Goldilocks & the Three Collateral Descriptions
Collateral descriptions: one of the trickiest and most delicate parts of a properly perfected secured interest. As you know, the collateral description is one of the key requirements in security agreements and these descriptions are often at the heart of bankruptcy hearings.
It is the ongoing debate of sufficiently describing your collateral – it reminds me of Goldilocks & the Three Bears – “this collateral description is too specific” “this collateral description is too vague” “this collateral description is sufficient, thus it’s perfect-ed.” Perfect-ed, get it? Perfect…ed? OK, so perhaps that was more entertaining with the 3 octave voices bellowing & chiming the phrases in my head, but hopefully you get the idea.
The article, No Security by Obscurity: The Importance of Clearly Identifying Collateral, provides an analysis of a case in Florida. The Bankruptcy Court for the North District of Florida held that in order for a security interest to be granted in certain collateral there are three requirements:
“… (1) value must have been given; (2) the debtor must have rights in the collateral; and (3) depending upon the type of collateral, there must be an authenticated security agreement that provides a description of the collateral…”
In this case, the lender’s collateral description in their security agreement was vague (“security interest in all of Maker’s assets”) although when the lender later filed the UCC Financing Statement they listed a more concise collateral description (“All personal property owned by the [debtors], including cash or cash equivalents, stocks, bonds, mutual funds, certificates of deposit, household goods and furnishings, automobiles, and water craft.”). Unfortunately for the lender, the court held that their security agreement did not meet the three requirements, because they did not sufficiently describe their collateral. (In other words – the language in the Security Agreement trumps the language in the Financing Statement.)
“The lesson to be learned is clear: To obtain a valid and enforceable security interest, both inside and outside of bankruptcy, the documents creating the security interest must provide a sufficient description of the collateral. This description must not only be understood by the parties, but must also be clear enough for an objective third party to understand which collateral is secured.”
A best practice is for the collateral description within your security agreement to match the collateral description listed on the Financing Statement. If the lender’s security agreement included the description supplied in their Financing Statement, they may have been able to maintain their secured creditor status.
It’s important to file & release timely – but, where should you file if your collateral includes intellectual property?
Most of us are familiar with the idea that collateral is often something “tangible” – an actual item (i.e. piece of equipment or property) and sometimes “intangible” (i.e. patents or copyrights – think of Ford & how their logo was put up as collateral during their bankruptcy case). We also know that UCC filings must be recorded with the Secretary of State, but what I did not know was that this filing may not be enough if the collateral is “intellectual property.”
In, Security Interests in Intellectual Property, the author suggests that in order to perfect a security interest in intellectual property, filings should also be recorded in the Copyright Office and the U.S. Patent and Trademark Office.
“…To perfect a security interest in copyrights, the security interest should be recorded at the Copyright Office to provide appropriate notice and to perfect the security interest. For patents and trademarks, the UCC filing is usually sufficient to protect the lender, but may not be sufficient with respect to a future transfer of rights by the debtor to an innocent purchaser. The better practice is to record in a timely manner, in addition to a UCC filing, a security interest in patents and trademarks at the U.S. Patent and Trademark Office (PTO).”
The author’s focus turns to timely filing & releasing the various recorded documents, which is incredibly important, but I was most intrigued with his best practice recommendation of recording interests with the Copyright Office and the U.S. Patent and Trademark Office. Is this a best practice you follow?
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