P. Gregory Schwed (PS-0861) Hearing Date: March 7, 2008 at 11:00 a.m.

Barry I. Slotnick (BS-9796)

Jason Blumberg (JB-1033)
LOEB & LOEB LLP
345 Park Avenue
New York, New York 10154-1895
(212) 407-4000

UNITED STATES BANKRUPTCY COURT

SOUTHERN DISTRICT OF NEW YORK
--------------------------------------------------------- X
In re: :
:
TEEVEE TOONS, INC., d/b/a TVT :
Chapter No. 11
RECORDS, :
Case No. 08-10562 (ALG)
:
Debtor, :
:
:
--------------------------------------------------------- X

LIMITED OBJECTION OF THE HARRY FOX

AGENCY TO CASH COLLATERAL MOTION

TO THE HONORABLE ALAN L. GROPPER:

The Harry Fox Agency, Inc. (“HFA”), on behalf of its nearly 35,000 music publisher-

principals, asserts a limited objection to the above-captioned debtor’s (“TVT” or the “Debtor”)

proposed cash collateral order, and states as follows:

Summary of Argument

1. TVT seeks the unrestricted use of cash generated under the proposed cash collateral

order, to continue the operation of its business. However, TVT ignores inconvenient but critical

facts: HFA terminated for cause TVT’s licenses to use copyrighted musical compositions and

TVT never bothered to obtain licenses to use hundreds of other copyrighted musical

compositions in the first place. As a result, TVT has no legal authority to manufacture and

distribute much of its musical catalog, which it is apparently still exploiting as a debtor-in-

NY706194.6
211813-10001
possession. Without valid copyright licenses, TVT cannot continue to manufacture or distribute

recordings of these musical compositions. TVT is therefore implicitly asking this Court to give

its official imprimatur to TVT’s continuing and illegal post-petition copyright infringement. As

shown below, the law prohibits this result, and the cash collateral order must be modified to

protect the rights of the copyright owners.

2. While HFA has no desire to derail TVT’s reorganization or sale efforts, HFA intends

to protect the copyright ownership rights of its principals, the music publishers, and the

songwriters they represent. The Debtor’s first day orders go to great pains to attempt to give

broad protection to recording artists and certain lienors and producers. But TVT makes no

attempt to even address, let alone safeguard, the interests of music publishers and songwriters

who provide the irreplaceable foundation for TVT or any record company. TVT’s

reorganization presumably depends upon its continuing ability to sell CDs in its inventory,

record and press new CDs and otherwise exploit the sound recordings in its catalog. However, to

the extent TVT is infringing copyrights – which it is presumably doing at this very moment –

TVT is essentially operating a renegade business, as illegal its own way as if the Debtor sought

permission to operate an auto “chop shop” with stolen cars.

3. Accordingly, HFA (1) objects to the cash collateral order to the extent it permits the

Debtor’s use of cash for continued infringement of copyrights held by music publishers

represented by HFA; and (2) reserves the right to seek damages and/or injunctive relief under the

Copyright Act with respect to such post-petition infringing use, against both the Debtor and any

non-debtor parties complicit in such willful infringement.

4. This Objection is supported by Declarations of (1) Christos P. Badavas, Vice

President and Senior Counsel of HFA (“Badavas Decl.”), and (2) Barry Slotnick, HFA’s outside

NY706194.6
211813-10001
2
counsel (“Slotnick Decl.”), and documents attached thereto, to which references are made

passim.

Background.

5. HFA is the leading “mechanical” licensing and collection agency in the United States,

representing about 35,000 music publishers with nearly 1.9 million songs in their repertoire.

Licenses that permit the recording and distribution of musical compositions embodied in CDs,

records, tapes and certain digital configurations are commonly referred to as “mechanical”

licenses. Badavas Decl. ¶ 2.

6. HFA is the agent for these thousands of music publishers and serves as a “one stop

shop” for most mechanical licensing in the United States. Id. ¶ 3.

HFA Licenses are Compulsory Licenses, Entitling the

Copyright Owners to the Full Protection of the Copyright Act.

7. The Copyright Act of 1976, 17 U.S.C. § 101 et seq. (the “Copyright Act”), extends

copyright protection to, among other things, musical works and sound recordings. Id. § 102.

The Copyright Act grants a copyright owner the exclusive right to reproduce copyrighted works

“in copies or phonorecords1“ and to “distribute copies or phonorecords of the copyrighted work

to the public by sale.” § 106. This exclusive right is qualified by Section 115 of the Copyright

Act (“Section 115”), which provides that once phonorecords of a non-dramatic musical work

have been publicly distributed in the United States with the copyright owner’s consent, anyone

1
“Phonorecords” are defined in Section 101 of the Copyright Act as:
“[m]aterial objects in which sounds, other than those accompanying a motion picture or other
audiovisual work, are fixed by any method now known or later developed, and from which the
sounds can be perceived, reproduced, or otherwise communicated, either directly or with the aid
of a machine or device. The term phonorecords includes the material object in which the sounds
are first fixed.”

NY706194.6
211813-10001
3
else may obtain a “compulsory” license to make and distribute phonorecords of the work upon

compliance with certain statutory and regulatory requirements. § 115 (a).2

8. Anyone who wishes to obtain a compulsory license must serve a “notice of

intention.” § 115 (b)(1). Failure to give timely notice forecloses the possibility of a compulsory

license and makes actionable the manufacture and distribution of phonorecords, as acts of

copyright infringement. § 115 (b)(2).

9. In addition, a compulsory licensee must render detailed monthly accounting

statements made under oath, accompanied by the payment of royalties. § 115 (c). The copyright

owner is also entitled to an annual statement certified by a public accountant. § 115 (c)(5).

10. If a compulsory licensee fails to render monthly payments and the appropriate

accounting, or in any way fails to comply with the requirements of Section 115, a copyright

owner may give notice of termination to such licensee. If the default is not cured within 30 days

after written notice by the copyright owner, then the statute provides for an automatic

termination of the compulsory license. § 115 (c)(6). Such termination renders the making and/or

distribution of all phonorecords for which the royalty has not been paid, acts of infringement

under section 501 and fully subject to the remedies provided by section 502 though 506 and 509

of the Copyright Act (which can include damages, enhanced statutory fees, injunctive relief and

attorneys’ fees). Id.

2
The compulsory license was first introduced with the passage of the Copyright Act of 1909, when the
recording industry was in its infancy and Congress became concerned that a single piano roll
manufacturer – the Æolian Company – would restrict musical variety and choices by buying up all the
recording rights from popular songwriters. See, e.g.., 2 Melville B. Nimmer and David Nimmer, Nimmer
on Copyright, § 8.04[A], at 8-58.3 (2002). The compulsory license, while ensuring that musical
compositions were readily available to the general public, also was designed to adequately compensate
the creators. See, e.g., H.R. Rep. 2222, 60th Cong., 2d Sess., at 7 (1909) (“The main object [of the
compulsory license] . . . [is to] give to the composer an adequate return for the value of his
composition[.]”).

NY706194.6
211813-10001
4
 11. Licenses issued by HFA on behalf of its principals (“HFA License”) expressly

incorporate the terms set forth in Section 115 and recite that the record company has requested a

license under the compulsory license provision of the Copyright Act. HFA Licenses further

indicate that the user of the copyrighted work shall have all the rights granted to, and all the

obligations imposed on, users of copyrighted works under the Copyright Act, with certain

exceptions. These exceptions, all of which benefit the prospective Licensee, include (1) waiving

the statutory notice requirement and (2) permitting quarterly accounting and payment schedules

in lieu of the monthly schedule prescribed by Section 115. In cases where publishers consent,

the royalty rates may be set below the statutory level. HFA thus affords prospective copyright

licensees numerous practical advantages over the rigorous requirements of Section 115. Id. ¶ 4.

12. Courts have for many years held that HFA Licenses are mere variations of the

compulsory licensing provisions of the Copyright Act and not a private contract. See Joy Music,

Inc. v. Seeco Records, 166 F. Supp. 549, 550 (S.D.N.Y. 1958) (holding that although parties

departed from the exact terms of the Copyright Act by varying the accounting period, lowering

the royalties for several songs and dispensing with notice requirements, “these mutually

convenient variations, were not sufficient to support the contention that theirs was a private

licensing agreement . . .”); Shapiro, Bernstein & Co. v. Gabor, 266 F. Supp. 613, 614 (S.D.N.Y.

1966) (concurring with the Joy decision and stating that “relatively minor variations [such as the

amounts of royalties, time and manner of payment and dispensing with the notice requirement]

were not sufficient to make the agreement a private licensing agreement”).

13. Indeed, HFA Licenses are regularly characterized as “written variations of the

compulsory license.” See, e.g., Peer Int’l Corp. v. Luna Records, Inc., 887 F. Supp. 560

(S.D.N.Y. 1995) (awarding damages under to the Copyright Act, because of defendants’

NY706194.6
211813-10001
5
substantial underpaying of royalties for numerous compositions for which it had obtained

“written variations of the compulsory licenses” from plaintiffs through HFA); Leadsinger, Inc. v.

BMG Music Publ’g., 512 F.3d 522, 525 (9th Cir. 2008) (assuming, in the course of rendering

decision, that HFA Licenses are compulsory licenses under Section 115).

14. Moreover, since HFA Licenses are merely variations of Section 115 compulsory

licenses, the judiciary has consistently held that once infringement has been proved, the

copyright owners are entitled to the full range of statutory remedies afforded by the Copyright

Act. See, e.g., Peer Int’l Corp v. Luna Records, Inc., 887 F. Supp. 560 (S.D.N.Y. 1995)

(awarding enhanced statutory fees, attorneys’ fees and injunctive relief for infringement claimed

under HFA Licenses).

15. It should be noted that those seeking a mechanical license need not go through HFA.

A license applicant is also free to (1) directly negotiate a license from the music publisher; or (2)

obtain a compulsory license under the statutory scheme. Despite these alternatives, most record

companies – like TVT – rely heavily on HFA to obtain mechanical licenses, because of the

above-mentioned numerous practical advantages. Badavas Decl. ¶ 5.

TVT Has No Authority to Use HFA’s Publisher-Principals’ Copyrighted Works.

16. In the past, TVT availed itself of thousands of HFA Licenses, each of which covered

one specific song for inclusion on a specific phonorecord. Id. ¶ 6.

17. In about April 2004, HFA commenced a royalty compliance examination (“RCE”)

of TVT’s books and records. As is customary, HFA used both its in-house auditors and the well-

regarded music industry accounting firm of Prager & Fenton. Id. ¶ 7.

18. The RCE (which, excluding schedules and exhibits, is attached as Exhibit A to the

Badavas Declaration) disclosed an underpayment of royalties by TVT from 1997 to 2002, which,

together with interest, totaled approximately $7.3 million. See “Summary of Findings” (last

NY706194.6
211813-10001
6
page of Ex. A)3 Prager & Fenton noted that: “TVTs failure to comply with our request has

severely limited the scope of our examination.” Badavas Decl. Ex.A at p. 5. Prager & Fenton

further reported that their test procedures of licensed selections “disclosed significant

discrepancies in which sales of licensed selections were either unreported or underreported.” Id.

at p. 7. The RCE also complained about TVTs “slow response to our data requests”; TVT’s non-

responsiveness to certain critical inquiries about royalty discrepancies; and TVT’s refusal to even

set a meeting at which Prager & Fenton could verify certain and apparent inventory

irregularities. Id. at pages 3-4, 9.

19. HFA submitted the RCE report to TVT in approximately January 2007. Despite

several attempts by HFA to solicit TVT’s substantive response and a commitment by TVT’s

CEO to provide one by June 2007, TVT failed to meaningfully comment on the RCE, let alone

address the issues identified by the RCE or pay the improperly withheld royalties. Badavas

Decl. ¶ 9.

20. Accordingly, on November 7, 2007, counsel for HFA sent to TVT a notice stating

that TVT was in default under the terms of its licenses and declaring that, pursuant to section

115(c)(6) of the Copyright Act, unless the defaults were remedied within 30 days from the date

of the notice, the compulsory licenses would be automatically terminated. Badavas Decl. ¶ 10;

Slotnick Decl. ¶ 3. A copy of that notice is annexed to the Slotnick Declaration as Exhibit A (the

“Termination Notice”).

3
Because of TVT’s lack of cooperation “severely limited” Prager & Fenton’s investigation, the RCE was
marked “preliminary and tentative,” and Prager & Fenton had to materially qualify the RCE. Badavas
Decl. Ex.A at p. 5. However, it should also be noted that the RCE only covered the period through
December 31, 2002. HFA has not had the opportunity to examine TVT’s books and records with respect
to the period from January 1, 2003 to date. Based on its experience with respect to, inter alia, the RCE,
HFA expects that any examination of this subsequent period would show additional underreported
royalties. Badavas Decl. ¶ 8.

NY706194.6
211813-10001
7
 21. During the 30 days following the date of the Termination Notice, TVT made no

effort to cure the license defaults. TVT’s principal, Steven Gottlieb, did contact HFA’s counsel

by phone, and asked that HFA withdraw the Termination Notice. That request was denied.

Badavas Decl. ¶ 11; Slotnick Decl. ¶ 4.

22. Accordingly, at the end of the 30-day period (December 7, 2007), all of the HFA

Licenses issued to TVT were automatically terminated under the express terms of the Copyright

Act (Badavas Decl. ¶ 12; Slotnick Decl. ¶ 5):

“Such termination renders either the making or the distribution, or both, of all
phonorecords for which the royalty has not been paid, actionable as acts of
infringement under section 501 and fully subject to the remedies provided by
sections 502 through 506 and 509.” Copyright Act § 115(c)(6).

23. In addition to terminating the existing licenses, the Termination Notice informed

TVT that no further HFA Licenses would be granted in the future. Badavas Decl. ¶ 13; Slotnick

Decl. ¶ 6. HFA, therefore, placed all license requests from TVT on hold. Badavas Decl. ¶ 13.

Subsequently, TVT has neither applied for, nor has HFA granted, any subsequent mechanical

HFA Licenses. Id.

24. After the expiration of the 30 day cure period described above, TVT representatives

finally met with HFA and engaged in some preliminary discussions, and TVT provided a

response to one claim in the RCE. However, TVT continues to manufacture and distribute

phonorecords embodying HFA’s publisher-principals’ copyrighted musical works and generate

revenues from such activities – even though the rights to use the underlying copyrights have

been terminated or were never granted. Id. ¶ 14.

25. Apart from continuing to exploit works for which the licenses were terminated, TVT

is also operating illegally in a different way. Specifically, in light of TVT’s failure to respond to

the RCE, HFA undertook an examination of TVT’s top album releases to determine whether any

NY706194.6
211813-10001
8
contained unlicensed copyrighted works (the “Never Licensed Works”) administered by HFA on

behalf of its publisher-principals. As part of this examination, HFA analyzed “SoundScan,” a

widely used industry service for tracking album sales, and reviewed its own records. In addition,

HFA contacted its publisher-principals to determine if TVT had obtained a license of any Never

Licensed Works directly from the publisher. Id. ¶ 15.

26. In total, HFA identified 259 Never Licensed Works that it believes TVT used

without license authority (whether from HFA or directly from a publisher-principal of HFA).

See schedule annexed to the Badavas Declaration as Exhibit B. Simply put, TVT is using

substantial numbers of musical compositions owned by publishers represented by HFA,

apparently without even bothering to apply for a license at all. The amount of unpaid royalties

on the Never Licensed Works – if TVT had bothered to seek a license – would have amounted to

at least approximately $3,000,000, exclusive of interest, for record sales through December 31,

2006. Id. ¶ 16.4 In addition, TVT’s infringing use of the Never Licensed Works potentially

entitles HFA to a statutory damage award of $150,000 per work (see, infra, note 5)), which,

assuming the use of all of the Never Licensed Works are actionable infringements, would

amount to over $35,000,000.

27. In short, TVT’s copyright infringement of HFA’s publisher-principals’ works is

widespread.

TVT Cannot Operate its Business Illegally in this Chapter 11,

by Continuing to Exploit Unlicensed Musical Compositions

28. It is axiomatic that a debtor-in-possession must operate legally and cannot violate

the law in its post-petition operations. See 28 U.S.C. § 959 (permitting lawsuits against a debtor-

4
By noting the hypothetical royalties on the Never Licensed Works, HFA is by no means waiving its
right to pursue other remedies provided for under the Copyright Act, including enhanced statutory fees for
each infringing act.

NY706194.6
211813-10001
9
in-possession, without leave of the court appointing them “for acts or transactions in carrying on

business” (subsection (a)), and requiring a debtor-in-possession to operate in accordance with

valid laws (subsection (b))); see also In re St. Mary’s Hospital, 86 B.R. 393, 398 (E.D. Pa. 1988)

(“[28 U.S.C. §959] requires a debtor to conform with applicable federal, state and local law in

conducting its business.”); U.S. v. Harris, 177 U.S. 305 (1900) (“it may be conceded that it was

the intention of Congress [in enacting predecessor statute to 28 U.S.C. §959] to subject receivers

of railroad companies . . . to the valid laws and regulations of the State and the United States…”)

29. Courts have also routinely held that debtors-in-possession cannot exploit intellectual

property that they are not authorized to use. See, e.g., In re Television Studio School of New

York, 77 B.R. 411 (Bankr. S.D.N.Y. 1987) (per Judge Brozman) (28 U.S.C. §959(a) permits

lawsuit against post-petition copyright infringement by debtor, despite automatic stay); Laramie

Limited v. Yes! Entertainment Corp., 244 B.R. 56, 60 (D.N.J. 2000) (automatic stay did not

apply to action to enjoin post-petition patent infringement; otherwise, “bankrupt businesses

which operated post-petition could violate patent rights with impunity”); Bambu Sales, Inc. v.

Sultana Crackers, Inc., 683 F. Supp. 899 (E.D.N.Y. 1988) (allowing injunction case to proceed,

despite automatic stay, because bankruptcy laws “‘should not be used as a shield behind which a

debtor may sustain the misappropriation of a trade name to which he is not rightfully entitled’”)

(citations omitted).

30. A debtor’s improper post-petition action also harms the estate, because a tortious act

committed by the debtor gives rise an administrative claim. See, e.g., Reading v. Brown, 391

U.S. 471 (1968) (tort claimants awarded administrative expense priority for damages sustained in

post-petition fire cause by receiver’s negligence.)

NY706194.6
211813-10001
10
 31. To sum up: HFA does not object to the entirety of the cash collateral order, but

rather objects to the limited extent that the cash collateral order suggests that the Debtor, secured

lenders, or other third parties may place in the stream of commerce or otherwise exploit

unlicensed phonorecords. Any such public dissemination or use would constitute a continuing

and illegal infringement of many copyrighted works. Copyright infringement is a tort, as to

which all participants are jointly and severally liable. Screen Gems-Columbia Music, Inc. v.

Metlis & Lebow Corp., 453 F.2d 552, 554 (2d Cir. 1972) (“Copyright infringement is in the

nature of a tort, for which all who participate in the infringement are jointly and severally

liable.”); Sygma Photo News, Inc. v. High Soc. Magazine, Inc., 778 F.2d 89, 92 (2d Cir. 1985)

(“All persons and corporations who participate in, exercise control over, or benefit from the

infringement are jointly and severally liable as copyright infringers.”) All parties are hereby on

notice that HFA and its publisher-principals intend to enforce these rights.5

32. As noted above, HFA has no desire to impede this Chapter 11 case. However, any

relief requested by the Debtor must be shaped in a way that protects the rights of the music

publishers.

33. A substantial portion of the TVT musical catalog is unlicensed and the Debtor’s

proposed use of cash to exploit these unlicensed properties is a continuing copyright

infringement. It is incumbent upon the Debtor and other interested parties to propose solutions

that do not openly and illegally violate the rights of the musical publishers.

5
Section 504(c) of the Copyright Act gives copyright owners the option of seeking actual or statutory
damages. An award of statutory damages for willful infringement may be, at the Court’s discretion, as
much as $150,000 per copyrighted work. Section 505 allows a successful party to recover, with the
Court’s discretion, its costs and attorneys’ fees.

NY706194.6
211813-10001
11
 Request for Waiver of Memorandum of Law

34. This Limited Objection does not raise any novel issues of law. Accordingly, HFA

respectfully requests that the Court waive the requirement of Rule 9013-1(b) of the Local

Bankruptcy Rules for the Southern District of New York that a separate memorandum of law be

submitted.

WHEREFORE, HFA (1) respectfully requests that the cash collateral order be entered

only in a manner that protects the rights of the publishers represented by HFA, and (2) reserves

the right to seek injunctive relief and/or damages (whether as an administrative, constructive

trust or other claim) under the Copyright Act for infringing use, against both the Debtor and any

non-debtor parties complicit in such willful infringement.

Dated: New York, New York

March 6, 2008

LOEB & LOEB LLP

By: /s/ P. Gregory Schwed

P. Gregory Schwed (PS-0861)
Barry I. Slotnick (BS-9796)
Jason Blumberg (JB-1033)
345 Park Avenue
New York, New York 10154-1895
(212) 407-4000

Attorneys for The Harry Fox Agency, Inc.

NY706194.6
211813-10001
12