Every time a restaurant, nightclub or other performance venue permits performance of a song (such as by radio (with certain exceptions), CD or live performance), the venue owes to the rights holder of the song a royalty for playing that song. In order to collect and administer these royalties, membership organizations known as “PROs” (Performance Rights Organizations) have evolved. The PRO membership is composed of songwriters, composers and music publishers. The PROs charge the clubs a licensing fee, which they then collect and distribute to their membership rights holders as royalty payments. By compliance with this rights licensing system, a night club is assured that it is complying with U.S. copyright law, which protects the rights holders’ right to perform the song.
In the United States there are three principal PROs: SESAC (“Society of European Stage Authors and Composers”, the smallest), BMI (“Broadcast Music, Inc.,” the middle bear), and ASCAP (“American Society of Composers, Authors and Publishers,” Papa Bear). When a performance venue fails to pay its royalties to a PRO, the PRO will come after the club to exact its pound of flesh.
Twister’s Iron Horse Saloon was a bar in suburban St. Louis. It failed to pay public performance licensing fees to ASCAP for a number of years. Over this period, ASCAP made numerous efforts to collect the licensing fee, even offering to settle the claim before suing. Finally, unable to collect the fees voluntarily, ASCAP sued the club and its managing members, including one Doug Walker, for copyright infringement and obtained a judgment for $41,000. The club eventually failed, and Mister Walker sought to discharge the ASCAP judgment against him through a chapter 7 bankruptcy.
A fundamental concept of chapter 7 bankruptcy is that an honest debtor will receive a discharge (extinguishment) of virtually all his debts upon completion of the bankruptcy process. He’ll walk away with a ‘fresh start’. I assume Mister Walker believed he would discharge the ASCAP debt in his bankruptcy. Mister Walker was wrong.
After the bankruptcy court determined that the debt was non-dischargeable (Mister Walker would have to pay this debt, despite filing bankruptcy), he appealed his case to the United States Bankruptcy Appellate Panel for the Eighth Circuit, which affirmed the bankruptcy court in Sailor Music, et al. v. Doug Walker.
One of the exceptions to the chapter 7 bankruptcy discharge is from any debt “for willful and malicious injury by the debtor to another entity or to the property of another entity.” To prevail, the plaintiff has to prove the debtor acted with both willfulness and maliciousness.
The appellate panel first determined that Mister Walker’s action were ‘willful.’ “If the debtor knows that the consequences are certain, or substantially certain, to result from his conduct, the debtor is treated as if he had, in fact, desired to produce those consequence.” The court found that ASCAP had attempted to contact Twister’s Iron Horse Saloon 44 times: twice in person, 14 times by mail (properly addressed and directed to Mister Walker) and 28 times by telephone. When that got no response, ASCAP sent a certified letter – which Mister Walker signed for – offering to settle the dispute. Mister Walker denied receiving any notice. There was no question that, based upon the numerous contacts from ASCAP, Mister Walker acted willfully. The court did not believe that all 44 attempts at contact somehow slipped by the debtor. In this case, the court noted, even the most unorganized and incompetent management staff would be hard pressed to convince the bankruptcy court of the debtor’s obliviousness. The debtor intentionally invaded the appellees’ legally protected rights under Federal copyright law and thus intended the injury to the appellees. The court found that these actions go beyond mere recklessness and are willful.
Were Mister Walker’s actions also malicious? The appellate panel determined that malice requires more than just reckless behavior. Rather, the debtor must have acted with intent to harm, rather than merely acting intentionally in a way that resulted in harm.
In this case, the debtor’s actions were malicious because he intended to harm the appellees. The debtor did not obtain a public performance license yet he continued to play music covered by the license. Prior case law clearly held that a bankruptcy court may consider a violation of a statute as evidence of malicious intent, and intentional violation of a Federal copyright law was an aggravating feature which evinces a voluntary willingness to inflict injury.
The court found that Mister Walker knew the rights holders were entitled to be paid royalties which the debtor was avoiding by not obtaining a license. As a consequence, he intended to harm the appellees, making his actions malicious. Debt not discharged!
So what’s the lesson here? In the course of operating a business, the owners have an obligation to be aware of the licensing issues related to running the business, whether as relates to public performance of licensed music, payment of sales taxes, or compliance with alcohol control requirements. Owners cannot simply turn a blind eye to the various compliance issues and expect to skate from liability by filing bankruptcy.