decoration decoration
Stories

GROKLAW
When you want to know more...
decoration
For layout only
Home
Archives
Site Map
Search
About Groklaw
Awards
Legal Research
Timelines
ApplevSamsung
ApplevSamsung p.2
ArchiveExplorer
Autozone
Bilski
Cases
Cast: Lawyers
Comes v. MS
Contracts/Documents
Courts
DRM
Gordon v MS
GPL
Grokdoc
HTML How To
IPI v RH
IV v. Google
Legal Docs
Lodsys
MS Litigations
MSvB&N
News Picks
Novell v. MS
Novell-MS Deal
ODF/OOXML
OOXML Appeals
OraclevGoogle
Patents
ProjectMonterey
Psystar
Quote Database
Red Hat v SCO
Salus Book
SCEA v Hotz
SCO Appeals
SCO Bankruptcy
SCO Financials
SCO Overview
SCO v IBM
SCO v Novell
SCO:Soup2Nuts
SCOsource
Sean Daly
Software Patents
Switch to Linux
Transcripts
Unix Books
Your contributions keep Groklaw going.
To donate to Groklaw 2.0:

Groklaw Gear

Click here to send an email to the editor of this weblog.


To read comments to this article, go here
US Trustee's Objections to SCO's Latest Reorganization "Plan" & more filings
Saturday, April 05 2008 @ 12:09 PM EDT

Here, as text, are two of the U.S. Trustee's Office objections to SCO's now scrapped reorganization plan, including the move to pay the Plan Sponsor. I think you'll see why SCO decided to try, try again after you read them. Our thanks to Steve Martin, once again, for the text. And we also have the most recent filings in the bankruptcy, two notices of withdrawal of the SCO motions regarding the bonuses they wanted to pay themselves that the US Trustee blocked and got modified; and the final bankruptcy filing is a bill from one of SCO's many lawyers, Pachulski, Stang. Those bills are as reliable as the sun coming up each morning.

SCO has folded its cards on the latest reorganization plan, as it informed the court at the most recent hearing, and it is supposedly headed back to the drawing board to try to figure out a "better" reorganization plan. I say supposedly, because as far as I can make out, it's premature to file any reorganization plan, in light of the issue that the US Trustee's counsel, Joseph McMahon, once again highlights in the objection to the SCO Disclosure Statement, "how much of the Debtors' business plan is predicated on the Debtors' use of property which Novell claims to be its own?" How many times does that have to come up before SCO figures out that it's an unmovable rock in its path?

Until that issue is settled in the trial in Utah that begins at the end of April -- assuming no 11th-hour quick stepping by SCO to delay it again -- how can SCO realistically figure out a way to reorganize? Not that this "plan" is even a plan, as you will see the US Trustee points out, since the money folks didn't sign on the dotted line, in the sense that they can pull out still. In fact, I gather they just did, as far as this plan is concerned. And if no such plan is going to fly until that issue of how much SCO has to pay Novell is settled, what can be the justification for filing yet another prematurely filed reorganization plan, or for all the fees being billed by various advisors to help SCO come up with another premature plan that is certain to be objected to on the same grounds that the others were? Just explaining the word "supposedly".

And we also have the latest filings in SCO v. Novell, a proposed witness list listing Andrew Nagle (presumably this Andrew Nagle, SCO's Director of Product Development), and SCO's proposed exhibit list.

In the SCO v. Novell filing, SCO lists exactly one witness, but that doesn't mean he's the only one it will use or that the list of exhibits the only ones they'll present. This is a Supplemental Pretrial Disclosure list, and you'll find its first list that it filed back in August of 2007 here; and also notice the phrase regarding exhibits that this is a list of evidence SCO may present at trial "other than solely for impeachment purposes". It's a list, in other words, of what they expect to use to support claims and defenses. Well, in SCO's case I guess only the latter in SCO v. Novell. That's all that's left to SCO in the April trial.

Impeachment purposes doesn't mean in this context like impeaching a president, removing from office. Impeachment purposes means evidence presented to prove a witness for the other side is wrong on facts or isn't being truthful or isn't reliable for one or another reason a party might be allowed to mention at trial. If, just as an example, Darl McBride testifies to something Novell wasn't expecting him to say, it can present witnesses or evidence to show that it's not true, even if the witness(es) or evidence isn't on its lists. There might be an opportunity to present some evidence as to character or how the world views his reputation for veracity, etc.

There's a 1922 book available in its entirety on Google Books that explains the subject, A Brief for the Trial of Civil Issues Before a Jury, and the section on impeaching witnesses starts here. Keep in mind the date of the book and the fact that the law never stands still, but it certainly will give you the overarching concepts, if not all the modern details. If you read that chapter in the book, I think you may discern why unscrupulous players might try to smear a person, so as to deliberately damage the person's reputation. For example, suppose a company was worried about potential testimony by someone. If, a year before trial, a friend in the media or a compliant blogger started a campaign to say the person was not truthful or had a reputation for not playing fair in some way, later, at trial, that "evidence" might be introduced to impeach that person's testimony. Dirty, yes. Conceivable? I think so. Anyway, this is a projected list, but it doesn't mean if someone testified in unexpected ways SCO couldn't come up with a new witness not currently on the list. It would just have to have a good reason for doing so. SCO is bound by the list otherwise, but not if there is a good reason to call more people than are on the list to introduce evidence to impeach.

What sometimes happens is lawyers try to reveal as little as possible in advance, as you may have noticed, and so there are rules to try to force them. If you are interested in how and why such rules came to be, here's a Fordham Law Review article [PDF], "Rule 26(a)(2)(B) of the Federal Rules of Civil Procedure: In the Interest of Full Disclosure?" by Katherine A Rocco, that tells the story. It will also help to remember that there are regional differences even between various federal courts, despite all of them using the same rules. Courts are not as predictable as math, as I have often told you.

Games are still played by lawyers sometimes, but then the rules can come into play too. It wouldn't amaze me to see something like that happen in SCO v. Novell but even more so in the IBM case. So then what? It can happen that one side or the other can't use a witness or the evidence, if games are played or even if an attorney just doesn't bother to file in advance the way he or she should. Here's a Utah case, Rukavina v. Sprague [PDF] where something like that happened, and the Utah Court of Appeals' decision cites the rule:

If a party fails to disclose a witness, document or other material as required by Rule 26(a) or Rule[] 26(e)(1), or to amend a prior response to discovery as required by Rule 26(e)(2), that party shall not be permitted to use the witness, document or other material at any hearing unless the failure to disclose is harmless or the party shows good cause for the failure to disclose. In addition to or in lieu of this sanction, the court may order any other sanction . . . . Id. R. 37(f) (emphasis added).

So, that's the rule, and if it's not followed, then sanctions can ensue. One court cited in that ruling described sanctions as appropriate if there are "persistent dilatory tactics frustrating the judicial process." Sometimes folks gamble and are not caught, which is why it happens despite the rules. But as the decision goes on to note, precluding the presentation of evidence or not letting a new witness testify aren't the only possible sanctions:

If a party fails to obey a scheduling order, see Utah R. Civ. P. 16(d), the trial court may "prohibit[] him from introducing designated matters in evidence." Id. R. 37(b)(2)(B). Furthermore, if a party fails to make the disclosures mandated by rule 26, the trial court is required to exclude the evidence and, at its discretion, may impose other sanctions in addition to or instead of exclusion. See id. R. 37(f) (providing that such a party "shall not be permitted to use the witness, document or other material" and that "[i]n addition to or in lieu of this sanction, the court may order any other sanction").

Catch that? "Any other sanction"? In other words, the judge has a great deal of discretion. But, if it's not necessarily a final list, why ask for such witness lists? One good reason is to figure out timing of a trial, and another is to let the other side know what they need to prepare for, but another reason is to be able to find out if any jurors are related to anyone on the list or best buddies, or the like. Of course, SCO v. Novell will be tried without a jury, so it's not relevant here. But I'm explaining it all now, because I expect everything to start moving pretty fast after the Novell trial begins, and I want you to understand as events unfold. Long ago, I mentioned that sanctions against SCO for the discovery games they pulled wouldn't surprise me in the IBM case.

Here, then, are the most recent filings in the bankruptcy:

428 - Filed & Entered: 04/03/2008
Notice of Withdrawal (B)
Docket Text: Notice of Withdrawal of Debtors' Motion for a Determination that Incentive Bonuses for Quarter Ending October 31, 2007 were Paid in the Ordinary Course of Debtors' Business and for Continuing Authority to Pay Ordinary Course of Business Incentive Bonuses (related document(s)[344] ) Filed by The SCO Group, Inc.. (Attachments: # (1) Certificate of Service and Service List) (Werkheiser, Rachel)

429 - Filed & Entered: 04/03/2008
Notice of Withdrawal (B)
Docket Text: Notice of Withdrawal of Debtors' Motion to Present Evidence and Testimony Related to the Debtors' 2007 Incentive Program Under Seal (related document(s)[345] ) Filed by The SCO Group, Inc.. (Attachments: # (1) Certificate of Service and Service List) (Werkheiser, Rachel)

430 - Filed & Entered: 04/04/2008
Application for Compensation
Docket Text: Monthly Application for Compensation and Reimbursement of Expenses as Co-Counsel to the Debtors and Debtors in Possession for January 2008 Filed by Pachulski Stang Ziehl & Jones LLP. Objections due by 4/24/2008. (Attachments: # (1) Notice # (2) Exhibit A# (3) Certificate of Service and Service List) (O'Neill, James)

And here's the filing in SCO v. Novell by SCO:

508 - Filed & Entered: 03/31/2008
Witness List(Proposed)
Docket Text: Proposed Witness List and Exhibit List (Supplemental) by SCO Group. (Normand, Edward)

And here's the US Trustee's Office at work, first the Objection to the plan to pay the Plan Sponsor (docket #418) and then the Objection to the Disclosure Statement (#419):

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

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)
Hearing Date: April 2, 2008 at 2:00 P.M.

OBJECTION OF THE UNITED STATES TRUSTEE TO THE
DEBTORS' MOTION TO APPROVE SETTLEMENT COMPENSATION OR SALE
COMPENSATION AND EXPENSE REIMBURSEMENT TO PLAN SPONSOR
(DOCKET ENTRY # 346)

In support of her objection to the Debtors' motion for approval of settlement compensation or sale compensation and expense reimbursement to the Plan Sponsor (the "Motion"), Kelly Beaudin Stapleton, United States Trustee for Region 3 ("U.S. Trustee"), by and through her counsel, avers:

INTRODUCTION

1. Under (i) 28 U.S.C. 1334, (ii) (an) applicable order(s) of the United States District Court for the District of Delaware issued pursuant to 28 U.S.C. 157(a), and (iii) 28 U.S.C. 157(b)(2), this Court has jurisdiction to hear and determine the Motion.

2. Under 28 U.S.C. 586, the U.S. Trustee has an overarching responsibility to enforce the laws as written by Congress and interpreted by the courts. See United States Trustee v. Columbia Gas Sys., Inc. (In re Columbia Gas Sys., Inc.),33 F.3d 294, 295-96 (3d Cir. 1994) (noting that U.S. Trustee has "public interest standing" under 11 U.S.C. 307 which goes beyond mere pecuniary interest); Morgenstern v. Revco D.S., Inc. (In re Revco D.S., Inc.), 898 F.2d 498, 500 (6th Cir. 1990) (describing the U.S. Trustee as a "watchdog").

(1)

3. Under 11 U.S.C. 307, the U.S. Trustee has standing to be heard on the Motion and the issues raised in this objection.

GROUNDS/BASES FOR RELIEF

4. 11 U.S.C. 503(b)(1)(A) allows for the payment of certain administrative expenses, including "the actual, necessary costs and expenses of preserving the estate." 11 U.S.C. 503(b)(1)(A). Contrary to applicable law, the Plan Sponsor Protections are bonus compensation to SNCP for providing a financing commitment of questionable value at an above-market cost. In the Motion, SCO reaffirms its belief that "it has an excellent chance to prevail in the Novell/IBM Litigation, including potential for an award of potential damages in its favor" (Mot. 7), yet seeks to award SNCP one-half of the net proceeds if any of the Litigation Claims are resolved prior to the Effective Date, regardless of whether the Plan is confirmed. Mot. 8. Given that the Debtors take the position that the Litigation Claims are valuable, they do not even attempt to argue that awarding one-half of the value of those claims to SNCP pursuant to a pre-Effective Date settlement represents the "actual, necessary cost[s]" of preserving the Debtors' estates under 11 U.S.C. 503(b)(1)(A). See Calpine Corp. v. O'Brien Env'tl Energy, Inc. (In re O'Brien Env'tl Energy, Inc.), 181 F.3d 527, 535 (3d Cir. 1999) (noting that break-up fee and expense reimbursement requests are subject to "general administrative expense jurisprudence"). Cf. Bruce A. Markell, The Case Against Breakup Fees in Bankruptcy, 66 Am. Bankr. L.J. 349, 369 (1992) ("[T]he maximum breakup fee that a court should approve is one that offers to repay a bidder's direct costs of preparing and making its bid. Any additional fee will overcompensate the bidder for its risk in bidding; it pays the bidder for bidding when it would have bid without the fee."). In fact, the Debtors concede that SNCP's proposed, pre-Effective Date share of settlement proceeds from Litigation Claims is a windfall.

(2)

Mot. 12 (describing SNCP's share of settlement proceeds consummated pre-Effective Date as an "extraordinary share").

5. Second, the Debtors also seek to permit SNCP to "participate directly in any settlement discussions relating to the Novell/IBM Litigation." Mot. 8. SNCP is interested in maximizing its own recovery and minimizing its downside risk, which means that, in light of the Debtors' dismal operating history, SNCP has every incentive to instruct SCO to adopt a settlement strategy which favors settlement of its Litigation Claims prior to the Effective Date on terms which obviate the need for the firm to provide the promised financing (i.e., a settlement involving a sale of the company), regardless of whether that result aligns with the estates' interests or Novell's/IBM's interests. Rather than assisting the Debtors' efforts to carry out their fiduciary duties, the insertion of SNCP into settlement talks complicates the Debtors' efforts to carry out those duties and potentially puts the Debtors' existing managers in the position of deciding whether they want to run counter to SNCP in the negotiations, regardless of the personal consequences (i.e., eventual loss of employment) which could ultimately follow from taking that position.

6. Third, the Debtors do not justify their proposed $500,000 expense reimbursement to SNCP (Mot. 18). Absent the execution and filing of the Definitive Documents (see below), the U.S. Trustee and other parties in interest cannot complete their evaluation of whether the Debtors' expense reimbursement request passes muster under 11 U.S.C. 503(b)(1)(A).

7. In addition to the foregoing, the Debtors agreed to a "no-shop" or a "window-shop" provision in the MOU (see "Restrictions on Affirmative [sic] Seeking Competitive Transactions," pg. 13 of MOU (Ex. A. to the Motion). The "no-shop" or "window-shop" provision is not described in either the Motion or the proposed form of order as a "Plan Sponsor Protection" (paragraph 2 of

(3)

the proposed form of order). The provision prevents SCO from "solicit[ing] or encourag[ing] submission of inquiries, proposals or offers from any third parties regarding any potential financing of a plan of reorganization for SCO" until August 15, 2008 (each such inquiry, etc., a "Competitive Transaction"). A "determination" by SCO or SCO's board of directors to "pursue" a Competitive Transaction is grounds for terminating the financing arrangements. There is no discussion of the justification factual or legal for the Debtors' request for approval of this term. See In re Bidermann Indus. U.S.A., Inc., 203 B.R. 547, 552 (Bankr. S.D.N.Y. 1997) (discussing "window- shop" provision).

8. Finally, SNCP has not signed the Definitive Documents contemplated by the MOU, as the firm has a due diligence "out" under the deal which expires at the commencement of the hearing on the Debtors' motion for approval of its proposed disclosure statement (see "Due Diligence," page 13). This Court should not even entertain the Motion absent the execution of Definitive Documents and granting parties in interest a reasonable opportunity to review those documents. See In re Tiara Motorcoach Corp., 212 B.R. 133 (Bankr. N.D. Ind. 1997) (ruling on break-up fee request in the absence of definitive documents would be premature).

[Continued on next page space intentionally left blank]

(4)

CONCLUSION

WHEREFORE the U.S. Trustee requests that this Court issue an order denying the Motion.

Respectfully submitted,

KELLY BEAUDIN STAPLETON
UNITED STATES TRUSTEE

BY: /s/ Joseph J. McMahon, Jr.
Joseph J. McMahon, Jr., Esquire (# 4819)
Trial Attorney
United States Department of Justice
Office of the United States Trustee
[address]
[phone]
[fax]

Date: March 27, 2008

(5)

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

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)
Hearing Date: April 2, 2008 at 2:00 P.M.

OBJECTION OF THE UNITED STATES TRUSTEE TO (A) THE DEBTORS'
PROPOSED DISCLOSURE STATEMENT AND (B) THE DEBTORS' MOTION FOR AN
ORDER (I) SCHEDULING THE CONFIRMATION HEARING; (II) APPROVING
FORM AND CONTENTS OF SOLICITATION PACKAGE; (III) APPROVING FORM
AND NOTICE OF THE CONFIRMATION HEARING; (IV) ESTABLISHING RECORD
DATE AND APPROVING PROCEDURES FOR DISTRIBUTION OF SOLICITATION
PACKAGES; (V) APPROVING FORMS OF BALLOT; (VI) ESTABLISHING VOTING
DEADLINE FOR RECEIPT OF BALLOTS; (VII) APPROVING PROCEDURES FOR
VOTE TABULATIONS; (VIII) ESTABLISHING DEADLINE AND PROCEDURES FOR
FILING OBJECTIONS TO CONFIRMATION OF PLAN; AND
(IX) GRANTING RELATED RELIEF
(DOCKET ENTRY # 369, 394)

In support of her objection to (a) the Debtors' proposed disclosure statement and (b) the Debtors' motion for an order (i) scheduling the confirmation hearing; (ii) approving form and contents of solicitation package; (iii) approving form and notice of the confirmation hearing; (iv) establishing record date and approving procedures for distribution of solicitation packages; (v) approving forms of ballot; (vi) establishing voting deadline for receipt of ballots; (vii) approving procedures for vote tabulations; (viii) establishing deadline and procedures for filing objections to confirmation of plan; and (ix) granting related relief, (the "Motion"), Kelly Beaudin Stapleton, United States Trustee for Region 3 ("U.S. Trustee"), by and through her counsel, avers:

(1)

INTRODUCTION

1. Under 28 U.S.C. 157(b)(2)(L) and (an) applicable order(s) of the United States District Court for the District of Delaware, this Court has jurisdiction to hear and determine the Motion and this objection.

2. Under 28 U.S.C. 586(a)(3)(B), the U.S. Trustee is charged with monitoring plans and disclosure statements filed under chapter 11 of title 11 and filing with the court "comments with respect to such plans and disclosure statements."

3. Under 11 U.S.C. 307, the U.S. Trustee has standing to be heard with regard to the Motion and this objection.

GROUNDS/BASIS FOR RELIEF

4. The Disclosure Statement does not contain "adequate information" as required under 11 U.S.C. 1125 for several reasons, among them the following:

  • The Debtors' disclosure statement does not describe their business plan and/or financial projections in sufficient detail. Further, the disclosure statement does not describe the impact that an adverse, final, non-appealable ruling in one or more of the significant litigation matters it is presently involved in may have on the Debtors' ability to carry out their business plan and/or meet those projections for example, how much of the Debtors' business plan is predicated on the Debtors' use of property which Novell claims to be its own? Such information enables interested parties to evaluate, among other issues, whether confirmation of the plan is or is not likely to be followed by the liquidation, or the need for further financial reorganization, of the debtor or any successor to the debtor under the plan, unless such liquidation or reorganization is proposed in the plan. See 11 U.S.C. 1129(a)(10).
  • The Debtors' disclosure statement does not contain adequate information about Stephen Norris Capital Partners, LLC ("SNCP") and/or SNCP's ability to provide or procure the exit funding commitment referenced in the disclosure statement.

(2)

  • The Debtors' disclosure statement does not adequately describe the proposed directors/officers of the reorganized Debtors, their affiliations and the compensation proposed to be paid to such persons. See 11 U.S.C. 1129(a)(5).
The factual and legal bases for the aforementioned concerns (and other objections) are more fully addressed in the objection of International Business Machines Corporation ("IBM") to the disclosure statement and the Debtors' proposed solicitation procedures (Docket Entry # 394). For substantially the same reasons stated in IBM's objection, the U.S. Trustee objects to the proposed disclosure statement.

5. Additionally, there are a number of exhibits to the disclosure statement that have yet to be filed. The U.S. Trustee reserves the right to be heard regarding the adequacy of the Debtors' disclosure statement after those documents have been filed with the Court.

CONCLUSION

WHEREFORE the U.S. Trustee requests that this Court issue an order/orders denying the Motion, disapproving the disclosure statement, or granting other relief consistent with this objection.

Respectfully submitted,

KELLY BEAUDIN STAPLETON
UNITED STATES TRUSTEE

BY: /s/ Joseph J. McMahon, Jr.
Joseph J. McMahon, Jr., Esquire (# 4819)
Trial Attorney
United States Department of Justice
Office of the United States Trustee
[address]
[phone]
[fax]

Date: March 27, 2008

(3)


  View Printable Version


Groklaw © Copyright 2003-2013 Pamela Jones.
All trademarks and copyrights on this page are owned by their respective owners.
Comments are owned by the individual posters.

PJ's articles are licensed under a Creative Commons License. ( Details )