Article 12 Perfection and Priority Disputes in Bankruptcy: Controllable Electronic Records and Other Digital Assets

This CLE webinar will discuss how trustees, committees, lenders, and debtors can analyze and verify or disprove perfection and priority in controllable electronic records (CER) as defined in Article 12. The panel will review perfection and priority of security interests in virtual currencies, non-fungible tokens, and other digital assets.

When a debtor gets ready to file, and then shortly after the case is commenced, one of the first tasks of trustees, committees, lenders, and debtors is to investigate the validity and priority of security interests. When the collateral is digital assets, in particular, CERs, ascertaining perfection and priority is far more complicated than with more traditional forms of collateral.

Technically, a security interest in CERs can be perfected by filing or by control, but perfection by control (perhaps coupled with filing) is preferred because it creates a super-priority lien that primes even an earlier filed financing statement. Perfection by control, however, will continue only so long as the requisite Article 12 control continues.

Assuming the collateral is a CER, one of the first questions to investigate is whether the debtor had the ability to transfer, restrict, or control the asset to begin with. If so, it is necessary to determine if the lender retained exclusive control as defined in Article 12. Because many digital assets exist in decentralized systems, it is possible that third parties with rights to control the asset have gone undetected. A debtor's need to use the digital assets can put control at risk. Other secured parties may obtain control, and in some cases qualifying purchaser issues will have to be considered. CERs are a relatively new form of collateral and Article 12 may not solve perfection issues in all cases.

Listen as experienced bankruptcy attorneys explore how to investigate perfection and priority in CERs.