1. 1 REMEDIES UNDER ARTICLE 9: PITFALLS AND PROBLEMS ABA –Spring Meeting Vancouver : April 18, 2009 Ellen A. Friedman Friedman Dumas & Springwater LLP San Francisco, California Dick M. Okada McDermott Will & Emery LLP Menlo Park, California

2. 2 Introduction. The presentation will focus on pitfalls and problems in enforcement of security interests. Topics Covered. 1.Conversion Issues. 2.Rights of Junior Creditors. 3.Intercreditor Issues and Remedies. 4.Special Issues relating to Foreclosure of Intellectual Property.

3. 3 Topics Not Covered. This outline does not cover consumer law issues. Special rules apply with respect to consumer transactions and consumer goods under Article 9 and other applicable law (e.g. the Uniform Consumer Credit Code, if adopted in the relevant jurisdiction).

4. 4 Conversion Issues. A.Brief Review of Law of Conversion. 1. Based in Tort Law. 2. Means to Resolve Adverse Claims to Personal Property. 3. A Remedy to Property Owners for Serious Tortious Interference. B.Generally arises in Foreclosure or Remedies Context as follows: 1. Asserted by Debtor for Wrongful Foreclosure. 2. As Between Junior and Senior Lienholders. 3. Issues with Buyers or Transferees.

5. 5 Asserted by Debtor for Wrongful Foreclosure. 1.Breach of the Peace. 2.Other Improper Foreclosure. a. Failure to Provide Proper Notice of Foreclosure. b. Failure to Call Default Properly or At All. c. Taking More than is the Lienholder’s Collateral.

6. 6 As between Junior and Senior Lienholders. 1.Right to Possession. 2. Right to Collect. 3. Right to Proceeds.

7. 7 Issues with Buyers or Transferees. Buyers or Transferees may unwittingly get caught in a conversion suit if foreclosure is done improperly.

8. 8 Damages. 1.Punitive Damages May Be Incurred. 2. Damages May Be Different than those Set Forth in Article 9 for Failure to Foreclose Properly.

9. 9 Junior Secured Creditors. A properly noticed foreclosure sale or strict foreclosure extinguishes junior security interests and liens. UCC §§9-617(a)(3); 9-622(a)(3) and (4).

10. 10 Effect of a Junior Lienholder Exercising Remedies. A junior lienholder may conduct a foreclosure sale and retain the sale proceeds. However, the collateral remains subject to any senior security interest, unless the senior lienholder authorized the disposition free of its security interest or lien. UCC §§9-315(a)(1). A junior lienholder that collects from account debtors may be liable to the senior lienholder for conversion, unless the junior lienholder meets the requirements for being a holder in due course or a good faith purchaser for value. UCC §§9-330(d), 9-331, Official Comment 5.

11. 11 Rights of Junior Lienholders upon Enforcement by Senior Lienholder. UCC §9-625(c) generally permits a secured creditor (senior or junior) to recover damages for any losses with respect to its collateral caused by a failure to comply with Article 9. In conjunction with UCC §§9-607 (c) and 9-610(b), this permits the junior lienholder to recover damages from the senior lienholder if the senior lienholder fails to collect or dispose of the collateral in a commercially reasonable manner. Article 9 requires notice to most junior lienholders of the senior lienholder’s proposal to retain some or all of the collateral in partial or full satisfaction of senior debt (UCC §9621(a)(2) and (3)). The junior lienholder may object to the proposed retention (UCC §9-620(a)(2)), thereby forcing the senior lienholder to conduct a public or private foreclosure sale.

12. 12 Intercreditor Issues and Remedies. 1.Negotiation of Issues Before Foreclosure so Problems do not Arise. 2.Notices and Rights to Cure. 3.Standstill. 4.Right to Control Disposition. 5.Terms of Commercially Reasonable Disposition.

13. 13 Intellectual Property Issues. Anti-assignment provisions in intellectual property licenses may cause problems for a foreclosing lienholder.

14. 14 Anti-Assignment for Specified Types of Intellectual Property. Patents. Nonexclusive patent licenses are personal and cannot be assigned without the consent of the licensor. Copyrights. The same analysis holds true for non-exclusive licenses of copyrights. Trademarks. Some courts have permitted assignment of trademark licenses because the Trademark Act of 1946 (Lanham Act) does not have the same forceful language prohibiting assignment. However more recent case law provides that assignment is prohibited under the Lanham Act.

15. 15 How Does This Affect the Secured Lienholder? If the debtor cannot assign the license there is a question as to what rights the secured party receives in a foreclosure. The secured party may not be able to actually use the license if it forecloses on the license. If the collateral is extremely important, the secured party may seek the consent of the licensor. Consent may be difficult to obtain. However, a secured lienholder should be able to claim a lien on the proceeds of sale of intellectual property.