The Uneasy Case Against the Uniform Commercial Code

• Author: Robert K. Rasmussen
• Position: Professor of Law and Associate Dean for Academic Affairs, Vanderbilt Law School

Professor of Law and Associate Dean for Academic Affairs, Vanderbilt Law School. I would to thank Ted Janger, Avery Katz, all of the participants at the LSU Hawkland Conference in general and Alan Schwartz in particular for helpful comments on an earlier draft of this article.

The last decade has not been kind to the Uniform Commercial Code ("U.C.C."). Prior to the last ten years, the U.C.C. was long regarded as one of the more, if not the most, successful projects in American lawmaking. Its self-stated goal of uniformity was achieved to a remarkable extent. All American jurisdictions, including Louisiana, have adopted the U.C.C.¹ Only acts of Congress could challenge the U.C.C. when it came to ensuring that the same legal rules would be found in every state. While there was a smattering of other uniform laws that had achieved widespread adoption, the areas of law covered by these statutes do not approach the depth and scope of the areas covered by the U.C.C. When it came to uniformity in an important area of state law, the U.C.C. had no serious contenders.

The U.C.C.'s success was more than simply achieving harmony among the various states. The substance of the U.C.C. was, by and large, considered a success as well. Perhaps the two most widely used portions of the Code in the life of a commercial lawyer, and a law student, are Article 2 and Article 9. Both were held in high esteem by the practicing bar and the professoriate. Article 2 was seen as the crowning achievement of perhaps the greatest legal academic of the 20th Century, Karl Llewellyn.² Its focus on commercial reasonableness was viewed as a triumph of realism over formalism.³Law adapted to business practice, rather than forcing businessmen to structure their transactions to adhere to the doctrinal niceties of times past.

Article 9 was viewed as an even more remarkable achievement. Article 2 had been built on its predecessor, the Uniform Sales Act. It was a successful offspring of a good, if somewhat worn, project.⁴Article 9, in contrast, had no such lineage. The drafters of Article 9 succeeded in melding together a welter of various state laws into a single, comprehensive statute governing the transfer of security interests in personal property.⁵ With Article 9, the drafters succeeded in creating a law of general scope that was uniformly adopted. Few federal laws and virtually no state laws rivaled the U.C.C. in terms of its craftsmanship.

Other areas of the U.C.C. were held in similar high regard. In particular, Article 5 on letters of credit operated smoothly, as did Article 7 on warehouse receipts. Moreover, the U.C.C. process repeatedly demonstrated its flexibility, both by periodic updates of the extant articles and by the addition of new ones. After a six year gestation period, Article 2A was added in 1987 to handle issues relating to leases. Article 4A on wire fund transfers was added to the U.C.C. stable in 1989. Article 9 had been revised in 1972, and Articles 3 and 4 had been updated in 1990. The Permanent Editorial Board stood ready to provide guidance in between these major events. The U.C.C. was thus not only a remarkable achievement when first composed, but it also managed to keep pace with the times.

The success of the U.C.C., both in terms of its substance and its widespread adoption, was routinely attributed to its genesis. This was no partisan legislation written to secure immediate gain. Nor was it a hasty, ill thought-out response to a single problem. Rather, the U.C.C. was the long, careful, systematic work of some of the country's leading scholars and attorneys.⁶ It was drafted under the auspices of the National Conference of Commissioners on Uniform State Laws and the American Law Institute. Moreover, these groups kept a watchful eye on their handiwork to ensure that it remained current. In short, the U.C.C. was often seen as the exemplar of what could be done when experts were allowed to till the field.

To be sure, one could always pick nits. Section 2-207 on the battle of the forms was always good for a few laughs.⁷ Article 3 recalled a somewhat mythical past in which negotiable instruments traversed the country as couriers without luggage.⁸ The process by which Article 4 was drafted, notorious in commercial law circles for the high-handed lobbing by the American Bankers Association, was likened to "appointing a committee of dogs to draw up a protective ordinance for cats."⁹ Article 4 has always been viewed as the price that had to be paid to ensure that the banking lobby would not derail the entire U.C.C. project. But these complaints were merely a side show. Indeed, what made them noteworthy was that they stood out from the rest of the project. The U.C.C. as a whole was universally seen as a praiseworthy achievement. In law school classrooms across the country, the U.C.C. was the gold standard. It was the exemplar of what a law should be. It may not have been perfect, but it was the best that we had.

What a difference a decade makes. The U.C.C. now finds itself under attack on various fronts. The few isolated snipings of the past became full broadside attacks. Some academics have gone so far as to argue that Article 2 and Article 9, the pillars of the U.C.C., should both be simply tossed away. Article 2 has been said to be inferior to both common law made by judges¹⁰ and to private law crafted by trade organizations.¹¹ The basic complaint is that Article 2's focus on commercial reasonableness and trade usage asks more than the litigation process can deliver. Judges and lay jurors operating within the confines of the adversarial system cannot be expected to master industry practices. Even if they could, there is no guarantee that the parties would, before the fact, want to be legally committed to following those practices. Contracting parties may well have a norm of live-and-let-live when things are going well while at the same time expecting to be able to insist on rigid adherence to the terms of the contract if a dispute goes to litigation. Moreover, the vague standards of Article 2 leave so much room for differing judicial interpretations that Article 2 fails to provide similar results across jurisdictions. In light of these concerns over whether Article 2 is in fact normatively desirable, even if one wanted to keep Article 2 around, parties should be allowed to contract out of its coverage quickly and easily.¹²

The debates over Article 9 have been extensive and wide ranging. As an initial matter, many questioned whether secured creditor promoted economic efficiency at all.¹³ Still others asserted that Article 9 encouraged inefficient investment because it allowed the debtor and the secured creditor to externalize costs onto nonadjusting unsecured creditors.¹⁴ We still lack an academic consensus on the appropriate scope of secured credit. There is widespread agreement that we lack sufficient data to resolve many of the key questions.

In a somewhat different vein, Alan Schwartz argued that even if contractual priority produces a net benefit for society, this benefit could be generated without the current Article 9. Article 9 sets forth a system by which a debtor can, via contract, grant priority rights in its various assets to various lenders. Each state is responsible for maintaining a registry in which each secured creditor can file notice of its security interest. Even if this institution of secured credit is efficient, according to Schwartz, it can be generated more easily. A simple rule of enforcing negative pledge clauses against third parties would work better.¹⁵ To be sure, Article 9 may be better than its predecessors in terms of its ease of use, but it is by no means the best that can be done.

Perhaps even more dramatic than the questioning of the substance of the U.C.C. has been the attack on the U.C.C. drafting process itself. The vision of the drafting process as being conducted by high- minded experts simply trying to improve the law has been replaced by a more realistic, less flattering one. The U.C.C. is now viewed as the output of a private legislature.¹⁶ Like all legislatures, this legislature is comprised of individuals who have their own biases and goals. Moreover, the drafting process is susceptible to interest group pressures, which rather than producing the best law possible, may generate a law that serves the need of the interest group. Indeed, this private legislature is worse in some respects than a public one. In those cases where competing interest groups exist, the private legislature lacks the institutional structure to resolve these competing claims, thus yielding either vague statutory provisions or even gridlock.

This reconception of the way in which the text of the U.C.C. comes into being has led to a new, more jaded view of most of the U.C.C. provisions. Article 9 is now seen as the output of attorneys for lenders who write the rules so as to favor their clients.¹⁷ Banks and their attorneys likewise dominate the formulation of Articles 3, 4 and 4A; here, they use their influence to ensure that they owe little, if any, duties to their customers.¹⁸ By and large, most rights that a customer has against its bank come from her contract with the bank and not from Articles 3 and 4.¹⁹ Article 2 is the inconclusive struggle between business interests and consumer interests.²⁰ The academics who often carry a large load in the drafting process are seen as trying to advance their own agenda. This agenda may include their own normative vision of the law, the desire for cultivating prestige with the practicing bar, or even procuring consulting...