Articles Posted in Secured Creditors

Published on:

Intellectual property (“IP”) can act as collateral to be pledged to secure an extension of credit.  For example, a company that borrows money from a bank can pledge its patents as collateral for the loan.  The bank (referred to as the “secured creditor”) in this case will of course want to make sure that its security interest in the IP can be enforced against the borrower if the borrower defaults on the loan.

What Happens to Your Security Interest in a Debtor’s Intellectual Property in Bankruptcy?

  • It is Important to Hold a Perfected Security Interest in Bankruptcy
Published on:

Editor’s note: this blog post was recently published in Law360.

The Advantages of Security

Security has many advantages for creditors.  Four important advantages are listed below, followed by a discussion of the results of a recent empirical study showing that creditors recognize the benefits of obtaining security from their borrowers.

     Advantage 1: A Secured Creditor Will Rarely Walk Away Empty-Handed

When a debtor files a bankruptcy petition, there is often not enough money to go around.  Equity holders may be completely wiped out, receiving zero cents on the dollar.  Unsecured creditors are slightly better-positioned, occasionally receiving a dividend, but this dividend is often less—sometimes much less—than 100 cents on the dollar.

However, secured creditors, while never thrilled to learn about a borrower’s bankruptcy, can at least take solace in the fact that they will retain their interest in their collateral.  This interest may be subject to a trustee’s surcharge, discussed below, but even after this surcharge, the security interest will often have value.

Further, secured creditors are protected against a decline in value of their collateral.  This protection, known as “adequate protection” under the Bankruptcy Code, most frequently comes in the form of cash payments or in the form of additional or replacement liens.  11 U.S.C. § 361.

Continue reading