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To read comments to this article, go here
In "Foxes Petition to Guard the Henhouse" News ...
Sunday, September 16 2007 @ 08:00 PM EDT

I'm sick in bed today, so I had nothing better to do than read the bankruptcy code. That is a little dry for a gal with a high fever and I kept falling asleep, so eventually I thought I'd start with the US Courts "Bankruptcy Basics" explanation and work up to it, when I noticed something worrisome about what happens next in the section on Creditors' Committees:
Creditors' Committees

Creditors' committees can play a major role in chapter 11 cases. The committee is appointed by the U.S. trustee and ordinarily consists of unsecured creditors who hold the seven largest unsecured claims against the debtor. 11 U.S.C. § 1102. Among other things, the committee: consults with the debtor in possession on administration of the case; investigates the debtor's conduct and operation of the business; and participates in formulating a plan. 11 U.S.C. § 1103. A creditors' committee may, with the court's approval, hire an attorney or other professionals to assist in the performance of the committee's duties. A creditors' committee can be an important safeguard to the proper management of the business by the debtor in possession.....

That makes sense, to let those who are about to be stiffed have some say in how it all happened and what to do going forward. The committee gets to see the books and look over all the records. You can imagine a creditors' committee with Novell and IBM and Red Hat on it, I'm sure.

But who are the top seven creditors, according to SCO's filing, who we would normally therefore expect will be investigating SCO Group's and SCO Operations, Inc.'s "operation of the business" and formulating a plan for SCO to reorganize? The list for SCO Group [PDF] and for SCO Operations is identical, and Novell isn't on it, and neither is IBM or Red Hat. Instead, we find:

  • Amici LLC ($500,650.73)
  • Boies Schiller (287,256.39)
  • Canopy Group ($139,895.00)
  • Gre Mountain Heights Property ($132,502.00)
  • Microsoft Licensing, Inc. ($125,575.00)
  • Sun Microsystems, Inc. ($50,000.00)
  • Veritas Software ($37,881.33)

With a couple of possible exceptions, that looks a little like a list of the perps to me.

Is that not bizarre? That can't be the final list. It can't pass the snort test, let alone the laugh test.

SCO is so much fun to watch. I'd say this bankruptcy is going to be at least as entertaining as the SCO saga has been in civil court.

This is a bit reassuring, from the Bankruptcy Code, the section on Creditors' and equity security holders' committees:

(1) A committee of creditors appointed under subsection (a) of this section shall ordinarily consist of the persons, willing to serve, that hold the seven largest claims against the debtor of the kinds represented on such committee, or of the members of a committee organized by creditors before the commencement of the case under this chapter, if such committee was fairly chosen and is representative of the different kinds of claims to be represented.

(2) A committee of equity security holders appointed under subsection (a)(2) of this section shall ordinarily consist of the persons, willing to serve, that hold the seven largest amounts of equity securities of the debtor of the kinds represented on such committee.

(3) A committee appointed under subsection (a) shall—

(A) provide access to information for creditors who—
(i) hold claims of the kind represented by that committee; and

(ii) are not appointed to the committee;

(B) solicit and receive comments from the creditors described in subparagraph (A); and

(C) be subject to a court order that compels any additional report or disclosure to be made to the creditors described in subparagraph (A).

If you don't mind me asking, what exactly is that $287,256.39 debt to Boies Schiller for and when was that debt incurred? And isn't Amici run by a friend of David Boies? Canopy Group. Microsoft. Sun Microsystems. These are the very folks who helped SCO end up in a bankruptcy court in Delaware, no? Well, I'm just a para, and one that doesn't do bankruptcies of this type, although I've done individuals' bankruptcies, but I can't believe this would be the makeup of the committee.

GRE Mountain owns a property in New Jersey, according to DealTracker. And so I thought I'd see if this was the landlord for SCO's offices in Murray Hill, New Jersey. Richard Ellis is the Managing Agent for GRE, and sure enough, here's a page listing their tenants, and SCO is one of them.

SCO has also filed an 8K with the press release announcing the bankruptcy attached. In SCO's most recent 10Q, from June, it mentioned it had entered into leases for its corporate offices in the US and for the international sales office extending through the year ending October 31, 2010. So that's why they are on the list.

Veritas has done business with SCO since the Santa Cruz days in connection with SCO UnixWare. Here's a copyright notice, for example, from November of 2002 for UnixWare 7 Release 7.1.3, and Veritas is on the list. And old timers will remember that back in 2005, I found a press release regarding Veritas and Project Monterey. So that's why Veritas is there.

But is there a single entry on this list that has a higher, or even a larger, claim to SCO's money than Novell? In fact, it isn't even SCO's money, according to the Honorable Dale Kimball, waiting patiently in another courtroom in Utah. I would venture to guess he is recalling, as am I, the words of SCO's attorney, Stuart Singer, in January at the hearing on Novell's motion for partial summary judgment on the sixth, seventh, eighth and ninth claims for relief or, in the alternative, a motion for preliminary injunction, and SCO's cross motion for partial summary judgment. In the section where Mr. Singer addressed Novell's claim that it needed a constructive trust because it was afraid SCO would file for bankruptcy, he said this:

Novell likes to say that SCO is on the point of bankruptcy. It has no proof of that. SCO obviously has been managing tight cash situations for some years, and it is planned to be in a position to continue through to conclusion of this litigation doing that.

"Unless Novell wins", he forgot to add. Joke. Joke. Here's how Michael Jacobs, Novell's attorney at that hearing, explained some fine points about the money they wanted put into a trust:

MR. JACOBS: I think that's -- so, the Supreme Court I think has helped us out on this issue recently and, to some degree, trumped some of the case law that might have preexisted on this question. I think I'm not going argue that, on that breach of contract claim, where our remedy is at law, that we have a constructive trust remedy. I don't think I need to reach that point because we are defined in the agreement as the equitable owner of the SVRX royalties because they are a fiduciary collecting for our benefit.

That set of predicate relationships, if you will, sets up the claim for a constructive trust. It's our property that they are holding in trust for us, and it's defined that way in two ways: One. The strict letter of the agreement, which allocates to us this ownership interest; and, secondly, the fiduciary arrangement that arises out of the contract.

So I think maybe the harder question is: Can a contract establish a fiduciary relationship? Can a contract allocate ownership in the way it does and not convert the remedy that we would have, because it's in a contract, to a legal remedy?

And I think the answer to that clearly, under California law, is that the contract doesn't change the essence of the claim. The fact that the relationship or the ownership interests arise out of the contract ... doesn't change this from an equitable to a legal claim, and, therefore, we have a claim to a constructive trust, and we have a claim to a preliminary injunction establishing a constructive trust....

So the language, "All royalties fees and other amounts due," is dispositive here of one of the issues in SCO's opposition. Is it really just royalties due under the binary aspects of the SVRX relationships? Well, it doesn't say "royalties only." It says, "royalties, fees and other amounts due." So, any category of revenue under an SVRX license, regardless of what it is attributed to and regardless of how it's labeled, again, all royalties, fees and other amounts due.

Now let me pause here because there is something very interesting going on in the debate between the parties. Their cross motion and their opposition rests heavily on these declarations from business people who have had some varying degree of association with the actual transaction. And I think there is a basic misapprehension about the role of contracts and the role of lawyers that divides the parties on this motion.

Business people form -- I'm not telling you anything new, but I thought it's worth articulating what's going on here. Business people come up with an idea for a deal. They model the deal. They model the transaction based on aspects of the transaction that they understand. One of the aspects of this transaction that they apparently modeled was the continuation of the existing SVRX revenues because they could understand that.

Lawyers then sat down and drafted an agreement. And lawyers, they are not computer engineers, but they are transactions engineers, and they try to draft language that anticipates not only what the business people might have specifically contemplated by way of the business purpose of the transaction, lawyers try and draft language that covers all contingencies.

That doesn't make that any less of the intent of the parties simply because it's the result of the lawyers doing drafting of an agreement. The lawyers are the party at that stage of a relationship and then, of course, the parties ratify what the lawyers do when they sign the agreement. So there's -- what's basically going on here is SCO would have us ignore what the lawyers did.

Now, there are ways to do that. They could ask for the contract to be reformed if, in some way, the contract didn't reflect the underlying intent of the parties. But they haven't asked for reformation. They could make an argument for mutual mistake, but they haven't made an argument for mutual mistake. They haven't said the lawyers were incompetent, although there is a theme running through their papers that somehow their lawyers didn't capture their intent or, to be more precise, the predecessor's intent in the agreement.

It may be that, as the Asset Purchase Agreement was being drafted, people were working quickly. It may be that Novell had all sorts of leverage over old SCO during the time of drafting the Asset Purchase Agreement. That doesn't change the outcome. We look at what the contract says, not what the business people might have thought was the essence of the deal.

Now, here, we have one additional important fact, if you will, that reinforces this basic point I'm driving at. There were three months between the signing of the Asset Purchase Agreement and the signing of Amendment Number 1. This provision was heavily focused on. 4.16 is a major focus of Amendment Number 1. There was a lot of opportunity to tweak the language if tweaking would have better conformed the agreement to some different notion of what the transaction was all about.

But, in particular, the language, "all royalties, fees and other amounts due, under all SVRX licenses" didn't change. SVRX royalties in Amendment Number 1 was used as a category. There are various carve outs from the category, but those carveouts confirm that the set SVRX royalty is a very large set because certain things were exempted from the set explicitly. They weren't said -- it wasn't not said that these things are not SVRX royalties. It was said that these things which are not SVRX royalties are not part of the payment remittance obligation that SCO incurs.

So, these elements of the set help define the set, and that was done three months after the Asset Purchase Agreement was signed. So that's the first "all," all royalties fees and other amounts due.

Then the second "all," all SVRX licenses as listed in detail under Item 6 of Schedule 1.1A hereof and referred to herein as SVRX royalties.

Now, this part has provoked all sorts of consternation and argumentation on the other side. What is an SVRX license, they ask. The list of programs that is identified under Section 1.1A makes this a non-issue as far as this motion is concerned because what we demonstrated in our papers is that if you take the SUN and Microsoft agreements and lay them against the list of programs in Schedule 1.1A, it's almost a -- it's a lay down. It's a perfect match up. It's almost as if they took Schedule 1.1A, added and subtracted a little bit from it, but used the exact formulations for the names of the programs in the SUN and Microsoft agreements.

So, we don't need to know the ultimate scope of SVRX licenses. We don't need to know how far it could possibly reach in order to decide this motion. What we know is: If you take that list of programs and you lay it down against the exhibits in SUN and Microsoft, particularly NXB of the Microsoft agreement, the second payment provoking annex of the Microsoft agreement, it's a nearly perfect match up.

THE COURT: What does "nearly perfect" mean?

MR. JACOBS: Well, there are a few additions. I didn't notice any important subtractions. There are a few additions to the list. In annex B, it's two additions at the top, I think, and everything else lines up perfectly. So are these -- is there -- there are two questions to ask, I suppose. Are the SUN and Microsoft agreements SVRX licenses, or do they represent at least, in part, SVRX licenses? We think the answer to both is yes. The second. They are at least in part an SVRX license. We think they are also SVRX licenses.

And this is where I think the fiduciary obligation starts to kick in. One of the obligations of a fiduciary is to make it possible for the principal to know whether you have collected on behalf of the principal or on behalf of yourself. And you have a duty to prevent the kind of commingling here that's gone on; not commingling only in the sense of the pot of money but commingling in the agreements. So this is where I think the fiduciary duty aspect of this should tilt the -- any concerns that one might have about this lineup of programs against SCO.

They had a duty to do this in a way that would not provoke this kind of self-serving, "no, no we are not your fiduciary for this" sort of declaration that they have introduced....

So really this is a question about the importantance of the language of the contract as against the declarations of the business people that SCO submitted.

He said he wasn't telling the judge anything he didn't know about contract law. And that is true. But I am reproducing it because I thought Roger Parloff might want to take notes. He may not have followed that hearing. And second, now that SCO has in fact done what Mr. Singer told the judge, or implied to the judge, it wasn't about to do, I thought it might help all those trying to figure out how all this ties in with the bankruptcy, particularly the fiduciary responsibilities SCO had toward Novell.

The Economist offered a tongue-in-cheek description of US bankruptcy law back in 2002:

THROUGH European executives' eyes, American bankruptcies are perverse affairs. First, failed managers often hang on to the helm well after their firms have officially gone bust. After companies seek safe harbour under Chapter 11, America's famous insolvency law, banks swoop in to lend them even more money. Next, lawyers help the firm restructure older debts, giving bosses months or years to run their businesses interest-free. Failure, American style, is nice work if you can get it.

But don't forget that in the Declaration of Tor Braham, the lawyer who drafted the APA between Novell and Santa Cruz, he mentioned that Novell thought ahead, worried about a SCO bankruptcy someday:

9. As to SVRX, the intent was that Santa Cruz would act as Novell's agent. The Wilson team and I drafted the APA provisions that memorialized the agency relationship. This drafting is reflected in contemporaneous documents that still exist. Exhibit 1, for example, is a true and correct copy of my marked-up redline of Wilson's early draft of the APA containing Section 4.16. In this early draft of 4.16, as well as the final APA, we defined SVRX License to include any agreements relating to a series of UNIX System V software products that we listed in Item VI of Schedule 1.1(a). (See Exhibit 1 at NOV 42711; See Exhibit 2 at 31.) We did not limit SVRX License to a subset of SVRX license agreements relating only to the binary rights and royalties under those agreements. Indeed, we drafted the contract to state "all SVRX Licenses" and that term was intended to encompass licenses governing source and binary rights and revenues. (Id.)

10. One agency obligation we included in the contract — and to which Santa Cruz agreed — was that Santa Cruz would collect and pass through all SVRX Royalties to Novell, subject to a 5% administrative fee. In Section 4.16(a), the Wilson team and I defined SVRX Royalties to be "all royalties, fees and other amounts due under all SVRX Licenses." (See Exhibit 2 at 31.) We did not limit this revenue stream to a subset of "all royalties, fees and other amounts" such as binary royalties or sums being paid be existing SVRX customers. Further, because we were concerned about Santa Cruz's viability and what could happen to these revenues if Santa Cruz went bankrupt, at my direction we proposed contract language to Santa Cruz whereby Novell would remain the equitable owner of the SVRX Royalties under the Bankruptcy Code:

Seller and Buyer further acknowledge and agree that Seller is retaining all rights to the SVRX Royalties notwithstanding the transfer of the SVRX licenses to Buyer pursuant hereto, and that Buyer only as [sic] legal title and not an equitable interest in such royalties within the meaning of Section 541(d) of the Bankruptcy Code.

(See Exhibit 3 at NOV 41922.) In case Santa Cruz declared bankruptcy, the SVRX Royalties would be protected from the bankruptcy estate and Novell would continue to receive them. Attached hereto as Exhibit 3 is a true and correct copy of Wilson's transmittal to Santa Cruz of the aforementioned proposed language. Santa Cruz agreed to our proposed language.

So, my question is, is this retroactive? By that I mean, if SCO failed to hand over the money it should have, doesn't it have to now anyway, if Novell has an equitable interest, and SCO actually has no interest in that money, and *then* the other creditors can have at whatever is left?

More digging needed. Here's something I can use for a start after I take another nap.


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