Friday

Belly-Up

By Richard Curtis

Agents don't like to admit that there are events beyond their control, and I suspect that is why it's hard to write about such contractual matters as forces majeures—acts of God—and bankruptcy. Such events serve only to reaffirm our human frailty and fallibility, our total helplessness before the awful natural and business convulsions that occasionally devastate the microcosmic world of book publishing. How easy it is to deny that they could ever happen or that there is anything we could do about them anyway. I am able to rationalize my omission of these subjects by telling myself that in the course of my career in the book business, I have never seen a publisher invoke fire, flood, strike, hurricane, insurrection, or war as an excuse for delaying or screwing up a book.

Yet, anybody who works in this business long enough knows that sooner or later Murphy's law will clutch us by the throat, and whatever terrible things can happen will, perforce, happen. These tired old eyes have seen booming markets dry up overnight, seemingly omnipotent chief executive officers of great publishing houses fired ignominiously, and corporate acquisitions, mergers, and divestitures undertaken as casually as cards tossed in a low-stakes poker game.

For instance, some years ago, at the very apogee of the gothic novel boom, Avon, the leading publisher of the genre, announced that it was terminating its gothics program. Snap! Just like that. Writers, agents, and Avon's competitors were floored. It was not as if the market had begun to decline. Anybody who wanted to make a small fortune in those days had but to take anything vaguely resembling a gothic formula story and slap on it a cover of a filmily clad girl looking apprehensively over her shoulder at a fog-shrouded mansion with a light burning in one window. We were all the more baffled because it was said that the head of Avon at that time killed the program simply because gothics bored him, which was like the secretary of the treasury announcing that he is bored with the presses that mint money. But that's what happened, and it left the paperback market in chaos and countless writers and agents floundering around on the wilder shores wondering where their livings were going to come from.

Or, take what happened after Harcourt Brace, the trade and textbook publishing giant, acquired Pyramid Books, an independent and minor paperback house that had suddenly found itself on the map with the huge success of John Jakes's Kent Family Chronicles. Harcourt changed Pyramid's name to Jove, replaced most of its staff, and poured millions and millions of dollars into acquisitions and self-promotion in a bid to make it the number one paperback company in the industry. Then, one Monday, the editor in chief and a number of other key editors were given until the end of the day to collect their personal effects and leave the building, and not long afterward Jove was unloaded on what was then MCA's Putnam-Berkley entertainment complex.

The upheavals created by these transactions were so immense that few of us had the experience of dealing with anything remotely like it, and the toll on writers, agents, and the industry at large was incalculable. A lot of authors cried Do something! to their agents, but I can think of scarcely anything an agent might have done to predict or control the situation so that he or she and his or hers would not be adversely affected.

In the modern history of publishing we have witnessed similarly seismic events. In the space of six or seven months during the mid-eighties, for example, the publisher of Bantam replaced the publisher of Pocket Books, then hired the publisher of Berkley, who quit a couple of months later and presently replaced the publisher of Avon, whereupon the editor in chief of Avon left and was replaced by the editor in chief of Pinnacle. The turmoil caused by these churnings cannot be described. Nor can the harm done to authors be mitigated by the efforts of even the most powerful agents in the business. You just stand there, mouth agape, and watch the majestic unfolding of events. Then you come in when the dust has settled and do what you can to pick up the pieces.

And then, also in the mid-eighties, we witnessed the collapse of a paperback publisher. For many years, Pinnacle Books was a marginal paperback house publishing routine genre books. It was then acquired by an investment group and the old management and editorial staff were replaced by a smart and enthusiastic team that expanded the firm's editorial vision, spent money to acquire better authors and properties, and marketed its books shrewdly and aggressively. Within a year or so the results were dramatic. Sales began to soar and Pinnacle was the hot shop in the industry, a genuine major-league contender. But there were serious problems underlying the successes. The company had expanded so explosively that its cash flow couldn't keep up with demand. Furthermore, as was alleged to me by people close to the situation, Pinnacle's parent company had to "borrow" some of Pinnacle's working capital to cover deficits or corporate acquisitions elsewhere in the conglomerate.

For many of us, the first crack in the structure appeared when a number of Pinnacle's checks bounced. As restitution was made shortly thereafter and cash started to flow again, most of us who'd been touched by that chilly wind accepted Pinnacle's reassurances that the situation was temporary and order would soon be restored. In midsummer, however, agents and authors demanding overdue payments were told that there just wasn't any money. By August the crisis had deepened. Key employees quit or were let go. Inquiries yielded a sketchy but frightening picture of Pinnacle's parent company allegedly using the publisher's accounts receivable to pay off corporate obligations that had nothing to do with Pinnacle. By the end of August the disaster was all but complete: Matters were turned over to the firm's attorneys and the last of Pinnacle's staff was forced to abandon ship.

This was a tragic event. When a paperback publisher goes out of business, there is none to replace it. Mass-market publishers are simply too expensive to create easily from scratch. The loss of a competitor is bad for publishing and worse for authors. The fewer publishers there are, the less flexibility there is in prices and terms available to writers. As if they didn't have it bad enough.

The possibility of an actual bankruptcy sent agents and authors scurrying to their contract files to examine the pertinent provisions of their agreements with Pinnacle. Almost all book contracts contain language to the effect that if a publisher goes or is forced into bankruptcy, takes advantage of any bankruptcy statutes, or assigns its assets for the benefit of creditors, the author is entitled to get his rights back automatically. Examination of the boilerplate of Pinnacle's contract confirmed the existence of such a provision. Specifically, Pinnacle's contract stated that:

If (i) a petition in bankruptcy is filed by Publisher or (ii) a petition is filed against Publisher and is finally sustained or (iii) a petition for Arrangement or Reorganization is filed by or against Publisher and an order is entered directing the liquidation of Publisher in bankruptcy, or (iv) if Publisher shall make an assignment for the benefit of creditors, then Author may, at Author's option, terminate this Agreement by written notice and, thereupon, all rights granted herein shall revert to Author.
Well, that was a relief. Although we still weren't sure what would become of any royalties Pinnacle might owe, at least there was no question about the procedure for getting our rights back. All we had to do was wait for an announcement that Pinnacle had filed for bankruptcy (or find out for ourselves by sending a lawyer to federal bankruptcy court, where bankruptcy petitions must be filed). Then we send a notice terminating the contract. Right?

Imagine our shock when we learned that the bankruptcy provision of the Pinnacle contract was unenforceable. And if you can imagine it, try imagining that the bankruptcy provisions of all publishing contracts are unenforceable.

When Pinnacle tanked I consulted with a lawyer friend of mine, Michael A. Gerber, a professor of law at Brooklyn Law School and now Associate Dean there. He had published a book about bankruptcy, and he cited provisions in the federal Bankruptcy Code that invalidate the bankruptcy termination clauses of contracts.

It turns out that book contracts are regarded by Congress as assets comparable to the furniture, typewriters, and light fixtures of a publisher. Section 365(e) (1) of the Code stipulates that an executory contract (that's what you have) may not be terminated just because your publisher goes into bankruptcy. And it doesn't matter whether or not your book has yet been published - it's the contract that counts as an asset.

The reason the law takes this position is that if a company is trying to reorganize in order to work things out with its creditors, as it may do in some bankruptcy cases, its rehabilitation may be hampered if you yank your contracts away. Those contracts are, after all, a key source of potential revenue for a company trying to get back on its feet. Even if a company is not attempting merely to reorganize but is completely liquidating, the law still regards the earning potential of your contracts as an asset to which all creditors have some claim. Thus, you may not get your rights back if the company elects to assume the benefits and obligations called for in your contract. There is some saving grace in all this in that the company cannot keep you dangling interminably. In a Chapter 7 (liquidation) case, the company must decide whether to assume or abandon the contract within sixty days of filing. In a Chapter 11 (reorganization) case, there is no hard-and-fast deadline, but the bankruptcy court may impose one at your request.

So, contrary to the black-and-white language of your publishing contract, if your publisher chooses to take advantage of this provision of the Bankruptcy Code, you're up the creek, at least for a while. Fortunately, few publishers who get into financial trouble go bankrupt because there is usually another publisher waiting in the wings to take it over. A publisher's backlist may continue generating income for anybody who takes it over, and because most creditors of publishing companies (such as a banks, printers, distributors, and the landlord) are incapable of generating income from the publishing of books, sooner or later they will conclude that it makes good financial sense to turn over to a publisher the contracts the creditors control.

That is precisely what happened in Pinnacle's case. Electing not to file for bankruptcy, Pinnacle sent a notice to all interested parties stating that it had signed an agreement in principle with the parent company of Zebra Books (now a division of Kensington Books) to take over the imprint. This meant that Zebra would be able to publish certain Pinnacle books under contract or on the Pinnacle backlist.

Back to their contract files scurried the authors and agents, where they confirmed that Pinnacle, like every other publisher, has provisions in its contract permitting it to assign that contract to anyone of its choosing without the author's permission. Some agents and authors are able to modify that clause in negotiations so that a publisher cannot assign the rights without the author's express permission, but most publishers resist that modification, for the freedom to assign is an extremely important one to them, more important at least than it is to authors, for whom it is seldom a deal-breaker. However, even if your contract prohibits your publisher from assigning your rights without your permission, that prohibition would be invalid in a bankruptcy situation under the Bankruptcy Code, according to Professor Gerber.

Actually, the assignment of your contract to another publisher might be the best thing that can happen to you if you are worried that your books may be tied up for years in bankruptcy litigation or seized by some creditor who doesn't know a copyright from a coffin nail. For one thing, before a publisher can assume or assign a contract, it must pay you any royalties it owes you or at least provide you with assurances that they will be paid. Moreover, if your contract is assigned, at least there is someone you can talk to, someone who will keep your book in print and generate some income for you.

That, however, might not necessarily have been the case if Zebra's original plan for taking Pinnacle over had gone through, for the notice Pinnacle sent out stated that the money Zebra generated for Pinnacle would not be paid directly to authors, but would rather go into an escrow account controlled by Pinnacle and its "secured creditor." A secured creditor is someone who has extended credit that is secured by some kind of collateral. In this case, that secured creditor appears to be the bank to which Pinnacle's owners allegedly pledged the publisher's accounts receivable.

Authors are not secured creditors. If a secured creditor intercepts revenue that otherwise would have flowed to the company and eventually to you the author, then that secured creditor is under no obligation to satisfy the claims of the unsecured ones. Of course, a judge might be most sympathetic to your plea for return of your rights and royalties, for it is clear that an author is a lot more helpless in situations like this than is a bank or a printer. But a judge is under no legal compulsion to grant an author's plea.

At length, no longer capable of fending off its creditors, Pinnacle filed for bankruptcy under the Chapter 11 provisions of the federal bankruptcy law, meaning it was seeking protection by the federal government while it reorganized and formulated a plan to repay its debts and restore business. It took almost two years, from autumn of 1985 through summer of 1987, for the company to get its act together. It did make a deal with Zebra, which proceeded to review the entire Pinnacle list to decide which unpublished manuscripts it would bring out, which backlist books it would reissue, and which properties it would release to the original copyright owners and under what terms it would do so.

As I said at the outset, agents don't like to admit that there are things they are powerless to control, but I must tell you that bankruptcy appears to be one area where little an agent does by way of negotiating contractual language is going to help if your publisher goes belly-up; and once it does, little that an author, agent, or lawyer does will help if the bankrupt firm and its creditors don't want to cooperate with you. My best advice is, first, to move like lightning once you or your agent get the feeling your publisher is in serious trouble, demanding a reversion of your rights and/or settlement of whatever financial obligations the publisher has to you. Put short deadlines on your demands and send official letters stating that owing to failure of your publisher to comply with the terms of his contract with you, you consider that contract canceled. Second, make a horrid pest of yourself in the hope that your publisher will decide life is too short to do combat tooth and nail with a crazy author.

One author did just that in the Pinnacle case and did win his rights back, but at a terrible cost because of the onerous terms of his settlement and the cost of hiring a lawyer - and you will need a lawyer. But if there isn't that much value in your books to begin with, the cost of hiring a lawyer to rescue them may not be justifiable. It's frustrating as hell, maddening in fact, but there you are. And that's just bankruptcy. I haven't even mentioned how helpless we are before acts of God. But I think I'll wait until a tidal wave demolishes Hachette, Random House, or Simon & Schuster before attempting to write about that. Given Murphy's law, you may be reading my remarks about that sooner than you think.


This article was originally written for Locus, The Newspaper of the Science Fiction Field. It's reprinted in This Business of Publishing: An Insider's View of Current Trends and Tactics Copyright © 1998 by Richard Curtis. All Rights Reserved.

2 comments:

  1. Oh, my God. I'm a lawyer, familiar with bankruptcy. I never thought through the implications you discuss here, but I can see now why the bankruptcy clause is unenforceable. And an agent has no power to change the bankruptcy laws or provide assurances that a publisher does business wisely.

    Just another example of how life can suck sometimes. Especially for writers.

    Like you said, about the best we can do is keep a cautious eye on the publisher's bottom line--and hope that, if things go south, they'll be willing to work something out (assuming they aren't gobbled up by someone else).

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  2. Oh ye gods... sigh... never thought of that either. And how the heck do you really keep an eye on a publisher's bottom line. My guess is it can't be done well, am I right?

    Should we lobby to have author's right become what, secureable? We really don't own anything do we.

    Seriously, what should we authors do?

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