Tech Bankruptcy
June 25, 2007
An Expert Builds on Cybernetic Services
For those, like me, with short memories, Cybernetic Services was the Ninth Circuit decision holding that a properly filed UCC financing statement is effective, as against a chapter 7 bankruptcy trustee, to perfect a security interest in a patent. Moldo v. Matsco, Inc., 252 F.3d 1039 (9th Cir. 2001). In Braunstein v. Gateway Management Services, Inc. (Coldwave Systems, LLC), 2007 WL 1417631 (Bankr. D. Mass. 2007), Judge William C. Hillman has expounded on the Cybernetic decision - holding that a properly filed UCC financing is essential to perfecting a security interest in a patent.
Of course, the Cybernetic decision is known for more than just its holding - it's the path it took to get to the holding that makes it interesting. In Cybernetic, the Ninth Circuit addressed the argument that in the area of security interest perfection, the Patent Act preempts state law UCC Article 9 enactments. The lender had perfected under the UCC, but had not filed a notice of security interest with the U.S.P.T.O. The Court held that the federal Patent Act did not preempt the state law statutes, and thus a secured lender who files a UCC financing statement has properly perfected its security interest. The Ninth Circuit also addressed the interesting question of what kind of animal a security interest is in patent nomenclature. Earlier decisions had considered a security interest as a type of assignment. As an "assignment," the security interest fell within the scope of 35 USC 261, which states that an assignment is ineffective against subsequent purchasers or mortgagees of the patent unless recorded with the Patent Office. The Ninth Circuit, however, disagreed. It stated that a security interest is a type of "license." Under applicable patent law, patent assignees and mortgagees take their interests subject to licenses. So, under the Ninth Circuit's framework, filing a notice of a security interest in a patent with the USPTO would have no effect on anyone (except those having actual notice as a result). Under the Cybernetic's framework, filing a UCC financing statement would be essential to perfect a security interest in a patent.
However, that particular discussion in Cybernetic was not essential to its decision and, thus, fell within the world of interesting dicta.
In Coldwave, Judge Hillman faced a slightly different fact pattern. The secured lender had timely filed a notice of its security interest with the Patent Office. However, its UCC financing statements were filed late and within the 90 day preference period. The debtor filed a chapter 11 bankruptcy petition, and its case then converted to a case under chapter 7. The trustee filed a complaint seeking to avoid the security interest as unperfected.
Judge Hillman followed Cybernetic in holding that the Patent Act did not preempt the California UCC. This made the UCC rules applicable, but left open the question of whether the Patent Act provides a back-up method for perfecting security interests in patents. Hillman addressed this, stating: "[t]he Federal statute does not protect holders of security interests...there is nothing in sec. 261 that addresses in any way with the conflict between one who is not a holder of an interest by way of assignment, grant, or conveyance and a bankruptcy trustee. We must look to other law for the answer." That law, of course, was the UCC, and under it the answer was clear. No financing statement - no perfection.
As an aside, Judge Hillman is a noted expert in the area of secured transactions, and the author of several books on the subject, including Documenting Secured Transactions, 2nd Edition (2004). Thus, the title for this blog. His decision provides not just the viewpoint of a bankruptcy judge on the issue of patent securitization, but that of one of the leading commentators on secured transactions.
Of course, the Cybernetic decision is known for more than just its holding - it's the path it took to get to the holding that makes it interesting. In Cybernetic, the Ninth Circuit addressed the argument that in the area of security interest perfection, the Patent Act preempts state law UCC Article 9 enactments. The lender had perfected under the UCC, but had not filed a notice of security interest with the U.S.P.T.O. The Court held that the federal Patent Act did not preempt the state law statutes, and thus a secured lender who files a UCC financing statement has properly perfected its security interest. The Ninth Circuit also addressed the interesting question of what kind of animal a security interest is in patent nomenclature. Earlier decisions had considered a security interest as a type of assignment. As an "assignment," the security interest fell within the scope of 35 USC 261, which states that an assignment is ineffective against subsequent purchasers or mortgagees of the patent unless recorded with the Patent Office. The Ninth Circuit, however, disagreed. It stated that a security interest is a type of "license." Under applicable patent law, patent assignees and mortgagees take their interests subject to licenses. So, under the Ninth Circuit's framework, filing a notice of a security interest in a patent with the USPTO would have no effect on anyone (except those having actual notice as a result). Under the Cybernetic's framework, filing a UCC financing statement would be essential to perfect a security interest in a patent.
However, that particular discussion in Cybernetic was not essential to its decision and, thus, fell within the world of interesting dicta.
In Coldwave, Judge Hillman faced a slightly different fact pattern. The secured lender had timely filed a notice of its security interest with the Patent Office. However, its UCC financing statements were filed late and within the 90 day preference period. The debtor filed a chapter 11 bankruptcy petition, and its case then converted to a case under chapter 7. The trustee filed a complaint seeking to avoid the security interest as unperfected.
Judge Hillman followed Cybernetic in holding that the Patent Act did not preempt the California UCC. This made the UCC rules applicable, but left open the question of whether the Patent Act provides a back-up method for perfecting security interests in patents. Hillman addressed this, stating: "[t]he Federal statute does not protect holders of security interests...there is nothing in sec. 261 that addresses in any way with the conflict between one who is not a holder of an interest by way of assignment, grant, or conveyance and a bankruptcy trustee. We must look to other law for the answer." That law, of course, was the UCC, and under it the answer was clear. No financing statement - no perfection.
As an aside, Judge Hillman is a noted expert in the area of secured transactions, and the author of several books on the subject, including Documenting Secured Transactions, 2nd Edition (2004). Thus, the title for this blog. His decision provides not just the viewpoint of a bankruptcy judge on the issue of patent securitization, but that of one of the leading commentators on secured transactions.
Labels: cybernetic, moldo, patents, perfection, security interests
¶ 8:45 AM 0 comments
June 10, 2007
A new tool for obtaining electronic records
As a chapter 7 bankruptcy trustee, I'm always looking for new ways to ensure debtors turn over their financial records. I now have a doozy, thanks to the New York Court of Appeals.
In Thyroff v. Nationwide Mutual Insurance Co., 8 N.Y.3d 283, 2007 WL 844860 (N.Y. 2007), the Court of Appeals of New York held that the tort of conversion applies when a defendant denies access to electronic computer information. Thyroff was an insurance agent. When Nationwide Mutual terminated its relationship with Thyroff, it allegedly denied Thyroff access to information he had maintained on Nationwide's computers. Thyroff sued Nationwide for conversion in Federal Court, which filed a motion to dismiss. When the case reached the Court of Appeals for the Second Circuit, it certified the following question to the Court of Appeals of New York: "is a claim for the conversion of electronic data cognizable under New York law?"
The state court said yes. Which means, for all practical purposes, that if a principal of a business debtor fails to turn over electronic records to a trustee, the trustee can sue him for damages - at least in New York.
In Thyroff v. Nationwide Mutual Insurance Co., 8 N.Y.3d 283, 2007 WL 844860 (N.Y. 2007), the Court of Appeals of New York held that the tort of conversion applies when a defendant denies access to electronic computer information. Thyroff was an insurance agent. When Nationwide Mutual terminated its relationship with Thyroff, it allegedly denied Thyroff access to information he had maintained on Nationwide's computers. Thyroff sued Nationwide for conversion in Federal Court, which filed a motion to dismiss. When the case reached the Court of Appeals for the Second Circuit, it certified the following question to the Court of Appeals of New York: "is a claim for the conversion of electronic data cognizable under New York law?"
The state court said yes. Which means, for all practical purposes, that if a principal of a business debtor fails to turn over electronic records to a trustee, the trustee can sue him for damages - at least in New York.
Labels: conversion, electronic records
¶ 8:32 PM 0 comments
