Mr. Kinsella,
I have a question after reviewing your chapter “A Libertarian Theory of Contract: Title Transfer, Binding Promises, and Inalienability,” in Legal Foundations of a Free Society (Houston, Texas: Papinian Press, 2023).
If a debtor, pursuant to a secured loan agreement (mortgage), decides not to continue making payments on the loan despite their ability to do so, is this theft? The lender has the ability to foreclose on the property in the event of default.
The debtor decides to no longer make payments because their estimation of the property’s value is less than the outstanding principal of the mortgage.
Would this be theft? If there is a deficiency—the proceeds from selling the foreclosed property is less than the principal (and remaining contracted interest payments)—would the debtor be stealing not to cure this deficiency?
Thanks,
***
KINSELLA:
You should see also my more recent paper: Stephan Kinsella, “The Title-Transfer Theory of Contract,” Papinian Press Working Paper #1 (Sep. 7, 2024).
Answer: it would depend on whether the loan is non-recourse or not. The question is simply whether title to money owned by the borrower/debtor transfers to the lender. If that is the agreement, then on the specified due date for a payment, that sum of the debtor’s property is now owned by the lender. If he refuses to turn it over to the lender, then that is the act of theft. This of course presupposes the debtor has the money.
The simplest loan agreement would be a (mostly) unconditional and unsecured future title transfer: A transfers $1k to B in one year (note: this can be in repayment of some money loaned to A, or some service provided to A, or even just a gift). Even that transfer is not completely unconditional because A must own $1k on the due date for it to transfer. But he does happen to have it, then now he is in possession of $1k owned by B and must turn it over upon demand by B.
Whether other property owned by A transfers to B if A doens’t have the owed sum depends on the terms. Presumably if A is penniless then he makes ancillary future title transfers of the $1k plus interest if he acquires money in the future.
If the loan is secured, presumably title to the collateral transfers to B if A doens’t have enough money. I.e., the loan agreement could be paired with collateral, so that in effect A makes two conditional future title transfers to B: A transfers $1k to B in a year if he has the money; if he doens’t, A transfers enough of collateral that can be sold to provide $1k to B.
If the collateral is worth enough to satisfy the sum owed, then what happens if A has the money and also has the collateral? Can he force B to take and sell the property to satisfy the sum owed, even if A has the cash, or can B take the cash so he doesn’t have to go through the hassle of seizing and selling the collateral? It depends on the terms of the agreement. I would think in most cases the lender/creditor B would have the option to just take the cash, i.e. $1k of A’s money transfers title to B and A cannot refuse to let B take it. He cannot force B to take the collateral instead. But it depends on the terms.
In my view, in the case of a secured loan, the presumption would be that if the collateral is worth less than the amount owed, and A has no other assets or money, then there is yet a third set of conditional title transfers, something like: And if A has no money or sufficient assets in one year, then the $1k amount, with accrued interest, transfers to B whenever A gets it. And/or other assets of A (movable or immovable), when acquired by A, transfer title to B so he can sell it to satisfy the outstanding principal. Again, it depends on the terms.
In other words, in my view, most loans would be full recourse, where you owe the full amount and if you are penniless and the collateral is not sufficient you still owe the rest. But there is no reason parties could not agree to a non-recourse loan, as some home and commercial mortgages are done today. I don’t see why the lender would agree to this as it sets up a moral hazard. This is apparently done now for some home mortgages and commercial mortgages, but I have always assumed this is some distortion of the market caused by some tax rule or some consumer protection rule or something like that, but I am not sure as I have not looked into this. I believe my friend Doug French talks about some of this in Douglas E. French, Walk Away: The Rise and Fall of the Home-Ownership Myth (Auburn, Al.: Mises Institute, 2010).
So it depends on the terms of the original loan.
Make sense?
