Security Agreements are written agreements in which an interest is created in certain property to guarantee the performance of an obligation or repayment of a debt. In a Security Agreement, typically, one party, the lender, agrees to loan money or extend credit to another party, the borrower, in exchange for an interest in collateral owned by the borrower. The essence of the agreement-what gives the lender security-is the ability of the lender to foreclose on the borrower’s collateral in the event that the latter defaults on his payments to the former. Article 9 of the Uniform Commercial Code (UCC) governs secured transactions in the United States. Whereas real property secured transactions vary according to each state’s own laws, those secured transactions covering intangible property (securities, for example), movable property (cars, boats, among the more common items for individuals; inventory and crops, in the case of a business), and fixtures fall under Article 9 of the UCC, which applies uniformly to all 50 states.

Article 9 holds that a security agreement must include a description of the collateral, must be authenticated, or signed, by the parties, and must expressly evidence an intent to create a security interest in favor of the lender. Further, the borrower must have received value from the lender, and the borrower must have rights in the collateral. Important clauses of the agreement lay out the rights and restrictions on the parties (covenants) and the various scenarios if the borrower fails to pay (default).

Once the security agreement has been authenticated and has met all the other legal requirements prescribed by the UCC, the security interest is said to have attached. That is, the lender acquires an interest in the collateral. The lender will then take possession of the collateral or a document representing the collateral-title on a car, for example. (An important exception to the requirement that the agreement be in writing is if the lender has and retains possession of the collateral; in this case, the agreement may be oral.) A common course of action is for the lender to “perfect” the security by recording the agreement with a local records office or with the Secretary of State where the transaction took place. Perfection notifies other lenders of the existence of this agreement.

An unsecured transaction is predicated on the borrower’s promise to repay the loan or debt to the lender. In the event that the borrower defaults and is foreclosed, the lender is obliged to recoup his loss by pursuing the borrower through legal action. By contrast, the security agreement in a secured transaction allows the lender simply to take the borrower’s collateral (subject to certain reasonable limitations) without having to bother with a lawsuit. Moreover, secured transactions create an order of precedence in the event of a bankruptcy. That is, if a borrower goes bankrupt, his secured lenders-those for whom a security agreement exists between lender and borrower-will have a greater right to his remaining assets than will his unsecured lenders.

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Intellectual Property Rights Security Agreements… Ahhh Where to begin? Security agreements can be tricky enough. But when the collateral being securitized is intellectual property (IP), another layer of complexity is added. In a standard security agreement, one party (the lender) makes a loan or extends credit to another party (the borrower). In exchange, the borrower makes a formal promise to repay this loan or else make the lender whole again by giving some sort of collateral in exchange for the loan. The borrower creates an interest in its collateral to guarantee repayment. Typical security agreements, dealing with “typical” collateral such as automobiles, securities, or inventory, are governed by Article 9 of the Uniform Commercial Code (UCC). However, IP is not typical collateral. IP is governed by federal law, not by the state-adopted versions of the UCC.

Intellectual property has become increasingly valuable over the last several decades, so its use as collateral should be no surprise. IP includes patent rights, copyrights, trade- and servicemarks, and trade secrets. Of the four categories, only trade secrets are not covered by federal law. Inventors seek patents to protect their inventions and improvements. Copyrights are secured by artists looking to protect their “original works of authorship,” such as books, songs, and motion pictures. Trade- and servicemarks are words, logos, designs, or symbols that denote companies or their products or services. And trade secrets are items like customer lists or unique business formulas or processes.

Intellectual Property Rights Security Agreements also known as IP Rights Security Agreements have been particularly tricky instruments because it has not been clear what it takes to “perfect,” that is, to make superior to all other claims, an interest in IP. Federal statutes and a handful of court cases have gone attempted to settle this question. And it would seem at this point that to perfect an interest in patents, copyrights, and trade- and servicemarks, not only must the lender file its interest under the UCC with governing state bodies, but must also file federally with either the US Patent and Trademark Office or the US Copyright Office. Such actions, while prudent and necessary, make the process of perfecting IP security interests just that much more intricate.

Intellectual property rights security agreements include a description of the collateral and must expressly evidence an intent to create a security interest in favor of the lender. Further, the borrower must have received value from the lender. Of prime importance, the agreement should have what is called an “after-acquired” clause that states that the lender has rights in all later-acquired IP rights, such as distribution rights, licensing rights, income and goodwill, the right to sue, and rights in foreign translation and sales. Acquiring IP without such attendant rights is a bit like buying a car without an engine or tires.

Both parties have ongoing duties under these agreements, but the borrower typically has more. While it is up to the lender to perfect its interest in the IP, it is incumbent upon the borrower to notify the lender of new developments with the IP and register such developments in the name of the lender. The borrower usually pays the maintenance fees associated with, for example, patents. In addition to indemnifying the lender, the borrower promises to protect the lender’s IP rights in the case of third party infringement.

Intellectual property is a complex field. Security agreements can be complex documents. The marriage of these two just adds to the overall complexity of the situation. There are a lot of moving parts, thus, with intellectual property rights security agreements. It is important to make sure all the elements of the agreements are present and that the agreements are then filed where they need to be.

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The online legal document provider, RealDealDocs.com has released a number of Security Agreements for the top companies in America including many Fortune 500 companies. These are the actual legal documents drafted by the nation’s top law firms.

CIT Healthcare filed a Security Agreement in November 2008 in which Redpoint Bio Corporation asked the healthcare company to make a loan in the form of notes. Also in November 2008, STEN Corporation filed a Security Agreement that includes and omnibus and ancillary agreements. Both of these Security Agreements are available in their entirety on the RealDealDocs.com website.

A Security Agreement is a signed by a debtor granting a security interest to a lender in specified personal property pledged as collateral to secure a loan.

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A security agreement is a contract in which an interest is created in certain property to guarantee the performance of an obligation or repayment of a debt. The property may be real or personal. Real property security agreements are governed by state law. Article 9 of the Uniform Commercial Code governs the rest of the property security agreements for all 50 states.

Common scenarios include an individual signing a security agreement with a bank. The individual needs a loan, so he puts up his car as collateral. Or a farmer wants a line of credit, so he offers his crops as collateral.

Security agreements may be oral if the lender has possession of the collateral. Otherwise, they must be written.

Key elements:

• A full description of the collateral.
• An expression of intent by the parties to create a security interest.
• Covenants-what the parties, usually the borrower, may and may not do.
• Default-what happens if the borrower does not pay.
• Signatures of the parties-called authentication.
• Lender must give value in exchange for the creation of the security interest.
• Borrower must own or have title to the collateral.

Secured lenders have the advantage of being able to take the collateral in the event of a foreclosure. Secured lenders have priority in right and time over unsecured lenders. Likewise, perfection-the act of recording the security agreement for public knowledge-creates rights in time among secured lenders.

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Without the security agreement, it is improbable that individuals or businesses would be able to borrow much money, for interest rates would be prohibitively high. Security agreements allow for the free flow of credit and capital by assuring lenders that they will be repaid on the loans they make.

When a lender makes a loan or extends credit to a borrower, the borrower makes a formal promise to repay this loan or else make the lender whole again by giving some sort of collateral in exchange for the loan. The borrower creates an interest in his collateral to guarantee that he will repay the lender. The document that memorializes this understanding is the security agreement. Incidentally, security agreements may be oral, but in such cases, the lender must be in possession of the borrower’s collateral.

More often, security agreements are written, and they include several key articles. The agreement must describe the collateral. Further, the agreement must expressly demonstrate an intent by both parties to create a security interest, whereby the lender may foreclose on the collateral in the event of default. Another essential article-covenants-stipulates what the parties (usually only the borrower) may and may not do under the agreement. The default provision lays out the triggers for foreclosure and what happens if the borrower misses one or several payments. Default provisions often have acceleration clauses whereby a default makes the entire outstanding balance due. Lastly, the agreement must be authenticated by both parties through their signatures.

The predicate acts of the security agreement are that the lender gives value to the borrower and that the borrower has proper title or ownership of the collateral that he is putting up in the agreement. The borrower may offer title to a car or a house, or ownership of his inventory or his crops, depending on the situation and what he has that is valuable to a lender. Real property transactions are a special case, for real estate law differs among states. However, if the transaction in question deals with intangible property (securities), movable property (cars, boats, inventory), and fixtures, then Article 9 of the Uniform Commercial Code (UCC) applies nationwide. Article 9 is concerned with creating predictability between lenders and borrowers.

The lender’s security interest is said to attach once the parties authenticate the agreement and after it has met all the other legal requirements delineated by the UCC. In addition to taking possession of or title to the collateral, the lender may also choose to perfect the agreement by recording it with a local government records office or with the state’s office of the Secretary of State. Such an action puts other lenders on notice about the existence of this agreement. Perfection of the security creates order and rights in time, such that the first lender to perfect will be the first to be satisfied in the event of a foreclosure. Likewise, secured lenders will be paid before unsecured lenders.

Mortgages are types of security agreements, as are deeds of trust (this is where the trustee holds the collateral).

Once a borrower has repaid the secured debt, he typically requests from the lender a termination letter, attesting to the fact that the debt is no more. At the opposite end of the spectrum, the lender may decide to keep the collateral as repayment for the debt; this is called strict foreclosure. However, this may not be possible if other lenders have an interest in the collateral.

In short, the realm of secured transactions is very much one ruled by rights in time and by precedence, as well as the number of lenders and the type of transaction in question. UCC Article 9 goes a long way toward creating order, stability, and predictability in what could otherwise be complete chaos.

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