Security interest in royalty distributions survives bankruptcy of composer

In a recent decision of the Ontario Superior Court of Justice, the Court rejected a bankrupt music composer’s argument that a security interest the composer had granted in royalty based distributions should be ineffective following his bankruptcy. The bankrupt unsuccessfully argued that a security interest in distributions from the Society of Composers, Authors and Music Publishers of Canada was equivalent to an assignment of accounts receivable as payment for a commission or professional fees in respect of services rendered under section 68.1 of the Bankruptcy and Insolvency Act.

Prior to his bankruptcy, Mr. Friedman, a music composer, entered into a loan agreement with OLE Media Management L.P. (OLE), whereby OLE loaned more than $4 million to Mr. Friedman. As security for the loan, Mr. Friedman granted OLE a security interest in his right to future distributions from SOCAN. The distributions represented royalty payment revenue relating to works composed by Mr. Friedman.

Following Mr. Friedman’s bankruptcy, he argued that the security he had granted to OLE should be of no effect pursuant to section 68.1 of the BIA. Section 68.1 provides that an assignment of wages, or an assignment of commissions or professional fees by a natural person for services rendered, is of no effect following a bankruptcy in respect of amounts earned or generated after the bankruptcy.

The Court held that section 68.1 of the BIA is intended to assist individual bankrupts in obtaining a fresh start. The Court, however, found that it would be against the spirit and intent of the BIA to use an expanded interpretation of section 68.1 so as to encompass the royalty distributions. In the Court’s view, since the remuneration arising in respect of the bankrupt’s SOCAN distributions resulted from activity conducted and completed prior to his bankruptcy, the security interest in the SOCAN distributions was outside of the scope of section 68.1.

The fruits of Mr. Friedman’s labour which generated the SOCAN distributions pre-dated the bankruptcy, and therefore the Court held Mr. Friedman’s ‘fresh start’ was not precluded by recognizing OLE’s security interest. Rather, the Court recognized that Mr. Friedman could earn income as a composer separate and apart from the SOCAN distributions or could earn other income from other activities, as he had in the past.