Alex M. Johnson, Jr.

Adding Another Piece to the Financing Puzzle: The Role of Real Property Secured Debt

PUBLISHER
Loyola of Los Angeles Law Review
DATE
1991
 

Abstract

At first blush, a secured debt system appears to be inequitable. Secured debt permits the debtor to grant its secured creditors priority over other unsecured creditors. Thus, in the event of debtor insolvency, the secured creditors have the right to take as much of the collateral or "security" as necessary to satisfy their claims before the unsecured creditors can 'take anything. A system disallowing secured debt would require all creditors to share pro rata in the debtor's assets in the event of debtor insolvency.

Realizing the facial inequity of secured debt, scholars have advanced numerous theories to justify its existence and widespread use. While many theories purport to explain the role of secured financing, none attempts to explain the role of real property secured financing. The secured debt puzzle cannot, however, be pieced together successfully unless the role that real property secured debt plays in financing transactions is factored into the analysis of secured debt.

This Article briefly describes the secured debt puzzle, the debate that has developed concerning its existence, and the theories legal scholars have developed to explain the existence and use of secured financing. It then explores the role that real property secured debt plays in solving the secured credit puzzle by raising and answering the question of how, if at all, real property secured debt impacts personal property secured debt. By examining the role that monitoring plays in real property security interests, as opposed to personal property security interests, another piece is added to the puzzle.

Finally, this Article explains the need for and use of secured debt in light of the existence and widespread use of real property security interests. By drawing upon examples provided by real property secured debt, the Article concludes that secured debt serves an important signaling function. Contrary to previously considered approaches, however, this Article shows that the signal provided by real property secured debt is not solely or primarily for the benefit of the creditors; real property secured debt also provides an important signal to creditors' investors.

 

Citation

Alex M. Johnson Jr., Adding Another Piece to the Financing Puzzle: The Role of Real Property Secured Debt, 24 Loyola of Los Angeles Law Review 335-363 (1991).
 

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