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Bankruptcy Law - Newsletter Archive

Protection by Lenders of Interests in Intangible Property


A lender, not surprisingly, looks for collateral security to provide additional sources of repayment of its loan in the event the principal debtor does not pay. Sometimes this collateral security takes the form of a guaranty from a third person. Often it takes the form of tangible property, either real property or personal property, such as inventory or motor vehicles. The rules that the law imposes to document these kinds of interests are well known and well established. However, how can a lender take back and protect an interest in intangible property, such as a patent or copyright, to secure repayment of a debt? Taking back a security interest in this kind of property and documenting it in such a way as to defeat the interests of adverse claimants is more difficult than with tangible property and requires the assistance of an experienced attorney.

Creation and Perfection of Security Interests in Intangible Property

A commercial lender is always well advised to take back as security for repayment of a debt a security interest in property of the debtor. The lender is called a "secured party" if the lender has taken an interest in the debtor's property. If the debtor fails to repay its loan, the secured party may seize that property, sell it, and apply the proceeds to pay the debt. The secured party is well advised to "perfect" its security interest, usually by filing a notice of its interest in a prescribed form in a designated location. While state law varies in how this perfection is effected, all states have enacted in some form a series of laws known as the Uniform Commercial Code (UCC). Article 9 of the UCC sets out fairly uniform standards for perfecting a security interest. A security interest must always be set out in writing in a prescribed format. Most states make forms available that they recommend or insist be used for this purpose.

Perfecting a security interest has at least three potential benefits from the secured party's perspective. First, perfection enables the secured party to avoid an attempted transfer of the property unencumbered by the security interest without the debtor's first having obtained the secured party's consent. Second, the secured party can take a priority position in the event of foreclosure and subsequent sale of the property, as against competing creditors with claims against the same debtor. Third, the secured party, if its interest is properly perfected, can prevail even as against the debtor's trustee in bankruptcy. The Uniform Commercial Code applies only to interests in personal property. It does not apply to interest in real property (real estate). Perfection of a security interest in tangible personal property, such as equipment or inventory, rarely presents much difficulty with respect to determining how to perfect the interest, since the laws governing security interests make that procedure fairly clear. Intangible property, however, can present more complicated perfection issues.

Patents, trademarks, and copyrights are documented intangible rights, meaning that those interests usually are evidenced by a particular kind of certificate resulting from a process of recording the right to give notice to the world of the existence of the right, to describe that right, and to declare the owner of that right. A security interest in this type of interest is susceptible of perfection by filing under state law pursuant to Article 9 of the Uniform Commercial Code. These three forms of intellectual property differ, however, with respect to whether a federal filing is required to perfect a security interest therein, either in lieu of a state filing or in addition to the state filing. This can be an important issue, because patents and copyrights are created exclusively under federal law, while a trademark can exist under either federal or state law, or under both.

Some state courts have decided that because federal law preempts state law, federal law being made supreme by the United States Constitution, a security interest in a copyright can be perfected only by filing the appropriate documents with the Copyright Office in Washington, D.C. The exclusive right to create copyrights is vested in the federal government. Other states have decided that while a security interest in a copyright must be in writing and recorded with the Copyright Office to be enforceable, a security interest in a trademark need not be so recorded in the United States Patent and Trademark Office (PTO) because a trademark, unlike a patent or copyright, can be created under state law as well. Accordingly, a filing in the state pursuant to Article 9 of the Uniform Commercial Code is sufficient and effective to perfect a security interest in a trademark. Usually the first creditor to file has priority--meaning that it is entitled to the sale proceeds until its debt is fully paid before any other creditor is paid at all--but that is not always true. One court decided that with respect to a patent a secured party that files in its state, but not federally with the PTO, would prevail as against a creditor with a subordinate interest that has not filed at all or had only filed after the paramount creditor in the state. That paramount creditor, however, would not prevail as against another secured creditor that has filed with the PTO in Washington, even if that creditor filed after the first creditor filed in the state.

Taken together, the teaching of these cases is that the prudent secured party should file in every location where it is possible to file. Under the law of some states, to be effective, filing must occur at the state capitol, as well as locally. Some local filings must be at the location where deeds and other real property documents are filed, while other kinds of filings must be in the local clerk's office. The law of each state must be examined to determine where filing should take place to perfect a security interest. In the case of intangible documented interests such as copyrights, patents, and trademarks, the additional step of filing federally should also be undertaken. It will save a creditor much time and money to consult an attorney knowledgeable about these matters to protect the client's interests by properly perfecting a security interest in property securing repayment of a debt.


It is never advisable to leave matters involving creditor's rights to chance, particularly where copyrights, patents, or trademarks are involved. Not only are questions of state law involved, but federal law may also be implicated. An attorney with familiarity in matters of intellectual property should be consulted, even though the matter may seem to involve simply a matter of perfection of a security interest by filing the right form with the Secretary of State's office. If the attorney consulted has no familiarity with federal law in these areas, there can be no assurance that the creditor's interest will be properly protected or that a debtor can assert all the defenses to liability that might be available.

Form: Release of Security Interests

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Release of Security Interests

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