Domain Names as Collateral

Headnote

Are We All Just Kidding Ourselves?

In 2006, a group of private investors purchased the domain name sex.com for an undisclosed amount rumored to be in excess of $12 million. The buyers were able to close the transaction using funding from a New Jersey investment firm, Domain Capital, LLC. Today, transactions in high-quality domain names are big business. Names like diamond.com, fund.com, and pizza.com frequently sell for seven or even eight figures.

The present market for domain names is red-hot, fueled in part by the availability of purchase financing from companies like Domain Capital, LLC, and DigiPawn, Inc. According to Christian Kalled, chief negotiator for the domain name brokerage and auction house Sedo, LLC, domainers (people in the business of operating domain name portfolios) now use asset-based lending to finance their domain name acquisitions. The ability to finance the purchase of a domain name is driving the market.

No doubt about it, domain names are big business. Lenders need to think about the roles domain names play in their borrowers' businesses and in their portfolio of collateral. Some borrowers might be domainers. More likely, the domain name is nothing more than the address for the borrower's Web site-but still an essential part of the business. Imagine being the lender for Frontier Airlines (which filed a Chapter 11 petition in early 2008) and discovering that your collateral did not include the domain name frontierairlines.com. You would effectively lose the company's Web site if you tried to force a secured party sale.

If you are a bank lawyer and just broke out in a cold sweat, don't get too nervous too fast. No court has ever held that a domain name cannot serve as collateral for a loan, nor has any decision suggested that a lien against a domain name cannot be perfected under Article 9 of the Uniform Commercial Code (UCC). In fact, despite its title this article will demonstrate that a security interest in a domain name is easily perfected as a lien against a general intangible and will provide some advice on the practical issue of recovering the collateral.

Still, the question of whether a domain name is a form of property, and what kind of property, has intrigued commentators since the...