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New Filings, New Revelations - Updated
Friday, December 07 2007 @ 08:31 AM EST

There are some new filings in the SCO bankruptcy, and we learn some more about SCO's business. There is a filing from a UK law firm [PDF], Elkington & Fife, and on page 5 it explains what it has been doing for SCO:
We have been handling an opposition to a Community Trade mark application UNIXWARE on behalf of The SCO Group, Inc. against Novell, Inc.

That's entirely news to me, as last I looked the Unixware trademark was assigned to X/Open. I can't explain what this new issue is, but X/Open is located in the UK. Something new seems to up. SCO has also now filed its Certification of Counsel [PDF] in the Cattleback patent motion, part of its effort to get that approved, which seems to be moving forward.

Update: In fact, the order is now signed, as of the 6th:

272 - Filed & Entered: 12/07/2007
Order on Motion To Approve Compromise
Docket Text: Order Approving Compromise of Incipient Controversy. (Related Doc # [194]) Order Signed on 12/6/2007. (LCN, )

Like you, I am finding it a bit unnerving watching the speed of events in bankruptcy court. It seems like SCO will run out of money before any of the creditors get so much as a whiff of it. Not only that, but to be perfectly frank, my impression is that bankruptcy court is a bit of of a pig trough, where all the little piggies line up to get their cut.

I know if you or I ever filed for bankruptcy, our first thought would be, "How can I economize so as to pay off as much as I can and to get a handle on this undertow?" But corporations seem to say instead, "How can I spend some more?" And as we watch orders approved almost faster than we can read them, it's natural enough to wonder, is this how it's supposed to work? So I did some research to try to get a better handle on it.

First, here are all filings:

267 - Filed & Entered: 12/06/2007
Affidavit
Docket Text: Affidavit of Ordinary Course Professional Elkington & Fife LLP Filed by The SCO Group, Inc.. (Attachments: # (1) Affidavit of Service and Service List) (Werkheiser, Rachel)

268 - Filed & Entered: 12/06/2007
Certification of Counsel
Docket Text: Certification of Counsel Regarding Order Approving Compromise of Incipient Controversy (related document(s)[194] ) Filed by The SCO Group, Inc.. (Attachments: # (1) Exhibit A # (2) Exhibit B) (O'Neill, James)

269 - Filed & Entered: 12/06/2007
Order on Application to Employ
Docket Text: Order Granting Debtors' Application for Approval of Employment of Boies, Schiller & Flexner LLP, as Special Litigation Counsel to the Debtors Nunc Pro Tunc to Petition Date. (Related Doc # [115]) Order Signed on 12/5/2007. (LCN, )

270 - Filed & Entered: 12/06/2007
Affidavit
Docket Text: Affidavit of Ordinary Course Professional Landman Corsi Ballaine & Ford P.C. Filed by The SCO Group, Inc.. (Attachments: # (1) Affidavit with service list) (Jones, Laura Davis)

271 - Filed & Entered: 12/06/2007
Affidavit/Declaration of Service
Docket Text: Affidavit/Declaration of Service Regarding [Signed] Order Granting Debtors' Application for Approval of Employment of Boies, Schiller & Flexner LLP, as Special Litigation Counsel to the Debtors Nunc Pro Tunc to Petition Date (related document(s)[269] ) Filed by The SCO Group, Inc.. (Jones, Laura Davis)

Now, about the research. I noticed, if you look at the affidavits from the two professional firms in the list of today's filings, you'll see this phrase:

I understand that any compensation paid to the Firm is subject to disallowances and/or disgorgement under 11 U.S.C. § 328(c).

Is that just boilerplate language, or does that ever really happen? I gather that the idea in bankruptcy is to help the company asking for Chapter 11 protection to stay functional, able to conduct day-to-day business, and *then* as the actual bills come in, the court looks at details as to whether too much is being billed and in extreme situations it can even ask for money back if it seems unreasonable.

I wondered what the standard is, though. What's reasonable?

I found this paper, albeit from 2002, on the Department of Justice's website, Emerging Chapter 11 Issues in Bankruptcy Administration. It explains:

The United States Trustee has opposed efforts by professionals retained in bankruptcy cases to obtain indemnification for claims arising from their work in the case. It is the position of the United States Trustee that these professionals have a fiduciary obligation to the bankruptcy estate and their service requires a high degree of skill and care, based upon special learning and advanced knowledge. All professionals should therefore be held to high standards of care analogous to those applicable to lawyers and underwriters.

In addition, indemnification undermines the debtor in possession's fiduciary duty to the bankruptcy estate. A claim by a debtor in possession against its professionals would be an asset. In the event the company prevailed in asserting any claim against a professional, indemnification would vitiate any recovery: any money recovered from the professional would have to be paid back to the professional as part of the indemnification. An attempt by a debtor in possession to indemnify a person for negligence in advance, without any possible way of ascertaining what harm might be done, is inconsistent with the duties of the debtor in possession to the creditors.

The issues and problems posed by indemnification have led the United States Trustee Program to urge the Third Circuit Court of Appeals in In re United Artists to adopt a per se prohibition against indemnification of professionals appointed under Section 327 of the Bankruptcy Code. Oral argument in this case was held on December 4, 2001, and the case is now under consideration.

That was in 2002. So back then, that was an emerging issue, one that the Department of Justice was trying to get resolved. By the way, just as a footnote, the judge in the District Court in the case, before it was appealed, was the Honorable Sue L. Robinson, the judge in the SCO v. Red Hat case. I know. What are the odds?

The following year, we find out what happened. Here's the appeals court ruling [PDF], in In re: United Artists Theatre Company, et al , and here's what happened, as explained by Weil, Gotshal & Manges' Bankrupty Bulletin Newsletter:

On appeal, the U.S. Trustee argued that allowing professionals such as Houlihan to obtain indemnity for their own negligence encourages a lax standard that is inconsistent with a professional’s fiduciary obligations to creditors. Houlihan argued that, absent indemnity provisions such as the ones at issue, courts might be able to second-guess financial advisors. Thus, financial advisors would feel constrained and provide overly conservative advice to their clients, to the disadvantage of the estate....

In determining whether the Houlihan indemnification provision was reasonable and therefore permissible under section 328, the Third Circuit looked to Delaware corporate law “as a useful analogue.”...

The court explained that in the corporate sphere, Delaware courts have resolved the problem of how to deal with questions of negligence. The Third Circuit noted that directors and officers in Delaware may obtain indemnity for their own negligence. While Delaware corporate law tolerates ordinary negligence from a director of a corporation, it holds directors liable for gross negligence.

In evaluating the liability of directors, courts in Delaware look to the process by which boards of directors reach decisions, rather than the results of the decisions themselves. The Third Circuit stated that under the “business judgment rule,” courts do not challenge advice by financial advisors provided that they (1) have no personal interest, (2) have a “reasonable awareness of available information after prudent consideration of alternative options,” and (3) provide that advice in good faith. In other words, under Delaware corporate law, so long as the process employed in reaching a decision was rational or undertaken in a good faith effort to advance corporate interests, and there is no conflict of interest, there is no ground for liability, no matter what a judge or jury thinks of the substance of the advisor’s decision....

Viewed in this manner, the court concluded that agreements to indemnify financial advisors for their negligence are reasonable under Bankruptcy Code section 328(a).

I know. Weird, but Delaware corporate law is tilted toward the needs and desires of corporations. I guess the DOJ tries to fight for equitable outcomes, and Delaware tries for outcomes that will encourage corporations to want to incorporate there.

The decision came in for criticism on a number of grounds, by the way, and there was a dissent filed, in which I note "Judge Alito concurred" basically saying that there was no need to articulate a new test for reasonableness under Section 328 of the Bankruptcy Code, the court should have just said that there is no per se ban on indemnification, that it should be determined case by case and that the court should have outlined how to do that. And the dissent took exception in another respect:

Additionally, the dissent questioned why the court had focused on Delaware law applicable to directors, when Delaware law did not govern the agreement, and the relationship was not between a company and its directors, but between a company and its financial advisors. With respect to the latter point, it should be noted that there has been some criticism of the decision because of the Third Circuit’s attempt to analogize the duties of directors of solvent companies with those of financial advisors to insolvent companies. Critics have questioned whether this analogy represents an erosion of the high standards that were required of a debtor’s fiduciaries in the past.

See what I mean about Delaware? What I understand from this research is that the Department of Justice's US Trustee's Office has an uphill climb in that state, where most corporations like to be formed, precisely because of the favorable corporate conditions there. Yet, despite all that, in the SCO bankruptcy, the US Trustee did manage to get the indemnification clause removed from the agreement with the temp agency, CFO Solutions.

Oh, that's not the end of the story about that financial services company at the heart of the United Artists Theatre Company decision. Here's a 2005 ruling from the appeals court for the Tenth Circuit -- you know, Utah's circuit -- involving the same financial services firm, Houlihan Lokey, only this time it got its wings clipped after it filed a bill in bankruptcy court that the US Trustee, among others, thought was unreasonable. You'll enjoy reading it, I think. And it will likely increase your respect for the US Trustee's instinct in the United Artists Theatre case, objecting to hiring that firm, or at least that was my reaction on reading how the firm put in a bill in the Tenth Circuit case for $1,920,967.74, tried to avoid providing an hourly breakdown to justify it, and when it did do a breakdown, the hourly rate was startlingly high:

Houlihan's requested fees during the first retention period amounted to $613.96 per hour, while its requested fees during the second retention period amounted to $1,173.99 per hour.

They said they were better than other firms providing financial services.

: )

Can you think of any job in the world that is worth paying someone $1,173.99 an hour? Anyway, the court chopped about a million off their bill, and the appeals court said that was fine with them.

So now I think I get it. The court may order that a firm get up to such and such an amount, but when the actual bills come in, they may or may not be deemed to be reasonable. And if the bill is outrageous, or as the court would put it unreasonable, the bankruptcy court can reduce it or deny it.


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