November 24, 2013
O'Say it's not So: Virginia Judge O'Grady Rules Domain Names are not Property Saleable By a Chapter 7 Trustee
Courts do not agree on the issue of domain names as property. Some courts treat domain names as a contract right between the domain name holder and the registrar. Other courts recognize domain names as a separate form of intangible property. But, until now, courts have all agreed that domain names are, in fact, property, and encompass a property right that can be transferred by a bankruptcy trustee.
In the Alexandra Surveys International, LLC case, Federal District Court Judge O'Grady held that a domain name was not a property right that could be sold by a chapter 7 trustee, particularly when the domain name registration agreement would have been automatically rejected under 11 USC 365(d)(1). The case had an unusual set of facts. The debtor filed a chapter 11 petition on March 3, 2010. At that time, it owned the domain name "ALEXANDRIASURVEY.COM" but did not disclose the domain name in its bankruptcy schedules. The case converted to chapter 7 on January 27, 2012, and eventually closed. After the bankruptcy case closed a new company started by the debtor's principals, Alexandria Surveys, LLC, acquired the domain name. The decision doesn't state whether the original domain name registration had lapsed, and the name re-registered, or whether the debtor had managed to assign the name to Alexandria Surveys, LLC in some manner. A month later, a third party filed a motion to reopen the case and offered to buy from the chapter 7 trustee the previously undisclosed domain name and other assets of the estate. The bankruptcy court allowed the motion to reopen, and, over Alexandria Surveys, LLC's objection, allowed the sale of the domain name and other assets. Because the domain name and other assets had not been disclosed by the debtor to the chapter 7 trustee, they remained property of the bankruptcy estate notwithstanding the case's closure.
On appeal, the District Court held that the domain name was not property of the bankruptcy estate saleable by the chapter 7 trustee. Bound to follow the Virginia Supreme Court's earlier decision in Network Solutions v. Umbro International, the court concluded that "because Virginia does not recognize an ownership interest in ... web addresses, neither were property of Alexandria International's estate and neither were subject to sale by the trustee." The court stated further that even if the estate had an interest in the domain name, that interest was limited to the rights under the domain name registration agreement. The debtor's schedule G had listed web hosting contracts with Cox Communications, and the chapter 7 trustee had not assumed those contracts within the 60 day period dictated by 11 USC 365(d)(1). Thus, the interest was automatically abandoned by the trustee and could not be sold.
The decision, unfortunately, is riddled with errors. First, it miss-characterizes the holding in Network Solutions v. Umbro International, which defines a domain name as a contractual property right. The decision cannot be properly read to hold that a domain name is not property at all. Second, it assumes that the domain name contract is executory in nature, which while possibly the case can't be determined without reviewing the actual contract. Third, a review of Verisign''s list of authorized domain name registrars indicates that Cox Communications is not a domain name registrar. So, even if the debtor had purchased website hosting services from Cox Communications, it's domain name registration agreement was not with that company. Its domain name registration agreement must have been with some other, unknown, company. Thus, the executory contract was not properly disclosed. Fourth, even though the undisclosed registration agreement might have been automatically rejected under section 365(d)(1), that does not necessarily act as a termination or abandonment of the agreement. Chapter 7 trustees can, with the cooperation of the non-debtor party, assume and assign previously rejected agreements. Finally, the decision completely ignores the possibility that the debtor's principals had, post-petition, transferred the contract rights to their new company instead of allowing the domain name registration to lapse and then re-registering it. In that case, the Trustee would have a right to recover the property interest both under sections 542 and 549.
The most troubling aspect of the decision is the language stating bluntly that a domain name registration is not estate property. Fortunately, the conclusion does not find support in other cases and also runs contrary to the proper interpretation of Network Solutions v Umbro International. Domain names are property, and can be administered in a bankruptcy case.
In the Alexandra Surveys International, LLC case, Federal District Court Judge O'Grady held that a domain name was not a property right that could be sold by a chapter 7 trustee, particularly when the domain name registration agreement would have been automatically rejected under 11 USC 365(d)(1). The case had an unusual set of facts. The debtor filed a chapter 11 petition on March 3, 2010. At that time, it owned the domain name "ALEXANDRIASURVEY.COM" but did not disclose the domain name in its bankruptcy schedules. The case converted to chapter 7 on January 27, 2012, and eventually closed. After the bankruptcy case closed a new company started by the debtor's principals, Alexandria Surveys, LLC, acquired the domain name. The decision doesn't state whether the original domain name registration had lapsed, and the name re-registered, or whether the debtor had managed to assign the name to Alexandria Surveys, LLC in some manner. A month later, a third party filed a motion to reopen the case and offered to buy from the chapter 7 trustee the previously undisclosed domain name and other assets of the estate. The bankruptcy court allowed the motion to reopen, and, over Alexandria Surveys, LLC's objection, allowed the sale of the domain name and other assets. Because the domain name and other assets had not been disclosed by the debtor to the chapter 7 trustee, they remained property of the bankruptcy estate notwithstanding the case's closure.
On appeal, the District Court held that the domain name was not property of the bankruptcy estate saleable by the chapter 7 trustee. Bound to follow the Virginia Supreme Court's earlier decision in Network Solutions v. Umbro International, the court concluded that "because Virginia does not recognize an ownership interest in ... web addresses, neither were property of Alexandria International's estate and neither were subject to sale by the trustee." The court stated further that even if the estate had an interest in the domain name, that interest was limited to the rights under the domain name registration agreement. The debtor's schedule G had listed web hosting contracts with Cox Communications, and the chapter 7 trustee had not assumed those contracts within the 60 day period dictated by 11 USC 365(d)(1). Thus, the interest was automatically abandoned by the trustee and could not be sold.
The decision, unfortunately, is riddled with errors. First, it miss-characterizes the holding in Network Solutions v. Umbro International, which defines a domain name as a contractual property right. The decision cannot be properly read to hold that a domain name is not property at all. Second, it assumes that the domain name contract is executory in nature, which while possibly the case can't be determined without reviewing the actual contract. Third, a review of Verisign''s list of authorized domain name registrars indicates that Cox Communications is not a domain name registrar. So, even if the debtor had purchased website hosting services from Cox Communications, it's domain name registration agreement was not with that company. Its domain name registration agreement must have been with some other, unknown, company. Thus, the executory contract was not properly disclosed. Fourth, even though the undisclosed registration agreement might have been automatically rejected under section 365(d)(1), that does not necessarily act as a termination or abandonment of the agreement. Chapter 7 trustees can, with the cooperation of the non-debtor party, assume and assign previously rejected agreements. Finally, the decision completely ignores the possibility that the debtor's principals had, post-petition, transferred the contract rights to their new company instead of allowing the domain name registration to lapse and then re-registering it. In that case, the Trustee would have a right to recover the property interest both under sections 542 and 549.
The most troubling aspect of the decision is the language stating bluntly that a domain name registration is not estate property. Fortunately, the conclusion does not find support in other cases and also runs contrary to the proper interpretation of Network Solutions v Umbro International. Domain names are property, and can be administered in a bankruptcy case.
Labels: alexandria surveys, domain names, kremen v cohen, umbro
¶ 11:16 AM
