George Mason School of Law

1. George Mason School of Law Contracts I Unconscionability F.H. Buckley fbuckley@gmu.edu 1

2. Williams v. Walker-Thomas 2

3. Walker-Thomas Furniture Store1074 Seventh St. NW (at L) 3

4. Why didn’t she shop at Woodward & Lothrop?10 blocks from Walker-Thomas

5. Or Garfinckel’s? 11 Blocks from Walker-Thomas

6. Do you recognize this Department Store?

7. What happened to Walker-Thomas?1074 Seventh St. NW (at L) 7

8. Seventh Street NW, April 5, 1968What happened the day before?

9. Would the Shaw community have been better off had Walker-Thomas never been there? 9

10. What might be wrong here? • Substantive Unconscionability • The “just price” doctrine • Procedural Unconscionability • “bargaining naughtiness”

11. Substantive Unconscionability • Thornborrow v. Whitacre, 92 Eng.Rep. 270 (1705): • W. borrows £5 and in return promises to pay two grains of rye-corn in the first week, four in the second, eight in the third, and so on for a year. The court refused to enforce the contract when it appeared that there was not enough grain in the whole world to satisfy this. The contract was set aside.

12. Substantive Unconscionability Is lending (with interest) per se wrong?

13. Substantive Unconscionability • Is lending (with interest) per se wrong? • The usury prohibition against taking interest on a loan • Deut. 23:20 Unto a stranger thou mayest lend upon usury; but unto thy brother thou shalt not lend upon usury: that the LORD thy God may bless thee …. • Canon 27, Council of Nicea

14. Substantive Unconscionability • Why did the church prohibit usury? • The Biblical prohibition?

15. Substantive Unconscionability Why did the church prohibit usury? The Biblical prohibition? Rent-seeking? Tolleson et al., 5 J.L.E.O. 307 (1989)

16. Substantive Unconscionability Why did the church prohibit usury? The Biblical prohibition? Rent-seeking Moral Hazard?: Eric Posner

17. Moral Hazard A range of outcomes associated with an investment opportunity

18. Moral Hazard How is one’s economic calculus affected if costs are curtailed at 0 on the left side of the curve?

19. Moral Hazard In that case, it’s all upside

20. Moral Hazard Thank God I have insurance!

21. Moral Hazard Do traffic signals cause accidents?

22. How to reduce speed levels…

23. Substantive Unconscionability • Is lending per se wrong?

24. Substantive Unconscionability Is lending per se wrong? Secured lending, then?

25. Substantive Unconscionability • Is lending per se wrong? • Secured lending, then? • UCC 9-201. General Validity of Security Agreement. Except as otherwise provided by this Act, a security agreement* is effective according to its terms between the parties, against purchasers of the collateral and against creditors. *A security agreement creates a security interest in collateral

26. Substantive Unconscionability • Is lending per se wrong? • Secured lending, then? • What about a security interest in after-acquired property?

27. Substantive Unconscionability • Is lending per se wrong? • Secured lending, then? • What about a security interest in after-acquired property? • 9-204 (1). After-Acquired Property. Except as provided in subsection (2), a security agreement may provide that any or all obligations covered by the security agreement are to be secured by after-acquired collateral.

28. Substantive Unconscionability • Is lending per se wrong? • Secured lending, then? • What about a security interest in after-acquired property? • Otherwise how could a lender take an interest in inventory or accounts receivable?

29. Substantive Unconscionability • Is lending per se wrong? • Secured lending, then? • What about a security interest in after-acquired propertyof a consumer?

30. Substantive Unconscionability • Is lending per se wrong? • Secured lending, then? • What about a security interest in after-acquired property of a consumer? • 9-204 (2). After-Acquired Property. No security interest attaches under an after-acquired property clause to consumer goods* … when given as additional security unless the debtor acquires rights in them within ten days after the secured party gives value. *Goods “used or bought for use primarily for personal, family or household purposes”

31. Substantive Unconscionability • Is lending per se wrong? • Secured lending, then? • What about a security interest in after-acquired property of a consumer? • What’s the point of this? • “Exempt Property” in Chapter 7

32. Substantive Unconscionability • The specter of household repossessions

33. Substantive Unconscionability Why would a consumer ever agree to a security interest in after-acquired property?

34. Substantive Unconscionability Why would a consumer ever agree to a security interest in after-acquired property? Ignorance as to the terms?

35. Substantive Unconscionability Why would a consumer ever agree to this? Ignorance as to the terms? Signalling? Two borrowers approach a lender. One is high risk, the other low risk. The borrowers know their quality but the lender cannot tell them apart. How can he distinguish them?

36. Substantive Unconscionability Signalling? Two borrowers approach a lender. One is high risk, the other low risk. The borrowers know their quality but the lender cannot tell them apart. How can he distinguish them? Assume that the low risk borrower can hold his hand in a fire for a longer period of time…

37. Substantive Unconscionability Signalling? Two borrowers approach a lender. One is high risk, the other low risk. The borrowers know their quality but the lender cannot tell them apart. How can he distinguish them? The willingness to do so might provide a separating equilibrium

38. Substantive Unconscionability Signalling Separating and pooling equilibria: Pooling equilibrium: Benefit > CostHigh Quality Borrower Benefit > CostLow Quality Borrower Separating equilibrium: Benefit > CostHigh Quality Borrower Benefit < CostLow Quality Borrower

39. Cheap Talk as a Pooling Equilibrium Hobbes: He which performeth first doth but betray himself to his enemy.

40. Secured Lending as a separating equilibrium Signalling? Two borrowers approach a lender. One is high risk, the other low risk. The borrowers know their quality but the lender cannot tell them apart. How can he distinguish them? Assume that default is costly for both borrowers. However, the low risk borrower has a lower probability of default…

41. Secured Lending as a separating equilibrium Signalling? Assume that default is costly for both borrowers. However, the low risk borrower has a lower probability of default… The cost C for each borrower is: pD*L, where pHigh quality borrower < pLow quality borrower So that CHigh quality borrower < CLow quality borrower

42. Substantive Unconscionability Signalling? Two borrowers approach a lender. One is high risk, the other low risk. The borrowers know their quality but the lender cannot tell them apart. How can he distinguish them? A separating equilibrium if the low risk borrower is ready to accept a penalty on default?

43. Now Procedural Unconscionability

44. Now Procedural Unconscionability Is unconscionability something different from the fraudlets we have seen? Is it simply all or many of them, in the ensemble? Or a weaker threshold for the Π? Or something else entirely?

45. Now Procedural Unconscionability A rule of capacity in Walker-Thomas? Do people like the Π in Walker-Thomas have the capacity to enter into the sales contract?

46. Now Procedural Unconscionability A rule of capacity in Walker-Thomas? Do people such as the Π in Walker-Thomas have the capacity to enter into the sales contract? Define “people such as the Π”

47. A Rule of Capacity? • If we don’t legislate this ex ante, how about letting all “such people” set aside their contracts ex post under UCC § 2-302? 47

48. A Rule of Capacity? • If we don’t legislate this ex ante, how about letting all such people set aside their contracts ex post under UCC 2-302? • Same diff from an ex ante perspective? 48

49. A Rule of Capacity? Did the Π understand the cross-collateral clause? 49

50. Is her poverty relevant? • What were her financial resources?