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Bankruptcy Court Rules Psystar Can't Use Checks or Deposit Slips As Is - Updated 3 Xs
Saturday, June 13 2009 @ 12:44 AM EDT

Psystar, as you know, has filed for Chapter 11 bankruptcy protection. Already, it's not going well.

One of the very first motions you see in a bankruptcy is the one that lets the company continue to use business forms, like checks, for example. Normally, it's a no-brainer, as you saw in the SCO bankruptcy, where the motion [PDF] was filed on September 14, 2007, at a September 17 hearing a second hearing was scheduled on that motion for October 5th, and the order [PDF] granted the motion that same day. Such motions are normally granted without debate.

Psystar's motion was just denied [PDF]. It can't use its checks or bank deposit slips. I take that as a sign that Apple's recent motion to lift the stay will likely be granted shortly. Apple argued that there can be no reorganization of Psystar's business, until a court rules on whether that business is even legal. Apple, interestingly, used the SCO bankruptcy as precedent in its motion.

Here's how it reads:

The Court having considered the contents of the Motion, taking specific judicial notice of the entire contents of the Court file, and hearing arguments of counsel in court, it is:

ORDERED that the Motion is DENIED with regard to the Debtor's use of check stock and deposit slips, and it is further

ORDERED that the remaining balance of the Motion is DENIED as unnecessary and moot. The Debtor may continue to use its business forms without the necessity of a Court Order.

Things don't look too rosy for Psystar, even in bankruptcy court, it appears. If the hope was to continue the business under the umbrella of protection in Chapter 11, while Apple was left at the courthouse door gritting its teeth, blocked from any ability to stop Psystar due to the bankruptcy's stay on litigation, which is Apple's accusation I think that dream just died, no matter how the court rules on Apple's motion to lift the stay. Clearly the judge has read that motion, and it will not be helping Psystar to keep a business in place that Apple has now told the court is infringing its rights. It's telegraphing, I suspect, that Apple's motion will be granted. In the SCO bankruptcy, Novell filed a motion to lift the stay pretty much immediately, early in October, and it was granted on November 27, 2007. SCO fought hard to get to reorganize first, but Novell prevailed, and it lookhttp://news.google.com/news?ned=uss to me like Apple is going to get its motion granted too, and then the litigation will continue to a resolution.

Update:

Here's Psystar's emergency motion [PDF] about using business forms, which you'll find also on Groklaw here. [ Update: We have found an earlier emergency motion, and I'll add relevant bits at the very end.] I'll show you the meat of it as text, so you can see what didn't persuade the court, and then after the double row of stars, I'll show you the language that SCO used in its comparable motion [PDF], thanks to a member looking it up for us and transcribing that section. Keep in mind that local rules can be different state from state, and Psystar filed in Florida and SCO in Delaware. Here are the local rules in Delaware [PDF]. Here's the website for the U.S. Bankruptcy Court for the Southern District of Florida, which is where Psystar filed. Click on the menu on the left on "Rules, Forms & Guidelines" and then on "Local Rules" for information on what Florida requires. The judge handling the bankruptcy is the Honorable Robert Mark.

To me, the most interesting part is where Psystar tells the court it owns valuable IP:

Debtor possesses valuable intellectual property which will be implemented in a well thought out and more profitable business plan.
Unless somebody like Psystar comes along and undermines their business by diverting their "valuable intellectual property" to their own business ends.

Here's the entire section in Psystar's motion:

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

BASIS FOR EMERGENCY RELIEF

4. The above-captioned debtors and debtors in possession (collectively, the “Debtor") requests an emergency hearing in this matter on or before May 26, 2009. By this motion, the Debtors seek the entry of an order authorizing the use of existing business forms. The Debtors request that this Motion be considered on an emergency basis as the relief requested herein is critical to the Debtor's continued operations. The Debtors respectfully request that the Court waive the provisions of Rule 9075-1(B) of the Local Rules, which require an affirmative statement that the Debtors made a bona fide effort to resolve the issues raised in this emergency motion, as the relief requested herein is urgent in nature and does not lend itself to resolution in advance of a hearing. ...

6. Debtor manufactures and distributes computers tailored to customer choosing. As a part of its devotion to supporting customer choice, Debtor supports a wide range of operating systems including Microsoft Windows XP and XP 64-bit, Windows Vista and Vista 64-bit, Linux (32 and 64-bit kernels), and the Mac OS. PSYSTAR generally refers to this custom tailored line of computers as Open Computers. Open Computers are personal computers that, in the case of the Mac OS, work like a Macintosh including the latest Macintosh operation system OS X.5 (a.k.a. Leopard). PSYSTAR Open Computers, again in the case of the Mac OS, run the OS X like that of a Macintosh from APPLE albeit on a computer hardware system offered at a considerably lower price and with considerably higher performance.

7. Due to the weakened economy, Debtor has had no alternative but to commence these Chapter 11 proceedings. Debtor sales have been greatly affected by the decrease in consumer spending. The financial crisis has also caused creditors to tighten up their terms and become more demanding for immediate payment. Debtor’ s vendors due to their own financial problems are not being able to supply all necessary items to allow Debtor to produce their product, thus, forcing Debtor to pay higher prices for parts in order to fulfill customer orders in a timely manner and to assure satisfaction with the product. These factors seriously contribute to the Debtor not being able to turn a significant profit in each sale.

8. Debtor has continued doing business in this manner with diminutive profit in hopes of a turn around in our present economy but find that the long term roots of this crisis can only be overcome by directly implementing the restructuring of Debtor s business plan and can only do so with the requested Chapter 11 protection. Debtor plans on emerging from this Chapter 11 with a strong and effective plan to make an increasingly higher profit and still provide the consumer with the product that they have grown to enjoy and trust. Debtor possesses valuable intellectual property which will be implemented in a well thought out and more profitable business plan. By doing so, Debtor plans to make payment of all debts and also, continue to provide support for its customers.

RELIEF REQUESTED

9. By this Motion, the Debtors seek authorization to continue using existing business forms. The Debtors seek to ensure the efficient transition to these Chapter 11 proceedings to avoid any disruptions and distractions that could occur.

10. To minimize the disruption to the Debtor’s operations during the pendency of this Chapter 11 case, and, in particular, during the early stages of this proceeding, the Debtor respectfully request an order authorizing the continued use of existing business forms.

BASIS FOR RELIEF REQUESTED

11.As set forth below, the Debtor seeks the entry of an order authorizing the Debtors continued use of existing business forms during this Chapter 11 case. The Debtor submit that relief is in the best interests of the Debtor, its estate and creditors and other parties in interest.

12. The Debtor uses various business forms in connection with their businesses including, without limitation, invoices, order forms, stationery, check stock, deposit slips, brochures, packaging and flyers.

13. The Forms do not include the terms DIP, debtor-in-possession or other reference to the fact that the Debtor is in a Chapter 11 proceeding. The Debtor would incur delay and expense if required to change its existing business forms.

14. It is critical that the Debtor avoids any disruption in its business operations.

15. As any disruption to the Debtor’s ordinary business affairs at this time could have a severe adverse impact on the Debtor’s ability to achieve its goals in these proceedings.

16. As such, by this Motion, the Debtor seek authority to use their existing business forms.

WHEREFORE, the Debtors request the entry of an order granting this Motion, authorizing maintenance and use of existing business forms, as requested herein, and granting such other and further relief that the Court may deem just and proper.

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

Here's the SCO language on its successful motion regarding forms, but note that the motions were filed in two different states. Psystar is in Florida, and SCO filed in Delaware, but still it's interesting to compare:

12. The United States Trustee for the District of Delaware has established certain operating guidelines for debtors in possession. One such provision requires a chapter 11 debtor in possession to open new bank accounts and close all existing accounts. The United States Trustee Guidelines also require that the new bank accounts only be opened in certain financial institutions designated as authorized depositories by the United States Trustee. This requirement, designed to provide a clear line of demarcation between prepetition and postpetition claims and payments, helps to protect against the inadvertent payment of prepetition claims by preventing banks from honoring checks drawn before the Petition Date.

13. The Debtors seek a waiver of the United States Trustee's requirement that the Bank Accounts be closed and new postpetition bank accounts be opened at depositories authorized by the United States Trustee. If strictly enforced in this case, the United States Trustee's requirement would cause disruption in the Debtors' activities and would impair the Debtors' ability to reorganize their business for the benefit of their estate and parties in interest.

14. Maintenance of the Bank Accounts will greatly facilitate the Debtors' operations in chapter 11. The Debtors' have in excess of 400 customers who make regular payments to the existing Debtors' credit card and lockbox accounts by check or electronic transfers, and closing these accounts, establishing new accounts in their place and instructing customers of the changes will substantially disrupt and delay the Debtors' receipt of payments from their customers. To avoid disruptions and delays in the Debtors' receipt of payments and the Debtors' payment of debts incurred postpetition, the Debtors should be permitted to continue to maintain the existing Bank Accounts and, if necessary, to open new accounts or close unnecessary existing accounts.

15. To guard against improper transfers resulting from the postpetition honoring of prepetition checks, courts have ordered banks, with limited court-approved exceptions, not to honor any checks drawn on a Debtors' accounts before the Petition Date. Subject to a prohibition against honoring prepetition checks or offsets without specific authorization from this Court, the Debtors request that the Bank Accounts be deemed debtors-in-possession accounts and that the Debtors be authorized to maintain and continue the use of these accounts in the same manner and with the same account numbers, styles and document forms as those employed during the prepetition period.

16. If the relief requested herein is granted, the Debtors will not pay, and each of their banks where the Bank Accounts are maintained will be instructed not to pay, any debts incurred before the Petition Date other than as specifically authorized by this Court.

Update 2: Interestingly, the Florida rules require that the petitioner provide specifics about what it has in the bank in order to get to use old checks:
Rule 9013-1. Motions. (J) Motions for Authority to Maintain Prepetition Bank Accounts. A motion seeking authority to maintain prepetition bank accounts shall include:
(1) a schedule listing each prepetition bank account which the debtor seeks to maintain postpetition;

(2) the amount on deposit in each such account as of the petition date; and

(3) whether the depository is an authorized depository pursuant to 11 U.S.C. §345(b).

If the debtor is unable to provide the foregoing information, the motion shall set forth the reason why such information is not available, and provide an estimate as to when the debtor shall be able to supplement its motion with such information.
So, what I can't help noticing is that I don't see any such information in Psystar's motion. Why not? Given the discovery struggles in the main litigation, one can't help but notice the lack of specifics or even any estimate of when it would be able to supplement the motion with the information. Psystar's motion references Local Rule 9075, which is the rule about emergency motions, and it reads like this:
Rule 9075-1. Emergency Motions.

If a motion or other paper requests an emergency hearing, the title of the motion or paper shall include the words "Emergency Hearing Requested". Unless a judge's procedures direct otherwise, at the time the emergency documents are filed, the party must also deliver to the divisional office clerk's office where the judge assigned to the case for which the documents are being filed is chambered, a Local Form "Emergency Filing Cover Sheet" (printed on red paper) and courtesy copies of the original documents filed. Any motion or paper requesting an emergency hearing shall set forth with particularity, under a separate heading in the text:

(A) the reason for the exigency and the date by which movant reasonably believes such hearing must be held; and

(B) a certification that the proponent has made a bona fide effort to resolve the matter without hearing.

Emergency hearings shall be held only where direct, immediate and substantial harm will occur to the interest of an entity in property, to the bankruptcy estate, or to the debtor's ability to reorganize if the parties are not able to obtain an immediate resolution of any dispute.

I confess to being mystified. Why would using old bank accounts be an emergency? I have no idea why they chose this course. It likely means there are many facts that we simply don't know, or don't know how to interpret properly, but over time we'll learn more, I'm sure. Eventually, the hearing transcript will become available, and then we'll have more information to work with.

[Update 3: Now, for the earlier emergency motion [PDF]. In that motion Psystar did list 3 banks, and the basis for its request to maintain its current bank accounts goes like this, right after it lists the requirements to close them and open a DIP account:

10. Section 105(a) of the Bankruptcy Code provides that "[t]he court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title." 11 U.S. C. Section 105(a). Extensive authority supports the relief that Debtor request. In other chapter 11 cases, courts have recognized that strict enforcement of the United States Trustee requirements does not always serve the purposes of chapter 11. Accordingly, courts, including courts in this District, often grant relief from these requirements and replace them with alternative procedures. See, e.g., In re Gemini Air Cargo Logistics, Inc., Case No. 06-10780-BKC-AJC (Bankr. S.D. Mar. 20, 2006) (Order granting motion for inter alia maintenance of existing corporate bank accounts and cash management system); ...

12. The Debtor uses an integrated, centralized cash management system in the ordinary course of business....Under the Cash Mangement System, funds are collected by the merchant processors and transferred to the bank account to soley handle these type of transactions (New Merchant Account) at TD Bank. The Cash Management System enables the Debtor to (a) better forecast and report its cash position, (b) monitor collection and disbursement of funds, and (c) maintain control over the administration of their various bank accounts, all of which facilitates effective collection, disbursement, and movement of cash.

13. As of the Petition Date, the Debtor maintains the following three (3) active bank accounts (the "Bank Accounts") in a "Authorized Depository" per the United States Trustee for Region 21:

a. [lists them, one for the website, one for an operating account, and a wire account to receive funds from overseas and who "can not fulfill the necessary security checks imposed by our Merchant processors". )
Uh oh. I wonder if it's the overseas wire transfers that may be the sticky wicket for them. Here's a press release that makes me wonder. Here's a bit more from the Office of Homeland Security. Assuming Psystar is on the up and up, it has nothing to worry about. If not, of course, it's now really and truly in the headlights. I think this likely explains the judge's order better than my first guess.

In any event, these are the accounts that they'd like to keep and be able to close if it thinks it's in the best interests of the estate. Keeping the accounts would keep the transition into chapter 11 "smooth and orderly and free from interference with continuing operations," they say. I see no amounts in the three accounts provided. The judge apparently didn't agree with Psystar's priority list.


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