Secured Claims

Secured claims in bankruptcy are claims that are “secured” under state law. For real estate that means a deed of trust or mortgage. For most personal property it means security that was perfected under the Uniform Commercial Code.

Introduction to Secured Transactions

A creditor’s primary goal under Article 9 (Secured Transactions) of the Uniform Commercial Code (“UCC”) is to become a secured creditor with first priority in assets of the debtor. Unless the security interest is a preference under the bankruptcy code (generally perfected within 90 days without new consideration), it is entitled to priority over unsecured claims.

The UCC uses technical vocabulary to describe the law of secured transactions. The interest of the creditor in assets of the debtor generally applies to any interest (regardless of its form) created by contract in personal property and fixtures and which secures payment or other performance of an obligation.¹UCC §9-109(a)(1) That interest is referred to as a security interest,²See UCC §1-201(b)(35) defining “security interest” and the property subject to the security interest is referred to as collateral.³See UCC §9-102(a)(12) defining “collateral”

The debtor is the person who has a property interest in the collateral other than a security interest or other lien.⁴UCC  §9-102(a)(28)(A) The term “debtor” also includes a seller of accounts, chattel paper, promissory notes or payment intangibles,⁵UCC §9-102(a)(28)(B) a person who has a property interest in collateral subject to an agricultural lien,⁶UCC §9-102(a)(28)(A); see §9-102(a)(5) defining “agricultural lien” and a consignee.⁷UCC §9-102(a)(28)(C); see §9-102(a)(20) defining “consignment” The person who owes the debt (the “secured obligation”) is not the debtor but is referred to as the “obligor”.⁸UCC §9-102(a)(59) In most secured transactions the person who has a property interest in the collateral is the same person who owes the secured obligation so usually the debtor and the obligor are the same person.

The security interest becomes legally enforceable against the debtor when it attaches⁹UCC §9-203(a) but is not legally enforceable against third parties until it is perfected. “Attachment” is the coming into existence of a security interest. “Perfection” relates to doing some additional act, usually the filing of a financing statement, required to make the security interest effective as against third parties.

For a security interest to attach, the following must have occurred: (1) value must have been given; (2) the debtor must have rights in the collateral; and (3) either (i) the collateral must be in possession of the secured party by agreement of the debtor or, if the collateral is investment property, a deposit account, electronic chattel paper or a letter-of-credit right, the secured party must have “control” of the collateral; or (ii) the debtor must have authenticated a security agreement that contains a description of the collateral.¹⁰UCC §9-203(b) The agreement under which a security interest is granted or provided for is called a “security agreement”. ¹¹UCC §9-102(a)(73); §9-102(a)(74) (2010)

An attached security interest is a “perfected security interest” if it will prevail over a creditor using judicial process to obtain a lien on the collateral, including a trustee in bankruptcy having the status of a lien creditor under §544(a) of the Bankruptcy Code¹²UCC 11 U.S.C. §544(a) on the commencement of the debtor’s bankruptcy. There are three primary ways in which an attached security interest may be perfected. First, the secured party may file a properly completed financing statement¹³UCC See §9-102(a)(39) defining “financing statement” in the appropriate filing office.¹⁴UCC See §9-102(a)(37) defining “filing office” Second, the secured party may take possession of the collateral or, in the case of investment property, a deposit account, electronic chattel paper or a letter-of-credit right, may obtain control of the collateral. Third, in a few cases, the security interest may be perfected automatically upon attachment. Depending upon the category of collateral, there may be only one method of perfection or several.

In some situations, no additional steps beyond attachment are necessary to perfect a security interest.¹⁵UCC See §9-309. The most common example is a purchase-money security interest in consumer goods.

Perfecting a security interest in intellectual property

Intellectual property is a type of general intangible.¹⁶General intangibles” is a residual category for intangible property. UCC §9-102(a)(42) Federal and state statutes may provide alternative methods of perfection and compliance may be necessary for perfection.¹⁷UCC §9-311(b)

Patents are governed by The Patent Act of 1952, as amended.¹⁸35 U.S.C. § 1–376 (1984) Copyrights are governed by the Copyright Act. ¹⁹17 U.S.C. § 101 The courts have considered whether these statutes preempt UCC state law. The majority rule is that compliance with the Copyright Act is necessary for perfection of a security interest in copyrights but security interests in patents may be perfected by filing a UCC-1 financing statement:

The extent to which the Federal Copyright Act regulates transfers, including security interests, leads to the conclusion that it preempts state methods of perfecting security interests in copyrights. National Peregrine, Inc. v. Capitol Fed. Sav. and Loan Ass’n (In re Peregrine Entertainment, Ltd.), 116 B.R. 194, 199 (C.D.Cal.1990). The failure of the Patent Act to include security interests within the scope of its regulation leads to the opposite conclusion; the Patent Act does not preempt state regulation of security interests in patents. See In re 199Z, Inc., 137 B.R. 778 (Bankr.C.D.Cal.1992) (Lanham Act trademark legislation does not preempt state regulation of security interests because it does not expressly include security interests within its scope).²⁰In re Cybernetic Services, Inc., 239 B.R. 917, 922 (9th Cir.BAP (Cal.),1999); affirmed In re Cybernetic Services, Inc., 239 B.R. 917, 922 (9th Cir.BAP (Cal.),1999) cited by In re Pasteurized Eggs Corp., 296 B.R. 283 Bkrtcy.D.N.H.,2003.

Perfecting a security interest in software

Software embedded in goods is considered as part of the goods if the software is customarily viewed as a part of the goods (e.g., the computer chip in the automatic brakes on an automobile) or if, by becoming the owner of the goods, a person acquires a right to use the software with the goods.²¹UCC §9-102(a)(44) If it is not embedded, software is part of the residual category for intangible property.²²UCC §9-102(a)(42) A security interest in software is perfected by filing.²³UCC §9-310