Security Interests in Uncommon Collateral, Part 1

In order to maximize collateralization of loans, lenders may look to infrequently utilized forms of security, including intellectual property rights, insurance policies, or partnership or limited liability company (“LLC”) interests. It is imperative that lenders understand the steps to take to protect interests in such collateral. 

Intellectual Property 

Security interests in trademarks, patents, and copyrights may provide lenders with a valuable collateral source and sometimes are more valuable than expected. However, the question arises as to whether a Uniform Commercial Code (“UCC”) filing alone will suffice to perfect or protect a secured party’s interest, or whether filing in the Patent and Trademark Office (“PTO”) or Copyright Office (“CO”) is required. Typically, filings with the PTO cover only transfers or outright assignments of actual title to the patent or trademark, and not security interests, whereas “transfer” as defined by the Copyright Act includes security interests. The following rules generally govern: 

Trademarks
UCC Filing Required; PTO Filing Permissive (may obviate litigation)
Patents
UCC Filing Required as to lien creditors; PTO Filing Required as to purchasers and subsequent mortgagees
Registered Copyrights
UCC Filing Permissive (may obviate litigation); CO Filing Required
Unregistered Copyrights
UCC Filing Required; CO Filing inapplicable

Insurance Policies

Lenders often take interests in a borrower’s insurance policy.[1] An interest can be obtained through a lender being named as a loss payee under a property insurance policy or the lender taking an assignment of proceeds of an insurance policy. Because neither of these encompasses the granting of a security interest under Article 9, no “perfection” is actually required; however, a lender can and should take a number of steps to protect its interest. 

First, a lender should have the borrower/insured obtain an endorsement to his insurance policy to include a provision requiring the insurer to give advance written notice to the lender of possible cancellation or non-renewal and allowing the lender to prevent cancellation and have the policy renewed. Next, the policy should include a loss payee endorsement that provides coverage to the lender. Lenders should also require language that provides that the loss payee has the right to receive payment even if the loss payee has started foreclosure or similar action on the property and that the loss payee has an assignment of all right, title and interest in any insurance policies. This is important because once a debt is extinguished through foreclosure or payment, some courts have held that the lender has no remaining interest in the property insurance proceeds related to the loss[2], which is typically limited to the amount of indebtedness. Without this type of clause, a lender may extinguish its right to payment under the policy when foreclosing on property after the insured loss occurs but before payment is made. 

With respect to an assignment of proceeds under an insurance policy, keep in mind that all owners of a policy must grant an interest in and assignment of the policy. Therefore it is imperative that a lender see a copy of the policy to be sure that the parties have done everything necessary to obtain the interest/assignment and to understand what rights such an interest/assignment grants the lender. Further, it is always recommended that the life insurance company consent to the assignment in writing. Certain policies make this a requirement to a valid assignment of the proceeds of the policy. Finally, the lender should take steps to ensure that it be given notice of non-payment or other possible cancellation for life insurance policies, along with the ability to cure any problems or issues that could lead to cancellation, including the ability to make premium payments. 

Conclusion

Maximizing loan security is always essential. In addition to the above forms of collateral, there are other forms of uncommon collateral, including partnership and LLC interests, as well as planes and watercraft (to be discussed in part 2 of this article), which involve special rules to perfect a lender’s interest in such collateral. Navigating and understanding these rules is therefore imperative for lenders. Obtaining the advice of the bank’s counsel is recommended if and when questions arise as to the uncommon forms of collateral. 

[1] Interests in insurance policies are not covered by Article 9 of the UCC. See Va. Code Ann. § 8.9A-109(d)(8) (“This title (Commercial Code-Secured Transactions) does not apply to a transfer of an interest in or an assignment of a claim under a policy of insurance or contract for an annuity including a variable, other than an assignment by or to a health-care provider of a health-care-insurance receivable and any subsequent assignment of the right to payment.”)  

[2] Assignments of insurance proceeds under loss payee endorsements or under assignments of all right, title and interest in any insurance policies are extremely fact intensive. It is recommended that lenders consult with their counsel prior to taking an assignment of such interests and prior to attempting to enforce any such interest.


Spotts Fain publications are provided as an educational service and are not meant to be and should not be construed as legal advice. Readers with particular needs on specific issues should retain the services of competent counsel.