Chapter 14 Taking an Interest in Carbon: Secured Financing
C. Perfecting De Facto Property Security Interests
Can the judicial approaches to security interests in de facto property in the liquor license and the broadcasting licenses be harmonized? In broadcasting license cases, the courts recognize the market value of the license as constituting the most valuable asset of the station upon which credit can be obtained. The public/private distinction first articu- lated in Ridgely preserves the “market” rationale by limiting security interests to license proceeds — essentially, those pecuniary rights arising between private parties. At the same time, the public/private distinction recognizes the legitimate government interest in maintaining control over the airwaves, such that a security interest in the license itself (and therefore against the issuing governmental agency) is invalid. Similarly, the liquor license cases recognize the same “market” rationale and the same public/private distinction. Bogus and its progeny distinguish security interests in liquor licenses from security interests in the license proceeds, using the same rationale urged by the courts in the broadcast licensing cases. The outlier cases — such as In re Revocation of Liquor License No. R- 2193 and In re Chris-Don — interpret statutes that expressly state that the license in question does not constitute property. While the Communications Act states that a broadcasting license provides for “use of [the licensed] channels, but not the ownership thereof,” it does not expressly state that a broadcast license is not property. 79 One might conclude, then, that security interests might be perfected in de facto prop- erty (at least to the extent of its proceeds), unless the statute creating the de facto property expressly disclaims the interest as constituting property. 80
VII. SECURING CARBON CREDITS
Does the public/private–license/proceeds distinction addressed in the liquor license and broadcasting license cases provide a conceptual framework to support some form
78 146 F.3d at 747. Contrary to the result in 21 West Lancaster Corp. (where the later fi led tax lien was found superior to an earlier fi led security interest in a liquor license), MLQ Investors held that the creditor’s perfection of its security interest in the debtor’s general intangibles meant its claim to the proceeds of the sale of the debtor’s broadcasting license was superior to the federal government’s later fi led tax lien.
79 47 U.S.C. §301. It was the FCC in Merkley , and not the language of the statute, that stated that a broadcast license did not constitute a vested property interest. When the Commission in Cheskey rejected Merkley , the characterization of the legal nature of a broadcasting license was likewise rejected.
80 See First Pennsylvania Bank v. Wildwood Clam Company , 535 F. Supp 266, 269 (E.D.Pa 1982). The court held that a security interest in general intangibles covered a clamming license under New Jersey law, fi nding that the New Jersey clamming license statute had no parallel exclusion of property rights as was contained in New Jersey’s liquor license law that precluded security interests.
SECURING CARBON CREDITS
of security interest in carbon credits? The policy arguments appear to be commensu- rate. As noted in the UN paper on trading carbon credits under the Kyoto Protocol,
“[f]orward carbon credits are traded for a significant economic value . . . and it would not be surprising to see a debtor wishing to use its carbon credits as security against a loan from a creditor . . . which might not otherwise have been available.” 81 The UN Industrial Development Organization (UNIDO) suggests that an alternative to security in carbon credits themselves might be the assignment of the revenue stream under a purchase and sale agreement. 82 At the end of the day, however, the Kyoto Protocol punts the issue of whether security interests can be taken in carbon credits. “As inter- national agreements, neither the Kyoto Protocol nor the Marrakesh Accords deals with the issue of security. The Parties to the Protocol must, therefore, deal with this issue in their own domestic legal regime.” 83
Looking to prior emission allowance schemes in the United States against the back- drop of the liquor license and broadcasting cases lends credence to the idea that secu- rity interests under the UCC are not available for emission allowances. Allowances under the CAAA, like the liquor licenses in New Jersey, do not by their very terms constitute “property.” 84 Following the reasoning of the “not property” liquor license cases (such as In re Chris-Don 85 ), a UCC security interest cannot attach to such rights, because the UCC security interest mechanism applies only to property interests. 86 Recently, the 111th Congress reported a draft version of American Clean Energy and Security Act of 2009, 87 which defines the legal nature of carbon emission allowances similar to the way they are defined in the CAAA and Kyoto Protocol. “None of the following constitute a property right: (a) An emission allowance. . . .” 88 Despite the
“market” rationale for allowing security interests in licenses and allowances, and the careful policy protections accommodated by the public/private–license/proceeds distinction, proponents of permitting security interests in emission allowances cannot avoid the judicial reasoning and syllogistic logic of the “no property” case law. 89
81 UNIDO, supra note 2, at 111.
82 Id. The paper also contemplates direct security interests in the carbon credits, with contracts for sale designating the creditor’s account in the national registry as the delivery destination for the carbon credits until the buyer/debtor repays the loan. But it states that legal/regulatory consid- erations must be kept in mind in any such arrangement.
83 Id. at 114.
84 42 U.S.C. 7651b(f).
85 This case is also instructive in that it examined whether a liquor license under New Jersey law was a “general intangible” for purposes of the voiding provisions of UCC § 9-408 (invalidating any anti-alienation provisions of laws applicable to general intangibles). Finding that liquor licenses cannot be general intangibles because they are not property, the court held that the invalidation provisions of § 9-408 did not apply. 367 F. Supp. 2d at 701.
86 See UCC § 9-203(a)(“a security interest attaches to collateral . . .”) and § 9-102(12)(“‘Collateral’
means the property subject to a security interest” emphasis added ).
87 Full text of the discussion draft available at http://www.energycommerce.house.gov./
Press_111/20090331/acesa_discussiondraft.pdf .
88 American Clean Energy and Security Act of 2009, supra note 4, § 721(c)(1)(a). In subsection (d), offset credits are also defi ned as not constituting property.
89 See McDowell, supra note 62, § 21-03. The author bemoans the “eccentric priorities” resulting
Facing obstacles to creating and perfecting security interests, financing parties have been creative in devising alternative arrangements to UCC Article 9 security interests.
Where a statute expressly prohibited the attachment of a security interest in a liquor license under California law, 90 financing parties established limited partnerships with debtors, in which the license vested in the financing party upon termination of the limited partnership. This legal structure creates an equivalent of an Article 9 security interest by triggering termination of the limited partnership upon the debtor’s default under the financing agreement. 91 It is unclear, however, the extent to which any arrangement would provide any priority to the financing party as against unsecured creditors, or the extent to which this arrangement would be recharacterized as an Article 9 security interest (and run into the definitional impediments concerning property). 92
Courts might also strain to find alternatives to balance the equities of financing par- ties and subsequent transferees. Confronting legislative obstacles to security interests in Michigan liquor licenses, the court in In the Matter of Gullifor 93 imposed an “equi- table lien” in favor of a creditor to give it priority over the interests of the bankruptcy trustee. The Michigan liquor ordinance examined by the court expressly prohibited security interests in liquor licenses. 94 In In the Matter of Gullifor , creditors were sellers of a business that held two liquor licenses, for which the purchasers agreed to pay in installments. The installment payment agreement contained a covenant to reconvey the licenses back to the sellers upon default. The court held that reassignment agree- ments were “something more” than mere executory contracts, and under proper cir- cumstances, specific performance can be ordered as an equitable remedy. 95 To counter inequities that would result from denial of a security interest in the liquor licenses pursuant to the reassignment agreement, the Gullifor court went to extraordinary lengths to recognize a non–Article 9 security interest and impose an equitable lien in
from the “no property” cases, but concedes that a change was required to the Pennsylvania liquor control act to permit security interests to be taken in them.
90 CAL. BUS. & PROF. CODE § 24076 (1985) (“No licensee shall enter into any agreement wherein he pledges the transfer of his license as security for a loan or as security for the fulfi llment of any agreement.”).
91 See McDowell, supra note 62, § 21-01. The author notes that the California Attorney General has approved this arrangement even though applicable law prohibits the creation of a security interest in the liquor license.
92 See Steven O. Weise, Financing Intellectual Property Under Revised Article 9 , 74 CHI-KENT L.
REV. 1077, 1085 (1999)(“[T]ransactions which are labeled by the parties as transfers of owner- ship, leases bailments, consignments or the like, or that adopt the structures of those transac- tions, are nevertheless governed by Article 9 when the economic effect of the transaction is to create an interest in personal property which secures the payment or performance of an obligation.”).
93 47 B.R. 450 (E.D. Mich 1985).
94 MICH. ADMIN. CODE r. 436.1119(3).
95 Id. at 453. Unlike the public/private dichotomy of other liquor license and broadcasting license cases, the Gullifor court recognized a right to specifi c performance of the reconveyance agree- ment as an equitable remedy. However, in the case at bar, the licenses had already been sold, and therefore the holding of the case related to the proceeds of the sale of the licenses.
CONCLUSIONS AND RECOMMENDATIONS: TAKING AND PERFECTING SECURITY INTERESTS IN CARBON CREDITS
favor of the sellers, rather than allowing the harsh results that follow from the statutory prohibition against security interests in liquor licenses. 96
VIII. CONCLUSIONS AND RECOMMENDATIONS: TAKING AND PERFECTING SECURITY INTERESTS IN CARBON CREDITS