In re Dillon
| Decision Date | 15 April 1998 |
| Docket Number | Bankruptcy No. 397-09284-AT-7. |
| Citation | 219 BR 781 |
| Parties | In re Lola Jean Fawbush DILLON, Debtor. |
| Court | U.S. Bankruptcy Court — Middle District of Tennessee |
Farris, Warfield & Kanaday, PLC, Robert C. Goodrich, Jr., Nashville, TN, for Chapter 7 Trustee.
Andy Tolbird, Nashville, TN, for debtor.
The court has before it the Chapter 7 Trustee's objection to the debtor's exemption of her right to royalties on songs written prepetition. The debtor argues that this right need not be exempted because it is not property of the estate. The debtor also asserts that the royalty rights are burdensome to the estate and are of inconsequential value and benefit to the estate. Therefore, argues the debtor, the Trustee should be ordered to abandon the estate's interest in them pursuant to 11 U.S.C. § 554(b).
The court finds that the debtor's right to songwriter royalties constitutes property of the estate. The debtor has properly exempted $4,000 of this interest. She, however, has not shown that the estate's interest in these rights is inconsequential or burdensome. The court, therefore, will permit the Trustee to market the rights for sixty days following the entry of the Order filed herewith. Within ten days after the marketing period, the Trustee shall file with the court a status report that includes a summary of his marketing efforts and the outcome of those efforts. If the Trustee is unable to successfully market the rights and has no prospect of negotiating a profitable sale, the court will reset this matter for hearing. At that hearing, the court will reconsider whether the Trustee should be ordered to abandon the estate's interest in the rights pursuant to § 554(b).
The debtor commenced this case under Chapter 7 on September 29, 1997. Her Schedule C ("Property Claimed as Exempt") filed with the petition lists a $50 clothing exemption and a $1,000 personal property exemption for the pro rata portion of her 1997 tax refund. The songwriter royalty rights are not listed in the schedules. A meeting of creditors was held November 3, 1997. The debtor allegedly testified there that she wanted to exempt all her personal property, which included an interest in songs she wrote prior to filing her bankruptcy petition.
The Chapter 7 Trustee objected to the debtor's exemptions on December 2, 1997. The debtor responded on December 15, 1997. On that date, the debtor also amended her schedules to include her "songwriter's share of songs" as personal property and to claim a $4,000 personal property exemption in that interest pursuant to TENN.CODE ANN. § 262-102 (Michie 1980). The debtor did not assign a value to her "songwriter's share." Instead, she listed the value as "unknown."
The debtor has written several hundred songs. The copyrights to these songs are owned by one of three publishing companies, Sony, Polygram, and Coal Miner's Music. The debtor holds only a royalty contract right in these songs,1 subject to a publisher's right to recoup previous advances made to the debtor.2 Sony and Polygram have never recorded any of the debtor's songs and have never owed or paid royalties to the debtor. All royalties received by the debtor have been paid by Coal Miner's Music, for which the debtor testified she is an "exclusive writer."3 It is these royalty rights that are at issue here. The parties stipulate that the debtor has historically received annual royalties from Coal Miner's Music of approximately $5,000.4
The debtor does not perform her songs for money. Instead her songs are performed by others. Some of the debtor's songs have been recorded by well-known country music singers. Some were released as singles and obtained top-ten positions on the music charts during the middle to late 1970s and early 1980s. The debtor testified that it was possible, but not probable, that any one of her songs could be recorded or re-recorded, become a "huge seller," and "make millions." She, however, has not had a song recorded in seven to eight years and no one has re-recorded any of her songs.
A hearing on the Trustee's objection was held January 20, 1998. Briefs were filed after the hearing. The debtor argued at the hearing and in her brief that the royalty rights are not property of the estate and, therefore, need not be exempted. The debtor also asserted that the royalty rights are inconsequential and burdensome to the estate and, therefore, the Trustee should be ordered to abandon the estate's interest in them pursuant to 11 U.S.C. § 554(b). The Trustee disagrees. He argues that to the extent the value of the rights exceeds $4,000 (the exemption amount),5 he is entitled to use, sell, or lease the rights pursuant to 11 U.S.C. § 363.
The issues to be resolved here are these:
The U.S. District Court for the Middle District of Tennessee, in Waldschmidt v. CBS, Inc., 14 B.R. 309 (M.D.Tenn.1981), held that royalties derived from postpetition record sales were property of the estate. In that case, George Jones and CBS had executed a recording contract. Pursuant to the contract, Mr. Jones was required to make master recordings and, thereafter, was entitled to receive royalties from the sale of certain records. The master recordings were made prepetition and, therefore, Mr. Jones's royalty rights accrued prepetition. "The simple fact that Mr. Jones could not actually collect the royalties until some time after the date of his bankruptcy petition" did not prevent his rights from being considered property of the estate. Id. at 311.
The court will apply the Segal test, as set forth in CBS, Inc.6 That test is "whether the bankrupt's claim to the asset is `sufficiently rooted in the prebankruptcy past and so little entangled with the bankrupts' ability to make an unencumbered fresh start that it should be regarded as "property" of the estate.'" CBS, Inc., 14 B.R. at 312 (quoting Segal v. Rochelle, 382 U.S. 375, 380, 86 S.Ct. 511, 515, 15 L.Ed.2d 428, 432 (1966)). This is a balancing test. Id. The "degree of relation between the asset and the `prebankruptcy past'" must be weighed "against the potential effect that placing the asset in the estate would have on the bankrupt's ability to make an `unencumbered fresh start' after bankruptcy." Id.
Ms. Dillon's royalty rights are rooted in the "prebankruptcy past." The royalties are and will be paid on songs she wrote prepetition. All the work required by Ms. Dillon to earn the royalties occurred prepetition. Her contract right to the royalties, therefore, accrued prepetition. The only relationship the royalties have to her postpetition future is that she will continue to collect them after the filing of her petition. Under the Segal test, this "simple fact" will not prevent her royalty rights from being considered property of the estate. CBS, Inc., 14 B.R. at 311; see Andrews v. Riggs Nat'l Bank (In re Andrews), 80 F.3d 906, 910-11 (4th Cir.1996) ().
The royalty rights are not entangled with Ms. Dillon's ability to make an unencumbered fresh start. She may work postpetition to earn wages and collect royalties on songs written postpetition. Such postpetition earnings will not be property of the Chapter 7 estate. See 11 U.S.C. § 541(a)(6). In addition, the debtor may receive disability payments in the future that can be used to support herself.7 Despite this, she argues that the royalties are her only means to accumulate "new wealth" and that she will be unable to support herself if the rights are included as property of the estate. The royalty rights, however, are not "new wealth" earned postpetition. Instead, the rights accrued prepetition and, therefore, 11 U.S.C. § 541 mandates that they be included as property of the estate. See Chappel v. Proctor (In re Chappel), 189 B.R. 489, 493 (9th Cir. BAP 1995) ().
The court holds that the property of this Chapter 7 estate includes Ms. Dillon's right to royalties for songs she wrote prepetition.
The Chapter 7 Trustee seeks to sell the royalty rights. He asserts that, at a minimum, the rights are worth $5,000, but are more likely worth some multiple times $5,000. The Trustee, based on his discussions with other bankruptcy trustees, alleges that there is a market for these royalty rights. People in the entertainment business buy royalty rights as streams of income on a discounted cash flow basis. The Trustee stated that if allowed to sell the royalty rights, he plans to contact those individuals and possibly advertise the rights in one of the music industry periodicals. The Trustee conceded that he is unable to estimate what price he might be able to receive for the royalty rights.
The debtor argues that the court should order the Trustee to abandon the property pursuant to § 554(b) because it is burdensome to the estate and is of inconsequential value and benefit to the estate. The party seeking abandonment has the burden of proof under § 554(b). See Smoker v. Hill & Assocs., Inc., 204 B.R. 966, 975 (N.D.Ind. 1997) (); In re Siegel, 204 B.R. 6, 8 (Bankr. W.D.N.Y.1996).
The debtor's evidence consists entirely of the testimony of Walter Robert Thompson.8 Mr. Thompson testified that there is not a third-party market9 for the purchase of songwriter royalty...
To continue reading
Request your trial