National Peregrine, Inc. v. Capitol Federal Savings and Loan Ass'n
116 B.R. 194 (Bkcy C.D. Cal. 1990)
Kozinski, Circuit Judge, sitting by designation.
This appeal from a decision of the bankruptcy court raises an issue never before confronted by a federal court in a published opinion: Is a security interest in a copyright perfected by an appropriate filing with the United States Copyright Office or by a UCC-1 financing statement filed with the relevant secretary of state?
National Peregrine, Inc. (NPI) is a Chapter 11 debtor in possession whose principal assets are a library of copyrights, distribution rights and licenses to approximately 145 films, and accounts receivable arising from the licensing of these films to various programmers. NPI claims to have an outright assignment of some of the copyrights; as for the others, NPI claims it has an exclusive license to distribute in a certain territory, or for a certain period of time.1
[Fn 1. According to NPI, valid copyrights exist in all of the motion pictures in its library by virtue of either (1) originality and fixation with respect to the works created after January 1, 1978, the effective date of the Copyright Act of 1976, or (2) publication and notice with respect to films created prior to 1978, and, thus governed by the Copyright Act of 1909. See Brief of Appellants at 6 n. 6 (citing 17 U.S.C. § 10 (1909 Act); 17 U.S.C. §§ 102(a), 302(a) (1976 Act)). Cap Fed, however, contends that NPI failed to offer any proof in its motion for summary judgment that any of these works were protected under either Act. The court need not resolve this dispute, however. For purposes of presenting the legal issues raised by this appeal, it is sufficient if at least one of the films in NPI's library is the subject of a valid copyright. Cap Fed has stipulated that there is at least one such film, the unforgettable "Renegade Ninjas," starring Hiroki Matsukota, Kennosuke Yorozuya and Teruhiko Aoi, in what many consider to be their career performances. See Stipulation & Order re Film in NPI's Library Subject to Federal Copyright at 4.]
In June 1985, Capitol Federal Savings and Loan Association of Denver (Cap Fed) extended to American National Enterprises, Inc., NPI's predecessor by merger, a six million dollar line of credit secured by what is now NPI's film library. Both the security agreement and the UCC-1 financing statements [Fn 2 omitted.] filed by Cap Fed describe the collateral as "[a]ll inventory consisting of films and all accounts, contract rights, chattel paper, general intangibles, instruments, equipment, and documents related to such inventory, now owned or hereafter acquired by the Debtor. "3
[Fn 3. The UCC-1 described the collateral as follows:
All inventory consisting of films and all accounts, contract rights, chattel paper, general intangibles, instruments, equipment, and documents related to such inventory, now owned or hereafter acquired by the Debtor, including, but not limited to:
(i) all accounts, contract rights, chattel paper, instruments, equipment, general intangibles and other obligations of any kind whether now owned or hereafter acquired arising out of or in connection with the sale or lease of the films, and all rights whether now or hereafter existing in and to all security agreements, leases, invoices, claims, instruments, notes, drafts, acceptances, and other contracts and documents securing or otherwise relating to any such accounts, contract rights, chattel paper, instruments, general intangibles or obligations and other documents or computer tapes or disks related to any of the above; and
(ii) all proceeds of any and all of the foregoing property, including cash and noncash proceeds, and, to the extent not otherwise included, all payments under insurance (whether or not the Secured Party is the loss payee thereof), or any indemnity, warranty or guaranty, payable by reason of loss or damage to or otherwise with respect to any of the foregoing property.
See Memorandum of Decision re Motion for Partial Summary Adjudication (Nov. 14, 1989) at 4 (emphasis added). The security agreement described the collateral in nearly identical language. See id. at 3.]
Although Cap Fed filed its UCC-1 financing statements in California, Colorado and Utah,4 it did not record its security interest in the United States Copyright Office.
[Fn 4. Under UCC § 9103(3)(b), "[t]he law ... of the jurisdiction in which the debtor is located governs the perfection and the effect of perfection or nonperfection of the security interest" in a general intangible. "A debtor shall be deemed located at the debtor's place of business ... [or] at the debtor's chief executive office if [it] has more than one place of business...." U.S.C. § 9103(3)(d). Because NPI is a Utah corporation that conducts much of its business in California, Cap Fed apparently deemed filing in both states prudent. Presumably, Cap Fed filed in Colorado because its own headquarters are located in Denver. UCC § 9106 defines "general intangibles" as "any personal property (including things in action) other than goods, accounts, chattel paper, documents, instruments, and money. " The official commentary to section 9106, adopted by numerous states (including California), specifically identifies "copyrights, trademarks and patents " as included in the definition of general intangibles.]
[NPI filed a voluntary petition for bankruptcy on January 30, 1989 and then sought to avoid Cap Fed's security interest on the ground that the security interest was unperfected.]
A. Where to File
The Copyright Act provides that "[a]ny transfer of copyright ownership or other document pertaining to a copyright" may be recorded in the United States Copyright Office. 17 U.S.C. § 205(a); [other citations and Fn 5 omitted.] A "transfer " under the Act includes any "mortgage" or "hypothecation of a copyright, " whether "in whole or in part" and "by any means of conveyance or by operation of law. " 17 U.S.C. §§ 101, 201(d)(1); see 3 Nimmer on Copyright § 10.05[A], at 10-43--10-45 (1989). The terms "mortgage" and "hypothecation" include a pledge of property as security or collateral for a debt. See Black's Law Dictionary 669 (5th ed. 1979). In addition, the Copyright Office has defined a "document pertaining to a copyright" as one that has a direct or indirect relationship to the existence, scope, duration, or identification of a copyright, or to the ownership, division, allocation, licensing, transfer, or exercise of rights under a copyright. That relationship may be past, present, future, or potential. 37 C.F.R. § 201.4(a)(2); see also Compendium of Copyright Office Practices II ¶¶ 1602-1603 (identifying which documents the Copyright Office will accept for filing).
It is clear from the preceding that an agreement granting a creditor a security interest in a copyright may be recorded in the Copyright Office. See G. Gilmore, Security Interests in Personal Property § 17.3, at 545 (1965). Likewise, because a copyright entitles the holder to receive all income derived from the display of the creative work, see 17 U.S.C. § 106, an agreement creating a security interest in the receivables generated by a copyright may also be recorded in the Copyright Office. Thus, Cap Fed's security interest could have been recorded in the Copyright Office; the parties seem to agree on this much. The question is, does the UCC provide a parallel method of perfecting a security interest in a copyright? One can answer this question by reference to either federal or state law; both inquiries lead to the same conclusion.
Even in the absence of express language, federal regulation will preempt state law if it is so pervasive as to indicate that "Congress left no room for supplementary state regulation," or if "the federal interest is so dominant that the federal system will be assumed to preclude enforcement of state laws on the same subject." Hillsborough County v. Automated Medical Laboratories, Inc., 471 U.S. 707, 713, 105 S.Ct. 2371, 2375, 85 L.Ed.2d 714 (1985) (internal quotations omitted).6 Here, the comprehensive scope of the federal Copyright Act's recording provisions, along with the unique federal interests they implicate, support the view that federal law preempts state methods of perfecting security interests in copyrights and related accounts receivable.6
[Fn 6. The Copyright Act does expressly preempt state law in respect to the exclusive rights possessed by holders of copyrights under federal law. See 17 U.S.C. § 301(a). In Del Madera Properties v. Rhodes & Gardner, Inc., 820 F.2d 973 (9th Cir.1987), the Ninth Circuit adopted the "extra element " test, holding that in order to survive a federal preemption challenge under section 301, a state law must involve rights that are qualitatively different from the exclusive rights established by section 106 of the Copyright Act. Id. at 977. The exclusive rights listed in section 106 include the rights to reproduce the copyrighted work, to distribute the work, to prepare derivative works and to display or perform the work. See 17 U.S.C. § 106. Section 301 is inapplicable because here we are concerned not with the creation of the exclusive rights under section 106, but rather their transfer through the creation of a security interest. The transfer of a copyright interest is fundamentally different from the creation of exclusive rights to a work itself, and is governed by separate provisions in the Copyright Act. See 17 U.S.C. §§ 101, 201(d), 205. Therefore, under the rationale of Del Madera Properties, the preemptive language of section 301 has no bearing on the issues presented in this case.]
The federal copyright laws ensure "predictability and certainty of copyright ownership," "promote national uniformity " and "avoid the practical difficulties of determining and enforcing an author's rights under the differing laws and in the separate courts of the various States. " [Citations omitted.] As discussed above, section 205(a) of the Copyright Act establishes a uniform method for recording security interests in copyrights. A secured creditor need only file in the Copyright Office in order to give "all persons constructive notice of the facts stated in the recorded document. " 17 U.S.C. § 205(c).7
[Fn 7. For a recordation under section 205 to be effective as against third parties, the copyrighted work must also have been registered pursuant to 17 U.S.C. §§ 408, 409, 410. See 17 U.S.C. § 205(c)(2). Of course, registration is also a prerequisite to judicial enforcement of a copyright, except for actions for infringement of copyrights in foreign works covered by the Berne Convention. 17 U.S.C. § 411; International Trade Management, Inc. v. United States, 553 F.Supp. 402, 402-03, 1 Cl.Ct. 39 (1982).]
Likewise, an interested third party need only search the indices maintained by the Copyright Office to determine whether a particular copyright is encumbered. See Northern Songs, Ltd. v. Distinguished Productions, Inc., 581 F.Supp. 638, 640-41 (S.D.N.Y.1984); Circular 12, at 8035-4.
A recording system works by virtue of the fact that interested parties have a specific place to look in order to discover with certainty whether a particular interest has been transferred or encumbered. To the extent there are competing recordation schemes, this lessens the utility of each; when records are scattered in several filing units, potential creditors must conduct several searches before they can be sure that the property is not encumbered. See Danning v. Pacific Propeller, Inc. (In re Holiday Airlines Corp.), 620 F.2d 731 (9th Cir.), cert. denied, 449 U.S. 900, 101 S.Ct. 269, 66 L.Ed.2d 130 (1980); Red Carpet Homes of Johnstown, Inc. v. Gerling (In re Knapp), 575 F.2d 341, 343 (2d Cir.1978); UCC § 9401, Official Comment ¶ 1. It is for that reason that parallel recordation schemes for the same types of property are scarce as hens' teeth; the court is aware of no others, and the parties have cited none. No useful purposes would be served--indeed, much confusion would result--if creditors were permitted to perfect security interests by filing with either the Copyright Office or state offices. [Citations omitted.]
If state methods of perfection were valid, a third party (such as a potential purchaser of the copyright) who wanted to learn of any encumbrances thereon would have to check not merely the indices of the U.S. Copyright Office, but also the indices of any relevant secretary of state. Because copyrights are incorporeal--they have no fixed situs--a number of state authorities could be relevant. See, e.g., note 4 supra. Thus, interested third parties could never be entirely sure that all relevant jurisdictions have been searched. This possibility, together with the expense and delay of conducting searches in a variety of jurisdictions, could hinder the purchase and sale of copyrights, frustrating Congress's policy that copyrights be readily transferable in commerce.
This is the reasoning adopted by the Ninth Circuit in Danning v. Pacific Propeller. Danning held that 49 U.S.C.App. § 1403(a), the Federal Aviation Act's provision for recording conveyances and the creation of liens and security interests in civil aircraft, preempts state filing provisions. 620 F.2d at 735-36.8 [Footnote 8 in original.] According to Danning, [t]he predominant purpose of the statute was to provide one central place for the filing of [liens on aircraft] and thus eliminate the need, given the highly mobile nature of aircraft and their appurtenances, for the examination of State and County records. 620 F.2d at 735-36.8
[Fn 8. Section 1403(a), which is similar in scope to section 205 of the Copyright Act, provides:
The Secretary of Transportation shall establish and maintain a system for the recording of each and all of the following:
(1) Any conveyance which affects the title to, or any interest in, any civil aircraft of the United States;
(2) Any lease, and any mortgage, equipment trust, contract of conditional sale, or other instrument executed for security purposes, which lease or other instrument affects the title to, or any interest in [certain engines and propellers];
(3) Any lease, and any mortgage, equipment trust, contract of conditional sale, or other instrument executed for security purposes, which lease or other instrument affects the title to, or any interest in, any aircraft engines, propellers, or appliances maintained by or on behalf of an air carrier....
49 U.S.C.App. §1403(a).]
Copyrights, even more than aircraft, lack a clear situs; tangible, movable goods such as airplanes must always exist at some physical location; they may have a home base from which they operate or where they receive regular maintenance. The same cannot be said of intangibles. As noted above, this lack of an identifiable situs militates against individual state filings and in favor of a single, national registration scheme.
Moreover, as discussed at greater length below, . . . , the Copyright Act establishes its own scheme for determining priority between conflicting transferees, one that differs in certain respects from that of Article Nine. Under Article Nine, priority between holders of conflicting security interests in intangibles is generally determined by who perfected his interest first. UCC § 9312(5). By contrast, section 205(d) of the Copyright Act provides:
As between two conflicting transfers, the one executed first prevails if it is recorded, in the manner required to give constructive notice under subsection (c), within one month after its execution in the United States or within two months after its execution outside the United States, or at any time before recordation in such manner of the later transfer....17 U.S.C. § 205(d) (emphasis added). Thus, unlike Article Nine, the Copyright Act permits the effect of recording with the Copyright Office to relate back as far as two months.
Because the Copyright Act and Article Nine create different priority schemes, there will be occasions when different results will be reached depending on which scheme was employed. The availability of filing under the UCC would thus undermine the priority scheme established by Congress with respect to copyrights. This type of direct interference with the operation of federal law weighs heavily in favor of preemption. See generally Bonito Boats, Inc. v. Thunder Craft Boats, Inc., 489 U.S. 141, 109 S.Ct. 971, 103 L.Ed.2d 118 (1989).
The bankruptcy court below nevertheless concluded that security interests in copyrights could be perfected by filing either with the copyright office or with the secretary of state under the UCC, making a tongue-in-cheek analogy to the use of a belt and suspenders to hold up a pair of pants. According to the bankruptcy court, because either device is equally useful, one should be free to choose which one to wear. With all due respect, this court finds the analogy inapt. There is no legitimate reason why pants should be held up in only one particular manner: Individuals and public modesty are equally served by either device, or even by a safety pin or a piece of rope; all that really matters is that the job gets done. Registration schemes are different in that the way notice is given is precisely what matters. To the extent interested parties are confused as to which system is being employed, this increases the level of uncertainty and multiplies the risk of error, exposing creditors to the possibility that they might get caught with their pants down.
A recordation scheme best serves its purpose where interested parties can obtain notice of all encumbrances by referring to a single, precisely defined recordation system. The availability of parallel state recordation systems that could put parties on constructive notice as to encumbrances on copyrights would surely interfere with the effectiveness of the federal recordation scheme. Given the virtual absence of dual recordation schemes in our legal system, Congress cannot be presumed to have contemplated such a result. The court therefore concludes that any state recordation system pertaining to interests in copyrights would be preempted by the Copyright Act.
State law leads to the same conclusion. Article Nine of the Uniform Commercial Code establishes a comprehensive scheme for the regulation of security interests in personal property and fixtures. By superseding a multitude of pre-Code security devices, it provides "a simple and unified structure within which the immense variety of present-day secured financing transactions can go forward with less cost and greater certainty. " UCC § 9101, Official Comment. However, Article Nine is not all encompassing; under the "step back" provision of UCC § 9104, Article Nine does not apply "[t]o a security interest subject to any statute of the United States to the extent that such statute governs the rights of parties to and third parties affected by transactions in particular types of property. "
For most items of personal property, Article Nine provides that security interests must be perfected by filing with the office of the secretary of state in which the debtor is located. See UCC §§ 9302(1), 9401(1)(c). Such filing, however, is not "necessary or effective to perfect a security interest in property subject to ... [a] statute or treaty of the United States which provides for a national or international registration ... or which specifies a place of filing different from that specified in [Article Nine] for filing of the security interest." UCC § 9302(3)(a). When a national system for recording security interests exists, the Code treats compliance with that system as "equivalent to the filing of a financing statement under [Article Nine,] and a security interest in property subject to the statute or treaty can be perfected only by compliance therewith...." UCC § 9302(4). 9
[Fn 9. According to the official commentary to section 9302:
Subsection (3) exempts from the filing provisions of this Article transactions as to which an adequate system of filing, state or federal, has been set up outside this Article and subsection (4) makes clear that when such a system exists perfection of a relevant security interest can be had only through compliance with that system (i.e., filing under this Article is not a permissible alternative). ....
Perfection of a security interest under a ... federal statute of the type referred to in subsection (3) has all the consequences of perfection under the provisions of [Article Nine].
UCC § 9302, Official Comment ¶¶ 8, 9.]
As discussed above, section 205(a) of the Copyright Act clearly does establish a national system for recording transfers of copyright interests, and it specifies a place of filing different from that provided in Article Nine. Recording in the Copyright Office gives nationwide, constructive notice to third parties of the recorded encumbrance. Except for the fact that the Copyright Office's indices are organized on the basis of the title and registration number, rather than by reference to the identity of the debtor, this system is nearly identical to that which Article Nine generally provides on a statewide basis.10
[Fn 10. Moreover, the mechanics of recording in the Copyright Office are analogous to filing under the UCC. In order to record a security interest in the Copyright Office, a creditor may file either the security agreement itself or a duplicate certified to be a true copy of the original, so long as either is sufficient to place third parties on notice that the copyright is encumbered. See 17 U.S.C. §§ 205(a), (c); 37 C.F.R. § 201.4(c)(1). Accordingly, the Copyright Act requires that the filed document "specifically identif[y] the work to which it pertains so that, after the document is indexed by the Register of Copyrights, it would be revealed by a reasonable search under the title or registration number of the work. " 17 U.S.C. § 205(c); see also Compendium of Copyright Office Practices II ¶¶ 1604-1612; Circular 12, at 8035-4.]
And, lest there be any doubt, the drafters of the UCC specifically identified the Copyright Act as establishing the type of national registration system that would trigger the section 9302(3) and (4) step back provisions:
"Examples of the type of federal statute referred to in [UCC § 9302(3)(a) ] are the provisions of [Title 17] (copyrights).... UCC § 9302, Official Comment ¶ 8; see G. Gilmore, Security Interests in Personal Property § 17.3, at 545 (1965) ("[t]here can be no doubt that [the Copyright Act was] meant to be within the description of § 9-302(3)(a)"). " UCC § 9104, Official Comment ¶ 1 (quoted in Memorandum of Decision at 9).11
[Fn 11. Cap Fed points to a portion of the official commentary that suggests the contrary conclusion: Although the Federal Copyright Act contains provisions permitting the mortgage of a copyright and for the recording of an assignment of a copyright [Title 17] such a statute would not seem to contain sufficient provisions regulating the rights of the parties and third parties to exclude security interests in copyrights from the provisions of this Article.]
Section 9104 governs all of Article Nine, including its schemes for perfection and priorities among conflicting creditors. Thus, what the portion of the commentary quoted above says is that the Copyright Act does not preempt all of Article Nine's provisions. Nevertheless, the commentary makes clear that the Copyright Act does preempt those portions of Article Nine that deal with the proper place for recording security interests:
The portion of the commentary stating that federal copyright law does not "exclude security interests in copyrights from the provisions of this Article" probably referred to priorities between conflicting holders of security interests and liens, rather than methods of perfection. But, as discussed below, see note 17 infra, this commentary has been superseded by the subsequent expansion of the Copyright Act's priority scheme since the UCC commentary was drafted. Compare 17 U.S.C. § 205(d) (1988) with 17 U.S.C. §§ 28, 30 (1976) (now repealed).
The court therefore concludes that the Copyright Act provides for national registration and "specifies a place of filing different from that specified in [Article Nine] for filing of the security interest. " UCC § 9302(3)(a). Recording in the U.S. Copyright Office, rather than filing a financing statement under Article Nine, is the proper method for perfecting a security interest in a copyright.
In reaching this conclusion, the court rejects City Bank & Trust Co. v. Otto Fabric, Inc., 83 B.R. 780 (D.Kan.1988), and In re Transportation Design & Technology Inc., 48 B.R. 635 (Bankr.S.D.Cal.1985), insofar as they are germane to the issues presented here. Both cases held that, under the UCC, security interests in patents need not be recorded in the U.S. Patent and Trademark Office to be perfected as against lien creditors because the federal statute governing patent assignments does not specifically provide for liens:
Applications for patent, patents, or any interest therein, shall be assignable in law by an instrument in writing. The applicant, patentee, or his assigns or legal representatives may in like manner grant and convey an exclusive right under his application for patent, or patents, to the whole or any specified part of the United States.
....
An assignment, grant or conveyance shall be void as against any subsequent purchaser or mortgagee for a valuable consideration, without notice, unless it is recorded in the Patent and Trademark Office within three months from its date or prior to the date of such subsequent purchase or mortgage. 35 U.S.C. § 261 (emphasis added).
According to In re Transportation, because section 261's priority scheme only provides for a "subsequent purchaser or mortgagee for valuable consideration," it does not require recording in the Patent and Trademark Office to perfect against lien creditors. See 48 B.R. at 639. Likewise, City Bank held that "the failure of the statute to mention protection against lien creditors suggests that it is unnecessary to record an assignment or other conveyance with the Patent Office to protect the appellant's security interest against the trustee." 83 B.R. at 782.12
[Fn 12. The district court in City Bank further held that, if Congress intended to preempt the field of filing and to require perfection in the Patent and Trademark Office, it could have explicitly said so. See 83 B.R. at 782. However, under UCC § 9302(3), the proper inquiry is not whether Congress has preempted state law--for Article Nine's provisions clearly could not apply then--but rather whether Congress has established a regulatory scheme governing secured interests that is sufficiently comprehensive to supersede all or part of Article Nine by virtue of section 9104(a).]
These cases misconstrue the plain language of UCC section 9104, which provides for the voluntary step back of Article Nine's provisions "to the extent [federal law] governs the rights of [the] parties." UCC § 9104(a) (emphasis added). Thus, when a federal statute provides for a national system of recordation or specifies a place of filing different from that in Article Nine, the methods of perfection specified in Article Nine are supplanted by that national system; compliance with a national system of recordation is equivalent to the filing of a financing statement under Article Nine. UCC § 9302(4). Whether the federal statute also provides a priority scheme different from that in Article Nine is a separate issue, addressed below. See pp. 205-207 infra. Compliance with a national registration scheme is necessary for perfection regardless of whether federal law governs priorities.13
[Fn 13. When a federal statute provides a system of national registration but fails to provide its own priority scheme, the priority scheme established by Article Nine--namely UCC § 9301--will generally govern the conflicting rights of creditors. Whether a creditor's interest is perfected, however, depends on whether the creditor recorded its interest in accordance with the federal statute. See UCC § 9302(4).]
Cap Fed's security interest in the copyrights of the films in NPI's library and the receivables they have generated therefore is unperfected.14
[Fn 14. The court also finds two trademark cases, TR-3 Indus. v. Capital Bank (In re TR-3 Indus.), 41 B.R. 128 (Bankr.C.D.Cal.1984), and Roman Cleanser Co. v. National Acceptance Co. (In re Roman Cleanser Co.), 43 B.R. 940 (Bankr.E.D.Mich.1984), aff'd mem. (E.D.Mich.1985), 802 F.2d 207 (6th Cir.1986), to be distinguishable. Both cases held that security interests in trademarks need not be perfected by recording in the United States Patent and Trademark Office. However, unlike the Copyright Act, the Lanham Act's recordation provision refers only to "assignments" and contains no provision for the registration, recordation or filing of instruments establishing security interests in trademarks. See Li'l' Red Barn, Inc. v. Red Barn System, Inc., 322 F.Supp. 98, 107 (N.D.Ind.1970) (mere agreement to assign mark in the future is not an "assignment" and therefore may not be recorded). The Copyright Act authorizes the recordation of "transfers" in the Copyright Office, and defines transfers as including "mortgages, " "hypothecations" and, thus, security interests in copyrights.]
B. Effect of Failing to Record with the Copyright Office
[Because Cap Fed failed to record its security interest with the Copyright Office its security interest is unperfected and may be avoided by NPI.]