Secrets and Liens: Verification and Measurement in Commercial Finance Law

Published in 21 Emory Bankr. Dev. J. 421 (2005)


This article argues that commercial finance law increasingly uses contract rules to displace property rules, especially as these rules pertain to verifying and measuring property interests. In this context, verification simply means confirming the existence of a property interest, such as a lien or security interest. Measurement means determining the relationships of various property interests to one another (i.e., the priority of interests).

Historically, commercial finance law – in particular the Uniform Commercial Code, which governs loans secured by personal property – provided that something would be treated as “property” only if its property character was fairly easy to discover. As a general matter, the commercial law frowned on “secret liens” – undisclosed interests in property. The principal method of verifying and measuring property interests in commercial finance law was, until recently, notice-filing.

Important, but little-explored, changes to the UCC – and the enactment of statutes that effectively override the UCC – are changing all of this. The 2001 revisions to the UCC, for example, contemplate a fairly broad range of “secret” liens, which will arise when data, bank accounts or investment property (stocks and bonds), among other things, are collateral for a secured loan. These liens are secret because the UCC provides that they are created solely by contract. No public notice of these property interests need be given to be effective.

More important, a number of states – most notably Delaware -- have enacted non-uniform statutes intended to “facilitate” asset securitizations – complex commercial finance transactions that were, in certain respects, misused by Enron. These facilitation acts should preempt the UCC, and void any notice-filing rules that might otherwise apply. Secret liens will be entirely enforceable under Delaware law.

Given this trend, the article then considers whether notice-filing systems in fact have much value. The article first assesses the standard rationales for these systems, and observes that none is terribly persuasive. The article goes on to consider the trend in the light of important developments in property law and in economic thinking about commercial finance law. Neither current property law theory, nor established economic thinking, fully accounts for the developing contractualization of property in commercial finance law. The article concludes by suggesting an alternative approach to the problem of verifying and measuring property interests in commercial finance law: Through our developing understanding of the role that “community” plays in setting appropriate default rules in private ordering.


Bankruptcy Law | Commercial Law | Economics | Property Law and Real Estate | Secured Transactions

Date of this Version

April 2004