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Bankruptcy - What Happens in Chapter 7? - Updated
Friday, May 29 2009 @ 02:42 AM EDT

What happens if a company ends up in Chapter 7 bankruptcy? Here's the overview from Cornell University School of Law's Legal Information Institute:
Bankruptcy law provides for the development of a plan that allows a debtor, who is unable to pay his creditors, to resolve his debts through the division of his assets among his creditors. This supervised division also allows the interests of all creditors to be treated with some measure of equality. Certain bankruptcy proceedings allow a debtor to stay in business and use revenue generated to resolve his or her debts. An additional purpose of bankruptcy law is to allow certain debtors to free themselves (to be discharged) of the financial obligations they have accumulated, after their assets are distributed, even if their debts have not been paid in full....

There are two basic types of Bankruptcy proceedings. A filing under Chapter 7 is called liquidation. It is the most common type of bankruptcy proceeding. Liquidation involves the appointment of a trustee who collects the non-exempt property of the debtor, sells it and distributes the proceeds to the creditors. Bankruptcy proceedings under Chapters 11, 12, and 13 involve the rehabilitation of the debtor to allow him or her to use future earnings to pay off creditors.

It sounds so simple, when they put it like that. But we've seen how very complex it can end up, in watching SCO in bankruptcy court. But they've been in Chapter 11, where the point is rehab. Catch the point that Chapter 7 is called liquidation? That's the point of it. So if the court grants the motions by the U.S. Trustee's Office, IBM and Novell to send SCO to Chapter 7, then what happens?

Someone has to oversee the liquidation, and in Chapter 7, that means the court has to appoint a trustee, who takes the steering wheel away from the executives and becomes the designated driver. He or she can even run the business for a limited time, while the liquidation is ongoing. So he distributes whatever there is left, following the rules of distribution, and then the slate is wiped clean, and the bankrupt owes no more. In the case of a company, as opposed to an individual, it also means it exists no more. Of course, with SCO, nothing is that simple, and because of the litigation, there has to be some way to get that all worked through and decided. But it's the trustee who decides what to do, not the current executives.

Normally, there's an interim trustee at first chosen by the US Trustee, and then a permanent trustee can be chosen by vote of creditors, but in the case of SCO, the creditors never did form any kind of cohesive interest in doing anything, with the result that there is no creditors' committee, so I gather in such a case the interim trustee can become permanent if there is no voted-in trustee. I can only guess how complicated the twists and turns might be between the lines of all this.

Here are the duties of a trustee:

§ 704. Duties of trustee
(a) The trustee shall—
(1) collect and reduce to money the property of the estate for which such trustee serves, and close such estate as expeditiously as is compatible with the best interests of parties in interest;

(2) be accountable for all property received;

(3) ensure that the debtor shall perform his intention as specified in section 521 (2)(B) of this title;

(4) investigate the financial affairs of the debtor;

(5) if a purpose would be served, examine proofs of claims and object to the allowance of any claim that is improper;

(6) if advisable, oppose the discharge of the debtor;

(7) unless the court orders otherwise, furnish such information concerning the estate and the estate’s administration as is requested by a party in interest;

(8) if the business of the debtor is authorized to be operated, file with the court, with the United States trustee, and with any governmental unit charged with responsibility for collection or determination of any tax arising out of such operation, periodic reports and summaries of the operation of such business, including a statement of receipts and disbursements, and such other information as the United States trustee or the court requires;

(9) make a final report and file a final account of the administration of the estate with the court and with the United States trustee;

(10) if with respect to the debtor there is a claim for a domestic support obligation, provide the applicable notice specified in subsection (c);

(11) if, at the time of the commencement of the case, the debtor (or any entity designated by the debtor) served as the administrator (as defined in section 3 of the Employee Retirement Income Security Act of 1974) of an employee benefit plan, continue to perform the obligations required of the administrator; and

(12) use all reasonable and best efforts to transfer patients from a health care business that is in the process of being closed to an appropriate health care business that—

(A) is in the vicinity of the health care business that is closing;

(B) provides the patient with services that are substantially similar to those provided by the health care business that is in the process of being closed; and

(C) maintains a reasonable quality of care.

So, he runs the show, for as long as it's in place, and answers questions from parties in interest, pays off claims, etc. That's why I can't believe SCO will let this happen, actually, if they have any choices left at all. But so many of you asked about what happens in Chapter 7 that's different from Chapter 11, I collected whatever I could find to answer your questions.

Chapter 7 isn't the only choice in the motions. The other is dismissal, and of course SCO can put forth its own reorganization plan if it has the money in hand. Here's an explanation of the dismissal option, comparing it with conversion, and setting forth all the options a judge has. In bankruptcy court, the judge apparently has a lot of discretion. We'll find out what SCO's fate will be when the judge rules after the hearing in June on the 3 motions. Hopefully this very basic look at Chapter 7 will be enough to help you to at least follow along meaningfully.

Update: SCO has now told Tom Harvey at the Salt Lake Tribune that SCO will be answering the three motions. They hope that the appeals court in Denver will rule before June 15, but I gather they'll ask the court to consider that factor, if not:

SCO officials hope the 10th Circuit Court of Appeals in Denver rules in favor of the company's appeal of Kimball's ruling and sends the case back to Utah before any decision is reached on the liquidation motions in bankruptcy court. They believe that would bolster their position before the bankruptcy court that SCO can remain a going concern able to pursue the lawsuits, continue to sell Unix and prosper with new software applications for mobile phones, including a partnership with FranklinCovey Products....

"It is probably not a big surprise that IBM and Novell would like to see us liquidated before our claims are heard by a jury," McBride said in a statement. "The timeline Novell and IBM have set is troubling given the fact that our appeal in the Novell case was heard by the appeals court a couple of weeks ago and a ruling to clear things up should be forthcoming sometime in the near future."


Bankruptcy - What Happens in Chapter 7? - Updated | 383 comments | Create New Account
Comments belong to whoever posts them. Please notify us of inappropriate comments.
Corrections Here
Authored by: entre on Friday, May 29 2009 @ 02:56 AM EDT
If needed...

[ Reply to This | # ]

Off-topic posts here please
Authored by: electron on Friday, May 29 2009 @ 03:12 AM EDT
Off-topic posts here please. :o)


"A life? Sounds great! Do you know where I could download one?"

[ Reply to This | # ]

News-pick discussions here
Authored by: electron on Friday, May 29 2009 @ 03:15 AM EDT
Put your News-pick discussions here...


"A life? Sounds great! Do you know where I could download one?"

[ Reply to This | # ]

Authored by: elderlycynic on Friday, May 29 2009 @ 03:24 AM EDT
Can someone please confirm that I have understood what this
means? I think that it means that the motion is rejected,
and SCO continues to bumble along in Chapter 11, but all and
sundry can propose reorganisation plans.

I assume that Novel and IBM have contingency plans for this,
but I also assume that it isn't likely. Their plans may well
involve appealing the dismissal, of course.

[ Reply to This | # ]

The records of the ch 7 company
Authored by: BobDowling on Friday, May 29 2009 @ 03:40 AM EDT
What happens to the papers of a company entering chapter 7? Presumably these
have a mixture of commercial and personal (and personnel) data in them. Is the
trustee allowed to sell them off as an asset? I could imagine IBM wanting to
read the whole set as part of the "smoking crater" legal strategy.

IBM still has a countersuit aimed at SCO. How will the chapter 7 trustee
interact with that? Does the trustee get to read the previous correspondence
between SCO and its lawyers? Is the attorney privilege between the individuals
and the lawyer or the company and the lawyer? If the trustee finds evidence of
misconduct in such a reading of the papers is he or she required to tell the
court and risk penalties against the company or keep quiet to maximise the
monies paid to the creditors?

Final question: If the asset sale disposes of a whole bunch of PCs and a large
international business [machine] company buys them are they entitled to any data
they manage to forensically recover from the hard drives?

[ Reply to This | # ]

And the sun slowly set into the sea of liquidation.
Authored by: Anonymous on Friday, May 29 2009 @ 03:57 AM EDT
and SCO was no more.

[ Reply to This | # ]

No committee
Authored by: IMANAL_TOO on Friday, May 29 2009 @ 05:41 AM EDT
"the creditors never did form any kind of cohesive interest in doing
anything, with the result that there is no creditors' committee"

No committee?! That must have been a deliberate choice and I am sure there are
motives for that, possibly in earlier cases.



[ Reply to This | # ]

Chapter 7?
Authored by: lanser on Friday, May 29 2009 @ 06:58 AM EDT
Does this mean that the trustee could give IBM or Novell whatever interests SCO
has left in Unix in lieu of cash?

[ Reply to This | # ]

Authored by: DaveJakeman on Friday, May 29 2009 @ 07:26 AM EDT
(4) investigate the financial affairs of the debtor;
There's no conditional statement in that. No, "if it smells like a very old fish then...", but is simply stated as a duty of the trustee.

That's comforting. For some.

Monopolistic Ignominious Corporation Requiring Office $tandard Only For Themselves

[ Reply to This | # ]

So will Franklin Covey be the Knight in Shining Armour?
Authored by: SirHumphrey on Friday, May 29 2009 @ 07:34 AM EDT
Considering the company is valued at about $US95M, they don't really seem big enough, despite having some recent interaction with SCOXQ.PK.

Some statistics from

Market Cap (intraday): 93.48M
Profit Margin (ttm): -0.22%
Stock Price 52-Week Change: -32.52%
Qtrly Revenue Growth (yoy): -60.20% (year over year)
Operating Cash Flow (ttm): -3.87M
% Held by Insiders: 26.67%
% Held by Institutions: 23.40%

Compare this to SCOXQ.PK SCOXQ.PK
Market Cap (intraday): $2.27M
Profit Margin (ttm): -55.52%
Stock Price 52-Week Change: -16.67% (from 12 pennies to 10)
Qtrly Revenue Growth (yoy): -36.40%
% Held by Insiders: 32.51%
% Held by Institutions: 1.00%

Then there was this event where the % Held by Institutions was probably affected by this trading:
Date: Volume Closing Price
10-Aug-07 68,900 1.56
13-Aug-07 5,968,600 0.44

Now, what happened there again? Oh yeah, THIS!

10-Aug-2007 Memorandum Decision and Order on Partial Summary Judgments. (Also known as Hot Potato Day)

[171] Novell's Motion for Partial Summary Judgment on its Fourth Claim is Granted;

[224] SCO's Cross-Motion for Partial Summary Judgment on Novell's Fourth Claim is Denied;

[258] SCO's Motion for Partial Summary Judgment on its First, Second, and Fifth Claims and Novell's First Claim is Denied;

[271] Novell's Motion for Partial Summary Judgment on Copyright Ownership of SCO's Second Claim for Breach of Contract and Fifth Claim for Unfair Competition is Granted;

[275] Novell's Motion for Summary Judgment on SCO's First Claim for Slander of Title and Third Claim for Specific Performance is Granted;

Only a paltry 6 million shares traded (dumped). Nothing quite like dropping 30% of the total shares in one day, to make a slightly noticeable hole in the share price

[ Reply to This | # ]

information requested by party in interest
Authored by: Anonymous on Friday, May 29 2009 @ 08:19 AM EDT
<blockquote>(7) unless the court orders otherwise, furnish such
information concerning the estate and the estate’s administration as is
requested by a party in interest;</blockquote>

The phrase "information concerning the estate and the estate’s
administration" is pretty all encompassing. Does this mean that Novell
and/or IBM can ask the trustee to tell them anything juicy that might still be
in SCO's records about who might have been behind all of this, if someone
outside of SCO has been pulling the strings all along?

[ Reply to This | # ]

Does the trustee need to settle the lawsuits first?
Authored by: Anonymous on Friday, May 29 2009 @ 01:18 PM EDT
I hope that the trustee must settle the lawsuits with Novell, IBM, Red Hat and
Autozone prior to undergoing liquidation.

It would be a great injustice if the trustee's liquidation process allowed a
buyer of any limited contract rights to renew the shakedown scam that SCO was
attempting with a new and improved strategy, and with out SCO's accumulated

Do Novell, IBM, Red Hat and Autozone have a right to have their cases settled
with prejudice? Liquidation sounds simple, but it seems that SCO deliberately
complicates every thing that they touch.

[ Reply to This | # ]

Bankruptcy Hearings
Authored by: kevinsnotalawyer on Friday, May 29 2009 @ 04:05 PM EDT
I read the other day about GM bankruptcy's hearings, and the first day had 9
HOURS of testimony.

What a mess.

I'm glad to be following such a "simple" case as this one......


"I declare you later, if I can. And thus, that received more stupider stupidest
the process in the history of the world rights. And a complete average batch."

[ Reply to This | # ]

Something good may finally happen ... ?
Authored by: Anonymous on Friday, May 29 2009 @ 04:06 PM EDT

That word "liquidation" has a pleasant air of finality about it.

Let us hope.

[ Reply to This | # ]

Can the trustee do the right thing?
Authored by: Anonymous on Friday, May 29 2009 @ 11:46 PM EDT
As I understand it, the money SCO got for licenses never was never SCOs money and that anyone reading the contracts with common sense and not have a desire to twist out stupid interpretations would know this.

Could the trustee decide that SCO legal claims are a bunch of self serving nonsense, made up at the spur of the moment out of greed, and therefore sign over all the license money or (all SCO had whichever is less) over to Novell on the first day?

It would seem to me that that is what a honerable person would do. Or is there some weird "continue the the theft" provision in th law the would prevent him from doing this?

[ Reply to This | # ]

Bankruptcy - What Happens in Chapter 7? - Updated
Authored by: gdshaw on Saturday, May 30 2009 @ 04:17 AM EDT
"It is probably not a big surprise that IBM and Novell would like to see us
liquidated before our claims are heard by a jury," McBride said in a
statement. "The timeline Novell and IBM have set is troubling given the
fact that our appeal in the Novell case was heard by the appeals court a couple
of weeks ago and a ruling to clear things up should be forthcoming sometime in
the near future."

That would have been an (almost) fair point, except for the minor detail that it
was the US Trustee who filed first - not IBM and Novell.

[ Reply to This | # ]

Bankruptcy - What Happens in Chapter 7? - Updated
Authored by: Anonymous on Saturday, May 30 2009 @ 07:02 AM EDT
Some questions:

1. If the court grants the Chapter 7 motion, can SCO still
drag this out? Can they appeal that decision? How long would
that postpone the transition to Chapter 7?

2. Is it likely that a - technically bankrupt - company will
get a Chapter 7 motion denied because of "ongoing litigation
(the Novell appeal) that might have an impact on the
company's chances to find a new investor"?

3. Could SCO still sell their (objectively worthless) IP
claims at the eleventh hour so that someone else could carry
on suing Linux users?


[ Reply to This | # ]

"Heard by a jury?"
Authored by: Jim Olsen on Saturday, May 30 2009 @ 11:14 AM EDT
In the quote above, Darl indicates that Novell and IBM don't want their cases
"heard by a jury". In the Novell case, at least, the trial judge
ruled that the only remaining issues were equitable (as opposed to issues at
law), and that therefore a non-jury trial was called for. I don't see anything
in SCO's appeal brief to contradict this point, so AFAIK, even if the case were
remanded for retrial, it would still not be "heard by a jury".

So who's wrong here, me or Darl?

[ Reply to This | # ]

The Re-Appearance of the Pipe Fairy
Authored by: The Mad Hatter r on Saturday, May 30 2009 @ 08:41 PM EDT

I think from Darl's response, that he is expecting a re-appearance of the Pipe
Fairy. Or a Pipe Fairy. If one does appear, it will be interesting trying to
determine who is actually behind it.


[ Reply to This | # ]

An elaboration on bankruptcy priorities of payment
Authored by: bezz on Sunday, May 31 2009 @ 04:33 AM EDT
I'd like to provide some observations on the priorities of payment in bankruptcy cases. There seems to be some confusion and unsupported speculation in the discussions. Unfortunately, this is probably going to burst some hopeful bubbles in regards to Novell's (and IBM's) potential to recover anything from SCO. Let's start with some definitions of classes of creditors. You can check what I referenced to get a bit more detail.

Creditors must file claims in order to be paid. We see them regularly from the law firms and accountants in the form of Monthly and Quarterly Applications for Compensation. These claims get paid as the case goes (most within 30 days unless there is an objection) because the lawyers and accountants are working as bankruptcy necessities.

Post-Petition Creditors have the highest priority claims. These are "administrative" expenses accrued after fling and necessary to preserve the estate; they get the highest priority because the American bankruptcy process is designed to rehabilitate companies and recognizes the costs necessary to keep a debtor going until it can emerge or is liquidated.

Pre-Petition creditors -- those who were owed money for claims arising before the company filed for bankruptcy -- are below Post-Petition creditors. They are divided into Secured, Priority and Unsecured classes -- in order of payment. Go to the latest Operations MOR, page 16, and you can see there are no Secured or Priority claims listed, so we shan't waste time defining them. All of SCO's creditors that had claims arising before the date of filing for bankruptcy are lumped into the Unsecured Creditors class. Pre-Petition creditors must identify themselves to the bankruptcy court by filing a Proof of Claim before the Bar Date passes.

So, where do Novell and IBM fit into the food chain of payment? They are definitely NOT Post-Petition creditors. How do I know this? They have "Proofs of Claims" on file that are used for Pre-Petition creditors and DO NOT state they have a secured or priority claim. You can check them at Epiq (and you thought Epiq was just another useless BK expense) for Novell's latest and IBM's. Notice the line at the top of Novell's stating the form is not to be used for administrative (Post-Petition) claims and makes no assertion of being a Secured or Priority claim. Hence, Novell and IBM are definitely Pre-Petition Unsecured creditors.

There is no basis for any preferential payment to Novell or IBM (who can not even yet state a dollar value claim). Sorry folks, even with Novell's definitive dollar value, they have no greater claim than any other Pre-Petition creditor and will get the same cut as the Pizza Parlor.

So where does that leave us? That requires a close reading of SCO's assets to understand. SCO reports only its domestic assets and liabilities to the bankruptcy court as SCO Group and SCO Operations; they also have overseas assets and liabilities. Roll up SCO GROUP, SCO Operations and the overseas assets and liabilities and you should get the Forms 10-Q and 10-K they report to the SEC as the total company position. Unfortunately, I have never been able to figure out exactly how they do that, so I have to make some estimates and corrections to get pretty close.

The SCO Operation MOR (where most of the assets and liabilities are reported) lists $4.84 million of Post-Petition liabilities (paid before Novell and IBM) and $8.28 million of assets. However, some of those assets are questionable because I (charitably) can't verify they even exist. For instance, Operations lists an asset of $1.75 million as money due from SCO Group, while Group lists that as a liability; this came up at the 341 meeting and no explanation was available to the US Trustee. There is also $2.04 million of Goodwill that I can't find listed on the SEC filings. If these are reflected in the SEC filings the way they appear to be (from my attempts to reconcile the SCO Operations and SCO Group MOR's into the SEC filings), there is not enough money to satisfy the Post-Petition creditors. And there are still more bills due.

So, if the Post-Petition creditors can not be satisfied in a Chapter 7 liquidation, there won't be anything at all for the Pre-Petition creditors -- including Novell and IBM. Of course, the Chapter 7 Trustee may pursue additional litigation (for instance against the Board and Management's insurance company), try to pierce the corporate veil and collect directly from management personal assets (good luck with that) or the PIPE Fairies and litigation lawyers. Those are possibilities, but are decisions the Chapter 7 Trustee must make. I won't try to speculate about how the Chapter 7 Trustee approaches existing and new litigation.

Given the magnitude of what is owed and potential to collect significant money from additional litigation, I do not expect Novell, IBM, Red Hat or Autozone to pursue anything but settling the litigation on the best terms attainable at the least cost. Why should they? They aren't going to collect anything significant unless the Chapter 7 Trustee can find a pot of gold at the end of the rainb... errr tornado. They already have too much money into this mess and setlling the counterclaims on their favor is worth more to them than spending more money chasing SCO. They may, however, pursue their own litigation against the PIPE Fairies and litigation lawyers.

[ Reply to This | # ]

Jury Trial - Bankruptcy - What Happens in Chapter 7? - Updated
Authored by: Anonymous on Sunday, May 31 2009 @ 07:54 AM EDT
They still expect to get the ruling overturned, returned to Kimball's court, and
a Jury trial set? Just how long did they expect the Bankruptcy Court to wait?

Delay, Delay, Delay once again. The light at the end of the tunnel is the
headlight from a monstrous train engine bearing down on them, and they've been
traveling this tunnel for years and years.

What super hero will fly to their rescue and bring this lumbering behemoth to a
screeching stop just in time to rescue the poor underdog from a frightful end?

Or is SCO simply the poor crewman with the red shirt?

Tune in next week for the next exciting installment of the SCO saga.

[ Reply to This | # ]

  • With what? - Authored by: argee on Monday, June 01 2009 @ 03:56 AM EDT
    • With what? - Authored by: PJ on Monday, June 01 2009 @ 10:07 AM EDT
      • SCO money - Authored by: Anonymous on Monday, June 01 2009 @ 07:40 PM EDT
Bankruptcy - What Happens in Chapter 7? - Updated
Authored by: Anonymous on Tuesday, June 02 2009 @ 02:24 AM EDT
It would helpful for me (and other non-americans) if we could map this chapter-N
bankruptcy to things to the way local companies deal with it. Here is what I
understand of the Australian Process.
1. It is, of course, illegal to operate a corporation that cannot pay its bills.
We would call this "trading while insolvent", and you can go to gaol.
So, when things go bad - when the directors decide that the corp. cannot trade
out of any problems, they place the corp. under the control of some
administrators - normally solicitors or large accountancy firms. The entity is
said to "Go into administration".
2. These administrators decide what should be done. If there is enough chance,
they may be able to trade out of the situation - the administrators, after
making sundry reorganizations, proceed to run the corporation until it is back
in the black. Negotiating terms with creditors may be done, sales of some
assets: I believe very little is off the table for the administrators. Note that
the original board is now out of the picture.
3. If not, then the administrators will liquidate the corporation. All assets
sold, as much paid back to secured and unsecured creditors as possible. If, as
is usually the case, there are debts remains, then the corporation ceases to be.
If the entity was an individual, he or she would be 'bankrupt'. I don't think
the term is ever used for corporations, but it would be the last step if it

With that in mind, you can see why we find these 'Bankruptcies' are confusing to
us. When we hear the term 'Bankrupt', we instantly think it is the end of the
line. It seems, though that 'Chapter 7' is roughly equivalent to
'Administration' in our context - even then, it seems much gentler.

Could someone enlighten us?

[ Reply to This | # ]

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