Moringiello: Digital Assets Challenge the Laws of Bankruptcy and Creditors’ Rights

Moringiello

“As valuable assets develop and are kept in an intangible environment, it’s important that we reclaim property using some of the reclassification and re-characterization tools that we already have,” said Juliet M. Moringiello, Commonwealth Professor of Business Law and director of the Business Advising Program at Widener University Commonwealth Law School.

“The division of rights in digital property has perplexed lawyers, judges and lawmakers for as long as individuals and business entities have been transacting in the online environment,” said Juliet M. Moringiello at the Southeastern Bankruptcy Law Institute Luncheon held at Georgia State University College of Law. Moringiello, Commonwealth Professor of Business Law and director of the Business Advising Program at Widener University Commonwealth Law School, spoke about how cyber assets challenge the laws of bankruptcy and creditors’ rights.

The complexity surrounding digital assets arises from contracts that govern rights in online assets, Moringiello said. “Every online asset has a third party in custody of it, every online asset is subject to an agreement with a third party, and often that agreement is labeled a ‘terms of use’—as if the folks who are holding the value just have the privilege of using for a while—or a ‘terms of service,’ connoting that the person entitled to the value is just using services for a limited period of time but doesn’t actually have property rights in it,” she said.

For bankruptcy and creditor’s rights purposes, this poses a problem, Moringiello said, because if you can’t determine who has rights in an asset and what the extent of those rights are, you can’t easily transfer or liquidate those rights.

Property rights bind the whole world—you know who owns a piece of real property and nobody can interact with that property without the permission of the person who has a right to possess it. On the other hand, contract rights generally bind only the contracting parties. But the standardization of contracts tests this line, and has for ages, she said. In that sense, the online environment is nothing new.

It’s important to “put the brakes” on contracted property, she said.

“The over-customization of property rights is bleeding into the tangible world environment,” she said. “As companies increasingly develop smart and connected products, even our tangible, real-world assets will be governed, or are governed, by terms and conditions that purport to limit the property rights of the persons who bought those items.”

She pointed to a cartoon the in the Wall Street Journal to illustrate her point. It reads “Really, a password for a jar of pickles?” “That’s kind of the direction we are going in,” Moringiello said.

To push back against contracted property, it’s essential to remember that property is not a thing. It’s a set of rights among people with respect to things, she said. Those rights include the right to possess, the right to transfer, the right to include and to exclude. Why do we allow terms of use to say ‘you have no rights to this asset’ Moringiello questioned.

Assets in nontangible form—such as bank accounts and shares of business entities—have been significant resources of value for long before the Internet ever came into being, she said, and laws governing property rights for bank accounts and share certificates are well developed through both statutes and case law.

The younger generation are so used to these terms of agreements that they have been socialized to think the contract terms always control and they own nothing, she said. Each year she asks her class “if you put a photo up on Instagram, who owns it?” Almost all of the class agrees that Instagram owns it.

“As valuable assets develop and are kept in an intangible environment, it’s important that we reclaim property using some of the reclassification and re-characterization tools that we already have,” Moringiello said.

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