This is an irreconcilable conflict between the ownership transfer provisions of state and federal law. No amount of drafting can finesse it. Only one system can prevail.

Although not entirely clear, FIPSA apparently does not intend to eliminate federal preemption of the ownership transfer rules for copyrights. Thus, under FIPSA the Licensee would still prevail.

But this means the Lender's security interest has no value against subsequent assignees or exclusive licensees unless the Lender also records in the Copyright Office. Even under FISPA, any prudent lender must still search and record in the Copyright Office to ensure the continuing value of its security.

Thus, FIPSA does not and can not eliminate the "dual filing burden."

2. FISPA Will Significantly Increase the Costs Of Copyright Lending

FISPA provides that the relative priority between secured lenders and lien creditors is determined solely by state law. Copyrighted works often have complex chains of title, with many tiers of derivatives works, licenses, sublicenses and sub-sublicenses. Under Article 9, foreclosure by a senior secured creditor anywhere higher up in the "chain" wipes out a junior interest. This makes its critical for lender to find any senior interests before it makes a loan.

Under current law, the lender can conduct a single search of the records in the Copyright Office to find all prior copyright liens. Under FISPA, a lender will now need to search the UCC filing systems maintained in the fifty states. This burden will be enormous.

Let me illustrate the magnitude of the problem with a practical example. Assume an independent producer wants to finance a new movie, Terminator 3, based on the popular Terminator and Terminator 2 pictures. Since Terminator 3 will be a derived from several prior works (screenplays and movies), the production lender certainly wants to know all prior security interests against any of these prior works since they would be superior to its loan. Attached is a Copyright Report for the Terminator pictures showing the recorded chain of title, but with the copyright mortgages omitted. If FISPA passes, this is what secured lenders will see in the future. Let us try to find all prior copyright mortgages using only this report.

The report shows numerous prior transfers. Any transferor or transferee could have granted a security interest in its rights so we must search each one. Ignoring duplicate entries and transfers that may not affect our new production, it looks like there are still 94 separate entities to search. The Copyright Report does not show where they are located, so we must search under the rules in all fifty states and the District of Columbia.

There are several state variants regarding the place to file a security interest. For a general intangible like a copyright, 26 states only require filing in the Secretary of State, while 14 others can also require an additional filing in the county where the debtor is located. (HAWKLAND, LORD & LEWIS UCC SERIES, §§ 9-401 et. seq. (1997 ed.).) According to one major searching service, there are 6,400 potential filing jurisdictions in the United States. How will our production lender find all prior lien filings, and how much will it cost?

Here is an analysis based on the going charges of a well known search company. • Locating the Corporations: It looks like 90 of the entries in the Chain of a Title are corporations. We can conduct a 50 state search to locate their place of incorporation at $365 per debtor, i.e. $365 x 90 = $32,850.

• Searching the Corporations: Now that we know where they are located, we must search the local UCC filings there. Searching fees vary per state. In California, a search at the Secretary of State costs $34. No county search is required for intangibles. If all of these companies are headquartered in California, then we must conduct 90 UCC searches at a cost of $34 x 90 = $3,060.

• Copies of Filing: The UCC searches only disclose the UCC-1s filed against the debtor, not against the copyright in Terminator. One transferor alone, Carolco Pictures, had more than 1,000 UCC-1 filed against it. (Each time it produced a picture, the lenders filed a UCC-1 to cover the physical materials). To find out which UCC-1s apply to Terminator, we must order a copy of each one. The cost in California is $1.25 per page. If we make the conservative assumptions that each UCC-1 is only 1 page, and that all 90 debtors only have only 2,400 UCC-1s in total filed against them, this means an additional cost of $1.25 x 2,400 = $3,000.

• Reading The UCC-1s: Then somebody has to read all 2,400 UCC-1s to determine which ones apply to Terminator. If a legal professional could read one UCC-1 a minute, it would still take 40 hours to read them all. If were only charged $100 per hour, that is an additional $4,000.

• Individuals: There are four individuals identified in the Copyright Reportthe screenplay writers. There is no facility for nationwide searches for individual locations like there is for corporations, so to be sure we have identified all security interests we must search the Secretary of State in all 50 states, plus all the counties in the additional 14 states that require dual filings. Let us assume, conservatively, this means searching 100 jurisdictions, or 4 x 100 = 400 searches. The costs is $34 per state search, and $49 per county search, i.e. ($34 x 200) + ($49 x 200) = $16,600. We will assume no copy or reading problem.

• Judgment Liens: We still have the judgment liens. Currently, a lien creditor who does not record in the Copyright Office remains junior to a federally recorded copyright mortgage (In Re Peregrine, supra 116 B.R. fn. 16; LeFlore v. Grass Harp Productions, Inc., 67 Cal.Rptr. 340, fn. 1 (Cal.App. 1997), although the case law is admittedly sparse. This means that currently a Copyright Report is sufficient to disclose any prior lien creditors. Under Article 9301(1)(b), however, a party who becomes a lien creditor by levy or attachment before the security interest is perfected has priority. (Barkley Clark, THE LAW OF SECURED TRANSACTIONS UNDER THE UCC, 13.03[2][c] (1994 Rev. Cum. Ed.).) Under FIPSA, our production lender would need to search at the state level to find prior lien creditors. Again, there are many state variations as to when lien creditor status arises (filing, levying) notice rules (some states include judgment liens with UCC filings) and procedures. (See Coogan, Hogan, Vagts & McDonnell, SECURED TRANSACTIONS, Chpt. 7E (Matthew Bender, 1998).) Since many copyright owners operate nationally, and copyrights exist everywhere, a judgment lien affecting the copyright might be recorded in any of the 6,400 filing locations nationwide. Searching them all would require examining all 94 parties in all 6,400 locations at $49 per search-for a staggering cost of $29,478,400. Let us assume we only need to search in the counties where the parties are located. Then we still need an additional 94 searches at $49 a search, or $4,606.

The following table compares the admittedly hypothetical costs of finding all liens that might apply to a Terminator 3 production loan under current law and under FIPSA.

Of course, we could get lucky. We could find the parties after searching only a

few locations. But we cannot guarantee it.

Terminator is not unusual. There are many U.S. motion pictures with chains of title just as elaborate, if not more so. Copyrights have complex chains of title. A remote transferee often has no way of knowing where prior transferors are located other than by searching the public records. Since copyrights are national assets, a remote transferee must be prepared to search public records on a national scale.

The average independent motion picture costs $2 million. They cannot absorb the uncontrollable costs that will be required under FISPA to obtain a production loan. It will mean these pictures cannot be produced at all-or that they must be financed and produced outside the United States. Indep Independent producers are responsible for close to 148,000 American jobs nationwide. FIPSA threatens them all.

A BETTER SOLUTION

As we mentioned, AFMA and AFIs do not believe that the current system is perfect. To the contrary, we have for several years advocated reform. Two problems need attention from the point of view of lenders:

• Floating liens: The ability to file a "floating lien" that covers all of the debtor's assets in a single filing.

• After-Acquired Property: The ability to have the lien attach to after-acquired property.

Article 9 does have legal rules to accommodate the creation, attachment and foreclosure of floating liens and after-acquired property. The problem is that Article 9 does not have the facilities for filing and perfection with regard to these types of interests where copyrights are concerned. As the previous discussion indicates, it is incapable of doing so.

That does not mean we cannot solve the problem. Copyrights are federal rights; they deserve a federal solution. AFMA has previously proposed a solution that preserves the essential nature of the copyright system and solves these problems. The details are discussed on the attachment. So let must just discuss the concept.

The Copyright Office filings are indexed against works. Article 9 filings are indexed against persons (debtors). To solve the problem, we need to create a facility in the Copyright Office for constructive notice filings against persons as well as works.

The idea is to allow the Copyright Office to establish a "person index." Persons (companies or individuals) with a copyright interest can file a "person registration statement" just like a copyright work registration statement. Recorded transfers can then be indexed against the parties in the "person register" or against the work in the current "work register." These filings will be linked in a computerized, relational database. Either one will have constructive notice and create priority under federal law, and the necessary perfection under state law.

This is essentially the same system the title insurance companies use for land titles. They maintain two indexes: a "lot book" for the properties, and a "general index" describing filings against the persons. They search both to issue a title policy. This is also the system used in all the major database vendors to create "relational databases." It is a well understood problem with well documented solutions. In practice, the system could be simple to use. A secured creditor loaning against a copyright need only insure that either the work or the debtor is registered. The lender can then, in principle, file an additional copy of its UCC-1 financing statement with the Copyright Office to perfect against the copyright assets. One extra filing. No multiple searching. No excessive costs.

Again, the exact details are explained in the attachments.

CONCLUSION

The 140 member companies of AFMA, and the 22 banks and financial institutions in the AFI, support needed federal legislation to update the current system for securing copyright mortgages. We endorse the goal of FISPA, but cannot under any circumstances support its “mixed filing" methodology.

Copyrights are national treasures. They deserve a national solution. We look forward to working on a system that will solve current problems while preserving the integrity of the federal copyright system.

LIST OF ATTACHMENTS

Documents Discussed In Statement

• Copy of Copyright Research Report For Terminator 2. Documents Advocating Positive Solutions

• Letter dated April 6, 1999 from Allen R. "Mike" Frischkorn, President of AFMA, to House Subcommittee on Courts and Intellectual Property enclosing proposed improvement legislation for copyright financing.

• AFMA proposed amendments to Copyright Act to improve copyright financing.

!

• Memo from Lorin Brennan and Prof. Ronald Mann describing benefits of AFMA proposal, with attached Concept Paper

Documents Regarding "Mixed Filing System

• Memo dated November 30, 1998 to ABA describing objections to “mixed filing” system in FISPA.

Thomson & Thomson

VIA OVERNIGHT

Ms. Darnell Young
Carolco Service Inc.
8800 Sunset Blvd.
3rd Floor

Los Angeles, CA 90069

Copyright Report - TERMINATOR 2

December 21, 1992

Boston

Dear Ms. Young:

A search of the records of the Copyright Office and the records and files of this office reveals that the motion picture entitled TERMINATOR 2: JUDGMENT DAY, starring Arnold Schwarzenegger and Linda Hamilton, a Mario Kassar presentation of

/ashington, D.Ca Pacific Western production in association with Lightstorm Entertainment, produced and directed by James Cameron, was Los Angeles released in the United States on July 3, 1991 by Tri-Star

Pictures. According to the copyright application, it was created Chicaço in 1991, published July 3, 1991 and registered for copyright in the name of Carolco Pictures, Inc., July 9, 1991, under entry No. Antwerp PA: 527-728. The application author is listed as Carolco International, N.V. and Carolco Pictures, Inc., employers for London hire. Pre-existing material consists of a screenplay and copyright is claimed on the motion picture version.

Montreal

"Baseline" reported on October 28, 1992 that the motion Toronto picture is being released as follows:

Tri-Star Pictures (North America)

Carolco (International sales)

Guild Film Distribution (Great Britain)

Penta Distribuzione/Cine Italia (Italy)

Unirecord International (Spain)

Columbia Tri-Star Film Distributors (Australia, Norway, Finland,
Sweden, Denmark, France, Switzerland, Germany, Latin America,
Hong Kong, Philippines, New Zealand, Japan, Taiwan)

SF Norge (Norway)

Concorde Film (Netherlands)

Independent (Belgium)

Twentieth Century Fox (Switzerland)

Nordisk (Denmark)

Guild Entertainment Central Europe (video-Czechoslovakia)

Interana (Czechoslovakia)

VCL/Carolco Communications Prideo-German speaking territories)

Orbis Communications (tv/syndication--United States)

RTL Plus (television--Germany)

Request TV (pay-per-view--United States)