Freedom to Contract, or Not?

Recently we had occasion to advise a client with respect to some specific provisions of U.C.C. Revised Article 9, namely those relating to retaining collateral in full or partial satisfaction of an obligation.  Section 620 provides a set of conjunctive conditions which are the “only” circumstances under which a creditor may retain its collateral in whole or partial satisfaction of a secured obligation.  One of those conditions is that the debtor must consent to the proposed retention.  He must do so in a writing which is “authenticated” (Article 9-speak for what most folks would call “signed”) specifically after default.  In other words, a secured party cannot require a debtor, in connection with originating the obligation, to pre-consent to the collateral’s retention, upon any circumstances.

As most people of more than just limited understanding are able to comprehend, the world works best when competent adults interacting with each other at arm’s length and as level pegs are permitted to arrange their mutual affairs to their mutual satisfaction, in the absence of fraud, duress, or undue influence.  This is necessarily so because, as Hayek pointed out, the range of circumstances under which people interact with each other, and the range of matters as to which they interact, are so infinitely numerous as to be beyond the scope of any human knowledge.  All you can do is set up some very basic, easily understood ground rules and let people make the best of it.

Our state’s legislature seems to a degree to have missed that memorandum.  Section 9-602 sets forth a laundry list of provisions of that Article that may be neither waived nor even “varied.”  Among them are the provisions of Section 620.  So not only can you not waive the requirement that the debtor consent to the collateral’s retention, but you cannot even vary the requirement that his consent be obtained post-default, nor can you, for example, change his affirmative approval requirement into a time-limited veto right.

That makes sense for certain kinds of debts and debtors.  Consumers, for example, or obligations secured by household goods.  The bargaining disparity between, say, Chase and Joe Bloggs is just so enormous that you really can’t expect ol’ Joe to know much about what he’s agreeing to or to be able to tell Chase to go pound sand.  But commercial borrowers, borrowing for commercial purposes and putting up commercial collateral?  Pray tell me what extraordinary protections those folks need.  Either they’re big enough boys to look out for themselves, or they’re not.

So much for Article 9 of the U.C.C.  There is another statute out there, which was specifically drafted to apply to large commercial actors, dealing with each other at arm’s length and both over-represented by counsel &c. &c. &c.  It’s the Federal Arbitration Act, which is codified in Title 9 of the U.S. Code.  Its provisions are construed not just strictly in favor of compelling arbitration, but mercilessly.  An agreement under that statute is enforced against anyone, even some 18 year-old kid who goes down to borrow him some money to get a beat-up ol’ car.  Like as not the loan paperwork he signs will contain a provision in which he agrees to arbitrate any dispute arising out of his purchase or the purchase money note, in some city halfway across the country, under rules which he has no realistic access to or understanding of, and which 99% of the lawyers he’d be able to go see to ask about it wouldn’t have any experience of, either.  All that notwithstanding, his agreement will be enforced against him to the hilt.

And what has our hypothetical 18 year-old kid given up?  The right to have any rule of law at all applied to his case.  The right to present any equitable claim or defense.  The right to present evidence in his favor, or to challenge evidence against him, based on any known rules of evidence.  The right to have a jury of ordinary citizens determine his rights and responsibilities relative to Mega Car Loans, Inc.  The right even to have a judge at any level review the substance of the award made by the arbitrator, who is not bound to follow the law, any law (and who, by the way, draws a not insignificant portion of his income from arbitration referrals from Mega Car Loans, Inc. and its peer organizations . . . and zero at all from our 18 year-old buyer). 

In short, our 18 year-old kid is viewed as competent to understand what he’s doing while throwing away the rights for which literally thousands of people have given their lives over the centuries.  In contrast, the businessman borrowing $1.5 million and who wants to pledge a half-million shares of a publicly-traded corporation as collateral is not viewed as being sufficiently savvy that he can be permitted to consent, in advance, to the creditor retaining so much of his collateral, credited at its current fair market value as determined by its most recent trading price on the NYSE, as is necessary to pay some portion or all of his obligation.

Discrepancies such as these are why anyone who pretends that the Law makes sense; or that the legal system is a “justice system”; or that, in practice, the determining of the rules under which each of us must live as he climbs out of bed in the morning is anything other than a raw struggle for power, each over the other, with those not blessed with intelligence, opportunity, energy, foresight, or other advantage are and will always remain the prey of those who are so blessed, is a fool or a charlatan, or some combination of both.  A public official, say a judge for example, who makes those representations to you is to be treated with public contempt because he making misrepresentations which he must know to be false.  A lawyer who tells you any of those things should prompt you immediately to return hom to inventory the portable articles of value.  A politician — judge or otherwise — who makes those statements needs to be pelted with rotten fruit.

Leave a Reply