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Lipson - The End of Notice ~ Secrets & Liens in Commercial Finance Law (2004)

Lipson - The End of Notice ~ Secrets & Liens in Commercial Finance Law (2004)

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ExpressO Preprint Series 
The End of Notice: Secrets and Liens inCommercial Finance Law
Jonathan C. Lipson
Temple Law School
This working paper site is hosted by The Berkeley Electronic Press (bepress) and may not becommercially reproduced without the publisher’s permission.http://law.bepress.com/expresso/eps/314Copyrightc
2004 by the author.
The End of Notice: Secrets and Liens inCommercial Finance Law
This article explores important recent changes in the way that we treat per-sonal property in commercial finance transactions. Among other things, thesechanges reduce or eliminate the obligation to give notice of interests in personalproperty when it is used in commercial finance transactions (as, e.g., collateralfor a loan).A principal purpose of notice-filing has been to deter the creation of secretliens, interests in property that are neither recorded nor otherwise readily ob-servable. Secret liens are universally castigated as abhorrent.Yet, two recent sets of legislative developments suggest that we may care muchless about the problem of secret liens than we might acknowledge. First, recentrevisions to Article 9 of the U.C.C (which governs many commercial financetransactions) tolerate secret liens as to such increasingly important assets asdata, intellectual property, bank accounts, and securities.Second, states have recently begun to enact non-uniform legislation designedto promote “asset securitizations.” This legislation gives fully-preemptive ef-fect to the parties’ contracts, and would therefore appear to displace rules onnotice-filing that might otherwise apply. They effectively end the obligation togive 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 adeeply-held intuition about the relationship between property rights and noticeobligations. This intuition enjoys both a new theoretical cache and a long lin-eage. I also suggest that we have become increasingly tolerant of secret liensbecause we have been seduced by a series of economic arguments about thealleged 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 twoimportant informational functions not fully considered by critics of these sys-tems. First, they will act as proxy for the information that might otherwise begenerated within tightly-knit merchant communities. Second, they may haveimportant behavioral consequences both for those required to provide the noticeand for the audience for the information thus provided. The article thereforecounsels caution in enacting legislation that would diminish or dilute notice-filing in commercial finance transactions.

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