Center for Contract and Economic Organization
Program in the Law and Economics of Capital Markets
In recent years a series of Supreme Court decisions has purported to envelop the rights of defaulting debtors in an enlarged concept of procedural due process. The central theme underlying this development is clearly an attempt by the Court to impose some degree of constitutional control on the exercise of provisional creditor remedies. The path that leads from Sniadach v. Family Finance Corp. to North Georgia Finishing, Inc. v. Di-Chem, Inc., is however, far from clear and the cases have provoked serious questioning of the meaning and impact of this doctrine. Due process as reflected in Sniadach and Fuentes v. Shevin, initially imposed on state enforcement procedures, in the absence of a compelling state or creditor interest, the requirement that the defaulting debtor be granted adequate notice and an opportunity to be heard before he could be deprived, even temporarily, of any significant property interest. Subsequent interpretations in Mitchell v. W. T. Grant Co. and Di-Chem recognized that an ex parte deprivation of the debtor's property interest could be sustained where the enforcement process incorporated various controls, including specific factual allegations of entitlement by the creditor, review of the request for ex parte process by a judicial officer, and an opportunity for the debtor to challenge the deprivation at an "immediate" post-seizure hearing. Any attempt, however, to search beyond this familiar litany for the impact of this doctrine on the debtor-creditor relationship and the state dispute resolution mechanism, quickly reveals that there is no consistent understanding of what procedural due process requires, when it is satisfied, and what if any purpose it serves.
Few would question the need to reexamine the concept of procedural due process in the context of the defaulting debtor. This article will undertake such a reexamination from the perspective of economic theory with particular focus on the enforcement costs of due process. A recognition of the utility of applying economic analysis to legal problems requires as well a recognition of its limitations. These limitations are particularly acute in an analysis of constitutional principle and of the individual's relationship to the state, and indeed in any case where fundamental social values must be measured. Economic analysis does provide, however, a method of evaluating the effectiveness of the procedures used to implement due process. This method seems particularly appropriate since a cost-benefit equation has emerged as the Court's primary evaluative tool in reviewing specific procedural requirements. A cost analysis of legal procedure initially assumes that a fundamental goal of procedure is to produce an accurate resolution of disputes. In the particular context of debtor default, due process, to the extent that it requires additional procedures in ex parte situations, imposes significant "direct" or litigation costs on the enforcement process. These costs justify themselves in economic terms only if they contribute to at least a corresponding reduction in "error" costs – social costs that arise when the legal system fails to perform accurately its assigned function of dispute resolution. The goal of allocative efficiency is to minimize the sum of these costs.
Robert E. Scott,
Constitutional Regulation of Provisional Creditor Remedies: The Cost of Procedural Due Process,
Va. L. Rev.
Available at: https://scholarship.law.columbia.edu/faculty_scholarship/312