What Happens to the Author When Big 5 Goes Bankrupt


As a former Chapter 11 Bankruptcy attorney (business bankruptcies, called “reorganizations”) I can somewhat predict what rules and forces will come into play when Big Publishing begins Title 11 (Bankruptcy) actions. If I were writing a novel about this scenario (thank heavens I'm not) these are some of activities I would consider for that fiction:

First, the BPH will most likely file chapter 11 over chapter 7. Chapter 11 gives them the opportunity to reorganize debt and hang on to certain assets. Chapter 7 is the opposite: while 7 jettisons debt altogether, it also jettisons assets.

How will Chapter 11 affect authors?

If you are a Big 5 author, you have signed a contract. In Chapter 11 parlance, that contract probably gets labeled as what is commonly called an executory contract. “Executory,” in the sense that there are terms yet to be performed at the time the bankruptcy is filed. And these might include: the debtor (BPH1) still has to perform production, distribution, sale, and author payment under the contract. The author, of course, still has to produce works, etc., but the “executory” in “Executory Contracts” refers to the duties owed by the debtor/BPH. Your contract is also an asset of the debtor's estate. This creates an interest in you by the debtor's creditors that you probably never expected. And most like would just as soon not have.

So…in Chapter 11, BPH will tell the judge, Look, we have certain contracts we want to keep, mainly author contracts. Plus there is a lease or two we want to keep so we can continue our presence in NY. Or maybe we'll jettison (“reject”) our lease and move the biz to Omaha, where rents are affordable. In other words, Your Honor, we wish to offer up a plan of reorganization that does this: [here fill in the Chapter 11 Plan of Reorganization, a document as brief as 25 pages for a pizza joint to 2500 pages for the first step of United Airlines].

Most important, Your Honor, here's what we would like to do with our author contracts:
1. Reject those that are unproductive. Get rid of the author altogether, give them their rights back.
2. Keep those that are making us money and abide by the original terms of the contract
3. Hybrid: keep the parts we like, reject those parts we don't like. (Example: We'll keep ebook rights but reject paper book rights. Let the authors publish their own paper if they wish, but we're hanging onto to electronic book rights)
4. Re-negotiate the contracts and offer these new terms based on our obtaining new financing: [use your imagination]

So that's a birds-eye view of what the BPH debtor will do.  Now let's take a look at what the affected author will do.

First, there's probably no worse position to be in than that of a party with a contract that ties one to a Chapter 11 debtor. This is true for two reasons: One, you will need a lawyer and you will need to commit a minimum of three years (part-time, one can only hope) to court appearances and preparation and filing of court pleadings. Two, you will be subject to the whimsy and imagination of the debtor's attorneys. They will be stridently looking out for BPH1's interests in both planning its moves inside the bankruptcy vehicle and inside the courtroom itself. They will offer plans, plans, and variations on plans until they finally arrive at a plan that a class, known as the authors class, will accept and vote for. As a member of that author class, you will require the services of a knowledgeable bankruptcy attorney to help you decide how to vote on the treatment of your class within the Chapter 11 plan or reorganization.

Second, the affected author will deal with years of uncertainty regarding revision of rights pre-term. For example, your BPH goes belly up, you want your rights back so you can self-pub and make payments on your Mercedes. Or Accord. Or–you get the idea. Problem is, there's really no one who has the power to give you your rights back. Except the debtor itself. And even that will require negotiations and approval by the judge before it is allowed to happen. Creditors will also get to vote on the resolution of how/when/price of you getting your rights back. Typically, your lawyer with negotiate with the BPH lawyer and say “We'll offer you $5,000 cash and ten percent of net epub sales for 24 months in return for a reversion of all rights effective immediately.”  You'll leave your lawyer's office thinking That's damn fair. I hope they take it. Problem is, there must be a motion to settle your part of the pie on those terms and there must be a court hearing on your motion, at which time any creditor may object to you getting cut loose, the trustee may object, the debtor itself may object, and the creditors' committee may object. Whew. All for a lousy $5K advance and royalties every six months?  What?!

As you can see, when BPH jumps in the bath water, everyone gets soaked. You get soaked with untold hours of worry, delayed royalty payments, less-than-earned royalty payments, legal fees (probably worth more than your advance, when all is said and done) and you may or may not get your rights back.

One other curious item, curious to authors, that is. Say your BPH files its Chapter 11 and six months into it you submit your third novel, according to the contract. At this point, the debtor is going to be able to perform its side of the contract in what is called the “ordinary course of business” and your novel will be edited, printed, distributed, and accounted for. Fair enough. But what if your novel is rejected by the debtor for whatever reason? Welcome to No Man's Land. Why? Because you now own both a rejected or declined novel and may or may not own the rights to it. You see, all dealings with a debtor like a BPH are subject to court approval. So do you dare self-pub our novel at that point? Are you sure about that?  Again, your legal counsel only can advise you.

This blog post is supposed to raise some of the fictional questions around a fictional Big 5 Publishing House's corporate reorganization aka bankruptcy. This post offers no solutions and is not legal advice. No attorney-client relationship is created by this blog post, whether or not you read and act on it or refrain from acting on it.

In other words, this is fictional only. It's supposed to be interesting, not usable.

I hope it's that.

Jonathan Schuler