Secured Lenders Have a Right to Credit Bid in Bankruptcy -- At Least in the Seventh Circuit

Posted on August 2, 2011 by Andy Nicoll

Breaking with the Third Circuit and the Fifth Circuit, on June 28, 2011, the Seventh Circuit held that a debtor's plan of reorganization that provides for the sale of the debtor's assets free and clear of an existing security interest may only be confirmed over the objection of its secured creditor if the plan's sale procedure permits the secured creditor to credit bid its secured debt for the assets being sold. River Road Hotel Partners, LLC v. Amalgamated Bank, -- F.3d --, Nos. 10-3597 & 10-3598 (7th Cir. June 28, 2011).

The circuit split centers on the Bankruptcy Code's provisions that only permit the confirmation of a plan of reorganization over the objection of a creditor class (a so called "cram down") where the plan's treatment of such class is "fair and equitable." When the objecting class consists of secured creditors, the Bankruptcy Code requires that such fair and equitable treatment include provisions whereby either: (A) the secured creditor retains its liens in its collateral whether such collateral is retained by the debtor or transferred to another party and the secured creditor receives a specified level of cash payments under the plan, 11 U.S.C. § 1129(b)(2)(A)(i); (B) the secured creditor "realiz[es] … the indubitable equivalent" of its claim, id. § 1129(b)(2)(A)(iii); or (C) the secured creditor's collateral is sold subject to the secured creditor's right to credit bid for such property, the secured creditor retains a lien in the proceeds of the sale and the treatment of this new lien is in accordance with (A) or (B) above. Id. § 1129(b)(2)(A)(iii). Because the Bankruptcy Code does not define "indubitable equivalent" the courts, in providing their own definition have struggled over whether these three alternative "fair and equitable" treatments are mutually exclusive such that the only method for selling property free and clear is in an auction that permits credit bidding, or whether indubitable equivalent alternative is broad enough to encompass a free and clear sale that would not otherwise be "fair and equitable" because it did not honor credit bidding.

Both the Fifth Circuit and the Third Circuit have interpreted the fair and equitable option broadly. In the 2009 Pacific Lumber opinion, (In re Pacific Lumber, Co., 584 F.3d 229, 246 (5th Cir. 2009) the Fifth Circuit held that a plan that proposed the sale of the debtor’s encumbered assets to a specified purchaser with the secured lender receiving cash in the amount of the judicially determined value of the collateral but absent any right to credit bid qualified as indubitable equivalent treatment. In the 2010 Philadelphia Newspapers opinion, (In re Philadelphia Newspapers, 599 F.3d 298 (3d Cir. 2010) the Third Circuit held, in a 2-1 decision, that a plan that proposed selling the debtor’s encumbered assets free and clear of liens in an auction that prohibited credit bidding could qualify as indubitable equivalent treatment where the secured creditor was entitled to the proceeds of such sale.

Breaking with such precedents, the Seventh Circuit, in the River Road bankruptcy, rejected such a broad interpretation of "indubitable equivalents" reasoning that, if such an interpretation were adopted, this option of achieving fair and equitable treatment would eliminate the need for the other two more specific options. Thus, adopting a narrow interpretation where the indubitable equivalent option does not encompass free and clear sales, the Seventh Circuit held that to be confirmed over the objection of a secured creditor, a plan may only provide for a free and clear sale of the creditor's collateral if it honors the creditor's right to credit bid.
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Security Interests in Domain Names and Intellectual Property

Posted on August 28, 2009 by Robert J. Morgan

In this challenging economy, intellectual property rights are increasingly valuable assets. As sales and profits struggle, companies are taking more steps to promote their brands and preserve their intellectual property rights in hopes of improving their position in the marketplace upon recovery. Likewise, many companies find themselves leveraging the value of their intellectual property and the strength of their exclusive rights as collateral on much-needed loans.

When taking intellectual property assets as collateral, lenders should be aware of issues specific to perfecting security interests in patents, trademarks, copyrights, and domain names.  The Official Comments to Uniform Commercial Code § 9-102 include intellectual property within the definition of “general intangibles.” Generally, a lender’s security in general intangibles is perfected by the filing of a UCC-1 financing statement in the state where the borrower’s principal place of business is located.  It should be noted, however, that UCC § 9-311 provides an exception when the intellectual property rights are governed by federal statutes, regulations, or treaties. In such a case, the proscribed federal procedures take precedence.


Patents
Courts have noted that the language of the federal patent statute explicitly provides for protection against subsequent purchasers or mortgagees, but appears to leave open the issue of protection against lien creditors, as lien creditors hold a security interest, not title to the property. Accordingly, a bona fide purchaser defense is most likely available to a subsequent purchaser or mortgagee against any claim that is not recorded at the United States Patent and Trademark Office (“USPTO”).

The best method for perfecting a security interest in patents is generally to:

  • record the security interest with the USPTO to perfect against subsequent purchasers for value; and
  • file a UCC-1 financing statement with the state to protect that security interest against future lien creditors.

Trademarks and Service Marks
There are particular limitations on trademark or service mark transfers which are of concern when taking a security interest in a mark. Section 1060 of the Lanham Act (15 USC § 1060) provides:

A registered mark or a mark for which an application to register has been filed shall be assignable with the good will of the business in which the mark is used, or with that part of the good will of the business connected with the use of and symbolized by the mark.

Trademarks and service marks cannot exist separate and apart from the ongoing business with which they have become associated. Therefore, any assignment which has the effect of transferring a mark apart from the associated good will is invalid. This stems from trademark law’s consumer protection origins, with the situation to be avoided being customer deception resulting from abrupt changes in the nature and quality of the goods or services after assignment of the mark. Lenders should keep in mind that a security interest recorded in a trademark with the USPTO should also grant a security interest in the good will.

Trademarks are governed by both state and federal regulations. In addition to a UCC filing, a lender should register its security interest in a federally registered mark (or in an application for federal registration of a mark) with the USPTO. The federal trademark statute does not contain any statutory provision for the registration, recordation, or filing of any instrument or document asserting a security interest in a mark or application for registration of a mark.

The best method for perfecting a security interest in a trademark is generally to:

  • file a UCC-1 financing statement with the state for unregistered or state registered marks;
  • record the security interest in a state registered mark with the state registration authority if it accepts such filings;
  • file a UCC-1 financing statement with the state for federally registered marks; and
  • record the security interest in a federally registered mark in the USPTO.

Copyright
Copyrights, in general, protect original works of authorship fixed in any tangible medium of expression and are governed by federal law. To perfect a security interest in a registered copyright, it must be recorded at the Copyright Office. The Copyright Act establishes a uniform method for recording security interests in copyrights and avoids the practical difficulties of determining and enforcing an author’s rights under differing state law. Therefore, the UCC step-back provision applies and federal law preempts state law in this area. A security interest in unregistered copyrights is properly perfected by filing UCC financing statements, but courts have suggested that it is the creditor’s responsibility to monitor whether the unregistered work becomes registered and to then take appropriate action to perfect.

The method for perfecting a security interest in a copyright is generally to:

  • record in the US Copyright Office the security interest in a registered copyright; and
  • file a UCC-1 financing statement with the state for unregistered copyright interests (being sure to register with the US Copyright Office should the copyright later be registered).

Domain Names
The best method for perfecting a security interest in a domain name is to file a UCC-1 financing statement setting forth the domain names to be used as collateral. There is a split in both legal authority and among legal scholars and practitioners, however, as to whether domain names are in fact a type of “property.” Many argue that a domain name is not property and that the registrant of a domain name receives only the conditional contractual right to the exclusive association of the registered domain name for the term of the registrations. The registrant does not, through its contract with the registry, obtain any rights against any other person other than the consequent exclusivity resulting from the fact that an identical domain name cannot be used during the term of registration. The legal status of domain names has been characterized by analogy to that of telephone numbers.

On the other hand, The Anticybersquatting Consumer Protection Act (ACPA) authorizes in rem civil action against a domain name, suggesting that a domain name is a form of intangible property, especially since in rem actions are brought specifically against property. Cases decided under the ACPA have held that Congress intended for domain names to be treated as property, at least with respect to the ACPA. Further, domain names have been treated as property in the “buying”, “selling” and transfer of domain names and by courts addressing disputes regarding the same. Not surprisingly, domain names have routinely been made subject to security interests created and perfected under the UCC. To date, there have been no statutes, regulations, or case law to suggest that the creation and perfection of security interests in domain names cannot be achieved under the UCC rules set forth for general intangibles.

It is important to note that registrars have exhibited a reluctance to accept the authority of a security interest recording without a court order or without the borrower registrant’s written agreement to transfer the domain. When possible, it is best for lenders to secure the borrower’s written agreement to transfer the domain in advance, with the condition that the agreement will not be presented to the registrar except upon default. 

 

 
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