SCO has added another lawyer to the bankruptcy team, John D. Eaton, from the firm of Berger Singerman. The order has been signed.
And financial advisors Mesirow Financial Consulting have filed a supplemental affidavit stating that they won't trade in SCO stock for their own account during the bankruptcy, but giving reasons why they feel they should be allowed to work for SCO and trade in SCO stock on behalf of their clients. This comes after the US Trustee objected [PDF] to their application [PDF]. I'll show you those objections. This is one of the issues that will be argued tomorrow at the hearing. We'll find out then if this adjustment is sufficient to satisfy the US Trustee.
Here's a bit of what Eaton specializes in:
John D. Eaton is a shareholder resident in the Fort Lauderdale office and is a member of Berger Singerman’s Business Reorganization Team. His practice includes representation of creditors, trustees, debtors in possession, committees, and other parties in interest in all aspects of Chapter 7 and Chapter 11 cases and adversary proceedings. Mr. Eaton also has substantial experience in commercial litigation in both state and federal courts. During the course of his career, Mr. Eaton has been primary bankruptcy counsel or has had significant involvement in many complex Chapter 7 and Chapter 11 cases, including but not limited to, CHS Electronics, Commercial Financial Services, The Celotex Corporation, Model Imperial, Inc., Ormet Corporation, PhyAmerica, Pallet Management and USA Labs.
In addition, Mr. Eaton has represented officers and directors with respect to breach of fiduciary duty and other claims involving Directors and Officers insurance policies in connection with the following bankruptcy cases: Renaissance Cruises, Inc., Flagship Healthcare, Unicapital Corporation, Hospital Staffing Services, Inc., Fuzion Wireless Communications, Tropical Sportswear, Aloha Airlines, Regional Diagnostics, LLC, and MercyHealth, Inc.
The order has been signed granting him admission pro hac vice.
Here's the primary objection the US Trustee had to Mesirow being hired:
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....
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).
I understand that to be saying that if they wished to trade for their own account, they had to disclose. Their response is to say that they will not do so. This is one of the issues that will be argued tomorrow at the hearing, so this Affidavit gives you a peek at Mesirow's position. It is:
3. Neither Mesirow Financial nor the Mesirow BD/IA Subsidiaries will trade, on their own behalf, in the Securities of the Debtors during the pendency of these cases. However, subject to the maintenance of the Ethical and Trading Walls described in paragraphs 12 through 14 of the Feltman Affidavit, the Mesirow BF/IA Subsidiaries are authorized to trade, on behalf of their clients, in the Debtors' Securities during the pendency of these cases.
There are also issues the US Trustee sees with regard to "impermissable limitation of liability provisions" in the engagement letter and using subcontractors to provide services under the Agreement without filing separate affidavits disclosing their connections, if any. There was also an issue over jurisdiction over any disputes. I don't see them responding to any of that, but it is possible that they have worked those matters out in discussions. We'll find out tomorrow.
Here are today's filings:
Filed & Entered: 11/05/2007
Order on Motion to Appear pro hac vice
Docket Text: Order Granting Motion for Admission pro hac vice of John D. Eaton. (Related Doc # ) Order Signed on 11/5/2007. (LCN, )
Filed & Entered: 11/05/2007
Docket Text: Affidavit (Supplemental) of Stephen B. Darr in Support of the Debtors' Application for Entry of Order Authorizing the Retention and Employment of Mesirow Financial Consulting, LLC as Their Financial Advisors (related document(s) ) Filed by The SCO Group, Inc.. (Attachments: # (1) Affidavit of Service and Service List) (Werkheiser, Rachel)
Filed & Entered: 11/05/2007
Affidavit/Declaration of Service
Docket Text: Affidavit/Declaration of Service (and Service List) Regarding [Signed] Order Granting Admission Pro Hac Vice of John D. Eaton, Esquire of Berger Singerman, P.A. (related document(s) ) Filed by The SCO Group, Inc.. (Werkheiser, Rachel)
Well, here's a funny addition, to me anyway. It looks to me very much like an oops filing. Remember in IBM's Objection to the asset sale, it wrote that one of the deficiencies in SCO's proposal was a lack of information?
1. SCO Does Not Provide Information on the Sale Process.
Here, SCO has not provided adequate information on which creditors and the Court can evaluate the merits of the sale, the bidding procedures, or the bidding protections. The Motion and the Term Sheet do not provide any information concerning a valuation of the assets being sold or describe the process SCO undertook to sell them. SCO does not provide any information on whether it explored any alternatives to selling substantially all of its assets (such as an internal reorganization, as it told this Court it would do at the First Day Hearing) or whether it could conduct a sale in a less hasty manner. Nor does it offer any reason for its haste. SCO does not describe what other bidders it contacted (if any) or whether there was any other interest in the assets that would make bidder protections such as a break-up fee unnecessary. SCO does not set
forth what process it will follow to market the assets for the auction, whether its financial advisor will participate in the process and, if so, how and to what extent. SCO simply asserts an unsupported conclusion that the sale was entered into to "maximize the value of the Debtors' assets" and will result in the highest and best offer and is in the best interests of the estate. (Mot. ¶ 5.) Without some meaningful indication that a bidding procedure will produce bidders and the highest and best offer, there is no basis on which to approve it and authorize an auction.
And now here comes SCO with a Motion [PDF] for Entry of an Order Authorizing the Expansion of the Scope of Mesirow Financial Consulting, LLC's Retention and Employment to Include Sale and Valuation Services Nunc Pro Tunc As Of October 8, 2007.
Nunc pro tunc just means that the order will cover their alleged services starting with the date October 8, five days after SCO first applied to hire them, even though it won't be signed until tomorrow at the earliest. And what are those services?
a. identifying potential buyers (strategic and financial) of the Debtors assets;
b. managing a bidding process...
c. negotiating with potential purchasers ...
d. evaluating bids received...
Etc. You may have noticed a close match. The nunc pro tunc part makes me smile, as I expect them to tell the court tomorrow that actually Mesirow has been doing the things IBM said they failed to do and they just didn't get it all reported yet. I could be wrong, but there'd be no reason I can see to ask for money to pay past services if they were not going to say there had been some. So, tomorrow, then.
Here's the Notice, Certification, and Proposed Order as well, all PDFs.
Here's the US Trustee's Objections as text. Note that the hearing date changed. Tomorrow is the date of the hearing on this:
UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE
THE SCO GROUP, INC., et al.,
Case Number 07-11337 (KG)
Hearing Date: October 25, 2007 at 4:00 P.M.
OBJECTION OF THE UNITED STATES TRUSTEE TO THE DEBTORS’ APPLICATION FOR ENTRY OF
AN ORDER AUTHORIZING THE RETENTION AND EMPLOYMENT OF MESIROW FINANCIAL
CONSULTING LLC AS THEIR FINANCIAL ADVISORS
(DOCKET ENTRY # 74)
In support of her objection to the Debtors’ application for entry of an order authorizing the retention and employment of Mesirow Financial Consulting LLC (“Mesirow”) as their financial advisors (the “Application”), Kelly Beaudin Stapleton, United States Trustee for Region 3 (“U.S. Trustee”), by and through her counsel, avers:
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 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 (6 th 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 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
(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. Respectfully submitted,
KELLY BEAUDIN STAPLETON UNITED STATES TRUSTEE
BY: /s/ Joseph J. McMahon, Jr.
Joseph J. McMahon, Jr., Esquire (# 4819)
United States Department of Justice
Office of the United States Trustee
[address, phone, fax]
Date: October 23, 2007