Oooh, ooh. [hand waves in the air] I know, I know! More than we've enjoyed?
We're working on the complete text for you, and we'll post it here as soon as we can. But how do you like the descriptive phrase, that SCO is shrinking to survive?
Here's the docket:
It has never mattered to IBM, I don't think, who owns the copyrights. IBM's position since the beginning has been that IBM didn't infringe any copyrights, regardless of who owns them.
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE
The SCO GROUP, INC., et al.,
Case No. 07-11337 (KG)
Hearing Date: June 15, 2009 at 2:00 p.m.
Objection Deadline: June 11, 2009
Re: Docket No. 778
REPLY OF INTERNATIONAL BUSINESS MACHINES CORPORATION
TO DEBTORS' RESPONSE TO MOTIONS TO CONVERT
THE DEBTORS' CHAPTER 11 CASES
creditor and equity security holder in these Chapter 11 cases, by
its undersigned counsel, submits this Reply to the Debtors'
Response [Docket No. 778] to the Motions of the United States
an order converting (but not dismissing) the Debtors' Chapter 11
cases to cases under Chapter 7 (the "Motions to
1. In response to the Motions to Convert, the Debtors argue (a)
even though they continue to bleed cash, lose customers and shrink
merely to survive and the only chance of rehabilitation is success
of the appeal in their nonbankruptcy litigation (the "Utah
litigation"), they should be given as long as it takes for the
Utah litigation to be resolved; (b) they really are
not losing all that much money and besides, they have lost money
every year that they have been in business; (c) their customers
really need them to survive, even at the expense of all the
creditors of the estate, because the creditors are not actively
complaining about the losses; and (d) a Chapter 7 trustee will
likely squander the opportunity to recover billions of dollars in
potential damages from IBM and Novell, among others. Along the way,
they ask this Court to determine that they are likely to prevail on
appeal, attempting to turn the hearing on a conversion motion that
this Court must decide on an expedited basis into a mini-trial of
the appeal of the Utah Court's ruling. Finally, they argue that the
Court should dismiss rather than convert.
2. IBM addressed each of these arguments in the IBM Motion to
Convert. IBM files this Reply to connect its showing and argument
in the IBM Motion to Convert to the Debtors' arguments in the
A. The Debtors Should Not Be Allowed to Remain in Chapter
11 Indefinitely Just to Pursue Litigation
3. At each stage of these Chapter 11 cases, the Debtors have
argued that they need only one more step in the Utah litigation for
them to rehabilitate. Their First Extension Motion filed on January
2, 2008 argued for more time to propose a plan until the Utah Court
reached judgment "even if the entire judgment is on appeal". (First
Extension Motion at ¶ 13.) Their Second Extension Motion filed
on May 9, 2008 argued for more time to reflect the results of the
May 2, 2008 trial conducted in the Utah litigation. Their Third
Extension Motion filed on August 11, 2008 sought an extension until
45 days after entry of final judgment (which this Court did not
grant) on the ground that entry of final judgment and commencement
of an appeal would facilitate a sale or recapitalization. In
arguing their Fourth Extension Motion, they stated in Court they
needed only until May 6, 2009 oral argument in the appeal.
4. Now, the Debtors argue that if only they can hold out until a
favorable decision in their appeal in the Utah litigation to the
United States Court of Appeals for the Tenth Circuit (the "Tenth
Circuit"), they will be able to rehabilitate, customers will
return, cash will be available, claims will be reduced and
investors will be knocking down their door. (Debtors' Response at
10-12.) However, they admit that a favorable ruling would result
only in returning the matter to the Utah Court for trial.
5. One is left to wonder, will the Debtors then argue for
further deferrals of these Chapter 11 cases, in stages, until the
Utah Court tries the case, until the jury returns a verdict, until
the Utah Court enters judgment, until the judgment is appealed,
until there is oral argument on the appeal and until the Tenth
Circuit decides? Is their present prediction that passing the next
stage of litigation will make rehabilitation possible any more
likely to pan out than their prior four predictions? Will the
process start all over for the IBM Case, which is not nearly so
advanced as the Novell Case?
B. The Debtors' Continuing Losses Provide Cause to
6. The Debtors freely admit that they are losing money and have
done so continually not only since the filing of these Chapter 11
cases but for nearly all of their corporate existence. (Debtors'
Response at 5-8.) But, they argue, there has been no "substantial"
diminution of the estate. To support their argument, they
mis-paraphrase the statute: "the court must find (a) a substantial
loss or diminution of the estate" (Debtors' Response at 4),
suggesting that the loss or the diminution must each be
substantial, and then focusing on whether their losses have been
substantial. (Debtors' Response at 6.) But the statute actually
provides that cause includes "substantial or continuing loss to or
diminution of the estate". 11 U.S.C. § 1112(b)(4)(A). Thus,
cause is shown by substantial loss to the estate, by continuing
loss to the
estate or by diminution of the estate.5 The Debtors admit at least the
latter two grounds. There has been continuing loss, and there has
been diminution of the estate. (Debtors' Response at 5-6.)
7. Continuing losses for years before a Chapter 11 case does not
render "continuing loss to the estate" inapplicable as a cause for
dismissal. Indeed, Chapter 11 is designed for companies that have
suffered continuing losses before bankruptcy. However, section
1112(b)(4)(A) shows that Chapter 11 is designed to accommodate
companies that are able to eliminate continuing losses. After 19
months, the Debtors have not been able to do so. Their Second
Disclosure Statement suggested that losses would continue, even if
the Second Plan of Reorganization were confirmed. (Second
Disclosure Statement at 40.) The only hope the Debtors' Response
now offers to reverse the trend of continuing losses is success on
the Tenth Circuit appeal, a matter addressed above.
8. Section 1112(b)(4)(A) also requires the absence of a
reasonable likelihood of rehabilitation to establish "cause". The
Debtors' four failed Chapter 11 exit attempts show the absence of a
reasonable likelihood of rehabilitation. The opportunistic
arguments in the Debtors' Response do not credibly show otherwise.
The Debtors' Response argues that a reversal on appeal of the Final
Judgment against SCO in the Novell Case entered by the Utah Court
November 20, 2008 would revitalize that business by re-attracting
customers. However, the Debtors' withdrawn Second Disclosure
Statement projected declining revenues for UnixWare and OpenServer
products (Second Disclosure Statement at 40), without any mention
that a reversal on appeal would improve those results.
C. The Debtors' Customers' Needs Should Not Mitigate
9. The customer letters in Exhibit 1 to the Debtors' Response are
hearsay and inadmissible, and IBM intends to object to their
consideration at the hearing on the Motions to Convert.
Fed R. Ev. 802.) Even if they were admissible, however,
they do not provide the unusual circumstances to establish that the
requested conversion is not in the best interests of the creditors
and the estate, nor do they establish a sufficient basis to support
dismissal as the preferable alternative to conversion. The Debtors'
argument that they should continue operations to protect their
customers rather than their creditors, at the expense of what
little cash remains in the estate for creditors, flies in the face
of the purpose of Chapter 11. That the creditors have not objected
is little surprise. As Congress recognized, creditors are often
apathetic and uninvolved. That is one of the reasons Congress
established the United States Trustee system, to act as a watchdog
when creditors do not have sufficient interest to do so.6
The United States
Trustee here has moved for conversion. Creditor apathy does not
justify dissipating the remaining assets of the estate.
D. A Chapter 7 Trustee Would Not Squander
10. Finally, the Debtors argue that this Court should dismiss
rather than convert, in part because a "Chapter 7 trustee might
quickly seize upon a de minimis settlement". (Debtors'
Response at 47.) Leaving aside the Debtors' inappropriate impugning
of the professionalism of the Chapter 7 panel trustees in this
District, Bankruptcy Rule 9019 requires this Court's approval of
any settlement. The Debtors, their creditors and their shareholders
may all object to any settlement. Objections are not disregarded.
indeed, just last week in this
District, the court refused to approve a major settlement over
the objection of creditors. (See In re Spansion,
Inc., 2009 WL 1531788 (Bankr. D. Del. June 2, 2009).) IBM
believes that it does not have any liability to the Debtors or the
estates and may in fact have one of the largest claims against the
estates. Fear that a Chapter 7 trustee, after a dispassionate and
independent review, may agree with that assessment is not a form of
"unusual circumstances" to excuse conversion.
For the reasons set forth above, IBM respectfully requests that
the Court grant the Motions to Convert these Chapter 11 cases to
Dated: June 10, 2009
POTTER ANDERSON & CORROON LLP
Laurie Selber Silverstein (No. 2396)
- and -
CRAVATH, SWAINE & MOORE LLP
David R. Marriott
INTERNATIONAL BUSINESS MACHINES CORPORATION
Alec S. Berman
Attorneys for Creditor International Business Machines
||Capitalized terms used in this Reply have the meaning ascribed
to them in the Motion of International Business Machines
Corporation for an Order Converting the Debtors' Chapter 11
Bankruptcy Cases to Cases Under Chapter 7 of the Bankruptcy
Code (the "IBM Motion to Convert") [Docket No.
||See Motion of the United States Trustee to Convert
Cases to Cases Under Chapter 7 [Docket No. 750].
||See IBM Motion to Convert.
||See Novell's Motion for Conversion [Docket No.
||"If ... the debtor is operating with a sustained negative cash
flow after the commencement of the case, these facts are sufficient
to justify a finding of ... 'continuing loss to ... the estate.'" 7
Alan N. Resnick & Henry J. Sommer, Collier on Bankruptcy ¶
1112.04[a][i] (15th ed. rev'd 2005) (footnotes omitted).
||For this history generally, see 1 Alan N. Resnick &
Henry J. Sommer, Collier on Bankruptcy ¶ 6.34- (15th ed.