The typical commercial security agreement form generated by bank form systems includes a number of boxes for the creditor to mark in order to describe the collateral in which the debtor is granting the bank a security interest. The boxes normally include broad, easily understandable, types of collateral such as “inventory,” “equipment,” and “accounts.” However, the boxes also include a residual category of “general intangibles,” which is perhaps less readily recognizable, say Davenport Evans lawyers Keith A. Gauer and Michael L. Snyder.
Some forms of personal property, such as goods held in inventory or equipment such as a skid loader, are tangible and easily imagined. Other no-less-valuable properties, however, are intangible and may seem ambiguous or even ethereal. Article 9 of the Uniform Commercial Codes generally defines these assets as “general intangibles.” Under Article 9, general intangibles are defined to include any form of personal property, including rights recoverable in legal claims, except “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.” Certain forms of software rights are also included in Article 9’s definition of general intangibles. Article 9 no longer includes a separate category for “contract rights,” which are now primarily folded into the secured intangibles category. As such, the definition is really a “catch all” or residual category of collateral including types of personal property not covered by the other more readily recognizable categories.
General intangibles can be both valuable and easily overlooked. They can be valuable because the term has been held to include partnership interests, various forms of licenses, publication rights, and intellectual property such as copyrights and trade names. They can be easily overlooked because the term is defined negatively; it is the residue of all personal property not otherwise excluded. As a consequence, many creditors have lost out because they either misclassified a type of property or did not recognize the full panoply of security interests encompassed by a grant of a security interest in general intangibles.
Creditors should therefore be aware of the many different forms of personal property which fall under the umbrella of general intangibles. Although by no means exhaustive, some of the more potentially valuable types of personal property assets included as general intangibles and recognized by courts are:
- An assignment of rights to tax refunds or anticipated tax returns
- Liquor licenses
- Patents and copyrights
- Rights of a franchisee under a franchise agreement, such as trademarks, the trade name, and the goodwill it represented
- Literary rights
- Proceeds of an impending or future lawsuit (except for commercial torts) or settlement
- Commercial fishing and clamming licenses
- Partnership interests in a general or limited partnership and limited liability company membership interests
- Contract rights and rights of performance, including the rights to receive funds in an escrow account
- Rights to collect under an annuity contract
As these examples illustrate, the breadth of the term “general intangibles” is wide and covers an immense variance of personal property. Faced with a type of personal property that cannot easily be classified, a creditor should consider whether the property may be a general intangible as contemplated under Article 9 for security purposes. Since taking physical possession of these kinds of property in order to perfect a security interest may be impossible, Article 9 requires a creditor to file a financing statement to perfect their security interest.
While the Article 9 security interest in general intangibles can be a powerful tool, other laws or provisions of Article 9 may render certain kinds of intangible property outside the governance of the Code. As a result, if a bank desires to acquire a perfected security interest in a specific (and perhaps unusual) type of property at the inception of the loan, the bank may want to seek counsel to determine whether or not the grant of a security interest in general intangibles alone will be sufficient to include the property in question. Nonetheless, simply “checking the box” by the general intangibles description in a security agreement may well provide a valuable, and perhaps often overlooked, form of collateral to secure repayment of a loan.
Davenport, Evans, Hurwitz & Smith, LLP, located in Sioux Falls, South Dakota, is one of the State’s largest law firms. The firm’s attorneys provide business and litigation counsel to individuals and corporate clients in a variety of practice areas. For more information about Davenport Evans, visit www.dehs.com or call 605-336-2880.