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To read comments to this article, go here
US Trustee Objects to SCO's Proposed Payment to York
Tuesday, April 15 2008 @ 06:51 AM EDT

The US Trustee, through her counsel Joseph McMahon, has now filed an Objection to SCO's motion to pay off ... I mean to pay York, despite the deal never having been consummated. Here's one reason why:
Here, this Court rejected the hasty process that the Debtors and York were seeking in favor of a process that benefitted all constituencies. Subsequent to this Court’s ruling regarding the process timetable, York walked out on the Debtors. This Court should not authorize the Debtors to make any payments to York, as York’s lack of commitment to a fair process is not consonant with the estates’ interests.

I believe that is the polite way of putting it. See how you can express yourself perfectly clearly while remaining calm and polite? Effective too. The Objection also points out that when you are in bankruptcy, you can't do things any old which way. And one thing you can't do is act like you are not bankrupt and pay people outside of the rules. IBM has also filed an Objection, as has Novell [PDF].

There is a bill from Pachulski Stang also and an affidavit of mailing regarding the R & D Strategic Solutions' assignment of its claim to Argo Partners.

Here are the filings:

441 - Filed & Entered: 04/14/2008
Affidavit/Declaration of Service
Docket Text: Affidavit/Declaration of Service of Epiq Bankruptcy Solutions, LLC (related document(s)[436] ) Filed by The SCO Group, Inc.. (Werkheiser, Rachel)

442 - Filed & Entered: 04/14/2008
Application for Compensation
Docket Text: Monthly Application for Compensation and Reimbursement of Expenses, as Co-Counsel to the Debtors and Debtors in Possession, for the Period from February 1, 2008 through February 29, 2008 Filed by Pachulski Stang Ziehl & Jones LLP. Objections due by 5/5/2008. (Attachments: # (1) Notice # (2) Exhibit A # (3) Certificate of Service and Service List) (Werkheiser, Rachel)

443 - Filed & Entered: 04/14/2008
Objection
Docket Text: Objection to Debtors' Motion for Authority to Pay an Expense Reimbursement to York Capital Management (related document(s)[367] ) Filed by United States Trustee (Attachments: # (1) Certificate of Service) (McMahon Jr., Joseph)

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

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 18, 2008 at 1:30 P.M.

OBJECTION OF THE UNITED STATES TRUSTEE TO THE
DEBTORS’ MOTION FOR AUTHORITY TO PAY AN EXPENSE REIMBURSEMENT
TO YORK CAPITAL MANAGEMENT
(DOCKET ENTRY # 367)

In support of her objection to the Debtors’ motion for authority to pay an expense reimbursement to York Capital Management (“York”) (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”).

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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/BASIS FOR RELIEF

4. In the Motion, the Debtors assert two grounds for making the requested payment: first, the Debtors are obligated to make the payment “as a business and moral matter,” Mot. ¶ 4; second, the Debtors’ failure to make the payment may make obtaining potential investors “more difficult,” Mot. ¶ 7.

5. With regard to the first ground asserted, applicable law instructs this Court that neither business practices nor morality should inform its decision whether to approve the requested payments. In O’Brien, the United States Court of Appeals for the Third Circuit specifically rejected the argument that business practices in the non-bankruptcy context should govern this Court’s determination of whether a break-up fee or expense reimbursement request is justified. Rather, the O’Brien court held that the determination of whether to approve a break-up fee or expense reimbursement is governed by 11 U.S.C. § 503(b)(1)(A), which 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); 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”). In O’Brien, the Third Circuit observed that, under 11 U.S.C. § 503(b)(1)(A), there will be situations where payment of bid protections will not be warranted, notwithstanding asserted business justifications and “moral” (using the Debtors’ term) concerns:

All parties recognize that break-up fees and expenses are accepted in corporate merger and acquisitions transactions. In summarizing the

2

corporate use of break-up fees, Calpine has explained that such provisions are designed to provide a prospective acquirer with some assurance that it will be compensated for the time and expense it has spent in putting together its offer if the transaction is not completed for some reason, usually because another buyer appears with a higher offer. Such provisions may also encourage a prospective bidder to do the due diligence that is the prerequisite to any bid by assuring the prospective bidder that it will receive compensation for that undertaking if it is unsuccessful.

Not all of the purposes that break-up fees serve in corporate transactions are permissible in bankruptcy.

Although the assurance of a break-up fee may serve to induce an initial bid (a permissible purpose), it may also serve to advantage a favored purchaser over other bidders by increasing the cost of the acquisition to the other bidders (an impermissible purpose).

Moreover, even if the purpose for the break-up fee is not impermissible, the break-up fee may not be needed to effectuate that purpose. For example, in some cases a potential purchaser will bid whether or not break-up fees are offered. This can be expected to occur whenever a potential purchaser determines that the cost of acquiring the debtor, including the cost of making the bid, is less than the estimated value the purchaser expects to gain from acquiring the company. In such cases, the award of a break-up fee cannot be characterized as necessary to preserve the value of the estate.

O’Brien, 181 F.3d at 535 (citation omitted).

6. With regard to the second concern, that the Debtors’ inability to make the payment may make obtaining potential investors “more difficult,” the Debtors again fail to acknowledge O’Brien. Under O’Brien, the Third Circuit established a standard that is necessarily difficult to meet; O’Brien eliminated the ability of debtors in possession to promise potential purchasers/investors break-up incentives in exchange for non-binding “commitments” and to then seek the bankruptcy court’s ratification of their “business judgment.”

3

7. Here, this Court rejected the hasty process that the Debtors and York were seeking in favor of a process that benefitted all constituencies. Subsequent to this Court’s ruling regarding the process timetable, York walked out on the Debtors. This Court should not authorize the Debtors to make any payments to York, as York’s lack of commitment to a fair process is not consonant with the estates’ interests. The Motion should be denied.

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: April 14, 2008

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