232 - Filed & Entered: 11/27/2007
Opinion
Docket Text: Opinion Granting Novell's Motion for Relief from the Automatic Stay to Proceed with the Lawsuit (related document(s)[89] ) (LJS, )

233 - Filed & Entered: 11/27/2007
Order on Motion For Relief From Stay
Docket Text: Order Granting Novell's Motion For Relief From Stay to Proceed with the Lawsuit (Related Doc # [89]) Order Signed on 11/27/2007. (LJS, )

Utah, here we come!

Judge Kevin Gross writes in the first filing, the Opinion, that there is no prejudice to SCO by continuing the litigation and finishing it since the case is ready for trial and SCO has separate counsel for it, the balance of hardships favors Novell, Novell has a probability of prevailing on the merits, and the SCO v. Novell litigation is highly technical, and Utah District Court Judge Dale A. Kimball has already spent years mastering that part of the dispute, and so it makes sense to let him finish, as footnote 4 highlights:

The learned District Court issued a thorough 105-page opinion carefully analyzing the facts and law. The District Court's mastery of the facts and law pertaining to the Lawsuit is a powerfully important consideration in the Court's decision to lift the stay.

Amen. Utah was, after all, SCO's chosen forum. We have the order now too, and here is the list of what is and isn't going to be decided in Utah:

ORDERED, that pursuant to 11 U .S.C. § 362(d)(1), relief from the automatic stay is granted for cause to allow Novell to proceed with the Lawsuit at the convenience of the District Court (as defined in the Memorandum Opinion ) on the following issues: (1) the amount of the royalties to which Novell is entitled from certain SCOSource licenses that the District Court determined to be SVRX Licenses and any additional licenses that are determined to be SVRX Licenses; and (2) whether SCO had the authority to enter into licensing agreements with Microsoft Corporation and Sun Microsystems.

ORDERED, that the automatic stay is not lifted for a determination of the imposition of a constructive trust, an issue which this Court will adjudicate if and when necessary, following the District Court’s decision in the Lawsuit.

So back SCO goes to Utah.

As is always true with bankruptcies, whatever Judge Kimball decides, then it goes back to Judge Gross to implement, but this order goes one step further, with the opinion (in this case that means the Findings of Fact, sort of the reasons why the judge orders what he orders) saying that it must come back to Judge Gross to "determine whether a constructive trust is appropriate." Money is the bankruptcy court's area, so he will get to review whatever happens in Utah, to determine what is and is not property of the estate. But he goes on to quote from a case regarding not holding an equitable interest, which is the case with SCO. He points out that "the Debtors simply cannot file a confirmable plan of reorganization until they know what liability they have to Novell." However, the stay on the constructive trust matter is not lifted. That has to be decided by the bankruptcy court, after Utah does what it does. So it's back to Utah to find out what liability SCO has to Novell. And footnote 7 shows what may have finally determined this decision, the difficulty is figuring out what SCO has to sell:

An example of Novell's dilemma, and the Court's, arose recently in the bankruptcy cases. Debtors moved to sell substantially all of their assets. Without a ruling on the Liability Issues it was unclear if the sale would adversely affect Novell's rights. Debtors subsequently withdrew the sale motion, but the problem remains.

I think that means there will be no assets sale as proposed by York until Utah is finished. And footnote 8 says that SCO already said it will appeal the Utah decision, so there may be a longer wait. I personally think there will likely be some issues going forward as to whether Judge Gross is correct in saying that no constructive trust was already established in Utah. We'll see. And he may mean not so much whether there should be one if there were no bankruptcy, but whether there should be one *now* under these circumstances, whether there should be the imposition of one, whether ordered or not. But that is what he wrote, that there was no constructive trust established and so he's not lifting the stay on that, and he'll decide that later. I expect some lawyering on that point, unless Novell decides it isn't worth bothering with. I think Judge Kimball already decided whether or not there should be a constructive trust. Here's what he wrote in his decision on August 10:

Although the court finds that Novell meets the requirements for the imposition of a constructive trust, the question of fact as to the SVRX portion of the 2003 Sun and Microsoft Agreements precludes the court from imposing a trust for the appropriate amount.

I believe that is clearly saying that there should be a trust, but that the amount in it needed to be determined. One would have to also read the cases Judge Gross cites to form a complete picture, which I haven't yet done, but that is one issue I see. But the bankruptcy court has discretion to decided about money, and that is its area of special competence. If any bankruptcy lawyers can explain this part to us, I'd be delighted.

Here's the Fernstrom case the judge refers to. And here's the Sonnax decision [PDF]. I couldn't find a free version, but Groklaw's Steve Martin took the initiative and went to a local law library and sent me the scanned decision, so we can all read it in full. Is he not amazing? I've been trying to get the text done, but things are happening so fast in this bankruptcy, I haven't been able to finish. But at least you have the PDF. Thank you, Steve. By the way, you'll see one reference "reh'g denied" and that means there was a request in that case referenced for a rehearing, and the request was denied. Just a small detail.

So it's back to Utah they go. I'm sure SCO's lawyers can't wait to see Judge Kimball again, after all the horrible things SCO's CEO Darl McBride said about Judge Kimball to the press. It occurs to me that Judge Kimball may have missed that. So as a service to the court, har har, here's an example of what Darl has been saying about the Honorable Judge Dale Kimball, from Todd Weiss's October 1st article in ComputerWorld, "SCO's McBride: Rumors of our demise are greatly exaggerated":

Behind the scenes, though, McBride said SCO's legal team has unearthed some details about Kimball's rulings that may provide a glimmer of hope for his company's ongoing fight.

"There's one little tidbit that we came across just a few days ago," he said. "Whereas the popular press has said, 'OK, this thing is now over,' there is an appeal process and the other fact is that if you look inside that appeals process and you take a microscope and look at the record of Kimball's summary judgment rulings that have gone to appeals, he gets overturned the vast majority of the time. It's nearly two-thirds of the time. That was something I was a little curious about myself.

"This apparently is a [judge] who very regularly, the majority of the time, gets [overturned] when it goes to the replay booth. That's the one sort of a news fact that's not out there today that [could] maybe temper some of this enthusiasm out there" about SCO's troubles. "He certainly has a dismal record on appeals."

So, SCO is not dead yet. Reminds me of a Dylan song lyric... "It's not dark yet, but it's getting there." A number of us looked into those figures, by the way, and I couldn't duplicate the SCO findings, quite the reverse.

It's looking like this bankruptcy thing was a big mistake, a SCO strategy that could only work if they could quickly get a sale shoved through before anyone could figure out what was happening, a Hail Mary pass, and it didn't work.

UPDATE: No moss is growing on Novell's lawyers. They have already filed the notice in Utah:

472 -Filed & Entered: 11/27/2007
Notice (Other)
Docket Text: NOTICE of Delaware Bankruptcy Court's Memorandum Opinion and Order Granting Novell's Motion for Relief from the Automatic Stay to Proceed with the Lawsuit by Novell, Inc. (Attachments: # (1) Exhibit A # (2) Exhibit B)(Sneddon, Heather)

And they're off and running. Here, as text, are the Opinion, then the Order, and then the Notice filed in Utah by Novell.

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

UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE

MEMORANDUM OPINION ¹

The matter before the Court is the Motion of Novell, Inc. for Relief from the Automatic Stay Pursuant to Section 362(d) of the Bankruptcy Code to Proceed with a District Court Action to (I) Apportion Revenue from SCOSource Licenses and (II) Determine SCO's Authority to Enter into SCOSource Licenses, Etc. (the "Motion") [D.I. 89]. The Motion matches the fundamental protection of the automatic stay against the necessity and timing of the adjudication of an issue that is essential in the administration of the bankruptcy case. After careful analysis of the facts and legal standards, the Court will grant the Motion, as set forth below.

I. BACKGROUND

A. The Debtor

On September 14, 2007, the SCO Group, Inc. ("SCO") and its affiliate, SCO Operations, Inc. (collectively the "Debtors"), filed voluntary petitions for relief under

Chapter 11 of the Bankruptcy Code. ² The Court ordered the cases to be jointly administered [D.I. 2]. Debtors are currently operating and managing their businesses as debtors in possession pursuant to §§ 1107 and 1108.

SCO is a provider of Linux software technology for distributed, embedded, network-based, and mobile systems, offering SCO OpenServer for small to medium sized businesses, branch offices and franchisees of Fortune 1000 companies, UnixWare, and SCO Mobile Server for enterprise applications and digital network services. SCO Operations, Inc. is a Delaware corporation that is wholly owned by SCO Group and operates the research, development, sales and implementation of technology owned by SCO Group. Declaration of Darl C. McBride, Chief Executive Officer, in Support of First Day Pleadings [D.I. 3].

B. The Novell Litigation

On January 20, 2004, SCO filed a lawsuit in Utah state court against Novell, Inc. ("Novell"). The case was removed by Novell to the United States District Court for the District of Utah ("the District Court") and is captioned The SCO Group, Inc. v. Novell, Inc., Case No. 2:04-CV-00139 ("the Lawsuit"). The Lawsuit is one of a number of litigations involving SCO and the UNIX property rights.

The Lawsuit concerns a dispute over an Asset Purchase Agreement, dated September 19, 1995 (the "APA"), between Novell and SCO's predecessor, The Santa Cruz Operation,

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In the Lawsuit, SCO asserted a claim for slander of title and interference with the UNIX copyrights. Novell, claiming that it retained all UNIX copyrights under the APA, counterclaimed against SCO alleging breaches of the APA and seeking various forms of relief. SCO subsequently amended its complaint to include claims against Novell for copyright infringement, unfair competition and breach of a technology licensing agreement. Finally, in September of 2006, Novell filed an amended counterclaim alleging that SCO's retention of funds from certain SCOSource licenses constituted breach of fiduciary duty, breach of contract and conversion.

Both SCO and Novell filed multiple motions for summary judgment on their respective claims and counterclaims. On August 10, 2007, the District Court issued its decision ⁴ denying SCO's motion for summary judgment and granting, in part, Novell's motions for summary judgment. The District Court concluded that: (1) Novell retained ownership of the UNIX copyrights; and (2) Novell is entitled to royalties from certain SCOSource licenses that the District Court determined to be SVRX Licenses. The District

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Following the District Court's decision, the parties were poised to begin a trial to resolve the following issues: ⁵ (1) the amount of the royalties to which Novell is entitled from certain SCOSource licenses that the District Court determined to be SVRX Licenses and any additional licenses that are determined to be SVRX Licenses; (2) whether SCO had the authority to enter into licensing agreements with Microsoft Corporations and Sun Microsystems; and (3) the amount of funds held by SCO that are subject to a constructive trust. The trial was scheduled to begin on Monday, September 17, 2007, until SCO filed for bankruptcy on Friday, September 14, 2007.

Novell filed the instant Motion on October 4, 2007 contending that relief from the automatic stay is warranted for cause. The Motion was set for hearing on November 6, 2007.

II. JURISDICTION

This is a core proceeding which invests the Court with jurisdiction pursuant to 28 U.S.C. § 157(b)(2)(G).

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III. ANALYSIS

A. The Law

The automatic stay is one of the most fundamental protections provided to the debtor under the Bankruptcy Code. Midlantic Nat'l Bank v. New Jersey Dept. of Envtl. Protection, 474 U.S. 494, 503, 106 S. Ct. 755 (1986) reh'g denied 475 U.S. 1090, 106 S. Ct. 1482. The purpose of the automatic stay is "to prevent certain creditors from gaining a preference for their claims against the debtor; to forestall the depletion of the debtor's assets due to legal costs in defending proceedings against it; and, in general, to avoid interference with the orderly liquidation or rehabilitation of the debtor." St. Croix Condominium Owners v. St. Croix Hotel, 682 F.2d 446, 448 (3d Cir. 1982).

However, the automatic stay is not meant to be absolute, and in appropriate instances relief may be granted. Wedgewood Inv. Fund, Ltd. v. Wedgewood Realty Group, Ltd. (In re Wedgewood), 878 F.2d 693, 697 (3d Cir. 1989). Section 362(d)(1) of the Bankruptcy Code provides that:

On request of a party in interest and after notice and a hearing, the court shall grant relief from the stay provided under subsection (a) of this section, such as by terminating, annulling, modifying or conditioning such stay

(1) for cause, including the lack of adequate protection of an interest in property of such party in interest. . . .

Except for lack of adequate protection, "cause" is not defined by § 362(d)(1). Cause is a flexible concept and courts often conduct a fact intensive, case-by-case balancing test,

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The legislative history to section 362(d)(1) emphasizes the section's applicability to proceedings in another tribunal. "It will often be more appropriate to permit proceedings to continue in their place of origin, when no great prejudice to the bankruptcy estate would result, in order to leave the parties to their chosen forum and to relieve the bankruptcy court from any duties that may be handled elsewhere." H.R. Rep. No. 595, 95th Cong., 1st Sess., 341 (1977). Most courts follow this logic and apply an equitable balancing test to determine if cause exists to lift the stay to allow pending litigation to proceed or continue in another forum.

This Court has developed a three-prong balancing test to determine whether to grant relief from the stay:

1. Whether any great prejudice to either the bankrupt estate or the debtor will result from continuation of the civil suit;

2. Whether the hardship to the non-bankrupt party by maintenance of the stay considerably outweighs the hardship to the debtor; and

3. The probability of the creditor prevailing on the merits. Izzarelli v. Rexene (In re Rexene Prods. Co.), 141 B.R. 574, 576 (Bankr. D. Del. 1992).

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1) whether relief would result in a partial or complete resolution of the issues; 2) lack of any connection with or interference with the bankruptcy case; 3) whether the other proceeding involves the debtor as a fiduciary; 4) whether a specialized tribunal with the necessary expertise has been established to hear the cause of action; 5) whether the debtor's insurer has assumed full responsibility for defending it; 6) whether the action primarily involves third parties; 7) whether litigation in another forum would prejudice the interests of other creditors; 8) whether the judgment claim arising from the other action is subject to equitable subordination; 9) whether the moving party's success in the other proceeding would result in a judicial lien avoidable by the debtor; 10) the interests of judicial economy and the expeditious and economical resolution of litigation; 11) whether the parties are ready for trial in the other proceeding; and 12) impact of the stay on the parties and the balance of the harms.

In re Sonnax Indus., Inc. v. Tri Component Prods. Corp., 907 F.2d 1280, 1287 (2d Cir. 1990).

B. Application

Before analyzing the applicable law, the Court notes that the circumstances surrounding this case are unusual. In particular, the parties were on the door-step of beginning a five-day trial of complex issues when the Debtors filed their petitions. Another court has extensive knowledge of the facts and issues and has already made detailed findings.

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1. Application of the Three-Prong Balancing Test

The first factor the Court must consider in determining whether to grant relief from the automatic stay for "cause" using the three-prong balancing test is whether the lifting of the stay will result in harm to the debtor or the estate. On the facts of this case, it does not appear that lifting the stay will unduly prejudice SCO.

The Debtors argue that allowing the trial to go forward would require the Debtors and their top management to focus all of their attention on the trial, to the detriment and exclusion of the reorganization efforts at a critical stage in the bankruptcy case. The Court does not agree. While the trial will likely require the attendance of SCO's primary officers and directors, SCO's attention to the Lawsuit will certainly not harm the estate.

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The Debtors also argue that the estate will be greatly burdened if the Court permits the trial to proceed because the imposition of a constructive trust on funds that are presently property of the estate would effectively kill the chapter 11 case at its inception. However, while the stay will be lifted in order to enable the District Court to determine the License Issues, this Court will determine whether a constructive trust is appropriate because it is the very essence of a bankruptcy court's jurisdiction to decide what is property of the estate. See In re Continental Airlines, 138 B.R.442, 445 (the determination of what constitutes property of the debtor's estate is one of the core proceedings arising under Title 11 and is inherently an issue to be determined by the bankruptcy court). As explained in In re Flanigan, 503 F.3d 171, 180-11(2d Cir. 2007):

The effect of a constructive trust in bankruptcy is profound. While the bankruptcy estate is defined very broadly under § 541(a)(1) of the Bankruptcy Code to include all legal or equitable interests of the debtor, any property that the debtor holds in constructive trust for another is excluded from the estate pursuant to § 541(d), which states

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Property in which the debtor holds, as of the commencement of the case, only legal title and not an equitable interest. . . becomes property of the estate. . . only to the extent of the debtor's legal title to such property, but not to the extent of any equitable interest in such property that the debtor does not hold.

11 U.S.C. § 541(a)(1), (d), see also Sanyo Elec., Inc. v. Howard's Appliance Corp. (In re Howard's Appliance Corp.), 874 F.2d 88, 93 (2d Cir. 1989). A constructive trust thus places its beneficiary ahead of other creditors with respect to the trust res.

Granting Novell stay relief will not result in the imposition of a constructive trust and, therefore, neither Debtors nor the estate will be prejudiced.

After determining whether relief from the stay will result in any harm to the debtor or the estate, the Court must balance that hardship with any hardship that the movant will suffer as a result of the stay being enforced. Here again, the Court finds the equities favor Novell. Hardship will result to Novell from denying relief, whereas the prejudice to SCO in denying relief, as discussed in the analysis of the first prong, is slight.

Novell has already prepared extensively for a trial that was to take place in September. Novell will be burdened by further delay and the fact that it will have to prepare again. Novell has already spent significant time and resources preparing for the trial in the Lawsuit. In addition, without a ruling on the Liability Issues, Novell's rights in these bankruptcy cases remains undetermined and the value of Novell's claim will remain a troubling issue for the Court, Novell and Debtors.

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The Debtors argue that the very same reasons to deny the Motion. The Court, however, finds that the fourth point is not present here. As Novell has pointed out in its papers, the Debtors simply cannot file a confirmable plan of reorganization until they know what liability they have to Novell. The resolution of the issues remaining in the District Court litigation will assist the Debtors, not burden them. ⁷

Finally, the Court must consider whether the movant has some probability of success on the merits of the pending litigation. Even a slight probability of success on the merits may be sufficient to support lifting an automatic stay in an appropriate case. Int'l Business

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Novell argues that "probability" has already solidified into actual success on the merits and the issues remaining are merely damage calculations. The Debtors contend that Novell has failed to demonstrate that it will prevail on the other remaining issues: whether SCO had the authority to enter into licensing agreements with Microsoft Corporations and Sun Microsystems; and the amount of funds held by SCO that are subject to a constructive trust. As the Court stated earlier, the stay will not be lifted and, therefore, the Constructive Trust Issue will not proceed in the District Court. It is therefore not necessary to analyze whether Novell is likely to succeed on the Constructive Trust Issue. As for the Liability Issues, the Court finds that there is sufficient evidence, including the District Court's decision, to support a finding of a reasonable probability of success on the merits.

2. Application of the Sonnax Policies

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IV. CONCLUSION

After an analysis of the facts and equitable considerations, the Court concludes that relief from stay is justified.⁹ An Order in accordance with the Memorandum Opinion is attached.

Dated: November 27, 2007

[signature]
KEVIN GROSS, U.S.B.J.

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¹ This Memorandum Opinion constitutes the findings of fact and conclusions of law required by Federal Rule of Bankruptcy Procedure 7052, made applicable to contested matters by Bankruptcy Rule 9014.

² 11 U.S.C. §§ 101 et seq. Hereinafter, references to statutory provisions by section number only are to provisions of the Bankruptcy Code, unless the context requires otherwise.

³ Santa Cruz was subsequently purchased by Caldera Systems, Inc. which changed its name to SCO.

⁴ The learned District Court issued a thorough 105-page opinion carefully analyzing the facts and law. The District Court's mastery of the facts and law pertaining to the Lawsuit is a powerfully important consideration in the Court's decision to lift the stay.

⁵ The first two issues are hereinafter referred to as "the Liability Issues." The third issue is hereinafter referred to as "the Constructive Trust Issue."

⁶ Debtors' trial counsel in the Lawsuit is being compensated on a contingency fee basis and therefore the expense of the trial will not unduly burden Debtors.

⁷ An example of Novell's dilemma, and the Court's, arose recently in the bankruptcy cases. Debtors moved to sell substantially all of their assets. Without a ruling on the Liability Issues it was unclear if the sale would adversely affect Novell's rights. Debtors subsequently withdrew the sale motion, but the problem remains.

⁸ Lifting the stay may also benefit Debtors who have made it clear that they will appeal the District Court's decision. Until the Lawsuit can proceed to final judgment, the adverse ruling is a "Sword of Damocles" over Debtors.

⁹ The Court does not presume that the busy District Court will be able immediately to schedule the anticipated five day trial in the Lawsuit, and respectfully defers to the District Court on scheduling.

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

IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE

ORDER GRANTING NOVELL’S MOTION FOR RELIEF
FROM THE AUTOMATIC STAY TO PROCEED WITH THE LAWSUIT

Upon consideration of Novell, Inc.’s Motion for Relief from Automatic Stay to proceed with the District Court Action to (I) Apportion Revenue from SCOSource Licenses and (II) Determine SCO ’s Authority to Enter Into SCOSource Licenses, etc. (the “Motion”); and the Court finding that (a) the Court has jurisdiction over this matter pursuant to 28 U.S.C . §§ 157 and 1334, (b) this is a core proceeding pursuant to 28 U .S.C . § 157(b)(2), (c) venue of these cases is proper pursuant to 28 U .S.C . §§ 1408 and 1 4 0 9 , (d) notice of the Motion was sufficient and proper; and upon the record of the hearing held on the Motion; and sufficient cause appearing therefor and for the reasons set forth in the accompanying Memorandum Opinion; it is hereby

ORDERED, that pursuant to 11 U .S.C. § 362(d)(1), relief from the automatic stay is granted for cause to allow Novell to proceed with the Lawsuit at the convenience of the District Court (as defined in the Memorandum Opinion ) on the following issues: (1) the amount of the royalties to which Novell is entitled from certain SCOSource licenses that the District Court determined to be SVRX Licenses and any additional licenses

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ORDERED, that the automatic stay is not lifted for a determination of the imposition of a constructive trust, an issue which this Court will adjudicate if and when necessary, following the District Court’s decision in the Lawsuit.

ORDERED, that Novell shall advise the Court of the trial date when the District Court schedules the trial.

Dated: November 27, 2007
KEVIN GROSS, U.S.B.J.

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MORRISON & FOERSTER LLP
Michael A. Jacobs (admitted pro hac vice)
David E. Melaugh (admitted pro hac vice)
[Address, Phone, Fax]

ANDERSON & KARRENBERG
Thomas R. Karrenberg, #3726
John P. Mullen, #4097
Heather M. Sneddon, #9520
[Address, Phone, Fax]

Attorneys for Novell, Inc.

IN THE UNITED STATES DISTRICT COURT
DISTRICT OF UTAH, CENTRAL DIVISION

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF UTAH

____________________________

THE SCO GROUP, INC., a Delaware
corporation,

Plaintiff/Counterclaim-Defendant,

vs.

NOVELL, INC., a Delaware corporation,

Defendant/Counterclaim-Plaintiff.

__________________________

NOTICE OF DELAWARE
BANKRUPTCY COURT'S
MEMORANDUM OPINION AND
ORDER GRANTING NOVELL'S
MOTION FOR RELIEF FROM THE
AUTOMATIC STAY TO PROCEED
WITH THE LAWSUIT
________________________

Civil No. 2:04 CV-000139

Judge Dale A. Kimball
________________________

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