This was the longest hearing in the history of the SCO Litigation Follies, 527 pages long.
It continued until 10 o'clock at night, with Darl McBride testifying. In fact, it's his swan song as CEO. And it's the one where SCO was fighting to avoid Chapter 7, which it did, but also against the appointment of a Chapter 11 Trustee, where it failed.
If anyone feels ambitious enough to try for a simple HTML version, in maybe four separate parts, that would be lovely. You can use any of our transcripts in any Timeline page as a model. Leave a comment saying what task you are tackling, so we don't duplicate effort, and then email to me in the body of a plain text email, also telling me if you do or don't want credit, and if so how you wish the credit to read. Thank you if you can. For that matter, if someone wants to cut up the PDF into chunks, that would help those stuck on dialup.
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE
IN RE:
THE SCO GROUP, INC.
Et al.
Debtors.
|
) ) ) ) ) ) ) ) ) ) )
|
Case No. 07-11337
(Jointly Administered)
Chapter 11
Courtroom 3
824 Market Street
Wilmington, Delaware
July 27, 2009
9:38 a.m.
|
TRANSCRIPT OF PROCEEDINGS
BEFORE THE HONORABLE KEVIN GROSS
UNITED STATES BANKRUPTCY JUDGE
APPEARANCES:
For Debtor: |
Berger Singerman
BY: ARTHUR J. SPECTOR, ESQ.
BY: FRANKLIN H. CAPLAN, ESQ.
[address]
[phone]
|
|
Boies, Schiller & Flexner LLP
BY: MAURICIO A. GONZALES, ESQ.
BY: JASON C. CYRULNIK, ESQ.
BY: EDWARD J. NORMAND, ESQ.
[address]
[phone]
|
|
Pachulski, Stang, Ziehl & Jones
BY: JAMES E. O'NEILL, ESQ.
[address]
|
ECRO: |
JENNIFER PASIERB |
Transcription Service: |
DIAZ DATA SERVICES
[address]
[phone]
|
Proceedings recorded by electronic sound recording;
transcript produced by transcription service
2
APPEARANCES:
(Continued)
For US Trustee: |
U. S. Trustee
BY: WILLIAM HARRINGTON, ESQ.
[address]
[phone]
|
For Unxis, Inc.: |
Bryan Cave
BY: LESLIE A. BAYLES, ESQ.
[address]
[phone]
|
For DBM: |
Potter Anderson & Corroon LLP
BY: LAURIE SELBER
SILVERSTEIN, ESQ.
[address]
[phone]
|
|
Cravath, Swaine & Moore LLP
BY: DAVID R. MARRIOTT, ESQ.
BY: MICHAEL T. REYNOLDS, ESQ.
BY: RICHARD LEVIN, ESQ.
[address]
[phone]
|
For Novell: |
Young, Conaway, Stargatt &
Taylor, LLP
BY: SEAN T. GREECHER, ESQ.
The Brandywine Building
[address]
[phone]
|
|
Morrison & Foerster
BY: ADAM A. LEWIS, ESQ.
BY: MICHAEL A. JACOBS, ESQ.
[address]
[phone]
|
3
For LNS Inc.: |
Lovells LLP
BY: CHRISTOPHER R. DONOHO,
III, ESQ.
[address]
[phone]
|
SCO Group: |
SCO Group, Inc.
BY: RYAN TIBBITTS, ESQ.
BY: JEFF HUNSAKER, Pres/COO
BY: DARL MCBRIDE, CEO
BY: KEN NIELSEN, CFO
BY: STEVE NORRIS
[address]
|
TELEPHONIC APPEARANCES: |
|
For Debtors: |
Berger Singerman
BY: DOUGLAS A. BATES, ESQ.
[address]
[phone]
|
For Oracle USA Corp.: |
Day Pitney, LLP
BY: AMISH R. DOSHI, ESQ.
[address]
[phone]
|
Pro Se: |
ALAN P. PETROFSKY
[address]
[phone]
|
4
WILMINGTON, DELAWARE, MONDAY, JULY 27, 2009, 9:38 AM.
THE COURT: Good morning, everyone. Thank you
and please be seated.
ALL: Good morning, Your Honor.
THE COURT: Good morning. Well we are here for
the Motion to Dismiss and Motion to Approve a Sale. And I
am ready having reviewed all of the documents. And how
shall we proceed, Mr. Spector? Good morning.
MR. SPECTOR: Good morning, Your Honor. I
suppose appearances would be helpful.
THE COURT: Yes.
MR. SPECTOR: My name is Arthur Spector. I'm
here with my partner, Frank Caplan over there.
THE COURT: All right.
MR. SPECTOR: Representing SCO Group,
Incorporated, SCO Operations, Incorporated both of whom are
Debtors in Possession in this case. With me also is our
paralegal, Carmen Cruz who's going to try to keep things in
order for us.
THE COURT: Okay, welcome.
MR. SPECTOR: And I'll let the other counsel --
of course, Mr. Tibbitts, general counsel to the Debtor is
here as well.
THE COURT: Yes, of course. Good morning, Mr.
Tibbitts. Any other introductions? Good morning.
5
MR. GREECHER: Good morning, Your Honor, Sean
Greecher from Young, Conaway.
THE COURT: Yes, sir.
MR. GREECHER: On behalf of Novell here with Adam
Lewis who you know.
THE COURT: Absolutely, Mr. Lewis.
MR. GREECHER: And I believe you've met Michael
Jacobs --
THE COURT: Yes, good to see you. Ms.
Silverstein, good morning.
MS. SILVERSTEIN: Good morning, Your Honor.
Laurie Silverstein for IBM here with Richard Levin.
THE COURT: Of course, Mr. Levin.
MR. LEVIN: Good morning, Your Honor.
THE COURT: Good to see you again.
MS. SILVERSTEIN: Also David Marriott.
MR. MARRIOTT: Good morning, Your Honor.
THE COURT: Mr. Marriott, yes, sir.
MS. SILVERSTEIN: And Michael Reynolds will be
addressing the Court.
MR. REYNOLDS: Good morning, Your Honor.
THE COURT: All right, thank you, Mr. Reynolds,
welcome.
MS. SILVERSTEIN: Thank you.
MR. O'NEILL: Good morning, Your Honor.
6
THE COURT: Good morning, Mr. O'Neill.
MR. O'NEILL: I just wanted to say good morning.
I'm here with Mr. Spector.
THE COURT: All right.
MR. O'NEILL: On behalf of the Debtors.
THE COURT: Thank you, thank you. Now I know
that I had --
MR. SPECTOR: We have counsel --
MR. NORMAND: Good morning, Your Honor. It's Ted
Normand from Boies Schiller for the Debtor.
THE COURT: Good morning. Anyone else? Well I
know we talked about two and a half hours a side. That is,
you know, I'm not inflexible on that of course depending
upon how things are moving along. I'll just be even handed
with the amount of time. And if it looks like despite your
best efforts it's taking a little bit longer, obviously I'm
not going to cut people off just because you've hit the
magic amount of time, but we will -- I'll try and, you know,
keep mind of the time, keep track of the time, and see how
we go. Mr. Spector?
MR. SPECTOR: Good morning, again, Your Honor.
Am I on the clock yet?
THE COURT: Not yet.
MR. SPECTOR: Okay. I'm prepared to --
7
THE COURT: Because there may be some preliminary
matters. Is that --
MR. SPECTOR: Well I was just going into my
opening.
THE COURT: Okay.
MR. SPECTOR: Okay.
THE COURT: All right.
MR. SPECTOR: We are here today on two matters
SCO's Motion to Sell substantially all of their assets under
363 and IBM's, Novell's, and the U.S. Trustee's Motion to
Convert the cases.
Putting aside the U.S. Trustee's Motion for the
time being, these motions by IBM and Novell to convert the
cases to Chapter 7 and even more so their objections to the
sale to Unxis are baseless. Moreover, their reasons for
filing the motions have nothing to do with their interest as
alleged creditors hoping to be paid for their claims. Their
active in these cases for one reason only and that is to put
SCO out of business in order to kill SCO's lawsuits against
them. These parties who call themselves creditors are
subverting the purpose of Chapter 11, namely to keep a
business in business in order to pay the just debts,
preserve jobs, provide a return to stockholders if we're
fortunate enough to have a solvent case. IBM and Novell
want to kill SCO's business and they care not a whip that
8
they and the creditors, the legitimate creditors will
receive little or nothing in the process. Why in heaven's
name does IBM care whether SCO sells its Unix business to
Unxis and that's how that name is pronounced we learned.
THE COURT: Thank you.
MR. SPECTOR: Why did IBM unleash its hordes of
high powered attorneys coast to coast to depose anyone who
might dare to testify for SCO? What possible reason does
IBM have to oppose the sale? The only reason is that by the
sale SCO would survive. And survive with the potent claims
against IBM intact. IBM and Novell want to crush SCO and
soon before the Court of Appeals can vindicate it. They
know that once that happens, they will have to face juries
to answer for what they have done to SCO.
The sale to Unxis is complex technically, but
simple in bankruptcy terms. It's complex because as you
will hear and probably already know, the circumstances of
this case make sale of the Unix business an extremely
difficult proposition. It is nevertheless quite simple from
a bankruptcy perspective. If there's a buyer willing and
able, virtually unconditionally to pay enough within a
matter of days or permit SCO to pay all of their allowed
claims in full, there is no more due diligence, there is
nothing else for the SCO Debtors or the sellers to do other
than to satisfy the closing, other than to obtain an order
9
from this Court.
The evidence will demonstrate the nearly non-stop
efforts the Debtor has made to market these assets to ensure
that the estate would be getting a fair deal. The Court
already knows simply by instructs the position with these
Motions to Convert alleging continuing losses, there is a
good business reason to sell these assets under Section 363
without a plan.
The sale requires that the Debtors assume and
assign to the purchaser a large number of executory
contracts. You will hear testimony about the factual
reasons why these contracts may be assumed properly under
Section 365 of the Code and the legal authority to support
it. To the extent any of these contracts is in default and
virtually none of them is, the defaults will be cured
promptly on or immediately after closing.
Mr. Steven Norris will testify about how you
Unxis will provide adequate assurance of future performance
on these contracts. All routine, but Novell and IBM will
try to divert the Court's attention from the real Section
363 issues and try to focus on all sorts of red herrings.
We urge the Court to keep an eye on the ball here and
remember that the purpose of Court oversight of a sale in
bankruptcy is the protection of the estate as a whole.
And as a result of the proposed sale, all claims
10
will be paid in full and the remaining stakeholders of the
estate, the shareholders will get to keep the company's most
valuable asset, the claims. No one with a legitimate
creditor interest in these cases loses by Your Honor's
authorizing the Debtors to close the transaction. The only
potential losers are Novell and IBM, but not as creditors,
but as competitors. The interests of competitors of course
have no real weight in these matters.
As I noted, the sale is only part of the hearing
today. We submit that the Court, if the Court authorizes
the sale, our hearing -- our business here should be over.
However, the Court has expressed its view that we should put
it all in together so let's speak about Conversion Motions.
Timing and discretion are the two key things to
keep in mind. At the outset of the cases, these Debtors
candidly stated that they would continue to lose money
during the pendency of these cases. They have expected that
their stay would be much briefer. As a result, their losses
would be less intense. They also said that from the outset
they would pay all of the claims in full and the Debtors
still have the means and intent to do so. The means of
course is the sale.
SCO is a chapter -- is in Chapter 11 because it's
business was destroyed by IBM with the help of Novell. SCO
has sued for the damages that these companies caused, but it
11
has been continuously drained of life at an accelerated rate
by its much larger and better capitalized adversaries. It
finally reached the point that if it had not filed Chapter
11 when it did, it might have had all of its assets placed
into a constructive trust thereby immediately putting it out
of business and thwarting their efforts to take an appeal of
the judgment that we find erroneous.
Once in Chapter 11 as predicted, the Debtors did
lose the money and this occurred in each of the first ten
months of the case. Then SCO received the answer of the
Utah District Court on the amount of Novell's claim with
interest, some of which is improper post petition interest
which we'll take up on another occasion, approximately $3.5
million, without interest about $2.5 million. Not between
the $30 and $40 million that Novell had originally tallied
in this case. When that sum is added to the then existing
universe of allowed claims, that is back in the Summer of
'08 of about $1.8 million at that time, SCO was facing
liabilities of about $5.3 million. But in July 2008 when
the judgment was rendered, the vendors had cash of no more
than $4.3 million. Without a sale of some or all of its
assets or collection on its lawsuits, SCO would not as of
July 2008 or any month through now pay its claims in full.
So nothing material in that context has changed in the last
11 months. The Tenth Circuit -- except of course the sale
12
we're pending.
The Tenth Circuit has shown that its keenly aware
of timing issues and why it's crucial to the life of these
companies that it resolve the critical appeal promptly. we
have good reason to expect as the Court knows that we will
have a ruling before August 31 or by August 31 because the
imminent retirement of one of the three judges on the three
judge panel. That's only 34 days from today. You've heard
me say that over -- it's only -- in another few more days.
I have to do it because it's the truth. It is only 34 more
days and we will have a definitive ruling on the most
important issues on the case.
Losses during this 34 days period will not
materially affect the dividend that unsecured creditors
would receive. If on or before the 31st of August the Tenth
Circuit reverses the judgment in favor of Novell, the $3.5
million judgment goes away. The $625,000 we reserved on
that judgment becomes back into the coffers of the Debtor.
And of course if the sale is approved we pay the creditors
and we have 625 to start out the mobility business. And
fund litigation in full. And if the sale closes, we also
have the funds to do that. So either way that could work.
How can it be accomplished? When the sale
closes, we dismiss the case, pay our creditors or if there's
an appeal, the judgment is overturned, there is no longer a
13
reason (indiscernible) to be here and we would also ask to
appeal and pay our creditors in full. We'll have the
ability to do that.
With these facts in mind, we need to focus on the
Bankruptcy Code itself. Under 1124(b)(4)(a), the Movant has
to prove two things and I'm not going to tell the Court
because the Court well knows and I have to save my time.
There is no doubt there's been a continuing loss, but case
law suggests that such loss is a mere evidence of cause and
do not ipso facto establish cause and I've cited those cases
in my response. These decisions are keeping with the
general rule that a court must make -- must consider all
circumstances and make a full evaluation of the present
condition of the estate, not merely look at the Debtors'
financial statement. Looking at the present financial,
present condition as the Debtor is about to get $2.4 million
to pay claims of about a million dollars and post petitions
of about I don't know $340,000 or something of that range.
Even if the Movants prove the first half of cause
under Section 1124(b)(4)(a), the Debtors submit that the
Movants will not and cannot prove that there is absence of
reasonable likely rehabilitation. We submit that other than
casting aside assertions, the Movants will have no evidence
to show that the steps that the Debtors have taken both in
the early days in the case and even more recently and
14
especially more recently, have no reasonable likelihood of
rehabilitating the Debtors. The plan you will hear is we
pay our creditors, the reorganized SCO much slimmed down
will have a business, a mobility application business and
the litigation. People will still be working for the
company. It will be rehabilitated. Without benefit of
plan, but rehabilitated nonetheless.
With respect to 1124(b)(4)(b), the Movant has to
prove not just typical or ordinary mismanagement, but gross
mismanagement. Once again, the Debtors submit the Movants
will fail in their burden. Our response already explained
without subsequent contrary argument by the Movants that
Section 1124(b)(4)(j) just doesn't apply.
Although the burden of proof is on the Movants,
the Debtor will provide a thorough record of why cause does
not exist. The Debtors will present the testimony of Ken
Nielson, the company's CFO who will testify about the
Debtors' historical losses and about the two -- about the
short-term projected losses. His testimony will show that
the risk to the creditors holding allowed claims over the
next 34 days is insignificant. He will -- we will offer the
testimony of Ryan Tibbitts, the Debtors' general counsel who
will among other things, testify about the headway made in
reducing claims against the estate which makes the reduction
on the asset side of the ledger pale in comparison. He'll
15
also testify about how a favorable ruling from the Tenth
Circuit in any of a number of ways would help to
rehabilitate the Debtor.
We will introduce the testimony of Darl McBride,
the Debtors' Chief Executive Officer who will testify to
among other things the ramification to SCO's business from
the events that led to the litigation. I guess we're not
going to be discussing that. That was something we thought
we were going to be discussing. Instead, he'll testify
about management's heroic efforts during the case to save
this company and managed to keep SCO alive despite
impossible odds to this day. Mr. McBride, as well as, Jeff
Hunsaker, the President and Chief Operating Officer of SCO
Operations and by his deposition, Renee Beltran, a third
party distributor of SCO products will testify about the
very unusual circumstances in these cases that justify
denial of the motions, even if a prima facie case were made.
The unusual circumstances justifying denial of
the motions even if the Movants were able to establish cause
are numerous. They include the temporal proximity of a
definitive ruling by the Tenth Circuit on whether or not the
Debtor owns legacy software around which its business is
built. Furthermore, the determination if it goes as the
Debtors anticipate and desire, would unlock the door to
perhaps enormous damages and will reconfigure the
16
marketplace for operating system software. This is a battle
that began six years ago and has consumed tens of millions
of dollars in legal fees.
Another unusual circumstance is that the Debtors
not only propose to pay all of their legitimate debts in
full including Novell's claim should it be allowed, it has
the present ability to do so within the next 34 days. Case
law will -- is allegiant about it and the Debtor can show at
a conversion hearing that it can pay its debts in full, that
is an unusual circumstance.
Mr. McBride will testify not only about the
various negotiations concerning a variety of proposed
transactions that would have previously supported a plan to
pay the debts in full. He will also testify about the sale
to Unxis which but for this Court's imprimatur is ready to
close within the next month. Mr. McBride will testify that
the cash consideration for the Debtors is sufficient to pay
the creditors in full and that the purchaser will post a
letter of credit sufficient when added to the $625,000 that
SCO holds in escrow for Novell to satisfy the Novell
judgment should it survive. The purchaser will get the Unix
business and the mobility server while SCO gets to keep its
litigation claims and the mobility applications business.
As intimated earlier, a most unusual circumstance
is that the Debtors have insurance against any potential
17
loss from now until August 31. And most certainly through
the date of the anticipated closing of the Unxis sale in a
couple of weeks in the form of a personal guarantee from the
Debtors largest stockholder, Ralph Yarrow [ph]. Mr. Yarrow
is committed to underwrite up to $200,000 of losses should
they occur. So that the Debtors' cash is not eroded when
the Court grants the Debtors' extended life. There's no
reason if we're worried about true creditors not to extend
the life to August 31 when the losses are being
underwritten.
Mr. Hunsaker, SCO's operations COO and Mr.
Beltran an independent distributor of SCO products will
testify in the latter case by deposition about the public
interest in SCO's survival. Most important, public interest
is one of the other unusual circumstances that cases have
indicated. Most important to the decision is the discretion
the Court advised, timing and discretion. This Court -- as
the Court's in the cases that I cited in the response and I
won't cite them now have held, the Bankruptcy Court still
has wide discretion to determine if cause exists and how to
ultimately adjudicate the case and that's a quote.
The Debtors submit that the cases that advise
that a Court considering a motion under 1112(b) must view
the totality of the circumstances are saying much the same
thing. Court's must weigh the evidence and use their
18
judgment in deciding whether cause exists. This is the
essence of discretion. And that's only on the issue of
cause. The statute is peppered with discretionary calls of
get even after Bapseepo [ph]. Right at the top the Court is
given the discretion to deny a motion even if cause is shown
if in the Court's mind the Court finds unusual circumstances
to justify denial. Then even if cause is established an
unusual circumstances are not, the Court has discretion to
order four different forms of relief as I discussed in my
response.
For a Court to properly exercise such broad areas
of discretion, it must be provided a full record. Today you
will get such a record from the Debtors even if not from the
Movants. For the Debtors, their corporate existence in the
livelihood of their employees, the resellers, and the public
interest of its many important customers lie in the balance.
Failure on the part of the Movants today carries no such
lethal consequences.
In summary, the Debtors believe that the record
will support, indeed mandate the Court's exercise of its
discretion to deny those motions.
Finally, I'm compelled to address certain points
raised in Novell's and IBM's replies very briefly. First,
that if SCO wins in the Tenth Circuit, it must means we'll
go to trial years from now and it will be on and on forever.
19
It doesn't matter. The sale is consummated. The real --
the creditors in the case will be paid. And if in Novell's
judgment if it's overturned which is the premise, it won't
be there anymore, it will be a regular company, small
company suing a big company just like it happened beforehand
and just like with afterwards. That's not a negative.
Secondly, say the Debtors will be asking for
similar deferrals of the Chapter 11 cases while the lawsuits
proceed. Well, no we won't, we're telling you we'd like to
just get out. If the Novell judgment is overturned, we're
out. If the sale is approved, we're out. So it's not like
this case will linger any longer than it has.
Lastly, they say the Debtors insult the integrity
of Chapter 7 Trustees by suggesting that they would settle
the litigation for a pittance to pay creditors -- that would
pay creditors a few cents on the dollar rather than to hold
out for trial and get a big pay day that will pay something
to the equity. And it's just reality, Judge. There's --
that's this Court's experience and I'll argue that when we
get to the end.
There's one other thing and that is the Trustee
could sell this business, the Unix's business. Well you'll
hear testimony that says no, they can't. If this Court
converted to seven, the cadre of engineers working there for
20 years or more as a group coming from AT&T labs and other
20
predecessors that developed this, they're going to scatter
to the winds. And when that happens, an operating system
business has very little value when the knowhow is gone, the
people that develop this stuff is gone. And so the Chapter
7 Trustee is going to have an empty hull to sell if this
case converts. The best way to sell, the only real way to
sell this kind of a business is as an operating company
which we're doing now. A Chapter 7 Trustee is very unlikely
in this Court's experience to run a company that's losing a
couple hundred thousand dollars a month or more the way the
Movants argue.
The Debtors submit that because the evidence will
not support a finding of cause, the Court will never even be
required to make that decision. Moreover, even if the Court
finds cause, the evidence will support findings of unusual
circumstances. We ask the Court to do just that and that is
to deny the Motions to Convert and grant the Debtors' motion
for authority to sell the assets of Unxis. Thank you, Your
Honor.
THE COURT: Thank you, Mr. Spector. By the way,
I failed to acknowledge Mr. Harrington's appearance for the
Office of the United States Trustee. Good morning, Mr.
Harrington.
MR. HARRINGTON: Good morning, Your Honor.
MR. SPECTOR: Your Honor, do you have a clock
21
timer?
THE COURT: I'm keeping track.
MR. SPECTOR: Can you share it?
THE COURT: Oh, that was 15 minutes.
MR. SPECTOR: Oh, I'm in business.
THE COURT: Mr. Levin, good morning.
MR. LEVIN: Good morning, Your Honor, Richard
Levin for Cravath, Swaine and Moore for International
Business Machines Corporation. Your Honor, it was not IBM's
original intention to oppose the sale of the assets
proposed. There were just a few things in the Sale
Agreement that concerned us when we read it. One was what
we called the vanishing, I'm sorry, the poison pill. The
second was the vanishing letter of credit sun. We call that
the solar eclipse.
(Laughter)
MR. LEVIN: And the third was the need to for the
Debtors to make a record to support the sale. But what we
found out in discovery surprised us. And you see some of
that reflected in our opposition paper.
THE COURT: Yes, yes.
MR. LEVIN: We found out that there were secret
payments from the Debtor and its CEO to Mr. Norris. There
was a reduction in the purchase price for the -- for an
asset that is currently generating no revenue, no material
22
revenue. There is the as I said the solar eclipse. We
learned that there's no committed financing for this
transaction. And that the agreement is largely an open for
which the Debtors have received a payment of $250,000. We
believe that we needed to call these matters to the Court's
attention and with them we found it hard not to oppose the
sale. What we found out we believe also supports the
Conversion Motion and we'll get into that in the evidence.
Since then, there's been a new development. This
case is full of new developments. Last Thursday, Your
Honor, we received and by copy of -- we saw a copy of an
email to the Debtor, the Debtor received a proposal from LNS
Acquisition, LLC which is an affiliate of DMEP Corporation,
d/b/a Hale Global to acquire all of the assets of the
Debtor. We haven't had time since Thursday afternoon when
this came in to evaluate whether it is a higher and better
offer or whether it is not. But what it does tell us is
that the idea in addition to all of the other problems that
we have with the sale, it does tell us that the idea of a
private sale is not a good idea in this case.
If you look at the structure of the Sale
Agreement itself, there is no urgency to closing the sale.
There's time to conduct an auction. We have a competing
bidder. And I also might mention that the principal of LNS
Acquisition is present in Court today as is his counsel who
23
can represent to the Court that they are willing to
participate in an auction. Obviously, they're not ready to
bid. It's a little early for that, but they've reviewed,
they'll represent that reviewed the Unxis agreement and even
in the face of that are willing to bid which suggests they
would come up with something higher and better, otherwise
why bother.
So we believe that there should be an auction.
That this should not go by private sale. And because of the
dynamics of this case, Your Honor, and all of the other
things that we will show during this case, we believe that
this Court should exercise its discretion under 1104(a)(3)
to order the appointment of a trustee to conduct that
auction rather than allowing SCO to conduct it itself since
it is so closely allied with the current bidder. There
can't be a mutual party, a disinterested Board of Directors
in effect to conduct an auction process, unless some
independent directors were appointed at this point.
So we believe that the fastest and easiest way to
get there would be the prompt appointment of a Chapter 11
Trustee to conduct that auction. Your Honor, on the other
hand if the Court determines not to order an auction for
this case, then for the reasons we stated in our opposition
and as the evidence will show, we believe the sale should
not be approved and the case should be converted to Chapter
24
7.
THE COURT: All right, thank you, Mr. Levin. Mr.
Lewis, good morning.
MR. LEWIS: Good morning, Your Honor. I don't
have very much here as an opening. I think I just want to
follow on a few points.
THE COURT: Okay.
MR. LEWIS: If you listen especially to the
beginning of the Debtors' opening, what you heard, I think
very clearly was this case is all about the litigation.
That's what this is about. And so if that's what this is
about, then in a sense part of what's confronting the Court
today is who should decide what to do with that litigation?
The Debtor has said repeatedly that we want to squash the
Debtor and crush the litigation. We've not asked for any
such thing. We've asked for conversion to a Chapter 7 for
the appointment of a neutral to assess that litigation given
management's obvious commitment to it, pretty much come what
may. And I think that's still a really good idea here.
So the sale should be disapproved among other
reasons because a neutral needs to evaluate this whole
approach to this case and we have not had a neutral since
the beginning of this case to do that. And you heard it
again this morning. But they won't concede that point, but
that's what you heard. And I think that you heard it very,
25
very clearly and I want to reiterate again that we have not
tried to end the litigation through this case, we have tried
to get the litigation in the hands of someone who can
approach it rationally. Maybe that someone will decide that
the litigations are worth billions of dollars and we will
not see an end to it. Maybe that person will decide it's
worth a whole lot less and there's a lot of risks to the
creditors, a lot of uncertainties, a lot of maybes, and a
long way down the road even if the case gets reversed in the
Tenth Circuit and what's in the best interest of creditors
is some other approach than litigation, perhaps a
settlement. But that should be in the hands of someone
who's judgment now can be trusted and I don't think the
Court or the creditors can trust the management of the
Debtor right now. That's just the way it is.
The idea that we're not are real creditor is
ridiculous. We are a real creditor. Your Honor, even if we
didn't have a $3.5 million judgment, we'd be a real
creditor. When a bankruptcy is filed, continued creditors
are creditors and liquidated creditors are creditors. We're
as entitled to how some provision for our wellbeing out of
the bankruptcy case as anyone else. The same would be true
for IBM, even though it doesn't have a judgment at all. It
has claims. It's filed a proof of claim. It's a creditor.
The notion that we've heard again and again is because they
26
think we're wrong, we're not real creditors. That's not how
the Bankruptcy Code works.
And that's the -- another one of the problems
here with this case which is what the Debtor is proposing
here is some sort of inchoate resolution of this case
without a plan of reorganization. We don't have a Motion to
Dismiss in front of you. There's nothing specific about how
this all will be accomplished that they're going to tell you
it's going to be done. There's just a lot of talk about it.
And the idea that we're provided for doesn't hold water.
Even with the amendments, Your Honor, our protection
goes away at some point, this letter of credit that
supposedly is protecting us. And so does the $650,000. And
where would that $650,000 go? It will disappear down the
maw of the Debtors continuing the litigation and running the
mobility business which is losing money. And if the Debtors
own board minutes which is one of their exhibits say on June
11 in their liquidity report section that the Debtor is
losing $650,000 a month, that's its cash burn and they will
be out of money by the end of July.
So let's suppose that the case gets reversed in
some fashion in the Tenth Circuit. Gets remanded. There is
a new trial and we win again in a year, two years, whatever
it is. Who's going to be there to pass? How is that going
to happen? Why are we now at the end of this bankruptcy
27
case only to be told we amongst all creditors are at the
beginning of the bankruptcy case in essence. Everybody else
gets paid and we get left to our devices and our chances
down the road. That's not the way bankruptcies should work.
There should be a much better, much more certain, much more
secure plan for dealing with all creditors within the
meaning of the Bankruptcy Code. And that is not here before
this Court today and I don't see how the Court can approve
the sale without some sort of definitive plan in front of it
that we can all attest because that's where are in this
case.
Finally, Your Honor, on the sale among the other
problems including those we mentioned in our opposition to
the Sale Motion per se and of course in our Motion to
Dismiss, our Motion to Convert is that the sale doesn't take
in account, into account the asset -- the Purchase Agreement
which we believe has to be assumed in order to be able to
sign the SVRX contracts and that hasn't happened. And
frankly, I don't think it can happen. And that's a problem.
Maybe we'll hear some testimony about that this morning
about how that can happen, at least factual testimony. But
I don't see how it can happen on the present plan. And for
that reason alone I think the sale has to be denied. Thank
you, Your Honor.
THE COURT: Thank you, Mr. Lewis. Anyone else
28
wish to be heard?
MR. DOSHI: Your Honor?
THE COURT: Yes.
MR. DOSHI: If I may interrupt on the phone for a
second.
THE COURT: Who is this?
MR. DOSHI: This is Amish Doshi with Day Pitney
on behalf of Oracle USA, Inc.
THE COURT: Yes, Mr. Doshi.
MR. DOSHI: Well good morning, Your Honor. I
just want to note my appearance for the record and also note
that we do not take any position with respect to this Motion
to Convert issue, but at some appropriate time when Your
Honor is ready with respect to the Sale Motion and the
assumption and assignment or attempt of assumption and
assignment of any Oracle agreement, at that point, I would
like to be heard. We have filed a limited objection and I
just wanted to note for the record that at some appropriate
time I want an opportunity to be heard on that limited
issue. Once again, we take absolutely no position with
respect to this motion and I don't want to interrupt the
proceedings that are going on with respect to that.
THE COURT: Thank you, Mr. Doshi. I certainly
will give you an opportunity to be heard at the right time.
MR. DOSHI: Thank you.
29
THE COURT: Mr. Levin?
MR. LEVIN: Your Honor, Mr. Levin. We have a
procedural question.
THE COURT: Okay.
MR. LEVIN: At approximately 11:30 last night, we
received a proposed amendment to the Purchase Agreement.
THE COURT: Yes.
MR. LEVIN: We're at a loss as to how to deal
with that. It seems only appropriate that we be given time
to look at that. If this Court determines to order an
auction process, a standard Section 363 auction process, it
will not be an issue. On the other hand, if this Court
doesn't go that way, we -- I think we cannot get through the
sale hearing without having to look at that, having some
time to look at that amendment. It was handed to me this
morning, a hard copy after the hearing started. It's a
little difficult to read on a blackberry last night.
THE COURT: Yes.
MR. LEVIN: So I would ask for the Court's
guidance on how we want to handle that.
THE COURT: Well why don't I ask Mr. Spector to
assist us a little bit on what he would propose. In other
words, what you're proposing is that the Court consider the
terms of the sale as amended?
MR. SPECTOR: Yes. There were objections that
30
raised issues. This poison pill nonsense. It isn't a
poison pill. We can argue as a matter of law and we will
later, I'm sure that there are certain things that they
pointed out that were unclear in the prior one or created
problems. They said well chronology doesn't work. What
happens -- they pointed some of those things out and we
said, you know, they have a point and we'd try to fix that.
The principals of Unxis are located -- well one of the
principals, one of the primary principals is located in
Europe. And to get the things done, we had to have Mr.
Norris fly in yesterday. He didn't get here till last --
late last night and he couldn't sign it till then. So we
couldn't -- we had it drafted, we just couldn't execute it
and file till last night.
These are the things that address responses,
address the issues that are in the objections. I don't have
a problem with him looking at it during the day. I don't
think we're going to be talking about those issues the first
few hours of the hearing anyway. I should tell you that
everything has been fast and furious. I'm just standing
here basically alone. I got an update this morning when I
woke up on their exhibit list, two or three more exhibits
showed up. I'm not objecting to it. And frankly, until
maybe I don't know, in five minutes they will, but they
haven't objected to the fact that we were amending our
31
exhibit list yesterday as well. Given the time exigencies,
I'm sure even they recognize it's impossible sometimes. We
give it to them as soon as we get it and they give it to us
as soon as we get it.
For example, they objected to every single
exhibit that we put in as of a few days ago. Some of them
because they weren't signed. Well the minutes weren't
signed because the Board was still meeting. I gave it to
them as a draft and they said it wasn't signed, but we have
signed ones now, we'll replace it. They objected to the
sale, the Purchaser Sale Agreement because the one we put up
wasn't the signed version. I got the signed version. I've
been carrying it around since June 15.
So I don't know what we're going to do with those
things but, you know, we'll be substituting those things.
There are various other objections, I guess we'll deal with
those when they come up. My long winded speech is I don't
care if they take time to review it's fair for them to do.
I think they won't find anything in there other than largely
responses to their objections, making the deal a better deal
for everybody on our side of the table, the creditors and
the shareholders and the like.
While I'm up here and I've got the mike, you
know, you hate to lose the mike when you have it. The
notion about having an action.
32
THE COURT: Yes.
MR. SPECTOR: You will hear testimony from one of
our witnesses, I don't know who, maybe several that they
consider hiring an IB, an investment banker to do the job.
They don't have the money to do that. In lieu of that,
you're going to hear experiential testimony. How many
efforts we've done to market these assets before what the
offers were and so forth. The record will be replete with
testimony to show that the state is getting a fair price
notwithstanding those red herrings I told you were going to
be coming up on another deal. Mr. Hale is not new to this
Court. Mr. Hale was the lead of York, remember York.
Because of York --
THE COURT: Yes.
MR. SPECTOR: -- we're in the position we're in
now. We spent tons of money to try to bring that York deal
home early in the case. Mr. Hale -- you'll hear testimony.
I'm not -- I'm doing an opening. No, don't put that on the
clock, I'm responding to their argument. You're going to
hear testimony --
MR. LEVIN: Your Honor, excuse me. I just asked
a procedural question of how we were going to handle the
amendments.
THE COURT: Yes.
MR. LEVIN: That's all I asked.
33
MR. SPECTOR: Well it invoked the idea of an
auction and says we can't do an auction without looking at
it. So while we're talking about the auction, Mr. Hale
through Global whatever it's Hale Global came back and
you'll hear Mr. McBride talk about it. He came back in the
last several months before the sale. He's one of those
people we considered this offer and rejected it. Now on
Thursday of last week while we're getting -- doing
everything, getting documents, we get this email from him
copy to IBM's lawyer and Novell's lawyer by the way saying
oh, by the way, here's what is. Well one of our deal
partners disassembled it and said here's what the deal
really is. We get to the merits of the deal, if we get to
the merits of the deal it stinks. It stinks and we don't
trust the person who's proposing it for experiential
reasons, for a lot of reasons. But we don't have to get to
that because we're doing like GM did. We're doing like
Chrysler did. We're doing like so many other companies have
done and warned -- I raised it earlier in the case that the
code allows a sale to -- a private sale without an auction.
And we've done the best thing for -- better than an auction,
we've marketed for two years. So this case can't support an
auction. And we've got enough money out of this to pay all
the creditors in full.
So I guess I'm going to repeat myself. I think
34
the idea of an auction is full hearted at this point.
THE COURT: Well thank you. In answer to Mr.
Levin's question though, let me get back to the question. I
think that in fairness changes in terms of various matters
is not unusual in a Bankruptcy Court. And I think what I
would propose to do is allow if necessary an adjournment,
you know, for a brief time, a half an hour, an hour,
whatever time you tell me you need to review the amendment
and to be prepared to proceed with it.
MR. SPECTOR: Your Honor, our first witness,
however, doesn't deal with that --
THE COURT: Mr. Harrington is --
MR. SPECTOR: Oh, I'm sorry.
THE COURT: Mr. Harrington, yes, sir.
MR. SPECTOR: I'm sorry.
MR. HARRINGTON: Good morning, Your Honor,
William Harrington.
THE COURT: Good morning.
MR. HARRINGTON: From the Office of the United
States Trustee pinch hitting for Joseph McMahon today. Your
Honor, I wanted to just get up briefly. There's been a lot
of talk mainly from the Debtors about what would happen sort
of post sale and some sort of structured dismissal but that
hasn't really been defined. There's no motion on the table.
I know Your Honor has read our motion. Our motion is very
35
simple.
THE COURT: Yes.
MR. HARRINGTON: And I don't think the Debtor
really disputes what's contained in our motion, although
they sort of disputed it today. I don't think they dispute
there's a continuing loss here. The reasonable likelihood
of rehabilitation, I think they were sketchy as to what's
going to happen with that. And the code talks about a plan,
Your Honor and the Debtors being able to propose a plan to
prove unusual circumstances and the best interest of the
creditors. That's not being discussed by the Creditors --
by the Debtors. And we have serious concerns regarding some
sort of structured dismissal that doesn't follow the code,
Your Honor.
There's two ways, there's I guess three ways to
get rid of a case in bankruptcy and the first is a plan.
And that's what is contemplated under the code in Chapter 11
that you'll get out through a plan of reorganization. We're
not -- no one's talking about doing that here. The second
is to convert the case and let a Chapter 7 go through the
claims and evaluate the claims and their distributions. And
then third would be a straight dismissal with no sort of
structure to it in certain circumstances.
So I did want to get up and rise because there is
sort of a lingering discussion of a structured dismissal
36
here with no sort of an amorphous structured dismissal.
It's been mentioned, but there's no kind of discussion as to
what form that would take. And we believe, Your Honor, the
two ways out here are reorganization plan or a Chapter 7
Trustee. And that's why we move for conversion. Thank you,
Your Honor.
THE COURT: Thank you, Mr. Harrington, thank you.
All right. Anyone else?
MR. MARRIOTT: Your Honor, David Marriott if I
may --
THE COURT: Of course.
MR. MARRIOTT: I think it might be to everyone's
advantage if we cleared some procedural underbrush. We have
provided the Court and counsel for the Debtors a set of
exhibits --
THE COURT: Yes.
MR. MARRIOTT: -- that we propose to move into
evidence during the course of these proceedings, Your Honor.
And I believe I'm right that the Debtors have objected to
only five of our proposed exhibits.
THE COURT: Yes, emails apparently.
MR. MARRIOTT: Yes, Your Honor. And we are
prepared to not seek the admission of two of those five
exhibits and I'll specifically identify them for Your Honor.
And other than -- and then I think you should have an
37
argument about those exhibits. But we'd like to move the
admission of the Movants' exhibits with the exception,
Judge, of Exhibit 11, 36, and 49. And 36 and 49 are two of
the exhibits to which the Debtors objected. That leaves
Your Honor, I need to argue about the admissibility of
Exhibits 37, 39, and 40. And so for the record if it's
agreeable to the Court, I'd like to move the admission of
those exhibits with the exceptions of 11, 36, and 49 now and
then have a discussion with Your Honor about the three as to
which there was an issue.
THE COURT: Is there any objection from the
Debtors' side? They're move --
MR. SPECTOR: Whatever procedurally I guess
whatever they say. I was going to say let's take it up if
and when it wasn't to come in one -- I think there are three
exhibits in that whole stack.
THE COURT: Right.
MR. SPECTOR: We didn't object to the 60 -- 59
other ones or whatever it was. These we have three
objections on. And I was -- typically I would like to get
the piece started. I waited since June. But if we're going
to spend -- if we're going to have to have a separate record
of this is what I'm anticipating which is why I hesitated.
THE COURT: Well my only reluctance is it's
helpful sometimes for me to be ruling on evidence more in
38
context of the case and it might be best, I think it would
be best were we to take those up when they're going to be
introduced.
MR. MARRIOTT: That's fine, Your Honor with
respect to those three.
THE COURT: Yes.
MR. MARRIOTT: So -- we then I believe -- so --
THE COURT: And the others I think I'm hearing
from Mr. Spector he does not have any objection to them and
I would admit them into evidence.
MR. MARRIOTT: Okay, fine, Your Honor, thank you.
THE COURT: Okay.
MR. MARRIOTT: Two other procedural matters. I
think what would be helpful is to give us the 30 minutes or
so which Mr. -- to which Your Honor would -- to review the
PSA if their first witness, the amendments to the PSA, if
their first witness is going to in any way address that so
that we don't find ourselves in a situation midstream in the
examination having to break to review the documents. So it
may make sense, Your Honor, to take those 30 minutes now.
And then finally, we would ask, Judge, that any
witness who will testify in the case be --
THE COURT: Be sequestered?
MR. MARRIOTT: Exactly, Judge, be sequestered
during the exam.
39
THE COURT: I certainly will grant that oral
motion to sequester witnesses. I think it's appropriate in
these cases. As far as the 30 minutes now will your first
witness be discussing the sale, Mr. Spector?
MR. SPECTOR: Not really. We're going to have
Mr. Nielson, CFO and Mr. McBride is the one who's primarily
talking about the sale.
THE COURT: All right. If it so happens that
there is any discussion of the sale, then I will certainly
give you that adjournment.
MR. MARRIOTT: Thank you, Judge.
THE COURT: Thank you, Mr. Marriott.
MR. SPECTOR: With regard to sequestration, of
course that's typical.
THE COURT: Yes.
MR. SPECTOR: I just have to point out Mr.
Tibbitts who's the general counsel is going to assist me in
trial, but he's also a witness.
THE COURT: Any objection?
MR. MARRIOTT: I'm sorry, Your Honor, I
apologize, I didn't hear you.
THE COURT: Mr. Tibbitts is going to assist Mr.
Spector here. He is a -- he will be a witness.
MR. MARRIOTT: Well, Your Honor, we would --
anyone who is a witness we think ought to be excluded during
40
the testimony. So yes, there's an objection.
MR. SPECTOR: What's the practice on that, Your
Honor? If --
THE COURT: Well I'm going to allow Mr. Tibbitts
to remain in the courtroom. I think to a large extent he is
the Debtors' representative.
MR. MARRIOTT: Can I suggest this compromise,
Your Honor. What if Mr. Tibbitts is the first witness?
THE COURT: Oh --
MR. MARRIOTT: I'm sorry.
THE COURT: -- yeah, we have to make sure we get
you on the record, Mr. Marriott. I'm sorry.
MR. MARRIOTT: I apologize. Can we solve the
problem by having Mr. Tibbitts as the first witness, Your
Honor?
THE COURT: Mr. Spector?
MR. SPECTOR: I suppose we could, but it wouldn't
-- I suppose we could do that. I -- there's really no
reason. It's just going to be a little out of order.
THE COURT: Is he going to be discussing the
sale? Will Mr. Tibbitts be discussing the sale?
MR. SPECTOR: Not really. That's not his primary
area either.
THE COURT: Okay, all right, that's a good --
MR. SPECTOR: Primarily Mr. McBride will be
41
talking about the sale. But, you know, in cross examination
as things come up, I noticed that, you know, they asked us
pre-trail what's this person going to talk about
specifically? And we said -- and we went through the
deposition and it was four hours of six of the topics had
nothing to do with it. So if that happens, Your Honor, and
I don't object for example, then we wind up going into other
areas. That's all I'm --
THE COURT: And if we go to the sale, then we'll
take a recess.
MR. MARRIOTT: Thank you.
THE COURT: Okay, Mr. Marriott, thank you. Thank
you for the -- I think that was a helpful suggestion.
MR. SPECTOR: Well in that case, we would ask Mr.
Nielsen and Mr. McBride to step outside. Who else? We've
got Mr. Hunsaker and Mr. Norris I suppose should step out as
well.
THE COURT: Yes, thank you.
MR. SPECTOR: Mr. Roderick is not listed as a
witness, but he could be rebuttal if something comes up.
THE COURT: Then why don't we have him excuse
himself as well.
MR. SPECTOR: One other housekeeping matter.
THE COURT: Okay.
MR. SPECTOR: This is going to be the cleanest
42
house in Wilmington. We have potential confidentiality NDA
concerns as things get through the testimony and the
exhibits come in. Counsel for the adversaries have agreed
that when we reach that we'll give a high sign or something
and they would not oppose clearing the court for those
periods.
THE COURT: All right, thank you.
MR. SPECTOR: Your Honor, now we have a very
interesting procedural question we have to ask Your Honor to
help us on. We took Your Honor's suggestion to expedite the
matter and three of our witnesses have prepared
declarations, not live testimony. Mr. Tibbitts is one of
those. I would like to hand up Mr. Tibbitts' declaration
and give copies of course to counsel and give everybody some
time to read it and then we'll let Mr. Tibbitts take the
stand for cross unless Your Honor has a better suggestion.
THE COURT: Mr. Marriott?
MR. MARRIOTT: May I, Your Honor?
THE COURT: Yes. There is a microphone at the
counsel table if that's helpful to you.
MR. MARRIOTT: Apparently I'm not close enough to
that though. I think it's sensible to proceed by way of
declaration, Your Honor. We have not of course seen these
declarations and this is the first we're hearing that the
declarations were used. As you know, we made the suggestion
43
last week and thought it had been declined. But what I
would suggest in view of that, Your Honor, is that we get
the declarations now, all of the declarations now. That we
take a break and that we look at the declarations and then
we proceed.
THE COURT: Yeah.
MR. MARRIOTT: And frankly, you know, I don't
know how Your Honor's going to count time. I don't want to
be petty about this, but there's some element here of the
time it takes to read them that we would suggest ought to be
taken into account in the time presentation.
MR. SPECTOR: One of the reasons I thought the
declaration idea was a great idea was because that way it
doesn't count on the clock.
THE COURT: Well as I said, you know, I'm not
inflexible on the time. I'm hoping the time will not be
that significant a factor --
MR. SPECTOR: The declarations are 8 pages, 10
pages, they're not 50 page declarations.
THE COURT: Okay.
MR. SPECTOR: I think it makes more sense -- if
were at a real trial, I'm not saying this isn't a real
trial, but if we had a trial the traditional way, we
wouldn't hear anything that direct is until the witness took
the stand and they'd hear it real time. I would suggest
44
that we shouldn't be penalized for doing the expedited
method. We could stand there with a proffer and read it out
loud one at a time which is another way Your Honor
suggested.
THE COURT: Right.
MR. SPECTOR: I don't think they should have all
of it advance and read it because they would get an
advantage they wouldn't get in a traditional trial. And
there -- you may not see it from the bench, Judge, but
there's an awful lot of points being scored in the
procedural side on their side that they don't really need
that extra help.
MR. MARRIOTT: Your Honor, isn't the compromise
here that they give us the declarations --
THE COURT: Yes.
MR. MARRIOTT: -- we take a break. They don't
count against their time and we move these things along?
THE COURT: Yes.
MR. MARRIOTT: Thank you, Judge.
THE COURT: But I do think we ought to give the
Movants an opportunity to review the declarations.
MR. SPECTOR: Why don't we give them to you, too?
THE COURT: I would like that, too.
MR. MARRIOTT: We have no objection, Judge.
THE COURT: All right, sir.
45
MR. MARRIOTT: Your Honor, when I say we have no
objection subject to whatever objections we may have when we
see the declarations.
THE COURT: Of course, I understand that.
MR. SPECTOR: May I approach?
THE COURT: Yes, of course, Mr. Spector, thank
you.
MR. SPECTOR: This would have been our first
witness.
THE COURT: Okay. Okay.
MR. SPECTOR: And here are the other two
exhibits.
THE COURT: So we have Declarations of Mr.
Nielsen, Mr. Tibbitts, and Mr. Hunsaker and that's what
we'll review. And you'll just let me know when you're ready
to proceed. Is that right, Mr. Marriott?
MR. MARRIOTT: Yes, Your Honor, thank you.
THE COURT: Thank you. All right, we'll stand in
recess as long as necessary.
(Recess from 10:30 a.m. to 11:10 a.m.)
THE COURT: You may be seated, thank you. Mr.
Marriott, did you want to respond to the declarations? I
mean, I know you're going to be -- you'll probably want to
cross examine, probably.
MR. MARRIOTT: We will, I believe have some
46
objections to the content of the declarations.
THE COURT: All right.
MR. MARRIOTT: But I think perhaps what makes
sense is to have the witnesses called and we can state our
objections when they've adopted their declarations which is
I assume the procedure we will be following.
THE COURT: Exactly.
MR. MARRIOTT: Thank you, Judge.
THE COURT: Thank you.
MR. SPECTOR: So you want me to --
THE COURT: Mr. Spector?
MR. SPECTOR: How exactly do you --
THE COURT: Well I guess we have to call Mr.
Tibbitts to the stand.
MR. SPECTOR: All right. Do I do that now?
THE COURT: Why not? I'll do it. Mr. Tibbitts?
(Laughter)
THE COURT: You may --
MR. TIBBITTS: Do I keep my declaration up there
with me?
THE COURT: Yes. I think that's a good -- you'll
probably need that, Mr. Tibbitts. Is that all right, Mr.
Marriott? Any objection?
MR. MARRIOTT: That's fine by me, Your Honor. I
have no objection.
47
THE COURT: Okay. And we will have you sworn,
Mr. Tibbitts.
RYAN E. TIBBITTS, DEBTORS' WITNESS, SWORN
THE COURT: Thank you, Mr. Tibbitts. When you're
-- yes, you may proceed.
DIRECT EXAMINATION
BY MR. SPECTOR:
Q Mr. Tibbitts, do you adopt your declaration?
A Yes, I do.
MR. MARRIOTT: Got it.
THE COURT: Thank you.
MR. SPECTOR: Thank you.
THE COURT: All right, now that's official.
MR. MARRIOTT: Thank you, Your Honor.
THE COURT: Thank you. Mr. Marriott?
MR. MARRIOTT: Good morning, Mr. Tibbitts.
MR. TIBBITTS: How are you?
MR. MARRIOTT: Your Honor, I may, I think in the
interests of expedition, what I'd like to do is state for
the record our objections to the certain paragraphs of Mr.
Tibbitts' declaration.
THE COURT: All right.
MR. MARRIOTT: And then I have but a few
questions for Mr. Tibbitts on behalf of IBM. Your Honor, we
would object to Paragraphs 7, 8, 9, 10, 11, 12, 16, and 17
48
on the grounds that they are speculative, not based on
personal knowledge and based on hearsay for reasons that I
believe are plain on the face of the document. I assume
Your Honor will take those objections under advisement if
and when you consider the merits of the testimony and you
don't wish to have further argument on that.
THE COURT: Well I suppose to the extent that I
sustained your objections, you would have to cross examine
on those points.
MR. MARRIOTT: I don't intend, Your Honor, to
cross examine on those points. The speculative nature --
the testimony in those paragraphs, Your Honor, speaks to
what would happen in a world in which the Tenth Circuit
Court of Appeals were to reverse Judge Kimball's decision in
Novell's favor in the District Court in Utah. And Mr.
Tibbitts' testimony is as Your Honor knows if you've had an
opportunity to review this --
THE COURT: Yes.
MR. MARRIOTT: -- lays out his view of several
possibilities in the event that event in the future, that
uncertain event in the future would occur. It's our
position that that is necessarily and inherently
speculative. That it isn't and can't be based on personal
knowledge. That it's based in parts on hearsay and for
those reasons alone Your Honor not take that into evidence.
49
I don't believe there's much additional cross examination to
about it. I think it is speaks for itself and on its face
and suffers from those problems. I have only several
additional questions for --
MR. JACOBS: If I may?
THE COURT: Please.
MR. JACOBS: This will be the first and last time
I disagree with Mr. Marriott today. But I actually think if
you were to rule, it would expedite my cross examination at
least because if it -- if I have to be concerned that it
might come in, then I have to develop further aspects of the
proposed testimony so --
THE COURT: And forgive me, your name again?
MR. JACOBS: Michael Jacobs, Your Honor, I'm
sorry.
THE COURT: I'm sorry, Mr. Jacobs.
MR. JACOBS; And I'm sorry for not being at the
microphone also.
THE COURT: No, I think we picked you up right
there at the table.
MR. MARRIOTT: And to be clear, Mr. Jacobs I
believe is the primary questioner of Mr. Tibbitts.
THE COURT: Yeah, okay.
MR. MARRIOTT: I am principally stating IBM's
objections which I think Your Honor should grant. And
50
because I only have several questions, it doesn't impede my
examination in the way of Mr. Jacobs.
THE COURT: All right. Mr. Spector, any response
to the objection?
MR. SPECTOR: Mr. Normand will handle this
witness, Your Honor.
THE COURT: All right, good morning.
MR. NORMAND: Good morning, Your Honor, Ted
Normand.
THE COURT: Yes.
MR. NORMAND: This goes to an issue that Mr.
Spector addressed in the argument last week so I have one
broad point and one specific point. As abroad matter, I'm
not sure the label speculative is of particular significance
here. And what Your Honor is charged with doing is to some
extent making a prediction about how these claims are going
to be resolved. I don't think there's any question that the
pendency of the litigation is relevant. We're not going to
address the merits. We're not trying to prove up the
merits.
THE COURT: Right.
MR. NORMAND: But I don't think there's a
question IBM and Novell haven't gone so far as to say that
the pendency of the litigation is irrelevant. So given its
relevance, Your Honor is charged with making one prediction
51
or another about what might happen. That's my general
comment. I would say specifically we have the general
counsel of the company who's been exposed to the proceedings
and who as a mechanism for Your Honor to gain some knowledge
through a witness about the company's view, trying to make
the point that, you know, there's a reasonable prospect of
rehabilitation. The company's view about how things might
play out. Now they're entitled to put up, I think they can
argue as attorneys. They can argue against it. The way
we've chosen to do it is to use the general counsel of the
company to argue about how he things given his many year
exposure, his investment in the issues as the general
counsel of the company, his non-stop experience of dealing
with them. He's qualified to speak to what he thinks will
happen upon, you know, any one of a number of events in
particular concerning the Tenth Circuit appeal. So for both
of those reasons, I think Mr. Tibbitts should be permitted
to testify to the substance of those paragraphs.
THE COURT: Thank you, Mr. Normand. Anything
further, Mr. Marriott?
MR. MARRIOTT: Your Honor, I would say simply
that without boring Your Honor again with all the detail of
our letter brief, Mr. Levin's letter brief to the Court, we
laid out there why Your Honor this testimony is inherently
speculative, why it's been disallowed by Courts in other
52
jurisdictions. It is offered here as I understand it, for
the purpose of showing that the Debtors have some prospect
of rehabilitation and an uncertain potential recovery at a
date uncertain in the future, Your Honor, is necessarily and
inherently speculative and for the reasons set out in those
papers and that have otherwise stated here, Your Honor, that
it not respectfully submit be allowed.
THE COURT: Yes, Mr. Jacobs?
MR. JACOBS: Michael Jacobs, Your Honor. For the
record, Novell joins in IBM's objections to this testimony.
THE COURT: All right. Mr. Normand?
MR. NORMAND: One last word, Your Honor.
THE COURT: Yes.
MR. NORMAND: It's important to note that part of
what Mr. Tibbitts is testifying to in these paragraphs is
based on his personal experience and that is in particular
what he thinks will happen in the market for lack of a
better term if there is some sort of reversal from the Tenth
Circuit. That's an issue that he has grounds to address
based on firsthand knowledge. And again, I think we're --
we shouldn't get hung up on labels. Is it speculative?
It's forward looking, but that's the context in which
everyone finds themselves, of course Your Honor knows that.
And Your Honor's task is to predict what's going to happen
in the future and Mr. Tibbitts has personal knowledge based
53
on which he can speak to that issue.
MR. MARRIOTT: May I just one additional point,
Your Honor raised by Mr. Normand's argument. A further
problem with Mr. Tibbitts' testimony, Your Honor is it is in
effect improper lay opinion testimony. What Mr. Norman
should have said and what Mr. Tibbitts says at Paragraph 10
of his declaration is that he will speak to the effect that
he personally believes a decision by the Tenth Circuit Court
of Appeals would have on the stock price and the market
capitalization of the SCO Group. That is if anything, Your
Honor, a classic question of expert opinion. It is not a
question for a lay witness, independent of the other reasons
for objection which we laid out. Thank you.
THE COURT: Thank you. Well, you know, Mr. --
let me ask Mr. Tibbitts one question. Mr. Tibbitts as
general counsel for SCO is your responsibility and there may
be others, but is it one of your responsibilities to monitor
the litigations to which you refer in your declaration?
MR. TIBBITTS: Yes.
THE COURT: Okay. Well given the fact that Mr.
Tibbitts is a lawyer, is general counsel, is charged with
the responsibility of monitoring litigation, I am going to
overrule the objection except as it relates to what impact
the litigation would have upon the stock prices because I do
not believe that Mr. Tibbitts as a lawyer has the expertise
54
to opine on that or to even speak to it as a fact, matter of
fact. But other than that as far as what might happen, I
think it goes to the weight of the evidence. I think we all
know that this is based on surmise to a large extent, but
nonetheless as general counsel, I do think that Mr. Tibbitts
ought to be entitled to testify or his declaration at least
as to those points should be admitted.
MR. MARRIOTT: May I inquire, Your Honor?
THE COURT: Yes.
CROSS EXAMINATION
BY MR. MARRIOTT:
Q Thank you. Mr. Tibbitts in your declaration, you
describe certain of the claims that the Debtors have against
Novell and IBM. Correct?
A Yes.
Q You do not mention, however, in your declaration any
counterclaims that either Novell or IBM has against the
Debtors. Correct?
A That's correct.
Q And, in fact, IBM has a number of counter claims
against the Debtors. Correct? Against the SCO Group, Inc.?
A Well I know at one point they had a number of
counterclaims and they dropped many of those. And I don't
know if they have many claims left or one or two, sorry.
Q But isn't a fact, Mr. Tibbitts that IBM asserted more
55
than ten counterclaims against the SCO Group including four
patent counterclaims which were -- which patent
counterclaims were dropped?
A I don't have the numbers in my head, but that sounds
about right.
Q And they're -- and IBM has asserted against the SCO
Group counterclaims in addition to patent counterclaims.
Correct?
A Yes.
Q And those cases are pending. Correct?
A Yes.
MR. MARRIOTT: In fact, IBM moved for summary
judgment for declaration -- with respect -- withdrawn, Your
Honor. No further questions.
THE COURT: All right, thank you. Mr. Jacobs,
when you're ready, sir.
BY MR. JACOBS:
Q Mr. Tibbitts, let's talk first about the timing of a
possible Tenth Circuit ruling. In your declaration, you say
that you have been advised, that SCO has been advised that
Judge McConnell plans to rule on this case as prior to his
departure date. Do you recall that testimony --
A Correct.
Q -- or declaration? What exactly has been said by whom
to whom, sir?
56
MR. NORMAND: Your Honor, let me just object on
the basis of privilege. I think the phrasing of Mr.
Tibbitts' declaration on this point was intentional and
carefully done. We wouldn't want Mr. Tibbitts to speaking
to his discussions with counsel.
MR. JACOBS: Move to strike, Your Honor. If
they're asserting privilege over the basis for this
testimony, then that has to be stricken from the record.
MR. NORMAND: Your Honor, someone can have an
understanding that they've developed from discussion with
counsel and testify to that understanding without testifying
to the content of the discussion with counsel. I didn't
mean to preclude an answer to the question, I was objecting
to the extent that question was implicating discussions with
counsel and testimony directly about those discussions. Mr.
Tibbitts can speak to understandings he developed following
discussions with counsel.
MR. JACOBS: I don't see how he can testify to
what he understands the Tenth Circuit has told SCO without
telling us what the Tenth Circuit has told SCO.
THE COURT: I understand and I'll overrule that
objection.
MR. JACOBS: So, Mr. Tibbitts, who has said what
to whom?
THE COURT: I'm sorry?
57
MR. TIBBITTS: I thought his counsel --
MR. JACOBS: You overruled the objection.
THE COURT: Yes.
MR. JACOBS: So I'm re-asking the question --
THE COURT: Yes, yes, okay.
MR. JACOBS: -- just to get --
MR. TIBBITTS: I just thought your co-counsel was
waiving you there. So that's why I pointed over there. The
first information I have on this is within a week of the
hearings on May the 6th, 2009, I picked up the phone and
called the -- there's an informational clerk at the Tenth
Circuit to ask them the general question of -- let me back
up. Judge McConnell announced he would be leaving the
bench, I believe the day before our case was argued. I
wondered -- we had discussed what the impact of that might
be. And I wondered if they, if the Tenth Circuit had any
information on it. So I called the general information
clerk over there and said what is the effect of Judge
McConnell's leaving the bench at the end of August? Would
it be his intent or do you know is there a procedure that
the intent would be that he would issue opinions on all the
cases he's involved in prior to that date and that clerk
said absolutely. I don't think we even discussed the SCO
case. I just said in general what is McConnell going to do.
And then I am aware that our counsel had a similar contact
58
some time after that, but my first information was when I
called the clerk.
BY MR. JACOBS:
Q And the similar contact, similar in terms of it being
of a general nature was the plan here in view of Judge
McConnell's impending departure?
A I don't know the answer to that. You mean with
others? I didn't -- it was general. My call was general.
Q And your counsel's call?
A I don't know.
Q Now have you -- at your deposition you were asked
about scenarios in which a Judge leaves the bench while a
case is pending. Do you recall that question or answer?
A Yes.
Q Isn't a fact, sir, that in certain circuits in the --
in this country if a Judge leaves the bench the two Judge
panel can continue to deliberate and issue a ruling?
A That may be true, but as I said in my deposition
that's news to me if they can do that.
Q And you don't know, in fact, what could happen, what
will happen here. It may be that the panel is divided.
That it takes more time for a ruling to come out.
A I suppose that's possible. What I do know is that
Judge McConnell sat on ten cases after he announced his
departure and if I got my numbers correct, I believe
59
opinions have come out on six of those ten so he is working
on the cases that he heard.
Q Were any of those cases complex commercial cases of
the sort at issue here?
A That he sat on?
Q Correct.
A I haven't drilled down on all of them. I know at
least one that was argued with our panel seemed fairly
complicated.
Q So it was on an asylum [ph] case I think wasn't it,
sir?
A That was the first one, the second one was a
commercial dispute as I recall.
Q Now in your declaration, you discussed various
scenarios what could happen depending on various Tenth
Circuit outcomes, yes?
A Correct.
Q And then you talk about -- and in your declaration you
discuss the scenario in which say the copyright rulings are
reversed.
A Yes.
Q It's possible that the -- that one of the possible
outcomes here is that the ruling, the Tenth Circuit affirms
Judge Campbell's decision on Novell's claim for money
against SCO.
60
A Correct.
Q And it's possible that that could be coupled with
different decisions say a remand on the copyright issue?
A Correct.
Q And then we would have a trial on the copyright issue?
A Correct.
Q And that could take place in 2009, 2010, possibly even
2011. Correct?
A Sure.
Q In addition, there's a pending arbitration relating to
copyright issues, isn't there?
A Yes.
Q You didn't mention that in your declaration, did you?
A I did not.
Q But that arbitration has been stayed because, partly
because SCO argued look, the ruling on copyright ownership
moves any need to have an arbitration in Zurich over
copyright issues.
A Say that again.
Q SCO argued in arguing that the arbitration shouldn't
go forward --
A In this Court. Is that what you're referring --
Q In this Court and to the arbitration panel as well.
SCO argued that the copyright ruling in the District Court
mooted any need for the arbitration to go forward in Zurich.
61
A I haven't studied all of that. It sounds about right,
but what I do know is the copyright issue was scheduled to
go to trial in September of '07 and was ready to go in Utah.
And I think we could get back there quickly.
Q If schedules allow. Correct, sir?
A Sure.
Q And depending on what additional record if any needs
to be developed after a Tenth Circuit ruling.
A Yes, if any.
Q And in terms of the arbitration, that's a whole other
category of potential expenses to SCO, isn't it?
A Yes.
Q You note in your declaration that the interest, some
of the interest owing may be non-allowable in bankruptcy in
Paragraph 7. Do you see that?
A Yes.
Q And that's one of the detriments to Novell isn't it
for the -- given the protracted nature of this bankruptcy.
If it should turn out that interest is not allowable, the
longer this persists, the lower the value of Novell's claim
against SCO. Correct?
A I guess you could do that math, yes.
MR. JACOBS: A moment, Your Honor?
THE COURT: Certainly.
MR. JACOBS: Thank you, Your Honor, no further
62
questions.
THE COURT: All right. Any redirect, Mr.
Normand?
MR. NORMAND: Just briefly, Your Honor.
THE COURT: Sure.
REDIRECT EXAMINATION
BY MR. NORMAND:
Q Good morning, Mr. Tibbitts.
A How are you?
Q Mr. Marriott had asked you about counterclaims. Do
you recall that?
A Yes.
Q Do you recall what amount of damages IBM claims for
those counterclaims that do remain?
A Not specifically. It was in the -- and I'm just going
from memory here. I haven't researched this. It was in the
-- well let me back up. I think when we took discovery on
that, their expert admitted something to the effect of they
didn't have any damages other than attorneys fees and what
that number is, I don't recall, but it was -- I just don't
remember specifically.
MR. MARRIOTT: And I would just object to the
characterization of what the expert admitted.
MR. NORMAND: I was asking Mr. Tibbitts about his
understanding --
63
THE COURT: Right.
MR. NORMAND: -- as to whether IBM had asserted
any damages for -- in support of their counterclaims.
THE COURT: Mr. Marriott?
MR. MARRIOTT: And in response, Your Honor --
THE COURT: Yeah.
MR. MARRIOTT: -- the witness purported to
characterize an expert report which is not of record at
which Your Honor ruled out of the record.
MR. NORMAND: He's not putting it in for the
truth of the matter, he's putting it in to explain the basis
for his understanding.
MR. MARRIOTT: Again, Your Honor, and the basis
of his understanding is speculative and irrelevant. What
matters is the underlying truth.
MR. NORMAND: That turns everything that I've
heard for the last week around, Your Honor.
THE COURT: I'm going to overrule that objection.
BY MR. NORMAND:
Q Mr. Tibbitts, did you attend the oral argument in
front of the Tenth Circuit?
A I did.
Q And was Judge McConnell at the argument?
A Yes, he was.
Q And do you recall whether he asked any questions?
64
A He asked the majority of the questions.
Q On this appeal in particular?
A On our case, yes.
MR. NORMAND: That's all I have, Your Honor.
THE COURT: Any new cross?
MR. MARRIOTT: Just briefly.
RECROSS EXAMINATION
BY MR. MARRIOTT:
Q Mr. Tibbitts, you don't know precisely what IBM's
damages experts say are the damages that IBM has suffered at
the hands of SCO, right?
A I'm just going on memory from what I recall from that
deposition but I don't know the specifics.
MR. MARRIOTT: Thank you, no further questions.
THE COURT: Mr. Normand?
MR. NORMAND: This could be bad form in that it's
not within the scope of what Mr. Marriott just asked, but I
wanted to ask one further question on my redirect if that's
okay with Your Honor.
THE COURT: I'll let you have that leeway,
certainly.
REDIRECT EXAMINATION
BY MR. NORMAND:
Q Mr. Tibbitts, from your experience at the company when
you were with the company, do you know what the stock price
65
was before the summary judgment ruling in August of 2007 and
the day before that?
A Yes, I do.
Q And do you recall what that stock price was?
A On August 10, 2007 the day the ruling came out after
the market closed, our market cap was $35.5 million
approximately and our stock price was $1.56 a share.
Q And you recall what those numbers were the next day
after the ruling?
A Yeah, the next trading day was Monday and our stock
price closed at 44 cents for a market cap of $9 million.
MR. NORMAND: Thank you, Your Honor.
THE COURT: All right, Mr. Normand. Anything
relating --
MR. MARRIOTT: Nothing here, Your Honor.
THE COURT: All right. Yes, I'm sorry, Mr.
Jacobs, nothing more? Mr. Tibbitts, you may step down, sir.
MR. TIBBITTS: Thank you.
THE COURT: Thank you.
MR. SPECTOR: Mr. Tibbitts is going to go call
Mr. Nielsen who --
THE COURT: Oh, fine, good.
MR. SPECTOR: -- who would have been our first,
but we -- now Mr. Tibbitts can stay here with us.
THE COURT: Yes, he's entitled to stay.
66
MR. MARRIOTT: Your Honor, may I just inquire how
much time we've expended in the interest of keeping everyone
on the same page?
THE COURT: You know, it's very difficult because
some of -- a lot of its been argument. I have you at the
moment at 15 minutes.
MR. MARRIOTT: Thank you, Judge.
THE COURT: And I have the other side at about 25
minutes.
MR. SPECTOR: Your Honor, I guess we'd call Ken
Nielsen.
THE COURT: Mr. Nielson, thank you. If you'll
just remain standing while you're sworn, Mr. Nielson.
MR. SPECTOR: Now I think they want you behind --
there's a bible.
KENNETH RAY NIELSEN, DEBTORS' WITNESS, SWORN
DIRECT EXAMINATION
BY MR. SPECTOR:
Q Do you adopt your declaration, sir?
A Yes.
Q Do you know what that means?
A No, but I assume it means do I -- is this my
declaration.
Q Yes. And you're agreeing that that is accurate?
A Yes.
67
THE COURT: Thank you.
MR. REYNOLDS: Good morning, Your Honor. Good
morning, Mr. Nielsen.
MR. NIELSEN: Good morning.
MR. REYNOLDS: I'm Michael Reynolds from Cravath
Swaine and Moore in New York on behalf of IBM. As a
threshold matter, Your Honor, I'd like to on behalf of IBM
object to Paragraphs 28 to 36 of Mr. Nielsen's declaration
on the grounds that those -- the subjects described therein
are beyond the scope of the topics that the Debtors
indicated Mr. Nielsen would be here to testify about. The
topics that we were advised he would be testifying about
were and I quote "financial results and management steps to
conserve" and did not relate to the topics that are
addressed in the paragraphs I just listed. If I could
further explain, Your Honor.
THE COURT: I was just waiting for a response,
but go ahead. Please go ahead while you're there Mr.
Reynolds.
MR. REYNOLDS: Yes. If you had a chance to
review those paragraphs briefly, you'll see they relate to
the witness' views on various intercompany impact of the
conversion of Chapter 7.
THE COURT: Right.
MR. REYNOLDS: And that's a topic that does not
68
fall within the two that I mentioned. And, in fact, during
Mr. Nielsen's deposition, I specifically asked him just to
make sure there were no -- there was no chance of him going
into this area whether it was his intent to address this
subject and he was instructed by counsel not to go into that
subject even though I thought that was something that were
entitled to do in these depositions. And so as a result, we
do not have testimony going into great -- any real length on
his views as expressed here, nor did we receive documents of
which I'm aware that relate to these topics and it's the
first time that I am seeing these kinds of numbers and
information and so forth on these areas. And so for those
reasons, we object to those paragraphs.
THE COURT: All right, thank you, Mr. Reynolds.
Mr. Spector?
MR. SPECTOR: Well as a threshold matter, Mr.
Reynolds should stay right here. I'd like him to cite for
me where it is I told the witness not to testify about this
because that was the day that discovery was going on and Mr.
Nielsen and I were in another room with depositions. And I
don't recall that. I'd like to hear -- I'd like to see it.
MR. REYNOLDS: On page -- here it is, right here,
Mr. Spector. On Page 251 of Mr. Nielsen's deposition, I
asked do you have any view in particular of whether the
Bankruptcy Court should convert this proceeding to a Chapter
69
7 under the Bankruptcy Code? Yes, I would. What is that
view? Which it should not. What is your basis for that
view other than anything you may have discussed with
counsel? I'm talking about your own personal view as to why
that should not happen. I don't think it serves the benefit
of stakeholders, be it customers, employees, creditors. Is
that a subject upon which you plan to testify at the hearing
on Monday? And Mr. Spector said objection, the witness said
I don't know. Mr. Spector: I want to finish the objection.
I objected the last time you asked it of another witness.
What this witness is going to testify about could only be
derived from conversations with counsel who prepares him for
that testimony. So I would ask that it not be answered.
MR. SPECTOR: Okay.
MR. REYNOLDS: And then it goes on and I
explained that I thought we could go into that. And he
instructed the witness not to answer.
MR. SPECTOR: Your Honor the -- a large -- this
is one of those, you know, don't take this pejoratively,
okay? I can't -- I'm having -- I'm tired and it's hard for
me to find the right words sometimes. It's one of those
pre-trial traps. There isn't anything in the Court Order.
There isn't anything in the Federal Rules of Civil
Procedure, the Federal Rules of Bankruptcy, Magna Carta
anywhere that say before we come to trial we have to say oh,
70
by the way, this person is going to step A through C and
somebody else is going to do D through F. And as a
courtesy, I tried when they asked and I'll remember if
there's a next time not to be so courteous, but I tried when
they asked to say well what is this guy going to talk about?
On each witness, I said well we're going to try put him for
this, we'll try to put him in that for that and then things
changed during the course. And I'm not saying that Mr.
Reynolds is misquoting anything that we said in emails three
weeks ago when I was thinking about how we're going to put
this case together. We had other witnesses. They didn't
show up. I won't even go into the side story about that. I
got subpoenas and they disappeared. And so things had to
change.
Having said that, Your Honor, there isn't
anything in these paragraphs that is mind blowing or outside
of the scope. The primary witnesses who are going to be
talking about conversion are Mr. McBride, Mr. Hunsaker. The
testimony they elicited in that deposition was and that I
objected to and they asked other witnesses, too is what are
you going to testify at trial? And I objected saying that
the witness is not prepared -- it's not proper to ask the
witness defense strategy, trial strategy. That's what that
objection goes to, Your Honor. I directed the witness not
to tell what you plan to testify to, what the lawyer tells
71
you you're going to testify about and so forth. That's what
I'm talking about. Now these questions, these paragraphs
talk about how the financials work in the company. The
intercompany transactions.
Some the issues that are addressed earlier in the
declaration talk about discrepancies between Novell and
IBM's accounting, the MRO's. Some of that is foreign
accounting. This all is part and parcel of one. There are
I have to admit not everyone of these paragraphs is that
way. Some of these talk about oh, by the way if it converts
we have 19 employees overseas and that may be a problem for
the case because they would have claims under the foreign
jurisdiction. We do have things like possible claims by
customers because the service contracts won't be audited.
Those things I probably could get in through other witnesses
later, but I don't think that's going so far a field or that
it's unfair to IBM, Novell, or the U.S. Trustee to let the
CFO testify about the internal financial affairs of the
company even if three weeks ago I may have thought that
wasn't going to come in through his testimony. And that's
really all I can say.
THE COURT: And how about documents? Were
documents produced?
MR. SPECTOR: I don't -- when Mr. Nielsen was in
the deposition when everybody else was producing documents.
72
There are documents. We have attached them. I don't know
that he has anything else to produce. Other people were
doing the document production while he was being deposed.
It was only a 24 hour process at that point, Your Honor.
Everybody was scrambling. I think we produced 12,000 or
17,000. How many -- more than 12, less than 17 perhaps
thousand documents in a space of 24 hours. Privileged
things got in there. And actually they put on some
privileged things. We're not even objecting to it. We just
don't want to take -- the effort isn't worth it anymore.
But, you know, we were writing these declarations right up
to midnight last night because the strategy is changing.
And they want to lock me into something I said as a courtesy
three weeks ago. I don't think it's fair.
THE COURT: Anyone else?
(No audible response heard)
THE COURT: The documents that are attached to
the declaration, Mr. Reynolds --
MR. REYNOLDS: Those documents --
THE COURT: -- were they produced?
MR. REYNOLDS: Oh, the documents attached this
declaration?
THE COURT: Yes.
MR. REYNOLDS: Most of those were -- almost every
page from what I remember were brought to the deposition by
73
Mr. Nielsen and I did have a chance to examine him about
those. But none of these relates to the intercompany --
THE COURT: No.
MR. REYNOLDS: -- matter that's the subject to
the paragraphs to which I referred, Your Honor.
THE COURT: I understand.
MR. REYNOLDS: And I would just like to refer
back to the transcript of the hearing before Your Honor on
June 15 in which the topic of a list of witnesses and an
outline of what their testimony would entail was discussed
and that Mr. Spector as he indicated would be happy to
supply that. My principal point is that we have not had
discovery on this matter. And I believe on that basis it is
unfair for the witness to be able to testify on the subject.
And as Mr. Spector has acknowledged, he has other witnesses
who have been identified as speaking directly to this topic
and I believe he should be able to rest on that, but I don't
see the reason to have this particular witness go into these
areas.
THE COURT: Okay.
MR. SPECTOR: Are those live is it just -- is
more convenient for us to do that way?
THE COURT: It probably would be just as well to
speak right from the table on objections.
MR. SPECTOR: All right. But in colloquy I guess
74
I got to get up.
THE COURT: Yes.
MR. SPECTOR: Okay.
THE COURT: Well you can remain at the -- you
certainly remain at the table on objections though.
MR. SPECTOR: Two things about that. The other
witnesses, there's only two live witnesses, Mr. Norris who
doesn't know anything about this. Mr. Tibbitts, pardon me,
Mr. Tibbitts' testified. Mr. McBride doesn't know anything
about what we're going to hit him with. Those are not
things that we prepped him for. So that's unfair.
Second, Your Honor, and I may come back to this
multiple times today. We showed up in Court on the assigned
date for trial on June 15 with eight live witnesses. Mr.
Nielsen was one of them. They wouldn't have had one width
of discovery on that day and we would have proceeded to
trial. I know we brought in some evidence. We could have
done that as the last witness at the trial if we wanted to.
We could have put that into evidence with the last of the
eight witnesses and say and here's the Purchaser Sale
Agreement that was inked three hours ago. And we would have
had the trial and they wouldn't have had anything from Mr.
Nielsen or anybody else. We've produced thousands and
thousands of documents. They've had -- they deposed
everybody. None of that would have happened if we had gone
75
to trial on June 15 when we were scheduled to go. We're not
begrudging we got six extra weeks, but it was all to the
advantage of IBM Novell.
I don't think the fact that they didn't get some
question in about something really as -- well foreign
employees or the effects in his mind of breaching contracts
on -- to customers or the effects of employee claims on --
that's what this is about is so overreaching or that I was
taking advantage of them by not telling them in advance
who's going to testify about that. Or I never permitted
them specifically in talking about the foreign employees,
never talked to them, prevented them from talking about the
effects of contracts. They didn't ask about that. They
could have asked about that. But I guess that's what I have
to say about it.
THE COURT: Well just look -- I think just for
the sake of moving things along, I'm going to overrule the
objection. I understand it. But I think that Mr. Spector
has made a good point and that is we had a hearing scheduled
previously that did not proceed and I will reluctantly
overrule the objection. And I think a few of the paragraphs
don't relate to the -- a few of the objected to paragraphs
don't relate to the foreign business.
MR. REYNOLDS: Very well, Your Honor. I'll do my
best to ask questions on this topic.
76
THE COURT: Okay.
CROSS EXAMINATION
BY MR. REYNOLDS:
Q I mean, we got the -- are we still in the morning?
Good morning, Mr. Nielsen again. I would like to ask you
first if you have had a chance to review your declaration
since you signed it?
A Yes.
Q Do you believe it to be true and correct in every way?
A Yes.
Q I would like to refer you if I could, Mr. Nielsen, do
you have a copy of the declaration in front of you, right?
A I do.
Q To page, Paragraph 18 of your declaration. And then I
would also like to refer the witness to Movants Exhibit 1.
Do you have the binder of exhibits there, Mr. Nielsen?
MR. MARRIOTT: Your Honor, may I be -- the
witness needs to have the binder of exhibits. May I take
them to --
THE COURT: You certainly may, yes, Mr. Marriott.
These are your exhibits, Mr. Reynolds?
MR. REYNOLDS: That's correct.
THE COURT: Yes, I think that's a good idea, Mr.
Marriott. Thank you very much, thank you.
BY MR. REYNOLDS:
77
Q Mr. Nielsen, do you have Movants' Exhibit 1 in front
of you?
A Yes.
Q Which is the Debtors' response to the objections by
IBM and Novell. Is that right?
A Correct.
Q And is that document that is Movants' Exhibit 1 the
document that you are quoting in Paragraph 18 of your
declaration?
A Yes.
Q Okay. So if you go to Page 5 of the Exhibit 1 which
contains language from that correspondence to the language
quoted here in Paragraph 18, I would just like to start by
asking you where do you see the first sentence, the monthly
operating reports, MOR's suggest an aggregate operating loss
of $8,652,000 on Page 5 of Exhibit 1.
A I don't see it.
MR. SPECTOR: Oh, oh, my goodness, my bad, Your
Honor. I think I got that from an early draft because the
documents on our PDF and I went back to my computer and I
pulled up what I thought was our response and I quoted from
the wrong paragraph. I have to take that one on me. And I
apologize to Mr. Nielsen who signed that declaration based
on my -- it was late at night.
BY MR. REYNOLDS:
78
Q Well the numbers there are the ones, things I want to
talk about. Isn't it true, Mr. Nielsen that the number
$8,652,000 does not appear on Page 5 of document -- of
Exhibit 1?
A Correct.
Q Okay. The next part of that first sentence does
appear on Exhibit 1. Is that right? The part that starts
the true aggregate net operating loss over that time period
was actually $4.37 -- sorry, $4.357 million, approximately
half of what the Movants allege. Is that right?
A Yes.
Q And at the end of that paragraph in Exhibit 1 is there
not a footnote?
A Yes, there is.
Q Is there a footnote in the corresponding part in
Paragraph 18 of your declaration that reflects that
footnote?
A No.
Q And isn't true that the number $4,357,000 that appears
in that sentence is false?
A That's incorrect.
Q What's the correct number?
A If we go to Paragraph 20 of my testimony or my
declarations, that correct number is $5,339,000.
Q So the submission to the Bankruptcy Court that is
79
Exhibit 1 understated the true aggregate net operating loss
of the Debtors over the time period described. Is that
right?
A Correct.
Q If you look now at the footnote that appears in
Exhibit 1, but not in Paragraph 18 of your declaration, does
it not state the MOR's, the monthly operating reports
include non-cash items. As of the latest MOR, aggregate
non-cash items listed as part of losses total $4.295
million. Is that right?
A On Page 5 of Exhibit 1, right?
Q Yes.
A That's correct.
Q Okay. And that language again does not appear in
Paragraph 18 of your declaration. But if you look at
Paragraph 20 where you were putting forth what you say is
the correct version, there is a footnote at that space at
the end of the first sentence. Is that right?
A Yes.
Q And the first part of that footnote does say the MOR's
include non-cash items. But then it goes on to say that as
of the March 2009 MOR, aggregate non-cash items listed as
part of losses on the statement of operations totaled $8.623
million before net advances to foreign subsidiaries of
$6.004 million. Do you see that?
80
A Yes.
Q If you look back at Exhibit 1 in Footnote 7, what
should the correct number have been in that sentence where
it said the aggregate non-cash items listed as part of
losses total $4.295 million?
A It would be the net of the $8.623 and the $6.004, so
it would be $2,619,000 if my math works.
Q So the non-cash items reflected in Footnote 7 were
considerably less than the amount that you or the Debtors
rather had submitted in Footnote 7 of Exhibit 1. Is that
right?
A Correct.
Q Okay. Going back to this Paragraph 18, I could go
through the numbers, but it's clear by comparing 18 to
Paragraph 18 and Paragraph 20 that the submission that was
made to the Bankruptcy Court, that is Exhibit 1, understated
the financial liabilities and exposure of the Debtors. Is
that right?
A That's correct.
Q And, in fact, looking into some of the key numbers,
the amount that was listed as the true losses from business
operations in Exhibit 1 that went to the Bankruptcy Court on
June 5 was said to be $561,000, but in fact, what should
that number have read?
A $1,137,000.
81
Q Which is more than twice $561,000, right?
A Correct.
Q Now if you look then in the next final paragraph of
your Paragraph 18 quoted text, it talks about an erosion in
cash of $3.5 million in the 19 months. And it goes on to
say when averaged over that time, the rate of cash burn is
around $184,000 a month. Do you see that?
A Yes.
Q What is the number that should have appeared there
instead of $184,000?
A $281,000.
Q $100,000 more per month. Is that right?
A Correct.
Q Now if you go to Paragraph 20, Mr. Nielsen, looking at
that same quoted paragraph that begins the erosion in cash
of $3.5 million, isn't it true that here in Paragraph 20
you're supposed to be correcting the numbers that were false
in the previous submission? Isn't that right?
A Yes.
Q But isn't it true that $3.5 million is incorrect?
A No, that's still correct.
Q I thought you told me in deposition if you recall
testifying on July 22, that that number should have been
$5.3 million.
A There's a difference there. And that difference is
82
the $5.9 is the cash burn, the $3.5 is the change in the
cash balance when that -- so what that means is of the $5.3
that was generating cash operating loss, it was funded by
working capital resulting in a diminution of cash of $3.5
million.
Q So are you telling me that when you said in deposition
that that number should have been $5.3 million you were
wrong?
A Yes.
Q And then when you see in the next sentence it says
when averaged over that time period, the rate of cash and
working capital burn is around $281,000. Is that right?
A That's correct.
Q Okay. And that number is greater than the one that
you previously reported as $184. Correct?
A Correct.
Q $184,000. And then going to the end of this
paragraph, let's look at 18. In Paragraph 18, the brief
that was submitted by counsel states that taking away those
months of cash burn yields a more normal rate of reduction
of $150,000 per month, but in fact, that number was false.
Correct?
A Correct.
Q What is the correct number?
A $244,000.
83
Q I'd like to refer you now to Paragraph 23 of your
declaration where you state that based on current
assumptions you project that SCO will have between $1.4 and
$1.6 million in total cash on hand as of August 31, 2009.
Do you see that?
A I do.
Q Isn't it true that approximately $1 million of that
stated cash amount is restricted cash?
A Yes.
Q Turning onto the next page where you talk about in
Paragraph 26 that management's implemented several programs
to preserve cash. You talk about reduction of R & D efforts
and reduction in marketing expenses. Isn't it true that
research and development is something that is necessary to
help you actually achieve sales in connection with the
revenue that you were hoping to achieve in Paragraph 25?
A No. The projections in Paragraph 25 are based upon
existing R & D and existing product line. It doesn't have
any introduction of new product lines or new products.
Q In Paragraph 25, are you making an assumption based on
reduced R & D or then current existing R & D?
A Current and existing R & D.
Q So not taking into account the reductions that you're
taking part in right now?
A Paragraph 26 says management has implemented. So
84
referring to R & D cutbacks that were implemented throughout
the period of this pre-petition or of this bankruptcy.
Q Are you planning any further reductions in R & D or
marketing expenses?
A At this time, no.
Q In Paragraph 27, you mention that the Debtors did not
retain the services of an investment banker because they
could not afford the cost. Do you see that?
A Yes.
Q And you state that you -- everyone you spoke with
wanted a retainer of at least $100,000.
A Correct.
Q Do you recall specific bankers with whom you spoke who
mentioned they wanted a retainer of that amount?
A D. A. Davidson.
Q I'm sorry, Mr. Nielsen?
A D. A. Davidson.
Q Anyone else?
A We spoke with others who weren't interested.
Q But can you name any other investment bankers with
whom you spoke who said they wanted a retainer of at least
$100,000 besides D. A. Davidson?
A No.
Q Now that mention of $100,000, isn't it true that one
of the Debtors' subsidiaries according to you paid Mr.
85
Steven Norris who represents the purchaser here, $100,000 in
connection with work that he did for the Debtors or their
subsidiaries?
A Yes.
Q Now looking at these paragraphs that relate to
intercompany expenses and again, I don't have documentation
on this, but the way I -- my reading this correctly in
Paragraph 28 to say that the foreign subsidiaries of the
Debtors receive a commission on all of their sales of the
Debtors' products equal to 110 percent of the subsidiaries
operating expense. Is that right?
A Yes, of their direct selling and operating expenses.
Q From whom do they receive that commission?
A It's received through an accounting convention that's
booked through the general ledger.
Q Okay. So in a sense, the commission is received from
the Debtors, from an accounting point of view?
A Correct.
Q Okay. Are you aware of any documents, Mr. Nielsen and
at that, by that I include studies or XL spreadsheets and so
forth that relate to the topics that are reflected in
Paragraphs 28, 29, 30, 31 for example?
A Paragraphs 28, 29, 30 and 31?
Q Yes, the ones relating to this intercompany accounting
treatment.
86
A Yes, there's agency agreements with each of its
foreign subs that support the 110 percent.
Q Have you performed any study or have you -- are you
aware of anyone else performing any study of the subjects
that are put forth in Paragraphs 28 to 31?
A Yeah, the intercompany pricing transfer is assessed,
has been assessed with outside parties like Price Waterhouse
Coopers.
Q Has it been assessed in terms of the subject that
you're putting forth here? In other words, the impact on
the Debtors should there be a Chapter 7 conversion?
A No. In this case, the information in those paragraphs
are talking to the implementation of that 110 percent that
the company follows with its foreign subs.
Q In paragraph 34, you talk about employee protections
in various nations.
A Yes.
Q Do you personally have knowledge of those employee
protections and what significance they may have?
A I have a general understanding.
Q What's the basis of your understanding?
A Is that in most of our foreign subsidiaries which are
in Europe, their benefits carryover and the credit -- if the
employee is terminated that the employer has to pay those
benefits.
87
Q Are you a lawyer, Mr. Nielsen?
A No.
Q In Paragraph 34, you state that you estimate that if
the foreign subsidiaries were to close down, the resulting
liability would be in the order of $1.2 million. Do you see
that?
A I do.
Q Did you perform any analysis that you reduced to
writing that relates to that subject right there?
A The Director of H. R. performed that analysis who has
a better understanding of the impact of terminating foreign
employees.
Q Have you see any written analysis by the Director of
H. R. or anyone else regarding your assertion that the
liability would be in the order of $1.2 million?
A Yes.
Q And do you know whether that's been produced to the
Debtor -- to IBM or Novell in this matter?
A Not that I'm aware of.
Q In Paragraph 36, you discuss that if SCO goes out of
business and is not able to fulfill its contractual
obligations to licensees, there will likely be millions of
dollars of new claims. Do you have any source for that
information?
A Yes.
88
Q And what is that?
A We've had claims submitted by CTI Group of $3 million.
Q Other than that?
A We also have revenues that we book every -- annually
for one year licenses and support agreements which are
earned as the passage of time.
Q Have you performed or are you aware of anyone else
who's performed any analysis or study regarding this topic?
A Not that I'm aware of.
Q I would like to refer you -- let's see if I've got it
here -- to Movants' Exhibit 5 which is titled, captioned the
United States Bankruptcy Court here in the District of
Delaware and it's titled Third Amended Summary of Schedules.
Do you see that?
A I do.
Q Is this a document that you signed on July 1, 2009
under penalty of perjury?
A Yes.
Q And does this document state that the total amount of
the Debtors' liabilities as of that date is $4,015,620?
A Yes.
Q I'd like to move onto a different topic if I could,
Mr. Nielsen. Do you recall testifying at your deposition on
July 22 that barring a transaction, the Debtors lacked
sufficient liquidity resources to fund their operations
89
through any period after July 31, 2009?
A Yes.
Q Isn't it true that you actually testified in Exhibit
11 of Movants' exhibits which is your transcript that you're
free to look at if you'd like, Mr. Nielsen at Page 238. Do
you believe that the Debtors have sufficient liquidity
resources at this point today to fund their operations
through any period after July 31, 2009? Answer: No,
barring a transaction, no. Is that right?
A Yes.
Q And do you recall --
MR. SPECTOR: What deposition exhibit is his
transcript, please?
THE COURT: Eleven.
MR. REYNOLDS: Eleven.
MR. SPECTOR: Eleven, thank you.
BY MR. REYNOLDS:
Q Now you did go on to revise that. There was a little
colloquy with counsel if you recall. And there was a
revision in which you said that yes, the company could
survive one or two days. Do you recall that?
A I do.
Q And then we discussed before how the projections that
appear in Debtors' Exhibit, Movants -- not Movants'
exhibits, but Debtors' Exhibit 22 which is one of the
90
documents you brought to your depositions that one page
consolidate sheet, balance sheet, in which you estimate that
cash on hand by the end of September 2009 would be $69,000.
Is that right?
A Barring the restricted cash.
Q Right. Now you're a certified public account, Mr.
Nielsen, right?
A I am.
Q And prior to becoming the CFO of the SCO Group, you
acted first as the Controller of Mrs. Fields Cookies and
then as the CFO of Foreign Foods. Is that right?
A Correct.
Q And you've performed evaluations of businesses before,
have you not?
A Internally for those purposes.
Q And you consider yourself to be competent to perform
evaluation analysis of the business. Is that correct?
A Yes.
Q And isn't true that you've never in the entire time
that you've been either interim or actual CFO of the
Debtors, you've never performed evaluation analysis of the
businesses that are the subject of the Purchase and Sale
Agreement that's before the Court today. Is that right?
A That's correct.
Q Isn't it true that you've never requested either that
91
any employee perform an evaluation analysis of any of the
businesses owned by the Debtors. Is that right?
A Correct.
Q And finally, isn't it the case that as CFO you never
requested an outside entity perform evaluation of any of the
assets of the Debtors. Is that correct?
A That's correct for the same reason we didn't engage an
IB.
Q Do you have a sense of the value of the mobility
business of the Debtors?
A No.
Q Okay. I'd like to now ask you, Mr. Nielsen about some
documents that are in our materials. I'll start off by
asking you whether Mr. Steven Norris has received $100,000
from a SCO subsidiary in connection with any work that he
may have done for the Debtors or for the SCO subsidiary.
A Yes.
Q And did you authorize that payment?
A Yes.
Q And do you know approximately when that payment was
made?
A June of '08.
Q June of 0?
A 2008.
Q Okay. And if I could refer you to IBM or the Movants'
92
Exhibit 57. And this is an invoice from Steven Norris,
Capital Partners, LLC. Do you see that, Mr. Nielsen?
A Yes.
Q Isn't it true that this invoice is for $100,000? Yes?
A Yes.
Q Isn't it true that it states that it's due on receipt
by May 31, 2008?
A Yes.
Q And isn't it also true that this invoice is directed
to Darl McBride of the SCO Group with its address in Lindon,
Utah?
A Correct.
Q And isn't true there's no mention anywhere on this
invoice of SCO Japan or any SCO subsidiary. Isn't that
true?
A That's correct.
Q And your testimony is that this money that's requested
in this invoice was paid?
A Yes, it was.
Q In you said around June of 2008?
A The first week of June.
Q I'd like to call your attention to the next -- the
authorization which I think is on the next page. And do you
see a one page document that says the SCO Group, Inc.,
payment authorization. Is that what it says?
93
A Correct.
Q And does this document contain your signature at the
bottom?
A Yes, it does.
Q Which is that you approve the payment of these
$100,000?
A Correct.
Q Is this the same $100,000 that we previously
discussed?
A Yes.
Q Did there come a time when you received invoices from
SCO Japan for various amounts of money in connection with
Mr. Norris?
A Yes.
Q And isn't it true that those invoices from SCO Japan
which appear later in the same exhibits, there are three of
them, that they are all dated after the payment of $100,000
was made to Mr. Norris. Isn't that right?
A Correct.
Q In fact, they're dated September 1, 2008, October 1,
2008, and October 31, 2008. Isn't that right?
A That's correct.
Q And that each one requests approximately $25,000. Is
that correct?
A Yes.
94
Q And, in fact, each one is billed to the SCO Group at
its address in Lindon, Utah. Isn't that right?
A That's correct.
Q Did the SCO Group pay these invoices?
A No.
Q And why not?
A Those are used for intercompany billings to reassign
expenses from Japan as we consolidate everything in the U.S.
and then it's reallocated out to the various marketplaces.
Q So these were accounting adjustments that were made in
connection with the $100,000 payment?
A Correct.
Q Is that correct?
A Correct.
Q That was already made?
A Correct.
MR. SPECTOR: You should wait until the question
is finished because your voice isn't going to be carried
over. So you're saying correct before he's finished the
question. I'm not sure you're answer is registering.
MR. NIELSEN: Okay.
BY MR. REYNOLDS:
Q Are there any more invoices other than these three SCO
Japan ones that the Debtors received from SCO Japan?
A Not that I know of. I don't know the answer to that.
95
Q Are you aware of any other payments from the Debtors
or any of their officers or affiliates to Mr. Steven Norris?
A No.
Q Are you aware that Darl McBride made a payment to Mr.
Norris of $100,000?
A Yes.
Q Are you aware of any agreement between Mr. Norris and
the SCO Group's German subsidiary?
A No.
Q We discussed in your deposition, Mr. Norris an acronym
called BRICKMIA [ph]. Do you recall that?
A Yes.
Q Can you state for the Court what BRICMIA stands for?
A It's for the emerging markets, Brazil, Russia, India,
Middle East, China, and Asia.
Q But isn't it true that BRICKMIA does not really stand
for Asia at the end, it stands for Africa?
A Oh, okay, Africa.
Q Does it now refresh your recollection that it does not
refer to Asia?
A Well I guess when I say China.
MR. REYNOLDS: No further questions.
THE COURT: All right, Mr. Reynolds, thank you.
Mr. Lewis whenever you're ready.
BY MR. LEWIS:
96
Q Thank you, Your Honor. Good afternoon, Mr. Nielsen.
A Mr. Lewis.
Q I'm Adam Lewis. I represent Novell in this matter.
To recur to your testimony in your declaration and in
response to the questions from Mr. Reynolds today about the
incorrect information in your -- in the submission to the
Bankruptcy Court in response to the Motions to Convert, do
you recall that testimony generally?
A Yes.
Q Okay. Now I think in your declaration you say that
you learned it was incorrect upon returning from a vacation.
Is that right?
A I believe my declaration -- yes.
Q Okay. And you're free to review your declaration any
time you want. I don't want to make this hard for you. I'm
not trying to trap you on anything that appears there so if
you want to look at it, it's Paragraph 19. You say --
A Yeah.
Q -- I noticed this error only after I returned from the
vacation a day or so before the June 15, 2007 hearing. Do
you recall that?
A Correct.
Q Did you disclose this error to anybody at SCO?
A I worked -- as I worked to recalculate the numbers, I
presented those to bankruptcy counsel and was prepared to
97
correct those when on June 15 when I was to come in to
testify.
Q Okay. But you weren't called to correct those. Is
that correct?
A I don't recall.
Q Well you weren't called to testify, right --
A Oh, correct.
Q -- on June 15?
A Correct.
Q So you didn't get to correct the record on June 15?
A Correct.
Q Did you make any other efforts to correct the record
after June 15 until you signed this declaration?
A No.
Q And bankruptcy counsel, the Debtors' counsel, they
were aware of these issues were they not once you advised
them in advance of June 15?
A Yes.
Q Okay. Now you've been doing a lot of financial
analysis I take it in the last month or two. Is that right?
A Just a bit.
Q Okay. And pretty intense work on that. Is that
correct?
A Correct.
Q When was the last time the Debtor filed a monthly
98
operating report?
A It would have been in May and the first week, second
week in -- some time in June.
Q Now going back to Exhibit 57 in the exhibit book this
Steven Norris invoice that you just looked at, this is a
$100,000 invoice. Is that correct?
A Correct.
Q And did you personally authorize the payment of this
invoice?
A I did.
Q Do you -- what do you do before you authorize the
payment of an invoice personally?
A We had discussions as an executive team of the purpose
and the nature of the invoice.
Q Okay. So someone told you what this was for?
A Correct.
Q What were you told what it was for?
A For the development of a marketing plan and a business
plan for the BRICKMIA market.
Q Okay. And did you make any effort --
MR. SPECTOR: Could you keep your voice up. I
don't know if Your Honor can hear it, but my ears it's
tough.
THE COURT: Are we picking him up on the -- we're
doing okay? But if you could speak maybe even a little more
99
into the microphone that would help us, please --
MR. NIELSEN: Okay.
MR. LEWIS: Your Honor, maybe if we bend the
microphone a little bit more towards the witness.
THE COURT: Yes, you can certainly do that. Move
it forward or bend it --
MR. NIELSEN: Or we can get rid of these books,
right?
BY MR. LEWIS:
Q Did you make any effort to verify whether there was
such an entity as Steven Norris Capital Partners?
A Yes.
Q Okay. What did you do to do that?
A We had already had some discussions with Mr. Norris
before at Capital Partners.
Q Did you verify the existence of this entity in any
way? Check with the secretary, state's records anywhere,
something like that?
A No.
Q And this invoice is numbered 9887. Is that correct?
A Yes.
Q Now I'm going to ask you to look at what has been
marked or identified by the Debtor as SCO's Exhibit 4. And
I don't know if you have an exhibit book up there for that
so I have an extra copy. May I, Your Honor?
100
THE COURT: Of course, certainly.
MR. LEWIS: And would the Court like a copy,
because I don't know --
THE COURT: It might be faster. Thank you.
MR. LEWIS: Your Honor, the copy I have and I
don't know if it's made it to the exhibit book we got
yesterday and I'm not complaining about it, but what
happened was they provided us with a signed copy --
THE COURT: Yesterday.
MR. LEWIS: -- of this -- these minutes yesterday
and I believe they have the unsigned copies previously so
that's the only change. And I just don't know if it's made
it to the Court's exhibit book.
THE COURT: Okay, thank you.
BY MR. LEWIS:
Q Mr. Nielsen, do you recognize this document as the
minutes of the June 22, 2009 board meeting of SCO?
A Yes.
Q And you were at that meeting were you not?
A I was.
Q Were you there for the entire meeting?
A Yes.
Q Now in this meeting there -- in these minutes there's
a liquidity discussion. Do you see that?
A Yes.
101
Q And in that liquidity discussion and this is on June
22 which is about a month ago.
A Yes.
Q You state that the Debtors current (inaudible) is
about $650,000 a quarter. Is that correct?
A Correct.
Q All right. And you also state that the Debtor will be
out of cash by the end of July 2009. Is that correct?
A I believe the statement says has enough cash to
continue, not run out of cash.
Q Okay. What other -- is that referring only to
unrestricted cash? What's your test of what having enough
cash to continue operations is?
A Based upon our working capital needs and the
projection for operating expenses.
Q And does that mean that you will not have cash for
either of those purposes by the end of July of 2009?
A No, I have enough cash. The company has enough cash
through July of 2009.
Q Right. But after that you won't for those purposes?
A That does not state that here.
Q I understand that, but is that what it means when you
talk about having enough cash for your operating -- your
capital and operating purposes? What's the other side of
that coin? What is it that you will not have as of August
102
1, 2009?
A I don't know.
Q Okay. What calculations were involved in your making
this representation to the Board in terms of actual cash on
hand at the end of July?
A Actual cash on hand at that time, the sales bookings
and operating expenses.
Q As of August 1, how much cash would you have had on
hand other than unrestricted, other than restricted funds?
A As of August 1 of 2009?
Q Yeah, based upon your predictions here.
A $300,000 to $400,000.
Q Now in your damage calculations for -- if the case is
converted to a seven, do you recall that in your
declaration, you say -- I'm talking specifically about
Paragraph 36 of your declaration.
A Okay.
Q If the Debtor converts to a Chapter 7, you say if SCO
goes out of business and is not able to fulfill its
contractual obligations to licensees, there are likely to be
millions of dollars of new claims that licensees could
assert against the Debtors bankruptcy. Do you see that
sentence?
A Yes.
Q Do you know what happens to these licenses if the case
103
goes into a Chapter 7?
A No.
Q So you -- do you have any reason to believe that the
licenses won't be fulfilled in some way?
A Based upon CitiFinancial's claim of $3 million, yes.
So I suspect that other licensees will have similar claims.
Q If their licenses are not fulfilled?
A Correct.
Q But you don't know that their licenses won't be
fulfilled after a conversion to a Chapter 7, that they won't
be sold to someone else by the Chapter 7 Trustee. That they
won't make their elections under Section 365 under the
Bankruptcy Code to retain their rights. You don't know any
of that?
A Correct.
MR. LEWIS: Okay. I have no further questions,
Your Honor, thank you.
THE COURT: Thank you, Mr. Lewis. Mr.
Harrington?
BY MR. HARRINGTON:
Q Very briefly, Your Honor. For the record, William
Harrington from the Office of the United States Trustee.
Have you ever been a Chapter 7 Trustee?
A No.
Q Are you aware that Chapter 7 Trustees can operate a
104
business?
A Yes.
Q Did you take that into account when you did your
declaration?
A Yes.
Q So when you say that the business terminates upon
conversion is that correct?
A Correct.
Q It is correct or it's not correct?
A Well it's not correct, but that's my assessment.
Q That was your testimony? Correct?
A Yes.
Q Okay. And that testimony is incorrect?
A Okay.
Q Well you just testified that they could operate a
business in Chapter 7. Is that correct?
A My testimony was that the business as we know it today
would not be viable. Engineers believe there would be no
support staff --
Q That's not what I asked you. I asked you whether or
not you could operate in Chapter 7, a Chapter 7 Trustee and
you said correct.
MR. SPECTOR: Your Honor, I'm going to object
about the scope of the question. If the counsel is asking
him legally can he operate, that's one answer. You know,
105
practically speaking can it operate it's a different -- it
can be asked -- asking and answering different questions.
THE COURT: All right, Mr. Harrington, perhaps
you could clarify your questions a little bit then that way.
MR. HARRINGTON: Your Honor, it may be easier if
I start again.
THE COURT: Okay.
MR. HARRINGTON: Are you aware that a Chapter 7
Trustee can operate a business in Chapter 7?
MR. NIELSEN: Yes.
MR. HARRINGTON: In Paragraph 32 of your
affidavit, that assumed that there would not be a business
operating in Chapter 7. Correct?
MR. NIELSEN: Correct.
MR. HARRINGTON: No further questions, Your
Honor.
THE COURT: Thank you, Mr. Harrington. Mr.
Spector?
REDIRECT EXAMINATION
BY MR. SPECTOR:
Q This is July 27. Correct?
A Correct.
Q All right. You can do that without checking your
calendar.
A Today I can.
106
Q Are we out of -- is SCO out of cash?
A No.
Q Do you expect SCO to run out of cash tomorrow?
A No.
Q Or by July 31?
A No.
Q How much cash does SCO have right now?
A $1.789 million.
Q And of that you said about a million is restricted.
Is that right?
A Correct.
Q And of the restrictions, how much of that is set aside
for the Novell judgment?
A Roughly six and a quarter.
Q And that leaves $375,000 that you call restricted,
right?
A Correct.
Q What is the nature of the restriction as to the other
$375,000?
A It's to be used for litigation or approval by the
legal team representing the company in its litigation.
Q That's Boies Schiller?
A Correct.
Q Is there any Court Order restricting those funds?
A No.
107
Q This is just something that's -- this is a practical
arrangement you have?
A Yes.
Q Okay. And has Boies Schiller indicated that it -- any
intention with regard to that $375,000 about future use of
that or availability of those funds?
A My understanding it is available.
Q So it's restricted in a loose sense?
A Correct.
Q If the judgment against Novell is set aside tomorrow,
what happens to the restriction on the 625?
A It's released.
Q Okay. So in essence, that million dollars is either
restricted because there's a Court Order -- there -- strike
that, start over. You've done projections as to how much
cash you expect the Debtor to have through the end of
August?
A Yes.
Q Can you tell the Court what that number is?
A Between $1.2 and $1.4 million.
Q Now when you were at deposition last Thursday, I think
it was Thursday the 22nd, how up to date was your
information about revenue?
A It was a week to two weeks late.
Q Since that time, since you were deposed, have you
108
brought yourself up to date on the revenue side?
A Yes.
Q What changes have you noticed from what your
assumptions were when you testified on Thursday to today?
A My assumptions on Thursday were conservative. I had a
meeting. I was informed by the SCO Operating President that
the sales pipeline for this week has increased from $100,000
to $400,000.
Q And have you factored that new information into your
declaration?
A Yes.
Q Now in your deposition, you were asked are we going to
run out of money? When are you going to run out of money?
You say we have enough to go through July which is
consistent with the minutes that were produced. Correct?
A Correct.
Q When you addressed the Board with regard to the cash
position was that your understanding?
A Can you state that again, please?
Q Well let me strike. Let me start that over again.
Are the minutes accurate in your mind?
A Yes.
Q Okay. Did you -- when you reported to the Board, did
you tell the Board that you were absolutely going to run out
of money by the end of July?
109
A No.
Q How would you have phrased those minutes if you were
writing them with regard to that topic?
A If I understand the question, I would say the company
has cash through July 31 and the operating concern is for
some time thereafter.
Q And weren't you asked that on your deposition after
this July 31 date that was raised? Do you recall? Do want
to look at the --
A I don't recall.
Q Look at page -- I think I have it marked here, Page
238 of your deposition transcript which is Exhibit 12, I
think. I don't think it's 11, I think it's 12. That threw
me for a little bit. It is 11, I guess? Well you know it's
pretty short.
THE COURT: It's is 12.
MR. SPECTOR: I could probably --
THE COURT: It's 12.
MR. SPECTOR: Huh?
THE COURT: It is 12.
MR. SPECTOR: It is 12, okay.
MR. NIELSEN: Okay. Which page?
BY MR. SPECTOR:
Q Page 238 when you were asked by Mr. Reynolds can you
survive more than four days beyond July 31, what did you
110
answer?
A Yes -- well, sorry.
Q I'm not asking today how you answered but how did you
answer even then? Well, do you want me to read it out loud?
A Yeah, I'm just trying to find it, Arthur.
Q It's Line 21 on Page 238. You stated I provided you
those financial forecasts so that shows survivability
through the end of September. Is that right?
A That's correct.
Q Okay. Were you testifying accurately on that day on
Thursday?
A With information I had at hand, yes.
Q And is the information that you have at hand now
better or worse than it was on that date?
A Better.
Q And was the financial projection now better or worse
than it was on Thursday?
A Better.
Q Tell me about the change in accounts receivable. Has
the accounts receivable changed since your -- has your
knowledge of the accounts receivable, has that changed since
Thursday when you testified at the deposition?
A Collection efforts have been better.
Q Okay. Let's go to Mr. Norris and ask you about Mr.
Norris. There was an invoice that was addressed to Darl
111
McBride, I think it's Exhibit 37 at the SCO Group,
Incorporated. Is that right?
A Correct.
Q You saw that. They showed you that?
A Yes.
Q Was there ever a replacement invoice issued?
A I don't recall.
Q Do you know who paid that invoice?
A SCO Japan.
Q SCO Japan. Not SCO Germany and not SCO USA or either
of the Debtors I should say.
A Correct.
Q Do you know what that invoice was for?
A Again it was for market development and a business
plan for the BRICKMIA emerging markets.
Q And did Steve Norris Capital Partners produce such a
business plan and the documents that were called for?
A Yes.
Q Was there any budget in SCO Japan for a marketing
study like this?
A Yes.
Q Was this budget pre-existing the services by Mr.
Norris?
A Yes.
Q Or his company, Steve Norris Capital Partners?
112
A Yes.
Q So SCO Japan -- what was is -- what was the study
about? What was the study supposed to be about?
A About the expendability and emergence of the Unix
space software and open server within those emerging
markets.
Q And when that bill was paid by SCO Japan, what
happened to the paperwork? Explain the paperwork that
followed SCO Japan's paying that bill.
A I don't quite understand the question.
Q Intercompany accounting comes into play, does it not?
A Correct.
Q All right. So when SCO Japan pays an invoice of
$100,000, what happens in the SCO organization?
A For one it develops -- it may cross other business and
divisions. We allocate it accordingly.
Q So this BRICKMIA marketing study, did it affect
anybody other than SCO Japan?
A Well, yes.
Q So what you're saying is it was allocated among other
companies?
A Correct.
Q So there are invoices and bills showing that other
companies got charged with those expenses?
A Yes.
113
Q And were any of those expenses charged to SCO Group?
A I don't know. I assume not. I don't do the manual
general entry.
Q And as I say this -- you said this was in June '08.
Correct?
A Correct.
Q And it was for a product that was delivered?
A Correct.
Q Do you know whether the company was -- the Japanese
Company and the foreign affiliates were happy, pleased with
the product that was delivered?
A I believe they were.
Q Now you testified on cross examination that SCO was
not planning to do any further reductions in R & D or some
other area Is that right?
A Yes, currently.
Q Is that entirely correct?
A No.
Q Are there any -- what plans, if any, are there for SCO
to what I think I colloquial used to say skinny down further
than what it's already skinnied [ph] down?
A Well we have the plan that if we have to skinny down
further, we'll reduce our head count from 62 to 25 and go to
a service and support model and launch with that the
expected launch of our virtualization product.
114
Q And if that should happen -- let's strike that. Would
that happen if Unxis closed the sale and bought the Unix
business?
A Will that happen if --
Q I mean is that -- strike that. Is that necessary to
do if Unxis closes the sale and pays $2.4 million to SCO?
A No.
Q So this is a contingency in case Unxis doesn't close?
A Correct.
Q And or anybody else doesn't close.
A Correct.
Q If you get to the -- so reduced in financial ability
you have to make further reductions. Is that what this is
about?
A Correct.
Q Okay. And so you go from 62 to 25 employees?
A Correct.
Q And on that model, what's the -- how's the revenue
going to be produced?
A It will be through virtual licenses and support
agreements that will extend out.
Q I mean the Unix business would still be operating.
A Correct. It's to move the Unix customers to a
virtualization model which allows them to upgrade their
hardware and continue to run their businesses on the Unix
115
platform.
Q And will the business be cash flow positive on such a
model or cash flow negative?
A Cash flow positive.
Q So if you went to the skinny down mode after failure
to liquidate the assets, the company should become
profitable again, but in a much reduced scale?
A Correct.
Q Not again, I should say for the first time actually,
right?
A Correct.
Q Did this -- did SCO formerly use the services of a
financial consultant with investment banking experience?
A No. Oh, yes, Mezero [ph].
Q Okay. And when you tried to sell the company -- well
did SCO try to sell its assets to a company called York
Capital?
A Yes, we did.
Q And did SCO have any financial consulting or
investment banking assistance in that process?
A Yes, Mezero Financial.
Q And how did SCO find that process finally to SCO?
A Draining.
Q Do you know how much money SCO spent in that process?
A Roughly $690,000.
116
Q Do you calculate that -- is that experience within
SCO's calculations when it determined whether to hire an
investment banker to sell the property again?
A Yes.
MR. LEWIS: Your Honor, I'm not sure where this
comes in within the scope of either direct or cross. This
seems to be way far afield. It seems to be more addressed
to counsel's remarks about York and other people. I'm not
sure that this is the right time for these questions and I
ask this line of questioning be ended and the prior
questions be stricken.
MR. SPECTOR: Your Honor, Mr. Reynolds asked this
witness about an investment banker expense of $100,000. Who
they asked. I think he said D. E. something, Davidson or
something, whatever the name of the company was I don't
remember. So this is responsive to cross examination.
MR. LEWIS: Your Honor, he asked him if they
looked at the investment bankers and he said no. He didn't
go into any detail about who they were and why -- the
witness said they didn't have any money. That was the end
of that.
MR. SPECTOR: He did go into detail.
MR. LEWIS: No, I don't think he did.
THE COURT: No, I don't think he did.
MR. SPECTOR: He named the company he talked to.
117
He --
THE COURT: And it was D. E. Something.
MR. SPECTOR: Right, as I recall.
MR. LEWIS: That's not exactly going into detail
--
MR. NIELSEN: D. A
MR. SPECTOR: D. A
MR. LEWIS: We're not talking about the merits of
various investment bankers. It was a question that had to
do with the finances of the company. And if counsel wants
to ask a question about how come you didn't hire any other
investment bankers and the answer is going to be because we
couldn't afford them, I have no problem with that. But
that's not what's going on here.
THE COURT: Understood. I have to agree with
Mr. Lewis here.
BY MR. SPECTOR:
Q How come you didn't hire other investment bankers?
A The company couldn't afford the cash flow.
Q Well why do you think you couldn't afford the cash
flow?
A From our past experiences, as well as, inquiry of D.
A. Davidson and others.
Q Past experience with whom?
A Mezero Financial.
118
Q And tell us about your past experience with Mezero
Financial. How much did it cost you?
A Roughly $690,000.
MR. SPECTOR: That's all I have on redirect.
THE COURT: All right, thank you, Mr. Spector.
Anything further, Mr. Lewis?
RECROSS EXAMINATION
BY MR. LEWIS:
Q Your Honor, I won't prolong this very long. Mr.
Nielsen, you testified that the $625,000 that's currently
being held in a trust account on account of the Novell
judgment would be freed up if the Tenth Circuit reverses.
Do you recall that testimony?
A Yes.
Q Do you know what the Tenth Circuit is going to say if
it reverses, what the scope of the reversal will be, what it
will say, and whether it will provide for further
protections for Novell? Do you have any idea at all?
A No.
MR. LEWIS: Okay, thank you.
MR. SPECTOR: I'm not rising to ask any
questions. I just want to say that I believe in the
thousands, 12,000 or more documents we produced while Mr.
Nielsen was testifying, I believe somebody came across a
replacement invoice that went to Japan as opposed to the
119
Utah company. If we can find it before the trial is over, I
may wish to call Mr. Nielsen to show him the invoice. So
I'm rising only to say I'd like an opportunity to recall him
if we can find that document.
MR. MARRIOTT: Your Honor, just on a general
subject.
THE COURT: Yes, Mr. Marriott.
MR. MARRIOTT: Mr. Spector has repeatedly given
the impression that the Movants ask for documents and
received --
THE COURT: I think you were doing okay, but
thanks.
MR. MARRIOTT: The suggestion that I wasn't
coming through. So Mr. Spector has repeatedly given the
impression to this Court that the Movants asked for a
collection of documents and that the Debtors have fully
complied with the subpoenas and did so in a timely way. And
I don't want to distract us with that now, we can take that
up at a break when it's more convenient to Your Honor. But
it's absolutely untrue and there are significant quantities,
we believe of documents that we've asked for that haven't
been produced. And in particular, we think documents from
the files of the witnesses who are here to testify. But I
say only that for now and we can come back to that at a time
more convenient to the Court.
120
THE COURT: All right.
MR. SPECTOR: I don't believe that that's
correct, but in the 24 hours we had to produce it, there
could have been errors is all I can say. It could have
crept in. But we produced massive amounts. Ms. Cruz and
three or four people spent overnight to get it to them.
Physically couldn't get it to them by the deadline because
it just couldn't be done. But on top of that, Your Honor,
well now I forgot the main reason I rose. That's --
THE COURT: I think to comment upon Mr.
Marriott's --
MR. SPECTOR: Yeah, I know that was -- that was
prefatory to what I really rose for. And as testament --
and if comes to me, I'll come back and tell you again about
it.
THE COURT: All right.
MR. SPECTOR: I don't know if you want to take a
break at this time --
THE COURT: Well let me ask if there's any more
questions for Mr. Nielsen --
MR. SPECTOR: Please don't tell me --
THE COURT: Yes.
MR. SPECTOR: Oh, I thought we were done, sorry.
THE COURT: It's all right.
BY MR. REYNOLDS:
121
Q Mr. Nielsen, do you recall testifying in response to
some of Mr. Spector's questions and you had come up recently
with some new numbers about cash on hand?
A Yes.
Q Do you recall that? Have you produced any documents
that reflect those numbers?
A No.
Q Have you had those numbers audited by any
professionals in the accounting world?
A They're projections.
Q Okay. So have they been reviewed by anyone else
beside yourself?
A No.
Q And you've acknowledged earlier that some of your
previous financial projections and numbers have been wrong.
Is that right?
A Correct.
Q And isn't it possible that these numbers that we
haven't seen in writing could also be in error?
A Possibly.
Q And were you aware that at the time that Mr. Steven
Norris received this payment as you said from SCO Japan in
2008, that he was also working with the Debtors in
connection with their reorganization plan and their attempts
to raise capital. You're aware of that, right?
122
A Yes.
MR. REYNOLDS: No further questions, Your Honor.
THE COURT: Does that prompt anything, Mr.
Spector?
REDIRECT EXAMINATION
BY MR. SPECTOR:
Q Yes. Mr. Nielsen, you're a very agreeable guy and you
like to go along agreeable. That's an observation. Listen
carefully to the question that was just asked that you just
answered. You answered something about that you were aware
that Mr. Norris was out there raising capital for the
Debtor. Is that accurate?
A No.
Q Okay. But you said yes. Correct?
A Correct.
Q Okay. Was Mr. Norris putting together buyers for him
to buy the company at some point in '08
A Not that I'm aware of.
Q What was Mr. Norris' relationship to the company, if
any?
A He had one, the first Steve Norris deal that was done
in January.
Q And what was that Steve Norris deal that was done in -
- well was cooked in late '08 -- strike that. In January of
-- which year are we talking about?
123
A 2008.
Q January 2008.
A It was January 2008.
Q So it was cooked in late 2007 and in 2008 it was a
plan on with --
A On file.
Q -- Steve Norris Capital Partners as the sponsor.
Correct?
A Correct.
Q And he was buying the company in that role, wasn't he?
A Correct.
Q Buying the assets, I mean?
A Correct.
Q Okay. Was that his relationship with the company
trying to find people to work with to buy the company with
him?
A I believe his role was to buy the company.
Q Okay. All right. And he was never retained by the
Debtor to be a consultant was he?
A Correct.
Q I mean other than --
A Other than --
Q -- the Japan marketing study.
A -- the marketing study.
Q Okay. But the Debtor, SCO Group and SCO Operations,
124
the never used them as a consultant or an investment banker
or anything of that nature, did he?
A Correct.
MR. SPECTOR: Okay. That's all.
THE COURT: Anything further from the Movants?
MR. MARRIOTT: No, Your Honor.
THE COURT: All right.
MR. MARRIOTT: May I just --
THE COURT: Mr. Nielsen, you may step down, sir,
thank you. Well I assume people would like to have some
lunch.
MR. SPECTOR: Okay, yeah.
THE COURT: So -- and hopefully there's lunch at
the offices because Wilmington doesn't serve lunch very
quickly. Can we reconvene at 2:00? Would that do it for
everyone?
MR. MARRIOTT: Yes, Your Honor.
THE COURT: All right. Then we'll stand in
recess until 2:00.
MR. SPECTOR: Can we lock --
THE COURT: Yes, this room will be locked and
counsel should not discuss the testimony that we've heard
here with those witnesses who have been sequestered.
MR. MARRIOTT: May I just inquire as to the order
of the proceedings, Your Honor? It would be helpful if we
125
know who the next witness is.
THE COURT: Oh, sure.
MR. MARRIOTT: You're being asked --
THE COURT: The next witness, Mr. Spector?
MR. SPECTOR: It is our present intention to call
Mr. McBride after the lunch break.
THE COURT: Okay.
MR. SPECTOR: For live testimony and not that
much.
THE COURT: Yes. Oh, okay, yeah, that's right,
very well.
MR. MARRIOTT: Thank you.
THE COURT: All right, counsel, thank you.
(Recess from 12:40 p.m. to 2:04 p.m.)
THE COURT: Thank you, everyone. Please be
seated. I apologize that it's a little warm in here, but
apparently it's a building problem and not just this
courtroom. Anyone who would like to take off his jacket is
welcome to do so. I would not be at all offended. So
however you're comfortable.
MR. SPECTOR: Good afternoon, Your Honor.
THE COURT: Good afternoon.
MR. SPECTOR: May we proceed?
THE COURT: Yes.
MR. SPECTOR: SCO calls Darl McBride to the
126
stand.
THE COURT: All right. Mr. McBride, hello.
MR. MCBRIDE: How are you today?
THE COURT: If you'll just remain standing while
you're sworn.
DARL CHARLES MCBRIDGE, DEBTORS' WITNESS, SWORN
THE COURT: Whenever you're ready.
MR. SPECTOR: Your Honor, we discussed the last
time we were here about the fact that this Court has urged
certain witnesses testifying in the past at other hearings -
-
THE COURT: Yes.
MR. SPECTOR: -- and we could spend some time
going through Mr. McBride's pedigree again, but I would ask
Your Honor, to allow for the use of that testimony in prior
hearings rather than going through that again if there's no
objection.
THE COURT: Any objection?
MR. MARRIOTT: As to the pedigree, Your Honor?
THE COURT: Yes.
MR. MARRIOTT: By that we mean background as to
where he went to school --
THE COURT: Yes, education and so on.
MR. MARRIOTT: No objection.
THE COURT: All right, thank you.
127
MR. LEWIS: None here, Your Honor.
THE COURT: All right, Mr. Lewis, thank you, sir.
MR. LEWIS: You also stated that we would get the
testimony from the last June 15 hearing would be brought in
to this record as well. I believe that was stated the last
time.
MR. LEVIN: Your Honor, the June 15 testimony was
on a specific narrow issue that this Court set up to
determine whether it even consider the purchase and sale
agreement.
THE COURT: Yes.
MR. LEVIN: And it was not for the general
purposes that I recall --
THE COURT: I don't recall that either.
MR. SPECTOR: I do recall that.
THE COURT: All right.
MR. SPECTOR: Your Honor, at the end of the
hearing you said we could take everything that was brought
up at that hearing and use it here so we don't have to do it
again. There was a lot of testimony regarding, you know,
other deals and the like and so I could abbreviate the
testimony today by saying you've testified about experiences
and other deals and that's just Mr. McBride. I think Ms.
Kaplan testified about it as well.
THE COURT: Do you have a preference?
128
MR. MARRIOTT: Your Honor, we don't have
objection to any incorporation of that testimony to this
hearing.
MR. SPECTOR: Thank you.
THE COURT: Mr. Lewis is that acceptable?
MR. LEWIS: That's all right, Your Honor.
THE COURT: All right, then we will do that.
DIRECT EXAMINATION
BY MR. SPECTOR:
Q Mr. McBride, describe the original business of SCO
Unix and UnixWare [ph].
A The original business really had two parts to it; one
was a source licensing business and the other one was a
products business. So Unix is one of the major operating
system platforms around the world, arguably the most
powerful platform from a business standpoint. And large
companies like IBM, Sun Micro Systems, a number of companies
from Japan, Hewlett Packard, Dell, Oracle, and the like took
down licensees to that Unix operating system --
Q Can you stop for a second? You're using lingo. Took
down, what does that mean?
A They licensed our operating system through --
Q Okay.
A -- a contract. That basically is one part of the
business which is here's this tree if you will that has this
129
rich intellectual property running through it and the
companies become various branches off from that. So each
large company goes off and does what they're going to do to
tailor that Unix operating system to their particular
clientele or customer base. That's the core foundation if
you will of the company. The second part of the Unix
business that SCO owns is one of these branches. So think
of the branches being a product business. SCO actually owns
two of those branches and one is called UnixWare and one is
called Open Server. SCO's particular twist or customer base
if you will that they focused on over the years is to supply
highly reliable Unix operating systems on really cheap
hardware like Intel chip sets. And so basically when you
have large companies like McDonald's, seven of the top ten
retailers in the U.S. are customers of ours, large customers
that have many, many branches. In the case of McDonald's
they have 14,000 branches where you will find our software.
So it's the source licensing business and then it's the Unix
products business.
Q Has SCO expanded its business beyond those two areas?
A Yes, it has.
Q In what way?
A Well in a couple of ways. First of all, we expanded
into a realm around mobile software applications and
powering that software with back end servers. So we've
130
always been a server company. And so rather than just
creating client site applications that run on your cell
phone or your iPhone or whatever, we've specialized in
developing applications that are powered by a back end
server. The second area that we've grown into is an area
called Unix virtualization. And so those are the two
primary growth areas we've had over the last several years.
Q Explain what virtualization is about and what the need
is and why you decided to go into it.
A Unix virtualization is basically taking our Unix
operating system and the associated application that sits
with that, that sits on top of the operating system and
building a layer if you will that allows that package to sit
on top of another operating system such as Windows or Linux
or something of that nature.
Q What's the purpose of having that?
A The purpose is to allow our customers to be able to
run their application for -- that they've been running many
times, you know, a decade or two and to get another decade
or two of use out of their application they've already
developed. By putting this virtualization layer in there,
it allows a customer to get updated and refreshed hardware
by putting it on top of a different OS that has more
certifications than we may have.
Q What happens if they don't have virtualization? What
131
problems would a customer face if they don't have this
virtual product?
A Well the challenge we face as a small company is
staying ahead of the game. Every time a big hardware
company like Sun or HP or IBM or somebody comes out with a
whole new set of hardware devices, it's hard for us to keep
up with all of the certifications. And so what would happen
over time is it would be more and more difficult for a
customer to take on the new hardware, to get faster hardware
because their applications would not tend to work with it if
it wasn't certified.
Q Let's go back to your mobility business, the cell
phone and so forth.
A Yes.
Q When this case began, what was the state of that
mobility business?
A We had been in development for I don't know, two or
three years. And we were about ready to go to market with
some early stage products that we had developed for a
company up the road here in Allentown, Pennsylvania, the
Day-Timer Company. And we were just on the verge of going
to market with our first real mobility products at that
stage of the game.
Q And what happened then after you filed Chapter 11?
A The Day-Timer Company came back and as a result of our
132
filing Chapter 11 said they didn't want to go forward with
the partnership.
Q Did SCO give up on mobility at that point or did it go
forward?
A We went forward. The whole idea of what we had
created up to that point, there were a number of
applications, but the core of it that was interesting was
the idea of having your time management system that you may
see on a desktop such as Outlook, packaged up and on your
Smart Phone. And so what we did at that point is we went to
another time management company. The two largest ones out
there really are Day-Timer Company and the Franklin Cubby
Company. So when Day-Timer Company backed out of the deal,
we then went to Franklin Cubby and a few months after that
we cut a deal with them. And we got the products developed.
We introduced them into the marketplace here recently. And
we're actually pretty excited about the uptick and the
uptake we're getting from new customers that are buying
those products.
Q Tell us about the products that you are selling
through Franklin Cubby.
A We have a set of products that are in the marketplace
and another set that are just about ready to be released.
The first one is a product called FC Mobile Life. And
that's where you have the ability to do your scheduling,
133
your task management, setting your goals, being able to have
a micro blogger or micro communication system if you will
phone to phone. And so that one was the first one we came
out with. And that runs on Blackberry's. It runs on
Windows Mobile Phones, things of that nature. The next step
that we took was to take chunks of those -- that broad
system and put them down into individual applications so we
released for example an application on the Apple iPhone in I
think it was February or so. And that is basically a task
management system. So we took one of these modules out of
the big system and put it down into one modular system,
released it into the iPhone App Store. Since we have done
that, we've had some really good uptake as I said earlier.
Since we released these first couple products in the
marketplace, SCO now has in just the last two quarters
period of time, we have 10,000, over 10,000 new customers
that have come in to the SCO fold so to speak during that
period of time. And so we're excited about that. We have
another -- the sake task management system that has been so
popular on the iPhone. That one product alone has sold
nearly 8,000 units, the number I have said earlier. And
that's just on the iPhone. We released an announcement last
week that we have now developed that same application called
FC Tasks on Blackberry's. So Blackberry's are obviously
very popular in businesses. And so I think we're going to
134
see a similar uptake on that platform.
Q Has Franklin Cubby marketed your applications?
A Yes, they have.
Q I'm going to show you what's been marked as Debtors'
Exhibit 18. Can you identify this, please?
A Yes.
Q I've got copies for the -- do you need these or do you
already have these?
MR. LEVIN: We would like a copy.
THE COURT: Mr. Spector, do I have a binder with
your exhibits or --
MR. SPECTOR: Well they objected to all our
exhibits so I didn't think --
THE COURT: Oh, that's right.
MR. SPECTOR: I wouldn't want to be presumptuous
and let you look at them without --
THE COURT: Understood.
MR. SPECTOR: Okay. I mean, I could have, but I
didn't.
THE COURT: That's fine. If I could just have a
copy of --
MR. SPECTOR: Do you want a copy now?
THE COURT: Sure.
MR. SPECTOR: I can give you one.
THE COURT: Oh, no, that's -- this is fine, thank
135
you.
BY MR. SPECTOR:
Q All right. Can you identify that exhibit, sir?
A Yes, I can.
Q What is that?
A This is the Franklin Cubby Company's Summer of 2009
Catalog that they sent out to hundreds of thousands of their
customers.
Q Has that catalog generated a revenue for SCO?
A Yes, it has.
Q Do you have an idea today how much revenue has been
generated from the products that are marketed in that
catalog?
A Yeah, to date, I would say we generated in the order
of tens of thousands of dollars.
Q Okay. And this is just beginning?
A Yes.
Q Was this product ever rated by some rating agencies
how popular it is? Is there some kind of rating system for
applications?
A Yes. If you go into the iPhone App Store, they have a
ranking system in there. And since we've released the FC
Tasks product, it has consistently been in the top 50 of
productivity applications and more frequently in the top 20.
And I think the highest point we reached was #13.
136
Q You previously stated there was a press release issued
last week?
A Yes.
Q I show you Defense, I mean, Debtors' Exhibit #29.
A Yes.
Q Let me give that to you. Can you identify that
exhibit, please?
A Yes, this is a press release that we issued last week
regarding our mobile products business and the Franklin
Cubby product line in specific.
MR. SPECTOR: Your Honor, I offer Exhibits 18 and
29 as Exhibit 18 and 29.
MR. MARRIOTT: Can we get a copy of the second
exhibit, please?
MR. SPECTOR: Of course.
MR. MARRIOTT: And for what purpose? The
documents, Your Honor, I think --
MR. SPECTOR: I didn't give Your Honor one, did
I?
THE COURT: No.
MR. SPECTOR: Okay.
THE COURT: Thank you, thank you, Mr. Spector.
MR. SPECTOR: I don't know if the Court has ruled
on that or not yet.
THE COURT: I was waiting to hear whether there
137
is an objection.
MR. MARRIOTT: Your Honor, we have no objection
to the exhibits.
THE COURT: Okay. Then they are admitted.
MR. SPECTOR: Thank you, sir. I just would ask
the Court to note on the front of Debtors' Exhibit 18, the
application that's right on the front page of that is the
Debtors' FC Mobile Life application.
THE COURT: Okay, thank you.
BY MR. SPECTOR:
Q What were the state -- what was the state of
development to these products when the cases were filed in
September of 2007?
A They were early stage iteration, early iterations. It
hadn't really gone to market yet.
Q During the pendency of these Chapter 11 cases you
brought these to market?
A Correct.
Q And you're starting to derive revenue that was never
there before?
A That's correct.
Q How did the Novell announcement on May 28, 2003 that
it and not SCO on the Unix copyright effect SCO stock price?
A It had a damaging effect.
MR. MARRIOTT: Your Honor again --
138
THE COURT: Yes.
MR. MARRIOTT: -- as was the case with Mr.
Tibbitts, I think the witness is incompetent to speak with
all respect to the witness is incompetent to speak to the
effect of events on the stock price of the company.
THE COURT: In other words, the witness can
factually say what the prices were on a certain date.
MR. MARRIOTT: As Mr. Tibbitts did --
THE COURT: Yes.
MR. MARRIOTT: -- without attributing the causal
link that I believe the witness has begun to --
MR. SPECTOR: Okay. That's fair. I accept that
as accurate.
THE COURT: Okay, fine, sustained.
BY MR. SPECTOR:
Q Before -- I will rephrase that. Before -- well was
there an announcement from Novell relative to the ownership
of the Unix copyrights?
A Yes.
Q When was that?
A That was on May 28.
Q What year?
A 2003.
Q Do you know what the stock price was or the market
capitalization was of SCO before that announcement?
139
A Yes, it was $9 a share.
Q And do you know what the price was after the
announcement?
A Yes, it was $5.85 a share.
Q What's the stock price today?
A I checked --
Q Well as of the close of business Friday I should say.
A It was at 17 cents a share.
Q When we came to Court on June 15, 2009, before the
Unxis sale was delivered to this Court, what was the sale --
what was the price of the stock, a share of stock in SCO at
that time?
A It was 12 cents a share.
Q So since June 15 the stock has gone up from 12 to 17
cents?
A Yes.
Q I'll do the calculation. I think that's a 42 percent
increase or something thereabouts. Has anything material
happened to SCO between June 15 and now other than the
announcement of the Unxis sale?
A No.
Q What effect do you anticipate on SCO's stock price if
the Tenth Circuit should reverse the decision by the
District Court in the Utah case?
MR. MARRIOTT: Objection, Your Honor. I think
140
Your Honor was ruled on this and there's no reason the
ruling should be any different as to this testimony then to
the prior two times in which Your Honor ruled.
THE COURT: I sustain the objection.
MR. SPECTOR: What effects on the business of SCO
do you reasonably project should the Tenth Circuit grant the
relief SCO has asked for?
MR. MCBRIDE: We think that will have very
positive effects on the business.
MR. MARRIOTT: Objection. Your Honor, objection.
THE COURT: Mr. Marriott?
MR. MARRIOTT: I think it's speculative and lacks
foundation. I don't think that the witness has personal
knowledge of the effects of a future event on the current
operation of the business.
MR. JACOBS: And I would only add that that
future event itself has very -- has a lot of variables
associated with it.
MR. SPECTOR: Your Honor, we have confronted
these kind of issues in deposition. And Mr. Tibbitts
testified about what was going to happen. And I said well
do you know there's going to be a reverse? No. Do you know
that if the judgment is reversed the $625,000 you can take
out of escrow and use will actually help the company? Do
you know you'll be using marketing? Do you know you --
141
well, the only thing I can say in response is if you ask the
witness if he's standing there on a street corner and he
sees a car being driven without a driver or a heart attack
victim is behind the wheel and another person crossing in
front of it and you ask them do you foresee some problem in
front of you, I think a normal witness could say yes, I
think it's likely that there's going to be an accident in
front of him. This is -- we're not asking for way out
projections. This is the CEO of a company and you're --
we're asking him on -- if you ask the CEO of a company if
you spend this money on marketing and development, do you
anticipate some benefit, yes, I do. Was that objectionable?
I mean, this is the kind of stuff that's grist for the mill
in every case. This witness is the CEO Of the company, a
major event in the life of the company is days away and it
has to project what it's going to do in the event if X, Y,
or Z occurs. I don't think it could be any more pertinent.
I don't think it could be -- it is by no means speculative
because you're -- the witness will testify why he has these
opinions. Most of it is logic and probably could be argued
to some extent. But I can't imagine that this is in any way
objectionable on the grounds or any other grounds.
MR. MARRIOTT: Your Honor, I would add to that
based on counsel's own argument to additional objections
which is its cumulative because if as counsel just said Mr.
142
Tibbitts addressed these issues and we need not hear it
again from Mr. McBride, and if his counsel says it's
argumentative, then we ought not be having argument through
the mouth of this witness, Your Honor. That's in addition
to the objections we've already stated.
MR. SPECTOR: Your Honor, you've heard it from
the perspective of one person. The best person to hear it
from, it's not cumulative when it comes from the CEO who's
in charge of the business affairs of the company. The
issue, one of the major issues in this case is the ability
to rehabilitate. You've heard Mr. McBride talk about the
going forward business after the sale. That's part of the
rehabilitation process. But also what happens if he has the
$625,000? How will that help the rehabilitation? What
happens if he has the ability to sue parties for -- who on
the SCO source program which we haven't gotten to yet?
That's going to bring revenue in. I have to --
MR. MARRIOTT: Your Honor, if I may, yet another
objection. Counsel identified, I believe at Your Honor's
direction if not and at a absolute minimum with Your Honor's
approval, the subjects on which the Debtors' witnesses would
testify at these proceedings. Mr. Tibbitts was expressly
identified as a witness who would testify as to the impact
of the litigations on the Debtors' prospect for
rehabilitation. He was as a result at Your Honor's order
143
deposed on that subject. Your Honor made clear in the
Court's order that we were allowed to have the opportunity
to examine Mr. Tibbitts or he wasn't allowed to be called at
his hearing.
THE COURT: Right.
MR. MARRIOTT: This witness, Your Honor, with all
respect was not identified as a witness who would speak as
to the supposed impacts of the litigation on the
rehabilitation prospects of the company. And so what
counsel has done is come in and now offered by way of an
additional witness, cumulative testimony on the subject as
to which the witness wasn't identified and as to which we
did not have an opportunity at deposition to question the
witness.
MR. SPECTOR: It's not true. Mr. McBride was
always a witness for everything. That's why it's no
declaration. He's the man on everything. And they had
seven hours of -- a full day of deposition of this witness
and they did cover these items. It is certainly no surprise
that Mr. McBride's going to talk about rehabilitation on a
Motion to Convert.
MR. MARRIOTT: It is a surprise, Judge. At least
as it relates to the litigation. It's not a surprise as it
relates to the mobility business and we're prepared to
proceed on that basis.
144
MR. SPECTOR: We cannot be restricted by the --
THE COURT: All right I'm going to overruled the
objection.
MR. SPECTOR: Thank you.
THE COURT: I'll take the witness' answer because
-- or answers because I think it is a particularly important
subject.
BY MR. SPECTOR:
Q Thank you, Your Honor. On the basis of SCO, what
effect would it have if the Tenth Circuit were to reverse
the decision of -- the summary judgment decision of the
District Court?
A Well it would be very positive across a number of
fronts. It would be positive as it relates to our employees
dealing with customers, positive as it relates to my
discussions with investors, positive from a market
perception standpoint. The fact that we would have some
vindication that we believe we deserve would have, we
believe a very positive effect on the company.
Q How hard is it to employ qualified individuals in your
current situation?
A It's very difficult.
Q If SCO received vindication by the Tenth Circuit,
would it be better or harder to employ qualified
individuals?
145
A It would be much easier.
Q Have customers been receptive of SCO's marketing since
this company was subject to the summary judgment ruling in
August of '07?
A It has been a difficult row to hoe.
Q How do you perceive the market reaction if SCO were to
receive vindication from the Tenth Circuit?
MR. LEWIS: Your Honor, I have to object here.
I'm going to be -- and Mr. McBride, too. And this in a
serious of previous questions about how they would react if
they reversed -- I mean, that's a thoroughly incomplete
hypothetical. There are all kinds as Mr. Jacobs has said,
all kinds of possible forums of reversal, instructions,
remand, and so on and so forth. I think what we're hearing
here and assuming is that it's a virtual outright victory on
various grounds for the Debtor. But it's certainly an
incomplete hypothetical and I don't think these are proper
questions. And I think the witness should not be allowed to
answer them or offer opinion testimony on them. We don't
even have yet any kind of groundwork for his competency to
offer an opinion on the effect of a legal decision which is
probably in a pretty -- I mean, it's one thing to talk about
gee, I've been selling these things for three years and this
is our track record and I've been doing this marketing and
that marketing study and so forth and that's one thing.
146
This is unprecedented. It's not like he -- the witness has
prior experience and we certainly haven't heard of it.
Prior experiences with this kind of situation and what the
effect would be on marketing, you know. And so I think the
testimony is incompetent and I think the questions are
incomplete hypothetical's and I think the entire line should
be shutdown and the prior answers should be stricken as a
consequence. Thank you, Your Honor.
THE COURT: Mr. Marriott?
MR. MARRIOTT: I'd simply join in that, Your
Honor.
THE COURT: I have to agree with them. I just
think it's --
MR. SPECTOR: I can ask it better.
THE COURT: -- it's too far reaching and too
uncertain. And I will sustain the objection.
MR. SPECTOR: It was too wide a question, too.
He's -- he was right about that because it didn't identify
what part of it. I was supposing all of it, but -- and I
wasn't clear about that. Let's take it piecemeal.
THE WITNESS: Okay.
BY MR. SPECTOR:
Q If the judgment -- the money judgment suffered --
A Yes.
Q -- by SCO --
147
A Yes.
Q -- in favor of Novell were overturned --
A Yes.
Q -- would there be any immediate benefit to SCO?
A Yes.
Q What would that be?
A Immediately, we would have $625,000 released from an
escrow account that is -- has been reserved. And if that
money part of the Tenth Circuit ruling was overturned, that
would go out of escrow and back into our bank account.
Q Would it do anything to your --
THE COURT: Mr. Lewis.
MR. LEWIS: I have the same objection, Your
Honor. If -- even if the Court reverses the money judgment,
it might say, but I want to keep this money in escrow, I
want to keep this money on the side. If the debtor gets its
wish and gets this Chapter Seven -- this case dismissed
without providing for payment to us, the Circuit might
decide they're going to look after us instead. Again, we're
assuming hypothetical result that's not clear.
THE COURT: Here --
MR. LEWIS: We don't know what the Circuit's
going to do.
MR. SPECTOR: That's cross-examination, Your
Honor. That --
148
THE COURT: Well, but here -- here's what's
disturbing me a little bit. You know, with this line of
questioning, it's -- it's as if you're getting the benefit
of having established that you were going to win on the
merits when we didn't -- when my ruling was that we weren't
going to get into the merits of litigation.
MR. SPECTOR: Correct.
THE COURT: So here, it's as if you had
established your point on the merits when you haven't even
proven them --
MR. SPECTOR: Well --
THE COURT: -- those issues by -- based upon my
ruling, I understand. I just think it's all so speculative.
MR. SPECTOR: Well, Your Honor --
THE COURT: Because, for example, the Judge -- it
could be reversed, but an appeal could be taken, and then
the $625,000 might not be released immediately. And you
know, there is just so many --
MR. SPECTOR: That is --
THE COURT: -- possibilities.
MR. SPECTOR: All of that is quite true. And in
-- never is it the fact that a witness, when it testifies,
has absolute certainty of the assumption that's going to be
there. And all of that goes to the weight. And in --
normally, a witness will testify, and then in cross-
149
examination they say, well, couldn't this happen? Yes.
Couldn't that happen? What's -- what are the likely of
that? And then, the Court weighs it.
But you know what, Your Honor, I think this is
something Your Honor can understand. We aren't permitted to
talk about the likelihood of any result because that goes to
the merits.
THE COURT: Right.
MR. SPECTOR: And so I assume the same thing for
them. They can't come in and cross-examine and say, isn't
it the long shot that you win? So the point is assuming
that -- am I wrong about that?
MR. LEWIS: You -- please finish.
MR. SPECTOR: Okay.
MR. LEWIS: They were having just a colloquy for
a minute.
MR. SPECTOR: Okay. But the --
THE COURT: "So assuming," you started to say.
MR. SPECTOR: Assuming I can do it this way, Your
Honor. I'll withdraw that question. I'll ask it a
different way.
THE COURT: All right.
MR. LEWIS: Your Honor, if I may?
THE COURT: Mr. Lewis.
MR. LEWIS: It's not a question of the weight
150
given the -- all the possibilities. The problem is we don't
know how to assess the possibilities. They're all just
possibilities. I can see the debtor might win a home run.
But on the other hand, we might win a home run. How can we
possibly assess what that's going to mean when we have no
idea of the contours? We're going to be here all day
examining and cross-examining on all kinds of possible
outcomes and permutations of what the Tenth Circuit might
rule and what it might do in connection with such a ruling.
I think we can all say with some comfort that if
the debtor gets some sort of victory of some kind in the
Tenth Circuit, the debtor will be, in some way, better off.
But the problem is trying to assess how much better off, and
there, I think, we can't possibly make an assessment without
spending the next three days with testimony. And even then,
we still might not be able to make an assessment. I just
think this whole line of questioning ought to be stricken
and we ought to just move onto something else.
And -- well, I'll agree that the debtor might be
better off if it wins something on appeal. And I think
that's where it ought to end.
MR. SPECTOR: Judge, basically --
THE COURT: Yes.
MR. SPECTOR: -- the effort here is to render our
claims irrelevant. It -- it's part of our balance sheet on
151
our claims against these companies, IBM, Novell, and others.
It's part -- it's the largest part of our balance sheet.
It's the major asset of the case. By a couple of words here
and there, they're basically saying, who knows? Let's throw
it away. It's worthless. Well, just the argument is
attacking the merits of our balance sheet.
The prognosis about reorganization,
rehabilitation depends upon whether you have a viable
balance sheet. Now, I'm being trying very carefully not to
step over the line and talk about merits, but if they're
saying because it's so speculative, we can't talk about it
at all or the effects it would have, it renders the fact
that we have these claims irrelevant. It's not subject to
discussion.
I can try to work around this and get it in
another way, but I can't allow it to go unsaid that what
they're trying to do is just take the claims and make it go
away and say, they're really not part of this case. They
are a part of this case. They're the 800-pound gorilla of
the case.
MR. LEWIS: Your Honor, we'll concede that if
they win something on appeal, they might be better off. And
I assume they'll concede that if we win something -- if we
win something on appeal, they might be worse off. Beyond
that, I don't see how you can incorporate into the balance
152
sheet. I mean, do we have a balance sheet which -- I don't
recall seeing any balance sheets which have any kind of
perspective value for these claims. I recall hearing
billions of dollars, if they win everything.
But we're not talking about the balance sheet
right now. As a matter of fact, the debtor hasn't put our
claims on the balance sheet. We have a three-and-a-half-
million-dollar proof of claim, and the debtor just filed an
amended Schedule F, and it doesn't even show up. It's a
judgment.
So, you know, that's -- and that's at least a
judgment that's been rendered. And for the moment, it's
still a judgment. But the idea that we're somehow taking
their balance sheet away from them, this whole case, Your
Honor, this whole proceeding today -- both proceedings that
are being heard today is based upon the debtor's contentions
that the litigation is extremely valuable and this Court
should essentially bend over backwards to keep that alive in
the hands of the debtor's current management.
And we think it's not terribly valuable, and
that's about as far as we can go on either side. I just
don't see how the Court can value the litigation or consider
very much what the witness is going to say about what he
thinks the results are going to be and how it's going to
affect their business, other than, yeah, if they get some
153
results, we'll be somewhat better off.
THE COURT: Well, I have enough trouble deciding
my own cases, let alone somebody else's cases, and that's
really the problem. I certainly am prepared to take notice
of the fact that you have -- that the debtors have very
serious litigation that's pending and that if they prevail
on that litigation, it is going to help their
rehabilitation. I don't have a problem with that.
But I do have a problem with the speculation
about what it's going to do for employees and customers and
that sort of thing. I think as a general proposition, fine
-- it's fine, but as a specific proposition, it's
problematic.
MR. NORMAND: Your Honor, Mr. Normand. I think --
THE COURT: Mr. Normand, you may.
MR. NORMAND: -- just a few points.
THE COURT: You may, please.
MR. NORMAND: The first is, I think we're all in
agreement that, as you just said, the litigation is
relevant. And I think we're all in agreement about
obsessing litigation does involve some amount of
speculation. That's the word that anyone will see it as.
You're in a forward-looking position. That's what you're
charged with. I don't think anyone disputes that. Forward-
looking falls along a spectrum. I mean, there's a spectrum
154
of speculation.
What Mr. McBride needs to speak to is the next 35
days. And contrary to counsel's argument, there is not a
world of possibilities that could follow from the Tenth
Circuit argument. There's a limited universe of results
that could follow, and Mr. Spector was going to speak to Mr.
McBride about three or four principal possibilities in the
next 35 days. It is not a year out, two years out. I don't
think it's particularly wishy-washy.
So I think on that spectrum of speculation, if
that's the word that people want to use, that Your Honor is
forced to grapple with, this is on the far end, in the near
end. And I think for that reason, we should hear the
testimony.
MR. LEWIS: Your Honor, it's no less speculative
for the next 35 days than it is for the next two or three
months. And we don't know what's going to happen in the
next 35 days. We don't know, as the Court heard this
morning, whether the Circuit will rule it out, Judge, I
mean, if they're not ready to rule yet. We don't know. And
so we don't even know it's for the next 35 days.
But even if it is for the next 35 days, it's just
as speculative today as it is tomorrow, as for the third
day, as to the fourth day, to the fifth day, until such time
as there is a result. And there isn't a result right now,
155
and I don't see how the fact that we're looking at a shorter
horizon makes it any less speculative.
And I want to contrast this with, again, the
example I used earlier. Yes, we're always talking about
forward-looking stuff when you're talking about
rehabilitation. But there, you're looking at past sales,
marketing studies, you know, cost analysis, all kinds of
stuff that people are used to dealing with. You know, it's
a little like the difference between trying to value stock
that's traded on a public market and trying to value -- I
don't know if the Court remembers that once upon a time, you
had to have a plant that made what was called heavy water --
H3O -- to make nuclear fissionable materials? We're not
competent to value a heavy water plant in this setting.
And I think we're -- it's really an analogous
situation. And there's -- and I think as a consequence, we
are just talking about speculation. If the debtor wants us
to concede that if the debtor wins something -- and it will
be an unspecified something because we don't know what the
contours are.
I mean, the Court -- Ten Circuit might remand for
trial on a very narrow issue with instructions that might
make the outcome almost a certainty for one side or the
other. And in the meantime, it might say, I want that
$650,000 held onto in the meantime because this isn't going
156
to take very long. And it might not. How can we possibly
fit this testimony in to that issue without going over every
possibility, most of which we can't think about?
THE COURT: See, that's the problem I have, Mr.
Normand, is technically, as almost the end of the questions,
each question that Mr. Spector is asking should begin
hypothetically "if." And we don't do hypotheticals with
fact witnesses. We do hypotheticals with expert witnesses.
And I don't think there's an expert witness who could
possibly testify on the outcome of this -- of the pending
litigation and appeal.
MR. NORMAND: Well, Your Honor, it may be
forward-looking, but to Mr. Lewis' point that, you know, we
have, typically, company employees who deal with, you know,
financial practices of the company in the past and therefore
they have a baseline level of personal knowledge from which
they can testify, Mr. McBride certainly meets that standard.
I mean, he's been doing nothing, to speak colloquially, for
six years except grapple with people about what is happening
in your litigation and how is that affecting your company.
If anyone on the planet can speak to those
issues, he can. And if he can't speak to the issues, then
the implication is Your Honor is not entitled to hear from
any witness about prospects of this litigation. Not the
merits, but the prospects. And I don't know how the
157
litigation can be entirely put to the side like that.
To the second point, to Mr. Lewis' offer that
there be some sort of amorphous stipulation that upon a good
result in litigation, something good would happen for the
company, it sounds to me that that's of no value at all,
that after a hearing where there had been such a
stipulation, IBM and Novell would still be in the position
of saying, we see no specificity and no testimony about what
would actually happen, only an amorphous agreement that
something good would happen. So that would be of no value
to SCO.
I think if --
THE COURT: Well --
MR. NORMAND: -- anyone can testify these issues,
Mr. McBride can. And I just don't see how we can't have no
witness at all on this issue. I don't know how that helps
Your Honor at all.
THE COURT: Well, I don't see how this witness
can testify as to what will actually happen.
MR. NORMAND: No, but it would be his best
estimate based on his six years of dealing with this at the
company. It does go to the weight, Your Honor. You can
take it or not. I think it's relevant. My point is, I
don't know how else Your Honor would assess what could
happen with the company. And I think that's part of what
158
Your Honor is being asked to do, to assess what would happen
with the company. Mr. McBride's testimony is as good as any
witness for that.
MR. LEWIS: Your Honor, Mr. McBride's testimony
depends on two elements. One is whatever his experience is
with customers. The other is possible outcomes of the
litigation, without getting to the merits, just possible
rulings. And he has no expertise in possible rulings,
whatever expertise he may have in dealing with customers of
the firm. And that's part of the problem.
And yes, I suppose it's true that this means, as
the Court has previously ruled in deciding it wasn't going
to ask -- what they're basically asking you to do, Your
Honor, is to let Mr. McBride estimate the value on the
merits because you've decided not to. That's essentially
what's going on. And I don't think he's a good substitute.
And I don't mean that as a criticism of Mr. McBride. That's
out of this case.
And the fact that it means that they can't
present everything they would like to, because that's the
argue -- that's the argument we're really doing. You can't
present hearsay either. That's the rules.
THE COURT: Here is the practical problem. Mr.
McBride can now testify as to all of the good things that
will happen if there is victory on the appeal.
159
Subsequently, I'll have cross examination on what
happens if they -- if you don't win on appeal, and it will
counterbalance everything that we've heard for however long
it takes. So it is valueless to my decision what will
happen if wonderful things happen.
MR. SPECTOR: We understand the Court's ruling.
We'll move on.
THE COURT: And that -- I'll sustain that -- the
objection.
MR. SPECTOR: We'll move on.
THE COURT: And we'll strike --
MR. LEWIS: Thank you, Your Honor.
THE COURT: And we'll strike the previous answers
relating to the merits. Or I should say the -- the possible
outcome.
MR. LEWIS: Thank you, Your Honor. Excuse me,
one moment.
THE COURT: Okay.
MR. SPECTOR: Thank you.
MR. LEWIS: Thank you, Your Honor.
THE COURT: Yes.
BY MR. SPECTOR:
Q When the case has commenced, do the debtors have some
idea of an exit plan from Chapter 11?
A Yes.
160
Q Would you tell us what it was?
A When we commence the cases, the idea is that we would
have an internal reorganization plan that we would present
to the Court.
Q Did something happen that changed management's mind
about that?
A Yes.
Q What was that?
A Within a few days after filing Chapter 11 in September
of '07, I received a call from Charlie Hale from York
Capital, who expressed a desire to come in and put an
investment into the company, and that would serve as the
basis of a reorganization plan.
Q What did you do after you received this call?
A Went back and met with Mr. Hale and his associates at
York Capital.
Q Describe the efforts made by the debtors to conclude a
deal with York Capital.
A For a period of about two months, I'd say going from
October through the end of November, maybe early December,
there were very intense efforts to try and get a deal done.
In fact, on the Friday before Thanksgiving of that year,
there was a tentative term sheet we had come to agreement
on, and so we flew everybody into New York on both sides,
went literally two and half days around the clock to try and
161
consummate a deal with a lot of professionals on both sides
trying to drive that transaction to completion.
Q Who was with you in New York for those intense
negotiations?
A We had -- on our side of the table, we had our CFO,
Mr. Nielson. We had counsel. We had --
Q Who were the counsel, if you recall?
A On our side we had Mr. Caplan from your firm. We had
Mr. Lampert from your firm. We also had some financial
experts from Mesirow Financial that were engaged in the
process.
Q How many?
A I don't remember exactly, but it was a number of them.
Q Was there someone else from our firm, as well, an
associate?
A Yes.
Q Do you remember her name?
A Not right now. I remember her face, though.
Q And do you know how many people were there on the
other side of the table?
A They had more than we had. Let's put it that way.
Q And this was in the offices of which law firm?
A Proskauer, as I recall.
Q And in what city?
A In Manhattan.
162
Q And you said already, it went two and a half days
around the clock?
A Yes.
Q And when you say around the clock, are you just saying
that or it really went around the clock.
A Well, it literally went around the clock. I know
because I showed up in the middle of this. I think I landed
around midnight at JFK, and by the time I got into the
hotel, both sides were going strong. And literally, it was
an all-nighter where nobody slept. I don't believe the
second night was as intense, but it was still, it was
basically that entire weekend.
Q Besides Mr. Hale, was there somebody else there for
his firm?
A Yes, Mr. Charnin [ph], David Charnin, as I recall was
his key business partner on that.
Q Ultimately, did SCO and York decide to proceed?
A No, we did not.
Q Why did SCO choose not to proceed with York Capital?
A Well, there are a number of reasons. The biggest
problem that we had in the trying to get to an agreement
with York was we had agreed on a term sheet, and in the
process of trying to convert a term sheet into actual
documents, the mapping wasn't taking place. We would talk
to the York group. We would take a term, and then as we
163
tried to transfer and translate that term into written words
on the fly, they continually were trying to adjust the terms
to a different set of terms than what we'd already agreed
to.
Q Did you come to some conclusion about the good faith
of the people on the other side of the table during these
negotiations?
A Yes.
Q And what was that?
A Well, we were concerned that if we couldn't get to an
agreement -- if we couldn't even agree one week and then go
the next week and transfer what we'd agreed to onto the
paper, it was going to be very difficult to have a long-term
relationship with these guys. And the nature of the deal
was a long-term relationship across all of our major
business categories.
Q By the end of the negotiations, did you trust them any
longer?
A The trust had pretty much evaporated.
Q What did they try to do at the end when we got close
to a deadline?
A Well, there were -- they tried to force us to take a
lower deal than, again, what we had agreed to or what we
wanted to do.
Q And do you remember in which areas those were?
164
A Yes. It had to do with payments that were going to go
to them. It had to do with accounts receivables that we had
not agreed to pay them. They wanted to take those. There
were a number of categories there where, originally, the
deal was so -- kind -- formed up as a sort of a $36 million
deal, and by the time -- I just remember thinking, by the
time we got done with what they wanted to spend on paper, I
was worried that we were going to have to write them out a
check.
Q Even before you were contacted by York, did you have
talks with anybody else?
A Yes.
Q Who is that?
A There were a couple in the fall timeframe.
Q And by the way, before we go any further down this
line, if there's anybody that we're going to be talking
about that has a contract with you -- hold a nondisclosure
agreement or some confidentiality provision, please let me
and the Court know because we have means to protect the
confidentially in that event.
So before you give the name of whoever contacted
you before York, is there a confidentiality concern as to
that?
A Yes.
Q Phew, just caught it in time.
165
A Yes.
MR. SPECTOR: Your Honor, I'd like to invoke the
procedure we discussed earlier today.
THE COURT: Does anyone wish to be heard on that
issue? Yes.
MR. JACOBS: Your Honor, my suggestion is that
Mr. McBride refer to Party A --
THE COURT: All right.
MR. JACOBS: -- and describe what happened, and
then at some convenient moment, in a closed courtroom, he
can -- we can go through a list of the confidential items
that have to be put on the record.
THE COURT: I think that's a good idea.
MR. SPECTOR: That's a great -- I've never heard
that one before.
THE COURT: Yes.
MR. SPECTOR: But that really is a very good idea
because we're going to have to do it multiple times.
THE COURT: Exactly.
MR. SPECTOR: Somebody keep track of the letters.
THE COURT: We'll start with A
MR. SPECTOR: All right.
THE WITNESS: I guess I have to remember these
too, then.
THE COURT: Mr. Marriott.
166
MR. MARRIOTT: The only point of clarification
that I would seek is, I thought at the outset of the
examination, counsel had indicated that he was not going to
incorporate the long back and forth that is alleged to have
occurred in finding other buyers in an effort to speed
things up. And we had said, I thought, that that was fine
by us. It sounds to me like we're, nevertheless, doing
that. I'm just seeking some guidance as to whether or not -
- and if it hasn't already been achieved by the prior
agreement that we have as to what comes in from the past
hearing.
MR. SPECTOR: Well, we have to make -- we have to
win this case, Judge. There was a record. It wasn't the
primary issue at that time. The issue was, did we just
trump up this deal. We'll be speaking to that quite a bit
more, also. I didn't mean to say that we use that as our
record for this case. I just want to say that there are
things that may have come in that we don't want to go back
over.
THE COURT: All right. I'll allow you to
proceed.
MR. SPECTOR: Thank you.
BY MR. SPECTOR:
Q So, Party A, you had conversations with Party A
A Yes.
167
Q When did that commence?
A That commenced in early September of 2007.
Q That would have been before September 14th, when the
case was filed?
A Correct.
Q And can you describe those talks briefly? We don't
need a lot of detail on that.
A Yes. Briefly, it was an idea of selling off our UNIX
business to Party A I don't know, these discussions were
going on simultaneous to discussions about bankruptcy and,
you know, we didn't come to an agreement with them.
Q Why did that deal fall through with Party A?
A Party A had difficulties with the UNIX ownership
rights that were spelled out in Judge Kimball's ruling in
that summer timeframe.
Q All right. Now, let's go after the York deal fell
apart. How long after the York deal fell apart did you
begin talks with others with regards to potential deal?
A And before I go to that, I had mentioned earlier there
were two in the fall. Did you want me to hit --
Q Oh, yes.
A -- the other one now?
Q Yes, that's right. You're right. Please go on.
A So Party B came on almost the same time as York. They
were more of a short cycle, so Party B, we had discussions
168
with. Again, nondisclosure. They went through and did due
diligence, another discussion about buying the UNIX
business. So that was in -- beginning to end, probably went
through the month of October of 2007.
Q After the York deal terminated, how long was it before
you got contacted by another party?
A It was the same month.
Q And who was this other party?
A That was Stephen Norris.
Q So you spoke with Mr. Norris?
A Yes.
Q Describe the discussions that commenced in the initial
weeks of your acquaintance with Mr. Norris.
A Mr. Norris was interested in the UNIX business. He
believed that it was -- had a lot of value, that there are
only a handful of platforms around the world that really do
operate in system management, if you will, in the computer
industry, and we were in the ownership position of one of
them. And so he found that very intriguing, and Mr. Norris
has, you know, he has a lot of contacts worldwide, and so we
found it intriguing to have those discussions with him.
Q After those initial conversations, were there any
follow-up conversations?
A Yes, there were.
Q And how long did those last?
169
A Oh, a period of weeks.
Q As I understand it, Mr. Norrison [sic] was trying to
put together a team to buy the company from you -- buy the
UNIX business from you, I mean.
A Yes.
Q Did you ever come to some kind of an agreement as to
terms with Mr. Norris or as, actually, Steve Norris Capital
Partners?
A Yes. So what happened then is we talked to Mr.
Norris. He was the founder of the -- what has become the
largest product equity firm in the world, the Carlyle Group.
He represented to us that he was prepared to take our
company into his hands and go out and form up some capital
arrangements with some people around the world. He talked
to various partners.
MR. SPECTOR: Well, my question, though, and I
guess that's a nonresponsive. But I guess that's mine. I'm
going to ask that as nonresponsive.
THE COURT: Well, you don't have to strike that.
MR. SPECTOR: I don't have to. All right.
THE COURT: You can --
BY MR. SPECTOR:
Q The question was, did you ever come to some agreement
as to terms with Steve Norris Capital Partners.
A Yes, so we did come to terms with him.
170
Q And what were the terms of that original deal with
Steve Norris Capital Partners? Generally speaking, because
--
A The -- generally speaking --
Q -- the actual document is on file.
A Sure.
Q Okay.
A Generally speaking, the terms were, we signed a
Memorandum of Understanding. The Memorandum of
Understanding called for a $5 million capital infusion into
the company and then a $95 million line of credit that was
going to be on the back end of that, depending on how much,
if any, that line of credit was tapped into was going to
have a dilutive effect on the shareholders of SCO, and
obviously, a lot more punitive to the extent that you drew
down more of the capital line.
Q Do you remember when a plan was filed with those
terms, generally speaking?
A I believe it was February of '08.
Q Did there come a time that the deal with Mr. -- with
Steve Norris Capital Partners also fell apart?
A Yes.
Q Was there something in the press about the time that
that happened?
A Yes.
171
Q What was it in the press that was noteworthy in
regards to these talks?
A There was a story that came out that said that SCO or
a new company in this case, Steve Norris Capital Partners,
whoever was buying the business from SCO was going to have
to pay 95 percent of the monies they collected as a royalty
back to Novell.
Q Did that have some effect on the desire of Stephen
Norris Capital Partners to close this deal?
A Yes, it had a very chilling effect, and even though
that statement was untrue, there was so much noise out
there, and the people we were dealing with were across the
ocean and they became very nervous about completing the
transaction.
Q And they cancelled it?
A Yes.
Q Now, Judge Gross has heard some talk about 95/5 in the
early stages of this case. Do you -- do you want to remind
the Court what the real 95/5 deal is about?
A You're talking about the SNCP?
Q Yeah. No, no, no, I'm sorry.
A Oh, you're --
Q I -- I'm being vague.
A Okay.
Q The article you just related said --
172
A Oh, the other, the UNIX royalties, yes.
Q -- 95 percent of the revenues that SCO would collect
would have to go to Novell --
A Sure.
Q -- leaving SCO --
A Yes.
Q -- with only five percent of gross revenues.
A Yes.
Q Which you said is untrue. What -- there is a 95/5
split with Novell, though, isn't there?
A Yes, there is.
Q Okay. And we discussed this in Court on a previous
occasion when Novell raised it, right?
A Yes. I believe in the fall of '07, if I'm not
mistaken, Novell was concerned about a royalty stream that
we, as part of our agreement with them in the 95 Asset
Purchase Agreement, would pay to Novell, which was older
versions of UNIX that we collected, mostly out of Japan. We
would send 95 percent of that revenue to Novell. That was
always part of the deal. Our deal was that we were going to
own UNIX where we already had open server, and so it was
just those older versions of UNIX that we're paying 95
percent.
So when this article came out, saying SCO has to
pay 95 percent, they had mistakenly attached that to our
173
actual product business, and if that would have been a true
statement, we wouldn't be in business today because we would
have no revenue to run our company.
Q Now, deal talks apparently ebbed and flowed during the
past two years; is that right?
A Yes.
Q Once the SNCP deal failed and the Novell case was set
for trial, were deal talks active or were they in a lull?
A They were definitely in a lull. Once that came down,
there was a dampening effect.
Q So the -- this is a matter of record, but I believe
the SCO -- the Novell trial, fixing damages on the
constructive trust issue, came to -- started in the first
part of May; is that right?
A That -- that's correct.
Q Of 2008?
A Yes.
Q So during the late spring and early summer, how would
you characterize the pace of talks with potential suitors?
A The pace of talks had dramatically slowed down.
Q Now, you previously testified on one of our
exclusivity extension motions about this particular
phenomenon, did you not?
A Yes.
Q And eventually, you received a ruling from Judge
174
Kimball on the liquidation of the amount of the constructive
trust claim of Novell; is that right?
A That's correct.
Q Now, was that in July of 2008?
A Yes, I believe it was July 16th, 2008.
Q Was that award $2.54 million, plus prejudgment
interest?
A Yes.
MR. SPECTOR: Your Honor, I have a copy of the
judgment or the findings, I suppose. Findings, I guess.
And that's what happened in July. The judgment was months
later.
THE COURT: Yes.
MR. SPECTOR: And the Court can take judicial
notice of a District -- a U.S. District Court judgment, but
I'm going to have a copy for you, so you can have it in case
we discuss it later.
THE COURT: Okay.
BY MR. SPECTOR:
Q Now, this has been marked as Debtor's Exhibit Number
28. Would you identify this for the Court, please? And
I'll hand them out.
THE COURT: Thank you. Thank you, Mr. Spector.
(Pause.)
Is there any objection? Well, I guess you really
175
haven't established it with the witness yet, right? I'm
sorry.
BY MR. SPECTOR:
Q Can you identify that, please?
A Yes, it's a Findings of Fact, Conclusions of Law and
Order in Case Number 204CB139DAK in the Novell versus SCO.
MR. SPECTOR: I offer Debtor's Exhibit 28.
MR. LEWIS: No objection, Your Honor.
THE COURT: No objection. It is so admitted,
then.
(Debtor's Exhibit 28 received in evidence.)
BY MR. SPECTOR:
Q After the -- Novell received that judgment, did talks
begin again?
A Yes, they did.
Q Which company was the next one that you spoke with?
A The next one was -- well, let's see, it was York and
SNCP, DNE, or am I just going to unidentified ones?
Q Well, after July 2008, SNCP was off.
A Right.
Q York was off.
A Right.
Q Was there somebody else?
A Right. I understand. I'm just trying to figure out
what lettering I'm up to now.
176
Q Oh, oh, I see.
THE COURT: C.
THE WITNESS: I'm confused.
MR. SPECTOR: Up to C, I believe.
THE WITNESS: I've never done this before. I
just -- I'm -- am I counting all of the people that we've
done, or are we just using --
MR. SPECTOR: No, no, just in order of your
regular test --
THE WITNESS: -- code letters for people that
aren't identified?
MR. SPECTOR: In order of your testimony.
THE WITNESS: Okay.
MR. SPECTOR: We had A, we had B, call this one
C, then.
THE WITNESS: Okay. Let's call this one C, then.
Company --
BY MR. SPECTOR:
Q Tell us about C.
A Com --
Q Who was C?
A Yeah.
Q No, no, I didn't mean who is C. Tell us a little
something about C without trying -- without --
A Okay.
177
Q Unless your description of C will help identify it,
which is going to be a little bit of a problem here.
A I think I can work around that.
Q Okay.
THE COURT: Okay.
BY MR. SPECTOR:
A Company C was a technology company based out of York.
It had some -- what shall we call this? I'm trying to
figure out how to say this without --
Q Well, rather than describing it, it's a technology
company in Europe.
A Okay.
Q That's good enough for these purposes.
A Okay. Let's just call it a technology company in
Europe. The general idea with Company --
Q Well, I didn't ask you anything else. It's my turn.
What was the general idea about the deal with this company?
A The general idea with Company C was that we would
merge the SCO group with Company C, and then there would be
some additional capital that would be invested into the
merged company.
Q Right out of the chute, was there a lot of activity?
A Yeah, initially, there was a lot of action, a lot of -
-
Q What type of action?
178
A Well, there were a lot of discussions. There were
meetings -- meeting with the principals of Company C,
putting together business plans. One of the things -- one
of the general ideas of Company C and the merged company,
SCO -- with SCO would be to go into the emerging markets
around the world. There's a term called BRICMEA -- Brazil,
Russia, India, China, Middle East, Africa, if I'm not
mistaken.
So the emerging markets of the world, we
believed, were a prime target for the SCO operating system,
and that was where we spent a lot of energy and market
development and marketing work to understand better that --
that opportunity.
Q What happened to those talks?
A They eventually just fizzled out.
Q About the time that the talks with Company C were
fizzling out, did you reengage with Mr. Norris on some other
venture?
A Yes, we did.
Q And what was the name of this other company he
introduced you to as a purchaser of the UNIX business?
A This was with MerchantBridge.
Q Tell us what you know about MerchantBridge.
A MerchantBridge is a merchant bank that is based out of
London. It has some very highly qualified financial people
179
that run it. The top guy of MerchantBridge is a guy named
Basil al-Rahim, who worked with Mr. Norris in their Carlyle
days. And in fact, I believe Basil ran Carlyle
International when Steve was at Carlyle.
Q What else do you know about MerchantBridge?
A Oh they had some other strong players there. We were
especially intrigued by -- well, there were two other things
I would say. One is some management talent they had there
that really understood UNIX. One senior executive at
MerchantBridge had worked at the Digital Equipment
Corporation and really understood UNIX very well. And then
the other person working with him, Rafe [ph], was also a
very strong UNIX advocate. So we had Rafe and Eric that
were big UNIX aficionados, if you will?
And then the other thing that was compelling
about MerchantBridge is they had very strong ties into some
big money players in the Middle East.
Q Did you make any trip to London to meet with these
folks?
A Yes, I did.
Q And when was the first time you did that?
A My first trip to meet with them on this was, as I
recall, in September of 2008.
Q Would you characterize this more as an introductory
talk?
180
A Yes, that's exactly what it was. It was a first
meeting.
Q How did they appear to you when you finished the
introductions? I mean, let's -- we strike that. That's
terrible. How receptive were the people at MerchantBridge
after they had been introduced to you and UNIX and SCO?
A The -- they seemed very receptive. They basically
said, we'll get back with you. We heard shortly after that
that they were very interested in the idea of buying the
UNIX business from us, investing in it, and then moving it
forward into these emerging markets.
Q So what did you do after that meeting to further those
discussions?
A Next thing we did then, is we scheduled a two-day
working session with the principals of MerchantBridge and
the key management players that would be involved in it, and
then, the key SCO management team players.
Q And when did you have this two-day working session?
A That was in the first part of November 2008.
Q At that time, in the first part of November 2008, how
confident were you that you'd have a deal soon?
A Well, we didn't know that we were going to have a deal
soon. We were trying to push for that because we knew we
had a deadline coming up with this Court at the end of the
year. So we were pushing for that, but it was still early
181
in the game.
Q Now, what, if anything, did the folks at
MerchantBridge do to advance the discussions? Did they do
any due diligence?
A Yes, they did. So what happened after the two-day
meeting in November -- so it was a very -- again, a working
session where we went through the technology. Our
technologist was in the meeting, Mr. Andy Nagel. Our
marketing people was there, Mr. Hunsaker. We had a very
deep set of discussions.
A couple of weeks after that, they came back
again and said, okay. It's not -- we passed another hurdle,
which is we've gone through this deep working discussion,
and they're very interested in pursuing it. And what they
wanted to do next was to come to the U.S. and to do more due
diligence to get a better, more full understanding before
moving to actual papering of the deal.
Q Did they do that?
A Yes, they did.
Q And when was that?
A Well, it started in December, and what happened is
the -- they started that deep due diligence just about ten
days before Christmas. And they were getting into the
depths of it, and we were pushing them very hard to try and
get a deal signed by the 31st of December.
182
Q Did they have lawyers to help paper a deal?
A Not at that point.
Q And we have a deadline of December 31st before we lose
exclusivity?
A Right.
Q And what were you trying to do with regard to that?
A Well, we were trying to get a -- some kind of a signed
agreement in place.
Q And if there were no signed agreement with them or
anybody else, what was the only alternative to -- for the
debtor at that point?
A To go back to the original plan that we had when we
came into the Court, which is to go to a company-internal
reorganized plan, where we would dramatically reduce the
size of the company into a plan that we could reorganize on
our own.
Q But what was your real goal? What did you really want
to do, as we entered into the Christmas week? What was your
real intent?
A What we really --
Q SCO really -- what did it really want to do at that
point?
A Well, we really wanted to get a deal with them that
would allow the UNIX business -- we don't want to send all
these employees home. We don't want the customers to
183
suffer. We were trying to get a deal signed to be able to
move forward.
Q Did there come a time in late December when it was put
up or shut up time?
A Yes.
Q And did that time come and go?
A Yes, it did.
Q Okay. And then, we had to file a plan that did not
include a deal with MerchantBridge; is that right?
A That -- that's correct.
Q Okay. After that -- and that plan was filed in the
early part of January 2009; is that right?
A Yes.
Q After that plan was filed, did you hear back from the
MerchantBridge folks again?
A Yes, I did.
Q What was the import of the conversation at that point?
A Well, they had seen that we had filed papers saying
we're going to go out and try and open this up to other
people to come and look at it. And they came back and said,
hey, we're -- just because we didn't get that signed didn't
mean we're not interested. We want to dive back in, but we
also don't -- we want to go down the path of a private sale
like we've been talking about. And that was the nature of
that discussion.
184
Q All right. Did you honor the request to reengage with
MerchantBridge?
A Yes, we did.
Q About that same time, in late January or early
February 2009, were any other inquiries made by other
parties to discuss being a stalking horse or something of
that nature?
A Yes.
Q And who were those people?
A From the period of --
Q Again, if you have to use letters --
A Yes.
Q Otherwise, if you don't have to use letters, if you
don't have an NDA, if you don't have confidentiality, you
can name names.
A So you mentioned 2000 -- January of 2009.
Q Yes.
A Did you want just that timeframe or did you want over
the ensuing months?
Q Well, answer it the best you can. I was talking about
when you filed the plan in January, 2009.
A Right.
Q But we can go back because I know there are other
companies, as well.
A Okay. Well, I'll just do --
185
Q Let's talk about this.
A You want me to take the January 2009?
Q Yes.
A Okay. So in that timeframe, we had two entities
emerge, one that we had talked to before and a new one. The
--
Q Who were they?
A The company -- let's go Company D, based out of New
York, software company had expressed a desire to, again, buy
the UNIX business.
Q How far did those talks advance?
A They went into a level of NDAs, sharing information,
due diligence.
Q Did it -- what came of those discussions?
A They received an offer from another technology company
to buy them, and that basically precluded them from doing a
deal with us.
Q And what about the other company that you engaged with
after?
MR. SPECTOR: What's that?
THE COURT: Is that the phone?
MR. SPECTOR: Stop that stopwatch.
THE COURT: Let's try it again.
MR. SPECTOR: Okay.
THE COURT: I'm sorry.
186
BY MR. SPECTOR:
Q Go ahead. You were answering.
A So the other company that came forward at that point
in time was -- I got to think back on the NDA status of this
one before I say it. To be safe, let's call it Company E,
and then I'll disclose later who it is.
Q Okay. That's fair.
A So Company E stepped forward and expressed an interest
in purchasing the UNIX business.
Q Could you describe for the Court the offer made for
the purchase of the UNIX business by Company E?
A Yes. Company E was trying to buy the business for
a lower amount than the discussions we had on the table with
MerchantBridge. And they -- and in terms of doing that,
they were basically saying, look, we don't need to pay
prepetition creditors a dollar on dollar. That's crazy. I
mean, most people coming out of bankruptcy are happy if they
get ten or twenty cents on the dollar.
Our commitment all along was to take care of all
constituents at 100 percent, including shareholders,
including creditors, employees, customer -- we were trying
to keep everybody intact. And their plan basically called
for cramming down customers, and that was -- that didn't sit
well with us.
Q It wouldn't be customers, it'd be vendors, wouldn't
187
they?
A Yes.
Q I mean, customers aren't creditors, are they?
A That -- that's right.
Q Okay.
A Yeah, I meant to say creditors. Right. Yeah.
Q Is there anybody who is a part of Company E that you
had met before in your discussions with other companies?
A Yes.
Q And who is that? As far as I know --
A Pers --
Q -- is there any reason why you can't give the name of
the person whom you dealt with for Company E?
A I don't know. That's the question. It's either
Person A or its --
Q Do you see that person in the courtroom?
A Yes.
Q Would you point him out? It sounds like the criminal
trial.
A It's right over my shoulder. Yeah.
Q I don't know who it is, so that -- what is he wearing.
A The guy smiling over there.
Q Raising a hand. All right. The gentleman without a
jacket with a bow tie. Do you know that person's name?
A Yes.
188
Q As what is his name?
A That's Charlie Hale.
Q Oh, that's the one way to get where I was coming from.
A Okay.
Q And is he a principal of some other company that you
did discussions with?
A Yes.
Q And which company was that?
A That was York Capital.
Q Okay. And we've already discussed those negotiations
and how you were left -- the feelings you were left with at
the end of those; is that right?
A Yes.
Q Okay. I take it no agreement was reached with Company
E?
A Correct.
Q And whose request was that let go?
A It was -- it wasn't something that we accepted. It
just didn't work.
Q Again, since January of '09 and through -- well, that
was January or February period?
A Yes.
Q Was there somebody else you spoke with before that we
haven't already talked about -- let me strike that. Were
there any other companies with whom you spoke with reference
189
to the sale of the UNIX business or other financial
arrangement that occurred before February 2009 that we
haven't already addressed?
A Not that I can think of.
Q Okay. Then, let's move forward.
A Okay.
Q After you had spoken with Company E and reengaged with
MerchantBridge, were there any other players out there?
A Yes.
Q All right. If you can give the names, give the names.
If you can't, let's use the letters again.
A Okay. Let's, first of all, go to Company F. Company
F was a group that wanted to come in and put investment into
the company. Actually, it was in the form of a DIP loan to
the tune of about between $5 and $6 million. The return for
that immediately was going to be, they would take somewhere
between 65 and 80 percent ownership in the company's shares
for that $5 to $6 million DIP loan.
Q Was there a company out of California with whom you
dealt?
A Yes.
Q We're talking about G now.
A Yes.
Q Right?
A Yeah, now we're at Company G.
190
Q Tell us about that.
A Company G is a very large buyout company. They buy
technology companies. And we had several discussions with
them, and that did not materialize in an offer, but the
discussion was that they would buy our UNIX business.
Q Did you have talks with an existing shareholder with
regards of financial deal about the same time you were
dealing with Company F and Company G?
A Yes.
Q And, of course, MerchantBridge, which --
A Yes.
Q -- you haven't gotten back to yet.
A Yes.
Q Is that name available or is it something we have to
put an H --
A Let -- let's be safe, let's put an I.
Q H -- I think we're up to H.
A We're up to H. Okay. Let's put an H behind that one.
Q And --
A That was an existing shareholder who had ties into
some other investors in the New York City area, and we had
several discussions with them about a possible investment.
The idea there was that they were going to put millions of
dollars into the company and get equity warrants and
possible upside on the litigation returns.
191
Q Now, at the time we were approaching the June 15th
hearing --
A Yes.
Q The latter of May, first week of June period.
A Yes.
Q How many different deals were being discussed at the
same time by management and counsel?
A Four.
Q It was the MerchantBridge deal; is that right?
A Yes.
Q And then there were H, G, and F?
A It actually would have been H, G, and one we haven't
talked about.
Q All right. What's the one we haven't talked about?
A The one we haven't talked about was a deal with our --
the chairman of our Board of Directors, Ralph Yarrow, who
was going to agree to backstop to a certain level a line of
credit that would allow us to move forward to complete a
deal with one of these other three. And then, as a means of
not causing harm to creditors in the event that it didn't
come to fruition.
The other one there was MerchantBridge. So we
have MerchantBridge, F, G, and Yarrow.
Q So let's get back to MerchantBridge. When we -- did
we have a name for this kind of competition at that time
192
where we were working with all four deals?
A What -- we -- it was during the time of the Triple
Crown Races, and so we referred it to as our horse race.
Q Was MerchantBridge always in front?
A No.
Q We know it won the race, but was MerchantBridge always
in front?
A No.
Q And there came a time that it pulled away from the
pack. And when was that?
A Yes. They pulled away from the pack when they put
down a $250,000 deposit into escrow.
Q And then moved on from there? Did we get into
negotiations and, I mean, papering the deal?
A Yes.
Q Okay. And as of June 15th -- strike that. As of June
5th, when we had a deadline to file a response to the
motions to convert, did we have, at that time, any knowledge
which of the four horses were going to win that race?
A No.
Q We didn't know that anybody was going to do a deal; is
that right?
A Correct.
Q Okay. When did you finally ink a deal with
MerchantBridge?
193
A About five minutes before the hearing on June 16th --
June 15th.
Q Okay. And His Honor has heard plenty about that
already. Now, let me -- I kept calling it MerchantBridge,
so we didn't have a problem with nomenclature. And I want
to go back and connect the dots on that, Mr. McBride.
When you first met MerchantBridge folks in London,
were they the only people involved in this deal?
A No.
Q Who else was involved as getting -- as part of this
deal from the purchasing side?
A Steve Norris.
Q In one of his companies?
A Yes.
Q And you didn't know which company it was at the
beginning, did you?
A No.
Q Ultimately, did a company emerge of Steve Norris's?
A Yes.
Q And what was the name of that company?
A It was called Gulf Capital Partners.
Q Okay. Now, did the two of them, MerchantBridge and
Gulf Capital Partners, jointly do this deal?
A They -- no, I wouldn't say it that way.
Q All right. How would you describe their relationship
194
on the deal that has ultimately come before this Court?
A Those two companies, MerchantBridge International and
Gulf Capital Partners, formed a new entity called Unxis.
That is the organization that we ended up doing the deal
with.
Q As far as you know, they're joint ventures in that
entity?
A Yes.
Q Okay.
MR. SPECTOR: May I have Exhibit 1, please? Now,
I had with me on June 15th, brand new, not even dry ink
version of the signed contract and probably have it in here.
We had objections that what I had sent in was not a signed
version, so do you have a signed version here?
THE CLERK: No.
MR. SPECTOR: I have it in my briefcase, but I
hate to put it up. I'd like to show it to you guys since it
is the original. And a folder I had that day for the
exhibits. And at some point during the day, I think counsel
for the other side actually held this document.
MR. LEVIN: Your Honor. Your Honor, to be clear
--
THE COURT: Yes, Mr. Levin.
MR. LEVIN: -- I don't recall that we ever
objected to the document that was handed to us on June 15th.
195
The only objection we had was, wait a minute, you're giving
us something with original signatures. Don't you want to
retain this and give us a copy?
MR. SPECTOR: Right. And I'm doing that now.
THE COURT: That's a copy?
MR. SPECTOR: No, this is the original. So, I
mean, the only reason I'm making this little drama here is
that we -- the objection we received was that it wasn't the
original. So I'm saying I've got it. I'd like not to put
it into evidence. I'd like to put a copy into evidence.
THE COURT: That would be acceptable.
MR. SPECTOR: This is the entire document. If
you want to hand it -- oh, and give it to them. We don't
have any copies of this?
THE CLERK: Well, because it's been on file, its
hundreds of pages.
THE COURT: Why don't you give it to the movants?
MR. SPECTOR: All right. We don't have an
exhibit number on that one, either.
MR. LEVIN: Your Honor, I might note that some of
the exhibits were filed under seal.
MR. SPECTOR: That's correct. Thank you for
reminding me of that.
THE COURT: That's right.
MR. SPECTOR: Well, it is filed and it is very
196
bulky. And we don't have I don't know how many, 15 copies
of everything else with us.
THE COURT: It is filed, and I don't think it's
critical that it be marked for that reason.
MR. SPECTOR: Thank you.
MR. LEWIS: Your Honor, just for the record.
THE COURT: Mr. Lewis.
MR. LEWIS: This is not what was presented to us
that day, as the Court may recall. We were presented with
the transactional documents and a couple of the exhibits and
were told everything else was coming, being copied at that
very moment.
THE COURT: Right. There was a 500-page document
or something like that that was coming.
MR. LEWIS: Something like that.
THE COURT: Yes.
MR. SPECTOR: Does Your Honor want the one we
brought to Court?
THE COURT: No, I do not need that one.
MR. SPECTOR: Well we'll just assume that that
purchase of sale agreement is in evidence.
THE COURT: Yes.
MR. SPECTOR: We were going to call it Exhibit 1
-- the Debtor's Exhibit 1, but it's in evidence under
whatever title it is. Fine.
197
BY MR. SPECTOR:
Q So your talks eventually were memorialized in that
exhibit that just was admitted, correct?
A Yes, that's correct.
Q Would you describe the principal deal points,
remembering the documents in evidence and people have looked
it over. Just the principal deal points that you remember.
A Yes, so the principal deal points were that we were
going to get about $2.4 million, I believe, in cash for the
UNIX business and there was going to be a line of credit
that would relate to their potential judgment. However, we
resolved the Novell judgment for another $2.85 million, and
we would divest of the UNIX products business to them and
the SCO Mobile server business to them. We would retain all
rights in what was going on in the litigation, and we would
also retain the SCO Mobile product applications.
Q From the SCO point of view, what were the benefits of
this deal?
A Well, it was a good deal. It is a good deal because
it addressed the objective we had from the beginning of our
entry into bankruptcy court, and that was to take care of
all of the stakeholders that related to us, whether it was
customers, shareholders, employees. Anybody who had a stake
in SCO, we wanted to be able to take care of them. This
deal does that.
198
Q Now, you talked about employees. How does this deal
keep the employees intact?
A What we're able to do with this Unxis deal is to take
the good, hardworking employee base that's been with the
company for decades that started at AT&T Bell Labs, some of
which are here in the room today, and the worldwide sales
force that hold this SCO ecosystem together and move that
pretty much en masse to this new investor.
And so that moves over to them, and then they
come in and, not only buy the business, but commit to take
it forward and to develop the UNIX products and to continue
to make good value for the customers.
Q So I take it from what you said, one of the goals of
the SCO management was to make sure that the customers --
the install base UNIX customers --
A Yes.
Q -- were taken care of by somebody committed to the
product?
A That's correct.
Q And are you satisfied Unxis folks will do that?
A Yes.
Q Well, you've already said their -- I think you said --
well, maybe if you did, I'll ask you again. Are they
committed to take over the employment of the core cadre of
engineers who have worked on this product for 20-some-odd
199
years?
A Yes, they are. That's a core part of the deal.
Q And is that evidence to you of anything -- about some
commitment to the product?
A Yes.
Q Okay.
A Going back to the very first discussions with
MerchantBridge, they have these two UNIX pros who were very
excited about taking the UNIX line forward.
Q So that part of the deal covers your concern about
employees and the UNIX install base?
A Yes. And the customers.
Q What about paying claims?
A Okay. So the other part, then, is unlike the -- I
forget which company letter it was. I think it was F, where
in the spring of '09, the proposal was to do a cram-down on
the creditors. Well, a cram-down on the creditors is also
going to, I believe, have a cram-down effect on
shareholders, and the whole thing was just going to not meet
our objective.
So in this case, what we have is a deal with
Unxis that allows us to go in and take care of our
prepetition creditors and do that at 100 percent level,
rather than a 10 or 20 percent level.
Q Why hasn't the debtor assumed the 1995 Novell Asset
200
Purchase Agreement with Santa Cruz operations?
A There's no need to. The contract has been performed
on each side, so it's not an executory contract.
MR. LEWIS: Objection Your Honor. Calls for an
opinion. It's a legal opinion.
THE COURT: A legal opinion.
MR. SPECTOR: I asked why didn't the seller
assume a contract. He says, because we don't need to. Why
don't you need to? Because it's not executory, everything
is done. I don't understand why this -- I mean, how do you
get that testimony? You know, I mean, I asked if they want
a factual record. Here's a factual record. The president -
- the CEO of the company is saying, we chose not to assume
it. We didn't have to choose not to assume it. We didn't
have to make that choice. It's not an executory contract.
BY MR. SPECTOR:
Q What is your understanding of an executory contract?
MR. LEWIS: Same objection, Your Honor.
THE COURT: I think I have to sustain the
objection.
BY MR. SPECTOR:
Q Are there any duties left on the Novell side to
perform from this APA?
A No.
Q Okay.
201
MR. LEWIS: Your Honor, it's the same objection.
It calls for legal conclusion, and the document speaks for
itself. We can argue that. He can testify about, you know,
what he has to do or doesn't have to -- what he thinks he
has to do or doesn't have to do. But his testimony is not
competent testimony on the question of what is an executory
contract.
THE COURT: Understood.
MR. SPECTOR: Your Honor, a company -- a
businessman is testifying about a contract. We're asking
him, is the contract completed, yes or no. Yes, it is. I
mean, this --
THE COURT: All right. I will allow that
question and answer.
BY MR. SPECTOR:
Q Mr. McBride, is the contract completed?
A Yes.
Q Okay. Does SCO owe -- other than to remit five
percent collection -- strike that -- 95 percent of the
collections, are there any obligations that SCO has to
Novell under that contract?
A No.
Q And does Novell owe any duty to SCO when you pay the
95 percent of the revenues?
A No.
202
Q Okay.
MR. MARRIOTT: Your Honor, just for -- if I may,
just for the record.
THE COURT: Mr. Marriott.
MR. MARRIOTT: I'd like to join and reiterate the
objection that this is incompetent testimony that goes for a
legal conclusion as to whether or not SCO has obligations,
whether Novell has obligations, and whether the obligations
have been satisfied. I want to make sure we've got a record
that both has spoken.
THE COURT: I think we need a record that it --
that -- to his knowledge.
MR. SPECTOR: All right.
BY MR. SPECTOR:
Q Do you know of anything that you have to get, that SCO
has to get from Novell as a result of this APA?
A No.
Q All right. Is it -- what is SCO's position as to what
you got -- well, strike that. Let me go back to something.
With whom did SCO -- who did SCO purchase -- strike that.
Who did Novell sell the assets to in the 1995 APA? Who is
the other party?
A The Santa Cruz operation.
MR. SPECTOR: And I'm trying not to go into the
merits of the case, Your Honor. That's why I'm trying to
203
think about the question in a very careful way.
BY MR. SPECTOR:
Q Did whatever the Santa Cruz operations get go to
somebody else?
A Yes.
Q To whom?
A Caldera International Corporation.
Q Did whatever -- and did Caldera get everything that
Santa Cruz operations had?
A To my knowledge, yes.
Q And did Caldera International transfer those same
assets to another company?
A Not yet.
Q Those intellectual property assets?
A No.
Q All right. Did Caldera --
A Well, we renamed the company --
Q All right.
A -- but they didn't transfer them.
Q They renamed the company. I see.
A Yes.
Q And what is Caldera International now called?
A The SCO Group, Inc.
Q Okay. So the asset purchase agreement was never
between Novell and SCO Group, Inc.; is that right?
204
A That's right.
Q All right. So it's not your contract to assume or
reject with Novell?
A That's my understanding.
MR. JACOBS: Your Honor, this is --
THE COURT: Yes.
MR. JACOBS: -- this is really way beyond the
scope now. And --
THE COURT: It certainly is.
MR. JACOBS: -- go -- there's a lot of litigation
history that goes to whether this company, the SCO Group, is
bound by the asset purchase agreement. We object.
THE COURT: I'll sustain the objection. I think
that is beyond this witness's ability to testify.
MR. SPECTOR: The --
THE COURT: Let me just point out, too, your two
and a half hours has roughly been used up.
MR. SPECTOR: Not mine, by my watch.
THE COURT: You've been going for an hour --
MR. SPECTOR: 2:08.
THE COURT: -- an hour and a half, roughly.
MR. SPECTOR: Right. And I had about ten
minutes.
THE COURT: And you had about an hour --
MR. SPECTOR: No, not -- I didn't Judge.
205
THE COURT: -- of use.
MR. MARRIOTT: Yes, Your Honor. That's
consistent with our time.
THE COURT: Yeah.
MR. SPECTOR: I didn't. I wish we had a running
clock because I was careful.
THE COURT: Well, I've been keeping track, and
I'm just saying, I'm not cutting you off, but --
MR. SPECTOR: I've only got maybe four or five
more questions -- maybe six more questions.
THE COURT: All right. I'm not cutting you off.
I'd like to get all of the evidence.
MR. SPECTOR: Are you -- wait a minute, are you
counting the colloquy? I thought you said the colloquy
wasn't going to count.
THE COURT: No. No, I'm not.
MR. SPECTOR: Well, I wish we could get a running
-- someone let me know.
THE COURT: But I don't have a stopwatch. Each
time there's an objection, I don't stop it, you know, the
time.
BY MR. SPECTOR:
Q All right. Why are you not -- why is SCO not
assigning any of the rights under the 1995 APA between SCO
Group -- strike that -- between Santa Cruz operations and
206
Novell? Why is it not assigning any rights arising from
that contract? Has it been asked to assign it?
A No.
Q If Judge Gross grants our motion, authorizes the
debtor to close the sale of the Unxis, when do you expect
the closing to occur?
A Middle of August.
Q In the 34 days between today and August 31, will SCO
continue to lose money, according to the company's
estimates?
A According to our estimates, yes.
Q Okay. Will it be a material amount?
A No.
Q What if, on August 31st, Unxis refuses to close? Will
the losses incurred in the 34 days prejudice creditors?
A No, I don't believe it will.
Q Why not?
A We have multiple backstops in place that we believe
will be there to preserve the creditors.
Q Tell us what those are.
A Well, the first one is what we mentioned earlier, that
we do have a signed letter agreement with our chairman,
Ralph Yarrow, for the benefit of creditors, to the extent
that the deal doesn't come through. That's probably about
the amount that we may lose.
207
To the extent that it's more than that, I was
informed by my CFO this morning, earlier today, that we're
actually running a couple of thousand to the positive better
than we were. That's another couple of hundred thousand.
We have a patent that is for sale. We filed that motion on
Friday. The estimate is there is we could get 500,000 to a
million. That one is a little bit speculative, so I put
that out above or beyond the other two. The first two are
pretty solid. We have a potential judgment. If we were to
get the judgment reversed in the Circuit Court of Appeals
and they agreed to release it, that would be -- I'd put it
up there with the patent, maybe speculative, but a
possibility.
And then, there's one more source of funds that
we would have access to, which is if the -- the Unxis deal
does not complete, we do have a $250,000 deposit they've put
down that would come our direction.
Q Is that 250 or 200?
A 250.
Q You're talking about 250 for Unxis?
A Yes.
Q Oh, I was talking about Mr. Yarrow. What about Mr.
Yarrow?
A So 200,000 from Mr. Yarrow.
Q Okay.
208
A We're -- we're to the good a couple of hundred
thousand, but better than we thought we'd be at this point,
according to the CFO and then the Unxis deposit.
Q Do you have an agreement with Boies Schiller with
regard to their pre-petitioned fees of $515,000?
A Yes.
Q What is that?
A The agreement there is that that pre-petition debt
goes away, and in return for that, we gave them some more
upside and a possible recovery in the litigation.
Q What company -- what subsidiary company for SCO
handles the marketing in Russia?
A The marketing in Russia would be handled by our
Germany operation.
Q What company handles the marketing for China?
A That would be our Germany operation.
Q German.
A Oh, I'm sorry. I -- our Vice President of
International --
Q Well.
A -- is in Germany.
Q Yes, but is there a --
A But the marketing --
Q Is there a -- who runs Japan?
A Mr. Ossell runs Japan.
209
Q Okay. Does he --
A And he is also over China.
Q I see. So Japan runs the marketing in China?
A Yes.
Q Okay. Which of the foreign subsidiaries holds the
most cash?
A The foreign subsidiaries that hold the most cash would
be Japan.
Q And how much cash is in Japan -- the Japanese
subsidiary's coffers or were there in May or June of 2008?
A Oh, less than a million, more than 500,000.
Q And did any of the other foreign subsidiaries hold any
money?
A Not other than just doing the trade-type tables.
Q From whose cash did the 100,000 -- well, let me strike
that. Did one of the SCO subsidiaries pay Steve Norris
Capital Partners any money for any kind of work?
A Yes.
Q Which company was that?
A That was the Japan operation.
Q Was there a marketing budget for this market study?
A Yes.
Q Did it preexist Mr. Norris's coming forward?
A Yes.
Q And did Steve Norris Capital Partners perform the
210
duties that were necessary for this marketing study?
A Yes, they did.
Q Did it deliver a product that satisfied the
subsidiaries?
A Yes.
Q Is this the BRICMEA marketing study?
A Yes.
Q Okay. And do you have -- do you have any reservations
whatsoever about the bona fides of Unxis or its principals
in closing this deal promptly?
A No.
Q Is there anything that SCO has to do or the sellers
has to do -- have to do, other than obtain an order from
this Court --
A No.
Q -- to satisfy the closing terms?
A No.
Q And is there any reason you have -- I think I already
asked you. And do you have any reservations doing business
with Unxis?
A None, whatsoever.
Q Do you have any doubts about the ability and desire of
Unxis to close this deal promptly?
A No.
MR. SPECTOR: All right. I have no further
211
questions.
THE COURT: Thank you.
Counsel.
MR. MARRIOTT: Your Honor, may I suggest a
recess? Given the time, we've been going almost two hours.
THE COURT: Yes. I think that's -- my only
problem is I have a 4:30 conference call with another judge
outside of the country that I'll have to take. Well, even
so, why don't we take a ten-minute recess. And then, we'll
come back, and then there'll be a brief interruption at that
time. Thank you, counsel.
MR. MARRIOTT: Thank you, Judge Gross.
(Recess at 3:46 to 4:03 p.m.)
THE CLERK: Please rise.
THE COURT: Thank you everyone. Please be
seated. All right. Are you leading off Mr. Marriott?
MR. MARRIOTT: I am, Your Honor, with the Court's
permission.
THE COURT: You may.
MR. MARRIOTT: Thank you, Judge.
CROSS EXAMINATION
BY MR. MARRIOTT:
Q Good afternoon, Mr. McBride.
A Good morning, Mr. Marriott.
Q Fine. Thank you, sir. Just to expedite the
212
examination, I have placed, in addition to the binders that
are behind you, some documents from those binders, including
from defendants. They're to your far right, Mr. McBride.
It may be most convenient if you just grab those. Though
they're in the binders, I think it'll make it easier for you
to follow along.
A Right here?
MR. MARRIOTT: May I approach, Your Honor?
THE COURT: Yeah, you may, Mr. Marriott. Of
course.
THE WITNESS: The other far right? Yeah, those
are the ones I had.
MR. SPECTOR: Judge, just so it's clear, we're
the debtors.
MR. MARRIOTT: What did I say?
MR. SPECTOR: Defendant.
MR. MARRIOTT: Well I apologize to the debtors.
BY MR. MARRIOTT:
Q Mr. McBride, you understand that IBM and Novell and
the United States Trustee have made an application to have
this case converted to Chapter 7, right?
A Yes.
Q And SCO debtors have opposed that application,
correct?
A Yes.
213
Q And SCO told the Court, did it not, that while it had
lost money during the course of this bankruptcy proceeding
there has been no substantial diminution of the estate,
right? SCO said that?
A I believe there is -- it was in one of the findings.
Q Let me refer you to MX 1, Mr. McBride, at Page 6. Do
you have that, sir?
A Okay.
Q And I would point you in particular to the first full
paragraph, the second sentence. SCO told the Court, did it
not, that quote, "For starters, the true aggregate net
operating loss over that time," referring to the time since
petition, "was only $4.357 million," right?
A I don't see that.
MR. MARRIOTT: May I approach, Your Honor?
THE COURT: Yes.
THE WITNESS: Did you say the -- oh, it's Page 5
and Page 6.
MR. MARRIOTT: Yeah, I'll make that --
THE WITNESS: Okay.
BY MR. MARRIOTT:
Q All right. Let me direct you to Page 5, Mr. McBride.
Do you see that? See where it says, first full paragraph,
second sentence, "For starters, the true aggregate net
operating loss over that period," referring to the period of
214
the bankruptcy, "was only $4.375 million." See that?
A Yes.
Q And that's a false statement, is it not, Mr. McBride?
A I don't know that to be false.
Q Well, let me ask you, if I may, Mr. McBride, to take a
look at Defendant's Exhibit 21, which I believe --
MR. SPECTOR: That would be Debtor's Exhibit.
MR. MARRIOTT: Debtor's Exhibit 21. Thank you.
BY MR. MARRIOTT:
Q See that, Mr. McBride?
MR. SPECTOR: Your Honor, Debtor's Exhibit 21 is
not in evidence. I was going to move the admission of
documents later. Do you want us to do that now? Make it
easier because right now I would have an objection as, you
know, we haven't admitted this into evidence Judge.
MR. MARRIOTT: Your Honor, its cross-examination.
It's debtor's exhibit. If counsel would like to move the
admission of Debtor's Exhibit 21, we obviously have no
objection.
MR. SPECTOR: Well, I was going to move -- Mr.
Nielson's referred to a bunch of the spreadsheets. I was
going to move them all in at once.
MR. MARRIOTT: Your Honor, I'd like to, if I may,
stick with my -- on this cross-examination --
THE COURT: Exhibit 21.
215
MR. MARRIOTT: -- Exhibit 21. We can deal with
the others.
MR. SPECTOR: I won't interrupt. I'll leave it,
then.
MR. MARRIOTT: Thank you.
BY MR. MARRIOTT:
Q Okay. You see that, Mr. McBride?
A Yes.
Q Okay. And so isn't it a fact, sir, that the -- SCO's
statement to the Court in its brief that, for starters, the
true aggregate in that operating loss over that period was
only 4.357 million was a false statement? Take a look at
the bottom right, if you would, Mr. McBride, at
Defendant's -- Debtor's Exhibit 21. Net loss from
operations, 5.339 million. You see that, sir?
A I see what you're talking about, but with sitting here
on this short notice, I have no way of being able to compare
this number to the one that's in your other brief to know if
those numbers match up.
Q But when you say, "your other brief," you mean
debtor's other brief, right?
A The first document that you gave me.
Q And that's debtor's document, is it not, sir?
A I don't know.
Q Okay.
216
A I mean, that's what I'm saying is you're throwing a
bunch of documents in front of me and asking me to interpret
them. If you want me to settle down and kind of read
through them before asking me if I'm --
Q Well, I want you to take whatever time --
A -- if we're lying about them. You know --
Q Sure.
A -- I would be glad to read through them. But I'm -- I
can't sit here and respond yes or no to your questions
without absorbing this just a little bit.
Q I want you to take whatever time you need to absorb
them, Mr. McBride.
A Okay.
Q Both of these documents are documents of the debtor,
Debtor's Exhibit 21 and Debtor's Brief.
(Witness examines documents.)
MR. SPECTOR: Your Honor.
THE COURT: Yes.
MR. SPECTOR: I got a suggestion from Mr. --
THE COURT: O'Neal?
MR. SPECTOR: -- O'Neal, and I don't want to do
this in front of the witness, so I'd ask that we can
approach the bench on it?
THE COURT: Sure. We'll -- keep us on the
record, if you can.
217
(At sidebar on the record:)
MR. SPECTOR: (indiscernible) It's a waste of
our time. What I would do is just let him kill time.
MR. MARRIOTT: Let me make a suggestion.
THE COURT: Yes.
MR. MARRIOTT: Why don't I take him through the
four statements, asking (indiscernible).
THE COURT: All right. That --
MR. SPECTOR: I didn't want to waste their time
going through -- he doesn't know. It doesn't really matter.
THE COURT: Okay. Thank you, counsel. That's
helpful.
(End of discussion at sidebar.)
BY MR. MARRIOTT:
Q At the suggestion of your counsel, take a look, if you
would, in addition to the first full paragraph to which I
pointed you, this is now in MX 1. Take a look at the second
full sentence. You see where it says, "The primary
component of the aggregate net operating loss consists of
bankruptcy and related reorganization expenses of $2.3
million." See that?
A Yes.
Q Okay. Take a look, if you would, in the same
paragraph at the fourth sentence, starting with the
parenthetical quote, "561,000 are true losses from business
218
operations," closed quote. Do you see that?
A Yes.
Q Take a look, if you would, same paragraph, next
sentence, quote, "That figure over 19 months equates to an
operating loss of $29,500 a month." Do you see that?
A Yes.
Q Okay. Mr. McBride, Mr. Nielson, CFO of your company,
testified that those representations to the Court as to SCO
losses were all false. Do you have any reason to disagree
with Mr. Nielson's testimony?
A No.
Q And your counsel has represented to the Court in the
sidebar that we just had that all of those figures were
false. Do you have any reason to disagree with the
representations of your counsel?
A Not if the CFO represented it that way.
Q But if just your counsel represented it, you -- do you
have a problem?
A Let put both of them in that bucket. As long as they
both said it, then I will agree with them.
MR. SPECTOR: Your Honor, I rise only to say that
the choice of words is incorrect. We're not saying they're
false. We're saying they were incorrect. Those number were
not correct when we put them down were that. I know it's
quibbling over words, but "false" has a stronger
219
connotation. We owned up to that. We would have June 15th.
MR. MARRIOTT: You can set those against the
side, Mr. McBride. I won't quibble over the distinction,
Your Honor. I see no distinction, but I will not quibble
over it.
BY MR. MARRIOTT:
Q Mr. McBride, SCO's mobility business is comprised of
two parts, right, a mobility server business on one hand and
a mobility applications on the other, right?
A Yes.
Q And Unxis here proposes to acquire the mobile server
part of that business, and it proposes to acquire one of the
applications, an application called HipCheck, right?
A HipCheck is one that's going to be tied into both
organizations. They will own the intellectual property to
it, but SCO Group, Inc., going forward, will have an
unlimited license to use that and sell it.
Q Okay. And SCO proposes to retain the mobile
applications of SCO's current mobile business, with the
exception of HipCheck, right?
A No, we keep HipCheck, as well, as I just described it.
Q You keep a piece of HipCheck, right?
A It's like IBM has a license to AIX from us. Well, we
have a license to HipCheck from them.
Q Hey, you described on examination a series of
220
communications that you had with a number of potential
investors in debtor, correct?
A Yes.
Q And isn't it a fact, Mr. McBride, that you discussed
with a number of those potential investors SCO's mobility
business?
A Yes.
Q You had discussions with --
MR. MARRIOTT: And, Your Honor, I frankly don't
know whether this is protected on an NDA or not, so I can't
refer to these by A, B, C, and D without -- and communicate
with the witness because we haven't made that linkup.
THE COURT: Put the letters to the names.
MR. SPECTOR: Do we want to clear the courtroom?
MR. MARRIOTT: Let me just take a second and ask
counsel if any of these present a problem.
MR. SPECTOR: Okay. As if I know. I don't know
about any, as long as they're in the room.
MR. MARRIOTT: Well, it sounds like it doesn't
present a problem.
MR. SPECTOR: Oh, no, no, no. I didn't say that.
You asked me -- you got to be very careful here. I said, I
don't know. That's what I said. I don't know.
MR. MARRIOTT: Neither do I, Your Honor. The
witness testified as to this as his deposition. I want to
221
be sensitive to not disclosing information.
MR. SPECTOR: None of these are A, B, through --
or mentioned in the direct. Not one of those four, except
one of those is mentioned in relation to something else, but
not as an acquirer.
MR. MARRIOTT: Right.
BY MR. MARRIOTT:
Q You had discussions with a number of entities about
making investments in SCO, correct?
A Yes.
Q And in some of those discussions, you had
conversations about SCO's mobility business, correct?
A Yes.
MR. MARRIOTT: Your Honor, may I approach to
address this concern?
THE COURT: You may.
BY MR. MARRIOTT:
Q I'm going to show you my outline, Mr. McBride.
Without waiving the privilege, I trust. Mr. McBride, isn't
it a fact that you had conversations with this company that
I'll refer to as K.P. about us potentially making an
investment in SCO's business?
A Yes.
Q And you had discussions with this company, which I'll
refer to as F.C., about intentionally --
222
MR. SPECTOR: All right. Your Honor, you know,
we can say who the --
THE COURT: Why don't we call the numbers, then?
Number 1 --
MR. SPECTOR: Initials, you know --
MR. MARRIOTT: Right.
THE COURT: -- number 2.
MR. SPECTOR: R-I-C-H-A-R-D.
BY MR. MARRIOTT:
Q Did you have discussions with Company 1?
A Yes.
Q Did you have discussions with Company 2?
A Yes.
Q Did you have discussions with Company 3?
A Yes.
Q Did you have discussions with Company 4?
A Yes.
Q And none of those companies made an offer to acquire
the mobility assets that you are proposing now to sell to
Unxis, correct?
A That is correct.
Q Now, as part of the deal -- as part of the Unxis
proposed deal, SCO was required to terminate some of its
employees, correct?
A SCO was required to -- well, we're transferring
223
employees to a new organization. If that means terminating
from SCO, yes.
Q Exactly. In a language of the PSA, it's contemplated
that they be terminated and that they become employees of
the new company, correct?
A Correct.
Q And what one of those individuals is a fellow by the
name of Steve [sic] Cutler, right?
A I don't --
Q Shaun Cutler. I apologize.
A Shaun Cutler, yeah.
Q And Shaun Cutler is a one of the SCO individuals
responsible for SCO's mobility business, correct?
A Yes.
Q He's a key player, is he not, with respect to that
business?
A He -- he's a marketing manager for us, yes.
Q He's a key player with respect to that business, is he
not?
A He -- he's a key marketing manager.
Q Okay. And under the proposed deal, he will no longer
be employed by debtors. He will be employed by Unxis,
correct?
A Yes.
Q Right. At what point, Mr. McBride, during the
224
discussions with the proposed buyers here, they were going
to purchase the entirety of SCO's mobility business, right?
A Yes.
Q And they asked SCO questions about that mobility
business, right?
A Yes.
Q And SCO provided the answers to them with respect to
SCO's products, right?
A Yes.
Q And specifically, Mr. Cutler provided information with
respect to SCO's mobility products, right?
A You'd have to ask Mr. Cutler. I don't know.
Q Well let me direct you to MX 50, if you would, Mr.
McBride. It should be in the stack of documents in front of
you. Do you see that, sir?
A Yes, I see it.
Q Okay. And this is an email from Jeff Hunsaker to Eric
le Blan and Rafe [ph] at -- both of whom represent -- who
were affiliated with Unxis, correct?
A That's right.
Q And they asked questions of Mr. Cutler on behalf of
SCO about SCO's Mobility business, right?
A Yes.
Q And in response to those questions, SCO provided
information, correct?
225
A Yes.
Q Take a look at Exhibit 50, Pages 1 through 2, would
you please? At the bottom of the page you'll see a listing
of certain SCO products. You see that, sir?
A Yes.
Q You see mobile -- FCmobilelife by FranklinCovey, Shout
Postcards, Shout Marketing, Shout 119, Shout Back, Shout
Coupon. You see all that?
A Yes.
Q Now, the majority of -- at the time of this report,
the majority of users for FCmobilelife were trial account
subscribers, right, Mr. McBride?
A I don't recall at that point in time what the
breakdown was.
Q Well, take a look at the paragraph at the bottom of
the first page, second sentence. The majority of the users
were, at that time, trial account subscribers, correct, sir?
A Yes.
Q Take a look, if you would, on the next page at Shout
Postcard. See there, where it says that, as to this
product, further development was on hold.
A Yes.
Q Take a look, if you would, at Shout Marketing, the
next product on the list. As of this report, the total
revenue to date for that product was $20,000, right?
226
A That's right.
Q And now look, if you would, at Shout 119, Shout Back,
and Shout Coupon. You see there where it says that those
three products are -- were, as at the time of this report,
awaiting a business driver to justify development. Do you
see that, sir?
A Yes.
Q Now, Mr. McBride, SCO shares whatever revenues that it
gets from these products with FranklinCovey, correct?
A That's not correct.
Q Take a look, if you would, sir, at the bottom part of
that Page 2. You see where it says in bold text quote,
"Please give a breakdown of the current position Me Inc. has
with respect to partnerships or current deals. In
particular, what is the current fee-sharing arrangement with
FranklinCovey?" Do you see that, Mr. McBride?
A Yes, I do.
Q Now, look at the paragraph two down from that. If the
product is sold by FranklinCovey, the revenue share is 60
percent SCO, 40 percent FranklinCovey --
A Right.
Q -- in year one. You see that?
A Yes.
Q So SCO shares its revenues with respect to those
products with FranklinCovey, correct?
227
A Yes.
Q SCO has competitors, does it, not in the marketplace
for its mobile products?
A Yes.
Q And it faces competitors in the area called technology
collaborative, right? Take a look at the next page if you
would, Mr. McBride, Page 3, second paragraph. SCO faces
competition for its mobile products with respect to
technology collaborative, technology calendaring and non-
technology, right?
A Right.
Q And SCO's main competitor with respect to
collaborative competitors are solutions like Google's
Calendar, right?
A Yes.
Q You can put that document aside if you'd like, Mr.
McBride. Who was involved on behalf of debtors in
negotiating the terms of the PSA which is offered to this
Court for approval? Who are the individuals?
A The primary one would have been Jeff Hunsaker.
Q Okay. And who besides Mr. Hunsaker negotiated this
proposed -- this deal which is proposed for approval with
Unxis and its principals?
A Well, let's see, as far as negotiating? I think Jeff
would have been the key guy. He would have ran it by me, he
228
would have ran it by our counsel, Ryan Tibbitts, our CFO,
Ken Nielson.
Q Was anyone else involved in dealing with Mr. Hunsaker
and with the proposed buyers?
A Well, there were a lot of people involved.
Q Who were they, Mr. McBride?
A Andy Nagel was involved. He's the director of
engineering. Alan Raymond is our vice president of North
America sales. Hans Bayer is vice president of
international sales.
Q Tell me about Hans Bayer, Mr. McBride.
A There's probably others.
Q Is he a capable man?
A Yes.
Q Is he honest?
A I believe so.
Q Is he trustworthy?
A I hope so.
Q Does he understand SCO's business?
A I believe he understands it best when it -- has to do
with the UNIX business.
Q Does he understand SCO's mobility business?
A I don't think he understands the mobile business that
well.
Q Isn't it a fact, sir, that Mr. Bayer is the vice
229
president of worldwide sales with responsibility for
overseeing, quote, "all aspects of direct and channel sales
of the company's UNIX and mobile products"?
A He's vice president over international sales.
Q Mr. McBride, is it not a fact that Mr. Bayer has
responsibility for overseeing all aspects of direct and
channel sales of the company's UNIX and mobile products?
A That's not my understanding.
Q So it's your testimony that Mr. Bayer has no
responsibility with respect to SCO's mobile products?
A I don't believe I said that.
Q I'm asking you that. Is it your testimony that Mr.
Bayer has no responsibility with respect to SCO's mobile
products?
A He has responsibility for the mobile products as it
relates to his area of the world.
Q So he has responsibility for SCO's mobile products, on
some level.
A For selling in the areas that he's in, but we don't
really market the mobile products that much outside of the
U.S. right now. So that's why --
MR. MARRIOTT: Your Honor.
THE WITNESS: -- he's fairly limited with respect
to his understanding of the mobile products.
MR. MARRIOTT: Thank you, Mr. McBride.
230
Your Honor, I'd move to strike the latter part of
the answer, but mostly, I want to be sensitive to the
Court's time. It's almost 4:30.
THE COURT: Thank you, I appreciate that. And I
also am sensitive to your, you know, questioning and -- but
I've got to take the call.
MR. MARRIOTT: I will survive.
THE COURT: Will five minutes make sense or is
this a good time to break for you?
MR. MARRIOTT: This is a fine time to break.
THE COURT: All right. Then, let's take -- I
don't know how long it will last, maybe 15 minutes. And
we'll take about a 15-minute recess. Thank you, everyone.
MR. SPECTOR: Thank you, Your Honor.
(Recess at 4:23 to 4:43 p.m.)
THE CLERK: Please rise.
THE COURT: Please be seated. All right. A
successful call, thank you. I thank everyone.
And you may --
MR. MARRIOTT: May I inquire?
THE COURT: You may.
MR. MARRIOTT: Thank you, Your Honor.
BY MR. MARRIOTT:
Q Mr. McBride, after considering a purchase of the
entire mobility business, Unxis discussed with SCO leaving
231
behind the mobility business, correct?
A That's correct.
Q And leaving behind -- leaving the mobile business
behind will not be a problem for new SCO, right?
A Well, I can't speak for them, but I -- they weren't
leaving the whole business behind. They were taking the
mobile server. We are keeping the applications.
Q Where we talked about Mr. Bayer before the break.
A Yes.
Q And he's a vice president with SCO, right?
A Yes.
Q With responsibility --
MR. SPECTOR: Objection. I don't believe the
record reflects that he's vice president of SCO, whatever
SCO. Are you talking about SCO Group? Are you talking
about SCO Operations? Are you talking about subsidiary? I
think the question is emphasized.
MR. MARRIOTT: Your Honor, I asked Mr. McBride
prior to the break whether Mr. Bayer was, and used the exact
language if I may, "vice president of worldwide sales for
SCO." And he said that that is, in fact, the case.
THE COURT: Yes.
THE WITNESS: No, I didn't say. I said that was
not the case.
MR. MARRIOTT: May I approach the witness, Your
232
Honor?
THE COURT: Yes.
MR. MARRIOTT: If I -- just because there's only
one copy, if I can --
THE COURT: That's fine.
MR. MARRIOTT: -- approach the witness?
BY MR. MARRIOTT:
Q I'm going to show you a printout from SCO's webpage.
Can you see that, sir?
A I see it, but I don't know what timeframe that is.
Q Well, I represent to you that it was printed out in
the last several -- in the last week.
A Okay. I don't know.
Q I'm sure we can get online and bring it up, if
necessary.
A Okay.
Q You see where that says, the executive -- SCO
executive profiles?
A Yes.
Q Just read to the Court what it says next to Mr.
Bayer's name. Is it Bayer or Bayer?
A Bayer.
Q Read to the Court what it says to Mr. Bayer's name.
A "As Vice President of Worldwide Sales, Hans Bayer is
responsible for overseeing all aspects of direct and channel
233
sales of the company's UNIX and mobile products."
Q That's fine. Thank you, sir. So leaving the mobile
business behind, that will not be a problem for new SCO,
right?
A You're talking about new SCO, the current debtor going
forward?
Q Yes. No, I'm talking about the proposed acquirer
here, Unxis.
A Well, it's imprecise to say it's being left behind.
Half of it's going forward, half of it's staying with SCO
Group, Inc.
Q Well, that's what Mr. Bayer told Mr. Norris, isn't it?
A Told him when?
Q Told him in connection with the negotiations of the
deal that's proposed for approval by the Court.
A I don't know what. I wasn't privy to what he told Mr.
Norris.
MR. MARRIOTT: Your Honor, may I approach?
THE COURT: Yes.
MR. MARRIOTT: Mr. McBride, why don't you grab
the binder behind you. It's Exhibit MX 37. Here you go.
Here is actually a copy of it.
Judge, may I just generally approach the on
each --
THE COURT: Yes, you may. Yes.
234
BY MR. MARRIOTT:
Q All right. MX 37, Mr. McBride is an email from Hans
Bayer to Eric le Blan and Steve Norris, right?
A Yes.
Q And you see in the first email on Page 1 where Mr.
Bayer says to Mr. Norris and Mr. le Blan in the second
paragraph, quote, "Leaving the mobile business behind will
not be a problem at all for new SCO." See that sir?
A Yes.
Q And that's what Mr. Bayer told Mr. Norris and Mr. le
Blan, right?
A Yes.
Q And SCO's management team was okay, were they not, Mr.
McBride, with the buy --
MR. SPECTOR: Your Honor, I rise to object the
questions and the answers that read the exhibit because the
exhibit is what we've objected to as hearsay. So by reading
it out loud, of course, it comes into evidence. So I object
to that line of questioning, and if we want to take on the
objection of hearsay, we can do that now. This is something
that they wanted to do at the beginning. You said you
wanted to hear it in context.
MR. MARRIOTT: Your Honor, I'm happy to have the
argument now. I hope it won't count against my time.
THE COURT: No.
235
MR. MARRIOTT: But what I would say is that I
think it might be useful to the Court to understand in full
the context of the document, what it says and what it
doesn't say in ruling on the objections.
There are three documents in dispute. The
objections that have been made are one, hearsay, and two,
relevancies. And I would submit, Your Honor that at least
with respect to relevance, Your Honor is going to need to
appreciate in full what's in the document in order to make
the ruling.
My suggestion would be that we proceed with my
being allowed to question in full the witness about the
exhibit. Your Honor can then, at an appropriate time with
the witness off the stand, hear whatever argument counsel
wants to make on this subject. If you find that the
document is inadmissible, the testimony can be stricken.
Otherwise, we're going to get, I'm afraid, bogged down in
this without the Court having the benefit of the fullness of
the document.
May we proceed in that way Judge?
THE COURT: I -- yes, I will accept your
suggestion.
MR. MARRIOTT: Thank you, Your Honor.
BY MR. MARRIOTT:
Q All right. SCO's management team, Mr. McBride, was
236
okay with the buyers leaving the FranklinCovey products
behind, right? Just -- Mr. McBride, I'll point you to the
document. If you can just try to answer the question
without that document, it might make it a little faster. If
I need you to refer to it, I'll point you to it. Let me
repeat the question. SCO's management team was okay with
the buyers leaving the FranklinCovey products behind, right?
A Yes.
Q And Mr. Hunsaker communicated that on behalf of SCO to
Mr. Norris and Mr. le Blan, right?
A I don't know.
Q Let me have you take a look, if you would, at Page 2
of MX 37. It's actually the third page in. This is a
series of emails, and at the bottom of Page 2, there is an
email from Mr. Hunsaker to Eric le Blan and Steve Norris,
copying Hans Bayer. Tell the Court, if you would, who Jeff
Hunsaker is, Mr. McBride?
A He's the president and COO of SCO.
Q You see where, in the first sentence of his note, he
says, Eric and Steve, referring to Mr. le Blan and Mr.
Norris, I just spoke with our attorneys in management team.
You see that, sir?
A Yes.
Q Okay. Now, take a look, if you would, down at the
paragraph that begins "lastly." Do you see that?
237
A Yes.
Q See where it says, "Lastly, they," referring to our
attorneys in management team, are, quote, "willing to carve
off an amount for the FranklinCovey products (FCmobilelife
and FC Tasks) for the purchase price. This would be 250K
for these two products or 500K is SCO keeps Shout Postcard
and HipCheck, as well." Do you see that?
A Yes.
Q And you agree with that?
A Well, it's not quite precise. There were more
products that were left than that. But it's in the
ballpark.
Q And you see where the next sentence it says,
"Considering these products are not generating any revenue,
they feel this is a fair compromise." See that?
A Yes.
Q And, in fact, that's an accurate statement, is it not?
A Yes. Well, it's not totally accurate because we are
generating revenue from FC Tasks and from FCmobilelife, so
it -- it's not totally correct.
Q We'll come back to that, but it is fair, is it not,
that the products that SCO is retaining, right, the mobility
products retained by SCO were, in the course of these
negotiations, valued by debtors on the one hand, proposed
buyer on the other hand, at $500,000, right?
238
A Yes.
Q You can set that document aside, if you would, please.
Now, SCO ultimately did retain certain mobility products,
right? You testified as to that on direct examination?
A Yes.
Q And the result was to decrease the purchase price,
right?
A Yes.
Q And SCO's keeping of some of the mobility products
reduced the purchase price again by $500,000, right?
A Yes.
Q Now, the mobility business retained by SCO is part of
its plan of proposed rehabilitation, right?
A Yes.
Q And the portion of the mobility business retained by
SCO actually has no value for new SCO, right?
MR. SPECTOR: Well, who is new SCO? At least
that's a term that isn't in evidence.
MR. MARRIOTT: Your Honor, the term "new SCO," as
used by Mr. Bayer in the email that we just looked at.
BY MR. MARRIOTT:
Q Do you have that in mind -- that context in mind?
Exhibit 37, Mr. McBride.
A What page on 37?
Q First page. Mr. Bayer says -- first page, second full
239
paragraph of the email. Mr. Bayer says, "Leaving the
`mobile business' behind will not be a problem at all for
new SCO."
A I see what it says. I just don't know on this case if
Hans was talking to new SCO being the newly reorganized SCO
or the new SCO entity called Unxis because new SCO going
forward isn't called -- the UNIX business going forward is
called Unxis. The debtor going forward is the SCO Group,
Inc. So I don't know which organization he's referring to.
That's not a term that we typically use.
Q Given to whom he's speaking, do you think it's fair to
say that he's referring to Unxis, the proposed buyer who
would -- under the transaction, is contemplating leaving
behind portions of the mobility business?
A That's fair.
Q Okay. With that understanding in mind, Mr. McBride,
isn't it a fact that the portion of the mobility business
retained by SCO actually has no value for new SCO?
MR. SPECTOR: I object. If new SCO is Unxis,
then this witness is not competent to testify what the value
is to Unxis of this property. And this is all being derived
from someone who is a German employee of a subsidiary in --
on marketing of these products to somebody -- I -- Your
Honor, this is why I was objecting in the first place. Your
-- the question on the floor is whether he's agreeing that
240
Unxis has no use for mobility. I object.
MR. MARRIOTT: Your Honor, I'm entitled to ask
the witness whether he agrees with the proposition or not.
If he doesn't, he can simply say that. And I'm happy to --
THE COURT: Yes, I don't think the question
itself is objectionable. So I will overrule the objection.
MR. MARRIOTT: Thank you, Your Honor. May I
approach?
THE COURT: Yes.
MR. MARRIOTT: I won't ask that again during this
trial
BY MR. MARRIOTT:
Q Now, take a look, if you will, Mr. McBride, at MX 40.
Take a look on the second page. This is an email from Hans
Bayer to Eric le Blan and Stephen Norris dated June 5, 2009.
Do you see that, sir?
A Yes.
Q That's just before the last hearing before the Court.
MR. SPECTOR: Which exhibit number was that?
MR. MARRIOTT: 40.
MR. SPECTOR: 40. Okay.
MR. MARRIOTT: I want to make sure the Court has
an opportunity to get there. Do you have this, Judge?
THE COURT: I have it, yes. I'm reading it now.
BY MR. MARRIOTT:
241
Q All right. Take a look, if you would, Mr. McBride, on
the second page of the document, the third paragraph down
begins Point Five. Do you see that?
A Yes.
Q And my question to you, sir, was the portion of the
mobility business retained by SCO actually has no value for
new SCO, right?
A The question was what?
Q The portion of the mobility business retained by SCO
actually has no value for new SCO.
A And you're saying that's --
Q I'm asking you if that's right.
A I -- well, I don't believe that's totally correct.
Q All right. Well, that's what Mr. Bayer told Mr.
Norris, isn't it? Take a look at -- for Point Five, where
Mr. Bayer, vice president of SCO says, "This proposal to
leave Mobile behind with old SCO reflects my explanation of
Darl's personal situation. And honestly speaking, there
could not be a better way of getting rid of something that
actually has no value for new SCO." You see that?
A Yes.
Q And that's what Mr. Bayer said to Mr. Norris, the
principal here of Unxis, right?
A Yes.
Q The concept, Mr. McBride, of Mobile is a -- is a dream
242
of yours, is it not?
A I don't know that I came up with that in a dream.
Q Well. Thank you for that moment of levity. It is --
whether or not you came up with it in a dream, it is a weird
dream of yours, is it not?
A It is a product that the -- the concept of Mobile is a
product that I was the principal driver of, and the Mobile
product line includes the mobile server and the mobile
applications.
Q Okay. And my question was, is it or isn't it a weird
dream of yours?
A Like I said, it wasn't -- didn't come to me in a
dream, and if it did --
Q Well, that's what Mr. --
A -- it wasn't a weird one.
Q That's what Mr. Bayer told Mr. Norris, isn't it?
A Yes. And so the question is, do you want me to
interpret what Hans Bayer thinks is in my head, or do you
want me to tell you what is in my head.
Q I want to know what's in your head --
A I'm trying to understand what --
Q -- Mr. McBride.
A Yeah, so I wouldn't represent Mobile as a weird dream
of mine.
Q That, however, is what Mr. Bayer said to Mr. Norris,
243
right? He said, "The whole concept of Mobile is another one
of Darl's weird dreams where he thought he had found the
next big thing, but reality shows we have spent millions of
dollars into developing something which nobody needs and
wants. We have no customers and no revenue stream for our
mobile products. And again, he is chasing something which
isn't for real." That's what he told Mr. Norris, right?
A Yes.
Q Now, is it fair to say that the FranklinCovey products
are your beloved toy, Mr. McBride?
A No, I wouldn't call them that.
Q Okay. That's what Mr. Breyer [sic] -- Mr. Bayer told
Mr. Norris, isn't it?
A That's what it says somewhere in here, yeah.
Q Take a look at the first page, second to last
paragraph from the bottom. "Darl is starting to realize now
that he won't have any purpose in life any longer once the
company was sold, and this seems to give him big headaches,
as he'd have to find a new occupation where he most likely
won't be in the center of gravity any longer and won't have
his beloved `toy,' FranklinCovey, any longer to play with."
Do you see that?
A Yes.
Q And that's what Mr. Bayer told the proposed buyers
here, correct?
244
A Yes.
Q Now, SCO kept a portion of its mobility business,
you've testified, as part of its proposed transaction,
right?
A Yes.
Q And you did that because you believed it could help
you win big in the courtroom and you were reluctant to give
up your dream of having your day in Court, right?
A That's not correct.
Q Okay. That's, however, what Mr. Bayer told Mr.
Norris, right?
A That's what's in this email.
Q Okay. The only thing that is real for SCO, Mr.
McBride, is its UNIX business, right?
A That's not right.
Q Again, that, however, is what Mr. Bayer told Mr.
Norris, right?
A That's what it says here.
Q Take a look at Page 2. See the paragraph that says,
"the only thing"? "The only thing about SCO which is real
for the UNIX business with its customers and partners and
the employees generating cash." I apologize, I read that
badly. Let me try that again. "The only thing about SCO
which is for real is the UNIX business with its customers
and partners and the employees generating cash. Legal and
245
Mobile are just Darl's hopes and dreams to win the jackpot
in the lottery drawing." See that?
A Yes.
Q There is, in fact, no money available, according to
Mr. Bayer, for the new company, correct?
A When you say there's no money available --
Q Well, take a look at the top of Page 2 where Mr. Bayer
says to Mr. Norris, quote, "Jeff," referring to Mr.
Hunsaker, "thinks that only a direct conversation between
either one of the two of you with Darl could resolve the
standstill, as he tells me that Darl won't speak to him any
longer, even if he mentions the deal to him. As Darl and
the BOD," referring, I assume, to the Board of Directors,
"and the BK," referring, I assume, to bankruptcy lawyers,
"simply thinks there is no money available to fund the new
company." See that?
A Yes.
Q And that's what Mr. Bayer told Mr. Norris, right?
A That's what's in here.
Q And you can set that exhibit aside, if you would,
please. Now, the grand total of SCO's mobility business,
Mr. McBride, as mobility revenue for fiscal year 2008 was
$82,000, right?
A I don't know offhand.
Q Well, I mean -- ask you to refer, if you would,
246
please, to MX 31? This is an email from Jeff Hunsaker, vice
president of SCO, to Mr. Le Blan, one of the principals of
the proposed buyer here. Do you see that?
A Yes.
Q Take a look at the second page in that document, if
you would. It says, does it not, that the grand total of
SCO's Mobility revenue for fiscal year 2008 was 82K, right?
If you look down the table, in the far left column, it looks
about five rows, you see where it says "Mobility"?
A Yes.
Q Now, look across that column in the grand total, see
where it says $82,000?
A Yes.
Q Okay. And in Q1, SCO's total revenue for its mobility
business was $427, right?
A I don't know offhand. Oh, on looking on here.
Q Take a look in Q1.
A Yes, on Q1, there.
Q You see that?
A That's right.
Q Now, SCO's Mobility business accounted, in fact, for
only .53 percent of SCO's revenue during fiscal year 2008,
right?
A Yes.
Q And the mobility -- and that's for the entirety of the
247
mobility business, right? SCO is only retaining a piece of
that, right?
A SCO is retaining the piece that drives 100 percent of
these numbers.
Q So SCO is retaining .53 percent of its revenue by
retaining that portion of its mobility business, right?
A Well, when the UNIX business goes, it'll be worth a
lot more than .53 percent.
MR. MARRIOTT: Your Honor, I move to strike as
non-responsive.
THE COURT: So stricken, yes.
MR. MARRIOTT: Thank you.
BY MR. MARRIOTT:
Q Now, the UNIX portion of SCO's business, Mr. McBride,
is the only portion of that business that has run at
either at or near breakeven during the course of SCO's
bankruptcy, right?
A I'd have to look at this. There is probably a point
in time here where the mobile business was there on a
quarterly basis.
Q Well, your deposition was taken in this case, wasn't
it, sir?
A Yes.
Q And you testified under oath, right?
A Yes.
248
Q You've given a lot of depositions since your becoming
CEO of this company, right?
A Yes.
Q Were you asked this question, Mr. McBride? Did you
give this answer?
Question: "Would you agree that the UNIX portion of the
business is the only part of the business that has run
either at or near breakeven during the course of SCO's
bankruptcy?"
Answer: "Yes, I would agree with that."
Did you give that testimony, Mr. McBride, in response
to that question at your deposition?
A Yes, I did, and that was slightly different question
than the one that was asked here.
Q Let's take a look, Mr. McBride, at another exhibit, MX
34. Do you recognize this document, Mr. McBride?
A Yes.
Q Okay. MerchantBridge and Gulf Capital Partners put
together a presentation concerning the proposed acquisition
here, right?
A Yes.
Q And that presentation is reflected in MX 34, correct?
A Yes.
Q And in that presentation they included certain
business forecasts, right? Take a look at Page 8 if that
249
helps you.
A Yes. Uh-huh.
Q And in that presentation, they included certain
business forecasts, right?
A (No audible response.)
Q Take a look at page 8, if that helps.
A Yes. Uh-huh.
Q And those forecasts included an income statement,
right?
A Yes.
Q And that income statement showed revenue for the
mobility business, right?
A Yes.
Q And it showed actual revenue for 2008 of 100K, right?
A Okay.
Q Take a look, if you would, again here at page 8, Mr.
McBride [ph]. The presentation includes certain forecasts,
does it not?
A What page?
Q Page 8 for UX-04901.
A Okay. I'm there.
Q Do you see that?
A Yes.
Q Okay. The forecasted revenue for 2010 for the
mobility business is $150,000, right?
250
A (No audible response.)
Q If you look at the left column, right underneath those
--
A Okay.
Q -- dates, do --
A I see it.
Q -- you see where it says revenue?
A Yes. Yes, that's correct.
Q Okay. Take a look at the forecasted profit. If you
go down that left column a little further --
A Right.
Q -- you'll see where it says mobility and then it says
total cost of -- it says gross profit. Do you see that?
A Yes.
Q And then, under gross profit, there's a line that says
mobility. Do you --
A Yes.
Q -- see that?
A Yes, I do.
Q So the forecasted profits, according to the proposed
buyer here, or the mobility business, for 2010, are what,
Mr. McBride?
A The mobility business for Unxis we're talking about
now, right?
Q Yes, sir.
251
A The profits for the business that is going to Unxis is
$1.3 million loss.
Q And for 2011, what is it?
A $1 million loss.
Q And for 2012, what is it?
A $1.2 million loss.
Q Okay. We talked -- you can put that aside, if you
like. We talked -- or you've talked, rather, in your direct
examination, about certain payments, right?
A Yes.
Q And in the course of your getting to the point where
you are with this proposed acquisition, you've had a number
of conversations with potential buyers of SCO and investors
of SCO, right?
A Yes.
Q And you had conversations with Mr. Norris? He
discussed those options with you, right?
A Yes, I did.
Q And you had such conversations with a Mr. Robbins
[ph], right?
A That's right.
Q And Mr. Robbins is a former partner of Mr. Norris's,
correct?
A Loosely. I don't know what their -- the extent of
their relationship. I know they had a business --
252
Q He's a --
A -- relationship.
Q Loosely speaking, he's a former partner, right?
A Yes.
Q And SCO --
A Yes.
Q Since SCO filed for bankruptcy, you, personally, made
a payment of $150,000 -- withdrawn. You, personally, made a
payment of $100,000 to Mr. Norris, right?
A That's correct.
Q And you, personally, made a payment of approximately
$200,000 to Mr. Mark Robbins [ph], right?
A That's correct.
Q And SCO, a subsidiary of SCO, made a payment of
$100,000 to Mr. Norris, right?
A Correct.
Q For a total of about $400,000, right?
A Yes.
Q Let me ask you, if I may, about -- a little bit about
those payments.
A Sure.
Q The subsidiary of SCO made a payment of $100,000,
right?
A Yes.
Q And that payment was made in May or June of 2008,
253
right?
A Somewhere in there.
Q And SCO was -- taken the position in its papers before
this Court that that payment was for certain consulting
services related to BRICMEA, right?
A The merging market development program for the SCO
Mobile Products, which BRICMEA was a key part of that,
right.
Q Okay. And what exactly, Mr. McBride, did Mr. Norris
do to earn his $100,000 in consulting services related to
emerging markets?
A I'd have to go talk to the people that were working
with him on that. I wasn't directly involved in that.
Q But sitting here today, you -- you're unable to tell
us precisely what it is Mr. Norris did, right?
A I know that there was a major business plan that was
put together between SCO and Company -- I can't remember if
it was D or E or F. If I saw the list, I could identify it.
One of the companies that we were talking to in the summer
of 2008, when we were working with Mr. Norris, there was
this idea of having a big, emerging market operating system
program going out in a market -- a program going into those
emerging markets. The $100,000 that went into that from our
Japan operation was to help put that into real numbers so
that we could go raise money against that.
254
Q That was part of a real plan to get yourself out of
bankruptcy, right?
A Yes.
Q Okay. Now, Mr. McBride, Mr. Norris is not an expert
in the markets in which SCO's products compete, is he?
A I wouldn't say that he's an expert in it.
Q In fact, so far as you know, Mr. McBride, Mr. Norris
was unfamiliar with SCO prior to the time he was introduced
to you by Mr. Robbins, right?
A I -- yeah, I don't know that he was well steeped in
our technology.
Q He's not a software consultant, right?
A No.
Q He's not a hardware consultant, right?
A No. That's why he used other people to go do that
study. It wasn't Steve that did the study, personally.
MR. MARRIOTT: Your Honor, I'd move to strike as
non-responsive.
THE COURT: Yes, I would have that stricken.
BY MR. MARRIOTT:
Q Mr. McBride, you say that the payment -- SCO says that
the payment made here was on behalf of a Japanese
subsidiary, right, not on behalf of the Debtors?
A Yes.
Q Mr. Norris submitted an invoice --
255
A Yes.
Q -- to SCO, did he not?
A Yes, he did.
Q And the invoice was not submitted to SCO's Japanese
subsidiary, was it?
A Initially, it wasn't, and I think they came back and
said this is for a Japanese subsidiary, and then it was
redone to go there.
Q So the -- initially, the invoice was submitted to SCO
in Lindon, Utah, right?
A I don't know the details. I think that that was --
that is correct. It was initially to SCO, and then
eventually, it was redone and sent to the Japanese
operation.
Q I'd ask you to take a look at NX-57. Do you see that,
sir? It's an invoice dated July 23, 2009.
A I'm still looking for 57.
Q Should be a tab on the right.
A Yes, I see that.
Q All right. The invoice was submitted to you, was it
not?
A Yes, it was.
Q In Lindon, Utah, right?
A Yes.
Q And the payment was approved, if you turn to the next
256
page in 57, it was approved by the company CFO, Mr. Neilson
[ph], right?
A Yes.
Q Mr. Neilson's not an officer of SCO's Japanese
subsidiary, is he?
A I'm not sure who the officers are over there these
days.
Q I'm sorry, sir? What was the answer?
A I'm not sure who is the officers. He might be.
Q BRICMEA, Mr. McBride, refers to what?
A BRICMEA?
Q Yes.
A Brazil, Russia, India, China, Middle East, Africa.
Q Okay. And the last I checked, Japan is not in the
area covered by BRICMEA, right?
A In SCO's organization structure, the Japanese
operations covers China. The Japanese company is, in fact,
a parent to the China operation.
Q BRICMEA: Brazil, Russia, India --
A China.
Q -- Middle East, China, Africa. Not Japan, right?
MR. SPECTOR: Objection, Your Honor.
MR. MCBRIDE: Japan was over --
THE COURT: Objection, Mr. McBride.
MR. MCBRIDE: -- our China operation.
257
MR. MARRIOTT: I'll withdraw the question.
THE COURT: All right.
BY MR. MARRIOTT:
Q Mr. McBride, it -- take a look, if you would, at --
I'm going to withdraw that. Your Japanese operation sought
reimbursement for those payments, did they not?
A Sought reimbursement, meaning what?
Q Well, take a look at page 3 in Exhibit 57. SCO Japan
sent an invoice to SCO in Lindon, Utah, asking for payment
of three separate amounts, approximately -- or totaling
$25,000 each, right?
A I'm not familiar with these documents.
Q Do you see the third page in, Mr. McBride? Do you see
that it says Japan LTD at the top, for -- yeah, LTD at the
top? Do you see that, sir?
A Yes.
Q Do you see where, in the description, it says SCO's
emerging market growth plan, consulting services for August
8 portion to Steve Norris, right?
A Yes.
Q So the payment was made by SCO Japan, and SCO Japan
sought reimbursement from SCO in Lindon, Utah, right?
MR. SPECTOR: Your Honor, I guess I can say it.
We have found we -- he testified to that, so I didn't -- we
found the reissued invoice, and we will want to call Mr.
258
Neilson back to talk about that, and he can talk about the
tax accounting on how those papers that Mr. McBride doesn't
know anything about what they mean and how they are handled.
MR. MARRIOTT: We can cover --
MR. SPECTOR: I just --
MR. MARRIOTT: Your Honor, we can cover that
elsewhere, but obviously, we object to the production of an
exhibit that's weeks late, in the middle of an examination,
in the middle of a trial. But we'll cover that when we get
to the next --
MR. SPECTOR: Well, it --
THE COURT: Very well.
MR. SPECTOR: -- be rebuttal, Your Honor.
MR. MARRIOTT: Rebuttal with respect to a
document that the Debtor failed to produce.
MR. SPECTOR: I believe we've produced it.
BY MR. MARRIOTT:
Q Mr. McBride, independent of the money that was paid to
Mr. Norris by way of SCO's subsidiary, you paid Mr. Norris
$100,000 yourself?
A Yes, that's right.
Q And you say that that money was for purposes of
putting together -- his putting together a group of
investors, possibly to acquire some assets of the Debtor,
right?
259
A My payment to Mr. Norris was in response to a request
from Mr. Robbins, who was supposed to pay Mr. Norris money,
to give him a loan to pay Mr. Norris, and he said he would
pay me back within a few weeks, and so I responded to that
request for a loan.
Q So, Mr. McBride, the payments you made, was it
compensation from you to Mr. Norris, as SCO says in its
brief, or was it a loan to you -- from you to Mr. Robbins?
Which was it: compensation or a loan?
A It was -- I paid a loan to Mr. Robbins. I knew that
the money was going to Mr. Norris. In fact, it went
straight from -- I wired it from my bank account to his.
Q Wired your -- the payment directly from your bank
account to Mr. Norris's?
A Yes.
Q And you don't have a written agreement with Mr.
Robbins, with respect to that payment, do you?
A No, I don't.
Q You didn't keep any records with respect to that
payment, right?
A Well, I have records. I have bank records that I made
the payment.
Q Okay. You didn't produce any records to us in
connection with this litigation of that payment, did you?
A I thought I did produce that. I thought I produced
260
it.
Q You produced your bank records? Is that --
A Yeah.
Q -- your testimony?
A I did. In fact, I took --
MR. MARRIOTT: I'd ask Counsel to please point
that --
MR. SPECTOR: Your Honor, can --
MR. MCBRIDE: I --
MR. SPECTOR: -- we let the witness finish his
answer before Counsel asks his next question?
MR. MARRIOTT: It --
THE COURT: That's --
MR. MARRIOTT: -- wasn't a question, Your Honor,
but I will endeavor to respect --
MR. MCBRIDE: I --
MR. MARRIOTT: -- the witnesses and let him
finish --
MR. MCBRIDE: I produced that document. I put a
note on there that said please redact this so that my bank
account information isn't filed in a public setting. I
don't know what happened to it after that.
MR. SPECTOR: I will represent that I remember
seeing that email that directed our people -- I was in the
middle of a deposition with Mr. Neilson, and I remember
261
seeing that email, and I directed our people to make sure
that you redacted -- like he said, redacted the personal
information on that exhibit. So it -- I recall all of that.
I can't tell you, standing here today, which one of the
12,000 documents it was, but we produced it.
THE COURT: I think we ought to allow Mr.
Marriott to proceed with his examination.
MR. SPECTOR: He asked me, Your Honor.
THE COURT: Oh, you did ask him?
MR. SPECTOR: I didn't --
THE COURT: I'm sorry.
MR. SPECTOR: -- volunteer this thing.
MR. MARRIOTT: I'm not sure that I asked a
question that contemplated interruption, but in any event,
Your Honor, I'll be happy to --
MR. SPECTOR: You said we'll ask Counsel about
that. That's what was said, if you'd check the record.
MR. MARRIOTT: May I proceed, Your Honor?
THE COURT: You may.
BY MR. MARRIOTT:
Q Mr. McBride, is it your testimony that you made this
payment from your own personal funds to Mr. Norris without
any expectation of reimbursement by SCO?
A Yes.
Q Are you a wealthy man, Mr. McBride?
262
A Not as wealthy as you are.
Q I'd move to strike that.
A I'm sorry.
THE COURT: I think we better.
BY MR. MARRIOTT:
Q You also made payments of approximately $200,000 to
Mr. Robbins, from your own personal funds, right?
A Yes.
Q And he's not a relative of yours, right?
A No.
Q Not a close friend?
A Used to be.
Q Not a friend presently, right?
A No.
Q He didn't pay you back, you say, right?
A Correct.
Q And you didn't take any action to get those moneys
back, right?
A That's wrong.
Q What action did you take, Mr. McBride?
A I filed a lawsuit.
Q And what's the outcome of that lawsuit?
A I received a judgment against, actually, his wife.
His wife wrote out one of the checks, so --
Q In what amount, sir?
263
A $109,000.
Q And what about the other $91,000?
A We're still working on that.
Q Mr. McBride's filed -- Mr. Robbins has filed a lawsuit
against you, hasn't he, sir?
A I've heard so.
Q Well, you've seen so, have you not?
A No, I haven't.
Q You understand, however, that he has filed a complaint
against you for fraud and deceit, right?
A I don't know. I haven't seen. I've heard that he's
filed something. I don't think that part of it was against
me.
MR. SPECTOR: Objection, Your Honor. He has
testified that -- I have seen it, and he misrepresents what
it is that's against Mr. McBride.
MR. MARRIOTT: Your Honor --
MR. SPECTOR: I know it says those words in it,
but there's other Defendants.
MR. MARRIOTT: Well, I can only deal with the
words one has. May I approach, Judge?
THE COURT: You may. You may.
MR. MARRIOTT: Would you like to join me?
MR. SPECTOR: Oh, I thought you were going right
to the bench. Well, yeah, let's go.
264
MR. MARRIOTT: Mr. McBride, I show you what -- a
pleading entitled Pelican Equity, LLC against Robert -- I'm
sure I will slaughter the pronunciation, so I hope they'll
forgive me -- Robert Brazelle [ph], Steven Norris, Talus
Partners, Rhama [ph] --
A Rhama Schalker [ph].
Q -- thank you -- Darl McBride, Brian Kate [ph]. Do you
see that?
A Yes, I do.
Q This is the lawsuit that -- to which you testified
having some understanding, right?
A Yes.
Q And this lawsuit asserts a number of causes of action
against you, does it not?
A Again, I haven't read it, but my understanding is the
causes of action was against the people that were tied to
that organization, which I am not.
Q Take a look, if you would, at page 18, Mr. McBride.
See where it says first claim for relief?
A Yes.
Q See where it says violation of the Computer Fraud and
Abuse Act?
A Yes.
Q Do you see the end of that where it says against the
individual Defendant? Do you see that?
265
A Yes, I do.
Q Do you see page 19 where it says second claim for
relief, misappropriation of trade secrets against the
individual Defendant? Do you see that?
A Yes.
Q Page 23, unfair competition against all Defendants, do
you see that?
A Yes.
Q Page 25, tortuous interference against all Defendants,
do you see that?
A Yes.
Q Page 33, fraud and deceit against all Defendants, do
you see that?
A Yes.
Q You paid Mr. Robbins --
MR. SPECTOR: Well, Your Honor --
MR. MARRIOTT: -- $300,000.
MR. SPECTOR: -- I rise only to say I don't see
the relevance of it. I move to strike it. But if it's
going to come in, we're going to have to spend some time
talking about it. Remember, this witness has never seen the
document.
MR. MARRIOTT: He just saw the document, Your
Honor. The question's simply asking what the --
MR. MCBRIDE: I didn't read it, though.
266
MR. MARRIOTT: -- document says. I'm happy to
have the Court have a copy to do with what you want. It
isn't --
THE COURT: I'm not going to strike it, and
perhaps it can be handled on cross-examination.
MR. MARRIOTT: All right. You -- thank you,
Judge.
BY MR. MARRIOTT:
Q You said, Mr. McBride, that you loaned Mr. Robbins --
withdrawn. You loaned Mr. Robbins $300,000 because you say
you wanted him to be a backstop, right?
A That was one of the reasons.
Q Okay. What were the other reasons?
A At the time, I viewed him as a friend, and he asked
for a loan, told me that he'd pay it back in a matter of --
in one case, a matter of weeks; other case, a matter of
days.
Q When you loaned him the $300,000 with the partial
intent of it being there because you wanted him as a
backstop, you meant by that that if the SNCP deal, the
Steven Norris Capital Partners deal, that you were
discussing with Steven Norris Capital Partners didn't go
through, he would come forward and he would -- that he would
put upwards of $5 million into SCO, right?
A That's what he represented to us.
267
Q Okay. So it's your testimony, then, that you loaned
$300,000 to Mr. Robbins so he'd be available to be a
backstop to contribute $5 million potentially to SCO, right?
A That was potentially one of the outcomes.
Q Now, SCO asked the Court earlier in these bankruptcy
proceedings to authorize a payment of $150,000 to York
Capital, right?
A Yes.
Q And SCO said that it felt that it was its moral
obligation to see that York Capital was paid for its efforts
in attempting to do a deal with SCO, right?
A Yes, that's right.
Q But prior to IBM and Novell [ph] bringing to the
Court's attention the payments that we've just been
discussing, those payments were not disclosed by Debtors to
the Court, right?
A I don't believe they were.
Q Mr. McBride, under the PSA, purchase and sale
agreement, that's proposed here, SCO is to hold a certain
patent for a period of time and then upon the elapsing of
that time, that patent goes to the proposed buyer, right?
A Yes.
Q And that's the so-called java patent 6931544, right?
A That's correct.
Q That's valuable intellectual property, is it not, Mr.
268
McBride?
A I believe so.
Q And what's your best estimate of the value of that IP?
A Well, we're hoping to get somewhere in the mid-six-
figures, maybe up to a little over a million.
Q And that -- the purchase and sale agreement provides
that if you don't get that money by a date certain, that the
-- this valuable IP will automatically transfer to Unxis
[ph] without further consideration, right?
A Yes, that's right.
Q Is it fair to say, Mr. McBride, that some of SCO's
employees are fed up with your attempt to protect the
litigations about which you've testified?
A I can't speak for SCO employees.
Q Well, that's what Mr. Bayer told Mr. Norris, isn't it,
Mr. McBride?
A Do you want to point me to something?
Q Do you know whether that's what Mr. Bayer told Mr.
Norris?
A I -- I'm not sure what he told him.
Q Take a look at MX-39 [ph] if you would, please.
MR. SPECTOR: Your Honor, this is, again, a
hearsay objection, as I've had all along, and I'm not saying
it every time, because I know the Court's going to let me
ask it to strike all of this, if it turns out that I'm
269
right.
THE COURT: That's correct.
BY MR. MARRIOTT:
Q CMX-39, Mr. McBride, this is an email from the bottom
of XM-39 from Mr. Bayer to Eric LeBlanc [ph], copying Steven
Norris, Jim Kelly.
A Yes.
Q Do you see that?
A Yes.
Q Take a look on the second page at what looks like the
third full paragraph down there. See where it says, "I can
only tell you that this motion has upset all employees I
have spoken to today. They all want the MB/GCP deal to
happen and are massively fed up with Darl's attempt to
protect the litigation." Do you see that?
A You say that's the bottom of --
Q Yeah, sorry. It's the -- it's page 2 --
A Yeah.
Q -- and it's the third -- the beginning of the first
full, third paragraph.
A Oh, okay. I see it now.
Q You see that, right?
A Yes.
Q And in fact, some of SCO's -- some of the members of
SCO's own management team believe that these litigations are
270
out of touch with reality, right, Mr. McBride?
A I can't speak for them.
Q Well, take a look at the first sentence, if you would,
of the first full paragraph. Do you see where it says, "I
still hope that Darl comes to grips with reality over the
next few days, i.e. that he finally sees and admits the
ancient battle over Linux is long over." Do you see that?
A Yes.
Q You can put that aside, if you would please, Mr.
McBride. Now you've received, have you not, sir, a
competing bid here from an organization with which Mr.
Charlie Hale [ph] is affiliated?
A Yes.
Q And you received that on July 23, right?
A Yes, that's right.
Q And the email indicated that an entity called LNS
Acquisition was making an offer to compete with the Unxis
offer, right?
A Yes.
Q And that email attached two documents: a Hale Global
SCO SPA redline versus the Norris agreement --
A Yes.
Q -- and a Hale Global SCO SPA clean document, right?
A Yes.
Q That's not your first communication with Mr. Hale,
271
right?
A No, it's not.
Q You've testified earlier that you had extensive
dealings with Mr. Hale, right?
A That's right.
Q He was affiliated with York Capital [ph], correct?
A Yes.
Q And you had discussions with him the days filing --
following the filing of the Chapter 11 Petition, right?
A Yes.
Q And you work as an investment group based in New York
City, correct?
A Yes.
Q And Mr. Hale was head of the technology group at that
time at York, right?
A That was my understanding.
Q And he spent, you said, I think, a lot of time -- I
think your testimony was that you were working around the
clock with him on that deal, right?
A Yes.
Q And he has devoted a lot of time and effort to
understanding SCO's business, correct?
A Yes.
Q The LNS [ph] offer to acquire substantially -- is to
acquire, substantially, all of SCO's assets, right, Mr.
272
McBride?
A Yes.
Q And that would include its Unxis business and its
mobility business, right?
A Yes.
Q And the amount of the proposed offer is $6 million and
some, right?
A Yes.
Q And that figure -- and Unxis offer, by contrast, is
for $5.25 million, right?
A Yes.
Q And that number, however, is -- that figure is
misleading, though, is it not, the $5.25 million?
A Misleading in what way?
Q Well, it's misleading as to what's, in fact, being
paid for the assets being transferred, right?
A I'm not sure where you're going with that.
Q I'm asking you whether it's true or not. Is it true
that the $5.25 million price for the assets being
transferred is a misleading number to affix to that
transaction.
A Not that I'm aware of.
Q Let me direct your attention, Mr. McBride, to -- and I
apologize, I only have one copy. I'll just -- if it's okay,
I'll just bring it up here and show you. You see this as an
273
email, Mr. McBride, MX-29? The second -- it's a chain of
emails. The second one there is an email from Mr. Spector
to Leslie Bayles [ph]. Who's Leslie Bayles, Mr. McBride?
A She's an attorney for Ryan Cave [ph].
Q And she copies on there Paul Aberon [ph] and Frank
William Kaplan [ph]. Who are they, sir?
A They are attorneys for Berger Singerman.
Q And Mr. Spector says, in the first line, I'm stepping
in for Paul. I believe in paragraph five or six, or maybe
one of the boxes, "Frank pointed out that we said that the
value of the consideration was (definitely 5.2 million), but
that is misleading for the Novell JGT," which I assume means
judgment, "is reversed. The true past consideration would
be 2.4 million." Do you see that, sir?
A Yes.
Q Mr. McBride, have you read, in its entirety, the
proposal that you've received now from L&S [ph] as a
competing bid?
A I've been briefed on it. I've read through it. I
can't say that I've read every word.
MR. MARRIOTT: I have no further questions, Your
Honor.
THE COURT: Thank you. Mr. Lewis.
MR. LEWIS: Thank you, Your Honor. My co-counsel
tells me I have two hours left.
274
THE COURT: All right.
XXX EXAMINATION
BY MR. LEWIS:
Q Mr. McBride, I'm going to kind of dart around here and
there, so -- for the most part, except for a specific series
of questions. Don't get confused by the fact that I'm not
talking about the same thing I was just talking about.
A Okay. Fair enough.
Q Okay. So let me start, first, with the press release.
Do you recall the press release: the 10,000-unit press
release?
A Yes.
Q Okay. Now, do you have any -- how long a period did
it take for the Debtors, for Franklin Covey to sell -- or
for there to be downloaded 10,000 units on the Apple iStore?
A The -- well, first of all, there weren't 10,000 units
in the Apple iStore. There were 10,000 units that came from
Apple iStore, Skils [ph] online store, and Blackberry's
online store. So that's where the 10,000 -- to be clear.
Q All right. I appreciate the clarification. And --
A Okay.
Q -- how long did that take?
A I don't know exactly when the downloads started, but
substantially, it kicked in gear in the early part of this
year.
275
Q The early part of this year?
A Yeah.
Q Do you have any idea of, for example, what the
download history is for the top applications on the iStore
for the iPhone?
A In any particular category, or just in --
Q Any category --
A -- general?
Q -- at all.
A I know that when we were at number 13 in the
productivity category, we were a little over 100 downloads a
day, so I don't know what number one in that category
would've been. I don't know how high it would be.
Q So you don't really know whether 100 is close to the
top --
A I know it's --
Q -- of the top 13.
A -- 13.
Q Right, but --
A I know it's 13.
Q -- you don't know whether if 100 units -- I mean, the
--
A I don't know what the reach is from 100 to -- I don't
know if 200's number one or 2,000's number one. I don't
know.
276
Q You don't know where the mean is or the median --
A No.
Q -- in this kind of deviation or any --
A They're kind of quiet, or they don't cover those stats
very much.
Q So, do you have any sense of what the typical margin
is for SCO on such a download?
A It depends on the product. You know, we get different
price points on different products. The range is probably
from a few bucks up to 20-some-odd bucks.
Q Okay. What does SCO sell, either directly or from
Franklin Covey on the iStore? What products?
A So far, we have one product in the iStore.
Q And what's the selling price of that product?
A Yeah, apple store, I should say. The selling price on
that product is 5.99.
Q And what's the margin on that product?
A We -- let's see. Apple takes 30 percent, and then
once that is gone, then we keep 60 percent of the remainder
between us and Franklin Covey.
Q And how much do you -- and what does Franklin Covey
get, and what do you get of that remaining 60 percent?
A I don't have the exact number in front of me, but it's
60 percent of 30 percent of 5.99.
Q Okay. I'm lost. I'm sorry. Let's just start --
277
Apple gets --
A Apple gets the first 30 percent.
Q -- 30 percent, and of the remaining 60 percent, how
much do you get?
A We get 60 percent.
Q You get 60 percent of the 60 percent.
A No, of the 70 percent.
Q Seventy percent; forgive me. So you get --
A It comes out to a couple bucks and some --
Q A couple bucks.
A -- change.
Q Okay.
A It's maybe 2.40, 2.50, somewhere in that range.
Q Okay.
A On that product. Now, we have other products. Like I
say, there's other products where, you know, it -- the price
is $20 to $30. I think we have one for $29 that we don't
share with Apple, and in that case, you know, we're just
splitting it up. We're getting 60 percent of 29 bucks.
Q Okay. And have you ever looked to see what sort of
ratings these products get on the online stores from users?
A Yes.
Q And what have you found?
A I've found that the -- when the task manager first
came out, it was -- there was a lot of really good ratings:
278
five-star ratings. Then some people were using it for a
while, and they -- the tasks were -- if you had too many
tasks, the things went slower, so the ratings would go down.
And then, when we'd release a new fix, then it'd come back
and up the score up, so it's kind of moving target,
depending on how they see the product at any point in time.
Q Okay.
A It's generally ranged between two-and-a-half to four
stars --
Q Out of five?
A -- depending on --
Q I'm sorry. Forgive me.
A Yes, out of five.
Q Thank you. I didn't mean to interrupt. I apologize.
Now you've testified earlier about the York transaction. Do
you recall that testimony?
A Yes.
Q And you were not very happy with the York people, as I
recall from your testimony, is that right?
A Well, let's split that up. The people themselves --
Charlie Hale is a delightful person. I enjoy talking to
him, but in -- with respect to the deals and the deal-making
that came through, every time we went down the path very
far, it felt like he was reaching too deep into SCO's
pockets for our comfort.
279
Q So, he was a hard negotiator?
A Hard to the point that we didn't feel like we were
getting a good deal.
Q Okay.
A For SCO's shareholders.
Q Now, let me ask you a general question about your
practices as the CEO of SCO.
A Yes.
Q And the question has to do with your general practice
with respect to pleadings, these kind of things, that the
Debtors file in this bankruptcy case.
A Yes.
Q And is it your general practice to read those and
review them and approve them before they're filed?
A I tend to rely on counsel and my CFO to go through the
detailed part of it and then brief me on it, so I can't say
that I've read every one that's been filed.
Q Okay. So even -- so you don't necessarily approve
them before they're filed, notwithstanding that someone else
does most of the preparation for them, is that fair?
A I may approve them, but I may not read all of them. I
rely on professionals to give me advice.
Q Okay. I've got insufficient copies here. It's not --
it's a rebuttal exhibit, and it is the Notice of Debtor's
Motion for authority to pay an expense reimbursement to York
280
Capital Management. I think it's Docket 367. And --
THE COURT: I won't need it, and you may
approach.
MR. LEWIS: I'm just going to read something from
it, Your Honor.
THE COURT: Okay.
MR. LEWIS: And if I may approach the witness.
THE COURT: You certain may; yes, Mr. Lewis.
MR. LEWIS: Thank you.
BY MR. LEWIS:
Q Now, I would point, please, Mr. McBride, to the --
one, two, three -- it looks like the fourth page. It begins
with paragraph number 3.
A Number 3?
Q Yeah, paragraph number 3 starts with --
A Yeah.
Q -- starts with the word unfortunately.
A Yes, I have --
Q Do you see that?
A Yes, I have it.
Q Okay. And this reads: "Unfortunately, the
negotiations between SCO and York did not reach a mutually
satisfactory conclusion. The transaction failed, and the
Court never entered an order approving the transaction or
any of the documents contemplated the transaction."
281
Paragraph 4: "SCO believes that as a business and moral
matter, SCO should make the $50,000 payment to York under
the terms sheet, which it did finalize, or the $150,000
payment to York under the terms of the asset purchase
agreement, which was virtually completed at the time that
the SCO and York abandoned the transaction." Do you see
that?
A Yes.
Q Now, this is a pleading filed on behalf of SCO. Do
you recall reading and approving this pleading, this motion
--
A I don't remember --
Q -- to compensate York?
A I don't remember reading these -- this motion before
it was filed.
Q Have you ever heard about this motion?
A I remember this as an issue, yes.
Q Okay. And you talked about -- and you approved the
idea of --
A Yes, I did.
Q -- filing this motion?
A Yes.
Q Okay. Now, do you recall that, on June 15, you
testified that the SCO board had approved the Unxis
transaction?
282
A Yes.
Q Did I get that right? I'm --
A Unxis is, I think, the --
Q Unxis.
A -- way you say it.
Q I'm sorry.
A Yeah.
Q We've been debating amongst ourselves.
A Just don't call it --
Q Today's --
A -- Unxis.
Q Today's been the day we're -- you know, we're all --
A Yeah.
Q -- advised. You recall that testimony. You said that
the board had approved that specific transaction. Do you
recall that testimony?
A Yes, I do.
Q Okay. Now, I'd like to show you a document that's
been previously used today. It's the board minutes of June
22. It may still be up there. Do you see those?
A Do you know the exhibit number?
Q It's not a -- oh, yes, it is actually. It's Exhibit
4.
A 4?
MR. LEWIS: It's the Debtor's Exhibit 4. SCO #4.
283
It looks like -- may I, Your Honor?
THE COURT: You may.
MR. LEWIS: Thank you. I'm going to hand the
witness another copy of this exhibit, Your Honor.
THE COURT: All right.
BY MR. LEWIS:
Q Okay. I'm going to ask you, Mr. McBride, to look at
paragraph number 3. It is on top, I think, of the second
page. Do you see that?
A Yes.
Q And isn't that a ratification by the board of the
purchase agreement on June 22?
A Yes.
Q Okay. And I would like to ask you to look at what is
SCO's Exhibit #3.
MR. LEWIS: And Your Honor, these are the minutes
of the June 11 --
THE COURT: Yes.
MR. LEWIS: -- 2009 board meeting.
THE COURT: June 11 or June 22?
MR. LEWIS: June 11.
THE COURT: June 11.
MR. LEWIS: Exhibit #3 is --
THE COURT: I'm sorry.
MR. LEWIS: -- June 11.
284
THE COURT: Thank you.
MR. LEWIS: And I'll wait, Your Honor, until you
have that handy.
THE COURT: Right here. Okay.
BY MR. LEWIS:
Q And if you look at page 2 of the minutes, Mr. McBride,
and paragraph number 2.
MR. SPECTOR: With regard to this exhibit, Your
Honor, there are names in here that correspond with some of
the letters, so I would ask that if we're going to honor
confidentiality, we do so verbally in Court and also the
document be --
THE COURT: Is it possible to avoid, Mr. Lewis --
MR. LEWIS: I think it is, Your Honor.
THE COURT: -- any questions --
MR. LEWIS: And if I find that I'm not able to
ask the question without disclosing names, I will stop, and
we'll figure out a way to handle that.
THE COURT: Okay.
MR. LEWIS: Thank you. Thank you, Mr. Spector,
for reminding me.
BY MR. LEWIS:
Q Part of paragraph 2 says, "The remaining members of
the board directed management to continuing pursuing the
deals described above."
285
A Yes.
Q And then it goes on to say with the exception of some
-- one of the transactions, which the board doesn't really
want to pursue anymore. Do you see that?
A Correct.
Q So there were no deals approved by the board as of
June 11, which was four days before the June 15 hearing,
right?
A They had given us authority to go after a deal that
was going to represent the interests of the -- you know, all
of the parties: the shareholders, the creditors, et cetera.
Q But they hadn't approved the Unxis deal, had they?
They didn't approve that until June 22.
A They ratified it. They gave us authority to go cut a
deal with one of those remaining three. They took one off.
They gave us the authority to go do a deal with one of those
three. We did the deal with Unxis. Then we came back and
had it ratified later.
Q And you had it ratified, because the specific
agreement had not been yet approved, isn't that right?
A That's correct.
Q Okay. But that's not what you testified to on June
15. You testified this particular deal. I can read you
your testimony, if you'd like.
A Well, I think I remember saying two things there. I
286
said that the deal was approved, and when they challenged --
I believe it was Mr. Levin [ph] was challenging me, I
believe I said in that hearing that day that the board had
given us the latitude to cut a deal with one of the
company's, and that's what we did. And so, in my mind, the
board had approved the -- whatever deal we came up with.
Q Yes, this is a question by Mr. Levin, I think. This
is page 75 of this transcript, and it begins at line 15:
"Q I didn't ask whether this agreement was within the
latitude of what the board gave you; I asked whether the
board approved this particular agreement.
"A Yes, they did."
MR. NORMAND: Your Honor, is that a question or
the publication of a purported admission?
MR. LEWIS: Is that --
MR. NORMAND: There's no question --
BY MR. LEWIS:
Q Was that your testimony?
A My testimony is that the board had given us latitude
to cut a deal, and based upon that latitude, I felt like
that the deal that we had cut was approved by the board.
Q That particular deal?
A The deal with Unxis was approved by the board, because
we had the latitude to cut the deal.
Q But you nevertheless had it ratified after the fact?
287
A We went back and ratified it, based on what the
written agreement was, but the deal itself, I believed, was
approved by the board.
Q When you say the deal, you mean the basic terms, or do
you mean all the particulars, all the terms? The document?
A We had represented to the board, on that call, the
material terms in all of the deals we were discussing.
Q And that's what you believe they approved on whatever
occasion that was --
A They had given us authority to cut a deal in one of
those three areas, based on what representations we made to
them.
MR. LEWIS: May I approach?
THE COURT: You may, certainly, Mr. Lewis.
MR. LEWIS: I'm going to show the witness
MX-54 --
THE COURT: Okay.
MR. LEWIS: -- which is the asset purchase
agreement between Novell and Santa Cruz operation.
MR. MCBRIDE: Okay.
BY MR. LEWIS:
Q And I'm not -- I'm going to direct your attention to
something very specific in a moment, but in general, what --
do you recognize --
A Yes, I do.
288
Q -- this document?
A Um-hum.
Q And this is the asset purchase agreement --
A Yes.
Q -- between Novell and Santa Cruz.
A The infamous one.
Q Yes. That's it. That -- I think we'll all confirm
that one, Mr. McBride. We won't cross-examine you on that
issue. Now I'd like to call your attention to Section 4.16,
which appears on page 24.
A Okay.
Q That section's entitled SVRX Licenses.
A Yes.
Q And this section obligates the counterparty to this
agreement to collect certain license revenue, as you
understand it, from SVRX licenses and remit them and has
some other state obligations, then, is that right?
MR. NORMAND: Your Honor, I just want to object
on the grounds that opposing counsel objected earlier when
Mr. McBride was speaking to his understanding of the terms
and nature of certain agreements, so I think there's a way
for him to ask questions around this, but to the extent he's
asking what obligations or action imposed, I don't think
that's an appropriate way of asking it.
MR. LEWIS: That's a fair objection, Your Honor.
289
THE COURT: Yes.
MR. LEWIS: I'll rephrase the question.
THE COURT: All right, Mr. Lewis.
BY MR. LEWIS:
Q Mr. McBride, you've read through this agreement
probably any number of times, is that right?
A Yes, I have.
Q In fact, you could probably write it by memory.
A It comes with Tylenol attached.
Q Is it your understanding that under Section 4.16, the
counterparty to this agreement is required to collect
certain license revenues and provide certain audit reports?
Is that your understanding of the way this section works?
MR. SPECTOR: Your Honor, I rise for the same
reason. I was trying to ask him the same questions, and the
objection was sustained when I asked him about what
obligations were owned from SCO or from the other party to
Novell and what obligations were owing for Novell to the
other party. The objection was sustained when I asked it.
Why is it not sustained when he asks?
THE COURT: Well, you know, I don't recall the
specific ruling of this specific question, frankly, but I
think that it's -- his -- Mr. Lewis is asking for his
understanding.
MR. LEWIS: Yes, that's --
290
MR. SPECTOR: All right.
MR. LEWIS: -- the question. I don't think we've
had that one before.
THE COURT: I can't say for sure, but I -- if I
got it wrong before, I'll get it right this time.
BY MR. LEWIS:
Q Is it your understanding that the counterparty to this
agreement would have certain obligations to fulfill to
Novell under Section 4.16 with respect to the collection and
remission of revenue -- license revenues?
A I don't view it that it's our obligation. I do -- we
have an opportunity to collect five percent of those
royalties by collecting them, but if we don't want to
collect them, then it's Novell's business to go out and take
100 percent, so I don't view it as an obligation.
Q All right. And looking at this document, in Section
4.16, you also -- is it also your understanding, upon
reading it, that Novell can object to the assignment to any
of the SVRX licenses? Your understanding: I'm not asking
for a legal opinion.
A I believe, to get the full understanding of 4.16, you
really have to read amendment 2, because it's modified, and
again, there are modifications in amendment 2 that relate to
this section.
Q Okay. And how about the section -- how about 4.16
291
with respect to the reassignment of licenses? You see -- do
you believe -- is it your understanding that there was some
obligation on the part of the counterparty to reassign
licenses?
MR. SPECTOR: A continuing objection, Your Honor.
THE COURT: Understood.
MR. LEWIS: I'm sorry. I missed the answer, or
was it just an objection?
MR. SPECTOR: He didn't -- I objected, and it's a
continuing objection. The Court's not ruled on it yet.
MR. LEWIS: Okay.
MR. SPECTOR: Mr. McBride, that means you can
answer the question, at this point, sir.
MR. MCBRIDE: Okay. Again, 4.16, to get to the
true understanding of it, really has got to be overlaid with
amendment 2.
BY MR. LEWIS:
Q Okay. Now have you had any discussions with the
buyer, Unxis, about the disposition of Section 4.16 of the
asset purchase agreement, what's going to happen to it?
A No.
Q Have you had any discussions with the buyer, Unxis,
about what's going to happen -- whether the buyer -- whether
Novell can object to the assignment of the SVRX licenses?
A No.
292
Q Okay. Do you have any understanding as to whether
anybody has had such discussions with the buyer?
A I think some people have talked to them about it, but
I'm not sure what the nature of the discussions were.
Q Now you testified, I think, earlier today, that the
reason the -- in your opinion, the reason that the Steven
Norris deal fell apart was this inaccurate report in the
newspapers about having to collect -- having to pay over 95
percent of the royalties?
A That was a key contributor, no doubt.
Q Okay. And when did that newspaper report come out, do
you recall?
A Some time in the spring of '08.
Q Or was it -- do you recall there was a hearing on this
sale, this proposed transaction with Mr. Norris on the plan
and the disclosure statement?
A Yeah, I don't remember the details of the times.
Q You don't recall whether the report came out before or
after that hearing?
A I don't remember precisely.
Q Okay.
A I just remember it was in the same general timeframe.
MR. LEWIS: Okay. Your Honor, I want to read to
the Court from the transcript of the hearing on April 2 of
2008. This was the hearing that was set on the SNCP [ph]
293
transaction. And this is counsel for the Debtor on page 8
and at line 19:
"The reason we did not get the definitive documents
in, in time, is not because we hadn't prepared them. It was
the deal was changing while we were drafting them. Both
sides, the buyer and the seller, came to an agreement
informally while we were drafting the documents we had, that
they'd rather restructure the deal in a totally different
way."
There's no mention here, Your Honor, of --
MR. NORMAND: Your Honor, is this a question --
MR. LEWIS: Yes.
MR. NORMAND: -- or a break in the examination?
MR. LEWIS: Yes, Your Honor.
BY MR. LEWIS:
Q Were you present when -- were you present at this
hearing?
A I think I've been to all the hearings.
Q And did you hear your counsel say that?
A If I was here, I heard him say it.
Q And did you believe it was correct when you heard him
say it?
A Yes.
Q Okay.
A Would you like an explanation of that, or should we
294
just leave it at that?
Q I think Mr. Spector can --
A Save it for cross?
Q Sure.
A Okay.
Q You've got this down, huh?
A I'm trying to.
MR. LEWIS: All right. Your Honor, I have no
other questions at the moment. Thank you very much. Thank
you --
THE COURT: Thank you --
MR. LEWIS: -- Mr. McBride.
MR. MCBRIDE: Yes. Thank you --
THE COURT: -- Mr. Lewis.
MR. MCBRIDE: -- Mr. Lewis.
THE COURT: Mr. Harrington [ph]? I think Mr.
McMann [ph] owes you something. I'm not sure what it is.
MR. HARRINGTON: I'll be very brief, Your
Honor --
THE COURT: Yes, sir.
MR. HARRINGTON: -- although I think I have, you
know, two hours and 25 minutes left on my time.
THE COURT: Well, actually, the -- I only gave
your office 30 minutes, I think, or something like that, but
that's okay. You take whatever time you need.
295
MR. HARRINGTON: Well, Jim said I would have
plenty of time.
THE COURT: Okay.
XXX EXAMINATION
BY MR. HARRINGTON:
Q Did you direct your counsel to give notice of this
sale to -- and I'll refer to the entities as numbers one
through four that were referred to on cross, and other than
the Norris and Merchant Bridge [ph] entities, the entities
referred to from A through G?
MR. SPECTOR: Your Honor, what this witness told
his counsel is privileged, but I can tell you that we did
make efforts to ensure that all prior entities that we knew
of were served. Some of them -- I think one of them we
couldn't find any longer. They may not have existed. It
might've been a -- but we did take efforts to include within
our -- I think we did a supplemental notice. We did a
supplemental notice of service, certificate of service, with
the additional parties after the original sale order went
out. I don't know if counsel knew that, but --
MR. LEVIN: Your Honor, was that certificate of
service filed with the Court?
MR. SPECTOR: I'm sure it was.
THE COURT: Mr. Spector?
MR. SPECTOR: I -- well, I -- I'm -- the records,
296
but I believe it was. We'd have to check the docket, but we
made -- I remember in the production, if there's emails
about -- there's lots of emails going back and forth. I
remember asking: what's the address of these guys? What's
the address of those guys? And we made a concerted effort
to get an additional matrix, additional service list for
those parties, because it did come up at the June 15
hearing.
BY MR. HARRINGTON:
Q Did you make any other efforts to contact any of those
prior buyers prior to signing up this -- the agreement with
the Norris Group?
A I'd have to go back and look at that list again, but
yeah, we went out and tried to contact as many people as we
could that would -- may have been interested in the
business.
Q And how did you go about doing that? Did you call
them directly?
A I think the telephone was -- would've been the main
way of trying to contact them.
Q And did you do that directly?
A It would've been myself or maybe Hunsaker.
Q Which entities did you call? And again, using the, I
guess, codes that you had before?
A Well, I've got to see the names again so I can
297
resurrect them. I mean, let me just think. So we did have
follow-on discussions with A.
Q And this is after?
A (No audible response.)
Q At what point in time did you have the follow-on
discussions?
A It was some time within the last couple of months.
Q Okay.
A B, we did talk to B, but they had already moved on, so
that wasn't an option. C was the one that got sold off, so
they weren't an option, so we didn't re-contact them. A lot
of the other ones were already -- they were new contacts
coming into the pipeline at that point in time.
Q And did you --
A There was a large technology company that we -- wasn't
even on this list, that didn't ever result in a material
discussion, but there was one large technology company that
we must have talked to a half-dozen times, asking if they
would be interested, because we thought it was a logical
choice, but they -- we contacted them again; they rejected
it.
Q Earlier, you testified that one of the sole reasons --
or two of the sole reasons were for the -- that you
preferred the Norris deal or it had benefits for employees
and customers, is that true?
298
A It -- not just those. It had employees, it had
customers, it had creditors, and it had shareholders. Those
are the big four we were -- I was trying to protect.
Q And those were the -- originally, though, you said the
primary beneficiaries were the employees and the customers,
correct?
A I -- if I said that, I was trying to say it in the
context of I've always viewed the Norris deal as taking care
of all four of those.
Q And when you say creditors, you're not including
Novell and IBM.
A No, that's not true. Well, I don't view IBM as a
creditor. I view Novell as one of them, but we may have
differences on that. I mean, the point is, whether they're
a creditor or not, I mean, they obviously have standing or
they wouldn't be in this courtroom. My view on that was
that we liked the Norris deal because it took care of
everybody in the SCO universe that needed to be taken care
of. It -- in the case of Novell, again, I don't understand
all the technicalities, whether -- what kind of creditor
they are, but obviously they have some interest in this
because of the judgment that we're trying to get reversed
right now. But the Norris deal allowed for paying them and
getting them taken care of. The Norris deal allowed for
paying off pre-Petition creditors in full, not in -- what
299
Charlie was trying to do is in very small part. It took
care of employees and --
Q And when you --
A -- the customers.
Q And when you say what Charlie was trying to do, are
you referring to his original deal?
A I was speaking of, in this case, the latter deal that
came.
Q But you said you hadn't reviewed that entire APA in
the latter?
A Well, I didn't say I hadn't reviewed it; I said I
hadn't read every word of it. I was talking -- in the
Charlie deal, there's Charlie 1, Charlie 2, and Charlie 3.
Okay. Charlie 2 and Charlie 3, both of those were pretty, I
should say, negative with respect to creditors. Again, it
was this idea that -- I've never heard of creditors coming
out of bankruptcy getting paid in full. That's ridiculous.
We don't have to pay them off. We'll get some percent on
the dollar, pay them, and we'll move on. And our approach
from day one was always to pay off the pre-Petition
creditors at 100 percent, take care of the Novell judgment
to the extent that it didn't get reversed, and at the same
time, try and get a deal on the table where the SCO
employees and customers would have a future home, and
preserve our litigation claims, which is what a lot of the
300
shareholders care about.
MR. HARRINGTON: Your Honor, I have no further
questions.
THE COURT: Thank you, Mr. Harrington. Mr.
Spector?
XXX EXAMINATION
BY MR. SPECTOR:
Q How does the article, that talked about the 95 percent
of the SCO revenue going to Novell, impact on the comments
made in Court that you heard Mr. Lewis talk about?
A Well, Mr. Lewis' comment, as I recall, I'll try and
paraphrase it, said the April 2 hearing we represented that
the Norris SNCP deal was being restructured. And that's a
true statement. The -- again, when we started out with
SNCP, it wasn't a signed transaction. It was a memorandum
of understanding, which is a long ways away from a signed
deal. So we had a memorandum of understanding, which was a
generalized, let's go try and do this. And as we got into
this discussion with the group, a very credible group out of
the Middle East, they wanted to take a different approach
towards the transaction, and that was causing us to
restructure the plan relative to what the original MOU
called for.
Q So when we got out of Court after we thought we were
trying to restructure the deal, what happened?
301
A Well, then in the middle of the restructuring and
trying to get it like they wanted it to be is when this
article came out, and they were totally freaked out by it.
Q Tell us how amendment -- well, were there any
amendments to the Novell APA with the Santa Cruz operation?
A Yes.
Q Tell us how amendment #2 affects Section 4.16.
A The --
MR. MARRIOTT: Your Honor, I just object, subject
to what the prior conversation about this being limited to
his understanding.
THE COURT: Correct.
MR. SPECTOR: Which is all I ever wanted the
first time.
THE COURT: The witness's understanding.
MR. MARRIOTT: And to the document itself. I
don't think that's been offered into evidence.
MR. SPECTOR: We don't need the document in
evidence, Your Honor. The question with Mr. Lewis went into
what's his understanding of 4.16 and he gave an answer, and
he said subject --
THE COURT: When --
MR. MARRIOTT: I withdraw the objection, Your
Honor. It's in evidence.
THE COURT: Yes, it is. Yes. Thank you.
302
MR. SPECTOR: Well, whether it is or it isn't,
Your Honor chooses whether to read it or not as well.
BY MR. SPECTOR:
Q But the question I have on the floor was how does
amendment #2 impact your answers to Section 4.16, in your
understanding?
A Well, in my understanding, there were clarifications
in amendment 2 around what the parties were supposed to do
in certain circumstances. And again, when you read 4.16 and
you read amendment 2, one of the take-aways that you get
from that is that this is not an obligation of SCO. This is
a thing that if SCO wants to get 5 percent, then just keep
collecting. And to the extent that you don't want the 5
percent and you don't go collect, then Novell has the rights
to go directly to those customers. We're out of the
picture. So from that standpoint, I just don't view that we
have an obligation with respect to SVRX collection.
Q Mr. Lewis, I believe, or my -- I'm sorry. Somebody
cross-examined you and asked you to look at Exhibit #29, and
I have it over here. That was an email from me to Ms.
Bayles, do you recall that?
A Yes.
Q Okay. I'm just going to ask you --
THE COURT: Which exhibit number is that, Mr.
Spector?
303
MR. SPECTOR: I thought it was 29. Am I wrong
about that? Oh, yes. Here it is. Second one down, Exhibit
#29. It's a chain of emails.
BY MR. SPECTOR:
Q Just read, for the Court, the time on that, the date
and time of that email.
A The date of that email to Leslie Bayles was Monday,
June 22 at military time 1951.
Q 7:51 p.m.?
A Yes.
MR. SPECTOR: Your Honor, the record will show
that the actual motion wasn't filed until 11:34 p.m. That
email is part of the negotiations of what it, this document,
ought to say.
MR. LEWIS: Your Honor, is that testimony by
Counsel or what?
MR. SPECTOR: I would ask the Court to draw the
inference.
MR. LEWIS: Is it argument, Your Honor?
MR. SPECTOR: I'll strike.
THE COURT: All right.
MR. SPECTOR: All right.
BY MR. SPECTOR:
Q Shawn Cutler [ph].
A Yes.
304
Q You testified that he was involved in the mobility
business for SCO. He still --
A Yes.
Q -- is today.
A Yes, that's right.
Q If he goes over to Unxis --
A Yes.
Q -- with the server --
A Yes.
Q -- who takes over the jobs he was doing outside of
doing the server? Let me strike that. What is his role at
-- with regard to mobility at SCO today?
A He is basically over the marketing programs.
Q Over the marketing programs of what?
A Of all of our mobile business.
Q Both server and application.
A Correct.
Q Okay. Is there some plan for the reorganized SCO to
replace Mr. Cutler when he goes to work for Unxis?
A Not initially. The initial plan is to run this thing
at a level where we can generate profits. As we get more
deals done and that business grows, then yes, eventually we
will bring someone into that role.
Q Now, when you testified on direct, you acknowledge
that at the beginning of the case, when this Chapter 11 was
305
filed, mobility was a startup. It really was -- hadn't
marketed at all, right?
A Right.
Q That was in September of '07.
A Right.
Q And in '08, you had some revenues, apparently?
A Yes.
Q In '09, do you have more revenues?
MR. MARRIOTT: Your Honor, I don't want to -- if
I may object, Counsel is leading his own witness.
MR. SPECTOR: I am.
MR. MARRIOTT: We've had it happen, and I've
tried to say nothing so far, but I think I'd object to the
leading. If we could just go back to the regular --
MR. SPECTOR: Yeah.
MR. MARRIOTT: -- course --
THE COURT: All right.
MR. SPECTOR: I am. And I was doing that for the
interest of time.
THE COURT: Sure.
MR. SPECTOR: I didn't think it was
controversial, and --
THE COURT: Understood.
MR. SPECTOR: -- I'll adapt to that.
BY MR. SPECTOR:
306
Q The -- what revenue -- is the revenue in 2009 greater
or less than it was in 2008?
A I expect it'll be greater.
Q Okay. What's the name of the person in charge of the
subsidiary in Japan?
A Makoto Aso [ph].
Q Do you know if he had any review over the -- if you
know, and if you don't, don't get it from somebody else. Do
you know if he had any review over the marketing -- merging
markets proposal?
A I'm not sure what extent he was involved in that. He
was over his -- it was his region impacted by it, and he had
money and funds for it. I'm not sure what extent he was
involved in the actual study, overseeing of it.
Q We talked about the patent.
A Yes.
Q The motion for the sale of the patent has been filed,
and do you expect that java patent will be sold before the
deadline and it has to be turned over to Unxis?
A Yes.
Q Okay. And the company -- did you previously sell a
patent in this case?
A Yes, we did.
Q Okay. And are you dealing with the same people?
A Yes.
307
Q Do you have any -- well, strike that. And if the
patent doesn't sell by that deadline -- what is it, the end
of the year?
A Yes.
Q What's the view of SCO whether there's any value in
that patent?
A Well, if we aren't able to sell it and get a
reasonable value out of it, then we won't believe that there
is a lot of value there.
MR. SPECTOR: Okay. One other thing I want to
point out, Your Honor, and this is not through testimony, if
you look at the motion for sale, it doesn't say 5.4 million,
it says up to 5.4 million, and I wanted to connect those
dots.
BY MR. SPECTOR:
Q Let's talk about Hans Bayer.
A Okay.
MR. SPECTOR: And this part, Your Honor, also
goes to the issue of the hearsay objections.
THE COURT: Okay.
MR. SPECTOR: It all came in already, but I'd
like to go back.
BY MR. SPECTOR:
Q Is Mr. Bayer an officer or director of SCO Operations
or SCO Group, Incorporated?
308
A No.
Q Okay. How do you explain the website screen-print
that they showed you?
A I don't know. I don't know when that was put on
there. It's not -- I don't know.
Q Is it --
A I can't do that.
Q -- accurate?
A Well --
Q Well, what -- well, strike that. What's the name of
the German subsidiary?
A It's -- probably has a GMBH in it somewhere.
Q At the end, but what does it say in the beginning?
A SCO.
Q Um-hum. Is he an officer or director of the SCO GMBH?
A I would expect that he is.
Q Okay. Well, what -- all right. It -- do you know his
title, his actual title?
A I don't. I don't.
Q What is his area that he's in charge of?
A He's in charge of -- my understanding is he's in
charge of international sales.
Q And he's in charge of international sales from which
entity?
A Well, he operates out of the German entity.
309
Q And does he have any authority to speak for SCO Group
or SCO International on matters such as sales of assets of
the company?
A No.
Q Does he have any authority to speak about sale of
mobility assets?
A No.
Q What is his major background?
A He's a sales person.
Q And his -- so his business is to sell to the public or
to a segment of the public?
A Yes.
Q Does he do any strategic work with financers or merger
partners? Is that his area of expertise?
A No.
Q Is he authorized by SCO to make statements about legal
positions or financial positions?
A No.
MR. SPECTOR: Your Honor, I've got case law to
support this, but the general point I want to make is an
officer of the subsidiary company has no authority just
because of that office to speak on behalf of the parent
company. Moreover, the -- to be an admission -- this is --
only comes in as admission, because everything, as Your
Honor well knows, is all hearsay, and there's double-hearsay
310
in a lot of that. And the only way it can come in is that
it's not hearsay at all, because it's an admission. And
that's obviously what I'm going to hear. But an admission
to come and -- an admission of a party, it has to be someone
authorized to make that statement. And the authority is
delimited by case law to people who are authorized to speak
on that topic for the company. So a salesman, I'm not
saying that Mr. Bayer was just a salesman, but if a salesman
says something that is very detrimental to his employer on
an area that's not in his area of expertise or authority,
that is not an admission of the parent, of the corporation
that he works for. And we'll -- if any of this is
controversial, I do have case law to support. So it's my
opinion, Your Honor -- or not opinion: my opinion doesn't
count.
THE COURT: Your argument.
MR. SPECTOR: It's my view, Your Honor, that the
testimony that we've heard at length about Mr. Bayer said
this to so-and-so and somebody told him about something, all
of that is hearsay, and all of that is not -- cannot be
considered an adoptive admission or any other form of
admission by SCO Group or SCO, Incorporated, and I ask that
the entire line of testimony be stricken. And of course, if
we had a jury, this would be a problem, having heard all
this, but I trust Your Honor knows how to do this.
311
THE COURT: Yes, Mr. Marriott --
MR. MARRIOTT: Well, I gather --
THE COURT: -- any response?
MR. MARRIOTT: -- we're done with the
examination.
THE COURT: Oh, I don't --
MR. SPECTOR: That's the --
THE COURT: Are you done --
MR. SPECTOR: No, I'm not done with the redirect.
I'm just -- I'm assuming that was voir dire on that. I'm
going to let them take a chance -- take their chance on
that. I was just being -- do you want to --
MR. MARRIOTT: Are you finished inquiring him on
that?
MR. SPECTOR: I'm finished inquiring on the voir
dire on the objection for the hearsay grounds.
MR. MARRIOTT: It's not clear to me whether you
were passing the witness --
MR. SPECTOR: No, I'm not passing the witness. I
was stepping aside --
THE COURT: I think --
MR. SPECTOR: -- because --
THE COURT: I think --
MR. MARRIOTT: I didn't understand Your Honor to
be inviting --
312
THE COURT: Mr. Spector is --
MR. MARRIOTT: -- voir dire.
THE COURT: -- renewing his --
MR. SPECTOR: My objection.
THE COURT: -- objection.
MR. SPECTOR: And request to strike that line of
testimony, and I just figured I'd step aside and let you
respond.
MR. MARRIOTT: Would you like to do it now,
Judge?
THE COURT: Why don't we do it now? One other
thing, the gentleman sitting back -- do you see that white
button back there? If you will push that, I'm hoping the
air-conditioning will come on.
MR. MARRIOTT: May I approach, Your Honor?
THE COURT: Yes.
MR. MARRIOTT: I -- with Mr. Jacob's [ph]
permission, I hand Your Honor his Blackberry, which calls up
SCO's webpage --
THE COURT: Yes.
MR. MARRIOTT: -- and I invite the Court to
review what it says about Mr. Bayer's current title and
responsibility, which is exactly what the witness agreed the
website printout that he was shown said.
MR. SPECTOR: We're not contesting -- we're not
313
saying Mr. Marriott misread that or misrepresented what it
said. I'd just --
MR. MARRIOTT: The witness -- the witness --
MR. SPECTOR: -- ask the witness --
MR. MARRIOTT: I'm sorry. Go ahead.
MR. SPECTOR: I'd just ask the witness whether he
agreed with what it says on the website.
MR. MARRIOTT: The witness said he didn't know --
THE COURT: Oh, I'm sorry. What's --
MR. MARRIOTT: Your Honor, the witness said --
suggested that perhaps the page was out of date, and I think
we can see, and Your Honor can see back in chambers, that
that is currently what the website says. Your Honor, those
documents, the three documents, which are in dispute, are
plainly, unquestionably relevant. The only serious -- the
only objection even attempted here as to those documents
with any seriousness is hearsay, and it is, at the end of
the day, Your Honor, not a serious objection. And it isn't
a serious objection. It isn't a correct objection for at
least the following reasons.
First of all, Your Honor, the documents aren't hearsay
if the statements about which the witness was questions were
admissions. The statements were plainly admissions. The
statements were made on behalf of a vice-president of SCO, a
person who holds himself out as a vice-president of SCO, a
314
person who, by the very text of the documents, was acting on
behalf of SCO in negotiating with the buyers in this
proposed transaction. You didn't hear any evidence from Mr.
McBride, and I'm happy to inquire if necessary, as to the
punishment of Mr. Bayer for communicating and dealing with
the proposed buyers in this way. He hasn't been
disciplined. There's no evidence that he's been
disciplined, Your Honor. The evidence is those -- as those
documents made claim, that he was carrying out his duties,
that he was acting on behalf of the company in helping to
bring about that proposed transaction. Moreover, one of the
documents, Your Honor, is not from Mr. Bayer, it's from Mr.
Hunsaker, who is another vice-president of the company, who
plainly is affiliated with the SCO Group, the Debtor in this
action.
THE COURT: Well, for -- let me ask this
question. For example --
MR. SPECTOR: Sure.
THE COURT: -- in one of the emails, Mr. Bayer
says that all of the employees think such and such and so on
and so on. The employees. Now, that's clearly hearsay.
How could he even speak for the employees -- what the
employees think? That's one example. I was troubled by
these emails, because I don't know -- I just don't know
their context. I don't know really their evidentiary value,
315
frankly, because this was one man's view.
MR. MARRIOTT: Your Honor, this man was --
THE COURT: And he's a -- and he is a vice-
president of their European operations, not an employee in
the United States.
MR. MARRIOTT: Your Honor, he holds himself out,
and the website holds him out, as a representative of the
company, without distinction to the German subsidiary or
SCO. He represents himself to the world, we would submit,
as being an employee and a representative of SCO. And in
any event, he was representing -- he was acting as an agent
of the company in connection with the proposed transaction,
which is at issue. And in acting as an agent, Your Honor,
of the company, in that regard, it makes no difference
whether he is technically an employee of the subsidiary or
he is technically an employee of the SCO Group.
With respect to -- at an absolute minimum, Your Honor,
he -- there was apparent authority on his part to be having
the conversations he was having with the buyer about the
state of the negotiations, about the value that was being
placed on the products being sold and the products not being
sold. Plainly, Your Honor, to the extent he talks about
what other witnesses thought, there may be different weight
which Your Honor would wish to accord to those statements,
and that is obviously Your Honor's discretion, as the finder
316
of fact in this particular proceeding. But we would submit,
Judge, there's no question they were admissions, because he
was acting on behalf of the company as its agent, and in the
course of his duties, made those representations. And Mr.
Hunsaker, again, in any case, was plainly a representative
of SCO.
Furthermore, Your Honor, at -- one of the issues in
this case is the good faith, or lack of good faith, of the
Debtors. And we would submit, Your Honor, that those
documents plainly go to that question; and therefore, if
they aren't in, Your Honor, for purposes of truth, and we
believe they should be, therein we would submit, Your Honor,
as to state of mind. Furthermore, there is an exception, as
Your Honor well knows, to the hearsay rule, that concerns --
that is effectively a catchall that says where there are
sufficient indicia of reliability, even if the statement is
hearsay, even if the statement is hearsay, even if it's not
an admission, even if it isn't otherwise permissible in
evidence, where there's a sufficient indicia of the
reliability of the statements made, whether they were in
fact made, that the evidence comes in. And there can't be
any question here that Mr. Bayer didn't make those
statements. There's no suggestion by Counsel for the
Debtors that he didn't actually make the statements. He
did, Your Honor. He is under the control here of the
317
Debtors. He is an employee of Debtor. Whichever entity
they want to say he's with, he is in their control. They
could've, without trouble, had Mr. Bayer come and explain
those emails in Court, and they made the election not to do
that, Judge, and they could've done that, and they didn't do
that. And there's no reason whatever to think that these
documents are irrelevant or unreliable, except that they
don't like what the documents have to say. And it would be
for Your Honor, based upon what the documents actually say
and the context in which you can put them, as you read them
in their full, to decide what weight they have. But we
would submit, Your Honor, for those reasons, the documents
are, and ought to be, admissible into evidence.
Thank you, Judge.
THE COURT: Yes.
MR. SPECTOR: Just two more questions I can ask
him to finish that record, and he -- that Counsel's raised.
BY MR. SPECTOR:
Q First of all, I'm going to show you Exhibit 37 as an
example. What's -- what does it say after Mr. Bayer's name
on that email?
A This is the one of June 9. It's the one we're talking
about. It says Hans Bayer, Vice-president, EMEA
Q What is EMEA?
A It stands for Europe, Middle East, and Africa
318
Q Okay. I'm going to show you the very last entry on
section -- on Exhibit #37.
MR. SPECTOR: What is that? Was 39 also -- or
used? Was 39 another one of those that was --
MR. MARRIOTT: Yes.
BY MR. SPECTOR:
Q Okay. Let me show you 39. #39, at the very end of
this, you'll see another entry for Hans Bayer, again vice-
president EMEA Turn the page over and see what Mr. Bayer is
affiliated with, calls himself affiliated with. What does
it say?
A So the address that he puts is the SCO Group, GMBH,
and then he goes on to give his address, and the website is
www.SCO.DE, which is our German website.
Q So he signs his name -- so he signs his affiliation as
EMEA and the SCO Group, GMBH.
A Correct.
Q Not the SCO Group, Incorporated or the SCO Group
Operations --
A Correct.
Q -- I mean the SCO Operations. So now, they asked, was
he reprimanded. Was Mr. Bayer reprimanded?
A Yes.
Q Who reprimanded him?
A I did.
319
Q How severely?
A You'll have to ask Cohns [ph].
Q Okay. Did Mr. Hunsaker partake in that?
A No.
Q Okay. That was you then?
A Yes.
MR. SPECTOR: Okay. Your Honor, both of those
issues that Counsel raised, you know, holding himself out as
-- he held himself as what he was: EMEA GMBH, both of which
are designations for a foreign entity and not the Debtors,
and he was reprimanded for stepping out of line for this.
So I think we've made the record we need to make to exclude
these exhibits and the line of questioning that followed.
MR. MARRIOTT: Your Honor, I --
THE COURT: You rest on the argument.
MR. MARRIOTT: -- stand by what I've said.
THE COURT: All right. Well, I am going to
sustain the objection and strike that testimony. I think
that, to the extent these documents were offered for the
truth -- for their truth or as an admission, they simply
don't meet the tests. And I also think that they're highly
prejudicial, and they're -- the prejudice far outweighs
their relevance.
MR. SPECTOR: Thank you, Your Honor.
BY MR. SPECTOR:
320
Q Those exhibits are out, there's a generalized
discussion about Mr. Bayer generally.
A Yes.
Q Did Mr. Bayer ever express different views about his
support for the mobility platform?
A Yes, he did.
Q And how was he -- do we have -- well, did he do that
in emails that we have as exhibits?
A Yes.
Q Those are some of the exhibits we brought?
A Yeah. Numerous, yes.
Q What about the lawsuits? Did he express opinions
different than what you heard today about the lawsuits?
A They're 180 degrees different.
Q What about your management of the company? Has he
expressed different views about the management of the
company?
A Yes, he's been very supportive.
Q SCO -- how is SCO Group's liquidity? Does it have a
lot of funds?
A No.
Q And it hasn't for some -- quite some time, correct?
A Correct.
Q Is there a competition for funds between the mobility
-- strike that. I'm leading. How is it that the mobility
321
side of the SCO tree and the UNIX [ph] side of the SCO tree
get funded?
A Well, we determine how much we're going to allocate
for certain technology and developments, and then we spread
them accordingly.
Q Okay. And is Mr. Bayer affiliated with one part of
the company more so than another?
A Yes, absolutely.
Q Which one is that?
A UNIX.
Q And you said before that mobility really isn't sold
overseas, those products?
A No, we tried to early on, then we just decided we had
to settle down and hunker down and make it be successful in
the U.S., and then we would go overseas later.
Q Okay. So is it fair to say he's an advocate for
further funding for UNIX over other operations in the SCO
business?
A Yes, that would be fair.
Q Did you hear the testimony from Counsel, I guess, the
statement before that Mr. Bayer says that everybody's in
favor of the -- now this may have been stricken and I'm
sure, but everybody in the company is in favor of the going
forward with the Unxis deal?
A Yes.
322
Q I think it was called the MBGCB deal.
A Yes. Uh-huh.
Q Is it -- do you share that viewpoint?
A Yes, absolutely.
Q Well, do you understand that the import of these --
Counsel's question is that there was complaints that you
were standing in the way of that deal?
A Yes.
Q Okay. And they were irritated by your standing in the
way of this great deal with Unxis?
A Yes, they were.
Q We have to turn, then, to Mr. Norris and Mr. Robbins.
A Okay.
Q How did you know Mr. Robbins?
A I originally met him a number of years ago, eight or
ten years ago. I was coaching youth football. I was little
league coach, and his son was on the team. His son and my
son became friends --
Q So your --
A -- and so --
Q -- relationship originally was a family relationship?
A It started off as a family relationship, and then over
time, our kids ended up being good friends, and then over, I
don't know, a couple years, a year-and-a-half or two, he
started to want to get more friendly with his -- he and his
323
wife and me and my wife.
Q All right. Did the -- who introduced you to Mr.
Norris?
A Mr. Robbins.
Q And at that time, did you have some understanding
about their relationship?
A I knew they'd been in some previous dealings, but I
didn't know exactly what it was.
Q And once you got introduced to Mr. Norris, did Mr.
Robbins have anything to do with the SNCP [ph] deal?
A Not materially. He was involved a little bit early
on, but it really started to morph pretty quickly away from
him and to Steve.
Q What was this testimony about his verbally agreeing
to, I think you used the term, backstop $5 million DIP loan?
Tell us about that.
A Well, Mr. Robbins held himself out as somebody who was
a very wealthy individual, had showed me one time a balance
sheet, a personal balance sheet that he was worth nearly
$200 million, and he didn't know what to do with all his
money. And so he, you know, was -- basically, at the point
in time we had this bad ruling out of the Utah Court. We
were friends at that point in time. We kind of tracked it
for a while. We went through the York deal. And there was
a point in time there where he said, well, hey, let me see
324
if I can come and help you, because I have -- you know, I
have a lot of resources. That was the way he represented
it. At the end of the day, that representation was, sort
of, like the Bernie Madoff, Jr. representation that it turns
out he ended up being fraudulent in a lot of his business
dealings. He was running a Quamsi scheme. And he
ultimately took a fraud judgment. Then when he wouldn't
report to court, they issued an arrest warrant for him, and
he's been on the run ever since January of '09. And so --
Q Did -- well, let me stop that. I mean, they're --
A I'm sorry.
Q -- going to say this is a run-on narrative, and I
wouldn't blame them.
A Okay. Well, you asked what I thought about him, so I
was trying to give --
Q Well --
A -- a picture.
Q -- actually, I -- I'm not sure that was my question,
but you said earlier that you had a judgment against him,
and you're working on getting more?
A Yes.
Q Okay. Are you in -- how -- what, if anything, are you
doing to try to collect that judgment?
A We're working through the judgment process as far as
trying to attach his various properties.
325
Q Do you have any relationship with Mr. Robbins
whatsoever, other than as an adversary?
A No.
Q Okay. Did you ever have any business relationship,
formal or otherwise, with Mr. Robbins?
A No.
Q You loaned him money.
A Yes, I did.
Q Why did you do that?
A Well, again, at the period of time we're talking
about, he came in and represented that, you know, he had
this massive empire he was sitting on; he had a lot of
money. And he introduced me to Steve Norris. Steve came in
and started working on our deal. And then shortly after the
deal is when Mark Robbins hit me up and said hey, I need a
quick spot loan for a week or two for 100,000, which you
know, was a big gulp for me and Mrs. McBride, but we did it
on the representation that it was going to be -- get paid
back soon. And that --
Q This was a short-term loan?
A Short term, yeah.
Q Just to tide him over for a short period of time?
A Yeah, the -- it was just a cash-flow issue, as he
described it. And so the point was we're moving, barreling
down the road with Mr. Norris. It all seemed good. And his
326
representation to me was, yeah, he owed this money. He owed
money to Norris, but he just wanted me to give him a loan
for a short period of time.
Q Well, how did this come about that this money was
going to Mr. Norris instead of Mr. Robbins, who was --
needed the cash?
A Well, Mr. Robbins got his by other means, you know,
soon after that. He got another 200,000 and that --
Q All right. Let's start with the first one.
A Okay. The -- well, the first one was he had
represented to Mr. Norris that he was going to pay him
money. And at the end of the day, this is the guy who
represented to everybody around him how rich he was and how
wealthy he was, but he was using a credit card to fly around
on a corporate jet and act like he was a big shot, when the
reality was he didn't have any money.
Q All right. So why is it -- how did it come about that
you loaned him $100,000 by paying it to Mr. Norris? What
was the res gestae of that deal?
A Well, so he came to me and said, look, I've
represented to Mr. Norris that I'm going to pay -- I was
going to pay him for these fees, because he was -- he had a
deal with him not just on our deal but other deals he was
doing with him where he had -- obligated to pay --
Q This was where Robbins had deals with Norris and
327
Robbins --
A Yes.
Q -- owed money to Norris?
A Yes.
Q Okay.
A And so he had obligations to pay Norris, and he asked
me if I would, again, just loan him the money for the period
of a week or two, because he'd get it right back to me. So
I viewed it as a pretty innocuous thing at the time.
Q If you realized how big an issue that came to be in
this case, would you have done that?
A Not in a million years. It's not -- before we get to
this case, the McBride family home case has been a disaster
since we went through this, and I have to tell you, this
whole thing of him representing that he had all this money,
it was a short-term loan, he was going to pay me out, not
just on the 100- but on the full 300-, has been a major
problem at home and at work.
MR. MARRIOTT: Your Honor, could I just inquire
where we are on time since I know we have additional
witnesses?
THE COURT: I think we've all gone so far over
time, at this point, but --
MR. SPECTOR: I -- my other witnesses are not
nearly as lengthy as these. I have Mr. Hunsaker's
328
declaration.
THE COURT: Right.
MR. SPECTOR: And it is fairly limited in scope.
This is not limited, and we have Mr. Norris to testify, and
his is very limited in scope. So we have to have Norris.
He has to leave. Even if we have to go out of order, we
have to use Mr. Norris, but --
THE COURT: Understood.
MR. SPECTOR: -- I'm almost done with my
redirect.
THE COURT: All right. Because I understand why
the Robbins/Norris issue came up. I -- well, I don't --
I'll be anxious to hear why it's so important --
MR. SPECTOR: Well --
THE COURT: -- to the --
MR. SPECTOR: -- you know, I heard in their
papers why, but I -- if we're going to -- some Courts like
to have a little colloquy, why are we talking about this at
this point in the case. I won't, because we don't have
time, but --
THE COURT: Right.
MR. SPECTOR: -- we'll get to that.
BY MR. SPECTOR:
Q This was all taking place in the context of a deal
with which company? Let me strike that. This was in, when,
329
May? When was this loan made? That's a better question.
A The span of the 300,000 spread from February to about
May.
Q Well, there's only 100,000 that ever went to Mr.
Norris, right?
A Yes.
Q Okay. That meaning the 100,000 --
A Yes.
Q -- you loaned to Mr. Robbins by giving it to Mr.
Norris?
A Yes, that's right.
Q Okay. And when did this take place?
A That was in -- Robbins hit me up in February of --
that would've been '08, and I think the actual wire went to
him two weeks later. That was probably in the first or
second week of March.
Q And that was about the time, was it, that the SNCP
deal was crumbling?
A Well, it was transitioning from the MOU to the way the
new buyers wanted to do this, so that we were in the
transition mode then.
Q And did you ever have any notion of asking SCO Group
or SCO Operations, or anybody at SCO, to reimburse you for
the $100,000 you loaned to Mr. Robbins to give to Mr.
Norris?
330
A No, I asked for advice as to whether it was okay, but
I never asked for any reimbursement from anybody at SCO.
Q You had no intention of ever asking for reimbursement
from the company?
A No.
Q Now, if Mr. Norris got this money and it's not tied to
SCO in any way, in other words, were you paying Mr. Norris
for anything that he was doing for SCO in this $100,000
transaction?
A No.
Q As opposed to SNCP getting $100,000 for a marketing
study from the Japanese entity, that -- you weren't paying
him for something?
A Yes.
Q Okay. Let's turn to the -- one more thing about this.
Why -- what did the article say that was of concern to Mr.
Norris and his investors in this SNCP deal?
A Yeah, the big headline came out that said that 95
percent of the UNIX royalties had to go to Novell as the
result of a recent Court ruling, which is --
Q And that --
A -- patently false.
Q Has that issue been resolved --
A Yes.
Q -- to a large extent? By what?
331
A Well, first of all, it was false to begin with, but
the bigger thing that happened is in the July 16, 2008
ruling from Judge Kimball, he affirmed our ownership rights
of UNIX, confirmed the extent that there were any royalty
issues ever tied from SCO back to Novell for UNIX where --
that those had expired in 2002, and that we -- basically, it
was clear saving for the UNIX business with respect to any
royalties. Nothing would be owed to Novell.
Q Do you have deals with Mr. Norris, besides through his
Unxis company and you being the CEO of SCO?
A No, I don't.
Q Does Talus Company [ph], do you have any interest in
that?
A No, I don't.
MR. SPECTOR: Your Honor, I believe you've
received a copy of the complaint. I would -- if you
haven't, I'll give you my copy of the complaint. I would
ask, Your Honor, if it has any impact at all on Your Honor,
to read the entirety and see what it is Mr. Robbins -- or
it's not Mr. Robbins who's suing him. It's this company
that -- oh, I forget the name of it. Pelican something.
THE COURT: Yes.
MR. SPECTOR: You'll see exactly what they say in
the factual allegations, say that -- and Mr. McBride doesn't
know this, but you'll see what it is they say Mr. McBride's
332
role was, and you'll -- notwithstanding anybody can put in a
complaint against all Plaintiffs -- I mean against all
Defendants, but you should see, if it's going to have any
weight at all, exactly what it is they said Mr. McBride's
role was at -- in that was. So if you don't have it, I will
see that you get it.
THE COURT: I don't believe I did receive it.
MR. SPECTOR: All right. I have it here before
the --
THE COURT: I think there's only one copy.
MR. MARRIOTT: I can give you a copy, Your Honor.
MR. SPECTOR: I would like it if you could.
Sure.
THE COURT: Thank you. Thank you, Mr. Marriott.
BY MR. SPECTOR:
Q Are there any other deals with Mr. Norris and Mr.
Robbins that you should tell the Court about that -- secret
or otherwise?
A No.
Q Okay. Do you have any deal to go and work for the
acquiring company, Unxis?
A No.
Q Any discussions about you going to work with Unxis?
A No.
Q Do you have any intentions to go to work with Unxis?
333
A No, I -- my desire is to get the SCO Group turned
around and work here another ten years.
Q Any kickbacks to you from anybody for -- from Unxis,
from SCO, for anybody involved in these transactions?
A No. In fact, that's the irony of the whole deal is
that I'm the one that was paying the money out, and I'm the
one who's under attack for that.
MR. SPECTOR: That's all I have, Your Honor.
THE COURT: All right. Thank you. Recross? Any
follow-up cross?
MR. MARRIOTT: I'd ask to have one minute, Your
Honor.
THE COURT: Sure.
MR. MARRIOTT: I have no further questions.
THE COURT: All right. Mr. Lewis?
MR. LEWIS: No, Your Honor, thank you.
THE COURT: All right. I think, then, Mr. -- may
Mr. McBride --
MR. SPECTOR: Yes, he may --
THE COURT: -- be excused?
MR. SPECTOR: -- step down.
THE COURT: You may step down. Thank you, Mr.
McBride.
MR. SPECTOR: Your Honor, we have Mr. Hunsaker.
We have Mr. -- what's his name -- Norris.
334
THE COURT: Does anyone wish to have a break?
MR. SPECTOR: I would.
THE COURT: All right. There is a soda machine
downstairs. I don't know if anyone mentioned this to you.
Feel free to bring them in, bring in a soft drink or
something like that. What do you want? Ten minutes?
MR. SPECTOR: Sure.
THE COURT: Ten minutes. Thank you.
(Recess at 6:44 p.m.)
AFTER RECESS
(Call to Order of the Court at 6:57 p.m.)
THE COURT: Thank you. Please be seated.
Mr. O'Neal [ph]?
MR. O'NEILL: Yes, Your Honor. Good evening.
I'd just like to respond to a question Mr. Harrington [ph]
raised before, and I did have an opportunity to speak with
him --
THE COURT: On the service --
MR. O'NEILL: -- regarding the service.
THE COURT: Yes.
MR. O'NEILL: And I wanted to confirm for the
Court that we did, in fact, serve an interested-parties list
regarding the sale, and that certificate of service is at
Docket No. 821. And because of confidentiality, it doesn't
list the identity of the parties. The certificate of
335
service just indicates that 20 interested parties were
served. And I indicated to Mr. Harrington that, subject to
appropriate confidentiality, if he needed that information,
we could certainly share it with him. But I just wanted to
address that point so that Your Honor knew.
THE COURT: Thank you, Mr. O'Neal.
MR. O'NEILL: Thank you.
THE COURT: Thank you.
MR. SPECTOR: The Debtors call Steven Norris to
the stand.
THE COURT: All right. Mr. Norris?
MR. SPECTOR: And I don't believe she -- Ms.
Bayles [ph], due to her appearance, but Ms. Bayles is here
to --
MS. BAYLES: Good evening, Your Honor.
THE COURT: Good evening, Your Honor.
MS. BAYLES: Leslie Bayles, on behalf of Unxis,
Inc.
THE COURT: All right.
MS. BAYLES: And Mr. Spector's going to let me
sit on this side of the --
THE COURT: Absolutely. You certainly may. Mr.
Norris, if you'll just remain standing while you're sworn.
THE CLERK: State your full name and spell your
last name, for the record.
336
MR. NORRIS: Steven L. Norris, N-o-r-r-i-s.
STEVEN NORRIS SWORN
THE COURT: You may proceed.
DIRECT EXAMINATION
BY MR. SPECTOR:
Q Good evening, Mr. Norris.
A Good evening.
Q I'm going to quickly go through your pedigree, but you
don't have to go quickly when I -- just because I do. Where
were you educated, sir?
A I went to three different universities. I went to the
University of Alabama, where I got a bachelor of science. I
also got a JD degree there. I got an LLM from New York
University. And I was a fellow at Yale Law School.
Q What were the years of these degrees?
A I was afraid you'd ask that. I graduated from college
in 1972, from law school in 1975, from NYU in 1976, and I
was in -- at Yale in 1977.
Q Tell us about your employment after you concluded your
studies.
A I worked for about three years for a law firm in
Washington, D.C. called Cohen and Uritz [ph].
Q And then what?
A And then, I left the -- I left that firm and went to
work for the Marriott Corporation, where I worked from
337
approximately late 1980/early 1981 until 1987.
Q And what was your job description there?
A When I went to Marriott to work for Mr. Marriott, I
was a director of taxes. When I left, I was vice-president
for tax, and I worked on a variety of transactions and
everything.
Q What did you do after that?
A I started a private-equity firm in Washington, D.C.
Q What was the name of that firm?
A The name of that's called The Carlisle Group.
Q Tell the Court something about The Carlisle Group.
A Well, The Carlisle Group grew out of an idea that
David Rubenstein and myself had to establish outside of New
York City a Blackstone, if you will, type private-equity
firm. I think it's now the -- one of the -- it's the first-
or second-largest firm in the world today, in terms of
private equity, depending on how you measure.
Q And there's -- did there come a time that you left the
-- Blackstone Group -- strike that, The Carlisle Group?
A The day I left, I was a senior advisor through 1996.
Q And what did you do after 1996?
A I set up another firm that was called Apiant Group
[ph], which I ran for approximately three years.
Q What did that firm do?
A Essentially the same sorts of thing, slightly
338
different kind of transaction. We focused a bit more on
transactions in foreign markets, but it was a private-equity
firm. We also did some real estate.
Q And when did you leave that firm?
A I actually sold that firm in the late 1990s and formed
another partnership in Washington with a gentleman who was
in the real-estate business, called Washington Investment
Partners.
Q All right. And how long were you with that firm?
A I was there until -- effectively until 2005, although
I still have an interest in some residual interests in some
of the -- some of their investments.
Q What have you done since then?
A In the last couple of years, I primarily acted as an
independent consultant in connection with private-equity or
real-estate transactions with a focus on working with a
number of groups, primarily from the Middle East and their
U.S. and European investment strategy and things related
thereto.
Q Tell the Court something about your investment
experience, business investment experience.
A Well, I think I've seen, over the last 20-some years,
investments of virtually every kind, from real-estate
investments to private equity to buy-outs. I've had the
great honor to work on the first recapitalization, Your
339
Honor, of Citibank. I worked on a number of major
investments in public companies: Disney being one, Four
Seasons being another, a variety of buy-outs in virtually
every industry, and as I say, a number of different kinds of
real-estate investments.
Q Did you ever do any public service?
A Yes, I was appointed by the -- I was asked to -- by
the president of the United States to serve on the federal
retirement board, and I was confirmed by the U.S. Senate to
that position.
Q That's the thrift-savings board where Your Honor --
where His Honor has probably a 403-B, like I do?
A I certainly hope so. It's a good plan. We've spent a
lot of time to implement it.
Q Who or what is Unxis?
A Unxis is really a company that was formed for the
purpose of making an acquisition of the UNIX business from -
- in the SCO Group.
Q And who are the constituent members?
A Well, there's two shareholders at the present point in
time. There's a company called Gulf Capital Partners -- of
which I'm the chairman, which is a recently formed, private-
investment company, capitalized primarily with partners from
the Middle East -- and a company called Merchant Bridge --
which is a London-based merchant bank, which is run by a
340
former head of Carlisle International.
Q We're going to take them one at a time. How well
capitalized is Gulf Capital Partners?
A Today, we are in formative stages, but we have a
committed capital from our investment -- from our investors
in the range of $10 million.
Q Okay. Do you know -- if you know, how well
capitalized is Merchant Bridge?
A To be frank, sir, I don't know the precise
capitalization, but it's a classic English-style merchant
bank. And I'm informed that they have substantial drawing
lines and access to the capital, not only of their firm but
some of their investors on a co-investment basis.
Q Tell us what you know about Merchant Bridge as an
entity.
A Well, Merchant Bridge is a well-regarded entity with a
-- they've had a focus primarily on investments in the
Middle East, and recently have been in the Vanguard on
investments in Iraq. They're working on, for example, a
major, new concrete facility in the western part of Iraq, so
they have quite a bit of experience in the Middle East.
Q How long have they been in business?
A I think Merchant Bridge was formed in about 1998.
Q And do you know the principles of Merchant Bridge?
A I know the -- two principles quite well.
341
Q Who are they?
A Well, I mentioned earlier Basal al Raheem [ph], who
was, for a time, the co-head of Carlisle International. And
the other principle partner there -- and I use partner in
the generic sense -- is a gentleman whose name is Eric
Leblanc [ph].
Q And did you have any prior dealings with Mr. Leblanc?
A No, I actually met Eric for the first time when I was
introducing a potential investment in SCO, in approximately
August of last year.
Q Do you know who at Merchant Bridge carries the
technical knowledge about businesses like SCO?
A Well, that would be Eric Leblanc.
Q Well, is there anybody else there that interfaced with
technical people on the SCO side?
A Yes. They have a very accomplished young analyst.
His name is Raif Alotta [ph]. I think he's in his mid-20s,
and he already has, I'm told, more than two patents.
Q Well, what, if any, relationship do you have with the
Merchant Bridge -- with Merchant Bridge or its principles?
A Well, I've only had a social prelateship over the last
decade or so with Basal al Raheem, and Eric is totally a
professional-partnership arrangement that we've put in place
for purposes of effectuating this transaction.
Q When did Merchant Bridge and Gulf Capital Partners
342
become interested in SCO?
A Well, Gulf Capital Partners, as I mentioned, was more
recently formed, but the initial meetings with Merchant
Bridge took place in August and then in the fall of last
year, 2008.
Q How did it come to the attention of Merchant Bridge?
A I brought it to Basal's attention and told him that I
thought it was something that he ought to take a hard look
at.
Q And after the -- there -- I take it there was an
introductory meeting, at some point?
A Yes, that was in August where one of the
representatives from the company's overseas operation and
myself met with Mr. Leblanc for about a two-hour lunch
meeting.
Q How did these talks go?
A Well, they went extremely well.
Q What happened after those introductory talks went
well?
A Well, we had a series of follow-on meetings. Darl
McBride and myself and Jeff Hunsaker and Hans Bayer and then
Andy Nagel [ph], we had a series of meetings throughout the
fall, beginning in October, where there was a set of
representatives, and then later on in November, where there
was a broader set of representatives. And I think it was in
343
the November meetings where they actually introduced the
engineering team, led by Mr. Nagel.
Q How intense were the discussions between the techies?
A I will say that they speak a totally different
language, and there was quite intense discussions between
Eric, Raif [ph], the two Merchant Bridge representatives,
and Andy, and even -- and Jeff Hunsaker. And I must say,
for most of that, I was probably concentrating somewhere
else.
Q What transpired after these November discussions had
concluded?
A Well, we began to work seriously with the company on
an effort to put together some kind of an investment. At
the time, we were thinking in terms of a -- forming a
company, as we ultimately did, that would make an investment
in the business, the UNIX business. But it was very, very
complicated, because we wanted to be sure that we had no
continuing involvement whatsoever in the litigation and the
controversy that's really germane to this whole proceedings.
Q Well, why are you -- why were your group -- why was
your group interested in acquiring the UNIX business?
What's your goal?
A Well, the goal is pretty simple. There's three
operating systems, to be frank, and about -- the market,
depending on how you define it, Your Honor, is somewhere in
344
the neighborhood of $8 to $10 billion a year. Probably
about 40 percent of that is Microsoft. There is a big piece
of the market that, for a variety of reasons, would prefer
not to deal with Microsoft. There are two other operating
systems, the both of which we think are fine and terrific
systems. One is Linux, supported by IBM. We think that's a
very fine system. It has a lot of applications to a lot of
people, as witnessed by the rather considerable sales and
revenues. If you just look at Red Hat's revenues last year,
its consulting alone $750 million in the last quarter. But
we also think that there's an opportunity for the UNIX
system, particularly in the emerging markets. It's a secure
system, you know. In the run-on since 9/11, people are
increasingly concerned about cyber security. I mean, Your
Honor's probably seen the stories about, probably, the
Koreans but maybe the Chinese hacking into the Defense
Department. People are much more, I think, thinking in
terms of certain advantages to proprietary systems. And so
we saw a unique opportunity to acquire an operating system
that has -- is well known for its reliability and take a
particular interest into the emerging markets.
Q Now you touched upon a concern about separating the
UNIX business from the litigation.
A Yes, sir.
Q I take it, then, Unxis and its constituents have no
345
interest in pursuing litigation that SCO is now pursuing.
A That's correct.
Q And I take it you -- did you -- did Merchant Bridge
and Gulf Capital Partners do any due diligence with regard
to that litigation before it decided to purchase this
company's UNIX business?
A Yes, we did. We had a decent feel for most of the
technology issues, but the -- some of the copyright, the IP
issues, were very complex. The -- frankly, the opinions
that are out there could be read both ways. You could make
a plausible argument that IBM should win and a plausible
argument that SCO should win or Novell should win. And yet,
we felt that if you could separate that out, you had a very
viable business, so we've spent an enormous amount of time
and, I must say, a fair amount of money on IP lawyers to
sort of give us the view as to how that could be done.
Q Did there come a time that the talks in late 2008 came
to an end, or at least a hiatus?
A Yeah, it came to a hiatus principally because, in my
view, we were running up against roadblocks in exactly how
we would define the assets to be acquired. It was very
important to us that what we were acquiring were free and
clear, and that a very complicated thing to do.
Q At some point, did SCO decide to go a different way?
A They did. We were actually quite disappointed, but
346
they did.
Q What -- and when was that, if you recall?
A That was some time around the early part of this year,
2009. We were actually hoping that we could reach an
agreement toward the end of last year, in December, but that
-- we weren't able to do it.
Q Well, when SCO went that other way, did you take any
action?
A Well, we didn't go away. We continued to try to have
an active and constructive dialogue. We continued to feel
that we could find a way through the morass of the
conflicting points of view dealing with the IP, and so we
kept at it.
Q But I take it, since you're here supporting the sale,
you continued negotiations some time after the plan was
filed in January of '09.
A We did. We've continued negotiations right up until a
few minutes before His Honor had the last hearing.
Q What's the structure of the deal that was discussed
from January of 2009, or thereabouts, through now?
A To be frank, sir, the basic structure really didn't
change much. We sort of -- as I said, we were very clear
that we didn't want to have anything to do with litigation,
the merits of that notwithstanding on either side of it. We
simply wanted to acquire the rights to the operating
347
platform, to the operating system. So that basic structure
really continued throughout the negotiations. I personally
didn't take -- was not involved in the detailed
negotiations, but in terms of the -- that basic strategy
really didn't change much.
Q Now you said you did the due diligence on the
litigation with Novell in reference to checking on what
intellectual property Unxis could get from SCO.
A Right.
Q Can you tell us whether Unxis is satisfied that it's
getting everything it needs to run its business?
A Well, we started from the premise that Judge Kimball,
in his ruling, I believe it was last summer, had said that
SCO had all of the necessary rights and assets, if you will,
to conduct the business that it had therefore been
conducting. We also took some comfort, or I believe the
lawyers did, out of the fact that this business had been
sold to a -- from Santa Clara corporation to --
Q Santa Cruz.
A -- Santa Cruz to Caldera some years earlier without
any objection, so we felt comfortable that we could, indeed,
acquire what we needed for, what I call, the short term.
Longer term, these systems will merge and migrate, and it
becomes less of an issue.
A So we felt comfortable that we could indeed acquire
348
what we needed for what I call the short term. Longer term,
these systems will merge and migrate and it becomes less of
an issue.
Q Now, to run the business, I assume you're going to
have to have a lot of the contracts that SCO currently is
party to; is that right?
A That's correct.
Q Have you or your representatives directed the debtor
to assume and assign hundreds, if maybe more, contracts?
A There's been long and painful, I think, discussions
over all that. My -- I'm informed by my lawyers and
counsel, and by my business partners, that the contract that
we've entered into conveys to us everything that's
necessary.
Q How much is Gulf Capital Partners invested so far in
this deal?
A You mean in the deal that's currently being discussed?
Q Yes.
A Well, the investment's a bit tricky We're responsible
for our share of the expenses, which are probably, to date,
are in the range of a half a million dollars of accrued
costs for legal counsel, IP analysis, and so on. And then,
of course, we have at risk a deposit of $250,000.
Q And getting into the counsel business did you have any
difficulty finding counsel to help you negotiate with our
349
team?
A I did. The first group of lawyers that I wanted to
retain -- not that we didn't retain excellent counsel, we
did. There was actually two firms that I have historical
relationships with that have conflict of interest with one
or the other of the parties to certain of the litigation.
Q And what effect did that have on the pace of the
negotiations with SCO?
A Well, it slowed it down. We spent probably three
weeks or four weeks trying to get counsel that was not
conflicted. We were fortunate in finding counsel that I had
a historical relationship with, but it was a tedious -- it
was a task, to be frank, Your Honor.
Q How committed are you personally in seeing that this
deal gets concluded?
A Well, I can tell you that I spent nine hours in the
waiting room today, and I'm sure Your Honor is equally tired
of today's proceedings.
We're very committed. I personally have had a lot at
stake in this. There is, as you know, sir, a lot of
controversy around the various aspects of the litigation
that gave rise to these proceedings, and people have strong
feelings on either side of it. And so, by venturing forth
into the SCO morass, I found myself the victim of not daily
anymore but virtually weekly bloggers with the various
350
conspiracy and other theories that are amusing but not
something that you would go into lightly. But still, I
believe that this is something that's worth doing.
Q So you've suffered the barbs of the bloggers. You
suffered nine hours in a Delaware waiting room. You've paid
hundreds of -- or obligated yourself for hundreds of
thousands of dollars. And I take it your answer is that
you're very committed to this deal.
A I am committed. I must say, too, that on the
conspiracy theories, it's most interesting to me that
somehow we're in cahoots with Bill Gates. Why in the world
he would need us is not so clear to me, Your Honor, but it's
something that we read about.
Q How soon can Unix close this deal if Judge Gross were
to sign an order today authorizing the Debtors to close it?
A We're committed to move as rapidly as possible.
There's some time periods provided for in the agreement.
To be quite honest, this has been a complicated
situation and none of us knew what Your Honor might rule.
And, therefore, we've had to wait and see, and there have
been objections voiced by various of those. And so we've
been in a position of not knowing exactly what we would be
faced with.
But suffice to say that we're committed to moving as
rapidly as possible. It's not a lot of money. And we feel
351
that this can be done certainly within the time frame set
out in the Purchase and Sale Agreement.
Q Does Unix have funds to close this deal as quickly as
possible as you've indicated?
A Well, Unix itself at the current time has access to
capital through Gulf Cap and through Merchant Bridge. We
also have had -- just this week, we now have received a
binding commitment, subject to the judge's order, for about
a million dollars. We've gone out to interested investors
because we think it will make a better company.
Q Well, let me just -- now that you've opened that door,
I take it you're not at liberty to discuss who these
individuals are?
A I'd be more than happy to, in some kind of a protected
way, discuss who potential investors that we're talking to
would be, but I wouldn't be prepared, unless compelled, to
put on the public record simply because it ends up on
someone's blog.
Q Now, there's two parts to this. Correct me if I'm
wrong. There's the take-out portion, that is at the closing
with SCO, with a 2.15 either letter of credit or cash that
would go to SCO --
A That's correct.
Q -- and a 2.85 million dollar letter of credit against
which Novell judgment would be covered.
352
A That's correct.
Q Come hell or high water, no investors besides Merchant
Bridge and Gulf Capital Partners, is this deal going to
close for those funds?
A We have the resources to not only the combination of
those two but to put in the initial working capital that we
would require for probably operating the company somewhere
in the range of a year.
Q And speaking of working capital, is that the major
focus of your fundraising at this point?
A Yes, it is. I mean, our plan, Your Honor, is to try
to raise about $10 million initially, approximately
6 million of which would be used for working capital. And
the bulk of that would be used for marketing and for
engineering.
MR. SPECTOR: I'll pass the witness at this time,
Your Honor.
THE COURT: All right. Thank you.
CROSS EXAMINATION
BY MR. REYNOLDS:
Q Good evening, Mr. Norris.
A Good evening.
Q You mentioned that you recently received a binding
commitment for $1 million. Is that from an investor has
signed a Subscription Agreement, for example?
353
A It's actually from two investors.
Q Two investors totaling 1 million.
A One million, yes.
Q I see.
And have they signed documentation with Unix?
A They have.
Q They have.
And how long ago was that?
A I think that probably took place on Friday of last
week.
Q Other than those two documents, which we haven't seen,
that total a million dollars, are there any other binding
commitments from any other sources that you have at this
time?
A No.
Q Under the Purchase and Sale Agreement, I believe even
as amended, Unix is required to provide a $2.15 million
letter of credit within five business days of the approval
of the sale order by this court or they could do so at
closing.
Do you understand that?
A I understand that, yes.
Q And that could be -- if the Judge were to approve the
sale order today, that could be five business days from
today.
354
You understand that?
A I understand that.
Q What is the capitalization of Unix?
A Today?
Q Today.
A Probably about $10,000.
MR. SPECTOR: Your Honor -- I'm sorry; that the
question assumed -- the one before. The question before
assumed a fact not in evidence, which is untrue, about it
being five days from today is what he asked. I believe the
contract says five days from a final order. Final order --
THE COURT: In other words, after the 10-day
appeal period.
MR. REYNOLDS: That's -- so five business days
from the entry of the order, which may not be five days.
Like it would not be five from today. It would be some
period longer, but not too far off, if the Court would enter
the order shortly.
BY MR. REYNOLDS:
Q Did you understand that?
A I do.
Q And you said the capitalization of Unix is
approximately $10,000?
A That's correct.
Q And you understand that Merchant Bridge and Gulf
355
Capital Partners are not signatories to the Purchase and
Sale Agreement.
A I understand that.
Q Do you have any documents in writing that obligate
Merchant Bridge or Gulf Capital Partners to fund this
transaction in any way?
A I don't -- I don't believe so.
Q Do you understand that there are certain contracts
that are to be assumed under the Purchase and Sale Agreement
by Unix?
A I do.
Q And have you personally familiarized yourself with the
contents of those contracts?
A No.
Q Isn't it true, Mr. Norris, that Unix itself, which you
said was created only recently for this transaction,
obviously has no business track record of any kind?
A That's true. It's a new company.
Q And have you taken any steps at this point,
Mr. Norris, to obtain office space in connection with this
transaction?
A To obtain office space?
Q Office space, yes.
A No.
Q Have you taken any other steps in terms of preparing
356
for the future with this transaction?
A We've created an outstanding senior management team.
We spend an enormous amount of time on strategic planning,
on assessing markets, and on conversations with very well
capitalized investors who we believe will make outstanding
shareholders. We haven't spent too much time on renting
office space yet.
Q There's a gentleman named Mr. Jim Kelly (ph), correct?
A That's correct.
Q And is he someone whom you've already offered a
position to?
A He is.
Q Do you have an agreement with him?
A I think he and Mr. Labla (ph) have been having
discussions about the finalization of such an agreement.
Q Other than Mr. Kelly, whom we just mentioned, have you
taken steps to retain anyone else?
A Yes, we actually have also recruited a gentleman. His
name is Kevin Cheatam (ph), who would be chief financial
officer. He was associated with me and Mr. Kelly in another
portfolio company that we successfully built with George
Sorells (ph) some years ago. He would be CFO. And Jim
Kelly has also recruited -- had substantive conversations
with a gentleman who would be the general counsel.
We've had ongoing and fairly detailed conversations,
357
Eric has, with Mr. Hunsaker, who would come over with
Mr. Bayer, who would come over with the engineering team
that would come over. So we spent quite a bit of time
discussing how we would see the operating management being
formed. And also, we've spent some time thinking about, and
actually had conversations with one of the leading cyber
security experts of the United States about joining our
board.
Q Have you yourself, Mr. Norris, ever run a software
company?
A No, no. I'm not an operating officer, sir.
Q Now, do you recall that you gave deposition testimony
in this matter in Los Angeles on July 17th?
A I recall that.
Q And you understand you were under oath during that
examination?
A I understand, sure.
Q And if you recall, at that time, you mentioned
that -- and there was a presentation that discussed this,
that you were seeking minimum investments in investors of
$2.5 million in connection with this joint venture.
A You're referring to a presentation we put together for
prospective investors, I believe.
Q Okay. But that is what the presentation asked for.
A I think that's probably what it did ask for.
358
Q But you've now arranged for investments of about half
a million dollars each; is that right?
A Well, typically speaking, in private equity context,
you have an offer, and you always have the discretion to
take investments of a smaller or larger amount if you choose
to, and that's simply what we've done.
Q Is the answer to my question yes?
A Could you repeat your question?
Q That although you had asked and you had planned for
investments of a minimum of 2.5 million from investors in
the presentation we discussed in the deposition, that you
have, in fact, since then accepted investments of
approximately half a million dollars.
Is that right?
A Two investments at a half a million dollars.
Q But is that correct?
A That's correct.
THE COURT: May I excuse you just for a moment,
Mr. Reynolds?
MR. REYNOLDS: Yes?
THE COURT: If you could speak a little more into
the microphone.
MR. REYNOLDS: Oh, I'm sorry, Your Honor. Yes,
of course.
THE COURT: Good.
359
MR. REYNOLDS: Sorry about that.
BY MR. REYNOLDS:
Q Mr. Norris, you understand there's a $250,000 deposit
that's been put in escrow, pursuant to the Purchase and Sale
Agreement, correct?
A I do.
Q Isn't it true that you're not sure where that money
came from?
A No, that's not true.
Q Did you recall testifying in your deposition, when I
asked you whether you knew where the actual $250,000 that
was deposited in escrow in connection with the transaction
came from, and you responded, "Probably the internal sources
of Merchant Bridge." And I said, but do you actually know
where it came from and you said "No"?
A Well, the internal sources of Merchant Bridge I stand
by it. Where internally they arranged for it, I don't know.
Q Have you yourself contributed any money toward that?
A No.
Q I'd like to move on to a different topic if I may,
Mr. Norris, and that is Mr. Robbins was mentioned earlier
today in your -- well, maybe before you were --
A No, I haven't been here. I've been outside.
Q -- before you came in.
Do you know who Mark Robbins is?
360
A I do.
Q Okay. Who is he?
A Mark Robbins is a Utah-based -- a Utah-based business
entrepreneur.
Q Isn't it true that he was, at least at one point, your
business partner?
A No.
Q Were you involved in an organization called Peninsula,
in which --
A Yes.
Q -- he was also involved?
A He was, but it wasn't his individually. He had an
entity that was owned -- interest in that company.
Q Isn't it true that Mr. Robbins introduced you to Darl
McBride?
A That's true.
Q And isn't it true that you never heard of SCO prior to
the November or December 2007 when Mr. Robbins introduced
you to Mr. McBride?
A I think that's true.
Q Now, did there come a time when Mr. Robbins was
working with you in connection with a possible transaction
involving the assets that are now the subject of the
Purchase and Sale Agreement?
A An entity that he formed.
361
Q Okay. And did this end up appearing as a memorandum
of understanding in approximately February of 2008?
A Yes, it did. There was a memorandum of understanding
between an entity formed by Mark Robbins and myself.
Q And at the time of the Memorandum of Understanding, is
it true that you considered yourself a kind of sponsoring
investor who was helping SCO Debtors to raise capital?
A The time frame again?
Q Around the time of the Memorandum of Understanding,
which is February 2008.
A Yeah. I was asked by Mr. McBride, with the
encouragement of Mr. Robbins, to act as a kind of sponsoring
investor in a plan that they planned to and then did file.
Q And isn't it true that after that point, you received
a payment of $100,000 from Mr. McBride?
A I think that that's -- actually, received the money
through Mark Robbins, but I knew it came from Mr. McBride.
Q Did you have an agreement with Mr. Robbins that
related to that money?
A No.
Q Did you have an agreement with Mr. McBride in
connection with that money?
A No.
Q And do you recall testifying on July 17th in response
to the following question.
362
"Is it fair to say that you were paid this $100,000,
not pursuant to any written agreement?" That's on page 63.
And you answered, "That's correct. There is no
written agreement. I have no agreement with Darl or didn't
sign an agreement with Mark. It was simply on account of
the fact that I had been working on this reorganization, and
I was not prepared to continue to do it without, you know,
some kind of expense covered or compensation. So I looked
at it as basically a, you know, a fee, part of a fee to
continue to try to help a company put together their plan of
reorganization."
Do you recall testifying to that effect?
A I think that's a fair characterization.
Q And do you recall also testifying in response to the
question, "Why did you make no effort to have this payment
documented in the form of an agreement as you've done in the
past and other situations?"
And your answer was, "By that time, I was already
embroiled in a situation, and I basically said, 'Look, if
you guys want me to continue to work on this, you're going
to have to provide some cover for this,' and it was in that
context. There was nothing really to agree to. I just
simply said, 'Look, I need to get some compensation for all
this time and effort or I'm not going to continue to go
forward with it.' So it really wasn't any more complicated
363
than that."
Now, do you recall testifying to that effect?
A Yes, I do. I stand by that.
Q So isn't it true that the $100,000 you got from
Mr. McBride was in connection with your work for the SCO
getters in terms of their reorganization plan and helping
them to raise capital?
A I don't think there's any controversy over that, not
in my mind.
Q Right.
Another question. If I could point your attention,
Mr. Norris, to Exhibit 57 of the Movants. It's in that
binder.
MR. REYNOLDS: May I approach, Your Honor?
THE COURT: Yes, you sure may.
BY MR. REYNOLDS:
Q So looking at Exhibit 57 of the Movants' exhibits, do
you see the first page there?
A I do.
Q Is it -- that invoice came from you?
A I believe it was sent on my behalf.
Q And is it not direct to Darl McBride of the SCO Group
at its Lindon, Utah address?
A Yeah, I think that's where we were told to send this
invoice, but this had nothing to do with the payment that
364
came from Mr. McBride, as I'm sure you'll point out.
MR. REYNOLDS: Your Honor, if we can take a short
break? Is that possible?
THE COURT: How much time do you need?
MR. REYNOLDS: One minute, Your Honor.
THE COURT: Oh, certainly. I'll remain here,
then, if you want to step out of the room for a moment or
whatever.
(Recess from 7:36 p.m. to 7:37 p.m.)
MR. REYNOLDS: Thank you, Your Honor. We have no
further questions.
THE COURT: All right.
MR. REYNOLDS: Thank you, Mr. Norris.
THE WITNESS: By the way, Your Honor, could I
note that the date on this is incorrect.
THE COURT: The date on -- what's that?
THE WITNESS: On this invoice. It's a typo, I
suppose, but it says July 23, 2009.
MR. REYNOLDS: That is, Your Honor, how the
document was provided to us. I'm not, obviously, aware of
the source of it. Sometimes those kind of things when
they're printed off the system have the date when they were
printed out, and that may well explain that.
THE COURT: Thank you.
MR. REYNOLDS: We got this document from
365
Mr. Norris' counsel, who represented that she obtained it
from SCO, after asking SCO for documents relating to these
payments. We, as far as I know, have no record of receiving
this document. We're the ones that follow it from SCO
itself. So there's no Bates number on it, and that's why.
THE COURT: I see. Thank you. Thank you,
Mr. Reynolds.
Any redirect?
MR. SPECTOR: Is there anybody else on your team?
THE COURT: Oh, I'm sorry. Mr. Lewis. I
apologize.
MR. LEWIS: No, Your Honor. I have no questions.
Thank you.
THE COURT: Mr. Harrington?
MR. HARRINGTON: No, Your Honor.
THE COURT: I apologize.
(Debtor's Exhibit D-34 marked for identification.)
REDIRECT EXAMINATION
BY MR. SPECTOR:
Q I show you what's been marked as Exhibit D-34.
Can you identify that document, sir?
A Yes. This is actually a copy of the document that was
pointed out before but has I think probably the correct date
in '08.
Q Take a look at the addressee. Is the addressee the
366
same?
A No, it's not the same.
Q And do you know who paid the invoice?
A So far as I know, it was paid from one of the foreign
subsidiaries.
Q Do you remember my asking you some questions at your
deposition? Pardon me. Would you just read into the record
who the addressee is on there?
A SCO Japan Limited, a subsidiary of the SCO Group.
Q Thank you.
MR. SPECTOR: I'm going to offer Exhibit D-34
THE COURT: Any objection?
MR. REYNOLDS: No. This is the first time I'm
really focusing on this document, Your Honor. I note that
it has the same invoice number as the one that's been marked
as Movants Exhibit 57, and I'm not sure of the origin of the
document. Other than what I'm aware of now -- I'll have
questions about it, but we have no objection right now.
THE COURT: No objection. It's admitted.
(Debtor's Exhibit D-34 received in evidence.)
BY MR. SPECTOR:
Q Mr. Norris, isn't it a fact that after you issued the
prior invoice that had the wrong date and the Utah address,
that you were asked to issue a new invoice to the Japanese
entity?
367
MR. REYNOLDS: Objection to leading, Your Honor.
MR. SPECTOR: Yes, it's cross examination -- oh,
it's not.
THE COURT: No, no. I'm sorry.
MR. SPECTOR: No, that's right. Never mind.
Sorry about that. I was going to cross examine --
THE COURT: It's quite all right. It's late and
it's been a long day for you.
MR. SPECTOR: I'm sorry. I withdraw that
question.
BY MR. SPECTOR:
Q Are you aware of the origin of this document, sir?
A I believe it was the document that was sent by my
office in connection with the consulting fee that was paid
for the emerging market analysis.
Q Thank you. Was there such an analysis done?
A Yes. It actually formed the basis of a lot of our
thinking about this whole transaction. We looked at China.
We looked at the Middle East. We looked at Russia. We
looked at the fact that they have pending, enormous
expenditures for infrastructure and so on and secure
systems, and we felt that this would be something that would
be of interest in these kinds of markets.
Q Do you remember my asking you at the deposition just a
few questions at the very end?
368
At the very end of the deposition, I don't know, it
was seven hours, that I say, "I'll be short but brief"?
A I recall you saying that judgment, too.
Q And was I a man of my word on that occasion if by no
other occasion?
A You certainly were.
Q Okay. Do you remember what it is I asked you at that
point?
A You should probably refresh my memory.
Q Did I ask you --
A I remember short but brief.
Q Okay. Did I ask you whether you received any money
whatsoever from the Debtors, SCO Operations or SCO Group?
A So far as I know, absolutely not.
Q Did you sign any consulting agreements with SCO Group
or SCO Operations?
A No.
Q And, in fact, you were there to buy the company with
others; is that right?
A That's correct.
MR. SPECTOR: That's all I have, Your Honor.
MR. REYNOLDS: Very briefly, Your Honor and Mr.
Norris.
THE COURT: Of course.
CROSS EXAMINATION
369
BY MR. REYNOLDS:
Q Isn't it true, Mr. Norris, that you made no mention of
SCO Japan in your deposition on July 17th? Just yes or no?
A Isn't it true -- could you repeat that?
Q Yes. Isn't it true that you made no mention of SCO
Japan in your deposition on July 17th?
A To be frank, I don't know how to answer that yes or
no. I made no mention of Japan.
Q Very well. And, in fact, isn't it your testimony that
you told me in deposition that it was SCO Germany with which
you were operating in connection with this consulting
arrangement; isn't that right?
A I did.
Q Have you ever met an individual by the name of Makato
Aso (ph)?
A Never.
Q Do you understand him to be an employee of SCO Japan?
A I have no idea who he is?
Q Have you ever been to SCO's Japan office?
A Never.
MR. REYNOLDS: No further questions, Your Honor.
THE COURT: All right.
FURTHER REDIRECT
BY MR. SPECTOR:
Q To what do you attribute the discrepancy?
370
A Because the head of the international operations was
Mr. Bayer, and Mr. Bayer was in Germany. And I'd had quite
a bit of dealings with Mr. Bayer. He had attended most of
the strategy meetings that we had. And I simply recalled it
as having been an arrangement entered into with one of his
groups, and I thought Germany.
Q Would that be the same individual that other people
have called Bayer, Hans Bayer?
A That's correct.
THE COURT: Bayer?
THE WITNESS: Yes, sir.
BY MR. SPECTOR:
Q And do you know what areas of the globe your study
covered?
A Yeah, we looked at the -- we did not look -- it was
initially to talk about the BRIC areas. We didn't really
look at all of Brazil. We looked at China. We looked at
Russia, primarily because there had been a very recent and
lucrative contract with a big Russian bank, and we spent
quite a bit of time in the Middle East, Qatar, Saudi Arabia,
Bahrain and Dubai.
Q So I guess since Russia is mostly in Asia, you did
very little work in Europe.
A We did very little work in Europe.
Q So Russian, Middle East, which is some parts of it
371
perhaps in Asia, but nothing in Europe.
A No, we --
Q And China you said as well.
A And China.
Q Right, okay.
MR. SPECTOR: I have nothing further.
THE COURT: All right.
Nothing further, Mr. Reynolds?
MR. REYNOLDS: No. Thank you.
THE COURT: Thank you very much, Mr. Norris. You
may step down, sir, and thank you for your testimony.
THE WITNESS: Thank you, Judge.
MR. SPECTOR: Your Honor, we have one more
witness, and I'll be short and brief, since I put it in my
declaration.
THE COURT: All right.
MR. SPECTOR: Thank you, Mr. Norris.
We'll ask for Mr. Hunsaker.
Do you want to just plow ahead with him and be
done?
THE COURT: I'm ready.
Mr. Marriott, are you ready, sir?
MR. MARRIOTT: I'm ready, Your Honor, if you are.
THE COURT: I am.
I know it's a long day, but it's difficult to get
372
everyone here together, you know, with schedules being what
they are, particularly this time of year. So I think it's
best that we try to complete it.
MR. SPECTOR: I couldn't agree with Your Honor
more.
THE COURT: Mr. Harrington, you would be in the
office reviewing some new case anyway.
MR. SPECTOR: The Debtors call Jeff Hunsaker.
THE COURT: Mr. Hunsaker, if you'll remain
standing, while we have you sworn, sir.
JEFF HUNSAKER, DEBTORS' WITNESS, SWORN
THE COURT: Thank you.
DIRECT EXAMINATION
BY MR. SPECTOR:
Q Good evening, Mr. Hunsaker.
A Good evening.
Q I'll be reciting a little mantra here, and if you
don't understand, just say so.
Do you adopt your declaration?
A Yes.
MR. SPECTOR: I turn the witness to cross.
THE COURT: Yes. Thank you.
MR. MARRIOTT: Good evening, Mr. Hunsaker.
THE WITNESS: Good evening.
MR. MARRIOTT: Your Honor, I have no questions of
373
this witness; only objections. And I can make my
objections, Your Honor, without the witness. So, as Your
Honor wishes, I have no questions.
THE COURT: Even if I overrule the objections,
you won't have?
MR. MARRIOTT: I will not, Your Honor.
THE COURT: Okay.
Mr. Lewis, any questioning from you?
MR. LEWIS: I have none, Your Honor.
THE COURT: All right.
Mr. Harrington?
MR. HARRINGTON: None, Your Honor.
THE COURT: All right. Then, Mr. Hunsaker, after
waiting out there all day --
THE WITNESS: I feel like leftover meatloaf.
THE COURT: I hear you. I'm sorry.
MR. SPECTOR: That's a long time to wait for zero
questions.
THE COURT: Yes, don't be sorry, Mr. Hunsaker.
Thank you. You can now sit in one of the soft chairs.
MR. MARRIOTT: Your Honor, let me just simply lay
out the objections --
THE COURT: Sure.
MR. MARRIOTT: -- and from our perspective, Your
Honor can rule on them now or you can rule on them as you
374
consider this in further detail.
THE COURT: Sure.
MR. MARRIOTT: But we would submit that the
Hunsaker declaration and, therefore, the adopted testimony,
is irrelevant. The gist of the testimony, Your Honor, is
that the conversion of this case from Chapter 11 to
Chapter 7 would have a disruptive effect on SCO's customers.
The testimony is, Your Honor, in all significant parts. And
for that purpose, I refer Your Honor to paragraphs 8, 9, 10,
11, 16, 17, 18, 20, 21, 22, 25, 26, 27 and 28, based, Your
Honor, on speculation.
THE COURT: Yes.
MR. MARRIOTT: It is based on hearsay, what some
customers supposedly told Mr. Hunsaker and what, therefore,
informs his views. It is not based on personal knowledge,
and we think that is plain from the face of the document,
Your Honor.
It also in at least one spot, paragraph 10, is
based on what we would submit is improper lay opinion
testimony. It is more far afield, Your Honor, the testimony
that Your Honor has already ruled out of bounds, and we
would ask you to, therefore, disallow it.
Thank you, Judge.
THE COURT: Thank you.
MR. MARRIOTT: Your Honor, if I may, I'm being
375
whispered to.
THE COURT: Yes, sir?
MR. MARRIOTT: The relevance to conversion, Your
Honor, is that the effect on customers is not a relevant
consideration for the Court in making that decision.
Thank you, Your Honor.
THE COURT: Mr. Spector?
MR. SPECTOR: Anything else?
This is a primarily a hearsay objection, Your
Honor, and I'm not surprised it came. And this is one of
the few things that got prepared on.
We have case law, surprisingly, on this very
point. The issue is can a -- Mr. Hunsaker is far more than
a salesman. Let's put it in the context of that.
Can a salesman talk about what he knows on his
job when a salesman job is to interact with his customers to
find out what they want and go back, anticipate their needs,
fill their needs, and so forth.
The whole job -- well, a lot of people's jobs
depend on communications. And, of course, anytime you talk
about communications, oh, my goodness, it's got to be
hearsay. Two circuits have said otherwise, and I'll cite
for the Court the cases.
Central Illinois Light Company v. Consolidation
Coal Company, 349 F.3d, 488 at 492 and 493, Seventh Circuit
376
2003.
Let me tell you about that one before I cite the
other one.
The court held that a salesman testimony
regarding his customers' unspoken business consideration was
not hearsay. Specifically, the court stated, "It is the
business of a salesman to know what alternatives his
customer's exploring. That is something within a salesman
personal knowledge rather than being hearsay." That's also
at 492 and 493, as I said.
Cited with approval by that court was a case of
Kansas City Power Light Company -- funny, they're both light
companies -- v. Ford Motor Credit Company, 995 F.2d, 1422
and 1432, Eighth Circuit 1993 decision.
In that case, the court was faced with the
consideration of whether to let certain testimony in from
the company's CEO and CFO regarding how they believed the
governmental agency was likely to react to a decision not to
redeem certain stock. And this was subject to a hearsay
objection.
The court affirmed the trial court's admission of
that, stating that based on this witness' years of
experience dealing with that governmental agency, the
witness had personal knowledge as to the agency's likely
reaction to any action taken by Power Company.
377
So I cite those two cases, and I have one more,
at least one more.
I cite for Your Honor a case from the -- I
believe this is the Third Circuit Court of Appeals. I
believe that's around here someplace.
THE COURT: Yes.
MR. SPECTOR: Wilhelm v. Commonwealth of
Pennsylvania. That's cited at 118 F. Appeals 611. This is
not a published decision in Westlaw -- it's in Westlaw I
guess, but not Federal Reporter. And it's decided
December 21, 2004.
They said there that the acting commissioner had
sufficient personal knowledge to testify about a employee's
capability to hold a press secretary position proposed for
reinstatement. And the case goes on to talk about personal
knowledge of one person about what the other person does in
conformance with their job.
And one other case is a district court case from
the district of Delaware. It's the case of Tracinda
Corporation v. Daimler Chrysler AG, very famous case. And
that was decided March 30, 2005, and cited at 362 F.Supp.
487.
I cannot quote to you the relevant provision of
that because it's quite long, and I didn't get to finish it.
But it said statements made by the CEO of the German
378
manufacturer that were printed in a newspaper article were
not hearsay. And I'll have to get to the rationale, and
I'll leave that for Your Honor -- and so forth.
Let me get the -- I had a little blurb on it, and
I probably misplaced it.
But those are the cases I cite for the support of
the idea that someone like Mr. Hunsaker, who you will see in
the early stages of the declaration lays out in detail the
basis of his knowledge and how it's important to his job as
the COO and his other positions, more than COO, but his
position mainly as sales and distribution chief, to know
what the company sells to the customers, what they use them
for, what their needs will be in the future so they can go
back. And he testifies about he has decide what
distribution -- what new upgrades to ask for from the
engineers and the like.
All of that gives him the expertise, personal
expertise, to testify on the topics he's raised.
Regarding the relevance, Your Honor, I've argued
in the response, and I'm not going to re-argue, the case is
there, that this court should take into consideration the
public interest, and the public has a say in this. And
several of the customers that you see in the declaration are
of public interest, some of them as you -- well, I'm not
going to say it out loud.
379
That could be very relevant to this court's
decision as to what to do on the conversion motion. And the
response covers that. There are some cases on that there.
And so, I urge the Court to overrule the objection.
MR. MARRIOTT: Your Honor, just briefly, and then
with Your Honor's permission, Mr. Levin would like to
address one quick point.
The objections were not limited to hearsay and
relevance, Your Honor --
THE COURT: Understood.
MR. MARRIOTT: -- I say on that and nothing
further. And the situation here is much more far afield
than the situation in the cases to which Mr. Spector
referred. I think, Your Honor, the Court's prior ruling on
related issues effectively compels the relief we're
requested.
Thank you, Judge.
THE COURT: All right. Thank you.
MR. SPECTOR: I don't know -- if I missed an
objection, I'll address it if I can be reminded if there was
another one besides hearsay relevance.
THE COURT: Well, there was --
MR. SPECTOR: Competence?
THE COURT: -- not based on personal knowledge,
therefore --
380
MR. SPECTOR: Oh, I think that's the same thing,
I think covered that.
THE COURT: Speculation.
MR. SPECTOR: The witness has a basis to testify
on what he's testified. Some of that is factual. This is
what this customer uses for. This is an experience I went
through when McDonald's wanted to change platforms. This is
not speculation. A lot of this factual, historical factual
information.
MR. MARRIOTT: Your Honor, I didn't identify and
we don't object to those paragraphs that relate solely to
the witness' background and description of his job.
THE COURT: Right.
MR. MARRIOTT: It's the conclusions that are then
sought to be drawn from that experience, which conclusions
are based upon hearsay, speculation and improper opinion
that we otherwise object to.
I will yield to Mr. Levin.
THE COURT: All right. Thank you.
Mr. Levin?
MR. LEVIN: Your Honor, thank you for allowing a
second lawyer to argue on this.
On the relevance point, Your Honor, our position
is that if the effect on customers is relevant to a
conversion motion, then this court would be ruling that the
381
creditors, and perhaps even the shareholders of this estate,
if there is enough value for them, must, despite the failure
of this debtor, comply with the requirements of Chapter 11,
and despite meeting the grounds for conversion or dismissal
under 1112, the creditors must continue to fund the
customers so that they will not be interrupted.
Now, at some point, the money runs out. And at
that point, the customers will be out of luck. It doesn't
seem to be the law that the creditors are required to stand
by to protect the customers until the money runs out when a
conversion motion is brought, when there's still a little
bit of money left for the creditors. That's why I think
this testimony is irrelevant to the conversion motion, Your
Honor.
THE COURT: All right. Thank you, Mr. Levin.
MR. SPECTOR: All I'll say about that is it goes
to the weight. I believe the Court is not only authorized
to, but I think is, in circumstances like this, required to.
And I'll remind the Court that this case law that says on
the motion for conversion, one of the unusual circumstances
is whether the company is invested with a public interest,
whether there be effects other than to the internal affairs
of the company, which is why this is entirely relevant to
this proceeding.
I have the cases here, Your Honor, and what I
382
would suggest because of the lateness of the hour -- and of
course I've given it to you and you can pull it up yourself.
But I could give it you if you want to read it now.
I would suggest, since this is a bench trial, and
I believe you've already read all of these declarations
anyway, that you reserve decision on that until you've read
the case law and researched that support that I've offered.
You've got the predicate there in your hands in
the form of the declaration, and we've offered you some law
to help you guide it. And you can rule it out after you've
done that or you can rule it in after you've done that.
THE COURT: Well, I think I --
Mr. Levin, I was about to say I think I can
reserve decision here because cross-examination is not going
to be dependent upon what my ruling will be.
Mr. Levin, yes?
MR. LEVIN: I understand, Your Honor.
The only final point I would make in reply to
what Mr. Spector said is that if this business is invested
with the public interest, and if the public deems that it is
important that it continue, the Fifth Amendment provides for
just compensation for that, not that the creditors' coffers
just have to be drained because this business is invested
with the public interest.
THE COURT: Thank you.
383
MR. SPECTOR: Is Your Honor then going to adopt
my suggestion?
THE COURT: Yes.
MR. SPECTOR: Thank you.
The next thing I want to bring in is the
deposition transcript of Rene Beltran. Mr. Beltran was
deposed in Los Angeles, I believe, on Wednesday, whatever
that was, the 14th, I guess it was -- 15th, Wednesday the
15th. He is a resident of California, well outside the
jurisdiction of a 100-mile deposed.
THE COURT: Yes.
MR. SPECTOR: And his deposition was taken by IBM
on behalf of all of the Movants. I'll offer that.
What exhibit is that? Exhibit 27, Your Honor.
(Debtor's Exhibit 27 marked for identification.)
It was also listed on their exhibit list as well,
which is -- you know what? Everything's in evidence. What
am I doing?
MR. MARRIOTT: No, Your Honor, it's not evidence.
That was one of the exhibits that was omitted when I moved
the admission of the exhibits. And we removed that exhibit
from our exhibit list. The witness was not called live as
counsel originally said that the witness would be called
live. The deposition was taken for purposes of being able
to cross-examine the witness.
384
So we didn't move for the admission of that
exhibit, and, indeed, we object to the admission of that
exhibit because what counsel -- what happened here, Your
Honor, is that the document was not, by the Court's
deadline, identified as a potential exhibit, despite the
fact that the deposition had been taken. And counsel never
pointed out the specific provisions that they sought to
introduce to give us an opportunity to make line-by-line
objections where appropriate to that testimony.
This witness' testimony, Your Honor, is, we
think, subject to the same objections that I laid out with
respect to Mr. Hunsaker, and I won't undertake to do that
now, except he's a customer vendor. And, frankly, I think
it's probably fair to say his testimony is a little less
objectionable than is Mr. Hunsaker's, but it is, we think,
in substance, subject to the same objections. And because
the deposition testimony was not designated line-by-line
because it was untimely submitted, we didn't go through and
lay out line by line objections for Your Honor because, as I
say, it was submitted past the deadline.
So we would object to that, to the introduction
of that testimony.
MR. LEWIS: Your Honor --
THE COURT: Mr. Lewis?
MR. LEWIS: -- I join the objection. In
385
particular, Mr. Beltran was originally listed as a witness
in the witness list that we were given in exchange. And I
was actually the person who was going to be responsible for
cross examining him, the lead person on this side of the
podium. Then the last witness list that we got omitted him,
and didn't say, bump, we're going to try this deposition;
just omitted him. It omitted several people.
Now, all I can say is, at that point, I stopped
preparing for Mr. Beltran. And as counsel has indicated,
we've done nothing towards commenting on his transcript, or
marking up his transcript, or objecting to anything. I just
think that under these circumstances -- and although counsel
acknowledges that Mr. Beltran's testimony may be one
relevant in one sense in that it's a personal experience as
an end user; on the other hand, he's one end user amongst
however many there might be.
It seems kind of asking a lot for the Court to
draw an inference from the very particular to the general
based upon that testimony. It seems that testimony is more
for effect than it is for substance.
MR. SPECTOR: If there's anything about this case
that is similar to the sport of fencing, this would be the
one.
Here it is they're objecting to the deposition
they took, but -- and there is a little dance going on, and
386
we're both doing it. We're both guilty of it, Your Honor.
Let me give you the full context so you can
appreciate it. And if you rule it out, you know, it's not
going to be the end of the world; I've got to tell you that.
But you ought to know the whole context.
First of all, Mr. Marriott's presentation
correct, is actually correct. Mr. Lewis' I believe is
incorrect, with all due respect. We didn't remove
Mr. Beltran from the list of witnesses until we filed the
list of witnesses, which was, I believe -- all the days run
together. Whenever our deadlines -- sometime fairly
recently. We always had him listed. And then after the --
Here's what happened. They served him with a
subpoena to attend his deposition, and I have his subpoena
here. It's attached with the production. I want Your Honor
to see the production.
Mr. Beltran's deposition explains who he is and
what he's about, what his company is. I think it's a two-
or three-man operation in the Los Angeles area He had -- it
was way, way overbroad, which is something he raised, and it
was well understood. Counsel, Mr. Marriott and I were
working on trying to narrow it down.
But we looked into filing a motion for a
protective order. We didn't have standing to do that. So
we asked Mr. Beltran if he didn't want to do it, go get a
387
lawyer. He says, I can't afford lawyer. I'm not hiring a
lawyer to be a third-party witness. So he showed up without
any documents to speak of. And they went ahead -- in fact,
it wasn't until the end of the deposition that they said,
oh, by the way, we're giving the documents to bring, and the
colloquy really takes place at the very end of the
deposition.
And so they took a whole deposition without
dealing with this. And then counsel who took it was
asked -- I don't know anything about what we're asking for,
but we'll object to it if you don't deliver it. Mr. Beltran
then says, well, I don't want to get in trouble. I'm not
coming over to De La Rue if I'm going to get in trouble over
this. And so we said, okay, forget it, we won't call you,
because they said they were going to object to him; forget
it.
Then we see Beltran's on their -- the deposition
transcripts, on their list of exhibits. Okay? We said,
oh, my goodness, we ought to object. And Your Honor on that
call said, no, he's outside the 100-mile limit; he can bring
it in.
So then we amended ours and said, okay, we'll add
him, too, the Beltran deposition. And then today, they
withdrew -- in light of my "objection," they withdrew
the -- so there's been a real minuet here, Your Honor.
388
I will, again, offer the transcript bare raw and
the subpoena, and Your Honor can do justice. If you rule it
out, we'll live with it. If you think otherwise, we
encourage you to read it. There are some things in there
he says, which is why they wanted to list it, that really
doesn't go our way, but we're offering it anyway.
THE COURT: Mr. Lewis?
MR. LEWIS: Your Honor, on July 23rd at 9:29 in
the morning, Mr. Marriott got an e-mail with a copy to me,
and a copy to the happiest man on the face of the earth, to
Mr. McMahon (ph) which says our witnesses will be Darl
McBride, Jeff Hunsaker, Ken Nielsen, Ryan Tibbitts, Frank
Caplan, Steven Norris.
We do not plan to call Rene Beltran. That's what
it says. And based upon that, I stopped preparing for
Mr. Beltran. I stopped reading his deposition. I just
stopped. And I think that under these circumstances, it is
not appropriate to try to admit Mr. Beltran's deposition.
He should have been here live to either cross-examine, or
his deposition should have been teed up early enough for us
to deal with it if it was going to be offered on the grounds
that he was unavailable. You may recall, we had that
discussion about Mr. Norris and availability during our
conference call.
So I would suggest, Your Honor, especially given
389
the marginal value of this anyhow, that the Court rule this
deposition out.
MR. SPECTOR: I want to apologize to Mr. Lewis,
and I'm feeling all tired, and it's late. I misunderstood
what he had said before. I thought he was saying he was
prepared to take the witness at deposition on the 15th.
THE COURT: Oh, no.
MR. SPECTOR: And that's what I was responding
to.
THE COURT: He was going to cross examine here.
MR. SPECTOR: I had no idea that he was -- I
didn't understand that in his comments, so I apologize for
misunderstanding that.
But if the witness -- Mr. Lewis and Novell were
invited to the deposition. They could have come and taken
it. It was called by IBM, not by us. He doesn't get to
cross examine the transcript anyway. So I don't think that
changes anything.
MR. LEWIS: Your Honor, I get to comment on a
transcript in advance of its being submitted. That's the
way it normally works. People submit their objections to
whatever testimony there's going to be. I have not had a
chance to do that.
MR. MARRIOTT: And if it's done right, Judge, we
get to go line by line, word for word, and decide whether we
390
have objections.
THE COURT: Yes.
MR. MARRIOTT: And we didn't have that
opportunity here, Judge.
THE COURT: Because, in other words, they would
be designating which portions of the deposition?
MR. LEWIS: Exactly.
THE COURT: All right.
MR. LEWIS: And, yes, we're all under a lot of
pressure here, but there still is a fundamental sense of
fairness that if we just literally don't have a chance to
prepare, when the circumstances could have provided
otherwise, we should not have to face that.
THE COURT: Well, from what I'm hearing, frankly,
is probably much to do about nothing. So I am going to,
just to sort of end these proceedings, I'm going to rule out
the deposition at this point.
MR. SPECTOR: Understood.
MR. LEWIS: Thank you, Your Honor.
THE COURT: Yes.
MR. SPECTOR: Now, we do have other exhibits. I
want to go through my list to make sure that they were
admitted.
THE COURT: Yes, please.
MR. SPECTOR: And if you'll give me a minute just
391
to do that. I've got to find them.
(Pause)
MR. MARRIOTT: You're a patient man, Judge.
THE COURT: Oh, I don't know. Just on the
outside.
MR. MARRIOTT: It's 8:15.
MR. SPECTOR: Your Honor, very few.
THE COURT: I didn't think there were very many.
MR. SPECTOR: There's a bunch, but we don't
really need to put them in.
THE COURT: Okay.
MR. SPECTOR: We had a bunch of e-mails from Hans
Bayer showing his support going our way, so that was
covered.
Exhibit Number 30 is a demonstrative exhibit of
claims reduced since September 14, 2007. It was part of
Mr. Tibbitts' declaration. It was attached I believe.
THE COURT: Oh, it was attached to it? Okay.
MR. MARRIOTT: Your Honor, my only problem here
is the list of Debtors' exhibits which I have only goes to
26.
MR. SPECTOR: Yes. I sent e-mails -- I did like
you guys did. I added by e-mail.
Let me ask you -- we can make this a little
faster.
392
If by his declaration coming in, the exhibits are
in with it, and we don't have to separately go through
these.
MR. MARRIOTT: Your Honor, I understand that
that's the way it works.
MR. SPECTOR: All right.
MR. MARRIOTT: If they think it's in, then better
or worse, when you cross that bridge.
THE COURT: But I don't have that exhibit
anywhere.
MR. SPECTOR: It should be attached to
Mr. Tibbitts' -- it's not?
THE COURT: To Mr. Tibbitts' -- oh, wait a
minute. I'm missing some pages to that.
MR. SPECTOR: And see, I didn't know that that
was an automatic pass-through.
THE COURT: I may need to get another copy of
that from you.
MR. SPECTOR: May I approach?
THE COURT: You may. Here it is. Okay.
Thank you, Mr. Spector. Thank you, sir.
MR. MARRIOTT: Your Honor, maybe I can speed this
up. With at least with respect to that exhibit, IBM has no
objection to it being -- so long as it's understood that
that exhibit -- I think it's plain on its face -- makes no
393
mention of and does not include any reference to any IBM
claims related to its counterclaims. Subject to that
understanding, we have no objection to that.
MR. SPECTOR: I believe it says this is the list
of -- strike that. That's a list of
reduced -- demonstrative claims reduced. IBM's wasn't
reduced.
THE COURT: Exactly.
MR. SPECTOR: The other one is 16.
Was that part of his declaration?
Well, you know, we don't need that. Never mind
16. We won't waste the time on that.
We ask the Court to take judicial notice of the
briefs in the SCO case in the United States Court of Appeals
with the Tenth Circuit.
MR. MARRIOTT: No objection.
MR. SPECTOR: And --
MR. MARRIOTT: Your Honor, it goes to the merits,
so with the understanding Your Honor is not coming to the
merits and not looking at those for purposes of making any
determinations to the merits since they became arguments of
either side.
THE COURT: Right.
MR. MARRIOTT: They're in the public record and
Your Honor is going to look them up, but I don't that
394
they're properly introduced into evidence.
MR. SPECTOR: Right. I asked judicial --
THE COURT: I know that they are, and I don't
know that --
MR. MARRIOTT: If the suggestion is you can take
judicial notice of their existence, as to that we have no
objection. As to the content and accepting the arguments,
it's to that we object, and I think Your Honor's already
ruled on that.
MR. SPECTOR: I'm not asking Your Honor to waive
them and value one argument against another.
THE COURT: Okay. They're not being admitted for
the merits of the arguments but rather just for the fact
that they are on file and when they're on file, I assume.
MR. MARRIOTT: I gather.
(Debtor's Exhibit 27 received in evidence.)
MR. SPECTOR: I believe we've got all we need in
there, Your Honor. And if you want to take a break, we can;
otherwise, I'll go right to the closing argument.
MR. MARRIOTT: I have only one brief observation.
I have no intent, Your Honor, to re-argue the Court's
rulings with respect to the three disputed exhibits, except
to ask that the Court consider reconsidering that in view of
the testimony that we heard from Mr. Norris about his
dealings with Mr. Bayer. And on that I say nothing further,
395
except, Your Honor, I think it bears on that question.
THE COURT: Mr. Spector?
MR. SPECTOR: I'm sorry?
THE COURT: I've been asked to reconsider my
evidentiary ruling on those e-mails from Mr. Bayer.
MR. SPECTOR: Well, I'd ask you not to, Judge.
We would have other exhibits that will be coming in and
further redirect, then.
THE COURT: Yes. I think that I'm going to have
to stand by that ruling.
Yes, Mr. Levin?
MR. LEVIN: Your Honor, before Mr. Spector
launches into final argument, I might ask if he rests.
THE COURT: That's a fair question, and I should
have asked it myself. Do you rest?
MR. SPECTOR: I'd love to.
THE COURT: All right.
And do the Movants rest?
MR. LEVIN: Your Honor, I would just ask the
Court's indulgence to permit a brief statement from
Mr. Christopher Donoho of the firm of Lovells, who -- I made
a representation in my opening statement, and I don't want
to let it be hanging. So I would ask the Court to permit a
brief statement on that subject before we rest.
THE COURT: And Mr. Donoho represents LNS; is
396
that correct?
Mr. Donoho, please? I'll hear from you.
MR. DONOHO: Good evening, Your Honor.
THE COURT: Good evening.
MR. DONOHO: Christopher Donoho of Lovells, LLP,
on behalf of LNS acquisition, LLC. Nice to see you again.
THE COURT: Good to see you again.
MR. DONOHO: It's been an interesting day today.
THE COURT: And you've been very patient.
MR. DONOHO: Thank you, and you have as well.
I did want to point out that -- you know, it was
discussed today that my client has made a proposal. It's
been received by the Debtors. I think it's been viewed
other constituents in this case as well. We stand by that
proposal. We'd like to investigate that opportunity
further.
We would obviously be very interested in any kind
of further discussions with the debtor. We'd obviously be
interested in any kind of competitive bidding process that
may be set up. We think that our bid is an attractive one.
I don't think we would have gone through the trouble of
putting the bid together if we didn't think that it provided
a better form of recovery for the creditors than what's
currently on the table. And so, we'd like that opportunity
if the opportunity arises.
397
Thank you, Your Honor.
THE COURT: All right, Mr. Donoho. Thank you.
MR. MARRIOTT: Your Honor, the Movants rest.
THE COURT: Thank you.
Mr. Levin?
MR. LEVIN: I was going to say that from here,
Your Honor, only because I was on my way to the water, if I
may access it.
THE COURT: Do the parties want a short break
to -- you want a five-minute break just to kind of gather
your thoughts and have a minute? Okay.
MR. LEVIN: Thank you, Judge.
THE COURT: Now, let me ask, about how long are
you looking for closing arguments here?
MR. LEVIN: Hours.
THE COURT: That's what I was afraid of,
Mr. Levin.
MR. LEVIN: We will attempt to be very
reasonable, Your Honor.
THE COURT: Mr. Spector?
MR. SPECTOR: When I prepared this, I allotted
about 15 minutes to mine, and I don't think I'll go longer
than that. On the other hand, there probably will be issues
that are -- we get the last say, I believe. Well, you know,
we're the movant on one and we're the respondent on the
398
other.
THE COURT: That's right.
MR. SPECTOR: Go figure it out.
You know, Your Honor, when we're done with the
closing arguments, there's another issue. And that is, Your
Honor was contemplating whether you were going to make a
ruling first on the sale, whether we even have to go in to
argue the merits of the conversion motion.
While we're taking this break, could we ask Your
Honor to ponder that and give us some advice so we can talk
about that?
THE COURT: Well, I'm pondering it, and I really
think that I'm going to reserve decision on both motions at
this point; not for long, but at least to give myself an
opportunity to sort of review a lot of evidence that I've
heard today and to consider the arguments.
MR. SPECTOR: Okay. So we'll take the break now?
THE COURT: Yes. Thank you.
(Recess from 8:20 p.m. to 8:28 p.m.)
THE COURT: Thank you. Please be seated.
All right. Mr. Levin?
MR. LEVIN: Your Honor, given the, as Mr. Spector
noted, two motions that are pending, how would you like to
order this?
THE COURT: Well, I think, first of all, why
399
don't I hear from the Movants first on the motion to
convert? And then I'll hear Mr. Spector's reply, and then
Mr. Spector -- or response, and your then reply, if you'd
like on.
MR. LEVIN: Your Honor --
THE COURT: Did you have a suggestion?
MR. LEVIN: You just gave me an idea on what you
said.
THE COURT: Yes?
MR. LEVIN: We'll go first on the conversion
motion.
THE COURT: Yes.
MR. LEVIN: He can respond to that and give his
views on the sale motion.
THE COURT: Correct.
MR. LEVIN: We'll then be able to reply to the
conversion as well as respond to the sale motion.
THE COURT: Perfect.
MR. LEVIN: And then he can perhaps have the
final word, but just on the sale motion, not on the
conversion motion.
THE COURT: Exactly. Makes all the sense.
No? You don't like that idea?
MR. SPECTOR: I wrote a closing based on both
together because, as we noted on June 15th, one of the
400
unusual circumstances, to fight it, to defeat the conversion
motion, was the fact that there's a proposal to pay the
creditors in full.
THE COURT: All right.
MR. SPECTOR: So they kind of go together. I
can't separate them out.
THE COURT: Mr. Harrington?
MR. SPECTOR: Your Honor, there's one closing,
we'll take the prepared remarks maybe 10 or 15 minutes, but
it's one closing.
MR. HARRINGTON: Your Honor, isn't that exactly
what was just offered to him?
THE COURT: To some extent, yes. If you go
second, then you'll be able to do that.
MR. SPECTOR: Yes, but to bifurcate -- I can't
bifurcate.
MR. HARRINGTON: The offer was that the Movants
would go first on conversion, that you would do both
together.
THE COURT: Right.
MR. SPECTOR: Oh.
MR. HARRINGTON: And the Movants would respond.
THE COURT: That's right.
MR. DOSHI: Your Honor?
THE COURT: Yes?
401
MR. DOSHI: Amish Doshi on the phone.
THE COURT: Mr. Doshi, yes, sir?
MR. DOSHI: I'd like Your Honor to note at some
point, I would like to say a couple of words with respect to
only the sale motion as it relates to the assumption and
assignment of the Oracle agreement. So in the going back
and forth, Your Honor, I would like to know at what point
can I get my couple of words in.
THE COURT: I would say perhaps we should hear
from you now so that Mr. Spector can respond to your
concerns.
MR. O'NEILL: Your Honor, if I may.
THE COURT: Oh, yes? Yes?
MR. O'NEILL: Mr. Doshi I believe is representing
Oracle, and they have proposed some language, which would
potentially resolve or, really, rather put off for another
day their cure objection. We only recently provided them
with copies of the agreements, which are the subject of the
Asset Purchase Agreement, and they provided language, which
basically would be incorporated into an order if the Court
approved the sale, which would indicate that their contracts
would only be assumed upon the parties reaching agreement
and entering into some kind of stipulation or agreed upon
language; or if that was not possible, that we would have to
come back to Your Honor for a hearing on that particular
402
cure objection. And that's acceptable to us.
And so, I just wanted to make that statement to
counsel for Oracle because it might abbreviate some of the
proceedings for him, and it also might alleviate their
concern. But they propose language, and we would be
acceptable -- we would agree to accept their proposed
language as an interim resolution of their cure objection.
THE COURT: Mr. Doshi, I wouldn't blame you if
you said, now he tells me.
MR. DOSHI: No, Your Honor. I appreciate that.
And with that confirmation, I just want to clarify one
thing, that our objection is not just with respect to cure,
it's also with respect to the actual assumption and
assignment. But the language -- if the language that we
proposed is going to be -- in the event Your Honor is going
to approve the sale, if the language that we propose is
going to be included in its entirety, then our objection is
resolved, and basically everything is reserved for another
day with respect to all the parties. And to the extent that
we can't resolve the issues, everybody has a right to come
back to court, and then Your Honor can deal with Oracle and
the Debtors at a later stage.
THE COURT: All right.
MR. O'NEILL: Yes, Your Honor. That is the
understanding. I can confirm.
403
THE COURT: Okay. Thank you very much,
Mr. O'Neill.
Thank you, Mr. Doshi.
MR. DOSHI: And may I be excused, Your Honor?
THE COURT: You may be excused, sir.
MR. DOSHI: Thank you.
THE COURT: Good evening to you.
MR. DOSHI: Thank you. Thank you for allowing me
to appear telephonically and thank you for the patience as
well.
THE COURT: All right, sir. Good evening.
MR. LEVIN: Your Honor, I wonder if Mr.
Petrofsky is still on the line.
THE COURT: Mr. Petrofsky?
MR. PETROFSKY: Yes. This is Mr. Petrofsky.
Hello?
THE COURT: Yes?
MR. LEVIN: Whether he wishes to be heard.
THE COURT: Oh, oh.
MR. LEVIN: I didn't mean to exclude him from
this process.
THE COURT: Did you wish to be heard or were you
on just for the sake of --
MR. PETROFSKY: Oh. No, I'm sorry. I'm just
listening. Okay. Thank you.
404
THE COURT: All right.
Mr. Levin, are you making the closing?
MR. LEVIN: Your Honor, I am opening the closing.
THE COURT: Opening the closing, yes.
CLOSING ARGUMENT BY MR. LEVIN
MR. LEVIN: I'll be focusing only on the
conversion motion, Your Honor, although they do
interrelate --
THE COURT: Yes.
MR. LEVIN: -- and I'll try to keep this limited
to the conversion motion.
Your Honor, our grounds for conversion were for
cause, which is broad in general, and then for a specific
cause in addition. And that is 1112(b)(4)(a), continuing
loss and -- continuing loss to or diminution of the
estate --
THE COURT: Yes.
MR. LEVIN: -- in absence of a reasonable
likelihood of rehabilitation. Let me take those separately.
The debtor in its opposition to the conversion
motion agreed that there are continuing losses.
Mr. Nielsen got on the stand, the CFO, and said,
well, yeah, there are continuing losses, but they're much
larger than we put in our opposition papers. They're really
big. And, in fact, in the now I would guess 20 or 21 months
405
that we've been here -- I'm sorry. The record only cuts off
a few months ago, so for 19 months, $5.3 million of cash
lost to the creditors and shareholders. Mr. Nielsen's
testimony is that that cash burn rate is continuing at the
rate of at least $240,000 per month and maybe 280,000,
including the organization expenses.
There is -- he testified that there is somewhere
between five and $800,000 in cash remaining. That's two to
three months, and it will be gone at that rate.
Now, sure, if the sale closes -- it's not going
to close tomorrow, certainly. But we are going to suffer
maybe as much as a third of that cash gone before a sale
closes.
Now, you'd think that the Debtors would do
something about that loss. What might they do? I'm
reluctant to refer to the Hunsaker deposition, Your Honor,
because it hasn't been admitted. But if it were admitted, I
would look at it and say, my goodness, I read the problems
that McDonald's would have migrating to any other system.
It seems to me that this debtor has enormous
pricing power over its customers if McDonald's is any
indication. And yet, they've sat here for 21 months and not
done anything to solve the loss problem with customers who
are inextricably tied to this debtor, and they're using that
as an excuse, as a reason not to convert but to continue to
406
lose money to support those customers, when, in fact, the
pricing power should be just in the opposite direction. We
don't think that's wise business management and is part of
the continuing loss and perhaps the gross mismanagement
aspect of the motion to convert.
If the sale is approved, Your Honor, and we'll
talk about that later, we had testimony about the
stand-alone ability of the mobility products, the mobility
applications, which have revenues in the tens of thousands
of dollars at this point. And I think the record will
reflect in Mr. McBride's deposition, which is in evidence,
that they would need about 10 to 12 employees to run that
business.
With revenues of less than $100,000 per year and
10 to 12 employees, they're going to need perhaps a lot more
than Novell's constructive trust money to last very long.
They're going to need an outside investor. They're going to
need fresh cash. There's no evidence of that in this case.
This case suggests continuing loss, even if the sale is
approved because the mobility business cannot be a money
maker, at least in the near term, according to Mr. McBride's
testimony.
Turning to the absence of a reasonable likelihood
of rehabilitation, Your Honor. If the sale is approved, the
prospects for rehabilitating the mobility application's
407
portion of the business are as I just described. If the
sale is not approved, then we've got a business that is
losing $250,000 a month approximately. Mr. Nielsen
testified we have a plan to skinny it down so that it
wouldn't lose month.
What have we been waiting for while 5.3 million,
plus a few months additional 250 a month, probably close to
6 million at this point, cash has gone out the door? What
are we waiting for?
Is that a rehabilitation? Is there a plan that
can be done around that? Mr. Nielsen's testimony suggests
it would not be cash flow negative anymore, but is that a
rehabilitation? Can a plan be had around that? There's
nothing in the record that suggests that, Your Honor.
The debtor has continued to press that if there
is a reversal at the Tenth Circuit, in whole or in
part -- and there are three separate claims that they
described at the Tenth Circuit -- that it will somehow help
the business. They've made that claim at several points
during this case. They're set out in my conversion motion.
I will not repeat them here, that things would turn around.
But I can note one thing.
The Debtors claim that the Novell claim early in
the case was in excess of 30 million perhaps $40 million.
In fact, when the district court ruled, the Novell claim was
408
determined to be $3.5 million, approximately 10 percent of
what the Debtors feared. If that's not a victory, Your
Honor, I'm not sure what I would characterize it as. And
yet, is there any evidence in the record that the customers
came flocking back, that investors arrived, that their
losses turned around? None. I'm not speculating about the
future, what may happen with the Tenth Circuit. I'm only
talking about the past and the ruling in the Novell case.
Your Honor, this case, as has been noted, is
about the obsessive pursuit of litigation and perhaps the
obsessive pursuit of the mobility applications, although
that's a little less clear. But we have here a Chapter 11
debtor who is supposed to be a fiduciary for the estate and
for the creditors. And what do we have?
McBride's testimony in his deposition that he
will not consider selling the litigation as part of any
sale, but worse we have incorrect financial statements to
this court, which were not corrected until called to their
attention. We have incorrect testimony not only on the
board meeting, which the record will show was incorrect on
the June 15th testimony, but also the reasons for the
termination of the sale negotiations both with York and with
SNCP, the first iteration of that.
Mr. McBride testified very clearly at the June 15
hearing that both of those deals fell apart because of the
409
uncertainty related to the litigation. We heard a very
different story today. I don't know which one to believe,
but a fiduciary shouldn't be telling this court different
stories.
We have a CEO of a business that has 62
employees, and he's not sure who his officers are or what
officer positions they hold. We have questionable payments.
There was debate about them. They attempted to justify
them. But at the most -- at the least -- excuse me, Your
Honor -- they were questionable.
We have a mischaracterization of board meetings.
We have a public reporting company that has a false website
identifying its officers, according to Mr. McBride's
testimony. And we have Mr. McBride's testimony that they
reached -- I'm not sure it was Mr. McBride, but we have
other testimony that they reached an agreement to revise the
fee agreement with Boies, Schiller & Flexner in this case
without this court's approval. And that is subject to this
court's approval under Section 327.
Your Honor, this does not amount to a Chapter 11
debtor that should remain in possession. These things all
speak of breach of fiduciary duty, failure to follow the
orders of this court, failure to comply with Chapter 11
procedures. We can debate whether that's grossly
mismanagement. There is no excuse for the failure to file
410
an operating report for any period after March 2009. All of
these are grounds for conversion of the case.
Unusual circumstances. How much must the estate
continue to pay to support McDonald's? McDonald's ought to
be able to support itself, Your Honor, and its other
customers.
Your Honor, as I mentioned in my opening, I think
the Court might appropriately consider, if the Court
determines to, to go the auction route on the sale, which
we'll discuss later, appointing a trustee under 1104(a)(3),
which an alternative to granting a conversion motion, or let
me say it's an alternative remedy upon granting a conversion
motion. And I'll address that more in connection with the
sale, Your Honor.
THE COURT: Okay, Mr. Levin. Thank you, sir.
Mr. Lewis
CLOSING ARGUMENT BY MR. LEWIS
MR. LEWIS: Thank you, Your Honor. I don't have
much to add there, except I'd like to focus on the issue of
rehabilitation.
THE COURT: Okay.
MR. LEWIS: The Court knows the standard is not
just whether you can confirm some kind of plan, whether you
can confirm a rehabilitating plan that puts an operating
company, the debtor, back out on the street. And Mr. Levin
411
has noted some of the concerns there, but on top of that,
Your Honor, we don't even have the debtor saying that's what
it wants to do. We have the debtor saying, if the sale's
approved, we want to have the case dismissed. We're not
telling you under what terms and conditions. We're not
telling you what kind of protections they're going to be.
And some of this gets to the motion to sell and the supposed
protections for creditors, so I don't want to get into that
too much now. I just ask the Court to remember this point
when we get there.
But, Your Honor, there is no rehabilitation being
discussed in this proceeding. It's in their papers. It was
in counsel's comments on the 15th of June that they intend
to ask for dismissal. This is a total abuse of Chapter 11,
and I think it's time to have a neutral Chapter 11 trustee,
Chapter 7 trustee, there to judge what should happen next in
this case, what operation should continue, what operation
shouldn't continue, what should be done with the litigation,
whether it should be prosecuted vigorously, whether it
should be settled in light of whatever happens in the Tenth
Circuit when the time comes.
I doubt seriously that given their devotion to
that litigation, the Debtors' management is going to scatter
to the four winds and desert a Chapter 11 trustee or a
Chapter 7 trustee. They're all shareholders. If they win
412
big, they make money anyhow. It's just not going to happen.
But that trustee will be taking -- while getting advice from
these people, he will be making his own judgments and
decisions as a new face on the block, as an experienced
bankruptcy person, perhaps as an experienced business
person.
Congress saw fit to provide for conversions to
Chapter 7, and to provide for Chapter 7, and to provide for
Chapter 7 trustees. And the notion that Chapter 7 trustees
can't be trusted to do their job just flies in the face of
Congress' judgment on that issue, which none of us is really
in a position to override.
So those are my comments, Your Honor. I'm going
to save most of what I have for discussions about the sale
motion because it really has to do, in many ways, with
what's left over if the sale is approved. Thank you, Your
Honor.
THE COURT: Thank you, Mr. Lewis.
Mr. Harrington?
CLOSING ARGUMENT BY MR. HARRINGTON
MR. HARRINGTON: For the record, Your Honor,
William Harrington from the Office of the United States
Trustee.
Your Honor, I think this case is interesting
because it's a case where the 800-pound gorillas didn't come
413
in on the first day of the case and demand conversion.
We've waited two years now, Your Honor, and I think kind of
what I'll call the 800-pound gorillas in this case have
finally come to the court and said, after $5 million has
been taken away from our recovery, please do something about
it.
So this is not the case where you have the
overbearing creditors coming in on the second day of the
case, demanding action of the court before anyone has a
chance to look at the case, before the Debtors have a chance
to rehabilitate and catch their breath; two years, Your
Honor.
Your Honor, I'm not going to go over continuing
loss. I think that was well covered. And I think it is
essentially admitted in the Debtors' response. On
rehabilitation, I think that also was well covered, Your
Honor.
I do want to stress the plan aspect of it. As I
said in my opening, the Debtors aren't talking about a plan
here; the Debtors are talking about some kind of structured
dismissal. I don't know what that means. That's not part
of the bankruptcy code, Your Honor. It's not a plan. It's
not a Chapter 7 distribution.
I am concerned, Your Honor, when we get to that
point where I think we've demonstrated cause, what Your
414
Honor then has to do is look at to whether or not it's in
the best interest of the creditors, unusual circumstances
based on the best interest of the creditors.
The creditors are here telling you they want
conversion. They want an independent fiduciary. So I think
you have to take that into account, Your Honor, when you
make your decision. And I think it's important that you
think about that they waited two years. They're given the
debtor their a chance, and the debtor hasn't produced. And
so I think at this stage, Your Honor, you do have to take
into consideration what the creditors are asking you to do,
and these are the 800-pound gorillas in the case, Your
Honor.
THE COURT: Talk to me for one minute, if you
will, Mr. Harrington, based on your experience about an
operating Chapter 7.
MR. HARRINGTON: Well, I think there are a number
of options here, Your Honor, and I think Mr. Levin mentioned
it. I mean, a Chapter 7 trustee can proceed under 721. You
can rule that he can operate the Debtors through a sale, and
that's happened in this district before. I know George
Miller has operated companies before --
THE COURT: Yes.
MR. HARRINGTON: -- under 721. But I think there
are other alternatives.
415
If you decide that the cause exists for
conversion, you can, under certain circumstances, appoint a
Chapter 11 trustee if you think that's appropriate in
carrying out a sale process or the appointment of an
examiner, Your Honor.
THE COURT: Thank you, Mr. Harrington.
All right.
Mr. Spector --
MR. SPECTOR: Yes, Your Honor?
THE COURT: -- it's your turn. Thank you very
much. It's been a long day and a long couple of weeks for
you, I know.
CLOSING ARGUMENT BY MR. SPECTOR
MR. SPECTOR: Yes, sir.
Before I dive into my closing, I'd like to
address some of the things that I've heard from counsel, and
put that aside, and then get into the guts of mine.
THE COURT: Okay.
MR. SPECTOR: Mr. Levin said SCO had pricing
ability. There's no evidence of that. As Your Honor
probably knows from testimony in this case or just living
with this case, that's not how this business works. There
are contracts. He's suggesting that they can go out and
tell Microsoft tomorrow we're raising the prices. Licenses
have been bought. It's not like there are new customers
416
walking in the door and they're going to raise the price.
There's no evidence that they have pricing ability.
The debtor -- the reorganized SCO -- I don't want
to say the reorganized SCO because it would be the former
debtor SCO -- will have new money to go on in the
rehabilitation phase post bankruptcy. If the Unix sale
closes, they'll have a million dollars left over after
paying the claims. That's new capitalization.
Why no skinny-down plan until now? Because
you've heard the efforts to try to sell the company is a
going concern. Who wants the Unix business if there are no
engineers there or R&D or support and service? That's why
there's not a skinny down plan. The major ease that this
company's been looking to is to try to sell the Unix
business. And by the way, it's also not true that
Mr. McBride testified that all they wanted to do was keep
the litigation. They did have some of the A,B,C,D,E,F,G,
which we never linked up the names, by the way.
THE COURT: Understood.
MR. SPECTOR: Some of those people were offering
deals that involved taking stakes in the claims, and you
heard Mr. McBride testify about that. So everything was on
the table. In fact, even the York deal involved that.
All the website said was
SCO. It didn't say SCO Group, SCO operations. the website
417
says what it says and all at least the subsidiary that Mr.
Buyer was affiliated was also called SCO Group, SCO Group
GBH which is Germany. It's a marketing website. Why bother
about niceties about, you know, one or the other. And I
won't go into the ruling again, but that deals with that.
By the way, the record should show and of course
the record speaks louder than lawyers, that the April and
May MRO's were filed. It's not just this March. Maybe
counsel misspoke when he said March and he meant to say May.
The BSF deal is contingent and it's not a done
deal. It's an officer basically by Boies Schiller Flexner.
It hasn't been executed. There's no signed agreements or
anything like that. It's just a statement saying if we get
past this and we go forward, they will do -- they'll
restructure going forward their contingency fee in return
for giving up their pre-petition claim and some other
consideration which --
MR. LEVINE: Your Honor, I apologize for
interrupting Mr. Spector, but I believe he's going far
outside the evidence record that we have so far.
THE COURT: On the Boies Schiller issue?
MR. LEVINE: Yes.
MR. SPECTOR: I think he said it was contingent.
I think the testimony from Mr. Tibbitts in his declaration
talked about that.
418
THE COURT: All right.
MR. SPECTOR: 1104(a)(3), we said in our response
that that -- there's four options on the table. It's not as
hard and fast as some commentators say since Bap CPA [ph]
came to the floor. This Court still has options and that's
one of them. An examiner is another one. And frankly,
we'll get to those I suppose at another stage.
The U.S. Trustee and Mr. Lewis talk about what's
the details of this dismissal, structured dismissal
actually. I didn't say anything about that. There is no
motion before the Court yet we have talked about it. It's
not unfair for them to raise it. But there's also no
discussion of any structure. It wasn't the plan to be any
structure. Once the sale closes, this is me talking,
there's no evidence, this is legal argument. Once the sale
closes and the money is in the hands of SCO and in the bank
account of SCO, the idea would just simply be I suppose and
we haven't gone through this, haven't talked to the client
about it, we just file a Motion to Dismiss. We no longer
have the Unix business. We no longer are -- have the
problem of, you know, the problem of the appeal will have
probably gotten to the end of the appeal by then. And there
probably is no reason to stay in bankruptcy, the purposes of
the bankruptcy have been accomplished. If there's some
structure that is requested by U.S. Trustee, we'll discuss
419
the structure.
The bulk of the creditors are not here. I know
Mr. Harrington is just coming in at the last minute and it's
amazing that he had to do all that today, but the bulk of
the creditors are not here. Novell is a creditor because it
has a judgment. IBM has a claim they say that you've heard
testimony and it's been valued by their own people at zero.
They don't have -- all it is is an attorney's fees claim is
all it is.
MR. MARRIOTT: Your Honor, I would object to that
characterization of the value of the claim by their own
people. That's absolutely untrue and it indicates there's
no evidence in the record, but have their own people,
whatever that means value the plan.
THE COURT: Yes, I --
MR. SPECTOR: I thought there was evidence about
an expert report saying there were no damages except for the
attorney's fees.
MR. MARRIOTT: And expert report in which Mr.
Tibbitts said he didn't really have a great recollection
about what it said. That's not the same thing as testimony
as to what it says and I'm happy to make a proffer as to
what it says if and when the Court wishes to hear that.
MR. SPECTOR: Well that's why I was -- I thought
there was something in the record about it. I'm trying not
420
to go out of the record.
THE COURT: I don't think there was anything. I
know there's nothing in the record on that issue.
MR. SPECTOR: I'd like to now get to the Sale
Motion.
THE COURT: Yes.
MR. SPECTOR: It's the assumption and assignment
part of it. I just want to put that away. Mr. Norris
testified and others have testified, Mr. Hunsaker has
pointed out, and the Purchase Sale Agreement itself has
provisions saying who's going from SCO to Unxis once it
takes over the Unix business? Basically, the engineering
cadre, the important people, the techies that run this
company. The management but for some of the management but
for Mr. McBride and I think Mr. Nielsen was on the list, Mr.
Hunsaker was. These people know how to run a business. The
testimony -- I think the Court can make an easy inference
that there's adequate assurance of future performances
contracts that are being assumed and assigned from that.
In addition, you heard the testimony about the
capitalization of the new company going forward, the deep
pockets that back it or the commitment of the people behind
it to make it operate, the vision they have and what they
want to do with this company. I think all of that goes to
evidence to our assumption and assignment. You've heard
421
very little testimony about the objection. I guess he hasn't
argued it yet. so I'll save that for that.
Addressing the Conversion Motions, the Debtors
submit that the Movants have failed to carry their burden of
proof to establish cause under Section 1112(b). Now I'm
going to make a legal argument and I'll make it fairly
briefly. There is no Third Circuit case that holds what the
standard of proof on a Conversion Motion is. I will confess
that there are cases, lower court all around the country
that just say as a matter of knee jerk reaction, well it was
by a preponderance of the evidence. I'm going to pause at
the argument that that's wrong. I'm going to pause at the
argument that it should be clear and convincing evidence and
this Third Circuit is not -- as far as I can tell, there's
no case that says otherwise. Here's why. We've already
heard argument that the Statute 1112(b) has a lot of
options.
One of the options is I believe Mr. Harrington
said and the Court followed is to appoint a Chapter 11
Trustee. So let's look at what the Third Circuit says about
the evidence necessary to appoint a Chapter 11 Trustee.
Well I cite the Court to Marvel Entertainment Group and
Sharon Steel Corporation. I'm not going to waste your time
at the cites, they're well known cases. And both of those
cases hold that in the Third Circuit and by the way others
422
as well, the standard of proof to get the appointment of a
Chapter 11 Trustee is by clear and convincing evidence.
Now to use a criminal law analogy, I would say a
Chapter 11 Trustee, especially the way this now appears as a
result of Bap CPA is a lesser included in a Motion to
Convert. That is a less drastic remedy than the Conversion
Motion. And that's really the way it's been put up to Your
Honor anyway.
Well, if the Third Circuit is on record as saying
to appoint a Chapter 11 Trustee you need clear and
convincing evidence, what do you need for conversion, proof
beyond a reasonable doubt I surmise not. But certainly, it
doesn't make sense that the more drastic remedy requires a
lower standard. So I know it's novel because I don't know
anybody else who's made the argument and the Third Circuit
permits the argument. I would submit that the standard of
proof is by clear and convincing evidence on this motion.
On the topic of cause under Section 1112(b)(4),
this Court's decision in 15374 Memorial Corporation and I
won't cite it, although there are numerous cases. It was up
and down and subpoenaed, the original one, listed factors
for why the Movants there had not established gross
mismanagement. That's one of the things they're talking
about here. And I think Mr. Levin made a couple of points
about, you know, why they didn't do this and why they did do
423
that but, you know, their tunnel vision on the claims and so
forth. Well that case was reversed on a different issue,
the finding on good faith or bad faith. The fact is that
the Court laid out in that case, Stan, in its instructive
and I'll just go through five them that exist both in that
case and guiding the Court to deny the Motion there and why
they -- and how they existed there as well.
The Debtors here successfully asserted the
automatic stay to avoid the Suisse [ph] Arbitration in
Switzerland. It's one of the things the Court found
important in the factual context of that case. SCO's
management facilitated the dismissal of the Debtors from the
IPO Class Action litigation in New York of $59 million.
That's something else the Court found important in a
different context in a Motion to Convert in the Memorial
case.
The management used the Freedom from
Dismemberment to reduce the claims against the estate by 91
percent and to develop and market cutting edge new software
obligations in mobility and virtualization. The parts of
the business that were either nascent or non-existent with
the cases commenced. That's an important fact to show what
management has done.
Management negotiated the sale of the claim by
(inaudible) for about a third of what was originally
424
asserted. And as I mentioned before have contingently,
conditionally eliminated a claim for in excess of half a
million dollars by Boies, Schiller, Flexner.
Management took steps to preserve cash and to
locate hidden assets and one of those a patent was sold
earlier in the case and they've now uncovered another
patent, the Java patent particular sale and can get
somewhere between a million and a half a million dollars.
All of those things I didn't just make up. Those
were -- this Court found in another Motion to Convert case
for relevant considerations. There were a couple other
minor ones and I'm going to say why it's so minor. One of
them was the Court said fixing the bar date. You can see
why I didn't go there.
THE COURT: Right.
MR. SPECTOR: Okay. Based on the evidence
establishing these factors, the Court should find that the
Movants have failed to carry the burden for cause under
1112(b)(4)(b) for mismanagement.
And by the way, let's talk about the tunnel
vision of the claim. They won't let us and Your Honor won't
let us tell you why management spent so much of their effort
and time on those claims because to do so you'd have to
evaluate how strong the claims are, how -- because if it's
important that they're having tunnel vision on these claims,
425
then it really ought to be, you know, why are they so
concentrated on these claims? I'm barred from arguing it.
But I think, Your Honor, cannot fault management for
concentrating on what they think is their largest asset by
far in selling off the Unix business which has been, you
know, dying slowing in their hands and so forth.
I'm not going to make much of an argument about
the other grounds, the continuing losses. There was an
error. Had I realized when I was drafting that response to
June 5 that the losses were as we now know they were, I
probably wouldn't have gone there. I would have
concentrated my power somewhere else. So I'm not going to
make an argument. Sure there's been continuing losses and
we're not surprised. We didn't expect to spend that much
money in this case. We had the devastation of the York deal
failure and other things but, you know, 20 months in Chapter
11 is going to cost money. And of course all of the
business reasons that existed before they came into this
case didn't get better because of that except for mobility
and that didn't have a material effect through this time
period.
So let's talk about unusual circumstances because
well let's stop for a second and say sure, there were
continuing losses, but I'm not saying sure as to a lack of
reasonable possibilities for rehabilitation. I don't know
426
where Mr. Harrington gets it and maybe he -- maybe there's
case law to support it, I don't know. I never looked at it
this way. I never heard that it was necessary for the
Debtor to say oh, by the way, rehabilitation shall come from
our plan of reorganization and then we will come out
rehabilitated. I didn't know that you couldn't rehabilitate
in the course of the Chapter 11 and say you know what, we
don't need to plan anymore. We took care of all of our
business, we just want it dismissed.
And if I'm wrong, then Your Honor, will tell me
I'm wrong. But I think we can still show that there's a
reasonable likelihood of rehabilitation despite a plan. And
if a plan were necessary, I suppose we could dig down and do
one as well. But we didn't plan to do that, but if we had
to, we really could do a plan, mobility going forward and
the litigation going forward. By then, everybody would have
been paid. It would be Novell would either have not had a
claim any longer or the LC would have been cashed and they'd
have been paid. And the only one left would have been Red
Hat, IBM, and we'll just go out and litigate it in the real
world. So I suppose we could put together a plan that said
we'll pay all our creditors in full. Oh, by the way, we did
that and we'll go out and litigate with remainders. I mean,
sure, we can do that if it's really necessary.
So you heard testimony about the growth of the
427
mobility business. You heard testimony from Mr. Nielsen
that if we sold the business, the Unix business and the
mobility server and kept the mobility applications and got
rid of -- well I won't say get rid of, that's a terrible way
to say it, skinny down because we don't need those engineers
any longer to go off with Unxis, you turn cash flow positive
in the short-term. And of course with the million dollars
that's funded, it's reasonable to believe that the long-term
(inaudible). There's no real evidence to the contrary
anyway. So we maintain that the Movants will not have
satisfied the burden of clear and convincing -- by clear and
convincing evidence that 1124(b)(4)(a) has done that because
of the rehabilitation problem. We don't have to talk about
J any longer.
And so it now brings me to the unusual
circumstances. If the Court were to find cause in either A
or B, we should talk about the unusual circumstances in this
case. And by the way, this case is chock full of unusual
circumstances. Usually, you're lucky to find one, but I'm
going to go through a list. Rarely, if ever does a Court
find at a context like this, a Conversion Motion, the Debtor
coming into Court saying oh, by the way, we have a means
within days to pay all of our creditors in full. Sale,
whatever, reinvestment, just the fact that the Debtor has a
credible means to pay the creditors. The Debtor has a
428
credible means to pay the creditors in full days from now
usually is all it takes. There's case law.
It's in my response, Your Honor, to find any
cases, two cases. It's rare because -- you won't find a lot
of cases because it's a rare circumstance that you really
have that. In these cases, we actually have that. You've
heard testimony about the steadfastness of Mr. Norris and
his partners on this deal. You know their deep pockets.
You know that there's been a lot of thinking on this.
They're ready to close. There's no contingencies on SCO,
but for getting Your Honor's signature on a piece of paper.
There's nowhere due diligence that has to be done. And I
guess I will cite the two cases in my response, the Newtown
Development case and the Orbit Petroleum case both in my
response.
Well a second unusual circumstance, while the
Court wouldn't hear about the merits of the substantial
claims, the fact that they exist and are large and important
are certainly relevant, extremely relevant in this case and
I'll cite a case to that effect. In re original IFPC
Shareholders, Inc. It's in my response. In this case,
these claims alone present unusual -- these claims against
the big entities that we have alone present an unusual
circumstance forgetting about that we have the money to pay
people in full in a few days, a matter of days I should say.
429
But this fact is especially an unusual circumstance when
just deposed with how soon these claims may be at least
partially vindicated. We should know and there's a
reasonable basis to believe that we'll know within 34 days
just how meritorious these claims are or at least more light
on that will be shed.
In the -- with the timing, I talked before about
discretion and timing. With the unusual circumstance of the
size and importance of these claims, with the -- just the
position of the timing when we're going to get clarity on
those things, that alone is an unusual -- those two together
are unusual circumstances. And what do we have to do for
those 34 days of look and see? In the meantime, if the
Court approved a sale, one would concede it will close.
But the other one is if we took even until August
31, we have testimony from Mr. Nielsen that we have the cash
to last that long. Notwithstanding testimony from the
lawyers to the contrary, we have the cash. We have over
$1.8 million I think he said now. We could lose perhaps
$200,000, $100,000 to $200,000 I think his declaration said.
And we have another unusual circumstance, the insurance
policy of Mr. Yarrow who's put up $200,000. Just in case it
does lose $200,000 in that 34 day span, he's going to put in
money to save the creditors so they don't lose anymore.
They don't lose any of that. It's a reimbursement to the
430
estate for that loss. Where do you find a case like that?
Just with that, forgetting all the other things I talked
about, where do you find a case with that? These -- this
case is loaded with serious unusual circumstances.
Once the Unxis deal closes, of course I said
we'll move to dismiss the case and any pay you creditors in
full and the claims -- well I don't have to go through that
again, we've already covered that. But if the case is
converted now, now before Unxis can buy the company. Before
we can get $2.4 million from Unxis, nobody wins. If the
Unxis deal closes, everybody wins. All fees and expenses of
the Chapter 11 case will be paid on exit. All the allowed
claims will be paid or taken care of. The employee's jobs
will be saved. They'll be moving on with the same job with
a new employer. Important customer interest will be
preserved, not the least of which is the government. The
foreign non-debtor subsidiaries in their re-sell would have
been saved. The stockholders investments which basically
will rely a little bit on mobility, but a lot of the claims,
they'll still exist. Every constituency in the case
prevails, wins if we do this.
On the other hands, if the case is converted now,
nobody wins. The sale disappears. There's a $715,000
benefit that goes away, $515,000 that Boies Schiller Flexner
is offering to wipe out and the $200,000 that Mr. Yarrow was
431
going to put up. That's never going to come about. The
mobility business would be gone. The most likely scenario
is that the businesses will shutdown making a going concern
impossible. Now, Your Honor asked a very good question. I
always think it's a fair question about an operating 7 or as
the Trustee said what about an 11 Trustee? Well I can't
speak about the 11 Trustee, Your Honor's question though
raised some hackles.
You'll read in Mr. Hunsaker's declaration about
what's like to happen. People don't know, especially
European's and customers out there, they get very nervous
when a company they do business with files Chapter 11. Ask
them what they feel if they're thinking about a Chapter 7,
okay? Oh, what's an operating 7? These engineers have to
think about their families. Will they stick around and run
this company? Will management run the company? The same
will go on about management. Will Mr. Hunsaker stick around
and do it? Will any of these other people do that with a
trustee in charge in the 7 mode for crying out loud? I
think that's a big risk.
And what happens to what -- the product he wants
to sell the Chapter 7 Trustee, he or she wants to sell in
that scenario? Mr. Hunsaker testified and I believe it's
common knowledge. I don't know that it needs much evidence
that when this company ceases to operate in the normal
432
course of business like it's been, you can kiss it goodbye
in terms of recovery. We've got a recovery that's twice
what is out there in terms of debt. And you can bet that's
not going to happen in 7 mode or probably even an 11 Trustee
mode.
Finally, the fact that the Debtors' core Unix
business is infused with a strong public interest is itself
independently an unusual circumstance of cases that -- of
the case law cited on that is Gateway Access Solutions also
in my response. The Court stated "we were continued
operation of the Debtor who provided an exclusive essential
service would foster the public interest." And it says "the
Court should not convert the case to one under 7". That
ascribed generally SCO.
The Unix operating system has to move on. If SCO
could have won this litigation sooner, it could have stayed
with SCO and it could have continued. Unix could have
stayed with SCO. It's exhausted its ability to keep it
operating. But in the public interest, its management is
looking to put it in the hands of somebody to keep it
operating because of the enormous install base that will
find it very difficult to migrate away or to make any
changes. That's not mismanagement, Your Honor, that's
management with a capital M. And when it's become pretty
likely that they can't go on any further, they had to make a
433
deal. And this is the deal they did. And they're happy with
the deal. They trust the people who are going to be taking
over. They're going to be good stewards of the Unix
platform. They have great ideas going forward. They can
make it run.
And by the way, one other little fact in
evidence. On June 15 when we came here facing only a
Conversion Motion, the evidence was the stock price of SCO
was 12 cents. On Friday, still facing the Conversion
Motions, but knowing that there's a sale to Unxis which has
been out there for awhile, the stock price was 17 cents.
Who really votes on this? The marketplace has voted on this
sale and it's voting thumbs up for this sale.
We can talk about the LNS deal. I don't know if
you want to do it now or in response, but I would defer to
Mr. Caplan who was the deal guy who's here, who's looked at
the -- I can tell you, I have not looked at the LNS deal. I
can tell you before we do that why we have not -- we're not
interested in the LNS deal. Generically, he can parse the
deal and can tell you the -- because it's there if we talk
about it. He can parse it and tell you why it's not
acceptable.
But number one, you've heard testimony about
principals of this company and the principal of the York
deal and one of the lettered entities that I won't name, the
434
experience that this company has had with them, the distrust
there is. There is also distrust of other natures that
there's nothing in evidence, but their distrust is deep. We
don't think that they're good custodians of the Unix
platform. We think there are ties with IBM. One thing I
will point out, they did -- they made it look like they were
putting this deal on the Unxis PSA platform, but they
deleted one of the reps. One of the reps that they deleted
was that there's tie in with IBM, no relationship with IBM.
That's not in its right and we think that's telling. And we
think that there's a willful chief component.
And for a moment, I'd like to defer to Mr. Caplan
if he can tell the Court the details of the deal and why
it's unacceptable. If it's no, I have some notes on that
and I could almost like read I guess.
MR. MARRIOTT: Your Honor, if I may.
THE COURT: Yeah.
MR. MARRIOTT: Mr. Caplan was on the witness list
to be a witness. It sounds like we're now opening --
THE COURT: I -- well Mr. Spector, you've now
gone on for roughly 40 minutes. It's late. I think your
time is up.
MR. SPECTOR: It is up. There are deal terms
about the LNS deal that are very, very poor and then much
worse financially than the Unxis sale.
435
THE COURT: All right.
MR. SPECTOR: Your Honor, for these reasons, I'll
ask Your Honor to approve the sale and deny the Motion to
Convert.
MR. SPECTOR: Thank you, Mr. Spector.
THE COURT: All right. Mr. Levin?
MR. LEVIN: Turning to the Sale Motion, Your
Honor, let me pick up where I left off this morning how many
hours ago? I said we had a few problems with the Sale
Motion. One was the poison pill.
THE COURT: Yes.
MR. LEVIN: The other was the solar eclipse.
Another was the lack of a record. Well I can say that the
Debtor has made at least somewhat of a record and one of our
problems has been solved in part. Of course it would have
been a lot easier had that record been made when the motion
was filed so we didn't have to go through all of this
exercise and we could have focused on the remaining open
issues. Let me address the remaining open issues.
To approve a sale, this Court has recognized that
the Debtor must meet four, must show four things. First, a
sound business purposes. Second, a fair price. Third,
notice. We're not disputing that, although Novell might.
And fourth, good faith. Let's take those in order.
Sound business purpose. Mr. Spector argues that
436
the sale will provide the ability to pay all claims in full.
He doesn't say what happens to shareholders. If all claims
are paid in full, there might be something leftover for
shareholders. But -- and IBM as we have known it, Your
Honor is a shareholder in this case in addition to its other
positions in this case. What I'd like to go over is a
statement of the ability to pay all claims in full. and
Your Honor, if I may approach, I'd like to hand a
demonstrative exhibit up to the Court which I admit has to
be amended a little bit because of the testimony today.
This was prepared in advance so if I may, Your Honor, I'll
hand that up and I'll hand counsel a copy.
THE COURT: Yes, thank you.
MR. LEVINE: I need to retain one for myself.
THE COURT: Good idea. That's a good idea, thank
you.
MR. LEVINE: Your Honor, this was an effort to go
through the sources and uses of funds in a proposed Unxis
sale.
THE COURT: Yes.
MR. LEVINE: The sources of funds we started out
with projected July 31 cash balance of $479,000. Now Mr.
Nielsen testified that that might go up by about $325,000
maybe $500,000 because of good sales, $325,000 because of
the -- some of that is reserved for Boies Schiller. I don't
437
know why that wouldn't still be reserved, but let's give
them the benefit of the doubt that that goes up by $500,000
and we'll call that $979,000. I'm not going to release the
Novell cash of $685,000 that is restricted cash. They
claimed that there was projected receivables. Your Honor,
this was on Exhibit MX53, these numbers are derived from
that exhibit. There were receivables, net of allowance of
$1,323,000. We don't know if they're all collectible even
after net of allowances there's always some uncertainty
about the collectability of receivables, especially in this
economy. But I put in the full amount shown on there and
$2.4 million cash from the Novell, I'm sorry, the Unxis
transaction.
Then I went and looked at their schedules that
they filed just a few weeks ago listing the unsecured
claims, some of which are disputed. Some of the large ones
are disputed. But in any event, those claims needs to be
reserved for. I did not include in this exhibit the Novell
claims on the theory that if the Debtor is right that the
letter of credit Sun and the reserved cash pays the Novell
claim in full if the judgment is affirmed, it's a wash, so I
did not include that. And, in fact, this $3.5 million in
priority and general unsecured claims does not include the
Novell claims.
Importantly, Your Honor, it also does not include
438
an IBM claim. And we don't know how much that claim may ever
be allowed for, but we know that in any fair Chapter 11 or
Chapter 7 process, that claim would be reserved for until it
was determined. And we could not simply say well we can
disregard the IBM claim, there's enough to pay everybody
else. We would be entitled to the same pro-rata distribution
as everybody else. So that doesn't include that.
The executory contract cure amounts are $134,000.
That was the schedule that they filed a week or ten days
ago. And then I looked at the pre-petition liabilities
which are again on MX53, accounts payable. I ought to point
out, Your Honor, that exhibit -- you'll see the fourth line,
royalties payable assumed PSA Schedule 2.4
THE COURT: Yes.
MR. LEVINE: Section 2.4 of the PSA says no
liabilities are assumed except for those set forth on 2.4.
And therefore, that's why from MX53 where there was a number
for royalties payable, I've zeroed it out. But all the
other payables on MX53 are listed here, accounts payable,
accrued payroll and benefit, accrued liabilities, long-term
liabilities, cash burn rate one month $240,000. That's an
approximation. And we come up with a total of pre-petition
liabilities, total post petition liabilities and I'm going
to give them the benefit of the doubt that we reduce claims
by $500,000 for the Boies Schiller claim and that brings
439
that down to we'll call it $5 million round numbers. And
even increasing the 4.2 at the top by the $500,000, I'm
sorry, by the -- yeah, $500,000 there, that's 4.7. We're
still $300,000 underwater.
So if anything, despite the Debtors' repeated
assertions that this sale pays all claims in full, the
record at least the explained record does not reflect that.
THE COURT: And your numbers as I understand them
don't include professional fees and expenses.
MR. LEVINE: Yes, thank you for pointing that
out. It does not include accrued unpaid professional fees
and expenses and given what's gone on in the last month, I
imagine they are not insignificant.
THE COURT: Correct.
MR. LEVINE: Plus whatever holdback there was
Your Honor and we did not do a calculation on that holdback.
So sound business purpose, because we can pay all claims in
full, the record does not support that.
Second, the purpose of the sale. Let me turn to
Exhibit MX34 which one of the witnesses was questioned about
which was the marketing materials that Gulf Capital Partners
and Merchant Brit [ph] had put together to find investors.
And I quote from UX04898, that's the page number, the date
stamp of that exhibit MX34 "returns of over 80 percent in
three years are achieved due to the minimal purchase price
440
of the assets agreed with the management of SCO which needs
funds to finance their longstanding litigation." That does
not ring of a sound business purpose for this sale.
We already discussed the sale protecting
employees and customers. A laudatory purpose, Your Honor,
but a sale that is improper in other respects should not be
approved simply because it protects employees and customers.
That is not by itself a sound business purpose, that is
collateral.
And the exclusion of the mobility. Mobility has
less than $100,000 in revenues. There is the evidence, Your
Honor, Mr. McBride admitted that the purchase price was
reduced $500,000 for the exclusion of mobility and hip check
[ph]. $500,000 that might have made up that gap if my
figures were right or might not have if IBM's claim is
substantial or Boies Schiller's restricted cash is not
available or whatever else. $500,000 for a business that
essentially has no revenue and only expenses. That does not
sound like a sound business purpose.
Let me turn to fair price. One of the things
that we raised in our opposition that is not addressed by
the amendment that was filed at 11:30 last night is the
price reduction depending upon the outcome of the Novell
litigation. The Debtor in its response to our opposition or
its reply said well, if the -- if Novell does not prevail,
441
then shareholders are not affected by the reduced price
because we need less to pay the creditors.
First of all, there's been no talk of
distribution shareholders here today. All I've heard is
we'll have $1,000,000 to try to fund this mobility business.
But even if that were -- even if there were something for
shareholders, Your Honor, the idea that a buyer -- let me
say it differently. The idea that assets become worth less
if unsecured pre-petition claims are less is contrary to
everything we know in bankruptcy law. If Unxis is willing
to pay $5.4 million for the assets because the assets are
worth that, then it shouldn't matter whether the Novell
judgment is overturned on the monetary. In fact, we'll be
out there cheering for it so there will be more distribution
to creditors. Nothing personal, Mr. Lewis.
So that is not an element of a fair price in this
deal. The Java patent we've already discussed. There's no
reason that that should be -- go over to the buyer if it's
not sold within a certain time.
Fair price, Mr. Nielsen is qualified to do
valuation and he has done valuation of other companies in
the past. No valuation now to make any showing that this is
a fair price. We simply don't know. And yet he's qualified
to do it without spending on an investment banker. And I
already noted on the fair price issue the reduction in price
442
of $500,000 for the loss of assets for the non-sale of
assets that have essentially no value. That's not part of a
fair price.
The poison -- excuse me, good faith, Your Honor.
I'm skipping notice and going to good faith. Your Honor,
one of -- we had a few items on good faith, but there's
still -- I think the record is still uncertain on the
payments. I think the questionable payments, but the record
is not uncertain on the poison pill. There was an amendment
filed as I said at 11:30 last night. And, Your Honor, on
Page 5 of that amendment begins not a provision that simply
strikes 12(b)(4), 12(a)(4) which was the provision that we
said we objected to that upon a conversion or the
appointment of a trustee, the rights, the SCO retained
rights transferred to the purchaser. Instead, we need a
page and half to make that amendment.
And let me boil down what it says. Your Honor
will have a chance to review it when you review the record
in this case. What it says is if the right to transfer to -
- I'm sorry, if those events happen, the rights won't
transfer to the purchaser, at least not right away. It says
they will transfer to the purchaser, however, if the trustee
ever attempts to sell them. And they will transfer to the
purchaser on October 1, 2009, two and a half months from now
even if the trustee doesn't attempt to sell them. I believe
443
that's what it says. I'm reading a page and a half on not
much notice, Your Honor. We would be -- and there's another
provision that says if they do transfer to the purchaser,
the purchaser is not to pursue them. Well that's terrific.
We're very pleased with that as you can imagine, Your Honor.
But to the extent this is any attempt to
influence this Court's decision on conversion by saying
valuable rights would be lost if the case were converted, it
is still a poison pill. We don't believe those rights are
valuable, but the Debtor has stated its whole case on that
argument and for it to argue now that it should not matter
to the estate is contrary to everything it said at this
point.
Finally, Your Honor, the last point has to do
with the private sale.
THE COURT: Yes.
MR. LEVINE: Private sale as you know, Your Honor
does occur in bankruptcy cases, but is very unusual. Mr.
Spector attempted to point to GM and Chrysler, but in fact,
even in those cases, the Court provided for an auction in
case there was an over bidder. Of course there wasn't and
the sales went to the stalking horse bidder in both of those
cases. Here we have another bidder who has made known his
willingness to participate in an auction based on a starting
bid of the Unxis proposal. I think we can infer from that,
444
Your Honor, that the bidder would not be bidding less than
the Unxis proposal. There wouldn't be much point. So we
have a live competition and there is no reason in this case
to approve this now as a private sale.
Now if this Court is going to order an auction,
how should it be done? As we said earlier, we believe an
appropriate way to do that would be the appointment of a
trustee under 1104(a)(3). Unless Your Honor feels -- would
like to hear closing argument to the burden of proof issue
which I was -- well let's just say I was surprised by it,
I'll leave that one aside and go straight to the appointment
of a trustee.
Why is a trustee appropriate in this case? We do
not take the position that a shutdown of the business
pending an auction makes sense. And we, IBM have never
argued that if the case is converted to Chapter 7 there
should be an operating trustee in Chapter 7. We think the
Bankruptcy Code is structured in a way that makes it easier
to operate in Chapter 11 and not in Chapter 7. If there is
a conversion because this company is losing money and has no
reasonable prospect of rehabilitation, then it should be
converted to Chapter 7 and money saved, stop the bleeding.
If there is going to be an auction, we believe
it's important to keep the business operating for that and
we would not seek immediate conversion but would seek
445
Chapter 11 trustee instead. Why? The Debtor has made very
clear on the witness stand today in Mr. McBride's testimony,
that they do not trust Mr. Hale. That's despite the fact
that they were here on multiple occasions seeking to pay
York Capital $150,000 fee. I don't know when relations
turned sour, Your Honor, but I tend to doubt when Mr.
McBride said they turned sour the minute the negotiations
stopped back in November of '07. It -- the two things do
not seem consistent. But now they say they cannot trust Mr.
Hale. Well if they cannot trust Mr. Hale, that's exactly
why we need an independent fiduciary to conduct the auction.
We don't want one of the bidders at the sale to be told your
bid is not welcome here. That is not how to have a free and
fair auction.
We believe a sale process can be conducted
quickly. Mr. Hale is familiar with this business. He's
already proposed an Asset Purchase Agreement. We believe it
will take some negotiation, but we think it could be
concluded within about 30 days give or take without looking
for an extended auction. It may be that once the buyers who
were identified on that secret certificate of service know
that there's really an auction, they might come back to the
table. When they're told there's a private sale, they
probably don't have much incentive to come back. We don't
know.
446
So, Your Honor, we believe the sale should not be
approved for all of the reasons. There's no sound business
purpose. The price as set is not fair. We questioned the
good faith, especially of the poison pill provision. And if
there is a sale approved, that should be changed.
Certainly, the fair price issue could be addressed by an
auction and that is where we stand, Your Honor.
THE COURT: Thank you very much, Mr. Levine. Mr.
Lewis?
MR. LEWIS: Thank you, Your Honor. I'm always a
man of my word and again, I won't be very long on this.
Your Honor, one way to look at the sale price here is to
look at the sale process throughout this case. And while
the Debtor wants you to believe that it was diligently
pursuing potential sales, you'll see in Mr. McBride's
deposition that basically the deal has been the deal
whatever, sell the Unix business, buy it for $10 million and
keep going on and on and on.
What we saw was they had a complete deal with
York that collapsed and not because we didn't know the
outcome of the litigation at that time. We saw another half
deal with SNCP in April that was based upon a memorandum of
understanding. Talk about rushing into Court to try to save
the day to keep the Chapter 11 case going. We saw once
again last January another plan and disclosure statement of
447
sale that weren't a plan and disclosure statement of sale
and what purpose were they? They wanted to try to keep
exclusivity over it. And now we see this one.
I want to read to the Court from one of the
exhibits. This is Exhibit 3, SCO's Exhibit 3. It's the
minutes of the June 11, 2009 Board meeting. The status of
financing efforts as the section titles, the first section.
And on the first page it says Mr. Yarrow asked Mr. McBride
to update the Board on the status of the company's financing
efforts since -- and the June 15 bankruptcy hearing. Mr.
McBride explained that in preparation for the June 15, 2009
bankruptcy hearing, the company is trying to secure
financing. He indicated that the company needs to have a
valid finance plan in order to avoid having the bankruptcy
agree to convert the bankruptcy case to Chapter 7 and
liquidate the company.
This sale was put together not because it was
necessarily the best sale which might have included a sale
of the litigation which though Mr. McBride he may have heard
such offers but we clearly know the Debtor never pursued any
such offers. It was put together to meet the Conversion
Motion. And that to me, Your Honor, given the history of
this case is indicative that the Debtors' purposes here have
always been served by just trying to keep the ball in the
air, hoping to get the litigation to a point where they
448
might be able to capitalize on it. It was not for any other
purpose here. And I think that also goes to the question of
whether the Debtors have been guilty of gross mismanagement.
Gross mismanagement doesn't mean dishonesty or fraud, it
just means gross mismanagement and you have to take that in
view of the fiduciary duties of management in a case like
this.
Now let's talk about the sale a little bit on
other terms. One of the objections that we filed, Your
Honor was an objection to the assumption and assignment of
all of those pages, the 400 and 500 pages of SVRX contracts.
And our view was as we explained that those were an integral
part of the whole asset sale that was the Santa Cruz Novell
deal which includes 4.16 which prohibits assignment without
the consent of Novell which requires the buyer and the
Debtor in this case SCO to reassign the licenses if so
directed. And it also requires the Debtor to collect and
remit revenues for whoever the counter party is now the
Debtor.
We haven't heard anything about how the problem
is going to be dealt with here because the Debtor has to
assume the APA in order to assume an assigned -- the Debtor
has to assume and assign the APA in order to assume and
assign all of these SVRX contracts. That's the way the
agreements work. You can't separate them out. And the
449
closest I think we've heard of anything to that was Mr.
McBride's opinion that that was no longer executory. Well,
Your Honor, if you look at Schedule G in this case, guess
what appears on Schedule G? The Asset Purchase Agreement on
the schedule of executory contracts since the beginning of
the case, never been amended. The Debtor simply cannot
complete this deal the way it's currently structured. The
Debtor cannot assume and assign the SVRX licenses without
assuming and assigning the Asset Purchase Agreement. It's
made no effort to do that and there would be some serious
objections if it did, but that's not in front of the Court
today because that's not the deal.
So there's a second reason why the Court, I think
needs to -- would have disapprove this sale today even if
the Court were otherwise convinced that the sale were
somehow an appropriate transaction unless we're going to
hear that somebody's going to waive all those SVRX contracts
and maybe that's what we'll hear, but that's what would be
needed. The Debtor would have to -- and the buyer would
have to decide those were not being assumed in the summary
because they can't do that without the APA, as simple as
that. And in light of the XI case, I don't think there's
any doubt that the APA is so integrated with those SVRX
contracts that you can't assume and assign the one without
assuming and assigning all those others or vice versa
450
The final issue is the payment issue, Your Honor,
that I want to address. And of course, Mr. Levin has nicely
addressed the question of whether we're really talking about
payment in full even before administrative expenses. But
let's think about this a little bit further. The way the AP
-- the way that the Purchase and Sale Agreement is now
structured, yes, there is a letter of credit and yes, it
lasts for awhile, but it still has conditions under which it
disappears. And after even when that happens, and if -- and
not withstanding that, the litigation between Novell and SCO
is continuing because, you know, Your Honor, it took how
many months for the District Court to schedule a new trial
after we got stay relief in January of 2008? Five months,
four months?
THE COURT: Yes.
MR. LEWIS: It took a long time.
THE COURT: Yes.
MR. LEWIS: And then to get to trial. It was six
months before we had a ruling. We don't know how long
depending on the contours of -- if the Tenth Circuit
reverses it in any way, we don't know how long that's going
to take. And at some point, when that letter of credit
disappears as it will if things go on, we will be
unprotected as well. Now the Debtor would like you to think
that because we then won't have them allowed the claim, we
451
don't count. The same thing is there -- the Debtors are
claiming with respect to IBM. That isn't the way bankruptcy
works. We didn't ask these -- the Debtor to file
bankruptcy, but the ground rules change when you do. And
what we're hearing and what we've been hearing today is the
Debtor wants the advantages of bankruptcy without the
burdens. And that's an abuse of the bankruptcy system. The
Debtor claims today, oh well, we're, you know, we've never
said we're going to dismiss. It's not like the Debtors have
-- counsel for the Debtor on June 15 said that. Said we
want with the Court's permission, we'll be asking for
dismissal if the sale closes.
And in the reply to the objections to the Motion
to Sell at Page 2, the Debtor says pursuant -- and this is
the first full paragraph on Page 2, pursuant to the motion,
the Debtors' request the Court to approve a transaction that
will enable payment in full of allowed claims including the
establishment of an effective surety for the disputed claim
of Novell, also not true. Subject to the Court's approval
and following the closing of the sale, the Debtors plan to
seek the dismissal of the Chapter 11 cases and preserve post
bankruptcy business assets and so on and so forth.
That's the Debtors' plan. Now true, no motion
has been filed, but I don't see how the Court can consider
the sale without considering what the unofficial, the plan
452
with a small P, I guess and not a Chapter 11 plan is here
and how that's going to work and what the Debtor really
plans to do and how it's going to protect all creditors
within the meaning of the Bankruptcy Code Section 101. Not
all creditors within the meaning of the Debtors' view that
the only real creditors are the creditors whose claims they
admit they owe. Thank you, Your Honor.
THE COURT: Thank you, Mr. Lewis. Mr.
Harrington?
MR. HARRINGTON: Your Honor, very briefly because
I think a lot of ground has already been covered. I did
want to just on that last point, Mr. Spector keeps saying
pay the creditors in full, pay the creditors in full. And I
think he thinks if he says it enough, Your Honor's going to
have it ingrained in your head that all the creditors are
being paid in full. But he never tells you when and how the
creditors are going to be paid. And so he says we're going
to be all paid before we get out of bankruptcy so we're just
going to dismiss. There's no way to pay pre-petition
creditors in bankruptcy without a plan or without a Chapter
7, you know, trustee filing their trustee's distribution or
trustee's final report. So you can't just pay all of your
creditors just because you have some money. That's not
possible, Your Honor. So I did want to raise that issue.
Your Honor, I know you don't want to address the
453
clear and convincing evidence standard. I don't think
there's any case law in the country on it with respect to
the 1112 issue. To pull that in from the 1104, I don't
think is appropriate. Also there's an argument that post
Bap CPA is not clear and convincing in the 1104 context as
well. So I don't think I need to address that any further.
There was a lot of commentary on how the Debtors'
management distrusts Hale and I think Mr. Levin handled that
very well. One other thing I would want to get to was there
was a sort of -- it was implied that the problem for going
forward with the customers again if that -- if they were the
successful purchaser here. Again, it's protection of the
customers as opposed to the protection of the creditors and
the equity security holders. And those -- that's what Your
Honor has to be looking at here, the creditors and the
equity security holders in their best interest, not the best
interest of the customers.
And finally, Your Honor, there's been a lot of
talk about how if this case there was an appointment of a
Chapter 11 Trustee or a Chapter 7 Trustee that all the
engineers would go running to the four corners of the earth.
This case has been going on since 2003. If these people
haven't left by now, they're not leaving, Your Honor. So
that's all I want to say, thank you.
THE COURT: Thank you, Mr. Harrington.
454
MR. SPECTOR: Your Honor, I'm not going to make a
long -- I'm just going to deal with the points that were
raised.
THE COURT: All right.
MR. SPECTOR: This demonstrative exhibit, a
variety of points I want to raise. Number one, in the
evidence, we have that the unsecured claims after scrubbing
$1,074,000 not $3,531,000. When does anybody pay attention
in terms of what's really owed by looking at the schedules?
If that were -- I mean, this is not -- the fact the
schedules exist and they say things has a very, very minimal
value. The -- for example, if this had come up in
examination, we could have showed you that a lot of those
were ongoing taxes that were paid in the ordinary course or
wages. Those numbers and priority things, well -- they sort
of -- these numbers aren't accurate and they're not in
evidence.
The $3,531,000 on the Schedule F, the number
you've seen in the evidence is $1,074,000. You take away
the two -- this is not to be trusted. This demonstrative
exhibit comes as not the 11th hour, it's the 12th and half
hour. We distrust the information on that. We do have a
similar demonstrative exhibit with -- that was -- we didn't
introduce but we have -- and it was old and it has been
updated and so forth. The testimony was there's enough to
455
pay over $1,074,000 in pre's and I think Mr. Nielsen's
declaration shows how much there are post, notwithstanding
pulling things off of documents. The evidence supports the
fact that everybody will be paid in full with the exception
of course that those people that we don't know if we owed
them anything, we've objected to IBM's claim, objected to
Red Hat's claim talking about a plan.
There's nothing wrong with a plan that says --
nothing wrong -- if I had done this with a plan, there's
nothing wrong with a plan that would have said here's our
plan we forwarded something months ago. We're going to find
a buyer and we're going to sell it. We're going to get the
money. We're going to pay the undisputed allowed claims at
that time. We're going to waive discharge as to the
disputed claims. And we're going to litigate those in the
Courts in which they're pending. That's not an uncommon
plan.
So if the U.S. Trustee says they'd rather see
that kind of plan, we could file that kind of plan. I'm not
running away from my comments of dismissal. I never said I
was running away from it. I was simply saying if they're
complaining that it's not a structured dismissal or haven't
given details of dismissal, that's true. It's because we
haven't brought it on. Nobody's given the idea that they
wanted that. And if they do, we can discuss the structure.
456
And if they insist it has to be in the plan, I suppose we
can do a plan. That's the only context I was talking about
there.
I'm going to skip to the Novell argument about
the APA There is no evidence that the APA has to follow the
SVRX licenses. There's -- all we have is Mr. Lewis in his
written document saying yes they do and sitting up here
saying it two more times, yes, they do, yes, they do. When
we try to get witness testimony to get to the nub of that,
what are your responsibilities? No, he can't testify to
that. Well I don't know. I mean, he's the President. He's
the CEO of the company. He wants to testify to say this APA
is irrelevant. And oh, no, he's drawing a conclusion, we
can't do that. All right, but what do we have on the other
side? All we have is commentary from the lectern from Mr.
Lewis. What evidence do they have that we have to do that?
We have the buyer saying it, Mr. Norris. I think we've got
all we need. We have the seller saying it. We don't need
to assume the APA
Now why does it say -- I said you can't always
trust schedules, yes, at the beginning of the case the
schedules were put together and they throw these documents,
you put down Schedule G. I had forgotten all about that it
was there. And I assure you had we recognized, we done our
homework properly and checked to see the Schedule G still
457
said it was an executory contract, we would have long ago
changed that.
But the evidence is -- the only evidence is and
it's pretty skimpy because we couldn't go in as much as we
wanted was that the APA does not provide that the SVRX
licenses do not have to come through the APA And even if
they did, and I'll make this argument, they are exclusive
licenses and there are two cases I'll cite to the Court on
exclusive licenses.
We all know about the Catapult Decision and the
Third Circuit adoption of a hypothetical test. I'm not
going to go into that, the Court knows it very well. And
that's what really what Novell's resting on. We have a very
skimpy record on that. I mean we couldn't -- this is a very
complex document they have. We have a very skimpy record on
that. However, Judge Kimball stated in July 2008 that SCO
owns the business it runs. SCO has all it needs to run.
That's all the buyer is buying, what it needs to run.
There is another fact in evidence and that is
Santa Cruz Operations, the party that dealt with Novell
under the APA sold all its rights under the APA, the Caldera
[ph]. There was never consent. There was never an
objection. There was never a hint of that. That was all
done. And that --
MR. LEWIS: Your Honor, there's no evidence to
458
that effect in this record.
MR. SPECTOR: And there's no evidence to the
contrary. That's what I'm saying. The record is entirely
skimpy. The -- there is nothing here that allows us to make
any conclusions that there is something improper about the
SVRX licenses which the Debtor owns going on.
And I believe there was testimony from Mr. Norris
that the licenses were conveyed from a prior company that
did the due diligence and was satisfied by that fact. And
if they were satisfied by that fact, it means that there
must have been something about it. And I submit it would
probably be that consent was either given or waived because
it wasn't needed. And if you examine the briefs in the
Tenth Circuit case, you'll get a better idea of the -- an
understanding what that's all about. And that's really the
only place they consent to.
As I said, Judge Kimball has ruled that SCO owns
the UnixWare and Open Server which has imbedded with it the
SVRX. And I know I'm getting into the merits and I'm not
very converse with the idea of the case. We have people
here for that. But he also said we have a license if
necessary to run the business with the SVRX license. So and
its exclusive because what good is it selling it for
millions of dollars to this company and then say oh, and
Novell can sell it to everybody else at the same time. It
459
kind of puts the whole idea of the sale to Novell.
The cases that cite to the Court are Golden Books
Family Entertainment, Incorporated, 269 Bankruptcy, Recorder
300, District of Delaware case in which the Court said the
opposite as if it's not an exclusive license you need to get
it. The converse of course is if it's an exclusive license
that you don't. And the other one is a Southern District of
Indiana case, District Court, Trachoff v. Digital Media that
says copyright, exclusive copyright licenses are not -- you
don't need the consent of the license or it is really
transferrable which is what we say we've got here anyway.
And precious little record on this, Your Honor, but they're
objecting and we've got evidence to say the buyer and seller
are confident they can do this and they don't have anything
but a brief and a couple of arguments from a lectern.
By the way, they keep saying that, you know,
there was no effort to sell anything to Unix. The evidence
in the record is that there was a merger, through emergent
talks. There were investments. There were warrants. The
York deal included investments in the claims side of the
case. There were various iterations. It wasn't only
selling.
There was some argument by, I think it was Mr.
Levin because I didn't hear anything about a disbursement to
shareholders or the shareholders I mean. Where do you get
460
the idea when you come out of 11, out of the sale proceeds
you turn around and say oh, now we make dividend to the
shareholders. We're not making dividends to the
shareholders, I'm sure. They're going to use that money to
keep the business operating. The shareholders will get
their benefit from the success of the business. That's
usually the way it's done. So I don't understand what that
point was trying to make.
The interesting thing -- well let me talk about
York's $150,000. Yeah, and you can look at that. But you
have to read further in the motion. The purpose wasn't to
pat York on the back. The reason and the motion says the
reason why we did that is we were early in the acquisitions
marketing game. We didn't want to have a reputation of
someone welshing on due diligence expenses. And it says so
in the motion. And if we wanted to have other people come
kick the tires and try to, you know, spend some time and
money on this, we didn't want to be seen as walking away
from those obligations. So we wanted the world to know we
will honor them. And of course the Court didn't hear that
and we -- that's an independent vehicle. I think don't
think we have any proof. But that's the purpose of that.
Notice to the world. We're not running away from it.
THE COURT: Well when I heard that reference to
that motion, I was thinking to myself, my God, I hope I
461
didn't grant that motion.
MR. SPECTOR: No, Your Honor.
(Laughter)
MR. SPECTOR: No, no, no, we didn't -- they --
actually they did our work for us. They objected. We said
okay, we'll defer that to another time but the word was
effected because we did have other people kick the tires and
spend money.
Well let's talk about the plausibility of the
solar eclipse. That's another one I would love to have Mr.
Caplan assess. My knowledge of those APA amendments are
shallow. But I'll tell you what I can tell you about the
poison pill.
THE COURT: And let's make this your last point,
all right, because it's 10:00.
MR. SPECTOR: Yes, sir.
THE COURT: Okay.
MR. SPECTOR: I don't want to --
THE COURT: This will be your last point. This
will be your last point so decide what your last points are.
MR. SPECTOR: The poison pill does not tie the
hands of the Court. It is not a poison pill by any means.
If the Court does not approve the sale, nothing happens with
regard to -- none of the rights in that agreement ever
arise. If the Court approves the sale and authorizes the
462
Debtor to close, it makes no sense. I mean, we couldn't get
it through the deal people. It makes no sense to worry
about your converting the case. Why would you approve the
sale at the close and then appoint a trustee of what's
remaining? Why would you be converting the case at that
point?
I saw it as a polar situation. The Court's going
to approve the sale and deny the conversion or nothing bad
is going to happen. If -- and it was a point that the other
side wanted to have because they felt comfort in it. They
didn't want -- they wanted to have the Unix business without
the claims. You heard Mr. Norris talk about that. They
didn't want these claims to fall into the hands of whoever
the trustee sells it to. They didn't want to be messing
with them. They trusted in the hands of SCO's management to
continue. They weren't going to be doing crazy things on
that. But if the Court were to grant the motions for a
sale, none of the rest of things are likely to happen and we
would be moving to dismiss the case.
And the other thing is the only time the October
1 date comes up is if the Court were to grant one of the
three things, conversion, appointment of a Chapter 11
Trustee, or an examiner with unusual powers, extraordinary
powers. And as I said, that's not going to happen. If the
Court were to do that, you're going to approve the sale.
463
These rights -- and it looks bad, but it really isn't. And
the purpose of that wasn't to bind this Court's hands in any
way. It was to -- and you'll see there's other things
talking about future events after the case is done and we're
out of bankruptcy if something should happen and SCO should
potentially lose the rights to the claims and other things
happen, that's really what that's all designed to do.
I would be interested in the Court's following up
with Mr. Harrington's discussion about an 11 Trustee if we
can work out or an auction process. I don't discount that.
The PSA does, in fact, talk about if the Court were inclined
to grant an auction that they want to be considered in the
PSA itself as a stalking horse is even break up fees and so
forth. So it's not off the table on our end.
THE COURT: Thank you, Mr. Spector.
MR. LEWIS: Your Honor, might I just have
literally 10 seconds?
THE COURT: Sure.
MR. LEWIS: And the 10 seconds are on the
question of what evidence there is on the APA, there is the
APA It is in evidence, the document itself speaks for
itself. And the contract rules of interpretation in the
first instance they're always you look to the four corners
of the document. It says what it says. It just like Exide
[ph]. Anybody else who testified to that about what it
464
means or doesn't mean wasn't around when it was negotiated.
And there is the second piece of evidence which is Schedule
G which like so many other things we now heard was an
oversight. Everything something inconvenient comes up, it's
an oversight. But it was there and it's been there all
along. Thank you, Your Honor.
THE COURT: Thank you.
MR. SPECTOR: Are these -- are all of the
exhibits, the amendments and everything to the APA here or
is it just the first original APA because if we're going to
have just exhibits, I mean, we don't have the full thing --
MR. LEWIS: I believe it's just the APA
MR. SPECTOR: Then, Your Honor, we would ask to
supplement the record with the rest of the exhibits because
that's not -- an amendment to that APA changes the APA
MR. MARRIOTT: I thought we were done, Your
Honor. The evidence is closed. What's in is in. And I was
standing to stretch.
MR. SPECTOR: You heard testimony about that the
amendment, Your Honor, and if the amendment is not in then
the exhibit is not complete and the amendment affects the
language. In that case, you don't have --
THE COURT: Any problem with submitting --
MR. JACOBS: We have no problem, Your Honor.
THE COURT: All right.
465
MR. JACOBS: It's the part to the APA, the
amendment, it's Amendment 1 and Amendment 2 should be in
there. You'll look at them yourself. You'll see they have
no impact on our objection to the transaction here.
THE COURT: Thank you, Mr. Jacobs. All right,
you may submit the amendments.
MR. SPECTOR: We'll do that. We don't have them
with us today.
THE COURT: Understood.
MR. SPECTOR: I've got them. I really have.
THE COURT: I'm reserving decision. I will act
on this as promptly as I possibly can. I think -- I know
that there is a statutory time limit here and --
MR. LEVIN: Which has long since run, Your Honor.
THE COURT: And yes.
MR. LEVIN: And we will be patient for Your
Honor's decision.
THE COURT: But certainly within a week. That I
can tell you for certain.
MR. SPECTOR: Your Honor, if you wish to call us
about any ideas that come to you with regard to the U.S.
Trustee's suggestion, I welcome -- you can reach me this
week any time you wish. And if you want to have a
conference call to discuss the parameters, we're willing to
discuss that at any time as well.
466
THE COURT: Thank you, Mr. Spector. All right,
counsel, thank you for a long but entertaining presentation.
(Laughter)
MR. LEVIN: Your Honor, thank you.
THE COURT: Good evening to you all and a safe
trip home.
MR. LEWIS: And to your staff, Your Honor, we
appreciate your staff sticking around so long.
MR. LEVIN: Yes.
MR. LEWIS: And the marshals.
UNKNOWN SPEAKER: You're allowed to buy him a
drink if you would.
THE COURT: I know.
UNKNOWN SPEAKER: Appreciate it, Your Honor.
THE COURT: A safe trip home everyone.
ALL: Thank you, Your Honor.
(Whereupon, at 10:05 p.m., the hearing was adjourned.)
CERTIFICATION
I certify that the foregoing is a correct
transcript from the electronic sound recording of the
proceedings in the above-entitled matter.
Traci Calaman Digitally signed by Traci Calaman
DN: cn=Traci Calaman, c=US,
o=DiazDataServices, ou=DiazDataServices,
email=[mail]
Date: 2009.08.06 11:28:58 -04'00'
5 August 2009
Traci L. Calaman
Transcriber
467
INDEX
Exhibits: | Marked | Received |
D28 - Findings of Fact, Conclusions
Conclusions of Law, Order
#204CB139DAK Novell v. SCO |
175 | 175 |
D34 - Invoice - SCO, Japan |
365 |
366 |
D27 - Beltran Deposition |
383 |
394 |
D30 - Claims Reduced since 9/14/07 |
391 | |
Closing Argument: | |
Mr. Levin | Page 404 |
Mr. Lewis | Page 410 |
Mr. Harrington | Page 412 |
Mr. Spector | Page 415 |