Last July, I blogged about the judgment obtained by one of Light Sword Publishing's authors against Light Sword Publishing and its two principals, Linda Daly and Bonny Kirby. Among other things, the author alleged breach of contract, fraud in the inducement, and intentional infliction of emotional distress. A default judgment in the amount of $15,342.64 was entered against Bonny Kirby, and a default judgment in the amount of $16,558.63 was entered against Linda Daly and Light Sword Publishing.
The author reports that to date, neither judgment has been paid.
Now Writer Beware has learned that on December 15, 2008, Linda Daly and Light Sword Publishing filed Chapter 7 bankruptcy petitions with the US Bankruptcy Court in the Eastern District of Michigan. Chapter 7 is "[t]he chapter of the Bankruptcy Code providing for 'liquidation,' (i.e., the sale of a debtor's nonexempt property and the distribution of the proceeds to creditors.)" (Definition taken from the US Courts website.) The first meeting of creditors is January 22, 2009.
A bankruptcy petition has not been filed for Daly's other publishing company, LSP Digital, LLC, which to all appearances is still a going concern, publishing books and accepting submissions. Although it seems pretty clear that LSP Digital is simply a re-named Light Sword Publishing (most, if not all, of Light Sword's books are offered by LSP Digital, and the company's URL--www.lightswordpublishing.com--and some of its META tags remain unchanged), LSP Digital has been set up as a separate corporation (Light Sword Publishing's corporate info is here).
If Daly's petitions are granted, a trustee (or possibly trustees, since two petitions are involved) will be assigned by the court to determine assets, decide what can be sold to satisfy creditors, and disburse the resulting funds. Assets include all property owned by the corporation and/or individual--not just tangible items such as office equipment, supplies, clothing, cars, etc., but intangibles such as intellectual property and interests in incorporated/unincorporated businesses.
However, Daly's personal bankruptcy petition, which Writer Beware has seen, makes no mention of her interest in LSP Digital, or of the contracts in her/the company's possession. Also, while the bankruptcy petition for Light Sword Publishing (which Writer Beware has also seen) claims that Light Sword has had no income for the previous 12 months, LSP Digital was only incorporated last June. So what happened between December 2007 and June 2008, when Light Sword was still Light Sword, and was still publishing and selling the books that are now with LSP Digital?
Is Daly hoping that she can solve her personal and corporate credit problems by declaring one publisher bankrupt while continuing to operate the other? I can't help but be reminded of literary scammer Martha Ivery, who declared bankruptcy for her vanity press Press-Tige Publishing, but attempted to shield Press-Tige's assets by transferring them to a "new" publishing company called New Millennium. The bankruptcy trustee in her case wasn't fooled. I'm not a lawyer, so take this for what it's worth--but if Daly's petitions are granted, the possibility that the trustee will fail to discover the existence of LSP Digital seems equally remote.
What does this mean for LSP Digital authors? If Daly's petitions are granted, they should probably be prepared to be caught up in the mess--and if there is a bankruptcy clause in LSP Digital's contracts (which I haven't seen), they should not rely on this to protect them. Although bankruptcy clauses in publishing contracts guarantee the return of authors' rights in the event of the publisher's bankruptcy or liquidation, such clauses are rarely heeded by the courts, which tend to view publishing contracts as assets that can generate income to help pay off creditors. Contracts are generally held by the trustee until a decision is made to sell or abandon them. (See this post from the Dear Author blog, which provides a good summary of what happens when a publisher files for bankruptcy).
In the Martha Ivery case, the bankruptcy petition was filed in June 2002, but Press-Tige authors' rights were not released until December 2003, when the judge handed down an order to close administration of the estate and abandon all property (this long delay was partly the result of Ivery's several perjuries, both in court hearings and on the petition itself). Things went more quickly when romance publisher Triskelion declared bankruptcy--Triskelion closed its doors in June 2007, and assets were auctioned off in November of that year.
There will doubtless be more developments in this situation. I'll provide updates as I receive them.