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January 18, 2024

What Happens to Your Music if Your Record Label Shuts Down?

You’re an independent rapper self-releasing mixtapes, or a country artist playing saloons in off-the-beaten path towns. You’re a local rock band playing frat parties, or a DJ getting hired to spin at weddings instead of Electric Daisy. What you’re all dreaming of is that plum gold standard of music success: the record deal. A corporate entity tells you they like what you’re doing and they’re going to give you the money to make a proper album! All the bells & whistles - a producer, engineer, mixer, marketing, promotions, even some tour support. It’s all happening! Sure, they’ll own the masters and copyrights to the music, but you believe in your art and have dollar signs in your eyes.

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You tour for nearly two years, play radio festivals, television, corporate events and colleges. You promote the hell out of your album, and it sells pretty well. It’s not going diamond anytime soon, but it turns a profit for the label and you’re finally getting some sweet, sweet residuals. Ready for album number two?

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Well, your label is not. In fact, it apparently wasn’t even ready for album number one. It borrowed too much money to start, and the few albums it released didn’t turn enough profit for it to pay off its debts. Its future is bleak; either it’s going to find someone to buy it and its debts, or it’s going to file for bankruptcy. So the question is where does that leave your record deal?

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According to prominent music industry lawyer Erin M. Jacobson Esq;

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“In general, a corporation’s assets are liquidated when the company is dissolved, which often results in another company or person purchasing those assets. In the music world, it is common for companies to buy other companies, so it may be that the copyrights are then owned by a new company or person. However, this can vary on a case-by-case basis, and there have certainly been instances in the past where the chain of title becomes unclear.”

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So if your label sells off its assets prior to bankruptcy, the rights to your music could likely go with it. While this means your deal for your first album would likely remain intact under the new management, and you would need to renegotiate your deal for future albums, it doesn’t mean you or your band will be a priority of the new management. There are a number of horror stories of artists getting lost in the shuffle when their labels get consumed, leading to future albums being shelved or released without promotion. And if you want to do something with your original album, say do a re-pressing on vinyl, you will be at the mercy of the new owners of your masters and what they feel is a worthwhile investment.

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So how do you protect yourself from this, aside from making a desperate attempt to own your masters/copyrights when negotiating your original deal? According to Jacobson;

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“Artists can try to negotiate clauses into their contracts upfront that either specify that the rights will revert to them if the company should go bankrupt or allow them to buy the ownership of their music back.”

Unless you made a good chunk of profit off your first album, it may be unlikely you’ll have the capital to buy back the ownership of your music yourselves. The first option is a more likely scenario, and one a label may be more open to, since they don’t foresee themselves going under when making their initial deal.

If you do get this clause written into your contract, you may not be out of the woods if your label cannot raise cash or sell the assets as described above, and resorts to filing for bankruptcy. This is due to Bankruptcy Code, specifically section § 365(a). Per Billboard’s Behind the Deal: Contracts Covering Bankruptcy:

“This is because federal bankruptcy law, which protects creditors, trumps state law, which governs contracts. Judges see such contractual provisions as an attempt to destroy the effect of bankruptcy law…”

Adam Burnett explains in The Implications of Record Label Bankruptcy on Musicians:

“If a record label goes bankrupt, certain powers given by the Bankruptcy Code may have drastic effects on a musicians’ ability to receive future royalty payments for the copyrights to their music…One section of the Bankruptcy Code intended to help trustees and debtors-in-possession increase the value of the estate is § 365(a). This section allows the trustee or debtor-in-possession to assume or reject any executory contract, subject to the court’s approval…The trustee has wide discretion in choosing whether to accept or reject the contract. The court will typically respect the trustee’s decision as long as the trustee uses sound business-judgment. If the decision to accept or reject appears to enhance the estate then the court will not second-guess the trustee. This rejection constitutes a breach of the contract on the date immediately preceding the filing of the bankruptcy petition.”

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So in more plain English, if your label goes bankrupt, the trustee put in charge has the right to nullify any of the label’s previous contracts and deals (including those with you or your band) if it can get the label to a place where it can get out of bankruptcy and pay off its debts. Per bankruptcy attorney Wayne Terry:

“The courts are very likely to run roughshod over the otherwise enforceable state law contract rights of an artist in the interest of getting a few shekels in for the creditors.”

Even if you have a clause in your contract reverting the rights to your music back to you in the case the label goes under, this clause is unenforceable under the Bankruptcy Code.

Uh oh. So the entity that owns your music is done for, and all their assets (including your music masters) are being sold off to new owners, and could potentially never be heard again. Among many things, this means the new owners won’t have to put your music on streaming services, release new physical copies or promote the music to radio. If the music is not out there generating profit, that means no residuals.

Any income streams from the content your former label owned is gone, and any future earnings expected from the release of your next album are just a pipe dream now. You calculate that over the next year, those earnings would have totaled $500,000. You are officially an unsecured creditor, meaning as the label’s assets are sold off to pay its debts, you are lower priority than the secured creditors. Basically, it’s not very likely you’re going to get any of the money you’re owed.

That doesn’t mean you shouldn’t put up a fight. Per Terry, one option is to include a clause in your contract that requires:

“…the label to continuously publish the albums (keep records available for sale to the public) or else the copyrights and the masters revert to the artist. Since the label might not be selling records while in bankruptcy, the artist can demand that the trustee keep selling them. If the trustee does not, the artist/creditor can argue that the copyrights belong to the artist.”

This of course only works if the bankruptcy court enforces it, which there is no guarantee they will. It’s also not a common clause to get included into a contract, and may be rebuffed. To help your chances, you could work to become a secured creditor, making you a higher priority for being paid back. Per Adam Burnett:

“To secure a claim a creditor must meet the requirements of Section 506. The claim must be “allowed” meaning it is valid under non-bankruptcy law and not invalid under bankruptcy law. [You can] become secured creditors by retaining a security interest in the copyrights assigned to [Your Label] and complying with the requirements in the Bankruptcy Code. To be a secured party, [you] must…have a claim against the debtor, which is the definition of a creditor.”

I realize that’s not the easiest thing to understand if you’re not brushed up on bankruptcy law, but basically if you and your label agree to a security interest in the copyrights and you comply with the statutory requirements of perfection, you will be secured up to the value of the copyrights. Think of it like a bank having a lien on a car you take out a loan on. If you don’t pay the bank back, they can seize your car. In this case, you’re the bank and your music rights are the car. To do this in a master license, per Billboard:

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“...a contract should state — in legal terms — that the owner grants rights in the copyright and the master, subject to a security interest, with the rights reverting to the owner if the label fails to perform its contractual obligations.”

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This will make you a secured creditor, meaning in layman’s terms, you’ll be prioritized in getting some of your financial debts owed by the label paid back to you. Much like a clause to force the label to keep releasing music, a secured creditor clause is a rarity and more likely to happen for superstar acts than mid to low level artists.

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A third option is to only grant the label “contingent rights” when making your deal, as opposed to “exclusive, worldwide rights”. This means that the label only owns the rights as long as they successfully perform all the duties laid out as obligations in the contract. Just be sure that your agreement clearly states (per Billboard):

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“...that the owner keeps all ownership rights in the copyright and master, perhaps also stating that the label merely holds rights in trust for the owner. Further, the contract must state that if breached, it is terminated and all rights revert to the owner.”

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Even if you have none of these clauses built into your deal, you could simply luck out when filing a case, and find a trustee that doesn’t see the legal battle as being worth it.

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Of course, nothing is as good as simply licensing exclusive use of your copyrighted material while retaining ownership. But you will need a damn good lawyer (and a good dose of clout) to make this happen. Whatever the case, pay attention to the contracts you sign with a label, and do whatever you can to protect your rights and future financial interests in your deal. Because if you transfer the ownership of your music to a label and they go under, your options for getting those rights back are few and far between!

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Guest blog post by Bo Liebman of The Indy Review. Follow him on social media @TheIndyReview and on LinkedIn

Photo by Tim Mossholder

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