The transcript [PDF] of the April 2nd hearing is now available. And we get some answers.
First, SCO's plan sponsor protections motion [PDF] is not going forward, as we suspected. Ditto the request for a scheduling order. The new deal , if there is one, will be a straight asset sale, with no loan features. So creditors will be paid on confirmation, SCO's attorney Arthur Spector tells the court, adding that he hopes that will resolve any future issues and stem the objectors from objecting to the next plan. Only the shareholders should care about that one, he indicates, and maybe the U.S. Trustee.
He expresses next the hope that the deadline for exclusivity, May 11th, stands, and he hopes to have the new plan done by then. But -- and with SCO there is always a but when it comes to deadlines, it seems -- the due diligence might be a problem, he says. They might need more time, an extension of another month or so to get the due diligence done.
Uh huh. Of course IBM's Richard Levin immediately stands up, tells the court the first he's hearing about an extension is live in real time out of Spector's mouth that very moment, so he puts in the record, without taking a formal position, that the original deadline for due diligence was that day, and he fails to see why changing the deal from a loan to a purchase would affect due diligence deadlines. SCO has a month and a bit more of time until the exclusivity deadline is up. So, if they ask for more time, IBM may object if SCO asks for an extension to do due diligence that should have been done by April 2nd anyway.
Then Novell promises that it will be back to object too, should SCO ask for an extension. And he expresses the hope that the next plan will actually be a real one, not another "fire drill".
Then Joseph McMahon, the trial attorney from the US Trustee's Office, stands up to express "a couple of cautionary notes." And his concerns are so deep, he informs the court that his office is looking into the need for a fiduciary.
First, he mentions the prior York deal, and he raises the same question about the new deal that he raised about the York deal -- to what extent the IP which "debtors do not own" was to be sold or made part of a business plan going forward. He hopes the new plan will be crystal clear about what exactly is proposed to be sold or used.
Then he expresses general concerns about the way this case is going, and just to mention that I think he means Microsoft and Sun when he says Novell and IBM:
The second point I have to make, Your Honor, is that we will review the papers when they come in. But we're sincerely concerned about the state of this case. It came in as essentially, Your Honor, a development company. It had operating losses for each and every quarter. My understanding was prior to the petition date, from its formation, which the exception of the quarters in which it struck the deals with Novell and IBM, that are the subject of, I guess, pending litigation.
I don't think that this case can take a fourth chapter. And to the extent that, you know, we have to take a look at the issue of appointing an independent fiduciary to provide some clarity, we very well may move in that direction. And I just want the Court to be aware that we're taking a look at that issue.
I think it's an indication that the doubts we first heard him express at the 341 Creditors Meeting about whether SCO has any hope of any business plan being successful going forward have not dissipated over time. Remember this interchange?
I believe that I recall reading in Judge Kimball's opinion, and
correct me if I'm wrong, that the Debtors have had I believe it's
like one profitable quarter over the last, I would say, five or six
years? And it's the quarter in which they signed up certain
agreements with Microsoft et al relating to its business, is that
I believe that from a technical standpoint that's probably a true
Are you saying that it's true that's what the opinion said, because
that's the way he asked it...in other words..?
Well, in other words, I'm looking at your, your historical filings,
and I guess my question is, you've been running, just on an operating
basis, have the Debtors, has SCO, turned a profit in the last five
In the last five years, I believe it would be just that one year.
SCO's dreams of millions from the litigation lottery, shall we say, do not seem to him, I gather, to be a business plan, since they depend on SCO using property that the court in Utah already ruled is Novell's, not SCO's. How do you sue people over intellectual property you don't own? If that is your business plan, and if you don't make money from your supposed software business and never have, what exactly is the plan to get out of Chapter 11 based on?
There is a very interesting back and forth between Spector and the judge on page 9, in which Spector seems to be trying to distance himself a bit from the gestank of SCO. He is explaining that there is a new deal in the works, and he promises the court it will not be filed "in pieces" as the two earlier ones were:
MR. SPECTOR: And we're working now with a new MOU and with -- and once that's -- and new definitive documents will be prepared. And we promise -- we promise we won't file it in pieces any more.
THE COURT: Okay.
We, as Your Honor probably knows, sometimes we have to dance to other people's tunes.
THE COURT: I understand.
MR. SPECTOR: And so things get thrown in, everything's a rush. And then you see what happens on the back end a lot of times. So, I am making the commitment now so I can tell people I have made this commitment.
THE COURT: Okay.
Of course, some of this is just Spector's style. He's always talking about how hard it all is to come up with a plan and how hard they are working on it, trying their level best to do right. Remember the performance he put on about the York deal at the November 2007 hearing, and how teams of lawyers went without sleep for days to try to get the plan finished by the court hearing?
14 MR. SPECTOR: I'd like to say one thing that I never
15 thought I'd say, from your lips to God's ear. Maybe we'll come
16 back with an agreed -- but, I'm not asking for -- if I have to
17 ask for miracles, there would be -- world peace would be on the
18 list. I wouldn't waste it on -- but, Judge, just so you have
19 an idea, I, speaking for myself, hoped that we would have an
20 asset purchase agreement before this Court before November 6th
21 when we first came here and asked for the emergency hearing --
22 emergency hurry-up hearing. I was hoping we'd have all that
23 and the questions that were raised, valid questions that were
24 raised by Novell, IBM and the U.S. Trustee would all be
25 answered by the documents and we would then bring witnesses to
1 supplement, and it would all be done in an appropriate manner.
2 I have colleagues, four of them that were up in New
3 York, and they worked literally around the clock, no break,
4 maybe two hours I think they took off, for two days, went
5 around the clock twice in the middle of this week. Fourteen
6 lawyers I'm told were on the other side of the deal from
7 Proskauer representing York. I don't' know how much money has
8 been spent in legal fees to try to get the documents in order,
9 and were still catching things and -- well, yes, we filed the
10 APA this afternoon after one o'clock.
They failed to get it finished, sad to say, and eventually he acknowledged that there was a bit of a problem figuring out exactly what was being sold, resulting in laughter in the courtroom. Finally the deal was withdrawn.
This time, there seems to me to be an awareness that this particular style of performance is not going to go over as well as he might need it to, and I read his words as pointing to SCO as the problem, not his firm. After all, he needs the judge to think well of his firm, regardless of the outcome for SCO, which is obviously looking bleaker and bleaker. He's saying that he wants to put it on the record that there will be no partial filings of MOU's without definitive statements, so he can tell his client no, that he won't file in pieces again. That of course is likely one of the factors that has Mr. McMahon talking about a fiduciary, all the secrecy and odd unwillingness on SCO's part to clearly express what the plan is and how they plan to get out of Chapter 11 successfully.
Now, if they asked me, I'd say they don't have any such plan. But no one asked me.
Update: Thanks to the indefatigable Steve Martin, we have the hearing transcript as text:
UNITED STATES BANKRUPTCY COURT
DISTRICT OF DELAWARE
THE SCO GROUP, INC.,
|Case No. 07-11337(KG) Chapter 11
Courtroom No. 3
April 2, 2008) 2:01 P.M.
TRANSCRIPT OF OMNIBUS HEARING
BEFORE HONORABLE KEVIN GROSS
UNITED STATES BANKRUPTCY JUDGE
|For the Debtors:
||Pachulski Stang Ziehl & Jones
By: RACHEL LOWY WERKHEISER, ESQ.
By: ARTHUR SPECTOR, ESQ.
GRACE ROBSON, ESQ.
SCO Group, Inc.
By: Ryan E. Tibbitts, ESQ.
General Counsel and Secretary
Proceedings recorded by electronic sound
recording, transcriptproduced by transcription service.
|Stamell & Schager, LLP
By: JOHN CROW, ESQ.
||Potter Anderson & Corroon, LLP
By: LAURIE SELBER SILVERSTEIN, ESQ.
Cravath, Swaine & Moore LLP
By: RICHARD LEVIN, ESQ.
||Young Conaway Stargatt & Taylor, LLP
By: JEAN GREECHER, ESQ.
Morrison & Foerster LLP
By: ADAM LEWIS, ESQ.
|For the Debtor:
By: DANIEL LAMPERT, ESQ.
|For Alan P. Petrofsky:
||ALAN P. PETROFSKY, Pro Se
THE COURT: Good afternoon, everyone. Please be
MULTIPLE SPEAKERS: Good afternoon, Your Honor.
THE COURT: It's a pleasure to see you. Ms. Werkheiser,
MS. WERKHEISER: Good afternoon, Your Honor. For the
record, Rachel Werkheiser from Pachulski Stang Ziehl and Jones on
behalf of the debtors.
With me today, Your Honor, is Arthur Spector and Grace Robson
from Berger Singerman.
THE COURT: Welcome back.
MS. WERKHEISER: And Ryan Tibbitts, who's in-house counsel
with the debtors.
THE COURT: Mr. Tibbitts, good afternoon and welcome.
MS. WERKHEISER: Your Honor, if we can go through the
agenda today, I'll turn the podium over to Ms. Robson.
THE COURT: Yes, that sounds fine.
MS. WERKHEISER: Thank you, Your Honor.
THE COURT: Thank you very much.
MS. ROBSON: Good afternoon, Your Honor.
THE COURT: Good afternoon.
MS. ROBSON: The first several matters on the agenda are
withdrawn matters. The first one is the motion of the U.S. Trustee
for an order authorizing the filing of certain parts of objection
to the bonus motion under seal. There are three
Based upon a resolution to be announced shortly after my
presentation on these matters, we're going -- that motion is to be
withdrawn by the U.S. Trustee.
The next matter is the debtors' motion for a determination that
incentive bonuses for the quarter ending October 31st, 2007 were
made in the ordinary course, and for continuing authority to
continue that bonus program. That motion also is to be withdrawn
based upon the resolution to be announced by the U.S. Trustee at
the end of my presentation.
The third matter is the debtors' motion to present evidence
relating to the bonus motion under seal. That motion also is to be
withdrawn based upon the resolution reached with the U.S.
So, I will turn it over to Mr. McMahon who can -- who has
indicated he's going to read the terms of that resolution into the
THE COURT: Thank you. Mr. McMahon?
MR. McMAHON: Your Honor, good afternoon. Our resolution
of those three items, Your Honor, is as follows:
The first point: Information acceptable to the U.S. Trustee
regarding the bonus payments for the fourth quarter of 2007 through
the second quarter of 2008 shall be included in the debtors'
proposed disclosure statement. The information shall include the
First, background information regarding the incentive payments,
the debtors, directors, officers and employees involved in setting
the performance metrics, and how the incentive plan operates.
Information similar to that which was included in the first day
Next, detail regarding payments to officers on an individual
basis and non-officers on an aggregate basis. Meaning the total
amount of the payments and the number of non- officers covered by
Third, the performance metrics related to the incentive payments
for the fourth quarter of 2007 and the first quarter of 2008,
including the date on which the payments were initially set,
whether the metrics were altered after they were initially set, and
if so, why. And projected budgeted payments for the second quarter
of 2008 and the performance metrics for that quarter.
And then the final component, this information, Your Honor,
that's going to be part of the information, the disclosure
statement, is the procedural history relating to the bonus motion
and the U.S. Trustee's objection. That's all going to be part of
the disclosure statement. That's one deal point, Your Honor.
Next, the debtors will refrain from paying the second quarter
2008 bonus payment to any insiders, which includes officers,
pending the effective date of the plan. Or, in the
event the plan is not confirmed or withdrawn, a subsequent order
of the Court, via a motion and notice to the U.S. Trustee.
The Court will not enter an order on the bonus motion presently
pending before the Bankruptcy Court. The respective rights of the
debtors, the U.S. Trustee and any other party in interest with
respect to the bonus payments for the fourth quarter of 2007, and
the first two quarters of 2008, other than the second quarter of
2008 bonus payments to the insiders, which is addressed as part of
our resolution, are fully reserved.
The debtors' pending bonus motion and motion to seal the
proceedings in connection with the bonus motion shall be withdrawn
without prejudice to the debtors' rights to renew same at a later
date and the U.S. Trustee's rights to oppose same.
The U.S. Trustee shall be authorized to file an unredacted
version of her objection to the bonus motion with the Court. And
our -- in our objection, Your Honor, that was proposed to be filed
under seal, we had put in there certain information regarding the
metrics that are to be part of the disclosure statement. So,
there's no need to further seal that information.
THE COURT: Okay.
MR. McMAHON: The U.S. Trustee's pending objections
relating to the disclosure statement plan process, which Mr.
Spector is going to be addressing with the Court in a moment, are
not affected by this resolution. And our proposal, Your Honor, was
conditioned upon us receiving a representation from the debtors at
first -- the first quarter 2008 bonuses payable on account of the
personal objective component for the debtors' insiders will not
vary substantially from the amounts that were paid on account of
that bonus component for the fourth quarter of 2007. Our office has
received that information, Your Honor.
And then second, the amount of the second quarter 2008 bonuses
to each individual, and in the aggregate, will not vary
substantially from the bonus payments made for the fourth quarter
Those are the deal terms, Your Honor. The debtors have provided
us with the representation that we have requested, it was a
condition of these deal terms. And, therefore, we are prepared to
resolve those three items on these terms.
THE COURT: Thank you, Mr. McMahon.
MR. McMAHON: Thank you, Your Honor.
MS. ROBSON: Your Honor -
THE COURT: Yes?
MS. ROBSON: -- if you had any questions about the pending
references, I'd be happy to answer any questions you may have.
THE COURT: Well, I think there's some information that's
going to be provided to me hereafter, but I don't have any
questions with respect to the -- the representations and the
agreement on the record.
MS. ROBSON: Okay. Thank you, Your Honor.
THE COURT: Thank you.
MS. ROBSON: I'll turn it over to Mr. Spector.
THE COURT: Thank you. Good afternoon, Mr. Spector.
MR. SPECTOR: Good afternoon, Your Honor. I wish I were
here under different circumstances and we were furthering the goal
towards confirmation of a plan. But, as you know, because the
agenda points it out quite clearly, we're here on a status
conference. And the reason is, and as I've explained to counsel for
Novell, and through him, I believe, counsel for IBM and also the
U.S. Trustee, we are not furthering the disclosure statement
process that's before the Court today, or the plan that's before
the Court today. We have a status report.
THE COURT: Okay.
MR. SPECTOR: The reason we did not get the definitive
documents in in time is not because we hadn't prepared them. It was
that the deal was changing after - while we were drafting them.
Both sides, the buyer and the seller, came to an agreement
informally while we were drafting the documents we had, that they'd
rather restructure the deal in a totally different way.
THE COURT: Okay.
MR. SPECTOR: And we're working now with a new MOU and
with -- and once that's -- and new definitive documents will be
prepared. And we promise -- we promise we won't file it in pieces
THE COURT: Okay.
MR. SPECTOR: Okay. We won't file the MOU until we have
the definitive documents, and we won't file the disclosure
statement and the plan that incorporates all that until we have
them all done this time.
We, as Your Honor probably knows, sometimes have to dance to
other people's tunes.
THE COURT: I understand.
MR. SPECTOR: And so things get thrown in, everything's a
rush. And then you see what happens on the back end a lot of times.
So, I am making the commitment now so I can tell people I have made
THE COURT: Okay.
MR. SPECTOR: So, the -- in terms of status, I just want
to -- you know, you've got to be very careful when you talk about
plans under construction.
THE COURT: Understood.
MR. SPECTOR: As I said -
THE COURT: And you'll notice I'm not going to ask you a
lot of questions -
MR. SPECTOR: Okay.
THE COURT: -- about it.
MR. SPECTOR: And I'm prepared to just say something very
general about that.
THE COURT: Yes.
MR. SPECTOR: The deal that you saw in paper that's before
you today is a disclosure statement and a plan that discusses an --
a stock sale with 95 percent of the money in financing, as the
worthy objectors had pointed out, uh -- at -
THE COURT: Yes.
MR. SPECTOR: There are some problems. And so the deal
that's changed, we think, has fixed it. Well, we don't have any
deal, but when we get the deal that we think we're going to get, it
will be a much better deal in that respect because it's going to be
an asset purchase and no lending. So, that's what we have on the
table right now. We are circulating drafts of the MOU.
I want to say that when we do get the disclosure statement
prepared, we will have fixed some of the objections that were
raised by the objectors to their credit. I do not dispute a lot of
the -- the validity of a lot of their points. And I will
incorporate it. I learn from these things. And we hope that we
won't have these objections when it comes back before the Court
because they'll be corrected.
And I also point this out in the following context:
Whatever the deal is in different structure, it essentially will
be creditors get paid on confirmation with interest, contract
interest as it may be, and they will be unimpaired. Now, if we
didn't properly unimpair certain of them, we will be sure to do so
the next time.
Which gets me to the recently stated terms. The only people who
should care about these metrics and the other things will be the
stockholders and perhaps Mr. McMahon or the U.S. Trustee because
creditors will be getting cash on the barrel at the point of
confirmation, and why do they care?
So, when it comes to the -- a lot of the other terms that come
up, and the objections raised, if -- if -- we're hoping that at
that point, we would see that the worthy objectors would sit on
their objections and not share them because they should be taken
care of with cash or a reservation of cash that would solve all of
The ones who are in the bubble in this case are the
stockholders. And if stockholders have problems, then we -- we
would have to deal with those. That's really all I feel comfortable
outlining about the not yet finalized or even close to finalized
Obviously for these reasons, we're not going forward with this
plan sponsor protections. They may change in scope and design
entirely because of the new structure. We're not going forward with
the scheduling order or a request for a
scheduling order because we have these other predicates that
have to be satisfied first. Nevertheless, we are hopeful that we
can stick to the deadlines that we have for the exclusivity, which
I believe is May 11th. Have a plan in by then. I'm hoping that if
-- if our discussions go as well as they have, we'll be able to
meet those deadlines and get it in.
The only loose end here would be the due diligence deadline. We
don't want -- I don't want -- I don't want to come back and have
loose ends. I don't want to say, well, it's subject to due
diligence now when we come here for the disclosure hearing. So, I
might have to say can we have another month so we don't have that
contingency overlooking us -- overhanging us when we come to the
disclosure hearing. On - on scheduling, that's my only comment.
If Your Honor has any questions, I'd be happy to field them.
Otherwise I'd be happy to sit down and let the other folk join.
THE COURT: Mr. Spector, I'm going to withhold any
questions because I think -- because of the sensitive nature of
what you're doing. And I'll hear from the other parties.
MR. SPECTOR: Thank you.
MR. LEVIN: Good afternoon, Your Honor. Richard Levin,
Cravath, Swaine and Moore for IBM.
THE COURT: It's good to see you again, Mr. Levin.
MR. LEVIN: As well you, Your Honor. I commend Mr.
Spector for much of what he said. And I rise only to let it not
be a surprise, if it happens, the position we may be taking a month
from now, come May 11th.
The first I heard of any request for more time for due diligence
was as Mr. Spector was speaking here just a moment ago. And my
immediate reaction to that, which I simply want to put on the
record without formally taking a position is that the prior deal
that is being withdrawn had a due diligence deadline of today.
Nothing Mr. Spector has said indicated that the changing of the
terms of how the transaction is going to go has anything to do with
additional due diligence.
There is yet another month or five weeks before exclusivity
expires when the debtor has to file a plan to stay within
exclusivity. If they need additional time for due diligence, five
weeks is certainly plenty of time since given how much they've
already had. And may -- and we may well object to any extension for
due diligence that should have been completed by today.
THE COURT: Thank you, Mr. Levin.
MR. LEVIN: Thank you, Your Honor.
THE COURT: I think I understood Mr. Spector largely to be
saying he may be back. Certainly I don't think the debtor is asking
for the extension at this point.
MR. SPECTOR: No, sir.
MR. LEVIN: And all I would say, Your Honor, is if
he's back -
THE COURT: If they do.
MR. LEVIN: -- I may be back.
THE COURT: Good. Thank you, Mr. Levin. Mr. Lewis, good to
see you again.
MR. LEWIS: Thank you, Your Honor. And how could I miss
the party if they're all going to be back?
THE COURT: That's right.
MR. LEWIS: I would just add my short remarks that I think
all remains to be seen, and we would obviously reserve our right to
object to any extensions or other proceedings as they may come up.
But there's really nothing further to do today other than to hope
that, as Mr. Spector has said, we don't have to go through another
fire drill for no reason in the future. If there's going to be
another plan, we hope it's a real plan, whatever it may be, its
merits, from our point of view.
THE COURT: Thank you, Mr. Lewis.
MR. LEWIS: Thank you, Your Honor.
THE COURT: Thank you very much. Mr. McMahon?
MR. McMAHON: Your Honor, good afternoon. Joseph McMahon
for the United States Trustee.
Our office is certainly going to take a look at the revised
papers when they come in, Your Honor. But I guess a couple of
cautionary notes, if I may.
First, the issue raised in connection with the York Capital
deal, and echoed again in the papers that were filed before Your
Honor today, was the extent to which this intellectual property
which the debtor -- debtors do not own was either being sold, as in
the case of the York Capital deal, or made part of a business plan
going forward for these debtors.
I sincerely hope that whatever it is we see in the third chapter
of these cases, Your Honor, addresses that critical issue insofar
as providing some level of clarity as to what it is precisely that
is changing hands in connection with the transaction. And I'm sure
that Novell will be closely attune to that issue.
The second point I have to make, Your Honor, is that we will
review the papers when they come in. But we're sincerely concerned
about the state of this case. It came in as essentially, Your
Honor, a development company. It had operating losses for each and
every quarter. My understanding was prior to the petition date,
from its formation, which the exception of the quarters in which it
struck the deals with Novell and IBM, that are the subject of, I
guess, pending litigation.
I don't think that this case can take a fourth chapter. And to
the extent that, you know, we have to take a look at the issue of
appointing an independent fiduciary to
provide some clarity, we very well may move in that direction.
And I just want the Court to be aware that we're taking a look at
THE COURT: Thank you, Mr. McMahon. And I know we're all
going to be interested in seeing the disclosure statement and plan.
And I think other than everyone reserving rights, there's not
really much more to say and it would be foolish to say much more at
MR. SPECTOR: Right. And that's why I rose. Because it
seems to be the tradition to rise to reserve rights if any motion
comes -- reserve the right to respond.
THE COURT: Absolutely.
THE COURT: And I do reserve the right to decide.
THE COURT: So, we'll all be -- we'll all be busy. Thank
I know there's a lot of work to be done. And as I say, obviously
everyone is interested I think in a successful result, hopefully,
and in seeing the -- the product that's being worked on so hard,
that I know that everyone was working on hard.
MR. SPECTOR: No, sir.
THE COURT: I think everyone and we will stand in
recess then. Good day, all.
MULTIPLE SPEAKERS: Thank you, Your Honor.
(Proceedings Adjourn at 2:20 P.M.)
C E R T I F I C A T I O N
I, Karen Hartmann, certify that the foregoing is a correct
transcript to the best of my ability, from the electronic sound
recording of the proceedings in the above- entitled matter.
/s/ Karen Hartmann Date: April 7, 2008