Aerocon Engineering, Inc. v. Silicon Valley Bank
(In re World Auxiliary Power Co.)
244 B.R. 149 (Bkcy N.D. Cal. 1999)
Tchaikovsky, Bankruptcy Judge.
In these adversary proceedings, Plaintiff Aerocon Engineering Inc. ("Aerocon") seeks to avoid the security interest of Defendant Silicon Valley Bank (the "Bank") in certain unregistered copyrights (the "Copyright") pursuant to [BRA § 544] [Citation omitted]. Aerocon and the Bank have filed cross- motions for summary judgment. For the reasons stated below, the Court finds that the Bank's security interest is perfected. Therefore, Aerocon may not avoid it pursuant to [BRA § 544].
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SUMMARY OF FACTS
The ["Debtors"] are corporate affiliates. They filed voluntary petitions seeking relief under chapter 11 of the Bankruptcy Code in August 1996. In September 1996, all three cases were converted to chapter 7, and chapter 7 trustees were appointed. Prior to the chapter 11 filings and conversion of the cases to chapter 7, the Debtors designed, manufactured, and sold aircraft related products. In the process, the Debtors acquired the Copyright. The Copyright was embodied in drawings, blueprints, and computer software which were used to acquire Supplemental Type Certificates from the Federal Aviation Administration. The Supplemental Type Certificates permitted the Debtors to make modifications to a particular airplane type. [Fn 2] The Debtors did not register the Copyright with the United States Copyright Office (the "Copyright Office").
[Fn 2. For a more detailed explanation of the process by which the Federal Aviation Administration approves airplane design and manufacture and of the role that a Supplemental Type Certificate plays in this process, see G.S. Rasmussen & Assocs., Inc. v. Kalitta Flying Serv., Inc., 958 F.2d 896, 898-900 (9th Cir.1992).]
Prior to the commencement of these bankruptcy cases, the Bank loaned money to two of the Debtors. The third Debtor guaranteed the loans. The Debtors executed security agreements (the "Security Agreement"), giving the Bank a security interest in the Copyright, among other things, to secure their obligations under the loan and guaranty agreements. The Debtors also executed UCC-1 financing statements (the "UCC-1") which the Bank filed with the California Secretary of State (the "UCC Office"). The Bank did not record the Security Agreement or UCC-1 in the Copyright Office.
On April 14, 1997, the Court approved the sale by the bankruptcy trustees of most of the assets of the three bankruptcy estates, including the Copyright and the trustees' avoiding powers with respect to the Bank's security interest in the Copyright under [BRA § 544]. Aerocon alleges that it is the successor-in-interest to the parties who purchased the Copyright and the related avoiding powers. [Citation omitted.]
APPLICABLE LAW
A. Summary Judgment Law
[Discussion omitted.]
B. COPYRIGHT LAW
The owner of a copyright is permitted to register the copyright with the Copyright Office but is not required to do so. See 17 U.S.C. § 208(a). [Fn 5] The transfer of ownership of a copyright may be recorded with the Copyright Office whether or not the copyright is registered. See 17 U.S.C. § 205(c). The Copyright Act defines "the transfer of ownership of a copyright" to include the transfer of a security interest. See 17 U.S.C. § 101.
[ Fn 5. However, the owner of a copyright must register the copyright if it wishes to sue a third party for copyright infringement. See 17 U.S.C. § 211.]
If the copyright is registered and the transfer of ownership of a copyright is recorded, the recordation gives third parties constructive notice of the transfer. See 17 U.S.C. § 205(c). In the event of conflicting transfers, priority is given to the first transfer executed provided: (1) the transfer is recorded within 30 days of the date of execution in a manner sufficient to give third parties constructive notice [Footnote omitted.] and (2) the transferee: (a) received the transfer in good faith, (b) for valuable consideration, and (c) without notice of the prior transfer. See 17 U.S.C. § 205(d).
DISCUSSION
The question presented by these cross-motions is whether the Bank perfected its security interest in the Copyright by filing the UCC-1 in the UCC Office. If it did, Aerocon cannot avoid the Bank's security interest pursuant to [BRA § 544] If the Bank's security interest is unperfected, Aerocon may avoid it under [BRA § 544(a)]. [Citation omitted.] [Footnote omitted.] In either instance, as discussed below, because the copyright was unregistered, the priority of the conflicting transfers must be determined under state law. See section A below. For similar reasons, as discussed below, the Court concludes that a secured creditor may perfect a security interest in an unregistered copyright in accordance with state law, by filing a UCC-1 financing statement with the UCC Office. See section B below.
A. PRIORITY OF CONFLICTING TRANSFERS OF OWNERSHIP IN UNREGISTERED COPYRIGHT
The issues presented here were first addressed in In re Peregrine Entertainment, Ltd., 116 B.R. 194 (C.D.Cal.1990). The Peregrine court held that a security interest in a copyright could not be perfected by filing a UCC-1 financing statement in the UCC Office and could only be perfected by recording the transfer of the security interest in the Copyright Office. Id. at 198-201. The Peregrine court also held that a hypothetical judicial lien holder under [BRA § 544] could obtain a lien on a copyright superior to an unperfected security interest. Therefore, a trustee could avoid the unperfected security interest under [BRA § 544]. See id. at 204-08.
The Peregrine court failed to specify whether the copyright in that case was registered with the Copyright Office. [Fn 8] However, the Peregrine court's analysis only works if the copyright was registered. This is most obvious in its analysis of the respective priorities of the hypothetical judicial lien holder under [BRA § 544] and the holder of an unperfected security interest.
[Fn 8. The Peregrine court does, however, acknowledge that a security interest in a copyright may only be perfected by recordation in the Copyright Office if the copyright is registered. See id. at 200 n. 7.]
The Peregrine court based its priority analysis on 17 U.S.C. § 205(d). It stated that:
...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: . . . . See id. at 205. It concluded first that, by definition, a hypothetical judicial lien holder under [BRA § 544(a)] should be deemed to have received its lien in good faith, for valuable consideration, and without notice of the prior transfer. It then stated that the only remaining issue was "whether...[the hypothetical judicial lien holder] could have recorded its interest in the Copyright Office...." See id. at 206. The Peregrine court concluded that the judicial lien holder could have recorded its interest in the Copyright Office and therefore that it could avoid the security interest of a secured creditor that failed to record its security agreement there. See id. at 206-08.
However, unless the copyright was registered in the Copyright Office, a hypothetical judicial lien holder's recordation of its lien in the Copyright Office would not give it any priority over an unperfected security interest in the same copyright under 17 U.S.C. § 205(d). As noted above, 17 U.S.C. § 205(d) only gives priority to a transfer of a security interest recorded in a manner sufficient to give constructive notice to third parties. Recordation of a security interest only gives constructive notice to third parties if the copyright is registered. See 17 U.S.C. § 205(c).
Subsequent to Peregrine, two bankruptcy courts addressed the issues presented here with respect to copyrights that were clearly unregistered. See In re AEG Acquisition Corp., 127 B.R. 34 (Bankr.C.D.Cal.1991), aff'd, 161 B.R. 50, 58 (9th Cir. BAP 1993) [Footnote omitted.]; In re Avalon, 209 B.R. 517 (Bankr.D.Ariz.1997). Both courts followed Peregrine, concluding that a security interest could only be perfected by recordation with the Copyright Office. Neither court considered whether it was appropriate to apply the Peregrine court's analysis to an unregistered copyright. See AEG Acquisition, 127 B.R. at 40-41; Avalon, 209 B.R. at 521-22.
It is unclear whether these two courts based their determinations of the respective parties' priorities on state or federal law. In AEG Acquisition, the court stated that: "The Uniform Commercial Code...gives lien creditors priority over holders of unrecorded security interests." 127 B.R. at 43. However, like the Peregrine court, it then addressed the requirements for priority set forth in 17 U.S.C. § 205(d). Like Peregrine, in doing so, it failed to note the requirement that recordation of the judicial lien be in a manner sufficient to give constructive notice to third parties or to discuss how such recordation could be accomplished when the copyright was unregistered. See id. at 43-44. [Fn 10]
[Fn 10. In fact, the AEG Acquisition court misstated the priority scheme established by 17 U.S.C. § 205(d) as giving priority to a transferee who records first. As discussed above, priority is given to the first transfer executed as long as that transfer is recorded in a manner sufficient to give constructive notice within 30 (or 60) days of the date of execution of the transfer. See 17 U.S.C. § 205(d).]
The Avalon court failed to discuss the priority issue at all. It merely stated that:
If a security interest is not properly perfected, it becomes subordinate to the rights of a bankruptcy trustee (or debtor-in-possession) whose principal purpose is to maximize a debtor's estate for the benefit of the unsecured creditors. [Citations omitted.]
Because the Peregrine court based its priority determination on 17 U.S.C. § 205(d), by citing to both state law and Peregrine, the Avalon court also failed to make clear whether it was basing its priority analysis on state or federal law. However, as discussed above, 17 U.S.C. § 205(d) does not establish a priority scheme between conflicting transfers of interests in an unregistered copyright. Therefore, the relative priorities of the Bank's security interest and the interest of Aerocon as a hypothetical judicial lien creditor under [BRA § 544] must be governed by Article Nine of the California Commercial Code. As stated above, whether Aerocon can avoid the Bank's security interest under the California Commercial Code depends on whether the Bank's security interest was properly perfected by filing a UCC-1 with the UCC Office.
B. PERFECTION OF SECURITY INTEREST IN UNREGISTERED COPYRIGHT
[The court proceeded to conclude that there is preemption only as to registered copyrights and where the debtor has not registered its copyrights a security interest may be perfected by filing a financing statement under Article 9.]