Secrets and Liens: The End of Notice in Commercial Finance Law

Abstract

This Article examines the trend in commercial finance law to reduce or eliminate the obligation to give notice of nonpossessoy interests in personal property in systems such as those created by Article 9 of the Uniform Commercial Code. Although the purpose and merits of such systems have long been debated, they have generally been viewed as effective solutions to the problem of secret liens-interests in property that were neither recorded nor otherwise readily observable. Two recent sets of legislative developments suggest that we may care much less about the problem of secret liens than we are willing to acknowledge. First, recent revisions to Article 9 of the UCC, which governs many commercial finance transactions, tolerate secret liens that may arise on such increasingly important assets such as data, intellectual property, bank accounts, and securities. Second, states have recently begun to enact non-uniform legislation designed to promote asset securitizations. This legislation often gives fully preemptive effect to the parties' contracts, which would, incidentally, appear to displace rules on notice filing that might otherwise apply. It effectively ends the obligation to give notice. This Article offers three arguments against this trend. First, tolerance of secret liens challenges recent developments in our understanding of the relationship between property rights and information costs. Second, notice filing systems will act as proxy for the information that might otherwise be generated within tightly knit merchant communities. Third, these systems may have important behavioral consequences both for those required to provide the notice and for the audience for the information thus provided. This Article therefore counsels caution in enacting legislation that would diminish or dilute notice filing in commercial finance transactions.