Document Type

Article

Publication Date

1994

Center/Program

Center for Contract and Economic Organization

Center/Program

Program in the Law and Economics of Capital Markets

Abstract

In the ongoing debate concerning the efficiency and social value of Article 9 of the Uniform Commercial Code, two points are beyond dispute. First, asset-based financing has undergone an enormous transformation since the enactment of Article 9. The most vivid illustration of this is the dramatic increase in the number and size of firms that rely on secured credit as their principal means of financing both ongoing operations and growth opportunities. Previously, with a few exceptions (such as factoring and trust receipts), secured financing principally had served second-class markets as the "poor man's" means of obtaining credit. Now, it has become the linchpin of private financing, prompting even large firms to employ leveraged buyouts as a means of fleeing public equity markets for the safe harbors of Article 9. When viewed in these terms, Article 9 can only be seen as a blazing success.'

No less debatable is that financial institutions, and those sympathetic to their needs, played a significant role in the drafting and ratification of Article 9. Grant Gilmore has described how conservatives in the legal establishment decided in the 1960s to throw their support behind the same U.C.C. they had considered overly radical ten years before.2 Earlier, when the U.C.C. project had just gotten underway after World War II, Homer Kripke, then associated with C.I.T. Financial Corporation, served as a key advisor to Gilmore and the other drafters of what eventually became Article 9.3 In addition, Kripke served as the principal drafter for what became the 1972 revision of Article 9.4 And, in the campaign to pass the U.C.C. in the 1960s, William Schnader, a strong proponent of the Code, was hesitant to incorporate amendments suggested by academics, but, as Robert Braucher humorously noted, "was quite sympathetic with people who were suggesting amendments, where [they] were people who had power to keep the Code from getting enactment."5

All this is not to impugn the motives of the managers of financial institutions, or the business lawyers who represent their interests, or to accuse either group of a conspiracy to infiltrate the lawmaking process and shape the Code to their advantage. Indeed, while recognizing the significant role played by financial institutions and their representatives in the Article 9 drafting process, Gilmore recalled that they acted honestly and in good faith.6 And it is quite clear that Homer Kripke indeed believes that "the legal structure of secured credit developed to make possible mass production and the distribution of goods" and "that these developments have increased human welfare."7 Nonetheless, the enthusiasm that secured lenders showed for Article 9 begs the question of why they found it so attractive.

Comments

Copyright is owned by the Virginia Law Review Association. This article is used with the permission of the Virginia Law Review Association.

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