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Red Hat Shows Up in the SCO Bankruptcy - Tells SCO, Not So Fast!
Tuesday, June 23 2009 @ 06:38 PM EDT

Red Hat has speedily responded to SCO's Objection to Red Hat's claim:

06/23/2009 - 816 - Response / Red Hat, Inc.'s Preliminary Response to Debtor SCO Group, Inc.'s Objection to Claim of Red Hat, Inc. Filed by Red Hat, Inc.. (Millar, James) (Entered: 06/23/2009)

06/23/2009 - 817 - Certificate of Service (related document(s) 816 ) Filed by Red Hat, Inc.. (Millar, James) (Entered: 06/23/2009)

Red Hat is letting the court know that it cares about its litigation, it intends to vigorously pursue it as soon as the bankruptcy stay is lifted, and its claim should not be thrown off a cliff without giving Red Hat notice and an opportunity to be heard.

Here's the meat of it:
5. The Objection provides little more than a statement of the Debtor's intention to contest the Red Hat Claim at some point in the future. Obviously, it provides no basis for the Court at this juncture to disallow the Red Hat Claim.

6. In addition, the Debtor has not provided an objection deadline or hearing date to start the procedural events attendant to claims litigation. Rather, the Debtor suggests that it intends to proceed by adversary proceeding. Thus, a response to the Objection is apparently not required at present to preserve Red Hat's rights with respect to the Red Hat Claim.

7. Nevertheless, for the avoidance of doubt, Red Hat files this response to make clear its intent to pursue the Red Hat Claim if and when this matter moves forward. Red Hat should be given specific notice and an opportunity to participate in any proceedings that seek to disallow or in any way affect the Red Hat Claim.

So, what's an adversary proceeding? It's a trial, but in bankruptcy court. Blech. Here are the rules regarding adversary proceedings. And here are the kinds of things that end up as adversary proceedings:
Rule 7001. Scope of Rules of Part VII

An adversary proceeding is governed by the rules of this Part VII. The following are adversary proceedings:

(1) a proceeding to recover money or property, other than a proceeding to compel the debtor to deliver property to the trustee, or a proceeding under 554(b) or 725 of the Code, Rule 2017, or Rule 6002;

(2) a proceeding to determine the validity, priority, or extent of a lien or other interest in property, other than a proceeding under Rule 4003 (d);

(3) a proceeding to obtain approval under 363(h) for the sale of both the interest of the estate and of a co-owner in property;

(4) a proceeding to object to or revoke a discharge;

(5) a proceeding to revoke an order of confirmation of a chapter 11, chapter 12, or chapter 13 plan;

(6) a proceeding to determine the dischargeability of a debt;

(7) a proceeding to obtain an injunction or other equitable relief, except when a chapter 9, chapter 11, chapter 12, or chapter 13 plan provides for the relief;

(8) a proceeding to subordinate any allowed claim or interest, except when a chapter 9, chapter 11, chapter 12, or chapter 13 plan provides for subordination;

(9) a proceeding to obtain a declaratory judgment relating to any of the foregoing; or

(10) a proceeding to determine a claim or cause of action removed under 28 U.S.C. 1452.

Here's a form [PDF] you fill out, with instructions, and page one and two explains what an adversary proceeding is basically about.

None of this tells us what SCO has in mind. They like to surprise us. But if they intend an adversary proceeding, they are supposed to start it like this. But it makes no sense to me yet, I confess. Normally, you see a debtor bring an adversary proceeding against a creditor if, for example, the creditor doesn't respect the automatic stay. So we'll have to wait and see why Red Hat thinks this is what SCO intends. But I believe I have captured the essence of the big picture: SCO doesn't want to pay Red Hat anything either.

Update: Here's SCO's Objection to Red Hat's Claim [PDF], as text. Reading it, I get the picture, I think. SCO wants the bankruptcy judge to handle the Red Hat litigation, and since it filed similar objections to IBM, Novell and SUSE's claims, it wants to get out from under them too. That way they can go out and sue new people, I suppose, without all those damages slowing them down.

I know. Well, if you were SCO, wouldn't you want this bankruptcy judge to handle all your affairs? Could this really be the plan? They are the amazings, so why not? Their position is that the appeal of Novell will annoint SCO as the victors after all, and all the other cases will then fail against them, so the claims are worthless. SCOthink.

And I note that "for the sake of brevity" they don't attach all the Red Hat filings. So here they are, in Groklaw's Red Hat Timeline. SCO claims all it said was things that Red Hat and IBM folks say too, like "UNIX was a prewrite of Linux." So it concludes that Red Hat's Lanham Act claims have no value. And the hope, I gather, is that the bankruptcy court will so rule and presto, SCO skips away from Red Hat's law suit with no threat of any damages hanging over SCO. Anyway, Red Hat wasn't damaged, SCO concludes.

You can read the filings, and judge for yourself. For example, here's Red Hat's complaint [PDF]. SCO already told the Delaware court they hadn't said anything wrong, when they tried to get Red Hat's complaint dismissed. The court did not agree.

[ Update 2: I think I just figured out what the game is here, or more precisely why SCO wants to have these claims tossed out. If IBM's, Novell's, SUSE's and Red Hat's claims are all disallowed, as SCO is asking, then they can't vote against SCO's proposed sale. All that would be left on the list, as far as large creditors are concerned, would be what I might humorously call friends and relations of SCO, not likely to vote against any plan of SCO's.]

Here you go, SCO's Objection as text:

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

IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE

________________________

In re:

The SCO GROUP, INC. et al.,1

Debtors.

_______________________

Chapter 11

Case No. 07-11337 (KG)
(Jointly Administered)

Objection Deadline: TBD
Hearing Date: TBD

DEBTOR SCO GROUP, INC.'S OBJECTION TO
CLAIM OF RED HAT, INC.

For the reasons that follow, Debtor SCO Group, Inc. objects to the allowance of the claim filed by Red Hat, Inc. ("Red Hat"), claim #150 ("Red Hat Claim"), against the estate of SCO Group, Inc.

Introduction

1. On September 14, 2007 (the "Petition Date"), the Debtors each filed voluntary petitions for relief under chapter 11 of the Bankruptcy Code.

2. This Court has jurisdiction over this Objection under 28 U.S.C. 157 and 1334. This matter is a core proceeding per 28 U.S.C. 157(b)(2)(B).

Background

3. On April 18, 2008, Red Hat filed the Red Hat Claim.

4. On August 4, 2003, Red Hat, Inc. filed a complaint against SCO Group, Inc., instituting a case which is pending in the United States District Court for the District of Delaware

under the case caption, Red Hat, Inc. v. The SCO Group, Inc., Civil No. 03-772. Red Hat asserts that the Linux operating system does not infringe on SCO Group, Inc.'s UNIX intellectual property rights and seeks a declaratory judgment for non-infringement of copyrights and no misappropriation of trade secrets. In addition, Red Hat claims that SCO Group, Inc. engaged in false advertising in violation of the Lanham Act, deceptive trade practices, unfair competition, tortious interference with prospective business opportunities, trade libel and disparagement. Before the case could progress very far, the litigation was stayed by the court, which requested status reports every 90 days on the status of a related case, entitled SCO Group, Inc. v. International Business Machines Corp., Civ. No. 2:03CV-0294-DAK, pending in the United States District Court for the District of Utah. If and when the stay is lifted, SCO Group, Inc. intends to vigorously defend the Red Hat lawsuit. In the alternative, and because the lawsuit is really at its inception, SCO Group, Inc. would be willing to have this Court try the claim in the format of a claim objection. In either case, however, SCO Group, Inc. will likely assert counterclaims against Red Hat, and therefore, if this Court agrees to hear this Objection on the merits, SCO Group, Inc. will file an adversary proceeding as a counterclaim to the Red Hat Claim.

5. SCO Group, Inc. rejects the notion that the Red Hat Claim holds any value. It is SCO Group, Inc.'s position that Red Hat's claims are not valid for several reasons: First, before SCO Group asserted its claims regarding Linux being an unauthorized derivative of UNIX against IBM, IBM had publicly announced, in an effort to promote and advance Linux into the enterprise market, that Linux was valuable because it is "derived from UNIX" and that "UNIX

2

was a pre-write of Linux". This is the basic point SCO Group, Inc. was making that forms the basis of Red Hat's claims. In other words, before SCO ever made any such statement, one of Red Hat's primary Linux customers and partners (and possibly the largest technology company in the world) had publicly stated the same thing that Red Hat asserts as the basis for its claim against SCO Group, Inc. This evidence shows that SCO Group, Inc.'s statements were truthful and known publicly before SCO Group, Inc. made its claims. Second, Red Hat's CEO publicly stated that SCO Group, Inc.'s allegations about Linux had caused "no slowdown whatsoever in the progress Linux was making." Therefore, Red Hat will not be able to prove that it has been damaged by any alleged statements by SCO Group, Inc.

Relief Requested

6. By this Objection, SCO Group, Inc. seeks entry of an order pursuant to section 502(b) of the Bankruptcy Code and Rule 3007 of the Federal Rules of Bankruptcy Procedure disallowing the Red Hat Claim.

7. Further, SCO Group, Inc. asserts that it did not engage in false advertising in violation of the Lanham Act, deceptive trade practices, unfair competition, tortious interference with prospective business opportunities, trade libel or disparagement. Indeed, SCO Group, Inc. asserts that Red Hat is a debtor of SCO Group, Inc. and not the other way around.2

Applicable Authority

8. Code Section 502(b) provided in pertinent part that:

3

The court, after notice and a hearing, shall determine the amount of [a] claim in lawful currency of the United States as of the date of the filing of the petition, and shall allow such claim in such amount, except to the extent that ... such claim is unenforceable against the debtor and property of the debtor, under any agreement or applicable law for a reason other than because such claim is contingent or unmatured.
11 U.S.C. 502(b)(1).

9. For the reasons set forth above, and for those reasons detailed in the Red Hat Litigation, SCO Group, Inc. submits that, pursuant to Code Section 502(b)(1) and Bankruptcy Rule 3007, the Court should disallow the Red Hat Claim.

Notice

10. Notice of this Objection has been given to the following parties, or in lieu thereof, to their counsel, if known: (i) the Office of the United States Trustee; (ii) parties requesting notice under Bankruptcy Rule 2002; and (iii) Red Hat. The Debtors submit that, in light of the nature of the relief requested, no other or further notice need be given.

No Prior Request

11. No prior objection has been made to this or any other court, other than in the United States District Court for the District of Delaware, where the Red Hat Litigation is pending.

WHEREFORE, Debtor SCO Group, Inc. respectfully requests that the Court enter an order (i) disallowing the Red Hat Claim and (ii) granting it such other and further relief as is just and proper.

4

Dated: June 5, 2009

PACHULSKI STANG ZIEHL & JONES LLP

[signature]
Laura Davis Jones (Bar No. 2436)
James E. O'Neil (Bar No. 4042)
Kathleen P. Makowski (Bar No. 3648)
[address, phone, fax, emails]

and

BERGER SINGERMAN, P.A.
Arthur J. Spector
Douglas A. Bates
[address, phone, fax, emails]

Co-Counsel for the Debtors

1The Debtors and the last four digits of each of the Debtors' federal tax identification numbers are as follows: (a) The SCO Group, Inc., a Delaware corporation, Fed. Tax ID. #2823; and (b) SCO Operations, Inc., a Delaware corporation, Fed. Tax ID. #7393.

2 For the sake of brevity, SCO Group, Inc. has not attached the court papers in the Red Hat Litigation (the "Red Hat Court Papers") which provide greater detail for this Objection. Prior to any evidentiary hearing on, or estimation arising from, this Objection, SCO Group, Inc. will provide, under a notice of filing, the Red hat Court Papers that support the Objection.

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