By Jon Tandler and Ed Ramey1
Note: This article originally was published in the December 2010 RWR.
Introduction
Who would ever think that you as an author would need to be concerned with your book publisher going into bankruptcy? Consider the questions you might be pondering.
How will my publisher’s bankruptcy impact me? Will I get my royalties? Will I get my statements? How will my publisher pay to print, much less promote, my book? What about my “rights”—can I get them back? Am I bound by first option, no competitive works or other obligations I have under my contract? What happens to my contract? Can I move my book to a new publisher? Do I need a lawyer?
The answers to these questions will vary with the specific facts and circumstances of a particular bankruptcy, including the decisions and actions of the publisher or (as we sometimes say here) “publisher debtor.” In this article, we discuss the general legal basics of a publisher’s bankruptcy and how they could impact you, an author. This article is intended to be neutral—we did not write it with any bent or view on behalf of either authors or publishers.
In this article, we discuss seven areas we believe are of most immediate relevance to authors:
I. Basic bankruptcy terminology and process;
II.
Ipso facto (bankruptcy termination) provisions in publishing agreements;
III. "Automatic stays" and their impact on royalty claims;
IV. Legal claims against the publisher debtor;
V. Bankruptcy’s impact on publishing agreements and an author’s obligations thereunder;
VI. Preference and other claims by a publisher debtor; and
VII. Author diligence on prospective publishers.
Summary
A provision in a publishing agreement which permits an author to terminate the agreement in the event of the publisher’s bankruptcy, known as an
ipso facto clause, is generally
unenforceable and is of little benefit to the author. See Section II below.
If a publisher commences bankruptcy proceedings, legal claims for royalties and/or contract breach (by reason of the author not timely receiving royalty statements or payments, including an advance against royalties, or for the publisher’s breach of other obligations) will generally be “stayed,” and, in most cases, may only be pursued in the Bankruptcy Court. See Section III below.
The terms of a publishing agreement and the publisher’s and author’s rights and obligations under it will generally be honored and enforced in a Bankruptcy Court in the same manner and by the same legal principles as those which apply outside of bankruptcy. The ability of an author to obtain full payment of earned royalties, however, may vary significantly from case to case, and even from author to author in the same publisher bankruptcy. See Sections IV and V below.
An author who receives payments or settlements on a royalty claim outside the publisher’s regular course and schedule, within 90 days prior to a publisher commencing bankruptcy, risks the Bankruptcy Court or bankruptcy Trustee claiming that such payments are a recoverable “preference” requiring the author to return such payments to the Court. See Section VI below.
An author should do “due diligence” on a prospective publisher to obtain a good understanding of the publisher’s financial processes and ability to honor publishing and royalty reporting and payment obligations. See Section VII below.
I. Basic Bankruptcy Terminology and Process.
Below are some important and often-used bankruptcy terms and information about bankruptcy process.
Bankruptcy Terminology
(a) A
“Debtor” is a person or entity which files a bankruptcy petition, or against whom a bankruptcy petition is filed, to commence bankruptcy proceedings; in this article the “debtor” is presumed to be a book publisher and is referred to in this article as either the “publisher” or “publisher debtor;”
(b) A
“Chapter 7” is a bankruptcy case brought by either an individual or a company under Chapter 7 of the U.S. Bankruptcy Code; this generally involves appointing a Trustee to assemble and liquidate the debtor’s assets (except for “exempt” assets for individuals) and pay the proceeds to the debtor’s creditors; this is the traditional bankruptcy liquidation by which an individual receives a “discharge” of debts and a company debtor goes out of business;
(c) A
“Chapter 11” is a bankruptcy case, usually brought by a company under Chapter 11 of the U.S. Bankruptcy Code; this generally involves a business’ effort to “reorganize” or liquidate itself under a creditor-approved Plan of Reorganization (or Liquidating Plan). During a Chapter 11 case, the debtor’s business usually continues to operate under existing management (in this case, the debtor is known as the “Debtor-in-Possession”), who is subject to removal for fraud, dishonesty, incompetence or gross mismanagement;
(d) A bankruptcy
“Trustee” is an independent bankruptcy specialist, usually an attorney, who is appointed by the Bankruptcy Court to assemble and liquidate the debtor’s assets in a Chapter 7 or take over operation of a business for reorganization or liquidation in a Chapter 11 (if the Debtor-in Possession is removed from control by the Court); and
(e) A
“Creditors Committee” is appointed by the Bankruptcy Court, principally in Chapter 11 cases, to represent the interests of unsecured creditors; this committee assumes a fiduciary responsibility to the unsecured creditors—thus its members are limited in actions they might take that would be adverse to fellow creditors; the members are modestly compensated (if at all) through the bankruptcy estate and generally consist of unsecured creditors with large claims.
Bankruptcy Process
(a) Bankruptcy proceedings are specialized and accelerated compared to other judicial processes. A premium is placed on seeking to resolve disputes quickly without arguing over or litigating every matter. Most active business bankruptcy attorneys are specialists who appear before and know the local courts well; most bankruptcy judges are also experienced and business-savvy.
(b) A publisher’s bankruptcy will generally be filed in the United States Bankruptcy Court where the publisher’s principal office is located or in its state of organization—it could be either. Bankruptcy law is Federal (U.S.) law and is generally uniform in all jurisdictions; however, there can be variations between the courts as to how they treat certain issues.
(c) Nothing will be done in the Bankruptcy Court that materially impacts an author’s interests without advising the author in writing via regular mail of the action proposed to be taken and providing the author with an opportunity to object. Authors should read all mail from the Bankruptcy Court and process and act on it (to the extent any action is required on the part of the author) on a timely basis. Some mail may simply be notices of procedural items.
(d) It is frequently useful to communicate with the debtor or its counsel prior to seeking relief from the Bankruptcy Court, as they are often amenable to working out a resolution to problems and claims.
(e) Trade associations representing the interests of several creditors and other parties dealing with a debtor in bankruptcy can be helpful and productive; if the Court or Trustee can address the claims or issues of a group’s members as a whole, they would likely view this as increasing efficiencies to move the case forward.
II. Ipso Facto Clauses in Publishing Agreements.
Some publishing agreements permit the author to terminate and take his or her rights back solely because of the publisher’s financial condition, insolvency, appointment of a receiver, or commencement of a bankruptcy case. These provisions, often referred to as ipso facto clauses, are inoperative and unenforceable in the context of a bankruptcy case. Here is an example:
BANKRUPTCY. If (i) a petition in bankruptcy is filed by the Publisher, or (ii) a petition in bankruptcy is filed against the Publisher and such petition is finally sustained, or (iii) a petition for arrangement is filed by the Publisher or a petition for reorganization is filed by or against the Publisher, and an order is entered directing the liquidation of the Publisher as in bankruptcy, or (iv) the Publisher makes an assignment for the benefit of creditors, or (v) the Publisher liquidates its business for any cause whatever, the Author may terminate this agreement by written notice and thereupon all rights granted by him hereunder shall revert to him.
Ipso facto clauses, by their nature, would penalize a debtor for filing a bankruptcy petition and undermine the effectiveness of the bankruptcy process; they are therefore deemed to be against public policy and cannot be enforced in a bankruptcy case.
Thus, if you are an author with a publishing agreement containing a clause like this, even if your publisher goes into bankruptcy, this will be deemed to be unenforceable and you cannot rely on it to terminate your publishing agreement or to get your publishing rights back.
III. The Automatic Stay.
Whether a Chapter 7 or Chapter 11 proceeding, the filing of a bankruptcy petition by a publisher debtor essentially stays (stops, prohibits and enjoins) all actions and proceedings against the publisher and enforcement of judgments against the publisher. The petition also prohibits enforcing security interests or liens and any act (including collection or demand letters or phone calls) to collect or recover upon a pre-bankruptcy claim against the publisher debtor.
Thus, as an author, if you have not been paid royalties by the publisher, although you will have a claim against the bankruptcy estate for your unpaid funds (see Section IV below) that will be your sole remedy for recovery—if the publisher goes into bankruptcy, you will not be able to go to a separate court to obtain a judgment for monies owed to you.
Under very limited circumstances, a claimant, including an author, may ask the Bankruptcy Court to grant “relief” from the automatic stay; this might be where the author has litigation pending against the publisher in another court (for example, a copyright or rights issue that would likely be in Federal District Court) and wishes to pursue that litigation to a determination. Enforcement and collection of a monetary judgment or other relief, however, would have to be done in the Bankruptcy Court.
As an author, if you have a pending claim against a publisher that you want to continue to pursue and that publisher goes into Chapter 7 or Chapter 11 proceedings, consult with qualified legal counsel to ascertain whether you can still maintain your claim. In our view, when in doubt, go to the Bankruptcy Court and ask for relief from the stay—a proceeding for relief from the stay generally takes 30–60 days.
IV. Asserting Royalty and Other Claims Against a Publisher Debtor; Filing Proofs of Claim.
Because of the stay of claims described in Section III above, bankruptcy substitutes a different process for asserting claims against a debtor publisher.
An author’s claims for unpaid royalties must generally be asserted by the author (or his or her representative) by filing a “Proof of Claim” on a standard form in the Bankruptcy Court. Although in some limited circumstances filing a Proof of Claim is not required, in our view it is a good idea to file one; in doing so, the author asserting a claim for past due royalties is a general unsecured creditor of the publisher. If a debtor or Trustee contests the amount of an asserted claim, a hearing can be conducted and a final determination entered (usually in the Bankruptcy Court).
As an author who is owed an advance or royalties, if your publisher goes into bankruptcy, you will receive a notice in the mail of the deadline for filing Proofs of Claim, together with the standard form and instructions for completing and filing it. Do not miss this deadline(!) as that could result in your entire claim becoming “disallowed” and uncollectible.
As approved by a Chapter 7 Trustee or as provided in a Chapter 11 Plan, distributions of the debtor publisher’s available funds to pay allowed unsecured claims must be made in a nondiscriminatory, pro rata fashion.
As an author, be aware that these payments, especially as to royalties earned and sums (if any) being held by the publisher as a “reserve for returns,” most typically come to a lot less than the actual amounts owed to the claimants because of the debtor‘s limited cash. There are situations, however, where an author may be able to obtain payment of the full amount of his or her claim—depending on whether or not the publishing agreement is deemed “executory” and whether or not the publisher wants to “assume” or “reject” it. See Section V below.
V. Bankruptcy’s Impact on Publishing Agreements.
In general, in the event of a publisher’s bankruptcy, all of the contractual rights and ongoing obligations of both publisher and author will remain in effect and enforceable according to the same legal principles as existed prior to the publisher’s bankruptcy. This includes royalty obligations as discussed in Section IV above, as well as reversion rights and other rights and obligations as set forth in the publishing agreement.
Thus, if your publisher goes into bankruptcy, you should plan and count on contractual provisions pertaining to out of print and reversion, negative covenants such as no competitive works or first option clauses, subsidiary rights licenses that the publisher has entered into in accordance with your grant of rights to it, and other contractual provisions and arrangements, all remaining in full force and effect and binding on the parties.
In the event you, as an author, have questions about the status of those rights, you should consult a bankruptcy attorney and, if necessary, request a determination by the Bankruptcy Court as to the enforceability of these obligations.
In some situations, a publishing agreement may be deemed by a Bankruptcy Court to be “executory”—this means that material affirmative obligations remain to be performed by both publisher and author (as opposed to just the publisher). Whether a publishing agreement is deemed to be “executory” will depend on the particular contract and the status of each party’s performance obligations under it as they exist when the publisher files its bankruptcy petition. Different Bankruptcy Courts, as well as different publisher debtors and creditors committees, may reach different conclusions as to whether a particular publishing agreement will be deemed to be “executory” or “non-executory” in a bankruptcy case. The Bankruptcy Court has the authority to agree or disagree with a publisher’s conclusion that a publishing agreement is executory; the final determination is made by the court.
If a publishing agreement is ultimately deemed to be “executory” by the Bankruptcy Court, the publisher will generally not be permitted to retain ongoing rights under the agreement, or insist on further performance by the author or assign or sell the agreement to another publisher, unless it “assumes” the agreement. To “assume” an executory agreement, the publisher is required to fully cure any existing defaults (such as past-due advance or royalty obligations) and continue to meet all of its obligations to the author in a full and timely manner going forward.
For example, where a publisher has not paid an advance against royalties when due, and the author has not delivered his or her manuscript due to the publisher, given the important obligations yet to be performed by both parties this contract would properly be viewed and deemed to be executory; the only way the publisher could insist on delivery of the manuscript and sue the author for breach if the manuscript is not delivered, would be for the publisher to assume the agreement, pay the due advance and otherwise perform all of its obligations.
If an author is evaluating whether or not to provide a manuscript when the author believes that the publisher may commence bankruptcy proceedings and the publisher has not paid the author the advance when due, the author should carefully consider the matter before stopping the author’s performance. If the author has a manuscript delivery obligation pre-bankruptcy, absent some circumstance which we cannot predict today, we would counsel the author to deliver the manuscript on a timely basis (hence not commit breach, or “anticipatory breach”) and then work through the publisher’s performance [or not] via the bankruptcy proceedings and, if warranted, a court-blessed reversion of rights.
If the publisher does not “assume” an agreement that is deemed “executory,” it will be deemed to have “rejected” the agreement—which means that it will be treated for legal purposes as if the publisher breached the agreement when the publisher files its bankruptcy petition. A “rejected” executory agreement would, in most cases, leave the author with a (perhaps significantly) reduced recovery of past due royalties, and would leave the publisher with minimal, if any, rights to the book going forward.
For clarity, in the case of a publisher’s rejection of an executory contract (i) the publisher cannot enforce the author’s performance of the author’s obligations, (ii) the publisher has no ability to sell or assign the agreement, and (iii) for practical purposes this would suggest that the publisher is not going forward with the author’s book. Thus, essentially the publisher will be either dropping the contract and its rights thereunder, either under express reversionary language (which the author could enforce), or the author could go to the Bankruptcy Court and request a release of the author’s rights. Should the publisher act in such a manner that would permit or foster a reversion that is not automatic, the author would need to act proactively in the bankruptcy proceedings to confirm the reversion, so that the title had a clean bill of health (be free of any adverse claims), before being sold to a new publisher.
If a publishing agreement is deemed to be “non-executory,” the publisher will not be permitted to “assume” it. In that case, the author will likely be treated as a general unsecured creditor with prospects for only a reduced recovery of royalties—past due, present and future (as discussed in Section IV), with the publishing rights remaining with the publisher subject to express contractual reversion rights. As to future royalties, the author’s prospects for receiving full or partial payments may depend upon a variety of factors, including whether the publisher debtor is able to sell/assign the publishing agreement to a new publisher (in which case the author should receive full payments going forward), the effect of the author’s reversion rights, or how the publisher debtor may treat future royalties under a plan of reorganization.
Unrelated to bankruptcy but in the context of reversion, authors should also be aware of rights which could be potentially important to them under Section 203 of the U.S. Copyright Act. Section 203 permits authors and their heirs, in the case of any work other than a work made for hire, to terminate the “grant of a transfer or license of copyright or of any right under copyright, executed by the author on or after Jan. 1, 1978 . . . ” 35 years after the contract date, even if the contract has a longer term. For an informative article on this timely topic, read “Publishing Doomsday Clock and the Death of the Backlist,” by Lloyd J. Jassin, Esq. (Oct. 2010 RWR).
VI. Claims (Including Preference Claims) Against Others by a Publisher in Bankruptcy.
A debtor in bankruptcy may pursue claims and enforcement actions against other persons—sometimes in the Bankruptcy Court, sometimes in other courts. If the author has an obligation to the publisher, the publisher is entitled to sue that author to require his or her performance (for example, completing a manuscript or compliance with a competitive works or first option clause, subject to applicable defenses).
One very unusual type of claim that only exists in the context of bankruptcy is a claim to recover a “preferential transfer.” A “preferential transfer”—or “preference”—is generally a transfer (a payment) made by the debtor to a creditor, on account of a debt (monies owed) by the debtor to the creditor (this could be the payment of royalties); this payment is made within 90 days immediately prior to the filing of the bankruptcy petition.
This preferential payment effectively enables the creditor recipient to receive more than it would have received in a pro rata distribution under a bankruptcy liquidation. Thus, the recipient of that payment is required to repay money legitimately owing and paid to it, and then file a Proof of Claim to get some (usually reduced) part of it back.
In the context of publishing agreements, exposure to “preference” recovery claims is most likely if a royalty payment is made within 90 days prior to the publisher’s filing of a bankruptcy petition. Should this occur, the author is likely to receive a demand from the publisher debtor (or the bankruptcy Trustee) for repayment.
There are several defenses that may be asserted against a claim for recovery of a “preference.” The author’s best (though perhaps not only) defense is likely to be the “ordinary course” exception—i.e., that the payment was made “in the ordinary course of business and financial affairs” of the publisher and author and “according to ordinary business terms” in the industry.
The success of this defense may depend on the degree to which the timing of the payment comported with, or departed from, the normal historical course of dealings between the parties; if the royalty payment(s) were made as per the publisher’s usual schedule, those facts would support an “ordinary course” defense—and the “preference” would not have to be disgorged, even though the payment had been made to the author during the 90 days immediately prior to the filing of the bankruptcy petition.
VII. Items Authors Should Learn About and Evaluate as to a Prospective Publisher.
Below we’ve set out certain items we believe authors should learn about and evaluate as to a prospective publisher from diligence and financial perspectives; this information might be obtained from the publisher, other authors who publish with the publisher, literary agents and author trade organizations:
- the publisher’s overall publishing activity, number of front list titles each year, and depth of active backlist titles;
- the publisher’s subsidiary rights licensing activity;
- the publisher’s overall financial condition—is it paying authors and other vendors on time;
- timeliness and clarity of publisher’s royalty statements and royalty payments;
- the publisher’s internal profit and loss statement (p & l) for your book as proposed to be published by that publisher;
- level of marketing and promotional dollars the publisher will spend for your title;
- the publisher’s form of royalty statement along with a sample publishing agreement, in order to understand how the publisher works with its authors financially and contractually;
- with whom the publisher prints and distributes its books, in order to get some sense of the financial soundness of the distributor—if a distributor has financial troubles, that could impact payments to the book publisher and, thus, payments to the publisher’s authors; and
- generally, the publisher’s processes so that you can make informed decisions about your novel and the risks (if any) you may have in signing with a particular publisher.
Do particular diligence on publishers who are adopting subsidy models and require payment of monies up front for the publisher to lay out, print, and market your title; think about these arrangements carefully, get the above types of information on the prospective publisher, have experienced publishing or business counsel read the proposed agreement and advise on same, and do careful diligence before you sign an agreement or send money.
Listen to your instincts about with whom you do business. The pre-contract phase with a publisher may well be described as the honeymoon phase; the business and legal relationships change when author and publisher are under contract with dollars actually being spent and earned and related formal legal obligations in place. It is more prudent to not enter into an agreement with a publisher that one is concerned about, rather than to try to terminate an agreement where the publisher might be in financial straits or have its options limited by a Bankruptcy Court.
1 October 1, 2010. 2010 Isaacson Rosenbaum P.C., Denver, Colorado. This Article was prepared on behalf of Romance Writers of America® (RWA), a nonprofit trade association representing the professional interests of romance writers. Jon Tandler and Ed Ramey specialize in publishing and bankruptcy law, respectively. Jon R. Tandler now practices at the firm of Sherman & Howard L.L.C., 633 17th Street, Suite 3000, Denver, CO 80202. Edward T. Ramey now practices at the firm of Heizer Paul LLP, 2401 15th Street, Suite 300, Denver, CO 80202. This Article is for general information and contains the views of the authors only; readers are urged to consult with their personal legal counsel to obtain advice as to their individual circumstances.