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To read comments to this article, go here
US Trustee Objects to Boies Schiller Conducting SCO's Bankruptcy Case; Wants Role Narrowed; Looking at Fees - Updated 2Xs
Friday, November 02 2007 @ 01:10 PM EDT

Here's a development nothing short of breathtaking to me: the US Trustee in the SCO bankruptcy, Kelly Beaudin Stapleton, by the US Trustee Trial Attorney assigned to this case, Joseph J. McMahon, Jr., has filed an Objection [PDF] to Boies Schiller being used by SCO to conduct its bankruptcy case. He says the firm's role must be limited:
6. Section 327(e) prohibits special counsel from representing the Debtors in conducting their case....Accordingly, BSF's proposed scope of employment ... should be narrowed to refect that the firm will not be addressing bankruptcy issues before this Court or be otherwise involved in conducting these cases."

Here's Bankruptcy Code Section 327. He quotes a statute that says a debtor can, with court approval, retain "for a specified special purpose, other than to represent the trustee in conducting the case, an attorney that has represented the debtor". I'm not 100% clear on this. I gather, from the footnote, that SCO as debtor-in-possession is the equivalent of the trustee for itself at the moment, for at least as long as they don't get one assigned, as they would in Chapter 7. That's a trustee for the estate; the US Trustee is a different role. That role is described as, in part, that of a watchdog, looking out for the public interest. So, as I understand the situation so far, SCO asked for BSF to be "special litigation counsel", and I think the US Trustee is saying that any order needs to specifically narrow and set forth the scope of what BSF is allowed to do. In the bankruptcy, I gather it can't do much.

If BSF's role is narrowed, then their fees logically will be too. No? Am I missing something? Unless BSF planned only a very narrow role, I think that is the logical conclusion. That's fees going forward. How about going backward? Mr. McMahon wants to know if the funds paid to Boies Schiller back in 2004 onward are in the nature of a retainer and hence now part of the SCO bankruptcy estate. That question informs us that it is possible that BSF might have to disgorge some of the money it got from SCO. He wants the amount of money paid to Boies disclosed, and he's looking into the fee-sharing element as to how it "intersects" with Bankruptcy Code provisions. He says Stuart Singer, in his Declaration in support of the motion regarding Boies Schiller's retention, did not disclose Boies Schiller's "connection" as required by the Federal Rules of Bankruptcy Procedure 2014(a) and so the court shouldn't rule on the application until those disclosures are made. He reserves his right to object further after that.

I don't want to be presumptuous in any way, or get the hopes up unduly of those who have been longing for what you feel would be justice, but this feels like the cavalry has finally arrived. Note paragraphs 8 and 9:

8. The Application suggests that BSF is holding monies previously paid to the firm by the Debtors pursuant to paragraphs a, b, and/or c (pages 1-2) of the October 31, 2004 engagement letter (appended as Exhibit A to the Application). The amount of those monies needs to be disclosed, as well as the Debtors'/BSF's position as to whether those funds are retainer funds which are property of the Debtors' estate.

Fees Need to Be Subject to Review Under Standard Employed in 11 U.S.C. § 330(a)

9. The fees payable to BSF (including fees payable to a Litigation Recovery or a Transaction Recovery) need to be subject to review by this Court under the standard set forth in 11 U.S.C. § 330. More specifically, the compensation terms of the October 31, 2004 engagement letter should not be "pre-approved" under the standard identified in 11 U.S.C.§ 328(a).

As I say, don't leap to conclusions. For one thing, the judge is not obligated to agree with the US Trustee, if he thinks he's gotten a point wrong. The US Trustee is reviewing and asking the court to limit BSF participation and not to rule on the motion until he can present the court with the office's position on a number of issues he identifies. I get the feeling this may be in part an outgrowth of the US Trustee's questions at the 341 Hearing about Kevin McBride. So, at the moment, that's where it stands. Nothing beyond that. But doesn't it feel good to know that somebody is finally asking the questions you've been asking?

For those of you planning on attending the November 6, 2007 hearing, please note there is a change of time. It will begin at 10 AM. It will not include the motion regarding the sale of assets. That will have its own special hearing on November 16, beginning at 4 PM.

Update: Now the folks who've been suing Caldera, now SCO forever and a day over the IPO have filed a request for notices. I'm telling you, I'm starting to hear the sound of flapping wings... all the chickens are coming home to roost.

Update 2: A lot of you were asking about the IPO litigation. Here's an article I did back in November of 2003, which will at least provide you with the context and how it all began.

Here are the filings:

181 - Filed & Entered: 11/02/2007
Objection
Docket Text: Objection to the Debtors' Application, Pursuant to 11 U.S.C. secs. 327(e), 328 and 330, for Approval of the Employment of Boies, Schiller & Flexner LLP as Special Litigation Counsel to the Debtors Nunc Pro Tunc to the Petition Date (related document(s)[115] ) Filed by United States Trustee (Attachments: # (1) Certificate of Service) (McMahon Jr., Joseph)

182 - Filed & Entered: 11/02/2007
Certificate of No Objection
Docket Text: Certificate of No Objection Regarding Docket No. [143] - Motion to File Under Seal Exhibits to Affidavit of Felix Imendoerffer Pursuant to Bankruptcy Code Section 107(b) and Fed.R.Bankr.P. 9018 (related document(s)[143] ) Filed by SUSE Linux GmbH. (Greecher, Sean)

183 - Filed & Entered: 11/02/2007
Notice of Matters Scheduled for Hearing (B)
Docket Text: Notice of Agenda of Matters Scheduled for Hearing Please Note: Hearing Time Has Been Changed to 10:00 a.m. Filed by The SCO Group, Inc.. Hearing scheduled for 11/6/2007 at 10:00 AM at US Bankruptcy Court, 824 Market St., 6th Fl., Courtroom #3, Wilmington, Delaware. (Attachments: # (1) Certificate of Service and Service List) (O'Neill, James)

184 - Filed & Entered: 11/02/2007
Affidavit/Declaration of Service
Docket Text: Affidavit/Declaration of Service of Kimberly A. Beck re: Docket Nos. [177], [178] and [179] - Novell, Inc.'s 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. [177]; Novell, Inc.'s Reply in Support of Motion for Order Directing the Debtors to Remit Undisputed Future SVRX Royalties to Novell Upon Receipt [178]; and Novell's 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 [179] (related document(s)[177], [178], [179] ) Filed by Novell, Inc.. (Nestor, Michael)

185 - Filed & Entered: 11/02/2007
Notice of Appearance(B)
Docket Text: Notice of Appearance and Request for Service of Papers Filed by Plaintiffs' Executive Committee. (Crow, John)

Here's is the US Trustee's Objection, as text:

*******************************************

UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE

In re:

The SCO Group, Inc., et al.,

Debtors.

Chapter 11

Case No. 07-11337 (KG)
(Jointly Administered)

Hearing Date: November 6, 2007 at 2:00 p.m. (ET)

OBJECTION OF THE UNITED STATES TRUSTEE TO THE DEBTORS’
APPLICATION, PURSUANT TO 11 U.S.C. §§ 327(e), 328 AND 330, FOR APPROVAL
OF EMPLOYMENT OF BOIES, SCHILLER & FLEXNER LLP AS SPECIAL
LITIGATION COUNSEL TO THE DEBTORS
NUNC PRO TUNC TO THE PETITION DATE
(DOCKET ENTRY # 115)

In support of her objection to the Debtors' application, pursuant to 11 U.S.C. § 327(e), 328 and 330, for approval of the employment of Boies, Schiller & Flexner LLP ("BSF") as special litigation counsel to the Debtors nunc pro tunc to the Petition Date (the "Application"), Kelly Beaudin Stapleton, United States Trustee for Region 3 ("U.S. Trustee"), by and through her counsel, avers:

INTRODUCTION

1. Under (i) 28 U.S.C. § 1334, (ii) (an) applicable order(s) of the United States District Court for the District of Delaware issued pursuant to 28 U.S.C. § 157(a), and (iii) 28 U.S.C. § 157(b)(2), this Court has jurisdiction to hear and determine the Application and this objection.

2. Under 28 U.S.C. § 586(a)(3)(I), the UST is charged with monitoring applications filed under 11 U.S.C. § 327 "and, whenever the United States trustee deems it to be appropriate, filing with the court comments with respect to the approval of such applications." This duty is part

1

of the U.S. Trustee's responsibility to enforce the laws as written by Congress and interpreted by the courts. See United States Trustee v. Columbia Gas Sys., Inc. (In re Columbia Gas Sys., Inc.), 33 F.3d 294, 295-96 (3d Cir. 1994) (noting that UST has "public interest standing" under 11 U.S.C. § 307 which goes beyond mere pecuniary interest); Morgenstern v. Revco D.S., Inc. (In re Revco D.S., Inc.), 898 F.2d 498, 500 (6th Cir. 1990) (describing the UST as a "watchdog").

3. Under 11 U.S.C. § 307, the U.S. Trustee has standing to be heard on the Application and the issues raised in this objection.

GROUNDS/BASES FOR RELIEF

4. The U.S. Trustee objects to the Application on the grounds identified below. Scope of Employment Needs to Be Limited

5. 11 U.S.C. § 327(e) ("Section 327(e)") of the Bankruptcy Code states that a chapter 11 debtor in possession1 may employ,

with the court's approval, for a specified special purpose, other than to represent the trustee in conducting the case, an attorney that has represented the debtor, if in the best interest of the estate, and if such attorney does not represent or hold any interest adverse to the debtor or to the estate with respect to the matter on which such attorney is to be employed. (Emphasis added).

6. Section 327(e) prohibits special counsel from representing the Debtors in conducting their cases. See In re Neuman, 138 B.R. 683, 686 (S.D.N.Y. 1992) ("[I]t is clear both from the language of § 327(e) and from the framework of § 327 more generally that, even if there is a special purpose, it is crucial that the appointment not be part of the trustee's general duty of conducting the

2

case.") Accordingly, BSF's proposed scope of employment (described in paragraph 9 of the Application) should be narrowed to reflect that the firm will not be addressing bankruptcy issues before this Court or be otherwise involved in conducting these cases.

Rule 2014(a) Disclosures Need to Be Made

7. In paragraph 10 of his declaration in support of the Application, Stuart H. Singer, Esquire did not disclose BSF's "connections" as required by Federal Rule of Bankruptcy Procedure 2014(a). This Court should not rule on the Application until those disclosures are made. The U.S. Trustee reserves the right to amend or supplement this objection at or prior to the hearing in light of subsequent disclosures by BSF under Rule 2014(a).

Amount of Monies Held by BSF and Status Thereof Needs to Be Clarified

8. The Application suggests that BSF is holding monies previously paid to the firm by the Debtors pursuant to paragraphs a, b, and/or c (pages 1-2) of the October 31, 2004 engagement letter (appended as Exhibit A to the Application). The amount of those monies needs to be disclosed, as well as the Debtors'/BSF's position as to whether those funds are retainer funds which are property of the Debtors' estates.

Fees Need to Be Subject to Review Under Standard Employed in 11 U.S.C. § 330(a)

9. The fees payable to BSF (including fees payable pursuant to a Litigation Recovery or a Transaction Recovery) need to be subject to review by this Court under the standard set forth in 11 U.S.C. § 330. More specifically, the compensation terms of the October 31, 2004 engagement letter should not be "pre-approved" under the standard identified in 11 U.S.C. § 328(a).

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Retention, Compensation Sharing Provisions of Engagement Letter

10. The engagement letter provides for BSF's employment of counsel to assist it with the litigation matters and the sharing of monies received from the Debtors with other firms, including certain professionals that have been (or are proposed to be) retained by the Debtors' estates. The U.S. Trustee is reviewing how those provisions intersect with the Bankruptcy Code's provisions governing employment of professionals and prohibiting fee sharing (see 11 U.S.C. §§ 327, 504) and will report to the Court regarding her position on these provisions at or before the hearing.

Disputes Related to Employment Subject to Bankruptcy Court Jurisdiction

11. On page 5 of the engagement letter, there is a provision for submission of disputes between the parties to arbitration. Consistent with this Court's prior guidance, in the event that the Application is approved, disputes relating to BSF's employment by the Debtors must be submitted to the jurisdiction of this Court in the first instance. See In re United Cos. Fin. Corp., 241 B.R. 521 (Bankr. D. Del. 1999).

[Continued on next page space intentionally left blank]

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CONCLUSION

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

Respectfully submitted,

KELLY BEAUDIN STAPLETON
UNITED STATES TRUSTEE

BY: /s/ Joseph J. McMahon, Jr.
Joseph J. McMahon, Jr., Esquire (# 4819)
Trial Attorney
United States Department of Justice
Office of the United States Trustee
J. Caleb Boggs Federal Building
[address, phone, Fax]

Date: November 2, 2007


1 Although Section 327(e) refers to the "trustee," pursuant to 11 U.S.C. § 1107 most of the rights, powers, and duties of a trustee in a chapter 11 case are conferred upon the debtor in possession. This includes the trustee's power to employ professional persons under 11 U.S.C. § 327. See United States Trustee v. Price Waterhouse, 19 F.3d 138, 141 (3d Cir. 1994); see also Fed. R. Bankr. P. 9001(10) ("`Trustee' includes a debtor in possession in a Chapter 11 case.").

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