Press Release - July 23, 2005
Legal Matters: The Label's Bankrupt: Here's The Good News

by SUSAN BUTLER

Few music lovers feel a thrill hearing horror stories of recordings getting tied up in a label's bankruptcy. When it happens, a label's rights to an artist's services, sound-recording copyrights, master recordings and the inventory of CDs are usually swept up by someone who purchases them from the bankruptcy trustee. In some cases, the recordings fall into a bottomless pit, never to be heard again.

Three lawyers beat the odds recently when they rescued eight albums by four recording acts-Peter Conte, Piffaro, Red Priest and Terra Nova- from the bankruptcy of Troy, N.Y.-based classical label the Dorian Group.

The attorneys-Bernard Resnick in Bala Cynwyd, Pa.; Paul Rapp in Housatonic, Mass.; and Peter Irvine in Northampton, Mass.-also successfully argued that rights under several recording and master-licensing contracts could not be sold.

Most artists and master-recording owners who grant rights to a label want their records released only by that company or else want their rights back (a "reversion" of rights) so they can make their own deal with someone else. As a result, lawyers often spend hours negotiating specific phrases in recording and license deals with labels, describing what they want to occur if the company goes broke, closes or files for bankruptcy.

"Those provisions are in entertainment contracts all the time, but it's also clear that they are unenforceable in a bankruptcy," says Wayne Terry, a bankruptcy attorney with Mitchell, Silberberg & Knupp in Los Angeles.

This is because federal bankruptcy law, which protects creditors, trumps state law, which governs contracts. Judges see such contractual provisions as an attempt to destroy the effect of bankruptcy law, Terry says. "The courts are very likely to run roughshod over the otherwise enforceable state law contract rights of an artist in the interest of getting a few shekels in for the creditors."

While a contract that requires a label to return masters if it files bankruptcy will not be enforced, artists and owners of masters can try a few other things in their contracts, Terry says. They will need bargaining clout, however, since most labels will shy away from the risk of losing any rights.

The provisions should clearly address three types of property: copyright in the sound recording, the physical master recording and the inventory of CDs.

In artists' recording agreements, Terry says a clause may require the label to continuously publish the albums (keep records available for sale to the public) or else the copyrights and the masters revert to the artist. Since the label might not be selling records while in bankruptcy, the artist can demand that the trustee keep selling them. If the trustee does not, the artist/creditor can argue that the copyrights belong to the artist. Yet Terry says there is no guarantee a bankruptcy judge will enforce this.

In master licenses, Terry notes two primary approaches: taking a security interest and granting contingent rights.

Secured creditors have first dibs to get their assets back from a bankrupt debtor. To do this in a master license, a contract should state-in legal terms-that the owner grants rights in the copyright and the master, subject to a security interest, with the rights reverting to the owner if the label fails to perform its contractual obligations.

As a comparison, a bank has a lien on the title to a car when it lends money for a consumer to purchase it. If the consumer fails to pay, the bank owns the car and can take it back.

To hold a security interest in recordings, the owner of the masters must also "perfect" the security interest, Terry says, by filing certain documents with state agencies and with the U.S. Copyright Office.

An alternative method to try is to avoid granting exclusive, worldwide rights in a license. Instead, the owner grants "contingent" rights, which means that the label only has the rights if it performs all of its obligations under the contract. The agreement must also clearly state that the owner keeps all ownership rights in the copyright and master, perhaps also stating that the label merely holds rights in trust for the owner. Further, the contract must state that if breached, it is terminated and all rights revert to the owner.

Even when contracts do not set up the necessary rights, it can pay to fight. The artists who won their rights in the Dorian bankruptcy did not have any special provisions in their contracts. Yet their lawyers filed a lawsuit, and then a motion for summary judgment that no one opposed. The bankruptcy judge returned their copyrights and ended their contracts. The artists then purchased the inventory and artwork for the albums for about $7,500.

"There are situations sometimes that the bankruptcy trustee just does not want to put up a fight," Terry says.