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SCO Answers Novell's Objection to Renewing Leases and more
Monday, January 07 2008 @ 12:03 PM EST

More bankruptcy news. SCO has answered [PDF] Novell's Objection to SCO's request to "assume" two of its leases, the one in New Jersey and the one in Utah with Canopy Group. And it has filed separately a "Fifth Amendment" [PDF] to that "sublease" which seems to be extending the lease for just one year, not until 2010 like the New Jersey lease, so I wonder if SCO realizes Novell has a point. And one of the SCO lawyers filed a notice of no objection to its bill, so it's "heigh ho, heigh ho, it's down the drain we go" for more of SCO's money. Or is it Novell's?

SCO complains about having to defend its lease renewal -- it's just a normal business decision, they argue, and they shouldn't really have to spend extra to defend it:
1. The Debtors filed the Motion of the Debtors to Approve the Assumption of Nonresidential Real Property Leases with GRE Mountain Heights Property LLC and Canopy Properties, Inc.... seeking approval of their business decision to extend the New Jersey and Utah Leases, and in so doing reduce the space rented and the monthly rent required for such facilities -- typically a noncontroversial matter that does not require an inordinate expenditure of administrative expense to defend, especially where reduction in administrative expense to the estate is the issue raised.

That's SCO's story. Novell's if you recall, goes like this:

Novell, Inc... hereby submits this objection ... to the Motion of the Debtors... seeking to "assume" two expiring office leases pursuant to Code section 365(a) under terms and conditions that -- to the extent disclosed at all -- impose substantial administrative expense burdens on already financially-strained estates whose futures are in serious doubt. Novell urges the Court to deny the Motion as not merely failing to meet the business judgment test for motions to assume, but also for being yet another in a series of cryptic, unjustified and inexplicable decisions by the Debtors in these chapter 11 cases.

Inexplicable because no one can imagine SCO still in business in three years, not even in one. And of course the real problem SCO has is nobody much trusts them to be trying to pay Novell what it likely owes them. That is the crux of the problem SCO faces, and so their cynical huffiness over having to explain more expenditures of what Novell considers its money, not SCO's, is a bit over the top.

Wait. If this is the Fifth Amendment to the Canopy lease, where are 1-4? For that matter, where is the lease itself? Is it identical to New Jersey's? That's the one we saw already. Last I noticed, SCO was saying that the Canopy lease wasn't finished. Did we ever get to see that? If so, I've dropped a stitch. In their Motion [PDF], SCO said that because the Canopy lease wasn't finished, it would file "a copy of the form of amendment to the Utah Lease and a summary of the amendments" under notice of filing once it was done. Where is the summary? For that matter, where is the justification for the assumption of the leases as sound business judgment? SCO argues that a motion doesn't have to prove all that. They'll tell us at the hearing:

The Debtors will demonstrate at the January 8, 2008 hearing that in addition to the bases pled in the Motion, other sound business reasons support the assumption of the amended leases.

Which gives Novell no opportunity to prepare to rebut. Pleasant.

I'd say, though, that it's perfectly natural to want some explanation for further indebtedness in a picture where observers aren't so clear how SCO is going to pay its rent going forward, in a context where SCO is trying to sell off all its assets except for Me Inc., which, as Darl confessed at the recent 341 Creditors Meeting, isn't lighting up the sky. But SCO argues the court shouldn't second guess its sound business decisions unless they are clearly unreasonable or give evidence of bad faith.

Hmm... bad faith.... I wonder if it's wise for SCO to bring *that* subject up?

Here's what SCO tells about the terms of the Canopy lease proposed:

  • it's extended for one year
  • SCO gives up 9,738 "Rentable Square Feet", which is almost half
  • the annual rent goes down to $252,560 from $524,883
  • the Debtor's percentage share of the operating cost goes down from 53.05% to 30.6%
  • if SCO fails to pay the rent, and owes more than $1,000, Canopy can give notice, written notice, and if SCO doesn't clear the debt in 10 business days, Canopy will have the right to terminate the lease on 30 days' written notice.

See? SCO says, we're *reducing* our expenses -- you should be happy. But the question remains: is SCO going to be able to pay the rent at all? The New Jersey lease is an obligation until 2010. If SCO ends up in Chapter 7, which seems imminent, then what happens with that debt? Does it go ahead of other creditors?

Here are all the filings:

291 - Filed & Entered: 01/03/2008
Notice of Service
Docket Text: Notice of Service Notice of Filing (I) Fifth Amendment to Sublease Agreement Between The SCO Group, Inc. and Canopy Properties, Inc. and (II) Summary of Amendments to Utah Lease (related document(s)[278] ) Filed by The SCO Group, Inc.. (Attachments: # (1) Exhibit A # (2) Certificate of Service and Service List) (O'Neill, James)

292 - Filed & Entered: 01/04/2008
Reply (A)
Docket Text: Reply to Novell's Objection to Debtors' Motion to Approve the Assumption of Nonresidential Real Property Leases (related document(s)[288], [278] ) Filed by The SCO Group, Inc. (Attachments: # (1) Exhibit A # (2) Certificate of Service and Service List) (O'Neill, James)

293 Filed & Entered: 01/04/2008
Notice of Matters Scheduled for Hearing (B)
Docket Text: Notice of Agenda of Matters Scheduled for Hearing 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. (Attachments: # (1) Certificate of Service and Service List) (O'Neill, James)

294 - Filed & Entered: 01/04/2008
Certificate of No Objection
Docket Text: Certificate of No Objection (No Order Required) Regarding First Monthly Application of Pachulski Stang Ziehl & Jones LLP, as Co-Counsel to the Debtors and Debtors in Possession, for the Period from September 14, 2007 through September 30, 2007 (related document(s)[274] ) Filed by The SCO Group, Inc.. (Attachments: # (1) Certificate of Service and Service List) (Werkheiser, Rachel)

  


SCO Answers Novell's Objection to Renewing Leases and more | 157 comments | Create New Account
Comments belong to whoever posts them. Please notify us of inappropriate comments.
Corrections here
Authored by: Erwan on Monday, January 07 2008 @ 12:05 PM EST
If any.


---
Erwan

[ Reply to This | # ]

News Picks Discussions here.
Authored by: Erwan on Monday, January 07 2008 @ 12:06 PM EST
Please remember to quote the article title.

---
Erwan

[ Reply to This | # ]

OT, the Off topic thread
Authored by: Erwan on Monday, January 07 2008 @ 12:07 PM EST
As usual.

---
Erwan

[ Reply to This | # ]

SCO Answers Novell's Objection to Renewing Leases and more
Authored by: JamesK on Monday, January 07 2008 @ 12:12 PM EST
"Wait. If this is the Fifth Amendment to the Canopy lease, where are 1-4?
For that matter, where is the lease itself?"

Perhaps they were offered several options and in the interest of protecting
themselves, decided to take the fifth. ;-)

---
May the source be with you.

[ Reply to This | # ]

I think the exact words are:
Authored by: Anonymous on Monday, January 07 2008 @ 12:16 PM EST
"I owe, I owe, so down the drains we go!"

[ Reply to This | # ]

landlord and lease
Authored by: Anonymous on Monday, January 07 2008 @ 12:19 PM EST
I'm surprised that the landlord is even entertaining the though of renewing a
lease with a company that's in CH11 and extremely likely to go into CH7

[ Reply to This | # ]

SCO Answers Novell's Objection to Renewing Leases and more
Authored by: ikh on Monday, January 07 2008 @ 01:08 PM EST
And no attempt to justify why they need a base in NJ at all! I would have
thought that consolidating to Utah would save them a lot.

[ Reply to This | # ]

SCOG, Novell, Leases ...
Authored by: Anonymous on Monday, January 07 2008 @ 01:37 PM EST
I expect SCOG noticed that IBM did not object. I expect SCOG noticed that the US
Trustee did not object. I wonder whether SCOG believe they can persuade the
Court to sign the order irrespective of the Novell objection. I wonder whether
SCOG view the Novell objection as an irrelevant irritation.

I expect that, although the York deal has fallen, SCOG continue to try to figure
out a way to dispose of the Unix business, as part of a reorganization, and
perhaps are in discussion with potential buyers. I expect that SCOG believe that
potential buyers will wish to acquire a decent term of lease for continued use
of the business premises for the staff in NJ. The NJ lease extension is three
years. The UT lease extension is one year.

[ Reply to This | # ]

Continuing the issue?
Authored by: Anonymous on Monday, January 07 2008 @ 03:35 PM EST
The Debtors will demonstrate at the January 8, 2008 hearing that in addition to the bases pled in the Motion, other sound business reasons support the assumption of the amended leases. Which gives Novell no opportunity to prepare to rebut. Pleasant.
Doesn't this give Novel every right to ask the Judge to continue the issue until they can respond properly? When exactly do SCO's leases expire? Would they be able to argue that to continue the issue, they would be without any office space before the leases expire? Dan

[ Reply to This | # ]

Sound Business Reasons
Authored by: ljs on Monday, January 07 2008 @ 03:44 PM EST
How much should one trust this phrase coming from those who filed Chapter 11 to
escape the effects of lawsuits they had filed?

[ Reply to This | # ]

Class A office space rates
Authored by: Anonymous on Monday, January 07 2008 @ 09:12 PM EST
The canopy lease works out to about $2.00/sq ft/month. This is more than the
current rates in the Silicon valley, which are still working towards
USD2/sqft/month from less that USD1/sqft/month a couple of years ago. Albeit a
far cry from the USD20 they wanted for Sand Hill during the dot-com boom.

[ Reply to This | # ]

Unreasonable?
Authored by: GLJason on Tuesday, January 08 2008 @ 12:04 AM EST
Which gives Novell no opportunity to prepare to rebut. Pleasant.

Well, it is SCO's motion, doesn't the moving party usually get to have the last word? Usually they cannot bring new issues though, but this isn't something against Novell, just a motion for the court. I'm so used to the IBM and Novell litigation that maybe I'm mixing up the rules. I belive Novell will have an opportunity to discuss their objection in court, won't they?

I think the reason Novell objected was because the information on the leases wasn't made available with the original motion. The fact that SCO is cutting office space at both locations seems like a sound business decision to me. As of now, SCO is still in Chapter 11 and the court has to presume it will emerge a viable business entity and a business needs office space. Novell may believe that there will be nothing left of SCO after the trial in Utah and that SCO's appeal will fail and they'll be forced out of business this year, but that isn't before the court right now.

[ Reply to This | # ]

Gamesmanship or Incompetence
Authored by: sproggit on Tuesday, January 08 2008 @ 02:21 AM EST
If we've correctly interpreted the motions (and I suspect we have) one of the
reasons that Novell raised objections to the original SCO motion was that SCO
basically gave the court virtually no information of the proposed transaction.
It was merely, "We intend to spend 'X' on rent..."

Now, in response to Novell's filed concerns, SCO come back with specific
information relating to the amount of office space in question and both the rent
and maintenance charges.

In the simplest terms, there are probably just two reasons that SCO failed to
mention this to the Court the first time around.

1. Incompetence.
It's possible that SCO management are moving so fast and spending so little time
thinking things through, that they left the issue on the back burner and then
suddenly realised that this had to be dealt with before they were evicted or
threatened with bailiffs.

We have to remember that there have been a lot of staff moves and changes,
including in respect to SCOs CFO just lately. And let's be honest, Darl hasn't
yet managed to convince us that he's done his job properly, never mind making
sure that his management team do theirs.

2. Deliberate Strategy
Had SCO provided all of the information in their initial filing, there is a very
good chance that Novell would have made only some cursory checks (i.e. a check
to ensure that the rental fees were reasonable for the location and that the
office space to be retained was commensurate with the company's staff in that
location) before approving the proposal (or at least confirming they had no
objections).

So the witholding of otherwise vital information can support several strategies
:-

i. It Introduces More Delays.
This is unlikely to be the case, since delaying the signing of the lease deal
could result in the company being evicted from their office space. I don't think
a Bankruptcy court would look favourably on a management team that couldn't
handle this little task, and would likely question their competence more
forcibly.

ii. It Spends more of Novell's Cash
Well, Novell and other creditors, of course. This second motion would, of
course, have required more legal fees and expense, all of which would come from
the rapidly dwindling reserves of income that SCO continue to collect from Unix
Customers. (Actualy, I'm not sure about this part. Are SCO still continuing to
withold license revenues? IIRC, this was in dispute just before bankruptcy was
being declared).

iii. It Enriches the Lawyers
Here's a spin on "deliberate strategy" - which is to say, it could be
entirely intentional, but not by SCO's management. This is totally
theoretical... but consider this scenario.

SCO suddenly realise that they need to sort the leases - it went on the back
burner but they had a reminder letter come in and time is short. They go to
their lawyers who say, "Don't worry, we'll file a motion and get you
approval to pay. We'll also do the negotiation for you." The lawyers then
write the first motion - one so terse that they're 99% sure it will be 'objected
out' by Novell or other creditors. When that happens they go back to Darl and
say, "Gee, Darl, those nasty Novell people just objected to our motion.
Boy, they've really got it in for you, huh? Look, we'll re-file, but now Novell
demand that we give them all the small print too. Don't worry, we'll get this
sorted for you."

Providing that the legal team have the experience to know that the work they
undertake for this falls into the per-hour agreed expenses they may charge this
client, they're guaranteed payment. As part of the deal struck with SCO, you can
be pretty sure that they would have access to know precisely what's in the bank,
so in other words they must know when the point is reached that SCO would be
unable to pay their legal fees. We can be certain that motions will dry up as
soon as that day is reached.

I'm sorry, that's a really black picture to paint of anyone. Exploiting another
when they are 'down for the count' is not ethical where I come from, regardless
of who they are or what they did, so suspecting it of a lawyer in this case is
not very charitable.


But perhaps there are wheels within these wheels.

Is there any way that we are likely to find out which, if any, of these theories
may be closer to the truth?

[ Reply to This | # ]

caldera to scox docs...
Authored by: Anonymous on Tuesday, January 08 2008 @ 07:35 AM EST
...it just occurred to me that i've never seen any description of what was
transferred in that deal.

[ Reply to This | # ]
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