UCC Collateral Descriptions – Don’t Be Too Specific or Too Vague

Avoid Being Too Specific or Too Vague in UCC Descriptions of Collateral

The Case: IN RE PROVIDERX OF GRAPEVINE, LLC – BANKR. COURT, ND TEXAS, 2013.

A UCC Financing Statement must provide the name of the creditor, the name of the debtor and the description of property serving as collateral. The following case involved the description of collateral in a UCC-1 Financing Statement which expressly covered “patent applications.”

The court determined that this language did not cover other intellectual property (“IP”) of the debtor, which is unfortunate because intellectual property often constitutes a company’s most valuable asset.

In ProvideRX, CERx (“Creditor”) and PM (“Debtor”) entered into a number of loan agreements and security agreements related to a principal loan amount of $8.92 million.

One of the security agreements executed between the parties was a Patent Application Security Agreement that included a description of collateral in language nearly identical to that in the Creditor’s UCC filing.  However, the UCC filing did not contain the broader phrase “IP assets” that was contained in the loan documents.

What Did the Court Say?

Although the court acknowledged that the description of collateral must be more precise in a security agreement than a UCC Financing Statement, it still found the UCC collateral description inadequate to cover intellectual property other than patents.

The court noted that the description of collateral in a UCC filing only needs to put a prospective creditor on notice so that prospective creditors have reason to inquire further about existing security interests.

“…The primary issue remaining before this Court is whether the language in the loan and security documents entered into by and among the various parties was sufficient to grant CERx a security interest in all of PM’s intellectual property assets owned immediately prior to a December 13, 2012 foreclosure sale (collectively, the “IP Assets”). For the reasons detailed below, this Court concludes that (1) the loan documents are unambiguous and, as a matter of law, PM did grant CERx a security interest in all of its IP Assets; (2) although CERx’s security interest attached to PM’s IP Assets, the collateral description contained in the UCC-1 financing statement filed by CERx with the Texas Secretary of State was insufficient to perfect CERx’s security interest in PM’s IP Assets, other than the Patent Applications (defined on p. 17); (3) pursuant to its Notice of Disposition of Collateral, CERx only foreclosed upon PM’s Patent Applications; (4) thus, as of its bankruptcy petition date, PM held title to all of its IP Assets, other than the foreclosed-upon Patent Applications, subject to CERx’s unperfected security interest; and (5) because CERx failed to perfects its non-Patent Application security interests, such interests were unperfected when PM filed its bankruptcy case and are subject to avoidance pursuant to 11 U.S.C. § 544(a)(1)…”

The Decision

The court found that the language of the financing statement was insufficient and pointed out that the UCC Financing Statement specifically mentioned patent rights but failed to mention other forms of intellectual property like trademarks, source codes, copyrights and other IP related assets.

Because of this failure (to include a broad category like “IP asset” or to list specific types of IP assets), the court concluded that creditors reviewing the financing statement would assume that the debtor had not given a security interest in its IP assets beyond those related to patents.

The language describing collateral must be specific enough to put creditors on notice of the need to inquire further while being general enough not to omit property that is contemplated as collateral but not expressly enumerated.  A delicate balance indeed!

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