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SCO Asks to Extend Exclusivity Period Again - Hearing Sept. 16
Tuesday, August 12 2008 @ 08:08 AM EDT

SCO has filed a motion [PDF] asking for a third extension of the exclusivity period. It wants 105 days after any final judgment is entered in the SCO v. Novell litigation. Since at the moment no one knows when a final judgment will be filed, it's a request for an open-ended extension. The hearing on this motion is set for September 16.

SCO's reasons for its motion are several: first, that Novell is asking for more money than SCO thinks is reasonable in pre-judgment interest in the Utah litigation. That means the issue may have to be worked out in motions to the Utah court. It wants to know, and its potential backers do too, SCO says, exactly how much SCO owes and also how long it will take for the appeal to be filed. Until there is a final judgment, SCO can't file a notice of appeal. Novell has raised the issue in Utah that until the Swiss arbitration is decided, some claims in the litigation are still pending, and so a final decision is not possible yet. So that may have to be litigated too. Then the bankruptcy court has to decide about the constructive trust.

According to SCO, the Stephen Norris deal is still being worked on, though they say now it might be either a buyout or a loan after all, and it hints at others potentially interested in funding SCO. But they want some clarity on when the appeal will be entered.

Does that make sense to you? After all, SCO mentions a figure of potential claims against SCO in the amount of $96 million, above and beyond what it owes Novell. Should it get an extension until all the claims against SCO are decided? Now, *that* would be clarity. Why is an interest calculation on $3 million or so and a date for a filed notice of appeal enough to give potential backers a feeling of finality, with so much to come? There is a much bigger cloud waiting on the horizon than anything Novell ever represented.

Anyway, SCO asks for an extension of time to file a reorganization plan, setting a new deadline at 45 days after a final judgment is filed in the SCO v. Novell matter, and then 60 days after that to "seek approval from impaired classes of such a plan."

That $96 million figure got my attention, because it's a figure I've not seen before, I don't think. The explanation is this: it includes potential damages in the Caldera IPO class action litigation as well as the damages asked for by IBM and Red Hat. But that's my point. Are potential investors not concerned about that figure?

On page 5 of the motion, SCO says it's been working on a business plan since 2002 "to preserve and continue the UNIX business and successfully launch its new mobility line of products and services." I think by "preserve" the UNIX business, SCO might mean litigate. I'm not clear what is standing in their way of launching "its new mobility line" which it's been announcing and announcing for a very long time. What litigation blocks that, I wonder?

SCO says this is what it needs from the bankruptcy to get back on its horsie:

  • determine how much it owes Novell
  • determine whether a constructive trust will be placed over some or all of those funds
  • file a notice of appeal "to let its customers and the market place understand the timeline for a challenge" of the Utah court's August 10 ruling "to resolve doubts about its ability to conduct business and related issues".

SCO feels it can't move forward until those things happen. But how could they not have anticipated that Novell would not view the recent trial in SCO v. Novell as leading to an immediate final judgment, when both parties were well aware that some of the claims in that litigation had been spun off to the arbitration and SCO got the bankruptcy court to spin off the constructive trust issue?

A cynical soul might view it that each time SCO comes up with a motion to extend the time, it hits on a new reason. And rational minds might reflect that there is an outside limit for any conceivable interest Novell can claim and an outside limit for a final judgment. So why can't SCO build a reorganization plan around those various likelihoods and contingencies? No? Too simple?

I'm not a cynic, and if you rise above all that and just look at the underlying issue, which is they don't know how long it will be before everything in the Novell litigation is over, and if you posit that finality there is all SCO needs to start afresh, the request does make sense. I can see the bankruptcy judge going along with this. His job is to protect SCO from creditors so it has a chance to get on its feet again. And if he accepts their argument, he will grant the motion. But my logical brain can't see the Novell litigation as being the biggest uncertainty for SCO or, even if it were, how filing an appeal, as opposed to getting a decision on an appeal, will help provide certainty.

The appeal matters greatly to SCO, because, quite aside from the money angle with Novell, the earlier August 10th ruling held that SCO must accept Novell's direction to SCO that it waive all claims against IBM. If that ruling stands, SCO is pretty much a cooked goose in the IBM litigation, because what remains in the case would then be IBM's counterclaims. All SCO sees, without an appeal, is dollar signs in the air heading toward them like missiles. So it has to appeal or give up, and SCO never gives up. No doubt it would very much like an appeal decided or at least filed before the IBM litigation comes up to bat, in an ideal SCO universe.

Here's how SCO describes the dispute over the final judgment:

9. The July 2008 Ruling also directed Novell to submit a final judgment consistent therewith. However, Novell did not submit a final judgment and instead filed a response indicating that a final judgment could not be entered because several of SCO Group's claims remain stayed and unresolved pending the SuSE arbitration and because Novell's claim for constructive trust is to be adjudicated by this Court. Novell asserts that the SuSE arbitration affects SCO Group's claims for breach of contract and unfair competition, and copyright infringement. Novell also submitted a request for prejudgment interest that the Debtors believe is well in excess of what is justified. Novell and SCO Group have been discussing these issues and on August 1, 2008 submitted to the Utah District Court a Joint Motion for Extension seeking an extension through August 22, 2008 for Novell to submit the proposed final judgment while the parties work together to try to resolve the issues of finality, interest calculation and constructive trust.

10. The Debtors and SNCP continue to make good faith progress towards improving the structure of a sale or financing transaction that would form the basis of an amended plan. Further, based upon feedback from prospective interested parties, the Debtors believe that the entry of a final judgment (and the commencement of the appellate process) in the Novell Litigation will greatly facilitate the Debtors' ability to sell, finance or recapitalize as necessary as a basis for a plan of reorganization. The Debtors have been told by prospective parties to a transaction that the uncertainty of SCO Group's interest in the UNIX and UnixWare copyrights that existed at the time of the 1995 Asset Purchase Agreement, and the terms of the implied license -- first mentioned by Novell nearly ten years after the transaction, gives prospective purchasers pause on the ability to acquire those rights from SCO Group, and hinders the ability to raise capital or obtain financing. Obviously, the final answer to some of these questions will not come until after a decision is issued on the appeal. However, the market and potential investors want to know if and when SCO Group will be able to commence the appeal process as it relates to these important rights. Once the appeal process is commenced, customers and potential investors can make reasonable assumptions as to how long it will take to get a resolution on appeal and investment decisions can be structured to take that process into account if it appears that SCO Group will not be able to file an appeal for several months or longer, that creates a different set of problems for SCO Group, its customers and investors.

Now, a cynic might point out that the same group of interested parties could really factor in all the unknowns. Either SCO can file an appeal in a few months or it can file an appeal several months longer. What difference, really, would it make to a customer or an investor, if they know there will be an appeal filed? If their decision hinges on ownership of copyrights, and to a large extent it does, then that won't happen until the appeal is decided anyway, so why would a few months matter?

That same cynic might also note that SCO told the court that it needed more time before because instead of SNCP offering SCO a loan, they were working on a new deal, a better one, because it would be a buyout instead. Yet, after the ruling in July assessing only $3 million or so against SCO, now SCO claims that the deal might be a financing plan after all, and significantly it talks about other "potential interested parties" who also tell them they need a final judgment filed to enhance SCO's "ability to sell, finance or recapitalize as necessary as a basis for a plan of reorganization". So SNCP isn't SCO's only suitor? Or is it losing interest, causing SCO to look elsewhere? Or is SNCP interested, but the money folks are balking? There's no way to know. But it wouldn't amaze me to see SCO later asking for an extension so the appeal can be decided. Then it could ask for an extension until the IBM damages are quantified, so SCO knows how much it owes them. Then it could say it needs time to figure out what it owes Red Hat. And then it could say it needs time to find out how much is owed in the IPO class action litigation. Kidding. Sorta. Still, if you think about it, if finality is what SCO needs to get back on its feet, the Novell interest calculation or even the exact date of an appeal of the Novell August 10th order isn't going to give it finality as to how much it owes the world and its dog.

Let's not be altogether cynical, however, or logical overmuch, and posit that SCO would like more finality but only up to a point, and that if it knows what it owes Novell and when it will be filing the appeal, it can hop on its horsie and ride happily off into the sunset. SCO adds something puzzling to the pot, though:

11. There has been some speculation in the marketplace that SCO Group will not be able to get to an appeal of the August 10, 2007 ruling because Novell (and IBM) will be able to block any such attempts and to delay the Novell Litigation until SCO Group does not have an ability to proceed. It is very important for SCO Group to get the final judgment entered and a notice of appeal filed as soon as possible so the market can estimate the time frame in which SCO Group's appeal will be heard and resolved. Delays in SCO Group's ability to appeal impede SCO Group's ability to finalize a plan to submit to this Court. The timeline of the final judgment and appeal are critical to this process. SCO anticipated that a final judgment would be entered soon after the ruling from the trial came down. Novell apparently has other plans.

Now, I read pretty much everything there is about SCO, and I can't recall reading anywhere any such speculation, that Novell and IBM would block an appeal. Maybe SCO's inner circle of special friends in the media wrote that, and I missed it, so if you ever saw any such speculation about Novell and IBM blocking an appeal, can you please post a URL?

Here's the docket entry:

525 Filed & Entered: 08/11/2008 Motion to Extend/Limit Exclusivity Period (B) Docket Text: Third Motion to Extend Exclusivity Period for Filing a Chapter 11 Plan and Disclosure Statement Under Section 1121(d) Filed by The SCO Group, Inc.. Hearing scheduled for 9/16/2008 at 10:00 AM at US Bankruptcy Court, 824 Market St., 6th Fl., Courtroom #3, Wilmington, Delaware. Objections due by 9/9/2008. (Attachments: # (1) Notice # (2) Proposed Form of Order # (3) Certificate of Service and Service List) (Makowski, Kathleen)

On the class action litigation, this page will give you some background and some filings. But there is an update, which will explain, I think, the sudden upsurge in potential damages from $200,000 to $50+ million. Remember when the class action lawyers for the Executive Committee in the Caldera IPO litigation filed an Objection [PDF; Exhibit A (PDF), which has the IPO complaint] to SCO's Disclosure Statement in the bankruptcy court, pointing out that SCO's Disclosure Statement had not discussed their claims? SCO in its 10K for 2007 said that the court of appeals had de-certified the class action (you can get that order on this page, among others), and so the settlement agreement reached by the class might not stand up any more:

We are an issuer defendant in a series of class action lawsuits involving over 300 issuers that have been consolidated under In re Initial Public Offering Securities Litigation, 21 MC 92 (SAS). The consolidated complaint alleges, among other things, certain improprieties regarding the underwriters’ conduct during our initial public offering and the failure to disclose such conduct in the registration statement in violation of the Securities Act of 1933, as amended. Class standing was certified for all of these cases by the district court.

The plaintiffs, the issuers and the insurance companies negotiated and executed an agreement to settle the dispute between the plaintiffs and the issuers. While the settlement agreement was awaiting approval by the district court, the court of appeals overturned the class certification on December 5, 2006. It is unlikely a settlement of a class action can remain effective as the class is de-certified. If the decision by the court of appeals is not reversed, we do not believe the settlement will stand, and it is possible the lawsuit may fragment into individual actions. At this time, we do not know and cannot determine the legal or procedural results of such an action. If the de-certification is reversed, and if thereafter the settlement agreement is approved by the court, and if no cross-claims, counterclaims or third-party claims are later asserted, this action will be dismissed with respect to us and our directors. If the settlement agreement is not approved by the court, the matter will continue unless another settlement agreement is reached. Plaintiffs have filed a second amended complaint and motions to dismiss are pending.

We have notified our underwriters and insurance companies of the existence of the claims. Management presently believes, after consultation with legal counsel, that the ultimate outcome of this matter will not have a material adverse effect on our results of operations or financial position and will not exceed the $200,000 self-insured retention already paid or accrued by us.

Hmm. So it told the SEC it would likely be $200,000, tops. Now it tells the bankruptcy court millions. How to explain that? I would guess SCO added up for the bankruptcy court all the various claims at their stated maximums. For the SEC, it listed what it more realistically expects to be the upper limit figure. But it also likely felt a need to include the potential claims, due to the Objection the IPO Executive Committee filed.

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