This column has reviewed numerous cases in which a creditor failed to properly create or perfect its security interest in property. And while we've also written many times about intercreditor agreements, where creditors often compete for priority as between their respective perfected liens, what is much less common is when a properly perfected creditor is claimed to have subordinated its rights to an indisputably unsecured creditor. And yet, this is what happened to the now defunct New York City-based intellectual property law firm, Kenyon & Kenyon, which recently lost a battle before a New York appellate court over its security interest in patents granted by its client, SightSound Technologies.

Case Background

During the 1990s, SightSound Technologies, along with its successor, SightSound Technologies Holdings (collectively, SightSound), developed and patented a system for delivering digital video and audio recordings over the Internet. SightSound retained Kenyon beginning in 1999 for legal advice and representation in pursuing a patent infringement claim. In 2001, when SightSound could no longer afford to pay Kenyon's legal fees, the parties signed a security agreement. Under this agreement, SightSound granted Kenyon a first priority lien on all of SightSound's assets in consideration for which Kenyon agreed to defer collecting its legal fees. The collateral included SightSound's patents, patent licenses and all proceeds, including license royalties and proceeds of infringement suits. The security agreement also prohibited sale or transfer of the collateral without Kenyon's prior written consent. In 2004, the patent infringement suit settled and Kenyon received approximately $1.6 million, amounting to half of the settlement proceeds.