A sound bankruptcy proceeding should do two things: productively redeploy the assets of the bankrupt firm and correctly prioritize various claims against the bankrupt entity. The Chrysler bankruptcy fails on both counts. […]
On claim priority, unsecured creditors come at the bottom of the bankruptcy totem pole. The basic rule of credit transactions distributes the net assets first to secured creditors in the order of their priority. First mortgages are normally paid in full before second, and lower mortgagees receive anything, in order, on their loans. Unsecured creditors of all types have an equal claim regardless of the time they perfected their claims. But they receive their first dime only after secured creditors have been paid in full.
It is absolutely critical to follow these priority rules inside bankruptcy in order to allow creditors to price risk outside of bankruptcy. Upsetting this fixed hierarchy among creditors is just an illegal taking of property from one group of creditors for the benefit of another, which should be struck down on both statutory and constitutional grounds.