In the wake of the recent financial crisis, I’ve been pondering the role of courts in the formation and execution of corporate financial law and policy. My focus quickly shifts to a predicate question: How do courts currently handle controversies relating to complex corporate financial arrangements? And what can we learn from judicial action and inaction in this realm?
My Article, Confronting the Certainty Imperative in Corporate Finance Jurisprudence (forthcoming in the Utah Law Review), explores the (seemingly nonexistent) role of the judiciary in shaping corporate financial law. Analyzing finance and lending jurisprudence, including cases in the related areas of consumer finance and public finance, I discover a judicial narrative of restraint, deference and abstention.
In particular, the dominant judicial decision-making paradigm in lending and finance asserts that stable financial markets require an environment of “legal certainty,” which is achieved when courts exercise considerable restraint. In disputes that stem from private financial agreements, courts show restraint by narrowly tailoring opinions to strict construction and passive enforcement of underlying contracts, and by declining to extend common law doctrines.
I call this paradigm the “Certainty Imperative.” I trace the Imperative to decisions rendered in the wake of the economic instability of the late 1970s and early 1980s, and I find that the paradigm continues to dominate finance and lending jurisprudence to this day. In fact, it has been bolstered by state and federal statutes that further constrain judicial decision-making in the corporate financing realm.
Ostensibly a creature of neoclassical economic theory, the Imperative infuses the specific goal of stability in financial markets into the broader and more deeply entrenched normative theme of legal certainty. The Imperative is rooted in the belief that financial markets are vital to the national interest, and that judges ought to decide cases in this realm in a manner that advances broad economic efficiency goals. What is more, the Imperative reflects the neoclassical conviction that markets are inherently stable in the absence of governmental intervention (including via judicial decision).
Imperative-abiding courts invoke forceful language, expressing fear that a decision might “throw credit markets into confusion and destabilize this area of law,” Smith v. Anderson, 801 F.2d 661, 665 (4th Cir. 1986), or “disrupt orderly credit markets.” Algemene Bank Nederland v. Hallwood Indus., 133 B.R. 176, 180-81 (W.D. Pa. 1991). The Fourth Circuit went so far as to suggest a slippery slope, whereby a ruling adverse to the expectations of lenders might send tremors through the industry, causing “untold and unknown consequences that cannot now be fully foreseen,” “undefinable instability” and even “widespread confusion.” Cetto v. LaSalle Bank Nat’l Ass’n, 518 F.3d 263, 277 (4th Cir. 2008). Other times, courts express this Imperative in vague terms, as if to imply some universal understanding that markets are profoundly sensitive to judicial decisions that modify existing law. For instance, courts have referred to undefined “ripple effects,” Central Bank of Denver v. First Interstate Bank of Denver, 511 U.S. 164, 189 (1994), and the simply-stated policy concern: “credit markets may be affected.” In re Fracasso, 210 B.R. 221, 228 (Bankr. D. Mass. 1997).
Generally focused on the needs of financial institutions rather than borrowers, the Imperative promotes bright-line rules that provide “all prospective lenders the certainty that is so important to the effective operation of markets,” In re Bulson, 327 B.R. 830, 845 (Bankr. W.D. Mich. 2005), or that deliver “guiding principle[s] for those whose daily activities must be limited and instructed” by laws governing commercial transactions. Dirks v. S.E.C., 463 U.S. 646, 664 (1983). The theme is often invoked as a rationale for maintaining the legal status quo, as courts lament a seemingly inequitable outcome under current law, but decline to engage in legal reform out of concern that any deviation from the expectations of lenders might disrupt financial markets.
When we consider this judicial narrative in its historical context, the Imperative seems not to be a reasoned legal philosophy, but rather a consequence of a shaken economy and a loose synthesis of emerging academic theories that seemed to offer new direction for maintaining financial market stability.
In my opinion, if courts are to assume a meaningful role in financial law reform, the Imperative must be confronted and overcome. The dominant paradigm heavily privileges the legal status quo, and its methodological constraints are a paralyzing force on the judiciary. The Article provides an in-depth critique of the Imperative’s strict interpretive norms, and suggests several possibilities for expanding the scope of judicial inquiries in the corporate financing realm.
I welcome your comments, questions and reactions!
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