Novell has filed a Reply [PDF] to SCO's Opposition to Novell's Motion for Conversion. Novell does not mince words. It suggests that the court check SCO's math, not to mention SCO's 22 pages of its "history" of UNIX and its litigation prospects.
Novell's theme is that SCO is fighting primarily to keep control of the litigation, and they are proposing to use money owed to Novell and other creditors to fund that gamble. The salient fact about the litigation is that Novell won. There's no reason not to convert to Chapter 7 and shut down "these wasteful operations (including their compensation to management)" Novell argues, because Novell believes it has demonstrated that "the rest of the so-called business will just continue to lose money."
And SCO has filed a motion [PDF] to settle the Amici debt at a greatly reduced rate, in exchange for SCO not contesting the debt. Amici has changed its name to XAC, by the way, according to Exhibit A [PDF]. It includes emails between the disputants, although it's the first we are hearing about any dispute, that I can recall, but the emails mention an agreement, which is not attached. I think I'd like to see that.
06/09/2009 - 793 - Affidavit/Declaration of Service re: Motion to Shorten
Notice Regarding Debtors' Motion to File Under Seal Debtors' Appendix to
Their Response to Motions to Dismiss or Convert (related document(s) 785
) Filed by The SCO Group, Inc.. (Makowski, Kathleen) (Entered:
Here's Novell's filing as text:
06/09/2009 - 794 - Affidavit/Declaration of Service re: Debtors' Motion to
File Under Seal Debtors' Appendix to Their Response to Motions to
Dismiss or Convert (related document(s) 784 ) Filed by The SCO Group,
Inc.. (Makowski, Kathleen) (Entered: 06/09/2009)
06/09/2009 - 795 - Motion to
Approve Compromise under Rule 9019 of Claim with Amici, LLC Filed by The
SCO Group, Inc.. (Attachments: # 1 Exhibit A # 2 Proposed Form of
Order) (Makowski, Kathleen) (Entered: 06/09/2009)
06/10/2009 - 796 - Reply to the
Debtors' Opposition to Its Motion for Conversion (related document(s)
778 ) Filed by Novell, Inc. (Greecher, Sean) (Entered: 06/10/2009)
06/10/2009 - 797 -Certificate of Service re: Debtors' Motion To Approve
Settlement of Claim With Amici, LLC Pursuant to Federal Rule of
Bankruptcy Procedure 9019 (related document(s) 795 ) Filed by The SCO
Group, Inc.. (Makowski, Kathleen) (Entered: 06/10/2009)
UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE
The SCO Group, Inc., et al.1,
Case No. 07-11337 (KG)
Objection Deadline: June 8, 2009 at 4:00 p.m.
(prevailing Eastern time)
Hearing: June 15, 2009 at 2:00 p.m. (prevailing Eastern
NOVELL'S REPLY TO THE DEBTORS'
OPPOSITION TO ITS MOTION FOR CONVERSION
Novell2 hereby replies to the Debtors' Response to Motions to Dismiss or Convert [etc.]
(filed June 5, 2009) (the "Opposition" or "Opp.").3 The Opposition responds to Novell's Motion
to Convert (filed May 11, 2007) (the "Motion") and similar motions (together with the Motion,
the "Motions") filed by the United States Trustee on May 5 and IBM on May 11.
1. The Motions ask the Court to convert the Cases to chapter 7 to preserve what little of
the estates remains to pay creditors and to permit a neutral to assess the litigation against Novell,
IBM and others that has been the driving force in these Cases. The Motions call the Court's
attention to these salient facts: the Debtors have languished in chapter 11 for nearly two years
without filing a confirmable plan; Debtors' estates are shrinking to the point where creditors,
who the Debtors repeatedly claimed would be paid in full, will recover little unless the Debtors
someday win big in the litigation; the absence of prospects for Debtors' "rehabilitation" (not
merely "reorganization" as required by Code section 1112(b)(1)); and (as Novell urged) the
Debtors' unmistakable gross mismanagement, represented by their wasteful operations and
repeated missteps as their management tried to retain personal control of the litigation by
fostering the illusion of an operating business that could be rehabilitated.
2. In the Opposition, Debtors: (1) claim that they have a thriving business that is not
losing too much money -- by misrepresenting their financial performance and offering a
smattering of hearsay purported testimonials -- even as they admit they have never made a
profit, in or out of bankruptcy (Opp. 6); (2) elevate speculation to fact by essentially assuming
both that they will win the Tenth Circuit appeal of Novell's victory in the litigation and that such
a reversal will ipso facto rehabilitate them; and (3) try to dismiss their mismanagement by saying
they meant well while acknowledging the "unhappy details" of their regime (Opp. 39).4
3. Alternatively the Debtors argue that their situation constitutes "unusual
circumstances" under Code section 1112(b)(2) so that the Court should not order conversion
even if it finds "cause" under section 1112(b)(1). Here, the Debtors' grounds essentially are
nothing more than a re-hash of portions of their futile arguments in opposition to the Motions.
Finally, evidencing yet again (and more incontestably than ever) management's desperate desire
to retain personal control over the litigation at any cost, the Debtors ask the Court, if it finds
"cause" under section 1112(b), to do anything but convert; since conversion would put the
litigation in the hands of a chapter 7 trustee who, they claim, would abandon his fiduciary duties
by entering into (ill-considered) "de minimis" settlements of the litigation (Opp. 47).
4. In assessing the Opposition in light of the Motions, the Court should bear in mind
that if it finds "cause" under section 1112(b)(1), it must act unless it finds "unusual
circumstances" and that on the latter issue the Debtors have the burden of proof. (See Motion
II. DIMINUTION OF THE ESTATES AND REHABILITATION
5. As Novell pointed out in the Motion, the issue here is whether the Debtors are
gambling at the creditors' expense (Motion 12). They are.
A. Diminution of the Estates
6. The Debtors contend in their Opposition that they are not losing nearly as much
money as the Motions argue. According to Debtors, the losses they have suffered since their
filings in September of 2007 have not been "substantial." They arrive at this conclusion through
two devices. First, they mischaracterize what the MORs show. Next, they argue that the
(inaccurate) admitted losses are not substantial because they must be compared to their
prepetition performance during which, Debtors admit, they made money only during one quarter
in 2003 (Opp. 6).5
7. Initially, it is worth observing that the Debtors' theory that the Court should deny the
Motions even though the Debtors admittedly are doing badly because the Debtors are (allegedly)
not doing as badly as the moving parties suggest is an astonishing argument in itself. But, in
fact, the Debtors are doing far worse than they admit.
1. Postpetition Losses: the Real Dollar Figures
8. According to the Debtors, their losses are not as great as they appear and they should
be able to continue their business in its current incarnation. However, even a cursory
examination of their analysis shows how wrong they are.
9. The Debtors reasoning is as follows: they say the $8,652,000 loss since the
beginning of the bankruptcy as stated in the MORs to which Novell referred in the Motion
should be reduced by (1) non-cash expenses, apparently because these are just accounting losses
not "real" losses; (2) reorganization expenses, since these have nothing to do with ongoing
operations; and (3) the costs of the Novell trial, again because this has nothing to do with
ongoing operations. They then calculate that the "real" losses are only $29,500 per month as
But almost every number in Debtors' calculation is incorrect or suspect:
Actual losses || $8,652,000|
| Non cash expenses || ($4,295,000)|
Reorganization expenses || ($2,305,000)|
Costs of Novell trial|| ($1,491,000)|
"Real" losses|| $561,000|
| Number of months || 19|
Average loss per month || $29,500|
Contrary to the Debtors argument, the loss of $8,652,000 set forth in the MORs
expressly represents operating losses before Reorganization Items.6 As such,
Reorganization Costs cannot be subtracted from the $8,652,000 loss.
The Debtors offer no support for the supposed value of non-cash items
($4,295,000) other than a vague reference to the MORs. Yet a scouring of the
operating expenses and related detail in the MORs fails to unearth information
indicating that non-cash expenses reach anything close to the Debtors' supposed
total. Generally, non-cash items consist of things like depreciation, amortization,
bad debt expenses and write-offs of property or long term assets due to
impairment arising from general or specific economic events. The MORs show
that expenses include depreciation ($208,000), bad debts ($77,000) and
impairment of assets ($253,000), totaling $539,000. Even assuming that it is
appropriate for the Debtors to exclude these non-cash expenses in their analysis,
they still have not pointed to anything in the MORs justifying the additional
$3,756,000. Thus, Debtors' $4,295,000 "non-cash items" total must be viewed
with considerable skepticism.
- Costs of the Novell trial are claimed at $1,491,000. Again, there is no evidence
to support this in the MORs. Further, this amount is particularly problematic as
total non-bankruptcy professional fees as shown on the MORs total only
10. Simply correcting the actual loss number and adjusting for the Novell trial costs to a
figure consistent with the MORs7 yields the following:
| Actual losses || $8,652,000|
Non-cash expenses|| ($4,295,000)|
Costs of Novell trial|| ($1,060,000)|
Number of months || 19|
Average loss per month || $173,500|
11. The resulting average monthly loss of $173,500 (or over $2 million per year) is more
than 5 times higher than the $29,500 average monthly loss claimed by Debtors8. Further, this
calculation would substantially change if ultimately it were determined that there was no support
for the full amount of non-cash expenses in the MORs. For instance, if the $4,295,000 were
reduced to $539,000 described above, the average monthly loss would increase to $371,200 (or
almost $4.5 million per year), more than 12 times the amount claimed by the Debtors.
12. Most importantly, these losses must be viewed in the context of the Debtors' cash
position. The MORs show total cash of $2,368,0009. Cash has been reduced by over $3.5
million from the $5,914,000 reported as of the Petition Date10. The total available cash of
$2,368,000 contrasts to total postpetition current liabilities of $4,841,000, not to mention
prepetition liabilities of $6,935,000. Revenue is quickly decreasing and accounts receivable are
down 55% (to $1,382,000) since the Petition Date. Almost two-thirds of the Debtors' accounts
payable are more than 90 days past due.
13. As these figures show, it also simply is not true, contrary to what the Debtors
contend, that they are paying their postpetition debts in due course. Only by not paying
reorganization expenses have they been able to pay other debts currently. Moreover, it is
irrelevant to the current issue that they are paying their debts as they come due postpetition if in
doing so they are not also equally replenishing their cash. Diminution of the estate is a balance
sheet issue, not a current item liquidity issue; it is concerned with how the creditors will fare in
the end, and in this instance creditors' fate is worsening by the day.
2. Postpetition Losses: Substantial
14. The Debtors' claims that these losses are not substantial are simply wrong, as the
foregoing analysis reflects. Nor is it any comfort that the Debtors have always lost money, that,
as the Debtors contend, "Compared to the Debtors' losses before bankruptcy, their losses are
hardly substantial." (Opp. 6.)11 In fact, the significance of the fact that a debtor continues to lose
money even with the protections of bankruptcy is quite the opposite. It is common sense that
companies that have always lost money and then lose even more money in bankruptcy are not
companies that hold promise for their creditors. Indeed, the prior question is whether the
Debtors' formula of comparing prepetition losses to postpetition losses necessarily is the correct
one. (Opp. 6.) The Debtor provides absolutely no support for that view.
15. "[R]ehabilitation" means, as Novell explained in the Motion, to "'put back in good
condition and reestablish on a sound basis.'" (Motion 13.) "'[V]isionary schemes'" and
"unsubstantiated'" hopes do not satisfy this heightened standard. (Motion 13.) Yet, that is all
the Debtors offer; indeed, the problem with these Cases is that that is all the Debtors have ever
16. Though taking many pages, the essence of the Debtors' argument is that if they win
their appeal of the Tenth Circuit argument in the Novell litigation, they will be rehabilitated
because customers and investors will flock to them. They all but assume they will win the
appeal, and spend many pages re-arguing the appeal later in the Opposition to try to convince the
Court of the merits of their case. Novell will address the latter below, although briefly. Here, it
will make a few points specifically directed at the Debtors' rehabilitation argument.
17. What is the evidence that all will be well with the Debtors if they win the appeal?
There is none. The Debtors simply assert that this will be so. This bald claim is reminiscent of
one they made a year ago when asking for one of their four exclusivity extensions: that once
investors and customers knew that the Debtors' appeal of Novell's judgment in the litigation was
on file, people who were holding back would suddenly come out of the woodwork to make a
reorganization plan possible. (Third Motion by Debtors under Section 1121(d) for Extension of
Exclusivity Deadlines (filed 8/11/2008, Dkt. No. 525) 5-6, 9-10; Transcript of 9/16/2008 Hrng.
(filed 9/26/2008, Dkt. No. 567) 7:10-8:11.) As the Court knows, however, that claim was never
heard of again. There were no supporters or investors, no sudden improvement in the Debtors'
business, and no plan. There was just silence until the Debtors' desperate defensive filing of the
wholly illusory Amended Plan as their exclusivity ran out yet again. There is no reason to
ascribe any greater accuracy to the Debtors' current claim about the effects of reversal.12
18. In this connection, moreover, it is important to remember that the best the Debtors
can achieve in the appeal is reversal for re-trial. Thus, "winning" the appeal would mean, at
most, that the Debtors face another long period of uncertainty and expense. That is the most that
the Debtors and their phantom allies can expect. That is not much.
In short, a reversal in August in the Tenth Circuit appeal, should that even happen, does
not equate to the Debtors'ipso facto being able to rehabilitate themselves.
III. THE LITIGATION AND THE APPEAL
19. The Debtors argue that reversal will mean rehabilitation by trying to convince the
Court that their claims against Novell, IBM and others are meritorious and, as subtext, that they
will therefore both win the appeal and any retrial, generating "billions" of dollars.
20. This is not the occasion for this Court to try to predict the outcome of the appeal,
much less the litigation as a whole. There is far too much for the Court to try to digest and
understand about this years-old litigation in the time available. The complexity confronting the
Court in any such enterprise is reflected in the fact that the Debtors employ 22 pages in their
Opposition to try to make their point. However, for the Court's information and to demonstrate
the weakness of the Debtors' claims, Novell will provide below a short account of the
21. In the 1980s, AT&T developed and licensed UNIX System V ("SVRX") to various
companies, who developed their own UNIX "flavors." In 1993, Novell paid over $300 million
to purchase UNIX System Laboratories, the AT&T spin-off that owned the UNIX copyrights and
licenses. In 1995, Novell decided to sell its UNIX business to Santa Cruz, another UNIX
vendor. Because Santa Cruz did not have sufficient cash to buy all of Novell's UNIX assets, the
Assset Purchase Agreement (the "APA") was structured so that Novell retained certain UNIX-related rights and received other consideration. Santa Cruz paid no cash. Instead, it transferred
shares of its stock worth approximately $50 million and promised a portion of future UnixWare
revenue exceeding certain targets (which were not met).
22. To bridge this considerable gap between the value of what Santa Cruz wanted to buy
and the purchase price of $50 million in Santa Cruz stock -- a differential of hundreds of
millions of dollars -- Novell reduced the value of what it conveyed by retaining significant
rights, including 95% of license royalties from SVRX (which amounted to $50 million in 1995
alone) and the UNIX copyrights on which that SVRX revenue was based. To protect those
license royalties, Novell also retained extensive control over SVRX licenses.
23. The negotiations of the APA and subsequent amendments confirm Novell's retention
of rights. As reflected in the plain, written drafting record, Santa Cruz twice asked for the
transfer of UNIX copyrights, and Novell twice refused. An early draft of the APA included "all .. . copyrights" in the list of assets transferred from Novell to Santa Cruz. Novell refused to make
such a transfer, instead editing the APA to place "[a]ll copyrights" on the list of assets excluded
from transfer and editing the list of included "intellectual property" to transfer only
"[t]rademarks UNIX and UnixWare as and to the extent held by Seller." That language became
the final, executed APA, thereby excluding "all copyrights" from the assets to be transferred.
24. At closing, Novell and Santa Cruz executed an Amendment No. 1 to the APA, which
edited the list of transferred and excluded assets, but left the exclusion of copyrights in place. As
a consequence, the bill of sale executed at closing -- the only document that ever transferred any
assets between Novell and Santa Cruz -- excluded all copyrights.
25. Later, the parties negotiated an Amendment No. 2. Again, Santa Cruz offered
language suggesting that "all copyrights" should transfer. Novell rejected Santa Cruz's proposal,
stating that Novell would confirm only Santa Cruz's right to use Novell's copyrighted UNIX and
UnixWare products, but would not transfer ownership of any copyrights to Santa Cruz through
Amendment No. 2. In the end, Amendment No. 2 revised the schedule of excluded assets to
read: "All copyrights and trademarks, except for the copyrights and trademarks owned by
Novell as of the date of the Agreement required for SCO to exercise its rights with respect to the
acquisition of the UNIX and UnixWare technologies." The parties never executed a bill of sale
or any other document purportedly transferring any copyrights to Santa Cruz.
26. In May 2001, SCO purchased Santa Cruz's UNIX business. Santa Cruz purported to
transfer its interest in UNIX and UnixWare copyrights to SCO, but warned SCO in the
accompanying representations and warranties that Santa Cruz "may not be able to establish a
chain of title from Novell." SCO announced that its acquisition of Santa Cruz's UNIX business
made SCO "the largest Linux company in the world," and that the deal would enable SCO to
"broaden and validate both the Linux and UNIX industries and communities, by providing open
access to its unified Linux and UNIX technologies."
27. However, after hiring a new CEO (Darl McBride) in 2002, SCO embarked on a new
business model called "SCOsource": abandoning its open access model, SCO claimed that
Linux contained SCO's copyrighted SVRX code. SCO attempted to extract license fees, suing
targets if they did not give in. SCO's new "SCOsource" campaign required SCO to establish
title to UNIX copyrights, despite Santa Cruz's warning. SCO hired a consultant, Michael
Anderer, to advise SCO on its intellectual property position. Anderer concluded that Santa
Cruz's "asset purchase" from Novell "excludes all patents, copyrights, and just about everything
else." Anderer warned SCO, "We need to be really clear about what we can license. It may be a
lot less than we think."
28. SCO thereafter repeatedly contacted Novell seeking a transfer of copyrights so SCO
could pursue its new business model. Novell rejected SCO's requests. Despite this rejection,
SCO launched a highly public campaign, claiming that Linux infringed SCO's alleged UNIX
rights. SCO sued IBM and others, and sent threatening letters to Novell and more than 1,000
other Linux users. Novell responded that SCO had failed to provide "meaningful notice of any
allegedly infringing Linux code," and that UNIX copyrights were owned by Novell, not SCO.
Other Linux users complained about SCO's vague claims. Merrill Lynch noted that "nearly all
the articles and papers published in connection with this very public dispute categorically reject
SCO's allegations of intellectual property ownership and infringement," and "SCO was even
fined last year by a German Court for continuing to claim that Linux violated SCO's intellectual
property." Industry analysts also reacted skeptically, noting that SCO's claims were "uniformly
29. SCO then sued Novell for "slandering" the title to copyright SCO claims to own. As
this Court is aware, the Utah District Court categorically rejected those claims. SCO takes great
pains to sub-divide its problems on appeal, arguing that a victory on any subdivision will turn the
company around. (Opp. at 10-15.) Nothing could be further from the truth. For SCO's
SCOsource "sue Linux users" business model to work, SCO must defeat every challenge it faces.
That precipitously uphill battle includes at least the following insurmountable obstacles:
- SCO must show it owns the SVRX copyrights.
30. As noted above, the APA excludes "all copyrights" from transfer. Amendment No. 2
suggests only that SCO might obtain the copyrights it "requires." SCO cannot persuasively
articulate why it "requires" any copyrights now -- 14 years after the APA was signed -- and
cannot point to any document that ever actually transferred copyrights to Santa Cruz or SCO
31. In the hopes of obscuring that stark reality, SCO offered testimony from various
witnesses who claim that, despite the explicit exclusion of "all copyrights" from the APA, the
parties intended to transfer UNIX and UnixWare copyrights to Santa Cruz. (Opp. at 23.) None
of these witnesses was familiar with the drafting of the actual APA language, and none had any
familiarity with Amendment No. 2. In opposition, Novell presented testimony from three people
who were actually involved in the drafting and negotiation of the APA and its amendments.
Each testified that copyrights were deliberately excluded from the transfer to protect Novell's
SVRX royalty stream and other interests. The only SCO witness who recalled drafting the APA
or its amendments admitted in a sworn declaration that SCO's claim that it had acquired
ownership of the UNIX copyrights was "incorrect" and that "neither Santa Cruz nor Novell ever
identified the specific copyrights . . . for which a transfer of ownership was 'required.'"
32. After an exhaustive survey of evidence, the district court concluded that "SCO has
not provided evidence from witnesses on the Santa Cruz side of the transaction with respect to
their review of the asset schedules. In fact, there is no evidence from any of Santa Cruz's outside
counsel and very little evidence from Santa Cruz's in-house legal department regarding the
drafting of the APA." The district court found that the APA, as originally executed,
unambiguously excluded "all copyrights" from transfer. The district court also found that the
APA, as amended by Amendment No. 2, was not intended to transfer copyrights and did not
meet the standards for a written transfer of copyright imposed by 17 U.S.C. § 204(a). To prevail
against those rulings, SCO must overcome the plain language of the agreements and the
testimony of those most familiar with the drafting of that language.
SCO must show that Linux infringes those SVRX copyrights.
33. From the start, Novell has challenged SCO to demonstrate its dubious claim that
Linux infringes enforceable SVRX copyrights. At every turn, SCO has failed to do so. SCO's
CEO Darl McBride originally claimed there were "millions of lines" of infringing code in Linux.
The Utah District Court has shown considerable skepticism toward those claims to date, striking
the vast majority of SCO's infringement case against IBM. What is left in SCO v. IBM is
roughly 300 lines of code, less than one 5,000th of a percent of the Linux kernel. IBM's pending
motions for summary judgment will likely dispatch that tiny remainder of SCO's infringement
- SCO must show it has the contractual authority to pursue IBM.
34. The SVRX royalties were critical in bridging the gap between what Novell wanted to
receive under the APA and what SCO could afford to pay. To protect those royalties, Novell
retained broad powers concerning SVRX license administration. Novell retained "sole
discretion" to require SCO to "amend, supplement, modify or waive any right" under "any
SVRX License" in "any manner or respect," and to waive such rights on SCO's behalf if SCO
failed to do so. SCO must show that Novell's broad, exclusive discretion somehow does not
extend to invalidate SCO's supposed revocation of IBM's paid-up SVRX license -- a license
which is itself "irrevocable" by its express terms.
- SCO must prevail in the SUSE arbitration.
35. SCO entered into a "UnitedLinux" joint venture with SUSE (later merged with
Novell), through which it gave SUSE (and other major Linux vendors) a "worldwide and
perpetual license" to distribute and sub-license Linux. To pursue any copyright claims against
Novell and any other UnitedLinux licensee, SCO will need to somehow avoid the plain language
of the UnitedLinux license and prevail at the currently-stayed SUSE arbitration.
- SCO will need to prove its purported damages.
36. SCO claims $135-$216 million in damages from Novell and over $1 billion from
IBM. A full rebuttal of these astounding figures exceeds the boundaries of this brief. It bears at
least noting that, in 2003, SCO purported to license to Sun the very same rights it claims are
otherwise worth billions of dollars -- the right to release an open-source operating system SCO
claims is based on its copyrighted code. That license cost Sun just $10 million, not $1 billion.
IV. THERE ARE NO UNUSUAL CIRCUMSTANCES
37. The Debtors argue that "unusual circumstances" relieve the Court of granting the
otherwise mandatory relief the Motions seek if the Court finds "cause" under section 1112(b)(1).
In essence, the Debtors argue that these Cases present "unusual circumstances" because they
have equity in their alleged billions of dollars of claims against Novell and others and because
other creditors are not clamoring for conversion or support the Debtors' opposition. These
grounds do not pan out upon inspection.
38. First, the Debtors have not established that they have equity in the form of billions of
dollars of claims. All that is certain is that the Debtors lost on their key claims against Novell at
trial and that the Novell litigation is now on appeal to the Tenth Circuit. At most, everything else
about the Debtors' claims is speculative. If any conclusions can be drawn about those claims,
they undercut rather than favor the Debtors. After all, the most obvious fact at the moment is
that Novell won. Furthermore, if the Debtors' prospects for recovering billions of dollars were
so marvelous, they would have attracted investment and even confirmed a plan based on the
potential litigation outcome (as they have tried unsuccessfully to do) long ago.
39. Second, the documents in Exhibit 1 not only are hearsay prepared in response to
undisclosed communications from the Debtors, but they do not expressly support the Debtors'
opposition to the Motions. Generally, all they say is that the authors like the Debtors' products.
However, to the extent that the interests of customers are relevant to the Motions, there is another
solution instead of denying the Motions. If the relevant parts of the Debtors' business really hold
some promise for some profit some day, a chapter 7 trustee will be able to sell them for the
benefit of the estate and those customers. Indeed, it may be the best thing for those customers
were these parts of the business divorced from the frivolous litigation that has consumed the
Debtors for the last six years.
40. The Debtors' citations to various cases to support their position are inapposite. For
example, in In re Orbit Petroleum, Inc., 395 B.R. 145 (Bankr. D.N.M. 2008), the Court found
"unusual circumstances" for a Debtor that had proposed a full payment plan based upon a
sufficient loan from its parent company. Here, there is no plan and, despite the Debtors'
assertions that their claims will make everyone, creditors and shareholder alike, "wealthy," no
demonstrated source of funding (reflecting that third-parties have no such confidence in the
Debtors' prospects).14 Moreover, the debtor in that case had been in chapter 11 only three
months when the motion to dismiss or convert was filed, not the 20 months that have passed in
41. Similarly, in In re New Towne Development, LLC, 2009 Westlaw 1110434 (Bankr.
M.D. La. April 24, 2009), a case arising from intra-company disputes that was begun by
involuntary petition, the court found significant equity in the debtor's real property after expert
testimony by appraisers. That case differs from this one in that it was only a month old when the
Court ruled on the motion to dismiss or convert and it involved an asset real property in
which there are recognized standards for determining whether there is equity. These Cases, by
contrast, are nearly two years old and the Debtors' claim that it has equity in its principal asset,
its alleged claims, is inherently speculative, as well as contrary to the result in the district court.
Notably, the New Towne court also commented that it would have dismissed the case as a bad
faith filing in the first instance had it been commenced by a voluntary petition by the debtor.
Hence, if there were unusual circumstances in that case, it clearly was just barely so.
42. In short, it is one thing to claim "unusual circumstances" when dealing with a young,
untested case where there is demonstrable value and even a plan; it is another when, as in these
Cases, the proceeding is aged by bankruptcy standards, has failed to produce a confirmable plan
with essentially the same pitch as the Debtors have been making since the Cases commenced,
and depends on a speculative asset. There are no "unusual circumstances" here. There is only
an attempt to speculate at the creditors' expense. After all, if the Debtors' rosy dreams about
how the litigation will end prove mistaken, who will compensate the creditors, Novell included,
for loss in their recovery from these Cases that further diminution of the estates will cause?
Section 1112(b)(1) prohibits that.
V. GROSS MISMANAGEMENT
43. In the Motion, Novell argued that there was cause for conversion of the Cases based
on gross mismanagement, consisting of the Debtors' failure to accomplish anything in these
Cases except waste money in their pursuit of retaining control of the litigation. The Debtors'
response is little more than to claim that what happened wasn't really so bad and that in any case,
they meant well.
44. But as the Debtors themselves acknowledge, their time at the wheel has been
characterized by "unhappy circumstances." To review the bidding, the Debtors: (1) brought the
York Sale Motion, which was premature not only in that the Debtors did not know what they had
to sell, but lacked any definitive documentation with York; (2) brought the York Compensation
Motion, which would have made a substantial gift of the Debtors' limited cash to York and
which the Debtors have yet to abandon; (3) brought the SNCP Plan, which again was based on
incomplete (indeed, virtually nonexistent) documentation and lacked any evidence of the
financial wherewithal of SNCP; (4) brought the SNCP Compensation Motion, which, like the
York Compensation Motion, was designed to entice SNCP to help them put some plan in front of
the Court, no matter how skeletal, by giving SNCP a very large upside just for being there; and
(5) brought the Amended Plan and the Auction Sale Motion to beat the exclusivity deadline that
it had promised it would meet, but which proved to be without substance.
45. These proceedings have cost the estate and the parties wasted time and wasted
dollars. None of them contributed towards prosecution of the litigation which, by the Debtors'
admission in the Opposition, was the reason they filed these Cases. A chapter 7 trustee could
have accomplished everything that the Debtors could have accomplished with the litigation
without wasting other estate resources. After all, the estate had its litigation lawyers on a
contingency arrangement, and they had every incentive to see the litigation through as well.15
46. Finally, to top things off, underscoring how these Cases will continue to be managed
if the Court denies the Motions, the Debtors have gone to the expense of preparing and filing
objections to the claims of Novell, SUSE, IBM and Red Hat in connection with the Opposition.
Yet, it has been clear all along that the Debtors eventually would do so. The question, therefore,
is why spend money for those filings now merely to emphasize to the Court that those claims are
disputed for purposes of the Motions? If the Court leaves current management in charge, this
latest decision further shows, the beat will just go on: management will continue to make bad
choices in its desire to hang on to personal control of the litigation. By comparison, a neutral a
chapter 7 trustee should bring an unbiased eye towards evaluating the litigation. In the
meantime, the Debtors' money-losing operations will cease.
47. That the Debtors may have meant well does not improve what must be a harsh
assessment of their poor judgment. Nor does it put back in the creditors' pockets the money the
Debtors have wasted in the Cases and will continue to waste if their management is left in
VI. NATURE OF THE RELIEF
48. Based on the Motions and the Opposition, and Novell's discussion in this reply,
Novell believes that there is "cause" to convert the Cases as the Motions seek. If the Court
agrees, it must convert, as the Motions request, dismiss, or provide some other remedy.
49. The Debtors beg the Court to do anything but convert based on their theory that a
chapter 7 trustee will, in essence, sell out the estate for a de minimis settlement. The Court
should reject that argument out of hand. The Debtors also contend that everyone else will be
better off with anything but conversion. Much of this argument depends on the very reasoning
that the Court will have rejected in finding "cause" (e.g., that the Debtors will win big in the
litigation and that other creditors and customers favor and will be happier with some other
result). Here, Novell will offer just a few comments on the other possible relief urged by the
Debtors: the appointment of a chapter 11 trustee, the appointment of an examiner, and dismissal.
50. Chapter 11 Trustee. A chapter 11 trustee would be a neutral just like a chapter 7
trustee. To that extent, such an alternative to the appointment of a chapter 7 trustee neither
benefits nor harms the Debtors or Novell and the other moving parties. But Novell believes that
conversion to a chapter 7 is more appropriate because it believes that it has shown that the rest of
the so-called business will just continue to lose money. There simply is no reason to postpone
shutting down these wasteful operations (including their compensation to management). A
chapter 7 trustee can always seek to employ former management or key employees to the extent
he or she needs them for advice on the litigation or how to sell the other assets (if they are
51. Examiner. The appointment of an examiner completely misses the point. What is
needed is to shut down the unprofitable operations and a neutral to assess the litigation as it goes
forward; that is, what is needed is for someone to be in charge who is not burdened by current
management's baggage and desire to stay in control of the litigation by keeping up the
appearance of real non-litigation business activities. An examiner does not fit the bill.
52. Dismissal. Perhaps the only appropriate remark by Novell about this radical
suggestion -- one even Novell did not make in its Motion -- is that it illustrates again the point
that management of the Debtors is concerned above everything else with remaining in control of
the litigation. As the Motion shows, that recipe has failed miserably in these Cases.
53. Nothing in the Opposition undercuts the demonstration by Novell and the other
parties bringing the Motions that it is time to change the course of these Cases by putting a
neutral in charge and stemming the Debtors' continuing losses. Indeed, all the Opposition does
is make it more clear that as long as current management remains, there will be no improvement
in the handling of these Cases.
Dated: June 10, 2009
YOUNG CONAWAY STARGATT & TAYLOR, LLP
/s/ Sean T. Greecher
James L. Patton (No. 2202)
Michael R. Nestor (No. 3526)
Sean T. Greecher (No. 4484)
MORRISON & FOERSTER LLP
Adam A. Lewis
MORRISON & FOERSTER LLP
Larren M. Nashelsky
Counsel for Novell, Inc. and SUSE GmbH
The original hearing date of June 12, 2009 was continued to June 15 at the Debtors' request.
Terms not defined in this reply will have the meanings ascribed to them in Novell's Motion for Conversion.
Although the Opposition was due by 4:00 p.m. Eastern Daylight Time on June 5, the ECF notification shows that it
was not actually filed until 11:46 p.m. Hence, instead of receiving the Opposition by early afternoon on June 5,
Novell did not have an opportunity to review it until the morning of June 6, a Saturday.
Right at the outset of the Opposition, the Debtors also argue, in essence, that the Court should deny the Motion
because IBM and Novell are evil players having in mind only to squash the Debtors, while the Debtors, by contrast,
are only selflessly looking out for others. (See, e.g., Opp. 1-4.) Of course, even if its premises were true, which
Novell disputes, this argument is irrelevant to the merits of the Motions: the Debtors' estates either are or are not
diminishing, they either do or do not have a prospect of rehabilitation, and they either have or have not mismanaged
the Cases. The Debtors' accusations do not explain why the Motions ask only for conversion rather than dismissal
when the latter would allow Novell to execute on its judgment forthwith. Nor do they square with the United States
Trustee also moving to convert; as the Debtors themselves admit (Opp. 4), that party's motives cannot be impugned
(evidently, they credit that office with more integrity than any possible chapter 7 trustee). Similarly, the Debtors'
reliance on the lack of participation by other creditors in the Cases does not mean that they speak for those other
creditors; there are all sorts of other possible explanations for this silence, including that the other creditors believe
that Novell and IBM are pushing the agenda they would follow or that they are loathe to put money into being active
in a case that they see as a looming failure. Notably, despite the Debtors' suggestion that the creditors will support
them in opposing the Motions, no such support has materialized (although a shareholder filed a letter in support of
the Debtors on June 8, 2009.
It bears noting that the quarter to which Debtors refer is the quarter Debtors took in $2.5M in money from Sun that
the Utah District Court has held SCO owed a fiduciary duty to remit to Novell.
The MORs scheduled losses including Reorganization Items at $11,521,000.
Even this sum gives the Debtors the benefit of the doubt since it assumes that all non-bankruptcy professional costs
relate to the Novell trial.
While there might be quibbling over some of the numbers, simply adjusting the calculation to remove only the
inappropriately included Reorganization expenses yields a monthly loss of $150,800, many multiples of the $29,500
monthly losses the Debtors claim in the Opposition.
$729,000 is classified as unrestricted; the remaining is classified as restricted.
Almost $3.3 million of this decrease relates to cash classified as unrestricted.
And, as just observed, the Debtors' loss figures are materially understated.
To the extent that the Debtors mean their Exhibit 1 to support the case that they have a real business to preserve,
they have offered nothing of substance. These "testimonials" are few and hearsay in response to undisclosed
communications from the Debtors. Moreover, one easily can imagine customers highly satisfied with a product on
which the vendor is losing money.
To the extent that the Court wishes to confirm that the following description accurately summarizes the positions
that Novell has taken, Novell asks the Court to take judicial notice of its brief in the Tenth Circuit appeal (Case No.
08-4217, filed 4/9/2009.)
The Court will recall that the SNCP Plan also involved loans, but the availability and terms of those loans were
undisclosed and unsubstantiated. The SNCP Plan therefore died a well-deserved death.
Creating a straw man that the moving parties are arguing that the Cases never should have been brought to protect
the litigation to begin with, the Debtors tout how they have reduced Novell's claim in the litigation. But the
Motions make no such argument. More importantly, that result was accomplished in the litigation, not in these
Cases. A chapter 7 trustee represented by counsel could have accomplished the same thing.