We have the first report from the bankruptcy court, where SCO's initial hearing took place at 8:30 AM, from Groklaw member bezz:
Just back from the hearing and -- short story -- SCO got pretty much
everything they wanted. Novell asked for a trust, but the judge denied it
saying if he granted on the basis of what they presented, it would be
preferential treatment. The judge invited Novell to file a motion to lift
the stay in the Kimball trial and he would consider it at that time.
Novell assured him they would file the lift stay motion and they will be
back in Wilmington.
Keep in mind that no important motions were heard today. That happens at the next hearing. This was about paying sales taxes and not shutting off utilities. However, Novell did show up to let the judge know they want their money. The judge asked them to present a motion, and they will.
And here's a second report:
The Hearing only lasted one hour. Nothing major decided. Novell will submit a motion for releasing the stay on the trial scheduled for yesterday, and we are fairly certain that will be cleared to proceed. Darl McBride was in attendance although didn't say much.
Attorney Spector for SCO did most of the talking. Novell right on target although repeated many points. SCO spewed same stuff we have heard many times before. SCO STILL does not admit that Sun & M$ licenses were owed to Novell.
The first 7 people in the courtroom were Groklaw'rs!
Next hearing will be October 5th, at 1:30 pm, with Singerman replacing Spector for that Hearing, due to schedule conflict. (Wedding!) Singerman was remote on phone for today's hearing.
Frank found information on the trustee. He is
US Trustee, Trial Attorney, Wilmington DE. That means SCO misspelled his name, I'm afraid.
Here's some more on what that role is. This explains why the DOJ was listed on the SCO filings.
I have the longer reports from two of our eyewitnesses, and they've ordered a transcript for us also. First, from MikeD, who had a chance to talk to Darl McBride after the hearing:
There were 7 of us Groklawer's there. We all met and had breakfast after the hearing. We even got a picture of us all for PJ.
Short version - SCO got $20k approved for temp accountants and approval to pay their employees. That's it. Novell asked for some things and got nothing.
Court began at 8:30
Mr. Singerman participated for SCO on the phone.
Mr. Spector spoke for SCO first. He gave some background on SCO. Last 3 months $7.4 million last year; $4.7 million this year. Last nine months $21.9 million last year; $16.7 million this year.
Spoke of decline in business due in part to competition.
Spoke of SCO Mobile which could put them in league with Microsoft/Rimm/Motorola.
SCO has $2 million in debt.
Said 7 out of ten big business run on -Novell- servers. Another attorney ran up and whispered to him and he corrected that to say 7 of 10 run on SCO servers.
Said Linux is competition and "is a knock off of Unix".
Spoke about how their companies are worried about their continued operation.
Ms Jones then spoke for SCO.
Made some mention of "Epic" as an agent that I did not get.
Mr. Spector spoke again.
Requested SCO be allowed to use current business forms until they are used or 30 days?
Said he had discussions with Mr. McMahon. Mr. McMahon is apparently the assigned trustee.
New forms will have DIP (Debtor in Possession).
Larren Nashelsky spoke for Novell
- here to protect Novell's rights and property
- mentioned that SCO filed BK the day before the trial was to begin in Utah
- Gave background
Novell sold certain rights to SCO. Money is supposed to go to Novell and SCO gets 5%. Spoke about Judge Kimball's 102 page ruling that said Novell owns SVRX and patents. SCO "impermissibly" retained fees. Trial which was to start Monday was to determine what portion of those fees were owed to Novell.
What Novell wants:
"liquidate claims" (allow trial to go forward)
- "where is our money"
- "trial with Kimball should go forward to determine amount owed"
- There should be no predetermination as to Novell's rights and property.
- Novell's money should not be used for running SCO during bankruptcy.
- All royalties should be turned over immediately.
- Other than their 5%, SCO should not be allowed to use any of Novell's money.
- Trial is needed to determine amount of money SCO has not turned over.
- Judge Kimball found SCO had not turned over the appropriate fees from Sun and Microsoft.
- Novell is NOT trying to stop SCO bankruptcy.
- Novell wants their money which is not SCO's to spend.
Mr. Spector spoke again for SCO:
Items Novell is discussing took place in 2003.
The purchase agreement that was decided upon by Judge Kimball was extremely confusing.
Kimball did not grant constructive trust.
SCO does not have a problem with Novell's requests. Agreed to forward royalties minus 5% going forward.
-95% of fees are Novell's and should be turned over to Novell.
- It's Novell's money and never was SCO's money.
- Novell's money should not be commingled with other money in bankruptcy (We discussed this at length at breakfast and others will comment - they used "commingle"many times in their discussion.
- Judge Kimball found $$$ were improperly converted and that the trial was to determine exactly how much of that money was rightfully Novell's.
- Asked the court to put Novell's money in escrow.
(speaking to Novell)
Understood their position. However, it was 1st day of bankruptcy and it was not appropriate for him to rule on their request as "other debtors could be in the same position."
He ruled that he would enter the judgment as entered by SCO for now.
Mr. Nashelsky again asked that Novell's 95% be paid to them during bankruptcy.
The Judge said that his order will not prejudice Novell.
Mr. Spector spoke about ongoing business. Spoke about accounting people leaving and year end (Oct.) looming, requested temp employees.
Mr. O'Neil spoke for SCO and said they needed $20k for accounting temps through October.
The Judge said he felt that was appropriate.
Ms. Jones spoke for SCO and asked permission to pay sales and use taxes. ($54k/$9,300)
She asked that SCO be allowed to pay approx $6k on a $10k debt for utilities because there were concerned "the lights would be shut off".
Mr. Spector asked the judge to accept Darl McBride's declaration.
Next hearing is 10/5 at 1:30 pm. Objection and motion deadlines are 10/2.
There were seven of us there, Other than the lawyers I believe there were only 3 or 4 other people there.
I tried to watch and listen to the players to get a feel for them.
The judge appeared friendly but very business-oriented. It appeared to me that he had prepared for this case. He had no trouble understanding what was going on and seemed to have a grasp of the background of the SCO saga.
Mr. Nashelsky for Novell was sharp as a tack. He was well prepared and went straight to the point.
Mr. Spector stumbled a few times while speaking. IMHO he was not nearly as prepared as Novell for this proceeding.
Several of us spoke to some of the Novell lawyers. I spoke with Julie Dyas. I asked if she had really got her law degree and PhD in the same year. Yes she did. I had printed the Novell Lawyers pictures the night before. She did not have a picture posted. She is an attractive young lady. I am not sure what her role is but in watching her I can tell you you want her on YOUR side in court. She was laser-like in her concentration. Ever meet a person where you just get the feeling "this is not some one to mess with"? - that was my impression of Julie.
I asked her why Novell had not challenged SCO's bankruptcy since they had more money than debt (for now). She told me this was not the time or place for that kind of challenge since it was the first bankruptcy proceeding.
It did not appear that Novell had a problem with SCO filing bankruptcy. They just want their money. Novell was clearly pushing to get the issue of how much they are owed back before the court. Our breakfast consensus was that they want the issue decided by Judge Kimball.
Some of us (the Groklaw 7) introduced ourselves as Groklaw followers. The Novell attorneys clearly know what that means. They all smiled when we said it.
After the hearing I introduced myself to Darl McBride. I told him I was one of those Groklaw people. He smiled and told me he admired our passion. There is a time and place to ask a CEO questions and a courthouse hallway is not the place to ask tough questions. I asked Mr. McBride how he was holding up through this ordeal. He told me that he knew it would be tough. He said that what he had not expected was the toll it has taken on his family. When he said that I was looking him in the eye and there was a brief sadness in his eyes and a quiet voice that surprised me. I wished him and his family well.
As a human being, he seemed to be a nice guy. If only he had chosen a different path .....
All in all it was pretty dull. SCO had their bankruptcy application rubber stamped. I suspect we will see the fireworks beginning with the motions due 10/2 and the next hearing on 10/5. Novell clearly wants its day in court to decide how much money SCO owes them. The judge today gave no indication of how that may play out in the future.
And here is
bezz's longer report:
The judge entered at 8:33. Laura Davis Jones began by thanking the judge
for taking time out from a trial for today's hearing and introducing Darl
McBride, Ryan Tibbetts, Arthur Spector, Stuart Singer and James O'Neill
(already known to the judge). Singerman was on the phone. Mr McMahon
(did not catch first name) is the US Trustee. Present for Novell were
Larren Nashelsky, Julie Dyas and a gentleman whose name I did not catch.
Jones began for SCO with the Eqiq motion (12) which was granted.
Spector took over for SCO describing the business. Revenues for the
latest reported quarter were $4.7 million vs $7.4 million for the previous
year's quarter. For the previous 9 months, $16.7 million vs. 21.9 million
for the previous year's 9 months. He stated SCO Mobile is a very
lucrative asset because in many parts of the world people do not have
desktop computers and rely on cell phones; SCO is targeting this market
for future growth. SCO's UNIX assets are very valuable and between them
and the Mobile business, SCO has a great potential for growth in the
future. SCO has no secured debt and $2 million of trade debt.
He went on to say seven out of ten retail systems use Novell technology
(OOOPS! SCO, not Novell); the whole courtroom got a chuckle out of that
slip. McDonald's and the US Military are examples of the very large and
potentially lucrative users of SCO technology.
But, over time revenue has slipped from $230 million to $20 million. That
is due to competition, particularly from Linux, which SCO claims is a
knock-off of SCO's UNIX. SCO has been spending a lot of money to compete,
including a significant amount on PR and that is important for SCO going
SCO has filed for Chapter 11 bankruptcy in order to get its day in court
so management can work on new products and wishes to keep disputes in
bankruptcy court for resolution.
Jones then resumed for SCO and addressed the Joint Administration of Cases
motion (2) which was granted.
Spector then addressed the Business Forms, Employee wages and Temporary
Accounting Staff motions (7, 8 and 14) which were granted. Mr. McMahon,
the US trustee requested they add DIP to their stationary when the
existing stock is exhausted. SCO is addressing cash flow issues with Mr.
Novell then began with Mr. Nashelsky. He stated Novell does not oppose
Chapter 11, but wishes to preserve its rights on counterclaims. Novell
bought UNIX in 1993 and sold certain rights to SCO's predecessor in 1995,
retaining other assets as its own. SCO began the litigation in Utah in
2004, and SUN and Microsoft gave money to SCO for UNIX licenses; under the
August 10 decision, Novell owns the copyrights and the Sun and Microsoft
funds were converted. The only things left to resolve in a 3 to 4 day
bench trial was how much SCO owed for wrongfully retaining Novell's money
and whether SCO had the right to enter into those license agreements in
the first place.
He then asked the judge to lift the stay on the trial to determine how
much SCO owes. The property (money) is not SCO's, but Novell's. There is
no dispute that the SVRx money is Novell's and it should be turned over to
Novell immediately. Kimball so ruled -- it was a breach of fiduciary
duty. SCO is liable for a constructive trust and the trial was to
determine how much. Novell is still demanding (and yet to receive) an
accounting to determine what part of the money is Novell's.
Spector then responded for SCO. He wants a formal motion for a lift stay
(as opposed to today's verbal). All this happened in 2003 on a very
confusing 1995 APA. He also claimed that Novell employees have
interpreted the APA in the same way as SCO. The August 10 ruling in Utah
was a shock to SCO since they had so much evidence in support of their
interpretation. Spector stumbled over the name of the Utah Court judge
and the Bankruptcy judge reminded him it is Kimball.
Nashelsky then replied for Novell. The 95-5 split is clear. SCO knows
the accounting but has comingled our property with theirs. SCO is trying
to use Novell's property. They are not asking for an injunction -- the
amount of the trust is to be determined and should be put in escrow by
Judge Kimball's determination.
The judge then stated that Novell's request would give Novell priority as
a creditor and if he granted it, then everybody coming in front of his
bench would ask for the same.
Nashelsky replied that it is their money, it can be escrowed and SCO
concedes it is Novell's money.
The judge ruled that Novell is not being prejudiced by the denial of a
constructive trust and invited them to file a lift stay motion to proceed
in Utah in front of Kimball. Nashelsky replied that he would file and
will be seeing the judge again.
Spector for SCO then addressed some payroll issues and stated there will
be layoff and severance issues to address to which US Trustee McMann and
Novell concurred. They lost line employees in accounting and not the CFO,
so they need some temps to get out the Annual Report to the SEC. The
judge granted all those requests.
Jones for SCO then addressed the tax and utilities motions (9 and 10)
which the judge granted.
Spector for SCO asked to admit McBride's First Day Pleadings (3) which the
The next hearing date was set for October 5 at 1:30 PM. Spector has a
wedding to attend, but Singerman will fill in for him. The Objection
deadline is set for 4 PM October 20.
At 9:30, it was over.
The impression I get from our reports is that the judge isn't ready to rule on anything substantive until he's up to speed. His worry that there could be other creditors with a claim equal to Novell's is an example. That doesn't mean Novell lost. It means that he wants to see a motion in writing. There was no time for motion practice prior to this hearing, but now the judge wants to see this dispute on paper, and no doubt SCO will respond with any other creditors that might be on an equal footing. I know of none. And that gives other creditors a chance to tell their story to the judge. They all get notices in the mail. So I'd say it is off and running.
Also, you see now what happens when a Groklaw volunteer meets up with Darl McBride. He treats Darl with the respect to which all humans are entitled, and the fellow feeling. All that "most hated man in tech" FUD was never true. It's about the company to us, or I should say the policy of the company, not the individuals.
And here's a report from a third attendee, Groklaw member sylvester:
Boy that was fun, even if the whole thing on the face of it was a non-starter. The Groklaw'rs had no trouble meeting up beforehand, and familiarizing themselves with the surroundings. There were seven of us who identified ourselves to each other, and we spread around the audience area, which was composed of 12 padded benches that could have comfortably seated 60 people. Besides us, there were a couple of gentlemen that appeared to be friendly with the attorneys in front of the bar; they just sat in the middle of the audience and watched. And independent of each other, in the back of the room, a man and woman tethered to the sole electrical outlet, typing feverishly on their laptops throughout the proceeding, who bolted as soon as the hearing was over. Darl left the courtroom as soon as the proceeding was over and milled about the lobby, perfectly willing to exchange pleasantries while the lawyers finished up inside; he pitched the super short form of his argument with the outward conviction that he truly believes what he is saying.
On the right side of the audience, (stage left) those present for SCO were Laura Davis Jones who opened and moderated throughout; Arthur Spector who did most of the addressing the court; Darl McBride himself, who said nothing, and looked like he was struggling to summon up a smile when his attorneys pointed to him as the CEO; and Ryan Tibbits, Stuart Singer & James O'Neill who did not address the court openly.
On the left side of the room the names I caught were Larren Nashelsky who did most of the talking for Novell; Michael Nestor; and Joe McMahon (United States Trustee) who occasionally spoke tersely just to confirm one thing or another. There were several others present with them, but the introduction went by so fast I couldn't capture them.
Attorneys for SCO spoke first.
Ms. Jones spoke first, lots of thank you's and introductions up and back, a particularly big one for the judge opening up a spot on his calendar on short notice after the filing on Friday.
Essentially, Mr. Spector delivered the content of the Darl McBride's prepared declaration in support of first day pleading. He spoke of SCO as a formerly great company with an overriding fiduciary duty to its shareholders, creditors and customers. He portrayed the company as essential to "McDonald's, NASDAQ , and thousands of mid to large customers... to say not a company without significant impact on world economics."
He heavily pitched SCO Mobile as a viable company product offering, capable of supporting the future of the company, if given the chance to mature and evolve. He described it a leading edge voice mail service, citing its use in hurricane ravaged Florida, and "in India, where there are potentially a 100 million people" to deliver their service to. This he postulated, would be the basis for them being a "profitable, tax-paying and wage-paying company," who he cited IDC as calling SCO "among leaders such as Microsoft, RIM and Motorola."
And of course, he attributed the decline of the SCO business to competition from Linux, "which is at least partially, a 'knock-off' of UNIX. And they [Linux] fought back hard. With a very large PR budget."
In summary he stated the objective is to stabilize the company, to ensure their day in court on a number of issues. To give them some 'breathing space'. And to "protect its customers." They promised they intend to keep the lines of communication open with the US Trustee, Joe McMahon. To put a "DIP" (Debtor In Possession) imprint on any new forms and stationary orders, although they tongue-in-cheek "hoped to have matters resolved before the current stock is exhausted."
Novell responded after the first volley
Mr. Nashelsky indicated that Novell is not here to oppose SCO bankruptcy, but are "here to protect and preserve Novell's rights." And on the eve of the case going to trial for the counterclaims, SCO initiated this proceeding. Briefly gave a synopsis of the history of UNIX ownership and the APA in "not too much detail or debating..." the events of the past. He basically repeated the same mantra over many times in referring to SVRx royalties. "It's Novell's property, SCO collects it, SCO administers it, but it's Novell's property."
He spelled out the high points of Judge Kimball's Aug 10th, 102-page ruling denying SCO's summary judgment motions; granting in part for Novell; declaring Novell the rightful owner of the copyrights, SVRx royalties; and the Sun and Microsoft deal "impermissibly converted Novell's property." "What Novell wants... Judge Kimball... lift the stay and liquidate the counter-claims.. . trial to only last 3 to 4 days."
He took issues with the cash management piece. "...will prejudice Novell's right to Novell's property... Novell holds equitable title... No dispute, SVRx royalties, Novell retained. SCO collects 100% and receives 5% administrative fee."
Also took issue with SVRx royalties not turned over being commingled with other monies, that Novell is the equitable owner of the funds. That SCO breached fiduciary duty in SUN and Microsoft deal. That Judge Kimball ruled SCO's "conduct sufficiently wrongful to impose a constructive trust" and that the trial that was to have happened yesterday was to have decided the amount owed. ...until that determination is made, to prohibit SCO from using those funds, and that they be held in escrow and that they provide a detailed accounting of royalties. "We have a right to our property."
Mr. McMahon and the SCO attorneys got up to speak here and there about this and that had been discussed and resolved. Mostly related to expenditures. $20K authorized for accounting temporaries. Something about a "30 day waiver of 345 agreements". And some glowing compliment to McMahon about noticing the differences between 507-A4 and 507-A5 whatevers. Something about dollar amounts. I also recall the touting of "management's wisdom" of having made payroll the day before filing, so that is not presently the issue.
Judge Gross thanks the attorneys for their input.
The judge prefaced his ruling by indicating that although he appreciates Novell's position, he is reluctant to offer them any special treatment here, lest everyone coming into his court would now be begging for the same handling of their cases. As such, he ruled to "enter the order as presented."
Mr. Nashelsky took another swing at the ball by expressing concern of the SVRx royalty revenue stream, Novell's property, the 100% collected less 5% administrative fee, being commingled with other money in SCO's general coffers, and that at least it be ordered that they keep those funds in separate accounts. The judge indicated that he was satisfied that it had been this way all along, and that there was sufficient oversight of the process to maintain the status quo. He basically said he was reluctant to take an extraordinary step of granting Novell any affirmative measures at this point. As far as lifting the stay on the proceedings in front of Judge Kimball, that would be something better left for Novell to make a motion on. Mr. Nashelsky concurred and assured him that it would be forthcoming.
The whole thing took almost an hour, which judging from the new wave of attorneys rolling in at 9:30 for the next proceeding, makes me deduce that it ordinarily would have been a fifteen minute rubber-stamp procedural exercise.
The team then grabbed some food and coffee, shared our observations and discussed our opinions, sent PJ whatever we could from the road, ordered the transcripts, and headed home.
All in all, the middle of the road opinion [mine] is that it met my expectations. I got the feeling that this type of filing is normally a no-brainer, and the Judge Gross was not about to upset the normal way of doing things, in a one-hour initial session. It's also my opinion that SCO bought themselves another short delay, but it will be back in a Utah courtroom eventually anyway. They're pushing Judge Kimball to show yet a little more tolerance of their behavior. I trust that if Judge Kimball has not been goaded into lashing out at them yet, he will continue to have the patience of a saint, and in due time administer the cold-hearted justice they so richly deserve.
It was interesting to see Darl in person, well worth the price of admission. I got the impression he genuinely believes (maybe having lied to himself for so long, it seems true) that he "owns" what he claims as his. He did not exude any of the arrogant confidence he has shown in the past. Rather, he came off as a wounded general who, although he started the war with a shock and awe attitude, has lost his whole army under the fatigue of real fighting, and is now desperately trying to preserve what little he has left, and cheat the hangman. But since this is bankruptcy court, I guess that it all meets expectations, too.
Here are some new filings, including a sign-in sheet showing what lawyers were there today. I note David Melaugh of Morrison & Foerster was there, in addition to the bankruptcy specialists from his firm, as was Stuart Singer from Boies Schiller for SCO:
Filed & Entered: 09/17/2007
Auto-Docket of Credit Card
Docket Text: Receipt of filing fee for Voluntary Petition (Chapter 11)(07-11337) [misc,volp11a] (1039.00). Receipt Number 3054513, amount $1039.00. (U.S. Treasury)
Filed & Entered: 09/18/2007
Order on Motion For Joint Administration
Docket Text: Order Authorizing Joint Administration of Related Chapter 11 Cases: 07-11337 and 07-11338. An order (the "Joint Administration Order") has been entered in this case directing the joint administration of the chapter 11 cases listed below. The docket in case no. 07-11337 should be consulted for all matters affecting this case. The following chapter 11 cases are jointly administered pursuant to the Joint Administration Order: The SCO Group, Inc., Case No. 07-11337; and SCO Operations, Inc., Case No. 07-11338. (Related Doc # ) Order Signed on 9/18/2007. (LCN, )
Filed & Entered: 09/18/2007
Motion to Maintain Bank Accounts
Docket Text: Order Authorizing the Debtors' (I) Maintenance of Existing Bank Accounts, (II) Continued Use of Existing Business Forms, (III) Continued Use of Existing Cash Management System, and (IV) Limited Waiver of Section 345(b) Deposit and Investment Requirements. (Related Doc # ) Order Signed on 9/18/2007. (Attachments: # (1) Exhibit A) (LCN, )
Filed & Entered: 09/18/2007
Order on Motion to Authorize
Docket Text: Order (I) Authorizing the Debtors to (A) Pay Prepetition Wages, Salaries, Commissions, Employee Benefits and Other Compensation; (B) Remit Withholding Obligations; (C) Maintain Employee Benefits Programs and Pay Related Administrative Obligations; and (II) Authorize Applicable Banks and Other Financial Institutions to Receive, Process, Honor and Pay Certain Checks Presented for Payment and to Honor Certain Fund Transfer Requests. (Related Doc # ) Order Signed on 9/18/2007. (LCN, )
Filed & Entered: 09/18/2007
Docket Text: Order (I) Authorizing the Debtors to Pay Prepetition Sales, Use and Similar Taxes and Regulatory Fees in the Ordinary Course of Business and (II) Authorizing Banks and Financial Institutions to Honor and Process Checks and Transfers Related Thereto. (related document(s) ) Order Signed on 9/18/2007. (Attachments: # (1) Exhibit A) (LCN, )
Filed & Entered: 09/18/2007
Docket Text: Order Authorizing and Approving the Retention of and Appointing Epiq Bankruptcy Solutions, LLC, as Noticing, Claims and Balloting Agent. (related document(s) ) Order Signed on 9/18/2007. (LCN, )
Filed & Entered: 09/18/2007
Docket Text: Order (INTERIM) (I) Prohibiting Utility Providers from Altering, Refusing or Discontinuing Service, (II) Deeming Utilities Adequately Assured of Future Performance, and (III) Establishing Procedures for Determining Adequate Assurance of Payment. (related document(s) ) Order Signed on 9/18/2007. (Attachments: # (1) Exhibit A) (LCN, )
Filed & Entered: 09/18/2007
Docket Text: Minutes of Hearing held on: 09/18/2007
Subject: FIRST DAY MOTIONS and FIRST DAY MOTIONS.
(vCal Hearing ID (57050)). (related document(s) ) (SS, ) Additional attachment(s) added on 9/18/2007 (SS, ).