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Monday's Hearing on SCO's Latest Reorg Plan Morphs Into a Mere Status Conference
Friday, March 27 2009 @ 04:19 AM EDT

This is just like the last time SCO filed a reorganization plan.

It's just been announced [PDF] that Monday's hearing, originally scheduled as a hearing on SCO's Amended Joint Plan of Reorganization [PDF] and the related Disclosure Statement [PDF] and Motion for an Order [PDF] confirming a scheduling hearing, etc., will instead be just a status hearing.

What? Issues? With a SCO reorganization plan?

You can get a hint of the depth of them by reading Exhibit A [PDF] attached to the latest Berger Singerman bill, showing the breakdown of time spent on them, to the tune of approximately $13,000. Look at the subhead beginning on page 14, "Plan and Disclosure Statement," and you'll see a long list of activity at Berger Singerman, with meetings and phones calls and conferences and emails and strategy sessions. How to respond to IBM's and Novell's various objections? You'll see that Joseph McMahon of the US Trustee's office appears in the list also, so there have evidently been discussions going on, but if they'd figured out solutions to all the issues, they wouldn't need a status conference. No doubt this reflects the seriousness of the objections raised.

IBM in its objections to SCO's Disclosure Statement mentioned that a plan is supposed to include "adequate information", not to mention accuracy, which it thought SCO should provide, and it reserved its right to object some more after SCO did so, "especially where, as here, the Amended Plan contemplates continuing deferred payment obligations and the possible issuance of equity securities."

What? They don't like SCO's brainstorm -- that if it loses at the appellate level in both SCO v. Novell and SCO v. IBM and can't pay what it owes them within 5 years after that, that it can issue some new SCO stock to pay them with that instead of cash? Who wouldn't go for such a happy plan? IBM, for one, who expresses its concerns about getting paid like this:

24. The Disclosure Statement must clearly and succinctly inform the creditors and equity security holders what they are going to get, when they are going to get it, and what contingencies there are to getting it. The Disclosure Statement fails to provide sufficient clarity with respect to treatment of Allowed Claims subject of the Pending Litigation. Class 4's creditors are informed that there are two payment alternatives; the first contemplates payment of the claims (plus applicable interest) in cash in five equal annual installments; the seconds, which is triggered presumably at the discretion of the Debtors, contemplates that reorganized SCO "will cancel its existing shares and issue new shares which will be interpled to [this Court] for the benefit of those holders of [allowed claims subject of the Pending Litigation]." (D.S. at 28; Amended Plan at 10.) The Disclosure Statement provides no additional information. Accordingly, the holders of Allowed Claims subject of the Pending Litigation are not informed of what they should expect to receive under the Amended Plan and when they may expect to receive it.
I can tell them what I have come to believe they will get from this plan, should it ever be approved, also when and what the contingencies are: they will get absolutely nothing. Ever. For sure. I suspect IBM is thinking somewhat along those lines too:
3. The Disclosure Statement Lacks Adequate Information About Financial Projections

29. A disclosure statement must provide adequate disclosure of financial projections, especially here, where the Amended Plan contemplates continuing deferred payment obligations and the possible issuance of equity securities. Disclosure with respect to financial projections prepared on a reasonable basis in good faith and not replete with inconsistencies is necessary to allow creditors and equity security holders to assess the risks that the reorganized Debtors might not be able to meet the Amended Plan's payment provisions and the risks to the Debtors' earning capacity and financial viability. Otherwise the financial projections would be little more than glowing opinions having little or no basis in fact.

30. The Disclosure Statement summarizes the past, present and future of UNIX-based application platforms:

If one were to think about the landscape of UNIX-based application platforms, SCO [sic] would be the clear leader in the first wave with 43% market share in the 1990's. The second wave would see Linux at the forefront being led by IBM. SCO [sic] has been building the requisite technologies and is now going to market with the goal of becoming the leader of the third wave of business application platforms with its SCO Cloud Server and [virtualization technology called "SCO UNIX Virtual"] products.
(D.S. at 24.) The statement about the first wave is questionable at best, and there is no supporting evidence or explanation. The statement about the second wave is similarly without supporting evidence and worse, is either misleading, inaccurate or both. Most troubling, however, is whether the final sentence's assertion that SCO "is now going to market with the goal of becoming the leader of the third wave of business application platforms with its SCO Cloud Server and SCO UNIX Virtualization products ..." can be justified at all or whether it is so unsupported and self-serving that it tests the limits of good faith. The absence of concrete factual support for the statement could render it misleading, as this claim is made despite the disclosures that there is a total of only 66 employees employed by the Debtors "and their foreign subsidiaries and affiliates ..." (D.S. at 3); that SCO incurred only "$3,684,000 in research and development expense during the fiscal year ending October 31, 2008 ..." (D.S. at 9); that the minimum bid the Debtors propose to accept for their entire mobility business is only $2,000,000 and that the SCO UNIX Virtual line of products and services have not yet been released. (See D.S. at 21.)
Tests the limits of good faith. For IBM's lawyers, that is very firm and unusually strong language. Novell was equally blunt:
7. The central concept of the Amended Plan is continuation by the Debtors of litigation with Novell and other parties (the "Pending Litigation" in the Amended Plan's terminology). To this end, the Amended Plan enables the Debtors and their existing shareholders (largely management, Novell believes) to speculate on the Pending Litigation against Novell and other Pending Litigation defendant-creditors by significantly postponing payment to them in a manner that plainly puts any such payment at risk. If the Debtors win the litigation, they will recover from the defendants. If the Debtors lose, as the Amended Plan's provision for payment in new SCO stock reflects, the Debtors themselves anticipate that the defendants will be unable to recover on their claims because the Debtors will have consumed their resources in prosecuting the litigation. In the meantime, however, existing equity will retain its interests.

8. Under the Amended Plan, the Debtors will remain in business with their current management. At the same time, the Debtors will continue the Pending Litigation. The Amended Plan makes various provisions for payment of creditors. However, the Amended Disclosure Statement says little more about this blueprint than that the Debtors are going to stay in business, make lots of money through operations and perhaps the auction, defeat Novell and other defendants in the Pending Litigation, and pay everyone off one way or another, adding only fleeting caveats that these things might not happen. Nowhere do the Debtors provide crucial detail, support their financial projections with historical or other evidence, harmonize their projections for various potential outcomes the Amended Plan entertains, or rationalize their discriminatory treatment of Pending Litigation claimants.

Of course, by now, SCO has cancelled the auction. Novell has issues with being paid with SCO stock:
The Amended Disclosure Statement fails to project the value of the new SCO stock that would be distributed to Class 4 creditors. This is no minor omission. After all, the Amended Plan's terms themselves make it seem unlikely that the new stock will have any value at all. By the time the occasion for such a distribution arrives, as Novell suspects it will, it will be for the very reason that SCO will be unable to pay its debts to one or more Class 4 creditors after having spent considerable time and resources in litigation against Class 4 creditors while operating under a business plan of questionable strength. What will be left in SCO to give the new stock value under those circumstances? The shares cannot be worth more than what, if anything, is left of the Debtors' assets. In that connection, the Amended Plan and Amended Disclosure Statement fail to discuss how the old SCO stock will be cancelled and, more importantly, what the mechanism and formula will be for distribution of the new SCO stock to Class 4 creditors.
Another big objection is to SCO's alleged "moral duty" to pay York Capital for one of the earlier reorgs that SCO withdrew. IBM asked for proof that there was any need to pay them anything. SCO claims it "agreed" to pay York, but IBM would like to see that writing. So all that may give us a hint at just how deep the issues are that Berger Singerman is working on.

Remember the last time SCO filed a reorganization plan and there was a loud chorus of objections also? And so instead of a hearing on the plan, they scheduled a status conference and then at the conference in early April, 2008, SCO's then-plan simply melted away? -- with a promise that the next one would be sooper dooper, of course.

Well, this is it, the promised sooper dooper plan. And now the hearing scheduled for Monday about the reorganization plan has just been replaced, just like last time, with a status conference instead. Is yet another plan sinking? I have no idea. But we seem to be deep in the weeds, judging from the Exhibit A.

Here are all the latest filings:

03/26/2009 - 727 - Notice of Agenda of Matters Scheduled for Hearing Filed by The SCO Group, Inc.. Hearing scheduled for 3/30/2009 at 02:00 PM at US Bankruptcy Court, 824 Market St., 6th Fl., Courtroom #3, Wilmington, Delaware. (Attachments: # 1 Certificate of Service and Service List) (Makowski, Kathleen) (Entered: 03/26/2009)

03/26/2009 - 728 - Certificate of No Objection (No Order Required) Regarding Seventeenth Interim Application of Tanner LC for Compensation for Services and Reimbursement of Expenses as Accountants to the Debtors for the Period From February 1, 2009 through March 4, 2009 (related document(s) 716 ) Filed by The SCO Group, Inc.. (Attachments: # 1 Certificate of Service and Service List) (O'Neill, James) (Entered: 03/26/2009)

That doesn't mean nothing will happen Monday, of course. You'll get to see Mr. Spector in action, one presumes, once again. Let's imagine it. I'll guess that he will tell the court no lawyer working on this plan has slept for weeks because of working so hard to try to get this plan into the most sooper dooper condition possible, but SCO needs more time.

The pro se objection to that, SCO's motion to extend the exclusivity period [PDF] will still be heard on Monday.


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