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SCO Asks Bankruptcy Court to Approve New Leases in NJ and Utah

Wednesday, December 19 2007 @ 03:29 AM EST

SCO proposes to sign, subject to court approval, a new lease for three years in New Jersey and a new lease with Canopy for their space in Utah, although both will involve cutting back on space and rent.

I know. Three years. They should live so long. This is the company that was described in court at a recent hearing as being under a death sentence.

SCO calls it an assumption of the leases, but I'd say it feels a lot like two new ones, because they both expire this month, so SCO could pack up their stuff and move out, if they wanted to. They don't want to. But how will they pay these rents? They propose to sell off all their Unix assets and their patent, after all, so where is the business that will pay the monthly rents?

This all comes up because when you file for bankruptcy protection, you get to decide if you will keep, or assume, your executory contracts and unexpired leases or not -- executory means it isn't fully performed yet. Actually, apparently executory is not too clearly defined, according to this article. But we know what an unexpired lease is. That same article says you have to assume this type of lease within 60 days of filing for Chapter 11:

In Chapter 7, trustees must assume or will be deemed to have rejected executory contracts and residential leases within 60 days of filing, unless the deadline is extended by the court before its expiration. In Chapters 9, 11, and 13, such agreements may be assumed or rejected at any time before confirmation. However, non-residential leases must be assumed within 60 days or any extension deadline granted before expiration.

Isn't it too late then? Did SCO get an extension? They filed on September 14. Section 365 of the Bankruptcy Code is the pertinent section, as SCO explains in the oddly paginated motion, page 3 of the PDF, page 6 of the motion.

SCO wants to keep both the New Jersey lease and the Canopy lease in Utah, and both leases expire at the end of December. That gives them very little time to figure out a solution, and yet they say, on page 6 of their motion, that the Utah deal isn't finalized yet. But the New Jersey one is, so we get to read its terms. In both, the idea is to reduce space, and because of renting smaller quarters, paying less rent. SCO tells the court it needs approval of the New Jersey lease by January 8. Does reduced space mean cutting back again on employees?

Here are the filings where I found all this fascinating information:

278 - Filed & Entered: 12/18/2007
Motion to Approve (B)
Docket Text: Motion to Approve the Assumption of Nonresidential Real Property Leases with GRE Mountain Heights Property LLC and Canopy Properties, Inc. Filed by The SCO Group, Inc.. Hearing scheduled for 1/8/2008 at 10:00 AM at US Bankruptcy Court, 824 Market St., 6th Fl., Courtroom #3, Wilmington, Delaware. Objections due by 12/28/2007. (Attachments: # (1) Notice # (2) Exhibit A # (3) Proposed Form of Order # (4) Certificate of Service with Service Lists) (Werkheiser, Rachel)

Exhibit A is the lease. And if you read the terms carefully, you'll see the landlord isn't cutting them much slack at all. If they wish to renew again, for example, they have to be out of bankruptcy. Three years is quite a short period for a commercial lease, in my experience, and I noticed on a very quick reading that the landlord, I think, can kick them out on 90 days' notice for no reason other than finding another tenant they want to rent to. And if they don't, at the end of the lease term, the new rent will be whatever the market is, something they'll figure out at the time.

Here's an explanation [or as PDF] by some New Jersey lawyers of executory contracts and unexpired leases and how it all plays out in bankrupty, if you are interested. I note it also says that they have only sixty days from filing to assume or reject a lease of this kind, unless they get an extension. Maybe they did. Bankruptcy court is more casual as to everyone getting together and talking, so maybe that happened. These aren't SCO's only US leases. SCO's latest 10K says they have more property to figure out than these two:

We are headquartered in Lindon, Utah, where we lease administrative, sales and marketing facilities. We lease additional facilities for administration, sales and marketing and product development in Scotts Valley, California and Murray Hill, New Jersey. The leases for our facilities expire at various dates through our fiscal year ending October 31, 2008.

I don't see anything about California in this motion. Maybe it's gone already and we missed it, or maybe that lease doesn't expire this month. The 10K lists quite a lot of exhibits, but either I'm too dumb to find them or they were filed in paper form only, but in the list you find:

Exhibit 10.15 - Office Sublease Agreement by and among the Registrant, Canopy Properties, Inc. and Gateway Technology Center, LLC, dated January 10, 2002 (incorporated by reference to Exhibit 10.6 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended October 31, 2003 (File No. 000-29911))
Exhibit 10.16 - First Amendment to Office Sublease Agreement by and among the Registrant and Canopy Properties, Inc., dated September 15, 2003 (incorporated by reference to Exhibit 10.7 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended October 31, 2003 (File No. 000-29911)).

And I found this part of the article about executory contracts and unexpired leases of interest:

1) Assumption. If an executory contract is "assumed" during the administrative or post-petition period then the other party to the contract becomes an administrative creditor granted priority payments over most pre-petition creditors ("administrative priority").

Uh oh. What about leases? I don't know, but I think so, based on this sentence from the first article:

Because damages for breach of an assumed contract or lease have priority, creditors will generally want assumption (where no assignment is contemplated) to be deferred until confirmation.

That means, it makes sense to wait until you are sure the business is going to survive before confirming or assuming. But the leases run out this month.

Excuse my cynicism, please, and my ignorance, but would this put Canopy and the GRE Mountain, the New Jersey landlord, ahead of the others in line? They are both on the list of the top 20 creditors already, GRE at $132,502.00 owed and Canopy at $139,895.00. SCO filed for bankruptcy in September, and presumably had already paid for that month, so they listed three months' going forward as the debt, I think. In the case of New Jersey, for example, the old rent was $44,167.50 a month. So, three months would be $132,502.50. Close enough. And one assumes that was paid after the court approved SCO paying normal business expenses.

The new rent will be the same for three months, with security taken out, and then the rent drops to $26,559.24 a month through the lease term, ending December of 2010. So that's $318,710.88 a year. I think, then, that the minute SCO signs with New Jersey, the debt would become $132,502.50 (the first three months) plus $239,033.16 for the rest of that year, and then $637,421.76 for the next two years, for a grand total of $876,587.42. That's just one lease. The Canopy lease is more.

This is a company that has no discernible business, after it sells all its Unix assets, and this debt becomes a priority debt. Hmm. I have an idea. I mean, to keep debts down while SCO figures out if it can survive at all, how about a one-year lease instead? Or month to month? Too simple? SCO argues that the standard is that the debtor "need only show that its decision to assume or reject the contract is an exercise of sound business judgment", as it quotes from a case. That's not a difficult standard to meet, it notes. I guess not, if this plan is acceptable. But don't you have to have a business to have sound business judgment about it?

SCO points out that the new leases have no cure amounts, so they'll actually be reducing their expenses. That depends on how you look at it. It's, to me, like knowing there is no money in the month's budget for any clothes shopping, buying a dress anyway, and telling your husband it was a "bargain". Not if you have no money to spend, it isn't. Or, if I want to rent a penthouse in Trump Tower, but I have no job, can I do it? Would it reflect sound judgment if I sign a lease before I find a job that will pay that rent? And what about the landlords? Since when do landlords let you rent on a hope and a prayer?

There is a drawing of the proposed reduced space in New Jersey, and there are terms for building a wall in the IT room, if another tenant moves into the old space SCO is vacating. I'm sure construction is just the thing for an IT room. I don't know which is stranger, the lease or the fact that SCO, poised to sell off pretty much all of its Unix assets, thinks it will need a New Jersey office at all. Seriously, why not consolidate your employees in one place and pay only one rent?

I can't explain it, because I don't understand SCO, and that is what makes them so riveting. And bankruptcy is an odd bird too, don't you think? I mean, this puts the judge in the hot seat. SCO is asking to take on new debt, in point of fact, although it's technically an assumption, and yet what can he do? They have to be somewhere until they fall into Chapter 7 and die. But that feels so imminent, and yet, who really knows? If he approves the new leases, then it affects the other creditors, conceivably, I gather. But if he doesn't, then what? How can he say no? He can't tell SCO to become homeless, so to speak. They are still in Chapter 11, after all.

I guess they could disappear into the Bermuda Triangle or wherever those MIT deep divers ended up vanishing and stay there. In my dreams, of course, SCO does disappear. And then, like a character in a soap opera, maybe I could wake up and the plot line will be that it was all just a horrible dream.

At least that would solve this knotty lease problem. Honestly, being a judge must be the hardest job in the world. You get to solve all the unsolvable problems. And if SCO is before you, you surely don't get a whole lot of time to do it.

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Corrections Here

Authored by: feldegast on Wednesday, December 19 2007 @ 03:35 AM EST

so PJ can fix them

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