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IBM Replies to SCO's Opposition to Motion to Convert
Wednesday, June 10 2009 @ 09:09 PM EDT

IBM has filed a Reply to SCO's Response to Motions to Convert the Debtors' Chapter 11 Cases [PDF], just as Novell did earlier today. Here's the SCO Response IBM here replies to, and here's the original IBM Motion SCO is opposing. IBM's Introduction section will give you the flavor in the very first sentence:
In response to the Motions to Convert, the Debtors argue (a) even though they continue to bleed cash, lose customers and shrink merely to survive and the only chance of rehabilitation is success on the appeal in their nonbankruptcy litigation (the "Utah litigation") they should be given as long as it takes for the Utah litigation to be resolved; (b) they really are not losing all that much money and besides, they have lost money every year that they have been in business; (c) their customers really need them to survive, even at the expense of all the creditors of the estate, because the creditors are not actively complaining about the losses; and (d) a Chapter 7 trustee will likely squander the opportunity to recover billions of dollars in potential damages from IBM and Novell, among others.
Here's the first header: "The Debtors Should Not Be Allowed to Remain in Chapter 11 Indefinitely Just to Pursue Litigation." How many times have we heard SCO represent to the bankruptcy court that all they need is just one more step in the Utah litigation to rehabilitate, IBM asks?

Oooh, ooh. [hand waves in the air] I know, I know! More than we've enjoyed?

We're working on the complete text for you, and we'll post it here as soon as we can. But how do you like the descriptive phrase, that SCO is shrinking to survive?

Here's the docket:

06/10/2009 - 798 - Reply of International Business Machines Corporation to Debtors Response To Motions To Convert The Debtors Chapter 11 Cases (related document(s) 778 ) Filed by IBM Corp. (Attachments: # 1 Certificate of Service) (Silverstein, Laurie) (Entered: 06/10/2009)

Just before the conclusion, IBM addresses the idea SCO put forth that a Chapter 7 trustee might approve a de minimis settlement:
IBM believes that it does not have any liability to the Debtors or the estates and may in fact have one of the largest claims against the estates. Fear that a Chapter 7 trustee, after a dispassionate and independent review, may agree with that assessment is not a form of "unusual circumstances" to excuse conversion.
That's the element that SCO never addresses forthrightly when it bursts into song about how great it will be if it can get an appeals victory in the Novell case. The truth is quite simply that it's the IBM claims that threaten SCO the most, not Novell's. That's been true since Chapter 1 of the SCO story. And it still is true. And nothing that happens in the Novell case can get rid of that threat, because SCO turned out to be unable to put any proof of its wild claims about purported Linux infringement on the table before the judge. And that's the only place that counts.

It has never mattered to IBM, I don't think, who owns the copyrights. IBM's position since the beginning has been that IBM didn't infringe any copyrights, regardless of who owns them.

And as promised, here it is, as text:

********************************

IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE

In re:

The SCO GROUP, INC., et al.,

Debtors.
Chapter 11

Case No. 07-11337 (KG)
(Jointly Administered)

Hearing Date: June 15, 2009 at 2:00 p.m.
Objection Deadline: June 11, 2009
Re: Docket No. 778

REPLY OF INTERNATIONAL BUSINESS MACHINES CORPORATION
TO DEBTORS' RESPONSE TO MOTIONS TO CONVERT
THE DEBTORS' CHAPTER 11 CASES

IBM,1 a creditor and equity security holder in these Chapter 11 cases, by its undersigned counsel, submits this Reply to the Debtors' Response [Docket No. 778] to the Motions of the United States Trustee2, IBM3 and Novell4 for an order converting (but not dismissing) the Debtors' Chapter 11 cases to cases under Chapter 7 (the "Motions to Convert").

INTRODUCTION

1. In response to the Motions to Convert, the Debtors argue (a) even though they continue to bleed cash, lose customers and shrink merely to survive and the only chance of rehabilitation is success of the appeal in their nonbankruptcy litigation (the "Utah litigation"), they should be given as long as it takes for the Utah litigation to be resolved; (b) they really are

(1)

not losing all that much money and besides, they have lost money every year that they have been in business; (c) their customers really need them to survive, even at the expense of all the creditors of the estate, because the creditors are not actively complaining about the losses; and (d) a Chapter 7 trustee will likely squander the opportunity to recover billions of dollars in potential damages from IBM and Novell, among others. Along the way, they ask this Court to determine that they are likely to prevail on appeal, attempting to turn the hearing on a conversion motion that this Court must decide on an expedited basis into a mini-trial of the appeal of the Utah Court's ruling. Finally, they argue that the Court should dismiss rather than convert.

2. IBM addressed each of these arguments in the IBM Motion to Convert. IBM files this Reply to connect its showing and argument in the IBM Motion to Convert to the Debtors' arguments in the Debtors' Response.

A. The Debtors Should Not Be Allowed to Remain in Chapter 11 Indefinitely Just to Pursue Litigation

3. At each stage of these Chapter 11 cases, the Debtors have argued that they need only one more step in the Utah litigation for them to rehabilitate. Their First Extension Motion filed on January 2, 2008 argued for more time to propose a plan until the Utah Court reached judgment "even if the entire judgment is on appeal". (First Extension Motion at 13.) Their Second Extension Motion filed on May 9, 2008 argued for more time to reflect the results of the May 2, 2008 trial conducted in the Utah litigation. Their Third Extension Motion filed on August 11, 2008 sought an extension until 45 days after entry of final judgment (which this Court did not grant) on the ground that entry of final judgment and commencement of an appeal would facilitate a sale or recapitalization. In arguing their Fourth Extension Motion, they stated in Court they needed only until May 6, 2009 oral argument in the appeal.

2

4. Now, the Debtors argue that if only they can hold out until a favorable decision in their appeal in the Utah litigation to the United States Court of Appeals for the Tenth Circuit (the "Tenth Circuit"), they will be able to rehabilitate, customers will return, cash will be available, claims will be reduced and investors will be knocking down their door. (Debtors' Response at 10-12.) However, they admit that a favorable ruling would result only in returning the matter to the Utah Court for trial.

5. One is left to wonder, will the Debtors then argue for further deferrals of these Chapter 11 cases, in stages, until the Utah Court tries the case, until the jury returns a verdict, until the Utah Court enters judgment, until the judgment is appealed, until there is oral argument on the appeal and until the Tenth Circuit decides? Is their present prediction that passing the next stage of litigation will make rehabilitation possible any more likely to pan out than their prior four predictions? Will the process start all over for the IBM Case, which is not nearly so advanced as the Novell Case?

B. The Debtors' Continuing Losses Provide Cause to Convert

6. The Debtors freely admit that they are losing money and have done so continually not only since the filing of these Chapter 11 cases but for nearly all of their corporate existence. (Debtors' Response at 5-8.) But, they argue, there has been no "substantial" diminution of the estate. To support their argument, they mis-paraphrase the statute: "the court must find (a) a substantial loss or diminution of the estate" (Debtors' Response at 4), suggesting that the loss or the diminution must each be substantial, and then focusing on whether their losses have been substantial. (Debtors' Response at 6.) But the statute actually provides that cause includes "substantial or continuing loss to or diminution of the estate". 11 U.S.C. 1112(b)(4)(A). Thus, cause is shown by substantial loss to the estate, by continuing loss to the

3

estate or by diminution of the estate.5 The Debtors admit at least the latter two grounds. There has been continuing loss, and there has been diminution of the estate. (Debtors' Response at 5-6.)

7. Continuing losses for years before a Chapter 11 case does not render "continuing loss to the estate" inapplicable as a cause for dismissal. Indeed, Chapter 11 is designed for companies that have suffered continuing losses before bankruptcy. However, section 1112(b)(4)(A) shows that Chapter 11 is designed to accommodate companies that are able to eliminate continuing losses. After 19 months, the Debtors have not been able to do so. Their Second Disclosure Statement suggested that losses would continue, even if the Second Plan of Reorganization were confirmed. (Second Disclosure Statement at 40.) The only hope the Debtors' Response now offers to reverse the trend of continuing losses is success on the Tenth Circuit appeal, a matter addressed above.

8. Section 1112(b)(4)(A) also requires the absence of a reasonable likelihood of rehabilitation to establish "cause". The Debtors' four failed Chapter 11 exit attempts show the absence of a reasonable likelihood of rehabilitation. The opportunistic arguments in the Debtors' Response do not credibly show otherwise. The Debtors' Response argues that a reversal on appeal of the Final Judgment against SCO in the Novell Case entered by the Utah Court November 20, 2008 would revitalize that business by re-attracting customers. However, the Debtors' withdrawn Second Disclosure Statement projected declining revenues for UnixWare and OpenServer products (Second Disclosure Statement at 40), without any mention that a reversal on appeal would improve those results.

4

C. The Debtors' Customers' Needs Should Not Mitigate Against Conversion

9. The customer letters in Exhibit 1 to the Debtors' Response are hearsay and inadmissible, and IBM intends to object to their consideration at the hearing on the Motions to Convert. (See Fed R. Ev. 802.) Even if they were admissible, however, they do not provide the unusual circumstances to establish that the requested conversion is not in the best interests of the creditors and the estate, nor do they establish a sufficient basis to support dismissal as the preferable alternative to conversion. The Debtors' argument that they should continue operations to protect their customers rather than their creditors, at the expense of what little cash remains in the estate for creditors, flies in the face of the purpose of Chapter 11. That the creditors have not objected is little surprise. As Congress recognized, creditors are often apathetic and uninvolved. That is one of the reasons Congress established the United States Trustee system, to act as a watchdog when creditors do not have sufficient interest to do so.6 The United States Trustee here has moved for conversion. Creditor apathy does not justify dissipating the remaining assets of the estate.

D. A Chapter 7 Trustee Would Not Squander Assets.

10. Finally, the Debtors argue that this Court should dismiss rather than convert, in part because a "Chapter 7 trustee might quickly seize upon a de minimis settlement". (Debtors' Response at 47.) Leaving aside the Debtors' inappropriate impugning of the professionalism of the Chapter 7 panel trustees in this District, Bankruptcy Rule 9019 requires this Court's approval of any settlement. The Debtors, their creditors and their shareholders may all object to any settlement. Objections are not disregarded. indeed, just last week in this

5

District, the court refused to approve a major settlement over the objection of creditors. (See In re Spansion, Inc., 2009 WL 1531788 (Bankr. D. Del. June 2, 2009).) IBM believes that it does not have any liability to the Debtors or the estates and may in fact have one of the largest claims against the estates. Fear that a Chapter 7 trustee, after a dispassionate and independent review, may agree with that assessment is not a form of "unusual circumstances" to excuse conversion.

CONCLUSION

For the reasons set forth above, IBM respectfully requests that the Court grant the Motions to Convert these Chapter 11 cases to Chapter 7.

Dated: June 10, 2009

POTTER ANDERSON & CORROON LLP
By: (signature)
Laurie Selber Silverstein (No. 2396)
[address]
[phone]
[fax]

- and -

CRAVATH, SWAINE & MOORE LLP
Richard Levin
David R. Marriott
[address]
[phone]
[fax]

Of Counsel:

INTERNATIONAL BUSINESS MACHINES CORPORATION
Alec S. Berman
[address]
[phone]

Attorneys for Creditor International Business Machines Corporation

6

1 Capitalized terms used in this Reply have the meaning ascribed to them in the Motion of International Business Machines Corporation for an Order Converting the Debtors' Chapter 11 Bankruptcy Cases to Cases Under Chapter 7 of the Bankruptcy Code (the "IBM Motion to Convert") [Docket No. 751].
2 See Motion of the United States Trustee to Convert Cases to Cases Under Chapter 7 [Docket No. 750].
3 See IBM Motion to Convert.
4 See Novell's Motion for Conversion [Docket No. 753].
5 "If ... the debtor is operating with a sustained negative cash flow after the commencement of the case, these facts are sufficient to justify a finding of ... 'continuing loss to ... the estate.'" 7 Alan N. Resnick & Henry J. Sommer, Collier on Bankruptcy 1112.04[5][a][i] (15th ed. rev'd 2005) (footnotes omitted).
6 For this history generally, see 1 Alan N. Resnick & Henry J. Sommer, Collier on Bankruptcy 6.34[2]-[3] (15th ed. rev'd 2005).

  


IBM Replies to SCO's Opposition to Motion to Convert | 204 comments | Create New Account
Comments belong to whoever posts them. Please notify us of inappropriate comments.
Corrections Here, Please
Authored by: TheBlueSkyRanger on Wednesday, June 10 2009 @ 09:36 PM EDT
Dobre utka,
The Blue Sky Ranger

[ Reply to This | # ]

Off Topic Here, Please
Authored by: TheBlueSkyRanger on Wednesday, June 10 2009 @ 09:37 PM EDT
Dobre utka,
The Blue Sky Ranger

[ Reply to This | # ]

News Pick Discussion Here, Please
Authored by: TheBlueSkyRanger on Wednesday, June 10 2009 @ 09:38 PM EDT
Dobre utka,
The Blue Sky Ranger

[ Reply to This | # ]

Looking into my crystal ball
Authored by: pcrooker on Wednesday, June 10 2009 @ 10:39 PM EDT
I had to laugh at section A - about SCO's desire to remain in Chapter 11 to pursue litigation:
One is left to wonder, will the Debtors then argue for further deferrals of these Chapter 11 cases, in stages [...]
I spin my magic 8 ball and it keeps saying "Yes". ;-)

[ Reply to This | # ]

IBM Replies to SCO's Opposition to Motion to Convert
Authored by: Anonymous on Wednesday, June 10 2009 @ 11:01 PM EDT
I am frankly astonished at several things here.
It seems that once it comes down to it, the lawyers drop the legalese and just
say, in plain language what the story is.

Why did it take so long to just say it simply, both here and in Novell's
statement? These things have all been true, differing only in how much more has
passed under the bridge, all along.

Does it normally take much more than three strikes? Here we have how many, 5 or
more? Or is it 10^5?

This has sadly been an entertaining demonstration (sorry PJ) of just how badly
the US legal system is utterly broken, not that it works. Time matters to
justice of any sort, and this has gone on for far too much popcorn and
enjoyment, and has caused unquantifiable but huge damages to many people,
including the open source (or free software if you prefer) community and those
who would have benefited much more had this cloud not been cast over it.

Who is to say whether the tipping point would have happend years ago if there
was actual, timely justice -- and what billions of value went to the wrong
parties due to this action and the resulting delays and Fear, Uncertainty, and
Deception?

And of course, it seems quite unlikely that the main instigator(s) are even
explicitly mentioned in any of this, and that in fact that (those) partie(s)
have proven quite handily to be thoroughly above the law worldwide.

Fining a monopoly what amounts to lunch money for its board does not constitute
effective justice in this case, in the cases in Europe, or elsewhere. They have
clearly violated the terms of their judgment in the anti competition case, but
there are no teeth in US justice for those who make the golden rule by having
the gold.

I am very glad this site has existed to shed light on how things really are,
even though it has a misplaced idea that the courts are effective when there are
billions involved.

Yes, SCO looks like finally going down so one could disingenuously state that
the law works. I submit that this is proof that it surely does not, even when
given plenty of help (this site for one, and thanks) and time.

Taking this long, and then not even mentioning the true perpetrators kind of
says it all -- "I refute it thus".

I see this sadly as an enlightening template for further serious abuse of the
system. If these losers with so little claim and talent could pull it off --
more will follow. And they may learn from SCO's mistakes and do quite a bit
better next time.

Makes me want to weep, frankly.

coultersmith

[ Reply to This | # ]

A Blackadder moment springs to mind
Authored by: SirHumphrey on Thursday, June 11 2009 @ 12:22 AM EDT
For those familiar with the comedy "Blackadder the Third", the episode
entitled "Sense and Senility" will jog your memory.
http://en.wikipedia.org/wiki/Sense_and_Senility

Prince Minibrain (played by Hugh Laurie - familiar to Americans as Doctor
"House") has (I think) gone off to try on his "enormous
trousers", leaving the "stupid actors" to rehearse lines from
their play "The Bloody Murder of the Foul Prince Romero and His Enormously
Bosomed Wife"

The lines they then speak can be interpreted in the context of SCOXQ.PK's
predicament as "while Novell holds the nostril pliers, IBM heats up the
bananas"

If you haven't seen the episode, then please do.

[ Reply to This | # ]

IBM's Reply to SCO's Opposition stings like a bee!
Authored by: webster on Thursday, June 11 2009 @ 12:39 AM EDT
..
Some gems:

*** "However, they admit that a favorable ruling would result only in
returning the matter to the Utah Court for trial." p. 3.

*** "Is their present prediction that passing the next stage of
litigation will make rehabilitation possible any more likely to pan out than
their prior four predictions?" p. 3. [Or fool you once, Judge, shame on
them. Fool you twice, Judge, shame on you. Fool you five times, Judge, you are
....." p. 1,073, metadata, sealed and unfiled.]

*** "To support their argument, they mis-paraphrase the statute:..."
p. 3. In other words, THEY LIE. Words 37-42, Marriott's twit.


*** "The Debtors' four failed Chapter 11 exit attempts show the absence
of a reasonable likelihood of rehabilitation. The opportunistic arguments in the
Debtors' Response do not credibly show otherwise." p. 4.

*** "Leaving aside the Debtors' inappropriate impugning of the
professionalism of the Chapter 7 panel trustees in this District, Bankruptcy
Rule 9019 requires this Court's approval of any settlement." p. 5. Hereby
also leaving aside the Debtors' inappropriate impugning of the Court that would
approve any settlement. google brain wave, subsurge b-vii blue wet.


.

[ Reply to This | # ]

SCO reminds me of ...
Authored by: Anonymous on Thursday, June 11 2009 @ 03:18 AM EDT
... the poetry of Ewan McTeagle. :-)

[ Reply to This | # ]

Who are the apathetic creditors?
Authored by: IMANAL_TOO on Thursday, June 11 2009 @ 05:39 AM EDT
IBM writes:

That the creditors have not objected is little surprise. As Congress recognized, creditors are often apathetic and uninvolved. That is one of the reasons Congress established the United States Trustee system, to act as a watchdog when creditors do not have sufficient interest to do so.6 The United States Trustee here has moved for conversion. Creditor apathy does not justify dissipating the remaining assets of the estate.
That leaves me mystified. Who are the apathetic creditors here and when and to what should they have objected?





---
______
IMANAL


.

[ Reply to This | # ]

They're doomed, doomed....
Authored by: Ian Al on Thursday, June 11 2009 @ 05:50 AM EDT
...thrice doomed. Hey, wait a minute. Where's the US Trustee got to. He will
surely have something sour to say about the impuning of the Worshipful Company
of Trustees.

I leave it to Judge Gross to remind SCOG how pleased he will be to watch over
the creditors interests in the litigation once he has given the debtors the
bums' rush.

Which leaves me with a question: How many shrunken-merely-to-survive SCOs can
sit on the head of a pin?

Answer: None, the SCO pin is already upside down.

---
Regards
Ian Al

Linux: Viri can't hear you in free space.

[ Reply to This | # ]

IBM Replies to SCO's Opposition to Motion to Convert
Authored by: Steve Martin on Thursday, June 11 2009 @ 06:14 AM EDT

I must admit that I am quite surprised that neither IBM nor Novell addressed the SCO Group's proposed stay on any order on the conversion. After all, a stay would simply act to delay implementation of the order, allowing the estate to erode further, to no purpose. I wonder if either will argue against it on Monday.

---
"When I say something, I put my name next to it." -- Isaac Jaffe, "Sports Night"

[ Reply to This | # ]

"The Debtors Should Not Be Allowed to Remain in Chapter 11 Indefinitely...
Authored by: Anonymous on Thursday, June 11 2009 @ 06:18 AM EDT

"The Debtors Should Not Be Allowed to Remain in Chapter 11 Indefinitely Just to Pursue Litigation."

Especially since they have been working on this endless litigation for, what, about seven years now, and when it looked like they were going to lose, they declared bankruptcy (and I don't even think that's supposed to happen).

[ Reply to This | # ]

First sentence is a suprise!
Authored by: Anonymous on Thursday, June 11 2009 @ 08:24 AM EDT
IBM,1 a creditor and equity security holder in these Chapter 11 cases
Emphasis added. Doesn't this mean that IBM owns some SCO stock? I don't remember hearing this tidbit before. Is it significant in any way?

[ Reply to This | # ]

IBM Replies to SCO's Opposition to Motion to Convert
Authored by: Gringo on Thursday, June 11 2009 @ 09:30 AM EDT

These two responses were the last thing I read before going to bed last night. I was just so impressed with Novell's reply that I lay awake a while, marvelling about it. It was so cohesive and homogeneous that would bear down on the Scales of Justice of like a block of cement balanced against a used condom.

I wonder to what extent, if at all, Novell's and IBM's legal teams might coordinate? I could imagine, for example, a call placed between the two teams where one says "We intend to address that issue in depth", and the other replying - "OK - then we'll take this other one here". It would make sense to me if they did.

Please excuse my experiment in "undisciplined stream of conciousness" prose in the 2nd line of the first paragraph. I am still not sure what it means. I noted other where moved to poetry and literature to express their feeling and felt similarly moved. I think SCO is toast.

[ Reply to This | # ]

A lucid moment where SCOG almost tells the truth....
Authored by: Anonymous on Thursday, June 11 2009 @ 10:00 AM EDT

Perhaps SCOG almost told the truth when they filed:

Chapter 7 trustee might quickly seize upon a de minimis settlement
I say almost, because perhaps that foreshadows SCOG's own opinion with regards just how much value lies in their lawsuits. I suspect SCOG's opinion with the lawsuits exist in a single "item of value":
    The value of making a vexatious litigant go away!
I seriously doubt any Chapter 7 trustee would see such value and I strongly suspect BSF has informed McBride and company appropriately. As a result, said trustee may very well agree with IBM once the state of all the lawsuits are reviewed and said trustee gets a "wide open, no NDA look" at SCOG's "evidence" and Legal theories.

I suspect the biggest thing SCOG fears is not that "a Chapter 7 trustee would settle for de minimis" but that "a Chapter 7 trustee just might settle for agreeing that IBM's activities do not breach any copyrights owned by SCOG, RedHat's activities do not breach any copyrights owned by SCOG, Autozone's..... you get the idea. Such a settlement would destroy any perceived value SCOG is holding as a carrot in front of any investors actually considering dumping money in SCOG. It would also completely destroy SCOSource.

    Intended EV1 like victim: I'm sorry, what are you trying to sell again? According to this Lawsuit [here], Linux does not infringe any of your copyrights and that's all we use. What would you like us to license again?
I had the above thought after reading IBM's response.

Of course, I still harbor the hope that upon such evaluation by the Chapter 7 Trustee, criminal charges just might be forthcoming as well. Ahh.... one must believe in something and Justice is a good thing to believe in.... even when it actually occurs so very rarely.

RAS

[ Reply to This | # ]

IBM Replies to SCO's Opposition to Motion to Convert
Authored by: Anonymous on Thursday, June 11 2009 @ 10:51 AM EDT

"Look, you stupid bastard. You've got no arms left!"

[ Reply to This | # ]

One thing I don't understand in IBM's reply
Authored by: SLi on Thursday, June 11 2009 @ 05:10 PM EDT

From the reply:

The Debtors, their creditors and their shareholders may all object to any settlement [agreed to by the Trustee].

Makes me wonder if I've misunderstood Chapter 7. Aren't the Debtors SCO and SCOG, which would be under direct management of the Trustee. Or are "the debtors" somehow separated from "the estate" in Chapter 7?

[ Reply to This | # ]

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