Domain Names: Obtaining and Perfecting a Security Interest

Article excerpt

The July/August 2000 issue of the Journal presented "Websites: Obtaining and Perfecting a Security Interest." This article, also excerpted from Agin's book, Bankruptcy and Secured Lending in Cyberspace, provides due diligence steps and concerns vis-a-vis domain names, as well as covenants to allow maintenance and recovery of Website-related collateral.

Is a domain name registration an asset that can be subject to a security interest? How does a secured lender obtain a security interest in the domain name and then protect its rights in that name? These are interesting questions for an industry just starting to face the issues raised by borrowers' use of domain names. Almost all businesses either have now or will have a domain name. Certainly, every large corporation has registered at least one domain name. When a bank grants a loan secured by all the borrower's assets, it should ensure it has a security interest in the borrower's domain names as well. Otherwise, the bank may find itself unable to foreclose an important asset. Possibly, a financially troubled borrower will sell its domain names without surrendering the proceeds to the lender.

As domain names become more valuable, domain name holders may attempt to securitize them. For example, The Industrial Bank of Korea established a program to lend against domain names. The bank uses an eight-member appraisal group to establish a domain name's value. The bank then will lend up to 30% of the appraised value. Securitizing domain names is possible by working with a domain name registration service, Internet Plaza City, which provides the appraisal services and allows the bank greater control over the domain name collateral. U.S. banks will have to find their own methods for lending against domain names.

Whether a license or a contract right, a domain name will be considered a general intangible under the UCC. The category of "general intangibles" is a catch-all, encompassing any personal property not included in the other asset categories provided by the UCC. Thus, in In re Hengalo Enters, the U.S. Bankruptcy Court for the Southern District of Florida considered a franchise agreement to be a general intangible. Domain names differ somewhat from the traditional contract in that they constitute, in one sense, an indirect government grant of the right to use the domain name. Another form of license by government grant, the liquor license, has been held to be a general intangible, potentially subject to a security interest. Domain names share features in common with telephone numbers, which courts have considered subject to security interests as general intangibles. These parallels indicate that the user of a domain name can grant a lender a valid security interest in the right to use the domain name.

Contractual terms in a domain name registration agreement may affect both the domain name holder's right to grant a security interest in the domain name and the lender's ability to recover the domain name upon default. For example, Network Solution's agreement includes the following clause:

Non-Assignment. Your rights under this Agreement are not assignable. Any attempt by you to assign your rights shall render this Agreement voidable at our option. Any attempt by your creditors to obtain an interest in your rights under this Agreement, whether by attachment, garnishment or otherwise, shall render this Agreement voidable at our option.

How this or similar clauses affect a lender's ability to obtain a consensual lien against a domain name will depend on the rights the borrower has to the domain name. Characterizing the domain name as an intellectual property right held by the domain name holder will give the holder rights outside of the contract, which the lender can take as collateral. However, defining domain name rights as just those rights contractually granted by the registrar means that restrictions on assignment, like those described above, will prevent a domain name holder from granting a consensual lien against a domain name. …