Pub. 7 2012-2013 Issue 1

www.nebankers.org 20 Extraordinary Service for Extraordinary Members. T HE CONCEPT OF THIS T YPE OF secured financing is simple: The lender provides financing to the borrower, and the borrower grants the lender a security interest in the IP assets as collateral for a loan. Effective security interests in IP or lack thereof are often discovered and disputed, if at all, in bankruptcy pro- ceedings. Lenders not aware of the pitfalls surrounding the structuring and perfection of a security inter- est in IP assets may find themselves without an enforceable security in- Security Interests in IP – Part II Collateralizing & Creating Security Interests in IP Jeff Makovicka, Husch Blackwell LLP COUNSELOR’S CORNER terest, jeopardizing the value of the collateral. Lenders should not ignore the fundamental questions of collat- eralization, specifically, (a) the effect of using different types of IP assets as collateral in secured financing and how it impacts the rights of borrowers and lenders and (b) the structure of the collateralization. This article, along with Part I, sets out general guidance relating to selected issues when dealing with IP as collateral. Lenders, however, are advised to consult with their counsel when collateralizing IP as- sets as fact-specific issues exist in every financing. I. Background As discussed in Part I, security interests in IP involve the application of two separate and distinct bodies of law: Federal IP law 1 and indi- vidual state uniform commercial codes (UCC). As a general principle, the UCC provides the rules for the creation, perfection, and priority of security interests in IP, unless pre- empted by federal law. Under the UCC, intellectual property will gener- ally be classified as a “general intan- gible,” although derivative rights to payment (such as the right of a licen- sor to receive royalties payable under a license of intellectual property) will be classified as accounts. While the UCC does not specifically recite patents, trademarks, and copyrights, the Official Comment uses the term “intellectual property” as an example of a general intangible. II. The Collateralization Structure A critical factor in attempting to define a security interest, which adds to the uncertainty surrounding IP security interests, is the distinction drawn between the term “assignment” and the term “security interest.” The terms “assignment” and “security in- terest” are terms with distinctly differ- ent meanings. A security interest in IP is a device to secure debt. Conversely, As discussed in the first installment (Part I) of this series, companies spend significant resources to either directly develop and obtain intellectual property (IP)—trademarks, patents, and copyrights— assets or acquire assets developed by others. Companies may exploit their IP assets by using them as collateral to obtain financing.