Shylock and Article 9 of the U.C.C. (with some thoughts on bankruptcy)
posted by Nate Oman
Shakespeare’s A Merchant of Venice (1598) is often misidentified as an anti-Semitic play about a contract. This is not technically correct, as the transaction at the heart of the drama seems to be a secured loan. (Albeit an anti-Semitic one.) Furthermore, contrary to Shakespeare’s conclusion, I believe that the security agreement is most likely enforceable, at least under Article 9 of the Uniform Commercial Code, a point that I hope to make to my secured transactions class. Here is Shylock’s description of the loan agreement between himself and Antonio, a Venetian merchant:
SHYLOCK: This kindness will I show; go with me to a notary; seal me there your single bond, and – in merry sport – if you repay me not on such a day, in such a place, such sum or sums as are expressed in the condition, let the forfeit be nominated for an equal pound Of your fair flesh, to be cut off and taken In what part of your body pleaseth me. (I.3.141-149)
It seems fairly clear from the passage that there is a debt. Antonio promises to pay “such sum or sums as are expressed in the condition.” However, without a valid security interest Shylock has only a personal right of action against Antonio. Indeed, even if Antonio promises the pound of flesh, all that Shylock gets in the event of a failure to deliver the bloody bond is a right to money damages. Section 9-109, however, teaches us that Article 9 governs “a transaction, regardless of form, that creates a security interest in personal property . . . by contract.” Such seems to be the case here. Indeed, Shylock casts the transaction in the form of a bond, ie a promise to deliver the pound of flesh, with a condition, ie payment of the debt, that defeats the bond, a classic pre-Code security arrangement, and the “pound of . . . fair flesh” falls under 9-102(a)(44)’s definition of “goods” (“all things that are moveable when a security interest attaches”), bringing it within the personal property requirement of 9-109.
The initial question is whether or not Shylock’s security interest has attached to Antonio’s flesh. Section 9-203 contains three conditions for attachment. First, Shylock must have given Antonio value, in this case the loan. 9-203(b)(1) Second, Antonio must have rights in the collateral. 9-203(b)(2) Note, that Article 9 leaves the definition of “rights in the collateral” undefined, but the case law indicates that less than full ownership is sufficient. Hence, even if others can claim some property right in Antonio’s flesh — e.g. a master or spouse — Antonio can still hypothecate what residual rights he retains. The third condition under 9-203(b) is a bit more complicated. In Shylock’s case it could be met in two ways. First, he could take possession of Antonio’s flesh pursuant to 9-313. This is likely impossible without cutting out the “pound of . . . fair flesh” at the time of the loan, as Antionio cannot retain possession of the flesh as Shylock’s agent. See 9-313 cmt. 3. Second, Shylock can satisfy 9-203(b)’s third requirement by having Antonio authenticate a record of the security agreement. This condition seems to satisfied by Shylock’s insistence to Antonio that he “seal me there your single bond.”
Once the security interest is attached, there are no other steps that Shylock must take in order for it to be enforceable against Antonio. See 9-203(a). The question is whether other provisions of law would make the security interest unenforceable. First, let us dispose of the argument made by Portia in the climatic scene of the play. Portia declares that Shylock’s cannot enforce the interest in Antonio’s flesh unless he can do so without the effusion of any blood, as the written contract between Shylock and Antonio contained no explicit provision allowing for the spilling of blood. This argument is clearly spurious. Section 1-205 of the code requires that “the express terms of an agreement and an applicable course of dealing or usage of the trade shall be construed wherever reasonable as consistent with each other.” Hence, provided that Shylock generally cuts out Antonio’s flesh with the effusion of blood in prior transactions or if the effusion of blood is standard in human-flesh security agreements in the trade, then Portia’s argument fails. Furthermore, given that Article 9 itself provides elaborate rules governing foreclosure, the absence of explicit contractual provisions specifying all rights in foreclosure cannot standing alone defeat a creditor’s right to repossess the collateral. Indeed, such a requirement would run flatly counter to section 1-102(a)’s statement that the underlying policy of the UCC is “to simplify, clarify, and modernize the law governing commercial transactions.” In short, the stale formalism upon which Portia’s argument rests has no place in the post-realist code of Llewellyn and Gilmore.
A more promising argument is to suggest that the security agreement cannot be enforced under section 1-203, which states that “Every contract or duty within this Act imposes an obligation of good faith in its performance or enforcement.” Hacking out Antonio’s flesh might violate such a duty. I suspect that it would depend on the jurisdiction in which one tried the case. As Judge Easterbrook, for example, has repeatedly stated the duty of good faith fills in gaps in the contract but should not be used to nullify its explicit terms. In this case, Antonio explicitly promised to deliver up his flesh, suggesting that in the 7th Circuit at least the appeal to 1-203 would be of little help. Of course, Antonio can always point to 1-103, which preserves “the principles of law and equity” so long as they are not displaced by the UCC to make some sort of an unconscionability argument or the like. As we have seen in class, however, 1-103 arguments tend to be the last hail-Mary attempts of regretful debtors to escape their just obligations and are seldom successful in the courts. It is also worth noting that Antonio, a merchant, as a very sophisticated party and he may be governed under 1-103 by “the law merchant,” which is preserved in addition to principles of “law and equity.”
Antonio might try to defeat Shylock by arguing that the flesh cannot be taken from him without a breach of the peace under 9-609(b)(2). The argument is problematic on a couple of fronts. Certainly, if Shylock tried to cut the flesh from a resisting Antonio it would likely be a breach of the peace. However, the Code defers to other state law in defining what constitutes a breach of the peace. For example, some particularly pro-creditor states might allow Shylock to take the flesh from a sleeping or anesthetized Antonio. Certainly, the policy rational behind 9-609(b)(2) is to prevent self-help repossession from degenerating into dangerous violence. Its purpose is not to allow the Debtor to retain possession of collateral to which a Creditor has a lawful right. Furthermore, even if there is no way of getting the flesh without a breach of the peace under 9-609(b)(2), this would only prevent Shylock from self-help repossession. He could always proceed against the collateral “pursuant to judicial process.” 9-609(b)(1). Note, however, that in the absence of a Antonio’s consent, Shylock cannot retain possession of the pound of flesh (see 9-620(b)), but must sell it at a sale that comports with 9-610′s requirement of commercial reasonableness. However, Shylock may obtain such consent from Antonio through Antonio’s silence, so long as Shylock sends to Antonio a record authenticated after default offering acceptance of the collateral in satisfaction of the debt to which Antonio does not respond within 20 days. See 9-620(c)(2). Shylock, of course, must return to Antonio any surplus from the sale of the flesh, and Antonio remains liable for any deficiency.
Of course, unless Shylock perfects the security interest, Antonio may be able to save himself from maiming by filing for bankruptcy. Under section 544(a) of the Bankruptcy Code (the so-called “Strong Arm Clause”), Antonio could avoid Shylock’s unperfect security interest. Note, however, that in this case Shylock seems to contemplate perfection, as they are to “go . . . to a notary,” presumably the public official who can accept financing statements under 9-501. Provided that Shylock filed a financing statement covering the flesh, then he should be protected from the strong arm clause by 9-317, which grants perfected security interests priority over the interest of a lien creditor. (Defined in 9-102(52)(C) to include a trustee in bankruptcy.) If there is some gap between the time when Shylock gave Antonio the money for the loan and the filing of the financing statement with the “notary,” then Antonio can also attack the security interest as a voidable preference under section 547 of the Bankruptcy Code on the theory that it promoted Shylock from an unsecured to a secured claim holder on account of a pre-existing debt. Shylock, however, can probably defeat any such argument under 547(c)(1)’s exception for a “substantially contemporaneous exchange.”
Despite the validity of Shylock’s security interest in Antonio’s flesh, however, he probably is not entitled to slice Antonio up. The reason for this is that in Act IV, Scene 1 of the play Antonio’s friend Bassanio offers to pay off the debt in full, an offer that Shylock refuses. However, 9-623 the Antonio can redeem the collateral at any time prior to its final disposition under 9-610 provided that he “shall tender fufillment of all obligations secured by the collateral; and the reasonable expenses and attorney’s fees of [Shylock].” 9-623(b)(1)-(2). Of course, 9-623 applies only to “[a] debtor, any secondary obligor, or any other secured party or lienholder,” a class that does not include Bassanio. On the other hand, there is nothing to stop Bassanio from giving the money to Antonio, who can then pay Shylock. Shylock, unfortunately for him, has no right to refuse Antonio’s offer of redemption.