## Facts

- AEG Acquisition Corp. was a Chapter 11 debtor whose principal assets included motion-picture copyright-related distribution rights.
- AEG’s predecessor, Atlantic Entertainment Group, entered 1987 distribution agreements with Zenith Productions for three films (*Patty Hearst*, *For Queen and Country*, and *The Wolves of Willoughby Chase*) and failed to pay $6 million in guaranteed advances.
- In 1988, Atlantic and Zenith executed renegotiated “option” contracts stating Atlantic had no present rights but could acquire distribution rights by exercising options totaling $6 million; Atlantic also executed confessions of judgment for the $6 million debt.
- After Atlantic was acquired and became AEG, the parties executed a February 1989 restructuring agreement under which AEG would acquire perpetual U.S./Canada distribution rights for $6 million payable in installments, and Zenith received a security interest in AEG’s distribution rights.
- Zenith attempted to perfect by filing UCC-1 financing statements and recording copyright mortgages for each film; Zenith filed a U.S. copyright registration application only for the domestic film (*Patty Hearst*), believing registration of the foreign films was unnecessary.
- AEG paid Zenith $2 million under the restructuring agreement, then filed Chapter 11 without paying the remaining $4 million.
- The Official Unsecured Creditors’ Committee filed an adversary proceeding seeking, among other relief, avoidance of Zenith’s interests and recovery of payments as preferences and fraudulent transfers; the matter was decided on cross-motions for summary judgment.

## Issues

1. Whether the restructuring arrangement was an option contract or a conditional sales contract creating a security interest.
2. Whether Zenith properly perfected its security interest in the distribution rights to each film.
3. Whether U.S. copyright registration of the foreign films was required to perfect Zenith’s security interest in those films.
4. Whether Zenith’s liens or related transfers were avoidable as preferences or fraudulent transfers to the extent relevant to the perfection determinations.

## Decision

- The court held the restructuring arrangement was a conditional sales contract, not a true option contract.
- The court held Zenith perfected its security interest only as to *Patty Hearst*.
- The court held the two foreign films had to be registered with the U.S. Copyright Office as a condition of perfecting a security interest in them; recording mortgages without registration was insufficient.
- The court held Zenith did not receive a fraudulent conveyance as to the perfected security interest in *Patty Hearst*.

## Legal Principles

- Courts classify transactions by their substance, not labels; an “option” may be treated as a conditional sale when the structure reflects a sale for a fixed price secured by a retained security interest.
- When collateral consists of copyrights or interests in copyrighted works, federal copyright recordation requirements govern perfection as against third parties and a bankruptcy estate, and state UCC filings alone are not sufficient.
- Registration of the copyrighted work is required to achieve effective perfection through the federal recordation system, including for foreign works when a creditor seeks to perfect a security interest in related distribution rights.
- A perfected security interest obtained through a restructuring may withstand fraudulent-transfer attack even if related, unperfected interests in similar collateral are avoidable due to lack of perfection.

## Conclusion

The court treated the parties’ restructuring as a secured conditional sale and held that perfection of security interests in motion-picture distribution rights depended on compliance with federal copyright registration and recordation requirements, leaving Zenith perfected only as to the registered domestic film and unperfected as to the unregistered foreign films.


In re AEG Acquisition Corp., 127 B.R. 34 (Bankr. C.D. Cal. 1991)