Bjerre, Carl S.

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Principle and Utility in the Structure of Securities Ownership: A Comment on Schwarcz & Benjamin

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BJERRE COMMENT_FMT.DOC 06/04/02 4:06 PM331PRINCIPLE AND UTILITY IN THE STRUCTUREOF SECURITIES OWNERSHIPA COMMENT ON SCHWARCZ & BENJAMINCARL S. BJERRE*In Intermediary Risk in the Indirect Holding System for Securi-ties,1 Professors Schwarcz and Benjamin take as their central moti-vating principle the time-honored idea that nemo dat quod non habet,or no one gives more than he or she has.  This principle, also knownas the “derivation principle” of property ownership because it main-tains that the rights of each property owner should be derived fromthe rights of the property’s previous owner,2 provides a window ontosome of the most central and intractable questions in the commerciallaw field.The nemo dat principle seemingly makes abundant and conclu-sive common sense: how, a non-lawyer would truculently ask, couldanyone possibly give more than he or she has?  But common senseturns out to be under-determinative in this area,3 and the answer tothe truculent question is easy: by legal fiat.  That is, the commerciallaw system can enable X to give more to Y than X has, not by con-Copyright © 2002 by Carl S. Bjerre* Associate Professor, University of Oregon School of Law.1. Steven L. Schwarcz & Joanna Benjamin, Intermediary Risk in the Indirect HoldingSystem for Securities, 12 DUKE J. COMP. & INT’L L. 309 (2002).  As the authors note, the articleintegrates and abridges others of their works.  See Steven L. Schwarcz, Intermediary Risk in aGlobal Economy, 50 DUKE L.J. 1541 (2001) [hereinafter Schwarcz, Global Economy]; JOANNABENJAMIN, INTERESTS IN SECURITIES: A PROPRIETARY LAW ANALYSIS OF THEINTERNATIONAL SECURITIES MARKETS (2000); JOANNA BENJAMIN, LEGAL RISKMANAGEMENT IN GLOBAL SECURITIES INVESTMENT AND COLLATERAL (forthcoming 2002).2. Douglas G. Baird & Thomas H. Jackson, CASES AND MATERIALS ON SECURITYINTERESTS IN PERSONAL PROPERTY 4 (2d ed. 1987); Jeanne L. Schroeder, Is Article 8 FinallyReady This Time?  The Radical Reform of Secured Lending on Wall Street, COLUM. BUS. L.REV. 291, 296–97 n.6 (1994).3. Consonant with this under-determinativeness, Schwarcz’s and Benjamin’s support forthe nemo dat principle in the context of indirect securities ownership is based on considerations,beyond the scope of this brief commentary, that are considerably more detailed than a simpleinvocation of common sense.  See Schwarcz, Global Economy, supra note 1, at 1573–77, 1580–86.BJERRE COMMENT_FMT.DOC 06/04/02  4:06 PM332 DUKE JOURNAL OF COMPARATIVE & INTERNATIONAL LAW [Vol 12:331juring additional rights out of thin air, but by expropriating some ofZ’s rights in order to include them in the package that Y gets from X.And as I explore in detail in a forthcoming article,4 the Americancommercial law system does so over and over again, in widely varyingcontexts.5  (One example, salient here because Schwarcz and Benja-min explicitly focus on it,6 is the U.C.C. provision that gives priority tothe secured creditor (Y) who takes as collateral from a securities in-termediary (X) the securities entitlements held by an entitlementholder (Z), even if the entitlement holder does not consent.7)  Thecommercial law system’s reason for taking these steps is to fostercommerce between X and Y, by freeing Y from concerns that thirdparties, such as Z, will have claims to the property that defeat Y’s.These violations of the nemo dat principle have a common sense oftheir own, one which duels with the common sense of the nemo datprinciple itself, and hence, the validity or invalidity of the principlecannot be resolved simply by applying common sense.Moral philosophy can hardly lay claim to being a readier prob-lem-solver than is common sense.  The moral philosophical approachdoes, however, frame the issues more sharply and, more important,reveals the depths of what is at stake in a way that ordinary commer-cial law scholarship often does not.  The nemo dat principle is of apiece with the classical liberal tradition, which of course prizes indi-vidual autonomy for its own sake, including, notably, freedom of al-ienation.8  Thus, if the only way for Y to get more than X had is forthe law to conscript Z’s property, then protection of Z’s freedomfrom non-consensual alienation calls for denying Y anything morethan X had.  (This classical liberal outlook is enshrined in theU.C.C.’s own self-declared purposes and policies, which include ex-panding commercial practices through “custom, usage and agreementof the parties.”9)  By contrast, departures from the nemo dat principle4. Carl S. Bjerre, Commerce and Community: The Redistributionist Streak in AmericanCommercial Law (on file with the author).5. In addition to the priority issues discussed in the text below, examples include the void-able title and entrusting rules for goods, the holder in due course rules for negotiable instru-ments, the protected purchaser rules for securities in the direct holding system, the true con-signment rules in secured transactions, and, in the indirect holding system for securities, the ruleimposing pro rata treatment on entitlement holders.6. Schwarcz & Benjamin, supra note 1, at 325–26.7. U.C.C. § 8-511(b) (2000) (secured creditor of a securities intermediary has priority overentitlement holder when secured creditor has control of the financial asset).8. The authorities here range from Locke and Kant to Robert Nozick, and are more fullyexplored in Bjerre, supra note 4.9. U.C.C. § 1-102(2)(b) (2000) (emphasis added).BJERRE COMMENT_FMT.DOC 06/04/02  4:06 PM2002] COMMENT 333in the interest of fostering commerce are of a piece with the utilitarianand pragmatic philosophical traditions, which of course reject the ideaof inviolable natural-law rights and, instead, evaluate rules or actionsin light of their practical results.10In the continuing conflict between these two philosophical tradi-tions, Schwarcz and Benjamin have focused on an area that has beena true stronghold for the utilitarian tradition, simply because the indi-rect holding system for securities has an even more potentially enor-mous practical impact than do most commercial law rules.  The richlyinterlocking, complexly tiered and cross-wired nature of the indirectholding system presents the specter of “systemic risk,” in whichproblems with one intermediary can readily cause problems withother intermediaries, and so on, potentially destabilizing the entiresystem.11  For these reasons it is refreshing and laudable that Schwarczand Benjamin remind us of the individualistic, classical-liberallyrooted nemo dat approach even in this context, while remaining non-doctrinaire enough to entertain utilitarian countercurrents, such asthe secured creditor priority mentioned above.It is unclear whether Schwarcz and Benjamin would, if pressed asa philosophical matter, align themselves generally with the classicalliberals or the utilitarians.  On one hand, they clearly see the securedcreditor priority rule as a limited departure from their starting princi-ple of nemo dat.12  On the other hand, however, they imply a utilitar-ian bent more generally by, among other things, expressing reserva-tions about a conflict-of-laws approach to the intermediary riskproblem (such as that currently proceeding under the auspices of theHague Conference on Private International Law13) on the groundsthat such an approach might sometimes point to a jurisdiction thatdoes not award priority to secured creditors.14  To notice this ambiva-lence is not to criticize it, for as I note above and elsewhere,15 the10. The authorities here, too, are wide-ranging, from the Skeptics through Hume and theChicago-school law and economics analysts.  This tradition is, usually tacitly, the predominantviewpoint in commercial law scholarship today.11. Jim Rogers accordingly calls U.C.C. Article 8’s work on controlling systemic risk “part[of] what might be described as ‘Armageddon planning’ for the financial system.”  James S.Rogers, Policy Perspectives on Revised U.C.C. Article 8, 43 UCLA L. REV. 1431, 1436 (1996).Rogers was the Reporter for the Article 8 Drafting Committee.12. Schwarcz & Benjamin, supra note 1, at 325–26.13. Id. at 316; Sandra M. Rocks & B. Shea Owens, Survey of International CommercialLaw Developments: 1999-2000, 56 BUS. LAW. 1867, 1874–75 (2001).14. Schwarcz & Benjamin, supra note 1, at 329–30; see also id. at 320–21 (discussing theindirect holding system itself in terms of a utilitarian framework).15. See supra notes 4–5 and accompanying text.BJERRE COMMENT_FMT.DOC 06/04/02  4:06 PM334 DUKE JOURNAL OF COMPARATIVE & INTERNATIONAL LAW [Vol 12:331same ambivalence pervades much of the body of American commer-cial law.

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Principle and Utility in the Structure of Securities Ownership: A Comment on Schwarcz & Benjamin

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