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SCO Gets Leases OKd Despite Novell Objection: "SCO's Spending $$ by the Boatful - There'll Be Nothing Left"
Tuesday, January 08 2008 @ 03:26 PM EST

The hearing on Novell's objection to the leases was today, and Groklaw had two observers there. The outcome was that SCO's leases were approved.

Novell no longer objected to the Utah lease, because now they see the terms, and probably also because that's the one that is for only one year. That left the New Jersey lease, the one that will last until 2010.

Here, SCO's strategy of not revealing the details until the hearing apparently paid off. They showed up with a witness to testify that this was the absolutely best possible deal they could find. How do you counter that live? Novell told the judge that SCO was spending money by the boatful, and that there will be nothing left for Novell, but the judge ruled that he can't assume that SCO is dead in the water until it is, meaning he can't assume the outcome of the Utah trial. SCO had told the judge that a three-year lease is the best they can find, that most properties in New Jersey want five, and that unless something gets decided fast, as a holdover tenant under New Jersey law, SCO could end up owing the current landlord a lot of money to stay.

Interestingly, SCO's lawyer said that the current landlord is only interested in a three-year lease, but then also told the judge that last year, the landlord gave SCO a one-year extension. I find those two facts hard to put together.

First, our report from UD:

Once again, the bankruptcy hearing was less than exciting today. There was only one issue before the judge and that was about Novell's objection to the renewal of the NJ office lease. Novell no longer objected to the Utah lease because they now had the opportunity to review the actual lease terms.

You could tell from the start there weren't going to be many fireworks. Only two lawyers were present per side, the US trustee and one SCO witness. Even the gallery had an all-time low of three people - two of which were Groklaw'ers.

Rachel Werkheiser started off arguing for SCO that renewing the lease in NJ meets the liberal criteria of being a common course of business and should be allowed. Grace Robson is going to present the case for SCO.

Ms. Robson explains that when SCO started the lease renewal process back in April 2007 they looked at 12-15 other properties as alternatives to their current site. They took into consideration the number of employees, the configuration of the space and how it might need to be reconfigured and the amount of power available (for the computers). Also they need to take into consideration the cost of actually moving. All sites had lease terms greater than or equal to three years. So she's basically saying that there were no more attractive terms at other locations and they were saving moving and setup costs. Also, as of Jan 1, they are considered a holdover tenant and may possibly be held liable for 1.5 to 2 times their current monthly rent unless they get this agreement approved. SCO has a witness - Justin Swenson - to provide testimony about the leasing process they undertook.

Adam Lewis cross-examines Mr. Swenson about his role in the lease renewal. He states he was a liaison between the agent (Charlie Dillon? of the Staubach Group?) and SCO. He did not personally negotiate with the actual landlords. He had only recently come into this role and was not involved with the negotiations for the 2005 lease agreement. SCO was looking for some sort of advantage with their current landlord by letting him know they were looking elsewhere (that worked well, didn't it?). No terms were discussed initially except that SCO wanted a three-year lease instead of five. Last year SCO got a one year extension of their lease that expired at the beginning of 2007. They evaluated the other 12-15 sites through April 2007, but then he was told to put the search on hold because SCO was uncertain of their position going into the late phase of their litigation.

Mr. Lewis asked him if the executives gave him any rationale for pausing the lease negotiations. He said again that they were not sure how the litigation would affect them at the critical stage they were entering. Mr. Young and Mr. Olson were his main SCO contacts. Negotiations remained in hiatus until shortly after they filed for bankruptcy.

Sandy Gupta told him they wanted to stay in the current location to avoid moving costs so at this point, no other locations were considered. Mid-October they started negotiations with their current landlord through Mr. Dillon who believed that they could do no better than a 3-year term. Here Mr. Lewis is generally arguing that SCO *could* have done a better job on the terms of the lease by being more aggressive in negotiations and considering possibly suspending lab activities (product development) to save space and money. He also argues that if they thought they should suspend the process when they were unsure of things back in April, why are they going ahead with business as usual now that they know they're in deep doo-doo? (my words, not his).

SCO explains once again that they could be on the hook as a holdover tenant for up to 2 times their current rent if this isn't approved and moving & build-up costs if they're forced to move.

Mr. Lewis reiterates his points again that SCO isn't using sound business judgement in its operations and is just spending money by the boatloads until there won't be anything left for Novell. They coulda this and they coulda that, but they didn't. No tough negotiations, not in a timely manner, didn't consider lab suspension, etc...

SCO is just basically saying (and this is a whole lot of paraphrasing) that whatever happened back when, it doesn't really matter. Here's where we are now and this is the cheapest option and makes the best sense.

Judge Gross says this matter is usually not hotly contested in bankruptcies. It would be inappropriate for him to assume that SCO is going to go under in the near future since its litigation is still in progress. He is satisfied that Mr. Swenson did a good enough job -- maybe not the best effort -- but good enough to satisfy the liberal test for the course of common business procedure. He then signs the order.

And that wrapped things up! We had the feeling during the proceeding that Mr. Lewis was fighting a un-winnable battle here.

Our other witness, MikeD adds this:

The meeting was sparsely attended:

Mr. Lewis
Mr. Nestor

Ms. Robson
Ms. Werkheiser
Mr. Justin Swenson (testifying for SCO)

U.S. Trustee's Office:
Joseph McMahon

#1 Motion to amend payments:
This was approved by the judge before the hearing started.

#2 Motion to Approve Leases
They did the easy one first. Mr. Lewis said that they (Novell) had no objections to the Utah lease after discussions and document reviews.

It was not that easy for the NJ lease.

Ms. Robson:
- The NJ lease will benefit the estate.
- SCO had a management company, Operations, Inc., evaluate 12 - 15 locations.
- They looked at space needs based on head counts and space needed.
- Has to have lab space
- Power and IT requirements for lab are a big issue.
- They looked at the cost of moving, build, IT expenses
- They feel that a 3 year lease with a 3 year option to renew at the current location is the best way to go.

She pointed out that NJ has a "holdover statute" where a client can continue to stay on premises with a new lease, but the cost would be 1.5 to 2 times current cost.

Mr. Swenson was sworn in as a witness and was questioned at length by Mr. Lewis. Mr. Swenson is an Operations Manager for Operations, Inc.

Without boring you with all the details, Mr. Lewis was tying to find out when SCO started addressing the leasing issues and how they handled it. Operations, Inc. started looking for alternative space in March 2007. Over the course of one day, they looked at "12-15-18 properties". They were told by SCO that new space had to be within a 5- to 10-mile radius of the current location. These efforts stopped in April 2007 when SCO said they were putting things on hold pending litigation.

Operations, Inc. pointed out to SCO that their leases were about to expire in October, 2007. The search for space began anew.

Mr. Lewis questioned whether the lab could be shut down for a short period during bankruptcy if smaller space needs would work. Mr. Swenson was told by Sandy Gupta that any shutdown would adversely affect them. He testified that the current space needs are for about 25 people, including 15 to 18 engineers "who are not there at the same time".

Mr. Lewis was trying to paint a picture that "this was not an exercise in business judgment, but an exercise in business neglect".

His points:
- makes no sense with the cloud over the future
- SCO did little to negotiate pre-petition
- Then no efforts at all until October
- Their financial distress was due to court judgment against them and their filing for bankruptcy
- Lab is R&D
- SCO wants "life as normal"
- "SCO is spending money by the boatload and nothing will be left for creditors".

Ms. Robson said that their search for properties will likely involve a 5-year lease and companies may have a problem with SCO since they were in bankruptcy. They casts of moving to a new location would disrupt their business and in the end, would cost more that staying where they are. The current landlord is not interested in anything less than a three-year lease. They already have used a one-year extension on the current lease.

Judge Gross asked if the new lease involved a reduction in lab space. Mr. Swenson said the footprint was being drastically reduced and they have already consolidated space.

Judge Gross then spoke. He said that leases are not normally a hotly contested issue in bankruptcies. He said it would be inappropriate for him to make a judgment at this point as to whether SCO will be able to make it going forward; or whether they would be adversely affected by court cases going forward.

He was satisfied that the debtor had made sufficient efforts at looking at alternatives and reducing their space needs. He therefore approved the motion. He signed the SCO motion on the spot.

That was the end of the hearing.

It's sad but true that the SCO "we won't tell you until the hearing" strategy did pay off, because there's no way to rebut testimony you are hearing for the first time. You can challenge it with questions, but you have no way to disprove anything really, the way you could if you had advance notice. Then you could walk into the courtroom with a list of properties in the area for rent for just one year, if they exist, for example. But live? Unless you have a brilliant paralegal there with you online during the hearing. That sometimes works.

But it's also true that SCO has to be somewhere until the funeral, which is what I told you when we first read the SCO motion, so I can't say I'm really surprised.

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