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The US Trustee Files Three Objections
Tuesday, October 23 2007 @ 11:38 AM EDT

Today is the day that the US Trustee in the SCO bankruptcy woke up. I'd say the gravy train is over, or at least the rubber stamping of SCO's filings. The trustee objects to SCO's request to use Mesirow Financial Consulting, to its request regarding severance pay and to sealing certain documents. The latter two SCO filings you'll find here. In the objection to the SCO request to maintain its severance policy, the trustee objects on several grounds, but this is my favorite:
6. Third, the Debtors appear to suggest in paragraph 7 of the Motion that, while the “general parameters” of the Severance Policy are outlined in paragraph 6 of the Motion, the Debtors’ Board of Directors has unlimited discretion to approve severance payments that exceed those “general parameters.” Simply put, this Court should not be giving the Debtors’ management a blank check to authorize severance payments in any amount going forward.

Ah, yes. I'd say that the gestank of SCO has begun to waft through Delaware. You'll note the footnote on that page too:

Debtors’ counsel advised undersigned counsel that the Debtors were withdrawing their request to make severance payments to the terminated Chief Financial Officer and the Vice President, Finance, without prejudice to their rights to renew their request for relief relating to those individuals.

Note also the agenda for the hearing on October 25th. It notes that SCO offers to amend, but says that the matter should go forward, because not all of the trustee's issues were resolved. So, that's October 25th at 4 PM.

There are three objections filed, or more precisely two and one limited objection:

145 Filed & Entered: 10/23/2007
Objection
Docket Text: Objection to Debtors' Application for Entry of an Order Authorizing the Retention and Employment of Mesirow Financial Consulting LLC as Their Financial Advisors (related document(s)[74] ) Filed by United States Trustee (Attachments: # (1)Certificate of Service) (McMahon Jr., Joseph)

146 - Filed & Entered: 10/23/2007
Objection
Docket Text: Objection to the Debtors' Motion for Authorization to (I) Continue Prepetition Severance Policy Applicable to All Employees and (II) Pay Severance and Accured Benefits to Employees Terminated Postpetition (related document(s)[116] ) Filed by United States Trustee (Attachments: # (1) Certificate of Service) (McMahon Jr., Joseph)

147 - Filed & Entered: 10/23/2007
Objection
Docket Text: Limited Objection to the Debtors' Motion to File Under Seal Documents and Data Subject to Debtors' Motion for Authorization to (I) Continue Prepetition Severance Policy Applicable to All Employees and (II) Pay Severance and Accured Benefits to Employees Terminated Postpetition (related document(s)[118] ) Filed by United States Trustee (Attachments: # (1) Certificate of Service) (McMahon Jr., Joseph)

148 - Filed & Entered: 10/23/2007
Notice of Matters Scheduled for Hearing (B)
Docket Text: Notice of Agenda of Matters Scheduled for Hearing Filed by The SCO Group, Inc.. Hearing scheduled for 10/25/2007 at 04:00 PM at US Bankruptcy Court, 824 Market St., 6th Fl., Courtroom #3, Wilmington, Delaware. (Attachments: # (1) Certificate of Service and Service List) (O'Neill, James)

The objection to sealing documents includes this:

6. There is a strong, compelling presumption of open access to judicial records and proceedings in civil matters. See 11 U.S.C. § 107(a) (“Except as provided in subsections (b) and (c) of this section and subject to section 112, a paper filed in a case under this title and the dockets of a bankruptcy court are public records and open to examination by an entity at reasonable times without charge.”); United States v. Continental Airlines, Inc. (In re Continental Airlines), 150 B.R. 334, 340 (D. Del. 1993) (citing In re Revco D.S., Inc., No. 588-1308, 1990 WL 269887 (Bankr. N.D. Ohio Dec. 30, 1990)); cf. Pansy v. Borough of Stroudsburg, 23 F.3d 772, 785-86 (3d Cir. 1994) (discussing public interest in access to court records). In In re Foundation for New Era Philanthropy, No. 95-13729, 1995 WL 478841 (Bankr. E.D. Pa. 1995), the court observed:
[Section 107(b)] was not intended to save the debtor or its creditors from embarrassment, or to protect their privacy in light of countervailing statutory, constitutional and policy concerns . . . . Full disclosure of bankruptcy records may help insure that the bankruptcy statute is applied effectively in this case. It may also assist governmental entities in the performance of their duties vis-a-vis this debtor and its officers . . . . Thus, there are significant public concerns which favor full public access to all documents filed in this case. Id. at *4, 6.

7. The Debtors are obligated under applicable securities law to make disclosures regarding compensation and related benefits paid to insiders. Accordingly, to the extent that this Court grants relief, it should be limited consistent with that obligation.

The objections to Mesirow are the following:

4. The U.S. Trustee objects to the Application on the following grounds: (a.) After reviewing the disclosures made by Mesirow in paragraphs 12 and 13 of the Application, it appears that MFI, Mesirow’s affiliated broker-dealer, believes that it may purchase and sell the Debtors’ securities for its own account without affecting Mesirow’s eligibility for professional employment in these cases. Feltman Aff. ¶ 13 (“In the ordinary course of business, Mesirow Financial, Inc. (“MFI”), Mesirow Financial’s affiliated broker-dealer, may purchase or sell securities on a principal or agency basis . . . . The securities transacted by the Mesirow BD/IA Subsidiaries may include securities issued by the Debtors, creditors, stakeholders or other parties-ininterest in these cases (“Related Securities”)). The U.S. Trustee can envision a scenario under which MFI’s position in the Debtors’ equity securities may disqualify Mesirow from employment by the Debtors under 11 U.S.C. §§ 327(a) and 101(14)(C) by making Mesirow a person that is not disinterested, notwithstanding any “ethical walls” which may be in place. Accordingly, while the U.S. Trustee believes that it would be preferable if the Mesirow BD/IA Subsidiaries agreed not to hold or trade in securities issued by the Debtors for their own account, if MFI and/or the Mesirow BD/IA Subsidiaries intends to hold or trade in securities issued by the Debtors for their own account, Mesirow has to disclose such holdings or trades pursuant to Federal Rule of Bankruptcy Procedure 2014(a).

(b.) Paragraph 9 of the Engagement Letter provides that “[i]nvoices will be presented every month and are due upon presentation. All fees and expenses incurred must be paid prior to our issuance of reports or rendering of deposition or trial testimony.” Paragraph 2 of Mesirow’s “Standard Terms and Conditions for Advisory Services” (appended to the Engagement Letter) (the “Standard Terms”) contains similar language. The proposed form of order should clarify that, notwithstanding anything contained in the Application, the Engagement Letter or the Standard Terms to the contrary, payment of compensation and reimbursement to Mesirow will be made in accordance with the procedures set forth in the Bankruptcy Code and related rules.

(c.) Paragraph 6 of the Standard Terms (titled “Limitation on Damages”) is an impermissible limitation of liability provision which should be struck from the Terms. See In re United Cos. Fin. Corp., 241 B.R. 521 (Bankr.D.Del. 1999); In re Dailey Int’l, No. 99-1233 (Bankr. D. Del. July 1, 1999).

(d.) Paragraph 7 of the Standard Terms (titled “Indemnification”) and the corresponding language relating to indemnity in the proposed form of order should be modified to provide that breach of contract is not an indemnity-eligible activity. See United Artists Theatre Co. v. Walton (In re United Artists Theatre Co.), 315 F.3d 217, 234 (3d Cir. 2003).

(e.) Paragraph 14 of the Standard Terms (titled “Assignment”) provides that Mesirow may use subcontractors to provide services under the Agreement. To the extent that Mesirow uses subcontractors, they should be required to file separate affidavits disclosing their connections as required by Rule 2014(a).

(f.) Paragraph 17 of the Standard Terms (titled “Arbitration”) is inconsistent with this Court’s prior guidance regarding its primary jurisdiction over disputes relating to professional employment in bankruptcy cases. See In re United Cos. Fin. Corp., 241 B.R. 521 (Bankr.D.Del. 1999).

CONCLUSION

WHEREFORE the U.S. Trustee requests that this Court issue an order denying the Application or granting other relief consistent with this objection.

Mesirow, if you recall, has already been paid a $35,000 retainer. And finally, the full grounds for the objection to the severance/bonus policy:

GROUNDS/BASIS FOR RELIEF

Administrative Expense Standard

4. 11 U.S.C. § 503(b)(1)(A) provides that, “[a]fter notice and a hearing, there shall be allowed administrative expenses, other than claims allowed under section 502(f) of this title, including the actual, necessary costs and expenses of preserving the estate . . . .” First, the U.S. Trustee leaves the Debtors to their burden to establish that the proposed payments under the Severance Policy represent the “actual, necessary costs and expenses of preserving the [Debtors’] estate[s].”

5. Second, the Severance Policy appears to be a hybrid plan which compensates an employee for termination in lieu of notice as well as provides credit for length of the employee’s service to the Debtors. Mot. ¶ 6 (summarizing Severance Policy). Under governing Circuit law, any payments relating to the length-of-service component of the Severance Policy are subject to proration into their pre-petition and post-petition components, with only the post-petition component receiving administrative expense treatment. See Former Employees of Builders Square Retail Stores v. Hechinger Inv. Co. (In re Hechinger Inv. Co.), 298 F.3d 219, 227 (3d Cir. 2002) (“Severance pay at termination based on length of employment is given in consideration of work performed both preand post-petition, and thus not all such pay is entitled to treatment as an administrative expense.”). Accordingly, the U.S. Trustee objects to the relief requested in the Motion to the extent it attempts to allow the length-of-service components of the proposed payments as administrative expenses of the Debtors’ estates without the required proration.

6. Third, the Debtors appear to suggest in paragraph 7 of the Motion that, while the “general parameters” of the Severance Policy are outlined in paragraph 6 of the Motion, the Debtors’ Board of Directors has unlimited discretion to approve severance payments that exceed those “general parameters.” Simply put, this Court should not be giving the Debtors’ management a blank check to authorize severance payments in any amount going forward. Given that the Debtors’ employees have no assurance that payments will exceed the “general parameters,” limiting the Debtors’ authority to authorize severance payments to those defined parameters provides some limits on the administrative cost of the Severance Policy. Alternatively, in the event that this Court were to permit the Debtors’ Board of Directors (or any other entity) to authorize payments outside of the “general parameters,” there should be subsequent notice of any such payments and an opportunity for objection to ensure that there is a check on administrative costs. The aforementioned limitations are particularly appropriate in light of the fact that an official committee of unsecured creditors has not been appointed in these cases.

Calculation of Severance Payments to Insiders 1

7. 11 U.S.C. § 503(c)(2) prohibits this Court from either allowing or paying severance to an insider of the Debtors under 11 U.S.C. § 503(b) unless two criteria are met: first, “the payment is part of a program that is generally applicable to all full-time employees;” and second, “the amount of the payment is not greater than 10 times the amount of the mean severance pay given to nonmanagement employees during the calendar year in which the payment is made.” 11 U.S.C. § 503(c)(2)(A, B).

8. Given that the Debtors are seeking authority to make payments under the Severance Policy going forward, there will have to be subsequent notice with an opportunity to object for payments proposed to be made to those persons who are “insider[s],” including those persons who have been appointed officers under corporate bylaws. This Court does not know when future severance payments to “insider[s]” will be made – theoretically, they could be made in 2008 – and what the calculation of mean severance pay to nonmanagement employees will be as of that future point in time. Thus, the notice mechanism proposed by the U.S. Trustee is necessary to ensure that the limitation contained in 11 U.S.C. § 503(c)(2)(B) is observed.

Payment of Accrued PTO

9. At the “first day” hearing, the U.S. Trustee obtained the Debtors’ agreement that any pre-petition employment compensation or benefit payments paid pursuant to the “pre-petition wages” motion would be subject to the caps identified in 11 U.S.C. §§ 507(a)(4) and (a)(5). Provided that the same limitation governs the proposed paid time off “cash out” (inclusive of payments already made), the U.S. Trustee does not object to the grant of that relief.

CONCLUSION

WHEREFORE the U.S. Trustee requests that this Court issue an order denying the Motion or granting other relief consistent with this objection.


1 Debtors’ counsel advised undersigned counsel that the Debtors were withdrawing their request to make severance payments to the terminated Chief Financial Officer and the Vice President, Finance, without prejudice to theier rights to renew their request for relief relating to those individuals.


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