Document Type


Publication Date



Center for Contract and Economic Organization


Program in the Law and Economics of Capital Markets


Despite advances in finance theory, secured debt remains a puzzle. As a consequence, the justification for the current legal regulation of secured financing is similarly unclear. What purposes, whether benign or malignant, does security serve? And what explains the peculiar sys- tem of priorities established by Article 9 of the Uniform Commercial Code? These are particularly urgent questions for students of commer- cial law because legally created priorities among creditors are an appar- ent aberration. In most legal regimes, equal treatment of those similarly situated is an important normative goal. Indeed, much of fed- eral bankruptcy law seems to reflect a conception of business failure as a common disaster.' As with a flood or an earthquake, when unantici- pated disaster strikes all victims are treated equally. Yet personal prop- erty security is a discriminatory financing device, one that offers certain creditors preferential treatment in any distribution of the debtor's assets. The conventional justification for such preferential treatment is that security increases the aggregate amount of credit available to de- serving debtors.2 Under this conception, creditors demand security for certain debts as a way of reducing unacceptably high risks of default. Without security, it is argued, such high risk debtors would be denied * Lewis F. Powell, Jr. Professor of Law, University of Virginia School of Law. I would like to thank Doug Baird, Michael Dooley, Ted Eisenberg, Tom Jackson, Homer Kripke, John McCoid, Gary Peller, Glen Robinson, Roberta Romano, Alan Schwartz, Paul Stephan, Bill Whitford, and the participants in workshops at the Univer- sity of Virginia and Georgetown University for their helpful comments on earlier versions of this Article.