustpfandprinzips im 18. und 19. Jahrhundert (Kiiln, Wien: Boehlau, 1971); ÜFTINGER/

BAER, supra note 14, Systematischer Teil, n°89-92.

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form Commercial Code bars super-generic descriptions²²and sets out different requirements depending on the type of collateral.²³

These two factors prevent security interests from driving the entire insolvency process and require collective debt enforcement proceedings as a backdrop solution. The interface between a collective process and individual property-based remedies is the source of a clash of institutions. In liquidation, the tension is mild: the collective proceeding and the individual right to sell the assets and specially the collateral at the best available priee. The incom- patibilities between the systems are therefore limited to the delays imposed on the realization of specifie assets in arder to warrant an orderly liquidation of the en tire estate. The disharmony tums into a conflict when the collective proceeding seeks to reorganize the trouble firm instead of liquida ting it. From thenon, either the secured creditor must accept to suffer the loss, or at the very least the stay, of its right to force the sale of the collateral, severing the tie between the secured daim and the specifie item of property, or the en tire reorganization process can bejeopardized by a loose secured creditor.

22 The security agreement must describe the collateral must "reasonably identify the collateral"

with sufficient detail to be identifiable. U.C.C. § 9-108(a). In practice, this requirements bars super-generic descriptions such as "ali persona! property'' or "ali assets". U.C.C. § 9-108(c).

But it does not prevent blanket liens as the secured creditor can list carefully ail the assets or pools of assets he may want to receive as a security for his daim in the security agreement and file for a security covering al! assets. See U.C.C. § 9-504(2) and Comment to U.C.C.

§ 9-504.

23 The filling requirements, which depend on the type of collateral, also prevent the implemen- tation of a simple and effective blanket lien. Notably, copyrights must be charged with a filing with the U.S. Copyright Office and the U.S. Patent and Trademark Office. See, for copyrights, 17 U.S.C. § 205(a), In re Peregrine Entertainment, Ltd., 116 B.R. 194 (Bankr. C.D. Cal. 1990). See a Iso Aero con Eng'g, Inc. v. Silicon Valley Bank On re World Auxiliary Power Co.), 303 F.3d.

1120 (9th Cir. 2002). Similar systems also exist for civil aircraft. See 49 U.S.C. § 1403(a), Dan- ning v. Pacifie Propeller, Inc. (In re Holiday Airlines Corp.), 620 F.2d 731 (9th Cir. 1980). For patents, the issue is more controversial. Although the Patent Act requires filing with the U.S. Patent and Trademark Office, case law seems to consider that Federal law does not preempt state security-interest law. Camp. 35 U.S.C. § 261 (requiring filing with the U.S. Patent and Trademark Office) with Moldo v. Mats co, Inc. (In re Cybernetic Servs.), 252 F.3d. 1039 (9'h Cir.

2001). Th us allows the fi ling of a patent only with the state security interest fi ling system.

Finally, in terms of trademarks, the case-law considers that a filing with the U.S. Patent and Trademark Office under the Lan ham Act codified at 15 U.S.C § 1051 is not sufficient to perfect a security interest in this kind of intellectual property. See In re Roman Cleanser Co., 43 B.R.

940 (Bankr. Ed. Mich. 1984), Joseph v. 1200 Valencia, Inc. (In re 199Z, Inc.), 137 B.R. 778 (Bankr. C.D. Cal. 1992), In re Together Dev. Corp., 227 B.R. 439 (Bankr. D. Mass. 1998). None of the federal filing systems allows blanket filings of ail intellectual property rights.

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III. Failed Attempts to Reconcile Security and Bankruptcy

A. A Simple but Ineffective Solution

In theory, the clash between secured credit and reorganization can be easily resolved: the very purpose of reorganization is to preserve any going-concern surplus that may exist. Therefore, the reorganized firm should be worth more than, if its assets were sold piecemeal in a quick liquidation process, or if the secured creditor could directly enforce its rights. In principle, the debtor and the unsecured creditors can therefore use this surplus to convince the secured creditors to stay the realization of the collateral and wait un til the end of the reorganization. ²⁴

However, this view is untenable in practice for severa! reasons. First, a reorganization is not a straightforward procedure and the valuation problem plagues the entire system. Neither the secured creditor nor the firms know the value of the firm nor can they easily determine the value of its collateral. ²⁵For most goods, the valuation is far from being straightforward and, hence, the criterion used to measure the right of preference boils down to a guesstimate. ²⁶

In addition to the valuation problem, secured creditors and the debtor have incentives to take very different views. The secured creditor, especially if his daim is covered, is risk averse, be cause they can only lose if things turn

24 BAIRD/JACKSON, supra note 2, p. 116; JACKSON, supra note 2, p. 186-187; WESTBROOK, supra note 18, p. 812.

25 An empirical comparison of the market value of firms th at reorganize with various estima tes based on management's published cash-flow projections shows a dispersion of errors rang- ing from 20% to 250%, although the estima tes were generally unbiased. STUART C. GILSON/

EDITH S. HOTCHKISS/RICHARD S. RUBACK, Valuation of Bankrupt Firms, 13, no. 1 Rev. Fin.

Stud., p. 43, (2000).

26 See BEBCHUK, supra note 7, p. 779; LUCIAN AYRE BEBCHUK/JESSE M. FRIED, supra note 7, p.

2398. This problem is just a variation of the more general issue of valuing the debtor during a reorganization process. See BAIRD/JACKSON, supra note 2, p. 116; BEBCHUK/FRIED, supra note 7, p. 2399; THEODORE EISEN BERG, Undersecured Creditor in Reorganizations and the Na- ture of Security, 38 Vand.L. Rev. 931, p. 952 (1985); MARGARET HowARD, Secured Claims in Bankruptcy: An Essay on Missing the Point, 23 Cap. U. L. Rev. 313, p. 313 (1994) (stating that the secured creditor in bankruptcy is entitled to the value of its property rights); JACKSON, supra note 2, p. 211-212; MARK J. RoE, Bankruptcy and Debt: A New Mode! for Corporate Reorganization, 83 Colum. L. Rev. 527, p. 537 (1983); WESTBROOK, supra note 18, p. 812. See aiso GILSON/HOTCHKISS/RUBACK, supra note 25.

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sour although they will not profit from any upturn. They will th us be inclined to take a pessimistic stance, ²⁷whereas the debtor and the unsecured creditors have little or nothing to lose by betting on a successful reorganization and are th us likely to be too optimistic.²⁸

This expectation gap between the secured creditor and the debtor is wors- ened by an adverse selection problem.²⁹The debtor and its management do not only have strong incentives to favor reorganization, but they also have access to more information than the secured creditor. Therefore, even if they know th at the firm is not worthy of reorganization, they will be inclined not to tell it to the secured creditor to keep the business running as a going concern.

Th us, if the secured creditor has only ac cess to good news re garding the pros- pects of reorganization, it cannot be confident th at the debtor did not conceal the dark si de of the story and will discount this risk from its valuation. ³⁰

In sum, this simple solution of a negotiated agreement between the secured creditors and other stakeholders is bound to fail, or at least can only work if very strict assumptions hold. Therefore, the legal framework has to provide for a way to mitigate the tension between security interests and collective proceedings. However, the appropriate approach is not obvious as high- lighted by the differences between Swiss and U.S.laws.

27 See GLAS BERGSTROM/THEODORE EISENBERG/STEFAN SUNDGREN, Secured debt and the JikeJi- hood of reorganization, Int'l Rev. L. & Econ. 21 (2002), p. 359, p. 365. See also BAIRD/JACK- SON, supra note 2, p. 107 and 121; JULIAN R. FRANKS/0REN SUSSMAN, Financia] Oistress and Bank Restructuring of Small-to-Medium Size UK Companies [CEPR Discussion Paper 3915]

(CEPR, 2003); available from www.cepr.org/pubs/dps/DP3915.asp; OLIVER HART, Firms, contracts, and financial structure (Oxford etc.: Clarendon Press, 1995), p. 174-175; THOMAS H. JACKSON/RoBERTE. ScoTT, On the Nature ofBankruptcy: An Essay on Bankruptcy Sharing and the Creditors' Bargain, 75 Va. L. Rev. 155, p. 158 (1989).

28 BERGSTROM/EISENBERG/SUNDGREN, supra note 27, p. 363. See also BAIRD/JACKSON, supra note 2, p. 107 and 121; JACKSON/ScoTT, supra note 27, p. 158.

29 See GEORGEACKERLoF, The Market for "Lemons": QualityUncertainty and the Market Mecha- nism, Q.J. Econ. 84 (1970), p. 488.

30 See WHITE, supra note 6; WHITE, Does Chapter 11 Save Econornically Inefficient Firms, supra note 11.

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B. Swiss Approach: Deference to Property Law

Swiss law's approach to this clash can be summarized as deference to property law subject to delays and collectivization. Swiss law provides for three types of insolvency proceedings:³¹

Liquidation by way of bankruptcy (Konlcurs, faillite) focuses on the sale of the assets under the supervision of an administration (Sachwalter, admin- istration), which can include either public officiais in charge ofbankruptcy proceedings or a group of pers ons elected by the creditors.

Ordinary composition (Ordentlicher Nachlassvertrag, concordat ordinaire) is a contract between a debtor and its creditors on the rescheduling or a partial or complete renunciation of claims.³²However, by virtue of a judicial confirmation, it can bind all general unsecured creditors, provided a majority of the creditors holding the two thirds of the aggregate value of the outstanding daims and at least three quarters of the outstanding daims accept it.³³To facilitate the negotiation of the composition agree-

31 A four th procedure, postponement ofbankruptcy (Konkursaufschub, ajournement de faillite), is not strictly speaking an insolvency procedure: it simply allows a debtor to obtain a tempo- rary stay of a duty to file from bankruptcy and protects it from bankruptcy petitions by creditors. CO art. 72Sa. LP art. 173. See generally FLORIAN CHAUDET, Ajournement de la faillite de la société anonyme: conditions, effets, compétences et responsabilité (art. 72Sa CO) (Basle;

Geneva, Munich: Helbing & Lichtenhahn, 2001); Louis DALLÈVES, L'assainissement des en- treprises insolvables, 1992 SJ, p. 345, p. 350 (1992); ALEXANDER DuBACH, Der Konkursauf- schub nach Art. 72Sa OR: Zweck, Voraussetzungen und Inhalt, 94RSJ, p. 149, p. 151 (1998);

RoGER Gmouo, Die Konkurseriiffnung und ihr Aufschub bei der Aktiengesellschaft, 2., über- arb. Aufl., ed. (Zurich: Schulthess PolygraphischerVerlag, 1986); FRANÇOIS VouiLLOZ, Perte de capital, surendettement, ouverture et ajournement de la faillite: l'état des lieux (art. 725 et 725a CO), 2004 Expert comptable suisse, p. 312, p. 318 (2004); HANSPETER WÜsTINER, in Heinrich Honsell, Nedim Peter Vogt, and RolfWatter (eds.), Basler Kommentar zum Schwei- zerischen Privatrecht: OR II, (Basle, Geneva, Munich: Helbing & Lichtenhahn, 2002), ad art. 725a CO, no 4. However, it does not bar the creditor to commence any other enforcement proceeding. Union de Banques Suisses, ATF 104 II 20, 20-22, Bundesamtfür Sozialversiche- rung gegen A., B, C, und Verwaltungsgericht des Kantons Bern, ATF (2000) H 301!99, consid.

5; BEAT SCHONENBERGER, Der Konkursaufschub nacb Art. 725a CO, BlSchK, p. 161, p. 177 (2002).

32 LP Art. 314. See also AMONN/WALTHER, supra note 4, p. 443, §53, n° 15-16; DALLÈvEs, supra note 31, p. 348; HANS FRJTZSCHE/HANs ULRICH WALDER-BOHNER, Schuldbetreibung und Kon- kurs nach schweizerischem Recht: ein Lehrbuch, 3'd ed., 2 vols. (Zurich: Schulthess, 1993), p. 592-593, § 71, n° 8-9; JüRG GUGGJSBERG, in Adrian Staehelin, Thomas Bau er, and Daniel Staehelin (eds.), Kommentar zum Bundesgesetz über Schuldbetreibung und Konkurs III, (Basle/Geneva/Munich: Helbing & Lichtenhahn, 1998), ad art. 314 SchKG, no 7-19.

33 LP art. 305(1).

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ment, the law allows the debtor to request a stay of all debt enforcement proceedings. 34

Composition by way of disposai of assets (Nachlassvertrag mit Vermo- gensabtretung, concordat par abandon d'actifs) is similar to an ordinary composition. But instead of allowing the debtor ^topursue its existence, it allows the debtor to assign all or part of its assets to the creditors or to a third party as a discharge of its debt, thus simplifying the liquidation process.35

These procedures affect more or less the position of the secured creditor. Liq- uidation merely centralizes the enforcement process. As of the beginning of banlauptcy proceedings, the secured creditor is barred from enforcing per- sonally his daim (even if he was contractually entitled to do so) and must hand in to the administration any collateral that it may have in its possession.36Moreover, subject to a few exceptional circumstances,37 the administration cannat realize the assets until the second creditors' meeting, after it has invited all the potential creditors to produce their daims and it has decided whether or not to admit their daims.³⁸

34 LP art. 293. The effects of the moratorium are limited to a stay of debt enforcementproceed- ings and a restriction of the powers of the de bror. LP art. 297 and 298. It does not affect can- tonal enforcement proceedings, which have another purpose than seeking the enforcement of a monetary daim. See Luzern, Schuldbetreibungs-und Konkurskornmission, 29.11.1983, BJSchk 50 (1986), p.117; FRITZSCHE/WALDER-BOHNER, supra note 32, p. 607, § 72, no 23, note 43.

35 LP art. 317. See also AMoNN/WALTHER, supra note 4, p. 443, § 53, no 17; DALLÈVES, supra note 31, p. 349; FRITZSCHE/WALDER-BOHNER, supra note 32, p. 592-593, § 71, no 8-9; GUG- GISBERG, supra note 32, ad art. 314 SchKG, no 20 (distinguishing ordinary composition from composition by disposa! of assets); ALAIN WJNKELMANN/LAURENT LEVY/VINCENT JEANNERET/

OLrviER MERKT/FRANCESCA BIRCHLER, in Adrian Staehelin, Thomas Ba uer, and Daniel Stae- helin (eds.), Kommentar zum Bundesgesetz über Schuldbetreibung und Konkurs III (Basle/

Geneva/Munich: Helbing & Lichtenhahn, 1998), ad art. 317 SchKG, no 1.

36 Inkasso- und Verwaltungsbüro Luzern, ATF 71 III 153, consid. 2, p. 155-156; FRITZSCHE/

WALDER-BOHNER, supra note 32, p. 144, § 41, no 13; ZoBL, supra note 14, Systematischer Teil, no 712. However, the administra tor is allowed to auction the assets, without the consent of the secured creditor, even if the proceeds are not sufficient to cover the latter's daims. ZoBL, supra note 14, Systematischer Teil, no 734. See Finanz & KreditA.G., ATF 90 III 18, consid. 3, p. 23-25 See also Gurtner, ATF 72 III 30, consid. 1, p. 30 (holding that there is no need for a consent to sell the assets), consid. 2, p. 31 (holding that a priva te sale in principle supposes the consent of the secured creditor except if the sale is certain ta cover its daim as in the case).

But see Fuchs & Cie., ATF 53 III 12, consid. 2, p. 18-19 (holding that the creditor can refuse a private sale and is not lia ble for a Joss caused by his refusai).

37 LP art. 243 (2).

36 LP art. 243 (3).

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However, these rules only apply to security interests. They do not extend ta quasi-secured transactions, such as fiduciary transfers of property, title re- tention agreements, ³⁹which entitle the owner-creditor to vindicate the assets from the debtor⁴⁰and to realize them notwithstanding bankruptcy proceedings. ⁴¹Similarly, a creditor secured by an assignment of receivables is entitled to collect directly all the daims that have arisen prior to the opening of the bankruptcy proceedings.⁴²

39 See, e.g., Finanz & Kredit A.G., ATF 90 III 18, consid. 3, p. 23-25, Konkursmasse Meier gegen Peters & Co., ATF 93 III 96, (on the effect of a non-registerd German reservation ofproperty clause in the event of bankruptcy), X. gegen Konkursmasse Y. AG, ATF 119 II 326, consid. 2c and 2d, p. 327-328 (wrongly speaking of a case where the fiduciary owner of the collateral acquires for himself the good-it already owns it). See also AMONN/WALTHER, supra note 4, p. 319, § 40, no 28; LUKAS HANDSCHIN/DANJEL HUNKELER, in Adrian Staehelin, Thomas Bauer, and Daniel Staehelin (eds.), Kommentar zum Bundesgesetz über Schuldbetreibung und Konkurs II (Basle/Geneva/Munich: Helbing & Lichtenhahn, 1998), ad art. 197 LP, n°68 (on title retention agreements); CARL JAEGER/HANS ULRICH WALDER/THOMAS M. KULL/MAR- TIN KoTTMANN, SchkG (Zurich: Schulthess, 1999), ad art. 197 LP, no 18-19, and ad art. 212, n°9. But see PIERRE-ROBERT GILLIÉRON, Commentaire de la loi fédérale sur la poursuite pour dettes et la faillite du 11 avril 1989, texte en vigueur le 1er janvier 1997. Art. 159-270 LP, (Lausanne: Payot, 2001), ad art. 198 LP, no 17-19. More accurately, if a good is sold subject to a property reservation clause, in the event of a bankruptcy, the esta te has the option either to acceptthe contract and perform it integrally or reject it. ln tl!e second case the debtor can either rescind the contra ct and vindicate the good or sim ply file for the unpaid amount of his daim as an unsecured creditor. Dreyfus v. Grimmer, ATF 73 III 166, consid. 2, p. 169-170;

JAEGER/WALDER/KuLL/KoTTMANN, supra note 39, ad art. 212 LP, no 6; RENATE ScHwos, in Adrian Staehelin, Thomas Bauer, and Daniel Staehelin (eds.), Kommentar zurn Bundesge- setz über Schuldbetreibung und Konkurs II (Basle/Geneva/Munich: Helbing & Lichtenhahn, 1998), ad art. 212 SchKG, no 4--5.

•o LP art. 242. See, e.g., Konkursmasse Meier gegen Peters & Co., ATF 93 III 96, consid. 3, p. 102-103

41 The creditor must however transfer to the estate the proceeds of the sale, net of tl!e secured daim including interests and expenses. See, e.g., Stadelmann-Vogel gegen Lotscher, ATF 56 II 444, consid. 2, p. 448-449, X. gegen Konkursmasse Y. AG, ATF 119 II 326, consid. 2c-2d, p.

328-329; EIGEN MANN, supra note 15, p. 10, no 31; OFTINGER/BAER, supra note 14, ad art. 891 CC, no 62; ZOBL, supra note 14, Systematischer Teil, 0° 1448.

42 See Bank F. gegen Konkursmasse H., ATF 111 III 73, consid. 3, p. 75-77, X SA contre époux A, ATF 130 rn 248, consid. 4.1, p. 254--255; MEIER, supra note 3, p. 25. The issue relating to future daims assigned prior to bankruptcy but which have arisen subsequently is more controversial. Compare Bank F. gegen Konkursmasse H., consid. 3, p. 75-77; JÜRG DoM MER, Der Einfluss des SchKG auf die Forderungsabtretung des Schuldners 1 Jürg Domrner (Zu- rich: Juris Druck +Ver!., 1987), p. 68-74; GILLLÉRON, supra note 39, ad art. 197 LP, N" 19;

HANDSCHIN/HUNKELER, SchKG Il, ad art. 197 SchKG, n° 82-83; JAEGER/WALDER/KULL/KOTT- MANN, SchKG, ad art. 197 SchKG, n° 24; MEIER, supra note 3, p. 25 with DANIEL GIRSBER- GER, in Heinrich Honsell, Nedim Peter Vogt, and RolfWatter (eds.), Basler Komrnentar zum Schweizerischen Privatrecht: OR I, (Basle, Geneva, Munich: Helbing & Lichtenhahn, 2003), ad art. 164 CO, no 48 (arguing against the Tribunal federal for the exclusion of ali assigned

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The pre-composition moratorium has a similar effect to the bankruptcy stay: although the secured creditor is entitled to remain in possession of any pledged collateral, it is barred from taking any step to enforce its monetary claims.⁴³Here again, quasi-security is not affected by the moratorium and certain authors argue that the petition does not affect the validity of assign- ments of futures claims.⁴⁴However, the differences with liquidation proceedings appear once the composition agreement is confirmed. From then on, in principle, the secured creditor is free to enforce his daim by forcing the sale of the collateral. ⁴⁵Exceptionally, on request of the debtor, the judge may stay the enforcement of security interests in real esta te for a period of lasting up to a year from the ratification of the agreement. This request is, however, admis-

daims from the estate on the basis of the immediateness theory); EUGEN SPIRJG, Die Ab- tretung von Forderungen und die Schuldübernahme: Art. 164-174 OR, in Kommentar zum schweizerischen Zivilgesetzbuch (Zurich: Scbulthess, 1993), ad art. 164 CO, no 72-74.

43 LP art. 297 (1). LP art. 297(2) (2) provides for an exception for security interests in real esta te, butdoes not allow the creditorto cause the sale of the collateral. B., ATF 102 III 109, consid. 1, p. 111. The moratorium also prevents a priva te realization. See Compagnie Coloniale Franco- Américaine, ATF 81 III 57, p.59-60. See also ZoBL, supra note 14, Systematischer Teil, no 752.

44 LP art. 298(2) limits the capa city to charge property, indu ding through assignment of receivables. The issue is therefore whether a daim, which has arisen during the moratorium, but has been assigned prior to that event, is deemed assigned for security purposes before or after the moratorium. Compare PETER DIETSCHE, (Globale) Debitorenzession im Nachlassverfah- ren, RSJ 93 (1997), p. 337 (considering the assignment of daims born after the moratorium are invalid) with HEINZ KLARER, Die Globalzession von Debitorenforderungen als wirksames und notwendiges Sicherungsmittelund ihre Behandlung im Konkurs, RSJ 94 (1998), p. 354, p. 357. See also GIRSBERGER, supra note 42, ad art. 164 CO, no 48 (arguing in favor of the same treatment as in bankruptcy, where, contrary to the Federal tribunal, he considers that ali present and future daims are transferred at the time of the assignment).

45 1\MONN/WALTHER, supra note 4, p. 463, §55, no 8; PIERRE-ROBERT GILLIÉRON, Commentaire de la loi fédérale sur la poursuite pour dettes et la faillite du 11 avril1989, texte en vigueur le 1er janvier 1997. Art 271-352 LP, (Lausanne: Payot, 2003), ad art. 310 SchKG, no 21-27;

HANS ULRICH HARDMEIER, in Adrian Staehelin, Thomas Bauer, and Daniel Staehelin (eds.), Kommentar zum Bundesgesetz über Schuldbetreibung und Konkurs III, (Basle/Geneva/

Munich: Helbing & Lichtenhahn, 1998), ad art. 310 SchKG, no 10; JAEGER/WALDER/KULL/ KOTTMANN, supra note 39, ad art. 310 SchKG, no 23-26; ZosL, supra note 14, Systematischer teil, no 753. See Schuler gegenAusseramtliche Konkursverwaltung, Gliiubigerausschuss, Schwei- zerischer B{J.nkverein sowie Obergericht des Kan tons Zürich, ATF 107 III 40, consid. 3, p. 42. See, in the event of a composition by way of disposai of assets, M. in Nachlassliquidation, ATF 84 III 105, consid. 3d, p. 109, B., ATF 104 li! 79, consid. 4, p. 83. But see Compagnie Coloniale Franco-Américaine, ATF 81 III 57, p. 59-60 (stating in obiter dictum that the realization of a pledge may be stayed by a composition agreement); GILLIÉRON, supra note 45, ad art. 324 LP, n• 11 (approving this decision); WINKELMANN/LEVY/JEANNERET/MERKT/BIRCHLER, Sllpra note 35, ad art. 324 SchKG, no 8-9 (approving this decision for a composition by disposai of assets).

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sible only if the debtor has not defaulted on interest payment on the secured daim for less than a year and if it proves that the property is necessary for the continuation ofbusiness.⁴⁶More generally, the secured creditor is affected by a composition agreement only to the extent of its effective deficiency daim (the valuation of the collateral for the purpose of determining the amount of the unsecured portion of its daim that is entitled to vote on the approval of the composition agreement do es not modify the secured daim) Y

Compositions by way of dispos al of as sets are subject to similar rules and cannot impair the rights of secured creditors. At most, the liquidator ap- pointed to realize the property can force the secured creditor to sell the collateral within six months.⁴⁸Otherwise, the secured creditor remains free to enforce his rights in the collateral indu ding through a priva te sale if it is contractually entitled to do so.

Swiss law provides a paradoxical solution to the clash between security interest and collective proceedings. On the one hand, it stays the rights of the secured creditor and forces it to join in the collective liquidation process. On the other hand, once the general unsecured creditors agree to a composition, the secured is free to enforce his interest in the collateral. This will force the debtor to directly renegotiate with the secured creditor a rescheduling of the payment of the secured debt or at least a stay of the realization and in this process the secured creditor will be in a strong position. Moreover, Swiss bankruptcy law does not directly affect quasi-security, which rely on title transfers to protect the creditor from insolvency.

In sum, although Swiss law seeks at the same time to protect the secured creditor and to create the condition for an effective reorganization, it does not achieve either of these goals. This failure stems from the inherent contradic- tion between the collective nature of debt enforcement through bankruptcy

46 LP art. 306a (1). See general/y AMONN/WALTHER, supra 110te 4, p. 465-466, §55, n• 12-13;

G!LLIÉRON, supra note 45, ad art. 306a LP; HARDMEIER, supra note 45, ad art. 306a SchKG;

JAEGER/WALDER/KuLL/KOTTMANN, supra note 39, ad art. 306a SchKG.

47 AMoNN/WALTHER,supra note4, p. 463, §55, n• 8; GILLIÉRON, supranote45, ad art. 310 SchKG, n• 21-27; HARDMEIER, supra note 45, ad art. 310 SchKG, n• 10; JAEGER/WALDER/KULL/KOTT- MANN, supra note 39, ad art. 310 SchKG, n• 23-26; ZoBL, supra note 14, Systematischer Teil, n• 753. See Schuler gegen Ausseramtliche Konkursverwaltung, Gliiubigerausschuss, Schweize- rischer Bankverein sowie Obergericht des Kantons Zürich, ATF 107 III 40, consid. 3, p. 42. See, in the event of a composition by way of disposai of assets, M. in Nachlassliquidation, ATF 84 III 105, consid. 3d, p. 109, B., ATF 104 III 79, consid. 4, p. 83. But see note 48 above.

48 LP art. 324(2). See general/y JAEGER/WALDER/KULL/KOTTMANN, supra note 39, ad art. 324 SchKG, n• 15-20; G!LLIÉRON, supra note 45, ad art. 324 LP, n• 15-18; WINKELMANN/LEVY/

JEANNERET/MERKT/BIRCHLER, supra note 35, ad art. 324 SchKG, n• 14-25

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proceedings, broadly speaking, and the individual right in a specifie asset which is conferred by a security interest. The former cannat coexist with the latter and by trying to force them to do that, Swiss law prevents bath systems from achieving their goal.

C. U.S. Approach: Protection of the Security's Value

The U.S. Bankruptcy Code contrasts starkly with Swiss law in its approach to insolvency. It seeks to redeem the debtor and give bankrupt firms a second chance. In particular, Chapter 11 reorganization is by no means comparable with Swiss law composition proceedings. Its very purpose is to crea te a forum for structured bargaining among ali the parties at interest. Furthermore, although nominally the Banlauptcy Code daims to simply transpose state law property and contract rights in the insolvency forum without changing their substance,⁴⁹the mutation of security interests is unquestionable: they Jose their property-based nature to become a mere priority right.⁵⁰

First, the automatic stay upon filing for banlauptcy prevents the crediter from taking any step to "create, perfect or enforce" a security interest in the property or the estate of the debtor.⁵¹The secured crediter may neverthe- less ask the judge for a relief from the stay if the value of the collateral is not adequately protected. However, only the value of the collateral is protected and postpetition interest is not included in the scope of the protection. ⁵²An- ether route available to the secured creditor is to argue that collateral is not necessary for an effective reorganization and that the debtor has no equity in it.⁵³This second option will however rarely be available when key assets are charged. The third and even more unrealistic way out of the automatic stay

49 Butner v. United States, 440 US 48, 55 (1979). See also ^JACKSON,supra note 2, p. 21-22, 62-64.

50 See UnitedSav. Asso. v. Timbers oflnwood ForestAssociates, Ltd., 484 U.S. 365 (Supreme Court 1988). See a/so BAIRD/ JACKSON, supra note 2, p. 116; BEBCHUK/FRIED, supra note 7, p. 2399;

EISENBERG, supra note 26, p. 952; ^HOWARD,supra note 26, p. 313 (stating thar the secured crediter in bankruptcy is entitled to the value of its property rights; JACKSON, supra note 2, p. 211-212; WESTBROOK, supra note 18, p. 812.

51 11 U.S.C. § 362(a) ( 4) and (5).

52 See United Sa v. Asso. v. Timbers of In wood Forest Associates, Ltd.

sJ 11 U.S.C. § 362(a)(5).