Here is Novell's Objection to SCO's Motion to Approve Settlement Compensation or Sale Compensation and Expense to Plan Sponsor [PDF] as text. Our thanks to kh for the OCR.
Of all the over-the-top ideas SCO has floated, this SCO motion Novell is objecting to is certainly one of the boldest. Everyone who could object objected, including the US Trustee's Office and IBM, and SCO, seeing the storm clouds, told the bankruptcy court at the hearing on April 2nd that it will come up with a "better" reorganization plan, so it seems likely this SCO motion will be altered too.
We'll see if the new plan is better. It could hardly be worse. But since SCO is marking on a curve, "better" it may indeed prove to be. I doubt it, though, since SCO's unrealistic dreams and the bankruptcy court's less exciting goals do not seem to be in perfect alignment. The official story is that the lender decided to change the deal to one involving a sale of assets, not a loan, so it's back to the drawing board for the reorganization, so I'm assuming that will impact this motion too, but I won't be sure until we have the transcript of the hearing.
So, another reorganization plan bites the dust. At this rate, SCO should be able to run through all its money just filing and then withdrawing reorganization plans.
That means this document may now be useful mainly for historical purposes and to get a measure of SCO's sincerity about ever emerging from Chapter 11. It may also prove useful to the few in the media who, after all these years of watching SCO's machinations, still write down SCO's every announcement of big money coming its way as if its claims had floated down from heaven itself and therefore must be true.
Novell fairly mocks SCO's motion. The opening paragraph says it all:
The Motion is nothing more than a giveaway by the Debtors in their desperate quest to find a way to keep alive their hopes for a big payday in litigation against Novell and certain other parties. As the Debtors have shown previously, they will accede to nearly any demand by a perceived "white knight" to keep their dreams alive no matter how limited the actual or potential benefit to their estates. But for obvious reasons bankruptcy law does not authorize debtors in possession to make gifts, or even just make bad deals. The Court should, therefore, deny the Motion.
Either way, improper gift or just a stupid business deal, Novell says it shouldn't happen.
So. All those headlines about millions being offered to SCO turn out to be less than reality? The media got snookered by SCO again? Time will tell, but so far, it seems so. It isn't hard to discern when reading this document that Novell at least doubts that the funding was ever available for what it seems to believe wasn't intended as a real plan anyway, being so vague in details and specifics that it's on a par with SCO announcing that its prince has come and is whisking SCO off to the castle to live happily ever after.
SCO was in the litigation business, Novell tells the court. And SCO wants to stay in that business, but it is running out of money and has nearly destroyed its Unix business, so it faces an inability to go forward without outside help. And so it keeps agreeing to hand money over to anyone willing to help them litigate some more, and on terms Novell challenges as not being good for the creditors or the estate.
Novell reminds the court of SCO's previous attempt to sell assets that Novell claims are its own to York Capital. SCO is still trying to get court approval to give York some money for that deal that never happened either. Should the new entity claiming to be SCO's white knight this time around -- Stephen Norris Capital Partners, purportedly offering to loan SCO money without, Novell notes, actually committing itself to doing so or even demonstrating that it has any such grandiose sums at its disposal -- get what this deal proposes, they'd get 50 percent of SCO's interest in the litigation and a payment just for offering to do the plan, even if it too fails to happen. In short, Novell finds it laughable. Extraordinary, Novell calls it. And not in a good way.
This is just one of four objections Novell filed to various aspects of SCO's now scrapped reorganization plan, which means that not only is SCO spending a lot of money on advisors and lawyers to come up with unrealistic reorganization plans and all the trimmings, but Novell is also having to spend money to shoot each of them down one by one as they float on by in the happy skies where SCO builds its castles in the air.
UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE
The SCO Group, Inc.,
Case No. 07-11337 (KG)
Ref. Docket No. 346
Objection Deadline: March 26, 2008 at 4:00 p.m, (prevailing Eastern time)
Hearing: April 2, 2008 at 2:00 p.m, (prevailing Eastern time)
NOVELL'S OBJECTION TO THE DEBTORS' MOTION
TO APPROVE SETTLEMENT COMPENSATION OR SALE
COMPENSATION AND EXPENSE TO PLAN SPONSOR
Novell, Inc., and its subsidiary, SUSE Linux GmbH ("SUSE" and together with Novell Inc., "Novell") object to the Motion to Approve Settlement Compensation or Sale Compensation and Expense Reimbursement to Plan Sponsor (the "Motion") of debtors and debtors in possession (the "Debtors") The SCO Group, Inc. ("SCO"), and its wholly owned subsidiary, SCO Operations, Inc. ("Operations"). The Motion is nothing more than a giveaway by the Debtors in their desperate quest to find a way to keep alive their hopes for a big payday in litigation against Novell and certain other parties. As the Debtors have shown previously, they will accede to nearly any demand by a perceived "white knight" to keep their dreams alive no matter how limited the actual or potential benefit to their estates. But for obvious reasons bankruptcy law does not authorize debtors in possession to make gifts, or even just make bad deals. The Court should, therefore, deny the Motion.
Understanding the Motions' problems requires reference to some background and a number of different developments in these cases.
A. Prepetition Events
Before commencing these cases, the Debtors conducted a software business. (Disclosure Statement in Connection with Debtors' Joint Plan of Reorganization (the "Disclosure Statement" or "DS") 3-10.) A major aspect of the Debtors' business was litigation with various parties, including, among others, Novell and IBM Corporation. (DS 11-14;
Memorandum Opinion (filed herein November 27, 2007) (the "Opinion") 1-2.) One major case was between Novell and SCO in the United States District Court for the District of Utah (the "District Court Litigation"). On August 10, 2007, Novell won important rulings against SCO on partial summary judgment in the District Court. (DS 13-14; Opinion 3-4.) These rulings decided major issues for Novell, leaving limited though significant issues (principally the compensation that SCO owes Novell) to try. (DS 13-14; Opinion 4.) The trial on the residual issues was set for September 14, 2007. (Opinion 4.) Having all but lost the litigation with Novell, and facing the prospect of a disastrous judgment in the trial to begin after the weekend, the Debtors filed their voluntary chapter 11 petitions before this Court on September 14, 2007.
The filing stayed all SCO's litigation, including the Novell/SCO trial and -- as this Court later ruled -- the SCO/SUSE arbitration pending in Zurich.
The "Emergency" Motion to Sell to York
Shortly after filing the cases, the Debtors attempted to sell substantially all their assets to York Capital Management ("York") on an "emergency" basis. (Emergency Motion of the Debtors for an Order (A) Approving Asset Purchase Agreement, (B) Establishing Sale and Bidding Procedures, and (C) Approving the Form and Manner of Notice of Sale (the "Sale Motion").) This development has important implications for the present Motion.
What exactly the Debtors proposed to sell to York was not entirely clear --
which was one of the fatal defects of the Sale Motion in the end -- because the Sale Motion attached only a nonbinding term sheet rather than a definitive sale agreement. However, it was clear that among the assets the Debtors sought to sell was an interest in their various alleged claims against Novell
and IBM, although the Debtors nominally retained control of those proceedings. The proposed sale would have conferred on York a substantial share in the proceeds of the IBM and Novell, among other financial benefits. In return, York was to pay the Debtors "up to" $36 million, subject to reduction for various offsets that, upon inspection, threatened to all but swallow up the nominal purchase price. In addition, the Debtors asked the Court preliminarily to approve various "bidding protections" for York.
As Novell explained in Novell's Objection to Emergency Motion [etc.] (the "Sale Objection"), this proposed "emergency" deal came close to a trade by the Debtors of something for nothing. The purchase price of $36 million was illusory, the need for a breakup fee to attract bidders was unsubstantiated, the breakup fee was grossly excessive (a problem exacerbated by the addition of an expense reimbursement) and even the transaction itself was illusory because, among other things, the lack of sale documentation made it impossible to determine just what the Debtors were selling and whether they had the right to sell it in light of their pending litigation with Novell. (Sale Objection 8-17.) Other parties in interest, including IBM and the United States Trustee, also objected to the Sale Motion.
Ultimately, without even getting to the bidding procedures issues, the Court rejected the Sale Motion because of the Debtors' inadequate disclosure of what the transaction comprised and because the Court recognized that the nature of the transaction required that the District Court Litigation be concluded so that what SCO had to sell would be clear.
Transcript of November 16, 2007 hearing (filed November 27, 2007) at 38:1-39:15; Opinion 11 & n.7.)
C. The Motion
On February 14, 2008, the Debtors filed the Motion. The Motion is
with respect to the Sale Motion.
seeks to afford the sponsor of the Debtors' Joint Plan of Reorganization (the "Plan"), a newly-formed entity called Stephen Norris Capital Partners LLC ("SNCP"), a
50% share of the Novell or IBM litigation if the Debtors resolve those cases through settlement or judgment before confirmation of the Plan. The Motion also seeks an expense reimbursement of up to $500,000 for SNCP
just for sponsoring the Plan
if the Plan is not confirmed other than through SNCP's fault.
The Motion does all this even though the Debtors had not even filed the Plan when they filed the Motion, and notwithstanding that to date the Plan, though filed, fails to attach key definitive financing and other agreements between the Debtors and SNCP. Rather, all the Motion attaches is a nonbinding Memorandum of Understanding (the "MOU") setting out various contemplated terms of a plan and the sponsor "protections" for which the Motion seeks approval. Even now, with the Plan finally filed two weeks after the Motion but still lacking its "definitive documents" and meaningful disclosure about SNCP and the financing SNCP supposedly is providing, it is impossible for the Court, creditors and equity even to begin to asses the attractiveness of the Plan.
Novell's Objection to the Debtors' Proposed Disclosure Statement (filed concurrently herewith) 4-5, 8-10.)
Admitting that this sight-unseen reward to the Plan sponsor SNCP "extraordinary" (Motion 5), the Debtors try nevertheless to justify it on the factually-speculative theories that SNCP's purported $100 million financing "commitment" under the Plan (a commitment that lacks substantiation) and its very presence as Plan sponsor will be
cause of any resolution of the Novell or IBM litigation before confirmation (which itself may never occur) The Debtors add that the Plan --
though not yet even filed at the time the Debtors filed the Motion and with confirmation of it undecided when the Court considers the Motion --
will benefit creditors and equity interests. (Motion 5-7.) Finally, the Debtors argue that the Motion seeks to "implement the MOU" even though most of the implementation of the MOU awaited filing and confirmation of the Plan when the Debtors filed the Motion and even now still awaits the Debtors' attempt to confirm the Plan. (Motion 7.) In essence, the Motion presupposes the very benefits that only the Plan can supply.
D. The Plan
On February 29, 2008, the Debtors filed the Plan and the Disclosure Statement. As Novell will now describe, essential to the Plan and Novell's concerns here are SNCP's financing and how it is supposed to provide for creditors and holders of equity. Understanding the issues regarding that financing is crucial to evaluating whether the alleged benefits to the Debtors' estates arising from SNCP's sponsorship of the Plan warrant the compensation to SNCP that the Motion contemplates. As the Court will see, they do not, in large measure because the "benefits" are far too speculative in a variety of ways.
Plan Financing and Sponsor
Under the Plan, SNCP will invest $5 million of equity in the Debtors immediately upon confirmation of the Plan and "commit" to lend up to another $95 million under a non-revolving loan for up to five years at a 17% over the LIBOR interest rate. SNCP will get a security interest in all of the Debtors' assets to secure the loan. The Debtors will remain in business with all of their assets, including intellectual property and litigation claims. The Plan refers parties in interest to a Memorandum of Understanding (the "MOU") between SCO and SNCP for further details.
Notably, the Disclosure Statement provides virtually no information about SNCP.
recites that SNCP was founded by Stephen Norris
Co. Capital Partners, L.P. ("SNCC") "for the purposes of this transaction [the Plan]." (DS 18.)
has a brief account of SNCC's partners, Stephen Norris and Mark Robbins, and sweeps breezily through a short statement of some of their past activities, making some very general grand claims about their past successes. (DS 19.) Beyond that, it says nothing about Norris, Robbins, SCNP or SNCC, including the capitalization or other access to funds of SNCP and SNCC. On that last subject, the only "information" is the MOU's statement that SNCP has a "financing commitment" that is "sufficient" and that SNCP "will provide the Debtor [no mention of the Court or parties in interest] with a firm financing commitment" at least five days before the hearing on the Disclosure Statement. (MOU 3.)
Similarly, neither the Plan nor the Disclosure Statement provide detail on terms and conditions are in the proposed line of credit even though, as in documenting any distressed loan (indeed, in any loan at all), the devil is in the details. Rather, in an approach akin to that permeating the Debtors' attempt to sell their assets to York Capital Management, the Debtors tell the Court and parties in interest that on the Plan's Effective Date, "the Company [the Debtors] shall enter into loan and security agreements and other related documents with SNCP (the
(known in the Motion as the "Definitive Agreements") to make the Loan available to the Company on the following terms ...." (DS 36.) The Debtors then set out certain of those terms generally (DS 36-37), but the Loan Documents, including any other covenants or conditions precedent to SNCP's obligation to make advances, are nowhere to be seen. Instead, the Debtors say they will file those materials on these critical questions only shortly before the hearing on the Disclosure Statement.
Motion 1.) The Disclosure Statement provides no explanation why the relevant materials will not be available sooner, but is reasonable to assume that the problem is that, as in the case of the Sale Motion, the documents simply have not been negotiated.
2. Continuation of the Business and Other
The Debtors will remain in the software business. They will continue to prosecute and defend their litigation with Novell and others. The Debtors will use the loan and equity funds supplied by SNCP (along with their other existing and future cash, if any) to underwrite all aspects of the Plan, including continuation of litigation (including the provision of any appeal bonds or like security), continuation of other operations, treatment of equity and payment of creditors, as described below.
3. Treatment of Equity
SCO's equity structure will change in that SNCP will own virtually all of it from the start, and all of it in the
Existing equity will get some cash shortly after the Effective Date and perhaps some more later, but eventually it will be squeezed out by SNCP.
4. Payment of Creditors Generally
The Plan treats all classes of unsecured creditors as unimpaired under Code section 1124 even though holders of disputed claims, and holders of pending litigation claims especially, are treated differently than holders of claims that are undisputed on the Effective Date.
The Debtors will use the SNCP equity and debt to pay creditors in full on their claims once they are allowed. Undisputed claims will, therefore, be paid on the Effective Date. Claims that are disputed will be paid if and when they are allowed. The Plan sets up a reserve for disputed claims other than the claims in the litigation with Novell and others. All those holding general unsecured claims except the holders of pending litigation claims, are, therefore, assured of full payment via payment on the Effective Date or from the reserve once their claims are
However, the Plan separately classifies pending litigation claimants from other claimants as Class 4, and they are subjected to a different -- and riskier --
regime for payment of their claims once allowed. When the claims are allowed by final order or settlement, the Plan relies on the availability of other residual funds or funds under the SNCP line of credit for payment rather than on an existing reserve. Moreover, the Plan specifies that the automatic stay of Code section 362(a) remains in place through a delay in the revesting of SCO's estate until the earlier of the allowance or disallowance of the last of the pending litigation claims or an election to revest by SCO. In other words, if any pending litigation claimant cannot get paid in full (voluntarily or otherwise) by the Debtors when its claim is allowed, its only remedy is to seek stay relief from
the Court to reach SCO's protected assets unless it is the last such claimant to have its claim allowed (or SCO has elected to revest sooner).
II. APPLICABLE LEGAL
As the Debtors acknowledge, the relief they seek in the Motion is unusual. In fact, it is so unusual that it does not neatly fit into any of the normal analytical structure found in bankruptcy law.
does, however, bear a striking resemblance to a request for approval of a "breakup" fee or "bidding protections" such as the Debtors sought in the Sale Motion. Consequently, that is the framework that Novell employs here.
The Court must carefully consider the propriety of any "bid protections." In the Third Circuit "the allowability of breakup fees, like that of other administrative expenses, depends on the prospective purchaser's ability to show that the fees were actually necessary to preserve the value of the estate."
Calpine Corp. v. O'Brien Envtl. Energy Inc. (In re O'Brien Envtl. Energy, Inc.),
181 F. 3d 527, 535 (3d Cir. 1999);
see also In re Beth Israel Hosp.
207 WL 2049881 at 12 (Bankr. D. N.J. 2007) (citing
181 F.3d at 535). In
the Bankruptcy Court examined the record before it to determine whether the stalking horse expanded any efforts to preserve the value of the debtor's estate. The Court found that the facts did not show that the stalking horse's bid for the debtor's assets was a catalyst for a higher bid.
at 12-13. One additional factor the Court should consider in deciding the necessity of breakup fees is whether they are reasonable in light of the purchase price.
See Integrated Resources, Inc.,
147 B.R. 650,662 (S.D.N.Y. 1992) (enunciating factors to consider in approval of bid protections).
also is possible to see this otherwise remarkable Motion as a species of a sale of assets out of the ordinary course under Code section 363(b). In proposing a 363 asset sale, the debtor must establish, and the Court must determine, that there is a "sound business justification" for the sale.
See In re Del.
Hudson Ry. Co.,
124 B.R. 169, 176 (D. Del. 1991) ("Once a Court is satisfied that there is a sound business reason or an emergency justifying the pre-confirmation
sale, the Court must also determine that the trustee has provided the interested parties with
adequate and reasonable notice, that the sale price is fair and reasonable and that the purchaser is proceeding in good faith");
see also In re Lionel Corp.,
722 F.2d 1063, 1068-69 (2d Cir. 1983) (finding no sound business reason for proposed 363 sale). The test has four requirements: i) a sound business reason; ii) accurate and reasonable notice; iii) fair and reasonable price; and iv) good faith.
See In re Titusville Country Club,
128 B.R. 396, 399 (Bankr. W.D. Pa. 1991);
In re Abbotts Dairies of Penn.,
788 F.2d 143, 149-50 (3d Cir. 1986) (good faith of the purchaser challenged).
Under either rubric, the Motion should be denied.
III. THE MOTION IS ANOTHER GIVEAWAY
In essence, the Motion asks this Court to approve the exchange by the Debtors of potentially significant financial benefits at the expense of the estate (and, therefore, its creditors and equity holders) in return for speculative benefits. The certainty and degree of those alleged benefits cannot be assessed now. Here are just a couple of the crucial but as-yet unanswered questions that are relevant:
How certain is the SNCP Plan financing in terms of enforceability by the Debtors, SNCP's access to funds (its own or another's) and the powers will SNCP have to cut off the funding prematurely?
What commitment will SNCP have to standing by the Debtors and the Plan (that is, how does SNCP treat its investment targets: is it more like a corporate raider looking for a quick profit using high leverage or a long-term investor?
Without evidence on these issues, it is impossible for the Court to evaluate the benefits the Debtors, their creditors and their equity holders supposedly are getting from SNCP in return for the benefits it is giving to SCNP in return.
is not even clear that SCNP will have access to funds by the time of a confirmation hearing, let alone to fund ongoing litigation and operations, fund the disputed claims reserve or make the Plan's delayed contingent payments to equity
holders and pending litigation claimants. SNCP's scheme to delay revesting under the Plan so that it can avoid the cost of financing bonds in the ongoing litigation
Plan 15; DS 37) does not bode well for the reality of its $95 million line of credit.
Of equal importance is the Debtors' contention that any settlement in the interim between filing of the Motion and confirmation of the Plan (if that ever occurs) will be due to SNCP's looming presence in the picture. This claim is pure speculation. And it is speculation without any factual environment from which to derive it as a hypothesis. After all, what in the history of the IBM and Novell litigation suggest that its resolution awaits only a
deus ex machina
such as SNCP? Certainly, the Debtors have not offered support for that notion.
Nor have the Debtors supplied any evidence that such an "extraordinary" award to SNCP (including both participation in the proceeds of settlement
as cost reimbursement if the Court does not confirm the Plan except by SNCP's
is necessary to attract a plan sponsor (a "bidder", to continue the analogy)? Similarly, although it is difficult to assess just what the "breakup" fee is as a percentage of the "sale" price because the parties do not know today what any subject judgment settlement will be in absolute numbers or as a percentage of the Debtors' total assets, it is clear that the chances are good that SNCP's 50% interest in the litigation is all but sure to amount to more than the 3-5% figure that is an appropriate percentage of the sale price.
But none of the uncertainties or questions have curbed the Debtors' enthusiasm for another "white knight" that has come their way. In short, the Motion is just another iteration of the Debtors' desperation to keep their litigation dream alive that was so obvious in the Sale Motion. The Debtors are willing to give practically anything to anyone who even gestures towards giving them the means to pursue the litigation that has been their
attitude makes for the poor judgment this Motion reflects every bit as much as did the Sale Motion.
For the reasons explained above, the Court should deny the Motion as but the latest exercise by the Debtors of poor judgment that fails categorically to meet applicable bankruptcy law standards.
March 26, 2008
YOUNG CONAWAY STARGATT
/s/ Sean T. Greecher
James L. Patton (No. 2202)
Nestor (No. 3526)
Sean T. Greecher (No. 4484)
Larren M. Nashelsky
Counsel for Novell, Inc.
Unable to get approval of the transaction without making the key documents available (probably because they never existed), the Debtors finally withdrew their sale motion altogether just days later, on November 20, 2007). (Docket No. 225.)
itself is directly implicated in this aspect of the Plan, as it simply will continue 100% ownership of Operations.
bears emphasis that the Court might deny confirmation of the Plan simply because the Plan that SNCP has helped to cook up is not confirmable. Yet, under the Motion, SNCP would be rewarded as Plan sponsor for its bad idea.