Here it is, the transcript [PDF] as text, this time without line numbers for those who use readers, due to poor vision. And of course, I promised to tell you if I saw anything of interest and to explain anything needing explanation so you can follow along.
First, I think it's one of the strangest hearings we've seen yet. Part of the reason for that is because none of the new lawyers, the bankruptcy guys, knows the details well regarding the SCO v. Novell litigation in Utah. The judge also seems to be still getting up to speed on that. You see that over and over. For example, SUSE's lawyer introduces Michael Jacobs as the guy who's been handling the patent issue in that case, but there aren't any patents at issue in SCO v. Novell, only in the bankruptcy to the extent SCO wants to sell one. And whenever the judge asks a qustion that involves those Utah details, both sides call in the lawyers who handled that.
What that means is that both sides are paying double, to have both types of lawyers on deck. It's a ridiculous waste of money, but what can you do? It is clear that going back to Utah would be quicker and cheaper to get things resolved, since everyone is already up to speed, and there would be fewer factual mistakes made.
Of course SCO would rather die than go back there after the whipping Kimball gave them, particularly after the CEO Darl McBride has said simply awful things about Judge Dale Kimball to the media, things that from my research I believe to be inaccurate to boot.
In the interests of time, I'm going to post this now, and I'll write a separate article about the rest of the hearing, so those waiting for the no-lines version have it as rapidly as possible. But I'll just draw your attention to one quick thing. Notice that SCO's lawyer, Arthur Spector, on page 112, asks if it's correct that Novell is dropping its damages claim. He asks because earlier there was a statement made that was ambiguous. Novell's Michael Jacobs says, "That's incorrect." I don't think it could be any clearer than that. There was a Maureen O'Gara article attacking Groklaw for allegedly missing big news and saying that Novell had dropped those damages, but she was wrong. I waited to see the transcript to mention it, because I wanted to be sure, but I was clear on one thing anyway even earlier: SUSE filed a Special Opposition, meaning they only appeared in this motion, to argue this motion, without agreeing to participate in anything else. So I figured she was wrong, because that limitation would limit any waivers too, but now it's here in black and white, and you can read it for yourself.
UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE
THE SCO GROUP, INC., et al.,
Case Number 07-11337 (KG)
November 6, 2007
TRANSCRIPT OF HEARING
BEFORE HONORABLE KEVIN GROSS
UNITED STATES BANKRUPTCY COURT JUDGE
For the Debtor:
Berger Singerman, P.A.
By: ARTHUR J. SPECTOR, ESQ.
JOHN EATON, ESQ.
For the Debtor:
Pachulski, Stang, Ziehl & Jones
By: LAURA DAVIS JONES, ESQ.
RACHEL L. WERKHEISER, ESQ.
Audio Operator: Nicole Schaefer
Proceedings recorded by electronic sound recording, transcript
produced by transcription service.
J&J COURT TRANSCRIBERS, INC.
[address, phone, fax, email]
For Novell, SUSE:
Young Conaway Stargatt & Taylor, LLP
By: MICHAEL NESTER, ESQ.
By: ADAM LEWIS, ESQ.
MICHAEL JACOBS, ESQ.
By: JULIE DYAS, ESQ.
For York Capital:
McNutt & Litteneker
By: SCOTT McNUTT, ESQ.
Duane Morris LLP
By: FRED ROSNER, ESQ.
For U.S. Trustee:
U.S. Trustee's Office
By: JOSEPH J. MCMAHON, JR., ESQ.
United States Dept. of Justice
For Alan P. Petrofsky:
By: ALAN P. PETROFSKY
THE COURT: Thank you, everyone, you may be seated.
ALL ATTORNEYS: Good morning, Your Honor.
THE COURT: Good morning, Ms. Jones.
MS. JONES: Good morning, Your Honor. How are you?
THE COURT: Very well, thank you.
MS. JONES: Your Honor, for the record, Laura Davis
Jones with Pachulski, Stang, Ziehl & Jones on behalf of The SCO
Group et al.
Your Honor, we have a number of matters scheduled on
the agenda for you this morning and does Your Honor have a copy
of the notice of agenda?
THE COURT: I do, yes.
MS. JONES: Your Honor, if I may walk through that.
And a number of the matters have been continued and/or
otherwise are still the subject of discussion.
It's indicated on the agenda, Your Honor, Matters 1-3
are continued. Matter 4, Your Honor, the application for the
approval of Dorsey and Whitney, Your Honor, I understand that
that has now been resolved. There were issues raised by the
Trustee's office on that and there is a supplemental affidavit
that has been filed. My understanding though is the parties
are working through a form of order that they would submit
under certification of counsel if that's okay with the Court.
THE COURT: That is perfectly fine. Thank you.
MS. JONES: Your Honor, Matter 5, our motion for
approval of employment of a CFO Solutions to furnish a chief
financial officer to the debtors, Your Honor, the Trustee's
office has given us comments with respect to that and, indeed,
provided a revised form of order this morning. Unfortunately,
Your Honor, we're not there yet, on agreement on that order.
So as we reflected on the agenda, if we haven't reached
resolution, this matter would be continued over to the November
16 day and, Your Honor, we seek to have that continued.
THE COURT: That's fine. We'll do that.
MS. JONES: Your Honor, the motion of SUSE with
respect to filing exhibits under seal, my understanding is a
certificate of no objection has been filed in connection with
THE COURT: Yes, and I don't know if anyone has a
form of order at this point, but if not, I will be approving
that. And that is fine. That order will be entered if it
hasn't been already in chambers.
MS. JONES: Thank you, Your Honor. Your Honor, just
to give Your Honor a preview of a couple other matters, we will
be going forward and I'm going to yield to Mr. Spector
momentarily with respect to Matter 7.
On Matter 8, Your Honor, the application for the
employment of Mesirow Financial, Your Honor, that matter there
had been issues raised by the U.S. Trustee. Those have been
resolved, Your Honor. There's the supplemental affidavit that
has been filed. And I do have a proposed form of order that
reflects comments from the Trustee's office, if I may approach.
THE COURT: You certainly may. Thank you, Ms. Jones.
Mr. McMahon looks comfortable seated, so I'm not going to
disturb him. And obviously he has approved the form of order
and I am prepared to enter it.
MS. JONES: Thank you, Your Honor.
THE COURT: It's been entered. Thank you.
MS. JONES: Your Honor, we would be going forward on
Matters 9 and 10. Let me jump ahead just for a second, though.
On Matter 11, Your Honor, our application to seek the approval
of the Boies Schiller firm. Your Honor, the Trustee's office
had some issues with respect to that application. We have
talked quite a bit about that. Mr. McMahon made another
proposal to us right before the hearing. I'd like to have some
time to digest that on our side of the table, Your Honor. So
we're -- we may go forward with that today. We have to work
THE COURT: That's fine. We can put that to the end.
MS. JONES: Thank you, Your Honor.
THE COURT: Or after a recess.
MS. JONES: And, Your Honor, also on the motion for
the employment of the ordinary course professional, Your Honor,
there were issues raised by the Trustee's office as well as an
individual who may be on the phone, Your Honor.
THE COURT: I believe he is, according to my roster.
Yes. Mr. Petrofsky.
MS. JONES: Yes, sir. And, Your Honor, I believe we
have resolved our issues with the Trustee's office. We sent a
proposed form of order. I left a voice mail for Mr. McMahon to
see if it was satisfactory and I know he's been busy this
THE COURT: Good morning, Mr. McMahon.
MR. MCMAHON: Your Honor, good morning. Good to see
THE COURT: Good to see you. Thank you.
MR. MCMAHON: Joseph McMahon for the U.S. Trustee's
Office. Your Honor, I would just like to have a few minutes to
review the post form of order just to ensure that its
consistent with my discussion with debtor's counsel. I just
have not had the chance to do that prior to the hearing. But
that's the request that I would make of the Court at this time.
THE COURT: That's fine. We can also, I think -- I
know we do have Mr. Petrofsky on the phone and perhaps it would
be well to hear from him before we proceed with what may be a
lengthy hearing. Mr. Petrofsky.
MR. PETROFSKY: Yes, Your Honor.
THE COURT: Good morning.
MR. PETROFSKY: Good morning.
THE COURT: We do have your objection.
MR. PETROFSKY: Yes.
THE COURT: And if you would just like to be heard,
this is your opportunity to do so.
(Appearing by telephone - difficult to discern)
MR. PETROFSKY: Thank you, Your Honor. Well, just
quickly then, to recount what's in the written objection,
there's two points. One is that the order (indiscernible)
schedule of non-professionals. And all the parties have had a
chance to view that list and file their objections, but through
the back door in Paragraph 7 whereby, you know, more
professionals have been added to the list. And, no
(indiscernible) voters would have any opportunity to object.
And I don't see any reason for the noticed parties be summarily
(indiscernible) and I don't think there will be any substantial
burden in withstanding the noticed parties that have objected.
And then the second point is on the German
litigation. This is not mentioned in the schedules and they
claim that this is, you know, in ordinary course of business
and that the business would somehow be fairly hindered if they
could not (indiscernible). I just donít see any facts to
support that. That's it, thank you.
THE COURT: You're most welcome. Ms. Jones, would
you like to respond?
MS. JONES: A couple things, Your Honor. With
respect to providing notice of any supplement -- supplements to
the OCP list, Your Honor, I don't know if the individual has
added his appearance under Rule 2002, but that might be the
simplest way to make sure that he has notice of any supplements
that are submitted.
THE COURT: And I assume, Mr. Petrofsky, have you
entered your appearance in this case?
MR. PETROFSKY: I have, Your Honor. The problem is
is that the noticed parties are not just -- the order doesn't
just say that those are the only people who get noticed. The
order also says those are the only people who have the
opportunity to object.
MS. JONES: Your Honor, we can made a point of making
sure that if we have any supplements, that we'll add this
individual. Your Honor, the order is very specific that if
there are any supplements, there is an opportunity to review
THE COURT: Yes.
MS. JONES: And also to object, so I'm not sure I
understand the individual's point. But, Your Honor, we can
make sure that he does receive a copy of any supplements. And
as I said, there is a period of objection in there.
THE COURT: Mr. Petrofsky, does that address your
concern that there will be notice and, of course, it would be
subject to the Court's review as well.
MR. PETROFSKY: Yes --
THE COURT: And specifically, notice would be given
to you as a noticed party.
MR. PETROFSKY: Right. Okay.
THE COURT: All right. So that addresses that
MR. PETROFSKY: Right.
THE COURT: And as far as the other litigation is
concerned, Ms. Jones?
MS. JONES: Your Honor, I believe what I've heard is
a concern about what is the German litigation about, Your
Honor, not so much about the retention of the ordinary course
professional. And Your Honor, I don't know if its something we
want to do during the course of this hearing or if we can talk
to this individual off-line and tell him what the German
litigation is about. But, Your Honor, at this point, the
debtor does believe in its business judgment that it does need
the retention of the German firm. I don't think there's any
dispute as the bona fides of that German firm. And we'd ask
that they continue to be on th OCP list, Your Honor.
THE COURT: Mr. Petrofsky, what we'll do is I will
have debtor's counsel speak with you about the German
litigation. But I do think its appropriate to approve ordinary
course counsel for that litigation. And to the extent you've
objected on that ground, I'll overrule your objection. But
again, you will be advised by debtor's counsel of the nature of
MR. PETROFSKY: Okay, thank you, Your Honor.
THE COURT: Certainly. Now, you are welcome to
continue on the phone throughout what will be a lengthy
hearing. Or you may excuse yourself at this point.
MR. PETROFSKY: Thank you. I'll stay on the line.
THE COURT: Okay.
MS. JONES: Your Honor --
THE COURT: So I, subject to Mr. McMahon's review and
comment, I would be approving that order.
MS. JONES: That's fine, Your Honor, and we can
submit that to the Court later in the hearing after -- once Mr.
McMahon signs off on it.
THE COURT: That will be fine, thank you.
MS. JONES: Your Honor, at this point I would yield
to Mr. Spector.
THE COURT: Okay. Thank you, Ms. Jones. Good
morning, Mr. Spector.
MR. SPECTOR: Good morning, Your Honor. I rise
primarily to introduce my partner, John Eaton --
THE COURT: Mr. Eaton.
MR. SPECTOR: -- who will addressing the next matter
on the calendar.
THE COURT: Welcome.
MR. SPECTOR: I believe the next matter on the
calendar is SCO's motion to enforce the automatic stay.
THE COURT: Yes.
MR. SPECTOR: With regard to the SUSE arbitration in
THE COURT: Thank you. Thank you, Mr. Spector. Mr.
Eaton, good morning.
MR. EATON: Good morning, Your Honor. John Eaton on
behalf of the debtor. Your Honor, the motion in question is
one, quite frankly, that I'm surprised that the debtor was
forced to file. It is simply a motion to enforce the automatic
stay with respect to an arbitration proceeding that is pending
in Switzerland that was instituted by SUSE Linux GMBH which I'm
going to refer to simply as SUSE throughout this hearing.
The main issue, the primary issue is with respect to
a fact that is not disputed. And that is who initiated the
arbitration. And its undisputed that SUSE initiated the
arbitration. And as Your Honor is well aware, under 362, the
automatic stay applies to any and all proceedings, wherever
located, that were brought against the debtor. And the Third
Circuit in the Maritime Electric decision that we cited to in
our motion and our reply specifically held that any and all
actions against the debtor are stayed and cannot proceed
forward. From our perspective, it's a very simple issue.
Unfortunately, Your Honor, the position that SUSE has
taken in the arbitration, and now before this Court, is that
somehow the arbitration does not apply because the argument is
made that their lawsuit, their arbitration claim, is defensive.
They also claim, not wanting to get to the merits,
that the Court doesn't have jurisdiction over them because they
don't have the requisite minimum contacts and they weren't
Your Honor, from our perspective, I don't believe any
of those arguments have merit. And I think we've addressed
each and every one of them in our reply. And I will take a few
minutes to go through each of them if the Court wishes, but I
think, quite frankly, that the primary issue and the only one
really that is an issue for the Court to decide today is, does
the automatic stay apply. And the reason its important is
because the current arbitration, Your Honor, is scheduled to
proceed on December 3rd, and go from December 3rd to December
THE COURT: Yes.
MR. EATON: The Swiss Arbitration Tribunal, as I
understand it, have asked the parties to advise them as to what
their respective positions are so as indicated that the
automatic stay applies to the proceeding. And SUSE has
indicated that it does not. And to a certain extent, as I
understand it, they're looking -- "they" meaning the Tribunal
-- is looking for some guidance here so they know where it
With that background, Your Honor, I think its
important to understand what the nature is of the relief that
SUSE is seeking in the Swiss arbitration. And there's several
forms of relief that they're taking and its set forth in their
statement of claim.
Specifically, Your Honor, they're seeking a
declaratory judgment that SCO was precluded from asserting
infringe -- copyright infringement claims, i.e. SCO cannot
proceed with litigation that would be an asset of the estate.
They are seeking a declaration that two United Linux
agreements divest SCO of ownership of certain alleged
intellectual property rights in certain software. Again,
divesting ownership with respect to an asset of the estate.
They are seeking an order to prevent SCO from making
any public statements relating to certain software and other
issues, specifically getting a preliminary injunction or a
permanent injunction against SCO.
And finally, Your Honor, they're seeking damages of
$100 million which is big. The $100 million aspect of the
Swiss arbitration, Your Honor, as I understand it, is in a
different phase than what is currently teed up because as I
understand it, I don't think there's a dispute. The current
Phase II is to contemplate a declaratory and injunctive relief
that SUSE is affirmatively seeking and also with respect to
SCO's counter-claims against them.
The problem, Your Honor, is with respect to the SCO
counter-claims, is that many of the counter-claims overlap with
respect to defenses such that if there's a determination of a
SCO counter-claim and it were against SCO, that wipe out a
defense to an affirmative claim that SUSE is making.
So with that background, Your Honor, we get to the
issues that are before the Court. And I think, as I already
pointed out, Your Honor, the automatic stay applies to all
proceedings that are blocked against the debtor. And I think
that in and of itself demonstrates why the automatic stay
applies. And the reason why we need an order from the Court is
because SUSE doesn't believe -- SUSE doesn't believe that it
applies and has affirmatively taken the position it does not.
With respect to their argument about service, Your
Honor, the service issue was served on a number of different
persons and entities when it was filed. The motion was served
overnight on SUSE in Germany. It was served on SUSE's Swiss
counsel by overnight mail. It was served by facsimile and on
SUSE's United States attorneys in San Francisco, the Morrison
and Foerster attorneys. And it was also served, Your Honor, on
what we believe is SUSE's agent, their parent company, Novell,
by hand-delivery on their counsel.
SUSE takes the position that the only way to
effectuate service was through use of the Hague Convention.
And the Hague Convention would apply if you wanted to try to
serve someone in Germany and do it through German. But the
Hague Convention doesn't apply if you're trying to serve an
agent that's located within the United States. And we believe
we have properly done that. We've served SUSE's United States
attorneys and we served Novell, its parent, in the United
There's no dispute that they were served. They're
here. They filed a response. And I understand that their
opposition reserve their rights on jurisdiction. But the
bottom line is, the key is, they received notice and everybody
is here in court today to address the substance with respect to
the automatic stay.
SUSE's parent, Your Honor, is not just a company that
owns SUSE. In 2004, the operations -- until 2004, SUSE
operated in the United States. It was based in Oakland. It
had employees in the United States. All of its contacts were
When Novell took over the operations, it functioned
in the same fashion that SUSE did. It continued operating SUSE
software. It did all of the activities in the United States.
Novell officers were, in effect, the CEO of SUSE in the United
States. And we've attached to our reply several website
references that were public available to demonstrate some of
those contacts because at this juncture, we haven't had an
opportunity to take any discovery to get into more specifics
for an evidentiary hearing.
We've also served the Morrison and Foerster firm.
And the Morrison and Foerster is not just -- its not just their
attorneys in connection with the Swiss arbitration. Attached
to our reply was a copy of a power of attorney that SUSE
executed in favor of the Morrison and Foerster department. And
I'm sure Your Honorís had a chance to look at it. It didn't
just allow them to take any and all action necessary to protect
their rights and to do things in connection with the Swiss
arbitration. It also allowed an authorized debtor to do
anything that was necessary to take action on their behalf and
protecting their rights in related proceedings.
Well, this is a related proceeding, Your Honor. Its
related to the debtor's assets. Its related to the debtor's
creditors. And the assets that are in question include
software, litigation rights which they're trying to go after,
"they're" meaning SUSE is trying to go after during the Swiss
So from our perspective, service has properly been
effectuated already. But even if the Court believes that its
not, there's still a way to resolve the issue, Your Honor, and
that is through Rule 2004, or Rule 4(f)(3) which is
incorporated through Rule 7004, which allows the Court to
authorize a different method of service. The Court could order
an interim order declaring that we may serve SUSE through its
agents in the United States, i.e. their Novell parent or its
attorneys Morrison and Foerster. I don't think we need to go
through that exercise because I think we've already properly
served them and the Court could so find. But if the Court
believes that an order through Rule 4(f)(3) is necessary, we
would respectfully request that the Court makes such a ruling
and make it nunc pro tunc to the time of the service so that we
can get to the meet which is does the automatic stay apply.
Next order of attention, Your Honor, to the other
argument they made which is that they don't have the requisite
minimum contacts with the United States. And we believe we've
laid out more than sufficient facts, not only to establish
specific jurisdiction, but also general jurisdiction. But we
don't need to have both. One is enough. And I think that for
purposes here, we will focus our discussion on the specific
jurisdiction and why the Court has it.
And in order to be subject to specific jurisdiction,
it can take place and be found in any suit in which the actions
relate to a single purposeful act in the United States or one
that can have an effect in the United States, and specifically
here on the bankruptcy case. And I believe one of the
decisions they've cited to in their reply, the O'Conner v.
Sandy Lane decision from the Third Circuit said that at least
one contact must relate to the plaintiff's claim.
Well, here, the claims are relating to the debtor's
assets. Its relating to litigation. Its relating to the
debtor's rights with respect to certain copyrights. And the
action that they want to take is to divest the debtor of that
and make a determination that the debtor doesn't have any
rights and to prevent the debtor from enforcing or seeking
recoveries on any litigation claims it may have.
They're affirmatively taking that position pre-petition. They are now trying an affirmatively taking that
position post-petition. In fact, Your Honor, on October 30th,
SUSE filed its memorandum with the Swiss Tribunal which laid
out all of the reasons why the Court should find in its favor
on all of its prayers for relief.
Now, we cited to a number of cases in our memorandum
which show that taking action against property of the estate is
enough to satisfy the requisite conduct that would necessitate
and require in support of finding for minimum contacts. And
I'm specifically referring, Your Honor, to the Lykes Brothers
decision from the Middle District of Florida. And I'm also
citing, Your Honor, to the Childs Power decision. And as well,
Your Honor, the decision of McClain -- McClain decision. And
here they have affirmatively taken those acts with respect to
property of the estate. But they also have other contacts,
The Swiss arbitration is based upon, Your Honor, the
United Linux agreements and alleged breaches by SCO of those
agreements. The position that SUSE takes is that their
arbitration -- if their arbitration doesn't relate at all to
the Delaware LLC that was formed in which they had a 25 percent
ownership interest. Its kind of surprising they've taken that
tact because they've even alleged in their statement of claim,
times, they make reference to the Delaware LLC which was a
at all times envisioned to be the joint venture entity that
would be the basis upon which those contracts would operate.
And they know that they have the 25 percent ownership interest
and that was going to be the vehicle that was going to be used.
The negotiations for the execution of the agreements
that are the subject of the litigation in Switzerland, the
arbitration in Switzerland, are admitted by SUSE to have taken
place in Salt Lake City, New York and Atlanta. Its found in
their own statement of claim. And we've provided the Court
with the citations to those contacts.
There has been numerous emails and faxes and calls to
SCO with SCO's attorneys in the United States with respect to
those contracts. And all of those are set forth in the
statement of claim that took place which, I don't believe is in
dispute, its in their own statement of claim.
In the October 30th arbitration filing that SUSE just
made, they make it a point to say that, well, you know what?
The Delaware LLC has nothing to do with the underlying
arbitration which we find somewhat surprising in light of the
previous references in their own statement of claim. And I
think the Court can just look at the statement of claim to see
the importance of the Delaware LLC to the claims that are the
subject of the arbitration in Switzerland to understand why
those provide the requisite -- you know, part of the requisite
contacts in the United States.
SUSE's arbitration is being pursued not just by Swiss
counsel. Its also being pursued, the arbitration itself, is
being prosecuted by their attorneys at Morrison and Foerster.
Morrison and Foerster has participated in telephonic hearings
from the United States. Its had conduct in -- excuse me, its
had telephone calls and communications with SCO's attorneys in
the United States, all pertaining to the Swiss arbitration
which are the contacts in the United States which I think would
be additional evidence or additional indicia of the minimum
contacts necessary to satisfy specific jurisdiction, Your
And, Your Honor, the reason why I think its important
with respect to the Delaware LLC, as I understand it, is that
part of the argument that is being articulated by SUSE in the
Swiss arbitration is that the Delaware LLC assigned to SUSE its
use in the United States and worldwide for certain of the
software that is in essence at issue in the litigation.
So, the Delaware LLC, which was a joint venture that
had been contemplated by the parties as part of the very
agreements at issue lies at the heart of that litigation and is
a contact they have with the United States.
Your Honor, the Lykes decision and the McClain
Industries decision and the Childs Power decision, Your Honor,
I think all demonstrate that the minimum contact which allows
this Court to exercise the jurisdiction over SUSE has been more
than met simply with respect to the relief relating to the
property of the estate, namely the copyright infringement
claims and divesting ownership.
The other indicia that we've articulated and the
other factors we've articulated relate to some of the other
non-bankruptcy cases that we've set forth in our motion. But I
think one or both, and certainly all show that they have the
necessary contacts related to the specific issue of what is at
issue in the Swiss arbitration and how it impacts the
bankruptcy case and the effect on the bankruptcy here in the
On the general jurisdiction, Your Honor, we set forth
and attached to our reply a number of matters that have been
the matter of public record, both interviews with former SUSE
officers. We attached information that I understand is in
German that reflect other indicia which were specifically
officers and directors or officers of SUSE, how they were in
the United States and had United States operations on behalf of
SUSE after, after Novell took over the operations.
I don't want to spend a lot of time going through the
general jurisdiction other than to point out that we do believe
its met. But I think we don't need to go there because that's
really getting into more, and acknowledges more than
evidentiary issue which would require a certain degree of
discovery which has not been taken. But I didn't want the
Court to believe or understand that we were not seeking to have
a determination of belief that the general jurisdiction
requirements have been met in this particular case.
THE COURT: And I understood that.
MR. EATON: And I appreciate that, Your Honor. So
the one decision that was the focus, I think, of SUSE's
response was the Fotochrome decisions from the Eastern District
of New York in the Second Circuit which specifically dealt with
a situation in which -- under the Bankruptcy Act, not the
Bankruptcy Code -- in which there had been an arbitration
pending in Japan. An arbitration award was made post-petition
and then the Japanese entity came into the United States and
sought enforcement of that arbitration in the bankruptcy court.
And the court, in that particular case, held that they didn't
have the requisite minimum contacts.
Interestingly, Your Honor, there was zero discussion
as I saw in my reading of the cases of what contacts they had.
Here, we've established what the contacts are. So from a
factual standpoint, the case is wholly in opposite and does not
apply. But there's other interesting aspects to it, Your
Honor, which show why it doesn't apply here. And one of the
most important is, is (1) the focus was not on what the Third
Circuit has held in Maritime Electronic which is the bread of
the automatic stay in its worldwide application.
And also, Your Honor, there was a specific statement
by the Second Circuit that shows why that decision doesn't
apply here under the Bankruptcy Code. One, it had no statutory
basis akin to the automatic stay of the worldwide application.
And in fact, Your Honor, I believe the court in that case said
there was not an issue there because the court said that the
jurisdiction over the estate property was not exclusive.
That's not the case, Your Honor, under the Bankruptcy Code.
Your Honorís well aware that Your Honor has the exclusive
jurisdiction of all property of the debtor.
So I don't think that the Photochrome decision really
has any application in this particular case. And I think the
bankruptcy cases that we've cited and have even been referred
to by SUSE, the Lykes decision, the McClain Industry decision,
the Childs Power decision reflect why, under the current Code,
the minimum contacts can take place with respect to one
particular act pertaining to property of the estate.
So that, Your Honor, brings us back to again the
point of why we're all here. Does the automatic stay apply.
And I think the Court can simply just look to the Maritime
Electric decision from the Third Circuit and which the Court
specifically held that you look at the initiation of the
lawsuit, or the arbitration as the case may be. Was it
initiated against the debtor? Its admitted here, Your Honor.
There is no dispute that they initiate it. The argument that
it was defensive in nature to protect their rights, quite
frankly, Your Honor, would apply to any lawsuit that a
plaintiff brought because presumably any lawsuit is to protect
That's -- even assuming that is the law, its not the
law in the Third Circuit in light of the Maritime Electric
decision. And Your Honor, I would also point out that 362(b)
sets forth about different types of matters that are not
subject to the automatic stay. Nowhere in there will you see
anything relating to an arbitration in a foreign jurisdiction.
There's nothing in there that says it doesn't apply to a
I think the Court can just simply look at the Third
Circuit's decision in the Maritime Electric and see that in
this particular case, its very clear that the automatic stay
applies. Its very clear that we need to have a direction to
SUSE and, more importantly, Your Honor, to the Tribunal in
Switzerland letting them know that the automatic stay applies
so that debtor can move forward with its reorganization efforts
and not have to deal with the time and expense relating to the
We attached the form of a proposed order, Your Honor.
I don't believe that evidence is required with respect to the
matters to show the requisite context, the requisite service.
We've attached the documents to our motion and our reply. To
the extent that SUSE disputes it, we can certainly have a
discovery schedule established by the Court. Discovery could
be taken. I think that would be expensive. I think its not
necessary when the Court has before it and has before it, the
parties, the specific issue relating to the applicability of
the automatic stay. And for that reason, Your Honor, we simply
request that the motion be granted.
THE COURT: Thank you, Mr. Eaton. Mr. Lewis.
MR. LEWIS: Good morning, Your Honor. Thank you.
Adam Lewis of Morrison and Foerster. If I may just take a
moment with you today.
THE COURT: Please.
MR. LEWIS: Mr. Nestor from Young Conaway.
THE COURT: Yes, Mr. Nestor.
MR. NESTOR: Good morning, Your Honor.
MR. LEWIS: And my co-partner and co-counsel, Mr.
MR. JACOBS: Good morning, Your Honor.
THE COURT: Welcome.
MR. LEWIS: -- who's been involved in the patent
litigation from Morrison and Foerster. And my associate Julie
MS. DYAS: Good morning, Your Honor.
THE COURT: Good morning.
MR. LEWIS: -- is helping on this case.
THE COURT: Thank you, Mr. Lewis.
MR. LEWIS: Probably the secret behind it.
THE COURT: Thank you.
MR. LEWIS: And I appreciate appearing in front of
the Court for the first time.
THE COURT: Thank you. It's a pleasure to have you
here, Mr. Lewis.
MR. LEWIS: Your Honor --
THE COURT: I don't want to interfere, but as you're
making your presentation, I think a principal concern of mine
is the argument that this is a defensive action taken by -- may
we call them SUSE? Is that acceptable to --
MR. LEWIS: Sure, sure, Your Honor. That's fine.
THE COURT: -- to your -- fine.
MR. LEWIS: Your Honor --
THE COURT: And I don't ask you that you address that
right off the back, but just in certainly making your argument.
MR. LEWIS: Well, as it happens, Your Honor, that's
exactly what I was going to do because I think once we've gone
over what that arbitration's all about with some care, you will
see, I hope, that it is not covered by the automatic stay
except in the very limited way and we're prepared to deal with
that limited way this morning. So let me go over that very
You can break the arbitration issues into three
components. The first component is the debtor's claims against
SUSE. Those are clearly not barred by the automatic stay. The
debtor claims, well, gee, they're so related to the other
claims that are barred by the automatic stay that there's some
kind of presto chango protection that comes with the automatic
stay to the extent that it applies to SUSE's claims. But
there's nothing in the law that says that.
So far as we're concerned, the debtor's admitted the
automatic stay, in its own papers, is not covered although it
took a different position initially with the Arbitral Tribunal.
The fact is, it is not covered by the automatic stay and
whether they proceed in the Arbitral Tribunal with their claims
against SUSE, their counter-claims, is between them and the
Tribunal and to some extent us as parties, that is SUSE, to the
proceeding in Switzerland. So that's not covered. That's out.
You don't have to discuss that this morning.
The second component is SUSE's damage claim. I want
to come back to that at the end because I think in some ways
it's the least important. The third component which I want to
talk about now is probably the one the Court is the most
interested in and the most controversial. And I want to talk
about how that arose. And to do that, I have to talk a little
about SUSE and then about O'Dell because I think it helps to
throw some light on the situation.
As the Court is aware from the pleadings, the
litigation in Utah was stayed with respect to the arbitration
issues. And here's the reason why. The debtor's, in the Utah
litigation, made various claims against Novell. Some of them
had to do with Novell's use of IP, intellectual property, that
it had licensed from SUSE. And the way that Novell handles
those claims is by raising its license from SUSE as an
affirmative defense. Not as an affirmative claim, just an
What's going on in Switzerland is the very same thing
except up the line one step. That is, the party involved is
the party that licensed to Novell. And although its made an --
its brought a declaratory relief action against the debtor in
the arbitration, the declaratory relief action really is all
about the affirmative defenses that nobody claims are stayed in
the litigation in Utah that Novell has raised. It's the same
So while SUSE has taken the initiative in Utah, its
really taken the initiative, in effect, saying, well, SCO,
we're not going to wait for you to sue us like you sued Novell
in Utah and then raise these as affirmative defenses. We're
just going to get this thing underway because you're messing
with our business in Europe. And that's all its about.
And, indeed, to the extent that SUSE -- that the
debtor claims that Novell and SUSE are one in the same,
essentially, for purposes of the jurisdictional and automatic
stay issues, how can they then argue that its not really a
defensive claim because its really just exactly what Novell is
doing that there's argument about, is defensive in Utah and is
not barred by the automatic stay.
SUSE's answer to that question is, well -- I mean,
the debtor's answer to that question is, well, you started it
in Europe. That's what it amounts to. And we come down to
that work against in section 362(a). And the question is,
what's the real key language in that provision of 362. And
they say that the key language is "brought". And so the key
issue is who started it, who filed the complaint, who started
We believe that that's trivializing that statute.
What the "against" means is attempts to recover from the
debtor, whoever starts it. And if the Court agrees with us on
that score, that the statute has to be interpreted in terms of
whether you're trying to recover from the debtor, not who just
started the litigation, that's almost irrelevant, then the stay
simply does not apply to those claims that are brought, the
declaratory relief part, of the arbitration. Its as simple as
Now, we've heard a lot about the cases, the Maritime
case, but if you look at the Maritime case, Your Honor, the
underlying issue there was a claim against the debtor, to
recover from the debtor. All of the cases that the debtor has
sited in its favor involve either outright claims against the
debtor which came up in various ways, or claims against
property that everybody admitted that the debtor owned, like
the insurance proceeds in the one particular case. That was
property of the estate. It was just this party trying to get
its hands on it.
We're not arguing over trying to get our hands on
property of the estate. The issue really here, ultimately, in
the arbitration, is whether its property of the estate at all.
And we don't have to wait around until the debtor is ready to
deal with that anymore than we do in Utah in order to protect
our rights and protect our business. And that surely is what
the automatic stay is about.
Otherwise, the argument is -- reduces itself to the
argument that, well, the real purpose of the automatic stay is
to save the debtor litigation costs. But if that were the
purpose of the automatic stay, then the automatic stay would
stay all litigation, including brought by the debtor, until
somebody, either the debtor or somebody else, sought relief.
And that's not what Section 362(a) says.
And I remind the Court that its not simply a matter
of what the debtor chooses or not -- chooses not to do with
respect to the automatic stay. Remember, anybody who is barred
by the automatic stay from doing something has to get relief
from the bankruptcy court. The debtor cannot unilaterally go
the court and say -- or on its own, without going to the court,
and say to the other party to litigation that the debtors
initiate it, well, even though this is barred by the automatic
stay, we're willing to go ahead, so let's go ahead. The debtor
would have to come to this court for that relief.
And so, two, if the automatic stay really barred --
was really designed to simply stay litigation costs, there is a
larger interest at -- that would be at issue then simply what
the debtor chose to do. There's preservation of the estate for
the benefit of all creditors meaning that the debtor would have
to come to this court to ask this court's guidance on whether
its wise to get stay relief to be able to continue with its own
claims. But of course, the automatic stay doesn't cover claims
that they've brought.
And the claims that have been brought in Switzerland
are no more than the defensive claims that everybody admits are
still at issue and can still be litigated in Utah that Novell
has raised as affirmative defenses. They are the same claims,
just raised up the line.
So the debtor's interpretation of the word "against"
trivializes the automatic stay and makes that statute
meaningless. And also, I think, is not consistent with the
actual facts of the cases, whatever the broad language is that
is sometimes used in some of those cases may say in a kind of
general way. In everyone of those cases, the automatic stay
was held to apply because assets of the estate, money that --
either the other property was seeking money or was seeking
property that everybody admitted belonged to the estate. We
don't have that here and I don't think those cases serve as
Incidently, the debtor spent some time arguing that
we claimed that the automatic stay doesn't apply to
arbitration. We never made any such claim.
So, now we have two components that I've talked about
so far of the Swiss arbitration. The first is the debtor's
claims, the counter-claims. And clearly they're not barred by
the automatic stay. In fact, we sort of just talked about, at
a second time, in a way, in talking about the second component
which is the defensive declaratory relief action that is simply
the Novell defenses, affirmative defenses in Utah repackage by
SUSE so that it doesn't have to wait around while the debtor
continues to bad mouth its business in Europe and interfere
with its business in Europe.
The third issue is the damage claims. And we
acknowledge, Your Honor, that the damage claims would be
covered by the automatic stay. Let me, at first, however, just
say that the notion that the damage claims are $100 million is
a complete misstatement of what's in the record. A $100
million is determined as follows.
Under the Swiss arbitration rules, we have to put a
value on the case, as it were, in order to determine what the
fees are to be paid to the arbitrators. We did that. Not by
asserting a damage claim, but by calculating what the injury to
our business would be if this went on and on and on. That's
where the $100 million came from. Its not the damage claim.
But that said, we acknowledge that the affirmative
claims for monetary relief is barred by the automatic stay. A
couple of points about that. The first is as everybody
acknowledges, its not teed up yet. And we're prepared to ask
this Court for stay relief at the right time if we need to do
that. The Court can always just grant us that if the Court's
otherwise inclined to let the arbitration go forward as we
think it should.
Second thing is, if we need to, we are prepared to
consider waiving that damage claim so that the arbitration can
go ahead in some sensible fashion.
And that leads to the next point here. It will take,
perhaps, 6 to 12 months to get another arbitration proceeding
set if we can't go forward as scheduled right now. Subject, of
course, to whatever the Arbitration Tribunal wants to do. We
don't control that.
THE COURT: When was the arbitration proceeding
commenced? On what date? Do you recall?
MR. LEWIS: I think it was commenced in 2006, is that
right? I think it was April 10th, maybe, in 2006.
So on the third point, it's a non-issue in this
instant. We acknowledge that the automatic stay would apply
here. We'd ask the Court to consider granting stay relief sua
sponte today. And if not, to simply postpone the issue until
it comes up because its not ripe yet. Because no one is at
that phase of the arbitration proceedings. The phase we're at
is, the critical phase, who has what. Who owns those
copyrights. The same critical issues that we're asking this
Court to allow to finish off in Utah, that are critical to this
case, to the debtor as the debtor's own recent motion to sell
reflects and critical to the creditors.
THE COURT: Could this have joined in the Utah
litigation? I'm sorry, could SUSE --
MR. LEWIS: I'm going to defer to Mr. Jacobs on that.
THE COURT: Oh, that's fine. Mr. Jacobs, thank you.
Could SUSE not have joined in the Utah litigation?
MR. JACOBS: I don't know the answer to -- we didn't
look at that specific question because of the scope of the
United Linux agreements, which is what's at issue in the Zurich
arbitration, is an arbitral issue by the terms of those
agreements. So the exact sequence was counter-claim -- amended
complaint by SCO in Utah asserting copyright infringement
against Novell by virtue of Novell's distribution of SUSE
Linux, step one.
Step two, SUSE files an arbitration in -- its an ICC
arbitration in Zurich. Files an arbitration demand seeking,
among other things, declaratory relief that SCO doesn't have a
claim relating to SUSE Linux by virtue of the United Linux
Novell goes into the district court in Utah and says,
these issues -- there are issues now in the litigation that are
referable to arbitration within the meeting of the federal
arbitration acts, asks the district court to stay those issues.
The district court parses through the complaint that's not
operative in Salt Lake City and says, I see, yes, these claims
relating to SUSE Linux, they are arbitral under the United
Linux agreements, makes a preliminary reading of those
agreements, decides, in fact, that those issues are referable
to arbitration and stays component of the Utah litigation.
So there's two different stays at issue here. It's a
little bit complex. The point, I think, that we're driving at
is the automatic stay doesn't apply to SCO's affirmative claim
against Novell in Salt Lake City for copyright infringement
because that's their claim. That's an affirmative claim
they're making. And this is in the nature of a precondition to
the assertion by Novel of the affirmative defense. The scope
of the United Linux agreements drives the scope of Novell's
affirmative defense in Salt Lake City. Hence, the defensive
nature of the declaratory relief claim.
One way to -- there's a little riddle I was realizing
as Mr. Lewis was talking. If we went back to -- if we went
back to Judge Kimball in Salt Lake City and said, you know,
this affirmative claim from SCO isn't stayed by the automatic
stay. So, you can continue on with that. The automatic stay
applies to our counter-claim. You have the lift stay motion.
But this affirmative claim by SCO isn't stayed. He would say,
but how can I proceed with that claim. The issues are
referable to arbitration in Zurich. The arbitration has to be
It should be the result, we submit, that because of
the defensive nature of the arbitration claim, the automatic
stay doesn't apply to that component of SUSE.
THE COURT: I understand. Thank you.
MR. LEWIS: Does that answer your question, Your
THE COURT: Yes. Thank you, Mr. Lewis, that was a
good answer you gave me.
MR. LEWIS: I can think of other situations where
both domestic and legal where I would like to send Mr. Jacobs
to represent me as.
Okay. So I think that's my argument on the merits of
the scope of the stay. And I guess my basic point, once again,
is we just don't think the stay applies except to very limited
extent we're prepared to live with whatever the Court decides
to do about that limited extent. Although we would recommend
that since the stay doesn't apply to the defensive, the
territory relief action that SUSE has brought and certainly
does not apply to SCO's affirmative claims in the arbitration,
if those are going to go forward, then we might as well have
everything go forward together. Let's get it done together and
let's get it done and we'll all know better where things stand.
This is not the kind of thing to put off for 6 or 12
months. The parties are ready, or should be ready. They've
had plenty of notice. And it would make much more sense to let
this go forward where the parties agree that would be decided
with their arbitration clause which referred it to Swiss
arbitration and its governed by Swiss law. And I don't think
there's any dispute about that.
So with that said, let me turn now to the
jurisdictional issues and let me start by saying that we don't
contend that the Court couldn't authorize the kind of service
that the debtor affected in this case. But the debtor didn't
affect that service in this case with this Court's authority
which is what the rule requires. What the debtor didn't do was
go and look at the rule which is in black and white in the
Federal Rules as adopted by the Bankruptcy Rules about what
they had to do.
One thing they could have done if they read the rule
was come to this Court in the first place and ask for authority
to serve whomever. And that would have been decided and we
probably would have agreed. We probably wouldn't have opposed
an attempt to service counsel once we'd had a chance to confer
with our client. I don't know what would have happened for
sure because we didn't get the chance.
But they didn't do that and that's what the rule says
they're suppose to do and they're attitude seems to be, well,
rules, rules, you know, we all know what's really going on
here. Let's just not play by the rules. We'll just kind of
make it up as we go along. You know, we're the debtor and we
need special care and attention. And we ask you to give us
that special care and attention. That's not how it works.
That's not due process. Its not in accordance with the rules.
The debtor claims that we, Morrison and Foerster,
through the power of attorney in the arbitration somehow
consented to this, to having Morrison and Foerster served in
this bankruptcy case because this is a, quote, related
proceeding. Well, as in other arguments they've made, the
debtor trivializes the language. There's no reason a debtor
would be suing a non-debtor except as it somehow related to the
debtor's welfare. Its not enough to say that it's a related
proceeding because the debtor's now in bankruptcy and the
assets are somehow related to what's going on. No one is
envisioning bankruptcy. We're talking about related
proceedings on the merits. That's what that's -- that's what
that provision means.
And to read it otherwise is, again, to say that
somehow the -- SUSE is saying, well, whatever happens, whatever
may come, fine, you can serve Morrison and Foerster if it has
the slightest connection now or in the future with the
arbitration proceedings out of which the power of attorney
grows. You have to read that in connection with the proceeding
in which its filed and to which it refers in its very first
Now, the debtor also argues that we have all kinds of
contacts because we're controlled by Novell and so on and so
forth. And the debtor admits it doesn't really have any
evidence here. No admissible evidence, no competent evidence.
It has a lot of speculation and stuff its pulled of Google.
And we all appreciate Google, but Google is not admissible
But just a couple of comments on this. The debtor's
argument amounts to the -- amounts to claiming in many ways
that because we're a wholly-owned subsidiary and because we
happen to share certain management personnel that we're one in
the same as Novell, in essence. That's an alter ego argument.
There's no evidence for alter ego grounds here. Every related
company -- surely in Delaware, this is something that we all
know -- every related company, every subsidiary is going to
share some officers and managers. And there's going to be some
relationship in how they're run. You wouldn't buy a subsidiary
if you didn't want to try to influence its affairs. If that's
enough, then every company is an alter ego of its parents and
every company can be served however you want to. That's not
what the law is.
And so, the mere fact that Novell -- and I remind the
Court that SUSE is not a direct subsidiary. Its -- there's a
number of intervening companies between Novell and SUSE. The
fact that they share some management, that they share some
strategic visions and objectives, that they talk to each other,
that's not enough to turn them into nothing more than Novell.
And I don't think the law says anything to the contrary. On
THE COURT: Did they not operate, though, in the
MR. LEWIS: They -- what they do in the United
States, its my understanding, is they basically sell through --
they have no office in the United States. They may have at one
time, they no longer do. They sell through Novell exclusively
in the United States. They have no people in the United States
on any permanent basis. People may come and go on occasion to
the United States.
But to turn occasional contacts and sort of some form
of minimal commercial intercourse into minimal contacts for the
purposes of suit would be back public policy to say the least.
And that's all we have in front of the Court in terms of
evidence right now.
The debtor argues that the -- that somehow the fact
that the Delaware LLC is involved in some way is significant.
THE COURT: Yes. The joint venture.
MR. LEWIS: Let me explain to the Court as best I can
how the Delaware LLC is involved. As the Court recalls, four
parties formed the Delaware LLC. So there's the LLC agreement
copy which is attached, too.
THE COURT: Yes.
MR. LEWIS: There are some other agreements, however,
between those same four parties. And in those -- those other
two agreements. There's an identical provision in each of the
two that does not appear in the LLC agreement. And in that
agreement and those provisions they say, in essence, each party
will license its software to the other party. And the licenses
will either be through LLC or directly, okay.
So, its true that -- and part of the arbitration is
over whether those -- what those licenses are and where they
are and who they are and so on. But the point here is that the
Delaware LLC is a mere conduit for those licenses. I think --
and I'm not expert in patent law, but I've learned some stuff
over the years and there's a doctrine, I believe, in patent law
called an implied license. This is a license that's deemed to
have been given when the parties agreed it would be given and
it would be unjust not to, regardless of whether there's
actually a writing, a specific written license which would be
nice, because its evidence. Makes the third parties feel more
comfortable. And -- but its not required in this situation.
And I think this would be the kind of situation where you'd
have an implied license, that is, a license by operation of law
given what these two agreements say.
There may also be expressed licenses. There may also
be licenses that are direct and we're not sure which of these
would the be ones that would be at issue in Switzerland. So it
may be that there's no involvement of the LLC at all in the
licenses in Switzerland if they're direct licenses. But if it
is involved as a licensor, its involved as a licensor only by
operation of law because it's a conduit under these agreements.
Its not actively involved in anyway.
And so whether its referred to times or times
in the other pleadings, as the Court can see, that's kind of
inevitable. But its not enough to say how many times its
referred in some pleadings in the Swiss arbitration. Its also
important to understand what the references are about. And now
the Court understands what the references are about. They are
about, to the extent that licenses from the LLC are involved in
the Swiss arbitration. And they may not be. They are involved
because they are automatic. And the Swiss -- and the LLC is a
mere conduit for the creation of these licenses and not because
it was involved in active business dealings or transactions.
So the LLC is really not involved. And the mere fact
that the company SUSE is a shareholder, a percent
shareholder in the Delaware LLC, its not enough, I think, to
raise minimum special or general minimum contacts for purposes
of jurisdiction anymore than any particular shareholders role
as a shareholder would be enough. Again, and I know Delaware
is very familiar with corporate law and that would be a pretty
bad rule under corporate law if every time you were a
shareholder in a company that was a U.S. company, people could
serve you because you were a shareholder out of state, let's
say. And we're not even talking about international.
So that would be -- that's, I think, our main point.
There are, as the debtor says, various factual issues regarding
the relationship of the parties. If those need to be
elaborated, I guess they'll be elaborated through a discover.
But again I suggest to Your Honor that we don't need to get
there because the stay doesn't apply to the Swiss arbitration
except in a very limited way, a way the Court can deal with
this morning. Either we can stay all damage issues or the
Court can grant stay relief now or we can simply postpone the
issue on our representation it will come back to the Court to
seek stay relief on the damages if and when we get there. But
that's down the line.
The alternative is for us to wait 6 to 12 months to
try to get some critical issues decided here that are also
critical to the Utah litigation and that we'll be talking about
a little bit later on, all of which in turn are critical to
this Chapter 11 case and to the parties, both the debtor and
the non-debtors. Any questions, Your Honor, that I can answer
THE COURT: No, I may have some for Mr. Eaton, but
you've been very clear, Mr. Lewis.
MR. LEWIS: Thank you so much, Your Honor, I
appreciate the time.
THE COURT: Thank you. Thank you. Mr. Eaton.
MR. EATON: Thank you, Your Honor. And to the extent
there are specific questions, Your Honor, about the Swiss
THE COURT: Well --
MR. EATON: -- I may have to turn over to some
colleagues who are more familiar with that. But I want to
THE COURT: The defensive issue, if you would,
MR. EATON: Yeah, I did want to go there --
THE COURT: Yes.
MR. EATON: -- because the argument was made that it
only -- the argument at this stage is really only going to
apply when you're trying to recover from the debtor. If that's
the case, then injunctive and declaratory relief would never,
ever be stayed. That's not the law. Okay. Its just not. And
we've cited to the cases specifically that address that
And I understand what counsel believes we'd like the
law to be or what the policy reasons are about trying to get
the estate assets. Let's just look to what the Third Circuit
said in Maritime Electric. And Your Honor, I'm turning to page
1204 of the decision.
"Whether a specific judicial proceeding falls within
the scope of the automatic stay must be determined by looking
at the proceeding 'at its inception'," citation omitted. "That
determination should not change depending on the particular
stage of the litigation at which the filing of the petition in
Thus the dispositive question is whether a proceeding
was originally brought against the debtor. It doesn't talk
about whether it was to get money or recover from the debtor.
It was whether or not the litigation was brought against the
debtor. End of story.
They chose to bring a Swiss arbitration, whatever the
reason, because there was a Swiss -- there was an arbitration
provision, whatever. The fact is they made the decision to
commence an action against the debtor. And under the Third
Circuit, which is what we have to go by, that is stated. And I
think -- I don't know how else I can address the point with
respect to the defensive nature, Your Honor. There is no
dispute that they initiated the action. And from our
perspective, that's the end of the story.
There was an argument made, Your Honor, that -- well,
the damages claims aren't being tried now. That's Phase IV.
There's one problem with that. As I understand it, a
determination of liability now with respect to Phase II will be
applicable with respect to when it came to determine damages in
Phase IV. And that is with respect to the affirmative claims
at this point. And for that reason, Your Honor, it does have
an impact. Even if they say they're not going forward with
damages now, it absolutely relates to that issue and is
impacted by that issue.
The argument is made that, well, we're already to go.
Everybody's geared up. Its set for December 3rd, it may take 6
to 12 months. I don't know whether, in fact, its true that
nobody can get in front of the arbitration in 6 to 12 months
assuming a proper motion for stay relief is filed.
But the fact is, as of right now, SCO does not have
counsel retained with respect to the Swiss arbitration. Our
Swiss counsel has resigned. We do not have Swiss counsel. So
from the debtor's perspective, from just a logistical
standpoint, we don't have anybody ready to go now. And
furthermore, Your Honor, we're talking about a litigation that
will take from December 3rd to December 14th which will require
substantial resources, which will require attendance by the
debtor, when right now, we're going through the drilling with
issues -- fundamentals of the reorganization which Mr. Spector
will talk about a little bit later.
But the bottom line is, we're not in a position to go
forward right now. And quite frankly, that's not the issue at
all in determining whether or not the automatic stay applies.
Its just -- respectfully, its just not relevant to that
Your Honor, I think there's been an acknowledgment.
I thought I heard that they really -- if the debtor had filed a
motion under Rule 4(f)(3) they probably would not have
objected. Respectfully, Your Honor, I think we can do that
now, nunc pro tunc. We've all addressed the merits. So I
think that particular concession by counsel, and I appreciate
it, kind of gets us to the merits that we were discussing
And I do believe the power of attorney that was
reflected with respect to Morrison and Foerster is a little bit
broader. Its not just to represent in the arbitration
proceeding. It is any related proceedings. The related
proceeding that we're talking about is not a lawsuit against
SUSE to recover money. Its not any type of action to divest
them of any property right or to take anything from them. Its
simply to get a determination that the arbitration that it
instituted, being prosecuted by its United States attorneys,
should go forward when they're making their position
affirmatively in the arbitration that it is not so.
And in light of that, Your Honor, I think it is
specifically related for the matters upon which they have been
retained, which is to prosecute that action. So I think that
addresses the point that counsel's making, that the -- excuse
me, that the power of attorney did not apply.
As to the argument on Novell and that what we're
really trying to do is some sort of alter ego. We're not
making that point, Your Honor. It has nothing to do with alter
ego analysis. It has nothing to do with piercing the corporate
veil analysis. The point that we're simply making is that
Novel can be considered and deemed to be their agent for
purposes of jurisdiction, not that they are one in the same,
but that Novell would be considered SUSE's agent for purposes
of establishing the requisite minimum contacts with the United
States sufficient to exercise jurisdiction over them with
respect to the very agreements in question.
I thought I heard counsel state -- Your Honor asked
the question, didn't they operate in the United States. They
did. They operated in the United States after they entered
into the very agreements in question, Your Honor. And from my
perspective, that in and of itself, shows why there is not just
the specific jurisdiction, it also shows the continuous
jurisdiction necessary to establish general jurisdiction over
And finally, Your Honor, the argument with respect to
the Delaware LLC and the LLC agreement not being really subject
to the litigation. As I understand it, Your Honor, all of
these agreements that were entered into were done at the same
time or on or around the same time. All of them were part of
the intention of these four entities to have a joint venture
that was going to be created through the U.S. entity to operate
in the United States and worldwide. You can't parse them out
and separate them out. It was all part of one concept that
actually came to fruition, occurred, and as counsel indicated,
it related and resulted in the company actually operating in
the United States.
So, Your Honor, I think for all of the reasons that
we've set forth here today and in our briefs, I believe that
the motion as filed should be granted.
THE COURT: Thank you, Mr. Eaton.
MR. LEWIS: Your Honor, may I respond briefly?
THE COURT: You may.
MR. LEWIS: Thank you, Your Honor.
THE COURT: Yes, you may.
MR. LEWIS: Your Honor, to turn to the Maritime case
first, its, as I think in someways the lynch pin here.
THE COURT: Yes, please, because that's the central
MR. LEWIS: The debtor has read some language from
the Maritime case where it says it doesn't matter what the
stage of the case is. It matters whose -- who is proceeding
against whom. And its that word "against" that I think is the
key. That's been my whole point. Its not who starts it. Its
not who initiates the litigation, who's first to court. It's
the nature of the litigation.
And in this case, the nature of the litigation is
defensive. Why should it matter for purposes of the stay who
starts it. Why should it matter whether its just because
Novell raised it as an affirmative defense. It can -- you
know, those claims are not stayed, no one's saying they are.
But because SUSE, not willing to wait around while its business
continues to be affected by the debtor's activities decides its
not going to wait to be sued to raise the same affirmative
defenses, in essence, that Novell has raised. It makes no
We're talking about attributing a sensible provision
to Congress's intent which we're required to do. That would
not be sensible. I think I've talked about that some as well,
that Congress would otherwise have simply stayed everything
because they only reason for such a provision would be to stop
the expenditure of attorneys' fees generally. Congress didn't
Now, on the question of the nature of the claims in
the Swiss arbitration where counsel says, well, the affirmative
claims, while the damage claim is, you know, may not be going
forward, to allow the defensive claims to go forward would be
effecting the damage claims. But the fact is, SCO has to
continue with its claims in the Swiss arbitration.
The automatic stay, and the debtor has not argued
this and couldn't, those claims, those counter-claims that SCO
brought are still alive. They're going to get into the merits
of the same kinds of issues that the declaratory relief action
is going to get into anyhow. So its going to happen one way or
the other. We might as well have it all happen together.
THE COURT: But they're not seeking to pursue those
claims at this time.
MR. LEWIS: Your Honor, they have to get the
arbitrators agreement not to do that. That hasn't happened
yet. And those -- there's nothing which allows them
unilaterally to stay the arbitration anymore than they can --
if they had sued Novell in Utah and Novell had not made any
counter-claims, the debtor would not be in a position to
unilaterally to tell Judge Kimball, well, fine, we're just
going to wait. We -- you know, we'd be able to make a motion
for failure to prosecute if we wanted to.
So those are still alive and they're still set to go
forward. And it may be that their appeals to the Arbitral
Tribunal based upon the recent resignation of their Swiss
counsel might get the Arbitral Tribunal's attention. But
that's up to the Arbitral Tribunal. That's not here today.
And their resignation of counsel took weeks -- took place weeks
after the case was filed. And I just find very puzzling to
have happen at the last possible moment when it looks like
everything else failed to try to stop the Arbitral Tribunal
from proceeding as it may intend to do.
They had the ability to be ready. They had the
ability, for example, also to ask for other counsel, go to
their Swiss counsel right away and say this is critical, will
you be with us. And if not, we need to find somebody else
sooner than later. None of that evidently happened. And all
of a sudden, out of the clear blue, after Swiss counsel did
write some letters, I might point out, in the arbitration,
post-bankruptcy to the tribunal, apparently happy to continue
to represent them for a while, all of a sudden, out of the
clear blue, says at the last possible moment, well, we don't
want any part of this bankruptcy. And I don't know what their
real reasons are. They just say they don't want to be
supervised by the bankruptcy court. Whatever their real
reasons are, maybe those are, maybe they aren't.
So -- and I think the important point here again is
these claims need to be decided. We can't wait to have them
decided. The debtor's motion to sell, which has now been put
off, only points that up further. We'll probably discuss that
more on the stay with these motions.
THE COURT: Sure.
MR. LEWIS: But its really the same point. You just
can't pretend that this case doesn't even know about these
issues regarding their critical assets. Who owns them. What
their money is going to be. All of those kinds of things which
we'll talk about more later are in essence encapsulated to some
extent in the Swiss arbitration anyhow. So we should get on
The notion that we're somehow going to distract from
the attention of the debtor, the debtor apparently has been
quite able to put together this sale motion. We see no signs
of a plan. If at some point or another later on that becomes
an issue, the debtor can always come back here and ask for some
kind of further relief or can go to the Swiss Arbitral Tribunal
and ask for further relief. I think we ought to get on with
what needs to be done in this case for all concerned, not just
for the debtor. Not for the debtor's narrow interest because
other interests are stake, namely the interest of other
creditors including Novell and SUSE.
The argument that we're just arguing that Novell is
the agent of SUSE and we're not arguing alter ego is
technically correct, but if you look at the motion, its not
accurate. The reason they're arguing that Novell is SUSE's
agent is they're arguing that Novell is, in essence, SUSE. The
evidence that they adduce or purport to adduce on that subject
is that kind of evidence. And that's the only evidence. And
even there, there's not -- most of its not real evidence. Most
of its just some speculation which may or may not be true.
On the Delaware LLC, once again, their argument
originally was, well, gee, the LLC is intricately involved and
therefore there is jurisdiction. As we've shown, the LLC is
not intricately involved. It's a virtual bystander. And so
the mere fact that the parties created the LLC doesn't really
matter anymore than if there was a complete stranger
corporation of some sort.
So, again, I'd ask the Court to find the stay does
not apply to the arbitration insofar as it concerns the
defensive aspects of the arbitration. It clearly does not
apply to the debtor's claims in the arbitration. And if it
applies, as it does, to the affirmative damage claims which are
nowhere near $100 million, then we ask the Court to either
grant stay relief, to just say its stayed if that's what the
Court prefers to do, or to let us bring that issue back to the
Court at some later date when its really and issue.
If, for example, in the unlikely event, in our view,
we lose the arbitration, then we won't have to worry about the
damage claim at all. I don't think that's going to happen, but
it just makes the point.
Thank you, Your Honor. I appreciate the time.
THE COURT: Of course, Mr. Lewis.
MR. EATON: Your Honor --
THE COURT: Mr. Eaton, you want to address the issue
of the debtor proceeding with the counter-claims in the
MR. EATON: Yeah, Your Honor, and I think to the
extent that the Court has specific questions about the interim
relationship between the Swiss arbitration and the claims being
asserted in the Utah litigation. I think Mr. Singer can of
address those because he's been primarily -- but the bottom
line is, as we put in our motion and as we even told the
Tribunal, we are prepared to stop with the prosecution of the
counter-claims for the very reasons we've articulated, that
they are interrelated because the -- they do have an impact on
the defenses that are being asserted with respect to their
claims. And Mr. Singer can address the specifics as to what --
of how that works.
THE COURT: That would be helpful.
MR. EATON: But we have specifically said, we are not
intending to go forward with our counter-claims in the Swiss
arbitration. We have told that to this Court and we have told
it to the Tribunal as well, Your Honor.
THE COURT: Thank you, Mr. Eaton. Mr. Singer, would
you like to come to the podium and I don't know the procedures,
of course, for the arbitration and how simple it is just to
tell the panel that we're not proceeding with the counter
MR. SINGER: Thank you, Your Honor. First of all,
I'm Stuart Singer from Boies Schiller & Flexner and counsel,
both, in the Utah litigation and in the arbitration.
THE COURT: Yes, welcome to you.
MR. SINGER: Thank you. We have indicated to the
panel that we do not intend to pursue the counter-claim in
light of our belief that the whole proceeding, or the claims
against the debtor, are stayed. And there's been no indication
from the panel that they will not accept that, no indication
from the panel that they would do what would be unusual in
going forward with those -- with that counter-claim piece
especially since its factually integrated with certain defenses
to the claims of Novell if the action is stayed. We have no
reason to believe that the panel would do that.
With the Court's permission, may I make two further
statements regarding the interaction of the arbitration and the
THE COURT: Yes, please.
MR. SINGER: First of those is that the affirmative
defenses in the Utah litigation are not nearly as broad as the
SUSE arbitration claims. While its true that in -- as an
affirmative defense, Novell raised to SCO's copyright
infringement claims, they have pled the affirmative defense of
The claims in the arbitration go far beyond that.
They are seeking a worldwide injunction against SCO proceeding
to make any steps to enforce its intellectual property against
SUSE Linux. That would be far greater relief than simply an
affirmative defense to a copyright infringement action in the
United States based on Novell's distribution of SUSE Linux.
They have also sought to have a declaration that our
intellectual property rights and certain Unix intellectual
property were contributed to the joint venture. That's not
raised at all by an affirmative defense with respect to
And, of course, they're trying to set in this phase
at least a predicate for damages in whatever amount they're
seeking. We only can go by the addendum amount that they
chose, but in whatever amount they're seeking, the predicate
for that would be the decision in this phase that we have acted
wrongly in seeking to enforce our intellectual property rights
in light of the joint venture agreements and the associated
The other point, Your Honor, I wanted to raise was in
connection with the assertion that the timing of this
arbitration is critical with respect to the resolution of
intellectual property issues that Novell and others have an
interest to see resolved. And I think that that is not the
case, respectfully, in like of Judge Kimball's ruling in August
of this year with respect to the ownership of the copyrights.
We disagree, very much, with the correctness of that ruling.
But Judge Kimball ruled that we do not own the copyrights in
Unix and Unix as of the time of the asset purchase agreement
in when Novell sold those entire Unix business to our
predecessor in interest.
That issue, that decision on summary judgment, which
hopefully will be reviewed by the Tenth Circuit, is what will
decide the ownership of intellectual property rights that are
key here. In fact, if we were arguing today the issue of stay
relief, we would argue that it hardly makes sense for an
arbitration as a prudential matter to go forward with the
question of whether we gave away to the joint venture
intellectual property rights that a U.S. District Court judge
has ruled we didn't own in the first place.
So the arbitration isn't needed to go forward to
resolve those issues. Thank you, Your Honor.
MR. LEWIS: Your Honor --
THE COURT: Yes, Mr. Lewis.
MR. LEWIS: -- I'm going to send Mr. Jacobs into
THE COURT: Mr. Jacobs.
MR. LEWIS: Its sort of see you one and raise you one
response. But before --
UNKNOWN PERSON: Touche, Your Honor.
MR. LEWIS: But before I do that, I just want to
comment on the comment about an injunction as part of the
THE COURT: Yes, please, yes.
MR. LEWIS: Your Honor, nothing in the Bankruptcy
Code allows the debtor to go about interfering with other
people's businesses post-petition just because it's a
bankruptcy debtor anymore than it can continue to impose a
nuisance. Each new infringement, as the Court knows, is a new
violation. And so, the debtor's position here that somehow the
fact that we're also seeking injunctive relief magically
changes into something else is just wrong. We're entitled to
defend ourselves and to defend our business. And that may
include obtaining, not a mandatory injunction, but a
prohibitory injunction, a classic defensive maneuver.
Thank you, Your Honor. I'll turn --
THE COURT: But that has to be brought here, doesn't
it? In this court?
MR. LEWIS: No, I don't believe it does, Your Honor.
I don't -- I think if someone was interfering with our business
post-petition, I think under, what is it, 959 we could bring
that anywhere, USC 959, just as we could bring a nuisance
claim against someone anywhere, in any court of competent. We
can sue the trustee. And I don't think that's any different
here, nothing in the Bankruptcy Code or the automatic stay give
the debtor the power to sort of lay about and interfere with
other businesses and other property interests just because it's
And now I'll turn it over to Mr. Jacobs. Thank you,
THE COURT: Thank you, Mr. Lewis. Mr. Jacobs,
MR. JACOBS: Your Honor, I think -- thank you, Your
Honor, for all the time on this somewhat complicated procedural
THE COURT: Its helpful.
MR. JACOBS: I think they're in a bit of pickle, that
is the debtor SCO. They're in a bit of a pickle because as Mr.
Singer indicated, in the Utah case, they want to get that
ruling up on appeal. But one of the causes of action is stayed
pending the outcome of an arbitration in Switzerland.
Before filing bankruptcy, SCO went to Judge Kimball
and said, take your summary judgment ruling and certify it for
appeal. Judge Kimball said, no, I'm not going to parse this
ruling. We're going to get all the issues decided at the
district court level.
Now, they could still conceivably go back and say, if
you were to grant us stay relief so we can go back on our
affirmative -- on our counter-claims for dollars with Judge
Kimball, maybe they'd go back to him and say certify it even
though this copyright infringement claim is stayed.
We'd resist that. We would say, they had all the
opportunity in the world to resolve the -- to get the
arbitration done, to resolve the issues that have been referred
to arbitration that relates to this claim in Utah. They went
to you. They asked you for -- to shut down the arbitration.
Its their own fault for dividing up the causes of action in
this -- in the district court case in Utah and making it
impossible to reach a final judgment on all causes of action.
So we would oppose certification, partial certification and
entry of final judgment so that the case could go up on appeal.
So in order -- even for them to accomplish their
appellate objections, it seems to us the arbitration should go
forward and the scope of the United Linux intellectual property
provision should be decided. Once those are decided, we can go
back to Judge Kimball on the copyright infringement claim.
There will be two reasons, if we are successful, why
he should grant judgment to Novell on the copyright
infringement claim; (1) Judge Kimball decided they never owned
the Unix copyrights in the first place; (2) if they did, under
the United Linux agreements, they were divested or licensed to
SUSE and, hence, no affirmative claim against Novell.
So when you look at this litigation, we step back and
look at what SCO needs to accomplish, even by their own terms
because they're out there publically, I think we submitted this
to Your Honor, the CEO of SCO is saying, we're going to appeal,
we're confident. Judge Kimball, like he says, you know, gets
it wrong all the time. And so this case has to get on the road
and get done. That's the first high-level point.
The second point, I don't think they're really
grappling with this point. The counter-claims are not subject
to the automatic stay. The counter-claims in the arbitration
are not subject to the automatic stay. They can protest to the
Tribunal all they want, that the Tribunal should not go forward
with the arbitration in December even if you grant their motion
on the automatic stay with respect to our affirmative claims.
They can protest all they want. The Tribunal, these
are distinguished arbitrators. They zealously guard their
jurisdiction. It wouldn't surprise you to learn that, I
suspect. And they will make their own decision on whether --
THE COURT: But if I grant their motion and stay you
from proceeding in the arbitration, I can't imagine you won't
be in there yelling that the counter-claims should not proceed.
MR. JACOBS: We want the counter-claims to proceed,
absolutely. I will say that on the record. You can -- they
can hold me to this. You can hold us to this. We would just
-- we would very much like to try those counter-claims in
December, Your Honor. And I'll be very straight up with you
about why they're very weak, number one. But number two, we
really -- getting three busy international arbitrators together
with counsel is a scheduling train wreck. And so to lose that
hearing date is something that we're very concerned about.
And, candidly, yes, as counsel for the debtor
acknowledged, there's a lot of overlap between the counter
claim issues and the, what we're calling, the defensive
affirmative claim that SUSE has brought. Essentially, their
counter-claim is that SUSE acted in bad faith and by asserting
the intellectual property provisions that it has.
So, there's some technical bankruptcy issues that I
think bankruptcy counsel has very well addressed, Your Honor.
But just thinking about how to get this -- the issues resolved
so that the bankruptcy can be resolved it seems to us that the
stay should not be -- the stay motion should not be granted.
In any case, the counter-claims will go forward if the Tribunal
chooses to do so. They have no real answer to that conundrum.
That's up to the Tribunal.
THE COURT: Thank you.
MR. JACOBS: There's one other thing, Your Honor, I
wanted to mention. We did not submit, but it seems to us it
could be helpful to Your Honor to have Judge Kimball's ruling
on the motion to stay the copyright infringement claim pending
the United Linux arbitration outcome because Judge Kimball
parsed through these agreements sufficiently to decide what
issues on their affirmative copyright claim were referable to
arbitration. So, if that would be helpful, I have copies here
THE COURT: Any objection?
MR. EATON: I have no objection, Your Honor.
THE COURT: Thank you. I would certainly accept
MR. JACOBS: May I approach?
THE COURT: Yes, you may. Thank you very much, Mr.
Jacobs. Thank you, sir. Yes, thank you. Thank you for doing
MR. EATON: Your Honor, I don't know whether the
counsel's finished, I want to --
MR. JACOBS: Yes, I am. Thank you very much.
MR. EATON: I didn't mean to interrupt you. Your
Honor, if Your Honor is going to look at any of the case law
and probatively look at the issue, I would ask the Court to
take a look at a Third Circuit decision called AC and S, Inc. v.
Travelers, we cite it with respect to the motion for stay
relief of Novell, 435 F.3d 252 in the Third Circuit which
addressed an arbitration and the court discussed some of the
meshing that takes place in an arbitration setting delineating
to counter-claims and defenses and incidently held that the
arbitration should have stopped once it became apparent that
regardless of how you couch things, it would affect and impact
on the debtor's estate and that the decision of the arbitration
panel was worth (indiscernible) analysis.
THE COURT: Have you had an opportunity to review
that case, Mr. Lewis?
MR. LEWIS: No, Your Honor, I actually just had a
small point that I wanted to raise that I've been reminded we
failed to address specifically in our last part of the
argument. And that is the debtor got up again and said, well,
we think you can do it nunc pro tunc in terms of authorizing
I just wanted to say, we don't think the Court can.
And while it may look like we're being hyper-technical, I think
its important to us that this case from the start, in all
respects, follow some reasonable due process procedures. We
don't want to set a precedent whereby the debtor is always say,
well, gosh, doesn't really matter. We're all here and so on.
I think its important to adhere to the rules that are set
forth. We will try to do so and we ask that the debtor be
required to do so as well.
If the Court wishes to authorize service by service
on Morrison and Foerster at the debtor's request pursuant to a
motion, I think we can deal with that when the time comes. We
don't think there's any authority to do it nunc pro tunc. It
would make no sense to talk about the power to bring a party
before the Court in the first instance after the fact. Thank
THE COURT: I don't disagree with that, but just
practically speaking, assume that they did file such a motion
and I granted authority. We would just be back in the same
posture and perhaps --
MR. LEWIS: Yes, Your Honor. And I think we're
prepared to discuss the possibility that we might just consent.
I think we just need a moment or two to do that. But I do ask
the Court to take seriously our concern about the employment of
proper procedure from now on.
THE COURT: Well, I do, I certainly do. And I share
your view on a nunc pro tunc application certainly.
MR. LEWIS: Thank you, Your Honor. If we'd just have
a chance to consult maybe at the end of the hearing this
morning, we've had a chance to whisper a little bit, we can
tell the Court how we feel about that.
THE COURT: Thank you.
MR. LEWIS: Thank you. I appreciate the inquiry.
THE COURT: I was thinking of taking a short recess
just to review my notes here and the arguments of counsel. And
just to see where I would like to proceed from here as far as
whether we need an evidentiary hearing or if, in fact, I might
even be prepared to rule at this time. So if we could take
maybe a 15-minute recess and the parties can also relax a
little bit before we proceed further. Thank you.
MR. LEWIS: Thank you, Your Honor.
THE COURT: Thank you, everyone, you may be seated.
MR. LEWIS: Your Honor, if I may, before the Court
does whatever the Court's about to do.
THE COURT: Yes, Mr. Lewis.
MR. LEWIS: I may sometimes be right and sometimes be
wrong, but I'm always a man of my word when I try to be. We've
talked about the service issue.
THE COURT: Yes.
MR. LEWIS: And a couple of other items. And so
before the Court rules, if that's what the Court's about to do,
I think we can spare the Court certain kinds of problems, if
First of all, we're prepared to -- for purposes of
this motion only --
THE COURT: Yes.
MR. LEWIS: -- stipulate to the form of service and
the issue of personal jurisdiction without prejudice in any
other proceeding to whether the same facts or any of those
facts would be relevant or decisive. And so, the Court doesn't
need to deal with that. And to the extent the Court was
thinking about future proceedings after discovery on those
issues, I don't think we need to do that.
We're also prepared to waive the damage claim in the
arbitration in Switzerland outright. Thank you.
THE COURT: Thank you, Mr. Lewis. Well, I am
prepared to rule, I think, at this time. I think its
appropriate. I think that the arguments and materials
submitted to the Court were just excellent and helpful. Didn't
necessarily make the decision easier, but certainly, I think
helped highlight the issues and hopefully to make the decision
And based upon the stipulations of counsel relating
just to this motion on the appropriateness of service and the
jurisdiction that the Court has, I certainly can, I think, get
more directly to the issues at hand. In fact, it shortens the
So I am going to address the applicability of the
automatic stay to SUSE's claims in the Swiss arbitration. We
all know what Section 362 of the Bankruptcy Code provides and
so I'm not going to quote from it. But I'm referring, of
course, to 11 United States Code Section 362 (a)(1).
And clearly the scope of the automatic stay is broad
and by necessity it is broad. And Associate of Saint Croix
Condominium Owners v. Saint Croix Hotel Corp., a decision by
our Third Circuit, 682 F.2d 446, provides as such. And we do
have, I think, agreement from SUSE that this arbitration -- an
arbitration is also subject to the automatic stay, but I think
its very clear that that is the law in any event. All
proceedings are stayed including arbitration, license
revocation, administrative and judicial proceedings. And that
language is taken from the House of Representatives Report, No. 95-595.
However, the clear language of Section 362(a)
indicates that it stays only proceedings against a debtor. And
again Saint Croix is the authority for that point. The statute
does not address actions brought by the debtor which would
inure to the benefit of the bankruptcy estate.
In determining whether a proceeding is subject to the
automatic stay, courts must look at whether the proceeding was
originally brought against the debtor. Saint Croix, 682 F.2d
at 449. And in making that determination, courts must look at
the proceeding at its inception. And again, that is Saint
Croix as the authority.
That determination should not change depending on the
particular stage of the litigation at which the filing of the
petition in bankruptcy occurs. Saint Croix is again authority.
At its inception, the Swiss arbitration at issue here was
commenced by SUSE against the debtor. Thus it falls within the
scope of the automatic stay.
SUSE argues that the arbitration is not subject to
the stay because SCO has asserted counter-claims in that
proceeding. However, the fact that SCO has asserted the
counter-claim in the arbitration is of no consequence. And I'm
going to quote from the Maritime Electric v. United Jersey Bank
decision by our Third Circuit which has been argued here at
"All proceedings in a single case are not lumped
together for purposes of automatic stay analysis. Even if the
first claim filed in a case was originally brought against the
debtor, Section 362 does not necessarily stay all other claims
in the case. Within a single case, some actions may be stayed,
others not. Multiple claim and multiple party litigation must
be disaggregated so the particular claims, counter-claims,
cross-claims and third party claims are treated independently
when determining which of their respective proceedings are
subject to the bankruptcy stay."
Now SUSE argues that the automatic stay does not
apply to the arbitration because their claims are defensive in
nature. However, the Court notes that most actions, most
lawsuits that are filed are, in effect, protective in nature.
And I think that this litigation which clearly was brought
against the debtor is an assertive -- an offensive if you will,
action. And it goes far beyond protecting their legal rights
to, in effect, seeking specific relief which would impact the
bankrupt estate. And accordingly, I find that the defensive
nature of the case argument, the protective argument made by
SUSE does not control.
Accordingly, the Court holds that the Swiss
arbitration is subject to the automatic stay and SUSE is
enjoined from proceeding in that arbitration during the
pendency of the bankruptcy case.
MR. EATON: Your Honor, if I may approach? We have a
copy of the order that was submitted along with our motion.
THE COURT: Yes.
MR. EATON: If I may approach, Your Honor?
THE COURT: I don't know if you've reviewed the form
of order, Mr. Lewis?
MR. LEWIS: I think we -- I'd like to just take a
real quick look at it, but before I do that --
THE COURT: Yes.
MR. LEWIS: -- I just want to be sure that I'm clear
what the Court's ruling is. The Court's ruling, as I
understand it is that the arbitration insofar as it involves
our claims, our declaratory relief claims is stayed.
THE COURT: Yes.
MR. LEWIS: And the monetary claims presumably as
THE COURT: Correct.
MR. LEWIS: But that it is not stayed insofar as it
involves SCO's claims against SUSE, seeking relief against
SUSE, is that correct?
THE COURT: Well, let me hear from Mr. Eaton before I
indicate my position on that.
MR. LEWIS: Okay.
THE COURT: Mr. Eaton.
MR. EATON: Your Honor, as we'd indicated and argued
earlier and in the Court's ruling, its our position the
arbitration is stayed for the very reasons we discussed
earlier, mainly that the counter-claims also overlap with
respect to the affirmative defenses such that if the Court
ruled against us on our counter-claims, it is ruling on the
affirmative defenses to SUSE's affirmative claims that the
Court has already upheld and applied with respect to the
automatic stay. The AC and S case that I gave to the Court also
stayed the entire arbitration and that's why we believe that
the order (indiscernible) applies to the entire arbitration as
well, including the counter-claims.
THE COURT: Mr. Lewis, that is the nature of my
ruling, yes, that the entire arbitration proceeding is stayed.
MR. LEWIS: Okay.
THE COURT: And -- proceed.
MR. LEWIS: Yeah. I guess from our point of view,
you know, no one made SCO make its counter-claims. It can
withdraw them, it can drop them, it can do whatever it wants to
do, but they are SCO's claims against us and if it wants to
have those stayed, I don't see why its not -- I understand
there are relations between the issues.
THE COURT: Yes.
MR. LEWIS: But SCO chose to create those relations
between the issues and its brought the action and just as it
did in Salt Lake City. And it needs to decide what its going
to do. And I obviously have lost that argument, but you know,
I respectfully have to say I don't agree with that aspect of
the Court's ruling in any case.
THE COURT: I appreciate that and I certainly
understand that you would not agree.
MR. LEWIS: Yeah, okay.
THE COURT: But I do think that the interrelationship
between the claims by necessity and the impact on the debtor
requires that the entire arbitration proceeding be stayed.
MR. LEWIS: Your Honor, as far as the order is
concerned, I think the order goes way beyond whatever was at
issue in this case. The Court orders -- this order purports to
enjoin SUSE from doing a whole lot of things that no one's ever
talked about us doing someday through itself or its agents. I
mean, the issue in this proceeding was is the arbitration
THE COURT: Correct.
MR. LEWIS: To the extent that the order purports to
go beyond that issue, and I'm not telling the Court that we're
going to be running around to some other forum, but I really
think its excessive here for the order to do anything.
THE COURT: Perhaps Mr. Eaton could be helpful in --
MR. EATON: Your Honor, what I was going to suggest
is that we will get together after the hearing, work out the
form of the order that we can submit that's in accordance with
the Court's ruling.
THE COURT: I would appreciate that, yes.
MR. EATON: We will, Your Honor.
MR. LEWIS: Thank you, Your Honor. I appreciate
THE COURT: Yes. Thank you. And to the extent that
you can't, then you certainly may submit alternative forms of
order for my consideration.
MR. LEWIS: Very well, thank you, Your Honor.
MR. EATON: We can do that, Your Honor. Thank you
very much, Your Honor. Thank you for allowing (indiscernible)
THE COURT: Of course, Mr. Eaton. Thank you, sir.
THE COURT: I'd like to make a suggestion as we
proceed. I know that the motion to lift stay, Novell's motion
to lift the automatic stay will take some time. And I'm
wondering if we couldn't perhaps address a motion that might --
the remaining motion on the compelling the payment of the
royalties that has been filed. Perhaps that might fit a little
bit better prior to, you know, a lunch recess that I think the
parties should take and I must confess to you, I was here until
after 2:00 this morning mediating a case. So I could use a
luncheon break myself and I think that perhaps just from an
orderliness standpoint, rather than start and interrupt the
hearing on the motion to lift stay, perhaps we could move
forward onto the payment motion?
MR. LEWIS: Your Honor, we certainly have no
objection to that if the debtor has no objection. And I think
it's a good suggestion because it should be fairly simple.
THE COURT: Yes.
MR. LEWIS: Its not a very complicated motion.
THE COURT: Yes.
MR. LEWIS: I think the facts are undisputed that the
debtor is receiving money that belongs to us, not the debtor's
money, our money. Its our property. Its not property of the
estate in any sense. I don't think there's any real issue
about that. The question is, are we at risk with respect to
what's going to happen to that money. And the related question
is, is there a way for this Court to fashion appropriate
Let me start with the latter question first, that is
is there a way for this Court to fashion appropriate relief.
The debtor argues, well, the contract says what the contract
says and the Bankruptcy Code can't be used to do things that
are inconsistent with the Bankruptcy Code's objectives, neither
of which, it seems to me, are of any relevance to the ultimate
We agree that the contract says what the contract
says. Bankruptcy courts all the time fashion specialized
relief under various circumstances that is not specifically set
forth in the Code. Sometimes it is, like adequate protection
and this is analogous to that. It doesn't apply here because
adequate protection has to do with property that's the estate's
property. But its an analogous concept.
THE COURT: Let me ask just one factual question
before you proceed.
MR. LEWIS: Yeah, yeah.
THE COURT: Is the debtor current on its payments?
MR. LEWIS: As I understand it, the debtor is current
on its payments at the moment. And we do apologize for the
mistake in the declarations. Its not something we like to do,
it wasn't intentional.
THE COURT: No, I think both sides were operating
under a misimpression on that.
MR. LEWIS: Yeah, apparently everybody had the same
misunderstanding. In any case, we do apologize for that to all
So I think there's authority in Section 105 (a) and
we've cited a couple examples of cases in the Code where
there's no specific provision of the Bankruptcy Code but the
bankruptcy court can, under 105(a), fashion a remedy as long as
its not inconsistent with the purposes of the Code.
This is not inconsistent with the purposes of the
Code. One of which is to specifically exclude certain property
as property of the estate. Section 541. We're not doing
anything that hurts the debtor in that sense. Or that is
somehow not provided for in the Bankruptcy Code in some other
way. We're just asking the Court to provide us some -- with
some additional protection for assets that are excluded from
So then, the other issue becomes what's the big deal.
The debtor says, well, the contract, what it says, what it says
and that's true, but again, bankruptcy contracts that say what
they say are overridden all the time, both under the Statute
itself under specific provisions, like Section 365 is
overriding of, you know, anti-assignment clauses, but also when
the bankruptcy court fashions the various kinds of relief.
Adequate protection is a classic example of that.
There's no specific provision in the adequate protection
statutes necessarily for the various kinds of remedies the
Court can fashion for adequate protection. Although a couple
are suggestive, its not limited there. And the Court can
create a remedy that suits the circumstances.
Are we at risk? Well, the debtor says no, what's the
big deal, we're paying. The debtor never really says in its
response that, yeah, we're in good shape, there won't be an
issue. And that's really our concern here. And the more the
debtor resists the idea of turning the money over to us, the
more we think that the debtor plans to use that money and then
replace it. Its not authorized to do that. Its suppose to put
that money aside and give it to us, not put the money aside,
use it and then like, you know, taking a little money out of
the drawer and put it back in the till next week, nobody will
ever know the difference.
And the debtor's resistence to turning the money over
to us suggests that our concerns about its financial condition
which itself says is a troublesome situation are justified.
And all we're asking is that the debtor turn the money over to
us as it comes in.
If that isn't an appropriate remedy for some reason,
then at least let's have the debtor escrow the money or set it
aside or have an order that expressly forbids the debtor from
using the money for any purpose whatsoever. Just let it sit in
the account if that's what the debtor really feels it needs to
do for some reason I can't fathom, and then pay it to us every
month. Surely its not that hard to cut a check once in a
while, a little bit more frequently as money comes in.
I think that's the essence of the motion, Your Honor.
THE COURT: Thank you, Mr. Lewis. Mr. Singer.
MR. SPECTOR: Good afternoon now, Your Honor.
THE COURT: Good afternoon.
MR. SPECTOR: It's so rare we can get an opportunity
and its so sweet to take that opportunity about --
THE COURT: I said Mr. Singer. I meant Mr. Spector,
MR. SPECTOR: I've been called worse and I'm sure I
will be. Its so sweet when you get an opportunity to turn it
around. We were admonished by Novell and SUSE not long ago
about following the rules. And the Court didn't bother to say
-- explicitly give us an admonition do it right the next time,
stupid. And we will, however, take that to heart.
But its so sweet to be able to say same to you. But
we're not going to make this. I just want to tell you the
issues so we can say we give up on it. We never raised them.
Actually, we raised them only to say we waive them.
But first, they're asking for an injunctive relief.
They're asking the Court to order us to do something under Rule
7001. That's a request for equitable relief that has to be
brought by an adversary proceeding. Everyone of the cases that
they cited in their papers that talks about 105 (a), the Court
has these broad equitable powers, they were all in the context
of adversary proceedings.
We could be coming in here, and I've done it in other
cases where I had different circumstances, and I said, Judge,
this has to be brought in an adversary proceeding. And I know
courts frequently, you know, write opinions and say, well, the
parties as stipulating and arguing on the merits and therefore
I'll go ahead and do it.
In this case, we would say in another court, we are
not waiving that issue, we're raising the issue and we don't
think the court can entertain this motion. We are waiving
expressly here, Judge. We want to get to the thinness of the
What else? They also say that the premise of this
case is its their money, its their money, its their money, its
their money. Therefore we win. That's the premise. The fact
that its their money or its their asset that we are in
possession of by contract because they put us in possession of
their money doesn't answer the question. It just sets up, it
frames the question.
However, some courts would entertain the notion and
we would in other places and if there were more at stake, we
would be pressing the argument just because the contract says
its your asset doesn't necessarily make it so. We are
conceding that point for these purposes, Judge, because whether
they have a contractual right which is what we say they have,
or a property right which is what they say they have to these
funds, good for you. We're going to give you these funds. We
don't intend not to give you these funds. We're fighting about
But we don't have to roll over just because Novell
files a motion demanding that we jump through their hoops.
They set up the hoops 12 years ago in the contract, Your Honor.
They said, this is our property and we want you to say so, too.
So the predecessor-in-interest is suppose to say, okay, okay,
okay, we'll say its your property.
But did they set up a segregated account system? No.
Did they set up an escrow? No. Did they say in the original
contract you can hold our funds for three months and change, I
don't know how many, 45 days past the end of the quarter, you
can hold our funds. And it doesn't say, and therefore, you
can't use those funds and then pay us 45 days at the end of the
quarter. You can possess our funds. That was the setup.
So what's changed since then other than now we're
monthly because there was an amendment and we all missed that
one. Although the clients probably didn't miss it, the lawyers
missed it. What's changed since then? Well, we're in
bankruptcy now and we're in these dire financial straits. We
only have $9 million to cover this months $45,000, note. That's
what it comes down to.
They're saying -- their basis for injunctive relief,
the prejudice to them if they don't get this important ruling
is that maybe on December 1st, the November money won't be
there, the $41,000, that is there money, won't be there to pay
them unless we set up procedures to cover that.
I thoroughly enjoyed the arguments of Mr. Lewis and
Mr. Eaton and their friends and relatives this morning on a
very important, you know, academically challenging issues that
Your Honor dealt with. I'm embarrassed to say we're arguing
over this. I think we should just simply deny it before I get
into the rest of my story and let us take a lunch break and
come back on something also academically challenging.
THE COURT: Mr. Lewis, you response, please.
MR. LEWIS: Your Honor, the odor you smell in the air
is lunch which is just a moment or two off. Again, I revert to
the question of if this is not money at risk, if the debtor's
not worried about where its going to go, why is it holding onto
it so fiercely. And the answer is, I think has to be, its
holding onto it fiercely because its hoping to use the money
along with its other money because it needs the money to
operate. And then it will replace it as it comes in.
That's the risk we face. And if it happens and there
isn't money at the end, it will be too late to do something
about that. That's our concern, Your Honor, and we're not
asking to impose a really great burden on the debtor. Thank
THE COURT: Thank you.
MR. SPECTOR: All right. I'm getting help.
THE COURT: The rest of the story?
MR. SPECTOR: Not giving you the whole rest of the
story. The papers really adequately state it. I mean, you
talk about 365, if you're talking about analogous situations
when an equipment lessor puts equipment into the debtors hands
and says, but that's our equipment and not the debtors
equipment, you don't entertain them when they come in and say
give it back to us now because we're worried they're going to
go out of business or they won't have the money to pay the
lease payments. You don't do that when a warehouse -- a
customer of a warehouse debtor has put its stuff in the
warehouse and says well, now they're bankrupt, I want my goods
out when they were told they have a contract to be there for
nine months or six months.
I'm not going to go and argue the cases about that
and I don't think I cited cases on that point. The point is
Novell gets a monthly report of the debtor every month. If you
ever see -- if Novell ever sees that we are so desperate that
we don't have next months $41,000, based on a $500,000, annual
divided by 12, we don't have that $41,667, available, well maybe
they should come running back on an emergency relief basis.
But this is sill.
THE COURT: Thank you.
MR. SPECTOR: It's a DIP report.
THE COURT: Pardon me?
MR. SPECTOR: The form of the report is a DIP report.
THE COURT: The monthly operating report?
MS. JONES: Yes.
THE COURT: Yes. Well, I understand certainly
Novell's concern. But there's been no breach of the
relationship between the parties, no breach of -- the debtor
has not breached its contractual obligations to Novell.
There's no clear evidence of any irreparable harm here. And
the Court is available to entertain an emergency application by
Novell in the event a payment is -- a required payment is not
promptly forthcoming. And I invite Novell to make such an
application and I can assure Novell that the Court will
entertain that emergency motion as it should immediately.
But at the moment, there is no evidence upon which
the Court could, in effect, modify the contract and I think
that certainly the debtor's arguments on the relationship with
Section 105 under which Novell sought the relief and other
provisions of the Bankruptcy Code is persuasive to me. And
accordingly I am going to deny Novell's motion. Its denied, as
I say, subject to necessity of making an emergency application.
And that is what the Court is here for and I'll be available.
MR. LEWIS: Thank you, Your Honor.
THE COURT: But as of today, I just don't see a basis
upon which to modify the contractual relationship between these
MR. SPECTOR: Thank you, Your Honor. We'll hand up
the order. We'll send the order on Monday?
THE COURT: Very well. Is there anything else that
we should consider perhaps on somewhat of a housekeeping basis?
I know that we had I believe it was the retention of Boies
Schiller, that application.
MS. JONES: Yes, sir. There are two other matters on
the agenda I think we can deal with very quickly, Your Honor,
as a matter of housekeeping. One, Your Honor is correct with
respect to the retention of the Boies Schiller firm. Your
Honor, we had a few more discussions with Mr. McMahon and I
think what we'd like to do is go back and discuss it in a more
fulsome manner --
THE COURT: Okay.
MS. JONES: -- and, Your Honor, continue that matter
over until the November hearing if that's okay with the
THE COURT: That is perfectly acceptable.
MS. JONES: Also, Your Honor, with respect to the
ordinary course professionals, Mr. McMahon has had the
opportunity to review the form of order and I understand is now
satisfied with that order. I'd like to approach if I may?
THE COURT: Please. Thank you.
THE COURT: I'm signing the order.
MS. JONES: Thank you.
THE COURT: Mr. McMahon, yes, sir.
MR. MCMAHON: Your Honor, good afternoon.
THE COURT: Good afternoon.
MR. MCMAHON: One comment with respect to the order
that I just want to note for the record. It expressly reserves
the rights of our office and parties-in-interest who object to
the employment and compensation of a specific ordinary course
professional when they file an affidavit seeking to be
retained. So notwithstanding the debtor's preview of the
ordinary course professionals to come on Exhibit A, those
rights are expressly reserved under the form of the order.
THE COURT: And I assume that is not agreed,
necessarily, to by the debtor's, but understood that that --
that the U.S. Trustee is reserving its rights?
MS. JONES: Yes, sir.
THE COURT: Okay. Thank you. I've signed that
MS. JONES: Your Honor, I think that on the agenda
then, that just leaves the motion for relief of stay which we
can take up after lunch.
THE COURT: Very well. All right. Let us recess
until -- oh, excuse me.
MR. SPECTOR: Your Honor, Mr. Petrofsky may be on the
THE COURT: Oh, Mr. Petrofsky, are you still on, sir?
MR. PETROFSKY: Yes, I am, actually.
THE COURT: I'm trying to think of the best way to
handle this from your standpoint. You can either call back in
at 1:30 or I can just leave the line open for a bit.
MR. PETROFSKY: I think on that end, I'll find out
from the Courtcall people, I think calling back in would work.
THE COURT: Okay. Then we will be returning at
MR. PETROFSKY: Okay.
THE COURT: So you might call in maybe ten minutes
MR. PETROFSKY: Okay, thank you.
THE COURT: Thank you. We'll stand in recess then
until 1:30. Thank you, counsel.
THE COURT: Thank you, everyone. Please be seated.
MR. LEWIS: Good afternoon, Your Honor.
THE COURT: Well, I think the next matter on the
agenda is Novell's motion to life stay.
MR. LEWIS: Thank you, Your Honor. Adam Lewis again
of Morrison and Foerster for Novell this time.
THE COURT: Yes, Mr. Lewis.
MR. LEWIS: Again. This is, I think, a pretty
straightforward stay relief motion. There's certainly plenty
of authority which we've discussed for stay relief under these
circumstances. The obvious factors in favor are you have a
court in Utah that's intimately familiar with the parties, the
background, the underlying fact, all of which will have some
bearing on the determination of the rest of the issues before
Its obviously a far advanced piece of litigation.
There's really no reason to have it redealt with or retried or
any of those issues redecided in this court given the status of
things in that court. Discovery is complete. Really all that
remains is the trial. Trial briefing is done. Witnesses are
done. Exhibit lists are done. People just have to show up
with their witnesses for a few days in order to complete those
There may be other things that can be done in
connection with what remains to be decided short of a trial.
There could be, for example, summary judgment motions on this
issue or that issue that might also more streamline the outcome
and maybe even narrow what happens in the district court.
Those are all possibilities and we've asked simply for sort of
a blanket stay of relief to do what makes sense as any party
would do were there no stay.
And so, the next question is why stay relief and why
now. And the answer is that the issues that remain to be
decided in the district court and also have to be decided
before there can be any appeal, either side to what happens in
the district court, intimately affect what the debtor's estate
is, what there is to do, what the debtor could possibly propose
as a plan, what the -- any proposed sale of assets could look
like, what could or could not be sold especially free and
All issues that, you know, when we filed the motion
were obvious issues. The debtor has now made the point for us,
in a sense, by filing its motion to sell where we filed our
objections. That's been continued by the debtor, I guess,
until the the 16th.
THE COURT: Yes.
MR. LEWIS: But the fact remains that some of the
very points we were making in our stay relief motion are
illustrated by that sale motion. What do they have to sell?
You know, what are people buying? What are they really going
to pay for it? Can they sell it. Those kinds of questions.
All are tied up with the question of what remains to be done in
the district court. And the sooner we're able to do that, the
better off, I think, everyone will be. And --
THE COURT: Tell me how far Judge Kimball has gone in
connection with the, if you will, Phase II of that Utah
MR. LEWIS: Well, let me do this, Your Honor. Again,
I'm going to perhaps defer to Mr. Jacobs who is much more
intimately familiar with it. We do know there's a summary
judgment decision that has decided the ownership of the
THE COURT: Yes.
MR. LEWIS: Partial summary judgment. Its not yet
appealable. Ownership of the copyrights and certain related
issues. And what remains to be decided is allocation. If I
can put this in a layperson's, that is a non-patent lawyer's
THE COURT: Please.
MR. LEWIS: There's allocation -- that's right. We
have to stick together. There's allocation of old -- of new
products, so to speak, developed by the debtor that involves
some old code and some new code and who owns what. And
therefore, proceeds as well go to whom from those. There's the
whole constructive trust issue that remains to be decided
although Judge Kimball has found that the conditions for a
constructive trust exists. And I can read the Court -- this is
on page on his opinion which we've attached as an exhibit.
THE COURT: Yes.
MR. LEWIS: And what Judge Kimball says, this is
beginning in the second full paragraph, "To prove a
constructive trust cause of action, Novell must demonstrate the
'existence of a race (some property or some interest in
property), the plaintiff's right to that race and the
defendant's gain of the race by fraud, accident, mistake, undue
influence or other wrongful conduct.'" And there's a citation
to the Pegg case.
The court then goes on to say in the last most
paragraph on that page, "In this case, the res is the XVRS --
SVRX royalties to which Novell retains all right, title and
interest. This res is traceable to the monies received from
Sun and Microsoft agreements. SCO's conduct also amounts to a
breach of fiduciary duty convergent, unjust enrichment and
breach of expressed contract, all of which are sufficient
wrongful conduct to impose a constructive trust."
So what the judge, Judge Kimball has said plainly in
his opinion, which I take to be law of good case, is that the
criteria for the imposition of a constructive trust have been
proven in the summary judgment motion. The only remaining
issue is how much, that is the tracing, of the funds. But --
THE COURT: Well, the reason I asked the question I
MR. LEWIS: Yes.
THE COURT: -- and I'm not looking to interrupt to
bring Mr. Jacobs up just yet because I want you to be able to
complete your argument first, but what you've discussed so far
is the significant impact of the remaining issues to be
resolved, their impact upon the bankruptcy case.
MR. LEWIS: Yes, Your Honor.
THE COURT: So the question that obviously has to
come to my mind is should the case from here forward proceed in
Utah before Judge Kimball? Or should it be -- or should these
issues be tried before me. And one of the issues I have, of
course -- and particularly because of this significance of a
constructive trust to the debtor's estate and its creditors.
So the question I've got is how much, if you will,
ahead in the work is Judge Kimball than I might be?
MR. LEWIS: Well, Your Honor --
THE COURT: And when I say that I might be, at the
moment, you know, I'm still at the beginning. But I don't know
how far Judge Kimball has advanced on these issues.
MR. LEWIS: A fair question, Your Honor, and we did
try to address it in the brief --
THE COURT: Yes.
MR. LEWIS: -- but I'll try to address it now as
well. And I think the short answer is very far along. The
passage I've just read you, just talking about the constructive
trust issue, remember there are other issues as well. The
allocation issue of code and therefore of revenues from other
licenses, those are separate issues from the constructive trust
issue. But also those issues are underlaned (phonetic) by his
findings about who owns the code and he's going to know what
the code is all about. He's going to be the one who's in a
position, therefore, to try and determine which pat of the code
in these new licenses is really old code and which part is code
that they were authorized to develop and did develop.
So he's got the background for that already because
of his decision -- the summary judgment decision he's already
made. This Court would have to retrace all of those steps.
I'm not sure what the purpose would be or whether that would
really be appropriate because its been done. And its been done
and has been fully and fairly litigated. And what we'd really
be talking about here is essentially a second bite at the
And I understand the interest in protecting debtor's
estates, but even that interest, it seems to me, has some
limitations in terms of fairness and a rational process that
respects prior litigation which, after all, it's the debtor
that brought this litigation. We didn't. And the parties may
cross summary judgment motions so the debtor hoped to get a
result of which it would not be complaining had it not lost so
far, wouldn't be asking this Court to decide the rest of the
issues. It'd be happy to have it stay in Utah.
That shouldn't be the reason why this Court does or
does not grant stay relief. It really comes down to forum
shopping and that's just not appropriate.
Let's talk about the constructive trust for a moment.
The passage I just read you, Your Honor, indicates that Judge
Kimball has made findings on the factual predicates for
everything about a constructive trust except applying the
lowest intermediate balance rule to decide what the exact
THE COURT: Yes.
MR. LEWIS: Now, the oldest intermediate balance rule
is frequently a -- pretty much a mechanical thing. I know it
can get a little tricky now and again. But even there, there
would be some questions about what money is coming from which
of the assets and some tracing that would presupposed some
background in the proceedings. But in terms of them asking
this Court to retry the constructive trust issue, which is
really what the debtor is asking this Court to do, that it
seems to me to be as wholly inappropriate.
He's already done that. He's already found that
there's a res. He's found that the res is traceable to monies
from the two -- the Microsoft and Sun licenses. He's found
that. And he's found that the -- its traceable as a result of
a breach of fiduciary duty, conversion, unjust enrichment and
breach of expressed contract. He's made these factual
Why would this Court want to, or should it, reinvent
that wheel that's been fully and fairly litigated before Judge
Kimball? Now, the debtor may disagree with that result.
Obviously does. And will, at someday, I assume, proceed with
an appeal if we get that far. But that's a different
(indiscernible) than this Court, exceeding to the debtor's
request to allow you to, in effect, second guess what Judge
Because whether this affects the bankruptcy estate or
not, the test for a constructive trust is the same. It doesn't
change. Judge Kimball's applied that test and he's found that
its satisfied. And it shouldn't matter, in theory, it
shouldn't matter which judge applies the test. It should be
applied in the same way at the same -- by any judge because
it's the same test. There's no bankruptcy aura to the tests if
this Court applies it. At least, I'm aware of -- unaware of
any law that says that.
And so, the bottom line here is, Your Honor, this is
far advanced. Judge Kimball has determined a whole lot, both
in making rulings, but also in the process of making those
rulings, he knows an awful lot about this case and the parties
and the facts and the background.
We've had proceedings that have lasted four years. I
can't, of course, tell the Court it would take four years to do
it all over again. But neither are we talking, Your Honor,
about some little quick, mini-motion that this Court would
preside over to decide whatever is left to be decided in that
case, even just the constructive judgments. And there's no
reason to redo that other than the debtor doesn't like the
outcome. That's what appeals are for, Your Honor, not
And so, I think in that sense, this is a case that
should proceed as expeditiously as Judge Kimball can do so with
stay relief here to resolve the rest of the issues by whatever
means are appropriate, whether it's the further trial, whether
it's partial summary adjudication on certain issues.
Maybe the parties will settle if stay relief is
granted, I don't know. That might be an incentive to them to
do that, too. But all of that remains to be seen. That would
be the usual outcome following the granting of stay relief to
complete litigation in another forum that's specialized
litigation. We're talking patents here. That is before a
judge that is wholly familiar, that's very far advanced with
very little left to do. Literally very little left to do
unless you're going to do it all over again.
And so, that would be the reasons for granting stay
relief. And as I say, the motion that the debtor has filed
with respect to its sale, its proposed sale of certain assets,
only illustrates the point. Even if the debtor withdraws that
motion or the debtor revises the motion, the points are still
the same. What has the debtor got to sell? What have people
got to buy? What are over-bidders going to be looking at? You
know, can the debtor sell property it doesn't even own? The
case law, I think, on that is pretty darn clear that it can't.
And until the debtor knows what it owns, it certainly can't
sell that kind of stuff.
And in terms of a distraction from the debtor's
current efforts, first of all, once again, I want to emphasize,
there's not that much left to do if we do it in Judge Kimball's
court because most of its been done and we won't be starting
all over again.
You're talking about a five-day trial. A couple
additional days, maybe, for preparation of a witness here and
there, but not everybody's sitting around twiddling his thumbs
in some hotel room for, you know, two weeks waiting from this
trial to take place and waiting for his ten minutes with -- to
be prepared for it. Again, Mr. Jacobs, I think, can probably
speak more, and other counsel I'm sure will, to exactly what we
can envision here.
THE COURT: And the timing is an obvious concern
MR. LEWIS: The timing is we don't know the answer on
unfortunately, other than we won't know the answer until we're
free to find out the answer. And the longer it takes us to get
this teed up, the further out the trial will be. Whatever that
delay is going to be.
If we have stay relief now to go back to Judge
Kimball and see what we can do about getting these issues
resolved, I suppose if something developed that turned out to
be a real problem for the debtor in terms of distractions, one,
we might be able to make an arrangement with Judge Kimball to
deal with that voluntarily; or two, if the debtor continues to
be disaffected, it could come back here and ask for further
But to speculate about the effect of this litigation
on the debtor's management when we don't even really have
anything in front of us yet is to let the tail wag the dog on
the stay relief motion. That is the tail. This has to be
decided. These issues have to be decided. I don't think
anybody's arguing against that.
And more importantly here, these issues have to be
decided because the estate needs to know and its creditors need
to know in order to assess whatever the estate's planning to do
what there is. Who owns what. What future income might be.
To assess a sale price, you'd have to know those kinds of
things or at least have some pretty good idea on them.
At some point, if there's a plan, we need to know who
much money is in the till. That includes what the debtor may
be able to generate from the sale, but it also includes how
much of the money is in that constructive trust. Those issues
have to be decided, too. And sooner than later. This is not
just some peripheral claim that some creditor really would like
to have liquidated.
This is the claim of a party who's proceedings are,
in that sense, essential to this case. Its not just another
creditor. And for all of those reasons we think stay relief at
this juncture so we can go back to Judge Kimball, see what we
can do, do it with the least interference with everybody's
interests and if an issue arises with the debtor, genuinely can
make a case to this Court that a specific proceeding is a real
problem for the debtor given exactly what its doing at that
point, then the debtor can come back to this Court and ask for
some further relief if they can't work something out with us
and Judge Kimball.
Any other questions, Your Honor?
THE COURT: I don't think so. I would like to hear
from Mr. Jacobs.
MR. LEWIS: Please, thank you, Your Honor.
THE COURT: Thank you, Mr. Lewis. Because what I'm
really interested in is, Mr. Jacobs, is the timing and a sense
of how complicated the issues are that remain to be tried or at
least resolved by a court even on the summary judgment.
MR. JACOBS: I think that the most accurate answer on
your latter question, Your Honor, is those of us who have been
living with the case thing that now its pretty simple because
we have worked through many of these issues. The hardest
issues were addressed by Judge Kimball's summary judgment
ruling. And I think what you're probably thinking is, okay, if
I take the summary judgment ruling and I pick up from there,
what would I really have to do.
THE COURT: Correct.
MR. JACOBS: And the -- so it may be helpful to know
that Judge Kimball decided motions after the summary
judgment ruling. One I think was a motion for reconsideration,
the SCO file.
THE COURT: Yes.
MR. JACOBS: So that's already -- that presumably
would be stable. There were some seven in limine motions and
then three other motions I just got a tally from my office. So
there was -- so there are a lot of trial-related motions that
Judge Kimball decided that have the affect of clarifying for
the parties what the evidentiary issues were going to be, what
the expert testimony issues would be limited to. And as the
trial was approaching, it was getting clearer and clearer
exactly what we were going to do at that trial. The trial was
getting shorter and shorter.
In fact, I think we were all thinking four days at
the most by the time the trial was ready to go. The exact
sequence was we were going to start the trial on Monday and SCO
went into bankruptcy on Friday. So we were all gathered for
the trial to begin. That's how far along we were.
THE COURT: Okay.
MR. JACOBS: And it was a bench trial. So it was not
-- we had -- he had -- one of the motions he decided after the
summary judgment ruling is that our claims are fundamentally
equitable and not legal. There was some shaping of the
pleadings that lead to that ruling.
And so the two big issues for trial, and I think this
is important, Your Honor, to understand where the constructive
trust issue fits. The two big issues for trial were, one, a
question whether SCO had the authority to enter into an
agreement with Sun and Microsoft that led to SCO's collection
of a lot of money that we claim is ours. Its an authority
And then the second issue is having entered into
those license agreements, having collected a lot of money, and
then having entered into about a million dollars worth of what
we might call miscellaneous license agreements, how much of
that money should be apportioned to Novell under Judge
Kimball's view of the way the asset purchase agreement works.
So it was an apportionment trial which was going to decide the,
if you will, the gross amount of Novell's claim from your
vantage point as a creditor in the bankruptcy.
Then there was going to have to be subsequent phase
in which we would address the exact amount of the constructive
trust. We anticipated doing that on motion. The two are
severable in that sense. What Judge Kimball would be deciding
is the gross amounts, if we went back to him for trial. And
then we would be going back to him and saying, okay, apply the
lowest intermediate balance rule and figure out how much is in
the bank account that's traceable and that's our constructive
trust. That is, we think, fairly mechanical.
So that's where we were. That's where we would be if
you lifted the stay. If your -- if the focus -- the focus of
their opposition is the constructive trust.
THE COURT: Yes.
MR. JACOBS: And which is sort of -- which is
interesting because they really didn't resist the question of
whether we should be back to him for an apportionment trial or
a trial, or perhaps we're thinking now a motion for summary
judgment on this authority question. The focus was the
You could lift the stay for an apportionment trial
and to decide that authority question. And then we can come
back to you and we can decide what to do about the construction
trust after that's done.
THE COURT: Thank you. That was helpful, Mr. Jacobs.
I appreciated it. Mr. Lewis, have you completed your
MR. LEWIS: I did, Your Honor, thank you.
THE COURT: All right. Thank you. Mr. Spector.
MR. SPECTOR: Your Honor, I've been listening now for
23 minutes, two different lawyers, two able lawyers, and I
haven't yet heard how Novell is being harmed by allowing the
debtor what every other debtor gets in Chapter 11, a breathing
spell from litigation so it can do its Chapter 11. And I think
that's probably because they can't show that they are in harm
by waiting a few more months.
They keep telling us, let's go. This is for your own
interest. This is for your own good. Don't you want to know
what you have to sell? Don't you want to know what your plan
is going to look like? Thanks, but we don't need their help.
We have our own ideas of how we're going to come out of
bankruptcy and how we're going to file the plan and how we're
going to sell certain assets and do other things of a
reorganization nature that will help us get creditors paid.
And you know what? Maybe, if we win the litigation, get
stockholders paid because they're in this game, too.
Let me plainly state what we believe the status of
the litigation in Utah is. And you know, I don't quibble with
able counsel from Novell. They really have it pretty close to
what we would agree.
In the court's summary judgment ruling, it delivered
to what the Novell reply brief euphemistically called the
THE COURT: Yes.
MR. SPECTOR: The -- what it wanted to do, the big
issue being who owns the Unix and Unixware copyrights. The
court decided that question. It's a big question.
THE COURT: Yes.
MR. SPECTOR: It's the question that the software
community thinks there's a public interest in, okay. What they
don't think there's a -- and again, that's my argument. I'll
wait for my argument. Point two, it also ruled that the
requisite wrongful act to set up a constructive trust existed
in the form of SCO's breach of its contract. The Novell
agreement was a contract between Novell and Santa Crux
Operations which is a predecessor for SCO, of SCO. And it was
a very difficult contract.
I think -- and, Your Honor, we are not trying to
retry the case, but to speak fairly, anybody looking at that
contract would think that Santa Crux operations bought the
copyrights from Novell. There's a body of evidence that would
suggest that it did. The judge ruled otherwise. That's the
law of the case. We have to live with that until and unless
its reversed on appeal.
Nevertheless, based on years of experience and never
having been told otherwise, SCO understood that it had the
rights to do what it did, sold certain rights to Sun
Microsystems and Microsoft Corporation. Those funds, it turns
out in retrospect, were received because apparently SCO got it
wrong. They didn't have the rights that Novell claims that it
owned. And therefore, that was the wrongful act.
Now, the judge, in his opinion, called it conversion,
called it breach of fiduciary duty, called it mopary
(phonetic). Whatever, it was bad enough to be the wrongful act
it has to find, the court has to find in order to even set up
an argument for constructive trust.
But let us be clear. On the same page that Mr. Lewis
asked you to look at, page 97, the court stated, "The Court
denies SCO's motion for summary judgment" --
THE COURT: Yes.
MR. SPECTOR: Pardon me. The Court denied both
Novell's and SCO's motions regarding the constructive trust
issue. So Novell's motion for the imposition of a constructive
trust was denied. So please, don't tell me that the judge set
up a constructive trust. He didn't. He was asked to and
That doesn't mean that the court didn't already make
certain findings of fact, as Mr. Lewis put it or Mr. Jacobs put
it, I forget who, with regard to the predicates coming up with
THE COURT: Correct.
MR. SPECTOR: And we don't agree with them of course.
THE COURT: Right.
MR. SPECTOR: But we agree that if Your Honor would
-- were to take any part of this case and move on from there,
you would have to start from those findings of fact. We don't
ask you to reexamine them or second guess them.
The court also said with respect to the constructive
trust issue that the res is, as stated by counsel, the
royalties received by SCO from the Sun Microsystems and
Microsoft Corporation agreements. And perhaps the million
dollars worth of miscellaneous sales as well.
One of the reasons it did not grant summary judgment
on the constructive trust issue in favor of Novell, and you
know, if you've read that opinion --
THE COURT: I have.
MR. SPECTOR: -- there's precious little that we can
take out of that and see if it was something that we could live
with. The one thing that we did get there is the court denied
the constructive trust summary judgment motion by Novell. One
of the reasons why is the court says, well, there's a res but I
don't know what size of a res.
What Mr. Jacobs didn't fully explain and I apologize
because I'm probably the last one that ought to be trying this,
but in what SCO licensed to Sun Microsystems and Microsoft
Corporation, and I may be using that term "licensed" broadly
and I hope I have license to do so, is some of that product
really was, and everybody, I think, agrees, some of that was
SCO's product. And because this is in code, some of it may be
attributable to Novell.
THE COURT: Right.
MR. SPECTOR: So there's a portion of it, we'll call
the questioned royalties, that the judge will have to determine
goes to Novell and maybe some of it stays with SCO. So the
court couldn't, didn't grapple in the summary judgment with
that allocation or apportionment as they put it.
THE COURT: Correct.
MR. SPECTOR: Okay. So the court denied summary
judgment. And for reasons the court probably didn't know
about, but had it known, it probably would have said, and the
second reason why is those funds that SCO got in I'm sure
were long since spent. The company was losing money forever,
right? Except maybe the year when it got that money. But
that money's gone. The res is gone.
Of course, that money went -- it was money. It went
into a bank account. And since that bank account received
those funds, new monies from customer sales and a $ million
recapitalization occurred. So maybe some of those funds could
still be there using the lowest intermediate balance test and
the court didn't know because it really wasn't teed up, it
wasn't really addressed. There really wasn't any discover or
argument on the issue of how the lowest intermediate balance
test would apply in this case. And so that would be another
reason, if he knew about it, that Judge Kimball would have
said, well, I can't grant summary judgment here.
The trial was set to being on September 14th, was, as
stated by Novell in its motion, intended to decide nothing more
than how much of the royalties received by SCO are royalties to
which Novell was entitled. In Novell's September 14th trial
brief to the court, prepping the court on how we perceive this
case should be handled from hereon, they said, in essence, the
tracing issue is a discreet issue and we should cover it after
we finish the five-day trial on the apportionment and the
authority issues that Mr. Jacobs just talked to us about. That
was their suggestion and that's what would have happened
because that wasn't teed up for the five-day trial.
So Your Honor, this gets me to the answer that you
were asking before. What is it for this Court to do if the
Court were inclined to do anything with regard to this case?
Well, we would say, you take everything that precedes, we grit
our teeth and bear it, and then you say, okay, there's going to
be a constructive trust in the amount of whatever its been
determined elsewhere, whatever that number is. And here's how
much of that is now being held by SCO. And that's how much,
through the lowest intermediate balance test, that's how much
would be potentially set asideable, if that were a word, for
This Court could do that. It doesn't need to
reinvent the wheel. It doesn't have to pour through 1500 pages
of summary judgment briefing or anything else. It's a simply
-- its not simply at all. A statement of the issue is simple,
but the actual going through it is not simple at all. It is
evidence specific. It's difficult because the funds were
originally placed four years ago, going on five years ago, I
guess. So it would take some time. But it would take time
wherever it is. And it's not even proposed to be part of the
five-day trial anyway.
So, that's where the status, I believe, of the Novell
litigations in Utah are all about right now. And as I said
before, we don't contest it, I've said it enough times.
THE COURT: Now, you mentioned that I would
essentially take the allocation determined -- is that how you
stated it? Determined elsewhere.
MR. SPECTOR: Yeah, we're not asking you to do that,
THE COURT: Okay.
MR. SPECTOR: I mean, we're not being ridiculous.
They're right. Its simply, we don't fight everything. They're
right. We wouldn't ask this of Your Honor, to go and try to
disassemble the string of code and then determine how much of
that was Novell's source and how much of that was SCO's. We
wouldn't put you through that. So, if there's going to be a
THE COURT: But it's a timing issue is what you're
MR. SPECTOR: Well, that's one thing. If -- I've
already discussed why -- well, I haven't discussed wholly why
the constructive trust issue is important that it be separated
out even though Novell already did separate it out. But we
think it ought to be separated out and tried here. But the
timing issue is the other issue.
I'll go to that first since Your Honor raised it.
Novell has multiply stated that SCO is trying to avoid
certainty or finality and they're the engines of finality and
certainty. If you'll only let us get to Judge Kimball and we
can have this five-day trial, it would be wonderful. We would
have the finality that's necessary and then the debtor would
Well, excuse me, the debtor would then know? All it
would know is some portion of those evil questioned royalties
really do belong to Novell. A dollar amount would be
established. It's a liquidation of a claim, that's what it is.
Because the judge already made the major determination of who
owns that code, that software. Who owns the copyrights for
that, I should say.
That's the major issue in the case. That's the issue
of public interest. That's the issue. If they want finality,
they should have stipulated to a 54 (b) certification and we
would be already arguing our appeals to the Tenth Circuit. If
they were really interested in finality and certainty, we
wouldn't heard Mr. Jacobs this morning and say, well, you know,
really, the way it ought to go is we ought to go back to
Switzerland, try the arbitration, then come back to Utah, fit
that result into the Utah litigation. Then -- of course, we
would have already had a five-day trial on allocation. Then
there are other issues that have to be decided based on what
happened in Switzerland. And then, we can have our appeal go
If we go down that pathway, Judge, we don't get
certainty in our lifetime, or we'll be a lot older. Why not do
it the way bankruptcy courts and debtor's-in-possession do it
in Delaware all the time and New York all the time and lots of
other places all the time.
We know this litigation. We proceed in Chapter 11
which is a breathing spell from litigation. We come up with a
plan that will resolve if not the litigation in a way that the
opponents would be satisfied, at least we say, here's the
alternative, Judge. If the company, the debtor, wins this
litigation, this is what we're going to do with the proceeds.
If we lose the litigation, stockholders are going to most
likely be wiped out and what remains are going to go to Novell
if it gets a money judgment, which I was told, in order to get
-- and this is an side -- I was told that in order to get the
waiver of the jury trial that was -- is a big issue recently,
in September, they waived, Novell waived their money damages
claim. And I'll stand corrected if counsel wants to correct me
on that. Is that incorrect?
MR. JACOBS: That is incorrect.
MR. SPECTOR: Okay. Then they would have a claim in
the estate if they should win. I just wanted to clarify that.
So if we -- if the plan was to, say, we'll look at
the alternatives. If we lose the litigation, Novell wins.
They'll have a claim and here's how we'll deal with their claim
as well as everybody else's, okay. That isn't unusual.
Northwest just pulled a plan like that. There's -- our firm
represents a creditor with a very, very large antitrust claim
and that's going to go to trial post-confirmation in Detroit.
There are other creditors with large claims like that. They're
going to go to trial post-confirmation in wherever. One of
them also is in Detroit. That Your Honor I'm sure knows, that
that is not terribly unusual.
We propose that we should be given the same
opportunity and not have this case chopped up into little
trials all over the world. Switzerland, Utah, then come back
here and try to fit that into a plan.
When would we be fitting those results into the plan?
The day after Judge Kimball rules on that five-day trial?
Well, that's not final. You know darn well, we'd want to
appeal that if we can. It may be that Judge Kimball's going to
agree with Novell, oh, I'm sorry, we don't have the result of
the SUSE arbitration in Switzerland. I can't send this up for
We'd be here forever waiting for that day. We don't
think creditors, stockholders or the Court should be held
hostage to that type of trial schedule. We should proceed with
our Chapter and we shouldn't be held up by that type of
THE COURT: But Novell says you're about to sell our
MR. SPECTOR: Well, you know, its very difficult when
you have to deal with generalities because sometimes exceptions
and specifics overrule them. You know, he says that -- counsel
stated that you can't -- its well-known, the law's plain, you
can't sell what you don't own.
THE COURT: Right.
MR. SPECTOR: Sometimes that's true. I know a lot of
Chapter trustees who sold causes of action of -- ridiculous
causes of action to people. There's really nothing there.
I've seen quit claim deeds and personality quit claim deeds
type in realty. You buy whatever it is we have. We have with
us today some folks that have some interest in this issue. Mr.
Scott McNutt, counsel from San Francisco representing York
THE COURT: Hello, Mr. McNutt.
MR. SPECTOR: He flew in because he saw the kind of
bad-mouthing his client received on the backhand meant for us
and would be happy to address the Court on that particular
issue if the Court were willing to listen to more of that.
THE COURT: Yes, I would be. Yes, thank you.
MR. SPECTOR: Oh, I'm sorry.
THE COURT: Mr. Rosner.
MR. ROSNER: For the record, Fred Rosner, Duane
THE COURT: Yes.
MR. ROSNER: I'd just rise to introduce Mr. McNutt of
McNutt and Litteneker who's admission pro hoc vitae, we'll file
the appropriate papers.
THE COURT: That's fine, Mr. Rosner.
MR. ROSNER: Thank you.
THE COURT: Thank you, sir. Mr. McNutt, welcome.
MR. MCNUTT: (Attorney not near microphone) Thank
you, Your Honor. I represent York Capital. York Capital is
the leading investment fund. It has many, many millions of
dollars in assets. York's Private Equity Fund specializes in
turnarounds in general and software businesses in particular.
York had devoted substantial time and resources for achieving a
transaction along the lines of the term sheet attached as an
exhibit in the sales procedure motion that's just been
continued from this date to the 16th.
Since 2005, York has followed SCO's struggles and has
dedicated a team of investment professionals with deep software
experience to analyze the value in the SCO business, the
SCO/Unix business, the (indiscernible) business and to try to
take apart and put back together the different, many different
moving pieces in a high technology, software kind of business
with 35 years of history, maybe more since this Unix product
was conceived in the early 60s.
Essential to achieving York's objective to acquire
Unix is the assembly of the experienced management team, York
has committed substantial resources, identified management
teams. That team has extensively participated in due diligence
and would be spread equal and prepared to take over the Unix
business if we are the successful bidder at the auction sale of
THE COURT: Okay. Thank you. Thank you, Mr. McNutt.
MR. SPECTOR: Thank you, Your Honor. And York
Capital Management is one. There are others and we're going to
get into that when we get to the bid procedures motion.
THE COURT: Of course.
MR. SPECTOR: The only thing I want to say is there's
been an extreme amount of due diligence. This case, the Novell
case is a matter of wide public -- I don't want to say
interest, but at least, its like notoriety we'll say. And a
lot of people in the so-called software community have been
following it for years. And a lot of the other bidders out
there know that there's a terrible decision out of Utah in the
case and they didn't -- it didn't stop them from coming and
trying to purchase the assets. You'll hear all the details of
that when that comes before you.
So can a debtor sell what it doesn't own? I think
we'll leave that to the marketplace. Let the buyers come in
and say, you know what, Judge, whatever it is they own, we'll
take a chance and we'll pay a few million dollars on that
change. So that -- and we'll get to that issue also.
But if the question was, Judge, what do we have to
get to make it marketable to people like York Capital
Management? Do we have to get the imprimatur of -- and the
reversal of Judge Kimball's ruling? If we need to do that
before we can sell it, well, we're talking a long way.
Now, I may have misspoken when I said after the five
day trial we might have to wait for SUSE's arbitration. That's
just by way of argument about Novell's position because that's
the position they espoused this morning. Judge Kimball, I am
told, actually has stated, at least he has officially ruled in
an order, he basically stated, I'm told, that when our 54 (b)
motion was denied and the judge sustained their objection to
that, he said, well, when the five-day trial is over, we may
So it may be possible that if the stay were lifted or
if, after the plan is confirmed, we would have a trial in the
five-day -- you know, the allocation issue, that apportionment
issue. Perhaps the judge will, indeed, give us a 54(b)
certification to go up on appeal at that point.
But right now, where we are with the real
reorganization engines going, with 363, 4 and 5 relief and a
plan behind it, all coming to the fore in the next month or so,
we don't want to be distracted. And most debtors-in-possession
wouldn't be forced to distracted to go back to the litigation
hell-hole they came from. We do want a resolution. We have to
have a resolution. But we don't think this is the time for
The constructive trust issue argument, I spoke about
earlier, briefly. But I have to reiterate that the issue is
one of the exclusive jurisdiction, not concurrent jurisdiction.
But the bankruptcy court has exclusive jurisdiction over
property of the estate under 28 USC Section 1334. Implicit in
that is the determination whether something is or is not
property of the estate.
We are not asking Your Honor to do the apportionment
issue. We're not asking Your Honor to do a lot of the
technical question issues that will be in the Utah case. But
we are asking this Court, if there's going to be an issue about
the constructive trust tracing, that this court, which is the
court you would expect to be the one to do it.
So who is it that's asking for or is seeking forum
shopping? Not us. We never said that the apportionment issue
should come here and you should try the case over again. We
never said that. Who's asking for forum shopping is Novell
asking this Court to advocate its role as the arbiter of what
is and is not property of the estate and run off to Utah and
have the judge who hasn't begun to focus on the issue.
In the page decision, there was one word, it was
this "traceable to", but it was not in the context of tracing.
On page , I think he says the bad act was traceable to the
royalties that were recovered. That isn't the same issue of
how do you trace it to what's in the hands of SCO at the
present time. It was never addressed.
I understand that there hasn't really been any focus
by the parties in the discovery process to do any of the work
necessary to do the tracing. And so I'll say it again, that is
an issue for this Court. Judge Kimball is no farther ahead
than this Court is. This Court has greater expertise, I would
surmise, in doing the exercise as do most bankruptcy courts
because the issue comes up in a lot of context in bankruptcy.
And we see no good reason why that should go off to Utah for
Now, they could be arguing now, well, we never really
said that. We just want the apportionment. But they said both
ways. Almost embarrassed to say they want the constructive
trust tracing issue to be done in Utah because in the motion
they never say it. We had to clarify that.
THE COURT: Yes.
MR. SPECTOR: They say in footnotes and other places,
well, we want -- and all other issues, too. Well, all other
issues will come up after the five-day trial because they said,
it's a discreet issue, after the apportionment is done, then we
can consider the tracing issue. Well, there are other issues
as well. They want all the issues, including the tracing
issue, tried in Utah. They're seeking the forum shopping.
MR. SPECTOR: I may have covered this before, but
Novell is trying to confuse the Court, I don't think it got
away with it, on what is in the public interest. I think I may
have covered this before. The public interest was in deciding
who owned the software or the copyrights.
THE COURT: Correct.
MR. SPECTOR: Not in how much of a royalty claim they
THE COURT: That's right.
MR. SPECTOR: SCO and its outside counsel firmly
believe that the district court ruling is seriously wrong. Our
opinion, of course, doesn't carry a lot of water. It's the
opinion of the Tenth Circuit that matters.
This litigation is an enormous asset of the estate.
Although SCO believes that the Novell ruling leaves various
causes of action against IBM intact, IBM and Novell have
argued, no, it basically guts our case against IBM. You
haven't heard anything about IBM yet.
THE COURT: No.
MR. SPECTOR: But its another major litigation. And
I'm sure that given one outcome of today's ruling, we may be
seeing them a week later. The IBM litigation could bring
hundreds of millions of dollars to the estate for creditors and
for stockholders. If -- what Novell and IBM, therefore,
jointly are trying to do in all -- in our estimation, it should
be plain, is to seek the demise of SCO before they can get
their day in court, the Tenth Circuit. And after Tenth
Circuit, remand to -- for a new trial or a trial.
We think that's the end game. We think that they
don't want this case to ever see a real trial with a real --
well, maybe it won't be a jury. Maybe it will be reversed on
appeal and there will be a jury. That may be one of the
issues. But that's really the game plan here is to kill the
case anyway they can because then we won't ever get our rights
and the benefits for the stockholders and creditors before a
So we think the Court should deny the motion for
these reasons and the reasons stated in our response.
THE COURT: Thank you, Mr. Spector. Mr. Lewis.
MR. LEWIS: Thank you, Your Honor. There's a lot
that's just been said that just has no basis in anything that
anybody has said. The alleged scheme between IBM and Novell is
pure fantasy. If IBM wanted to be here, they would be here
And further more, by asking for stay relief to
litigate the case, we're not trying to kill the case before it
can be litigated. We're trying to get the case litigated. I
mean, that's just nonsense. Its foolishness.
We're glad to hear that SCO has changed what its
position is. We've just heard that SCO, oh, no, we just want
to try the tracing issue. That's not what SCO said in its
brief. And let me read you, Your Honor, this is from page 19
of their brief. "This Court therefore should make" -- "This
Court should, therefore, make any determination as to what or
what is not property of the estate and if a constructive trust
can be imposed and in what amount."
They were asking this Court to redo the constructive
trust issue. But evidently they've abandoned that now and
that's fine because we don't think the Court should and they
evidently agree. But let's not kid ourselves about what they
were arguing. They were arguing this Court should do that
because they think of this Court as a more favorable forum.
And that is the point I want to make because it also reflects
on the motives for a lot of their arguments. They think this
Court is a forum.
Its not a question of what's a more favorable forum.
It's a question of who is familiar with this case and what
studying up would be need -- to do in order to do what remains
to be done. If the Court wants to do the tracing issue, as
such, once everything else is done, if its that important, I
guess that's what will happen. We don't see why Judge Kimball
shouldn't just do that, too.
Debtor said its pretty much mechanical. I think I
agree. I think I said that. There can be complications. I
think we can trust Judge Kimball to do that notwithstanding the
debtor's disagreement with Judge Kimball's rulings. Not
surprising, they lost and lost badly. But I understand that.
But the fact remains, most of what remains to be done
really should be done by the judge who is familiar with the
case and there's no reason not to let him just do the
mechanical tracing thing.
If you look at the case law in the lowest
intermediate balance, there is -- there are, of course, cases
in bankruptcy court. But there are also just scads of cases in
the district courts and in other courts. And there are
articles all over the place on the lowest intermediate balance.
Normally, its not rocket science. It is what it is.
There can be tricky questions. Judges know those tricky
questions do come up occasionally and have to make some
decisions. But just because the debtor lost in front of Judge
Kimball has no reason to say to this Court, well, we should
really have you do that instead.
In term to the harm to us, remember, too, there is
also the question of what's happening to the money in the
meantime. We've just heard counsel say, well, gee, there's --
we don't think there's anything left. Well, I wonder how that
happened, Your Honor. And if the issue of a constructive trust
gets delayed and they claim it's a million dollars or less and
we claim its more, what's going to happen when that money isn't
there at the end. Where's it going to go? Are we going to
hear more tracing arguments? Well, we had a million dollars
when we filed this case, Your Honor, but you know, we
successfully resisted stay relief. We spent all that money in
the meantime. We've got lots more money in from other things.
We got the sale money. And all that money's gone. All the
rest of it, whatever was there.
I don't want to be hearing that when the time comes.
Lets get the issue decided now while the bank account is
discernible. And what we -- and we know what's in it. And we
can -- don't add another six or eight months or a year to the
So, in terms of the harm -- and then the public harm,
yes, the major issue about who owns the copyright has been
decided. But there are other public interest issues like how
much of the other code which somebody might choose to try to
license belongs to whom? Some of those licenses from SCO to
someone else where the allocation issue, the apportionment
issue was still alive, what are those people going to do in the
meantime about trying to sublicense or relicense or defend
themselves. There are more interests here at stake than simply
the estate's interest.
Now, the debtor says, well, gee, we don't need
anybody to tell us how to run our case. Your Honor, I submit
that may not be true in general and probably is not true in
this case. If you look at the motion that was filed for sale,
in my opinion, it was an ill-advised motion. Maybe there's all
this activity behind it that we haven't been told about until
we heard today that there allegedly is. Why wouldn't you
include that? This is a motion that was filed out of the
clear blue by a debtor that said its main interest was in
coming out at the other end as an operating company. That's
not where we're going apparently and we're talking about sale
that's basically going to set the course of this case.
Now, maybe the debtor wants to retain control over
who it gets to negotiate with and so on. But other parties-in-
interest, and we're not the only ones, might like to know more
about what's going on, might like to have a more responsible
process, might want to know what else there is in the estate
and what can be sold.
York has gotten up here today and said, we've looked
at this and we're comfortable buying it. We don't know what
other parties feel about it. Maybe York's the only one that
thinks that way, but other creditors might say we'd really like
to have some further exposure here on a reasonable basis, not
on a short notice basis. I don't want to argue the sale motion
here, but the point is, in terms of how this case is conducted
and whether there should some additional checks on that and
whether people might want to have some knowledge about the
outcome of this litigation, that is for today. And my points
are really directed at that.
Even the York comments, we're told they've been
looking at this for a long time, they tell us. But they
haven't even been able to reach an asset purchase agreement
which we were told was going to be available for the 6th in
their motion and apparently, may or may not be available by the
16th. We'll see about that when the time comes.
So there are other larger interests that I think this
Court ought to take into consideration when deciding this stay
relief motion, interests that might like to see something more
definitive develop with respect to the litigation and what its
outcome will be and what's going to be in the till before they
decide on whether to approve a sale. Or decide what position
to take on a proposed sale.
And that's why there's a larger public interest in
this as well, as well as the interest of other parties in what
they have that they can license or sublicense. Until those
apportionment issues are decided, they're not in a -- they're
holding up not only their own boat, they're holding up a lot of
boats. And the public interest, it seems to me weighs on the
side of opening up the locks and letting that water flow so
that we know where we stand.
And if some of this can be done by summary judgment,
that won't be all that distracting. We've all prepared summary
judgment motions and we harass our clients to read a draft and
we harass our clients to look at draft declarations if we need
them. But that isn't having people sitting around, twiddling
their thumbs, doing nothing at all. And as Mr. Jacobs said,
they were literally ready to go. We have four or five days.
And we're probably not talking about four or five days
tomorrow. I'm sure Judge Kimball's not going to crook his
finger and wag it at us and say, you all come on in, we'll try
But if we don't get stay relief today, we're just
going to be that much further down the road and I, again, I
submit, Your Honor, give a stay relief today. Let's get these
issues tried. There's no secret about our wanting to do the
tracing in the district court as well. If the Court wants to
do that, that's fine. We're not concealing that as the debtor
has somewhat disingenuously suggested in its argument. We've
always said that openly, that we want to do whatever it takes
to finish that litigation. That would include that.
And if that problem develops, let us come back before
this Court and deal with that problem. But if we don't at
least open the flood gates, then we'll be having these
arguments and having to deal with all those problems -- these
problems in six months or a year or two years. Thank you, Your
THE COURT: Thank you, Mr. Lewis.
MR. SPECTOR: You know, sometimes when you're in
litigation, you wind up saying things and you say, oh, gee, did
I really say that then, I didn't mean it. And Novell
previously told Judge Kimball that he ought to grant an
immediate injunction to freeze those funds because you know
what happens if they go into bankruptcy, we'll never be able to
get them because there's no right to them there.
They now say, and they're probably right, they
overstated their case at that point because there is relief in
the bankruptcy court in that case. However, its putting the
cart before the horse to say its their money and therefore, the
Court should immediately lift the stay so they can run off and
get their money. It doesn't work that way either.
You know, lifting the stay is a serious matter. I
know I don't -- I don't want to sound pedantic. The Court
knows that lifting the stay is a serious matter.
THE COURT: Certainly.
MR. SPECTOR: We've been in bankruptcy six weeks,
Your Honor, six weeks. This is a serious matter. We knew it
was coming. On the first day they told us it was coming and we
were gearing up for it frankly from that first day when they
put us on notice.
But we were doing other things. We were doing the
business-type things that you want a debtor to do. We were out
there -- when we walked out of court, we got phone calls from
people saying let's do business. And one of them is now in
court through counsel. There are others that thought there was
some promise in this company. We stated we owe it to our
customers that there be a stable business to continue running
the Novell operating system.
One of the things that actuated the board of
directors to choose York, and it could have chosen others as
well, is that they have a confidence this is a company of heft
and they will be responsible to the customers and feel
comfortable -- the board of directors feel comfortable that
McDonald's will still be able to sell hamburgers and maybe
missiles will still be able to get to their targets and the
like because those are the things that the Unix platform
So this is all consistent. They try to point out in
their reply we're being inconsistent, we want -- we never said
we were going to keep the Unix business forever. We told you a
lot about the future. The Unix business is a legacy business.
There are people out there that think they can make something
out of it. The board of SCO thinks maybe reorganization and
Chapter is a good way to look -- to get rid of the past and
look to the future. And we're vesting money, as you can tell
from the agreement, which you haven't seen yet, that there will
be money being used to the future investment of ME, Inc. and
the things that come with that.
So, this is what reorganization is about. That's
what we are about. And we don't think its asking too much to
ask the Court to allow us the breathing spell to get this off
the ground. I believe that's all I have, Your Honor.
THE COURT: Thank you. Thank you, Mr. Spector.
MR. LEWIS: I have nothing further, Your Honor, thank
THE COURT: Nothing further? I'm going to take this
one under advisement and I won't take long because I recognize
that to take long is to deny the relief you've requested and
I'm certainly not about to do that. But I would like to just
give the matter a little bit more thought based upon the
helpful arguments, go back and look at the record a little bit
and I'll issue an opinion as quickly as I can here.
MR. LEWIS: Thank you, Your Honor.
MR. SPECTOR: Thank you, Your Honor. We appreciate
the care and attention.
THE COURT: Absolutely. And with that --
MR. LEWIS: We appreciate the time you've allotted to
THE COURT: Pardon me?
MR. LEWIS: We appreciated as well the time you've
allotted to these matters as well.
THE COURT: Absolutely. They're important matters
and its an important case. And I appreciate counsels hard work
on the papers. They were just excellent and very helpful. And
I thank you and good day.
ALL ATTORNEYS: Thank you, Your Honor.
* * * * *
C E R T I F I C A T I O N
I, Susan Holcomb, court approved transcriber, certify
that the foregoing is a correct transcript from the official
electronic sound recording of the proceedings in the above
/s/ Susan Holcomb
Date: November 13, 2007
Susan Holcomb AAERT CET **00273
J&J COURT TRANSCRIBERS, INC.