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March 5 Bankruptcy Hearing Report - Updated
Saturday, March 06 2010 @ 11:45 AM EST

Here is Groklaw member RFD's report from the bankruptcy hearing from Friday March 5. His initial notes come first, followed by a more detailed report by another witness, pbk.

Update:PJ: I have had a chance now to listen to the CD, and I've taken notes to share with you. I've added them at the end. My overview: this is money they want to pay themselves, Blank Rome and the other professionals. I take it they are worried they might get stiffed. And it turns out there are 12 to 14 lenders, and we don't have all their names. It's farcical.


10:40 - Arrived an empty courtroom 3

10:48 - Bonnie Fatell, Edward Cahn and others arrived.

11:08 - Judge Gross entered and Bonnie Fatell opened, introducing Edward Cahn

11:09 - Mr. Cahn gave a status report—SCO is closing some foreign subsidiaries and reducing others. He received expressions of interest from several hedge funds, but the conditions they proposed were so onerous that he dismissed them out of hand.

11:13 - Bonnie Fatell calls Mark Fisler as a witness. He works for OPA financial advisers. Apart from the litigation, he said SCO had four assets: a patent, excess equipment, ME, and the operating business. The first three they are trying to sell. He has visited some of the European subsidiaries and believes with serious trimming, there can be a viable business. (He may be right, but it is a dying one.)

SCO was in crisis mode when they arrived. They could survive two payroll cycles. They started cutting costs in two phases. Phase 1, which they could do quickly, consisted of RIF's which were “top heavy,” moving to smaller and cheaper quarters, and eliminating any non-essential expenses.

Phase 2, involved downsizing the overseas operations. This can take time because of foreign laws on severance pay.

In searching for financing, they had discussions with a hedge fund, Mr. Yarro, and 10 or 12 others. Eight signed NDA's and examined the books. Mr. Yarro's offer was the best.

Ms. Fatell handed the lawyers and Judge Gross Exhibit 1 and Mr. Fisler explained how the money would be used--$1 million for operations, and $1 million for litigation, including getting up to date with overdue professional fees.

11:52 - Adam Lewis (Novell) by phone. Could this wait 3 weeks? Mr. Fisler didn't say it couldn't wait, but that it be wise to do it as soon as possible.

11:57 - Al Petrofsky by phone clarified a few details.

12:00 - In response to a question from Ms. Fatell, Mr. Fisler confirmed the they planed to close the deal Monday morning.

12:07 - Mr. Lewis asked if Mr. Fisler had concluded that SCO, under the DIP, had not made a robust offer to sell. Mr. Fisler declined to go that far, but he clearly was not impressed by what SCO had done.

12:13 - Argument by Ms. Fatell.

12:19 - Closing argument by Mr. Lewis — This proposal does not satisfy the requirements for such an extraordinary loan.

12:23 - Mr. Petrofsky — most of his questions had been answered but he did question if Mr. Yarro's LLC legally existed.

12:28 - Ms. Burton, attorney for Mr. Yarro, spoke up by phone and assured the court that that the LLC is in existence under Utah law.

12:29 - Ms. Fatell closed and urged the court to grant the motion.

12:35 - Judge Gross. He found Mr. Fisler to be a credible witness (I tend to agree). He found the terms to be “fair, reasonable, and adequate.” He granted the motion and signed the order.

12:40 - Adjourned


Okay, just got back to Philly and I'm writing up my report on the trial. There was another representative from Groklaw there, who I assume will also be sending in a report.

First, a couple of impressions of some of the people. These are completely subjective, of course, and in most cases they are probably colored by my previous non-visual perceptions of the players.

Judge Gross: Seems like a very kind and friendly man. Obviously very happy about getting some nice weather for the weekend, as we've had a February here in the mid Atlantic like I haven't ever seen. On the other hand, he rather gave the impression of a father who is too kind to effectively discipline his unruly children.

Joseph McMahon: Looks absurdly like I pictured him looking when listening to his initial interview with Darl immediately following the chapter 11 filing. Great posture, almost military bearing. Gives an impression of fairness, but also does not look like someone who would be easily intimidated.

Judge Cahn: Made me think of a slightly less sinister Mr. Potter from It's a Wonderful Life. Looked a little better when he smiled.

Bonnie Fatell: Didn't make a particular impression one way or the other. Clearly quite competent, not flashy. She spent most of the hearing at the lectern, so I mostly saw her from behind.

And introducing Mark Fisler of Ocean Park Advisers.

Okay, as to the hearing. There was a brief interim status update, not more than 10 minutes, followed by a lengthier discussion on the SNCP(2) loan offer. All in all the hearing was about an hour and forty-five minutes. The loan discussion consisted of an initial part where a witness from Ocean Park, Mark Fisler, spoke about the financial situation, what steps had been taken, and why the load was required and how it was arrived at. That took up about half the time, perhaps a little more. Then there was some questions from Adam Lewis (by phone) and Al Petrofsky (also by phone). Then the judge ruled for SCO.

The interim status update was given by Judge Cahn, who was admirably concise (which Judge Gross also noted). He started by noting that they had worked to curtail the operating costs, and mentioned that they were closing and consolidating some of the foreign subsidiaries, but that that was more complex because of obligations to employees that exist in some of those jurisdictions.

He stated that because of the banking crisis in the past or so it has been difficult to secure financing. He stated that the SNCP arrangement was (a) required and (b) the best they could achieve under the circumstances. He mentioned other cost cutting measure they had taken, including moving to less expensive premises, reducing head count and selling some assets (I believe he was referring to things like office equipment and such), all of which Mr. Fisler would address in more detail later.

He then went on to update the court on the recent motions in limine and Daubert motions in the Utah court. He seemed rather pleased with the results (as I guess he should), and described it as winning on all the Daubert motions and most of the limine. He certainly put a rosy picture on it, but nothing that he said was incorrect.

That was pretty much the interim status update. The judge thanked him for his clarity and indicated that he felt that he was up to date. Then attention was directed towards the proposed loan from SNCP. Bonnie Fatell started by stating that everything was now filed (of course, being SCO, it was all filed at the last possible second). Then she introduced Mark Fisler from Ocean Park Advisors as a witness. He was sworn in, and started with a rundown of his experience and role with respect to SCO.

He stated that the focus of OPA (which is how Ocean Park was referred to most frequently) is to make recommendations to the trustee. He was primarily focused on (1) preserving and restructuring what remained of the company, and (2) looking for financing. He described the assets as falling into four main buckets of which the largest was what he referred to as operations, by which I presume he meant the Unixware/OpenServer main operating system business. The other three buckets he described, which he characterized as insignificant compared to the operations, were some IP assets ("a patent", didn't seem to be referring to the litigation), some "de minimis" assets like printers, office chairs, etc, that were no longer needed, and the mobility business which he felt SCO in its current situation was not going to be able to grow into a significant revenue source. All of these were being sold off to raise capital, I believe.

He then talked about the cash position of the company when he was brought on board in September 2009 (I think that date is right), which he described as being in "crisis mode". His first concern was to determine how many payroll cycles could they expect to last, and he concluded that it was "a couple". He then described how they had "locked down" expenditures to try to bring expenses in line with revenue. He then described a two-pronged approach to cutting costs, the first prong he characterized as "quick and domestic", while the other was longer term and more focused on the foreign subsidiaries. My notes from when he was describing the domestic side say "Throwing everything overboard", and the image that came to mind is a sinking hot-air balloon where the people in the gondola are tossing everything overboard that's not nailed down, although that's obviously not the imagery he used. He did describe the RIF (Reduction in Force) as being top heavy, saying it was "Focused on the chief level as well as the indian level".

Then he talked about what they've been doing since November 2009. He talked about the two core pieces of value being the litigation and the operations. He avoided discussing the litigation as he was focused on the operating revenue and expenditures. This is where he said they've started looking at the foreign subsidiaries, but he asserted that because of the complexity of multiple legal environments and employer obligations it was a complicated business. He also referred to one-time costs associated with consolidating/closing the foreign subsidiaries, which, he said, was part of why they needed the loan. Once these one-time costs were addressed, then he expected profitability in run-rate expenses. Ms. Fatell asked him at this point why they needed the loan then, and he stated that the run-rate does not include litigation expenses. He stated that one half of the SNCP financing would go towards operations, and the other half would go towards litigation expenses.

He then began to address the circumstances of the SNCP loan and the general financing situation. They approached many people about unsecured financing, but apparently none were interested (can you believe it?). He stated that they approached 14 parties, including an unnamed hedge fund which was not the right size, and mentioned a proposal from Ralph Yarro which exceeded expenses? My notes here get a little rough. Financial mumbo-jumbo is not my strong suite. The Yarro offer seems from what I could tell to be some kind of predecessor to the SNCP offer that was approved today. Of those 14 parties they had "robust discussions" with 12 of them, got to the point of signing NDAs (presumably not as onerous as the ones SCO wanted developers to sign before seeing their magic evidence) with 8 of them, and considered proposals from 2, one of them being Yarro's.

He then described the rationale for going with the Yarro/SNCP offer instead of the competing offer. The Yarro offer has an interest rate of 14% quarterly compound rate, the other was apparently higher. The Yarro offer had no up-front fees, whereas there were up-front fees with the other, and if the litigation is successful then the Yarro offer entitles SNCP to 6.6% of the bee-lions, whereas the other offer wanted 10%. He stated that it (the SNCP loan) is secured by assets. There was something about being able to sell the assets or the company, but I didn't quite follow it. Ms. Fatell then asked about Yarro's involvement. Was it arms-length? Absolutely. Reasonable? Yes. Transparent? Yes. He says he dealt "95%" with Yarro, and had a few conversations with some of the other investors. They were lined up by Yarro, who did the negotiating for all of them. He described them as being made up of both insiders (including shareholders) and people not involved with the company (yet, heh heh heh).

The testimony then turned to what the financing would be used for, at which point he submitted a two-page exhibit that forecast the budget for 13 weeks, which we in the gallery did not see. Page one apparently involved the operations, while page two concerned the litigation budget. He ran down the first page, which sounded like the kind of budget that any business would have. He did reiterate that they needed some financing for one-time up-front expenses that would lead to profitability (if not actual profit) by the end of the 13 weeks, at least according to his budget projections. Then he discussed the litigation expenses, expert witnesses (not covered by contingency of course), and stated that without the SNCP financing the money would have to come from operations and it just ain't there (again that's my phrasing). He mentioned the need for a "buffer" for the litigation expenses, and (significantly to my mind) said that there was nothing in the budget for post-trial expenses (e.g. appeals or, presumably, the SUSE arbitration and the IBM hurdle that still stand between SCO and the big brass ring).

Finally one of the major themes was introduced, which is why not just sell what they've got now. Bonnie Fatell asked why SCO hasn't just shut down, and he likened the situation to putting a "For Sale" sign outside a house while the roof is on fire. He essentially stated that he wanted to get SCO into a more advantageous position to bargain before selling. The selling a burning house metaphor came up frequently after this. (He also made a less striking analogy about selling a (melting) ice cube on a hot summer day, but it didn't have the legs that the burning house one did). The other image that came up a lot was that of "creating a runway"; all I could think is you can have the best runway in the world but it's still the plane that's gotta fly.

At this point Ms. Fatell rested and Mr. Lewis (for Novell), who was there by phone, got to ask some questions. His first question (which he would return to several times) was whether the financing could wait until after the Utah litigation. Mr. Fisler asserted that they would need the financing no matter what the results of the litigation were. Which would be true if SCO would have any reason to exist beyond the litigation, which I doubt. Mr. Lewis then asked if he had analyzed the financial situation of the debtors if they lose, at which point Mr. Fisler started to become a lot less specific and informative. He said that they were aware of the unsecured creditors, and when asked if they would be able to pay he replied that they had not done any detailed analysis, but he believed that they would be able to pay. Mr Lewis brought up the burning house analogy and Mr. Fisler asserted that the fire was out. Finally he asked about the incorporation and it moving from DE to UT, which Mr. Fisler said he didn't know why. This point came up again later, mostly with Mr. Petrofsky's questions, which started next.

Mr. Petrofsky asked some questions, mostly about the minutiae of incorporation paperwork, whether everything was signed and delivered (no, but it was all done but for the signing), if it fell through at the last minute was SCO liable for any payments to SNCP (no), could the lenders suddenly reduce the loan amount (no), and something about filing with Utah tax authorities instead of commerce authorities, but I didn't really follow it. Eventually Ralph Yarro's lawyer (a Mona Burton(?) who was, unbeknown to anyone, on the phone) chimed in that everything was legit, which satisfied Judge Gross.

At this point there were a lot of questions and answers about the loan, but for the sake of brevity I will try to consolidate and hit the high points. Basically Novell (in the form of Mr. Lewis) reiterated several times the idea that the financing should wait until after the Utah litigation, which after all is starting Monday and is a jury trial so we won't have to wait months for a judges decision. I though this was his strongest point. There was a bit about whether there was any money set aside for Novell if they lose, which there is, some $655,000 (I think that's the number) in escrow, which is less than the total owed. Mr. Lewis did make a point of asking Mr. Fisler if he had testified that they had made no robust efforts to sell assets in two years, which he more or less confirmed. Again, he stated that he wanted to put out the fire before putting the house on the market. Whenever Mr. Lewis asked for specifics regarding if (when?) SCO loses the litigation lottery the reply was more or less "we haven't done the analysis, but I believe that the creditors will be taken care of".

There was an interesting exchange where Mr. Lewis asked what sale price would be required for the unsecured creditors to get paid if SCO loses in litigation. Mr. Fisler replied that that analysis was very complex, partly because the loan would have been only partially realized by that point (i.e. the whole two million would not have been loaned yet, apparently it's coming in pieces), though he mentioned (a couple of times) a figure of $5.5 million as an estimate of what the estate might bring in. Mr. Lewis then asked about how much money was ahead of the unsecured creditors, and Mr. Fisler replied that there was whatever from the SNCP loan had been loaned at that point, plus "3-4 million", and them come the creditors. After he was done with the questioning Ms. Fatell got up to "clarify" the question and (as far as I can tell) asked the same question again, but this time got an estimate of "a half million". Not sure what was going on there.

Mr. Lewis then asked the Judge (Gross) to disregard the trustee's assessment of their prospects in litigation, and he replied that he would, making an analogy to what a judge asks during a trial versus what he rules. He also reiterated his opinion that there there's no need to do the financing until the Utah trial is concluded, saying (a) the needs and prospects of SCO will be clearer then, (b) it's only 3-4 weeks before it will be resolved, and (c ) nothing that he's heard suggests that SCO can't last that long, although perhaps not much longer, without the influx of capital. Also reiterated his concern that the unsecured creditors were "in the balance".

Finally Judge Gross concluded by reiterating his confidence in Judge Cahn (a confidence which I can't help but believe is misplaced) to make judgments on the merits of the litigation, commended his efforts to cut costs and praised the credibility of his testimony. Finally he ruled, allowing the loan to proceed. He also stated that this was the time for the financing because it will he harder to get financing should the Utah litigation not go SCO's way, which seems to beg the question of why incur more debt then.

I just want to add some final thoughts and observations. SCO did a very good job and spent most of the hearing conducting themselves as if they were a legitimate company. If I wasn't familiar with the case I would probably have sided with SCO. They focused on the "operations" and barely mentioned the litigation unless they couldn't help it. When they did mention the litigation it was all in the context of the Novell litigation, but of course that's only step one before they make any money, and I think probably the easiest. As they have done so well for the better part of the past decade, they again managed to focus the discussion on anything but the facts of the alleged infringement. IBM barely came up if at all (although they had a lawyer there, she (along with Mr. McMahon) was a silent observer). Mr. Lewis was not as active as I would have hoped, but he's probably more focused on the Utah litigation at the moment (I hope so, anyway), and may well be distracted by the recent takeover attempt. By the end of it I was not surprised by the judge's decision.


PJ's notes:

Cahn's status report: They are in the process of closing or consolidating those foreign subsidiaries. After the 10th circuit decision, he thought it would be easy to get a loan, but because of the bank crises, it was not possible.

Their terms were too onerous.

They are marketing to some IP not germane to litigation.

He will attend the first and third week of the trial. The jury is not to know who he is so he won't be at counsel table.

He still believes the Novell and IBM should be pursued vigorously. He prevailed on all Daubert and most of the motions in limine, so he feels things are well established favorably for the debtor.

[Mark Fisler called to the stand.]

Mark Fisler of Ocean Park Advisors: Since Sept 2009 Primary focus: initially crisis mode so needed to preserve cash capital and restructure. Looked at financing,

Asset sales: 4 buckets, core asset the operating business.

Non core:IP= patent not core to the business, de minimis assets, like equipment, and finally noncore mobility products. Has traction in the market place the company doesn't have the assets to support that business.

How many payrolls could we last ? A couple and then out of cash.

Put a lockdown on all expenditures and took approvals to a low level, examining every expense, then asked execs what was the plan? Determined that there were two phases: an affordable one we could do fast domestically, and two more expensive in the EU jurisdiction. Couldn't do two because expenses in employee payments.

So needed to do phase 1, so RIF employees, reducing from 10.9 to 7.2 million by changing leases, etc.

RIF = reduction in force

Since November, he and a partner travelled to Europe to see about phase two. They want to preserve value, and they believe the operating business has value, if the restructure well. Spent time with head of foreign operations in Germany and UK. Lots of time on phone with other subs in Asia. Talked about what is the right size for the foreign subs. There will be cuts. Eliminate certain inefficient operations and do things out of fewer offices, that will save money.

Broad brush number of $3 to $400 thousands. Dollars they don't have, and that is what they need the loan for. Annualized saving of 2.1 savings so down to 6 million in run rate expenses after the phase two. So it will quickly pay for itself.

So why need the loan? Litigation as an expense bucket is outside of core operation. So divided that off. They have their own expenses, so half of the loan goes to litigation. Professional, employees that are full time on that, experts. There is also a need to have a cushion so the company can get up to date on paying professionals.

No unsecured financing was available. Contacted 14 parties. And buttressed that list with those they thought might be interested in a company like SCO, and SCO had some discussions going. But one was inappropriately sized, so the hedge fund dropped off. The second was from Ralph Yarro, so they started a discussion. It was too expensive but willing to entertain further discussion.

12 had robust discussions. 8 signed NDAs, some back and forth. Ultimately two, Yarro and second written proposal from the NE.

The determining factor was economics. Lined up loan amounts, up front fees, interest rate, and both wanted equity or direct participation.

Yarro's was better offer. No up front fees, but there is a loan fee, an equity like fee. The other had a higher interest rate, upfront fees, and fees to part with before we had a signed commitment.

Legal fees were not capped. 10% from litigation.

So Yarro proposal was superior. 6.6% at 2 million. Secured by all assets but SCO is not precluded from selling the assets or the company in toto. So some flexibility. So if we can sell some assets, we can use them for the estate. So more breathing room.

If core assets are sold, they are shared 50-50, with cap at loan amount.

The 6.6 percent is only on a successful litigation. If fail, they just get their loan paid back.

If settlement 10 M he gets 660,000

Is Yarro getting more stock? No.

Yarro is a minority lender. 20 percent. Rest is 13 to 14 lenders will be funding. Ranging from 10,000 to 650,000. Yarro lined them up.

Some were former board members or had an employee-consultant role. Some had no former relationship with SCO.

Then showed a 13-week budget. First for SCO's business, second for litigation.

Independent contractors provide help to company. Most are past, but they might have them come back a day or two.

Other vendors, like Etrade. It is eliminated that cost.

Data processing. Significant IT function.

Premises is NJ office and Lindon.

Financial costs would be bank fees and taxes.

Office would be selling T & E, sales, communication for internet connectivity.

Disbursements to foreign subs: debtors makes contributions for their expenses. Has a separate source of funds. They collect from the foreign subs, so then they pay out from the revenue stream.

The company has always operated in that manner.

OPS estimates they can save $100,000 a month.

The goal was to stop the bleeding of cash. Believe successful. Slight cash positive.

Why then a request for loan?

It's a forecast. But they can't use the current cushion for phase two, and they are behind in paying bankruptcy professionals fees through the end of January. Loan is not revolving.

Need a buffer. There will be ongoing expenses. Loan helps them.

Next page is the litigation budget.

Out of pocket expenses of upcoming trial or future expenses associated with the court. Travel. The page is 13-slice of a projected year's budget. Professional fees like Blank Rome that need to be paid out of litigation budget also.

Right now, without debtor loan, SCO has nothing to go forward with the litigation.

Budget for $500,000 or so for the rest of the year.

If litigation is resolved at the end of March, there will be surplus funds for the estate.

Appeals? No the budget doesn't take that into account.

Why not just shut the company down? His view is you can't sell a house with a burning roof.

SCO is distressed. You can't sell in these circumstances. It's like trying to sell an ice cube that is melting.

So OPA said triage. Allow us to go forward in an orderly sales process. They'll then can invite people in to sell.

LEWIS: Have a few questions. First, the trial is about to begin and will last three weeks. Is there a reason this financing can't wait until the trial over?

Fisler: time is of the essence. Debtor needs money. We have to assume perhaps the litigation doesn't go SCO's way, and we need to handle the rest.

LEWIS: What if SCO loses. Did you analyze that?

Fisler; We're aware of unsecured obligations.

Lewis: Will there be funds to pay the unsecured creditors?

My view it we will have some.

Lewis: You have that view but you have not done any analysis.

Fisler: Correct.

Lewis: Were you trying for financing for a house on fire?

Fisler: We had already made significant cuts, so the fire was out by the time we did the financing.

Lewis: So the company is not is distress.

Fisler: We've put the fire out.

Lewis: Why the lender fee indicates the lender was a Del. co. and now it's a Utah company?

Fisler: I don't know.

Al: Have any of the lenders signed any agreements yet?

Fisler: Ask Fatell. As far as I know, no.

Al: Why not signed on the dotted line before filing?

Fisler: The contracts are now signed.

Al: Date is March 8 for closing. Why?

Fisler: We wanted to close just prior to at the start of the trial. That was our deadline.

Fatell: Closing is Monday. It's a condition of closing. All those lending have said they are committed. Can they reduce the loan? No. How much is committed? All of it up to 2 million. Do you have some sense in the market as to what the assets might bring in the beginning or since?

Fisler: Yes: there was 5 1/2 million offer. Interest is high. They've been approached by another party new to this. So there is a competing offer. There are discussions. As to value. We are talking with prior people. Our belief that we should be able to come in in the range of prior offers.

Fatell: You will be able to pay this loan back? Yes. And there will be money to pay off all the creditors?

Fisler: Yes. We feel the company hadn't considered all its options to sell. We didn't see a call list or a backup bidder. So felt the offer was potentially low negotiated under duress. So felt we could get a better offer. If the trial if favorable, it clears up an issue. All the key IP was stripped out and couldn't be sold. Some willing to buy without IP, but if we clear that up, the interest level has to go up.

Fatell: Novell's claim is unsecured?

Fisler: Yes, but we have some set aside, but not in full.

Judge: Novell's objection is the size of the fee. Is that a possibility it could be that large a number?

Fisler: Yes.

Lewis: Are you saying there wasn't a robust effort to sell?

Fisler: Can't say no efforts, but fell short of what we'd do.

Lewis: What if SCO loses, what will it take to provide enough funds to pay unsecured creditors?

Fisler: It depends on timing. If they lose in next 3 weeks, the loan is still there. If they've used half a million, then the loan pays itself somewhat, and then if we sell the company, we can pay the loan off and the rest would be available for creditors. Expect would have 3-4 million range.

Lewis: Do you know who the members are?

Fisler: Yes, names on a list.

Lewis: Do you know anything about the LLC?

Fisler: It's Ralph Yarro's entity.

Lewis: Do you know if the names on the exhibit are lending from personal funds?

Fisler: There isn't somebody else behind those names.

Fatell clarifies: what would be ahead of unsecured creditors, there'd still be a secured loan left over, so you would have a half a million ahead of creditors.

Al: If the funds are not wired, what recourse would there be?

Fisler: No commitments if it doesn't close.

Al: What about legal fees?

Fisler: No. If it doesn't close, we have no obligations.

Fatell's closing argument: there is a need for financing. Belt tightening but not enough to satisfy all its obligations, including professional fees. The market has been tested. Up to 12 people showed interest. Even though with an insider, there has been a transparent process to get the best deal. It is an unusual loan, small loan, with a contingent piece and they are lending and in some respects hoping for a benefit. We have been unable to get unsecured credit. It's necessary. Terms are fair and commercially reasonable. This is a unique type of loan, but the trustee is appreciative that Yarro was able to get lenders together.

Two objections. This is not a subordination of creditors to equity. The litigation is a valuable asset and should be pursued. It doesn't pay for prepetition claims. I think we've addressed all Novell's objections.

As to Al, it's not like a breakup fee they get no matter what.

History: we have no history with this company.

Lewis: The key issue is whether it needs to be done today. Why not wait for trial? It's only 3 or 4 weeks away, and then we'll have a verdict. In the meantime, we haven't heard anything that the company can't make it that far. And we heard nothing that says the creditors won't be sacrificed if the litigation goes wrong. No one has calculated that, including Mr. Fisler. We still don't really know who the lender is. In one document, it's a Delaware LLC and in another it is now a Utah LLC. And curiously the filing was only the first page, so we don't know anything about the lender itself.

Al: This motion was on very short notice. Most of my questions have been answered. There is still a strangeness about the entity. According to the websites, neither entity is formed. It seems clear that this is related to the trial.

Fatell: When they filed the notice, the only thing provided us was a scanned copy of the tax document. She now has the complete filing. [Hands it to the judge.] Yarro is the manager and represented by Holland & Hart, a reputable firm.

Mona Burton, of Holland & Hart: I am Yarro's attorney, and the tax office is the appropriate place to file the articles. The filing won't be on the website for a while, and that is normal. But the company was formed by filing the articles.

Fatell: The estate needs this money, quite aside from the litigation. It's not week to week cash flow positive. There is a significant amount that needs to be paid and it comes ahead of creditors anyway. They need the money to do the European phase two. And it will better position it for sale.

There could be appeals after the trial, so to hold this in abeyance would be a great detriment to the estate. We believe there is interest in buying these assets, but we don't think we can get best value today.

Lewis: The test isn't a best business judgment. This is not ordinary course. The test is the creditors' protection. Counsel noted that if the trial doesn't do well, they won't be in such a great situation to sell. Everybody knows there will be appeals, but the trial itself will also have an impact, and when we know what that situation is, we'll know if this runway funding is even needed.

Al: May I ask Yarro's lawyer a question? [Quotes: Utah code indicating that a company is not formed by tax office filing ] Judge: I accept Burton's representation. She is a lawyer. This has been a difficult case. I am pleased with Cahn's report that he is active in restructuring and cut costs dramatically. I have heard credible testimony from Mr. Fisler and I will grant the motion based upon that testimony that the requirements have been met, that there is a need for the financing now. I agree that at the conclusion of the trial, there may be different conditions, so the time is now. I wait with bated breath the trial outcome. 13 or 14 lenders. Yarro is 20% of the total. Some are insiders; some not.


March 5 Bankruptcy Hearing Report - Updated | 210 comments | Create New Account
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"SCO did a very good job"
Authored by: Yossarian on Saturday, March 06 2010 @ 12:15 PM EST
That's the US legal system.

The quality of your lawyers is more important than the
strength of your case. (And the best compliment you can
give a lawyer is to say that he won even though the
other side was right.)

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Concerns about a jury trial
Authored by: Anonymous on Saturday, March 06 2010 @ 12:22 PM EST
SCO did a very good job, and spent most of the hearing conducting themselves as if they were a legitimate company. If I wasn't familiar with the case I would probably have sided with SCO.
And this is why I worry about a trial by jury.

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  • Agreed.... - Authored by: Anonymous on Sunday, March 07 2010 @ 12:14 PM EST
Corrections Here
Authored by: SilverWave on Saturday, March 06 2010 @ 12:44 PM EST

RMS: The 4 Freedoms
0 run the program for any purpose
1 study the source code and change it
2 make copies and distribute them
3 publish modified versions

[ Reply to This | # ]

The Off Topic thread
Authored by: SilverWave on Saturday, March 06 2010 @ 12:45 PM EST

RMS: The 4 Freedoms
0 run the program for any purpose
1 study the source code and change it
2 make copies and distribute them
3 publish modified versions

[ Reply to This | # ]

News Picks discussion
Authored by: SilverWave on Saturday, March 06 2010 @ 12:46 PM EST

RMS: The 4 Freedoms
0 run the program for any purpose
1 study the source code and change it
2 make copies and distribute them
3 publish modified versions

[ Reply to This | # ]

Thanks RFD
Authored by: Gringo on Saturday, March 06 2010 @ 01:06 PM EST
I really enjoyed reading your report. I thought you struck a
good balance between various opposing concerns, such as
editorializing and reporting and many others issues. Thank
you for taking the time to be there and write this up for us.

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the unsecured creditors
Authored by: Gringo on Saturday, March 06 2010 @ 01:21 PM EST

Mr. Lewis asked what sale price would be required for the unsecured creditors to get paid if SCO loses in litigation.

This was a key point for Novell, and the responses he got were interesting. Clearly, nobody was very concerned about the creditors, and SCO had not given that much thought. Between Ms. Fatal and OPA, they seem to have come up with wildly different figures, which emphasizes that they don't appear to have specifically considered the issue.

I am left wondering why Novell asked about unsecured creditors. Does that mean that they accept that they are only considered ordinary unsecured creditors, in the line up with all the others? But I thought the money owed to Novell by SCO had special status, because it was Novell's money that SCO was illegally holding on to.

Who is willing to bet that we will see Novell looking for an injunction bright and early Monday morning, with an appeal to follow?

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No objections from the US Trustee?
Authored by: Anonymous on Saturday, March 06 2010 @ 01:28 PM EST
No objections from the US Trustee?

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The Real Wookiee?
Authored by: DaveJakeman on Saturday, March 06 2010 @ 01:44 PM EST
Great report -- thanks.

So, if SCO didn't have their litigation addiction, and with some severe cost savings, they'd be profitable. Well, duh!

My reading of this is that, despite assurances, SCO wouldn't have had enough cash to pay their litigation expenses through the impending trial, they were that strapped.

...he likened the situation to putting a "For Sale" sign outside a house while the roof is on fire.
Perhaps they think they can get more for SCO when it's a pile of smouldering ashes, because they're still burning their cash in the blazing litigation inferno.

By Lewis not being present in person, I'm wondering if SCO haven't pulled a wookiee misdirection in the shape of their jury trial, distracting Novell from the real plot. Perhaps, like us, Novell didn't think the Yarro deal would possibly be accepted on such straightjacket terms.

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March 5 Bankruptcy Hearing Report
Authored by: RFD on Saturday, March 06 2010 @ 02:39 PM EST
I am afraid that I have gotten far more credit here than I deserve. I did not
write the lengthy narrative, another groklawer did. I was "another
representative from Groklaw there", not Chris Brown. I am sorry, but I did
not get his name. I have emailed PJ to let her know of the mix-up.

I must admit that I am envious of his reporting skills--he did a much better job
of conveying the feeling of the hearing then I did.

I am not sure I agree with his last sentence, however--I don't believe Mr. Lewis
is involved in the Utah litigation. As the song goes "you have to know
when to hold'em and know when to fold'em" and after hearing Mr. Fisler's
testimony, I think he decided to fold'em. It may have been a strategic

Eschew obfuscation assiduously.

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House on fire analogy
Authored by: wvhillbilly on Saturday, March 06 2010 @ 03:29 PM EST
The fire may be out, but the house is a pile of charred rubble.

Trusted computing:
It's not about, "Can you trust your computer?"
It's all about, "Can your computer trust you?"

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Where was Elliot?
Authored by: Anonymous on Saturday, March 06 2010 @ 04:21 PM EST
Yes, that's a rhetorical question, because I know Elliot is not (yet)
a party to these proceedings. However it strikes me as significant that
a "vulture capitalist" should settle on the still walking Novell,
passed by the bleached bones of SCO, apparently marking the litigation
value as zero. Is Elliot expecting Novell to lose? Is Elliot the hand inside
the SNCP puppet? Keeping at arm's length from the sordid business of
"sue every Linux user"?

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"creating a runway"
Authored by: SpaceLifeForm on Saturday, March 06 2010 @ 05:05 PM EST
Would that be to land a plane in distress,
or to launch a fleet of bombers?


You are being MICROattacked, from various angles, in a SOFT manner.

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Why oh why no ch. 7?
Authored by: peope on Saturday, March 06 2010 @ 07:02 PM EST
I cannot get it.

In such desperate needs with
co->income() - co->running_cost < 0
co->asset(2)->towards() < co->income() // UNIXWARE
co->asset(3) == CHAIRS_TO_THROW_AROUND
co->asset(4) == OLD_OBSOLETE_CRAP
business_plan.get() == NULL

Why oh why not just say the company is bust?

co->checkbook() += (co->drain_assets([1]) + co->checkbook())

co->status() == BUST || co->status() == MEGA_BUST // UGLY_HACK

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So is Steve Ballmer going to buy their "surplus" chairs?
Authored by: SirHumphrey on Saturday, March 06 2010 @ 07:48 PM EST
And after all the talk of runways, do the chairs come with airworthiness
certificates? The filing cabinets could be used as counterweights in
chair-flinging trebuchets.

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Appeals of Bankruptcy decisions in Delaware subject to mandatory mediation
Authored by: UncleJosh on Saturday, March 06 2010 @ 08:49 PM EST
There have been some comments about Novell appealing Judge Gross's decisions. In this context it is worthwhile to note that in Delaware any appeal of a Bankruptcy court decision is subject to mandatory mediation: order. So I suspect appeals are very unlikely...

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Designed to fail?
Authored by: jbb on Saturday, March 06 2010 @ 11:52 PM EST
This is the only bankruptcy I've seen in depth, but what I've seen here makes it appear like the system is designed to fail. Like a series of dams on a river that are designed so that if the top dam breaks, there is enough water to break the next dam down and so on. It seems SCO is consistently a year late and a $1 million short.

If they had started these drastic cost-cutting measures 3.5 years ago, then they wouldn't have piddled away all the money while in bankruptcy. Similarly, if they had a chapter 11 trustee a couple of years ago then maybe there would have been enough resources left for him/her to turn things around or at least enough time to do something other than play litigation-lotto. Then last summer, if they had gone right to chapter 7 instead of messing around with a chapter 11 trustee, they would have been able to mostly pay off the creditors. The way SCO played it, they've succeeded in striping all the assets from the company and they've avoided even a hint of rehabilitation.

Maybe the system is designed to succeed when the debtor makes a good faith effort to rehabilitate. From my very limited perspective (and despite a couple of newspicks to the contrary over the years) it seems that the lawyers with the least scruples tend to win while making the judicial system look foolish and inept.

You just can't win with DRM.

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Time for some Larry Norman...
Authored by: Anonymous on Sunday, March 07 2010 @ 12:05 AM EST
Right is wrong and wrong is right,
White is black and black is white,
I think I just lost my appetite.
Stop the world, I want to get off.

Stop the world, I want to get off,
This is too weird for me.
Stop the world, I want to get off,
I've just got to find a planet
Where they believe in sanity.


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March 5 Bankruptcy Hearing Report - Updated
Authored by: tknarr on Sunday, March 07 2010 @ 01:12 AM EST

If Cahn believes the IBM suit should be pursued vigorously, he obviously hasn't read up on the state of the evidence yet (or he's only reading SCO's side of the story). And he definitely hasn't read up on SCO's history of trying to produce "infringing" code, or he'd be really really worried about the few bits of code SCO's got left on the evidence table. And with IBM's counterclaims hanging there, there's a big big downside if he loses. That's assuming he wins the copyright transfer issue in the Novell case. If he doesn't, game over in the IBM case. As far as a settlement goes, good luck there. IBM's far beyond the point where they care about the costs anymore. They want either an admission from SCO or a ruling from the judge that SCO never had a case to begin with. And forget any sealed settlement, IBM will want it public.

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Proper place to file??
Authored by: jbeadle on Sunday, March 07 2010 @ 01:52 AM EST
Mona Burton, of Holland & Hart: I am Yarro's attorney, and the tax office is the appropriate place to file the articles.

Hmmm... Must be Utah, and perhaps the states vary in filing regulations.

In Colorado, ya ain't legal until you've filed your corporate application (*and* paid your dues) and the Articles of Incorporation with the Secretary of State. Something just plain smells about a filing with the "tax office" being all you need to do...


[ Reply to This | # ]

This was strange! Transcription error?
Authored by: Anonymous on Sunday, March 07 2010 @ 02:48 AM EST

Al: Have any of the lenders signed any agreements yet?

Fisler: Ask Fatell. As far as I know, no.

Al: Why not signed on the dotted line before filing?

Fisler: The contracts are now signed.

The agreements are not signed - then in the very next reply, they are signed? Surely he didn't say that?

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You know, this worries me
Authored by: Anonymous on Sunday, March 07 2010 @ 04:49 AM EST

Cahn obviously thinks SCO has a good chance of hitting the jackpot in the litigation.

We don't think it has a case at all. But we are not lawyers. Cahn is not only a lawyer, he has been a trial judge. He has an infinitely better feel for what wins trials than anybody who posts on Groklaw.

And he has had time to study the matter from all angles. He has been working on this full-time for several months. It is absolutely certain that he has read the GPL very carefully, and understands it fully. He will also be thoroughly familiar with the issues that were argued before Judge Kimball.

I hate to say this, but if Cahn thinks SCO has a good chance before a jury, then Cahn is very likely right.

I'm not a lawyer, and have never seen a jury trial. But it could be that the advocacy skills that are needed for a jury trial are different from the skills needed to present a case to a judge. IBM's Marriott was extremely effective before a judge. He had all the facts at his fingertips, was logical and clear, and could "think on he feet", i.e. react effectively and promptly to the other side's arguments. He could cut through the fluff and smokescreen put up by SCO. which had no chance of confusing a judge like Kimball. But would this work before a jury as well as BS&F's tricks?

[ Reply to This | # ]

"I have had a chance now to listen to the CD"
Authored by: Anonymous on Sunday, March 07 2010 @ 05:49 AM EST
What CD? Have I missed something?

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Harvard Law 101
Authored by: Ian Al on Sunday, March 07 2010 @ 07:03 AM EST
'OK, you have reviewed Housefire v Firehouse. What is the most important conclusion from the court case?'

'No, not that due process was not truly followed.'

'No, not that the key contract details were ruled inadmissible.'

'Yes, all the lawyers got paid.'

Secured by all assets but SCO is not precluded from selling the assets or the company in toto
So, Cahn can sell the whole company even though all the assets are held as collateral for Yarro's loan. (BTW, Yarro is now cited by his lawyer as the manager of SNCP (whichever of the three that might exist) and can now sue for profit!)

It's a forecast. But they can't use the current cushion for phase two, and they are behind in paying bankruptcy professionals fees through the end of January. Loan is not revolving.
Out of pocket expenses of upcoming trial or future expenses associated with the court. Travel. The page is 13-slice of a projected year's budget. Professional fees like Blank Rome that need to be paid out of litigation budget also.
Right now, without debtor loan, SCO has nothing to go forward with the litigation.
They will be bust before the end of the Novell trial and they must pay their lawyers.

Appeals? No the budget doesn't take that into account.
'Who cares? Our plan is not to let Ralph get his collateral and for us to get paid. The lawyers, that is.'
... money set aside for Novell if they lose, which there is, some $655,000... in escrow, which is less than the total owed.

Fatell: Novell's claim is unsecured?

Fisler: Yes, but we have some set aside, but not in full.

Lewis: So the company is not is distress.

Fisler: We've put the fire out.

'Yes, of course the company is in distress, but we can get through the Novell trial with Ralph's money and then pay ourselves. I wish we could get hold of the rest of Novell's money in escrow.'
Fisler: It depends on timing. If they lose in next 3 weeks, the loan is still there. If they've used half a million, then the loan pays itself somewhat, and then if we sell the company, we can pay the loan off and the rest would be available for creditors. Expect would have 3-4 million range.
'Don't really care. As long as SCOG survive as a company through the Novell trial we will get paid. I don't really know how much we will get in the sale whichever way the trial goes, but we can pay ourselves with Ralph's money. Didn't you hear Ed Cahn say that the litigation was not one of the four parts of the business that we have in our plans? Although the SCOSource litigation and the IBM trial might keep some other lawyers paid, that is not what we are looking at, here. This is not about other lawyers. This is about us.'

Fatell: The estate needs this money, quite aside from the litigation. It's not week to week cash flow positive. There is a significant amount that needs to be paid and it comes ahead of creditors anyway. They need the money to do the European phase two. And it will better position it for sale.
'Hey, I'm a lawyer, too. Don't forget that the lawyers get paid before the creditors. The estate needs this money to pay me and my boss as well as the other lawyers. Look, if we keep going until we have fired the European folk, we will get even more money for the company and our pay cheques will continue to be paid for most of the current year. Without Ralph's money to spend on European trips and European lawyers, we might not get all of our pay. Don't forget the European lawyers. They have lifestyles to support, as well. Don't worry about IBM. We have no plans for SCOG to exist at that stage.'

Of course, my evidence is parol evidence and garnered from hearsay, to boot. It may be that the results of the trials and arbitration are important in some way. I think the reporters may have failed to note some important threads to this effect in the hearing.

Or not.

I hope I have not, inadvertently, got the wrong end of the stick. You know I would not do that if I could help it.

Or not.

Ian Al

PJ: 'Have you read my open letter?

[ Reply to This | # ]

IBM and US Trustee Objections
Authored by: Anonymous on Sunday, March 07 2010 @ 10:44 AM EST
As a few others have noted, neither IBM nor the US Trustee objected to this
deal. (You can even go so far as to say that Novell's questions at the hearing
did not seem like they were that interested in objecting.) Both IBM and US
Trustee have objected strongly (along with Novell) to past deals. Why not now?

Again, as others have suggested, there is something we don't see in all this.
Perhaps it is as simple as "We know we'll win eventually, so we don't care
anymore what happens at this stage." Or perhaps there is something else
that IBM, the US Trustee, and Novell are planning. Or perhaps it is just that
Judge Cahn is just making a bad decision, and that other parties realize this
and are willing to let me and Yarro make that mistake.

If we have learned anything in this case, it is that surprises are always to be

Take care,
Not Logged In

[ Reply to This | # ]

Holland & Hart where Patrick McBride of Novell used to be an Associate
Authored by: Anonymous on Sunday, March 07 2010 @ 10:46 AM EST
Patrick McBride, Associate General Counsel at Novell, was early in his career an
Associate at Holland & Hart LLP

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No Objection based on the "deliberate default" theory
Authored by: WWWombat on Sunday, March 07 2010 @ 12:16 PM EST
There's been a lot of effort expended here on the theory that Ralph Yarro will
be getting the IP as colatteral after SCO defaults on the loan repayments.

But it seems that this theory was never touched on in court. Everything
discussed there was based on the fact that the loan was a perfectly legitimate
device, with no hidden angle. And even then, this wasn't discussed as an
unwarranted side-effect.

Is that right?

I guess to do that would have to call into question Cahn's ethics &
legality, so presumably the remaining lawyers wouldn't want to do that unless
they had evidence, rather than just theory.

[ Reply to This | # ]

Should Cahn really be sitting in on the trial?
Authored by: Gringo on Sunday, March 07 2010 @ 04:25 PM EST

I'm mean - he's a judge - just like Judge Stewart. Cahn will be there to oversee his interests. You think Stewart won't notice a colleague sitting over there? How will that affect his actions? Perhaps he will want to show Cahn that he is doing it right? Cahn's presence adds dimensions that are unknowable by us. Who knows if they have some kind of personal relationship? Who knows if Cahn may send signals to Judge Stewart? Who knows if Judge Stewart may find the presence of Cahn intimidating? How would you feel if you were a judge, and a colleague is associated with one side of a case you are presiding over. Could it have an impact on the way you handle things? Maybe, maybe not? Then I don't think it is a good idea for Cahn to be there!

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Hostile creditor(s)
Authored by: Anonymous on Sunday, March 07 2010 @ 05:47 PM EST

I think a big problem is that the Judge Gross views Novell as a "hostile
creditor"--a creditor whose interests are adverse to the interests of the

Most creditors have interests which align with those of the estate--the creditor
only wants to get paid, the debt in question is not disputed, and there's
nothing personal between the creditor and the debtors.

Novell, on the other hand, has a pending litigation going on--which if allowed
to continue, could potentially be damaging to Novell's interests. The interests
of the estate--and of otherwise-disinterested creditors--would be maximized by a
SCO victory against Novell, possibly resulting in the "taking out" of
a major creditor's claims, a reward in the other direction. Even ignoring the
dreams of a larger litigation windfall, it's in the interest of most creditors
to get to a verdict quickly--the upside probably exceeds the downside (continued
diminution of the estate) or them.

OTOH, it's in the interest of Novell to see SCO in Chapter 7 ASAP--to see a fork
stuck in SCO.

In many bankruptcy cases, hostile creditors are the "bad guy"--so if
indeed Novell is viewed as such, it's not surprising that Judge Gross is
ignoring them. Were the other creditors or the US Trustee complaining, I'd
expect a different result--but since it was just Novell (and Al P.)--it's easy
for the judge to assume that Novell holds a person adverse to that of the
estate, and to disregard their objections.

Of course, the fact that the "white knight" in question has
connections with equity ought to be a big red flag in and of itself...

[ Reply to This | # ]

March 5 Bankruptcy Hearing Report - Updated
Authored by: Anonymous on Sunday, March 07 2010 @ 05:49 PM EST
My overview: this is money they want to pay themselves, Blank Rome and the other professionals.

It seems to me that, as a minimum, the word "professionals" here ought to be in quotes. I can think of these guys as "professionals" only if I am told that their occupation is looting.

[ Reply to This | # ]

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