Notes and Changes

This event is also a webinar. To participate, visit from 16:45 (GMT) on Wednesday, 20th February. Participants can submit questions via

There are two downloadable handouts relating to this event:

Coles-Bjerre lecture material

Bjerre lecture materials


Any system of property rights must navigate between two conflicting principles: transferability (pursuant to which property rights support a robust economy in furtherance of the common good) and stability (pursuant to which property rights are transferred only in accordance with the rights-holder’s intentions). Though this conflict has been evident for centuries, the relatively modern United States codification of property rights to stocks, bonds and other investment securities highlights the conflict’s continuing stakes, while also demonstrating that particular resolutions of the conflict are fraught with the potential for cognitive error, even among expert statutory draftspersons. 

In particular, if a transferor of securities is later found to have lacked the mental capacity to understand the transaction, or to control his or her actions in relation thereto, then the conflict between transferability and stability of property rights poses a particularly intractable dilemma. The law must either deny rescission, thereby protecting the reliability of the commercial securities transfer system, albeit on the shoulders of a transferor who cannot self-protect; or permit rescission, thereby exercising a perhaps defensible paternalism, but undermining the robust reliability of innocent transferees’ rights. Under Article 8 of the Uniform Commercial Code, which codifies questions of property rights to securities under U.S. law, the evident effect is that rescission is denied under facts that expressly include the transferor’s lack of mental capacity. 

Startlingly, though, the Article 8 drafters themselves are on record as clearly intending, and believing, that their statutes permit rescission by a transferor who lacks mental capacity. Such a severe mismatch between drafter intention and statutory result may be explained by insights from cognitive psychology, showing that even expert knowledge tends to be deployed so as to fail, in identifiable ways, to comport with idealized rationality. The Article 8 drafters had fractionated expertise, well suited to protecting the ordinary transactional patterns that, for all their complexity, are the subject matter’s bread and butter; but the drafters were less adept at managing the unusual fact of mental capacity. Corresponding failures can be expected to afflict statutory drafting on other subjects as well, a fact that supports flexibility in the process of statutory interpretation.


In the United States corporate insolvency system, the challengingly dense statutory regime known as the Bankruptcy Code is subject to conflicting interpretations by judges having differing policy outlooks. The inescapably subjective nature of those judicial interpretations is tacitly illustrated by the U.S. Supreme Court’s ruling in Merit Management Group, LP v. FTI Consulting, Inc., which grapples with a modern high-finance twist on the ancient pattern of a fraudulent transfer, made by an insolvent entity to a transferee and detrimenting creditors generally. Parallel theoretical points also operate in a different insolvency context, specifically the established U.S. principle of cross-class “cramdowns” that are binding on dissenting creditors. 

In Merit Management, a company had promised to buy the common stock issued by its competitor and, while insolvent, proceeded to borrow the corresponding millions of dollars from a lending bank. The lending bank transferred the funds into an escrow account at a second bank, which then disbursed the funds to the sellers. Under broad fraudulent transfer principles (akin to “transactions at an undervalue”), the funds would ordinarily be recoverable from the sellers – but in the modern financial context, the Bankruptcy Code has recently immunized from avoidance any “transfer” on account of stocks or bonds that is made “by or to” a financial institution. At issue for the Supreme Court was whether the company’s payment was “by or to” a financial institution (taking into account the roles of the lending bank and the escrow bank), or not (because the payment was essentially “by” the company and “to” the sellers). 

Unacknowledged by the Supreme Court, the answer inescapably depends on the phenomenon known in cognitive linguistics as a mass/multiplex ambiguity. The payment can equally well be viewed as a single transfer from the company to the sellers (a “mass”), notwithstanding the multiple intermediate steps; or as a collection of sequential transfers first from the company, thence through the banks, and finally to the sellers (a “multiplex”), notwithstanding the parties’ overarching purpose. The case thus echoes ancient philosophical conundrums concerning one versus many, but with great practical import because of its consequences for the Bankruptcy Code’s immunization. (In the context of plans that reorganize multiple debtors, the parallel mass/multiplex ambiguity is this: does assent from an impaired class of creditors only of Debtor A suffice for the “cramdown” of dissenting creditors of Debtor B?) People resolve mass/multiplex ambiguities by reference to their own cognitive “motivation,” which for a judge implicates among other things his or her jurisprudential outlook. The jurisprudential outlook of Justice Sonia Sotomayor, who authored the unanimous Supreme Court opinion in Merit Management, is generally liberal (i.e. it tends to favor the protection of creditors as a group rather than the immunizing of those who receive fraudulent transfers), and indeed her opinion holds that the Bankruptcy Code’s immunization does not apply here. However, perhaps for strategic reasons, Sotomayor’s opinion focuses narrowly on the purportedly plain language of the statutes in question, thereby perniciously slighting the cognitive dimensions that are inherent to the process of judging.