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Bankruptcy Court Rules Psystar Can't Use Checks or Deposit Slips As Is - Updated 3 Xs
Saturday, June 13 2009 @ 12:44 AM EDT

Psystar, as you know, has filed for Chapter 11 bankruptcy protection. Already, it's not going well.

One of the very first motions you see in a bankruptcy is the one that lets the company continue to use business forms, like checks, for example. Normally, it's a no-brainer, as you saw in the SCO bankruptcy, where the motion [PDF] was filed on September 14, 2007, at a September 17 hearing a second hearing was scheduled on that motion for October 5th, and the order [PDF] granted the motion that same day. Such motions are normally granted without debate.

Psystar's motion was just denied [PDF]. It can't use its checks or bank deposit slips. I take that as a sign that Apple's recent motion to lift the stay will likely be granted shortly. Apple argued that there can be no reorganization of Psystar's business, until a court rules on whether that business is even legal. Apple, interestingly, used the SCO bankruptcy as precedent in its motion.

Here's how it reads:

The Court having considered the contents of the Motion, taking specific judicial notice of the entire contents of the Court file, and hearing arguments of counsel in court, it is:

ORDERED that the Motion is DENIED with regard to the Debtor's use of check stock and deposit slips, and it is further

ORDERED that the remaining balance of the Motion is DENIED as unnecessary and moot. The Debtor may continue to use its business forms without the necessity of a Court Order.

Things don't look too rosy for Psystar, even in bankruptcy court, it appears. If the hope was to continue the business under the umbrella of protection in Chapter 11, while Apple was left at the courthouse door gritting its teeth, blocked from any ability to stop Psystar due to the bankruptcy's stay on litigation, which is Apple's accusation I think that dream just died, no matter how the court rules on Apple's motion to lift the stay. Clearly the judge has read that motion, and it will not be helping Psystar to keep a business in place that Apple has now told the court is infringing its rights. It's telegraphing, I suspect, that Apple's motion will be granted. In the SCO bankruptcy, Novell filed a motion to lift the stay pretty much immediately, early in October, and it was granted on November 27, 2007. SCO fought hard to get to reorganize first, but Novell prevailed, and it lookhttp://news.google.com/news?ned=uss to me like Apple is going to get its motion granted too, and then the litigation will continue to a resolution.

Update:

Here's Psystar's emergency motion [PDF] about using business forms, which you'll find also on Groklaw here. [ Update: We have found an earlier emergency motion, and I'll add relevant bits at the very end.] I'll show you the meat of it as text, so you can see what didn't persuade the court, and then after the double row of stars, I'll show you the language that SCO used in its comparable motion [PDF], thanks to a member looking it up for us and transcribing that section. Keep in mind that local rules can be different state from state, and Psystar filed in Florida and SCO in Delaware. Here are the local rules in Delaware [PDF]. Here's the website for the U.S. Bankruptcy Court for the Southern District of Florida, which is where Psystar filed. Click on the menu on the left on "Rules, Forms & Guidelines" and then on "Local Rules" for information on what Florida requires. The judge handling the bankruptcy is the Honorable Robert Mark.

To me, the most interesting part is where Psystar tells the court it owns valuable IP:

Debtor possesses valuable intellectual property which will be implemented in a well thought out and more profitable business plan.
Unless somebody like Psystar comes along and undermines their business by diverting their "valuable intellectual property" to their own business ends.

Here's the entire section in Psystar's motion:

************************

BASIS FOR EMERGENCY RELIEF

4. The above-captioned debtors and debtors in possession (collectively, the “Debtor") requests an emergency hearing in this matter on or before May 26, 2009. By this motion, the Debtors seek the entry of an order authorizing the use of existing business forms. The Debtors request that this Motion be considered on an emergency basis as the relief requested herein is critical to the Debtor's continued operations. The Debtors respectfully request that the Court waive the provisions of Rule 9075-1(B) of the Local Rules, which require an affirmative statement that the Debtors made a bona fide effort to resolve the issues raised in this emergency motion, as the relief requested herein is urgent in nature and does not lend itself to resolution in advance of a hearing. ...

6. Debtor manufactures and distributes computers tailored to customer choosing. As a part of its devotion to supporting customer choice, Debtor supports a wide range of operating systems including Microsoft Windows XP and XP 64-bit, Windows Vista and Vista 64-bit, Linux (32 and 64-bit kernels), and the Mac OS. PSYSTAR generally refers to this custom tailored line of computers as Open Computers. Open Computers are personal computers that, in the case of the Mac OS, work like a Macintosh including the latest Macintosh operation system OS X.5 (a.k.a. Leopard). PSYSTAR Open Computers, again in the case of the Mac OS, run the OS X like that of a Macintosh from APPLE albeit on a computer hardware system offered at a considerably lower price and with considerably higher performance.

7. Due to the weakened economy, Debtor has had no alternative but to commence these Chapter 11 proceedings. Debtor sales have been greatly affected by the decrease in consumer spending. The financial crisis has also caused creditors to tighten up their terms and become more demanding for immediate payment. Debtor’ s vendors due to their own financial problems are not being able to supply all necessary items to allow Debtor to produce their product, thus, forcing Debtor to pay higher prices for parts in order to fulfill customer orders in a timely manner and to assure satisfaction with the product. These factors seriously contribute to the Debtor not being able to turn a significant profit in each sale.

8. Debtor has continued doing business in this manner with diminutive profit in hopes of a turn around in our present economy but find that the long term roots of this crisis can only be overcome by directly implementing the restructuring of Debtor s business plan and can only do so with the requested Chapter 11 protection. Debtor plans on emerging from this Chapter 11 with a strong and effective plan to make an increasingly higher profit and still provide the consumer with the product that they have grown to enjoy and trust. Debtor possesses valuable intellectual property which will be implemented in a well thought out and more profitable business plan. By doing so, Debtor plans to make payment of all debts and also, continue to provide support for its customers.

RELIEF REQUESTED

9. By this Motion, the Debtors seek authorization to continue using existing business forms. The Debtors seek to ensure the efficient transition to these Chapter 11 proceedings to avoid any disruptions and distractions that could occur.

10. To minimize the disruption to the Debtor’s operations during the pendency of this Chapter 11 case, and, in particular, during the early stages of this proceeding, the Debtor respectfully request an order authorizing the continued use of existing business forms.

BASIS FOR RELIEF REQUESTED

11.As set forth below, the Debtor seeks the entry of an order authorizing the Debtors continued use of existing business forms during this Chapter 11 case. The Debtor submit that relief is in the best interests of the Debtor, its estate and creditors and other parties in interest.

12. The Debtor uses various business forms in connection with their businesses including, without limitation, invoices, order forms, stationery, check stock, deposit slips, brochures, packaging and flyers.

13. The Forms do not include the terms DIP, debtor-in-possession or other reference to the fact that the Debtor is in a Chapter 11 proceeding. The Debtor would incur delay and expense if required to change its existing business forms.

14. It is critical that the Debtor avoids any disruption in its business operations.

15. As any disruption to the Debtor’s ordinary business affairs at this time could have a severe adverse impact on the Debtor’s ability to achieve its goals in these proceedings.

16. As such, by this Motion, the Debtor seek authority to use their existing business forms.

WHEREFORE, the Debtors request the entry of an order granting this Motion, authorizing maintenance and use of existing business forms, as requested herein, and granting such other and further relief that the Court may deem just and proper.

**********************************
**********************************

Here's the SCO language on its successful motion regarding forms, but note that the motions were filed in two different states. Psystar is in Florida, and SCO filed in Delaware, but still it's interesting to compare:

12. The United States Trustee for the District of Delaware has established certain operating guidelines for debtors in possession. One such provision requires a chapter 11 debtor in possession to open new bank accounts and close all existing accounts. The United States Trustee Guidelines also require that the new bank accounts only be opened in certain financial institutions designated as authorized depositories by the United States Trustee. This requirement, designed to provide a clear line of demarcation between prepetition and postpetition claims and payments, helps to protect against the inadvertent payment of prepetition claims by preventing banks from honoring checks drawn before the Petition Date.

13. The Debtors seek a waiver of the United States Trustee's requirement that the Bank Accounts be closed and new postpetition bank accounts be opened at depositories authorized by the United States Trustee. If strictly enforced in this case, the United States Trustee's requirement would cause disruption in the Debtors' activities and would impair the Debtors' ability to reorganize their business for the benefit of their estate and parties in interest.

14. Maintenance of the Bank Accounts will greatly facilitate the Debtors' operations in chapter 11. The Debtors' have in excess of 400 customers who make regular payments to the existing Debtors' credit card and lockbox accounts by check or electronic transfers, and closing these accounts, establishing new accounts in their place and instructing customers of the changes will substantially disrupt and delay the Debtors' receipt of payments from their customers. To avoid disruptions and delays in the Debtors' receipt of payments and the Debtors' payment of debts incurred postpetition, the Debtors should be permitted to continue to maintain the existing Bank Accounts and, if necessary, to open new accounts or close unnecessary existing accounts.

15. To guard against improper transfers resulting from the postpetition honoring of prepetition checks, courts have ordered banks, with limited court-approved exceptions, not to honor any checks drawn on a Debtors' accounts before the Petition Date. Subject to a prohibition against honoring prepetition checks or offsets without specific authorization from this Court, the Debtors request that the Bank Accounts be deemed debtors-in-possession accounts and that the Debtors be authorized to maintain and continue the use of these accounts in the same manner and with the same account numbers, styles and document forms as those employed during the prepetition period.

16. If the relief requested herein is granted, the Debtors will not pay, and each of their banks where the Bank Accounts are maintained will be instructed not to pay, any debts incurred before the Petition Date other than as specifically authorized by this Court.

Update 2: Interestingly, the Florida rules require that the petitioner provide specifics about what it has in the bank in order to get to use old checks:
Rule 9013-1. Motions. (J) Motions for Authority to Maintain Prepetition Bank Accounts. A motion seeking authority to maintain prepetition bank accounts shall include:
(1) a schedule listing each prepetition bank account which the debtor seeks to maintain postpetition;

(2) the amount on deposit in each such account as of the petition date; and

(3) whether the depository is an authorized depository pursuant to 11 U.S.C. §345(b).

If the debtor is unable to provide the foregoing information, the motion shall set forth the reason why such information is not available, and provide an estimate as to when the debtor shall be able to supplement its motion with such information.
So, what I can't help noticing is that I don't see any such information in Psystar's motion. Why not? Given the discovery struggles in the main litigation, one can't help but notice the lack of specifics or even any estimate of when it would be able to supplement the motion with the information. Psystar's motion references Local Rule 9075, which is the rule about emergency motions, and it reads like this:
Rule 9075-1. Emergency Motions.

If a motion or other paper requests an emergency hearing, the title of the motion or paper shall include the words "Emergency Hearing Requested". Unless a judge's procedures direct otherwise, at the time the emergency documents are filed, the party must also deliver to the divisional office clerk's office where the judge assigned to the case for which the documents are being filed is chambered, a Local Form "Emergency Filing Cover Sheet" (printed on red paper) and courtesy copies of the original documents filed. Any motion or paper requesting an emergency hearing shall set forth with particularity, under a separate heading in the text:

(A) the reason for the exigency and the date by which movant reasonably believes such hearing must be held; and

(B) a certification that the proponent has made a bona fide effort to resolve the matter without hearing.

Emergency hearings shall be held only where direct, immediate and substantial harm will occur to the interest of an entity in property, to the bankruptcy estate, or to the debtor's ability to reorganize if the parties are not able to obtain an immediate resolution of any dispute.

I confess to being mystified. Why would using old bank accounts be an emergency? I have no idea why they chose this course. It likely means there are many facts that we simply don't know, or don't know how to interpret properly, but over time we'll learn more, I'm sure. Eventually, the hearing transcript will become available, and then we'll have more information to work with.

[Update 3: Now, for the earlier emergency motion [PDF]. In that motion Psystar did list 3 banks, and the basis for its request to maintain its current bank accounts goes like this, right after it lists the requirements to close them and open a DIP account:

10. Section 105(a) of the Bankruptcy Code provides that "[t]he court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title." 11 U.S. C. Section 105(a). Extensive authority supports the relief that Debtor request. In other chapter 11 cases, courts have recognized that strict enforcement of the United States Trustee requirements does not always serve the purposes of chapter 11. Accordingly, courts, including courts in this District, often grant relief from these requirements and replace them with alternative procedures. See, e.g., In re Gemini Air Cargo Logistics, Inc., Case No. 06-10780-BKC-AJC (Bankr. S.D. Mar. 20, 2006) (Order granting motion for inter alia maintenance of existing corporate bank accounts and cash management system); ...

12. The Debtor uses an integrated, centralized cash management system in the ordinary course of business....Under the Cash Mangement System, funds are collected by the merchant processors and transferred to the bank account to soley handle these type of transactions (New Merchant Account) at TD Bank. The Cash Management System enables the Debtor to (a) better forecast and report its cash position, (b) monitor collection and disbursement of funds, and (c) maintain control over the administration of their various bank accounts, all of which facilitates effective collection, disbursement, and movement of cash.

13. As of the Petition Date, the Debtor maintains the following three (3) active bank accounts (the "Bank Accounts") in a "Authorized Depository" per the United States Trustee for Region 21:

a. [lists them, one for the website, one for an operating account, and a wire account to receive funds from overseas and who "can not fulfill the necessary security checks imposed by our Merchant processors". )
Uh oh. I wonder if it's the overseas wire transfers that may be the sticky wicket for them. Here's a press release that makes me wonder. Here's a bit more from the Office of Homeland Security. Assuming Psystar is on the up and up, it has nothing to worry about. If not, of course, it's now really and truly in the headlights. I think this likely explains the judge's order better than my first guess.

In any event, these are the accounts that they'd like to keep and be able to close if it thinks it's in the best interests of the estate. Keeping the accounts would keep the transition into chapter 11 "smooth and orderly and free from interference with continuing operations," they say. I see no amounts in the three accounts provided. The judge apparently didn't agree with Psystar's priority list.


  


Bankruptcy Court Rules Psystar Can't Use Checks or Deposit Slips As Is - Updated 3 Xs | 195 comments | Create New Account
Comments belong to whoever posts them. Please notify us of inappropriate comments.
Corrections
Authored by: mupi on Saturday, June 13 2009 @ 12:57 PM EDT
If needed...

Error -> Correction

In the title makes it easier for PJ to find them.

[ Reply to This | # ]

[NP] Newspicks Discussion
Authored by: mupi on Saturday, June 13 2009 @ 01:01 PM EDT
Discussion of newspicks goes here.

Please note the newspick you are discussing in the title.

Also clickies, since news stories can drop off pretty fast. Don't forget to use
HTML mode and follow the directions under the comment box for clickies.

[ Reply to This | # ]

[OT] Off-topic Discussion
Authored by: mupi on Saturday, June 13 2009 @ 01:03 PM EDT
Off topic discussions can go here.

On-topic discussions will be ridiculed or ignored.

Please don't forget to use HTML mode for clickies as appropriate, and change the
title as necessary.

[ Reply to This | # ]

Bankruptcy Court Rules Psystar Can't Use Checks or Deposit Slips
Authored by: mupi on Saturday, June 13 2009 @ 01:08 PM EDT
OK, does anyone have of know what their Checks and/or deposit slips look like?

I wonder if the design somehow is evocative of the Apple logo or something; in
that case, Apples motion to unstay might have had some bearing.

Since I have never had cause to receive a check from them, I can't speak to it,
but as PJ says, it seems pretty routine and automatic to be allowed to use your
existing business forms as a DIP, so there must be something seriously amiss for
them to deny it.

[ Reply to This | # ]

Bankruptcy Court Rules Psystar Can't Use Checks or Deposit Slips
Authored by: sef on Saturday, June 13 2009 @ 01:17 PM EDT

This confuses me mightily. If they can't use their checks, and they can't use their deposit slips... how can they do anything at all?

Perhaps "checks and deposit slips" means something different for a business than it would for me, as an individual?

[ Reply to This | # ]

Strange order?
Authored by: Anonymous on Saturday, June 13 2009 @ 01:17 PM EDT

I thought it was considered to be automatic that a court grant this sort of motion. Yet the last sentence seems to indicate that the court does not think it necessary:

The Debtor may continue to use its business forms without the necessity of a Court Order.

Strangely this seems to say that the court is explicitly saying that it's ok for Psystar to continue to use it's forms without the order and is denying it based on that no order is needed. It doesn't appear that the judge is actually saying they can't use their business forms ... or am I missing something?

[ Reply to This | # ]

Bankruptcy Court Rules Psystar Can't Use Checks or Deposit Slips
Authored by: kenryan on Saturday, June 13 2009 @ 01:34 PM EDT
Sounds to me like a pretty effective way to issue a preliminary injunction
_sua_sponte_ (is that the right term?) without calling it that.

Without the ability to write checks, no supplier is going to send them parts.
Without parts, Psystar can use up their existing stock but then are effectively
prevented from delivering anything else.

This is just speculation of course, but to my little mind it's plausible.


---
ken
(speaking only for myself, IANAL)

[ Reply to This | # ]

Cash is King
Authored by: Anonymous on Saturday, June 13 2009 @ 04:21 PM EDT
Given their CEO's incoherence on accounting records during
deposition, it could turn out they are yet another of those
thorns in the tax collector's side: the people who do much
of their business with folding money.

[ Reply to This | # ]

Some possibilities
Authored by: bezz on Saturday, June 13 2009 @ 05:24 PM EDT
Not allowing Psystar to continue to use its existing checks and deposit slips is odd. I haven't read any transcripts, so I don't know what was argued at the hearing. This is just speculation of additional reasons why Psystar was denied use of the checks and deposit slips.

The rule is that a DIP must cancel its existing bank accounts and open new ones to prevent unauthorized prepetition debts from clearing after the filing date. SCO addressed this issue in its motion to maintain existing accounts and continue to use business forms.

12. The United States Trustee for the District of Delaware has established certain operating guidelines for debtors in possession. One such provision requires a chapter 11 debtor in possession to open new bank accounts and close all existing accounts. The United States Trustee Guidelines also require that the new bank accounts only be opened in certain financial institutions designated as authorized depositories by the United States Trustee. This requirement, designed to provide a clear line of demarcation between prepetition and postpetition claims and payments, helps to protect against the inadvertent payment of prepetition claims by preventing banks from honoring checks drawn before the Petition Date.

13. The Debtors seek a waiver of the United States Trustee's requirement that the Bank Accounts be closed and new postpetition bank accounts be opened at depositories authorized by the United States Trustee. If strictly enforced in this case, the United States Trustee's requirement would cause disruption in the Debtors' activities and would impair the Debtors' abilty to reorganize their business for the benefit of their estate and paries in interest.

14. Maintenance of the Bank Accounts wil greatly faciltate the Debtors' operations in chapter 11. The Debtors' have in excess of 400 customers who make regular payments to the existing Debtors' credit card and lockbox accounts by check or electronic transfers, and closing these accounts, establishing new accounts in their place and instructing customers of the changes wil substantially disrupt and delay the Debtors' receipt of payments from their customers. To avoid disruptions and delays in the Debtors' receipt of payments and the Debtors' payment of debts incurred postpetition, the Debtors should be permtted to continue to maintain the existing Bank Accounts and, if necessary, to open new accounts or close unnecessary existing accounts.

15. To guard against improper transfers resulting from the postpetition honoring of prepetition checks, courts have ordered banks, with limited court-approved exceptions, not to honor any checks drawn on a Debtors' accounts before the Petition Date. Subject to a prohibition against honoring prepetition checks or offsets without specific authorization from this Court, the Debtors request that the Bank Accounts be deemed debtors-in- possession accounts and that the Debtors be authorized to maintain and contin~e the use of these accounts in the same manner and with the same account numbers, styles and document forms as those employed during the prepetition period.

16. If the relief requested herein is granted, the Debtors wil not pay, and each of their banks where the Bank Accounts are maintained wil be instructed not to pay, any debts incurred before the Petition Date other than as specifically authorized by this Court.

Psystar failed to address that issue in its motion. That is stuff so basic it should be a matter of course for any bankruptcy lawyer to include in a First Day motion. There were also deficiencies with the original motion filing and it had to be resubmitted.

Another thing in the timeline is a bit odd. Notice on the SCO bankruptcy timeline that SCO simultaneously filed its applications to retain/employ its legal counsels (Berger Singerman and Pachlski Stang). Not so in Psystar. They filed for Chapter 11 on May 21, but did not file an application to employ their lawyer until June 4.

06/04/2009 - 23 - Emergency Application to Employ Lazaro J Lopez as Attorney [Affidavit Attached] Filed by Debtor Psystar Corporation. (Attachments: # 1 Exhibit) (Lopez, Lazaro) (Entered: 06/04/2009)
Once again, very sloppy. Did the lawyer not know he Psystar would require court approval to retain and pay legal counsel? There is a very good reason courts require that because the lawyers get paid as the case goes, typically getting the bulk of their billings approved in 30 days.

This stuff is so basic I never spent any time researching it in other BK's I have followed. It seems to typically be addressed in the First Day motions. I wonder if this is just a situation where Psystar hired a lawyer who does not have a strong background in Chapter 11 bankruptcy.

Better call Saul!!!

[ Reply to This | # ]

Aren't we chasing a red herring?
Authored by: ausage on Saturday, June 13 2009 @ 10:17 PM EDT

As I read this, the ORDER refers to Docket #13, "Emergency Motion For Order Authorizing Debtor to Continue Using Business Forms."

This motion states under "BASIS FOR RELIEF REQUESTED":

11. As set for below, the Debtor seeks entry of an order authorizing the Debtors continued use of existing business forms during this Chapter 11 case. The Debtor submit [sic] that relief is in the best interests of the Debtor, its estate and creditors and other parties in interest.

12. The Debtor uses various business forms in connection with their businesses including, without limitation, invoices, order forms, stationary, check stock, deposit slips, brochures, packaging and flyers.

13. The forms do not include the terms DIP, debtor-in-possession or other reference to fact that the Debtor is in a Chapter 11 proceeding. The Debtor would incur delay and expense if required to change its existing business forms.

Therefore, this Order denies the request to continue using existing cheque stock and deposit slips and requires Pystar to order new stock marked "Debtor-in-Possession", although the may continue using all their other existing forms.

[ Reply to This | # ]

Psystar can't pretend they're not in Bankruptcy
Authored by: Guil Rarey on Sunday, June 14 2009 @ 12:35 AM EDT
When it comes to their cash transactions.

They have to order new check and deposit stock indicating they are now
debtor-in-possession and therefore DO NOT have free and clear rights to the
cash.

In other words, the judge doesn't trust them as far as he can throw them.

What is not clear to me from what PJ posted is if Psystar ALSO has to switch
bank accounts as well. (This was discussed in SCO's petition, not theirs...)

Businesses typically run lots of bank accounts, for different purposes:

Lockbox: When you mail your payment - car payment, electric bill, whatever - to
a PO Box, odds are pretty good, that PO Box is nowhere near the actual business
your paying. Instead it's at their bank, which deposits the checks directly,
and tell the company what checks they received.

Disbursement: The checkbook for the company to pay it's bills.

Sweep account: Every day, all of the net cash in and out is swept up and
invested overnight in a money market account - this one.

Payroll accounts -- your payroll checks or direct deposits are typically paid
out of a separate account that the company funds each pay period.

If you're eyes haven't glazed over yet, either you're an accountant and knew
this already, too, or you're crazy. And this, folks, is a very, very, simple
set up, typically for a medium sized manufacturing business. It can get a lot
more complicated. Drivers for complications: the company is bigger and more
complex; the nature of the business requires more financial sophistication; or
someone involved is a crook of one sort or another.

The first 2 do not apply to Psystar.

---
If the only way you can value something is with money, you have no idea what
it's worth. If you try to make money by making money, you won't. You might con
so

[ Reply to This | # ]

Since this is basically a copyright issue,
Authored by: kawabago on Sunday, June 14 2009 @ 02:49 PM EDT
Does the author have the right to pre-determine where you can read her book?
Certainly with printed books there is no such prohibition. If there is no such
author's right with printed books why should there be with electronic books?
Even though this is about OS X it is still based in copyright law and the same
principles should apply.

So is running OS X on any hardware you like a fair use or not? I think it is a
perfectly fair use. Just like I can read a book anywhere I like under any kind
of lighting conditions. I should also be able to run software I buy on any
hardware that will run it. You can't accept the terms and conditions until after
you install the software so you can't return it if you don't like the terms.
The courts already threw out terms and conditions you aren't aware of until
after it's too late to return the software. So even the license agreement
shouldn't stand up in court.

But IANAL so I'll just go clean my pool.

[ Reply to This | # ]

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