Waldschmidt v. CBS, INC.

• Decision Date: 25 September 1981
• Docket Number: No. 81-3074.,81-3074.
• Citation: 14 BR 309
• Parties: Robert H. WALDSCHMIDT, Plaintiff, v. CBS, INC., Defendant.
• Court: U.S. District Court — Middle District of Tennessee

14 B.R. 309 (1981)

Robert H. WALDSCHMIDT, Plaintiff, v. CBS, INC., Defendant.

No. 81-3074.

United States District Court, M.D. Tennessee, Nashville Division.

September 25, 1981.

Robert H. Waldschmidt, Nashville, Tenn., pro se.

Jean Nelson and Val Sanford, Nashville, Tenn., for defendant.

MEMORANDUM

WISEMAN, District Judge.

This action 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 any royalties derived from their sale are the property of Mr. Jones' estate and therefore should pass to the trustee. CBS, on the other hand, argues that because the royalties actually stem from services rendered under a personal services contract — the recording contract between Mr. Jones and CBS — they are not the property of Mr. Jones' estate and do not pass to the trustee. CBS's argument is important because it also alleges that under the contract it is entitled to recoup from these royalties certain advances it made to Mr. Jones prior to his bankruptcy. CBS's fear is that if the royalties are deemed the property of the estate, its right of recoupment would dissipate and it would be forced to proceed as an ordinary creditor of Mr. Jones to recover the money it advanced to him. The advances far exceed the royalties collected to date, and if treated like any other creditor, CBS would be unable to recover the full amount of the advances.

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 arguing 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 services is "nonassignable." What this rule means, however, is simply that the performance of the particular personalized service itself is nondelegable, not that the right to payment for any such service may not be assigned once performance has occurred. See Corbin, Corbin on Contracts 805 (1952). This rule has, moreover, been consistently applied under the bankruptcy laws in cases involving personal services contracts. As one commentator has stated,

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 completed 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 § 70.223 (14th ed. 1979). See also Florance v. Kresge, 93 F.2d 784 (4th Cir. 1938); In re Wright, 157 F. 544 (2d Cir. 1907). CBS attempts to refute application of this rule to the facts of this case by arguing that Mr. Jones had not actually completed performance of his contract as of December 1978. CBS argues that Mr. Jones was still obligated under the contract to certain promotional activities, as well as live performances, before he was entitled to receive the royalties.

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 the 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, 2 B.R. 674 (Bkrtcy.M.D. Fla.1980).

Having concluded that the personal services nature of the recording contract does not preclude passage to the trustee of Mr. Jones' rights to the 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(a)(5) 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 broad interpretation. As the Supreme Court stated in Segal v. Rochelle, 382 U.S. 375, 379, 86 S.Ct. 511, 514, 15 L.Ed.2d 429, 432 (1966), in words that seem especially applicable to this case,

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 contingent 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 Wiles, 295 F.Supp. 13 (W.D.Va.1968); In re Durham, 272 F.Supp. 205 (S.D.Ill.1967); In re Dunn, 5 B.R. 156 (Bkrtcy.N.D.Tex.1980). Cf. Matter of Haynes, 9 B.R. 418 (Bkrtcy.N. D.Ind.1981).

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.

382 U.S. at 379, 86 S.Ct. at 514, 15 L.Ed.2d at 432. Elaborating on this restriction, the Court in Lines v. Frederick, 400 U.S. 18, 19, 91 S.Ct. 113, 114, 27 L.Ed.2d 124, 127 (1970), stated,

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, 292 U.S. 234, 244-45, 54 S.Ct. 695, 699, 78 L.Ed. 1230, 1235 (1934)). The test for determining whether the inclusion of certain items in the estate is consistent with the purpose and policy of the Bankruptcy Act 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...