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SUA SPONTE
Judith Greenstone Miller
Raymond & Prokop, P.C.
jmiller@raypro.com

Reflections and Resolutions . . . A New Year, A New Beginning

I was recently in a Chinese restaurant where I received the expected fortune cookie at the conclusion of my meal. Naturally, I opened it. It read, “Wisdom comes from experience. Learn and you shall have a good future; ignore and accept the consequences!” This message, while not necessarily unique, is particularly compelling and relevant when reflecting upon the past year and beginning to make resolutions for the one ahead.

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CASE ANALYSIS
Robert N. Amkraut
Riddell Williams, PS
ramkraut@riddellwilliams.com

Ninth Circuit Holds State Law Governs Perfection of Unregistered Copyrights
Case: In re World Auxiliary Power Company, 303 F.3rd 1120 (9th Cir. 2002)

Summary: How should a lender protect its security interest in copyrights? Because the Copyright Act is a federal statute, some courts have held that it preempts state UCC filings and that failure to file with the Copyright Office renders security interests unperfected. Under these decisions, state UCC filings covering intangible property (many copyrights are intangible property, see UCC § 9-102(42)) fail to perfect a security interest in copyrights and permit a bankruptcy trustee to use the Bankruptcy Code’s strong-arm statute (11 U.S.C. § 544(a)) to avoid a lender’s security interest in the copyrights.

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Dischargeability. University permitted student to enroll in, and receive credit for, classes even though debtor had not paid. In debtor’s subsequent bankruptcy, the university argued that it and the debtor had an informal agreement that debtor would pay, and that agreement was a loan for purposes of § 523(a)(8). Held, debt is dischargeable; nonpayment of tuition qualifies as a loan in only two classes of cases, by agreement and where funds have changed hands. Delinquent tuition, alone, is not a nondischargeable loan. Boston Univ. v. Mehta (In re Mehta), 310 F.3d 308 (3d Cir. 2002).

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MEET YOUR EXECUTIVE COUNCIL

Harry Greenfield
Treasurer
Greenfield@bucklaw.com

Harry Greenfield, of Buckley King, is a shareholder, partner in charge of the Cleveland office, and is the head of the bankruptcy group. Harry currently serves as the Treasurer of the Bankruptcy Section and as the CLLA’s representative to INSOL. Harry has been active in the CLLA since 1973, when he attended his first League meeting in Chicago two weeks after his honeymoon. Harry has been the Chairman of the Bankruptcy Section, a member of the League’s Board of Governors, and in 2000 received the League’s President’s Cup for meritorious service. Outside of the League, Harry has a variety of interests. He has been a competitive swimmer since he was 10 years old. He recently competed in the US Masters National Championships, taking second in the 50 and 200 meter butterfly and third in the 100 meter butterfly. He enjoys playing his guitar (mostly southern and Chicago blues) and playing golf. Harry is about to celebrate his 30th wedding anniversary with his wife, Kate. He has three grown children, one of whom Jamey, is a League member.

Hon. Judith Fitzgerald
Executive Council Member
judge_judith_fitzgerald@pawb.uscourts.gov

The Honorable Judith K. Fitzgerald was appointed to the bench for the Bankruptcy Court for the Western District of Pennsylvania on October 30, 1987, and was recently reappointed for a second 14-year term. On January 8, 2000, she began a term as the Chief Judge for the Court. She sits by designation in the Bankruptcy Court for the District of Delaware and formerly for the Eastern District of Pennsylvania. Previously, Judge Fitzgerald served as an Assistant United States Attorney in the Western District of Pennsylvania for nearly 12 years and represented the United States and its agencies in civil and criminal cases, with an emphasis in complex litigation and frauds. She graduated from the University of Pittsburgh and its School of Law where she taught Secured Transactions as an Adjunct Professor. In addition to membership in several other professional associations, Judge Fitzgerald is the Immediate Past President of the National Conference of Bankruptcy Judges. In addition to her service as Executive Council Member of the Bankruptcy Section, she also serves as a board member of the American Bankruptcy Institute and is co-chair of its Mass Tort Committee. Judge Fitzgerald is a non-voting representative to the Third Circuit Council and sits on its Bankruptcy and Magistrate Judges' Committee. Aside from her law-related activities and responsibilities, she is a chorus member and board member of the Mendelssohn Choir of Pittsburgh, which performs a wide variety of vocal selections locally and internationally, frequently appearing with the world renowned Pittsburgh Symphony Orchestra and other prominent arts groups such as the Pittsburgh Ballet and the Chautauqua Symphony Orchestra.

Lewis B. Freeman
Executive Council Member
lfreeman@lbfmiami.com

Lewis Freeman is the Founding Principal of Lewis B. Freeman & Partners, Inc., a forensic accounting and consulting firm. He is also the Founding Partner of Freeman Dawson & Rosenbaum, a CPA firm. In addition to serving as a member of the Bankruptcy Section Executive Council, he is President of the University of Miami Law Alumni Association and a member of the University of Miami’s Society of University Founders. He is Former President of the Epilepsy Foundation of South Florida. Lewis was selected for the 1998-99 Who’s Who of American Law and Outstanding Corporate Executives. He is a Certified Mediator and a Certified Fraud Examiner. He is a resident of Coconut Grove, Florida and is married with two children.

SUA SPONTE

Reflections and Resolutions . . . A New Year, A New Beginning

I was recently in a Chinese restaurant where I received the expected fortune cookie at the conclusion of my meal. Naturally, I opened it. It read, “Wisdom comes from experience. Learn and you shall have a good future; ignore and accept the consequences!” This message, while not necessarily unique, is particularly compelling and relevant when reflecting upon the past year and beginning to make resolutions for the one ahead. In retrospect, it seems hard to believe that another year has passed and we are about to embark upon a new one. As we mark this year and begin anew, I thought it appropriate to reflect on the year that has just passed and to set forth some resolutions for the new year in order to make the Chinese fortune a reality.

A year ago many of us were focused on the relatively recent past events of September 11th – our families, national security and peace were at the forefront of our minds and our thoughts. While today we generally feel a greater sense of security and normalcy in our daily lives, nevertheless, the issue of world peace looms overhead, along with concerns over the fragile economy. This environment has created a lot of opportunities for the bankruptcy community to become more active and to gain renewed national stature. Unfortunately, however, the spotlight has often been focused more on the hefty fees being earned by bankruptcy professionals and the minimal amounts going to unsecured creditors, particularly in the larger mega-cases, rather than on the quality of the services being rendered. It is important that we, as bankruptcy professionals, continue to foster an environment where providing quality restructuring services is the benchmark of achievement. By making compensation the focal point, we risk being tagged with the labels and sentiments associated with the corporate abuses that have been so prevalent this year and led to the enactment of such legislation as the Sarbanes-Oxley Bill from also being leveled against the bankruptcy professionals through yet to be proposed new bankruptcy legislation next year. The pendulum in Congress has already swung in a manner to suggest a mistrust of the courts and the professionals – it is important that we not add fuel to that position and continue to push for balanced and fair legislation that works for both debtors and creditors. Our collective experience and “wisdom” hopefully can be utilized to influence necessary changes and modifications to the Bankruptcy Code to correct real, and not simply perceived, abuses.

During this last year, the Commercial Law League of America and its Bankruptcy Section have commenced a restructuring aimed, in large part, at providing the highest quality educational programs and enhanced networking opportunities, as well as streamlining the volunteer opportunities by forming national committees (Legislative, Marketing, Governmental Affairs, Membership and Meetings). The new committee structure allows for an effective use of members’ time, as well as providing the most national exposure for their work. Each of these goals is laudable and meritorious, but their overall success and benefit to each of you largely depends on your getting involved. As a member of the CLLA and the Section, it is important not only to attend the meetings and the programs, but also to let your leaders know what we can do to improve the organization. We welcome your comments and look forward to getting to know you at our future meetings. If you haven’t been to a meeting in a while, things have definitely changed and improved – the quality and quantity of events and people have increased – take a chance to rediscover the CLLA and the Section in the upcoming year. The Winter Conference is just around the corner – please think about joining us in New Orleans on February 20 – 23, 2003. Highlights of the conference include a program on privacy and a program on Revised Article 9 featuring Professor J.J. White from the University of Michigan Law School. Click here for program and registration information.

When I became Chair of the Section in July, the path that had been initially paved and structured by my immediate predecessor, Jay Welford, was one conceived in strength and vision. Over the last year, our ability to communicate with members has been significantly improved through the conversion of the newsletter to an electronic format. As we gather our members’ emails, it should also improve our ability to dialogue on a multitude of issues - a Section Chat Room to discuss cases, legislation, opportunities (both business and career) then becomes a reality to further link our members nationally. A Long Rage Planning Committee, headed by Mary Whitmer, has also been reinstituted to develop a plan by which the Section may grow and prosper. It is anticipated that the committee will meet in conjunction with the Executive Council at the Winter Conference to begin the process by which to enhance the national reputation and scholarship of the CLLA and the Section. The creation and expansion of the Lawrence P. King Award for Excellence in Bankruptcy last year by the Section has already begun to foster that goal. The group of candidates nominated to receive the award this year was simply astounding – a who’s who of the bankruptcy community – a remarkable signal of the esteem in which the CLLA and the Section are held in the two year period since the award was conceived. Each year as the award gains prominence and recognition, and the recipients become involved in CLLA and Section activities, the visibility and reputation of the organization should increase. This year’s recipient, Professor Elizabeth Warren, from Harvard Law School, has been made an honorary lifetime member of the CLLA, and further has agreed to act as an active participant on the CLLA’s National Governmental Affairs Committee. Her wisdom, experience, expertise and scholarship will help to pave the future for the CLLA.

A fortune can provide a wonderful ending to a good meal and, likewise, can provide food for thought. Your involvement and support of the CLLA and the Section can help to foster and to reenergize the growth of the organization. However, achieving these goals is not possible unless you take the time to reflect and then act upon that new beginning. As we approach the new year, I hope that each of you will reflect on your own fortunes and utilize and share the wisdom and experience you have gained in the past to make a better and brighter future. The Executive Council joins me in extending all our best wishes to each of you and your families for a happy, healthy and joyous holiday season and new year.

Judith Greenstone Miller
Raymond & Prokop, P.C.
26300 Northwestern Highway
4th Floor - P.O. Box 5058
Southfield, MI 48086-5058
Phone: 248-357-3010
Fax: 248-357-2720
jmiller@raypro.com
www.raypro.com

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CASE ANALYSIS

Ninth Circuit Holds State Law Governs Perfection of Unregistered Copyrights

Case: In re World Auxiliary Power Company, 303 F.3rd 1120 (9th Cir. 2002)

Summary: How should a lender protect its security interest in copyrights? Because the Copyright Act is a federal statute, some courts have held that it preempts state UCC filings and that failure to file with the Copyright Office renders security interests unperfected. Under these decisions, state UCC filings covering intangible property (many copyrights are intangible property, see UCC § 9-102(42)) fail to perfect a security interest in copyrights and permit a bankruptcy trustee to use the Bankruptcy Code’s strong-arm statute (11 U.S.C. § 544(a)) to avoid a lender’s security interest in the copyrights. In In re World Auxiliary Power Company, 303 F.3rd 1120 (9th Cir. 2002), the Ninth Circuit Court of Appeals distinguished between registered and unregistered copyrights, and held that state UCC filings properly perfect security interests in unregistered copyrights. World Auxiliary provides guidance for lenders seeking to protect their security interests in copyrights, and for trustees seeking to avoid such security interests.

Facts: Three related California corporations owned copyrights in drawings, technical manuals, blue-prints, and computer software. The companies didn’t register the copyrights with the United States Copyright Office. Silicon Valley Bank (“Bank”) made loans to the companies secured by essentially all the companies’ assets, including all copyright rights. The Bank perfected its interest by filing UCC-1 financing statements in California. The Bank did not make any filings with the Copyright Office.

The three companies filed bankruptcy petitions. The copyrights were assets of the bankruptcy estates. A competing unrelated company (“Aerocon”) purchased the debtors’ assets, including the copyrights, as well as the trustee’s strong-arm right to sue under 11 U.S.C. § 544 to avoid the Bank’s security interests. Meanwhile, the Bank obtained relief from stay and foreclosed on its security interest. The Bank then sold the copyrights to a company that ultimately proved to have interests adverse to Aerocon. Aerocon brought adversary proceedings seeking to avoid the Bank’s security interest and to recover the copyrights or their value from subsequent transferees. The Bankruptcy Court held that the Bank’s security interest was properly perfected when it filed its California UCC-1 and granted summary judgment against Aerocon. The United States District Court affirmed.

Issue: Whether state law or federal law governs perfection of security interests in unregistered copyrights.

Holding: State law governs perfection of security interests in unregistered copyrights.

Discussion: Under the Copyright Act of 1976, secured lenders may perfect their interest in copyrights registered with the Copyright Office by filing with the Copyright Office in a manner akin to state UCC filings. A secured party cannot file a security interest in unregistered copyrights with the Copyright Office. Registration of copyrights is permissive and is not required for copyright protection. Most copyrights are not registered. However, registration provides the copyright owner with certain infringement remedies. Because only the copyright’s owner can register a copyright, a secured party cannot protect its interest by unilaterally registering a copyright and then filing with the Copyright Office.

Because the Copyright Act is a federal statute, courts considering the effect of state UCC filings covering copyrights must decide whether state UCC law defers to the Copyright Act and whether Congress has preempted the UCC as it applies to copyrights. At least two lower courts have held that the Copyright Act controls and that, therefore, state UCC filings do not perfect security interests in copyrights. In World Auxiliary, the Ninth Circuit rejected the two lower court decisions and held that the Copyright Act does not apply to perfection of unregistered copyrights.

The Court based its decision both on the Copyright Act itself and on the UCC. As noted above, the Copyright Act prohibits a secured party from filing a security interest with the Copyright Office unless the copyright owner first registers the copyright. UCC Article 9 defers to federal law only to the extent that a federal statute preempts the UCC. See former UCC § 9-104(a), current UCC § 9-109(c). The World Auxiliary Court held that because the Copyright Act does not provide for perfection of unregistered copyrights, federal law does not preempt the UCC with regard to unregistered copyrights and that they must be perfected under state UCC law. (As a corollary to this holding, the Court also affirmed lower court holdings that registered copyrights must be perfected by filing with the Copyright Office and not under state UCC law.)

The Court reasoned that, given the language of the Copyright Act and the UCC, to hold otherwise would require copyright registration as a condition of perfection and that therefore unregistered copyrights would be “practically useless as collateral.” World Auxiliary, 303 F.3rd at 1130. The Court found such a position contrary to the Copyright Act which states that copyrights “may” (as opposed to “shall”) be registered and contrary to Congress’ expectation that most copyrights will not be registered. Because Congress contemplated that most copyrights would not be registered, there was no reason to infer that the Copyright Act’s silence as to perfection of unregistered copyrights meant that Congress intended “to make such copyrights useless as collateral by preempting state law but not providing any federal priority scheme.” Id. at 1131.

Finally, the Court addressed the risk that debtors will obtain financing based on unregistered copyrights on which lenders file state UCC-1’s and then register the copyrights with the Copyright Office in order to borrow money from new secured lenders who, unaware of the state registration, will file with the Copyright Office and thereby take priority. The Court found that preventing this possible borrower fraud does not justify an inference that Congress intended to make unregistered copyrights useless as collateral.

The Court noted that prudent creditors should obtain full disclosure of all copyright registrations and perfect under federal law. The Court also found that lenders can use covenants and “policing mechanisms” to protect their security interests.

Conclusion: Because copyrights are created “every time people set pen to paper, or fingers to keyboard, and affix their thoughts in a tangible medium,” World Auxiliary, 303 F.3rd at 1131, copyrights present unique challenges to lenders seeking to perfect security interests. While not solving the challenges of perfecting such “dynamic collateral” as copyrights, World Auxiliary provides guidance. For registered copyrights, lenders must file with the Copyright Office. For unregistered copyrights, state UCC filings perfect a lender’s security interest (at least in the Ninth Circuit), but a prudent lender will take additional steps to further protect its interest.

Robert N. Amkraut
Riddell Williams, PS
1001 Fourth Avenue Plaza #4500
Seattle, WA 98154
Phone: 206-624-3600 Fax: 206-389-1708
Email: ramkraut@riddellwilliams.com

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CASE LAW UPDATE

Dischargeability. University permitted student to enroll in, and receive credit for, classes even though debtor had not paid. In debtor’s subsequent bankruptcy, the university argued that it and the debtor had an informal agreement that debtor would pay, and that agreement was a loan for purposes of § 523(a)(8). Held, debt is dischargeable; nonpayment of tuition qualifies as a loan in only two classes of cases, by agreement and where funds have changed hands. Delinquent tuition, alone, is not a nondischargeable loan. Boston Univ. v. Mehta (In re Mehta), 310 F.3d 308 (3d Cir. 2002).

Bankruptcy Discrimination. Debtor owed debt to his employer, whom he informed of his intent to seek bankruptcy protection. Debtor was fired and subsequently sought Chapter 7 relief. Trustee contented employer’s actions violated anti-discrimination provision of § 525. Held, § 525 applies only where a bankruptcy case has actually been filed. Employer here was free to terminate debtor’s employment; to hold otherwise would be inconsistent with language and policy of the Bankruptcy Code. Majewski v. St. Rose Dominican Hospital (In re Majewski), 310 F.3d 653 (9th Cir. 2002).

Sanctions for Violating the Automatic Stay. Sanctions imposed against creditor’s attorney affirmed where counsel unjustifiably delayed dismissal of state court collection action. Eskanos & Adler, P.C., v. Leetien, 309 F.3d 1210 (9th Cir. 2002).

Homestead/Tenancy by the Entireties. Applying Virginia law, where husband and wife have only individual creditors, other than mortgage lender, the spouses may exempt home owned as tenants by the entireties to the extent of their equity; exemption applies notwithstanding joint administration or substantive consolidation of spouses’ individual bankruptcy estates. Bunker v. Peyton (In re Bunker), 2002 U.S. App. LEXIS 23908 (4th Cir. Nov. 21, 2002) aff’g Thomas v. Peyton, 274 B.R. 450 (E.D. Va. 2001).

Fraudulent Transfers. That a transfer of debtor’s assets is not supported by consideration is sufficient to find the transfer fraudulent under state law; fact that some or all of transferred funds later went to creditors does not legitimize the transfer. Nostalgia Network, Inc. v. Lockwood, 2002 U.S. App. LEXIS 23040 (7th Cir. Nov. 6, 2002).

Catherine E. Vance, Esq.
Columbus, Ohio
614-336-3861
Email: vance76@earthlink.net

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Washington Hot News

December 18, 2002
Shelby Rejects Preemption of State Privacy Laws

Likely incoming chairman of the Senate Banking Committee Shelby (R-Ala.) recently indicated he would work for states to be able to enact more stringent financial privacy regulations than those required under GLB.

Although GLB does not preempt states from enacting stricter privacy laws than its privacy protection, the Federal Credit Reporting Act prohibits states from enacting stricter privacy legislation restricting sharing of information among corporate affiliates until 2004.

The financial services industry has argued that a patchwork of state laws would increase their costs and impede the industry's ability to offer customers products tailored to their needs. Industry supports continued federal preemption of certain state privacy laws.

December 13, 2002
First the Senate, now the House: Bankruptcy reform will be back!

House Judiciary Chairman Sensenbrenner (R-WI) intends to make it four straight and push comprehensive bankruptcy reform in the 108th Congress. With GOP majorities in Congress and a Republican in the White House, some industry sources have suggested they might try to persuade lawmakers to roll back some concessions they were forced to make to lock up needed Democratic support this past year.

Sensenbrenner said he would reintroduce this year's version of the bill - except for an abortion-related compromise brokered by Sen. Schumer (D-NY), and Rep. Hyde (R-IL).
Sensenbrenner stated the House could pass "practically anything" that omits the offending abortion-related language. But the Senate, he said, offers the greater challenge.

December 6, 2002
GOP-Controlled Congress and Privacy

A GOP-controlled House and Senate for the 108th Congress will have an effect on any privacy legislation taken up. In addition, factors such as possible state action on privacy could affect the picture as well (as already seen by California's recent attempt). However, contrary to what some might feel is a reason to slow down Congress, the proliferation of state laws is actually an impetus for Congress to act. Basically, having a choice between a national standard as opposed to a 50 state standard, uniformity and certainty clearly are preferable to industry.

One of the keys in the 108th Congress is the Senate Banking Committee, where Senator Shelby (R-AL), will take over as chairman. Shelby is arguably more of a pro-privacy advocate than former chair Sarbannes (D-MD). Shelby, who introduced two bills dealing with financial privacy (S. 536, S. 324) in 2001, has said he was never satisfied with the consumer privacy protections included in the 1999 Gramm-Leach-Bliley Act. Not surprisingly, on December 5th Sen. Shelby confirmed his view that consumers deserve more privacy protection than they were given a few years ago in GLB.

Although there are no plans to specifically, directly revisit the GLB, another piece of legislation that deals with privacy – the Fair Credit Reporting Act, which governs how the nation’s three major credit agencies collect and disseminate information about consumers – has its state pre-emption expiring at the end of the next year. That will require that lawmakers revisit the privacy issue, particularly the part of the law that preempts state laws on the subject, and possibly in a broader sense, next year.

December 4, 2002
California Senate Starts New Session with Financial Privacy Bill

On December 2nd, leaders in the California State Senate kicked off the 2003 legislative session by introducing a financial privacy bill similar to the measure that failed in the final hours of the 2002 session.

Under, S.B. 1, permission from the consumer would be needed in order for a financial institution to share nonpublic personal information with unaffiliated third parties; they could share such information with affiliates unless consumers "opt out". S.B. 1, is, thus, more restrictive than the federal Gramm-Leach-Bliley Act. The bill calls for a specific check-off notice be sent to consumers. Violators would face fines of $2,500 a day, up to a maximum of $500,000. The California Attorney General would enforce the measure.

Similar to last year’s S.B. 773, S.B. 1 distinguishes between large and small institutions, allowing small institutions, like credit unions, to share information with vendors and businesses pursuant to joint marketing agreements. S.B. 1, however, does not contain the exceptions and amendments that were added to favor specific businesses or industries, such as retailers, which ultimately doomed S.B. 773.

California lawmakers are in recess until January 6. S.B. 1 is likely to be heard in committee in February.

December 2, 2002
Louisiana Issues Guidelines for Contracts with Debt Collectors

On November 26th, the Louisiana Department of Revenue set guidelines for the collection of in-state tax liabilities via contracts with private debt collectors or the attorney general's office. On all accounts, the AG will have the right of first refusal. However, the right must be exercised within 30 days of the date of mailing or electronic transmission of the list of past due accounts. The AG's collection fee may not exceed 15 percent of total liability.

Under Statute 47:1516.1, an advertisement will be run for ten days in the official State Journal or newspaper soliciting proposals. In selecting collection contractors, the State will examine: fees charged, experience with government accounts, computer capabilities, collection methodology, financial stability, and personnel resources. Prior to entering into any contract, a performance bond, cash, or securities in an amount not to exceed $100,000, will be required. Contractors may file suit, at their expense, in the name of the Department of Revenue secretary in a Louisiana court to collect the tax debt.

The taxpayer must be informed by the collector that the obligation is a final judgment and that a collection fee, not to exceed 25 percent of the total liability, will be charged to the account if the debt is not paid within 60 days of the date of notice.

The text of the rule is available at http://www.rev.state.la.us/.

David Goch
Washington Legislative Counsel, CLLA
Webster, Chamberlain & Bean
150 North Michigan Avenue, Suite 600
Chicago, IL 60601
dgoch@wc-b.com

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©2002, Commercial Law League of America