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First Report on Bankruptcy Hearing: SCO Wins Extension - Updated 3Xs

Tuesday, June 17 2008 @ 03:58 PM EDT

I don't have details yet, but here's the first report from today's bankruptcy court hearing on SCO's motion to extend its exclusive right to file a reorganization plan, which Novell had filed objections to:

Just got back. Many notes to decipher and type up for you. Short version - the whole hearing was on extending exclusivity. The Judge granted SCO's motion. The judge further stated that he would not set a deadline for a plan. He said that further extensions were possible.
More to come ......

I think you get the picture. I'll add to this as more details arrive. The other matter at the hearing was all the fee applications. What? You doubt they were rubber stamped?

Update: We have the rest of the story, and MikeD also had a chance to talk with Darl after the hearing and find out what the plan is going forward. You'll be surprised, I think. I'll let him tell it:

I met with Darl briefly and exchanged pleasantries after the hearing. I asked him what his role was now. He is still President and CEO. I told him it sounded "like they were taking him out back and shooting him" from some of the things we had read. We both laughed.
Darl told me the plan is to spin off the Unix assets under a new company with a new CEO. Darl will run the remaining company ---running IP litigation---.

I guess that is where the post-APA copyrights and OpenServer come in. They still dream of second homes in Spain or whatever. And "spin off" has a ring of insider, to me. Does it to you? Sale is one thing, spin off is another. Of course, it's always possible the word is MikeD's, not Darl's. One thing is for sure. This story never gets boring. And the good news is we'll always have Darl to kick around. Kidding.

OK. Here is the long version of what happened at the hearing from MikeD:

What a glorious day. I mention this because the entrance to the courthouse is in an alley. I have been there in the middle of winter in freezing cold and howling winds blowing through the alley. Today it was 80 degrees, sunny and beautiful.
I thought the meeting was going to be cancelled. I was there early. No one showed up until about 10 minutes before 2 p.m. Mr. McMahon was late and they delayed the start of the hearing until he arrived at 2:05 p.m.
Adam Lewis and another lawyer (who did not sign in) were there for Novell. SCO had six lawyers plus Darl McBride on their side. There were three others in the gallery besides me. I did not recognize the others.
There were three items on the agenda.
1. Motion to pay York. Deferred until July 15.
3. Quarterly fee application. Judge Gross signed on the spot. I should note there were four people attending via phone. Stuart Singer, Al Petrofsky, James Felton (Mesirow), and Scott Robinson (Tanner LLC). Since the fee application was approved, Mr. Feltman and Mr. Robinson were offered the opportunity to be excused and they both left the conference call.
2. Extension of Exclusivity.
Sigh. As Webster has pointed out, sometimes laymen (me) don't catch the legal drift of some things. The following are my notes and observations. The transcript will reveal much more, I'm sure.
Mr. Spector.
Mr. Spector began by saying that SCO cannot create a plan until the results of the Utah litigation were known. He spoke about the fact that "How much - if anything" SCO owes Novell from the Utah case has not been decided. He spoke about how this was a unique bankruptcy case. SCO received a devastating litigation result last year in Utah. There are many uncertainties that have not been decided beyond just the financial aspects of the Utah case regarding what they do or do not own. Even Novell has agreed they could not move forward until what assets were owned to whom was decided.
He spoke of the SNCP deal worth $100 million(s) of dollars. This deal is still being discussed with SNCP. Mr. Spector spoke of how they will be able to show that their prospects are now better than previously expected. He mentioned the York and SNCP deals of the past.
He spoke of how there has been no harm to creditors to date.
Spoke of how the past contemplated deals started as equity sales but have now moved to asset sales, which is of benefit to the estate. He got into past dates. They were trying to put together a deal from April 2 through 27 knowing there was a potential $40 million "bogey" out there with Novell. On April 27, Novell surprised them out of the blue by only asking for $19 million.
That changed the matrix in the viewpoint of the debtors and others seeking to do a deal. A $40 million judgment might be insurmountable. But $20 million, they might be able to pay off - even if it takes 10 years.
On May second, the judge in Utah said he would render a judgment without undue delay. They had hoped to have the ruling by now. He said the trial in Utah was good for SCO in some aspects.
(at this point I have to say - I am not making this stuff up)
Mr. Spector concluded by saying they need the ruling in Utah. They request the extension until Aug 11. However, if the ruling in Utah comes on Aug 3; they make no guarantees that they will not ask for another extension.
Mr. Lewis.
(launches from chair!)
Mr. Lewis admits that debtor did not know what assets they had to sell. However, on Jan 2 they filed their first motion for an extension. They needed the extension because a premature plan would waste estate assets. Here they are again, arguing the same thing, that they don't want to waste estate assets.
Then they made a plan. The SNCP plan. They then withdrew the plan. SCO said nothing about awaiting the trial in Utah when they made or withdrew this plan. The debtors have been portraying a series of rushes to get plans done and then withdrawing them.
Mr. Spector had offered to have Mr. McBride testify if needed. Mr. Lewis said it was not needed in the context of this hearing.
Mr. Lewis spoke of the "scads of money" that have been spent to date on these plans. The debtor can and has proposed a plan knowing the possible outcomes in Utah. The last plan was withdrawn because it was completely unsubstantiated.
Mr. Lewis argues for a deadline. If the extension is granted it should be a final deadline. It could be a deadline of 30 days after the Utah ruling comes in. But Novell requests a deadline.
Judge Gross.
Would there be any prejudice to Novell if he grants this extension?
Mr. Lewis: Not really, not to Novell, but there are other parties which this whole case cast a cloud over that might be prejudiced.
Mr. McMahon.
He began by saying he had not filed any papers with the court but had a few things he wanted to say. He views the proceedings from a practical standpoint. How do we get from point A to point B? The exclusivity period is a privilege, not a right. What have the debtors done from the beginning to today?
No creditors committee has been formed due to a lack of interest.
It is the debtors responsibility in bankruptcy to negotiate with the other parties. The only negotiation that has been going on has happened in this courtroom.
Mr. McMahon agrees with Novell's position.
SCO has "been to the plate two times now". A deadline is needed for a plan. There have been substantial costs in time and money up to this point. It is the duty of the debtor to come forward with a plan to the court. The creation of a plan does not need to stop in its tracks waiting for a ruling in Utah. Getting from point A to Point B requires a confirmable plan. No real negotiation has been or is now going on.
Mr. Spector.
(launches from chair!)
Objects to the Trustee's "broadside" and asks that they be stricken from the record. No papers were filed with the court and he has had not opportunity to prepare a response.
Judge Gross: Accepts Mr. McMahon's comment as the Trustee.
Mr. Singer: "I had to do that."
Mr. McMahon: (paraphrased) I'm the Trustee and I have the right to say such things. (he quotes chapter and verse giving him that authority)
Judge Gross: The Utah litigation has a major impact on this bankruptcy, and the ability of SCO to create any deal. That was a deciding factor in his lifting the stay to allow the litigation in Utah to proceed. The Utah litigation must be concluded before any deal can be put together by SCO.
Mr. Spector: We have not resolved that creditors or shareholders won't get any money. In fact, we might be able to put together a really good plan now that the $40 million bogey is now only $20 million.
Mr. Lewis: The debtor has a plan to deal with this regardless of the outcome in Utah. They potentially have $100 million in this potential deal which should be more than enough to cover anything. SCO has been vocal about appeals. There will be uncertainties even after Utah. Please impose a deadline for a real plan from the debtor.
Judge Gross: I did not lift they stay to punish SCO. I did it to allow SCO to remove the uncertainty of litigation.
I am going to grant the motion. I will not limit this to one extension. Doing so could tie the court's and the debtor's hands. I will not tell them that this is the last extension. Motion to extend until Aug 11 is granted. Parties will keep judge apprised of the Utah litigation.
Court adjourned.

I know. There's that funny whiff of whazzup in the air. Mr. Spector in effect admits there never was a firm deal with Stephen Norris, just negotiations, which were difficult, according to this new story, because of the threat of a $40 million judgment. Now that Novell changed its figure downward, there is allegedly new life in the deal. But they told us at the April 2nd hearing, there was life already. They didn't have a deal, but when they did, it was going to be great, and they hoped to be finished by May 11, the last deadline, but they might not be because of due diligence, which as we now learn simply means waiting for Utah to rule.

Honestly, it's hard to keep up with the stories. But here's the bottom line:

Judge Gross: Would there be any prejudice to Novell if he grants this extension?
Mr. Lewis: Not really, not to Novell, but there are other parties which this whole case cast a cloud over that might be prejudiced.

Update 2: MikeD also got a copy of the sign in sheet [PDF] for us, and while he says there were some attorneys there that didn't sign in, the ones that did were overwhelmingly on SCO's side of the room. Here's the list:

For SCO:
Rachel Wertheiser
James O'Neill
Arther Spector
Grace Robson
Robert Mallard
Stuart Singer (telephone)

For SCO enablers:
James Feltman for Mesirow (telephone)
Scott Robinson for Tanner (telephone)

For Novell:
Adam Lewis

That's 5 lawyers for SCO, and two more for the buddies. Novell had one lawyer there. And Joesph J. McMahon was there for the US Trustee's Office. He did object and supported Novell's position, but not in writing in advance. One can't help but think that SCO cared about this a lot more than anyone else did. Of course all those lawyers get paid. And that is also why you probably don't see a phalanx of lawyers on the other side. Litigation is expensive, and at this point it's all down the drain, with little hope of recovery.

However, McBride told MikeD that they plan to go forward with IP litigation, if they survive Chapter 11, and I hope folks believe them. That part isn't about money. It's about Linux being free from any cloud of legal doubt.

Update 3: The filings making the hearing decisions official are now available. Here's the docket while we get them for you:

06/17/2008 - 500 - Minutes of Hearing held on: 06/17/2008 Subject: OMNIBUS HEARING, FEE APPLICATIONS. (vCal Hearing ID (71956)). (related document(s) 497) (SS, ) Additional attachment(s) added on 6/17/2008 (SS, ). (Entered: 06/17/2008)
06/17/2008 - 501 - Order (OMNIBUS) Approving Certain Quarterly Fee Applications. (related document(s)462, 474, 479, 460, 478 ) Order Signed on 6/17/2008. (Attachments: # 1 Exhibit A) (LCN, ) (Entered: 06/17/2008)
06/17/2008 - 502 - Order Further Extending Debtors' Exclusive Periods in Which to File a Chapter 11 Plan and Solicit Votes Thereon. (Related Doc # 470) Order Signed on 6/17/2008. (LCN, ) (Entered: 06/17/2008)
06/17/2008 - 503 - Certificate of Service and Service Lists Regarding [Signed] Omnibus Order Approving Certain Quarterly Fee Applications (related document(s)501 ) Filed by The SCO Group, Inc.. (Werkheiser, Rachel) (Entered: 06/17/2008)
06/17/2008 - 504 - Certificate of Service and Service List Regarding [Signed] Order Pursuant to 11 U.S.C. Section 1121(d) Further Extending Debtors' Exclusive Periods in Which to File a Chapter 11 Plan and Solicit Votes Thereon (related document(s)502 ) Filed by The SCO Group, Inc.. (Werkheiser, Rachel) (Entered: 06/17/2008)

First Report on Bankruptcy Hearing: SCO Wins Extension - Updated 3Xs | 413 comments | Create New Account

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SCOGBK #500 - Minute Entry

Authored by: Anonymous on Tuesday, June 17 2008 @ 04:01 PM EDT

It wil be fascinating to read your notes, thanks so much once more.