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Here Come the Objections to the Asset Sale -- IBM is Baaack
Thursday, November 01 2007 @ 05:03 PM EDT

Both Novell and IBM have filed objections to the proposed assets sale. Novell also responds to the supplemental filing about how fast SCO should pay the undisputed royalties. They still want them immediately because otherwise the royalties "remain at risk in the Debtors' hands." A new Berger Singerman lawyer asks to be added to SCO's team. And a creditor, Bynari, sells his claim to a firm that eats up dying companies' assets/liabilities. I think that's what Argo does, from a quick Google search.

IBM's objections are enjoyable to read. I have missed reading Cravath's filings, so I read that one first. IBM opens with quotations from SCO's representations to the bankruptcy court at the First Day hearing, all of them belied by the precipitous "emergency" motion SCO filed to sell off essentially all of its assets. Remember this? "SCO filed these cases to stabalize its business -- to have a breathing spell"? How about this one: "SCO owes a heavy responsibility to its customers"? Hardy har. I'm sure York will be doing bug fixes. The purpose of Ch. 11 being to gain a little breathing room, not to grab the money and run without even touching the normal bases you are supposed to for such a motion, IBM opposes the sale:

SCO has asked the Court to approve an emergency request to permit the sale of what appears to be much, if not all, of SCO's business assets. The procedure that led to the proposed transaction, the procedure for going forward with it (or an alternative), and the requisite showing of the support for its terms and conditions are all absent. So, too, is any proffered justification for the sale itself or any explanation for SCO's apparent abondonment of its stated intentions when this reorganization proceeding began less than two months ago. Accordingly, IBM requests that the Court deny SCO's Motion.

Ah. IBM is back. The filing is by Cravath and Potter Anderson & Corroon, a Delaware firm. We can read the rest together.

Novell's objection points out that SCO has failed to reveal what relationship, if any, there may be between SCO management and the stalking horse buyer or why this sale is a good idea, not to mention failing to adequately describe what is being sold, since "it offers only a preliminary term sheet". More nuggets in the complete list of things that show the Sale Motion to be deficient:

  • fails to establish grounds for a sale of substantially all the Debtors' assets outside a plan in terms of both why there should be such a sale at all outside a plan and whether this sale is reasonable (e.g., the Debrors offer no description or evidence of prior marketing or other alternative disposition efforts, not any disclosure about the relationship between Debtors and their management, on the one hand, and the stalking horse buyer, on the other);
  • fails to provide adequate information on the factors that may affect what already is a largely illusory, nominal $36 million sale price (e.g., representations and warranties, possible cure amounts for assigned executory agreements);
  • purports to sell assets whose ownership by the Debtors is, to put it mildly, in serious question; and
  • grants the stalking horse buyer very generous breakup fee and cost reimbursement benefits without any justification whatsoever.

Good points. Especially the first one. Here's what I'd suggest: that Novell investigate whether there is a connection between York, IP Innovations/Acacia, and Microsoft. Novell points out that SCO is proposing to sell assets that the US District Court in Utah has already ruled belong to Novell. But it also, Novell says, "seeks to sell other assets as to which Novell has at least partial ownership."

I also enjoyed Novell's handling of the "unclean hands" claim in its Reply in Support of Motion for Order Directing the Debtors to Remit Undisputed Future Royalties to Novell Upon Receipt:

Novell's Hands Are Clean

8. Finally, SCO claims that a supposed breach by Novell of the APA precludes the relief Novell seeks. Putting aside whether Novell breached the APA, which Novell contests, the point is entirely irrelevant to the current motion. Even under SCO's version of events, it has acquiesced to the payment arrangements it describes -- whereby SCO withholds its 5% from the following month's payment -- for over four years.

9. The Debtor establishes no link between Novell's alleged breach some years past and the relief they now seek to prevent, and cite no authority at all supporting their argument. The APA is governed by California law under which, "[t]he misconduct which brings the unclean hands doctrine into operation must relate directly to the transaction concerning which the complaint is made, i.e., it must pertain to the very subject matter involved and affect the equitable relations between the litigants." Fibreboard Paper Prods. Corp. v. East Bay Union of Machinists 227 Cal. App. 2d 675, 728 (Cal. Ct. App. 1964) ("relief is not denied because the plaintiff may have acted improperly in the past or because such prior misconduct may indirectly affect the problem before the court"). The misconduct must infect the cause of action before the court. Id. This is not the case here: the Motion seeks immediate remittance and the purported breach is over non-payment of administrative fees (which the Debtors admit were eventually paid via setoff). Thus, the "unclean hands" doctrine does not apply....

11. In any event, the Debtors were first to breach the APA, which they did in late 2002 by failing to remit royalties as agreed. See, e.g., Exhibit B. So by their own reasoning, they themselves are prevented from having equity favor them in the first instance. If they are not so prevented, then for the same reason, nor is Novell.

Don't you love it? What's good for the goose is good for the gander.

Here are all the documents:

175 - Filed & Entered: 11/01/2007
Transfer/Assignment of Claim
Docket Text: Transfer/Assignment of Claim. Transfer Agreement 3001 (e) 1 Transferor: Bynari, Inc.(Amt. $5,209.58) To Argo Partners. Filed by Argo Partners. (Gold, Matthew)

176 - Filed & Entered: 11/01/2007
Motion to Appear pro hac vice (B)
Docket Text: Motion to Appear pro hac vice of John D. Eaton. Receipt Number 149415, Filed by The SCO Group, Inc.. (Jones, Laura Davis)

177 - Filed & Entered: 11/01/2007
Reply (A)
Docket Text: Reply to Debtors' Response to Motion for Relief From Automatic Stay to Proceed with District Court Action to (I) Apportion Revenue from SCOscource Licenses and (II) Determine SCO's Authority to Enter into SCOsource Licenses, Etc. (related document(s)[150], [89] ) Filed by Novell, Inc. (Attachments: # (1) Exhibit) (Greecher, Sean)

178 - Filed & Entered: 11/01/2007
Reply (A)
Docket Text: Reply in Support of Motion for Order Directing the Debtors to Remit Undisputed Future SVRX Royalties to Novell Upon Receipt (related document(s)[167], [166], [90] ) Filed by Novell, Inc. (Attachments: # (1) Exhibit A # (2) Exhibit B) (Greecher, Sean)

179 - Filed & Entered: 11/01/2007
Docket Text: Objection to Emergency Motion of the Debtors for An Order (A) Approving Asset Purchase Agreement, (B) Establishing Sale and Bidding Procedures, and (C) Approving the Form and Manner of Notice of Sale (related document(s)[149] ) Filed by Novell, Inc. (Greecher, Sean)

180 - Filed & Entered: 11/01/2007
Docket Text: Objection to Debtors Emergency Motion For An Order (A) Approving Asset Purchase Agreement, (B) Establishing Sale And Bidding Procedures, And (C) Approving The Form And Manner Of The Notice Of Sale (related document(s)[149] ) Filed by IBM Corp. (Attachments: # (1) Addendum A # (2) Certificate of Service) (Silverstein, Laurie)

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