Chapter 19 Perfection Pursuant To Federal Law
A. Generally
As noted in Chapter 12 (Perfection Generally), perfection of security interests in certain collateral must be accomplished by complying with laws outside Article 9. We examined in Chapter 17 (Perfection as to Goods Subject to Certificate of Title Legislation) the important case of perfection by "lien notation" of security interests in goods covered by certificate of title laws. The other major category of cases where Article 9 does not govern perfection is that where compliance with federal law is required. See new sections 9-310(b)(3) and 9-311(a)(1).
As with certificate of title cases two questions must be answered. The first is whether federal law and not Article 9 governs perfection. The second is what is necessary to comply with a federal law that has displaced Article 9. When federal law supercedes Article 9 it may do so as to every aspect of a security arrangement from creation and enforceability to perfection, priority and foreclosure. However, this chapter, and most of the debate as to when federal law rather than Article 9 governs, is concerned only with the question of whether perfection may be achieved under Article 9 or must be accomplished by action under federal law.
As was seen in Chapter 12 (Perfection Generally), the general rule of new Article 9 is that a security interest may be perfected only by filing a financing statement in the proper place. Thus, the perfection question, for the most part, becomes a question of whether a security interest in particular property may be perfected by filing a financing statement under Article 9 or whether perfection may be accomplished only by complying with the requirements of federal law.
B. When Compliance with a Federal Statute is Required
1. The Governing Provisions
Under the Supremacy Clause of the Article VI of the United States Constitution, federal law may displace state law to the extent that the federal law, explicitly or implicitly, preempts state law. Unfortunately, determining when and to what extent federal law has preempted state law is a difficult task at best.
As to Article 9, the question is when a federal law providing for the federal registration of interests in personal property has preempted the Article 9 rules governing the perfection of security interests in such property. Former Article 9, sections 9-104(a) and 9-302(3)(a) offered little guidance for deciding whether a particular federal law scheme displaced the Article 9 perfection scheme as a matter of preemption and there was some indication that federal law governed even where there was no preemption as such. See National Peregrine, Inc. v. Capitol Federal Savings and Loan Ass'n, 116 B.R. 194 (C.D. Cal. 1990), discussed further below.
It is clear that the drafters of new Article 9 intend that Article 9 yield to federal law only when and to the extent that federal law has preempted Article 9. Thus, new section 9-109(c)(1) provides that new Article 9 "does not apply to the extent that a statute, regulation or treaty of the United States preempts [Article 9]." [Emphasis added.] See Official Comment 8 to new 9-109 (rejecting the "voluntary step back" approach taken in National Peregrine, supra).
As to the specific matter of the perfection of a security interest, new section 9-311(a)(1) states that "the filing of a financing statement is not necessary or effective to perfect a security interest in property that is subject to . . . a statute, regulation, or treaty of the United States whose requirements for a security interest's obtaining priority over the rights of a lien creditor with respect to the property preempt Section 9-310(a)." [Emphasis added.]
The effect of new section 9-311(a)(1) is that the perfection rules of new Article 9 apply unless a federal law not only provides for federal registration of a security interest in personal property but federal registration is a condition of priority of the security interest over the rights of a lien creditor. According to Official Comment 2 to new section 9-311, new section 9-311(a)(1) uses the lien creditor language rather than the word "perfection" because the essence of perfection tends to be that a security interest is protected against lien creditors, including a trustee in bankruptcy, and federal laws posing preemption issues may use language other than “perfection.”
The difficult reality facing Article 9 practitioners is that although the test of displacement of Article 9 by federal law may be relatively easily stated it is anything but easily applied to particular federal laws. Most federal laws do not make clear by their language whether federal registry of an interest in personal property is a condition of and results in priority of the interest over the rights of a lien creditor. The remainder of this chapter examines court decisions under former Article 9 dealing with particular federal statutes and inquires whether the cases would be decided the same way under new Article 9.
2. Perfecting Security Interests in Particular Property Subject to Federal Statutes
a. Perfecting Security Interests in Civil Aircraft
There was general agreement under former Article 9 that to perfect a security interest in or other lien on civil aircraft (or parts thereof) a creditor had to register the security interest or lien with the Federal Aviation Administration in Oklahoma City, Oklahoma. See e.g., Danning v. Pacific Propeller, Inc. (In re Holiday Airlines Corp.), 620 F.2d 731 (9th Cir.), cert. denied, 449 U.S. 900 (1980).
The controlling provisions of the Federal Aviation Act, 49 U.S.C. §§ 44107-11, do not in so many words indicate that the effect of recording a security interest with the FAA in Oklahoma City, Oklahoma is to give the recording creditor priority over a lien creditor. However, there is language in sections 44108(a) and (b) indicating that a recording is necessary to make a security interest effective against persons other than the debtor or who have actual notice of the security interest and that no other recording is needed to make the security interest effective against all persons.
The language of these sections supports a conclusion that the Article 9 filing requirements have been preempted as contemplated by new section 9-311(a)(1). Official Comment 2 to new section 9-311 specifically identifies the federal aviation statute as the type of statute to which new section 9-311(a)(1) applies. Consequently, under new Article 9 it will be necessary to perfect a security interest in aircraft (or aircraft engines or propellers) by complying with federal law and filing an Article 9 financing statement is neither necessary nor effective under new sections 9-311(a)(1) and 9-311(b).
Until March of 2006, compliance with federal law to perfect a security interest in aircraft meant registering the security interest with the Federal Aviation Authority (FAA) in Oklahoma City, Oklahoma. Effective on March 1, 2006, the United States became a party to the Cape Town Convention. See 49 U.S.C. subtitle VII, Pt. A and the FAA regulations, 14 C.F.R. §§ 1 et seq., implementing the Convention. A copy of the Convention and Protocol may be found at http://www.unidroit.org/english/conventions/c-main.htm.
The details of the Convention and Protocol are beyond the scope of these materials but the essence is that to perfect security interests in aircraft and engines and documents related thereto that fall within the scope of the Convention a creditor must go to the FAA and obtain a code that enables the creditor to register a security interest in an international electronic registry in Dublin, Ireland. Thus, the FAA is the exclusive entry point but perfection requires registration pursuant to the Convention in Ireland. Consistent with the proposition that filing and searching are flip sides of the same coin, searching for security interests in covered aircraft now requires searching the international registry.
A multiplicity of questions regarding the details of compliance with the Convention and implementing federal registration, priority of conflicting security interests and how the new scheme interfaces with federal bankruptcy law undoubtedly will arise. A useful overview of the new scheme has been provided by Frank L. Polk in “Cape Town and Aircraft Transactions in the United States,” Air and Space Lawyer (Winter 2006), available from Westlaw at 20-WTR Air & Space Law. 4.
In the case of In re AvCentral, Inc., 289 B.R. 170 (Bkcy D. Kan. 2003), it was held that a security interest in aircraft acquired by the debtor to be “parted out” had to be perfected by recording the security interest with the FAA. In so holding, the court did not decide the question of whether a security interest attaching to aircraft parts of an already disassembled aircraft (other than engines or propellers or spare parts held by an aircraft carrier) would be subject to the federal recording scheme or had to be perfected by filing a financing statement under Article 9 of the UCC.
Presumably, the decision in AvCentral will continue to be good law after the effective date of the Cape Town Convention, but confirming that this is so and determining the steps necessary to achieve perfection as to such collateral as was involved in the case will require examining the Convention and implementing federal legislation.
b. Perfecting Security Interests in Copyrighted Property
Perfection of security interests in copyrighted property was the subject of considerable debate under former Article 9. In National Peregrine, Inc. v. Capitol Federal Savings and Loan Ass'n, 116 B.R. 194 (Bkcy C.D. Cal. 1990), Judge Kozinski, a Ninth Circuit Court of Appeals judge sitting by designation in a bankruptcy proceeding, concluded that both as a matter of voluntary deference of Article 9 and preemption a security interest in a copyright or copyrighted materials could be perfected only by recording the security interest in the U.S. Copyright Office.
In so holding the court in National Peregrine, relying essentially on 17 U.S.C. § 205, concluded that a federal recording was necessary to achieve priority over a lien creditor and, hence, a trustee in bankruptcy. National Peregrine has been understood to mean that the need to record federally applies not only to copyrighted materials as such but also to accounts generated by the sale or licensing of copyrighted materials. However, the court's opinion in National Peregrine did not indicate whether its holding applied to all copyrighted materials, whether the copyrights had been registered by the owners in the U.S. Copyright Office or not, or whether only security interests in copyrighted materials as to which copyrights had been registered had to be recorded in the Copyright Office.
The distinction matters because, although registration gives a copyright owner certain enforcement advantages not enjoyed by owners who have not registered their copyrights, 17 U.S.C. § 411(a), copyright protection exists under federal law whether or not a copyright has been registered, 17 U.S.C. §§ 102(a), 408(a), and many copyrights are never registered. Beyond this, registration is a pre-condition to the ability of a creditor to record a security interest in the U.S. Copyright Office.
Registration results in an identification number being assigned to a copyright, 17 U.S.C. § 409, and recordings of all transfers, including security transfers, are indexed using the identification number (and not the owner's name). 17 U.S.C. § 205(a). Consequently, there is no way to record an interest against an unregistered copyright and, as considered further below, if security interests in all copyrights must be made federally a creditor would first have to require a debtor-copyright owner to register all its copyrights.
National Peregrine was followed in In re AEG Corp., 161 B.R. 50 (BAP 9th Cir. 1993) and in In re Avalon Software, Inc., 209 B.R. 517 (Bkcy D. Ariz. 1997). The courts in these cases concluded that federal filing was necessary even where a debtor-copyright owner had not registered its copyrights. The court in Avalon Software acknowledged that a security interest may not be recorded in the U.S. Copyright Office unless and until a copyright is registered, but it insisted that it is the responsibility of the secured party to be sure that the debtor has registered all copyrights (as to copyrighted materials in existence at the time the security interest is created and as to copyrights arising later and those involving modifications and derivatives of the original copyrighted works).
More recently, in In re World Auxiliary Power Co. (AKA Aerocon Engineering, Inc. v. Silicon Valley Bank), 303 F.2d 1120 (9th Cir. 2002), the Court of Appeals for the Ninth Circuit upheld the decisions of a bankruptcy court and a federal district court concluding that a security interest in unregistered copyrights need not be recorded in the U.S. Copyright Office and may be perfected by filing a financing statement under Article 9. To view the opinion click on the case name.
In so holding the court of appeals affirmed the decision and analysis in National Peregrine regarding registered copyrights, including the conclusion that a federal recording is necessary to achieve priority over a lien creditor and, hence, a trustee in bankruptcy, but the court of appeals rejected the holdings in AEG Corp. and Avalon Software, supra, to the extent that those decisions made recording federally necessary as to unregistered copyrights.
In its opinion, the court of appeals in World Auxiliary Power agreed with Judge Kozinski in National Peregrine that federal recording is required as to registered copyrights both as a matter of voluntary deference by Article 9 to federal law and as a matter of preemption. As noted above, new Article 9 has rejected the voluntary deference approach and Article 9 is displaced only to the extent that there is preemption. Therefore, only the preemption aspect of World Auxiliary Power is viable under new Article 9. Nonetheless, it is clear, at least in the Ninth Circuit, that a filing under new Article 9 is effective to perfect a security interest in unregistered copyrights and only security interests in registered copyrights need be recorded in the U.S. Copyright Office.
The credit industry undoubtedly will hale the decision in World Auxiliary Power as a major victory. As the court of appeals notes, the vast majority of copyrights are not registered and as to these copyrights creditors may perfect their security interests by taking the relatively simple step of filing a financing statement under Article 9 and need not go the costly and time-consuming route of requiring a debtor-copyright owner to register its copyrights and to record their security interests in the U.S. Copyright Office. Of manifest importance, filing under Article 9 will perfect security interests in unregistered copyrights and protect the security interests in unregistered copyrights against trustees in bankruptcy.
However, the decision in World Auxiliary Power does not relieve a creditor of the responsibility of recording a security interest in registered copyrights in the U.S. Copyright Office. Moreover, the decision does not satisfactorily dispose of the question of what happens when a debtor-copyright owner registers a copyright a security interest in which has been perfected by filing under Article 9. It would seem that perfection achieved by filing under Article 9 ceases when a copyright is registered. Consequently, a secured party will have to establish procedures to monitor a debtor-copyright owner's behavior with regard to copyright registration.
Nor does the decision in World Auxiliary Power adequately address the problem that arises if a debtor gives a security interest in unregistered copyrights to a creditor who perfects by filing and the debtor then gives a security interest in the same copyrights to a subsequent creditor who requires the debtor to register the copyrights and who records its security interest in the U.S. Copyright Office. If perfection by filing ceases when a copyright is registered, it follows that the creditor who recorded with the U.S. Copyright Office would have priority.
The court of appeals dismisses the problem by labeling it "double dealing" and fraud, which the court declines to try to prevent by requiring federal recording as to security interests in unregistered copyrights. But, of course, there need be nothing fraudulent about the debtor's behavior in such a situation. Debtors regularly offer as collateral property already subject to a security interest and it is the fact that they do so, and that such subsequently created security interests are effective, that makes necessary the extensive and often complex set of priority rules in Article 9.
A related question is what happens if a debtor-copyright owner who has given a security interest in unregistered copyrights that is perfected by filing later registers the copyrights and then files bankruptcy. The answer again would seem to be that the security interest is not perfected and is avoidable by a trustee in bankruptcy. A creditor could include in its security agreement a provision barring later security interests, but under new section 9-401 such a provision would not render ineffective a later-created security interest and, rather, would have the effect only of making the creation of a later security interest by the debtor a default.
Neither is there necessarily anything improper about a subsequent creditor requiring a debtor-copyright owner to register its copyrights. Indeed, realistically, determining whether particular copyrights have been registered is not so simply accomplished as the court of appeals' opinion suggests. It would seem that simply asking a debtor would not provide complete assurance and the best way to know is to require a debtor to provide evidence of registration that a creditor must then confirm by doing a search in the U.S. Copyright Office.
Given that both creditors who are acting to perfect their security interests and creditors who engage in a search for outstanding security interests before lending against copyright collateral may end up in the U.S. Copyright Office, it is reasonable to ask why it would not make more sense to require all recordings to be made in one rather than in two places, such as is the result of the decision in World Auxiliary Power.
In the last analysis, the important question is what lenders who take security interests in copyrights and copyrighted material and accounts generated by the sale or license of such property must or ought to do both to be sure that there are no outstanding interests that could have priority and to perfect any interests that lenders take so as to protect their security interests against the claims of other parties, including a trustee in bankruptcy.
Under new section 9-311(a)(1) and World Auxiliary Power, to perfect a security interest in registered copyrights a creditor must record the interest in the U.S. Copyright Office. Under new section 9-311(b), only a recording in the U.S. Copyright Office will perfect a security interest in registered copyrights (but federal recording is the equivalent of an Article 9 filing to the extent that filing is material under new Article 9). Because recording federally is the exclusive mode of perfection as to registered copyrights, a lender who is contemplating taking a security interest solely in registered copyrights need search only in the U.S. Copyright Office.
On the other hand, under new section 9-311(a)(1) and World Auxiliary Power, recording a security interest in unregistered copyrights in the U.S. Copyright Office will not perfect the security (indeed recording technically is not possible as to unregistered copyrights). To perfect a security interest in unregistered copyrights a lender must file a financing statement under Article 9 and need not (may not) record federally and such a lender need search only the Article 9 filing system.
A word of caution is in order. Copyrighted materials, other than software bundled with computers so as to make the software goods under new section 9-102(a)(44), most likely will be general intangibles and both the security agreement and financing statement should so describe the copyrighted materials (describe the materials by item). Although revenues generated by the sale or license of the materials may be proceeds under new section 9-102(a)(64), it may be wise to specifically refer to such revenues as accounts (and this is true of revenues from materials as to which copyrights have been registered as well).
The foregoing may be seen as a summary of what creditors lending against copyrighted materials must do under World Auxiliary Power and new Article 9. What such creditors should do may be quite different. As was explained, knowing whether a copyright is registered or not is no trivial matter. As also explained, perfection by filing in an unregistered copyright would seem to end if the copyright is later registered, putting the secured party at risk as against a later creditor who perfects a security interest by recording in the U.S. Copyright Office and a trustee in bankruptcy.
Consequently, to be safe a creditor probably should search both the Article 9 system and the U.S. Copyright Office (something that can be done only using copyright identification numbers and not a debtor's name) and a creditor should file an Article 9 financing statement and record its security interest in the U.S. Copyright Office, something it can do only if it requires the debtor-copyright owner first to register the copyright. Given the cost and time involved, the extent to which a creditor will be so thorough will depend upon how much is at stake.
Stated another way, the decision in World Auxiliary Power may not change what thorough creditors would do or should do, but it will protect those who choose not to be so thorough. The decision also will protect those who do choose to be thorough during the time it takes to complete the process of getting copyrights registered and recorded, especially against a trustee in bankruptcy.
c. Perfecting Security Interests in Patents
The perfection of security interests in patents may pose an interesting test of the changes made by new Article 9. The Lanham Act, the federal statute governing patent assignments, in 35 U.S.C. § 261, provides that "an assignment, grant or conveyance shall be void as against any subsequent purchaser or mortgagee for a valuable consideration, without notice, unless it is recorded in the U.S. Patent and Trademark Office within three months from its date or prior to the date of such subsequent purchase or mortgage."
Judge Kozinski, in National Peregrine, discussed above, concluded that perfection of a security interest in a patent required recording the interest in the U.S. Patent and Trademark Office. According to Judge Kozinski, holding otherwise would produce a dual filing system under which protection against lien creditors, including trustees in bankruptcy, would be achieved by filing under Article 9 but protection against purchasers, including other secured parties, would require recording in the U.S. Patent and Trademark Office.
To avoid a dual filing situation and reach the result that it was necessary to file federally, despite the incompleteness of the priority scheme provided for in 35 U.S.C. § 261, Judge Kozinski argued that perfection and priority are distinguishable matters. Under Judge Kozinski's analysis it is possible for a federal law to establish a federal recording system that displaces the Article 9 filing system, but leave the consequences of recording a security interest federally to the Article 9 priority rules.
As noted earlier, under new section 9-311(a)(1), the Article 9 filing scheme is displaced only where the federal statute preempts not only the Article 9 place of filing rules but further that the effect of a federal filing is to give a security interest priority over the rights of a lien creditor. Consequently, new section 9-311(a)(1) does not allow for the distinction between perfection and priority argued for by Judge Kozinski in National Peregrine. Of course, preemption is a federal question and a court might adopt Judge Kozinski’s distinction between perfection and priority as a matter of federal law so as to require that to perfect a security interest in a patent the security interest must be recorded in the U.S. Patent and Trademark Office.
However, the need to make a choice between what new Article 9 intends and a federally imposed preemption result has been avoided, at least for now, and at least as to patents, by the Ninth Circuit Court of Appeals decision in In re Cybernetics Services, Inc., 252 F.3d 1039 (9th Cir. 2001). In that case, it was held that the Lanham Act, in particular, 35 U.S.C. § 261, deals only with ownership interests and does not allow for or require that a security interest be recorded in the U.S. Patent Office and Trademark Office for the security interest to be perfected and protected against either a lien creditor or another secured party. Under this decision, a security interest in a patent may be perfected only by filing a financing statement under Article 9.
The Ninth Circuit’s interpretation of 35 U.S.C. § 261, especially the word “purchaser,” seems a bit strained, as does the court’s insistence that transfers are divided into those involving ownership interests and those involving licenses (with the result that security interests somehow become license interests). However, insofar as the decision is that of an appellate court, the decision provides greater certainty and guidance on the matter of perfecting a security interest in a patent than exists as to copyrights.
d. Perfecting Security Interests in Trademarks
In In re Together Development Corp., 227 B.R. 439 (Bkcy D. Mass. 1998), the court held the filing of a notice of a security interest in a trademark in the U.S. Patent and Trademark Office was not effective to perfect the security interest. The court concluded that the Lanham Act, 15 U.S.C. § 1060, does not provide for recording security interests, as distinguished from ownership interests, in trademarks in the U.S. Patent and Trademark Office. The secured party should have filed a financing statement under Article 9.
As with Cybernetics Services, discussed above, the decision rests on a distinction between security transfers and outright assignments of ownership interests. As was also true in Cybernetics Services, the court viewed security interests in copyrights as a different matter.
It should be noted that security interests in trademarks present special drafting and enforcement problems. A mark cannot be transferred "in gross," that is, separately from the business with which it is associated. 15 U.S.C. § 1060. Consequently, the security agreement should be structured so as to effectively create a security interest in the debtor's business that allows the creditor to sell the business on default.
Doing so likely will require that security interests be created specifically in all of the debtor's business property and that these interests be properly perfected. For example, the security agreement should cover good will as a general intangible and equipment and inventory as tangible collateral, in addition to creating a security interest in the trademark.
e. Trade Secrets
Trade secrets can be valuable collateral. There are several problems with using trade secrets as collateral. One is that there is no legal protection for a trade secret once the secret is out. Persons who steal a trade secret and persons to whom the secret is communicated with awareness of the theft may be criminally or civilly liable, but the secret is otherwise available to the public. Consequently, a creditor must be sure the debtor is taking every precaution to maintain the secrecy of a trade secret.
Another problem is classifying the trade secret for purposes of describing it in a security agreement and financing statement. One would think that describing the collateral as the "debtor's trade secrets" would be sufficient and it may be. More generally, a trade secret would seem to be a general intangible under new section 9-102(a)(42) and, hence, describing the collateral as "debtor's general intangibles" should also be sufficient.
Insofar as the theft or other unauthorized appropriation of a trade secret gives rise to an action in tort that action, by analogy to insurance proceeds, should be proceeds of the trade secret under new section 9-315(a)(2), as discussed in Chapter 9 (The Specifics of Enforceability – After-Acquired Property, Future Advances, Transferred Collateral and Proceeds and the New Debtor Problem).
As explained in Chapter 16 (Perfecting Security interests in Proceeds and Other Later Acquired Property), so long as the security interest in the trade secret as original collateral was perfected the interest in the tort action as proceeds would be perfected automatically for twenty days under new section 9-315(c) and would continue to be perfected beyond the twenty-day period under the “same place” filing rule of new section 9-315(d)(1). See Chapter 24 (Continuing perfection – Changes as to the Use of the Collateral or in the Location of the Collateral or the Debtor; Security Interests in Proceeds).
Some uncertainty arises from the fact that the basic legal protection for trade secrets is misappropriation and it may be that a secured party who takes a security interest in a trade secret is getting a security interest in a "commercial tort claim," which as explained in Chapter 4 (Scope of Article 9) is covered by new Article 9. If the collateral constitutes a commercial tort claim then under new section 9-108(e)(1) a description by type in a security agreement is not adequate and greater specificity is required. A more serious problem for the secured party is that under new section 9-204(b)(2), as discussed in Chapter 9 (The Specifics of Enforceability -- After-acquired Collateral, Future Advances, Transferred Collateral and Proceeds, and the New Debtor Problem), a security interest cannot attach to a commercial tort claim as after-acquired property and the secured party would have to rely on its ability to reach any such tort claim as proceeds.
The final point about trade secrets is that they may be used to produce copyrighted or patented property. Consequently, a secured party will want to have an interest in any such resulting patents or copyrights. Whether or not the resulting property constitutes proceeds, even under the expanded definition of proceeds in new section 9-102(a)(64), is a nice question. See Chapter 9 (The Specifics of Enforceability – After-Acquired Property, Future Advances, Transferred Collateral and Proceeds and the New Debtor Problem).
The copyrighted or patented property likely would be covered by a description in a security agreement that includes existing and later-acquired general intangibles, but there is the problem of perfection discussed above. A filing under Article 9 is sufficient to perfect a security interest in a patent, but recording the security interest in the U.S. Copyright Office may be necessary as to copyrighted property, at least if the copyright is registered.
f. Domain Names
In the age of electronic commerce domain names are valuable assets because a name that readily identifies the debtor's business allows web surfers to get quickly and easily to the debtor's web site without the need to do a search that undoubtedly will result in multiple hits that may include the sites of competitors. Even in the age of such powerful search engines as Google, for businesses that depend on their web presence for success, a domain name may be among the most valuable assets the business owns.
In Network Solutions, Inc. v. Umbro International, Inc., 529 S.E.2d 80 (Va. 2000), the court held that the contractual right arising when a domain name is registered by a debtor is not subject to garnishment. In so holding, the court rejected the view that domain names constitute a new form of intellectual property and concluded that the contract with the registering entity was a contract for services that was not within the scope of the Virginia garnishment statute. The question arises as to what effect, if any, this decision has on the creation and perfection of a security interest in a domain name. The short answer would seem to be that the decision has no effect.
In Network Solutions, the court was interpreting the Virginia garnishment statute. Whether its conclusion that the contract with a registering entity is a contract for services withstands the test of time remains to be seen. But, Article 9 clearly covers contract rights. The question is whether the contract right is an "account" under new section 9-102(a)(2) or a "general intangible" under new section 9-102(a)(42).
Although the new Article 9 definition of "account" is expanded so as not to be limited to a right to payment for goods or services, new section 9-102(a)(2) still limits accounts to rights to payment. Therefore, the contract right is a general intangible under new section 9-102(a)(42) and should be treated accordingly. A security agreement describing the collateral as "existing and later-acquired general intangibles" would create an enforceable security interest in existing and later-acquired domain names and filing a financing statement under Article 9 covering general intangibles would perfect the security interest.
This, however, is not the end of the story. Domain names may be bought and sold and otherwise transferred, but only with the cooperation of the registering entity. Thus, domain name contracts may be understood to include the functional equivalent of a "no assignment" clause. New section 9-408(a) provides that a term in an agreement between an account debtor (here the registering entity) that relates to a general intangible and which prohibits, restricts or requires the consent of the account debtor to an assignment or transfer of the general intangible is ineffective to prevent the creation of a security interest in the general intangible.
However, new section 9-408(d) provides that if an agreement relating to a general intangible contains a term that is rendered effective by new section 9-408(a), then a security interest in the general intangible is not enforceable against the account debtor, does not impose any duty or obligation on the account debtor, does not require the account debtor to recognize the security interest, does not entitle the secured party to use or assign the debtor's rights under the agreement and does not entitle the secured party to otherwise enforce the security interest in the general intangible.
The official comments to new section 9-408 make clear that section 9-408(d) means what it says and acknowledge that outside of bankruptcy the value of any general intangible is a function of the extent to which the account debtor is willing to cooperate. Therefore, a secured party taking an interest in a domain name should attempt to get an agreement from the registering entity that it will cooperate with the secured party in the event of a default by the debtor (or that the registering entity will give the secured party an opportunity to cure any failures of the debtor to perform its contractual obligations, e.g., to renew a domain name registration when necessary.
In bankruptcy, BRA § 365 could render the no-assignment clause completely ineffective and the secured party could obtain the rights under the domain name contract.
Two other points should be made regarding domain names. Often a domain name will be of little or no value except as it is associated with an ongoing business. To this extent, a domain name is like a trademark and, as indicated above, a domain name ought to be viewed as part of a business rather than a separate asset. Certain domain names may have value independently of a given business and could be important to the success of a bankruptcy reorganization. But, a creditor should carefully investigate for the possibility that a debtor's acquisition of a domain name violates the Anti-Cybersquatting Consumer Protection Act, 15 U.S.C. § 1125(d) or poses an untoward risk of trademark infringement.
You may test your understanding of the heady matter of the need to perfect by compliance with federal law in the next five problems.
Problem 19.1 (interactive)
Donald Debtor, a sole proprietorship, is engaged in the sale of printer ribbons. Donald borrows from Western Bank and gives Western a security interest in Donald's inventory of printer ribbons, existing and after-acquired, a 1999 Acura used exclusively in Donald's business and a Cessna aircraft that Donald uses to travel to business meetings and to escape to an island retreat.
What must Western do to perfect the security interests in each of the items of collateral under new Article 9?
What sections of new Article 9 support your answer?
Problem 19.2 (interactive)
Super Soft, Inc. is an Arizona corporation that is in the business of developing computer software for managing inventory from purchasing through manufacture to sale to collection and accounting on disposition. Super Soft 's research and development and manufacturing and sales office is located in Tucson, Arizona. The software Super Soft developed is called "SureThing." Super Soft registered its copyright on SureThing with the United States Copyright Office. To finance its expanding business operations, Super Soft borrowed money from Southwestern Bank. To secure the credit, Super Soft authenticated a security agreement granting Southwestern a security interest in Super Soft's personal property consisting of Super Soft's inventory of software, accounts generated by the sale or license of the software, and computer equipment. The security agreement contained an "after-acquired" property clause that covered all of the collateral. Southwestern filed a UCC-1 financing statement with the Arizona Secretary of State that described the collateral as "all of Debtor's inventory, accounts, and equipment." Subsequently to entering into the security agreement with Southwestern Super Soft developed a software product called "AnotherThing." Super Soft did not register its copyright on AnotherThing.
As to which items of collateral can it be said with confidence that Southwestern's security interests are perfected?
If Southwestern were your client, what you have advised Southwestern to do to perfect its security interests in the collateral described in the security agreement in the problem?
Where should someone contemplating lending to Super Soft in Problem 19.2 search for outstanding security interests on the collateral referred to in that problem?
Would a search in both offices be conducted under Super Soft 's name?
Problem 19.3 (interactive)
Suppose that the collateral in Problem 19.2 included a patent and a trademark.
Must the security interest in the patent be recorded in the U.S. Patent and Trademark Office to protect the interest against lien creditors and other secured parties?
Must the security interest in the trademark be recorded in the U.S. Patent and Trademark Office to protect the interest against lien creditors and other secured parties?
What should Southwestern Bank do to perfect its security interest in the patent? In the trademark?
Problem 19.4 (interactive)
Suppose the collateral in Problem 19.2 included a trade secret.
May the security interest in the trade secret be perfected by filing a financing statement under Article 9?
How should the collateral be described?
What further steps would you advise Southwestern Bank to take to "secure" its interest in the trade secret?
Problem 19.5 (interactive)
Suppose the collateral in Problem 19.2 includes the domain name "SuperSoft.com."
May the security interest in the domain name be perfected by filing a financing statement under Article 9?
What further steps would you advise Southwestern Bank to take to "secure" its interest in the domain name?
2011-08-22 update