Case: AEG

In re AEG Corp., 161 B.R. 50 (BAP 9th Cir. 1993)

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FACTS

AEG Acquisition Corp. ("AEG") is a debtor under Chapter 11 of the Bankruptcy Code, 11 U.S.C. §§ 1101-1174, [Footnote omitted.] whose principal asset is a library of copyrights, distribution rights and licenses to more than 100 motion pictures. In 1987, Atlantic Entertainment Group, Inc. ("Atlantic"), AEG's predecessor, entered into three distribution agreements ("1987 Agreements") with Zenith Productions, Ltd. ("Zenith"). The 1987 Agreements relate to three motion pictures entitled "Patty Hearst," "For Queen and Country," and "The Wolves of Willoughby Chase" ("Films"). Zenith delivered the Films to Atlantic in 1987, but Atlantic failed to pay guaranteed minimum advances totalling $6 million as provided for by the 1987 Agreements.

In September, 1988, Atlantic and Zenith entered into a series of option contracts which stated that Atlantic had no distribution rights in the films, but that it could purchase the distribution rights for $6 million until November 15, 1988. The option contracts also required Atlantic to execute confessions of judgment in favor of Zenith for the entire $6 million owed under the 1987 Agreements. Atlantic failed to exercise the options by the specified date.

In December, 1988, Zenith began negotiating with Alan Saffron, President of Kartes Video Communications, Inc. ("KVC"), whose investment group eventually acquired Atlantic (which was renamed AEG). The negotiations resulted in a third contract, a Restructuring Agreement dated February 7, 1989 ("Restructuring Agreement").

The Restructuring Agreement called for AEG to purchase distribution rights for the Films in the United States and Canada in perpetuity. The purchase price for these rights was $6 million which was to be paid in six $1 million installments. The Restructuring Agreement also required AEG to pay the attorney's fees incurred by Zenith in the litigation and negotiations concerning the Films. The Restructuring Agreement provided that AEG was to receive a bundle of distribution rights in return for each $1 million installment [FN3] until, after paying the sixth installment, it would own all the distribution rights for the Films in the United States and Canada. The Restructuring Agreement required AEG and KVC to execute new confessions of judgment totalling $6 million, but further provided that upon payment of the purchase price, the confessions of judgment would be destroyed. In the event of default by AEG (including failure to purchase the distribution rights), Zenith could enforce the confessions of judgment and exercise other remedies.

FN3. For instance, upon making the first $1 million payment, the Agreement provided that AEG was to receive "the right to distribute and exhibit 'For Queen and Country' theatrically and nontheatrically."

Pursuant to the Restructuring Agreement, AEG gave Zenith a security agreement granting a security interest in all of AEG's interest in the Films. To perfect its security interest, Zenith filed financing statements in California, Indiana and New York, recorded a copyright mortgage for each of the Films with the United States Copyright Office, and filed a certificate of copyright registration with respect to "Patty Hearst." Zenith did not file such a certificate with respect to the other two Films because they were foreign works which Zenith believed were exempt from registration.

On April 12, 1989, AEG paid Zenith $250,000 and on May 10, 1989, it paid Zenith another $1,810,000. [FN4] These sums appear to represent the first purchase price installments and a partial payment of Zenith's attorney's fees.

FN4. The ninetieth day before AEG filed bankruptcy was April 16, 1989. Thus, the $250,000 payment was outside that period while the $1,810,000 payment was within it.

On July 12, 1989, AEG filed its Chapter 11 petition. AEG subsequently filed an adversary proceeding to recover the two payments from Zenith as preferences and as fraudulent transfers pursuant to Bankruptcy Code §§ 547 and 548. [FN5] Zenith, meanwhile, brought a motion to compel AEG to assume or reject the Restructuring Agreement on the grounds that it was an executory contract.

FN5. The official unsecured creditors' committee is also a party to the adversary proceeding and to this appeal. It is unclear from the record, however, whether the committee was originally a party to the action.

After arguments on cross-motions for summary judgment and on the motion to compel assumption or rejection, the court issued a published decision, In re AEG Acquisition Corp., 127 B.R. 34 (Bankr.C.D.Cal.1991), in which it held: (1) That the $1,810,000 payment was a preference; (2) that the $250,000 payment was a preference (even though it was made more than 90 days prepetition) because the payment benefitted KVC, an insider of AEG; (3) that Zenith's security interests in the foreign Films were avoidable under Bankruptcy Code § 544(a) because they were not perfected when AEG filed bankruptcy; and (4) that Zenith's security interest in "Patty" was perfected when AEG filed bankruptcy because Zenith had registered that film and recorded its copyright mortgage with the copyright office.

The court later allowed AEG to amend its complaint to add a cause of action to avoid the security interests as preferences. In this cause of action, AEG alleged that if the security interests were perfected at all, perfection occurred more than 10 days after AEG incurred the debt to Zenith and within the 90-day preference period. They were thus preferences and were not protected by the 10-day grace period created by Bankruptcy Code § 547(e)(2). On December 31, 1991, the court held for AEG on the latter cause of action, and entered a judgment in favor of AEG for $2,060,000 plus interest and costs.

Zenith timely appealed.

ISSUES

A. Whether the trial court correctly held that AEG's payments to Zenith were preferences.

B. Whether the trial court correctly held that the security interests AEG granted to Zenith were preferences.

C. Whether the trial court correctly held that Zenith failed to give new value for the payments and the security interests.

D. Whether the trial court correctly applied Bankruptcy Code § 547(e)(2) to conclude that the security interests were given on account of an antecedent debt.

E. Whether the trial court properly concluded that the Restructuring Agreement was not an executory contract.

STANDARD OF REVIEW

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DISCUSSION

The Payments as Preferences

Five elements must be present for a transfer to be a preference. The transfer must "(1) benefit a creditor; (2) be on account of an antecedent debt; (3) be made while the debtor was insolvent; (4) be [made] within 90 days before the bankruptcy; and (5) enable the creditor to receive a larger share of the estate than if the transfer had not been made." Union Bank v. Wolas, 502 U.S. 151, ---- - ----, 112 S.Ct. 527, 529-530, 116 L.Ed.2d 514 (1991). The trustee or debtor in possession bears the burden of proving these elements, 11 U.S.C. § 547(g), but the debtor is presumed insolvent during the 90 days immediately preceding the petition, 11 U.S.C. § 547(f). The preference period is extended to one year before the bankruptcy if the transfer is to an insider. 11 U.S.C. § 547(b)(4)(B).

In the case at bar, there is no dispute that the payments made by AEG benefitted Zenith. Zenith disputes the existence of the remaining elements, however. We address each element in order.

[Extensive discussion of the application of 11 U.S.C. § 547(b) to the facts of the case is omitted.]

a. Improper Perfection of Foreign Films

The trial court determined that Zenith had failed to perfect its security interests in the foreign Films because the Films had not been registered with the United States Copyright Office. Zenith argues that the court erred because, under the Berne Convention for the Protection of Literary and Artistic Works (Paris Text 1971) ("Berne Convention"), registration is a prohibited formality.

Under United States law, recording a document in the Copyright Office gives all persons constructive notice of the information contained in the document only if the document identifies the work to which it relates and the work is registered. 17 U.S.C. § 205(c). The Berne Convention provides that authors of foreign works enjoy the same protections of any member country as do nationals of that country. Berne Convention, Art. 5(1). In addition, authors of Berne Convention works are entitled to copyright protections without complying with formalities. Berne Convention, Art. 5(2); AEG Acquisition, 127 B.R. at 42.

Zenith argues that requiring registration is a "formality" which may not be imposed on a Berne Convention work. Zenith points out that registration is not a prerequisite to the bringing of an infringement action for a Berne Convention work, while it is a prerequisite for a work not covered by the Berne Convention. 17 U.S.C. § 411. Zenith asserts that registration as a prerequisite to perfecting a security interest in a foreign film is a similarly prohibited formality.

As the trial court here noted, however, United States law provides no other exemptions for Berne Convention works. 127 B.R. at 42. Moreover, 17 U.S.C. § 205, which deals with recordation of transfers of copyrights, makes no distinction between foreign and domestic works. We therefore hold that Zenith's failure to register the two foreign Films before AEG filed bankruptcy defeats its attempt to perfect its security interest in the copyrights.

b. Preferences under § 547(e)(2)

[Extensive discussion of the meaning of 11 U.S.C. § 547(e)(2) is omitted.]

Zenith neither filed its UCC-1 financing statements nor recorded its copyright mortgages until more than ten days after the security interests were created; the earliest of these was filed on March 13, 1989 and the Restructuring Agreement and all other documents were signed on or before February 28, 1989. Under this theory, therefore, the perfection of the security interests is not deemed to have occurred simultaneously with the creation of the debt (i.e. the execution of the Restructuring Agreement) as § 547(e)(2) would otherwise provide. The security interests are thus not insulated from being treated as preferences under § 547(e)(2).

Zenith responds that § 547(e) does not, ipso facto, invalidate any security interest not perfected within ten days of when it was granted. This argument, however, ignores the balance of the discussion above. Section 547(e) is only relevant here to address the antecedent debt element of a preference. The other elements, are satisfied in this case and the security interests in the Films were therefore properly avoided (subject to application of the Deprizio doctrine).

5. New Value Defense

[Discussion of the new value defense in Bankruptcy Code § 547(c)(1) omitted.]

B. The Strong Arm Clause and Unperfected Security Interest

Zenith further argues the strong arm powers provided to the debtor under Bankruptcy Code § 544(a)(1) do not permit it take priority over Zenith's unperfected copyright mortgage. The trial court relied on In re Peregrine Entertainment, Ltd., 116 B.R. 194 (C.D.Cal.1990), to find to the contrary. In Peregrine, the court specifically found that a debtor-in-possession using the strong arm powers of § 544 (as defined under California judgment lien law) would prevail over the holder of an unperfected copyright mortgage. Peregrine is well reasoned and on point. Zenith presents no sound reason to vary from Peregrine 's analysis or holding.

C. Executory Nature of Contract

[Discussion of whether there was an executory contract that AEG could be required to assume or reject is omitted.]

CONCLUSION

Based upon the foregoing, we AFFIRM the trial court's decision.