Features of a Well-adapted Law of Real Security

The empirical research on the lending behaviour of banks in modern economies demonstrates the importance of the law of real security as a driver for the availability of credit/^[1339] The research of mid- and eastern European transition economies by Haselmann, Pistor, and Vig shows that ‘improvements in collateral law seem to have a statistically significant effect on bank lending/⁹ In a more recent research project on the laws of real security in contemporary economies, Calomoris and his co-researchers have used a cross-country micro-level dataset providing information regarding asset liquidation values in order to examine whether different laws of real security with respect to movable assets and receivables did have an impact on lending by banks in the reviewed countries.⁴⁰ Their conclusion was that differences in legal systems' ability to support the use of movable assets and receivables as collateral for bank loans ‘substantially affect the ability of borrowers to gain access to credit’.

They identified a number of features of laws of real security, each of which they consider important for the ability of debtors to use their movable assets and receivables as collateral and thus to enhance their access to credit/¹

In this section these requirements for an effective law of security, which are to a large extent a reflection of its economic functions, will be applied (in slightly modified form) to Roman law.^[1340] ^{^[1341] ^[1342] It will appear that the classical Roman law of the third century ad satisfies all these requirements, with the exception of one: a collateral registry.}

List of features

In their contribution, Calomiris and his co-authors list a number of features of laws of real security enhancing access to credit, which I have adapted in order to reflect the special characteristics of the Roman economy?³

The law allows a debtor to grant a (possessory or non-possessory) security right in a single category of movable assets, or in substantially all its movable and immovable assets and receivables, without requiring a specific description of the collateral, and (ideally) with a single method of creation. 0

2. A security right can be given over future or after-acquired movable and immovable assets, and can extend automatically to the products, proceeds, or replacements of the original assets. 0

3. The law allows the debtor and the creditor to agree who shall have the right to use the collateral, and certain rights to dispose of the collateral can be granted to the creditor or the debtor. 0

4. A general description of debts is permitted in the collateral agreement and in registration documents. All types of debts can be secured between the parties, and the collateral agreement can include a maximum amount for which the assets are encumbered. 0

5. Secured creditors are paid first (e.g., before tax claims and employee claims) when a debtor defaults outside an insolvency procedure. 0

6. A collateral registry or registration institution for security interests over immovable and movable property is in operation, unified geographically and by asset type, and indexed by debtors' namesTh

7. The law allows parties to agree in a collateral agreement that the creditor can enforce its security right out of court. 0

Calomiris and his colleagues oppose the (greater) importance of movable assets and receivables in providing debt capacity for firms to that of real estate. This fits well for modern economies but is less suitable for the Roman empire, where the ‘allocation of resources that favor immovable-based production’^[1343] was much more important?^[1344] In addition, the protection of debtors is left out of the picture by Calomiris and his co-authors, although a law of real security which is too harsh on security providers may cause them to shy away from credit markets.

Generic and general pledges (1); future assets, fruits, and products (2)

In order to reduce transaction costs, there should be as few formalities for creating security as possible?^[1345] For the creation of a right of pignus or hypotheca, no formalities existed. Initially, a full-fledged right in rem required that the charged property was somehow brought under the control of the creditor (traditio, inductio), but at a later stage non-possessory pledges could be created ‘by mere agreement’ (nuda conventione). In practice, however, the granting of a right of pledge would—for evidentiary purposes—be recorded on writing tablets or papyrus. During the course of the classical period it became standard practice that res mancipi were also charged by way of pignus or hypotheca.^[1346] ^{^[1347] Thus, a single method for creating security over all types of asset became available, which, moreover, could also be used for property acquired subsequently?⁹ Any admissible form of property defined in the pledge agreement could be made the object of a right of pledge.5° This would include a wide range of assets: movable property, slaves?¹ immovable property, and even subordinate real rights (servitudes, usufructs).^[1348] ^{^[1349] ^[1350] ^[1351] ^[1352] In addition, the debtor's contractual claims against his debtors could be charged by way of pignus. It would also be possible to pledge one's co-ownership interest in property jointly owned with others and commonly owned property/³ The description of the pledged assets contained in the conventio pignoris could be drafted in generic terms, for instance invecta et illata, a herd or a shop's inventory, without it being necessary that each individual item be identified and that frequent updates be executed for after-acquired items/⁴ From the second century ad, it even became possible to create a ‘floating charge' over all the debtor's present and future assets/⁵ At an early stage, products from the pledged property could be pledged, provided this was expressly agreed.}}

This is illustrated by the clause recommended by the early classical jurist Cassius in D. 13.7.18.3, that ‘whatever things are the creation from and product of the wood' shall be pledged. Gaius (D. 20.1.15.1) and Papinian (D. 20.1.1 pr.) hold that virtually all future assets could be pledged by way of general pledge. For special pledges of assets acquired after the pledge was granted, it was originally required that they should have roots in the patrimony of the debtor at the time of the conventio pignoris, such as crops, offspring, or land purchased before the granting of the pledge (res debita). In late classical law (Marcian), future goods without such roots could be specifically pledged too, by including their acquisition by the debtor as a condition of the granting of the pledge.

Rights of disposition or use (3)

Empirical studies for contemporary economies demonstrate that non- possessory security leads to a greater availability of credit/⁶ Charged assets that are essential for the debtor's business should still be able to generate income with which the secured debt can be discharged. By allowing the debtor to remain in possession of the charged assets, he or she will be able to continue using the assets for the exercise of a trade or profession. The archive of the Sulpicii provides epigraphic evidence of a transactional practice of creating non-possessory pledges already in the first century ad. A non-possessory pledge would be even more effective if the debtor were able (with the creditor's permission) to dispose of the charged assets in the ordinary course of his or her business. Although originally the debtor could not transfer pledged property, this later changed. With the secured creditor's (express or implied) consent, the debtor could transfer the pledged property without the pledge continuing to attach to it. For general pledges this may have been inherent to the legal nature of this variation of pledge. The logical sequel of the non- possessory pledge is the multiple pledge.

In particular, when the (expected) liquidation proceeds of a charged asset exceed the amount of the secured debt, the debtor can optimize the collateral value of the asset if the law enables him or her to create several layers of security in favour of multiple creditors. During the course of classical law, the inability to create multiple pledges over the same assets disappeared, under the influence of transactional practices.

The availability of credit may be further enhanced by giving the creditor rights to use the charged assets or even dispose of them. In Roman law, such rights could take several forms. The creditor could use the (natural or civil) fruits of the charged property to discharge the secured debt or to cover the interest (antichresis). The creditor could also have the right to charge the collateral for his or her own debts (‘rehypothecation').^[1353] Also, when a creditor assigns a secured claim to another person, that other person (the assignee) should be able to enforce the security when the assigned debt is not properly discharged. Although the assignment of debts was problematic in Roman law, devices were used to achieve the same results, and in those situations the ‘assignee' was entitled to enforce the security/^[1354] One of the ways of ‘assigning' the active side of debts was the replacement of the original creditor of the debt with the assignee as the new creditor by way of novation/^[1355] The replacement of creditors by way of novation was, however, far from efficient. Thus, a constitution by Gordian from 239 ad rules that, where a debt is transferred through novation, the security granted for the original debt should be granted again.^[1356]

Range of secured obligations (4)

In modern terminology, the classical right of pledge was an accessory right. The whole life of the right of pledge—from its inception to its end—would be determined by the existence of the secured debt. The accessory nature of pignus and hypotheca entailed, first and foremost, that the right of pledge could—in principle—only come into existence when there was a secured debt.

Pursuant to the formula of the actio Serviana, it would come into existence as an actionable real right only ‘for money owed', indebted either now or in the future.^[1357] ^{^[1358] The interpretation by the jurists of the words ‘propterpecuniam debitam is a good example of how one condition of the conditional programme comprised in the actio Serviana’s form of action formed the basis for a refined set of sub-rules developed by the Roman jurists, which was well adapted to the economy. The principle of dependence (accessory nature of pledge) was not strictly applied by the jurists: pledges could also be granted for conditional and future debts. From Marci. D. 20.1.5 pr. it appears that debts arising under whatever contract (e.g., mutuum, stipulatio, sale, rent) or other legal basis (e.g., dowry) could be secured by a right of pledge/² The secured debt could not only be an obligation arising pursuant to ius civile (e.g., the contracts mentioned above) but could also arise as a matter of ius honorarium (e.g., constitutum debiti). It would be possible to grant a right of pledge for only part of the debts owed to the creditor (e.g., principal or interest, part of the rentals). It would also be possible that a right of pledge would be granted sometime after a loan (or other) agreement had been entered into, for instance because during the term of an unsecured loan the debtor's solvency had deteriorated and the creditor wanted to strengthen his position by taking a pledge. A constitution by Septimius Severus and Caracalla (C. 4.32.4.1) rules that where a pledge had been granted in order to secure interest, but afterwards the debtor promised that he would pay higher interest, the pledge could not be enforced for the higher interest ‘since at that time, when the (original) documents were executed there was no agreement that the pledge be bound for such an addition'. This constitution indicates that increased interest would be secured where the pledge agreement had already specifically provided for this. Also, where a banker had provided a ‘credit facility' to a client, giving the latter an option to borrow money, a right of pledge could already be granted, provided that the conventio pignoris expressly defined the secured obligations with reference to the future loan.^[1359] Ranking (5)
The creditor who was the first in time to take a right of pledge over one or more of the debtor's (or someone else's) assets could be sure that subsequent rights of pledge would not adversely affect his preferential right of recourse/^[1360] The ranking of multiple pledges over the same property would be determined by the prior tempore principle, and only the first ranking pledge creditor would have the right to sell the pledged property (ius vendendi).^[1361] ^{^[1362] Where the first ranking creditor would actually exercise his right of sale, lower-ranking pledges would be extinguished by operation of lawTh Lower-ranking secured creditors eventually became as such entitled to the superfluum, even in the absence of an express or implied pledge thereof (as still contemplated by Gaius D. 20.1.15.2). When the debt secured by the first ranking pledge was discharged, the second-ranking pledge became a first ranking one, while other lower-ranking pledges would also shift rank correspondingly/⁷ A lower-ranking creditor could accelerate this process, by exercising the so- called ius offerendi et succedendi. We have seen that the secured debt could be a conditional or future one or could even arise under a contract that still had to be entered into. In most cases, the ranking of the pledge as well as the ability to institute the actio Serviana would then still be determined with reference to the time at which the pledge was granted. From several Digest texts the principle emerges that the decisive factor for the priority of a right of pledge is the time at which it is certain that the debtor is bound by the secured debt. In other words, normally the priority and ranking of a right of pledge would be determined with reference to the time it was granted. This would be different, however, where the debtor was still at liberty to decide whether or not the secured debt would arise. The priority of the pledge would then be determined by the time the debtor became committed to the secured debt. All the cases discussed by the jurists are based on this principle.^[1363] Also, the opening of insolvency proceedings did not adversely affect the secured creditor's ability to take recourse against the charged assets. In Roman law, when insolvency proceedings were conducted in respect of the debtor, the secured creditor could still take recourse against the charged property with priority over other creditors. If the creditor was in possession of the charged property, he could sell it to third parties and would only be required to pay the surplus to the person conducting the insolvency proceedings (the bonorum emptor). If the pledge was non-possessory, the creditor could institute the actio Serviana to recover the pledged property from the person in charge of the relevant stage of the insolvency proceedings/^[1364] As a matter of Roman law, secured creditors could, therefore, generally be certain that the proceeds of the charged property were exclusively available in order to discharge the secured debt. The ranking of rights of pledge was only rarely reversed by operation of law. This did take place, however, in particular when the money provided by a later secured creditor was used for the benefit of the pledged property, such as the equipment, crew or repair of ships or the storage or transport of mer- chandise.^[1365] ^{^[1366] ^[1367] In an opinion by Papinian (D. 20.4.3.1) and in a constitution from 293 ad by Diocletianus and Maximianus (C. 8.17.7), the pledge over real estate and other goods (e.g., marble plates in Scaev. D. 20.4.21.1) granted to the lender who financed their purchase is considered to have priority over any other (general or special) pledge granted earlier/¹}}
From the second century ad onwards, there was an increasing number of cases in which all the debtor's assets would be subject to a right of pledge (or ‘pledge-like' privilege) arising by operation of law in favour of the imperial treasury. These fiscal general pledges may not have been as devastating for secured credit as is often assumed in modern literature/² In particular, where general pledges secured debts arising under loans or other contracts entered into between the treasury and citizens, the position would be exactly the same as with conventional pledges granted to private creditors. These general pledges would generally be subject to the prior tempore principle, so that they could not adversely affect existing security rights.^[1368] ^{^[1369] ^[1370] ^[1371] ^[1372] ^[1373] ^[1374] But, for fiscal preferences too the guiding principle was that imperial procurators, shall in their enforcement, not infringe the rights of prior pledge creditors/⁴ They shall only be authorized to sell property charged with anterior pledges where there is a surplus value, and prior creditors shall be paid first/⁵ In the late classical period a tendency may have started to grant a special position to the treasury/⁶ However, if in the late Empire tax burden was low, as it very well may have been/7 fiscal general pledges may not have been seriously disruptive at all. The large amount of late classical jurists' opinions and imperial constitutions on pignus and hypotheca, in any case, do suggest that these security interests continued to be widely used. This could be an indication that fiscal general pledges were not fatal for the effectiveness of real security.}
Publicity (6)
For a long time, the combination of social norms, legal rules, and transactional practices must have worked reasonably well to remedy the lack of publicity and the absence of a general principle protecting bona fide third parties.7⁸ It was only by the end of the second century ad that this combination may have started to become less effective and that pledging someone else's or previously charged property became a serious problem. The case of publicity shows that Hayek's spontaneous orders are not always capable of achieving the most efficient solution (with the lowest transaction costs)/⁹ Here, the Roman state could have intervened (as it did in Roman Egypt) by setting up public registries in which ownership and other real rights were recorded, but it did not do so.^[1375] ^{^[1376] ^[1377] ^[1378] ^[1379] The effects of this were, however, not as devastating as they are professed to be in modern handbooks of Roman law, with the exception perhaps of the end of the Principate/¹}
From a comparative perspective, it is important to note that classical Roman law was not unique in not having title registers for immovable property. English and other modern experiences show that developed credit markets can exist without registration systems for immovable property, and that setting-up and operating such registries is not without difficulties/² In respect of movable property, Roman law did not develop a general principle protecting bona fide pledge creditors (or purchasers) against lack of title or already- existing charges. Also, this remarkable feature of Roman law can be put in perspective by a comparison with modern laws. In contemporary market economies, contractual claims are valuable assets and therefore an important category of collateral: receivables-based financing is of immense importance for many companies. Nevertheless, as far as the protection against multiple dispositions or unauthorized dispositions of claims is concerned, in many (if not most) civilian jurisdictions (e.g., Germany, the Netherlands, France), the situation is exactly the same as with movable property in classical Roman law. There is neither a public filing system for charges over receivables, nor are there rules on the protection of bona fide chargees (or assignees) of receiv- ables.8³ In the credit markets this is no obstacle for taking receivables as collateral, as there are sufficient non-legal incentives which prevent debtors from failing to disclose that their receivables have already been assigned or charged.8⁴ These non-legal incentives may—at least for many centuries—even have been stronger for all types of assets in ancient Rome.
Enforcement out of court (7)
In recent historical literature, it is stressed how ineffective the Roman law of civil procedure was in enabling creditors to get what was due to them.^[1380] This could be an exaggeration. The procedural documents in the archive of the Sulpicii indicate that there were no great obstacles for relatively low placed Romans (freedmen) to have access to justice/^[1381] The Sulpicii did litigate a lot, and for relatively low amounts, which rather suggests that Roman litigation was overall effective/^[1382] In any case, if litigation was so inefficient, there was all the more reason for creditors for taking real security, because precisely the law of real security enables a secured creditor to take enforcement measures without the need to go to court first.^[1383] ^{^[1384] ^[1385] ^[1386] Empirical studies indicate that efficient enforcement mechanisms lead to greater availability of credit, lower interest rates, and less collateral for equivalent levels of borrowing/⁹ As early as the first century ad (and perhaps already earlier), creditors would, in practice, take recourse against charged assets by selling them at auction. Auctions were an economically efficient method of selling charged assets/⁰ The role of argentarii as specializing in giving credit to purchasers at auction further enhanced the importance of credit for the Roman economy/¹ Even where borrowers would default under their loans, lenders could be certain that they would be able to recover their funds quickly through a procedure with which they were well familiar. This probably entailed that lenders were more willing to lend, so that credit was more easily obtainable for borrowers. In his comparative study on the Egyptian and Roman credit markets, Lerouxel therefore concludes that the institution of the auction must have significantly contributed to the number of transactions in the Roman credit market.9²}
The state of the law at the end of the classical period can be summarized as follows/³
1. The creditor must in principle take recourse against the object of security by selling it to a third party (C. 8.34.1), and paying any surplus proceeds to the debtor (D. 13.7.24.2).^[1387] ^{^[1388]}
2. The creditor can acquire ownership of charged objects in four cases:
a. the parties have—at the time the security is created—agreed to a conditional sale for the market value (D. 20.1.16.9);
b. the parties have—after the secured debt has become due and payable—agreed to an unconditional sale or datio in solutum (C. 8.19.1.1, D. 13.7.34);
c. the creditor has obtained imperial permission to appropriate the charged object (impetratio dominii; C. 8.33.1);
d. the parties have agreed that if the secured debt is not paid in time, the creditor shall be entitled to the fruits of the charged property, whose value shall be set off against the secured debt (D. 20.1.1.3).
3. The debtor has a right of redemption, allowing him to recover the charged object by satisfying the secured debt after default, which can be exercised until the enforcement sale takes place (C. 8.27.8).
4. The creditor has a right to withhold redelivery of the charged object until his other, unsecured claims have been discharged (C. 8.26.1.2).
This scheme is strikingly similar to modern execution laws and is, in some respects, more advanced than most contemporary laws. Only recently have several European codifications introduced legislation positively sanctioning the type of agreement discussed in Marci. D. 20.1.16.9 (conditional sale), precisely because it is regarded as an effective security arrangement?⁵ Where, indeed, the parties' agreement ensures that the charged property is estimated at its market value at the time of execution and the surplus value is for the benefit of the debtor, there is no need for formal execution proceedings by way of auction. What in the twenty-first century is regarded as ‘state of the art' in collateral enforcement was already provided for in the Roman law of the third century ad!
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Source: Verhagen Hendrik L.. Security and Credit in Roman Law: The Historical Evolution of Pignus and Hypotheca. Oxford University Press,2022. — 448 p.. 2022

Features of a Well-adapted Law of Real Security

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