Prodigy Distribution v. Seven Arts Entertainment

Schism LLC was created to produce a film called Schism. In 2011, Schism took a $3.75 million advance from Seven Arts Entertainment, Inc. (SAE) (defendant), in return for which Schism granted SAE distribution rights for the film. In 2012, Schism signed a mortgage of copyright for SAE as security. In 2013, Peter Hoffman, the manager of Schism, contacted Prodigy Distribution, Inc. (Prodigy) (plaintiff) to obtain postproduction financing for the film. On June 14, 2013, Prodigy and Schism entered into a series of agreements under which Prodigy would loan Schism funds to be repaid by October 31, 2013. Schism granted worldwide distribution rights to Prodigy as security and also granted Prodigy a first ranking and superior interest over all of Schism’s property. SAE was involved in this process and provided notices of assignment and direction to send payments to Schism to help repay the Prodigy loan. Prodigy filed a financing statement in Louisiana on June 18, 2013. On October 1, 2013, SAE entered into its own agreement with Seven Arts Filmed Entertainment Louisiana, Inc. (SAFELA) (defendant), which was 60 percent owned by SAE, granting SAE’s distribution rights to SAFELA and granting it a mortgage of copyright. Schism did not repay the Prodigy loan by October 31, 2013, and, in fact, never repaid it. On December 9, 2013, Schism registered its copyright in the Schism film with the United States Copyright Office. On June 30, 2014, SAE and SAFELA recorded their mortgages of copyright with the Copyright Office. Prodigy filed suit, seeking a declaratory judgment that it was the full owner of all rights in the Schism film. SAE argued that SAE’s and SAFELA’s mortgages had priority. The United States Code then indicated that a later transfer would prevail if it was recorded first, was taken in good faith and for valuable consideration, and without notice of the earlier transfer. SAE and SAFELA argued that because their interests were recorded with the Copyright Office, they should have priority. Prodigy noted that the film had not been copyrighted when it filed its financing statement in Louisiana.