Here is the transcript [PDF] from the last bankruptcy hearing, as text. That was the one on January 8 about whether SCO could renew the New Jersey lease for three years or not. We learn some interesting things.
First, according to SCO's witness, Mike Olson is no longer with SCO. I'm not sure if this witness, who is there to testify about trying to find space to lease, would know if he's still with Germany or not, but he testifies that he's not around in the US now.
I think you'll see why the judge decided what he did, quite aside from the fact that bankruptcy court is set up tilted toward a Chapter 11 debtor anyway. Grace Robson of Berger Singerman, who we've mainly seen listed on the bills heretofore, argued for SCO, and I thought she was well prepared and presented well, clearly and persuasively, which is even more impressive when you consider that Novell's attorney, Adam Lewis of Morrison & Foerster, clearly brought out in his questioning of SCO's witness, Justin Swenson, that SCO didn't look around for a new place after the bankruptcy at all. Not at all. They did look around in March, then decided things were so up in the air, it'd be better to wait and see what happened in the Utah case. What happened was that SCO lost and then filed for bankruptcy, and then instead of looking for a cheaper place, they just waited until it was an "emergency" and then filed the motion.
Robson would make a good programmer, I think, because she is very logical. Her brain thinks neatly and if I might say it, modularly. No spaghetti code. It's organized in her mind and she's planned in a kind of outline format, I'd say. Each point is developed on its own and presented without any side journeys or folksiness, but she gives off a sincerity, which I'm sure SCO can benefit from.
She begins by stating the legal standard, what case law says should determine a matter like this, which basically is that a Chapter 11 debtor gets to do as he pleases without being second guessed as far as business decisions are concerned. It's a very liberal standard: The case law explains that the business judgment test is not a difficult test to meet, and it's not intended to allow for the second guesses of the debtors' business judgment. The Court is simply to determine whether the proposed decision benefits the estate. So that's the ruler. It's not up to the Court to see if he thinks he could do better; the standard is simply will it benefit the estate, not whether another course might benefit it more.
Next she states clearly what the witness will testify to, all that SCO tried to do to find a better deal, spinning it favorably of course, so as to make it appear that SCO tried and tried, but this New Jersey lease is the best that it can get. They looked at 12 to 15 spaces, and none would do, and none were for a shorter time period than this lease, and if you add on moving expenses and what not, and factor in that SCO has specific requirements for its research and development lab, it just can't find anything better. And if they stay there without a lease, they would be a holdover and they'd have to pay more, that the statute in New Jersey for holdovers is that they pay double the rent: I believe that the lease, as currently drafted, provides for one and a half times rent, but in any event, we would be considered a holdover tenant as of January 1st of this year, and I would also proffer that the company estimates it would take between three and four months to negotiate and move into a new space from the present time. So, during that time period, we would be liable for double rent under the hold- over statute as an administrative expense as well as incur moving costs and any build-out and IT expenses. Did you notice that she said that she *believed* the lease provides for one and a half times the rent? Now, when a lawyer fudges on a detail, my ears perk up. She's very precise in all particulars, but here she tells the court she *believes* that's how the lease reads. I believe Mr. Lewis's ears also perked up, because he states near the end: First of all, before I get into the merits of the motion as such, let me just say, I'm not at all convinced that the New Jersey holdover statutes tell us what the holdover rent would be. I think it's an expensive administration, and it would be the reasonable value of the premises, not what the statute says. At least that's what - And I don't know what the answer there would be, but I don't think you can assume it's two and a half times or one and a half times the current rent or even less for that matter. That's a polite way of saying that he thinks Ms. Robson may have stretched a little. When lawyers stretch the truth in a courtroom, they usually use words like, "I believe it's that way," and so he may be right. I decided to look around and see which of them was more correct.
You'll find a case here [PDF] in "Quarterly Report on Current Developments
in Real Estate Law - October 1, 2006 through December 31, 2006", where the court upheld such a clause, but note that the article quotes the attorney who found the case saying it's rare that courts uphold those types of clauses:
The current case properly differentiates Village Station,
but still is vulnerable to the criticism that double rent is a
pretty high figure for liquidated damages. Norm
Guttmacher, the Ohio lawyer who sent the case in,
commented: “I have rarely come across a case where a
court specifically holds that, in a commercial lease
situation, a ‘double rent’ provision for a holdover tenant
is enforceable and is neither unconscionable nor
unenforceable as a penalty. I’m not sure how often this
issue is squarely faced by courts; but given the prevalence
of this type of provision in commercial leases, it is
reassuring at least to counsel for landlords.” So, what Lewis was saying likely reflects his awareness that most courts won't uphold such a lease clause, because they view them as unconscionable or excessive, but since it's a matter that you'd have to litigate, he can't say for certain. Here's a New York case [PDF] where the court absolutely did uphold such a clause. Even so, I'd say he was more correct in his presentation.
Mr. Lewis then cross examines the witness -- that's the part with Q and A instead of names -- and I finally see why Morrison & Foerster assigned him to this case. He is in his element. Mr. Swenson is a good witness, but Mr. Lewis is able to get several important admissions that undermine the glowing tale that the very capable Ms. Robson has just spun. First, we learn, it was in March and April that SCO looked for new office space. After filing for bankruptcy, they haven't lifted a finger. And they only looked for one day before deciding that their current digs were best. The witness does say they looked around after that a bit, maybe over a month, tops. Done by April. They also looked only in a 10 mile radius from where they are, so as to make it an easy commute for employees. As Mr. Lewis points out, employee comfort is all well and good, but when you are facing bankruptcy, everyone needs to tighten their belts so the company can to try to survive. He would like SCO to try again to find a cheaper place or a shorter lease or both.
Novell's Adam Lewis tells the court that SCO is not only not showing reasonable business judgment, it's showing no business judgment at all. Of course, we know the outcome was the judge said he would let SCO sign the lease. I also think Novell expected that likely outcome, given the liberality of the standard. So why fight at all? I think it's to show on Novell's side that they will litigate everything, every little bit. And he's making a record. This is by no means the end. The court in announcing its decision makes a mistake, calling the lease "the headquarters lease", and seeming to make its decision based on that. When Novell reminds him that the New Jersey lease is not for the headquarters, he says he misspoke. The way Lewis particularly makes sure the record is clear tells me that this is building a record. And as I say, while I don't get the impression that he expected to win this particular motion, given the way bankruptcy court works, he did have an opportunity to present the thought that SCO is spending in boatloads, without good judgment, as if it were not in bankruptcy. The only way to get bankruptcy's tilt to go the other way is to persuade the US Trustee and the court that something the debtor is up to is fishy.
Our thanks go to Groklaw's kh for the text. I appreciate the help so very much.
********************************************
UNITED STATES BANKRUPTCY COURT
DISTRICT OF DELAWARE
IN RE:
The SCO Group, Inc.,
et al.,
Debtor(s). |
Chapter 11
(Jointly Administered)
Case No. 07-11337 (KG)
Jan. 8, 2008 (10:03 a.m.)
(Wilmington) |
TRANSCRIPT OF PROCEEDINGS
BEFORE THE HONORABLE KEVIN GROSS
UNITED STATES BANKRUPTCY JUDGE
Proceedings recorded by electronic sound recording;
transcript produced by transcription service.
INDEX
Direct Cross Redirect Recross
WITNESS:
Justin Swenson
2
THE CLERK: Please rise.
THE COURT: Good morning.
ALL: Good morning, Your Honor.
THE COURT: Thank you, you may be seated. Ms. Werkheiser, good morning.
MS. WERKHEISER: Good morning, Your Honor. For the record, Rachel Werkheiser from Pachulski, Stang, Ziehl & Jones on behalf of the debtors. With me today, Your Honor, is Ms. Robson from Berger Singerman.
THE COURT: Welcome, good morning.
MS. ROBSON: Good morning, Your Honor.
MS. WERKHEISER: She's previously been moved pro hac vice into this Court.
THE COURT: Yes.
MS. WERKHEISER: Thank you, Your Honor. And also with me is the operations manager from the company, Justin Swenson.
THE COURT: Mr. Swenson, good morning.
MS. WERKHEISER: With that, Your Honor, I believe there's only one matter left on the agenda which is the motion of the debtors to assume non-residential real property releases with GRE Mountain Heights Property LLC and Canopy Properties, Inc., and I'll turn the podium over to Ms. Robson.
THE COURT: Thank you. Thank you, Ms. Werkheiser.
3
MR. WERKHEISER: Thank you.
MS. ROBSON: Good morning.
THE COURT: Ms. Robson, good morning.
MS. ROBSON: Good morning, and thank you, Your Honor. The contested issue here - We've been able to resolve with Novell the issue of the Utah lease. So my understanding is that they're not going to be prosecuting the objection to the Utah lease so we're going to be litigating the issue of whether the New Jersey lease was an exercise of the debtors' sound business judgment. The case law explains that the business judgment test is not a difficult test to meet, and it's not intended to allow for the second guesses of the debtors' business judgment. The Court is simply to determine whether the proposed decision benefits the estate. Here, I think, we'll provide ample evidence that the proposed assumption of the New Jersey lease, as amended, does satisfy that test. Your Honor, Mr. Swenson will testify that the company -
THE COURT: Are we going to proceed by a proffer and then a cross-examination or do you prefer - Let me - Good morning, Mr. Lewis.
MR. LEWIS: Good morning, Your Honor, thank you.
THE COURT: Let me just ask if I may, Ms. Robson -
MS. ROBSON: Sure, of course.
THE COURT: - forgive me. Let me interrupt and ask
4
-
MR. LEWIS: Good morning, Your Honor. Just for the record, Adam Lewis of Morrison & Foerster and Michael Nester of Young, Conaway -
THE COURT: Yes, good morning, Mr. Nester.
MR. LEWIS: - for Novell.
THE COURT: And Mr. McMahon, I don't want to leave you out. Good morning. MR. McMAHON: Thank you, Your Honor. Good morning, happy New Year.
THE COURT: Same to you, thank you.
MR. LEWIS: Your Honor, we have withdrawn our objection as to Utah for the simple reason that we now see what it looks like, and it seems reasonable to us.
THE COURT: Right. At the time that the objection was filed, we did not have the amended lease.
MR. LEWIS: That's right, and given the space, and given the three-month horizon where the debtor can terminate the lease on three months' notice and the rent, we think that's reasonable and don't intend to pursue the issue. But we are still concerned about New Jersey. The debtor has made some efforts to talk to us about alternatives. Nothing has panned out, unfortunately. The debtor's not able to, we're told, to change the deal in any way that would be acceptable. In terms of how to proceed, I'm more or less prepared to
5
leave it up to the debtor how it wants to do this -
THE COURT: Okay.
MR. LEWIS: - if it wants to make a general proffer and let me cross-examine or if it wants to make its own record first and let me cross-examine, it's really up to the debtor how it thinks it wants to present its case.
THE COURT: Okay.
MR. LEWIS: Either way I'm prepared to cross- examine.
THE COURT: Thank you, Mr. Lewis.
MS. ROBSON: Your Honor, my preferred method of proceeding would be to proffer testimony first of Mr. Swenson.
THE COURT: That is acceptable to the Court.
MS. ROBSON: Okay, thank you, Your Honor.
THE COURT: Thank you.
MS. ROBSON: If called to testify, Mr. Swenson would testify to the following: Justin Swenson is the operations manager for SCO Operations, Inc. The company - In that capacity, he is responsible for the researching and assistance with the negotiation of the company's leases. In that position he began with the company exploring new lease options for New Jersey in approximately March of 2007. They looked at approximately 12 to 15 different premises. Considerations and comparisons were done with respect to the
6
location and proximity to where the employees live. The number of employees, i.e., the headcount of the employees versus the space needed, the space and configuration needs for the company, for example, New Jersey houses the company's lab for their engineers to do testing and the like and requires certain specifications that are not normal for a corporate premises. So, for example, they require excessive amounts of power compared to normal offices. So, while it's not impossible to have such configurations done in a new space that would require build-out and other modifications to a new premises. The company also considered and compared the price of a new lease, including what the monthly rent would be, the term of the lease, requirements for deposits, and the like, as well as the expense to move their premises, including the physical move, IT expenses that might be incurred in connection with the move, possible build-out to accommodate for their engineering lab, and none of the New Jersey alternatives had terms for less than three years nor the configuration for their lab. So, at a minimum, any alternative would require a build-out as well as moving expenses and IT expenses. Therefore, the company did negotiate what they considered favorable terms to extend their current lease by a three-year term as well as get an option for another three-year term. Your Honor, I'd like to point out - That's the end of my proffer, however, there are
7
additional legal issues that may come up to the extent that the lease is not approved as amended. New Jersey statutes do provide for a holdover tenancy which is double the rent. I believe that the lease, as currently drafted, provides for one and a half times rent, but in any event, we would be considered a holdover tenant as of January 1st of this year, and I would also proffer that the company estimates it would take between three and four months to negotiate and move into a new space from the present time. So, during that time period, we would be liable for double rent under the hold- over statute as an administrative expense as well as incur moving costs and any build-out and IT expenses.
THE COURT: Thank you very much.
MS. ROBSON: Thank you.
THE COURT: And you certainly - you will have an opportunity to make argument after the cross-examination.
MS. ROBSON: Okay, thank you, Your Honor.
THE COURT: Mr. Lewis. Mr. Swenson is available in the courtroom to be cross-examined, and I assume you're calling him to the stand.
MR. LEWIS: Yes, Your Honor, thank you, I would like to call Mr. Swenson, please.
THE COURT: Mr. Swenson, if you would remain standing so that you can be sworn. Thank you, sir.
THE CLERK: Please raise your right hand, state your
8
Swenson - Cross 9
full name, spelling your last name for the Court.
THE WITNESS: Justin Mark Swenson, S-w-e-n-s-o-n.
THE CLERK: Thank you.
JUSTIN SWENSON
having been duly sworn testifies as follows:
THE CLERK: You may be seated.
THE COURT: Thank you. Mr. Lewis, you may proceed.
MR. LEWIS: Thank you, Your Honor. CROSS-EXAMINATION BY MR. LEWIS:
Q. Good morning, Mr Swenson.
A. Good morning.
Q. Thank you for taking the time to come here and testify.
I'm sure that you have much better things to do, and maybe it will turn out you did. You've heard Ms. Robson's description of the testimony that you would give on direct examination by her under oath; did you not?
A. That's correct.
Q. And do you affirm that that would be in fact your testimony?
A. That's correct.
Q. Okay. So, let me begin a little bit by going back to the beginning of that testimony, Ms. Robson stated that you were responsible for leasing activities and took part in some of the negotiations that she later summarized, very briefly.
9
Swenson - Cross 10
What exactly was your role with respect to leasing in general?
A. I assisted and basically was the liaison between executive management and landlord and our agent negotiations for leases.
Q. Okay, and so, do I understand from your testimony just now that the SCO Operations, Inc., which I take it is the party that conducted the negotiations; is that right?
A. That's correct.
Q. That SCO Operations, Inc., which I'll just refer to as Operations if I need to -
A. Okay.
Q. - talk about them again specifically. That Operations worked through a real estate broker of some sort to - or leasing agent to find a new lease?
A. That's correct.
Q. And was it the same leasing agent throughout the period from March of 2007 until now?
A. Yes.
Q. Okay. Who was that party?
A. The gentleman's name is Charlie Dillon with the Staubach group out of New Jersey.
Q. Has the debtor used Mr. Staubach in the past?
A. I believe so.
Q. Okay. Would that be for its extension of the original
10
Swenson Cross 11
lease term?
A. That's correct.
Q. Okay. That was in 2005 or thereabouts?
A. I believe so. I wasn't affiliated with that lease.
Q. Okay. Was that because you weren't with the company or you had no role?
A. It wasn't because I wasn't in the role of negotiating the leases at that time.
Q. Okay. Now, do I understand from your testimony that you had no direct contact with the landlord, that the debtor - that the operations contacts with the landlord were instead through Mr. Dillon?
A. I would have contact directly with the landlord with connection with the agent on our behalf as well. So it would be conference calls or meetings with the landlord directly.
Q. Okay. Now, the proffer of testimony indicates that
Operations began its leasing efforts in March of 2007; do you recall that?
A. That's correct.
Q. Can you describe the course of those negotiations very generally? Now, I'm only talking about New Jersey. We don't need to worry about Utah.
A. As far as negotiations, it was more of a tour at the time in March to evaluate the opportunities for new leases and also to help probably put ourselves in an advantage with the
11
Swenson - Cross 12
current landlord to let him know that we would seek other opportunities if needed to kind of help in our negotiations if we decided to stay at the current residence.
Q. Okay, and how long did that tour last?
A. Most part of the day including discussions with the current landlord at the end of the day.
Q. So this occurred in March of 2007?
A. That's correct.
Q. Okay. So, in March of 2007, you toured other potential spaces with Mr. Dillon?
A. Yes.
Q. And then after looking at those and considering them some, you had a meeting with the current landlord.
A. Just to talk briefly about, you know, renewing in the current space and what our options were going to be potentially.
Q. What was the landlord's reaction to -
A. Very favorable. He wanted to retain us as a tenant.
Q. Okay, and did you discuss at all at that point what sort of terms?
A. Not at all.
Q. Okay.
A. Let me just say, with the exception of possible, at a minimum, trying to reduce the term to three years, staying to a three-year termer at that point.
12
Swenson - Cross 13
Q. Okay, and the original lease was for how many years?
A. The original lease?
Q. Yes.
A. I believe it's five years. I haven't reviewed that on the original lease document.
Q. And the renewal is three years?
A. We had a - I believe - and it wasn't at my point with negotiations, they entered into a one-year extension lease prior to the expiration of the 2007 lease.
Q. Okay, but what was the next step that you took with respect to the New Jersey lease - "you" being operations?
A. Basically to evaluate the properties and the opportunities. As we toured the buildings there wasn't a whole lot of opportunity for a drop-in type of situation. We would have had to modify the current spaces. Either they were too small, too large a space that we were needing. They weren't a custom fit to the current business.
Q. And over what period of time did this activity take place?
A. It would have been taking place during my visit up to at least another month of evaluation, but primarily on entering of those premises, you could identify whether it was going to be sufficient for the business as is or would meet modification.
Q. So would it be fair to say that the process you just
13
Swenson - Cross 14
described now, the initial tour, initial conference, and some followup with other potential properties was concluded somewhere around the end of April of 2007?
A. It was probably concluded then. Based on factors within the company we just - we kind of ceased further negotiations with any party at that point because of current litigation that was pending.
Q. Okay. So that would include ceasing negotiations with the current landlord as well; is that right?
A. That's correct.
Q. And when you say Òbecause of the litigationÓ, can you tell the Court how that related to whether to continue discussions with potential landlords?
A. Well, if I understand correctly, based on the litigation that was pending, coming up in August or September with Novell, the executives didn't want to enter into any lease at that time or up to that point based on the current litigation and the rulings that were to come either in our favor or not in our favor.
Q. Let me see if I can get you to expand on it a little bit, and if a question isn't clear, please tell me.
A. Okay.
Q. Don't try to speculate. It's my job to ask you clear questions.
A. Okay.
14
Swenson - Cross 15
Q. What was the - Did the executives explain their rationale to you about what the pendency of the litigation meant, how that would affect whether you wanted to --
A. No, I interpreted --
Q. Let me also say, it's important to let me finish my question for a couple of reasons. First is, you want to be sure to hear exactly what my question is, and secondly the reporter can't take down people talking on top of each other.
A. Okay.
Q. So, did they explain to you their rationale of what the potential outcomes would mean in terms of a new lease and why that, therefore, meant that they didn't want to continue leasing efforts?
A. No. The only understanding I knew is that we were to kind of cease on negotiations at that point, and there was a personal interpretation it was based on pending litigation.
Q. Okay. So, you're telling me it was your interpretation - Let me see if I can rephrase this. Is it your testimony that you got the clear message that you shouldn't pursue negotiations for the present somewhere towards the end of April and that your interpretation of the reasons was that the management wanted to see how the litigation that was coming up turned out before they resumed their negotiations?
A. Correct.
Q. Okay. Who were the managers you were talking to about
15
Swenson - Cross 16
this at that time?
A. Burt Young, the CFO; Mike Olsen, the controller, VP of finance.
Q. Okay. Anyone else?
A. Those were the two primary contacts.
Q. Okay, Mr. Young, as I recall, is no longer with the company; is that right?
A. That's correct.
Q. Is Mr. Olsen still with the company?
A. He is not.
Q. He is not either?
A. He is not.
Q. So, you entered a kind of hiatus in terms of negotiations with your landlord somewhere towards the end of April; is that right?
A. Yeah, I mean, we were still talking to the agent. The agent was still calling to see if we had determined what direction we were going and we had backed off as a company, but the agent was still actively involved in trying to complete a transaction.
Q. Okay. But in context, being the company and the agent, the company's position was essentially, Go ahead and do whatever you're going to do, but we're not doing anything for the moment; is that right?
A. That's correct.
16
Swenson - Cross 17
Q. Okay. When did that hiatus come to an end, if ever?
A. As we moved closer to the terms of the lease, I continued to push forward to try to, you know, I was always actively pursuing opportunities just because I knew it was ultimately going to term out. I would say, after the litigation of the IP issue or the UNIX copyrights with Novell, shortly thereafter, we started to ramp up again on the leasing opportunities.
Q. Would that have been just about the time the company filed its bankruptcy petition?
A. Yeah, it was shortly after that.
Q. Shortly after it filed its petition?
A. Yeah, that's correct.
Q. Okay. Tell me exactly what you did to restart discussions for a new lease.
A. At that point it was determined that they didn't want to move at that point because of the build-out costs and all of the relevant costs associated with a move, all of those costs associated there.
Q. "They" being management?
A. That's correct.
Q. And who in management was it your understanding made that -
A. At that --
Q. -- decision?
17
Swenson - Cross 18
A. I'm sorry. At that time it was Sandy Gupt A.
Q. Okay. So, Mr. Gupta - is it a Mr.?
A. Yes.
Q. Mr. Gupta told you at that point that the company had made a decision to stay in its existing premises; is that right?
A. That's correct.
Q. And for the reasons you just discussed, build-up costs, moving costs, and so on.
A. In addition to relocation of staff. I mean the moving and having staff commute to a new area was also a big factor as well.
Q. Okay. So at that point, which was shortly after the bankruptcy was filed, the company didn't make any further efforts to negotiate with other potential landlords; is that right?
A. That's correct.
Q. Okay. And the only negotiations, therefore, were with the existing landlord.
A. That's correct.
Q. And when did those negotiations with the existing landlord actually resume?
A. I honestly can't recall a specific date. It was probably in the October time line.
Q. Somewhere in October.
18
Swenson - Cross 19
A. Yeah.
Q. Uh-huh. The beginning of October or late October?
A. I would say mid-part of October.
Q. Mid-part of October, okay. When Mr. Gupta told you about the company's decision to remain in the existing premises, was there any discussion between you and him about how long the company might continue in existence - Let me rephrase that. That's a bad question. Did you discuss at all the question whether you should push for a shorter renewal term in light of the company's current circumstances of its being in bankruptcy and facing adverse judgments from Novell?
A. We knew with the current landlord there was no option for less than three years.
Q. So, you didn't make any further effort to discuss that with the landlord after that?
A. It was discussed with the agent, Charlie, but he inferred that there was no option for less than three.
Q. So, let me be really clear here. Just - Did you ask Mr. Dillon to talk to the landlord about reducing the renewal term from three years in light of the company's current circumstances in late October or did you simply talk to him about the issue and learn from him that he felt there would be no point in doing that?
A. We spoke. He felt like there would no option in doing so based on two factors: that we were up against our deadline of
19
Swenson - Cross 20
terminating the lease and the fact that we had already extended our lease by one year, previous year. So, it was the landlord's understanding that we would renew on a, I believe, I wasn't involved with that, but that we would renew on a larger term lease based on the one-year extension previous to the year.
Q. Okay. So it's your understanding that no further effort was made with the landlord to induce the landlord to agree to a shorter extension than three years?
A. Not directly.
Q. Okay. When you say Ònot directlyÓ, that implies to an old salt that there something indirectly, you have something else in mind. Can you tell us what that is if there is such a thing?
A. When I say Ònot directlyÓ is that with communications between myself and the agent, it was just understood that it wasn't an option to do less than three years.
Q. Okay.
A. So it was never directly communicated to the landlord that it was a request.
Q. Okay. And to be clear, the debtor made no effort to find other alternatives once the bankruptcy was filed, for whatever reasons.
A. There was discussions but as far as actively pursuing any open leases or available spaces, no.
20
Swenson - Cross 21
Q. Okay. Now, one of the reasons in the proffer of testimony for renewing this space was the lab space that you needed and a couple of points about that Ms. Robson made as part of your proffer were energy needs, electricity for the lab space, and the specialized nature of the lab space; do you recall that?
A. That's correct.
Q. And that's your testimony; right?
A. Yes.
Q. Okay. There were other reasons: where people were located and so on. Given the company's current situation, how much activity is going on at the lab space at the moment?
A. The facility holds, I believe, approximately 25 headcount. I believe 15 to 18 of those are current engineers. Depending on their time at the office - the engineers keep odd hours, so they're in there all the time, whether the space and capacity of individuals within that space, it's here and there. They're not all within the lab at any one given time, so, they're going in and testing different features or whatever the engineers may need those testing systems and so forth.
Q. Could the debtors suspend any portion of their lab activities for the present, while their Chapter 11 case develops?
A. I probably can't testify whether that would be the case.
21
Swenson - Cross 22
My understanding and communications previous to Sandy Gupta's departure was it would be a major disruption and whether it was for a short period or long term, it would severely damage ongoing product improvements.
Q. Okay. So, is it your testimony that you had a discussion with Mr. Gupta about the possibility of suspending some or all of the activity at the lab for some short period of time while the Chapter 11 case progressed?
A. It wasn't in relation to the Chapter 11 status. It was in relation to the reduction of space or moving - potentially moving equipment and space.
Q. Okay. And Mr. Gupta indicated to you that he felt that that would damage the company's prospects if there was even a brief suspension of activity?
A. Product development, yeah.
Q. I'm sorry.
A. On product development.
Q. On product development.
A. Yeah.
Q. Okay. And you mean by Òproduct developmentÓ improvements on the products?
A. That's correct.
Q. That you provide already?
A. That's correct.
Q. Okay. Now, you talked a little bit - or Ms. Robson for
22
Swenson - Cross 23
you, talked a little bit about the convenience of the current location for your current employees. In terms of siting, what other alternatives were there for the company as a result of your contacts with Mr. Dillon?
A. As far -
Q. Where would the other spaces - might the other spaces have been located?
A. I believe we took a circumference of about five to ten miles at the current location to try to minimize the impact to the current employees.
Q. And were there other alternatives, all things being equal, which they rarely are, within that five to ten miles or was the current space the only space within that five to ten miles?
A. Oh, there was - We toured 10, 12, to 18 properties that day within that proximity of our requirements.
Q. Okay. Do you have any understanding as to where the company's employees are located generally? Are they located, for example, generally around, scattered around the current location in a circle or to the east or to the west?
A. I honestly don't know.
Q. Okay. Who assessed the question of convenience for the employees?
A. Sandy Gupt A.
Q. Okay. Did he discuss that in any length with you or was
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Swenson - Cross 24
that simply a conclusion that he provided you that had to be within 10 to 15 miles of the current site?
A. He had directly mentioned that it had to be within a close proximity of the current facility in order to accommodate the employees.
Q. Okay. But he didn't go into any further detail on that subject with you?
A. Just to say that they needed to be within that certain circumference of the current space.
Q. Okay.
MR. LEWIS: All right, Your Honor, I think I have no further questions.
THE COURT: Thank you very much.
MS. ROBSON: We have no redirect, Your Honor.
THE COURT: Mr. McMahon, any questions? MR. McMAHON: No, Your Honor.
THE COURT: Mr. Swenson, I have just one question. In connection with the reduction in space that's contemplated by the amended lease; is there a reduction in the lab space?
THE WITNESS: Currently as of today, no. There's a - within the contract it does state that the current lab space can be used in its entirety until the landlord so chooses to demise that space and reduce our actual square footage.
THE COURT: Okay.
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THE WITNESS: But as far as staff in the vacated space, they are now back into the reduced space, and we have no staff working in the vacated space. We are just occupying the entire lab of approximately 3,600 square feet, and based on the landlord's request on demising for a new tenant, that would reduce down to approximately 2,000 square feet.
THE COURT: Thank you. All right.
MR. LEWIS: Nothing further, thank you, Mr. Swenson.
THE COURT: Thank you very much. You may step down, sir. Argument.
MS. ROBSON: I think that the business judgment standard has been met here. The company has presented testimony that there's a benefit to the estate in terms of reduced rent, reduced space, and that the decision process in getting to the form of amended lease was an exercise of the debtors' sound business judgment. Again, other factors that militate in our favor are that, to the extent that we are deemed a holdover tenant as of January 1st, we would be liable for between one and a half to two times the current rent, not the amended lease rent, but the current rent, which is approximately $44,000 in the New Jersey space, so that would be approximately $88,000 per month while we are in the premises, and it would take approximately four months between negotiating and finding new space let alone the moving
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expenses, build-out costs, and other affiliated expenses. Therefore, Your Honor, I think you should overrule Novell's objection and grant our motion as proposed.
THE COURT: Thank you. Mr. Lewis.
MR. LEWIS: Thank you, Your Honor. First of all, before I get into the merits of the motion as such, let me just say, I'm not at all convinced that the New Jersey holdover statutes tell us what the holdover rent would be. I think it's an expensive administration, and it would be the reasonable value of the premises, not what the statute says. At least that's what - And I don't know what the answer there would be, but I don't think you can assume it's two and a half times or one and a half times the current rent or even less for that matter. On the merits, Your Honor, I think what we've heard is that although the debtor decided not to continue to try and negotiate after April of last year because of the cloud over its future, that is to say, because it made no sense to make a major commitment given the cloud over its future posed by the litigation between the debtor and Novell. Once it lost that litigation and went into bankruptcy, it was prepared to go ahead and resume negotiations for a long-term extension. I mean it makes no sense to me, Your Honor, that pre-petition, the cloud over its future, which only was greater by the time mid-October rolled around, a month after the bankruptcy was filed. The
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cloud over its future was even greater then all of a sudden it made sense to commit to three more years when it didn't make sense to even continue negotiating pre-petition for months after April, and furthermore, the debtor made no effort - the testimony is this morning, made no effort whatsoever to even think about other space and in fact made no effort to do anything until mid-October knowing that the space - that the expiration of the lease was rolling around, that it's in Chapter 11, that it has fiduciary duties to its creditors as well as to its shareholders to the extent that there might be a surplus for the shareholders. You know, I understand the limitations on the sound business judgment test, that it's not particular exacting, but this is no business judgment at all. In fact, it's contrary to the business judgment that they made in April. So, while I understand the dilemma everyone faces here in terms of where they're going to bo located, I don't understand how this is an exercise of business judgment, and there are other issues here, Your Honor. For example, we're talking about a Chapter 11 debtor accompanying some financial distress in a market that's somewhat down for IP companies and software companies, and yet the debtor set a parameter last April that it never even reconsidered of trying to have space within 10 to 15 miles of the current space with the convenience of its employees. Now, I'm in favor of the convenience of
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employees. I've worked a long time myself, but when you're in Chapter 11, you've got to think a little bit differently. In fact, before you're in Chapter 11, when you're in financial distress, you've got to think a little bit differently about the world, and your employees have to think a little bit differently about the world, not just continue life as it was. It's just not the same situation anymore. And yet the debtor has not done that. Hasn't done any of the things you would expect with respect to this lease to do once it was in financial distress because of the judgments and then once it was in bankruptcy. And so, to see this as the exercise of sound business judgment, I think, Your Honor, is just contrary to the record to the witness's testimony. I understand the problem of trying to find some alternative. There was no real effort to assess, Well, can we suspend lab activities for a few months while we see where this case goes and then find some new space. It may well have been damaging somewhat to the company's prospects, and, Your Honor, we were not told that the lab has anything to do with current operations. It only has to do with product development. Well, if you're in financial distress sometimes you have to suspend product development a little bit while you get your house in order if you can. So, what we hear is, essentially, life is as it always was. Life as it was before April of 2007, and indeed, if you hear the proffer of testimony, Your
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Honor, we were told activities started in March of 2007. It was left for the Court to infer that that went on all the way through the bankruptcy, and this was the best we could do. As the Court's now heard this morning, that's not what happened at all. So, Your Honor, I submit that this does not meet the sound business judgment test, and the debtor needs to do what it can about finding some other space to put its essential employees for the moment in until we know where this case is going, because we don't know where this case is going, and what's going to happen here is through this decision and other decisions that are surely going to be like it and already have been like it, for example, the sale motion, we're going to be spending money in this case on an administrative basis in boatloads, and there's going to be nothing left for anybody at the end unless the debtor hits a goldmine in the litigation with Novell, which the record suggests is not going to happen, and that's a poor bet to make for the creditors. And while my client, Novell, obviously has an interest as a competing party on the IP level, it is a creditor and it as a pretty big claim, and it's likely to get bigger. Thank you, Your Honor.
THE COURT: Thank you. Ms. Robson.
MS. ROBSON: Your Honor, if I may just address a couple of points -
THE COURT: Certainly.
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MS. ROBSON: - as to those raised. The part about the litigation having a cloud over what the debtors' negotiations were going to be. I believe Mr. Swenson clarified that that was just his interpretation of what the reasons were to cease the negotiations at the time not that that was the actual business reason. Again, there were _- I believe Mr. Swenson also testified that no further efforts were made with respect to New Jersey because they had negotiated the terms with the landlord and determined that that space, the current space, was the best suited for the company based upon the circumstances, which not only included convenience to the employees but also reduction in space, reduction in rent, mitigation of, you know, or no moving expenses being involved and no build-out costs. Mr. Lewis also mentioned financial distress and that the market's down for IP companies, but there's been no evidence of that, so, that's just argument without any evidence to support that statement. Mr. Swenson also testified that any suspension of lab activities would be damaging. While there's no monetary amount on that, that is a negative factor, and Mr. Swenson also did testify that upon reviewing the premises in March and going on the tour with the broker that you could tell right away from viewing the premises whether it would be suitable for the company's needs. So, while there was a month or so negotiations there, then it ceased, and then
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picking it up later a couple months down the road, there's no reason to believe that circumstances would have changed so much between the end of April and September after the case was filed. Anyway, to the extent these leases are not assumed or the assumption are not approved today, any new lease by the debtor would be an administrative expense of the estate. Mr. Swenson testified that he did not believe that there would be - the company would be able to negotiate a lease for less than a five-year term. There's no guarantee that the rent for the amount of space required under any new lease would be more favorable than what's currently been negotiated, and as much as we hate to admit it, while the company is in bankruptcy, landlords may be more hesitant to rent to a client in bankruptcy. So, they may require maybe more onerous deposits, letter of credit, and the like, which is not required under the current lease as amended. Thank you, Your Honor.
THE COURT: Thank you. Mr. Lewis, sir -
MR. LEWIS: Your Honor, if I may just -
THE COURT: You may, certainly.
MR. LEWIS: - address a couple very brief remarks. First of all - and they're really related. The idea that - Mr. Swenson testified, that there was no chance to change what the landlord wanted. That may have been true. Why not try? And that relates to the second point. Regardless of
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what the company's reasons were for ceasing its efforts in April, and it seems pretty obvious what they were, the fact is, it didn't turn to what it must have known as a debtor in possession was a crucial issue the moment it filed its bankruptcy. It filed its bankruptcy with a lot of first day motions. It was pretty well prepared going in to its bankruptcy case, but evidently it didn't both to think about its lease for another month, and the landlord might have been more interested in some kind of adjusted deal right away facing a debtor in possession then it faced when negotiations began again, and they weren't even negotiations, in the middle of October, a month and a half before the lease expired. It's just not an exercise of business judgment, Your Honor. It may be in the end it's what the debtor is stuck with. I certainly hope not because I certainly hope there are alternatives that could be explored, but it's not an exercise of business judgment. It's an exercise of business neglect in my view. Thank you, Your Honor.
THE COURT: Thank you very much, Mr. Lewis. You know, normally an issue relating to a headquarters lease is not very hotly contested in a bankruptcy case, particularly where a debtor has occupied the particular space for some time and is already up and running there, and we all know both in business and personally, the expenses attendant to moving and the disruption to business of moving and
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everything of that nature. Here we have a difficult situation because it's obvious that our debtor is undergoing some difficulty, but I think to make a judgment that the debtor's operations will not continue to improve, that there is not a reasonable likelihood of success in the litigation that is pending with Novell, which obviously the debtor is highly dependent upon, would be, I think, inappropriate for the Court to make such a judgment at this time. And it isn't my job to make an assessment of whether the debtor has done the best it could or if there's a better deal out there to be had. It's not, obviously, the Court's role under all of the cases to substitute its judgment for the debtor's, but simply to make an assessment based upon the facts as to whether or not the debtor has acted within a range of reason which the Court could then decide satisfies that business judgment test, which is a very liberal test as we all know for a debtor to satisfy. So, here I am satisfied, based upon Mr. Swenson's testimony, that the debtor made significant efforts to explore alternatives and that the - although everyone perhaps would have liked to have had a shorter term, the fact that there is a reduction of space and a reduction of rent for that space, is evidence that the debtor made a substantial effort and has reduced the estate's exposure, and on the basis of the testimony, the facts presented, and the standards that the law imposes, I am prepared to approve the
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debtor's motion on the amended lease for the New Jersey property.
MR. LEWIS: Your Honor, just -
THE COURT: Mr. Lewis.
MR. LEWIS: - a quick note.
THE COURT: Please.
MR. LEWIS: I'm not making this point in the hopes the Court will change its ruling, but the headquarters lease is the Utah lease. There is no objection on the Utah lease.
THE COURT: Exactly.
MR. LEWIS: We're comfortable with that.
THE COURT: And this is more - But this is, the other - I appreciate that.
MR. LEWIS: I'm really not trying to get the Court to reconsider. I just wanted the record to be clear on this point. It is the headquarters lease that we have not objected to based upon what was negotiated there.
THE COURT: The Utah headquarters and, of course, the New Jersey property is the second, if you will, operation site of the company.
MR. LEWIS: Yes.
THE COURT: And I thank you for that -
MR. LEWIS: Thank you, Your Honor.
THE COURT: - for that clarification. And I misspoke. So, Ms. Werkheiser, if you have a form of order,
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I'm prepared to enter it.
MS. WERKHEISER: May I approach?
THE COURT: Yes, you may. Anything further? Counsel, thank you very much.
MR. LEWIS: Thank you very much, Your Honor.
THE COURT: And I wish you a good day. Thank you. We stand in recess. (Whereupon at 10:49 a.m., the hearing in this matter was concluded for this date.)
I, Elaine M. Ryan, approved transcriber for the United States Courts, certify that the foregoing is a correct transcript from the electronic sound recording of the proceedings in the above-entitled matter.
/s/ Elaine M. Ryan
January 10, 2008
Elaine M. Ryan
[address, phone]
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