7.1 Introduction
Legal heterodoxy is hard to sustain, especially in developing countries. When transnational interests are at stake, the geopolitical pressures are great and opposite forces are usually prevalent. Legal harmonization predominates. The European Union may be the best example among developed countries. There, visions of a common market drive the reduction of national legal differences. In the developing world, promises of development and foreign investment propel hegemonic models. Institutions like the Organization for Economic Cooperation and Development, the United Nations Commission on International Trade Law, Unidroit, as well as the World Bank and the International Monetary Fund, each in their own way promotes the global standardization of national laws. International development assistance by powerful countries also works by conditioning aid on national legal reform, often in the style if not exact copy of donor laws and institutions. Foreign investors equally demand familiar laws and legal institutions providing for the maximum of profits and guarantees.
By contrast, critiques of “one-size-fits-all” solutions are routinely rebuffed by assertions of “best practices,” proven solutions, investor rights, efficiency, and lower transaction costs. Alternatives more responsive and representative of local conditions, potentially more sustainable, are mostly undermined or ignored. This is not simply because they are not known. Powerful interests often stand against them. In this environment, the developing world is the least capable of resisting. Such countries often depend on international loans, trade treaties, bilateral assistance, and foreign investment tied to legal harmonization. If that were not enough, the main experts on law and development, and their sponsoring institutions, similarly applaud the benefits of one model over multiple alternatives.
Despite the adverse currents, Latin American countries enjoy a long history of legal innovation, whether the result of autonomous development, explicit adaptations of foreign models, or de facto variation on the ground of the law-in-the-books. For most international observers, many of these developments remain relatively obscure, unless they involve transnational interests or geopolitical attention. Indeed, most comparative law on Latin America stems from law-and-development work. It is these projects that have garnered the most attention. Local legal differences – when considered at all – mostly figure as diagnoses of legal underdevelopment. They generally become targets for reform, “modernization,” and inevitably elimination.
Regardless, differences persist. And not all Global South differences can be simply dismissed as either dysfunctional or indefensible. However, the law-and-development literature has helped consolidate a hierarchical ordering between developed and developing. This makes it harder to take developing country law seriously and to examine its features at face value. It is not simply a question of making these legal systems, and their latest developments, better known to an international audience. Even when amply shown, skepticism quickly emerges over their lack of effectiveness, relative unacceptance by the broader population, origins in a foreign parent jurisdiction, and even their drafters’ misunderstanding of their own laws. Pretending that this hierarchical structure does not exist will not make it go away. An array of geopolitical interests, and an extensive development assistance industry, depend on it existentially.
As such, in addition to making heterodox laws and legal institutions better known in the legal literature, the structural bias against their recognition must be frontally addressed. The elements that keep it in place must be critically assessed. To the extent these are not defensible distinctions, they must be challenged and rejected – repeatedly, until a new paradigm is in place. It may not be inalterably structural, but it is also not just ephemerally discursive. This chapter contributes to that work by challenging one of the main elements of this hierarchical arrangement: specifically, legal informality as a marker of underdevelopment.
Surely, recognizing different policy objectives and distributional effects within developing country law allows for more sober consideration of alternatives. This is not possible, however, if they are summarily dismissed. Certainly, not all differences will be useful or positive. Some examples of heterodoxy may turn out to be norms and institutions from a different era – uniformly regarded as unsuitable to address contemporary problems. Some may represent unjustifiable advantages for a single group or class in society, enacted through pork-barrel politics common throughout the world’s legislatures. However, some legal heterodoxy may more valuably signal a defensible technique, policy preference, and distribution of resources than those offered by hegemonic prescriptions.
This chapter is divided into two sections and two examples. Section 7.2 examines the notion of legal heterodoxy itself and introduces the theory of heterodox legal informality. The latter, I argue, is Latin America’s pre-eminent contribution to modern law. It represents alternative arrangements of legal formality and informality, combined. Section 7.3 examines two instances of heterodoxy in Latin America. The first is secured transactions laws. These are laws that enable transfers of property rights from debtors to creditors to guarantee debts. They have undergone a neo-liberal revolution in the past decades. Almost all countries in the region have replaced, or are under pressure to replace, their chattel mortgage laws. Whatever laws were previously in place, the reforms enact the liberalizing approach to security rights modeled by the Uniform Commercial Code in the United States. The second example is specifically from Colombia. That country has adopted an innovative property law regime within the context of private law transitional justice. Its objective is to restore landed property to those physically displaced from their homes by that country’s guerrilla war. It turns the traditional mix of formality and informality in property law on its head, by switching presumptions and shifting burdens of proof. Both of these are examples of heterodoxy: the first waging a rearguard action and mostly losing, the second recently extended by Colombia’s legislature for a second ten-year period until 2031.
7.2 Latin American Legal Heterodoxy
Uncovering legal heterodoxy, from a constructive perspective, may yield some defensible alternatives to dominant global models. Of course, the first distinction to make concerns the meaning of the term “heterodoxy” itself. What is considered heterodox or divergent from the hegemonic changes over time, as dominant global positions themselves change. Features that may seem heterodox today may have been hegemonic in their day, when initially introduced. Heterodoxy also depends on the type of orthodoxy that it militates against – whether global, local, sectorial.
From today’s perspective, legal heterodoxy was rife in Latin America in the early twentieth century. An example is the area of property rights. Panama developed a form of rural property not subject to foreclosure.Footnote 1 Colombia established the power to extinguish title without compensation on large, un-utilized tracts of agricultural land for redistribution to landless farmers.Footnote 2 Mexico, until a recent reform, constitutionally protected collective ownership of campesino farmlands.Footnote 3 Brazil recognized different property types, distinct from full title, for squatters on public land.Footnote 4 And, in many countries, indigenous territories have long constituted a different type of landholding.
Most of these laws when enacted were not counter-hegemonic per se. They benefitted from the globalization of “social law” in the early twentieth century, equally impacting Latin America.Footnote 5 The specific formulas adopted in the region were in some cases unique, but they were supported by a broader transnational zeitgeist generating models and authoritative ideas. These were generally directed at protecting the most vulnerable from the unequal harms produced by industrialization and capitalism. Some of the laws and models from that era remain on the books. And these are certainly heterodox today, from the perspective of a contemporary neoliberal order.
Faced with the increasing power of multinational agribusiness and foreign investors, however, even obscure agrarian laws on the books have come under fire. Promoted by the World Bank and the Inter-American Development Bank, titling programs for squatters and parcelization of collective farming have had this effect. They substitute full-title property for the social relations and legal forms previously in place – consolidating a singular form of property. Indeed, “orthodox” legal rules – to which powerful transnational actors are committed – are hard to deviate from. A significant amount of geopolitical pressure accompanies the push for uniform rules for foreign creditors and investors.
7.2.1 Legal Informality
Probably the most significant example of legal heterodoxy in Latin America however is the role played by informality in the legal system.Footnote 6 This is not generally perceived as a positive, though.Footnote 7 Rather the opposite is true. In fact, it figures as an element in law-and-development’s diagnosis of underdevelopment.Footnote 8 In development circles, legal informality goes hand in hand with legal formalism, which has a different meaning than informality’s opposite, “formalization.”Footnote 9 Legal formalism refers to excessive rigidity in the drafting and application of legal rules and categories.Footnote 10 This is generally associated with raising form over substance. And the forms prereform in Latin America are generally perceived as backward, connected to (old) European models, inherent to political economies less conducive to economic development, and generally unaligned with contemporary policy goals. The formalistic training of lawyers is blamed for the reproduction of a legal consciousness steeped in doctrinal categories, traditions, and idées fixes. These get in the way of implementing policy and functionality.
Indeed, both excessive legal formalism and rampant informality are closely associated with law in the region. One is typically tied to the other: legal formalism breeds informality. However the two are interconnected, they mark the hard divide between developed and developing country law. Developed countries are not formalistic (or much less so), and they do not have significant informality, so this thinking goes. I have critiqued the diagnosis of excessive legal formalism in Latin America, elsewhere.Footnote 11 My focus here is on informality. In this context, the high incidence of legal informality is perceived as related to economic stagnation, political instability, lawlessness, and other evils.Footnote 12 It may be expressed as a gap between law and society, lack of penetration of the formal legal system, or some other way. The basic concept, however, is routinely misused. And informality has no singular meaning.Footnote 13 It has been stretched to include a broad array of phenomena – that is, as a euphemism for illegality; abuse of discretion in official decision-making; social norms operating instead of legal norms; gaps, conflicts, and ambiguities in the positive law; impunity; the gap between law and enforcement; and other possibilities. In reality, these represent commonplace phenomena in all modern legal systems, although not normally labeled that way.Footnote 14 Nonetheless, the diagnosis of informality – in its various forms – drives much development reform.Footnote 15 It works by undermining the defensibility of existing arrangements – described as informal – and, in their place, advancing development reforms.
7.2.2 The Stigma of Informality
The preference for formalization is strong and long-standing. It hails back to at least Max Weber and his authoritative analysis of developed legal systems.Footnote 16 According to him, their hallmark was the superior level of formalization and bureaucratization attained. It was a legal system’s dis-embeddedness from traditional and charismatic authorities that distinguished it. It was able to garner legitimacy through routinization and regularization. Legal norms and institutions stand apart because of their character as general rules applied uniformly. Weber may have fallen prey to an overly narrow reading of his texts, considering his more nuanced views.Footnote 17 It is not surprising, however, that Western legal professionals would have internalized this definition.
Law and development experts easily extended it to the developing world.Footnote 18 There, the prevalence of non-formalization or different formalization helps explain underdevelopment.Footnote 19 It encapsulates the distinction between developed and underdeveloped law. Not limited to informality, the discursive divide is created by an array of familiar observations about underdevelopment: the arcaneness of laws on the books, backwardness of institutions, an extraordinary gap between the law-on-the-books and the law-in-action, law’s lack of penetration in society, excessive legal formalism, as well as extensive informality. These generalized beliefs consolidate the view that legal development reform depends on formalization of the informal.
However, what may be appropriately considered informal is far from clear. There is a tendency to find a plethora of informality in developing countries and to characterize such phenomena as negative. The designation may effectively express, in any given instance, a preference for rules over standards on a certain question; judicial review instead of administrative discretion; state law instead of social (or extralegal) norms; and the repression – or conversely regularization – of illegal or quasi-illegal activities. Regardless, the finding of informality becomes an argument for reform. Whatever gets tagged as “informal” appears deficient and in need of modernizing and changing.
Quixotically, some of the same phenomena when noted in developed countries are rarely labeled “informal.” Instead, they are validated and legitimated within the legal system as expressing some other value. Extralegal phenomena simply become private ordering, self-regulation, legislated deference to commercial practices, decision-making based on standards, official tolerance for residual non-enforcement, self-help remedies, and other concepts of this type. Some of the equivalent phenomena in the developing world are not so generously described. Regardless, law and sociology scholars have abundantly demonstrated the gap between the law in the books and the law in action in developed countries.Footnote 20 In a famous 1971 article by Stewart Macaulay, the informal practices of businesspeople, car dealers in Wisconsin, were examined.Footnote 21 Despite the mythology of commercial law as a regulator of business transactions, business actors actually transact in the shadow of the law. Moreover, their behavior varies significantly depending on whether they are dealing with repeat actors or one-time transactions. Repeat actors are better able to interact with the legal system to their benefit.
The Macaulay piece is significant for many reasons. Primarily, however, it demonstrates the informality prevalent within developed legal systems. No need to go to the developing world or other locations to find it. It exists in plentiful form throughout developed country law. Authoritative descriptions, such as certain interpretations of Weber, obfuscate the real workings of these legal systems. They present a fictionalized narrative, in which evidence of informality is relegated to the exceptions or not even clearly seen for what they are. For example, trial court judges have significant latitude in a range of decisions. They may have the power to assess monetary responsibility for harms produced in society through their views on duties of care and proximate cause of events. In fact, numerous areas of the law require that government officials rely on standards and not black-letter law. Likewise, the Uniform Commercial Code frequently relies on industry standards and commercial practices as the source of law.Footnote 22
What might be condemned as informality in one context can be seen quite differently in another. Indeed, it may approvingly reflect private parties independently pursuing their contractual remedies rather than submitting to judicial management. Or, the repossession and sale of collateral in a secured credit transaction may allow for efficient (if relatively unchecked) self-help remedies rather than mandated judicial intervention. Such powers nonetheless allow for significant amounts of informality on the part of creditors, pushing against if not overstepping the bounds of legality when repossessing collateral. Regardless, self-help is a lauded feature of US secured transactions law, the premier global model.
Additionally, there are differences in terms of doctrinal formality and informality. While formal categories like “contract” and “property” may have legal significance, the distinction may not matter at all or matter only for specific questions. The latter suggests a form of doctrinal informality. In an example, the difference between a “true sale” of an account receivable – and its transfer as collateral – does not matter for most purposes in the Uniform Commercial Code (UCC). But it critically matters upon default of the debtor.Footnote 23 If the transaction is deemed retrospectively a secured loan and not a sale based on formal indicia, the debtor may be able to get its surplus value back after the loan is paid off. As such, within the same law in the same code, formal legal categories are determinative for some purposes, but not so for others.Footnote 24 Another example is the effect of public registration for property transfers. This formal requirement may generate a favorable legal presumption for some transactions or, quite differently, certain facts on the ground may be assigned (by courts or legislatures) the superior legal presumption. All of these scenarios involve alternative allocations of formality/informality within the legal system as discussed next.
7.2.3 Locating Legal Informality
Examples abound in Latin America, and elsewhere, that much legal informality is not outside the legal system but rather within it. It is ordered directly by legislation and enabled indirectly through the mix of background rules. This is what I am calling legislated informality. Moreover, legal systems may allocate – or allow for – informality at different points within legal relationships, substantive law requirements, the legal process, and official decision-making. As already noted, it is not as if any legal system in the world has eliminated all forms of informality altogether. That would not be possible or advisable. Developed country law relies on substantial standards-based official decisions, discretion of the parties, self-help remedies, legal ambiguity, function over form, and a host of similar phenomena.
Moreover, if one were to accept certain legal realist insights, the differences between inside and outside the legal system are not substantial.Footnote 25 Legislating informality (authorizing private practices, etc.) is not much different than allowing its reign without such explicit approval. Thus, de jure and de facto deference to private ordering – for example – is rather indistinguishable. Deregulating and legislative silence are functionally equivalent. There is nothing truly outside the law or essentially extralegal, the latter being one of the standard understandings of “informality.” One could unilaterally insist on a narrow formal definition of informality to attempt to cabin its usage. However, that would not reflect functional reality nor how the term gets used expansively.
Indeed, the intention here is not to nail down a definitive meaning for the term “legal informality,” once and for all. One could certainly insist on a narrow definition of “informality” in the hopes of policing its expansive and instrumental use. But that is not the project here. Nor is my objective to track down all the many meanings attached to the term “informality.” That would certainly be useful but beyond my scope. Rather, this chapter examines a few ways in which the notion has been used. I am not espousing any particular definition myself. I am simply selecting some of its usages in Latin America in order to turn the gaze back on developed country law. How about if developed country law were viewed through the same wide lens of legal informality used to diagnose underdevelopment?
When viewed from this angle, informality – in its expanded use – is alive and present throughout the developed world. Most of it is just not typically characterized as negative. Instead, it is legitimated by alternative terms and concepts that normalize it. Moreover, the locus of informality – when comparing laws and legal systems – is different from legal community to legal community. And that is not always a sign of dysfunction (of either one or the other). Informality is simply a legal device employed with different policy and distributional consequences.
7.2.4 Heterodox Legal Informality
Latin America has historically produced different allocations of legal informality – different from hegemonic models. This is what I am calling heterodox legal informality. It has been the region’s main contribution to modern law. To take it seriously, however, legal informality requires destigmatization and differentiation among its varieties. It is not just an epithet to be used against things we don’t like. And, distinguishing among the different meanings is crucial to developing better policy. The specific type of informality foregrounded here is located within law itself, whether overtly legislated or produced indirectly through the intersection of background rules.
In a number of legal domains in Latin America, the locus of informality is – or has been – simply different than where global hegemonic models prescribe. For example, local criminal procedure may place investigative and charging authority in the hands of a “judge of instruction,” rather than a public prosecutor. However, both involve significant quotients of discretion to the officials designated. And this kind of standards-based, relatively unaccountable decision-making is one of the possible definitions of “informality.” But this kind of informality is obtained in either case. It is simply allocated differently, to different officials in different offices.
Indeed, over the past twenty years in Latin America, the United States Agency for International Development (USAID) and other foreign assistance have been heavily involved in promoting the transformation of criminal procedure codes in the region.Footnote 26 The change is characterized as moving from an inquisitorial to an adversarial system. One of the main indictments of the inquisitorial system is the wide discretion it vests in the “judge of instruction.” In civil law systems, a judge is in charge of the investigation phase of a criminal proceeding. They should lead an effective investigation but also safeguard the rights of defendants. This type of “informality” lying within the entire discretion of the judge of instruction has been highlighted as exceptional and intolerable. It is damningly perceived as providing no accountability for decisions made, unchecked by defense counsel, a “secretive” process, and increasing the likelihood of outside influence and corruption.
However, the big change made in many Latin American countries was to move those decisions to a public prosecutor, along the lines of the model of the United States. The prosecutor has broad discretion in deciding whether or not to take on a criminal case, what charges to press, whether or not to enter into a plea deal, and a number of other questions throughout the life of a criminal case. All the same discretion remains, if not more. In fact, judges of instruction had in some cases less discretion. They had to process all cases brought to them and could not choose to drop a case. However, prosecutorial discretion – no less a form of informality – within the legal system appears more natural to USAID funders than the civil law analogue. Informality has not been eliminated. It has just been relocated.
Legal informality in developed and developing countries is, in fact, not so dissimilar. The difference, I am arguing, is its location. Some countries locate their informality under the auspices of different officials, allow certain social or economic groups to exercise their particular norms and practices, and sanction explicitly or not certain activities or individuals to undertake self-help remedies. Whether these allocations are justified or not, should be reformed or not, is certainly a topic of debate and contestation. They should not, however, be simply refuted or reformed on the basis of the practice being stigmatizingly labeled informal, or that the informality happens to be located differently than “developed country” models. Indeed, the strong belief in Weber’s reputed characterization has obscured the fuller picture.Footnote 27 Developed legal systems are riddled with instances of informality, whether legislated directly or indirectly through background rules or meaningful omissions and lacunae.
When examining Latin American legal systems, however, these heterodox phenomena are often lumped together as harmful informality, especially when placed in the hands of unexpected actors and situations. Unexpected because the informality is assigned differently than where informality occurs in hegemonic models. By contrast, within hegemonic models, the given allocations of informality are normalized as acceptable – if not preferable – and may not even be fully understood as examples of informality. Indeed, as already noted, instances of informality are routinely described more positively as standards-based decision-making, deference to commercial practice, functionalism, self-help remedies, alternative interpretations, legal pragmatism, and other such legitimating characterizations. By contrast, the over-inclusive epithet of “informality” for these same and other phenomena is mostly reserved for developing countries.
Certainly, informality assigned de jure or de facto to unexpected parties and situations appears, from an external perspective, as extralegal. It looks like social norms prevailing over legal norms, pragmatic workarounds to ineffective legal systems and outright law breaking. Such informality seems to be taking place wholly outside the legal system. From this angle, the greater the informality, the greater the gap appearing to exist between law and society. The greater the gap between law and society, the greater the perceived failure of law. The greater the perceived failure of local law, the more compelling the exhortations to adopt hegemonic models.
Ideological filters that normalize informality generally fall away when examining foreign legal systems. Unless the lines separating formality and informality are drawn exactly the same way, foreign informality assigned to different actors and situations appears strikingly prominent and out of place. In these foreign contexts, informality has not been normalized, especially from an outsider perspective. Rather, it stands out. It stands out from the baseline normal, or what is unreflexively considered normal from an external legal consciousness. The observed legal community may indeed have developed its own modes of legitimating specific allocations of informality and formality. However, as is often the case in developing countries, there is frequently much less self-legitimating discourse surrounding those systems. And foreign observers are indubitably less attuned to – or interested in – its affirmative construction.
Indeed, in any liberal-legalist system, reinforcing the rationality and justification of legal institutions and legal outcomes requires substantial resources – both discursive and economic. Legal scholars and legal commentators are on the front lines of this societal and institutional function. Overall, their job is to justify and legitimate the workings of liberal legal systems, often in the face of contradictory values and inevitable failures and shortcomings. The objectives of neutrality, objectivity, and universality that these systems aspire to, however, are tall bills to fill. The inevitable shortcomings are mitigated through explanations and post-hoc rationalizations by supportive – or relatively supportive – legal experts and commentators.
In developing countries, this task of social construction is less well sustained, or less well prioritized, as an essential element of liberal-like legal systems. Latin American countries, in particular, have constructed national legality as relatively continuous with continental European and in some cases US law. Local legitimating discourse often piggybacks on foreign scholars from those same source countries. Such foreign sources and commentators, however, are principally focused on their own legal systems and their particular composition. Justifying the mix of formality and informality chosen, or – when seen as a whole – in place, in a given Latin American country, is not at the forefront of concerns for foreign legal scholars or international observers.
As such, there is no institutionalized rebuttal, defense, or justification generally available to defend Latin America’s particular allocations of formality and informality. This is not to say that all informality – wherever and of whatever type – is justified and should be maintained. But, some of it might. They are not simply social norms interfering with otherwise formal legal systems, not simply a gap between the law on the books and law in action, not simply an unjustifiable transaction cost or inefficiency. Rather, they are an integral legal device. However, it is not possible to perceive them as such – or credibly argue in defense of a particular configuration – if they are summarily denounced. If they are automatically diagnosed as the product of failed legal systems.Footnote 28
In the examples in Section 7.3, one can better appreciate the various generations of law-and-development as a preference for one combination of formalization/informality over another. The mix of formality and informality is simply different: different from pre-reform law and different across the various generations of law and development itself. They are differences, however, that have major policy and distributional implications.
7.3 Examples from Latin America
This section discusses two examples of legal heterodoxy from Latin America. The first concerns secured transactions law and the “heterodox” secured lending previously in place. It has been substituted almost in its entirety by reforms based on UCC Article 9. It is a story of the difficulties of sustaining and articulating a credible defense for heterodoxy in the Global South. The second example concerns the special private–law transitional justice scheme enacted in Colombia. It is an exceptional measure to address that country’s long-standing guerrilla war and displacement of people. It transforms the traditional rules of property. Admittedly, it is an exceptional measure with a limited duration, twenty years. However, the model has the potential to be extended to other policy concerns and potentially made permanent or of long duration.
7.3.1 Secured Transactions Laws
Laws enabling personal property guarantees for debts are another example of the travails of legal heterodoxy. In an area of law highly relevant to transnational financial interests, secured credit in recent years has been a major topic. Indeed, secured lending has widely caught the attention of the US government, international financial institutions, development experts, and legal scholars. It is considered an essential aspect of economic development, presumably enabling additional resources in the form of debt to support business development. With liberalized security laws, the thinking goes, creditors would be encouraged to lend more freely on the strength of debtor’s economic resources. And they would do so at lower rates of interest. Anything of value could potentially serve as collateral. And creditors could easily enforce property rights to obtain those resources upon the debtor’s default.
The ostensible objective of reforms is thus to make credit more readily available to all debtors, from all creditors, and guaranteed by anything of value. The model overwhelmingly pursued is Article 9 of the Uniform Commercial Code, adopted in all fifty US states. It is the preeminent model for secured transactions worldwide. International financial institutions and proponents of harmonization widely promote it. It has at this point influenced numerous legal reforms around the world.Footnote 29 It is a model directly or indirectly, in its essential terms, pursued by international institutions, including in the Organization of American States’s (OAS) Model Inter-American Law on Secured Transactions.Footnote 30 The UNCITRAL (United Nations Commission on International Trade Law) Model Secured Transactions Law,Footnote 31 and the recommendations of the International Finance Corporation, which is part of the World Bank Group, equally follow this same approach.
Many Latin American countries have followed suit. They have modified their laws to resemble Article 9. Some have adopted the OAS Model Law, in part or outright.Footnote 32 The latter is also patterned on Article 9.Footnote 33 Vestiges of differences and distinctions from earlier secured transactions models may remain in certain countries.Footnote 34 However, the reforms move in the direction of making anything of value the potential object of collateral, the creation of a single security device to do so, and a centralized registry to record these consensual liens.Footnote 35 Latin American countries have not been able to resist this type of uniformization.Footnote 36 After all, providing unconditional market access, without government limitations, is an essential part of the neoliberal recipe – at least when it comes to some markets and for some market actors.
The international campaign began in the 1970s with funding by the Rand Corporation and the United States Agency for International Development.Footnote 37 Recipient of this funding, Professor Boris Kozolchyk’s National Law Center for Inter-American Free Trade at the University of Arizona has led the charge throughout Latin America. Many commentators note his oversized influence and direct involvement with reform proposals in Latin American legislatures.Footnote 38 His center produced the Arizona Project, modeled on Article 9, which served as the first draft, and substantially final, for the OAS Model Law.
Other legal scholars have also forcefully argued for Article 9 as the model for Latin America-wide harmonization.Footnote 39 Among them, Professor Alejando Garro at Columbia Law School has been instrumental with extensive publications and consulting, critiquing Latin America’s selective model and praising Article 9.Footnote 40 Moreover, liberalized secured transactions laws are heavily endorsed by the United States government, international financial institutions, the European Union, and other promoters of Article 9. Legal heterodoxy in this realm has been explicitly targeted for elimination, which makes the defending and maintaining of alternative models quite improbable.
Such reforms and the discourses that propel it have been, nonetheless, critiqued from certain quarters. To some extent, Latin America’s alternative political economy and modes of regulation have been championed. For example:
[T]here are consistent assertions that Mexico’s secured transactions and bankruptcy laws are not just deficient, but pre-modern, archaic, and backwards. These same voices contend that Mexico’s economic development will remain retarded as long as the Mexican government fails to adopt protections of creditors modeled after the U.S. Uniform Commercial Code. These discourses are propagated by elite corporate groups within the U.S. that have vested interests in altering particular aspects of Mexico’s legal system.Footnote 41
Critiques of this type, however, remain vastly in the minority. Alternatives – heterodoxies – are hard to sustain.Footnote 42 The analysis that follows focuses on the interests disfavored by Article 9 reforms. It also examines the preconceptions and discredit associated with alternative legal devices. Part of the campaign in favor of reform rides on critiques of the particular mix of formalism and informality. It is especially this latter dimension that I consider here.
The following sections describe the heterodox model previously in place in Latin America. And, they examine the allocations of informality inherent in both this model and in Article 9. My argument is that the selective “Latin American” model simply assigns informality differently than Article 9 does. The latter could be equally faulted on grounds of “informality.” Indeed, I provide three different examples of legislated informality within Article 9. However, these are not perceived as signs of its weakness but of its strength. This is evidence of the structural bias operating within developed and developing country discourse. It is not about whether or not there is informality. It is about where informality is preferably located and by whom it is exercised. And, ultimately, whose preferences prevail on these questions.
7.3.1.1 Selective Secured Transactions Laws
Latin American countries began from a different starting point. They generally pursued a model of selective secured lending. Historically, the civil codes in these countries limited personal property security to the traditional pledge. That legal device requires the transfer of physical possession of the collateral to the creditor. Only in this way are these asset guarantees (for other than publicly registered personal property) enforceable against all others. Certainly, this is an unworkable solution for debtors that must handle those assets on a regular basis. Only in some countries did commercial codes relax this requirement.Footnote 43 They enabled nonpossessory security interests for merchants. In the past, however, for most countries of the region nonpossessory security interests were only available through special enabling legislation.
7.3.1.1.1 Special Laws
In civil law countries generally, not just Latin America, special legislation has historically supported a selective approach to secured credit.Footnote 44 Specific industries and products have been singled out for the benefits of this private law instrument. Special laws were created over time for specific types of personal property. These include assets commonly serving as security, such as automobiles, vessels, and generally registered property. But, more creatively, special legislation can target specific assets, industries, and creditors.
Selective secured credit is not simply pre-modern, archaic, and backward – as development reformers insist. It does promote some defensible goals. Selectively enabling non-possessory security interests provides opportunities for enacting industrial policy. It allows governments to conduct differential credit policy through a private law mechanism. Moreover, it allows them to do so without state aid or subsidies, which could violate contemporary international trade treaties. These special laws are not government subsidies or exemptions from amounts owed to government. Rather, this scheme mobilizes the rules of private law, commercial law specifically. It does so in a way such as to create segmented credit markets. Some actors are capable of accessing – through the relevant legislation – secured credit markets. Others are not. Only certain industries or products are granted such exceptions, in this case “private law” benefits. Additionally, certain conditions may be imposed in order to qualify for the exception, whether certain products, production methods, environmental sustainability, or other.
Both France and Italy, for example, developed this sectorial approach over time.Footnote 45 Secured credit was not indiscriminately made available in the civil code. Rather, certain sectors of the economy were selected legislatively to benefit from this legal privilege. The laws in each of these countries developed over time, dependent on economic exigencies and the importance of certain industries or sectors of the economy. Probably the most recent example of this is Italy’s enactment of special legislation for the wine and alcoholic beverage industry. As part of its COVID-19 emergency measures to support the economy, it extended these norms to these industries in its 2021 Cura Italia decree.Footnote 46 Previously, collateral enabling legislation had been directed to the prosciutto industry in 1985 and aged-cheese industry in 2001.Footnote 47 These laws allow producers to grant their stock of products, warehoused during the ageing process, as collateral without transfer of possession to the creditor. These provisions are limited to certified Italian origin denominated goods. And, they are conditioned on producers following the traditional production protocols required by their industry association. In short, selectively – rather than liberally – enacting secured lending laws functions as a sort of industrial policy. Whether thought out comprehensively over any one point in time, or the accretion of past decisions of industrial policy, the overall model in the history of civil law countries is one of selective enabling laws.
Latin America followed this selective approach.Footnote 48 Most countries in the region, starting in the late nineteenth and early twentieth century, opted for the French model of warrants and gages sans dépossession.Footnote 49 The warrants were new legal instruments that combined a negotiable instrument and chattel mortgage over specifically defined assets. The gages sans dépossession constituted a nonpossessory pledge with registration. There is considerable similarity among the region’s twenty plus countries.Footnote 50 A discernible pattern of economic policy emerges at historical inflection points.Footnote 51 Like in France, the earliest laws were in the agricultural sector. Such laws enabled pledges without transfer of possession, so-called agrarian pledges. They defined the permissible scope of assets, debtors, and creditors. These later led to industrial pledges: extending the same legal device to industrial debtors and their particular assets. The conditions and terms of legislation certainly vary across countries. The terminology may also be slightly different. Overall, though, the differences between this selective model and Article 9 are highlighted next.
7.3.1.1.2 Heterodox Informality
The reform campaign for secured transactions in Latin America has relied mostly on critiques of legal formalism, not informality per se. The variety of laws pertaining to different industries, different debtors, and different registries are condemned as part of Latin America’s typical, excessive formalism. Yet, as this same thinking goes, that leads to a sort of informality for those not benefiting from the legislation. They must resort to a combination of contractual means, legal subterfuges, and official complicity to simulate their desired legal outcomes. Excessive formalism and informality here work together discursively. Debtors excluded from selective enabling laws must recur to other devices to achieve comparable yet less favorable results.
Certainly, private parties can transact into nonpossessory secured transactions. They can operate under the general rules of contract law – in relation to either official or ad hoc creditors. However, these are not recognized as property rights enforceable against third parties and the bankruptcy trustee. Historically in the civil law, there has been a limitation on contractual arrangements for asset guarantees, and the parties need careful drafting to avoid such pitfalls.Footnote 52 However, the difference between formal and informal is precisely the point. It is the relative advantage made available to the law’s intended beneficiaries. Only the former may assuredly engage in secured credit transactions, backed by assets employed in the operation of business, enforceable by creditors, against all others.
Certainly, credit market segmentation is quite controversial from a neo-liberal economics perspective. Differentiation is precisely what hegemonic secured transactions reform is intended to eliminate. The latter is championed as opening up credit to all on equal terms and on anything considered by the parties to be of value. Article 9 does indeed provide a singular security device for all industries in the real economy. However, this does not mean that it does not differentiate among markets. It focuses on financial assets – with different rules depending on financial type and deviations from standard priority rules. It is economic policy tailored to the financial industry. Wall Street not Main Street.
Still, defenders of the state’s need to undertake industrial policy remain steadfast. This is especially so in developing countries where “Main Street” is the principal, or only, economy. Beliefs about the ability of completely undirected markets to create development, sustainable and equitable, are very much disputed. Sectorial differentiation – rather than financial asset differentiation – may be even more important there. In light of that economic debate, selective secured credit is not necessarily anachronistic but rather an alternative legal device that enables a different economic policy prescription.
The disagreements over economics may be debated on their own merits. The economic reasoning may certainly be challenged from a neo-liberal perspective. Nonetheless, selective enabling is an approach with a long pedigree in Western countries and an articulable rationale in its favor. Credit markets are segmented.Footnote 53 And the private law rules enable this differentiation. However, the arguments are obscured by erroneously characterizing it as arcane legal tradition, cumbersome technique, or even legal informality. Disagreements over these policy differences cannot genuinely be resolved by simple appeals to formalizing the informal, or conversely reducing formalism. That shortcut would circumvent the economic and distributional decisions being made. It is tantamount to deregulation and liberalization without transparent discussion.
7.3.1.2 “Liberalized” Secured Transactions
The transformation to “liberalized” secured transactions upends the selective model. At its utmost, liberalization means enabling anything of value, from any debtor, to be conveyed to any creditor, preferentially against all others, with minimal recording requirements, enforceable privately without recourse to the courts. The reforms are promoted as pro-development, pro-modernization, good for small- and medium-sized businesses, and a win–win. It portends to place all potential debtors on equal footing. In effect, it restructures how the state implements credit policy. Government is deprived of the use of multiple legal devices, tailored to specific industries, to devise and implement industrial policy through private law. Regardless of one’s economic theory or political preferences, the change is not merely one of modernization over tradition, development over stagnation. Rather, it reflects divergent opinions with respect to industrial policy, and it generates different distributional outcomes.Footnote 54
Latin America is not the only region to feel the pressure to “liberalize,” nor is it just developing countries. Italy passed liberalizing reform in 2016, coming into effect just this past 2022.Footnote 55 France has gone through two stages of liberalization in 2006 and 2021, while still retaining some nominal distinctions.Footnote 56 Regardless, the Article 9 model contains its own mix of formality and informality.Footnote 57 This is not the place for a detailed description of the workings of the UCC. Suffice it to say that Article 9’s provisions create a singular legal device for all non-realty consensual guarantees.Footnote 58 The result serves as an example of the political and economic indeterminacy of critiques of formalism. In this case, formalism’s opposite – functionalism – is placed at the service of the financial industry.Footnote 59 Anything of value can be preferentially conveyed to creditors as collateral.Footnote 60 As to its particular types of “informality,” I point out three dimensions: private action (self-help) based on social norms; informal types of property; and related transactions outside the law’s scope.
7.3.1.2.1 Self-Help Remedies
Article 9 deploys informality in several ways. Most prominently, it authorizes self-help remedies for repossession of collateral and foreclosure of a debtor’s property rights. Creditors can seize debtors’ property without any prior judicial notice or supervision. Private parties may seize the collateral and dispose of the property to satisfy the underlying debt. The only limitation is that creditors not “breach the peace” as part of the physical act of seizing the property. And the only remedies for debtors are post hoc. They may be able to sue for wrongful repossession, if they can prove damages. And, they may defend against a deficiency judgment – that is, a judgment for the remaining amount of the debt beyond the proceeds of the foreclosure sale – if the repossession and foreclosure are not conducted by the creditor in a commercially reasonable manner.
There can be no greater example of legal informality than this.Footnote 61 The legal process is seconded to private actors.Footnote 62 Creditors and their agents may carry out the entire procedure of seizing assets and terminating debtor’s rights. All of this under the most general and cursory admonition to creditors to not “breach the peace” and to proceed under “commercially reasonable” standards. These post hoc restraints have proven very malleable and are interpreted in wildly different ways. It leads to conflicting and even absurd results. In some cases, simply saying no to a repossessor entails a breach of peace if the latter proceeds anyway.Footnote 63 In another reported case, two male repossessors could legitimately proceed in the middle of the night against a single mother with two small children, living in a trailer park, contrary to her physical overtures to enter her car and the disturbance caused to neighbors.Footnote 64 And, most perplexingly, a repossession carried out with the accompaniment of paid law enforcement does constitute a breach of the peace even where there was no disruption or violence, because the debtor was inhibited from becoming violent – ironically.Footnote 65 Moreover, the post hoc check of commercial reasonableness only works to eliminate deficiency judgments against debtors. As such, the actions of creditors and their agents are constrained, if anything, by social norms and personal limits. The line of illegality is frequently grazed if not outright breached with impunity. Notably, this is an area in which social norms reign in the place of law. It is legislated informality.
Globalization of Article 9 on this very point has met with significant resistance. Even countries that have in principle adopted “self-help” remedies have built in protections.Footnote 66 Secured creditors must repossess under the supervision of a notary public or public official. Moreover, the debtor may stop creditor’s self-help remedies if there is disagreement on the default, amount of debt, or right to repossess. These safeguards for debtors have provoked a hail of criticism from Article 9 harmonizers. Only the most extensive informal version is considered economic and efficient. Indeed, in the case of Mexico, for example, it has led to the complaint:
The Mexican legislator seems to harbor a fundamental distrust of the marketplace, wary of the secured creditor’s capacity to restrain himself from abuses against his debtor if foreclosure is made too easy and of the debtor’s capacity to assert himself when he has a valid defense or cooperate in an expeditious foreclosure when appropriate.Footnote 67
Formalization here is rather a global inclination, if not the hegemonic one.
7.3.1.2.2 Informal Property
Another example of informality relates to the scope of Article 9. The latter is primarily a property statute governing chattel mortgages. But it also includes contractual payment rights and treats them increasingly like property. It accomplishes the latter by muddying the differences between contract and property.Footnote 68 This is especially poignant in the case of accounts receivable.Footnote 69 The elision has become so normalized in US legal culture that it is hard to see. It is a two-step operation. First, payment rights are deemed to be “property.” What that means is not a given, however. Second, the full range of property features are presumed.
Article 9 principally advances the second step. It extends the power to convey “preferential rights against all others” to contract right-holders.Footnote 70 A contract right-holder does not have a “preferential right against all others” with respect to its debtor. But it can nonetheless convey one to its own creditor.Footnote 71 Admittedly, the contract right and the derivative preferential right are enforceable by different parties. Still, the logic runs counter to the fundamental property principle that one cannot convey more than one has.Footnote 72 Much less the contract rule that assignees stand in the shoes of their assignors.
In the world of Article 9, however, this all makes perfect sense. The objects of security interests need not consist of full title. Any right held by a debtor will suffice.Footnote 73 Conveyed to a creditor, it becomes a full preferential right. In this way, Article 9 sanctions a sort of informal property creation;Footnote 74 that is, contract rights with property characteristics. Notably, Article 9 does not codify a new property type. Nor does it change the definition of “personal property.” Nor does it explicitly announce a power to convey greater rights.Footnote 75 Rather, it simply operates as if it already existed. It is not that the distinction between contract and property does not matter in the common lawFootnote 76: it does, throughout the legal system, including other sections of Article 9.Footnote 77 On this particular point, however, doctrinal “informality” flourishes.
Admittedly, accounts receivable have long been considered “property” in the United States.Footnote 78 They have been extensively assigned and used as collateral since the 1920s and expanding after WWII.Footnote 79 Assignments of such accounts were first popularized in the textile industry. In turn, assignments of long-term contract rights became popular during World War II, to finance inputs for US government procurement contracts. Such transactions assumed a property-like nature, at least with respect to assignor–assignee conveyances and debtor–creditor collateral.Footnote 80 Doctrinalists in the United States have gone as far as claiming that contract rights are property, tout court.Footnote 81
Regardless, the fact that contract rights have some property features does not mean that they have to have them all. Contract rights serving as property-guarantees enforceable against all others, especially against the bankruptcy trustee and all involuntary creditors, is an additional step. Yet, it passes relatively unremarked.Footnote 82 In this way, Article 9 effectively adds more property features to contract rights.Footnote 83 It extends the power to grant enforceability against all others.Footnote 84 And, it does so informally by fudging the distinction between assignment of contract and mortgage of property. It subsumes both types of transactions indistinctly within its scope.Footnote 85 The differences between contract and property are thus blurred.Footnote 86
It is not incidental that Article 9 avoids all mention of property rights, opting instead for the term security “interest.” The UCC drafters admit, in an obscure comment on licenses:
Neither this section nor any other provision of this Article determines whether a debtor has a property interest … the debtor’s property interest may be confined solely to its interest in the promises made by the licensor in the license agreement (e.g. a promise not to sue the debtor for its use of the software) (italics mine).Footnote 87
This insouciance about formal categories is no doubt a testament to the UCC’s legal realist pedigree.Footnote 88 Surely, there are strong arguments for function over form. A debtor’s contractual rights to payment from a third party is a definable value over which a creditor could be assigned priority.Footnote 89 Nothing materially impedes it. Not wholly dissimilar situations in Latin America have been labelled “informal” property, that is, private contractual arrangements that are treated like property.Footnote 90 At the same time, enabling the proliferation of informal property priorities through private ordering contradicts the contemporary development mantra on the need for “clear property rights.”Footnote 91 Functionality and informality may be different sides of the same coin.Footnote 92
In any case, “functionalist” deconstruction of the property–contract distinction does not address its distributive effects. The fact that contractual and other rights can be treated as property functionally/informally does not mean that they should be. Function here is not neutral.Footnote 93 The doctrinal distinction has major policy implications. How much of debtor’s economic value can be prioritized for some obligations and not others? Privileged are consensual creditors – without limits on the economic value available for their prioritized claims.Footnote 94 In the process, contractually produced judgment-proof debtors may leave non-self-adjusting involuntary creditors without any recourse whatsoever.Footnote 95 Think workers, pensioners, tort judgment creditors, tradespeople, and the like. They may be left with no assets to satisfy their claims. These considerations may be particularly relevant to developing countries where Article 9 is exported, which may not have social safety nets like workers compensation or pension guaranty trusts.
In the civil law tradition including Latin America, this operation is much more debated.Footnote 96 Civilians are more punctilious and insistent about “formalities.” The conceptual question has bedeviled commentators and courts.Footnote 97 Can “obligations” be property? Property rights over contractual obligations have been controversial, if not an outright anomaly. They are like apples and oranges.Footnote 98 Likely, it is because the civil law world is more categorical about legal distinctions.Footnote 99 It defies the quintessential logic of contract and property, personal and real rights. In Latin America, security interests over floating stocks, proceeds, and uncertificated accounts receivable, for example, have been a particularly thorny issue.Footnote 100 A property right over a contractual right appears quite anomalous, and a contractual right such as an account receivable is not property. It is only in the latter half of the twentieth century that certain property rights over contract rights became admitted.Footnote 101 But, even so, it remained mostly a minority position in doctrinal circles.Footnote 102 It has been asserted that certain contractual obligations have a dual nature.Footnote 103 Defenders of “credits” or contractual rights, as property, have also upheld this classification on functional grounds.Footnote 104 Rights to payment, the argument goes, can be appropriated and conveyed just like property.Footnote 105
Not surprisingly, the question of “property” was one of the stumbling blocks over the Article 9-inspired Arizona Project first presented as the OAS model law by the United States. Early on, Mexican commentators noted the Anglo-American particularity of the text that did not fit with Latin American legal codifications precisely for this reason:
Typical personal rights will now be the axis upon which previously real rights transited. Or said in different words, assets today have a different value than assets conceived under the structure of real rights.Footnote 106
These objections led, in response, to Mexico’s co-presidency (along with the United States) of the OAS Commission that approved that institution’s model law. It ultimately produced the same informalization of property evident in Article 9, possibly with a “Latin American” twist. Specifically, the discussion of “real” rights – the civilian term for property rights – was simply set aside, given the insistence by reformers for property-like priority over personal rights and credits.Footnote 107 The doctrinal conundrum between real and personal rights could not be formally resolved, so it was informally settled by not calling them property rights.
7.3.1.2.3 Informal Others
Finally we come to closely-related parties and transactions that Article 9 leaves out. These other legal relations operate in a realm of relative informality. In this regard, I channel the work of Peruvian economist Hernando de Soto specifically. He draws a hard line between formals and informals. Formals are those that operate within the formal legal structure. Informals are all those that operate outside, for whatever reason. The costs of formal transactions may be too high. They may not be convenient for them. There may be too many bureaucratic steps to fulfill. They may be subject to an alternative set of rules, functionally similar but distinct. Regardless, de Soto’s prescription for development is to turn informals into formals. This means, in effect, lowering or eliminating legislative and regulatory conditions that treat them differently, whether that requires unconditionally titling squatters, automatically licensing street vendors, or condition-free regularizing of workers. No differentiations – or only minimal ones.
This conceptualization merely serves, however, to redraw the regulatory lines. Anything outside the existing lines can be labeled “informal.” The conditions for it, and the reasons those operating outside may want to remain so, as well as policy reasons for having more than one line, are dismissed or simply ignored. Informality, once identified, must be formalized – according to this prescription. In the case of de Soto, the new lines proposed happen to coincide with neo-liberal preferences.
Yet, Article 9 could be described in similar ways. It draws its own regulatory lines, not always in functional ways.Footnote 108 Agricultural liens are included, but not other nonconsensual liens.Footnote 109 Consumer deposit accounts cannot serve as original collateral, but they can when they are the proceeds of a different type of collateral.Footnote 110 The centralized registration system excludes nonconsensual liens (with the exception of agricultural liens).Footnote 111 All of these are subject to complicated rules beyond the scope here, but the point is that Article 9 makes significant policy distinctions.
Additionally, security agreements need not be recorded or even written. Loan amounts are not public information, nor is meaningful documentation of collateral provided, especially in the case of accounts and contract rights.Footnote 112 The latter must be forensically reconstructed when bankruptcy or other issues arise, requiring proof such as invoices, bank statements, ledgers, and oral testimony. All of these features may be characterized as informality of various types.Footnote 113
Indeed, distributing the remaining assets of an insolvent debtor may be seen as requiring a wholistic formal legal regime. Latin American systems have been faulted precisely for failing at that.Footnote 114 But, the scope of wholistic reform under the model of Article 9 extends only so far. For example, the silence on involuntary creditors effectively downgrades their remedies, if not eliminates them altogether. Their rights and powers are dependent on sources outside of Article 9 – for their different creation, priority, and enforcement. This is not unlike Hernando de Soto’s “informals.” Indeed. their relative order of preference is not pegged to a pre-emptive “perfection” or notice filing date, but in the best of cases after the legal process runs its course and a valid judgment is rendered.Footnote 115
Surely, another way to perceive this is not as a gap or informality but as deliberate and justifiable, a conscious political or policy decision. Employees, pensioners, and other involuntary creditors – no matter how meritorious – have little or no priority and may only collect after everyone else. The priority date for these creditors is when a judgment is obtained. Surely, that is the case in the United States. Still, a relative informality – or an alternative formality if you will – is the way of achieving this result. These are matters of deliberate choice. As is evident, the mantra of comprehensive formalization alone cannot neutrally decide the question.
7.3.1.3 Section Summary
The transformation from selective to liberalized secured transactions law rearranges the elements of formality and informality. In the process, it distributes resources differently. The two models both allow for informality but at different stages and assign it to different actors. It would be hard to choose one model over the other based merely on preferring formalization. Both have elements of formality and informality. And arguments based merely on the equating “formalization” – or the model effectively labeled as representing formalization – with development are misleading. Indeed, the choice cannot be made as a technical legal matter. Rather, it requires understanding the relative benefits assigned to different parties under different regulatory regimes.
The informality of Article 9 may be no greater than that denounced in developing countries, although of a different type. The difference is that Article 9’s text remains relatively unchallenged, indeed hegemonic.Footnote 116 As such, it can effectively elide the question of superior rights granted to priority secured creditors over all economic value of the firm. It blurs the distinction between property and contract and effectively makes these rights property. The latter squarely involve economic and social policy questions. These should be debated specifically, not as either “transcendental” legal categories, disembodied functional equivalents, or informal property rights.
7.3.2 Real Property Laws
In a quite different example of legal heterodoxy, a 2011 Colombian law introduced a transitory property regime.Footnote 117 It was intended to right the wrongs of property despoilment generated by that country’s civil conflict. Even though the conflict was not yet over, nor is it still completely now, the state acted to restore property to those displaced by the war, at least in areas where it was secure to do so.Footnote 118 The new law was meant to operate for 10 years, which was later extended another ten years, now in effect until 2031.Footnote 119 It sets up a separate state bureaucracy to deal with restitution cases. It has achieved some notable success. It is an elaborate scheme of new actors and new government offices.
For our immediate purposes, the more interesting points are the heterodoxy it introduced into property law. In the context of transitional justice, it modified the basic rules of ownership. Rather than employ command and control public legislation, it amended the rules of private law for cases of involuntary displacement. Restitution claims are judged based on alternative criteria, modified presumptions, and shifted burdens of proof. Indeed, this property restitution scheme offers another example of re-arranging formal and informal elements in the legal system. It is an instance of heterodox informality.
7.3.2.1 Traditional Property Law
Normally, property law in Colombia – like in most modern legal systems – grants superior rights to registered property owners.Footnote 120 Real property formalization in the civil law tradition typically takes one of two forms. Either it conditions property rights on public registration or it conditions enforceability of property rights against all others on the act of registration. Colombia recognizes ownership without registration but makes it subject to superior rights of registered owners. This step, registration, is considered the epitome of formalization. Registered right-holders receive all the legal procedural advantages.Footnote 121 They enjoy a presumption in their favor. Opponents, mounting a challenge, must rebut the presumption and carry the burden of proof demonstrating better rights.
In recent years, a wave of development projects has swept the developing world which purports to extend this type of formalization to all land holdings. Indeed, international financial institutions have embraced the formula of titling all forms of landholding. Squatters, irregular tenants, and others have been made eligible to receive full title ownership. Along with that presumably come the benefits of legal presumptions in their favor and shifted burdens of proof.Footnote 122 The formula has been advanced as a social justice measure for the landless and a development project for the economy. The locked-up capital of irregular holdings may become more freely alienable and available for mortgage loans. In both cases, markets are expected to expand.
Formal property in this mold, in the full-title civil code form, is not bereft of informality however.Footnote 123 Legal systems throughout the world recognize a quintessentially informal method of land transfer. Adverse possession is an integral part of property law in both common law and civil law countries. Open and notorious irregular possession of another’s land (but not state land) over an extended period of time vests superior rights in the informal holder. Two types of adverse possession are recognized: adverse possessors in good faith who presumably had good title but there is a defect, and adverse possessors lacking good faith. Both of these periods have been repeatedly shortened over the past century: They currently stand at five and ten years, respectively.Footnote 124
Adverse possession is not the only type of legislated informality.Footnote 125 Irregular possessors of state land may also be eligible for ownership rights. Under agrarian reform laws, the state may assign certain lands to landless farmers meeting eligibility guidelines. One of the requirements, under one of the procedures, is occupation of those lands for a period of time. Once again, informality is legislated and sanctioned. Meeting the formal requirements for both adverse possession and allocation of state lands requires informality. It requires the irregular occupation of land. Indeed, the initial Colombia agrarian reform law of 1936, Law 200, provided for superior rights to occupants of state land working the soil for a period of two years.Footnote 126 No registration was required or expected. Indeed, this legislated informality worked as the pre-eminent legal fact. It carried primary legal significance. Possibly in an era, and at a time, where extensive cartography and registration were not feasible, raising alternative acts to the level of legal significance made perfect sense. Regardless of the differences in time and resources, however, these quick examples demonstrate the deliberate uses of informality within the law.
Moreover, property theorists have demonstrated the equally property-like nature of competing claims to formal ownership.Footnote 127 Disputes over the use of land, for example, may thus be best understood as consisting of property claims on both sides. Squatters may have colorable property claims based on adverse possession or agrarian reform laws. Neighbors may have a legal privilege to challenge nuisances on adjoining property based on city ordinances. Long-time licensees of land may have accrued property interests in the development decisions of formal owners. The task for adjudicators is not identifying an owner based on strictly formal indicia and then excluding all others. Rather, the issue when more realistically approached requires resolving competing property claims (including both formal and informal elements) to determine who is in fact the “owner” of the specific entitlement in question.
Furthermore, formal property rights in both civil and common law systems are subject to a number of well-known limitations and restrictions.Footnote 128 They are certainly not absolute and are subject to the discretional state power of eminent domain; dependent on zoning laws in the area and their potential modification; and restricted by nuisance doctrines and other local rules and regulations. Many of these are subject to formal processes themselves (e.g. amending zoning laws and declaring eminent domain). They are subject to wide swaths of official discretion and unanticipated variability as evident for example in the determination of what qualifies as a nuisance or differences about takings for a public purpose.
Finally, full title is not the only type of formal property in modern legal systems. Both civil law codes and common law estates demonstrate multiple property forms: Fee simple, mere possession, life estates, fee tails, emphyteusis, servitudes, etc. These are made formally available within the positive law. And not all of them rely on public registration. As such, for example, possessors are recognized as having a property status. They have rights, just different or less than full owners. They may seek judicial assistance against intruders in Colombia for a one-year period. However, as initially noted, registered owners have paramount rights. They enjoy all legal presumptions in their favor and the burden is on opponents to dispute their rights. This is what the Colombian transitional justice regime changes.
7.3.2.2 Private Law Transitional Justice
The traditional property scheme is vastly unsatisfactory for remedying the particular situation of forcible displacement in Colombia’s countryside. There, residents lost their homes and farms due to: Fighting nearby requiring them to abandon their holdings; coercive and below-market purchases by unscrupulous individuals, guerrilla fighters, and organized crime figures taking advantage of the situation; and fraudulent sales at gunpoint or other forms of intimidation. Moreover, some of the displaced had registered title to their lands. Others were mere possessors or occupants of private or state lands. While some cases resulted from harried abandonment and flight, other transfers were formally registered conveyances. These various fact patterns, equally considered as forcible displacement by the law, could not be easily addressed by formal property law. Unless traditional duress can be proven, the sale would not be overturned. Moreover, if adverse possession periods had run against displaced persons, even prior registered owners would lose their rights. Furthermore, possessors and occupants are quickly impeded, by the short statute of limitations, from a return of possession. In all cases, claimants would have to carry the burden of proof in individual cases. All in all, standard property law could not satisfactorily address the multitude of cases. Nor could it effectively restore lands to those unjustly displaced.
More specifically, traditional property raises the formal element of registration as the sine qua non. All legal presumptions and preponderance of proof tilt in the favor of registered owners. Other property rights are at best informal. For example, the adverse possessor is informal in that they have no adjudicated rights. At best they have an executory claim to seek adjudication of the land in their favor. By comparison, occupants on state land may not adversely possess under private law rules. Instead, they may seek an adjudication of the land under administrative law, agrarian reform proceedings. However, they are not entitled to such land until the procedure is concluded and rights are granted. Thus, any property claimant seeking to disrupt that status quo has presumptions stacked against them and must carry the burden of proving better rights against the registered owner, satisfaction of adverse possession requirements, or compliance with state land distribution conditions.
As such, everyone other than the registered owner starts from a position of informality. Squatters are normally considered “informal,” but so are mere possessors and occupants (even those waiting out adverse possession periods and occupant residency requirements). Past registered owners barred by adverse possession running against them – or those having sold at unfair prices or under coercion not easily proved – may all be seen as holders of informal claims. Faced with a new registered owner, or adverse possessor running the required period, restitution claimants are all informals – or informal petitioners. Their particular combination of formal and informal indicia of property rights are insufficient to award restitution – to prevail over new property holders.
Law 1448 changes that. It works by re-arranging the formal and informal elements of property law. Preeminence is assigned to informal indicia of superior property rights. The law itself sets out four fact patterns that are elevated and prioritized: displacement arising from generalized violence, forced collective displacement or serious human rights violations in the area; property concentration of land abutting armed conflict; property transfers to narco-traffickers; and excessively below-market sales (below 50 percent). The law provides a bit more detail and the special land courts, set up by the law, have further refined its application. In any case, demonstrating these facts – with the assistance of the special bureau established to assist claimants – is of preeminent legal significance. It is not property registration that primes all else. It is a particular arrangement of facts on the ground that is awarded superior rights. Registration is only another element of the complicated picture. Still, subsequent purchasers may demonstrate utmost good faith in the transfer and may, as a result, be eligible for state compensation. However, it is not determinative of whether or not they will be able to keep the property.
7.3.2.3 Heterodox Informality in Transitional Property Law
In this manner, facts on the ground – a form of legislated informality – have primary legal significance. The particular circumstances surrounding the transfer, the abandonment, or displacement are what give rise to the superior position of claimants. They are then vested with a legal presumption in their favor. They have a presumptive right to restitution. Subsequent occupants must carry the burden of proof of their own “good faith without fault.” If proven, these secondary occupants (as described in the law) may receive compensation, or in some cases alternate property.
This particular arrangement is surely not without faults. It does attempt, however, to get at the problem of manipulation of registration systems to effectuate fraud. And, it has the capacity of setting up a dual or multiple property market. Indeed, its mechanisms could be extended to other domains. In this case, it is the public policy determination to restore land to displaced persons. The subjects of fact patterns identified in the law are assigned a priority. The informal, multiple and fact-driven situations enjoy presumptions and shifted burdens of proof which prevail over formal registration. But displacement is not the only public policy issue which could potentially be addressed this way.
Low-income housing and small-scale farming may also be considered. The scarcity and unaffordability of these proprieties arise from market competition. Merely one single market for urban housing or agricultural land places great pressure on lower income residents and small farmers. It also tends to displace them. As such, a re-allocation of formality and informality – not unlike that in Law 1448 – could be extended to these sectors. Even duly registered transfers of housing and land could be subject to informal requirements. Transferees would need to meet such need or use requirements. Otherwise, transferees – even those duly registered – would be confronted with a reversed legal presumption and shifted burdens of proof. This would act to keep a pool of designated properties within their segment of differentiated markets. The penalty for transfers out would be a private law remedy – a cloud on title and possible reversal of the transaction.
In any case, consideration of other applications must remain for another day. For now, land restitution has been proceeding at a steady pace in Colombia. Even large corporations have been subject to the land courts’ orders of restitution.Footnote 129 As noted, the program was extended for a second ten-year period. The ultimate merits may surely be better assessed then. However, reconcentration of land is a continuing issue in Colombia. It may be the primary issue in fact. Land restitution only indirectly gets at that. Some restitution claimants are small landholders, but some of them are not. Restitution to the latter only exacerbates the problem of land concentration. As such, other mechanisms of maintaining sectors of low income housing and small scale farming will be needed. Whether the mechanisms contained in Law 1448, or other modes of legal heterodoxy, will crucially need to be devised and implemented.
7.4 Conclusion
Legal heterodoxy presents in a variety of ways. Alternative laws, different institutional arrangements, and special procedures may all be discovered in different places. For developing countries, these are not always easy to maintain, even if patently suitable to their particular concerns and constraints. Geopolitical pressures have a large role to play. International institutions, powerful states, and foreign investors forcefully advance their own interests and preferred models. In a hegemonic arrangement, these interests primarily coalesce around a limited set of orthodox types. Thus, heterodoxy that stands out is often condemned, as underdeveloped or dysfunctional.
This is even more the case with informality, or alternative assignments of informality within the legal system. Informality appears like a marquis sign of underdevelopment. Regardless of the fact that all legal systems make use of substantial levels of informality, in the development community it is evidence of dysfunction and a rallying cry for formalization. Of course, informality within the legal system – in the sense of discretion lying with certain public officials, self-help remedies, private dispute resolution, tolerated areas of nonenforcement of law, and other forms – is an intrinsic aspect of liberal legal systems. When those instances of informality arise in unexpected places – especially from the perspective of external observers – they stand out, seem excessive or outright unlawful. Surely, outside observers have internalized the particular mix of formality and informality in their home legal systems. It is those arrangements that seem natural and right. Developed country legal systems dedicate significant resources to normalizing the inherent anomalies of their own versions of liberal legality.
Regardless, probably the most significant type of legal heterodoxy that Latin America produces is its particular arrangements of legal informality. This is not a defense of all of its uses – wherever they may appear. To recall how I began, the term informality is overused. Sometimes it is just a euphemism for illegality. However, in many cases, the mobilization of discretion, private action, self-help remedies, and the like are just differently arranged. As such, a project for continuing work is analyzing the heterodox informality that proliferates in Latin America, and the developing world generally – without negative preconceptions.
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