Pub Rants

Why You Have Bankruptcy Clauses In Contracts

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STATUS: TGIF! I really enjoy writing that every Friday. I finished one contract and got ready to dive into another but alas, too many interruptions. Will have to tackle on Monday.

What’s playing on the iPod right now? GAUCHO by Steely Dan

This week I read in Publishers Weekly that Sports Publishing, LLC has filed for Chapter 11 bankruptcy.

Well, lately, just about every day I read a tidbit in Media Bistro or Shelf Awareness about a newspaper, magazine, bookstore, or what have you calling it quits.

In fact, I received an email today from a wonderful editor at Rager Media (a small independent literary house out of Ohio). He was writing to tell me that they were closing the doors.

That’s very sad news as they were doing some powerful books over there.

But all this got me thinking about bankruptcy clauses. When I heard about Sports Publishing, I immediately got out the contract file for one of my early books—CHAIR SHOTS by Bobby Heenan and Steve Anderson. This was way back in the day when I was foolish enough to take on nonfiction projects before I realized that my expertise was much more focused on fiction and the occasional memoir.

There it was on page 6—a nice bankruptcy clause highlighting how rights will revert. Today I wrote a formal letter requesting the reversion and final accounting so I have it in writing. I’m glad it’s there in black and white on the contract page–which is why we have this clause in all our contracts.

But my contracts manager recently told me that she’s seeing some push-back from publishing houses wanting to eliminate the clause. (I’d have to dig a little to find out what the rationale is behind that.) Now I’m also not a corporate bankruptcy attorney so I really can’t detail the vagaries of how corporate bankruptcy unfolds. All I know is that I’d rather have the clause in that contract so rights revert—even if the courts don’t allow that to happen automatically. Good thing I have an intellectual property attorney and his firm on retainer. Looks like I’m about to learn how it works.

15 Responses

  1. Anonymous said:

    Sadly, I’ve been through a bankruptcy with an epublisher, and that bankruptcy clause is basically worthless. The judge can decide if the rights of that book are worth something and then hold the author’s rights until they find out if they can sell them.

    Because a book or the book rights are an asset, the company going through a bankruptcy has no right to give that asset away, in essence taking potential money away from debtors.

    Trust me. It’s not as easy as just writing a letter and asking for your rights back.

  2. blogolodeon said:

    I’m not a lawyer either, but I would imagine this is a bean-counting move, completely divorced from thinking about the authors (or agents) as if they were human beings.

    Ooh. There’s a joke in there. Something about bean-counting vs being-counting.

    Anyway, the lawyers are probably trying to preserve all possible assets for the company in the event of bankruptcy so that the company has something to sell. They would count the nonreverting contracts as assets and sell them off to other entities in any reorganization.

    But that’s just a guess. Stand firm!

  3. Debby G said:

    I worked as a bankruptcy appellate lawyer for nine years, researching and drafting memoranda and decisions for a judge on the Ninth Circuit Bankruptcy Appellate panel. And now I write humorous books for teens and children. Go figure.

    Those “ipso facto” clauses are often unenforceable in bankruptcy, though it’s somewhat unresolved whether they can be enforced when the debtor is the licensee of a registered copyright. Here’s an article explaining things:

  4. Deb said:

    I’m told by authors who were with Triskelion that the bankruptcy clause in their contracts is unenforceable. Their rights are tied up ad infinitum until some court releases them.

    Attorneys out there, why would these be unenforceable if both parties agreed that rights would revert? I’m no legal-savvy type, but aren’t contract provisions usually binding unless the premise is illegal?

  5. Jean said:

    Wow, I had no idea! A bit scary too.

    I read this on the ‘In the (Red)’ blog: “If enforcing an ipso facto clause is important to one of your agreements, especially if you also seek the highly problematic reversion of intellectual property or other rights upon such a termination, be sure to get specific legal advice on your situation, including whether alternative approaches may exist to help achieve your objectives.” It made me wonder, what are the alternatives, because honestly, the idea of having your rights and income tied up by a bankrupt publisher is terrifying. Does anyone know what the alternative is?


  6. Courtney Milan said:


    Contract provisions are usually binding, but if you think about it, bankruptcy is relief from debt that that the person going bankrupt is contractually obligated to pay. If you enter bankruptcy and you have credit card debt and a mortgage and the like, your creditors may have to accept a smaller amount than they would otherwise get by contract.

    When someone is no longer able to pay, bankruptcy dissolves contracts and apportions the remaining assets in a way that is (hopefully) as fair as possible.

  7. Anonymous said:

    Deb, not if the company owes money, and these book rights are the majority of their ‘assets.’ The judge is all about getting the debtors as much money as he can. Authors’ rights are assets, nothing more.

    This has also happened to some who’ve been through other types of bankruptcy. They sell a product to a company, the company gets a bill, they don’t pay the bill, they company files for bankruptcy. You would think that the person who sold that product to the bankrupted company would get it back…they never paid for it, right? But no. The judge would use that as a asset and sell it to pay off debt…some of that debt being the very person they bought the asset from!

    It makes absolutely NO sense. But that’s how it works.

    Authors have absolutely NO protection in a bankruptcy case. That is what is so disturbing. The rights to this author’s book will be stuck for months and months (or even maybe a year or more) before the court either sells those rights to someone else, or releases the author’s rights to him once they find out there is no buyer for those rights.

  8. Anonymous said:

    I think the Econ downturn means publishers will want more polished material. I edit most of my stories about twice each year. I took out 2 years to write screenplays for every one, and this taught me a great deal about being thorough. My guru in this regard is Linda Seger, THE Hollywood script consultant. Her attitudes might help any writer.
    She writes books like “How to Make A good Screenplay Great!” I watch movies much differently now. Structure is everything. It’s rare to find anyone who will pay millions of dollars to make a movie if the screenplay itself is not clear, detailed and vivid. These days, I’m editing my books as if I had to convince someone to make a movie out of each story I am a real scientist, and we have to be imaginative to get grant money too.
    The next few months will obviously be hard on new authors. Study and learn from your best stories and scenes. Try to understand your voice better and continue to polish and edit.
    Scientifically, all huge market downturns are preceded by times of great overconfidence. Right before the crash of 1929, President Hoover promised voters “Two cars in every garage!” We had just learned to mass produce the auto a little more than a decade earlier.
    Newspapers collaborated. They spread the good news. Headlines in ’29 screamed, “Everyone is Rich!”
    Facts prevalent today show Wall Street printed too many stock shares. Daily trading volume is 200-600 times that traded about 3-4 decades ago. With the exception of prosecutable flimflam CEOs, the bad news is your salary hasn’t increased that much. Added cash in circulation has lagged too. The printers of share certificates though were overconfident.
    Keep writing. Best of luck to you.
    WilliamEpic (“Eppik”, online)

  9. Anonymous said:

    WilliamEpic correction: (“Eppik”, online)should read (LiveJournal dot com, then search for Eppik.) Otherwise, it’s random Google nonsense. Things change so fast these days!

  10. Courtney Milan said:

    “The judge would use that as a asset and sell it to pay off debt…some of that debt being the very person they bought the asset from!”

    It’s true that an author is nothing other than a creditor in a bankruptcy proceeding. It doesn’t mean that it doesn’t make sense.

    A company has $1000 of assets and $10000 of debt, and a bankruptcy court decides to apportion the assets out as 10% of all debt to the creditors. So yes, that means you have to sell off the assets, including assets that belong to the person who has been credited. And it’s not like there’s “no” reason–the reason is that everyone is going to get shafted, so you try to shaft people in a fairly equitable fashion. Bankruptcy rules actually make a lot of sense. They just don’t make a lot of people happy.

    All that being said, there is a reason to get an ipso facto clause even if it’s unenforceable. Imagine that you have a bankruptcy court, and it’s going to give people a percentage of what they’re owed.

    Sans ipso facto clause, you can argue that you’re owed the royalties that you’ve collected thus far. With it, you may be able to argue that you’re owed royalties plus the value of the remaining rights. You may not get your rights back, but you could get your percentage of a larger pot.

    It might not work out like that, but a chance is better than not having anything at all.

  11. Ghost Girl said:

    I’m so glad you posted this, because last week I was actually wondering about it. With all the financial chaos of the last few weeks, the question of “what if” has grown even larger in the back of my brain. Now I know what to look for. Thanks!

  12. Anonymous said:

    i read somewhere on another blog about an author who’s publisher went belly up after they bought the rights but before the book mde it into print and the author found themserlves in a situation where they never got to see their book in print, and they never got to shop it elsewhere because of something complicated with rights ownership.

    as someone above said rights are assets. and are usually treated as such.

  13. Anonymous said:

    How would a bankruptcy court assess the value of a title in the scenario Anon 6:09 cited above? I mean, no book (yet) equals no royalties. Only individual getting shafted here, as I can see, is the author who can’t sell the work anywhere else.

  14. Twill said:

    Bankruptcy courts are courts of equity rather than courts of law. In essence, the judge doesn’t have to follow the exact laws, but is supposed to determine what feels “equitable” as a distribution of the assets to the creditors.

    Now, when an author license the right to publish a book to a publisher, that right becomes part of the publisher’s assets. By contract law, only the written contracted rights should be assets owned by the publisher. Unfortunately, the judge *can* override contract law and decide that, for reasons of equity to the group of creditors, the asset (publication rights) can/shall be retained for longer than the original term.

    It’s like leasing some manufacturing equipment to a company and having the bankruptcy judge determine that, since the equipment is needed for the business to continue, it must stay on the factory floor even if they are not making payments.

    It’s not fun for the company doing the leasing, but it’s the way bankrupcy works