Banking and Finance Law Report

Regulatory Changes for Money Market Funds

Grant Stephenson — Thu, 25 Feb 2010 09:42:28 -0600

On February 23, 2010, the Securities and Exchange Commission began what may become radical revisions to the regulation of money market funds when it adopted a number of significant changes to its rules governing money market funds. The changes were accompanied by a statement from the SEC chairman that indicated more regulatory change is on the way. SEC Release No. IC-29132 (Feb. 23, 2010) is online.

The new rules are generally intended to increase investor protections by increasing regulatory oversight of money market funds. For example, among other things, the new rules establish:

liquidity requirements for money market funds (a daily cash or equivalent requirement of 10 per cent);
a new restriction on the ability of funds to acquire illiquid securities;shorter maturity limits for securities held by money market funds;
“know your investor” procedures requiring funds to hold liquid securities to meet foreseeable redemptions;
a requirement for periodic stress testing to assess ability of a fund to maintain a stable net asset value upon the occurrence of events such as a sudden increase in interest rates;
andnew disclosure requirements including a monthly report of holdings to the Commission and a monthly posting of holdings online.

In many of these areas there previously was little or no regulation. The rules are effective May 5, 2010, but a number of the new requirements are phased in over two years, including a new requirement that funds be able, as a matter of processing capability, to process transactions at prices other than a stable net asset value.

SEC Chairman Mary Schapiro’s statement on the new rules is online.

Ms. Schapiro’s remarks indicate that the SEC is continuing to study the possibility of floating net asset value money market funds, among other changes. She indicated the market place should expect further changes when she characterized the current regulatory changes as “important initial steps toward making money market funds less vulnerable to ‘runs’.” (Italics supplied.) One further change under study is the establishment of a private liquidity facility for money market funds in times of stress.

What Border Officials Can Do With Your Laptop And Cellular Phone

Renata Vasconcellos — Tue, 23 Feb 2010 12:57:07 -0600

Having your laptop or smartphone searched or detained by Customs on your way back from a business trip would be a nightmare for most travelers, including bankers and other finance professionals. However, this scenario is quite possible under new governmental policies. In 2009, Customs and Border Protection (“CBP”) and Immigration and Customs Enforcement (“ICE”) both issued their respective new policies on border searches of electronic devices. It was a coordinated effort of CBP and ICE to update and harmonize their border policies to detect an array of illegal activities, including terrorism, cash smuggling, contraband, child pornography, copyright, and export control violations.

With all the technology innovations that allow business travelers to carry massive amounts of information in small electronic devices, CBP and ICE are facing an enormous challenge. On the one hand, travelers have a legitimate right to carry information on electronic devices. In that respect, there are serious concerns regarding the traveler’s expectation of privacy. On the other hand, the government has a duty to combat illegal activities and to enforce U.S. law at the border. The difficulty is finding the right balance between the government’s duty to enforce the law and the rights of travelers.

The legal basis for ICE and CBP policies is the border search exception to the Fourth Amendment requirement that officers obtain a warrant before searching someone’s property. But, assuming that they have this power, another key issue is exactly what CBP and ICE are allowed to do with one’s laptop. In short, they have authority to search and share information on laptops, disks, drives, tapes, mobile phones, Blackberries, cameras, music players, and any other electronic or digital devices — with or without “reasonable suspicion1” of illegality. Detention of the devices and/or information requires probable cause that an illegal activity is underway or is about to occur.

Searches
CBP searches may be conducted with or without suspicion of an unlawful activity. To the extent practicable, CBP searches should be conducted in the presence of a supervisor. ICE searches should be conducted by an ICE Special Agent, CBP Officer, or Border Patrol Agent. The searches should be conducted in the presence of, or with the knowledge of, the traveler. Naturally, the guidelines provide for exceptions to the traveler’s presence under certain circumstances where national security or operational considerations are an issue. ICE guidelines specifically state that the traveler’s consent for the search is not needed.

Detention
CBP detention of a device should not exceed five days, but that period can be extended. ICE detention periods may be longer — up to 30 calendar days or longer — if circumstances warrant. CBP is required to issue a Custody Receipt to the owner of the device (CBP Form 6051D) at the time of detention. ICE will also give the owner of the device documentation regarding its custody. Detention of electronic devices requires probable cause to believe that the device, or its contents, contains evidence of illegality that CBP and ICE are authorized to enforce.

Review of Information: Assistance During Search
If CBP and/or ICE officers have difficulties conducting the search of an electronic device, they may request assistance from other agencies. Technical assistance (e.g., translation of information in a foreign language or encrypted ) may be requested with or without individualized suspicion, while subject matter assistance (e.g. determination of the meaning, context, and value of information) requires reasonable suspicion of illegality. Requests for translation, decryption, and subject matter assistance require supervisory approval.

Copying Information
CBP and ICE are authorized to copy the information on an electronic device. CBP searches that yield sensitive information, including medical records, work-related information carried by journalists, or attorney-client privileged information, are entitled to special handling procedures. In such cases, the searching officer should seek advice from CBP associate counsel or assistant chief counsel. Furthermore, CBP and ICE policies and procedures require business confidential, privileged, or sensitive information such banking customer files must be protected from unauthorized disclosures. Transmission of the device to another federal agency for assistance is discouraged but not prohibited. Copying information is the preferred method in such cases.

Advice to Business Travelers
Remember, the next time you or your employees cross the border with a company laptop or Blackberry, be aware of ICE and CBP officers. If you are stopped for a device search, be patient and allow officers to do their work. More importantly, before you or your employees travel, think carefully about the type of information being carried on your devices and keep a backup copy of important information in the office. If you suspect that you are carrying sensitive information that may be controlled for export by the government, consult an export control attorney before your trip to make sure a government authorization is not required. If necessary, inform your general counsel of any search or detention of company property.

The complete ICE and CBP policies are available at the links below:
Customs Policy on Border Searches of Electronic Devices (August 20, 2009)

ICE Policy on Border Searches of Electronic Devices (August 18, 2009)

Ohio WARN Legislation Proposed

Franck Wobst — Mon, 08 Feb 2010 10:45:04 -0600

Ohio employers will want to pay close attention to H.B. 434, which was proposed by House Representative Kenny Yuko, D-Richmond Heights, last week. The Bill is similar in nature to the Worker Adjustment and Retraining Notification Act ( “WARN”), but goes further than the federal law in several respects. For example, the Bill would require an employer in Ohio laying off 25 or more employees in any 30-day period to give at least 90-days’ advance written notice of the layoff to affected employees, local workforce policy boards, and certain state departments and local elected officials. The notice period would be expanded to 120 days for employers planning to lay off 250 or more employees. Also, the penalties for violations include double back pay for all affected employees, as well as the full value of their employee benefits.

The Bill does contain exceptions similar to those found in WARN, including exceptions for temporary facilities, layoffs arising from “circumstances that were not reasonably foreseeable,” caused by “physical calamity, natural disaster, or act of war,” or where the employer can show that "notice would have blocked incoming capital which might have prevented the layoff.”

H.B. 434 is still in the very early stages of the legislative process. However, because it would expand employer advance notice obligations in several respects beyond WARN’s requirements, it bears watching – and perhaps warrants a call to your State representative. You can stay updated on H.B. 434 by subscribing to www.employerlawreport.com, a blog on employment related matters from Porter Wright Morris & Arthur.

Obama Proposes No Proprietary Trading for Financial Institutions

Jack J. Gravelle — Mon, 01 Feb 2010 11:10:55 -0600

January 21, 2010, President Obama proposed reforms to the financial system designed to ensure no bank, or financial institution that contains a bank, will own, invest in, or sponsor a hedge fund, private equity fund, or proprietary trading operation for the bank’s own profit. The new reforms, known as the Volcker Rule after former chair of the Federal Reserve Board, Paul Volcker, are intended to prevent banks from engaging in what are now perceived as risky investments.

How the Volcker Rule will be drafted and applied is unclear. At a minimum it seems that banks may have to halt investments that use solely the bank’s capital. Banks may therefore have to divest their proprietary trading desks, although most banks have significantly smaller proprietary trading desks than they did prior to the economic crisis.

What constitutes proprietary trading operations under the Volcker Rule is unknown. For example, do such activities include the practice of facilitating trading for clients and investing alongside clients? Additionally, it is unclear whether only wholly-owned bank funds would be prohibited or any bank involvement in a hedge fund or private equity fund above a certain threshold. One approach, which would be a broad interpretation of the Volcker Rule, would be to prohibit any trading activity that could affect a bank’s balance sheet.

President Obama has pledged to work with Congress to implement the Volcker Rule as part of a comprehensive financial reform bill. The dynamics of the bill should have a direct effect on whether some banks will be willing to cease being a bank holding company in order to keep their trading and investment business.

Mayer v. Medancic: Is Interest in Ohio as Simple (or Compound) as it Seems?

Ken Rathburn — Fri, 15 Jan 2010 15:24:25 -0600

On December 3, 2009, the Supreme Court of Ohio decided the case of Mayer et al. v. Medancic et al., in an effort to clarify the calculation of interest on an obligation upon the occurrence of a default. As stated by the Court, “compound interest is not available upon a default on a written instrument absent agreement of the parties or another statutory provision expressly authorizing it.” Accordingly, lenders should ensure that their loan documents clearly state that interest will be compounded not only during the term of the loan, but also after default.

The case involved the calculation of default interest on three promissory notes executed and delivered by the Medancics to the Mayers. All principal and accrued interest on each note was due and payable at maturity and the Medancics failed to make those payments in each case. Although the maturity dates fell in 1995 and 1997, the Mayers did not receive judgment on the notes until May of 2006. The Mayers contended that they were entitled to post-judgment interest at the rates set forth in the notes, compounded annually, but the trial court held that the Mayers were entitled to post-judgment simple interest at the rates set forth in the notes. The Eleventh District Court of Appeals reversed, on the basis of the Supreme Court of Ohio case, State ex rel Bruml v. Brooklyn, which the Eleventh District held provided for “interest upon interest” and, therefore, provided for compound default interest. In doing so, the Eleventh District acknowledged the general rule that compound interest is not available absent a statutory provision or agreement of the parties, but found that the rule applied only to cases decided under Ohio Revised Code 1343.03.

The Supreme Court of Ohio disagreed. The Court evaluated both statutes: Ohio Revised Code 1343.02 and 1343.03. 1343.02 provides that “upon all judgments, decrees, or orders, rendered on any bond, bill, note, or other instrument of writing containing stipulations for the payment of interest in accordance with section 1343.01 of the Revised Code, interest shall be computed until payment is made at the rate specified in such instrument.” 1343.03 sets forth the applicable statutory rate of interest when the instrument does not specify the interest rate. The Court made two crucial findings: (1) it saw no reason to withhold application of the general rule to cases decided under 1343.02, despite its historic application to cases decided under 1343.03, and (2) Bruml v. Brooklyn allowed for only “interest upon interest,” which it distinguished from compound interest. “Bruml merely permits the collection of interest on an amount that is due and payable, but not paid, even if that amount includes previously earned interest.” According to the Court, this meant that Bruml provides for the collection of simple interest on the judgment, whether that judgment amount included unpaid interest or solely principal was irrelevant.

Ultimately, this decision takes a middle position between that urged by the Mayers and that urged by the Medancics. Because the payment at maturity on each note included both principal and accrued interest, the default interest would be on that entire missed payment amount, but would be simple interest instead of compounded annually. Still, the decision is a costly one for the Mayers who lost compound interest over a nearly ten year period. This case should serve as a warning to all lenders in Ohio. Even if the instrument fully describes the accrual and calculation of interest during the term of the obligation, it must also do so for the period following a default.

Porter Wright Recognized Among 30 Elite Law Firms Nationally For Superior Client Service in BTI Survey

Mindy Stobart — Mon, 07 Dec 2009 10:37:49 -0600

Porter Wright is deeply honored to be ranked among the 30 elite firms in the country when it comes to client service. In a national survey of in-house counsel at Fortune 1000 companies conducted byThe BTI Consulting Group (BTI), Porter Wright ranked 22 out of 505 core firms named by in-house counsel.

Porter Wright was honored as a “Leader of the Best” when it comes to advising clients on business issues. According to the report, “Porter Wright differentiates itself with clients by translating legalese into business speak — a key method to prove your commitment to help clients.” The report also cites specific comments from corporate counsel about Porter Wright’s commitment to client service, specifically, “They know our business and us. They have skilled people in a number of areas critical to our business.”

Based out of Boston, BTI is the leading provider of strategic market research to law firms and professional services firms. BTI’s analysis draws on candid feedback from 240 corporate counsel at Fortune 1000 companies to determine which law firms among 505 core firms nationally top the charts in client service. Corporate counsel ranked Porter Wright among the best in the country in 14 areas:

Anticipates the Client’s Needs
Breadth of Services
Brings Together National Resources
Commitment to Help
Deals with Unexpected Changes
Helps Advise on Business Issues
International Capability
Keeps Clients Informed
Legal Skills
Meets Scope and Budget
Provides Value for the Dollar
Quality Products
Understands the Client’s Business
Unprompted Communication

For more information about this survey, visit www.bticlientservicesateam.com.

Smaller Reporting Companies May Avoid SOX Requirement Auditor Attestation Concerning Internal Controls Under Proposed Legislation

Jack J. Gravelle — Wed, 02 Dec 2009 10:07:07 -0600

In November the House Financial Services Committee passed an amendment to the proposed Investor Protection Act, H.R. 3817, that would exempt non-accelerated filers from providing auditor attestation of internal control over financial reporting. Public holding companies for some community banks may be affected. If passed, the bill as amended would provide significant relief for smaller reporting companies which are, generally speaking, companies with a public float of less than $75 million.

On October 2, 2009, the SEC extended the deadline by which annual reports must include auditor attestation for non-accelerated filers, including smaller reporting companies, to fiscal years ending on or after June 15, 2010. For calendar year-end companies, this would be the Form 10-K for the year ended December 31, 2010, to be filed in March 2011. Previously the deadline applied to annual reports for years ending on or after December 15, 2009. The Commission indicated the deadline will not be extended again, but if the Investor Protection Act becomes law the deadline will become moot. Congress is expected to consider the Investor Protection Act sometime in December.

Gramm-Leach-Bliley Act Compliance: Model Privacy Notice Form

Ken Rathburn — Wed, 25 Nov 2009 13:25:25 -0600

Under the Gramm-Leach-Bliley Act (“GLB”), financial institutions are required to disclose their information-sharing practices to their customers and also to notify them of their right to opt out of certain practices. As amended by the Financial Services Regulatory Relief Act of 2006, GLB also requires that certain regulatory agencies develop a model privacy notice form. This form will assist consumers in comparing the different information and privacy practices of financial institutions by providing an inclusive form that is consistent across all institutions.

On November 17, 2009, the Board of Governors of the Federal Reserve System, the Commodity Futures Trading Commission, the Federal Deposit Insurance Corporation, the Federal Trade Commission, the National Credit Union Administration, the Office of the Comptroller of the Currency, the Office of Thrift Supervision, and the Securities and Exchange Commission jointly issued a final model privacy notice form under GLB. The final model privacy notice form comes in two versions: (1) a version containing opt-out language in a section titled “To limit our sharing,” and (2) a version without opt-out language.

By using the appropriate final model privacy notice form, financial institutions can comply with the GLB notice and disclosure requirements. Under the final rule promulgated by the regulatory agencies, use of the model form functions as a “safe harbor” such that any financial institution correctly using the appropriate model form will satisfy the notice and disclosure requirements.

While the model form provides a safe harbor, financial institutions can continue to use their own notice form so long as it complies with the final rule. If a financial institution elects to use the model form, that institution must determine whether or not their information-sharing practices necessitate the use of the opt-out model form. Accordingly, financial institutions should seek the advice of privacy personnel and legal counsel to determine if switching to the model form is the right decision for their business and, if so, which version applies.

Mergers: Intellectual Property Considerations

Sheena Little — Tue, 17 Nov 2009 08:20:14 -0600

The Sixth Circuit Court of Appeals recently addressed the effect of mergers and internal corporate restructuring on intellectual property licenses in a decision that has implications in drafting and interpreting license agreements as well as in advising entities who are considering whether to restructure or merge a corporate entity.

In Cincom Systems, Inc. v. Novelis Corp., 6th Cir. No. 07-4142, 2009 WL 3048436 (6th Cir., Sept. 25, 2009), the Court considered whether an internal corporate merger resulted in an improper transfer of a copyright license. It determined that an internal merger may result in a transfer and that the transfer is improper unless it is expressly authorized by the licensor.

Cincom Systems granted Alcan a software license, which was “non-transferable” without Cincom’s prior written approval. Alcan, a wholly-owned subsidiary of a Canadian corporation, later created a separate corporation, Alcan Texas, and the two subsidiaries merged. The surviving corporation, Alcan Texas, simultaneously merged into itself and its three subsidiaries. After several name changes, the corporation became Novelis. None of the entities ever sought or received Cincom’s approval to continue to use the software license. In the resulting copyright infringement action, the district court granted summary judgment to Cincom, finding that the merger with Alcan Texas was an improper transfer of the software license under the Sixth Circuit’s decision in PPG Industries, Inc. v. Guardian Industries, Corp., 597 F.2d 1090 (6th Cir. 1979) (the “PPG” decision). The court awarded Cincom $460,000 in damages for the infringement.

In PPG, the Sixth Circuit held that a statutory merger automatically transfers patent licenses from the constituent corporations to the successor corporation. Applying federal law, the Court concluded that a license is presumed to be non-assignable and non-transferable in the absence of express provisions to the contrary. Because there was no express provision allowing the transfer, the Court ordered judgment in favor of the licensor.

Novelis argued that (1) the PPG decision was inapplicable in the context of internal corporate reorganizations where there was no concern that the license would be acquired by a competitor and (2) no transfer occurred under current Ohio law.

In rejecting these arguments and affirming the district court’s decision, the Sixth Circuit first clarified the applicable law and addressed the interplay between federal and state law in the intellectual property context. According to the Court, federal law governs the assignability of patent and copyright licenses and creates a presumption that a license is non-assignable and non-transferable. Federal policy favors allowing the copyright or patent owner to control the use of his creation, so it is immaterial whether the transfer is to a competitor or not. State law governs the interpretation of a license’s language and whether the merger results in a transfer of the license. State law must yield to federal law, however, if it would allow a license to be transferred without express authorization from the licensor.

Interpreting Ohio law, the Court held that “in the context of a patent or copyright license, a transfer occurs any time an entity other than the one to which the license was expressly granted gains possession of the license.” Unless there is express language in the intellectual property license permitting the transfer, it is improper, and the corporation that acquires the license may be liable for infringement.

Under the Court’s decision, a corporate entity may be liable for patent or copyright infringement if it acquires and uses a license from a separate entity through an internal merger without the express authorization from the licensor. Thus, corporations that are considering any kind of merger or internal restructuring should check all intellectual property licenses held by the involved entities to determine whether the licenses are assignable or whether the licensor’s permission must be obtained prior to effectuating the merger.

UCC Search Logic: Can Secured Creditors Be Too Careful?

Ken Rathburn — Fri, 23 Oct 2009 13:48:26 -0600

It seems safe to assume that no lender would extend high-dollar credit without first having a deep knowledge of the party accepting the funds. Certainly, such deep knowledge would include the precise legal name of that borrower. Nevertheless, recent cases continue to demonstrate the prevalence of filing UCC-1 financing statements that may be deemed “seriously misleading” as to the name of the debtor and, therefore, ineffective to fix the secured creditor’s place in the chain of priority. All of this means that secured creditors should be cautious when preparing and filing UCC-1 financing statements, or else watch their claims in bankruptcy move further down the chain of priority. But, is there such a thing as being too cautious?

Revised Article 9 of the Uniform Commercial Code, specifically 9-503(a)(1), states that a financing statement sufficiently provides the name of the debtor “if the debtor is a registered organization, only if the financing statement provides the name of the debtor indicated on the public record of the debtor’s jurisdiction of organization which shows the debtor to have been organized[.]” Instead of leaving it at that, however, 9-506 discusses the effect of errors or omissions in a filed financing statement. In short, 9-506(a) provides that errors or omissions are of no consequence unless they render the financing statement “seriously misleading,” and 9-506(c) provides that if a search in the filing office using the filing office’s standard search logic would disclose the financing statement, then it is not “seriously misleading,” even if it fails to provide the precise name of the debtor as required under 9-503(a).

Most filing offices use search logic that eliminates certain common words or abbreviations (such as “inc.,” “co.,” “Company,” and so forth). And, any other words are included in the search in a way that allows additional words to create problems. A recent example appears in the Nebraska bankruptcy case of EDM Corporation. In that case, the first-filing lender used the debtor name of “EDM Corporation d/b/a EDM Equipment.” The later-filing lender searched the debtor’s exact legal name of “EDM Corporation.” The filing office search logic eliminates the word “Corporation” and does a search only for the name “EDM.” Because of the filing office’s search logic, that search revealed only filings for “EDM” with no other words included in the filing. That search failed to disclose the first-filing lender’s financing statement because only a search for “EDM,” “d/b/a,” and “Equipment” would have revealed that filing. Thus, the first-filing lender had failed to file the exact public record name of the debtor (as required by 9-503(a)(1)) and the search logic failed to reveal that erroneous financing statement (as an available cure under 9-506(c)), so the first-filing lender lost its first priority lien position because its financing statement was “seriously misleading” under the law.

The result of the EDM Corporation case seems harsh—the first-filing lender was trying to be extra cautious by using a belt-and-suspenders, cover-all-the-bases approach. This harshness is tempered only by the fact that the result preserves the purpose of Revised Article 9: to put the burden of proper notice on the filing party, not the searching party. If the law and/or the search logic were the opposite, the later-filing lender would have to review every filing containing the word “EDM,” when only “EDM Corporation” is the precise name of the debtor. This may be a small task to expect when it involves the name “EDM,” but it could be an arduous task if the name were “Smith.”

Regardless of its harshness, the EDM Corporation case and others like it clearly show that secured creditors must carefully check and review the debtor’s name prior to filing. And even more, secured creditors could avoid most problems by simply running a search on the debtor’s precise legal name after filing their UCC-1 financing statement. If doing so fails to reveal their recent filing, then that secured creditor knows there is a problem with their financing statement. Although running a post-filing search takes additional time and money, learning of the problem at that point is far better than learning of the problem once the debtor enters bankruptcy.

Receiver's Sales of Real Estate Free and Clear Post-Eastlake

Rebecca Kucera Fischer — Tue, 29 Sep 2009 10:56:53 -0600

Receiverships have gained in popularity in foreclosure cases and in other types of litigation in recent years. Orders appointing receivers and setting forth the receiver’s duties frequently include a provision allowing the receiver to market and sell real estate. However, the question of whether a receiver legally has the ability to convey title to real estate, free and clear of liens and encumbrances, appears to have been answered in the negative, at least by one appellate district in Ohio.

In 2008, the Eighth District Court of Appeals handed down its decision in the matter of Ohio Director of Transp. v. Eastlake Land Dev. Co., 177 Ohio App.3d 379, 2008-Ohio-3013, 894 N.E.2d 1255. In what appears to be a classic example of bad facts making bad law, the appellate court reversed the lower court’s approval of a receiver’s sale of real property free and clear of liens. In Eastlake, which was not a foreclosure, the court-appointed receiver sought authority to sell a parcel of real estate for the sum of $250,000, an amount which he stated he “believed” was a commercially reasonable price for the property. In connection with the motion, the receiver presented no evidence of his marketing and sale efforts, nor did he present any evidence regarding the value of the property. Notably, the receiver’s motion did not state that he intended to sell the property free and clear of AFF’s liens. The senior lienholder, American First Federal, Inc. (“AFF”) intervened in the case and filed an objection to the receiver’s motion to sell the property for less than what was owed to AFF.

On January 20, 2007, the court issued two, inconsistent orders related to the receiver’s motion. In the first, the court set the receiver’s motion for hearing on February 13, 2007. In the second, the court “inexplicably” granted the receiver’s motion to sell, without vacating the order setting the hearing. In its approval of the motion, the trial court specifically authorized the receiver’s sale free and clear of AFF’s liens. On February 2, 2007, (presumably unaware of the court’s 1/20/07 granting of the sale motion) AFF filed its objection to the receiver’s motion and in that objection (1) submitted a credit bid of $251,000 and (2) offered evidence to the court that the property in question was worth at least $600,000.

In reversing the trial court’s approval of the sale, the court of appeals held that it was error for the lower court to authorize the receiver’s action without AFF’s consent or notice that the property would be sold free and clear of its liens. The trial court’s approval resulted in a denial of AFF’s due process rights. Although, as the court of appeals observes, it found “no Ohio case that holds that the only way to extinguish a lienholder’s interest in a property is through a foreclosure action,” the procedures mandated in a foreclosure (notice, opportunity to be heard, appraisal, public sale) are due process concepts ingrained in all court action.

The holding of Eastlake seems to suggest that so long as due process is not violated, a receiver may be able to sell real property free and clear, over objections by a lienholder, however, in application, this has not been the case.

Recent rulings out of the Cuyahoga County, Ohio Court of Common Pleas have interpreted Eastlake and have extended its reach, leading practitioners to the only reasonable conclusion that a receiver’s sale of real estate (with or without any objection by the property owner or a lienholder) is likely no longer permitted in Cuyahoga County.

In a recent decision in the foreclosure case of Republic Bank v. Flynn Properties, LLC, et al., Case No. CV-05-557338, Judge Carolyn Friedland denied the receiver’s motion to sell commercial real estate free and clear of liens. In that case, the receiver had extensively marketed the property and received multiple purchase offers including two that were for an amount well in excess of the appraised value of the property. The property owner objected to the sale as did the property owner’s attorney who had recorded a mortgage encumbering the property, three years after lis pendens had been effective, in order to secure his legal fees. In denying the receiver’s motion, the court pointed to the objections by the owner and the junior mortgage-holder and the fact that the sale proceeds would not provide enough to pay the junior mortgage. No discussion was had by the court as to the validity of the junior mortgage within the context of lis pendens.

An even broader application of Eastlake can be found in another Cuyahoga County matter, FirstMerit Bank, N.A. v. Rockside Business Center, LLC, et al., Case No. CV-08-647544. Relying on Eastlake, Judge Janet R. Burnside denied a receiver’s motion to sell real estate free and clear. In that case, the motion was denied despite the fact that: (1) the only lienholders other than the plaintiff bank were the county treasurer and Plymouth Park Tax Services, LLC (who had purchased a tax certificate) and those two lienholders were going to be paid in full from the proceeds of the sale and (2) the property owner had been duly noticed of the sale motion and failed to object or respond in any fashion. In addition, all of the entities that had an interest in the property were named in the suit and had made an appearance through counsel. Nevertheless, the court denied the motion and a subsequent motion to vacate, reconsider or amended that judgment. The subject property is currently set for sheriff’s sale.

Until another decision from the Eighth District or the Ohio Supreme Court either changes the ruling of Eastlake or limits its application to the egregious facts presented in that case, receiver sales of real estate in the Eighth District appear to be a thing of the past.

National Bank Act Preemption Remains A Viable Defense Against Terminated Officers' Employment Claims

Kevin Griffith — Mon, 28 Sep 2009 13:27:29 -0600

Ohio and federal courts continue to recognize an effective but seldom used preemption defense under the National Bank Act (“NBA”). This legal defense, available only to national banking associations, can be asserted against certain employment claims brought by terminated bank officers.

Specifically, the NBA grants national banks the power: To elect or appoint directors, and by its board of directors to appoint ... officers, define their duties, require bonds of them and fix the penalty thereof, dismiss such officers or any of them at pleasure, and appoint others to fill their places.

Courts continue to hold that the NBA’s “at-pleasure” provision preempts state-law tort and contract wrongful discharge claims brought by terminated bank officers. For instance, recently in Schweikert v. Bank of America, Case No. 06-2137 (4^th Cir. April 1, 2008), Bank of America terminated Schweikert, a senior vice president in private banking, for failing to cooperate with the bank’s and the FBI’s investigation of a client for whom Schweikert had arranged several loans. Schweikert sued the bank for wrongful and abusive discharge under Maryland law. The trial court held the NBA’s “at-pleasure” provision preempted the claims and dismissed the complaint. The federal Court of Appeals for the 4^th Circuit upheld the trial court’s application of the NBA’s “at-pleasure” provision. In so ruling, the 4^th Circuit cited with approval the 9^th Circuit’s nearly twenty-year-old ruling in Mackey v. Peoria National Bank, 867 F.2d 520, 525-26 (9^th Cir. 1989), where the 9^th Circuit held that the NBA’s “at-pleasure” provision preempts a terminated bank officer’s state tort and contract claims.

The federal 6^th Circuit similarly has held that the NBA’s “at-pleasure” provision preempts state law governing employment relations between a national bank and its officers. See, e.g., Wiskotoni v. Michigan National Bank-West, 716 F.2d 378, 387 (6^th Cir. 1983) (squarely recognizing the NBA’s preemption defense but finding in this case that it did not apply to the former bank branch manager’s implied employment contract and public policy wrongful termination claims because the bank could not establish that the branch manager was an “officer” or that they bank’s Board of Directors had ratified his dismissal in a timely manner, since it waited nearly three years to pass a resolution ratifying the dismissal and it did so only on the eve of the oral argument requesting the trial court to apply the NBA’s preemption defense).

Recently, Ohio’s 9^th District Court of Appeals went even further by holding that the NBA also preempts state-law statutory employment and retaliation discrimination claims. See Boesch v. Champaign National Bank, Case No. 24014 (Ninth App. Summit Cty., June 30, 2008) (“the trial court properly found that the employment discrimination and retaliation provisions of R.C. 4112 [Ohio’s employment discrimination statute] are in conflict with , and are therefore preempted by, the NBA.”) See also Farmer v. National City Corp., Case No. C-2-94-966 at 6-7 (U.S. District Court, S.D. Ohio E.D., September 12, 1995) (the NBA preempts all state-law actions, including employment discrimination).

In applying the NBA’s “at-pleasure” provision, however, these Ohio and federal court decisions make clear that the defense is only available if the bank’s Board of Directors — itself — makes or expressly ratifies the termination decision. Thus, to invoke the preemption defense successfully, the bank must show that its Board of Directors took action to dismiss the bank officer, either by itself or by ratification of the termination decision. See, e.g., Schweikert at p. 6 (citing to and relying upon the California Supreme Court’s seminal decision in Wells Fargo Bank v. Superior Court, 811 P.2d (525, 1038 (Cal. 1991) and holding that a Board of Directors’ ratification of an officer’s termination is sufficient to invoke the preemptive effect of the “at-pleasure” provision of the NBA).

By way of example, the Schweikert court found that the minutes of a board meeting showed the board had “reviewed proposals . . . to ratify the termination from employment, as officers of the Bank, the individuals listed on the document entitled ‘Officer Separations’ dated August 2, 2005.” Since the document listed Schweikert with a separation date, the Schweikert court held that the minutes “reflect that the Board exercised its discretion with respect to Schweikert and ratified his termination.”

By contrast, the Boesch Ohio Court of Appeals reversed the trial court’s dismissal of one of the terminated officer’s claims because a genuine issue of material fact existed regarding whether the bank’s Board of Directors actually dismissed the officer or ratified the dismissal decision, since it appeared that an undated amendment to the Board’s meeting minutes concerning the dismissal was prepared after-the-fact for litigation purposes. See Boesch at p. 10.

So, a bit of a conundrum exists. The NBA’s preemption defense definitely is a powerful defense. It leaves a terminated bank officer with virtually no employment-related remedy. But, to invoke the defense successfully, the bank’s Board of Directors must be “involved” in the termination decision. Such involvement, however, necessarily exposes the bank’s Board members to discovery as witnesses in the terminated bank officer’s employment-related litigation — the very litigation against which the bank desires to assert the NBA’s preemption defense. Moreover, in some states — like Ohio — “supervisors” and “managers” — and “any person acting directly or indirectly in the interest of the employer” — can be held individually liable for engaging in employment discrimination. It remains to be seen, therefore, whether a bank’s Board members in those states could be subject to such an individual liability claim based on their involvement in the decision to dismiss or ratify the dismissal of an officer of a national bank association.

Consequently, Board members, many of whom are not employed by the bank and who have their own busy jobs and careers, may view becoming involved in the bank’s efforts to assert the NBA’s preemption defense as more than they bargained for when they agreed to become a Board member. By the same token, their involvement likely can be protected by D&O and/or EPLI insurance policies, and the economic benefits to the bank and its shareholders — including the reduction of significant legal defense expenses and removal of potential liability for most employment termination claims — appear to far outweigh the inconveniences of potential litigation imposed on the Board members.

State Insurance Regulators Challenge Role of Credit-Rating Agencies

Karim A. Ali — Wed, 23 Sep 2009 15:26:03 -0600

As if the specter of newly proposed SEC Rules and an investigation by the California Attorney General were not enough of a distraction for the battered credit-ratings industry, the Wall Street Journal reported that some state regulators are mounting a challenge to reduce or eliminate the role credit-ratings agencies play in evaluating the health of an insurer’s portfolio of investment-backed bonds. As one of the largest purchasers of bonds, insurers rely extensively on credit-ratings published by Standard & Poor’s, Moody’s, and Fitch and other SEC designated Nationally Recognized Statistical Rating Organizations (“NRSROs”). Insurance regulators rely on the same credit-ratings to value an insurers portfolio of mortgage backed bonds. The lower the rating the more capital regulators require an insurer hold in reserve to cover future loses.

While no state insurance regulators have presented any firm proposals, regulators are reportedly considering whether to expand the number of firms allowed to provide securities evaluation analysis. This expansion would be a marked departure from the insurance industry’s exclusive reliance on credit-ratings provided by NRSROs. The potential break-up of the de facto ratings oligopoly will likely foster increased competition among rating agencies, which seems to be a key goal of insurance regulators and NRSROs’ critics.

Credit-rating Agencies Face New SEC Rules, Mounting Legal Challenges

Karim A. Ali — Wed, 23 Sep 2009 15:06:27 -0600

As credit-rating agencies, including Standard & Poor’s, Moody’s and Fitch try to rebuild their image and credibility in the wake of the U.S. financial Crisis, the SEC proposed new rules to promote transparency and eliminate conflicts of interest. The proposed rules target a select group of credit-rating agencies called Nationally Recognized Statistical Rating Organizations (“NRSROs”). NRSROs have been under intense scrutiny since regulators and other industry watchers began examining their role in the sub-prime mortgage crisis. Critics argue that NRSROs provided

AAA bond ratings on mortgage backed securities and other collateralized debt obligations that should have received significantly lower credit-ratings. Historically, NRSROs have served as “financial gatekeepers” that assess the risks associated with certain public and private bonds and other securities. NRSROs are primarily funded in two ways: (i) by issuers, sponsors, or underwriters of securities (commonly known as “arrangers”) that seek ratings to sell securities; or (ii) subscribers (e.g bond purchasers) who pay to have access to and rely upon NRSROs credit rating data. NRSROs, however, have several other sources of revenue. Many NRSROs are also paid to advise arrangers on how to structure complex financial products that are later rated by the same NRSROs. The structuring of these complex financial products often lead to lucrative commissions for the NRSRO’s, which creates an inherent conflict of interest. Some critics also accuse arrangers of seeking undisclosed “preliminary ratings” from NRSROs in an effort to “shop” for the most favorable credit-rating. Among other goals, the SEC’s proposals seek to address concerns about conflicts of interest and “ratings shopping.” The key proposals are as follows:

Disclosure of Conflicts of Interest: Require NRSROs to disclose (i) their net revenue attributable to the 20 largest users of credit rating services; and (ii) the percentage of their net revenue attributable to other services and products. In addition, the NRSROs would have to post a consolidated report at the end of each fiscal year that discloses the name of any person (or company or institution) that purchased services and products other than credit-rating services from the NRSRO and disclose the relative percentage of net revenue earned by the NRSRO from that person (to 10%, top 25%, top 50%, bottom 25%).
Annual Compliance Reviews: Require NRSROs provide to the SEC an annual report describing their compliance reviews for the most recently completed fiscal year. The reports will outline the steps the NRSROs have taken to comply with securities laws and describe any material compliance issues.
Disclosure of Credit Rating Reviews: Require NRSROs disclose to all other NRSROs when they are in the process of determining the credit rating of a structured financial product for an arranger. The rule would also require NRSROs to obtain a representation from the arranger that the arranger will provide the same information to other NRSROs seeking to rate the product.
NRSRO liability under the Securities Act: Require that if an issuer or registrant includes a credit-rating issued by an NRSRO in a registration statement then the issuer or registrant would be required to file the consent of the NRSRO, which would subject the NRSRO to potential liability as an expert under the Securities Act.

The SEC’s proposals come on the heels of the California Attorney General’s announced investigation of credit-rating agencies’ role in fueling the financial crisis and a federal court ruling that held credit-rating agencies can’t use a “free speech” defense to avoid liability for faulty ratings reports. On September 17, 2009, California Attorney General, Jerry Brown, launched an investigation of whether Standard & Poor’s, Moody’s, and Fitch broke state consumer protection or unfair business practice laws in connection with the ratings they issued on mortgage backed securities. NRSROs typically claim that their ratings are protected “opinions” under the First Amendment, but a federal judge recently ruled in a case against several NRSROs that such a defense is not available to an NRSRO due to the widely disseminated nature of the opinions and the reliance on the opinions by investors. The federal court ruling was in a case brought by investors that lost millions of dollars in a structured investment product containing over valued highly rated mortgage backed securities.

The NRSROs are expected to survive this latest round of regulations, investigations and lawsuits, but the question remains—will they ever retain their unquestioned credibility? Many industry observers believe that the industry titans Standard & Poor’s, Moody’s, and Fitch are going to be the ultimate losers. The new SEC regulations are targeted to promote competition and reduce their industry leading market share. Moreover, the mounting investigations and lawsuits against Standard & Poor’s, Moody’s, and Fitch continue to erode their remaining credibility.

Are Financial Institutions Required to Comply with e-Verify?

Mike Underwood — Tue, 22 Sep 2009 10:19:39 -0600

As a follow up to our recent post on e-Verify [link], many of our financial institution clients have been asking whether they are required to comply with the new federal e-Verify requirements for federal contractors.

Under federal affirmative action laws, many banks are considered federal contractors because they are issuing and paying agents for U.S. savings bonds or they are insured by FDIC. However, as explained below, issuance and payment of U.S. savings bonds and FDIC insurance do not trigger e-Verify obligations.

Clarifying language in the e-Verify regulations states that:

Agreements or activities performed by financial institutions that are not subject to the FAR (Federal Acquisition Regulation) are not required to comply with the e-Verify provisions and clauses of the FAR.

This statement in the e-Verify regulations is given in response to a specific question about whether banks and other financial institutions whose federal contracts are limited to serving as issuing and paying agents for U.S. savings bonds or being insured by the FDIC should be excluded from e-Verify requirements. Since issuance of or payment on U.S. savings bonds and FDIC insurance are not covered by FAR, they do not trigger e-Verify obligations. Similarly, the clarification notes that financial agency agreements (FAAs) between banks and the federal government are not subject to FAR and, therefore, do not trigger e-Verify obligations.

For all of these reasons, so long as the only federal contracts for your bank are of the sort described above, you can rest assured that you do not have to comply with the federal e-Verify requirements.

The e-Verify regulations do not address specifically federal share insurance of the sort that credit unions have under the National Credit Union Insurance Fund. However, the rationale for concluding that FDIC insurance does not trigger e-Verify requirements would apply also to federal share insurance for credit unions.

401(k) Plan ERISA Fiduciary Liability

Ann Caresani — Mon, 21 Sep 2009 13:39:17 -0600

Litigation regarding 401(k) plans is on the rise, and while the Employee Retirement Income Security Act (ERISA) is probably not the first thing on your mind these days, we hope you will take a few moments to consider whether you may have exposure in this area. Any company, including banking companies, that sponsors a 401(k) plan, and any company that handles 401(k) plan assets for clients, needs to be familiar with ERISA fiduciary responsibilities.

A plan has “named fiduciaries,” and ERISA also broadly defines a “fiduciary” as a person who:

Exercises discretionary authority or control in the management of the plan or exercises any authority or control respecting the plan’s assets;
Renders investment advisement for compensation, direct or indirect, concerning any money or property of the plan, or has authority or responsibility to do so; or
Has any discretionary authority or responsibility in the administration of the plan.

A fiduciary has the duty to follow plan terms, to act solely in the interests of participants and beneficiaries for the exclusive purpose of providing benefits and paying only reasonable expenses of the plan, to act prudently, and to diversify plan investments.

Fiduciaries can be held liable to make the plan whole for any losses that occurred as the result of a breach of fiduciary duty, and may be assessed penalties.

The Department of Labor (DOL) may investigate and bring an action against persons it believes are fiduciaries. Delinquent contributions are a topic for the DOL. The regulations regarding the timeframe for deposit of 401(k) deferrals and loan repayments withheld from pay into trust are rather vague, but the DOL is initiating investigations and asserting that breaches of fiduciary duty and “prohibited transactions” have occurred for failure to deposit within days.

The boom in ERISA fiduciary litigation by plan participants started with the “stock drop” cases. Plaintiffs seeking class certification alleged (among other things) that it was imprudent to offer employer stock as an investment in the 401(k) plan, and that fiduciary breaches caused losses to the plan assets. The collapse of the subprime mortgage market and economic downturn resulted in a new round of these cases.

Plan participants have also brought suits seeking class certification against plan fiduciaries and financial institutions regarding other alleged harm to their investments, such as undisclosed revenue sharing, and failure to negotiate lower fees. This is anticipated to result in greater disclosure requirements, including renewed interest in potential conflicts of interest.

Anyone who may be an ERISA fiduciary needs to evaluate whether the necessary steps have been taken to fulfill duties, prevent the likelihood of litigation, and minimize exposure.

The position of federal banking regulators on these matters is clear. Banking companies should carefully consider the implications of status of a fiduciary under ERISA. For example, Appendix E of the FDIC Trust Examination Manual, titled Employee Benefit Law sets forth a fairly in-depth explanation of ERISA matters. The Appendix begin with this Interagency Agreement: http://www.fdic.gov/regulations/examinations/trustmanual/appendix_e/appendix_e.html.

Additional information from the Department of Labor is available at http://www.dol.gov/ebsa/.

Ohio Secretary of State Changes Policy on Name Reservations

Barry Kiser — Fri, 11 Sep 2009 10:37:36 -0600

Under Ohio law, a person may reserve a name for a proposed new corporation or limited liability company, or an existing corporation or limited liability company intending to change its name may reserve a name for 180 days. Once filed, a name reservation form grants the registrant the exclusive right to use the specified name in the State of Ohio for the 180 day time period.

The Business Services Division of the Ohio Secretary of State recently changed their policy regarding the renewal of name reservations with their office. Effective immediately, they will no longer accept name reservation renewal forms, stating that such renewals are not permitted by Ohio law. If a registrant desires to reserve a name longer than the 180 day period, they may file a new name reservation form after the current reservation has expired. The Secretary of State’s office has said that they will reject a name reservation form if it is received by them before the name has expired. In the past, the Secretary of State had permitted a registrant to file name reservation renewal forms prior to the expiration of their name reservation, allowing a registrant to continuously keep a name exclusively reserved for as long as they desired.

This raises the question of what would happen if multiple parties attempted to reserve the same name the day following its expiration. The Secretary of State has indicated that multiple reservations will be taken on a first come, first served basis as soon as the name has expired so it is to your advantage to file a name reservation early in the morning the day following its expiration if you wish to reserve a name for longer than 180 days.

New Disclosure Requirements for Private Student Loans

Matt Moberg — Fri, 11 Sep 2009 09:45:26 -0600

The Higher Education Opportunity Act (“HEOA”), signed into law on August 14, 2008, regulates private education loans and the relationships between postsecondary education institutions and private education lenders. The Board of Governors of the Federal Reserve (the “Fed”) recently issued a Final Rule amending Regulation Z, which implements the disclosure requirements of HEOA and imposes a number of substantive restrictions on lenders. Compliance with these requirements becomes mandatory on February 14, 2010.

The Final Rule also sets forth a fairly regimented process for the application, approval and disbursement of private student loans. In connection with loan applications or solicitations, lenders must provide general information about loan rates, fees and terms, including an example of the total cost of the loan based on the highest interest rate permitted under the loan. The initial disclosures must also inform the student of the possibility of obtaining federal student aid.

Once the application has been submitted and the loan approved, the lender must provide a second set of disclosures, this time based on the specific terms of that consumer’s loan. Once the consumer has received the approval and disclosures, he or she will have 30 days during which to decide whether to accept the loan offer. Other than changes to the variable interest rate brought about by changes in the index to which it is tied, the lender may not change the terms of the loan during this period.

After the borrower accepts the loan and delivers to the lender a student self-certification, the lender must send out yet another set of disclosures, which should reflect the terms and conditions of the prior set of disclosures. After the loan has been accepted and all disclosures and certifications have been delivered, the student has another three business days during which he or she may terminate the loan transaction. Only after this three day period has expired may the lender finally disburse funds.

Because the disclosure requirements for private education loans differ from those for other loans, lenders that offer private education loans will have to implement specific procedures to ensure compliance.

FDIC TAG Program

Grant Stephenson — Fri, 04 Sep 2009 13:23:36 -0600

For bankers, November 2, 2009, is a key date to remember in conjunction with unlimited FDIC deposit insurance on noninterest-bearing transaction accounts. By that date, bankers must decide to opt out of the program, or not. For bank customers, November 16, 2009, is a key date because by that date banks that opt out must post notices to that effect.

You will remember the origins of this program: The Transaction Account Guarantee (TAG) program was established in October 2008 in the midst of a severe disruption in the credit market. The TAG program is one of two elements of the FDIC’s Temporary Liquidity Guarantee Program. The other element is the Debt Guarantee Program that provides a guarantee for bank-issued senior debt. The ability to issue debt under that program was scheduled to expire on June 30, 2009 and has been generally extended for four months.

On August 26, 2009, the Board of Directors of FDIC approved its Final Rule on the extension of unlimited deposit insurance for transaction accounts under TAG, and the rule is effective October 1, 2009. The program has been extended to June 30, 2010 (from December 31, 2009).

Each financial institution that participates will be subject to certain FDIC fees during the extension. The Final Rule provides that financial institutions can opt out of the program by November 2, 2009, and it describes the procedures required for a financial institution to make an election to opt out. The fees to be paid by participating institutions are based on the entity’s Risk Category under the FDIC’s risk-based premium system and range from 15 basis points to 25 basis points (annualized) multiplied by the amounts held in noninterest-bearing accounts that exceed the current deposit insurance limit of $250,000.

The rule also contains requirements for financial institutions to provide notices to customers with respect to the financial institution’s participation in TAG. In summary, the notices must be prominent and must be posted in the lobby of the main office, in each branch office and on the financial institution’s website if it offers internet deposit services. The notice must state whether the institution is participating in the transaction guarantee program and, if so, that the funds held in noninterest-bearing transaction accounts are guaranteed in full by the FDIC.

In addition, the rule requires certain disclosures of institutions that use sweep arrangements or other actions that result in funds being transferred or reclassified to an account that is not guaranteed under TAG. For example, funds swept into an interest bearing account would not be covered. These disclosures must advise customers that such arrangements would void the FDIC’s insurance guarantee with respect to the swept, transferred, or reclassified funds.

The FDIC’s Final Rule is available here.

Security Interests in Domain Names and Intellectual Property

Robert J. Morgan — Fri, 28 Aug 2009 13:46:19 -0600

In this challenging economy, intellectual property rights are increasingly valuable assets. As sales and profits struggle, companies are taking more steps to promote their brands and preserve their intellectual property rights in hopes of improving their position in the marketplace upon recovery. Likewise, many companies find themselves leveraging the value of their intellectual property and the strength of their exclusive rights as collateral on much-needed loans.

When taking intellectual property assets as collateral, lenders should be aware of issues specific to perfecting security interests in patents, trademarks, copyrights, and domain names. The Official Comments to Uniform Commercial Code § 9-102 include intellectual property within the definition of “general intangibles.” Generally, a lender’s security in general intangibles is perfected by the filing of a UCC-1 financing statement in the state where the borrower’s principal place of business is located. It should be noted, however, that UCC § 9-311 provides an exception when the intellectual property rights are governed by federal statutes, regulations, or treaties. In such a case, the proscribed federal procedures take precedence.

Patents
Courts have noted that the language of the federal patent statute explicitly provides for protection against subsequent purchasers or mortgagees, but appears to leave open the issue of protection against lien creditors, as lien creditors hold a security interest, not title to the property. Accordingly, a bona fide purchaser defense is most likely available to a subsequent purchaser or mortgagee against any claim that is not recorded at the United States Patent and Trademark Office (“USPTO”).

The best method for perfecting a security interest in patents is generally to:

record the security interest with the USPTO to perfect against subsequent purchasers for value; and
file a UCC-1 financing statement with the state to protect that security interest against future lien creditors.

Trademarks and Service Marks
There are particular limitations on trademark or service mark transfers which are of concern when taking a security interest in a mark. Section 1060 of the Lanham Act (15 USC § 1060) provides:

A registered mark or a mark for which an application to register has been filed shall be assignable with the good will of the business in which the mark is used, or with that part of the good will of the business connected with the use of and symbolized by the mark.

Trademarks and service marks cannot exist separate and apart from the ongoing business with which they have become associated. Therefore, any assignment which has the effect of transferring a mark apart from the associated good will is invalid. This stems from trademark law’s consumer protection origins, with the situation to be avoided being customer deception resulting from abrupt changes in the nature and quality of the goods or services after assignment of the mark. Lenders should keep in mind that a security interest recorded in a trademark with the USPTO should also grant a security interest in the good will.

Trademarks are governed by both state and federal regulations. In addition to a UCC filing, a lender should register its security interest in a federally registered mark (or in an application for federal registration of a mark) with the USPTO. The federal trademark statute does not contain any statutory provision for the registration, recordation, or filing of any instrument or document asserting a security interest in a mark or application for registration of a mark.

The best method for perfecting a security interest in a trademark is generally to:

file a UCC-1 financing statement with the state for unregistered or state registered marks;
record the security interest in a state registered mark with the state registration authority if it accepts such filings;
file a UCC-1 financing statement with the state for federally registered marks; and
record the security interest in a federally registered mark in the USPTO.

Copyright
Copyrights, in general, protect original works of authorship fixed in any tangible medium of expression and are governed by federal law. To perfect a security interest in a registered copyright, it must be recorded at the Copyright Office. The Copyright Act establishes a uniform method for recording security interests in copyrights and avoids the practical difficulties of determining and enforcing an author’s rights under differing state law. Therefore, the UCC step-back provision applies and federal law preempts state law in this area. A security interest in unregistered copyrights is properly perfected by filing UCC financing statements, but courts have suggested that it is the creditor’s responsibility to monitor whether the unregistered work becomes registered and to then take appropriate action to perfect.

The method for perfecting a security interest in a copyright is generally to:

record in the US Copyright Office the security interest in a registered copyright; and
file a UCC-1 financing statement with the state for unregistered copyright interests (being sure to register with the US Copyright Office should the copyright later be registered).

Domain Names
The best method for perfecting a security interest in a domain name is to file a UCC-1 financing statement setting forth the domain names to be used as collateral. There is a split in both legal authority and among legal scholars and practitioners, however, as to whether domain names are in fact a type of “property.” Many argue that a domain name is not property and that the registrant of a domain name receives only the conditional contractual right to the exclusive association of the registered domain name for the term of the registrations. The registrant does not, through its contract with the registry, obtain any rights against any other person other than the consequent exclusivity resulting from the fact that an identical domain name cannot be used during the term of registration. The legal status of domain names has been characterized by analogy to that of telephone numbers.

On the other hand, The Anticybersquatting Consumer Protection Act (ACPA) authorizes in rem civil action against a domain name, suggesting that a domain name is a form of intangible property, especially since in rem actions are brought specifically against property. Cases decided under the ACPA have held that Congress intended for domain names to be treated as property, at least with respect to the ACPA. Further, domain names have been treated as property in the “buying”, “selling” and transfer of domain names and by courts addressing disputes regarding the same. Not surprisingly, domain names have routinely been made subject to security interests created and perfected under the UCC. To date, there have been no statutes, regulations, or case law to suggest that the creation and perfection of security interests in domain names cannot be achieved under the UCC rules set forth for general intangibles.

It is important to note that registrars have exhibited a reluctance to accept the authority of a security interest recording without a court order or without the borrower registrant’s written agreement to transfer the domain. When possible, it is best for lenders to secure the borrower’s written agreement to transfer the domain in advance, with the condition that the agreement will not be presented to the registrar except upon default.