National Peregrine, Inc. v. Capitol Federal Savings & Loan Ass'n of Denver (In Re Peregrine Entertainment, Ltd.)

OPINION AND ORDER REMANDING

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?

I

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

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 2 filed by Cap Fed describe the collateral as “[a]U inventory consisting of films and all accounts, contract rights, chattel paper, general intangibles, instru *198 ments, equipment, and documents related to such inventory, now owned or hereafter acquired by the Debtor.” 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.

NPI filed a voluntary petition for bankruptcy on January 30, 1989. On April 6, 1989, NPI filed an amended complaint against Cap Fed, contending that the bank’s security interest in the copyrights to the films in NPI’s library and in the accounts receivable generated by their distribution were unperfected because Cap Fed failed to record its security interest with the Copyright Office. NPI claimed that, as a debtor in possession, it had a judicial lien on all assets in the bankruptcy estate, including the copyrights and receivables. Armed with this lien, it sought to avoid, recover and preserve Cap Fed’s supposedly unperfected security interest for the benefit of the estate.

The parties filed cross-motions for partial summary judgment on the question of whether Cap Fed had a valid security interest in the NPI film library. The bankruptcy court held for Cap Fed. See Memorandum of Decision re Motion for Partial Summary Adjudication (Nov. 14, 1989) [hereinafter “Memorandum of Decision”] and Order re Summary Adjudication of Issues (Dec. 18, 1989). NPI appeals.

II

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); see Copyright Office Circular 12: Recordation of Transfers and Other Documents (reprinted in 1 Copyright L.Rep. (CCH) H 15,015) [hereinafter “Circular 12”]. 5 A “transfer” *199 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 “hy-pothecation” 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.

1. 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.

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.” Community for Creative Non-Violence v. Reid, — U.S.-, 109 S.Ct. 2166, 2177, 104 L.Ed.2d 811 (1989); H.R.Rep. No. 1476, 94th Cong., 2d Sess. 129 (1976), U.S.Code Cong. & Admin.News 1976, p. 5659. As *200 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 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 Dancing 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 H 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. See G. Gilmore, Security Interests in Personal Property § 17.3, at 545 (1965); see also 3 Nimmer on Copyright § 10.05[A] at 10-44 (1989) (“a persuasive argument ... can be made to the effect that by reasons of Sections 201(d)(1), 204(a), 205(c) and 205(d) of the current Act ... Congress has preempted the field with respect to the form and recordation requirements applicable to copyright mortgages”).

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 According to Dan-ning,

*201 [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. 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, see pp. 205-207 infra, 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 rec-ordation 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 *202 system pertaining to interests in copyrights would be preempted by the Copyright Act.

2. 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 debt- or is located. See UCC §§ 9302(1), 9401(l)(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

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 And, lest *203 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 11 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)”). 11

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.

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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 *204 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

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 Cap Fed’s security interest in the copyrights of the films in NPFs library and the receivables they have generated therefore is unperfected. 14

B. Effect of Failing to Record with the Copyright Office

Having concluded that Cap Fed should have, but did not, record its security interest with the Copyright Office, the court must next determine whether NPI as a debtor in possession can subordinate Cap Fed’s interest and recover it for the benefit of the bankruptcy estate. As a debtor in possession, NPI has nearly all of the powers of a bankruptcy trustee, see 11 U.S.C. § 1107(a), including the authority to set aside preferential or fraudulent transfers, as well as transfers otherwise voidable under applicable state or federal law. See 11 U.S.C. §§ 544, 547, 548.

Particularly relevant is the “strong arm clause” of 11 U.S.C. § 544(a)(1), which, in respect to personal property in the bankruptcy estate, gives the debtor in possession every right and power state law confers upon one who has acquired a lien by legal or equitable proceedings. 15 If, under the applicable law, a *205 judicial lien creditor would prevail over an adverse claimant, the debtor in possession prevails; if not, not. Wind Power Systems, Inc. v. Cannon Financial Group, Inc. (In re Wind Power Systems, Inc.), 841 F.2d 288, 293 (9th Cir.1988); Angeles Real Estate Co. v. Kerxton (In re Construction General Inc.), 737 F.2d 416, 418 (4th Cir. 1984). A lien creditor generally takes priority over unperfected security interests in estate property because, under Article Nine, “an unperfected security interest is subordinate to the rights of ... [a] person who becomes a lien creditor before the security interest is perfected.” UCC § 9301(1)(b). But, as discussed previously, the UCC does not apply to the extent a federal statute “governs the rights of parties to and third parties affected by transactions in particular types of property.” UCC § 9104. Section 205(d) of the Copyright Act is such a statute, establishing a priority scheme between conflicting transfers of interests in a copyright:

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. Otherwise, the later transfer prevails if recorded first in such manner, and if taken in good faith, for valuable consideration or on the basis of a binding promise to pay royalties, and without notice of the earlier transfer.

17 U.S.C. § 205(d) (emphasis added). For the reasons discussed above, see p. 201 supra, the federal priority scheme preempts the state priority scheme.

Section 205(d) does not expressly address the rights of lien creditors, speaking only in terms of competing transfers of copyright interests. To determine whether NPI, as a hypothetical lien creditor, may avoid Cap Fed’s unperfected security interest, the court must therefore consider whether a judicial lien is a transfer as that term is used in the Copyright Act.

As noted above, the Copyright Act recognizes transfers of copyright ownership “in whole or in part by any means of conveyance or by operation of law.” 17 U.S.C. § 201(d)(1). Transfer is defined broadly to include any “assignment, mortgage, exclusive license, or any other conveyance, alienation, or hypothecation of a copyright ... whether or not it is limited in time or place of effect.” 17 U.S.C. § 101. A judicial lien creditor is a creditor who has obtained a lien “by judgment, levy, sequestration, or other legal or equitable process or proceeding.” 11 U.S.C. § 101(32). Such a creditor typically has the power to seize and sell property held by the debtor at the time of the creation of the lien in order to satisfy the judgment or, in the case of general intangibles such as copyrights, to collect the revenues generated by the intangible as they come due. See, e.g., Cal.Civ. P.Code §§ 701.510, 701.520, 701.640. 16 *206 Thus, while the creation of a lien on a copyright may not give a creditor an immediate right to control the copyright, it amounts to a sufficient transfer of rights to come within the broad definition of transfer under the Copyright Act. See Phoenix Bond & Indemnity Co. v. Shamblin (In re Shamblin), 890 F.2d 123, 127 n. 7 (9th Cir.1989) (under the Bankruptcy Code, “[t]his court has consistently treated the creation of liens on the debtor’s property as a transfer”).

Cap Fed contends that, in order to prevail under 17 U.S.C. § 205(d), NPI must have the status of a bona fide purchaser, rather than that of a judicial lien creditor. See Pistole v. Mellor (In re Mellor), 734 F.2d 1396, 1401 n. 4 (9th Cir.1984) (judicial lien creditor does not have the same rights as a bona fide purchaser); cf. 11 U.S.C. § 544(a)(3) (for real estate in the bankruptcy estate, debtor in possession has the rights of a bona fide purchaser). Cap Fed, in essence, is arguing that the term transfer in section 205(d) refers only to consensual transfers. For the reasons expressed above, the court rejects this argument. The Copyright Act’s definition of transfer is very broad and specifically includes transfers by operation of law. 17 U.S.C. § 201(d)(1). The term is broad enough to encompass not merely purchasers, but lien creditors as well. 17 NPI therefore is entitled to priority if it meets the statutory good faith, notice, consideration and recording requirements of section 205(a). As the hypothetical lien creditor, NPI is deemed to have taken in good faith and without notice. See 11 U.S.C. § 544(a). The only remaining issues are whether NPI could have recorded its interest in the Copyright Office and whether it obtained its lien for valuable consideration.

*207 In order to obtain a lien on a particular piece of property, a creditor who has received a money judgment in the form of a writ of execution must prepare a notice of levy that specifically identifies the property to be encumbered and the consequences of that action. See Cal.Civ.P.Code § 699.540. If such a notice identifies a federal copyright or the receivables generated by such a copyright, it and the underlying writ of execution, constitute “document[s] pertaining to a copyright” and, therefore, are capable of recordation in the Copyright Office. See 17 U.S.C. § 205(a); Compendium of Copyright Office Practices II II¶ 1602-1603 (identifying which documents the Copyright Office will accept for filing). 18 Because these documents could be recorded in the Copyright Office, NPI as debtor in possession will be deemed to have done so. 19

Finally, contrary to Cap Fed’s assertion, a trustee or debtor in possession is deemed to have given valuable consideration for its judicial lien. Section 544(a)(1) provides:

The trustee [or debtor in possession] shall have, as of the commencement of the case ... the rights and powers of, or may avoid any transfer of property of the debtor or any obligation incurred by the debtor that is voidable by ... a creditor that extends credit to the debtor at the time of the commencement of the case, and that obtains, at such time and with respect to such credit, a judicial lien on all property on which a creditor on a simple contract could have obtained such a judicial lien_

11 U.S.C. § 544(a)(1) (emphasis added). The act of extending credit, of course, constitutes the giving of valuable consideration. See First Maryland Leasecorp v. M/V Golden Egret, 764 F.2d 749, 753 (11th Cir.1985); United States v. Cahall Bros., 674 F.2d 578, 581 (6th Cir.1982). In addition, the trustee’s lien — like that of any other judgment creditor — is deemed to be in exchange for the claim that formed the basis of the underlying judgment, a claim that is extinguished by the entry of the judgment.

Because NPI meets all of the requirements for subsequent transferees to prevail under 17 U.S.C. § 205(d) — a transferee who took in good faith, for valuable consideration and without notice of the earlier transfer — Cap Fed’s unperfected security interest in NPI’s copyrights and the receivables they generated is trumped by NPI’s hypothetical judicial lien. NPI may therefore avoid Cap Fed’s interest and preserve it for the benefit of the bankruptcy estate. 20

CONCLUSION

The judgment of the bankruptcy court is reversed. The case is ordered remanded for a determination of which movies in NPI’s library are the subject of valid copyrights. The court shall then determine the status of Cap Fed’s security interest in the *208 movies and the debtor’s other property. To the extent that interest is unperfected, the court shall permit NPI to exercise its avoidance powers under the Bankruptcy Code.

IT IS SO ORDERED.