Has David Bowie Started A New Era Of Celebrity Securitizations

This article discusses the recent securitization of future royalties by rock star David Bowie and the various issues that other celebrities might face in following suit.

The asset-backed securities market (the "ABS market") traditionally has been applied to securitize trade receivables, home mortgages, home equity loans, credit card receivables, vehicle loans and leases, delinquent real estate taxes, non-performing consumer loans, reinsurance and lease payments, long-term bonds, commercial loans and student loans among other assets. It is estimated that the ABS market for 1997 will be between $150 billion and $190 billion ¹. Each year new assets are being securitized adding to the rapid growth in this market. Earlier this year, rock star and entertainer David Bowie completed a securitization reportedly involving the sale of existing publishing and recording rights to as many as 300 songs Bowie has produced in his career. The financing was said to raise $55,000,000 through the issuance of 15 year notes having an average life of approximately 10 years at a fixed interest rate of 7.9%. The financing was reportedly provided by one insurance company and rated A3 by Moody's Investor Services, Inc ². This transaction has heightened the interest of other artists, writers and owners of copyrighted or royalty producing materials to do similar securitizations to raise current capital or as a comprehensive scheme of estate planning. This could include music, movies, plays, books, other forms of literature or the arts and even professional sports. Recent reports indicate that a similar transaction may be under consideration by Crosby, Stills & Nash, The Rolling Stones, Prince, Neil Diamond and Luciano Pavarotti among other entertainers ³. The music performers who may consider a similar securitization would not be limited to rock stars but could also include high-grossing popular, classical or operatic entertainers or conductors. Moreover, highly successful authors, movie producers or TV entertainers might also qualify as potential candidates.

As seen in the Bowie transaction, securitizing all or a portion of his or her work permits an artist, in return for parting with ownership of the assets to a related, yet limited purpose entity ("SPE"), to realize the fair market value of the assets, primarily in cash, at an implicit funding cost that is less than would be the case if the artist had instead borrowed the money from a bank or other financial institution. A typical bank financing would also be for a shorter period and the artist would retain the downside risk if the assets are worth less than expected. This, of course, is a common thread that runs through all types of securitizations and may be particularly attractive to artists as it may allow them to immediately "monetize" the value of their artistic work that they could not otherwise hope to realize for many years. As discussed below, that, in turn, may permit the artist to facilitate various aspects of his or her estate planning. Moreover, what may make securitizations particularly appealing to artists is that this form of capital markets activity may give the artists the cash resources to re-acquire, whether in the SPE or otherwise, artistic works that they have felt themselves forced to sell earlier in their careers. Thus, through parting with ownership of existing assets to the SPE as part of a securitization transaction, an artist, ironically, may be provided with the means to re-acquire, at least in the SPE as a related entity, his or her own original work. The SPE could be wholly-owned by the artist or by family members or a trust established for family members.

Such securitization transactions also are intended to provide investors with the same benefits as investors seek in any other type of securitization: to realize a sufficient return on an asset-based, cash generating investment. Moreover, certain investors may "value" because of its "glitz-appeal", or because of the investors' more subjective determination as to the potential future appreciation, having a claim to a body of artistic work, whether the work consists of songs or television programs, under a different set of assumptions from those that are used to value traditional financial assets that redounds to the benefit of the seller. Because the market is in its infancy, only time will tell, but is not implausible that a Bob Dylan-owned SPE may be able to command lower-priced financing than a seller of auto loan receivables because investors value differently having an interest in a body of work that includes such songs as "Blowing in the Wind". If this should be the case, such renowned artists with a substantial body of work would be able to obtain premium financing or at least benefit from above-average investor interest in their sponsored securitizations.

However, because this securitization market is in its infancy, and because of the nature of the financial assets involved, these securitizations will present both opportunities and issues that differ, both in kind and degree, from the business and legal issues faced in other types of securitizations that artists, investors, rating agencies, investment bankers and their counsel would have to consider in analyzing and structuring this type of transaction. This article discusses a number of those issues.

The basic structure of a transaction could take the following form. The owner (the "Artist") of the royalty producing materials protected by copyright, trademark or patent ("I.P.") would contribute or sell for a purchase price (the "Purchase Price") the I.P. and associated licensing rights (the "Material") to a SPE that is a special purpose bankruptcy remote entity which would in turn issue medium or long-term notes (the "Notes") to one or more investors (the "Investors") for an aggregate principal amount less than the Purchase Price (the difference being part of the over-collateralization required by the Investors or the rating agencies referred to below). The SPE could be owned by the Artist or other family members of the Artist or trusts for their benefit. The Material would be licensed by the SPE to an existing Company in the applicable business (the "Licensee") pursuant to one or more licenses (the "Licenses") to cover each different category of Material. A typical applicable business for a music performer would be a recording company that is already doing business with the performer and wishes to continue to do so on a long-term basis. Similarly, for a writer or an actor an applicable business would be a publishing company or a movie studio, respectively. The Licenses would preferably have certain minimum guaranteed license payments sufficient in aggregate to cover the anticipated expenses of the transaction during a certain minimum initial period of years. The expenses would include principal and interest on the Notes, the expenses of an administrator (the "Administrator") under an Administration Agreement, a servicer (the "Servicer") under a Servicing Agreement and a trustee (the "Trustee") under an indenture (the "Indenture"). Pursuant to the Indenture, the Trustee would take a security interest in all the Material and the related contracts for the benefit of the holders of the Notes. Pursuant to the Licenses the Licensee would be authorized to produce and sell Material such as CD's, records and tapes in the case of a music performer. The Notes may be rated by one or more rating agencies (the "Rating Agencies") for the benefit of reducing the interest rate on the Notes and perhaps to make it an eligible investment for one or more of the Investors such as an insurance company. The structure described above is diagramed in Appendix A.

The Artist would probably not be involved in servicing the Material. The Servicer would likely be a Company in the business that would act on behalf of the SPE.

The Indenture would ordinarily provide a "waterfall" priority in terms of directing the Trustee as to the application of the cash stream of payments. This would determine in what order the Servicer, the Administrator, the Trustee and the Investors get paid. It is often the case, that the servicer is the parent or an affiliate of the SPE and thus might have its servicing fees pushed down the "waterfall". Since the Servicer and the Administrator would most likely not be affiliated with the Artist, each would need to be paid near the top of the waterfall most likely ahead of interest and surely ahead of principal on the Notes and behind the fees and expenses of the Trustee which would have the first order of priority. This order of priority would need to be negotiated among the various parties.

The Indenture would need to provide for reserve or sinking funds to cover contingencies in the case of shortfalls in cash flow. These amounts would have to be sized by the Rating Agencies and negotiated between the Artist and the Investors.

The duties and rights of the Trustee, the Servicer and the Administrator would be set forth in the documentation described above and would be similar to other securitizations.

The risk of the mismatch between royalties earned and principal and interest due under the Notes would be mitigated by the minimum guaranteed payments due under the License if this were a feature of the Transaction. Nevertheless, Investors and the Rating Agencies may not be satisfied with the credit of the Licensee or the amount of the payments to accrue under the Licenses, especially if the guaranteed license payments to be made during the Initial Term do not extend for the full term of the Notes. The longer the tenor of the Notes, the greater the concern about "asset quality". For how many years will the public be buying the Artist's works? One way to overcome this risk is to provide that the SPE has a put (the "Put") of the Material to the Licensee or another credit-worthy party at one or more points after the expiration of the Initial Term. This contractual right would be assigned to the Trustee by the SPE as additional Collateral for the Notes. Pursuant to the Put the Licensee or such other credit-worthy party would become the legal owner of the Material. It may be necessary also to have a more highly rated guarantor that is unrelated to the Artist that would guaranty the payments to be made under the Licenses and the Put. This may be an affiliate such as the parent of the Licensee. It would be best to have guaranteed rentals or royalties such that it would be more certain that sufficient payments would be made to service the Notes. To protect the Licensee, it may be necessary to have an automatic extended term for the Licenses if the minimum periodic payments made by the Licensee have not been recouped from royalties earned on the Material. This allows the Licensee the opportunity to earn a minimum return on its payments under the License. The Licensee or the other obligor of the Put may want to size the principal amount of the Put payment based on some multiple of the most recent three or four years cash flow from the Material. On the other hand, the Investors and the Rating Agencies would want to be comfortable that there would be sufficient cash available to pay off the principal and interest on the Notes depending on the rating to be given to the Transaction.

The longer the term of the Notes, the more difficult it would be for the Investors and the Rating Agencies to become comfortable with the Transaction. Medium to long-term Notes in the range of 5-15 years may be workable. The Notes can be structured as fixed rate or floating rate. It would be easier to do rating analysis with fixed-rate Notes and sell to purchasers such as insurance companies that are willing to lock-in longer term fixed rate income. If floating rate Notes are required by Investors, then the Transaction could be structured to contain some interest rate hedging contract. From a structuring perspective it is preferable to amortize principal and interest in equal semi-annual or quarterly installments over the term of the Transaction . The longer term notes would presumably require equal periodic payments of principal and interest to fully amortize over the term and thus the average life might be 10 years if the final maturity were 15 years. This would be compatible with periodic payments under the Licenses.

The health or life expectancy of the Artist may not be of great concern, since the Material has already been produced and with many stars, such as Elvis Presley and John Lennon, would continue to sell after the death of the Artist. This may eliminate the need of a costly large life insurance policy which might be required if the Material being licensed extended to future production or was dependent upon the Artist's being alive.

As in any securitization, a legal analysis must be made and opinions rendered with respect to true sale, perfection and non-substantive consolidation issues in addition to other customary opinions. The true sale analysis requires that there be only limited recourse back to the Artist such as for breaches of representations and warranties or for dilution. The Artist can't guaranty the payment of the Notes. Also, if the Transaction contains a Put as discussed above, the Artist may wish under certain circumstances to have a right of first refusal to repurchase the Material. This must be carefully structured to apply only in limited circumstances so that the Artist does not effectively have a call on the Material. A right in the Artist to repurchase the Material should not undermine the true sale analysis if it is only available in the case of liquidation of the collateral by the Trustee and then if it equals or exceeds other bids or is equal to or greater than a "fair market value", which would be determined as if the repurchase option were not encumbering the assets.

The legal issues and analysis may be complicated if the Artist is "located" for purposes of the applicable Uniform Commercial Code ("U.C.C.") outside of the United States ⁴. This would be the case if the Transaction were a cross-border transaction with parties in one or more jurisdictions both in and outside of the United States. If copyrights are involved, there would need to be searches and perfection which can be accomplished with the U.S. Copyright Office. If recording rights are involved, one may need to perfect against master records which are often held in "record vaults" and treated as "goods" under the U.C.C. requiring a filing in the applicable state either centrally and/or locally depending on the jurisdiction ⁵.

Typical legal documentation to be negotiated could include the following among others:

1. Indenture
2. Servicing Agreement
3. Administration Agreement
4. Guaranty
5. One or more Purchase Agreements covering the Material pursuant to which the Artist may have to repurchase some of the Material from third parties.
6. Purchase and Sale Agreement covering the Material by which the Artist conveys the Material to the SPE.
7. Corporate or Partnership constitutive documents for the SPE and perhaps other parties.
8. Licenses between the SPE as licensor and the Licensee.
9. Legal opinions on behalf of the various parties and from counsel in the various jurisdictions.
10. U.C.C. Financing Statements or similar filings in other jurisdictions.
11. Notes.
12. Rule 144A Representation Letter.
13. Certificate of Authentication by Trustee of the Notes.
14. Filings with the Copyright Office covering the Material.

Other legal issues relating to rejection of executory contacts and insolvency must be analyzed since most of the contracts including the Licenses and the Put would be executory in nature. In a proceeding in a United States Bankruptcy Court, an "executory contract" could be rejected (i.e., repudiated) by a bankruptcy trustee or a debtor-in-possession in a reorganization proceeding. The Licenses and the Put arguably would be executory contracts since there is future performance required on the part of both parties to the contract, which would generally satisfy the traditional test for whether a contract is executory for bankruptcy purposes. The result of a rejection would be a claim for damages which might well be less than the anticipated aggregate payments remaining to be due under the Licenses. This is not an issue in a typical securitization program where existing receivables are being sold and there is no "executory contract" that could be rejected unless the value of the financial assets involved similarly can be affected by whether the originator in the future performs under the contract giving rise to the receivables.

The application of these Bankruptcy Code provisions raises certain issues when hypothetically applied to the type of contracts likely to be involved in these types of securitizations.

First, the transactional structure is intended to ameliorate the possible adverse consequences to the investors of a bankruptcy of a Licensee. The investors, as the primary creditors of the SPE with a security interest in the underlying intellectual property, would be the primary beneficiaries of any re-licensing of the intellectual property caused by the bankruptcy of, or any other termination of a License by, any Licensee.

Second, with respect to the bankruptcy of an artist, any contract with the artist for future services is not likely to be able to be enforced against the artist's will if he or she should subsequently become a bankruptcy debtor ⁶. This underscores the significance of securitizing an existing body of work, as opposed to a recording contract for future, as yet unproduced, record albums. In the former case, securitized assets are pre-existing assets that are not executory in nature and have been transferred by the artist to the SPE in a transaction that is intended to be a "true sale". In the latter case, the artist, even though he or she had transferred the payment rights relating to the contract to the SPE in a "true sale", the artist necessarily retains the obligation to perform under such contract and, as such, could essentially render the asset valueless by declaring bankruptcy and "rejecting" the recording contract. Such a rejection would free the artist from any enforceable obligation to complete his or her remaining obligations under the contract. Indeed, as the revenues stream from that contract had already been sold as part of an existing transaction, the artist would have every economic incentive to do just that and enter into another contract with the same or different record label.

Third, also with respect to the possible bankruptcy of a licensor, there are special provisions that limit the licensor's ability to reject intellectual property licenses in bankruptcy. Specifically, Section 365(n) of the Bankruptcy Code permits the licensee to retain its rights under the license as such rights existed immediately before the commencement of the licensor's bankruptcy even if the licensor should reject the licensee in its subsequent bankruptcy case ⁷. Thus, Section 365(n) of the Bankruptcy Code is likely to add an additional benefit to this type of securitization transaction. The rights that a licensee enjoys under Section 365(n) of the Bankruptcy Code arguably shelter the licensee from any material risk of disruption in its right to use the intellectual property even in the event of the bankruptcy of the SPE. Theoretically, this should increase the confidence in licensees that they will be able to enjoy the benefit of their bargain notwithstanding any licensor bankruptcy and should thus translate into more certain revenue streams for the investors.

Finally, to the extent that the investors are relying on a Put, the "rejection" risk can be addressed through traditional collateralization or credit enhancement means. For example, the Put provider could be required to grant a security interest in its own property or the credit support of a third party (such as a letter of credit from an acceptable financial institution) to secure its obligations under the Put.

If this is an international transaction with obligors in various countries, then insolvency and perfection advice must be obtained and opinions rendered on this issue under the laws of each applicable jurisdiction. An analysis must be made of the residence, domicile and citizenship of the Artist and the other parties to the Transaction.

Also in an international transaction, an analysis would have to be made of any required tax payments or tax withholding to be made on the various payments. Any such taxes would, of course, reduce amounts available for the Transaction. In certain circumstances, an international Artist may be based in or relocate to a tax-haven. While being in such a jurisdiction could minimize the tax risk to the Artist, location of the Artist in such a jurisdiction could subject the Transaction to withholding taxes that would not otherwise apply.

While the increased production and value of intellectual assets has sparked new interest in using these assets for financing, Investors may be hesitant to lend money on the security of intellectual property due to the unique challenges the property presents. The use of intellectual property as a source of collateral security requires detailed due diligence to determine ownership rights and dual filing in order to perfect the security interest .

As part of due diligence, searches should be made to confirm that title to the Material is held by the Artist or other transferring party free and clear of security interests or other liens, etc. This confirmation may be much more difficult than a typical U.C.C. search. Conducting a search of the Patent and Trademark Office records is a reasonably reliable method for determining ownership of patents and registered trademarks. It must be noted, however, that there is a statutory three-month grace period for recording competing assignments for patents or trademarks. Likewise, the Copyright Act provides a one month grace period for recording. As a result, the search results will not reveal an assignment of ownership that was filed in the grace period and that will have priority. In order to safeguard against missing a priority filing, an Investor may wish to delay the release of funds until the federal statutory grace period for recording assignments has expired or be comfortable with the recourse to the Artist.

While patent and trademark searches are a good source of most ownership information, registration searches are less helpful when copyrights and common law trademarks are involved. Although copyrights may be federally registered and assignments recorded, registration and recordation is not required to trigger copyright protection. Since registration and recordation is optional, the Copyright Office records are a less dependable source of ownership information. Even if the copyright were registered, additional due diligence may be required to determine if the registration remains valid. For instance, if the copyrighted work were published before January 1, 1978 it may be subject to the renewal requirements of the previous Copyright Act of 1909. Another concern is a provision in the Copyright Act which grants authors or the author's statutory successors an inalienable and unwaivable right to terminate transfers or licenses of copyright after a set number of years, usually between thirty-six and forty years after the grant of copyright. Given the vulnerabilities of relying on copyright registration records, an alternative method of ascertaining the copyright owner is to trace the payment of royalties generated by the copyrighted work. A Transaction will be possible if a Artist owns, or can repurchase, the copyright and licensing rights in the Material and there is a Guarantor who can effectively back-up the representations as to ownership.

The risks are further reduced if the Artist has a long track record of successful sales and royalty earning history from the applicable Material. Candidates for this type of financing must have proven staying power to give the Investors the necessary comfort.

Another unique factor to consider when assessing ownership of intellectual property is the numerous rights encompassed in the Material. Copyright, for example, grants a bundle of rights, including: the rights to reproduce the work, to distribute the work, and to create derivatives of the work. These rights may be transferred and owned individually or as a whole. Therefore, one copyrighted work may have different owners depending on which right is involved. There may also be joint owners in a work based on shared authorship. Each joint owner has an interest in the Material and the right to transfer rights in the work.

Finally, if the Artist or the material is subject to a jurisdiction other than the United States, the controlling law may be dictated by certain treaties. Among the treaties to which the United States is a party are: the Berne Convention; The Universal Copyright Convention; the Paris Convention; the Patent Cooperation Treaty; the European Patent Treaty and the Agreement on Trade-Related Aspects of Intellectual Property Rights, which is a component of GATT.

Late last year an agreement was reached by representatives of 160 countries to extend "protections for the creators of art, software and music into cyberspace" ⁸. Care must be taken to properly draft sale and licensing agreements to extend over long-term and to cover innovations such as cyberspace which had not been an area of concern a few years ago. Under the auspices of the World Intellectual Property Organization, a United Nations body, current international copyright laws protecting recorded music would be specified to include computer-generated copies of recordings. The Recording Industry Association of America estimates that illegal copying costs the $40 billion American music industry as much as $2 billion each year in lost revenues. This concern must be factored in analyzing the return on the Material ⁹.

Part of Investors' resistance to security interests in intellectual property may be the confusion surrounding the proper place to file a security interest. Article 9 of the U.C.C. provides that security interests in general intangibles, which include patents, trademarks and copyrights, may be perfected by filing a financial statement with the proper state authorities ¹⁰. The U.C.C., however, is preempted when a federal statute provides for a national system of registration or specifies a place of filing different from that designated by Article 9 of the U.C.C. ¹¹.

While the federal statutes governing patents, copyrights and trademark generally provide for registration and recordation, they do not expressly provide a structure for perfecting security interests. The court decisions dealing with the different statutes have generally found the federal statutes control security interests in copyrights and patents, while Article 9 controls security interests in trademarks ¹². Given that the case law interpreting the proper place of filing is not clearly defined, coupled with the fact that certain ancillary "state" rights may be involved, a security interest should be filed at both the state and federal levels to protect all the interests of the secured creditor ¹³.

If the Artist is an individual, there may be an estate planning aspect to the Transaction that does not exist in the typical corporate securitization. The Artist may wish to create trusts and have the trusts or family members own the SPE as part of an overall estate plan. Recourse to the Artist for breaches of representations and warranties or for dilution etc. may be more difficult to collect if the Purchase Price has been put beyond the reach of the Artist's creditors. This is of special concern because of the extended term of the securitization. The other parties to the Transaction must be comfortable that the Artist will be able to perform its repurchase obligations for "bad collateral".

The Artist may want to retain some call on the assets that would prevent them from being liquidated at a "below market" fire sale. This raises "true sale" concerns but may potentially be resolved as discussed earlier under Paragraph III describing Legal Issues.

Often in situations of this type, the Material may be owned in part by others including the current or former agent or manager of the Artist or co-authors. In such a situation, which is often the case, the Artist may have to use part of the Purchase Price to repurchase this portion of the Material immediately prior to the closing of the Transaction. This further complicates the legal analysis in terms of perfection and non-substantive consolidation issues.

The Artist may also lose control over the way in which the Material is distributed and sold. One example would be the inclusion of recording material with other artists in a compilation of period music. Also, if not contractually limited by the License, recording material might be used in advertising in a manner unacceptable to the Artist.

An article in Business Week ¹⁴ reported that following the David Bowie securitization a poll was commissioned as to which celebrity would be the best investment. The following were the reported results of that poll:

National survey of 1,000 Americans.Remaining 6% didn't know or declined to answer.

However, this survey may be of little use in helping to predict the demand for possible future Bowie-like securitizations for several reasons. First, the survey does not seem to have defined what form the "investment" would take and, consequently, it is not self-evident that those polled had securitizations in mind or, if they had the Bowie transaction in mind, they understood what securitizations entail. For example, while many Americans no doubt would be interested in "investing" in Michael Jordan in terms of purchasing a portion of his earnings from any of his future endeavors, he is not generally understood to have an existing group of assets that can be securitized such as Bowie's 300 songs. The same can be said of Tiger Woods. Second, while perhaps it represents an interesting alternative way to measure the popularity of certain celebrities, the survey does not appear to have been taken of the individuals or institutions who are most likely to invest in securitization transactions. As indicated, the notes issued in the Bowie transaction were purchased by a single insurance company. Third, the survey, of course, is unscientific in that those questioned presumably were not fully knowledgeable about the past and possible future market for such artist's work (including the past and possible revenue streams produced from such work).

Thus, such surveys may well be used as part of the process in determining the "staying power" of an artist's work, but are unlikely to be determinative in identifying future Bowie-type securitizations. Instead, securitization professionals who become knowledgeable about a particular artist or a particular body of artistic work and the market therefor and who are further able to adapt and apply conventional financial tools to that knowledge to determine the value and cash flow capability of such work are the ones who are likely to define and participate in the securitization market for that artist's work or that body of work.

It has also been reported that investment bankers are talking with executives in Silicon Valley with the idea of securitizing high-tech patents and licensing royalties ¹⁵. Such new technology does not have the track record of a performer such as David Bowie. The reference in this Article to "Artist" would be replaced by a business entity as the seller of the intellectual property. It has also been reported that in 1996 Citibank placed $1 billion in commercial paper backed by Twentieth Century Fox's future movie revenues ¹⁶. In June of 1997, Citibank also structured a transaction in excess of $1 billion backed by future movie revenues of Universal Studios.

There is heightened interest in the music and entertainment world and among securitization professionals resulting from the sale of the so-called "Bowie Bonds" and a recent article ties in EMI Music in London as a licensee of Bowie prior recordings and catalogue ¹⁷. Certainly, other celebrities will want to investigate this exciting new opportunity.

¹ 1997: New Assets, New Rules, ASSET SALES REP., Jan. 13, 1997, at 9.

² Simon Hamer, Others Queue Up to Launch Asset Backs, GLOBAL PRIVATE BANKING, Apr. 14, 1997, at 12; Smart Bonds: David Bowie's Brokers Set Their Sights on Silicon Valley's Intellectual Property, SAN FRANCISCO EXAMINER, Mar. 25, 1997, at D-1; Watch That Man from the Pru, CORP. MONEY, Feb. 19, 1997; Bowie Ch-Ch-Changes the Market, CFO: THE MAG. FOR SENIOR FINANCIAL EXECUTIVES, Apr. 1997, at 20.

³ Crosby, Stills & Nash to Securitize Music Royalties, CORP. FINANCING WK., Mar. 17, 1997, at 4. See also Bonding with the Music Biz, VARIETY, Oct. 6-13, 1997 at 32; Bergen, A Star Turn Banking on the Future, CHI. TRIB., Dec. 5, 1997, §3, at 1.

⁴ U.C.C. § 9-103 (3).

⁵ U.C.C. § 9-302.

⁶ See 11 U.S.C. § 365(c)(1) (1994). See also In re Taylor, 103 B.R. 511 (D. N.J. 1989) (rejection of personal service contract in the form of a recording contract otherwise permitted as being in best interests of estate).

⁷ 11 U.S.C. §365 (n) (1994). Specifically, the licensee under such rejected contract may elect either (i) to treat such contract as terminated by such rejection if such rejection constitutes a breach that would otherwise permit termination of such contract by virtue of its own terms, applicable nonbankruptcy law, or an agreement made by the licensee with another entity or (ii) to retain its rights under such contract or under such related agreement to such intellectual property as such rights existed immediately before the petition date for the duration of such contract and any renewal period contained in that contract. If the licensee elects to retain its rights under such contract, the licensee is entitled to exercise such rights, but the licensee is required to make all royalty payments due under such contract for the duration of such contract and for any period for which the licensee extends such contract pursuant to applicable nonbankruptcy law. Also, as indicated, this right is limited to the intellectual property as it existed as of the date of the commencement of the bankruptcy case. Thus, if the intellectual property, such as computer software, is capable of being transformed after the commencement of such a bankruptcy case, the licensee is not likely to have a right to subsequent iterations of the intellectual property pursuant to Section 365(n) of the Bankruptcy Code.

⁸ Seth Schiesel, Global Agreement Reached to Widen Law on Copyright, N.Y. TIMES, Dec. 21, 1996, at A1.

⁹ Id. at A22.

¹⁰ U.C.C. § 9-102(1)(a).

¹¹ U.C.C. § 9-104(a).

¹² In re Peregrine Entertainment, Ltd., 116 B.R. 194 (C.D. Cal. 1990) (Copyright filing scheme preempts the U.C.C. with regard to perfection and priority of security interests. The court suggested that this reasoning also applies to patents); In re Roman Cleanser Co.. 43 B.R. 940 (Bankr. E.D. Mich. 1984) aff'd, 802 F.2d 207 (6th Cir. 1986) (Perfection of security interest in trademark effected by filing under Article 9).

¹³ For a detailed article discussing the interplay between federal and state laws regarding the filing of security interests , see Security Interests in Intellectual Property, in LICENSING AND OTHER INTELLECTUAL PROPERTY TRANSACTIONS, (American Conference Institute, March 6-7, 1997).

¹⁴ Fame and Fortune, BUS. WK., Mar. 24, 1997, at 6.

¹⁵ Will Silicon Valley Yield ABS Fruit?, ASSET SALES REP., Mar. 31, 1997, at 1.

¹⁶ Kim Clark, How Wall Street Can Securitize Anything: On the Frontier of Creative Finance, FORTUNE, Apr. 28, 1997, at 50.

¹⁷ Alice Rawsthorn, EMI in £18m Bowie Deal, FIN. TIMES, May 21, 1997, at 31.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.