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Producers Beware: What happens when your movie distributor files bankruptcy? Part 2.

In my blog article on August 9, I focused on some of the issues that licensors need to be aware of as they license IP rights, including the concept of allowing distributors to include “damages only” clauses in the distribution agreements.

The second issue that often arises in distribution agreements related to DVD distribution rights is that the producer/licensor grants to the distributor/licensee the right to distribute a movie in various media, including, but not limited to DVD. The distributor will often pay for the cost of manufacturing the DVDs and then have the first right to recover the cost of manufacturing out of the first sales of those DVDs.  Sometimes the producer/licensor will pay for the cost of manufacturing the DVDs.  In either instance, however what happens when a distributor files a bankruptcy and holds on to the DVDs, the cost for which may have already been recouped through prior sales or which have actually been paid for by the producer.

The “automatic stay” which comes into being on the filing of a bankruptcy by the distributor, precludes the producer from immediately recovering those DVDs, and a significant question arises whether or not those DVDs become “property of the distributor’s bankruptcy estate”.

The licensor can take steps to ensure its recovery rights if the sale of the DVD’s is structured as a “sale or return” also know as a consignment sale under Commercial Code 2326, in which event the producer/licensor is required to comply with the rules for a consignment sale, including the filing of a UCC-1 statement; or alternatively whether or not the agreement is written such a way so as to keep the rights to those DVDs out of the distributor’s bankruptcy estate.

Producer/licensors need to be careful how they draft these provisions so that they avoid the trap of their inventory being tied up while a distributor/licensee works its way through its bankruptcy case.