Wednesday, February 07, 2007

2 Live Bankrupt

The copyright controversy over 2 Live Crew's parody (or alleged parody to some) of "Pretty Woman," reached the Supreme Court where in front of the Court, Luther Campbell pulled up in a Rolls Royce, complete with entourage, and held a pre-oral argument press conference of sorts. It was good theater, and I enjoyed it. One wonders what happened to Luther afterwards. Some inkling may be gathered from a opinion issued by the Eleventh Circuit on Monday February 5th, Thompkins v. Lil' Joe Records, Inc., 2007 WL 316302. The case well illustrates the potentially toxic intersection of copyright and bankruptcy law for recording artists.

Plaintiff is Jeffrey Thompkins, who along with Patrick Watler, formed the group "Poison Clan." In 1989 Thompkins signed with a Effects Records, a division of Campbell's Skywalker Records, which in turn became Luke Records. The 1989 agreement transferred to Luke Records copyright in sound recordings created by Poison Clan. The transfer of rights in the sound recordings carried a continuing royalty obligation. (The status of rights, if any, transferred in the underlying musical compositions, was subject to disagreement).

In 1995, Luke Records, and Campbell personally filed for bankruptcy. Thompkins filed a proof of claim in the Luke Records bankruptcy as an unsecured creditor. Eventually, a joint reorganization plan was agreed to. In that agreement, rights in the sound recording copyrights owned by Luke Records, including those of Poison Clan, were to be transferred by operation of law to Lil' Joe Records. Pursuant to 11 U.S.C. sec. 365, certain executory contracts, including specifically those of Poison Clan were "rejected" by Luke Records at Lil' Joe's insistence. "Rejection" of an executory contract is a term of art in bankruptcy law. Thompkins did not file a pre-petition claim for damages resulting from the breach caused by the rejection.

Here's what all this means. By Luke Records' rejection of the contract with Thompkins, Luke Records was relieved of any obligation to pay royalties to Thompkins, even though the contract that imposed those obligations is the one that transferred the rights to Luke Records in the first place, and even though the transfer of the rights was not affected by the rejection. (That's why I said "rejecting" a contract is a term of art in bankruptcy law). Thompkins' sole remedy was to file a separate claim in the bankruptcy proceeding, as an unsecured creditor, for damages for the breach of the contractual obligation to pay royalties. But since Thompkins had failed to file such a pre-petition seeking damages, he waived his claim.

Lil' Joe was free and clear of any obligation: it owned 100% of the copyright in the sound recordings, yet did not have to pay anyone any royalties, nor was it liable for any contractual breach; it had no contract with Thompkins. Recording artists beware, to say the least!


Anonymous said...

For another interesting case involving the collision of Titles 11 and 17, see In re Valley Media, 279 B.R. 105 (Bankr. D. Del. 2002). Suffice it to say that having a well-drafted license agreement is essential . . . .

LKB in Houston

Anonymous said...

Interesting case, but a factual clarification. Thompkins wasn't tripped up by a failure to file a pre-petition claim for damages, indeed, it is not possible to file a claim until after a bankruptcy petition has been filed. He did file a claim that would have paid him for royalties owed pre-petition, but that yielded no pay-out. He failed to file a separate claim for rejection damages, that would have (in theory, anyway) paid him for royalties to become due after the sale of the copyright to Lil Joe. See FN 21 and text thereat. This case was Thompkins' attempt to get a second bite at the apple by arguing that Lil Joe could not get the copyright without also accepting the payment obligations that came with it via the original (rejected) agreement.

Rich in NY

Anonymous said...

Ah, bankruptcy and copyright, one of my favorite topics. This story is just one more reason creators should not assign their rights, but rather grant nonexclusive licenses. In that case, if the licensee goes bankrupt, it loses the license, and the rights come home to the creator. See In re Catapult, 165 F.3d 747 (9th Cir 1999). Exclusive licenses, on the other hand, still put you in jeopardy. See Gardner v Nike, 110 F.Supp.2d 1282 (CD Cal 2000).

William Patry said...

Thanks, Rich for the clarification. I should have used the second bite at the apple language, but tried instead to track the court's language. What I was trying to get at is what you phrased much better: a separate claim for rejection damages.