Author’s Rights When a Publisher Files Bankruptcy
DISCLAIMER: Just to CYA, I feel like putting up a disclaimer. There is much that I don’t know about the Triskelion situation and any discussion regarding the law and the legal issues surrounding copyrights and publisher bankruptcies are general and not to apply to any one particular situation. If you feel like you are in a position where you, personally, need to apply this information to a case, you should seek a lawyer right away. My posting of my thoughts regarding the legal issues surrounding this matter or matters similar should not be construed as specific legal advice nor does it create an attorney/client relationship.
When Triskelion announcement that it would be closing its doors and filing bankruptcy, the issue of authorial rights arose. I did a little primer on copyright law a couple of weeks ago as it related to Simon & Schuster’s rights grab. For ease of reading, I’ll include the pertinent parts here.
Brief summary of copyright protection:
When an artist creates a work of art, this art has a copyright. The copyright is a form of protection that is granted by the U.S. Congress. Essentially, the writer of a book has the right to
- reproduce the work (make a copy)
- prepare derivative works (i.e., a series of books like the Black Dagger Brotherhood series or Eve Dallas series)
- distribute copies to the public by sale or other transfer of ownership, by rental, lease or lending; (sell print rights)
- perform the work (i.e., sell the rights to have a movie or tv show based on it);
Essentially an author engages in a sale of intellectual property which are known as the rights of distribution. The question presented is whether an author’s rights to her copyrighted work (her book) reverts to her upon the filing of bankruptcy.
Background of Bankruptcy Proceeding
The goal of bankruptcy is to allow the debtor to have a fresh start, unencumbered by debts. Understanding the goal of bankruptcy is important because that is how bankruptcy judges interpret the bankruptcy code and apply it to each legal and factual question that is put before them. A Chapter 7 Bankruptcy is a liquidation of assets. A Chapter 11 Bankruptcy is a reorganization. These are the most often referred to bankruptcies although there are technically six different kinds. Each bankruptcy is known by the chapter it occupies in Title 11 of United States Code – the laws that govern the federal bankruptcy system.
An uncomplicated personal Chapter 7 bankruptcy can be opened and closed in 4 months. A more complicated one will take more time. Essentially, a debtor files for bankruptcy and is required to file the following items:
- schedules of assets and liabilities;
- a schedule of current income and expenditures;
- a statement of financial affairs;
- a schedule of executory contracts and unexpired leases; and
- tax returns.
Fed. R. Bankr. P. 1007(b). The above information will include a list of all creditors and the source of all income. Once the petition is filed, all attempts at collection of a debt owed must stop. This is called a “stay.” A creditor cannot initiate or continue lawsuits, telephone calls or even emails that attempt recover a debt such unpaid royalties. If a creditor does not obey the “stay”, the creditor can be held in contempt which might be a fine or even jail time.
A trustee is assigned. Within a couple months of the filing, there is a meeting of the creditors. This is open to the public and held in one of the bankruptcy rooms (generally not a courtroom). The debtor is put under oath and both the trustee and the creditor may ask questions. Generally there are many debtors present. Each one is called up, placed under oath, asked questions and then dismissed. The trustee then gathers up all the assets, liquidates them and determines a discharge plan. The discharge plan repays creditors according to security interest. Those creditors who have a security interest get paid first and then the unsecured creditors follow, in order of priority. If there are no objections to discharge, the case is closed. Once the debts are discharged, any attempt to recover that debt is viewed unfavorably and the creditor can be held in contempt of court (not a good thing).
In many cases, however, there is litigation involved objections to discharge. This is called an Adversary Complaint or Proceeding. It costs $250.00 to file an adversary complaint. Soon after the bankruptcy is filed, a notice is sent to creditors via either mail or electronically, indicating the intent to discharge debts and then giving a deadline by which a creditor can file an objection or complaint. Deadlines in court are hard and fast (generally) and must be met or you can lose your rights entirely. There is one other proceeding for a creditor to take and that is a Relief from Stay. Essentially, the creditor is saying to the trustee and the court that the debt owed is of such a nature that Stay does not apply. It costs $150.00 to file a Motion for Relief from Stay.
Ipso Facto Clauses.
Someone emailed me the following clause that was in one of the Triskelion contracts.
If the Publisher is adjudicated as bankrupt or liquidates its business, this agreement shall thereupon terminate, and all rights granted to the Publisher shall automatically revert to the Author.
Upon such termination, the Author, at his or her option, may purchase any remaining book stock for any print edition (not including electronic downloads or print on demand editions) for one-half of their manufacturing costs. The Author must exercise this option within sixty (60) days of notice by the Publisher
This is known as an Ipso Facto clause and generally held to be invalid by 11 U.S.C. §541(c)(1)(B) and §351(e) . In some situations, depending on whether the creditor has an executory contract, these clauses can be upheld but, for the most part, these clauses have no teeth in a bankruptcy case. See, e.g. In re Southern Pacific Funding Corp., 268 F.3d 712, 716 (9th Cir. 2001).
An executory contract is one where both sides still have to do something. I.e., in a writing situation, if an author “sold” her story to a publisher and has yet to write the book and the publisher has yet to pay an advance, there are still parts of the signed contract that needs to be executed or accomplished. This is known as the Countryman test (based upon a Professor Countryman who first articulated the test). The 9th Circuit (which is the Appellate court that governs the US Bankruptcy court in Arizona) still follows the Countryman test. See In re Robert L. Helms Construction & Development Co., Inc., 139 F.3d 702 (9th Cir. 1998) (quoting the Countryman test with approval).
In 1992, the Bankruptcy Court in the Southern District of New York rejected the Countryman test and determined that a contract would be deemed executory if the debtor had any obligations to fulfill, such as the payment of royalties. Cohen v. Drexel Burnham Lambert Group, Inc. (In re Drexel Burnham Lambert Group, Inc.), 138 B.R. 687, 708 (Bankr. S.D.N.Y. 1992). While some Intellectual Property (IP) attorneys believed that this should be the standard, Drexel has not been widely adopted. See Moore, Entertainment Bankruptcies: The Copyright Act Meets The Bankruptcy Code, 48 Bus. Lawyer 567, 583 (1993).
A contract is not considered to be executory if the author has completed the book (fulfilled her side of the bargain) but is due royalties (the publisher’s side of the bargain). There are two cases which address the nature of an author’s contract with a publisher and both cases say that the contract is not an executory one. In re Stein & Day, Inc., 81 B.R. 263 (Bankr. S.D.N.Y. 1988) and In re Learning Publications, Inc., 94 B.R. 763 (Bankr. M.D. Fla. 1988).
Why is this distinction important? Because section 365(e) says that in the case of executory contracts, a debtor might not actually be in possession of those rights and therefore cannot assign or sell them to someone else. Further, the author can force the debtor to assume or reject a contract. If the debtor assumes it, it must cure all past defaults (pay past unpaid royalties) and prove that it can fulfill future obligations. If the contract is rejected, the author can take her rights and go away. It is also possible, under some provisions of section 365(e), that you could prove that the contract is not assumable and thus the debtor must reject the contract and the author can take her rights and go away.
If the contract is non executory, then you turn to the copyright law which says that a transfer of rights cannot be done without the permission of the licensor (the author). The problem is if the contract contains permission for the publisher to resell those rights, then the author has given permission already and therefore the rights are those to dispose of by the bankruptcy trustee.
The law also provides that the trustee can go back and reclaim transfers (reversion of rights) which were done within 90 days and during a time of insolvency. Or another creditor can apply to have the pre-petition transfer negated.
The question of whether authors could band together is a sticky one because each author has a different interest and could be in direct conflict with another author. I.e., an author who received her rights back 6 months ago but hasn’t been paid royalties for six months might rather see all the contracts assumed and sold so that there was money in the estate. Her interests would be in direct conflict with another author who hasn’t got her rights back yet.
Some links of interest:
The US Bankruptcy Court for the District of Arizona has a proof of claim form online that can be filled out by anyone who is owed money by the debtor. This claim form is one that you can fill out online and then print off and fax to the clerk of court at (602) 682-4004.
- The United States Bankrupcty Court for the District of Arizona
- Pro Se Handout for Adversary Complaints
- Motion for Relief from Automatic Stay
- Proof of claim form which can be faxed to 602-682-4004.
- Help line: 602-682-4900
The Arizona court system has always been light years ahead of its sister courts in terms of technology (they have kiosk divorces). There is alot of information on the site that can be helpful in filling out forms and securing one’s position as a creditor in the bankruptcy.
Finally, let me end with the a note of caution. I read on Angela James’ blog that some Triskelion authors were debating online as to whether they could repackage their work (ie. changing the name) and resell to a different epublisher. Without a clear conclusion as to whether the authors actually have the distribution rights to their work back from Triskelion, any action like that could be viewed as contempt (fine or jail) or fraud (big money damages). I think the author has to ask herself whether she wants to be responsible for possibly embroiling the new publisher in an expensive suit in bankruptcy or whether she wants to gain a reputation for deviousness. That can’t be good for business.
I think an author has three options. She can hire an attorney to explore various ideas such as pursuing the claim that the author’s contract is executory in nature. If the author cannot afford a lawyer, then she can contact the clerk of court for assistance. It might be that an author may decide that the time and expensive to recover her rights aren’t worth it.
I know this all sucks and I hope I don’t sound cold hearted when you read this. That’s not my intention (although if you get to know me, you’ll know that I am a just the facts kind of person). I just know that the legal system is confusing and complicated and I hoped to shed some light on a topic that seems of importance to the romance community. My best to all of you authors in pursuing your dreams.