How to Protect a Trademark as Collateral on a Loan (Part 1)

Working for a firm that does a high volume of work with intellectual property allows for deeper dives into IP-related issues. One example involves situations where a lender has loaned money to a person with collateral for that loan being an item of intellectual property, such as an interest in a trademark. Whoa! Can a trademark (think something like a logo) be used as collateral against a loan? According to the Uniform Commercial Code, the set of laws which concern commercial transactions, it can. I’ll get into more on the IP-specifics in another post. For now, I bet you might be wondering more about the process of securing a loan with collateral. This gets us into the glamorous world of Secured Transactions, which is overseen by that Uniform Commercial Code (UCC)—since you asked, that would be UCC Article 9, to be exact.

Most people have encountered the loan process before. What you may not know is borrowing from a lender is a “secured transaction”, with the borrower giving the lender a “secured interest” in the borrower’s collateral in exchange for the loan. That means if the borrower defaults on the loan, the lender can repossess and sell the collateral to help make back the money owed. Again, that collateral can be a trademark, patent, or copyright. So how does that interest in the collateral become enforceable, giving the lender the right to possess it? 

The UCC tells us that in order for that interest in the collateral to become enforceable, it has to “attach”. In most cases, this happens when the lender gives the borrower the loan and the borrower puts up collateral that they have the right to offer to the lender. Additionally, an agreement must be completed to formalize the process. After that, the security interest has been created. Easy, right? However, issues can arise when there is more than one lender with an interest in an item of collateral. So how do we know which security interest gets priority should the borrower default?

Priority is determined based on the process of “perfection”, which allows lenders to know if they can cash in on collateral should a loan default. The main method lenders use to perfect their interests in collateral is by filing a financing statement for their secured interest. Wow! That sounds so easy. So, if you’re a lender, all you have to do is file a quick statement to protect your interest in the collateral? Well, not always so easy. Generally, you have to be the first one to file, and you also need to know the right place to file it. The how and the where of filing can be a somewhat complicated question, particularly when IP is involved, and it’s one we will explore in the next blog post. Thank you for reading and look out for the thrilling IP-driven conclusion to this Secured Transactions saga.

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