A must-have for copyright co-owners in uncertain times – The Hollywood Reporter

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At the start of 2020, the ever-competitive entertainment landscape – plagued by content wars – caused Hollywood companies to spend (and borrow) more than ever, supporting growing debtsand causing waves of concern across the industry.

Six months ago, the industry’s debt ratios approached double those of the average communications services sector, and the era of COVID-19 threatens to turn those ripples into waves of widespread economic fallout. Many companies are treacherously on the verge of bankruptcy, held back by low interest rates.

Between the Annapurnas narrow avoidance of bankruptcythe fall of Distribber and the continued uncertainty surrounding the industry push for legislative reliefthe risk of financial difficulties is at the forefront of many media companies’ concerns.

But behind these financial anxieties lurks insidiously a related, but often unrecognized uncertainty: what happens to a party that owns a copyright with a company that declares bankruptcy? Of particular interest in this age of franchise reboots and sequels: what derivative rights (if any) can the non-bankrupt co-owner claim against the sneaky monster of bankruptcy? How can the co-owner parry such an enemy?

In the nascent stages of film and television development, copyright co-owners spend incredible amounts of time and money negotiating specific contractual rights to their productions. Rights to initiate sequels and/or spinoffs, creative statements, lifetime commitment to credits, and financial back-ends are just a sample of the hard-won details in co-production deals. However, when a threat of bankruptcy arises, a unique – and, for many parties, unexpected and counter-intuitive – set of rules comes into play to govern copyright ownership during bankruptcy.

Immediately upon filing for bankruptcy, all of the bankrupt’s assets are monolithically labeled the bankruptcy “estate” and placed under an automatic stay, which is essentially a ceasefire on any rights a third party may have. on estate assets. This stay remains in place until the court is satisfied to decide otherwise.

In the meantime, without court intervention, no money can leave the estate and, with few exceptions, no contractual rights can be enforced against it (although the estate itself may assert the contractual rights due to him).

The length of automatic stay is as unpredictable as the length of pre-dinner speeches at a Beverly Hills charity dinner. At best, a judge can lift the automatic copyright stay, allowing the non-bankrupt co-owner to freely exercise his rights during the collective proceeding. At worst, the non-bankrupt co-owner is left in legal purgatory, prohibited from exercising his rights until the bankruptcy procedure is completed.

If an automatic reprieve sounds bad, that’s because it is. Yet this is just a mere boredom compared to the possible outcomes left in the wake of bankruptcy. Co-production agreements are most often considered “enforceable contracts,” a special bankruptcy designation given to contracts that are still materially in progress on both sides at the time of the bankruptcy filing. In bankruptcy proceedings, each enforceable contract must be assumed or rejected in its entirety by the trustee in bankruptcy (or debtor-in-possession, depending on the type of bankruptcy—here, we’ll say “trustee” for simplicity). Their desire to assume or reject is rarely overridden by the court, effectively granting unfettered reign over the decision of the best interests of the bankruptcy estate. Third parties must either convince the trustee that assuming the contract will maximize the estate or deal with the loss of future benefits.

If the contract is rejected, it is considered broken and the non-bankrupt co-owner is entitled to monetary damages. However, these damages (in the absence of a lien) are treated as a general unsecured claim, meaning they are placed at the back of the payline. Since the average bankruptcy creditor’s claim only recovers pennies on the dollar, the likelihood of seeing money down the line is uncertain at best.

Worse still, all highly negotiated contractual rights may now vanish, leaving the parties with copyright “bare”. Mere copyright ownership is a big deal: a party can always exploit the production, make sequels, and license or even sell their share of the copyright. However, his bankrupt co-owner can too.

Without the rules of engagement of the co-production agreement, the two co-owners have carte blanche to do whatever they want with their copyrights, limited only by the obligation to share the financial benefits. This new landscape effectively pits co-owners against each other, locking them into a race for liberation. Whoever exploits their rights first — say, in a sequel movie or later TV show season — can tell the story to fans, simultaneously undoing the slower production.

The only possible outcome is massive inefficiencies in the industry, poor results for viewers, and diminished economic results for competing producers. And the blows don’t stop there: if the co-ownership cannot be divided effectively, the bankruptcy code allows the sale of the entire property (i.e. a sale of the property of the two co-owners) with only an obligation to proportionally share the payment.

If, however, the contract is assumed, then its terms are reinstated and become fully binding on the parties again – but the risk remains. While the trustee is bound by most provisions of the contract, the bankruptcy code expressly trumps assignment restrictions.

Thus, the estate could assume a contract and then sell its rights to a third party, even if the contract expressly prohibits such a sale. If this happens, the non-bankrupt co-owner will be dealing with a third party they have no endorsement for, who may have wildly disparate creative opinions, work philosophies, and/or industry resources.

This is no far-fetched horror story; recent industry bankruptcies, such as the 2018 Relativity Media bankruptcy (his second in three years), highlighted that the world of post-bankruptcy co-ownership often includes terribly inexperienced entities.

The good news is that co-owners don’t have to be unfortunate players in the drama of bankruptcy. Co-owners can protect themselves against some of the particularly loathsome bankruptcy results by obtaining a security interest in the rights and obligations under the co-production agreement governing the creative property (including in the underlying copyright).

Security interests are legal designations that indicate that the party receiving the security interest has high-priority protected rights to certain property (here, rights under the co-production agreement). A security interest has many advantages, but for these purposes the most important is to deter the fiduciary from rejecting the underlying co-production agreement and selling its rights to an undesirable third party.

Without security, the estate would reap all the financial benefits from the sale of valuable rights to a third party or the exploitation of rights that the bankrupt co-owner was not permitted to exploit under the existing co-production agreement. With security, a co-owner’s interests are entitled to “adequate protection” as provided by the bankruptcy code. Therefore, any profit from a sale of rights subject to security would be directed into the pocket of the non-bankrupt co-owner, rendering such sales efforts worthless to the bankruptcy estate (and making the maintenance of the status quo by assuming co-ownership production agreement much more attractive).

Unfortunately, putting security in place means investing time and money in legal fees up front, and their value often doesn’t show up until years later. This makes security interests easy to overlook and hard to sell internally, especially with today’s market pushing companies to make short-sighted decisions in an effort to simply stay afloat. With all the time and money spent negotiating contractual rights, parties should take extra steps to adequately protect those rights. Businesses are bombarded with tough decisions, but this one should almost always be easy.

Evie Whiting and Ashleigh R. Stanley are members of the entertainment transactions team in the Century City office of O’Melveny & Myers, regularly representing major studios, production companies and investment funds.

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