[HELPFULAW FOR THE INDIE ARTIST is a legal column on matters pertaining to the music industry written by guest contributor Christiane Cargill Kinney.]

Q: I’m in the mixing and mastering stages of an independent CD release that I’ve been working on for the past few years. When I register my copyright with the Library of Congress, I will own both the publisher’s and the songwriter’s share of the copyright. Meanwhile, I may be on the verge of filing for bankruptcy. If that happens, do I have to list my songwriter and/or publisher share of the copyright as assets with the bankruptcy trustee? How would things change if I can find a publisher willing to meld my songs into his catalog, or if I transfer the copyright ownership over to my LLC? Am I better off waiting until after the bankruptcy to file for the copyright? 

A:  Ah, the dreaded “B” word: bankruptcy.  If it makes you feel any better, you’re not alone. Many great entrepreneurs, artists, and well-respected business minds have filed, including Walt Disney, Mark Twain, and Donald Trump. Savvy musicians have even used bankruptcy in the past as a way of rejecting their existing recording contracts that arguably impaired their ability to recover from their financial hardships.

That said, it’s never a fun process, and when a bankruptcy involves not only traditional assets like a house or car, but your creative assets, it’s a double blow. Songs are like our kids … it’s hard work getting them out, but once they are, they are beautiful creatures (at least in our own eyes) and you hope they will make a lot of money one day.

When musicians consider filing for bankruptcy, they need to realize that their entire songwriter catalog may be at stake. Consulting with a skilled bankruptcy attorney is essential to discuss your financial situation and options for filing under various chapters of the US Bankruptcy Code, and how those options may impact your ability to retain the copyright in your songs.

A quick overview of the three most common forms of filing for bankruptcy protection:  

Chapter 7 is often used by people with little to no assets looking for a fresh start. Chapter 7 allows for the “liquidation” or sale of the few assets you may have (including your IP), to hopefully pay something to your creditors before you secure a “discharge” of your debts. To keep things straight, let’s call that one “liquid discharge” … on second thought, we’ll just stick with Chapter 7.

Chapters 11 and 13 allow individuals and businesses to reorganize and work out a repayment plan while they try to regain financial stability.  Chapters 11 and 13 can be more advantageous when it comes to protecting your IP; unfortunately, not everyone qualifies for these protections. Your financial condition, the amount of debt you are in, and the type of relief you are seeking play a huge role in determining what bankruptcy chapter you can file under.

Chapter 7 is the most common form of bankruptcy filing for individuals.  The Trustee assigned to your case determines what assets you have as of the date of filing your bankruptcy petition, and how he or she can sell-off those assets to pay the Trustee, any secured creditors, and any unsecured creditors, all so you can attempt to start anew.

Is my musical work an “asset?”

In terms of whether your musical works should qualify as an “asset” of your bankruptcy estate, it depends.  The basic rule is this:  A copyrighted work that exists on the date you file your bankruptcy petition (regardless of when you register it with the Library of Congress) is technically an asset of your bankruptcy estate. A copyrighted work created after the filing date is yours to keep.

So, what qualifies as a copyrighted work under US Copyright Law?  A copyrighted work is defined as an “original work of authorship fixed in tangible form.”  A work is considered to be “fixed in tangible form” when “its embodiment in a copy or phonorecord” is “sufficiently permanent or stable to permit it to be perceived, reproduced, or otherwise communicated for a period of more than transitory duration.”  (You totally just checked out, right?  That’s what the teachers were actually saying in all those Charlie Brown specials when the kids heard “Wah wah wah wah wah wah …)

As you can probably guess from the definition above, not all Trustees are going to know whether a song that is a work-in-progress should qualify as an “asset” or not.  If you are in the early phases of writing a song, you may be able to argue that it does not qualify as an “original work of authorship fixed in tangible form.”  However, it doesn’t take much to meet the definition above; virtually any recording of the song will qualify, and if the song is changed and re-recorded later, it will be a derivative work.

In your case, since the songs are already in the mixing and mastering phases, they have been “fixed in tangible form” and are technically “assets” of your bankruptcy estate.  The Trustee can choose to “liquidate” the songs and turn them into cash by looking for potential investors.  If a bid is offered and accepted by the Trustee, the Court will approve a copyright transfer document, and any future money the songs earn will go to the investor and/or their publishing company (although you would still receive credit as the songwriter).

So, here’s the key: none of this means anything unless the Trustee can find a buyer interested in purchasing your songs. Remember, Chapter 7 is a “liquidation” proceeding, so the Trustee’s job is to turn that song into cash. If your songs don’t earn money yet and the Trustee can’t find an investor willing to purchase them, your case could be declared a “no asset” case and your copyrights could be returned to you. That said, it’s a very big risk to take, much like including jokes in a legal blog, or performing a puppet show for your prison inmates.

Here’s another issue to watch out for: while transferring ownership of the songs to another publisher or to your own LLC prior to filing for bankruptcy may sound like a good idea, the Trustee has the power to set aside any fraudulent transfers made within two years of the filing.  So, if a transfer occurs in close proximity to your bankruptcy, the Trustee may still try to claim those songs as assets of the bankruptcy. Transferring them to your own LLC creates a strong presumption that the transfer was fraudulent and should be set aside. If you are considering transferring ownership of your songs, make sure it’s done as an “arms-length transaction” (i.e., don’t sell it to your own company or your Uncle Sal), and you probably want at least a two-year cushion between the sale and filing for personal bankruptcy.

In sum:

In this day and age, songs get “discovered” sometimes years after they are written, and giving up your right to all of those potential incomes forever just to have a fresh start is a scary proposition. If you are a songwriter and it looks like you may have to file for bankruptcy protection, keep the following in mind:

* Musicians filing for bankruptcy should consult with a skilled bankruptcy attorney with a solid understanding of how your IP may be impacted in your bankruptcy proceeding.

* You’ll want to discuss your particular financial situation and your options under Chapters 7, 11, and 13, and how that may impact your ability to retain your songwriter catalog (or your share of the songs you have written, if you have other co-writers).  Your attorney can discuss strategies with you, as well as how the Intellectual Property Bankruptcy Protection Act may impact you (which is WELL beyond the scope of this article unless I want you all to fall asleep. Oh, you already fell asleep?  I lost you during the whole “fixed in tangible form” debacle, right?)

* If some of your songs are works-in-progress and have not been recorded, you may have a legitimate argument that the songs were not “original works of authorship fixed in tangible form” at the time you filed your bankruptcy petition.  In such a case, it will serve you to hold off on registering for copyright protection, recording demo versions of the songs, or taking other actions contrary to that position.

If you have gotten this far, you must LOVE legalese, so I’ll include a bit more in the fine print for you.

© 2013 Christiane Cargill Kinney. All rights reserved. This Blog contains information of a general nature that is not intended to be legal advice and should not be considered or relied on as legal advice. Any reader of this Blog who has legal matters involving information addressed in this Blog should consult with an experienced entertainment attorney. This Blog does not create an attorney-client relationship with any reader of this Blog. This Blog contains no warranties or representations that the information contained herein is true or accurate in all respects or that it is the most current or complete information on the subject matter covered. I’m not sure what to include as my inside joke this time, bankruptcy is so serious. Can we talk about cowbells or something lighter next time? Christiane Cargill Kinney is a Partner and Chair of the Entertainment Industry Team of LeClairRyan, LLP.

[HELPFULAW FOR THE INDIE ARTIST is a legal column on matters pertaining to the music industry. If you have a suggestion for a future article that you would like to submit to our columnist, entertainment attorney and indie artist Christiane Cargill Kinney, please feel free to leave them in the comments section below or send them to her at Christiane.Kinney@leclairryan.com. You can also follow her on Twitter @musicalredhead for more helpful indie-artist tips.]

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[Bankruptcy image from Shutterstock.]