CURRENT ISSUES IN
SECURED TRANSACTIONS
LAW IN THE UNITED STATES
Peter Winship (June 2014)
ISSUES ADDRESSED
Three issues addressed:
1. May a debtor grant a security interest in a
statutory or contractual licence?
2. How may syndicated financiers perfect a
security interest in a deposit account?
3. Over what collateral should a secured party
be given purchase money priority?
UCC ARTICLE 9
US law for security interests in personal
property is Article 9 of the Uniform
Commercial Code:
State law, not federal law
 Individual states may amend so like a model law
 Where applicable, federal law preempts
UCC first adopted in 1951
Comprehensive revision in 1998
Most recent amendments 2010
 Adopted except in NY and Oklahoma
I. LICENCES
Example 1. Restaurant holds liquor licence issued
by State Liquor Board. State law prohibits
assignment of licence without Board’s consent.
Restaurant grants Bank a security interest in all its
business assets, including licence, to secure
repayment of bank loan. Bank duly perfects its
interest.
Restaurant defaults and commences insolvency
proceeding. With consent of Liquor Board, business
assets—including the licence—are sold as a “going
concern.”
Does Bank have an enforceable security interest in
proceeds of this sale?
LICENCE (2)
1998 revision introduced § 9-408:
Overrides any term of statutory or
contractual licence that prohibits, restricts or
requires the consent of licensor to creation,
attachment or perfection of a security
interest in the licence.
But at same time leaves the licensor’s rights
unaffected in all material respects.
“one of the most intractable provisions of the
Uniform Commercial Code”
LICENCE (3)
Is the liquor licence personal property?
Article 9 does not answer; look to “other law”
Virtually all states recognize that holder of
liquor licence may grant security interest in
the licence if it is transferable
 Depends on wording of liquor licensing law
 No difficulty articulating policy, but
 Difficulty articulating nature of right in licence
 Crucial interest is right to what is received on
transfer of licence
LICENCE (4)
Assuming liquor licence in Example 1 is
personal property, the licence is a “general
intangible” (§ 9-102(a)(42))
Section 9-408 has following consequences:
 Liquor law requirement that Liquor Board consent
to transfer ineffective; Restaurant’s grant of
security interest in licence is effective
 Bank may not enforce security interest but has right
to whatever is received on transfer of licence made
with Liquor Board’s approval
LICENCE (5)
Bank has security interest in present “right to
proceeds” not in “proceeds” received on
subsequent transfer of the licence
Distinction important in bankruptcy
proceeding:
 Security interest in existing property and their
proceeds created before commencement of
bankruptcy proceeding is effective in bankruptcy
proceeding (BC § 552(b))
 In Example 1, before bankruptcy Bank had a
security interest in right to proceeds and the
proceeds of that right; when licence sold Bank has
enforceable security interest in proceeds of this
right; BC § 552 satisfied
LICENCE (6)
Initial proponent of § 9-408 recognized
proposal is of principal value to lenders to
“cash flow” businesses
 Such businesses have few valuable assets other than
licence (or equivalent, such as franchise)
 Lender relies on payment from the cash generated by the
business rather than on security interest in tangible assets
 Lender has strong incentive to keep business operating,
thereby creating “good will”
 Lender, rather than general unsecured creditors, should be
entitled to good will realized when business is sold as going
concern
Smith (1994) 28 Loy LA L Rev 335
LICENCE (7)
Example 2. Developer agrees to grant SME a non exclusive licence of its computer software.
One term of the agreement provides that an attempt
by SME to assign rights in the software entitles
Developer to terminate the licence.
A second term prohibits SME from disclosing to
anyone certain information regarding the software.
If SME seeks financing secured by a security interest
in the licence, what legal or practical obstacles will it
face?
LICENCE (8)
Section 9-408 covers contractual as well as
statutory licences (§ 9-408(a))
Terminology confusing (§ 9-408, Comment 5)
 Licence is a “general intangible”
 Developer (licensor) is “account debtor” (§ 9102(a)(3))
 SME (licensee) is “debtor”
Nature of SME’s property interest in licence
may be limited to promise of Developer not to
sue for SME’s use of Developer’s software
LICENCE (9)
In Example 2:
 1 st term: Developer ’s right to terminate if SME
attempts to grant a security interest is ineffective
to the extent it impairs creation of the security
interest (§ 9-408(a)(2))
 2 nd term: this contract restriction is not covered by
§ 9-408(a) so term is not made ineffective (cf. § 9408(d)(5))
 As practical matter, potential lender to SME must
decide whether to make loan without full
information about Developer ’s software
LICENCE (10)
Section 9-408 modeled on approach to security
interests in broadcast licences issued by the Federal
Communications Commission
Weise, (1999) 74 Chi -Kent L Rev 1077
 FCC and UCC § 9-408 appear to differ: FCC not allow security
interest in licence; UCC allows security interest in licence
 Federal Circuit Court recently ruled that difference is semantic
using concept of property as a bundle of rights:
 FCC allows security interest in one right (right to proceeds on
transfer of licence)
 UCC allows security interest in total bundle of sticks but then takes
away rights, such as enforcement rights, that affect licensor
In re Tracy Broadcasting Corp., 696 F.3d 1351 (10 th Cir. 2012), cert.
denied, 133 S Ct 2340 ( 2013)
II. DEPOSIT ACCOUNTS
Pre-1998 Article 9 recognized security
interests in deposit accounts only when
proceeds of other collateral could be traced
into the account
 At common law creditors could take a security interest in
bank account but non-uniform
 Bank could not take security interest in account maintained
with it; but bank had rights of recoupment and set -off
1998 revision permits both third party and
depository bank to take security interest in
deposit account as original collateral
DEPOSIT ACCOUNTS (2)
“Control” a key concept:
Attachment: “control” pursuant to security
agreement equivalent to authenticated
security agreement (§ 9-203(b)(3)(D))
Perfection: only by “control”—filed financing
statement ineffective (§§ 9-312(b)(1); 9-314)
Priority: security interest with “control”
usually has priority (§ 9-327)
DEPOSIT ACCOUNTS (3)
Obtaining “control” of deposit account ( § 9-104):
Bank with which account is maintained deemed in
control if security agreement with Debtor covers
deposit account (§§ 9-104(a)(1), 9-203(b)(3)(D))
Third party has control when:
 it concludes Deposit Account Control Agreement
with Bank and Debtor (§ 9-104(a)(2)); or
 it become Bank’s customer with respect to the
account (§ 9-104(a)(3))
Control not defeated if B entitled to deal with account
(§ 9-104(b))
DEPOSIT ACCOUNTS (4)
Example 3. D maintains a deposit account
with Bank A. To secure a loan from Banks X, Y
and Z, D creates a security interest in the
deposit account in favour of Bank A, as agent
for the three banks. Do Banks X, Y and Z
have a perfected security interest in the bank
account?
Source: Query on UCC Listsev (25 September 2012)
DEPOSIT ACCOUNTS (5)
2010 Amendment to Official Comment 3 to §
9-104 (but without amending black-letter text)
adds an “Example” exactly on point
Answer given:
“Because Bank A is a “secured party” as
defined in Section 9-102, the security interest
is perfected by control under (a)(1).”
Nothing said about agency relation.
DEPOSIT ACCOUNTS (6)
Listserv participants commented:
 Agent/Trustee held property (perfected security interest) for
Principals, citing Restatement 3 rd Agency § 8.12, Comment b
 Some recommended all banks conclude a deposit account
control agreement spelling out relationship between banks
on matters such as shifting control to successor agent,
disclaimers of liability, indemnity
 If DACA concluded, one suggested adding statement that it
entered into just in case court finds Bank A deposit does not
perfect
Other commentators recommend agreement
with Bank A subordinating its rights of
recoupment and setoff
DEPOSIT ACCOUNTS (7)
Drafters discover agency and trust law:
Restatement 3 rd Agency § 8.12 (Duties regarding
principal’s property), Comment b (2006):
 “An agent’s possession or control of property on behalf of a
principal is tantamount for many purposes to possession or
control of the principal [citing, inter alia, UCC § 9-104]”
Restatement 3 rd Trusts § 2, Comment i (2003):
Trust res may include claim against trustee
 Authority and logic of prior restatements meager and
dubious
 Reporter ’s Note: contrary to prior restatements; change
supported by “practical considerations as well as [it avoids]
… strained explanations of sensible results”
DEPOSIT ACCOUNTS (8)
Example 3 (var. a). D maintains a deposit account
with Bank A. D creates a security interest in the
deposit account to secure a loan from Banks X, Y, Z,
and A. The banks appoint Bank A as collateral agent.
Do Banks X, Y, Z and A have a perfected security
interest in the bank account?
Listserv commentators: slight hesitation
 Bank A is a secured party as depository bank
 Most commentators consider all banks are perfected by
Bank A’s perfection of interest
 Need for agreement between banks stressed as even more
needed
DEPOSIT ACCOUNTS (9)
Example 3 (var. b). D maintains a deposit account
with Bank A. D creates a security interest in the
deposit account to secure a loan from Banks X, Y,
and Z. The banks appoint Bank A as collateral
agent. Do Banks X, Y, Z have a perfected security
interest in the bank account?
Listserv commentators: greater hesitation
 Bank A is no longer a secured party
 Even if take security interest when account opened not
necessarily to secure other banks’ security interest
III. PURCHASE MONEY SECURITY INTERESTS
A recent study of whether English law
recognized purchase money security interests
(PMSIs) notes:
 SMEs have difficulty attracting capital
 Growing importance of intangible assets
Study recommends:
 English law should recognize such an interest “in well defined circumstances”
 Legislatures are better equipped than courts to resolve the
competing economic policy issues involved
 There should be public consultation followed by legislation
 Urged consideration of foreign legislative models
Boadle, [2014] LMCLQ 76
PMSI (2)
From mid-19 th century the concept of the purchase money security interest (PMSI) was recognized in
federal and state common law as an interest with
priority over earlier creditor with an interest in
debtor ’s after-acquired property
UCC Article 9 codified concept in 1951
 Pre-1998 text suggested that there could be a purchase money interest in “collateral” (i.e., all personal property,
including fixtures)
 Grant Gilmore suggested (1963) that there could
occasionally be a purchase money interest with priority in
general intangibles
PMSI (3)
1998 revision limits purchase-money security
interests to goods and software (UCC § 9-103(b),
(c))
 “Goods” includes software embedded in goods
 “Software” is separate category: in PMSI context, seller or
third-party financer finances debtor ’s acquisition of goods
and software to be used in these goods
No explanation for limiting the types of collateral in
which a secured party might have a purchase money
security interest
UCC Article 9 also provides that later security
interest in some intangible property has effective
priority without being called a PMSI (e.g. § 9-330)
PMSI (4)
No explanation for limiting the types of collateral in
which a secured party might have a purchase money
security interest
Possible explanations:
 There had been little if any practice of purchase -money
claims as to non-tangible collateral
 During drafting process there was no demand from debtors
or interested financers of other non -tangible collateral
 Time pressure to complete revision
 Separate uniform law projects underway to provide rules for
licences in intangible property (UCITA)
 Intellectual property complicated by federal law coverage
which preempted state law, such as UCC Article 9
 Intellectual property practices not yet ripe for codification
III. PMSI (5)
Example 4. X Inc. grants SP-1 a security interest in
all the corporation’s existing and after -acquired
assets to secure repayment of a loan.
SP-2 subsequently lends money to X Inc. to enable it
to acquire Inventor's patent. X Inc. grants SP-2 a
security interest in the patent to secure repayment.
As between SP-1 and SP-2, which creditor has
priority if X Inc. defaults on both loans?
ANSWER: SP-1. Patent is a general intangible and
therefore not a good. The general priority rule —first
to file or perfect (§ 9-322)—gives priority to SP-1’s
prior interest.
PMSI (6)
Comments:
 SP-1 has potential windfall
 SP-1 has “situational monopoly” because of
information and transaction advantages so obtains
monopoly rents
 But intangible property may be risky therefore new
intangible asset potentially dilutes SP -1’s risk
assessment
 SP-2 may be in better position to assess riskiness
of new intangible asset
 Need for empirical research into business practices