Why the Bankruptcy Clause in Your Publishing Contract May Not Protect You

I’m blogging at Writer Unboxed again today.

Bankruptcy.

When you’re considering a publishing offer, the possibility that your publisher will go bankrupt probably isn’t top of mind. And indeed, publisher bankruptcies aren’t very common. Publishers frequently fail or close, but bankruptcy takes time and costs money, and makes a business accountable to its creditors. Especially where there have been shady dealings, troubled publishers often prefer to just disappear.

Bankruptcies do happen, though, as in the recent, nearly simultaneous bankruptcies of UK publisher Unbound and US publisher Albert Whitman & Co. Often there are warning signs, sometimes considerably ahead of time: for example, authors were complaining about missed royalty payments from Albert Whitman as far back as 2019. But not always.

Though the odds you’ll ever be tangled up in a publisher bankruptcy are slim, it’s a good idea to have a general idea of what’s involved–and why, if your contract includes a clause addressing bankruptcy, it doesn’t provide the protection you may assume.

How Publishing Contracts Address Bankruptcy

There several types of bankruptcy in the USA. A publisher will most likely file for Chapter 7, which allows for liquidation of the business, or Chapter 11, which enables the publisher to continue operating while re-organizing and paying off creditors.

Most publishing contracts include language addressing bankruptcy and insolvency (though not all: I’ve seen several small press contracts recently that didn’t mention bankruptcy at all). Here’s an example:

If Publisher files for protection under the Bankruptcy Laws, all rights hereunder shall immediately revert to Author. If the bankruptcy filing involves a reorganization and Publisher continues to operate during the reorganization, Author and Publisher may agree in writing to continue this Agreement under the same or revised terms.

This one is more elaborate:

If the Publisher files for Chapter 7 protection under the Bankruptcy Laws, or suspends operations permanently, all rights granted to the Publisher shall immediately revert to the Author. If the bankruptcy filing involves a reorganization and the Publisher continues to operate during the reorganization, this Agreement shall remain in force unless the parties agree in writing to continue under revised terms. A reversion of rights under this section will be subject to the rights of third party licensees pursuant to contracts entered into during the Term for Subsidiary Rights or other rights in the Work.

It sounds pretty straightforward, right? Publisher files for liquidation or re-organization, rights revert or new agreements are made, the end.

In practice, though, that’s not how it works.

Bankruptcy Realities

Thanks to key provisions of the US Bankruptcy Code, clauses like the ones above are unenforceable in bankruptcy cases. Declaring bankruptcy brings the bankrupt’s assets under the control of the court (via an appointed administrator called a bankruptcy Trustee), at which point those assets become subject to the claims of creditors.

For most publishers, their main asset is their author contracts, which can be sold to generate cash to pay off debts (hopefully the purchaser will be another publisher that will treat the incoming authors fairly, but there are no guarantees). Contracts may be sold off even in Chapter 11 bankruptcies where the publisher doesn’t cease operations.

Either way, and regardless of the wording of your contract, your ability to terminate your contract or request rights reversion ends with a bankruptcy filing. The bankruptcy process freezes everything in place, and you will be stuck in that limbo until the fate of your publisher’s contracts is decided. Even if you or your agent become aware of an impending bankruptcy and manage to revert rights before the petition is filed, you may not escape, since the court may not consider such reversions valid because of their proximity to the filing.

If royalties are in arrears, you yourself become a creditor–so if assets are successfully sold you should at least get some of the money owed you, right? Again, probably not.

Authors are considered unsecured creditors (creditors who are owed a debt that’s not secured by collateral); and secured creditors, such as banks that have provided loans or mortgages, take priority for payment. Administrative expenses must also be paid first, and depending on how complicated the bankruptcy is, they can be considerable. Authors are among the last in line for restitution from any money remaining in bank accounts or generated by asset sales or reorganization plans.

What if the publisher’s contracts are put up for sale and there is no buyer? In that case, the bankruptcy Trustee will determine to abandon them and order the return of rights to authors–as happened when publishing scammer Martha Ivery tried to escape bad press and an FBI investigation by declaring bankruptcy. But this is an involved process that can take months to resolve, during which time authors and agents can do little except wait.

Why do bankruptcy clauses appear in contracts at all, given how little protection they provide? Often I think it’s because they have long been part of standard boilerplate and publishers include them without thinking. But also, while the clauses are unenforceable in regard to bankruptcy, that’s not necessarily the case for other forms of insolvency. If your publisher goes belly up without a bankruptcy filing, and hasn’t returned rights and/or paid royalties owed, the clause can maybe be enforced–as long as you can find the publisher, of course.

IS THERE ANY RECOURSE FOR AUTHORS?

Despite the fact that authors are relatively helpless in the event of a bankruptcy, there are some things you can do.

• It may sound trite, but the best preparation simply is awareness. Knowing what may happen, and your status as to rights, will make the process less disorienting. if not less traumatic (and save you from false hope inspired by the bad advice on the internet that tells you to rush out your termination letter the minute you hear your publisher has gone bankrupt).
• If you have an agent, consider having a conversation about how they’d handle a possible publisher bankruptcy.
• Pay attention to warning signs. Are your royalty payments late? Missed entirely? This can be an important indicator of financial distress. Is the publisher brushing the problems off with changing excuses, or making promises that aren’t fulfilled, or trying to gaslight or intimidate you? All of these are big red flags, and should be pointing you toward at least considering requesting a rights reversion while you still can. Too often, authors cut delinquent publishers far too much slack, and publishers take full advantage.
• Hopefully your publisher will be forthcoming about what’s going on (for example, sharing the bankruptcy case number), and if you’re owed royalties, will include you in its filings as a creditor (in which case you’ll get notices from the bankruptcy court). Regardless, to have any chance of payment, you will need file a proof of claim with the court, and you have just 70 days after the bankruptcy filing to do so. If your publisher is uncommunicative and/or failed to include you as a creditor, staying on top of what’s happening will be much more difficult. You might consider seeking legal counsel.

BANKRUPTCY TALES

These examples of publisher bankruptcies illustrate the variety of possible outcomes.

Byron Preiss Publications went into Chapter 7 in early 2006, following Preiss’s sudden death the previous year. Its assets, which reportedly included more than 2,500 mostly fiction book contracts, were sold in December 2006 for less than asking price to nonfiction publisher Brick Tower Press.

When digital publisher Triskelion declared bankruptcy in 2007, its contracts were put up for sale. Unusually, the publisher that purchased them did so with the express intent of releasing rights back to the authors.

Things were messy for authors with indie publisher MacAdam Cage, after the publisher’s 2014 Chapter 7 filing. They regained their print rights after a struggle, but not their e-rights, which had been sold some years earlier to a different publisher that was still in operation at the time of the bankruptcy.

UK-based Black Dog Publishing went into liquidation in January 2018 owing hundreds of thousands of pounds to printers and employees. Its assets were sold the following August to a media company looking to expand its trade publishing division.

Medallion Press filed for Chapter 7 in October 2018. In February 2019, the court granted the Trustee’s motion to abandon all of Medallion’s publishing contracts and revert rights to the authors. Outstanding royalties remained unpaid, though, and even with the relatively quick determination on rights, the case didn’t fully wrap up until September 2020.

In 2019, the book publishing assets of F+W Media, which had filed for reorganization under Chapter 11, were acquired at auction by Penguin Random House. More than 2,000 backlist titles changed hands.

Crowdfunded UK publisher Unbound went into administration just this past March, and almost immediately was sold, along with its hundreds of contracts, for a fraction of the value of those assets (and an even smaller fraction of millions it owes to creditors), in a sale that was arranged before bankruptcy was even declared. That the new owners were essentially the old owners with a new name didn’t thrill the authors affected by the collapse, and many remain uncertain of where their rights stand.

Albert Whitman & Co, which owes hundreds of thousands in royalties and has long been the subject of delayed payment complaints, went into reorganization in May of this year. The company had begun reverting rights on request before filing for Chapter 11, but the bankruptcy filing froze that process, even though the company is still operating. It’s unclear what will happen to remaining contracts, and when (or whether) authors will be paid.