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Novell's Objections to the Amended Plan, as text |
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Friday, February 20 2009 @ 07:33 PM EST
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On Wednesday, we saw IBM and Novell file their respective Objections to SCO's Amended Plan and associated filings. Here are Novell's Objections as text.
For convenience, you can jump directly to the text versions as follows:
PDF | Title | Link to Text |
704 |
Novell's Objection to the Debtors'
Proposed Amended Disclosure Statement | Text |
705 |
Novell's Objection to the Debtors'
Revised Motion for (I) Order Scheduling
Confirmation Hearing [Etc.] for
Amended Plan | Text |
706 |
Novell's Objection to Debtors' Motion
for an Order Establishing Sale and Bid
Procedures and Related Relief | Text |
(Note: In footnote 4 to Docket # 704, Novell points to a series of docket filings that make up a basic history of the SCO bankruptcy. For those who wish to read up [or just catch up], links to these documents are all available on the Groklaw SCO BK timeline.)
- The Groklaw Team
*********************************************************
UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE
In re:
The SCO Group, Inc., et al.,
Debtors.
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Chapter 11
Case No. 07-11337 (KG)
(Jointly Administered)
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Objection Deadline: February 18, 2009 at 4:00
p.m. (prevailing Eastern time)
Hearing: February 25, 2009 at 11:00 a.m. (prevailing Eastern
time)
NOVELL'S OBJECTION TO THE DEBTORS'
PROPOSED
AMENDED DISCLOSURE STATEMENT
Novell, Inc. ("Novell"), and its subsidiary, SUSE Linux GmbH
("SUSE" and together with Novell the "Novell Parties") object to
the proposed Disclosure Statement in Connection with Debtors'
Amended Joint Plan of Reorganization (the "Amended Disclosure
Statement" or "ADS") of debtors and debtors in possession The SCO
Group, Inc. and SCO Operations, Inc. ("SCO" or the "Debtors") in
connection with their Debtors' Amended Joint Plan of Reorganization
(the "Amended Plan" or "AP").
To fund the Amended Plan, the Debtors propose a combination of
continued business operations and possible auction sale of some of
their assets. The Amended Plan proposes to pay most creditors in
full quickly, but considerably stretches out payment of one of the
two classes of general unsecured creditors: the class of general
unsecured creditors, such as Novell, International Business
Machines ("IBM") and Red Hat, against whom the SCO is in
prepetition litigation. As certain pivotal plan terms reflect, the
Debtors themselves recognize that they may be unable to pay these
litigation creditors in full, so the Amended Plan proposes to pay
them in new SCO stock if cash to pay them is in insufficient. In
the meantime, however, SCO's current shareholders will be able to
keep their existing stock.
Clearly, the Debtors' ability to fund the Amended Plan is
crucial to all creditors, but especially the litigation creditors.
Hence, a thorough analysis of the Debtors' business plan,
the
(1)
proposed auction, and the claims the Debtors may have to pay, is
indispensable to help creditors decide whether to vote for the
Amended Plan. Yet, the Amended Disclosure Statement fails to
provide the kind of meaningful information that would enable
creditors to judge the Debtors' prospects of meeting their
commitments under the Amended Plan. For this reason, the Court
should deny approval of the Amended Disclosure Statement. The Court
should also disapprove the Amended Disclosure Statement because the
Amended Plan is unconfirmable on its face as violating the absolute
priority rule in permitting existing shareholders to retain their
stock even though its terms explicitly anticipate that litigation
creditors may not be paid in full.
I. BACKGROUND
A. The Novell Litigation
1. Before filing these chapter 11 cases, SCO was involved in
litigation against various parties, including Novell. (See
Memorandum Opinion (filed herein November 27, 2007) (the "Opinion")
1-2.)1
2. On August 10, 2007, Novell won important rulings against SCO
on summary judgment in the District Court. (Opinion 3-4.)
3. The trial on the issues left by the summary judgment was set
for September 14, 2007, a Monday. (Opinion 4.) The Debtors filed
their voluntary chapter 11 petitions before this Court on September
11, 2007, the preceding Friday. The filing stayed the District
Court litigation.
4. In late November of 2007, Novell obtained stay relief to
complete the litigation. (Dkt. Nos. 232, 233.)2 Ultimately, Novell
obtained a judgment for over $3.5 million, including about $625,000
that SCO was to hold in trust for Novell. (See, Final
Judgment (a true and
(2)
correct copy of which is attached hereto as Exhibit A); Agreed
Order Resolving Novell's Motion [etc.] (filed December 29, 2008,
Dkt. No. 644).)
5. SCO thereafter appealed the District Court.s judgment to the
United States Tenth Circuit Court of Appeals, where the appeal is
now pending. (ADS 14.)
II. THE AMENDED PLAN AND DISCLOSURE STATEMENT
A. Introduction
6. Nearing the end of exclusivity under Code3 section 1121(d) after
sixteen months, several false starts, and post-petition losses
(excluding reorganization costs) of at least $7.7 million,
the Debtors filed the Amended Plan and Amended Disclosure Statement
on January 9 of this year.4
7. The central concept of the Amended Plan is continuation by
the Debtors of litigation with Novell and other parties (the
"Pending Litigation" in the Amended Plan's terminology). To this
end, the Amended Plan enables the Debtors and their existing
shareholders (largely management, Novell believes) to speculate on
the Pending Litigation against Novell and other Pending Litigation
defendant-creditors by significantly postponing payment to them in
a manner that plainly puts any such payment at risk. If the Debtors
win the litigation, they will recover from the defendants. If the
Debtors lose, as the Amended Plan's provision for payment in new
SCO stock reflects, the Debtors themselves anticipate that the
defendants will be unable to recover on their claims because the
Debtors will have consumed their resources in prosecuting the
litigation. In the meantime, however, existing equity will retain
its interests.
8. Under the Amended Plan, the Debtors will remain in business
with their current management. At the same time, the Debtors will
continue the Pending Litigation. The Amended Plan makes various
provisions for payment of creditors. However, the Amended
Disclosure Statement says little more about this blueprint than
that the Debtors are going to stay in business,
(3)
make lots of money through operations and perhaps the auction,
defeat Novell and other defendants in the Pending Litigation, and
pay everyone off one way or another, adding only fleeting caveats
that these things might not happen. Nowhere do the Debtors provide
crucial detail, support their financial projections with historical
or other evidence, harmonize their projections for various
potential outcomes the Amended Plan entertains, or rationalize
their discriminatory treatment of Pending Litigation claimants.
B. The Amended Plan and Amended Disclosure Statement
9. To fund the Amended Plan, the Debtors will use continued
operations, the proceeds, if any, of an auction of most of their
business and software assets, and any recovery from the Pending
Litigation. The Debtors only cursorily describe what businesses
they will "continue". (See ADS 22-25.) They acknowledge that
some of it is declining irreversibly (ADS 10, 40) and that some of
it is essentially brand new, with no track record (ADS 23-24). They
also say that they will be trying new pricing mechanisms (ADS 24).
The Debtors say they will reduce operating costs by 10% (ADS
25)5 and
even further reduce the salaries of management in order to meet
their commitments under the Amended Plan, if they can (AP 13).
10. The Debtors do not describe the proposed auction except to
state that there will be certain minimum bids totaling $6 million.
They recently have filed a separate motion for approval of bidding
procedures. (Debtor.s Motion for Order [etc.](filed February 4,
2009, Dkt. No. 695) (the "Sale Motion").6 However, although referring to
the Amended Plan, the proposed auction process is not conditioned
on confirmation of the plan. (See Sale Motion, Ex. A
(Purchase and Sale Agreement), § 10.3 (conditions to closing
do not include confirmation of Amended Plan).) Indeed, quite the
contrary is true. Sections 7.1(ix) and (x) of the Purchase and Sale
Agreement expressly purport to require any plan to be subordinate
to the sale. And the proposed form of order attached to the sale
motion expressly contemplates that the sale is one
(4)
outside a plan and is "a prerequisite to the Debtors' ability to
confirm and consummate the Plan or a different plan." (Sale Motion,
proposed order, Recitals H, S.)
11. The Amended Plan proposes to pay priority claims in full on
the Effective Date. It will pay Classes 3 and 3A (hereinafter
together "Class 3") general unsecured creditor claims in full as of
the Effective Date or when they are allowed, either in one lump sum
or, if their funds are inadequate on the Effective Date, in two
installments with 5% interest on the delayed payment. (AP 9, 14;
ADS 27-28.) Class 3 consists of all general unsecured creditors
except those creditors against whom SCO has Pending Litigation,
including Novell. The only difference between Classes 3 and
3A is that one class is composed of unsecured creditors of SCO
Group and the other of unsecured creditors of SCO Operations.
12. The Amended Plan places the latter (the Pending Litigation
claimants) in their own class, Class 4.7 If and when the Class 4 claims
are allowed at the end of the relevant litigation (i.e., upon
settlement or when no further appeal is possible), the Amended Plan
would pay Class 4 claimants, such as Novell, in five equal
installments with "applicable" interest. (AP 10, 12, 14-16; ADS
28-29, 36.) If the Debtors determine, using undisclosed criteria,
that they are unable to pay Class 4 claims in full when allowed
later, even in five installments, the Debtors will instead cancel
their existing stock (which shareholders can retain in the
meantime) and turn over to this Court's Clerk new SCO stock to
"pay" those creditors according to some undisclosed formula, stock
that — for reasons Novell will explain presently — is
certain to be worthless because SCO necessarily will be insolvent.
(AP 10, 12, 14-16; ADS 28-29, 36.) The Amended Plan imposes this
decidedly less favorable treatment on Class 4 general unsecured
creditors without any explanation.
13. The Amended Plan permits existing shareholders to retain their
stock; only if the Debtors determine in their (unexplained)
judgment that they cannot pay Class 4 creditors will the existing
stock be cancelled. (AP 10, 12, 14-16, ADS 28-29, 36.) Thus,
although the Amended
(5)
Plan says shareholders will get nothing on account of their
equity (AP 15), that is simply false. Not only do they get to keep
their shares until and unless there is a problem with payment of
Class 4 claims, but it appears they have full rights in their
shares. Nothing in the Amended Plan prevents them from selling or
otherwise taking advantage of the stock in the meantime; indeed,
the Amended Plan does not even expressly prohibit the payment of a
dividend to shareholders while they hold the stock.
14. Knowing that the Amended Plan's discriminatory treatment of
the Class 4 creditors will be controversial, the Debtors say
categorically in the Amended Disclosure Statement that they
will be able to confirm the Amended Plan over the objections
of dissenting impaired class because, among other things, the
Amended Plan satisfies the requirements of Code section
1129(b)(2)(B), which permits equity to retain its interests only if
unsecured creditors are paid in full. (ADS 36-37.)
15. The Amended Disclosure Statement contains various income and
expense projections, balance sheets and a liquidation analysis
purporting to compare the outcome of the Amended Plan with the
outcome of conversion of the cases to chapter 7.
16. The Amended Disclosure Statement gives a glowing, lengthy
account of why the Debtors think that they will win their appeal
against Novell, followed by a cursory caution that they might lose
(ADS 12-15). The Debtors also assign unexplained minimum bids
totaling $6 million to the various assets for the proposed auction
(which is addressed only in the Sale Motion and is not linked to
the Amended Plan), assets that the Debtors evidently value at next
to nothing in the liquidation analysis.
17. The Amended Disclosure Statement opines (as does the Amended
Plan) that there is "no guarantee" that creditors will do better if
the Amended Plan is not confirmed. (ADS 45.). Indeed, at the top of
ADS 45 the Debtors state that the only alternatives to confirmation
of the Amended Plan are dismissal or conversion.
(6)
III. OBJECTIONS TO THE AMENDED DISCLOSURE STATEMENT
18. As has been their history in these cases, the Debtors fall
far short of their disclosure obligations in the Amended Disclosure
Statement. In addition, the Amended Plan appears unconfirmable on
its face. For both these reasons, the Court should deny approval of
the Amended Disclosure Statement.
A. Summary of Applicable Law
19. Code section 1125(b) provides that:
An acceptance or rejection of a plan may not be
solicited after the commencement of the case under this title from
a holder of a claim or interest with respect to such claim or
interest, unless, at the time of or before such solicitation, there
is transmitted to such holder the plan, or a summary of the plan,
and a written disclosure statement approved, after notice an a
hearing, by the court as containing adequate
information.
In turn, section 1125(a)(1) defines "adequate information" as
being:
[i]nformation of a kind, and in sufficient detail, as
far as is reasonably practicable in light of the nature and history
of the debtor and the condition of the debtor's books and records .
. . that would enable a hypothetical [creditor of or investor in
the debtor] of the relevant class to make an informed judgment
about the plan . . . .
20. There are many general formulations concerning the purpose
of a disclosure statement, and given the case-by-case analysis that
courts must apply and the flexibility courts have in assessing
proposed disclosure statements, it is not meaningful to try to
provide more than a general account of that purpose. A typical
explication is:
The general purpose of the disclosure statement is to
provide 'adequate information' to enable 'impaired' classes of
creditors and interest holders to make an informed judgment
about the proposed plan and determine whether to vote for the
plan.
In re Phoenix Petroleum Co., 278 B.R. 385, 392 (Bankr. E.D.
Pa. 2001) (emphasis added); see also, e.g., In re Monroe Well
Service, Inc., 80 B.R. 324, 330 (Bankr. E.D. Pa. 1987).
(7)
21. Notwithstanding the general nature of section 1125's test
for the adequacy of a disclosure statement, certain observations
are possible. Indeed, some courts have composed lists of subjects a
disclosure statement generally should cover. Such a case is In
re Cardinal Congregate I, 121 B.R. 760, 765 (Bankr. S.D. Ohio
1990). Among the considerations listed there that are of particular
relevance to this case are: a chapter 7 liquidation analysis;
valuations or pro forma projections of future performance;
and "[i]nformation relevant to the risks being taken by creditors
and interest holders." Accordingly, a disclosure statement should
illuminate financial aspects of the plan. See, e.g., In re
Monroe Well Service, Inc., 80 B.R. at 330, 332("[s]ufficient
financial information must be provided so that a creditor (likened
to a 'hypothetical reasonable investor') can make an 'informed
judgment' whether to accept or reject the plan"). In that regard, a
central issue is the competence of a reorganized debtor's proposed
management. E.g., See In re Prussia Associates, 322 B.R.
572, 584 (Bankr. E.D. Pa. 2005)
22. Finally, a court should not approve a disclosure statement
if the underlying plan is unconfirmable on its face because
approving the disclosure statement and proceeding to confirmation
would be futile and a waste of judicial and other resources.
E.g., In re Phoenix Petroleum Co., 278 B.R. 385, 394 (Bankr.
E.D. Pa. 2001) (holding that if the described plan is fatally
flawed so that confirmation would not be possible, it is
appropriate to consider such issues t the disclosure hearing
stage); In re H.K. Porter Co., 156 B.R. 16, 17 n.1 (Bankr.
W.D. Pa. 1993) ("The Objectors correctly posit that it would be a
waste of the Court's resources and of the estate's assets to allow
a plan which is nonconfirmable on its face to proceed through the
confirmation process."); In re Cardinal Congregate I, 121
B.R. at 764; In re Monroe Well Service, Inc., 80 B.R. at
333.
B. Inadequacies of the Amended Disclosure Statement
23. The Amended Disclosure Statement is inadequate for many
reasons, some of which no doubt will be noted by other objecting
parties.
(8)
-
The Amended Disclosure Statement fails to explain why the
Debtors expect to make substantial profits in virtually no time
following confirmation ($3.8 million in 2009, $19.2 million in 2010
and $22.5 million in 2011)8 even though they have lost money
incessantly, plan to continue what they acknowledge is a declining
licensing business and plan to market essentially altogether new
products employing a new strategy of pricing and discounts. The
projections are even more questionable in light of the current
national economy, which the Debtors omit to mention at all as a
factor in their future. Yet, the ability of the Debtors to turn and
sustain a real profit is of special importance to creditors,
especially to Class 4 creditors, who will have to wait up to five
years after their claims finally are allowed to get their payment
in full (or risk being saddled with "new" SCO stock). Even Class 3
creditors, although receiving more favorable treatment, must be
concerned about the Debtors' prospects since the Amended Plan
recognizes the possibility that the Debtors may have to pay them in
two installments.
-
The Amended Disclosure Statement fails to project the value of
the new SCO stock that would be distributed to Class 4 creditors.
This is no minor omission. After all, the Amended Plan's terms
themselves make it seem unlikely that the new stock will have any
value at all. By the time the occasion for such a distribution
arrives, as Novell suspects it will, it will be for the very reason
that SCO will be unable to pay its debts to one or more Class 4
creditors after having spent considerable time and resources in
litigation against Class 4 creditors while operating under a
business plan of questionable strength. What will be left in SCO to
give the new stock value under those circumstances? The shares
cannot be worth more than what, if anything, is left of the
Debtors' assets. In that connection, the Amended Plan and Amended
Disclosure Statement fail to discuss
(9)
how the old SCO stock will be cancelled and, more importantly,
what the mechanism and formula will be for distribution of the new
SCO stock to Class 4 creditors.
-
The Amended Disclosure Statement fails to discuss adequately the
Debtors' proposed auction of various assets in various important
respects. It also conflicts with the Sale Motion.
¶ |
For example, it does not make clear any of the following: what
assets are being sold, describing them only very generally; what
the terms of the sale are other than minimum initial bids (the
basis for which the Debtors also do not discuss); and whether there
is already a stalking horse bidder and, if so, upon what terms it
has bid. |
¶ |
Similarly, the Amended Disclosure Statement fails to clearly
provide projections (if it provides any such projections at all)
reflecting the interplay between how the Debtors (and their
creditors) will fare given the range of possible auction outcomes
from sale of all the assets to sale of none. Clearly, the auction
may affect the Debtors' "going forward" business model and ability
to pay creditors. |
¶ |
By the same token, the Amended Plan's liquidation analysis does
not clearly and separately encompass and value the assets that the
Debtors hope to auction for at least $6 million. Such a separate
evaluation should be part of the projections so that creditors can
assess the Debtors' view of how a liquidation rather than the
auction sale might affect the assets' value. |
¶ |
The language in the Sale Motion about the auction's being a
"prerequisite" to the Amended Plan or any other plan conflicts with
Amended Plan and Amended Disclosure Statement, which at no point
state that success of the auction (at any level) is a sine qua
non of the Amended Plan. By the same token, the Sale Motion
does not condition any sale on confirmation of the Amended Plan. In
fact, the Amended Plan says quite the opposite. (Amended Plan 13
("If the Asset Sale(s) do not generate sufficient funds to satisfy
Allowed Claims, Reorganized SCO shall reduce the annual base
compensation paid to these officers by 10% as part of the
go-forward business strategy."); ADS 38 ("[I]f the proposed going
concern auction proves unsuccessful in the Debtors' business
judgment, the Reorganized Debtors will continue their operations
with the unsold assets and repay the remaining debts . . . over
time in full.").) |
-
The Amended Disclosure Statement's discussion of the Pending
Litigation is a sales pitch regarding the Debtors' prospects rather
than a balanced disclosure of what the issues and arguments are
that would enable the hypothetical creditor to make an informed
decision about the Amended Plan. For example, the Amended
(10)
Disclosure Statement spends nearly four single-spaced pages on
all the reasons that SCO will win its appeal of the Novell
judgment, but only one two-line paragraph pro forma
acknowledgment that it might lose. (ADS 12-15.) A similar comment
is apropos of the Amended Disclosure Statement's discussion of the
other litigation, such as that against IBM. (ADS 12-12, 15-16.)
This not disclosure; it is manipulation of creditors who are being
asked to cast their lot with the Debtors' decision to spend (and
perhaps exhaust) resources on continuing the litigation.
-
The Amended Disclosure Statement does not explain why it has
separated unsecured creditors into three different classes, two of
which receive identical treatment and the third of which receives
materially less favorable treatment. Though those reasons may
affect the Amended Plan's confirmability. This is so because the
classification scheme smacks of class-rigging to obtain the vote of
at least one, if not two impaired classes of general unsecured
creditors (Classes 3 and 3A) by providing them with more favorable
treatment than the general unsecured creditors in Class 4. See,
e.g., In re National/Northway Ltd. Partnership, 279 B.R. 17,
29-30 (Bankr. D. Mass. 2002) (attempt to classify unsecured
creditor's claim separately from other unsecured claims because
creditor held third party collateral improper); In re Holly
Garden Apartments, Ltd., 223 B.R. 822 (Bankr. M.D. Fla. 1998)
(creation of two classes of unsecured creditors that were treated
identically symptomatic of class rigging); In re Montclair
Retail Center, L.P., 177 B.R. 663 (BAP 9th Cir. 1995) (separate
classification of general unsecured creditors from deficiency
claimant under plan that otherwise treated both classes the same is
class rigging). Indeed, the Third Circuit, in John Hancock
Mutual Life Ins. Co. v. Route 37 Business Park Assoc., 987 F.2d
154, 158 (3d Cir. 1993), held that "it seems clear that the Code
was not meant to allow a debtor complete freedom to place
substantially similar claims in
(11)
separate classes" because "critical confirmation requirements .
. . would be seriously undermined if a debtor could gerrymander
classes." The John Hancock court ruled that a debtor could
not construct a classification scheme designed to secure approval
by an arbitrarily designed class of impaired claims, even though
the overwhelming sentiment of the impaired creditors was that the
proposed reorganization of the debtor would not serve any
legitimate purpose. Id. at 159 ("Where, as in this case, the
sole purpose and effect of creating multiple classes is to mold the
outcome of the voting, it follows that the classification scheme
must provide a reasonable method for counting votes. In a 'cram
down' case, this means that each class must represent a voting
interest that is sufficiently distinct and weighty to merit a
separate voice in the decision whether the proposed reorganization
should proceed. Otherwise, the classification scheme would
simply constitute a method for circumventing the requirement set
forth in 11 U.S.C. § 1129(a)(10) (1988).") (emphasis
added).
-
The Amended Disclosure Statement should not be permitted to
state affirmatively that the Debtors will be able to confirm
the Amended Plan over a dissenting impaired class. If the Debtors
want to state that they believe that they will be able to
confirm the Amended Plan over a dissenting impaired class, Novell
has no objection for disclosure purposes, but the Amended
Disclosure Statement's pronouncement on this point amounts to a
statement of law on an issue that only the Court can decide.
-
The Amended Disclosure Statement should be corrected to state
accurately what the alternatives are to confirmation of the Amended
Plan. Clearly, there are other possibilities, including
confirmation of a different plan, including one proposed by a party
other than the Debtors, or appointment of a chapter 11 trustee. Any
of these other courses might lead to a resolution of the Debtors'
financial issues that is acceptable to creditors. Indeed, at the
bottom of that same page of the
(12)
Amended Disclosure Statement at the Debtors state the only
choices or conversion or dismissal, the Debtors more correctly add
as a choice confirmation of some other plan by them or by a third
party. (ADS 45.)
-
The Amended Plan and Amended Disclosure Statement should not be
able to state that equity interests are impaired. Equity is keeping
its shares, with the only restriction being that they will be
cancelled if the Debtors cannot ultimately pay their creditors, a
limitation that is essentially no different than the shareholders
would experience under nonbankruptcy laws for an insolvent company
that is effectively owned by its creditors.
-
The Amended Plan and Amended Disclosure Statement fail to set
forth any standards or criteria by which the Debtors will make
certain key decisions, e.g., whether to cut back on costs and
expenses, to invoke the distribution of new SCO stock to Class 4
creditors, and what the "applicable interest rate" is for delayed
payment on Class 4 claims. This substitution of a "trust us"
standard for an objective and intelligible one is the very epitome
of inadequate information.
-
The Amended Plan and Amended Disclosure Statement fail to make
clear the fate of the Trust Funds.
C. The Plan Is Unconfirmable on Its Face
24. There is yet another reason why the Court should deny
approval to the Amended Disclosure Statement in addition to its
inadequate disclosure: approval would be futile because the Amended
Plan plainly is unconfirmable. See In re Phoenix Petroleum
Co., 278 B.R. at 294; In re H.K. Porter Co., 156 B.R. at
17 n.1, In re Cardinal Congregate I, 121 B.R. at 764; In
re Monroe Well Service, Inc., 80 B.R. at 333.
25. The Amended Plan will violate the absolute priority rule of
Code section 1129(b)(2)(B) because equity is being allowed to
retain its interests even though the Amended Plan contemplates that
Class 4 creditors cannot be paid in full. See In re Prussia
Associates,
(13)
322 B.R. at 595 ("fair and equitable" standard of Code section
1129(b)(2)(B) requires more than "abstract" mathematical provision
for payment in full; plan that shifts risk of underpayment from
junior class to senior class cannot be confirmed). Such risk
shifting is obvious here. Though compliance with the absolute
priority rule usually is an issue for confirmation, the Amended
Plan's plain expectation that Class 4 creditors may not be paid in
full and provision for "payment" of any shortfall with stock that
will be virtually if not totally worthless because the Debtors'
resources will be spent betrays a plan that also is unconfirmable
on its face in allowing existing shareholders to retain their stock
in the meantime.
IV. CONCLUSION
26. Facing the expiration of their exclusivity rights for plan
confirmation after languishing in chapter 11 for nearly 1 1/2
years, the Debtors' overriding concern remains control of the
Pending Litigation for as long as possible in the hope it will
prove to be a windfall. The Amended Plan has been cobbled together
to serve this purpose. The Amended Disclosure Statement has been
compiled accordingly. It is filled with material that either simply
tracks the Amended Plan or is pro forma that is "disclosure"
in name only. For the reasons stated above, the Amended Disclosure
Statement is inadequate and should be rejected.
(14)
Dated: February 18, 2009
Wilmington, Delaware | |
| YOUNG CONAWAY STARGATT & TAYLOR, LLP
/s/ Sean T. Greecher
James L. Patton (No. 2202)
Michael R. Nestor (No. 3526)
Sean T. Greecher (No. 4484)
[address]
[phone]
-- and --
MORRISON & FOERSTER LLP
Adam A. Lewis
[address]
[phone]
-- and --
MORRISON & FOERSTER LLP
Larren M. Nashelsky
[address]
[phone]
Counsel for Novell, Inc. and SUSE Linux GmbH |
(15)
|
At the same time, an international arbitration (the
"Arbitration") was set for December of 2007 between SCO and SUSE
that related to certain issues that the District Court had agreed
should be decided in the Arbitration. (Debtor The SCO Group, Inc.'s
Motion to Enforce the Automatic Stay (filed September 28, 2007, Dkt
No. 69) (the "Arbitration Stay Motion")); Transcript of Hearing of
November 6, 2007, Dkt. No. 207) ("11/16 Tr.") at 34:19-36:20;
60:15-64:21.) |
|
However, SCO asked this Court to determine that the automatic
stay barred continuation of the Arbitration. (Arbitration Stay
Motion.) The Court granted the Arbitration Stay Motion as requested
by SCO. (Order Granting The SCO Group, Inc.'s Motion to Enforce the
Automatic Stay (filed November 14, 2007, Dkt. No. 204).) |
|
The "Code" is the Bankruptcy Code, 11 U.S.C. §§
101-1532. |
|
For this history generally, see,, e.g., Dkt. Nos. 149,
179, 180, 193, 202, 207, 215, 218, 221, 225, 231, 255, 289, 329,
346, 359, 367, 368, 239, 407-11, 413, 414, 418, 419, 425, 437, 440,
443, 470, 502, 525, 559, 562, 644 and 649. The losses can be found
in the December 2008 monthly operating report, Dkt. No. 692. |
|
Else, they claim the reduction will be 20-20%. (AP 11.) |
|
As described in Novell's Objection to Debtors' Motion for an
Order Establishing Sale and Bid Procedures and Related Relief
(filed concurrently herewith), there are some serious issues with
the Sale Motion. |
|
SUSE is not, however, placed in Class 4. |
|
Amended Disclosure Statement, Ex. 4, Income Statement. |
UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE
In re:
The SCO Group, Inc., et al.,
Debtors'
|
)
)
)
)
) |
Chapter 11
Case No. 07-11337 (KG)
(Jointly Administered)
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Objection Deadline: February 18, 2009 at 4:00
p.m. (prevailing Eastern time)
Hearing: February 25, 2009 at 11:00 a.m. (prevailing Eastern
time)
NOVELL's OBJECTION TO THE DEBTORS' REVISED
MOTION FOR (I) ORDER
SCHEDULING CONFIRMATION HEARING [ETC.] FOR AMENDED
PLAN
Novell, Inc., and its subsidiary, SUSE Linux GmbH ("SUSE" and
together with Novell Inc., "Novell") object to the Debtors' Revised
Motion for Order (I) Scheduling Confirmation Hearing [etc.] (filed
February 4, 2009 (the "Motion") for several reasons arising from
plainly controversial aspects of the Debtors' Amended Joint Plan of
Reorganization (the "Amended Plan" or "AP") and the Disclosure
Statement in Connection with Debtors' Amended Joint Plan of
Reorganization (the "Amended Disclosure Statement" or "ADS").
Calendar for Proceedings. The Motion asks the
Court to set various dates in connection with the attempt of
debtors and debtors in possession The SCO Group, Inc. and SCO
Operations, Inc. (the "Debtors" or "SCO"). Examples are the record
date for the Amended Plan, the balloting and objection deadlines,
and a date for a confirmation hearing. However, as discussed in
Novell's Objections to the Debtors' Proposed Amended Disclosure
Statement and Novell's Objection to Debtors' Motion for an Order
Establishing Sale and Bid Procedures and Related Relief, both filed
concurrently herewith, the Amended Disclosure Statement and Amended
Plan each raise substantial issues. Examples are whether the
Debtors have adequately discussed their business plan and
projections, whether the Amended Plan is feasible, whether the
proposed auction sale is permissible or adequately discussed,
whether Amended Plan violates the absolute priority rule, whether
the Amended Plan incorporates impermissible classification and
whether
(1)
equity holders are impaired because they are able to retain
their shares unless the Debtors are unable to pay their debts
postconfirmation. With such substantial issues to be addressed and
resolved, Novell submits, the Court should not set future
plan-related dates until and unless a disclosure statement is
approved and it is clear that there will be a confirmation hearing.
When it does set any confirmation hearing and related deadlines,
moreover, the Court should take into account the likelihood that
Novell and other parties may need to conduct discovery on
confirmation issues.
Ballots. The Motion asks the Court to approve the
form of various ballots. In effect, the Motion asks the Court to
approve the Amended Plan's classification scheme and contention
that equity holders are impaired. As just noted, there are
potential confirmation issues related to whether the classification
scheme is proper and whether equity is impaired. Any approval of
the form of ballots should be provisional until these issues are
resolved at confirmation or otherwise.
(2)
Dated: February 18, 2009
Wilmington, Delaware |
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YOUNG CONAWAY STARGATT & TAYLOR, LLP
/s/ Sean T. Greecher
James L. Patton (No. 2202)
Michael R. Nestor (No. 3526)
Sean T. Greecher (No. 4484)
[address]
[phone]
-- and --
MORRISON & FOERSTER LLP
Adam A. Lewis
[address]
[phone]
-- and --
MORRISON & FOERSTER LLP
Larren M. Nashelsky
[address]
[phone]
Counsel for Novell, Inc. and SUSE Linux GmbH |
(3)
UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE
In re:
The SCO Group, Inc., et al.,
Debtors'
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Chapter 11
Case No. 07-11337 (KG)
(Jointly Administered)
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Objection Deadline: February 18, 2009 at 4:00
p.m. (prevailing Eastern time)
Hearing: February 25, 2009 at 11:00 a.m. (prevailing Eastern
time)
NOVELL'S OBJECTION TO DEBTORS' MOTION FOR AN
ORDER
ESTABLISHING SALE AND BID PROCEDURES AND RELATED
RELIEF
Novell, Inc., and its wholly-owned subsidiary, SUSE Linux GmbH
(together "Novell"), hereby submits this objection (the
"Objection") to Debtors' Motion for an Order (I) (A) Establishing
Sale and Bid Procedures, (B) Approving Form of Asset Purchase
Agreement, and (C) Approving the Form and Manner of Notice of Sale;
and (II) Approving (A) Sale of Certain Assets Free and Clear of
Interests and (B) Assumption and Assignment of Executory Contracts
and Unexpired Leases (filed February 4, 2009) (the "Sale
Motion").
1. Introduction. The Sale Motion seeks the Court's
authority for debtors and debtors in possession The SCO Group, Inc.
and SCO Operations, Inc. (together, the "Debtors" or "SCO") to sell
a substantial portion (if not substantially all) of the Debtors'
assets. It suffers from numerous important defects, starting with
its virtual elimination of creditor suffrage in these chapter 11
cases. Not surprisingly, many of the problems with the Sale Motion
are similar to those afflicting the Debtors' Motion for Order (I)
Scheduling Confirmation Hearing [etc.] (filed March 11). (See,
e.g., Novell.s Objection to the Debtors' Motion for Order (I)
Scheduling Confirmation Hearing [etc.] (filed March 26, 2008).)
(1)
2. Sub Rosa Plan. Although the Sale Motion
purports to be in support of the Debtors' Second Amended Joint Plan
of Reorganization (the "Amended Plan" or "AP"), nothing in the Sale
Motion or the Amended Plan conditions the proposed sale on
confirmation of the Amended Plan. (See Sale Motion, Ex. A
(Purchase and Sale Agreement), § 10.3 (conditions to closing
do not include confirmation of Amended Plan).) Indeed, quite the
contrary is true. Sections 7.1(ix) and (x) of the Purchase and Sale
Agreement expressly purport to require any plan to be subordinate
to the sale. This renders the proposed sale a sub rosa plan,
limiting the choices of the Debtors and, more importantly, their
creditors ever after if the Amended Plan is not confirmed.
3. Sales of substantial assets of the estate under Section
363(b) of the Bankruptcy Code must be "closely scrutinized" because
of the risk that a sale outside of a plan of reorganization may
deprive parties of substantial rights inherent in the plan
confirmation process. Accordingly, the Debtors bear a "heightened
burden of proving the elements necessary for authorization." In
re Channel One Comm., Inc., 117 B.R. 493, 496 (Bankr. E.D. Mo.
1990) (citing Indus. Valley Refrigeration & Air Conditioning
Supplies, Inc., 77 B.R. 15, 17 (Bankr. E.D. Pa. 1987); In re
Woods, 215 B.R. 623, 626 (BAP 10th Cir. 1998), aff.d 173
F.3d 770 (10th Cir. 1999), cert. denied sub nom Woods v.
Kenan, 528 U.S. 878 (1999) (citing cases and quoting Collier on
Bankruptcy ¶ 363.02[4], at 363-19 (Lawrence P. King ed., 15th
ed. rev. 1997) (sale by chapter 11 trustee under confirmed plan
permissible because plan protections already honored). See DDJ
Capital Management, LLC v. Fruit of the Loom, Inc. (In re Fruit of
the Loom, Inc.), 274 b.R. 631 (D. Del. 2002) (sale of
substantially all assets permissible because closing conditioned on
confirmation of related plan).
(2)
4. The Debtors attempt to justify the Sale Motion on the grounds
that it is vital to the Amended Plan because the sale will provide
funds necessary for the Amended Plan's focus of continuing
litigation against Novell and others. (See Sale Motion 2-3.)
However, even if otherwise sustainable, this rationale fails for at
least two reasons.
5. First, as just noted, the Sale Motion does not
condition the proposed sale on confirmation of the Amended Plan.
Thus, the Debtors may still sell most of their assets even if they
do not need the funds for the Amended Plan because the Court does
not confirm the latter. Under those circumstances, however, the
Debtors will have channeled the estate into a limited array of
possible disposition of these cases, whether through a plan or
otherwise, since the only real remaining assets will be cash from
the sale and the litigation claims it will retain.
6. Second, the Debtors effectively admit that the sales
they contemplate are not essential to the Amended Plan. They assert
they will be able to proceed with the Amended Plan even if they
fail to sell the assets. (Amended Plan 13 ("If the Asset Sale(s) do
not generate sufficient funds to satisfy Allowed Claims,
Reorganized SCO shall reduce the annual base compensation paid to
these officers by 10% as part of the go-forward business
strategy."); Disclosure Statement in Connection with Debtors'
Amended Joint Plan of Reorganization (the "Amended Disclosure
Statement" or "ADS") 38 ("[I]f the proposed going concern auction
proves unsuccessful in the Debtors' business judgment, the
Reorganized Debtors will continue their operations with the unsold
assets and repay the remaining debts . . . over time in
full.").)
7. The absence of any real justification for a sale outside a
plan is exacerbated because the Sale Motion, aiming at an April
2009 sale, effectively allows only a limited exposure and due
diligence period. See In re Castre, 312 B.R. 426, 428
(Bankr. D. Colo. 2004) (explaining the importance of marketing a
363 sale). In order for a sale under Section 363 of the
Bankruptcy
(3)
Code to be expedited, the Debtors must establish a compelling
justification. See, e.g., In re Beker Indus. Corp., 89 B.R.
336, 339 (S.D.N.Y. 1988) (denying sale where, although
reorganization plan was not imminent, there was an "absence of any
compelling circumstances permitting a sale"). But there is no
evidence of any compelling circumstances here. The only "need" for
a sale is the Debtors' desire to have more money to prosecute
claims against Novell and others (with or without a plan). (See,
e.g., Sale Motion 3, ¶ 4.) That purported reason does not
require any immediate sale of the assets. Hence, the sale may
needlessly sacrifice value for creditors, further constraining
their options in these cases.
8. In short, the Debtors do not meet the standard for a sale of
substantially all of their assets outside a plan. The creditors
should not be stripped of choices if the Debtors cannot confirm
their Amended Plan under the false guise of enhancing the plan.
9. Subject Assets and Valuation Unclear. The Sale
Motion and appended exhibits do not precisely identify what assets
the Debtors are proposing to sell. Exhibits A-1 and A-2 to the form
of Purchase and Sale Agreement that is Exhibit A to the Sale Motion
say, in essence, only that the Debtors will be selling certain
businesses. The assets involved themselves are not specifically
listed. Without that information, it is not possible for creditors
or the Court to determine whether the sale price is acceptable;
indeed, it may not even be feasible for potential bidders to
determine whether to place a competitive bid. In that regard, the
Sale Motion also does not discuss the basis for the Debtors'
proposed minimum bids, either, making it even more difficult for
the creditors to evaluate the proposed sales. Understandably, the
Debtors will not want to publicize any actual valuation they have
in advance of an attempt to sell the property, but they should
provide whatever information they reasonably can about the basis of
their valuation.
(4)
10. Moreover, as with the Debtors' "emergency" sale motion a
year ago, the Sale Motion's imprecision about what is being sold
raises the question whether the Debtors are purporting to sell
rights that are still in dispute in the litigation between Novell
and the Debtors in the litigation now on appeal to the 10th
Circuit. Clearly, the Debtors mean to retain control over the
litigation with Novell as such. But that does not mean that they
could not "share" the underlying rights in some way with a buyer. A
debtor cannot sell another's property. See Cincola v.
Sharffenberger, 248 F. 3d 110, 121 (3d Cir. 2001) (bankruptcy
authorized the sale of property of the estate, as defined in
section 541 of the Bankruptcy Code). When title to assets disputed,
a bankruptcy court may not allow the sale of property as "property
of the estate" without first determining whether the debtor in fact
owns the property. See In re Rodeo Canon Dev. Corp., 362
F.3d 603, 608 (9th Cir. 2004), withdrawn per settlement, 2005 U.S.
App. LEXIS 3802 (9th Cir. 2005) (property could not be sold free
and clear of liens, claims and encumbrances when debtor's title was
in dispute).
11. Moreover, this underlying question must be decided before
the property can be sold free and clear under Section 363(f).
See In re Clark, 266 B.R. 163, 172 (9th Cir. B.A.P. 2001)
(sale free and clear of claims denied because not property of the
estate); Gorka v. Joseph (In re Atl. Gulf Cmtys. Corp.), 326
B.R. 294 (D. Del. 2005) (sale of real property under section 363
not free and clear of claims because title in dispute); In re
Claywell, 341 B.R. 396 (Bankr. D. Conn. 2006) (sale disallowed
pending resolution of debtor's ownership in property).
12. Perhaps clarification of what the Debtors will be selling
will not be easy, but easy or not, it must be done.
13. Liens and Interests Unspecified. The Debtors
ask the Court to approve the sale free and clear of liens, claims
and interests. But nowhere do the Debtors specify what specific
liens,
(5)
claims and interests are at stake. Thus, it is not possible for
the affected parties to know that their rights are implicated so
that they may protect their interests. Such notice fails to satisfy
due process. In re Takeout Taxi Holdings, Inc., 307 B.R.
525, 531-33 (Bankr. E.D. Va. 2004) (sale free and clear is a
powerful tool for which notice to affected creditors specifically
identifying their interests at stake is necessary to satisfy due
process).
14. Bid Protections Unjustified. The Sale Motion
asks the Court to authorize an expense reimbursement of $30,000 and
a breakup fee of 3% of the purchase price for any stalking horse
bidder. Again, the Debtors have failed to justify the need for any
such terms.
15. The Court must carefully consider the propriety of any "bid
protections". In the Third Circuit "the allowability of breakup
fees, like that of other administrative expenses, depends on the
prospective purchaser's ability to show that the fees were actually
necessary to preserve the value of the estate." Calpine Corp. v.
O.Brien Envtl. Energy Inc., 181 F. 3d 527, 535 (3d Cir. 1999);
see also In re Beth Israel Hosp. Ass.n of Passaic, 207 WL
2049881 at 12 (Bankr. D. N.J. 2007) (citing In re O'Brien Envtl.
Energy, Inc., 181 F.3d at 535). In the Beth Israel case,
the Bankruptcy Court examined the record before it to determine
whether the stalking horse expanded any efforts to preserve the
value of the debtor's estate. The Court found that the facts did
not show that the stalking horse's bid for the debtor's assets was
a catalyst for a higher bid. Id. at 12-13.
16. As yet, there is no evidence that the Debtors must offer bid
protections to attract bidders. Indeed, they evidently think there
already is some interest in the assets, for they have set
substantial minimum bid prices ($6 million altogether). Moreover,
there is no requirement in the Sale Motion that any sale be for all
cash. That being so, it may be problematic how the Debtors will
determine what the purchase price is for the purpose of awarding
the 3% breakup
(6)
fee. Certainly, the Debtors shed no light on that question. It
is, therefore, impossible to tell whether the 3% is a reasonable
fee even if a breakup fee might otherwise be justifiable.
17. Stalking Horse Bidder. The Sale Motion
contemplates a potential stalking horse bidder that would get the
benefit of the bid protections. Moreover, that bidder might already
be in negotiations with the Debtors, giving it a substantial
advantage over other potential bidders. If there is a current
stalking horse bidder in the wings, the Debtors should disclose
that fact and the bidder's identity and background. Indeed, if the
Debtors already have competing bidders, they should disclose all of
them. The sale should be as transparent as possible consistent with
reasonable needs for confidentiality to maximize the sale
price.
18. Conclusion. The Sale Motion is neither
necessary nor adequately presented. It should be denied.
(7)
Dated: February 18, 2009
Wilmington, Delaware |
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YOUNG CONAWAY STARGATT & TAYLOR, LLP
/s/ Sean T. Greecher
James L. Patton (No. 2202)
Michael R. Nestor (No. 3526)
Sean T. Greecher (No. 4484)
[address]
[phone]
-- and --
MORRISON & FOERSTER LLP
Adam A. Lewis
[address]
[phone]
-- and --
MORRISON & FOERSTER LLP
Larren M. Nashelsky
[address]
[phone]
Counsel for Novell, Inc. and SUSE Linux GmbH |
(8)
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Authored by: bprice on Friday, February 20 2009 @ 07:52 PM EST |
If needed
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--Bill. NAL: question the answers, especially mine.[ Reply to This | # ]
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Authored by: bprice on Friday, February 20 2009 @ 07:53 PM EST |
Check the hints on the "Post a Comment" page for links and stuff.
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--Bill. NAL: question the answers, especially mine.[ Reply to This | # ]
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Authored by: bprice on Friday, February 20 2009 @ 07:54 PM EST |
For starting a thread, use your comment's title to give us a clue which News
Pick you're discussing. Thanks.
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--Bill. NAL: question the answers, especially mine.[ Reply to This | # ]
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Authored by: Crocodile_Dundee on Friday, February 20 2009 @ 09:53 PM EST |
Just asking because I'm not sure. Can I retire on my SCO shareholding yet?
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That's not a law suit. *THIS* is a law suit![ Reply to This | # ]
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- Yabut... - Authored by: Tufty on Saturday, February 21 2009 @ 12:53 AM EST
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