Waldschmidt v. CBS, INC.Waldschmidt v. CBS, INC.
MEMORANDUM
This аction involves a dispute between the bankruptcy trustee for the estate of musician George Jones and the defendant CBS, Inc., concerning who is entitled to the royalties from the sale of certain records made by Mr. Jones pursuant to his recording contract with CBS. Because the recordings were made by Mr. Jones prior to the date of his voluntary bankruptcy petition, the trustee argues that аny royalties derived from their sale are the property of Mr. Jones’ estate and therefore should pass
Each party in this action has moved for summary judgment pursuant to Rule 56, F.R.Civ.P. Because no genuine issue regarding any material fact exists, this cause is ripe for summary judgment. Having reviewed the pertinent facts and law, this Court now makes the following determinations: (1) that the royalties are the property of Mr. Jones’ estate; (2) that although the royalties are the property of the estate, CBS is entitled to recoup the full amount of the advances from these royalties; and (3) that the trustee is entitled to an accounting of the royalties and of the amounts recouped by CBS.
The Royalties as Property of the Estate
The threshold issue in this case is whether the royalties constitute “property” within the meaning of section 70(a)(5) of the old Bankruptcy Act. 1 That section provides in relevant part:
(a) The trustee of the estate of a bankrupt .... shall ... be vested by operation of law with the title of the bankrupt as of the date of the filing of the petition initiating a proceeding under this title, except insofar as it is to property which is held to be exempt, to all of the following kinds of property wherever located. . . . (5) property, including rights of action, which prior to the filing of the petition he could by any means have transferred. . . .[ 2 ]
CBS bases its argument that the royalties are not property within the scope of section 70(a)(5) on two grounds. First, CBS argues that because the recording contract between Mr. Jones and CBS was one for personal services, both the contract itself and any rights growing out of it — such as the right to royalties — were nontransferable and nonseverable as of the date of the bankruptcy petition, December 13, 1978. Second, CBS argues that even if Mr. Jones had transferable rights in the royalties in December 1978, royalty rights are not the type of property intended to be covered by section 70(a)(5). The trustee counters CBS’s contentions by аrguing that Mr. Jones had unquestionable rights in any royalties collected by CBS from sales of his records, that these rights were clearly alienable by Mr. Jones, and that “property” as meant by section 70(a)(5) includes the rights to the royalties here in dispute.
In regard to the first point of contention, this Court finds that nothing in the nature of the recording contract itself prevents the rights to the royalties from passing to the trustee. As CBS argues, it is generally true that a contract for personal
Where the bankrupt had a contract right and it appears that a desire to deal with persons named in the contract only was in contemplation of the parties, the contract rights will not pass to the trustee.... If the personal service element is complеted and there remains a mere right of the bankrupt to collect compensation, the contract right will pass to the trustee.
1 Cowans, Bankruptcy Law and Practice § 344 (2d ed. 1978).
See
4A Collier on Bankruptcy § 70.22[3] (14th ed. 1979).
See also Florance v. Kresge,
While it is true that Mr. Jones did have certain obligations outstanding under the overall contract with CBS, this Court cannot agree that Mr. Jones’ right to the royalties was expressly conditioned on such additional activity. Mr. Jones completed performance of the basic contractual duties upon which the receipt of royalties was conditioned by making the master recordings from which the records were ultimately pressed. Mr. Jones did have other obligations under the contract, but these obligations did not affect his right to royalties from the record sales. If anything, Mr. Jones’ further obligations seemed designed to boost records sales, and it is only in that respect that they affected thе royalties. This Court rejects CBS’s argument, then, and accepts the contention of the trustee that any contingency that did exist in Mr. Jones’ contract regarding the royalties would at most affect the marketability of Mr. Jones’ interest, but not its assignability.
See In re Malloy,
Having concluded that the personal services nature of the recording contract does not preclude passage to the trustee of Mr. Jones’ rights to thе royalties, this Court must now decide whether these rights are in fact the sort of “property” intended to pass to the trustee under section 70(a)(5). Although the definition of property under section 70(aX5) has been considered by the courts on numerous occasions, no case appears to have addressed this particular question directly. Despite the absence of a specific precedent, the voluminous case law that has evolved under section 70(a)(5) does provide guidelines for this Court’s inquiry. Taking the existing interpretations into consideration, this Court concludes, in this case of apparent first impression, that the royalty rights here are property under section 70(a)(5) of the Bankruptcy Act.
It is well established that the term “property” as employed in section 70(a)(5) is to be given a brоad interpretation. As the Supreme Court stated in
Segal v. Rochelle,
The main thrust of § 70a(5) is to secure for creditors everything of value the bankrupt may possess in alienable or leviable form when he files his petition. To this end, the term “property” has been construed most generously and interest is not outside its reach because it is novel or contingеnt or because enjoyment must be postponed.
The simple fact that Mr. Jones could not actually collect the royalties until some time after the date of his bankruptcy petition, then, does not prevent his rights to those royalties — which effectively accrued before his bankruptcy — from being considered property under section 70(a)(5).
See In re
While “property” under section 70(a)(5) is thus broadly defined, its scope is not unlimited. As the Supreme Court noted in Segal,
[Limitations on the term do grow out of other purposes of the Act; one purpose ... is to leave the bankrupt free after the date of his petition to accumulate new wealth in the future.
The most important consideration limiting the breadth of the definition of “property” lies in the basic purpose of the Bankruptcy Act to give the debtor a “new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt. The various provisions of the bankruptcy act were adopted in the light of that view and are to be construed when reasonably possible in harmony with it so as to effectuate the general purpose and policy of the act.”
(citing
Local Loan Co. v. Hunt,
Over the years the courts have applied the
Segal
test to a wide range of interests and have reached a variety of conclusions regarding what constitutes property within the scope of section 70(a)(5). For example, a general income tax refund is “property” even though it is paid subsequent to bankruptcy,
Kokoszka v. Belford,
In characterizing assets for the purposes of section 70(a)(5), the courts have developed no clear mode of classification. Indeed, the Supreme Court itself has stated that “property” as meant by section 70(a)(5) “has never been given a precise or universal definition.” Moreover, “it is impossible to give any categorical definition to the word . . ., nor can we attach to it in certаin relations the limitations which would be attached to it in others.”
Kokoszka v. Belford,
Applying this balancing test to the facts of this case, this Court finds that Mr. Jones’ rights to the royalty payments are indeed sufficiently rooted in the prebankruptcy
The conclusion of this Court is also supported by the position taken by the Sixth Circuit on the analogous issue of whether certain wages are includable within the bankrupt’s estate. Ruling that “earned wages” are covered by section 70(a)(5), the court in
In re Aveni,
Earned wages ... are far different from future wages. Earned wages are normally payable at a fixed time following the rendering оf services by an employee, and the occurrence of bankruptcy does not alter the maturity of the employer’s obligation to pay....
The Bankruptcy Act is designed to give the bankrupt a fresh start to begin anew, but this concept should not be judicially expanded to include “property” which would otherwise vest in the trustee.
Although the royalty payments owed to Mr. Jones were not due in toto on any one specific date, the arrangement between Mr. Jones and CBS did require a regularized system of accounting and payment to Mr. Jones at six-month intervals. Moreover, nothing in the fact of Mr. Jones’ bankruptcy has (or had) any effect at all upon CBS’s obligation to pay the royalties. That obligation matured upon the completion of the recordings by Mr. Jones, and nothing has since occurred to аlter it. While the example of wages is not a perfect analogy — for there is no perfect analogy to this case — the reasoning of the Sixth Circuit in this respect is persuasive. Coupled with this Court’s previous conclusion that any impediment to Mr. Jones’ ability to start anew is far outweighed by the prebankruptcy nature of the royalties’ roots, Aveni provides ample basis for including the royalties within the estаte.
This Court thus rules that the royalties owed by CBS, Inc., to George Jones because of recordings made by Mr. Jones prior to the date of his bankruptcy petition are property within the scope of section 70(a)(5) of the Bankruptcy Act and pass to the trustee for the benefit of the estate. The argument of CBS is accordingly rejected.
CBS’s Right of Recoupment
Although this Court has ruled that the royalties are the propеrty of the estate under section 70(a)(5), this Court also holds that CBS is entitled to recoup the full amount of its advances to Mr. Jones from these royalties.
The trustee attempts to argue that CBS must proceed with its claim under the
In the first place, no authority exists to support the trustee’s assertion that recoupment is within the ambit of section 68. 3 Indeed, there is ample authority to the contrary. For example, the Third Circuit has stated that
[t]he rule of recouрment in bankruptcy derives from the rule that the trustee takes the bankrupt’s property subject to the equities therein. It does not attach by reason of the set-off provisions of Sec. 68, sub. a.
In re Monongahela Rye Liquors,
The cases speak of recoupment, set off and counterclaim.... Recoupment dealing with diminishment of a claim due to something growing out of the same transaction is not dealt with as such by Section 68. There seems to be little doubt that it is available either to a trustee in bankruptcy or to a claimant. As to set off, one should look to applicable non-bankruptcy law to determine whether it fits within non-bankruptcy common law, equity or statutory principles. If so, one should consult Section 68 and cases thereunder to see if anything bars its use.
2 Cowens, Bankruрtcy Law and Practice 121 — 22 (2d ed. 1978). Clearly, recoupment is entirely separate from the restrictive provisions of section 68.
Additionally, the recoupment process is different from the requirements for set-off. While set-off under section 68 is limited to instances involving mutuality of obligation, recoupment is subject to no such limitation.
See
2 Cowans,
supra,
at 122-23. The only real requirement regarding re-coupment is that a sum can be reduсed only by matters or claims arising out of the same transaction as the original sum.
Id.
at 121;
In re Monongahela Rye Liquors,
The Trustee’s Right to an Accounting
As a final point, this Court rules that the trustee is entitled to an accounting of all royalties received by CBS from the sаle of recordings made by George Jones prior to the date of his bankruptcy. The trustee is also entitled to an accounting of all advances to date recouped by CBS from these royalties. Because this Court has held that the royalties are the property of the estate, but subject to CBS’s right of recoupment, the trustee must have all information regarding the royalties and advances. The
Notes
. This dispute has grown out of proceedings in the United States Bankruptcy Court (M.D. Tenn.) that were initiated prior to the effective date of the new Bankruptcy Code. Bk. No. 78-31885.
. The trustee also claims entitlement to the royalties by virtue of section 70(a)(6) of the Bankruptcy Act, which includes within thе estate any “rights of action arising upon contracts” held by the bankrupt. The trustee is correct in asserting that section 70(a)(6) is relevant to this dispute. Before section 70(a)(6) can apply, however, it must first be determined whether the royalties and any right to them held by Mr. Jones constitute property under section 70(a) that can pass to the trustee. Because this Court has determined that the royalties do pass to the trustee (see the discussion infra), the trustee will also assume the right to sue under section 70(a)(6) should CBS fail to remit any of the excess royalties to the trustee, presuming any excess royalties exist or may exist in the future.
. The trustee cites
Stanolind Oil & Gas Co. v. Logan,