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SCO Agrees With Itself (Technically with its New Subsidiary Cattleback) to Give Itself Some Bonuses - Updated
Wednesday, November 07 2007 @ 12:24 AM EST

All rise, please. The word fraud has just entered the courtroom. And it's SCO who has first uttered it. Of course, it denies it.

It has filed a document, proposing a settlement with itself (technically with its newborn subsidiary, Cattleback Holdings, born on July 17), regarding a sale of a patent which was transferred to the subsidiary without consideration quite recently, whereby they'd like the court to say it's OK that they did that and let them pay some unnamed employees some bonuses, prepetition don't you know, and the document tells all about why it isn't a fraudulent transfer.

Even if it is another asset sold off that Novell and the other sadsack creditors whom no one in that courtroom in Delaware cares one bit about, I gather, can't get full value from. No bonuses for creditors. What, are you mad? "All gone!" I imagine I hear Mr. Spector tell the court someday soon, "so where's the harm to Novell now?" Shazam! It all got spent on lawyers and financial advisers and now a fair chunk, if SCO gets its way, to the folks who found the buyer for the patent, after great labors for which it must be paid, Ocean Tomo, who call themselves "the leading Intellectual Capital Merchant Banc® firm that specializes in understanding and leveraging Intellectual Property assets." But this article about Intellectual Ventures, started by two ex-Microsoft executives, Edward Jung and Nathan Myhrvold, calls it a patent auctioneer:

Also complementary to Intellectual Ventures' operations is patent auctioneer Ocean Tomo. "An auction is a great way of setting prices. We’ve participated in Ocean Tomo auctions...as buyers and sellers," Jung said.

Small world, isn't it?

Now, SCO is worried that there might be some nitpicky types, like creditors and whatnot, who might argue that "a transfer for no consideration made by a chapter 11 debtor shortly before its entry into chapter 11 should be avoided as a fraudulent transfer." I might think that way myself, now that they mention it. "In lieu of filing a lawsuit against its wholly-owned subsidiary," SCO helpfully suggests, "the Debtor has agreed to the following resolution of the incipient dispute." Um. Agreed with whom? Who is Cattleback? Are there humans there? Other than Darl and his gang of cowboys? His wife? Who?

Here's the deal SCO offers, and I'm sure this was a hard-fought compromise after blazing gun battles with the Cattleback posse:

  • Cattleback gets paid for the patent and pays SCO $570,000, the full amount offered, (and may I inquire the last time a patent was worth that little if it had any value at all?) to SCO, and Cattleback will pay everything that was incurred by the Debtor for the development and marketing of the patent. With what? Did money get transferred to that subsidiary too?
  • SCO must pay Ocean Tomo, the folks that found the unnamed buyer, the balance that it owes them for that laborious task, and the balance they are owed is $60,500. That's the *balance* on a $570,000 deal? What did they get already?
  • SCO says it owes the inventor and unnamed "several employees" a cut, to the tune of $45,000 split between them, whoever they are. They have to pay themselves, unfortunately, since the marketing agreement says so. They are "obligated by the marketing agreement". Those are the breaks. Evidently SCO lost the poker hand, got into this marketing agreement, and now it can't escape, and SCO has to pay its employees money. Whoever they are. Drat.
  • That leaves $464,500 for SCO Group "in full and final satisfaction of any claims that the Debtor may have against" Cattleback. Like they are really fighting.

Hence the word fraud might start floating past in middle space... so before such a horrible thought takes root in anyone's brain, SCO explains why it is not a fraud:

  • It's cheaper than litigating the controversy between SCO and itself...er.. I mean Cattleback
  • the judge has discretion, and settlements are encouraged and the court should only look and see whether the settlement "falls below the lowest point in the range of reasonableness." Well. Not hard to leap over that bar, I'd say. They might just get this approved if that's all it takes.
  • True, a transfer made for no consideration within a year before bankruptcy -- let alone two months before -- is avoidable if the transfer was made with the intent to "hinder, delay or defraud a creditor" ... heaven forfend. Or if the transfer was made when the transferor was insolvent or would make him so. How about if he woke up and smelled the coffee, knew bankruptcy was almost inevitable, and set up a straw subsidiary to siphon off an asset so Novell couldn't get it? Well. There goes my wild imagination again. Skip that. SCO says it's paying itself the proceeds of a "market-based sale", so that's better than the lowest point in the range of reasonableness.
  • It was Ocean Tomo that advised SCO to set up Cattleback after all. It never entered SCO's pretty little head to defraud any creditor. No. This isn't a bit like that.
  • SCO was solvent in July so it can't be faulted on that account. True, and it still is, so why is it in bankruptcy court? A cynic might say for the same reason it set up the newborn subsidiary and transfered an asset without consideration. The wind was blowing all one way, and SCO stuck its finger in the air. Or maybe it heard Novell tell the judge in Utah that for SCO bankruptcy was inevitable and imminent and caught a clue. No, not at all. SCO was solvent, so no one can prove it's a fraud. No sir, "there is no evidence of actual intent nor any badge of fraud to substitute for such evidence that would support a recovery." Badge of fraud? That's a new phrase to me. My imagination takes wings. Surely there could be no more worthy recipient of such an honor. I didn't know they have badges for that. Well, whoever can design a badge of fraud, please send it to me, so we can start thinking of an award ceremony. Joke. Joke. Here's what it means. And here is a ruling where the court goes into detail. The short version is that because it's hard to know or prove intent, being inside your noggin, they look for outward indicia. Like the ones SCO mentions. Here's another it didn't list: that on the eve of bankruptcy, you gave your brother a lot of money. Stuff like that. It's like the Girl Scouts, I gather. One badge won't do it. But get enough badges, and you fly on up.
  • And nobody could make a constructive fraudulent transfer theory stick either, because SCO was solvent not only before but after the transfer, so any money it can get for the estate "is clearly a win."
So would the court please let them do this too? It's " Method and apparatus for monitoring computer systems and alerting users of actual or potential system errors", patent number 6,529,784. After recent events, I'd like to see someone invent a Method and apparatus for monitoring courtrooms and alerting judges of actual or potential lawyer errors issuing out of their mouths. Colloquially known as a dancing baloney meter. We sure could have used one of those at the hearing yesterday.

We reported the patent had issued back in 2003, to gales of laughter and suggestions of prior art. Of course, you may know of more.

The last entity on planet earth I'd want to hold a patent, good, bad or indifferent, would be SCO. However, I think the creditors perchance will hold the opinion that any patent worth $570,000 in a firesale would be worth a lot more if retained and used to sue victims right and left. Just saying. And isn't that SCO's line of work? They even need the court to approve this "agreement" or it'll have to sue itself.

I don't see why SCO needs to sell its patent. According to Mr. Spector, they are potentially going to be raking in the dough, millions and millions for errno.h and stuff. If they can just hold on.

Here are all the filings:

190 - Filed & Entered: 11/06/2007
Order on Application to Employ
Docket Text: Order Approving the Employment of Mesirow Financial Consulting, LLC as Financial Advisors to the Debtors. (Related Doc # [74]) Order Signed on 11/6/2007. (LCN, )

191 - Filed & Entered: 11/06/2007
Motion to File Under Seal
Docket Text: Order Authorizing SUSE to File Exhibits to Affidavit of Felix Imendoerffer Under Seal. (Related Doc # [143]) Order Signed on 11/6/2007. (LCN, )

192 - Filed & Entered: 11/06/2007
Order on Motion to Approve
Docket Text: Order Authorizing Retention of Professionals Utilized in the Ordinary Course of Business. (Related Doc # [138]) Order Signed on 11/6/2007. (Attachments: # (1) Exhibit A # (2) Exhibit B) (LCN, )

193 - Filed & Entered: 11/06/2007
Minute Entry
Docket Text: Minutes of Hearing held on: 11/06/2007
Subject: OMNIBUS. (vCal Hearing ID (57215)). (related document(s) [183]) (SS, ) Additional attachment(s) added on 11/6/2007 (SS, ).

194 - Filed & Entered: 11/06/2007
Motion to Approve Compromise (B)
Docket Text: Motion to Approve Compromise Debtors' Motion for Approval of Compromise of Incipient Controversy Filed by The SCO Group, Inc.. Hearing scheduled for 12/5/2007 at 10:00 AM at US Bankruptcy Court, 824 Market St., 6th Fl., Courtroom #3, Wilmington, Delaware. Objections due by 11/28/2007. (Attachments: # (1) Notice # (2) Proposed Form of Order # (3) Certificate of Service and Service List) (Werkheiser, Rachel)

I didn't get all the certifications and notices, because it's getting too expensive and they're the same, over and over. But everything else is there.

Update: I received a donation to cover the extra documents. Thank you. And a comment had me running to look at SCO's SEC filings. SCO says that it set up Cattleback and transferred the patent to it without consideration in mid-July. Where is that to be found in SCO's SEC filings? Here's SCO's 10Q for the period ended July 31, 2007. Not one word that I can find about Cattleback's establishment or about transferring an asset to it.

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

IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE

In re:

The SCO GROUP, INC., et al.,1

Debtors.
Chapter 11

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

Objection Deadline: November 28, 2007, at 4:00 p.m. (prevailing Eastern time)
Hearing: December 5, 2007 at 10:00 a.m. (prevailing Eastern time)

MOTION FOR APPROVAL OF COMPROMISE OF INCIPIENT CONTROVERSY

The above captioned Debtors seek approval of a compromise in settlement of a potential controversy between the Debtor, The SCO Group, Inc. ("Debtor") and one of its wholly-owned subsidiaries, Cattleback Intellectual Property Holdings, Inc. In support of this motion (the "Motion"), the Debtor states:

Jurisdiction and Background

1. The Court has jurisdiction over the matters subject of this Motion pursuant to 28 U.S.C. §§ 157 and 1334. The procedural predicates for the relief sought herein is Rule 9019 of the Federal Rules of Bankruptcy Procedure.

2. On September 14, 2007 (the "Petition Date"), the Debtors filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code, 11 U.S.C. §§ 101-1532.

(1)

3. For greater detail regarding the background of the Debtors' business and events leading up to the filing of these cases, the Debtors refer the Court and parties to the Declaration of Darl C. McBride, Chief Executive Officer of the Debtors, in Support of First Day Motions (the "McBride Declaration") filed on the Petition Date and incorporated herein.

4. In June, 2007, the Debtor decided to sell U.S. Patent No. US 6,529,784 titled "Method and Apparatus for Monitoring Computer Systems and Alerting Users of Actual or Potential System Errors." On June 29,2007, the Debtor retained a professional intellectual property marketing firm, Ocean Tomo, LLC, to help it market the patent.

5. Ocean Tomo recommended that the Debtor set up a separate company to hold and market the patent, which advice the Debtor followed.

6. Accordingly, on July 17,2007, the Debtor formed a wholly-owned subsidiary which it called Cattleback Intellectual Property Holdings, Inc.

7. The Debtor then assigned the patent to Cattleback on July 18,2007.

8. Inasmuch as Cattleback was always a wholly-owned subsidiary of the Debtor, it paid no consideration for the transfer.

9. Ocean Tomo marketed the patent to almost 200 companies during August, 2007, with several companies showing interest and doing due diligence.

10. From September 7 - 12, Ocean Tomo received six bids for the patent.

11. Ultimately, Ocean Tomo and Cattleback settled upon a buyer for $570,000.

5 (2)

12. In the meantime, while marketing efforts were underway, the Debtor filed a petition for relief under Chapter 11 of the Bankruptcy Code.

The Settlement

13. Creditors could argue that a transfer for no consideration made by a chapter 11 debtor shortly before its entry into chapter 11 should be avoided as a fraudulent transfer. In lieu of filing a lawsuit against its wholly-owned subsidiary, the Debtor has agreed to the following resolution of the incipient dispute.

14. Cattleback will pay to the Debtor 100% of the net proceeds of its sale of the patent and will assume any obligations, if any, incurred by the Debtor for the development and marketing of the patent.

15. The Debtor is obligated under a marketing agreement to pay Ocean Tomo $60,500 as the balance of its fee for finding a buyer for the patent. In addition, the Debtor is obligated to the inventor of the product and to several employees for bonuses approved by the Debtor pre-petition in the aggregate amount of $45,000. These expenses will be paid by Cattleback and the balance of the sale proceeds ($464,500) will be turned over to the Debtor in full and final satisfaction of any claims that the Debtor may have against it.

Standards For Approval Of Compromises

16. Rule 9019(a) of the Federal Rules of Bankruptcy Procedure provides that, after notice and a hearing, a court may approve a proposed compromise or settlement of a controversy. The settlement of time-consuming and burdensome litigation, especially in the bankruptcy context, is encouraged and "generally favored in bankruptcy." In re World Health

6 (3)

Alternatives. Inc., 344 B.R. 291, 296 (Bankr. D. Del. 2006). See also In re Penn Central Transportation Co., 596 F.2d 1102 (3d Cir. 1979) ("administering reorganization proceedings in an economical and practical manner it will often be wise to arrange the settlement of claims"), quoting In re Protective Committee for Independent Stockholders of TMT Ferry. Inc. v. Anderson, 390 U.S. 414, 424 (1968).

17. The decision to approve a settlement "is within the sound discretion of the bankruptcy court." World Health Alternatives, 344 B.R. at 296. See also In re Neshaminy Office Building Assocs., 62 B.R. 798, 803 (B.D. Pa. 1986), cited with approval in Meyers v. Martin (In re Martin), 91 F.3d 389 (3d Cir. 1996). The bankruptcy court should not substitute its judgment for that of the debtor. See Neshaminy Office Building, 62 B.R. at 803. The responsibility of the court "is not to decide the numerous questions of law or fact raised. . . but rather to canvass the issues and see whether the settlement 'fall[s] below the lowest point in the range of reasonableness.'" In re W.T. Grant Co., 699 F.2d 599, 608 (2d Cir. 1983)(quoting Newman v. Stein, 464 F.2d 689,693 (2d Cir. 1972)). See also World Health Alternatives, 344 B.R. at 296 (stating that "the court does not have to be convinced that the settlement is the best possible compromise. Rather, the court must conclude that the settlement is within the reasonable range of litigation possibilities.") (internal citations and quotations omitted).

18. In determining the fairness and equity of a compromise in bankruptcy, the United States Court of Appeals for the Third Circuit has stated that it is important that the bankruptcy court "apprise[ ] itself of all facts necessary to form an intelligent and objective opinion of the probabilities of ultimate success should the claims be litigated, and estimated the

7 (4)

complexity, expense and likely duration of such litigation, and other factors relevant to a full and fair assessment of the [claims]." In re Penn Central Transportation Co., 596 F.2d 1127, 1153 (3d Cir. 1979). See also In re Marvel Entertainment Group. Inc., 222 B.R. 243 (D. Del. 1998) (quoting In re Louise's Inc., 211 B.R. 798, 801 (D. Del. 1997) (describing "the ultimate inquiry to be whether 'the compromise is fair, reasonable, and in the interest of the estate.' ").

19. The Third Circuit has enumerated four factors that should be considered in determining whether a settlement should be approved: "(1) the probability of success in litigation; (2) the likely difficulties in collection; (3) the complexity of the litigation involved and the expense, inconvenience and delay necessarily attending it; and (4) the paramount interest of the creditors." In re Martin, 91 F.3d at 393. Accord Will v. Northwestern Univ. (In re Nutraquest, Inc.), 434 F.3d 639,644 (3d Cir. 2006).

20. In passing on proposed settlements, the standard that courts applied under the former Bankruptcy Act is the same standard as courts should apply under the Bankruptcy Code. In re Carla Leather, Inc., 44 B.R. 457, 466 (Bankr. S.D.N.Y. 1984), aff'd, 50 B.R. 764 (S.D.N.Y. 1985). As stated by the Supreme Court in Protective Committee, supra, under the Act, to approve a proposed settlement, a court must have found that the settlement was "fair and equitable" based on an -

Educated estimate of the complexity, expense, and likely duration of . . . litigation, the possible difficulties of collecting on any judgment which might be obtained and all other factors relevant to a full and fair assessment of the wisdom of the proposed compromise.

8 (5)

390 U.S. at 424. See also In re Justice Oaks II, Ltd., 898 F.2d 1544, 1549 (11th Cir. 1990); In re Lion Capital Group, 49 B.R. 163 (Bankr. S.D.N.Y. 1985); Drexel v. Loomis, 35 F.2d 800 (8th Cir. 1929); Matter of Marshall, 33 B.R. 42 (Bankr. D. Conn. 1983).

21. Applying the foregoing standards, the Debtor believes that the compromise satisfies that four-part test relating to Rule 9019. The Debtor also believes that based upon the likelihood of success in litigation, and the expense, inconvenience and delay that would be caused by litigating, litigation would not be in the best interests of the estate. Therefore, it is the Debtor's belief, in exercising its business judgment, that after full and careful consideration of the issues and the merits of any litigation, the terms of the compromise (resulting in a benefit to the estate of $464,500) is in the best interests of the estate.

This Settlement Satisfies The Above Standards

22. A transfer made for no or inadequate consideration within one year before the transferor's bankruptcy is avoidable if either: (1) the transfer was made with the actual intent to hinder, delay or defraud a creditor; or (2) if the transfer was made when the transferor was insolvent or the transfer rendered the transferor insolvent. 11 U.S.C. § 548(a). Because the Debtor could not prove either of these theories, a settlement whereby the putative defendant provides the estate 100% of the net proceeds of the market-based sale of the transferred asset and indemnifies the estate for any expenses is far above the "lowest point in the range of reasonableness" as required by Rule 9019 and applicable law.

23. Here, the plaintiff would have an insurmountable burden to prove that the transfer of an asset that the transferor was itself trying to sell at market prices but placed into a

9 (6)

holding company on the advice of professional marketing firm was done with the actual intent to hinder, delay or defraud its creditors. In this case particularly, where the Debtor was plainly solvent on the date of transfer and was current with all of its creditors, there is no evidence of actual intent nor any badge of fraud to substitute for such evidence that would support a recovery.

24. Nor could a putative plaintiff prevail under a constructive fraudulent transfer theory. Again, the transferor was solvent on the date of transfer, both before and after the transfer. Therefore, any settlement at all that brings any amount of money to the estate is clearly a win for the estate.

[remainder of page intentionally left blank]

10 (7)

WHEREFORE, the Debtor requests the Court to enter an order approving the compromise and granting the Debtors such other and further relief as this Court deems just and proper.

Dated: November 6 , 2007

PACHULSKI STANG ZIEHL & JONES LLP
(signature)
Laura Davis Jones (Bar No. 2436)
James E. O'Neil (Bar No. 4042)
Rachel Lowy Werkheiser (Bar No. 3753) [address]
[phone]
[fax]
[email addresses]

and

BERGER SINGERMAN, P.A.
Paul Steven Singerman
Arthur J. Spector
Grace E. Robson
[address]
[phone]
[fax]
and
[address]
[phone]
[fax]
[email addresses]

Co-Counsel for the Debtors and Debtors-in-Possession

11 (8)

1 The Debtors and the last four digits of each of the Debtors' federal tax identification numbers are as follows: (a) The SCO Group, Inc., a Delaware corporation, Fed. Tax Id. #2823; and (b) SCO Operations, Inc., a Delaware corporation, Fed. Tax ID. #7393.

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