How Helpful is the Bankruptcy Clause in Publishing Contracts?

A. Not very, but you would be ill-advised to remove it.

When a publisher is in bankruptcy, both the company and people dealing with it are prohibited from taking many actions without court approval. Among these is enforcement of the typical clause in publishing and certain other contracts that says the contract terminates when the publisher is in bankruptcy.

Getting court approval to terminate an author’s book contract is often difficult. If the bankruptcy is the type where the publisher seeks to reorganize so it can continue in business (and filed for bankruptcy primarily to stave off creditors), the company will often successfully argue that it needs those contracts to continue functioning after it emerges from bankruptcy. Where the bankruptcy is the kind in which the publisher goes out of business, the contracts are considered assets that can be sold to other companies with the proceeds distributed to creditors in partial payment of what they are owed.

Although authors who are owed royalties are also creditors, they are considered unsecured creditors because the publisher never granted them any “security” (i.e., collateral) on which they could foreclose if their royalties were not paid (just the way a bank can foreclose on your house if you don’t pay your mortgage). Under bankruptcy law, secured creditors–generally banks that lent the publisher money and got collateral to secure the publisher’s obligation to repay them–are entitled to have their loans repaid before unsecured creditors get repaid (with limited exceptions not relevant here).

Even if you had some of the publisher’s assets as collateral (and we know what publishers would say to almost any author who requested that provision, even if the only collateral sought was the publishing contract itself), that grant of collateral might help you get past-due royalties repaid but probably would not enable you to get your publishing rights back. This is because the publisher’s obligation to return the contract would be cancelled if those past-due amounts were paid (by the publisher or another creditor). Further, any foreclosure on the contract likely wouldn’t occur until after (often lengthy) bankruptcy proceedings and approval from both the court and specified percentages of the publisher’s other creditors.

It is nonetheless worthwhile to have the typical clause in your contract (and no publisher seriously argues that it should not be there) because, without it, the court would have little basis to grant a motion by you to terminate your contract when the publisher is in bankruptcy. Even with the clause, both the company and other creditors can argue against your motion.

The best chance that authors have of trying to avoid this situation when a publisher goes into bankruptcy is to include a provision like the following in their contracts:

“If Publisher shall fail to make any payment or deliver any royalty statement required by this Agreement by the date provided therefor herein and if, after x days [30 is plenty] written notice by Author to Publisher, (i) said payment has not been made or (ii) such royalty statement has not been delivered (together with all amounts shown thereon as payable, if any), as applicable, then this Agreement and all rights granted by Author to Publisher hereunder will automatically terminate (without any further action required by Author or Publisher) at the end of said [30th] day.”

Although this provision won’t get you your rights back if the publisher files for bankruptcy before the end of the time period specified, it should work if the filing occurs after that date. Because publishers in financial distress and delinquent in paying royalties are often among those that file for bankruptcy, this provision can be useful exactly when it is most needed. (Limiting the provision just to non-payment of royalties would make it relatively ineffective because royalty statements are the best and quickest way to prove you are owed royalties. Including non-delivery of royalty statements in the provision might also help authors not owed royalties regain their publishing rights.)

The suggested provision is also one that publishers can generally agree with—if the requirement for notice by the author to the publisher is included—because the duty to deliver royalty statements and pay royalties is completely within the publisher’s control and the notice requirement eliminates the danger that the contract could be terminated inadvertently because of an error by the publisher’s accounting staff or the post office.

Note that the clause saying that the contract automatically terminates should be qualified—either by a parenthetical or a separate sentence at the provision’s end—to say that the termination will not affect things such as the author’s right to receive monies then owed, royalties on books sold previously or afterwards, subsidiary rights payments not yet received or the author’s right to purchase film and bound books as if the Work were out of print. This is generally done by cross-reference to the relevant sections.

(Originally published in the Summer 2006 issue of the Authors Guild Bulletin. © Mark L. Levine)

Editors Note: Special thanks to Janice Grubin, Tim Casey and Dan Morse of Gardner Carton & Douglas LLP* and Gayle Ehrlich of Sullivan & Worcester for their assistance with certain aspects of the above article. (Ms. Grubin is now with Todtman, Nachamie, Spizz & Johns, P.C.)

Answers to questions on this site are general in nature only.  You should consult a lawyer for information about a particular situation.  For more information about book publishing contracts and issues, see Levine’s new book.

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