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Novell Responds to SCO's 2nd Extension Request: Please Make it the Last, Yr. Honor - Updated, as text
Tuesday, June 10 2008 @ 08:03 PM EDT

Novell has filed its Response to Debtors' Second Motion to Extend Exclusivity [PDF], and you could sum up its message to the court like this: Enough already, but if you do grant another extension, please let it be the last.

SCO's position is that it can't file a plan until Utah reaches a decision on how much SCO owes Novell. Oh really? Novell says. Then how come it filed a plan already which they seemed able to file prior to any judgment from Utah?

The position the Debtors take in the Motion assumes the necessity of completing the District Court Litigation for plan formulation even though in their prior plan [they] were ready to proceed without a judgment there. The Debtors give no reason why they no longer can take the approach of the prior plan, an approach the Debtors did not disavow even as they withdrew that plan. And in light of that fact and the history of futility in these cases, Novell sees no grounds for a further extension of the deadline. If the Court is, nevertheless, inclined to grant a further extension, Novell urges the Court to do so in a way that makes it clear to the Debtors that this is their last chance and that they must act expeditiously. The Court can do this by making the Third Deadlines the outside deadlines under any circumstances and requiring the Debtor to proceed with their plan sooner than the Third Deadlines if the District Court rules in the District Court Litigation sooner.

Not that the bankruptcy court has shown any inclination to hurry SCO along. Remember the first court hearing, when Novell asked for protection from the court, requesting that money it thought it was owed, according to the August 10th Order from Utah, be put in a trust, because otherwise the money would disappear? The judge declined to help, and he said his order would not prejudice Novell, but lo and behold, the money is now pretty much gone. Perhaps he should have listened to Novell back in September.

So now, Novell reminds the court of the history of the bankruptcy since:

Since filing these cases, the Debtors have stumbled through a succession of obvious missteps. For example, almost immediately they tried but failed in an attempt to sell substantially all their assets to York Capital Management ("York"). The Court refused to approve the York sale motion in the face of substantial opposition focusing on the sale motion's lack of transparency....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....

Next ... the Debtors, having obtained an unopposed extension of their exclusivity periods ... filed the Debtors' Joint Plan of Reorganization (the "Original Plan") and the related proposed Disclosure Statement in Connection with Debtors' Joint Plan of Reorganization (the "Disclosure Statement"). The Debtors structured the Plan to proceed without prior resolution of the District Court Litigation. The Original Plan contained provisions to deal with either a favorable or unfavorable ruling by the District Court (and appeals, if needed). However, in the face of extensive objections on other issues filed by Novell, IBM and others... the Debtors withdrew the Original Plan and Disclosure Statement....

The Debtors' record of false starts in the cases also include at least two other incredibly bad ideas beside the York sale motion and the Original Plan. First, the Debtors asked the Court to pay York a breakup fee even though there was no sale to York or anyone else, and no prior approval of any breakup fee for York before the Debtors withdrew the York sale motion.... Similarly, the Debtors asked the Court to approve potentially massive compensation for SNCP for, in essence, just being willing to be a sponsor of the proposed Original Plan regardless of whether the Court confirmed that plan....

In other words, since SCO never before cited a need to wait for the Utah court to come up with a figure before it filed plans, how come it cites that as a reason now? Novell calls is "a contrivance". As for SCO's other excuses, Novell makes fun of them. SCO claims now it needs an extension because "their reorganization cases are 'complex'", Novell writes. "Surely, the cases have not suddenly become more complex than they were several months ago," Novell states.

As for SCO's words about its supposed "good faith progress towards reorganization," Novell says "the facts say otherwise":

After nine months, all the Debtors have managed to do is bring at least four ill-considered proceedings: the York sale motion, the Original Plan, the SNCP preplan compensation motion and the motion to grant York a breakup for a sale that never happened. In each instance, the Debtors' quick trigger required Novell and other parties to file objections and make appearances, and in each case, the Debtors ended up dropping the proceeding outright in response to the objections. Wasted time and money for all concerned is not progress.

Sigh. If only the court had listened to Novell back in September. Here's part of what Novell's attorney, Larren M. Nashelsky, told the judge in Delaware at that first hearing on September 18th:

Obviously the estate has monies that it can use to fund its operations, and we're not here to tell you that that shouldn't happen. What we're here to tell you is that our property, the property that they receive and are to remit to us need to be remitted to us, and not co-mingled, and the monies that they've received that they have converted, and not remitted to us as Judge Kimball found, need to be escrowed until Judge Kimball is able to determine the proper amount that is ours and the proper amount that is the estate's. Your Honor, with that, that's really all we wanted to say today. As I tried to point out, we are not opposing the substantive relief. We're not trying to stop the Debtor from continuing its operations. What we are trying to make clear is we have rights here, we have property that the Debtor has, and the Debtor receives. It's not the Debtor's property to do with what they want, and we need these orders to make that clear. Thank you, Your Honor.

The court was concerned about other creditors' at the time, and of course it was the very first day, so he suggested instead that Novell submit a motion to lift the stay on the Utah litigation, and in due time that happened and back to Utah they all went. But by then, the money was gone. Here's what the judge said and Novell's 2nd request:

THE COURT: Well, I certainly understand Novell's position, and at the time that there's a hearing, and a, on the motion, and evidence presented, certainly I will take facts into consideration. But for purposes of today, on the first day motion, to do what Novell has requested, I would have to put into every order such as this that a Debtor shouldn't convert, that the Debtor should escrow any funds that it's holding for others, and it would really give Novell, I think, priority treatment over other creditors who may be in similar positions that the Court doesn't even know about, and who are not before me today. So I'm going to enter the order as presented.

MR. NASHELSKY: Your Honor, Your Honor, if I may?

THE COURT: And I certainly will hear Novell on notice and, of a motion.

MR. NASHELSKY: Your Honor, there are two parts to this, and maybe it would be easier if - - on the first part where it's undisputed, and they agree it's ours, I would think that, that it would be clear and easy for them to say that those monies they collect which is ours, not the one that's in dispute that Judge Kimball is going to decide as part of the counter claims, but the monies they collected over time, that are our monies that they take the fee for, there really is no reason, that's not escrow it later, that's not deal with it. It's our property that they're collecting. They should be able to keep that segregated. That doesn't effect any other creditor. It doesn't affect that, that, that piece should be able to be kept separate in just the cash management order that they collect those. They can, you know, they can pay all the, the wages and things they have, because they have a whole bundle of money today. But it's the money that comes in that should be kept separate, not comingled, and turned over to us, and then they can keep the 5% fee from that. That really shouldn't implicate any of these other things, or implicate any of the other motions, and reserve rights through all the, the other orders. That should be a discrete issue that protects Novell as to its property. And I would ask if Your Honor could, could do that. That's - - the Debtors concede it's not theirs. It should not be an issue. This is not going to the money they have at hand. It's the money they collect for us.

SCO's attorney then said that of course SCO would pay going forward, and the court agreed that they would:

THE COURT: Yeah, the, this order does not prejudice Novell in any way. And I don't know that on this motion I should be granting Novell in effect affirmative relief. Which is what it's requesting this morning. And I'm going to enter the order as it's been presented to me.

MR. SPECTOR: Thank you, Your Honor.

THE COURT: I understand Novell's position, and certainly Novell has every right to bring whatever motion it seeks, and the Court will certainly consider that motion at the appropriate time.

MR. NASHELSKY: We will be back before Your Honor.

THE COURT: Thank you.

MR. NASHELSKY: With a motion.

THE COURT: Yes.

So there you are. And now, sure as shooting, the bundle of money is gone, largely paid out to SCO's current helpers, the lawyers and financial analysts and accountants, not to mention bonuses to SCOfolk and insurance plans and severance plans, instead of to Novell. I wonder if the Honorable Judge Kevin Gross has a plan to get that money back for Novell? Here's hoping.

Update: Just FYI, there is a new acting US Trustee for Delaware, New Jersey and Pennsylvania, Roberta DeAngelis as of May 8.

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

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)

Ref. Docket No. 367

Objection Deadline: June 10, 2008 at 4:00 P.M. (prevailing Eastern time)
Hearing: June 17, 2008 at 2:00 p.m (prevailing Eastern time)

NOVELL'S RESPONSE TO THE DEBTORS' SECOND
MOTION TO EXTEND EXCLUSIVITY

Novell, Inc., and its subsidiary, SUSE Linux GmbH ("SUSE" and together with Novell Inc., "Novell") hereby responds to the Second Motion by Debtors under Section 1121(d) to for Extension of Exclusivity Deadlines (the "Motion"). By the Motion, debtors and debtors in possession The SCO Group, Inc. and SCO Operations, Inc. (together, "SCO"), ask this Court pursuant to Code 1 section 1121(d) to extend their previously-extended current deadlines for filing and confirmation a plan of reorganization for an additional 120 days. These extensions would be from May 11, 2008 and July 11, 2008 (the "Second Deadlines") to August 11, 2008 and October 13, 2008, respectively (the "Third Deadlines"). The fundamental reason for the Debtors' request is that they claim to need these additional extensions while they await the United States District Court for the District of Utah's decision on the final phase of their litigation (the "District Court Litigation") with Novell, Inc., in order to be able to formulate their plan.

The position the Debtors take in the Motion assumes the necessity of completing the District Court Litigation for plan formulation even though in their prior plan were ready to proceed without a judgment there. The Debtors give no reason why they no longer can take the approach of the prior plan, an approach the Debtors did not disavow even as they withdrew that

plan. And in light of that fact and the history of futility in these cases, Novell sees no grounds for a further extension of the deadlines. If the Court is, nevertheless, inclined to grant a further extension, Novell urges the Court to do so in a way that makes it clear to the Debtors that this is their last chance and that they must act expeditiously. The Court can do this by making the Third Deadlines the outside deadlines under any circumstances and requiring the Debtors to proceed with their plan sooner than the Third Deadlines if the District Court rules in the District Court Litigation sooner.

I. BACKGROUND

Events Leading to and Commencement of the Cases

Before filing these chapter 11 cases, the "Debtors conducted a software business. SCO was involved in litigation against various parties, including Novell, IBM Corporation ("IBM"), Red Hat and Autozone involving SCO's claims that they were interfering with its alleged ownership of certain UNIX code copyrights that are central to SCO's business. 2

(See Memorandum Opinion (filed herein November 27, 2007) (the "Opinion") 1-2.)

The central litigation was the District Court Litigation. On August 10, 2007, Novell, Inc., won important rulings against SCO on partial summary judgment in the District Court. (Opinion 3-4.) That left only Novell, Inc.'s counterclaims against SCO to try. (Opinion 4.) The trial on those residual issues was set for September 14, 2007, a Monday. (Opinion 4). Having all but lost its litigation with Novell, Inc., the Debtors filed their voluntary chapter 11 petitions before this Court on September 11, 2007, the preceding Friday. (Ibid.) The filing stayed all SCO's litigation, including all its litigation with Novell.

B. The Debtors' Record in the Cases: Nearly a Year of Futility

Since filing these cases, the Debtors have stumbled through a succession of obvious missteps. For example, almost immediately they tried but failed in an attempt to sell

2

substantially all their assets to York Capital Management ("York"). The Court refused to approve the York sale motion in the face of substantial opposition focusing on the sale motion's lack of transparency. (See Novell's Objection to the Debtors' Proposed Disclosure Statement (filed March 26, 2008) (the "Novell DS Obj.") 2-3.) 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.)

Next, on February 29, 2008, the Debtors, having obtained an unopposed extension of their exclusivity periods under Code section 1121 (Motion 4), filed the Debtors' Joint Plan of Reorganization (the "Original Plan") and the related proposed Disclosure Statement in Connection with Debtors' Joint Plan of Reorganization (the "Disclosure Statement"). The Debtors structured the Plan to proceed without prior resolution of the District Court Litigation. The Original Plan contained provisions to deal with either a favorable or unfavorable ruling by the District Court (and appeals, if needed). However, in the face of extensive objections on other issues filed by Novell, IBM and others ( see, e.g., Novell DS Obj.), the Debtors withdrew the Original Plan and Disclosure Statement at the scheduled hearing on the Disclosure Statement on April 2, 2008.

It is worth pausing here on the explanation the Debtors gave for withdrawing the Original Plan and Disclosure Statement. The Debtors' primary reasons were not because of the various creditors' objections to the Original Plan and Disclosure Statement (although the Debtors did say they planned to avoid some of those objections in a new plan). More importantly, those reasons also did not include any need to wait for the outcome of the District Court Litigation (something the Original Plan did not require). Rather, the Debtors and their Original Plan sponsor, Stephen Norris Capital Partners ("SNCP") had already decided to restructure their underlying deal in some unexplained ways and begun redrafting the necessary documents. (Transcript of April 2, 2008 hearing ("April Tr."), 8:9-12:17.) The Debtors did not indicate that any of that restructuring had anything to do with a need to await the outcome of the District Court

3

Litigation. That is no surprise, since the Debtors saw no such need in proposing the Original Plan, nor did any of the creditor objections assert that the Debtor had to await the resolution of the District Court Litigation to proceed with a plan.

The Debtors' record of false starts in the cases also include at least two other incredibly bad ideas beside the York sale motion and Original Plan. First, the Debtors asked the Court to pay York a breakup fee even though there was no sale to York or anyone else, and no prior approval of any breakup fee for York before the Debtors withdrew the York sale motion. The Debtor withdrew this motion in the face of substantial objections, too. (See, e.g., Novell's Objection to the Debtors' Request to Approve an Expense Reimbursement to York.) Similarly, the Debtors asked the Court to approve potentially massive compensation for SNCP for, in essence, just being willing to be a sponsor of the proposed Original Plan regardless of whether the Court confirmed that plan. Of course, in the face of substantial objections to this motion, too (see, e.g., Novell's Objection to the Debtors' Motion to Approve Settlement Compensation or Sale Compensation and Expenses to Plan Sponsor), the Debtor dropped this request, as well.

II. THE MOTION'S GROUNDS FLUNK EXAMINATION

Though the Debtors cite various purported grounds for the Motion's request for further extensions of the relevant deadlines (Motion 14), only one really presents something "new" about the Debtors' situation from what obtained when the Debtors filed the ill-fated Original Plan some months ago. That is the notion, found in Paragraphs 14(b) and 15 of the Motion, that it would be a good thing to await the District Court's ruling in the District Court Litigation. This idea is new, however, only in the Debtors now choose to rely on it even though it posed no obstacle to them in proposing the Original Plan. Moreover, when explaining on April 2 why they withdrew the Original Plan, the Debtors did not hedge at all their willingness to proceed without a decision by the District Court. In short, the Debtors' reliance on the need for a decision by the District Court is a new factor in the Debtors' plan prospects only in the Debtors'

4

sudden, about-face reliance on it. Thus, the Debtors' theory that they need to wait for the conclusion of the District Court Litigation to propose a new plan is a contrivance. 3

Some of the Debtors' other reasons for asking the Court to extend the plan deadlines yet again are equally questionable. For example, the Debtors claim that their reorganization cases are "complex". (Motion 14a.) But they do not explain (nor is it obvious) why that is so; indeed, it did not seem to the Debtors to be a problem when they proposed the Original Plan. Surely, the cases have not suddenly become more complex than they were several months ago.

Perhaps more importantly, the Debtors claim as a ground for the Motion "good faith progress towards reorganization." (Motion 14c.) The facts say otherwise, however. After nine months, all the Debtors have managed to do is bring at least four ill-considered proceedings: the York sale motion, the Original Plan, the SNCP preplan compensation motion and the motion to grant York a breakup for a sale that never happened. In each instance, the Debtors' quick trigger required Novell and other parties to file objections and make appearances, and in each case, the Debtors ended up dropping the proceeding outright in response to the objections. Wasted time and money for all concerned is not progress.

In that regard, the Motion's blithe description of the Original Plan's (and Disclosure Statement's) failings as having to do only with the "high leverage ration . . . high interest cost of the debt component and the difficulties of evaluating and confirming the Plan before the District Court rendered a final ruling" simply ignores the other real issues that so compromised the Original Plan. The Debtors' inability to see this (or unwillingness to admit it) does not foreshadow much promise for the future of these cases. For example, the Original Plan and Disclosure Statement provided no details about crucial terms and conditions of SNCP's key lending obligations; indeed, they provided no information of any significance about SNCP (a new entity) even though SNCP's purported commitment of $100,000 in debt and equity was a

5

reason to suspect that the Debtors' judgment has improved to the point where the Court and creditors can comfortably expect better from the Debtors in the future. Indeed, the Debtors' sudden reliance on the need for resolution of the District Court Litigation has more the look and feel of scheme to buy time than of the promotion of an opportunity for real progress in the cases.

Indeed, the Debtors' claims to evolution towards reorganization ring hollow in light of recent events alone. According to the Debtors' remarks at the April 2 hearing, the restructuring that purportedly accounted for the Debtors' withdrawal of the Original Plan already was under way before the April 2 hearing. (April Tr. 8:19-9:5.) Yet, here it is more than two months later, and the Debtors still have no plan on file. In fact, the Debtors have swung without blinking from, 'We don't need to know the result of the District Court Litigation,' to, 'We do need to know that result.'

III. CONCLUSION

Thus, even a cursory look at the facts betrays the Debtors' arguments in the Motion. The Debtors have elected to pursue doomed measures to solve their problems rather than soberly trying to construct a solution to them with the aid of bankruptcy law. Moreover, the evidence is that they will continue this pattern because they lack an understanding of their situation upon which to base a realistic plan. Their "plan", it would seem, is to keep the ball in the air in the hope that they will figure something out. To accomplish this goal this time, it is nothing for the Debtors to claim that what was no obstacle to the Original Plan is a decisive reason why they cannot propose a new plan now.

Accordingly, Novell asks the Court to deny the Motion. If the Court is inclined to accommodate the Debtors at all in response to the Motion, it should do so in a way that gives the

6

Debtors an unmistakable incentive to file their next plan quickly and to make that plan a real one. This the Court can do by ruling: (1) that it will grant no further extensions than the Third Deadlines; and (2) that the Debtors must file their complete proposed new plan and disclosure statement by the earlier of the Third Deadlines or within 10 days after the District Court's ruling in the District Court Litigation.

Dated: June 10, 2008
Wilmington, Delaware

YOUNG CONAWAY STARGATT & TAYLOR, LLP

/s/ Sean T. Greecher
James I. Patton (No. 2202)
Michael R. Nestor (No. 3526)
Sean T. Greecher (No. 4484)
[address, phone]

-- and --

MORRISON & FOERSTER LLP
Adam A. Lewis
[address, phone]

-- and --

MORRISON & FOERSTER LLP
Larren M. Nashelsky
[address, phone]

Counsel for Novell, Inc. and SUSE Linux GmbH


1 The "Code" is the Bankruptcy Code, 11 U.S.C. 101-1532

2 The discussion of the disputes between SCO, on the one hand, and Novell and other parties, on the other hand, are highly simplified in this brief since their precise counters are not material to the issues before the Court on this occasion.

3 Whether the Debtors can propose and confirm a plan before the District Court rules remains to be seen. They did not see such an obstacle when proposing or withdrawing the Original Plan. The Original Plan continued the Debtors' business and litigation, but also purported to provide for payment in full of Novell and to envision an alternative business model if Novell won the final phase of the District Court Litigation. One must wonder whether they really see the unfinished District Court Litigation as a barrier now to a plan now.

7


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