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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.

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A blog discussing the impact of technology on bankruptcy law and practice.

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Location: Boston, Massachusetts, United States

Warren E. Agin is a partner in Swiggart & Agin, LLC, a boutique law firm in Boston, Massachusetts focusing on the needs of technology companies. Mr. Agin heads its bankruptcy department. The author of the book Bankruptcy and Secured Lending in Cyberspace (3rd Ed. West 2005), Mr. Agin also chaired the ABA's E-commerce and Insolvency Subcommittee from 1999 to 2005, co-chaired the Boston Bar Association's Internet and Computer Law Committee (2003-2005), and served on the American Bar Association's Standing Committee on Technology and Information Services (2008-2011). Mr. Agin currently co-chairs the Editorial Board of Business Law Today. A contributing editor to Norton Bankruptcy Law and Practice, 3d, and co-author of its chapter on intellectual property for the past fifteen years, he is author of numerous legal articles and addresses on topics of technology, internet and bankruptcy law.

An Expert Builds on Cybernetic Services
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