Wedding Carlson and Schwartz: Understanding Secured Credit as a Fuzzy System

16 Pages Posted: 2 Jul 2015

See all articles by Edward S. Adams

Edward S. Adams

University of Minnesota - Twin Cities - School of Law

Steve H. Nickles

Wake Forest University - School of Law

Thomas Ressler

University of St. Thomas - Opus College of Business

Date Written: 1994

Abstract

Using economic analysis, legal academics have challenged themselves to posit a rational explanation for a debtor's willingness to issue secured debt. These academics have questioned why a debtor would grant a creditor a security interest in collateral, given that the debtor's unsecured creditors, recognizing that “the pool of assets available to satisfy their claims has shrunk,” will increase the price of credit they provide by an amount that precisely corresponds to the secured creditor's reduction in price. Economic theorists contend that, because the debtor's overall position is not obviously improved by the issuance of secured debt, the existence of secured debt is a puzzle.

Professor David Gray Carlson attempts to “solve” the secured debt puzzle by denying that there really is a puzzle. Using price theory, Carlson contends that, because security interests lower the cost of debt service by “shifting power from the debtor to the creditor,” they actually reduce risk and therefore the interest compensation the creditor requires. This reduction in risk, Carlson asserts, “is large enough to make available credit that otherwise would not be extended.” And, if no future unsecured creditors arise, “the risk dissipated by the security interest vanishes entirely.”

The fundamental problem with Carlson's article is its remarkable inconsistency with his prior work. For years he has argued that efficiency alone fails to explain everything (or much of anything) about secured credit. Carlson has seen more clearly than anyone else writing in commercial law that “there is no single correct explanation [of law].” Rather, “[t]here are infinite correct explanations, each co-existing with the other at different levels of generality.” This Carlson, the true Carlson, is insightfully right. Through his full body of work, Carlson has tried admirably to broaden the debate and make it more inclusive, less rigid, and more democratic. In doing so, he has essentially argued for a multivalent analysis of law, which is the central idea of this Commentary.

Keywords: Secured Credit, Fuzzy System

Suggested Citation

Adams, Edward S. and Nickles, Steve H. and Ressler, Thomas, Wedding Carlson and Schwartz: Understanding Secured Credit as a Fuzzy System (1994). Virginia Law Review, Vol. 80, pp. 2233-2248, 1994. Available at SSRN: https://ssrn.com/abstract=2625310

Edward S. Adams (Contact Author)

University of Minnesota - Twin Cities - School of Law ( email )

229 19th Avenue South
Minneapolis, MN 55455
United States

Steve H. Nickles

Wake Forest University - School of Law ( email )

P.O. Box 7206
Winston-Salem, NC 27109
United States

HOME PAGE: http://law.wfu.edu/faculty/profile/snickles/

Thomas Ressler

University of St. Thomas - Opus College of Business ( email )

1000 LaSalle Avenue
Minneapolis, MN 55403
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
10
Abstract Views
249
PlumX Metrics