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


This article explores important recent changes in the way that we treat personal property in commercial finance transactions. Among other things, these changes reduce or eliminate the obligation to give notice of interests in personal property when it is used in commercial finance transactions (as, e.g., collateral for a loan).

A principal purpose of notice-filing has been to deter the creation of secret liens, interests in property that are neither recorded nor otherwise readily observable. Secret liens are universally castigated as abhorrent.

Yet, two recent sets of legislative developments suggest that we may care much less about the problem of secret liens than we might acknowledge. First, recent revisions to Article 9 of the U.C.C (which governs many commercial finance transactions) tolerate secret liens as to such increasingly important assets 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 gives fully-preemptive effect to the parties’ contracts, and would therefore appear to displace rules on notice-filing that might otherwise apply. They effectively end the obligation to give notice.

The article considers how we have come to diminish the role of notice-filing, and what that might mean. I argue that tolerance of secret liens challenges a deeply-held intuition about the relationship between property rights and notice obligations. This intuition enjoys both a new theoretical cache and a long lineage. I also suggest that we have become increasingly tolerant of secret liens because we have been seduced by a series of economic arguments about the alleged inefficiencies of notice-filing. I consider and reject most (but not all) of the economic arguments as incomplete or speculative.

The article then suggests that notice-filing systems may perform at least two important informational functions not fully considered by critics of these systems. First, they will act as proxy for the information that might otherwise be generated within tightly-knit merchant communities. Second, they may have important behavioral consequences both for those required to provide the notice and for the audience for the information thus provided. The article therefore counsels caution in enacting legislation that would diminish or dilute notice-filing in commercial finance transactions.


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

Date of this Version

August 2004