I think this was predictable enough, that Novell would file an objection to the proposed sale of SCO's patent via its newly formed wholly owned subsidiary, Cattleback Holdings, and now it has, a limited objection:
Filed & Entered: 11/28/2007
Docket Text: Limited Objection to Motion for Approval of Compromise of Incipient Controversy Regarding Cattleback Intellectual Property Holdings, Inc. (related document(s) ) Filed by Novell, Inc. (Greecher, Sean)
The motion is dripping with scornful understatement. Novell would like more information regarding this insider deal to make sure it isn't a way to insulate SCO from litigation outside of bankruptcy.
Hunh. Who'd read SCO's proposed plan and think of that?
Here's the meat of the objection:
10. Whether reviewed under Rule 9019 or section 363(b), the Debtors should be required to provide additional information to the Court and the estates' creditors prior to approving the proposed settlement, as the proposed settlement cannot be appropriately evaluated on the Debtors' submission. The protection to the estates of requiring adequate disclosure is particularly important as the Debtors propose a settlement with Cattleback -- an insider -- with whom transactions are inherently subject to higher scrutiny by the Court. The Third Circuit in In re Nutraquest, Inc., 434 F. 3d 639 (3d.Cir. 2006), recognized that insider settlements must be scrutinized so that insiders do not insulate themselves from litigation outside the bankrupty context. Id. at 647 (upholding a settlement between non-insiders as distinguishable from settlements with insiders)....
12. Even were there no applicable heightened standard of settlement, Novell submits that the Debtors must provide substantial additional information before the Court and parties-in-interest can properly consider the Motion for approval according to the most basic standards.
Here's what Novell would like to have: proof of what the patent is actually worth, why SCO decided to sell it allegedly last summer "while engaged in bitter litigation with Novell and others", and they'd like to know who is proposing to buy it. Is there a relationship with the Debtors, its personnel or Cattleback? Novell would also like to know what other offers there were with more specificity, since SCO claims it was shopped to 200 entities and there were several offers, it'd like to see a copy of the winning bid, some of the competing bids, any proposed sale contracts, the marketing agreement with Ocean Tomo and a look at those expenses -- "expenses of sale in excess of 18% surely warrant greater review," Novell calmly states, even if this were not an insider transaction. And Novell feels the creditors should be given the opportunity to vet the reasons SCO decided to sell and for Ocean Tomo's suggestion to set up a new subsidiary. For that matter, how about showing the settlement agreement between SCO and Cattleback if there is one designed to "resolve this 'incipient' controversy."
Oh, and Novell would like some "useful information on SCO's alleged solvency at the time it contributed the Patent to Cattleback" because, Novell states, "SCO's lack of fraudulent intent and solvency are not as obvious as SCO declares in the Motion and such expressions are argument unsupported by the Debtors in fact."
Like SCO will even try to do all this. Novell says it isn't necessarily opposed to a sale, but how can it know without further information? I expect this SCO motion to be withdrawn as well now, rather than supply all that Novell is asking for.
UPDATE: This is odd. There is another objection [PDF] now filed regarding SCO's proposed sale of the patent, by The 363 Group, whoever they are in this context. The call it a "response". The 363 Group deals in buying and selling for "distressed companies". That falls under Section 363 of the Bankruptcy Code, so cute name. So... who are they and why do they care if SCO sells a patent? The 363 Group must have ties to someone in this mess.
I did some quick research, and I see they
were employed as consultants by the Chapter 7 trustee in MarchFirst's bankruptcy, currently still ongoing, I gather, in Illinois Bankruptcy Court, if you can believe it. You remember MarchFirst. It's where Bert Young used to work. The 363 Group would be wearing white hats in that bankruptcy. Actually, I don't even know that. This is surely a small world, though.
The 363 Group were also retained in another bankruptcy and in that one, when asking to hire them, there was filed this Exhibit [PDF] that tells us a little bit about them. On page 3, you'll find that they say they were at that time, in 2003, "advising a $100 million investment fund regarding potential distressed company and distressed asset acquisitions." Like... um... who? Give us a hint. First letter? I'm not going to sweat it. Sooner or later, it all comes out in the wash. This is bankruptcy court, after all. Anyway, the 363 Group agrees with Novell that it would like a teensy bit more info about the proposed sale and they ask if it's a 363 or exactly what part of the code such a sale is under. If SCO is seeking the kinds of protections 363 offers, like "insulation from future avoidance actions", it thinks it has yet to touch all the bases before it can head for home. Like what is the sound business purpose that would justify selling an asset without a confirmation of a reorganization plan?
And it would like to make a counter offer: $670,000 "on behalf of an entity TBD" to purchase the patent. More mystery. They say patents, plural, but I don't think SCO offered more than one. Details, details. So it would like the court to consider its offer, which it points out is 17.5% more than the current offer. Just making the offer kills the other deal, I'd say. The whole thing will have to be opened up again, if it goes forward at all, I'd imagine. Bankruptcy courts don't usually say no to more money for an asset in the estate.
I wish the court would make everyone wanting to buy tell who they really are and who they really represent. That seems to be a significant aspect to the story. Who wants this junk good for annoying litigation and not much else?
UPDATE 2: Groklaw's readers have already solved the mystery:
As of July 15, 2004, The 363 Group, Inc., a bankruptcy and
distressed transaction consulting firm, has merged its practice
into the Corporate Restructuring practice of I|C|M|B Ocean
Tomo. This merger allows The 363 Group, Inc. to take
advantage of significant new resources of I|C|M|B Ocean
Tomo in serving its clients, especially as they relate to
intellectual property. Mark F. Thomann, President and CEO of
The 363 Group, Inc. will become the Managing Director of
Corporate Restructuring and David P. Kuipers, Principal of The
363 Group, Inc. will serve as Director. I|C|M|B Ocean Tomo's
Corporate Restructuring's professionals have substantial
experience in advising distressed companies in a wide variety
of industries and in structuring, negotiating and consummating
distressed transactions on behalf of the company, creditors,
shareholders and other involved parties.
Here [PDF]. Read it for yourself. So, Ocean Tomo, hired to sell the patent for Cattleback Holdings, a/k/a The SCO Group, is now bidding against the folks that it found to buy it? Laugh? Cry? What shall it be? I say laugh. Let's let *them* cry. And here's the filing [PDF] in MarchFirst's bankruptcy, seeking to retain the 363 Group to sell off MarchFirst's investment portfolio, and you'll see on page 5 the same names, Mark F. Thomann and David P. Kuipers, as signatories on a March 12, 2003 retention letter sent to the trustee. On page 12, the list of creditors, the number one creditor was Microsoft. That is the same month and year SCO filed suit against IBM, actually, so the two matters have been inching along simultaneously on different tracks.
Is this getting seriously weird, or what?
UPDATE 3: Mr. Thomann gave a talk at a seminar in 2004 on VoiceoverIP, and its description says it all:
2:15 pm - Optimizing the Value of Intellectual Property: What You Need To Understand and Why
The shift from manufacturing to services in the U.S. economy: The new phase of economic development where services are being commoditized and value is captured only though Intellectual Property; the proprietary position it offers.
Mark F. Thomann, Esq., Managing Director
I|C|M|B Ocean Tomo/The 363 Group, Inc. / Chicago, IL
Here's Novell's limited objection, as text, followed by The 363 Group's "Response":
UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE
Objection Deadline: November 28, 2007 at 4:00 p.m. (prevailing Eastern time)
THE SCO GROUP, INC., et al.,
Case Number 07-11337 (KG)
Hearing: December 5, 2007 at 10:00 a.m. (prevailing Eastern time)
NOVELL'S LIMITED OBJECTION TO MOTION FOR APPROVAL OF
COMPROMISE OF INCIPIENT CONTROVERSY REGARDING
CATTLEBACK INTELLECTUAL PROPERTY HOLDINGS, INC.
Novell, Inc. ("Novell") hereby submits this limited objection (the "Objection") to the Debtors' Motion for Approval of a Compromise of Incipient Controversy (the "Motion") between The SCO Group, Inc. and – as disclosed in the Motion – one of its wholly-owned subsidiaries that is not in bankruptcy, Cattleback Intellectual Property Holdings, Inc. ("Cattleback"). As is characteristic of the Debtors' bankruptcy cases so far, the Motion fails because it does not provide adequate information on which the Court and creditors of the estates, including Novell, can reasonably evaluate the settlement.
In support of its Objection, Novell respectfully states as follows:
1. By the Motion, the Debtors seek the Court's approval of their "incipient" controversy consisting of potential actual and constructive fraudulent conveyance claims SCO may have
against Cattleback under Bankruptcy Code sections 544(a) and 548 arising out of SCO's contribution of the Patent to Cattleback shortly before the Debtors filed their voluntary petitions.
2. According to the Motion, SCO decided last summer to sell the Patent. The Motion provides no information about the Patent other than its United States patent number. Nor does the Motion discuss why SCO decided to sell the Patent.
3. SCO hired Ocean Tomo to assist it with selling the Patent. According to the Motion, Ocean Tomo, in turn, advised SCO to form and contribute the Patent to a subsidiary for that purpose. The Motion does not disclose the rationale of the advice. Following Ocean Tomo's advice, SCO formed Cattleback and contributed the Patent to it.
4. Ocean Tomo then marketed the Patent. Apart from stating that Ocean Tomo marketed the Patent in some fashion to "almost 200 companies" in the ensuing couple of months and received "six [undisclosed] bids" for it, the Motion does not detail the marketing process or activity or the alleged "bids."
5. Ultimately, according to the Motion, SCO and Ocean Tomo concluded to sell the Patent to the buyer for $580,000. However, the sale was not concluded before SCO filed its bankruptcy petition. The Motion does not include a copy of the winning bid or any associated proposed contract.
6. SCO now evidently has agreed with Cattleback — its own subsidiary — to resolve potential fraudulent conveyance claims it may have against Cattleback to recover the Patent by: (a) permitting the sale to the buyer to close; (b) receiving all the proceeds of the sale except for Ocean Tomo's fees under Ocean Tomo's contract with Cattleback and certain related obligations
to SCO's own employees and the inventor; releasing its fraudulent conveyance claims against Cattleback.
7. The Motion claims that the fraudulent conveyance claims are weak because of an "insurmountable" task of proving actual intent to hinder, delay or defraud because SCO had been "trying to sell the Patent at market prices" and contributed to Cattleback at Ocean Tomo' s advice; and (b) SCO was "plainly solvent" when it transferred the Patent to Cattleback.
8. Novell asserts the Objection because the Motion does not provide adequate information on which the Court and creditors of the estates, including Novell, can reasonably evaluate the proposed settlement.
9. The Debtors ask the Court to review the Motion under the standard of Federal Rule of Bankruptcy Procedure 9019, under which the settlement must be fair, reasonable, and in the interest of the estates. Viewed alternatively, the Motion requests relief appropriate under section 363(b) of the Bankruptcy Code, as causing a wholly-owned subsidiary such as Cattleback to sell its only asset is a use of property of the estate that is outside of the ordinary course of business. Uses of estate property outside of the ordinary course of business must be fair, equitable, and in the best interests of the estates.
Whether reviewed under Rule 9019 or section 363(b), the Debtors should be required to provide additional information to the Court and the estates' creditors prior to approving the proposed settlement, as the proposed settlement cannot be appropriately evaluated on the Debtors' submission. The protection to the estates of requiring adequate disclosure is particularly important as the Debtors propose a settlement with Cattleback – an insider – with whom transactions are inherently subject to higher scrutiny by the Court. The Third Circuit in In
re Nutraquest, Inc., 434 F. 3d 639 (3d. Cir. 2006), recognized that insider settlements must be scrutinized so that insiders do not insulate themselves from litigation outside the bankruptcy context. Id. at 647 (upholding a settlement between non-insiders as distinguishable from settlements with insiders).
11. As another example of the heightened level of scrutiny for insider settlements, the Fifth Circuit in Connecticut Gen. Life Ins. Co. v. United Cos. Fin. Corp. (In re Foster Mortgage Corp.), 68 F. 3d 914 (5th Cir. 1995), overturned a Rule 9019 settlement between a debtor and non-debtor parent and subsidiary out of deference to an objecting creditor group. The Fifth Circuit expressed particular concern that creditors were not involved in the negotiation of the settlement, noting that though "future possible compromise agreements of this claim" may be reached, the court's scrutiny must be great when the settlement is between insiders. Id. at 919. In finding that the bankruptcy court abused its discretion in approving the Rule 9019 settlement, the Fifth Circuit held:
[A] bankruptcy court should consider the amount of creditor support for a compromise settlement as a factor bearing on the wisdom of the compromise, as a way to show deference to the reasonable views of the creditors....When a debtor subsidiary settles a claim it has against a parent corporation without the participation of the creditors, a bankruptcy court should carefully scrutinize the agreement.
Id. at 918 (internal citations omitted). See also In re Drexel Burnham Lambert Group, 134 B.R. 493, 498 (Bankr. S.D.N.Y. 1991) ("Lastly, this agreement was negotiated by Debtors with an insider. We subjected the agreement to closer scrutiny because it was negotiated with an insider, and hold that closer scrutiny of insider agreements should be added to the cook book list of factors that Courts use to determine whether a settlement is fair and reasonable.").
Even were there no applicable heightened standard of settlement, Novell submits that the Debtors must provide substantial additional information before the Court and parties-in-interest
2 can properly consider the Motion for approval according to the most basic standards.
13. Much of that information pertains to the value of the Patent and the adequacy of the proposed sale price. This is an important issue, in part, because if the Patent is worth far more than the sale price, the estates may be benefited in negotiating more favorable terms through settlement, or even commencing a fraudulent conveyance or other action to try to recover the Patent or its value; clearly, the greater the potential value of the Patent, the more value litigation may have to the estates.
14. Thus, for example, the Debtor should provide more information about the Patent itself, how it fits into the Debtors' business and portfolio, and why it decided to sell it last summer while engaged in bitter litigation with Novell and others. Similarly, the Debtors should identify the buyer and discuss what relationship, if any, it has with the Debtors, the Debtors' personnel or Cattleback and its personnel, as well as any other offers the Debtors may have received for the Patent. The Debtors should also supply a copy of the winning bid, relevant competing offers, and any related proposed sale contracts.
15. Additionally, the Debtors should disclose their marketing agreement with Ocean Tomo for review and evaluation; expenses of sale in excess of 18% surely warrant greater review, even were this not an insider transaction.
16. Additionally, with respect to the issue of actual fraudulent intent, creditors should have the opportunity to vet the reasons behind SCO's decision to sell the Patent last summer and Ocean Tomo's recommendation that the Debtors create a new entity to accomplish the transaction. Without information on those subjects, parties in interest are left to rely solely on SCO's conclusory statement that the intent issue is "insurmountable" because of a sale process creditors know little about.
17. The Debtors should also provide some useful information on SCO's alleged solvency at the time it contributed the Patent to Cattleback. SCO's lack of fraudulent intent and solvency are not as obvious as SCO declares in the Motion and such expressions are argument unsupported by the Debtors in fact. Yet, SCO is asking the Court to approve the settlement.
18. Finally, if there is a settlement agreement between SCO and Cattleback to resolve this "incipient" controversy, it should be presented to the Court and creditors as part of the Motion. If there is not a written agreement, there should be one. In the meantime the Motion should be denied for that reason alone.
19. Novell wishes to make it clear, once again, that it does not necessarily oppose the proposed settlement. Indeed, the settlement might be in the best interests of the estates. But the problem is that it simply is not possible to assess the settlement intelligently on the paucity of information the Motion supplies. Novell therefore presents this Objection in limited form in acknowledgement that it may support the relief requested once appropriate disclosures are made. However, given the current inadequacy of disclosure, Novell proffers this limited Objection and asks the Court to require the disclosures requested herein prior to consideration of the settlement for approval.
Dated: November 28, 2007
YOUNG CONAWAY STARGATT & TAYLOR, LLP
/s/ Sean T Greecher
James L. Patton (No. 2202)
Michael R. Nestor (No. 3526)
Sean T. Greecher (No. 4484)
-- and --
MORRISON & FOERSTER LLP
Adam A. Lewis
-- and --
MORRISON & FOERSTER LLP
Larren M. Nashelsky
Julie D. Dyas
Counsel for Novell, Inc.
As described in the Motion, the "Patent" is defined as U.S. Patent No. US 6,529,784, titled "Method and Apparatus for Monitoring Computer Systems and Alerting Users of Actual or Potential System Errors."
2 As the Court is aware, no official committee of unsecured creditors has been appointed in these cases.
3 In fact, given that the Debtor is paying for the obligations of a third party (Cattleback), some of which normally would be carefully scrutinized under Bankruptcy Code sections 327 and 330, there is even more reason for the Court and creditors to understand and evaluate these underlying prepetition obligations and what Ocean Tomo has done to earn them.
UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE
THE SCO GROUP, INC., et al.,
Case Number 07-11337 (KG)
Docket No. 194
RESPONSE OF THE 363 GROUP, INC. TO DEBTORS' MOTION FOR
APPROVAL OF COMPROMISE OF INCIPIENT CONTROVERSY
The 363 Group, Inc. ("363") hereby submits this response (the
"Response") to the Motion for Approval of Compromise of Incipient Controversy (the
"Motion"), filed by that above-captioned Debtors and Debtors in Possession (collectively, the
"Debtors"). In support of this Response, 363 respectfully represents as follows:
1. 363 does not object to the proposed settlement between the Debtors and
their wholly-owned non-debtor subsidiary, Cattleback Intellectual Property Holdings, Inc.
("Cattleback"), or the waiver of the Debtors' avoidance powers, generally, with respect to the
sale of the U.S. Patent No. 6,529,784, titled "Method and Apparatus for Monitoring Computer
Systems and Alerting Users of Actual or Potential System Errors" (the "Patent") by Cattleback.
2. However, the Motion does not clearly indicate whether the sale of the
Patent has been completed or become binding on Cattleback. Instead, the Motion merely states
that "Ocean Tomko and Cattleback settled upon a buyer for $570,000." (See Motion at 5.)
3. 363 recognizes, the sale of the Patent by Cattleback may not governed by
section 363 of the Bankruptcy Code but believes that it might appropriately be governed by
section 363. However, to the extent the Motion seeks to grant Cattleback and the purchaser of
Bankruptcy Code -- such as insulation from future avoidance actions -- the sale should be
governed by the same standards.
4. Courts typically require debtors-in-possession to establish a "sound
business purpose" to sell any or all their assets before confirmation of a plan of reorganization.
In re Delaware & Hudson Railway Co., 124 B.R. 169, 175-76 (D. Del. 1991); In re Titusville
Country Club, 128 B.R. 396, 399 (Bankr. W.D. Pa. 1991); In re Sovereign Estates, Ltd., 104
B.R. 702, 704 (Bankr. E.D. Pa. 1989); In re Conroe Forge & Manufacturing Corp., 82 B.R. 781,
783-86 (Bankr. W.D. Pa. 1988); In re Industrial Valley Refrigeration & Air Conditioning
Supplies, Inc., 77 B.R. 15, 21 (Bankr. E.D. Pa. 1987). Courts consider the following non-exhaustive list of factors in determining whether a sound business purpose exists: (1) sound
business reason for the sale; (2) accurate and reasonable notice; (3) proportionate value of the
asset to the estate as a whole (fair and reasonable); (4) the amount of elapsed time since the
filing; (5) the likelihood that a plan of reorganization will be proposed and confirmed in the near
future; (6) the effect of the proposed disposition on the future plan; (7) the amount of proceeds to
be obtained from the sale versus the appraised value of the property sold; and (8) Whether the
asset is decreasing or increasing in value. Delaware & Hudson Railway, 124 B.R. at 176; In re
Weatherly Frozen Food Group, Inc., 149 B.R. 480, 483 (Bankr. N.D. Ohio 1992).
5. The Debtor has made no such showing with respect to the proposed sale of
the Patent and, as set forth above, 363 is willing to offer $670,000 on behalf of an entity TBD to
purchase the Patents (nearly 17.5% more than the current offer). Under these circumstances, 363
requests that the Court consider its offer and, to the extent necessary, reopen the sale process
with respect to the Patent.
6. 363 is aware that the hearing for this case is scheduled at 10 am onDecember 5th, 2007, however, due to a prior engagement, 363 respectfully asks for the hearing to be rescheduled for 3 pm.
Dated: Wilmington, Delaware
November 28, 2007
Mark F. Thomann
Chief Executive Officer
The 363 Group, Inc.