The following Middle Market insight* originally appeared in the Spring 2015 edition of Disclosure Statement, the official publication of the Bankruptcy Section of the North Carolina Bar Association.
Whether it’s for the purpose of providing collateral to secure DIP financing, being able to sell assets in a Section 363 sale, or determining whether a preferential transfer or fraudulent conveyance has occurred, how a court views a debtor’s property rights in domain names and telephone numbers will determine how those assets can be used and conveyed in bankruptcy. The issue has arisen in various contexts in bankruptcy cases, with courts producing a range of results.
The heart of the controversy centers around the fact that on the one hand, both a domain name and a telephone number are issued and serviced by either a registrar or a telephone company and thus have attributes of a contract for use and services; on the other hand, both are also susceptible to increasing in value in the hands of the user and, particularly with a domain name, may represent the goodwill associated with a business. Thus, they also resemble a property interest in the hands of the user. In Network Solutions, Inc. v. Umbro Intern., Inc., 259 Va. 759, 772 (2000), the court noted that both telephone numbers and domain names are “products of contracts for services [and that] neither one exists separate from its respective service that created it and that maintains its continued viability.” (internal citation omitted.) In Kremen v. Cohen, 337 F.3d 1024 (9th Cir. 2003), the Ninth Circuit Court of Appeals explained that, “Someone who registers a domain name decides where on the Internet those who invoke that particular name – whether by typing it into their web browsers, by following a hyperlink, or by other means – are sent. Ownership is exclusive in that the registrant alone makes that decision. Moreover, like other forms of property, domain names are valued, bought and sold, often for millions of dollars, and they are now even subject to in rem jurisdiction [under 15 U.S.C. § 1125(d)(2), also known as the Anticybersquatting Consumer Protection Act].” Id. at 1030 (internal citation omitted). Courts have similarly recognized that the user of a telephone number can add significant value to the number through advertising and in developing customer familiarity over time. See, e.g., In re Pers. Computer Network, Inc., 97 B.R. 909, 910 (N.D. Ill. 1989).
Defining Property Interests
Property interests are defined under state law, but bankruptcy law determines which property will be included in property of the estate. See In re Larry Koenig & Assoc., LLC, 2004 WL 3244582, *6 (Bankr. M.D.La. 2004) (citing Butner v. United States, 440 U.S. 48, 55 (1979)); 11 U.S.C. § 541. In In re Larry Koenig & Assoc., LLC, the court applied Louisiana law which defined property as the “exclusive right to control an economic good, corporeal or incorporeal; it is the name of a concept that refers to the rights and obligations, privileges and restrictions that govern the relations of men with respect to things of value.” Id. at *6. Noting the expansive definition of property rights in that state, the court determined that both a domain name and the contractual right to use it were property under Louisiana law and were property of the estate under 11 U.S. C. § 541. Id. at *7.
In Kremen v. Cohen, the court looked to the definition of property under California law, which included “every intangible benefit and prerogative susceptible to possession or disposition.” 337 F.3d at 1030. The court went on to apply a three-part test requiring that there be “an interest capable of precise definition” which is “capable of exclusive possession or control,” and that the “putative owner…establish a legitimate claim to exclusivity.” Id.
Courts Finding Property Rights in Domain Names and Telephone Numbers
Several courts have concluded that domain names and telephone numbers constitute an intangible property right. See, e.g., Kremen v. Cohen, 337 F.3d at 1030; In re Sheppard’s Dental Centers, Inc., 65 B.R. 274, 278 (Bankr. S.D.Fl. 1986) (including telephone numbers used by debtor before bankruptcy within those assets subject to Section 363 sale, together with “other similar intangible property”). Other courts have recognized that a property interest exists but have not clearly identified the nature of that interest. For example, in Darman v. Metropolitan Alarm Corp., 528 F.2d 908, 910 (1st Cir. 1976), the court allowed the Chapter XI receiver (under the former Bankruptcy Act) to transfer “rights in the [telephone] numbers” because while the debtor’s interest in the numbers was “undoubtedly subject to the paramount rights of the telephone company, the [debtor] plainly h[eld] a right of user[sic] superior to others.”
Courts Finding No or Limited Interest in Domain Names and Telephone Numbers
On the other end of the spectrum, several courts have found that there is not a property interest created in a telephone number or domain name. In Slenderella Systems of Berkeley, Inc., 286 F.2d 488, 489-90 (2d Cir. 1961), the Second Circuit decided, under theformer Bankruptcy Act, that it did not have summary jurisdiction to determine the debtors’ petition for an order enjoining the telephone company from changing the telephone numbers assigned to those debtors, or alternatively, to require the telephone company to furnish the new numbers to people calling the old numbers. The court found that under the California tariffs, rules, and regulations applicable to public utilities, and under the terms of the contracts, the debtors had no “proprietary right in the number.” Rather, the debtors had a “license to use a specific telephone number . . . .” Id. at 490; see also In re Best Re-Mfg. Co., 453 F.2d 848, 849 (9th Cir. 1971) (holding that the telephone number was not property of the estate but leaving open the question of whether the debtor had a contractual right to continued service).
The Fifth Circuit Court of Appeals explicitly disagreed with the holding in Slenderella, noting that bankruptcy laws take precedence over conflicting state laws, including the “self-serving” tariffs. In re Fontainebleau Hotel Corp., 508 F.2d 1056, 1059 (5th Cir. 1975). Asserting that “[r]ight of use is surely the most important attribute of possession,” the court held that it had summary jurisdiction to enjoin the telephone company from discontinuing service unless it was paid on unpaid bills. Id. at 1059.
In Network Solutions, Inc. v. Umbro Intern., Inc., the Supreme Court of Virginia decided the issue of whether a domain name could be garnished under Virginia law. The court held that a garnishment of the domain name would equate to an impermissible garnishment of the services provided by the domain name registrar. 259 Va. at 770–2. Relying on this decision, in an appeal from the bankruptcy court, the District Court in In re Alexandria Surveys Int’l, LLC, 500 B.R. 817, 821-22 (E.D.Va. 2013), determined that, under Virginia law, the user of a telephone number or domain name does not have a property interest in that phone number or domain name. Thus, the court held that the Chapter 7 trustee could not sell the phone numbers and domain name used by the debtor because the bankruptcy estate had no interest in that property. Id. at 822. Alternatively, the District Court posited that if anything, the debtor had a possessory interest in the use of the phone numbers and domain name, created by its contracts with the communications provider. This possessory interest was lost when the trustee failed to timely assume the contracts with the communications provider under 11 U.S.C. § 365(d) (1). Id. The decision was appealed to the Fourth Circuit, which affirmed based on an issue of standing, but declined to address the substantive issue regarding the nature and extent of a debtor’s property rights in telephone numbers and domain names. Alexandria Consulting Grp., LLC v. Alexandria Surveys Int’l LLC, 2014 WL 7388325 (4th Cir. Dec. 30, 2014).
Status of the Law in the Fourth Circuit
The status of the law in the Fourth Circuit and in North Carolina on these issues remains unclear. The Supreme Court of North Carolina has stated that the term property “means, in reference to the thing, whatever a person can possess and enjoy by right; and, in reference to the person, he who has that right to the exclusion of others is said to have the property.” Mial v. Ellington, 134 N.C. 131 (1903). While this definition appears to be relatively broad, it is not as broad as the definition applied in Kremen v. Cohen. Further, it leaves open for interpretation what it means to “possess” or “enjoy by right” or to hold a right “to the exclusion of others.” The Fourth Circuit, in Harrods Ltd. v. Sixty Internet Domain Names, 302 F.3d 214, 227-32 (4th Cir. 2002), broadly construed the provisions of the Anticybersquatting Consumer Protection Act to allow in rem jurisdiction over domain names with regards to certain claims brought under that Act as well as under other federal trademark laws. This decision may indicate a willingness to view domain names with the attributes of property rather than as a purely contractual interest.
While guidance can be gleaned from the decisions arising out of other jurisdictions, bankruptcy practitioners should be aware of the uncertain status of the law when making strategic decisions in bankruptcy cases where the outcome will turn on whether telephone numbers and domain names are property of the bankruptcy estate.