THE OBJECTIFICATION OF DEBTOR-CREDITOR RELATIONS, PART 1

Steve H. Nickles

Being named the Roger F. Noreen Professor is the high ‘point of my career, and I am nervous about being there — at the high point One of the reasons is that I am afraid of heights. Part of that, of course, is actually a fear of falling. Another part is that the higher a person climbs, the larger is the group that can view the climber’s backside.

Another reason for my nervousness results from having become a Minnesotan. When life goes well for Minnesotans, they suspect that their good fortune is undeserved, that it is a mistake soon to be dis­covered and corrected.

Well, I am a Minnesotan now. I own a snowblower and a roof rake, and I drive a winter-beater. So I fear this whole affair must be a mistake. It is a very happy mistake, however, to be named the Roger Noreen Professor, and I hope it is a mistake that long goes undiscov­ered to anyone in a position to correct it

Being named to a professorship is, in a tiny way, like a very traditional marriage. You take the name of the person in whose honor the professorship is established. Forever after, that name ac­companies yours for professional purposes. I am very happy to wed my name to Roger Noreen’s because, as I have already privately ex­plained to Roger, his name represents extraordinary kindness, suc­cess, and loyalty that are rarely combined in such large doses in a single person. So it is truly an honor for me to hold his professorship.

INTRODUCTION

It is true that much of what I teach is not naturally appeal­ing to most people. They are not fascinated, as I am, by the in­tricate details of priority battles between creditors claiming the remains of a bankrupt business, or by the fights among banks to determine which of them finally must bear the loss of yet another check-kiting scheme. These contests, and many com-

mercial law problems, involve the application of specialized rules addressing needs and interests of business and banking that are foreign to almost everyone else. Moreover, the typical combatants are finance companies, insurance companies, banks, and large corporations fighting among themselves. The effects of these battles on real people usually are too indirect to get the public’s attention, or to cause interest and debate in the popular press, or to raise passions even among law students in my own classes.

Frankly, to most people commercial law is like plumbing: you need and must have it, but you don’t understand or care how it works. You don’t want to see it, and hide it in the walls. When you are forced to think about it, it costs you money. So you hope to avoid having to think about it.

Commercial law teachers, then, often are treated as plumb­ers or some other kind of mere technician on the law school stage, hidden in the shadows of the spotlight that shines on col­leagues who teach more glamorous subjects. Center stage usu­ally is occupied by the constitutional law teachers. They get all the attention, and the Supreme Court appointments, arguing such fundamentally human “people” issues as whether the gov­ernment can regulate the bedroom activities of consenting adults. Constitutional law teachers can freely showboat, unre­strained as they are by law.

In less “sexy” ways, every commercial law case affects real people no matter how obscure the issue or rule of law, or how impersonal the parties. Whenever a bank or other business loses a commercial law dispute, it loses money, and this loss af­fects real people. Investors lose money. Employees lose jobs. Farmers lose a way of life, and in some cases, lose life itself.

Determining risks and losses in business and banking may be less glamorous than deciding constitutional rights, but the process of shifting wealth through finance and commerce is hardly less important to the real people behind the enterprises that are on the losing side. And the fairness of the process is an important factor in measuring the fairness of the society.

Commercial law has its most direct effect on real people, and its fairness is most often publicly debated, in the law’s reg­ulation of the bilateral relationship between a creditor and a debtor. This regulation mostly concerns the limits that credi­tors must observe in dealing with the debtor herself and with the debtor’s property for the purpose of insuring that the credit is repaid.

Debtor-creditor relations is the topic of my lecture today. I will focus on what I term the “objectification” of the debtor- creditor relationship. First, I will define the concept. Then I will illustrate it by describing three recent cases in which it has occurred. Next, I will explain the reasons for objectifying debtor-creditor relations in those cases. The reasoning is inces­tuous and is powered by a single concern. Finally, I will con­sider the desirability of objectification as it has occurred in the cases described.

1. BACKGROUND

To a very large extent, the law has delegated to the debtor and creditor themselves the job of regulating their relationship. That is to say, the parties define, by contract between them, when and what the creditor can do in order to secure repay­ment. The standards or rules they must follow to avoid civil sanctions are those that the parties have legislated for them­selves. Whether the creditor or debtor acts illegally, so as to justify the state coming to the other’s aid, depends on whether there has been compliance with, or breach of, the contract. In short, the law that governs the debtor-creditor relation tradi­tionally has been the law of the parties’ contract.

Concern is growing, however, especially among lenders, that the freedom of creditors and debtors to regulate their con­duct by their own contract is narrowing. The worry is not about debtor-creditor relationships involving consumers. Con­sumer credit transactions have long been heavily regulated by statute and judicial rules so as to limit substantially the kinds of creditor conduct that can be contractually sanctioned. More­over, to most lenders, consumer credit transactions are rela­tively unimportant compared to commercial lending and lending services, so that limits on creditor conduct toward con­sumer debtors that might increase risks and costs are not seri­ously threatening.

The lenders’ worry is about growing limits on contractually privileged creditor conduct in commercial transactions involv­ing business debtors: from farmers to other small businesses to large manufacturing enterprises. Creditors and debtors in com­mercial transactions have, until now, generally been left alone to regulate their relationship however they wish through mu­tual agreement, within limits that are so broad that they sel­dom abridge contractual power in the typical situation.

The worry about a narrowing of this power is not caused by legislatures enacting new statutes, nor by the courts developing new legal theories of judge-made law. Rather, the worry is caused by the courts applying old law in new ways: refining and redefining the substance or application of established legal principles — some statutory, some common law — so that there is creditor liability for conduct — or an appreciably increased risk of it — where before there was no liability or only a small risk of it. This liability has resulted notwithstanding that the creditor’s conduct apparently was sanctioned by the contract with the debtor. This reworking of the law therefore has seem­ingly reduced the extent to which contractual standards, deter­mined by agreement of the debtor and creditor, govern the parties’ relationship. In place of these contractual standards are external standards — sometimes found in the lending in­dustry and sometimes in the wider community as a whole — against which creditor conduct is measured.

Resorting to external standards for this purpose, and thereby displacing contractual standards in the process, is what I mean by objectifying debtor-creditor relations. It is judging creditor conduct by community standards in disregard of a con­tractual privilege to engage in the conduct. It is a lessening of the immunity from liability provided by contract. It is another instance of tort swallowing contract.