General Intangibles
Written by: Steven N. Kurtz, Esq.
Ask most lawyers or someone experienced in lending or factoring the definition of general intangibles and the first thing you will likely hear after a slightly awkward pause is “umm”. The practical understanding is that general intangibles constitute portions of your collateral that is not otherwise defined in the Uniform Commercial Code (“UCC”), provided that the granting language in your security agreement covers general intangibles and you properly perfect your lien. When you have a lien against general intangibles you basically have a lien against the essence of the business. This includes assets which you might not always think about, but often have value and protect you in the future.
UCC Sec. 9-102(a)42) defines a general intangible as “Any personal property, including things in action, other than accounts, chattel paper, commercial tort claims, deposit accounts, documents, goods, instruments, investment property, letter-of-credit rights, letters of credit, money, and oil, gas or other minerals before extraction. The term includes payment intangibles and software”. The UCC Official Comments which discuss general intangibles are quite lengthy but lists examples of general intangibles that include all forms of intellectual property, the right to payment of funds not evidenced by chattel paper or a note and the right to exploit the intellectual property. General intangibles also include rights in contracts that are not considered accounts- in other words rights in a contract that do not involve the payment of money. These are known as contract rights.
The various rights in intellectual property which constitute your general intangible collateral include patents, trademarks, customer lists, trade secrets, know-how, and copyrights. As mentioned, above, these items of collateral can constitute the very essence of the business. If a deal goes south and the factor client/borrower tries to start up the same form of business, your general intangibles lien follows and “sticks to” any transfer of your collateral, although if this happens you should contact your counsel to avoid a double debtor problem. (See, “The Double Debtor Problem”, February 2024).
For intellectual property, except for registered copyrights, you are perfected against third parties and a bankruptcy trustee provided that your financing statement is properly filed. As most of you know, your financing statement can either mirror your collateral description in the granting section of your security agreement or you can simply say all assets, which is my preference because typing all assets is hard to mess up. When your financing statement says all assets, your lien is perfected, but only as to the collateral described in the security agreement provided that it’s the form of collateral that is perfected by a financing statement. This is basically everything except for registered copyrights, motor vehicles which are not inventory or for sale (car lots) aircraft and its parts, and vessels.
The general intangible subsets of patents, trademarks, and copyrights at one point caused some litigation controversy. Proper perfection of your collateral protects you against a bankruptcy trustee, a lien creditor (someone who has a judgment or a pre-judgment remedy and is executing on those specific rights against your collateral), and junior lienholders. While the litigation drama involving patents, trademarks and copyrights can take up a lot of writing space, I’ll succinctly describe the problem.
Trademarks and patents are registered at the United States Patent and Trademark Office and can be searched by the public. General Intangibles are perfected with a financing statement. Creditors can also file notices with the Patent and Trademark Office to record liens against specific patents and trademarks. In bankruptcy a debtor-in-possession and a bankruptcy trustee have the right to avoid liens that are not properly perfected. Lenders who perfected against trademarks and patents through only a UCC-1 were sued to avoid their liens because the bankruptcy trustee contended that the lender should have filed its liens with the Patent and Trademark Office. Courts have upheld and protected the creditors who perfected their rights in patents and trademarks through only a financing statement. (See, In re Transportation Design & Tech. Inc., 48 BR 635 (1985) – Patents and In re TR-3 Industries, 41 BR 128 (1984) – Trademarks).
The better practice is to perfect liens against trademarks and patents through the UCC and the Patent and Trademark Office. To the extent you are dealing with valuable trademarks and patents, filing at the Patent and Trademark Office registers your lien and prevents your borrower/factor client from selling your patent and trademark collateral out from under you. Patents and trademarks are slightly different than other collateral because with other forms of collateral an unauthorized transfer does not divest your rights against the collateral, but it can in many instances do so with patents and trademarks.
Copyrights are a unique animal. If one wants to protect their original works against others exploiting or copying your copyright you must register your copyright at the United States Copyright Office. By way of example. Taylor Swift writes Anti-Hero. Once she finishes her work, it’s a copyright. In order to protect herself in her original work, she files her music and lyrics at the U.S. Copyright Office and now she’s subject to all of those protections. Works such as paintings, music, films, scripts, books and things of the like are copyrightable and must be filed at the U.S. Copyright Office to protect the author. The UCC in Sec. 9-109(c)(1) has the step back provision, which defers to other federal laws for perfection if specifically delineated in such other law. However, some original works also constitute copyrights such as technical drawings and computer programs or code. However, authors of technical drawings and computer codes may not want to register their copyrightable material because they then have to expose their secrets to the world when registering. If one has a copyrightable product but wants to keep it secret, it can be protected under state law governing trade secrets. Therefore, for copyrights that are registered, perfection of your general intangible copyright collateral must take place in the United States Copyright Office. (See, In re Peregrime Entertainment Ltd., 116 BR 194 (1990)). For copyrights that are not registered, you perfect with a lien against general intangibles and a UCC filing but lose those rights if the copyright is registered unless you file at the United States Copyright Office. (See In re Word Auxiliary Power Co., 303 F.3d 1120 (9th Cir. 2002), where I was on the wrong side on that decision and am forever a published loser).
On a more down-to-earth level, being perfected against the very essence of the business is important. When things go south, rights to payment that are not an account can be valuable or provide you with leverage. Having general intangibles shores up your rights in contracts that are not necessary the payment of money. If your debtor defaults and starts up a son of debtor, you always have successor liability rights. But, a lien against general intangibles makes you secured and puts you ahead of the old debtor’s unsecured creditors. Many factors enter into intercreditor agreements where they are senior on accounts and give up other rights, including general intangibles to the other secured party. It’s best to keep your rights in general intangibles in an intercreditor agreement, or at least have a shared interest.
The genius of the UCC is that general intangibles can cover just about anything and evolve over time and changes with technology. As the world becomes more digital, and people transact business through blockchains and electronic records, these types of assets are also protected forms of general intangibles. In fact, a new section of the UCC, Article 12 entitled Controllable Electronic Records, is essentially built up around electronic general intangibles and electronic accounts. Stay tuned for a further article on this topic.
About Steven N. Kurtz
Mr. Kurtz began his career as a commercial and bankruptcy litigator. He has conducted multiple bench trials and evidentiary hearings in the federal and state court systems, as well as appellate work. He has served as lead counsel in numerous complicated commercial “meltdowns,” including fraudulent transfers, lender liability, fraud, PACA, transportation, garment industry, high tech and multi-jurisdiction matters. After a successful career as a litigator, Mr. Kurtz began, at first, dabbling in documentation, which has morphed into structuring complex commercial finance transactions and helping his clients develop and implement cutting edge lending products. Mr. Kurtz now spends about 50% of his time in litigation and 50% of his time in transactional matters, and has a large national presence and burgeoning international practice. His clients include factors, asset based lenders, commercial finance companies, innovative fintech lenders, banks and entrepreneurs. Mr. Kurtz also serves as outside general counsel for several entrepreneurial and commercial finance companies.
Mr. Kurtz has served as a Judge Pro-Tem for the Los Angeles County Superior Court and regularly provides pro-bono work in order to give back to the community.
Mr. Kurtz leads a very active life. His primary focus is his wife, Leslie, and daughters, Ashley and Megan. He enjoys road biking, mountain biking, yoga, stand-up paddle boarding, and reading. Mr. Kurtz is also the President of the Calabasas Shul.
The views expressed in the Commercial Factor website are those of the authors and do not necessarily represent the views of, and should not be attributed to, the International Factoring Association.