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To read comments to this article, go here
Novell's Objection to the Leases and Berger Singerman's 3rd Bill
Friday, December 28 2007 @ 06:25 PM EST

Faithful Novell indefatigably steps up to the plate once again and has filed an objection to SCO's motion seeking to "assume" two of its leases, the one in Utah and the one in New Jersey. It's a smoker -- do not miss footnote 3 in your reading.

Here's Novell's main argument:
Novell, Inc... hereby submits this objection ... to the Motion of the Debtors... seeking to "assume" two expiring office leases pursuant to Code section 365(a) under terms and conditions that -- to the extent disclosed at all -- impose substantial administrative expense burdens on already financially-strained estates whose futures are in serious doubt. Novell urges the Court to deny the Motion as not merely failing to meet the business judgment test for motions to assume, but also for being yet another in a series of cryptic, unjustified and inexplicable decisions by the Debtors in these chapter 11 cases.

Inexplicable if you don't think that SCO's goal is to run through all the money before the Utah trial, I suppose. Here's footnote 3:

The Debtors' results would be still worse had they not underspent their projected wages by about half a million dollars since filing the cases. This figure is itself a bit puzzling since the operating reports indicate that the debtors overspent their projected payroll taxes by almost $400,000 for the same period.

And Berger Singerman has filed a third bill, 40-some pages for the exhibit. Blech. We'll have to do it as text. I was hoping this would all be over before they had a chance to file another bill. Not that they're not fascinating, I must say.

Here are the filings:

287 - Filed & Entered: 12/28/2007
Application for Compensation
Docket Text: Monthly Application for Compensation (Third) for Services and Reimbursement of Expenses as Co-Counsel to the Debtors in Possession for the Period from November 1, 2007 through November 30, 2007 Filed by Berger Singerman, P.A.. Objections due by 1/17/2008. (Attachments: # (1) Notice # (2) Exhibit A # (3) Certificate of Service and Service List) (Werkheiser, Rachel)

288 - Filed & Entered: 12/28/2007
Objection
Docket Text: Objection to Motion to Approve the Assumption of Nonresidential Real Property Leases with GRE Mountain Heights Property LLC and Canopy Properties, Inc. (related document(s)[278] ) Filed by Novell, Inc. (Attachments: # (1) Affidavit of Service) (Nestor, Michael)

It's getting to be a habit, Novell tells the court, for SCO to provide insufficient information to support its motions. And as for sound business judgment, the standard SCO must meet, that test "is not a license for the Debtors to do as they see fit, with the relief they seek in essence theirs for the asking." They have to also show some benefit to the estate. And there has to be some evidence in support of the motion, not just cryptic or missing discussion. Otherwise how are the Court and the creditors supposed to evaluate the motion? How do the leases fit in to SCO's business plan, if it has one? What alternatives are there? Do they need both offices? For what? SCO's future, Novell states, is "cloudy".

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

UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE

In re

THE SCO GROUP, INC., et al.,

Debtors.
Chapter 11

Case Number 07-11337 (KG)
(Jointly Administered)
Re: Docket No:278

Hearing: January 8, 2008 at 10:00 a.m. (prevailing Eastern time)
Objection Deadline: December 28, 2007 at 4:00 p.m. (prevailing Eastern time)

OBJECTION OF NOVELL, INC. TO MOTION TO APPROVE THE ASSUMPTION OF
NONRESIDENTIAL REAL PROPERTY LEASES WITH GRE MOUNTAIN HEIGHTS
PROPERTY LLC AND CANOPY PROPERTIES INC. [D.I.278]

Novell, Inc. ("Novell") hereby submits this objection (the "Objection") to the Debtors' Motion to Approve the Assumption of Nonresidential Real Property Leases with GRE Mountain Heights Property LLC and Canopy Properties, Inc. (the "Motion") [D.I.278] filed by the debtors and debtors in possession SCO Group, Inc. and SCO Operations, Inc. (together, the "Debtors"), seeking to "assume" two expiring leases pursuant to Code 1

section 365(a) under terms and conditions that -- to the extent disclosed at all -- impose substantial administrative expense burdens on already financially-strained estates whose futures are in serious doubt. Novell urges the Court to deny the Motion as not merely failing to meet the business judgment test for motions to assume, but also for being yet another in a series of cryptic, unjustified and inexplicable decisions by the Debtors in these chapter 11 cases.

In support of its Objection, Novell respectfully states as follows:

The Motion

1. The Debtors seek the Court's approval, pursuant to Code section 365(a), of the Debtors' decision to assume their leases (the "Leases") of two of the Debtors' office spaces. One lease is for the Debtors' headquarters in Lindon, Utah (the "Utah lease"). The other lease comprises supporting office space in New Jersey (the "NJ Lease"). According to the Debtors, the Leases both expire at the end of 2007. The Motion seeks to assume them as amended to extend them beyond their current expiration dates and to modify certain other terms (such as square footage and rent).

2. With respect to the Utah Lease, the Motion fails to describe any other terms of the proposed transaction. Instead, the Motion states that the Debtors are negotiating the other terms and hope to have a deal with the landlord by the time the Court hears the Motion.

3. With respect to the New Jersey Lease, the Debtors actually attached a copy of the proposed form of amendment. However, while the proposed lease extension the Debtors seek to "assume" 2

reduces somewhat the space and rent for the Debtor over that two additional years, it nevertheless burdens this estate with a significant financial commitment of nearly 1.1 million dollars for an additional three years (with no reduction from the prior rent for the first few months, even for the reduced space). Moreover, that commitment will be a dollar-for-dollar obligation of the Debtors. All rent payable currently and in the future under an assumed lease becomes an expense of administration in the cases, payable dollar for dollar. Interface Group-Nevada v. TWA (In re TWA), 145 F.3d 124, 136 (3d Cir. 1997). It stands to reason that the rent for the Utah Lease will be an even bigger such financial commitment of administrative expense since it involves the Debtors' headquarters.

2

4. In seeking the Court's authority to assume the Leases as extended, the Debtors fail to explain the genesis of, and rationale for, their decision in any manner. For example, the Debtors do not say:
  • Why they need both spaces for two years (that is, what their underlying business plan is (if they have one), including what they anticipate the course of these cases to be, and why they need the two Leases for that plan)

  • What efforts they have made to satisfy their space needs consistent with that business plan

  • What other, less burdensome alternatives were/are available to meet their demonstrable space needs

5. According to the Debtor's most recent monthly operating reports (November 2007), since filing these cases on September 11, 2007, the Debtors have barely broken even on their operations on a cash flow basis, and last month (November 2007) they lost about $250,000. See Debtor-In-Possession Monthly Operating Report for Filing Period November 2007, Docket No. 282. The reality of the Debtors' situation is even worse. Currently, the Debtors' financial advisor has pending an application for payment of interim fees of just about $500,000. No doubt the bills of the Debtors' other professionals are piling up, too. Hence, the Debtors' accrued (as opposed to cash flow) losses probably are much greater than reflected in the operating reports.3

6. The present Motion is not the first time the Debtors sought relief from this Court based upon inadequate information. The Court will recall that the Debtors asked the Court to approve a sale of significant assets on an "emergency" basis without attaching a sale of agreement

3

or describing its prior marketing efforts to justify its request to the Court and creditors. Ultimately, facing the objections of Novell and IBM Corporation ("IBM") and the Court's reservations on these and other points, and unable to produce a sale agreement, the Debtors simply abandoned their emergency motion several weeks later.

7. Similarly, the Debtors asked this Court to approve a settlement of their "incipient" controversy with nondebtor subsidiary Cattleback in a motion that again failed to make even the most rudimentary disclosures. On that occasion, the Debtors managed to provide adequate information under oath at the last moment, thereby sufficiently addressing Novell's objections for purposes of that motion.

8. Although the Debtors correctly characterize the standard by which the Court should review the Motion as whether the Debtors have exercised a sound business judgment in deciding to assume the Leases, the Motion wholly fails to meet that test.

9. The business judgment test is not a license for the Debtors to do as they see fit, with the relief they seek in essence theirs for the asking. "The principal test is that the assumption must be in the exercise of a sound business judgment showing benefit to the Debtor." In re Global Int'l Airways, 35 B.R. 881, 886 (Bankr. W.D.Mo. 1983)(motion to assume aircraft lease for $1.9 million rent and other costs in order to make $300,000 was denied; debtor also unable to show it cannot operate without lease of that particular aircraft); accord Citizens Nat'l Bank of Greater St. Louis v. Selma Properties, Inc. (In re. Crystalin, L.L.C., 293 B.R. 455, 463-64 (B.A.P. 8th Cir. 2003). As one court noted even early in a case when a debtor perhaps merits special lattitude (as contrasted with a case that, like this one, is already nearly four months old) a debtor must justify its decision as a sound business judgment:

The Court is mindful of the leeway a debtor in possession should be given in the exercise of its business judgment. The Court is also

4

sympathetic to the debtors' desire to retain its management team; to avoid the possible cost in time and expense in hiring new employees, and to add to the employees' sense of job security.

Clearly, any corporation in the process of a Chapter 11 reorganization faces uncertainty as to its future. Employees of such companies may often find it more advantageous to seek more secure surroundings. Nevertheless, the Court should not be constrained to accept the debtors' generous award of compensatory benefits when in the early stages of the reorganization process the employees have already been granted substantial incentive to remain with the company.

In re Anglo Energy Limited, 41 B.R. 337, 341 (Bankr. S.D.N.Y. 1983) (denying debtor's motion to assume employment contracts as not making economic or practical sense at that juncture). Moreover, the Debtors have the burden of proof on the Motion. Crystalin, L.L.C., 293 B.R. at 464; Global Int'l Airways, 35 B.R. at 886.

10. Here, the Debtors have not only failed to satisfy their burden of proof, but they have failed to include all but the most minimal and cryptic discussion that the Court and creditors need to evaluate the Motion, instead of the factual and financial evidence necessary to support approval of the Motion. The Debtors fail to allege any facts regarding the dtails of the Utah Lease other than that request for a three-year extension; there is no discussion or evidence at all about how either of the Leases fits into the Debtors' operational and financial future, both of which subjects are cloudy, to say the least; and there is no information or evidence on what alternatives, if any, the Debtor is considering before proceeding with what appear on their faces to be improvident extensions of the Leases. In short, the Debtors seek to burden their estates with significant administrative financial liabilities, but have failed to provide this Court or parties in interest with any relevant information to evaluate the merits of the relief requested or, more importantly, determine whether such relief is actually in the best interest of the Debtors, their estates and their creditors.

5

11. There is a woeful lack of information and facts upon which the parties in interest and the Court can consider, let alone grant, the relief requested in the Motion. As such, Novell respectfully submits that the Motion should be denied.

Dated: December 28, 2007
Wilmington, Delaware

YOUNG CONAWAY STARGATT & TAYLOR, LLP

___[signature]___
James L. Patton (No. 2202)
Michael R. Nestor (No. 3526)
Sean T. Greecher (No. 4484)
[address, telephone]

-- and --

MORRISON & FOERSTER LLP
Adam Lewis
[address, telephone]

-- and --

MORRISON & FOERSTER LLP
Larren M. Nashelsky
Julie D. Dyas
[address, telephone]

Counsel for Novell


1 The Code is the Bankruptcy Code, 11 U.S.C. 101-1551.

2 Arguably, this transaction is simply a new lease rather than an assumption of a modified lease that should be considered under Code section 363 rather than section 365(s).

3 The Debtors' results would be still worse had they not underspent their projected wages by about half a million dollars since filing the cases. This figure is itself a bit puzzling since the operating reports indicate that the debtors overspent their projected payroll taxes by almost $400,000 for the same period.

6


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