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Potential Problems for Secured Lenders with IP Collateral in Bankruptcy

February 2010

This is the fifth in a series of five "IP/Bankruptcy Law Alerts."

Lenders who make loans to debtors with significant IP assets as collateral must ensure that their security interests in the IP assets are properly perfected. This is particularly necessary when a bankruptcy filing is likely, since a defective security interest may be voided for the benefit of general unsecured creditors. While companies accustomed to financing secured by tangible personal property may think the same rules apply to financing secured by IP assets, those uninformed lenders are at risk of losing their security interests.

When trademarks and patents serve as collateral, having filed notice of a security interest with the Patent and Trademark Office is not enough to perfect a security interest. For example, to perfect a security interest in a patent, a lender must, instead, file the proper financing statements required by the applicable state uniform commercial code. This means filing a UCC-1 financing statement in the proper state. Similarly, to perfect a security interest in a trademark, a lender must not only file the required financing statements concerning the trademark, but also must record its interest in the trademark’s “goodwill” – under applicable state law – to be able to foreclose its interest on the mark itself. Consequently, lenders must take a security interest in sufficient related assets, those naturally associated with the mark, to ensure that the goodwill will pass with the mark, if and when a lender forecloses upon its security. If a lender neglects to file any of these required financing statements, they risk holding an unperfected security interest in the IP assets.

When a lender’s collateral consists of substantial copyright assets, however, simply filing the financing statements required by the applicable state commercial code is not enough to perfect a security interest; only a filing with the Copyright Office can do so for copyrights. Additionally, only a security interest in a registered copyright can be filed with the Copyright Office. Therefore, a lender that agrees to use an unregistered copyright as collateral for a loan may not be able to perfect this interest. Thus, before a lender agrees to a copyright serving as collateral for a loan, the lender must ensure that the copyright is registered and, if not, recognize that it may not be able to perfect its security interest in those unregistered IP assets.

Lenders who seek IP licenses as collateral for their loans also must be acutely aware of the implications of a bankruptcy filing, particularly the leverage licensors may hold over a licensee’s ability to transfer IP assets freely in a bankruptcy proceeding. For example, a licensee of intellectual property must meet certain criteria before assuming and/or assigning its license to a third-party user. Most importantly, the licensor – depending upon in which jurisdiction the bankruptcy is filed – may have the right to prevent either the assumption or the assignment of the license to a third-party, or both. Accordingly, a lender who has agreed to a license serving as collateral for a loan could find itself with worthless collateral. The lesson here is that before lenders agree to take IP licenses as collateral for a loan, they must closely scrutinize the terms of the licenses. If the licenses do grant the licensor veto power over a subsequent assignment, a prudent lender would either refuse to allow such a license to serve as collateral or would make certain that the licensor either consents to a transfer in advance or will cooperate in a bankruptcy proceeding.

If you have any questions, or would like additional information about this series of Alerts or recent bankruptcy filings that may affect your business, please contact:

Bankruptcy and Creditors’ Rights Group:
Karen L. Gilman ¦ Member of the Firm ¦ Phone (973) 530-2006 ¦ Email
Robert E. Nies ¦ Member of the Firm ¦ Phone (973) 530-2012 ¦ Email
David N. Ravin ¦ Member of the Firm ¦ Phone (973) 530-2034 ¦ Email 

Intellectual Property Group:
Peter E. Nussbaum ¦ Member of the Firm ¦ Phone (973) 530-2025 ¦ Email
Jeffrey M. Weinick ¦ Member of the Firm ¦ Phone (973) 530-2028 ¦ Email