13 January 2004


The publishing industry's culture of secrecy is claiming more victims. According to a story in today's New York Times, a bankruptcy trustee has written letters to freelance authors of the late Lingua Franca (declared bankruptcy in 2001) trying to recover payments for articles as preferences. See "A Freelancer Tale: Paycheck Clears; Suit Demands It Back" (and don't blame the author for the inaccurate headline; no adversary complaint has yet been filed, according to the docket). Should any of the authors actually have the resources and guts to fight the trustee on this one—usually for payments of $1,500 or less—there will be some lessons for all in preferences in bankruptcy.

Under the Bankruptcy Code, a debtor is not allowed to prefer one otherwise-equally placed creditor over another during the period shortly before declaring bankruptcy.

Except as provided in subsection (c) of this section, the trustee may avoid any transfer of an interest of the debtor in property—
(1) to or for the benefit of a creditor;
(2) for or on account of an antecedent debt owed by the debtor before such transfer was made;
(3) made while the debtor was insolvent;
(4) made—
   (A) on or within 90 days before the date of the filing of the petition; or
   (B) between ninety days and one year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider; and
(5) that enables such creditor to receive more than such creditor would receive if—
   (A) the case were a case under chapter 7 of this title;
   (B) the transfer had not been made; and
   (C) such creditor received payment of such debt to the extent provided by the provisions of this title.

11 U.S.C. § 547(b). The key here is whether the articles created an antecedent debt—and I think that the trustee will be in for a surprise.

Although I have not seen any of the actual letters from the trustee, it appears that the trustee is acting as if all rights to the stories had somehow been transferred. I doubt that is the case; instead, a license to use intellectual property was transferred. "Licenses" are "property," but not quite in the same way. Further, the trustee will also have to prove that the the authors, solely through the timing of the payment, received more than a creditor would have after a hypothetical complete liquidation and application of the priority chain. Given the intersection with the Copyright Act, among other things, this is not something that I'd take on a contingency basis.

The policy question is whether payments made to acquire stock for resale in the ordinary course of business—or, as in this case, the license to allow others to see that stock—qualify as preferences when the "stock" in question is an individual, unique item. I suspect that is what is confusing the trustee. It doesn't look similar to, say, payments for office rent, so it gets more scrutiny. That publishing contracts and practices are so opaque is not helping matters at all.