If you recall, the hearing was about SCO's request to extend the time to exclusively present a plan of reorganization. It had some elaborate math to justify the request, even though a child looking at a calendar would say its time for exclusivity had clearly run out.
It turns out there was a lot of confusion and discussion about it at the hearing, but in the end the judge ruled against SCO. Both IBM and Novell argued that SCO should be sent to Chapter 7 or that a Chapter 11 trustee be appointed, so the SCO ship wouldn't be run into the ground leaving nothing for creditors like them. The judge ruled that there would be no extension of exclusivity, and that no matter what the exact days' counts were, it was time for others to offer their plans. He believed the time for exclusivity had terminated anyway. So he set up a schedule for motions from IBM and Novell to be filed.
SCO had shown up once again with a plan that wasn't quite ready to be filed, with glowing stories about how wonderful it would be when it was fully baked. I think you'll enjoy listening to the IBM and Novell attorneys respond to that. And when you read SCO's lawyer lay out SCO's appeal strategy and hopes, I think you'll be appalled. Unless, like me, you now find it simultaneously appalling and amusing, sort of in the way you find it both amusing and appalling when your young child tells you a real whopper, trying to get something the child knows you are unlikely to agree to.
I read the first part, got disgusted, so then skipped to the end, the part about the time for exclusivity being terminated, and then worked backwards bit by bit as I could endure it. I confess I find Arthur Spector a bit more appalling than hilarious, as he fights for SCO. Your equation may vary. He is undeniably skillful, but what he says is so outrageous to me, my brain and heart got increasingly aligned in fury, so I had to take it in in small bits. I'm only human. I found Novell's clear speaking very refreshing, and when IBM's attorney stands up to speak, you'll see an attorney who remains low-key in style because he knows he has the law on his side. So he is as effective as shark's teeth, in that he reminds the judge of how the law is supposed to work and how strange SCO's opening remarks actually were. That's how you get a judge's attention, of course, reminding him about the law. That's what hems in even a judge. IBM's lawyer was one of the principal authors of the Bankruptcy Code and the Bankruptcy Reform Act of 1978, among many other accomplishments, and I'm sure Judge Gross knows that. Note IBM objects to Mr. Spector's presentation, saying whether it was attorney testimony or opening statement or whatever it was, he objects.
I suspect the foundation was being laid for an appeal, if necessary. But it turned out to be unnecessary. Of course, from Spector's position, it was worth a shot, and once said, it's in the judge's mind. Oh, if only! Spector seems to be saying... If only you'll give us just a little more time, our ship will come in, and what a tragedy if SCO isn't around to see its ship come in. You and I might not find it all that sad, but to Mr. Spector, it's pitiful to contemplate. There are billions to be made, if all the stars align SCO's way, he says.
Yes. Billions. He said that. So SCO's malicious dream is alive and well in SCO's fantasy world. It has, apparently, learned absolutely nothing from real life. Like a little child.
The judge's order begins on page 53, and notice what he confesses at the very beginning, that he had to take a five-minute break to think:
Whether the current plan is real or not is yet to be established, but at least it's on paper. Well, a sales plan is. I have yet to see anything that indicates there is a viable business going forward either for SCO or for unXis. As is admitted in this hearing, SCO's Unix business is a dying business. And while Mr. Spector waxes poetic about SCO's Franklin Covey iPhone app, I notice in the sales plan's exhibits, that contract goes to unXis. Perhaps IBM has subpeonaed unXis to get some answers to the obvious question: what's the plan? Is it real? Is it viable?
What is it Spector said in those opening remarks? Here are some of the main points:
There is certainly no evidence in the IBM case that I've ever seen that says SCO owns any infringed UNIX copyrights. Even if any of the ones in the IBM litigation had been infringed, the Utah court already ruled Novell didn't transfer any copyrights to SCO in 1995 when they did the deal. And Novell isn't looking to sue IBM or anyone over those copyrights. But here's the point: even if SCO on appeal was found to have some or even all of the copyrights at issue, it would make no difference to IBM, which holds the position that there isn't any infringed copyright in the case, no matter who owns them.
For Spector to say what he did is... well, let's just say it's not the complete picture. Maybe he hasn't read the IBM materials carefully enough.
It's too late to introduce new discovery, specifically new allegations of infringement, in the IBM case. SCO could try. It tried before, but the Utah court was not receptive.
For a reality check, you might like to reread this article about its behavior regarding discovery and the sanction SCO was given in the order on that page.
And as for what the marketplace really thinks of SCO's chances, let's not just guess. I point you to its customer base, shown in SCO's latest filing, and check the dates of any new business since this began in 2003. I think it speaks more loudly than Spector's glowing supposings. Or go to Google. Type in SCO. See what the world and its dog really thinks of SCO's ownership rights.
As for the expedition plate of spinach he serves up here, you might like to read what really happened, although it's interesting that he mentions a clerk helping SCO out. I can't help but wonder if Spector spilled some beans. Here's the Groklaw Novell Appeal Timeline page with all the filings and events in the appeal. SCO first filed a motion to expedite on January 23rd. Note its title: Appellant's Unopposed Motion to Expedite Appeal, and it ends with these words:
I think you can compare for yourself what Spector told the court with what really happened. No need for me to put into words, except to express my deep feelings that I find it a crying shame when a litigant can't prevail without embroidery. In this case, it didn't prevail even with it, but who is to say it didn't plant a seed that inclined the judge at the next hearing to give SCO one last chance?
Since it's wise to have a ruler's edge to measure his words by, here are all the Berger Singerman bills from January onward, so you'll have them all in one place. Spector, for example, says in the hearing that there were several interested parties that contacted the company after January 8. I do see some long distance phone calls around January 8, but they are to numbers Berger Singerman's shown on its bills since at least October of 2007. That's not necessarily a mismatch, just an observation. You may notice other interesting bits. Here are the bills from January to May:
UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE
THE SCO GROUP, INC.,
Case No. 07-11337-KG
March 30, 2009
TRANSCRIPT OF HEARING
BEFORE THE HONORABLE KEVIN GROSS
UNITED STATES BANKRUPTCY COURT JUDGE
|For the Debtor:
the SCO Group, Inc.
|JAMES E. O'NEILL, ESQUIRE
KATHLEEN P. MAKOWSKI, ESQUIRE
PACHULSKI, STANG, ZIEHL & JONES, LLP
ARTHUR J. SPECTOR, ESQUIRE
BERGER, SINGERMAN, P.A.
|For Alan P. Petrofsky
||ALAN P. PETROFSKY, PRO SE
||DIANA DOMAN TRANSCRIBING
Proceedings recorded by electronic sound recording; transcript
produced by transcription service.
|For Novell, Inc.
||ADAM A. LEWIS, ESQUIRE
MORRISON & FOERSTER, LLP
|For IBM Corp.
||RICHARD B. LEVIN, ESQUIRE
CRAVATH, SWAINE & MOORE, LLP
|For U.S. Trustee
||JOSEPH J. MCMAHON, JR., ESQUIRE
I N D E X
Transcriber's Note - Alan P. Petrofsky appears
(Court in Session)
THE CLERK: Please rise.
THE COURT: Good afternoon, everyone. Please be
COUNSEL: Good afternoon, Your Honor.
THE COURT: Thank you. Good to see you all. Mr. O'Neill,
MR. O'NEILL: Good afternoon, Your Honor.
THE COURT: It's a double header for you today.
MR. O'NEILL: It is a double header. Nice to see you again
in such a short time span. Your Honor, James O'Neill for the record
appearing today on behalf of the debtors, The SCO Group, and I'm
joined today by my colleague, Kathleen Makowski, and my co-counsel,
Arthur Spector, who the Court knows.
THE COURT: Welcome back, Mr. Spector.
MR. SPECTOR: Thank you.
MR. O'NEILL: Also in the courtroom from the company who
the Court knows are Darel McBride and Ryan Tibbits.
THE COURT: Yes. Welcome, gentlemen.
MR. O'NEILL: Your Honor, we have a couple of matters that
are on the agenda for today, and I'm going to -- I think that
really, we're going to start with the status conferences for items
number 2 and 3 to give the Court a picture of where we are, and Mr.
Spector is going to give the status report to the Court.
THE COURT: Thank you, Mr. O'Neill.
MR. O'NEILL: Thank you.
THE COURT: And certainly, that relates I think to item
number 1. So it's probably helpful to do it in this order.
MR. SPECTOR: Your Honor, I don't know the Court's
preference. Do you want to take appearances first, or do you want
THE COURT: No. That's all right. Everyone has returned, I
think, and I know who -- who everyone is, and they'll just --
MR. SPECTOR: Thank you --
THE COURT: -- rise when they're ready.
MR. SPECTOR: Thank you, Your Honor. Once it became public
knowledge that SCO was planning to auction its business UNIX which
was, of course, public on January 8th when we filed a plan that
proposed that, various parties, including prospective purchasers
approached the management and asked SCO to take the auction away so
they could do a deal privately.
Included within this group were several players that were --
I'll call them interested in the company pre Judge Kimball's ruling
of July 16, 2008 and some that were also there after that. So we're
not necessarily dealing with new players, but some of the old
players came back and said don't auction it off to the public, we
still want to buy it. Okay?
Eventually, SCO implicitly acquiesced --
THE COURT: It sounds worse than it is, I think.
MR. SPECTOR: I didn't --
THE COURT: That rumbling -- that rumbling is not
MR. SPECTOR: Yeah. I didn't -- I didn't need that today,
and I had no lunch. So it's not that either, sir.
THE COURT: All right.
MR. SPECTOR: By withdrawing -- eventually, SCO implicitly
acquiesced by withdrawing the motion that would set the hearing on
the 16th of this month asking for approval of bid procedures. These
talks were making sufficient progress so that we had hoped to have
definitive documents that would have made a status report
unnecessary. I -- I concede and to say that I spoke with Mr. Lewis
on behalf of Novell, Mr. Levin on behalf of IBM, several weeks ago
saying we are withdrawing that because we have talks in the works
and I hope to have a disclosure statement fixed in a fashion that
you would find less objectionable than what you had previously seen
and see if we can work out any differences so that on March 30th,
we can come in and say we kind of worked those things out and here
is our disclosure statement and let's have approval, and I told
them it's not going to be a lot like the January 8th version,
because we have a private sale going now and so forth, and I -
I only say that because I believed it based on the status of the
talks at the time.
Those talks have not come to the level that would be necessary
for me to make any changes to the documents because I'd be writing
and then erasing and then writing and then erasing, and I promised
Your Honor some time ago with -- in the wake of another fiasco that
I would not burden this Court any further with plans or disclosure
statements based on LOI's and that's what we've been offered, and
I've told that to our negotiating partners on the other side,
saying, you know, LOI doesn't -- isn't worth anything. Well pointed
out a year ago in one transaction.
So since I don't have such definitive documents, we don't have
an amended disclosure statement, and we don't have, of course,
anything worked out with IBM and Novell. In addition, there is
another reason why we don't have an amended disclosure statement,
and that's because we don't have our negotiating partners at the
place we want them. The deal isn't at a point that we want to close
Now, I don't want to -- you know, I don't want to make
disclosures about the status of negotiations, but we're not happy
with where they are. Although there is progress, we're not there
We had -- one of the bidders had a counsel that was going to
join at this hearing and testify -- not testify but
speak to their -- her client's continuing interest in doing a
deal, but she had a conflict and just said that she couldn't make
it but we could relay that, of course, but that's obvious.
In a matter of five weeks, SCO will finally have its biggest day
in court in its history. It's May 6th, just around the corner. It's
the date set for oral argument on SCO's appeal of the August 10,
2007 summary judgment ruling in the Novell litigation, and the
subsequent money judgment rendition in -- on July 16, 2008.
How did we get a May 6th hearing date, oral argument hearing
date on an appeal in which the record wasn't even submitted until
January? Answer, following the suggestion of a clerk, I guess it
was, at the 10th Circuit that maybe this case was worthy of
expedited attention, SCO filed a motion for expedited briefing,
which was granted, I don't know, a couple days later.
Within days there -- then SCO filed its brief on March 5th, and
the very next day, the 10th Circuit set oral argument for May 6th.
I think that's unusual.
The order also discouraged, and that's a word I - that was in
the order, quote, discouraged Novell from seeking an extension of
its time to file a responsive brief. Wouldn't it be a shame if SCO
ultimately wins the appeal in the 10th Circuit but had already sold
all of its UNIX assets just to stay in business or to see -- or
stay alive to see that day
come to fruition?
Before the August 10, 2007 ruling, SCO had a market
capitalization of $35.0 million. Within weeks after that ruling,
the price of SCO stock plummeted so that the market capitalization
just a few weeks after that ruling was
1.5 million, approximately $1.5 million. If the ruling is
overturned, it's fair to say that the share value will improve
dramatically. Consequently, SCO's ability to obtain conventional
financing would improve markedly, or if it's still then inclined to
do a sale-based transaction, the demands that SCO will make to do
it will be far more commensurate with the interests of its
constituents and what's being discussed today, and this is all
The three underlying factors that lead to these conclusions are,
one, the $3.5 million judgment against just, against SCO by Novell
would be gone. That's part of the premise of the argument.
We believe that the marketplace has always felt - always felt
that SCO clearly owned the UNIX copyrights, the UNIX technology all
together including the copyrights. Even certain IBM documents
acknowledge that SCO was the owner of the UNIX copyright, and that
will all be in evidence when we get to a trial.
We believe the market still holds this view, but it's -- it's --
the firmness of its view was shaken by the
August 10, 2007 ruling. By removing that opinion, the market
will likely reassume the validity of SCO's ownership in the
Third, major customers went into a holding pattern upon the
release of that ruling, not knowing what to do. Just wanted to sit
it out. Now, they didn't necessarily quit UNIX and go to some other
platform, because, frankly, it's a very major task for them to do.
I'll get into that a little bit later, but there were loads of
orders for other upgrades and things that were frozen. That's
revenue that's sitting on a shelf waiting to come to SCO if the
fear that the customers have is taken away.
When we first came before you in September, 2007, we talked a
bit about SCO's future technology, the Mobility business through
its subsidiary, Me, Inc. The technology at that time had not been
fully developed nor marketed. It was a future technology.
In the worse economic times since the first great depression,
SCO finished the development of the products and began their
marketing in earnest, but due to the economic climate -- climate,
SCO's strategic partners in this endeavor, folks like Day-Timer,
FranklinCovey, RIM, and Rogers Communications either pulled out or
slowed down their marketing efforts because of their own financial
problems. Well, I won't say problems, but concerns.
Now, both FranklinCovey and Apple, a new player in this
marketplace, in this space, are aggressively marketing the products
that have now come to market. Revenue stream has now commenced.
This is no longer future technology. It's present technology.
Remember where we were in September of 2007 and what hill we had
to climb to get revenue. There were people who were not friendly
disposed towards the company who said that the Mobility products
were a fiction. There really wasn't anything there. It was like
Billy Celestes, if you're old enough to remember.
THE COURT: I remember.
MR. SPECTOR: The oil from one place to another. If you
came and looked, it wouldn't be there. There are other apt
analogies since then I know. It's not true. It not only exists, but
it's being marketed and revenues have started to be produced.
As a result of this success, early success with the first
product that SCO delivered, it's all FC Tasks. FC stands from
FranklinCovey. Tasks is jobs. It's the first application SCO did in
conjunction with FranklinCovey for the iPhone. That application
made it to the top 20 paid productivity applications for the iPhone
in days coming out of the market. It's still in the top something,
but it -- it is -- and that's before FranklinCovey sent out the
e-mail to its loyal base of
Franklin customers to push the thing. This is just word of mouth
at this point.
SCO now has a pipeline. Oh, by the way, this is on the iPhone.
There is 20.0 million of them approximately last count on the
marketplace. This is a paid additional application you can get for
your iPhone, and this is in the top or was in the top 20 last we
looked, I guess, of paid productivity applications for the iPhone.
That's without -I'm repeating myself. That's without the pushing of
FranklinCovey. It's brand new. I think it only hit the market
SCO now has a pipeline of new products being developed for other
companies for the iPhone, people coming to SCO and asking for that.
That's with all of the problems, A, in the world marketplace, B,
with this company being in Chapter 11 and facing the -- the
competition that it has and everything else in its way.
Now let's talk about UNIX. After all, that's what this company
was all about. Thousands of SCO customers, loyal SCO customers have
millions of SCO servers to run their basic business applications.
It's a major task, as I said earlier, for them to switch off of the
UNIX-based system to something else. They would have to rewrite
their own business applications that run on UNIX. They have lots
and lots of business applications, and I suppose some companies
McDarel's, have the wherewithal to do it. A lot of them don't
have the wherewithal to do that or not easily.
They would love to have the ability, all of these customers
would love to have the ability to run their applications on a
variety of platforms if they could of hardware and software
configurations. SCO has developed a new product that will be
released in a matter of weeks that answers this demand.
Although UNIX sales have been on a steady decline for years,
this product is designed to reverse that trend. The product is
called SCO UNIX V. V is for virtual. It will allow SCO customers to
access Windows operating system overtop of the existing UNIX, which
would save them the necessity of making the changes.
So that's what's happened. This is a status report. I'm telling
you what's happened in the core business, and - and the litigation
is one of the core businesses unfortunately to say in the SCO -- in
the SCO company. We touch on UNIX, Mobility, the litigation. It's a
three-legged stool largely, and it's largely been a race against
time as the Court well knows.
I'll now turn to the -- well, that's the status report. We
didn't touch about the third -- I think item 1, we're just talking
about the exclusivity, but it kind of runs into that. If you want
me to sit down now and stop or I can --
THE COURT: No. Continue. Continue, Mr. Spector. That's
MR. SPECTOR: Thank you. As we said at the hearing on the
first-day motions in September, 2007, SCO filed this case to
protect itself from a $40.0 million plan by Novell with the poison
dagger of a constructive trust that would immediately shut the
This would have been calamitous to the thousands of loyal
customers that we talked about, because they wouldn't have anybody
to provide ongoing support or upgrades. As they get new
applications, business applications for the business to run on
UNIX, we have to do things to make it run on UNIX, and there
wouldn't be a SCO company to do that. So that was one of the major
considerations. If we go out a business, a lot of people would be
harmed by that.
Second, it would have killed SCO's budding Mobility business. At
the time, there was -- the products had been mostly developed, and
we were on the verge of coming to market with product, and then, of
course, it slowed down because of the economy, but we finally had
gotten there, and so that goal has been realized, and third, it
would have cost SCO its valuable intellectual property rights,
which when and if we get to court and prevail at a trial can be
worth billions of dollars. That's what this case is largely
Chapter 11 has helped SCO achieve these objectives so
far. It's still here. We are now on the last lap of the race
against time. Therefore, we are making an ore tenus motion for the
last extension possible.
Under 1121(d)(2)(B), the Court may allow an extension of the
time for exclusivity under 1121(b)(3) for 20 months. In this case,
that's May 14th. Then we can't ask you for anything more except
confirmation of a plan when that date comes, and that -- I know
that the motion we had on file said March 16th, but we all know --
first of all, we asked for January 16th for the exclusivity. We
filed on January 8th. The dates got all jumbled up, but let's look
at the statute. The statute doesn't say anything about the minutia
of facts that we have on dates. Simply says the debtor has to --
has exclusivity if the Court so grants it for not longer than 20
months from the date of the order for relief for getting a plan
Now, I am fully aware that if we filed a plan April 15th and we
went to a disclosure hearing somewhere around May 14th, and not
shortening schedules, just the normal 30-day, days plus a little
bit of notice, if we did that and we got here May 14th and the
Court granted approval of that disclosure statement, on May 15th,
we wouldn't have exclusivity anymore. I know that. I can't change
that. Congress thought it was wise to put those limits in, and we
live with them. We have to live with them, but that's -- I hate to
-- I'm thinking words like Dayenu. I'm thinking words like Alavai.
I'm thinking of
words -- and I don't know how you're going to put that on the
I'm thinking that that will suffice us. Okay? Because at that
point, we're out of the gate, we've got the horse in front, and we
can -- and we can get to a confirmation in June, if necessary, but
ahead of any competing plan, unless the Court wanted to slow it
down and put it on a track, and we would argue against that for
So, I mean, I can't ask for any more than that, but I -- but I
really can't ask for any less than that. So that is what the
request is for today, and it's the only real request we have for
you today. And with that, I'll either take questions of Your Honor
or sit down and let someone else speak.
THE COURT: Let me hear from others who might want to be
MR. SPECTOR: Thank you.
THE COURT: Thank you, Mr. Spector.
MR. PETROFSKY: Good afternoon, Your Honor. This is Al
THE COURT: Yes. Mr. Petrofsky.
MR. PETROFSKY: Thank you. Well, let me start by
addressing a couple of points that came up here. That May 6th oral
argument date in the SCO v. Novell deal, that is -- that is an
argument date. That's not a decision date.
THE COURT: That's right.
MR. PETROFSKY: And the Court's ruling, I don't think
that's been submitted to you, but the -- the Court's ruling on that
case on expediting the appeal did not say anything about expediting
the decision after the argument.
THE COURT: Correct.
MR. PETROFSKY: And, of course, there are no -- you know,
unlike some State Appellate Courts, there are no limits on how long
they can roll that thing over after the argument, and the appendix
in that case is 16,000 pages. So I don't think they're going to be
turning around in one day with a decision.
Secondly, on the supposed success of the Mobility business, SCO
is still reporting losses every quarter on this operation, and
that's -- even when you exclude all of the reorganization
Okay. And then one other thing that may just be a
misunderstanding. The debtors claimed in their motion that they are
paying their debts as they come due. However, as I pointed out in
my objection, the debtors contradicted in their operating reports
in which they say that they are more than half a million dollars of
past due unpaid post-petition debts.
Since I filed the objection, the debtors have filed two more
operating reports which continue to show past due debts in similar
amounts. Now, maybe these are all just mistakes in the operating
reports, but if so, you know, it's
troubling that the debtors continue to make this mistake after
its been brought to their attention.
And now getting to the heart of the matter, it's the debtor's
burden to show cause for an extension, and Congress said, "A
granted extension should be based on a showing of some promise of
probable success", and we haven't seen anything to the Court.
Back in September, Mr. Spector said --
"We promise Your Honor that we wouldn't come in again
with a half-baked, quarter-baked plan. We would make sure that
everything is there. We would do what Mr. Lewis says we could have
done the first time, make sure there is a real commitment, that
there is financing behind it, it's not the pie in the sky that you
walk away from in the due diligence period. That -- that, Your
Honor, is why we need a further extension of
Now, the Court then generously gave the debtors until the end of
the year to come up with a plan that wasn't half-baked or
quarter-baked, but was completely baked, and the debtors failed to
do so. We're now three months into the year. We haven't seen any
progress for confirmation. Just more false starts and promises that
the next time will be different.
we've had three hearing dates set and then cancelled. This is
not progress. Success has not been shown to be
probable. This case has been held hostage for too long by
debtor's ineffective efforts. There is no cause to continue to
silence all of the other parties while the debtors get us nowhere.
Let's open up the floor to all parties, including the debtors. I'm
not suggesting that their plan should be, you know, completely
rejected right now, but just open it up to all parties and find out
which parties, if any, can propose a vital plan, and I think that's
all I have to say. Thank you.
THE COURT: Thank you, Mr. Petrofsky. Mr. Lewis, it's good
to see you again, sir. It's been a while.
MR. LEWIS: Thank you, Your Honor. It's always a pleasure
to be here. Your Honor, I'm going to just kind of address the whole
package at this point --
THE COURT: Okay.
MR. LEWIS: -- and you'll hear my specific comments about
the exclusivity motion along the way. But looking at the larger
picture, I'm not quite sure whether I'm hearing Periclis (phonetic)
say the uphill path is the downhill path or vice versa or whether
we're hearing people in the Government say well, the really bad
economic news is really good news, because that's essentially what
we've heard, and, in fact, that's what we've heard every time we've
come in here for an extension or something else, a new reason why
it didn't quite happen this time, but things are just looking
great, but the fact is that's
all we've ever heard. We have no evidence of anything solid
Mr. Petrofsky has referred to the operating statements. The
debtor continues to lose money and while if everything goes right
and the debtor somehow manages to stay in business and continue its
appeal, if the debtor wins, I suppose there are billions of dollars
at the end of the rainbow, as the debtor says, or maybe there are.
On the other hand, if the debtor loses, where are we?
Your Honor, when -- when we were here one or two times ago on
this issue, in fact, I think it was back in April when the debtor
withdrew the SNCP plan, we heard that really, this case is not
about the creditors. They're going to get paid in full. The only
real stakeholders are the shareholders.
Well, Your Honor, if all of this doesn't happen as - as the
debtor would like it to happen, there won't be enough money to pay
the creditors even. The creditors are being sacrificed to this pot
at the end of the rainbow, and I don't think that's appropriate. If
it were ever true that the creditors were going to get paid in
full, even if everything goes wrong, it's not true now and it's
only going to get worse.
The Court may recall Mr. McBride's testimony and Mr. -- and
counsel's comments at the September extension motion hearing where
we were told really, the UNIX business was a dying business. That's
what we were told.
Mr. -- counsel put it a little bit more aggressively than Mr.
McBride did, but essentially, that's what we were told, and we were
told the Mobility business was right on the verge of a real
breakthrough, they were ready to go, and what we finally heard is
that there are some revenues. We didn't hear anything about the
size of the revenues. We didn't hear anything about how they might
increase and when they might increase. In fact, those were all
issues that should have been addressed, the Court may recall, in
the last disclosure statement, and we made objections that they
were not addressed. There was no substantiation for all these
claims about how business was going to operate and was going to be
wonderful and money was going to come in and everything was going
to be just fine, and I suspect one of the reasons we didn't see any
substantiation is because it couldn't be substantiated.
So here we are again in a case where the debtor has continued
with its single-minded focus on this litigation, which I suppose it
may be true that if they win, they win big, but if they lose, and
they have lost so far, and we have to keep that in mind. However
the debtor would like you to think that their prospects are
wonderful and would like you to draw that inference from the mere
fact that the Court ordered an accelerated oral argument, the fact
remains that we won, and even if our claim isn't 40 but 3.5
million, we don't even know what IBM's claim is yet when it gets
liquidated if they win and
IBM wins, and we know there are several million other dollars in
creditor claims. How is that all going to get paid? Who's going to
make up for the deficit? Who's going to -- who's going to
compensate the creditors or the shareholders, if that's who's
behind this, speculating at their expense?
Under the circumstances, Your Honor, I think the notion that
there should be an extension just doesn't make any sense. In fact,
the notion that this should remain a Chapter 11 doesn't remain --
make any sense. There should be a neutral installed here by
conversion to Chapter 7, which this Court has the power to do even
sua sponte, or the appointment of a Chapter 11 trustee to make an
independent assessment which is made not by someone who's been
committed to whatever this company's prospects thought -- thought
they were for years and years but can make an independent
assessment of whether the litigation is worth pursuing in light of
the damage to the creditors that may well ensue if it is pursued
rather than resolved in some fashion.
I can't control whether it gets resolved, but we have what it
seems to me is a clearly biased party adhering to this litigation
endlessly no matter what, willing to come in and tell this Court
again and again well, we made a mistake this time, but next time we
won't make a mistake and next time it will be for real, and as Mr.
Petrofsky pointed out, this last claim was not for real. It was
something that was filed
because exclusivity was about to run out. It wasn't for real
because it wasn't substantiated in the disclosure statement, and it
wasn't for real, because it had its own inherent problems,
impairment problems, problems with the absolute priority rule.
In fact, the notion that exclusivity hasn't expired already I
think is -- is doubtful, because while there is a plan on file, the
debtor has all but admitted that's not its plan. It's just -- it's
a placeholder. That's not a plan. The debtor is not going to pursue
that thing, whatever it was. The debtor is going to file something
new if it gets the chance to maybe some day, maybe by mid-May,
But, you know, I recall the Court saying at the first extension
motion that we opposed -- as the Court may recall, the first
extension motion was filed in January of 2008.
THE COURT: Yes.
MR. LEWIS: We didn't even oppose that. We did oppose the
next two, and we were told that the debtor was going to bring in
something for real and was never again going to come to this Court
with anything that wasn't for real, and that's exactly
unfortunately what the debtor did do. The SNCP plan wasn't for
real. The -- the -- this plan that was filed in January wasn't for
real, and I think that there comes a time where the Court's
admonition that each time you ask for an extension, it gets harder
needs to be taken seriously.
They're now asking for another extension when there is no reason
to believe -- I mean, we've heard from counsel this morning and I
appreciate the candor. It's -- it's to his credit, that there is no
deal. In fact, doesn't sound like they're really close to anything.
Sounds like they're still talking and they don't like what they're
hearing, and maybe - maybe it's because the market isn't at all
convinced that they're going to win on appeal. Maybe that's part of
the problem. They want this Court to almost assume that they're
going to win on appeal, but the market apparently doesn't believe
that's so, and you can bet there are people out there, Your Honor,
who have a lot of money and a lot of sophistication and can hire
high-priced lawyers like counsel and me and Mr. Levin and can make
their own assessment, and they're apparently not quite taken with
what they see or we would be seeing investments now of one kind or
another, people willing to step up. Probably what we're seeing is
people who are low balling because they don't believe it, and the
market is telling something right now, and it's not simply because
there is a cloud hanging over the debtor's assets. It's because the
cloud is a serious cloud.
I can't rule out that the debtor will win on appeal, although
even if it did, the most likely result would not be it's all over.
The most likely result would probably be a remand, and how much
longer are we going to wait for that to be
decided? And we'll hear well, if it gets remanded -- Your Honor,
you may recall when we were here in September, we heard that --
that parties were waiting to see what happened. In fact, we were
told that last June. Waiting for the appeal to get started was
somehow a magic -- a magic moment or the debtor was waiting for the
outcome of the trial. We've known of the outcome of the trial since
mid-July. The appeal has been on file or we knew there was going to
be an appeal filed and it got started, and we're still waiting.
After a while, the story just doesn't have any credibility
anymore, and the interests of other parties which have been
subordinated here, including my client, which is, after all, a
creditor, and we do have a judgment. We may have interests that are
adverse to the debtor, but we do have a judgment and we are a
creditor, and it's not an insignificant judgment and it's cost us a
lot of money to get to that point.
So I suggest, Your Honor, that exclusivity not only can't be
extended. It doesn't even exist anymore. There has not been a plan
on file that's been a real plan in the time during which the
exclusivity still existed, and as a consequence, I think it's
expired, but even if that were not so, there is absolutely no
reason to cause another month and a half's delay here based upon
another reassurance that we're talking to somebody and something
might happen, and on the notion that -- the implicit notion in this
entire argument that
the -- that the debtor is going to win the appeal, that's really
what we're hearing from this, and -- and counsel wants you to draw
the conclusion that there is a signal from the 10th Circuit in its
ordering expedited oral argument right after the debtor filed its
motion, that that somehow is a signal that the 10th Circuit looks
favorably on the appeal.
It's a completely neutral thing. It could just as well be a
signal that it wants to get this over with and understands the
problem or it could be nothing at all. It could take six months or
eight months or whatever for -- I mean, I have an appeal in front
of the 9th Circuit, which I - I grant is not necessarily the
paragon of timeliness among the circuits, but I have an appeal from
the 9th Circuit where the last appellate brief was filed on the
29th of April of last year, and I still don't even have an oral
argument set. So, you know, appeals can take a long time.
THE COURT: Well, lawyers love to read a lot into orders
for expediting and so on, and I've learned, of course, that they
really don't mean very much.
MR. LEWIS: Exactly, Your Honor. I mean, our clients want
to hear what we think, but --
THE COURT: And we give them that positive spin.
MR. LEWIS: With a king's X behind our back.
THE COURT: That's right.
MR. LEWIS: So I think not only should the Court deny
the exclusivity motion, but the Court should take a step to set
this case on a rational path, which it has not followed to date,
because the management of the debtor has been entirely too focused
on the big payday.
Now, maybe an independent party, trustee in a Chapter 7 case,
which would be appropriate here, because there is really no
business to run. The business is losing money. That's the record in
this case. The contrary record, there is none. There is only
counsel's assurances this morning that there is some revenue
somewhere from the new Mobility products, but we're losing money in
There should be -- this case should be, as it were, shut down
and an independent third party, a trustee should be appointed
either as a Chapter 7 trustee or a Chapter 11 trustee to make an
independent assessment of where to take this case. Thank you, Your
THE COURT: Thank you, Mr. Lewis. Mr. Levin, good to see
MR. LEVIN: Pleasure to see you, Your Honor. Thank you.
Good to be back. I haven't been here for quite a while, because
we've been very patient with this debtor, but there is a time in
which patience runs out, and that's why our client has asked that
we come back and be heard on this -- on the exclusivity extension,
on the status conference on the disclosure statement, and the plan
I was thinking to thank Mr. Spector, Your Honor, for his
consideration of all of our time, of not wasting time of putting a
witness on the stand but just testifying himself for us, but my
real concern here is a -- a procedural concern which is real. It's
substantive. It's not -- it's not just lawyers testifying.
THE COURT: Well, I wasn't sure that we weren't still
going to --
MR. SPECTOR: I have witnesses --
THE COURT: Yes.
MR. SPECTOR: -- if the Court -- if the Court were willing
to accept, we would put witnesses on. We could do that.
THE COURT: That's what I had understood, Mr. Levin.
MR. SPECTOR: I was just making a status report on - on
THE COURT: And sort of an opening argument so to speak,
MR. SPECTOR: Exactly.
MR. LEVIN: Fine. I will take it as such, but here --
THE COURT: That's how I understood it.
MR. LEVIN: But here is -- there is still a major
procedural problem with this --
THE COURT: Yes.
MR. LEVIN: -- before I get to the substantive issue. The
exclusivity motion was filed in December. It had none of those
facts in it. In fact, that was three months ago. Those facts didn't
exist at the time.
THE COURT: Right.
MR. LEVIN: There has been no supplemental motion filed
that would give anybody any notice of the evidence that Mr. Spector
intends to introduce this afternoon, would give us any opportunity
to take discovery, to investigate on our own, to put on any kind of
a counter case, to cross-examine or to put on contrary witnesses in
If he's relying on his December motion, then we should proceed
on the December motion. If he wants to file a new motion properly
noticed with adequate evidence and argument on it that we can then
test in this court, that may be appropriate to do so, but it's a
little late in the day for that, especially given the May 17, May
14, whatever the day is, mandatory expiration of exclusivity.
So I'm going to object, Your Honor, to any testimony along the
lines of what Mr. Spector proffered in his either status report or
opening statement or however it's characterized. That's number
Let's turn to the substance, Your Honor. Two points to make
here. One is just the -- the timing of the mandatory expiration
along with the timing of the plan.
If exclusivity is extended to May 17, there is no chance absent
shortened time on both the hearing on approval and on the voting
and on the notice of the confirmation hearing that we're going to
have acceptances by May 17th. Exclusivity will expire. Other
parties in interest will be permitted to file their plans. Don't
know if they want to, but they certainly will be permitted to.
So all that Mr. Spector is really asking for, all the debtor is
asking for today is we want a head start on that process. We've had
a head start for 18 months, but it isn't enough. We still need
another month and a half of a head start on that process, and that
doesn't seem like -- if there are going to be competing plans
anyway, let's put them on parallel tracks. I don't know if there
will be competing plans, but if there are, there is no sense to
start solicitation on one only to have one come in several weeks
later and then start solicitation on that. They ought to be done
So we might as well terminate now and allow those competing
plans, if -- if they're to be filed, if the debtor is to file a new
plan, we still don't know about that, to allow them to go in
parallel rather than one ahead of the other.
And to Mr. Lewis's point whether exclusivity still exists, as I
recall the state of the record, Your Honor, and I may be mistaken
here, exclusivity expired on December 31. The plan was filed on
January 8 or January 9. There was a motion
to extend, but I don't recall that there was a bridge order or
anything else that would have extended the exclusivity. So even if
that plan which Mr. Spector has told us is going -- is going to be
amended or withdrawn or superceded in some fashion counted for the
exclusivity preservation, I think the record reflects that it
expired before that plan was filed. Something to consider.
Now, going forward, the debtor has had 18 months to file a plan.
Through a technical reading, if I'm wrong about exclusivity having
-- not yet having expired and if we can count the plan that was
filed in January as a real plan, if we suspend disbelief on that
for a moment, Congress has said the debtor should have 18 months of
exclusivity to file a plan. I suppose you could construe that to
mean any plan, whether the debtor intends to proceed with it or
not, but I don't think that's what Congress had in mind in 2005
when it said cases should be moved along at a faster pace.
So we're past that 18 months. We don't have a plan, a viable
plan on file. So again, there is no reason to extend, even if it's
technically still in -- in effect, the policy behind 1121(d)
suggests that this Court should not extend it any further, but the
facts of this case lead to the same result.
Over the first 16 1/2 months of this case, and that's through
the January 31 operating report, the debtor, SCO
Operations, which is the main operating company, not counting
SCO Group, the debtor, SCO Operations lost over $11.0 million on an
accrual basis on revenues of just slightly over $20.0 million.
They've lost over $3.0 million in cash in that same period. I
haven't gone and tried to tie cash to accrual and see why one is so
much larger than the other, but the debtor started the case with
just slightly over 6.0 million in cash, and now it has somewhat
less than 3.0 million in cash. So it's less than half.
I cite those figures as of January 31, Your Honor, because the
operating report for February 28th has not yet been filed. It's
overdue. In fact, the operating report for January was way overdue.
It was filed in mid to late March. I think it was the 20th or 23rd
of March that it was filed. So it was at least a month late as
So we're not quite current on all that's happened in February,
and certainly, March is still here. So we can't - can't know that,
but we don't know how much more was lost in February.
What those operating reports show us, Your Honor, is that there
is no real remaining business. The disclosure statement that was
filed in January, it almost admits as much, that as Mr. Lewis has
said, the ability to pay claims has seriously been compromised. The
December -- I'm sorry. The January disclosure statement notes that
there are approximately
$1.9 million in general unsecured claims at Operations. There is
about $500,000 of unsecured claims at Group. There is the $3.5
million Novell claim. There is a disputed uncertain amount of an
IBM claim, and if you look at the January operating report, there
is over $2.0 million in current administrative expenses that have
not been paid, and I don't mean to say that the debtor is late in
paying those, but just in the normal operation of the business that
get paid routinely, there is, as we stand at the end of January,
and I have no reason to believe it's different today, there is over
$2.0 million in unpaid administrative expenses.
You start adding those numbers against the less than $3.0
million in cash and who knows if the business will sell for
anything and that's another topic which I'll get to in a moment.
Creditors are seriously at risk. This is no longer a case about how
much the shareholders will recover. It's about whether even the pre
-- the pre-petition unsecured creditors will uncover anything, let
alone be paid in full.
You look at the administrative expenses. By the way, that number
does not include unpaid professional fees, and it's hard to tell
exactly from the operating report how much the - how far the cash
would have to go, but looking at the liquidation analysis that was
filed in the January disclosure statement suggests that there is a
real question as to whether unsecureds would be paid anything at
all given the current
level of cash at operations at the company.
Section 1112(b) lists cause for converting a case. (b)(4)(A)
says it's cause if there is continuing loss or diminution of the
estate and no reasonable prospect for rehabilitation, and I
emphasize rehabilitation rather than just confirmation of a plan.
They are different, and 1112(b)(4)(F) says that grounds for
conversions if there is an unexcused failure to satisfy timely any
filing or reporting requirements imposed by the statute or the
Both of those circumstances are present here, Your Honor, and
both of those circumstances, because they constitute cause and
because 1112(b) has now been amended to make conversion mandatory,
should provide grounds for conversion of this case, or under
1104(a)(3), the appointment of a trustee, as Mr. Lewis
Now, the -- this debtor, as I noted, has been given an ample
chance to reorganize. The Court I recall in one of the earlier
hearings said it was incumbent on the debtor to come up with a plan
that was not dependent on waiting for the outcome of the
litigation, and yet, the debtor by fainting plans, proposing,
pulling back, proposing, pulling back - we're now at the third time
on that, Your Honor -- has accomplished or attempted to accomplish
The statements that Mr. Spector made today almost sound like a
replay of the prior hearings; we have a buyer; we
have York Capital Partners; we have a term sheet but we don't
have the definitive documents yet but we're working on it and we're
really close; we have a buyer, Stephen Norris Capital Partners; we
have a term sheet; we don't have the definitive documents, but
we're negotiating and we're really close; this time we have a
buyer, but we're not going to tell you who it is; we don't even
have a term sheet yet; we don't have a substantive deal, but we're
negotiating and we're really close.
Your Honor, sometimes -- I understand they may be close to
getting products out there. They may be close to generating
revenues, and it's -- and it has been hampered apparently,
according to Mr. Spector's opening statement, by the state of the
Well, the fact is that sometimes the economy just doesn't
cooperate with the best laid plans of business and particularly of
debtors. All we have to do is look at President Obama's address
this morning about the car companies. Whether they -- whether the
car companies were right or wrong, the economy sure caught up with
them, and that's what may have happened to this debtor. I can't
tell you whether the debtor's business plan was right or whether it
was wrong, but as Mr. Spector said, the economy is substantially
Now, I believe Your Honor has ample authority under Section
105(a) on a sua sponte basis to convert this case or order the
appointment of a Chapter 11 trustee. Harking back to
my statement at the opening, however, about proper procedure, I
think it only appropriate that the debtor be given an opportunity
to be heard yet again on why this case is going to be a success
some day just around the corner, and what I would suggest the
purpose of the status conference should be, Your Honor, would be to
set a date for the hearing on the motion to dismiss, not on a
disclosure statement which has not yet been filed. Thank you, Your
THE COURT: Thank you. Yes, Mr. McMahon. Good
MR. MCMAHON: Your Honor, good afternoon. This is - these
cases have been difficult to be assigned to on one level to say the
least, Your Honor, and perhaps that's the way bankruptcy is. If
every set of debtors had an unlimited supply of free money in the
form of equity or credit from which it could operate, things would
be easy to figure out, and I've been doing a fair amount of
thinking recently, especially today leading up to the hearing as to
well, why, why is this difficult, and you've got a debtor --
debtors whose business is presumably caught in the cross hairs of
litigation, and the temptation, the immediate temptation, Your
Honor, is to relegate your mind to the thought that well, if I try
to make sense of the litigation, I can determine the course of the
bankruptcy case or if we give the debtors a bit more time, this
will resolve itself, if -- if we see things from IBM's and
Novel's perspective, then we can just dispense with this and
move on, and I think really, probably the easiest way of thinking
about the case, and that's really where we're at. I know the --
there was a status presentation, and the exclusivity motion is
before the Court.
Let's be candid here. I said this at an earlier hearing. The
purpose of exclusivity is to put things in a package and a bow and
bring it before Your Honor to allow Your Honor to consider
something in a more streamlined fashion. Exclusivity has not served
any purpose whatsoever to date in these cases. It's basically been
the cause for interim opportunity for the parties to come to court
and state their respective positions.
But here we are more than 18 months into the cases, and the
bottom line is you have to step back, and I think that's the
perspective that our office approaches the matters from. It's not a
matter of who's right with respect to the litigation, but that's
the way every case comes in. You know, Your Honor takes debtors,
our office takes debtors as we find them --
THE COURT: Right.
MR. MCMAHON: -- and if you move -- you look at that --
things through that prism, then I think that after 18 months, after
the erosion of the case base to date on a natural basis -- and
IBM's counsel correctly notes that there is an
accrued number to be factored in on top of that -- then we're at
a point where at a minimum, there has to be a hearing to determine
where we go next, and the creditors certainly have their position
with respect to the fact that dispositive motions should be
scheduled, and we would support a hearing to -- to test that
Section 1112 of the Bankruptcy Code is clear that a debtor to
avoid having its business being transferred to Chapter 7 has to
demonstrate that there is no continuing loss to diminution of the
estate. That's beyond satisfied at this point, Your Honor. There
can be no debate about that if and when there is a hearing, at
least from our perspective, and the second element of that is the
absence of a reasonable likelihood of rehabilitation, and if
anything has occurred after 18 months, Your Honor, the -- that ball
has been put in the debtor's court at this juncture I think fairly
And to underscore something about what Congress intended, Your
Honor, in the 2005 amendments to the Bankruptcy Code, that's the
one item in 1112 that the Court has no discretion to sidestep. If
Your Honor makes those findings, there -- there is an exceptional
circumstances situation where the Court can give the debtor more
time if someone objects to the relief sought, but that's one of the
-- the Code subsections where the Court is -- is powerless to do
anything but grant the relief requested by a party in interest.
So I think that our office shares IBM's view that the debtors
are certainly entitled to present their evidence with respect to
their position presumably that there is a viable business here to
be salvaged notwithstanding the litigation, but the difficulty
again that I noted at the outset of my comments is extracting
oneself is the people who are in neutral positions, our office, the
Court with respect to thoughts about the litigation and accepting
-- evaluating the here and now.
Novell's counsel correctly notes that the 10th Circuit result is
not necessarily the end. It's a summary judgment motion. So it goes
back down, and it's a significant piece of litigation, and it could
go on interminably.
So what's the purpose of this Court? Well, after giving the
debtor a fair opportunity, after going through as much cash as --
as these debtors have with their -- with respect to their
operations in Chapter 11, our office does believe that it's high
time to have a wholesome consideration of the direction of these
cases. Thank you.
THE COURT: Thank you, Mr. McMahon. Anyone else before I
hear from Mr. Spector? All right.
MR. SPECTOR: I didn't hear you, Your Honor.
THE COURT: No. I was just asking if anyone else had
anything before you spoke.
MR. SPECTOR: Well, if I were in the positions of the
gentlemen that preceded me, I'd be saying exactly -- not as
well, but I would be saying basically the same thing as they've
said, and there is a lot of merit to what they said, but we've got
to remember who this is coming from. There are hundreds of
creditors in these cases. You haven't heard a single one in those
18 months find anything, anything.
What you've heard -- and I'm not saying that IBM has beat us up.
They really have been gentlemanly, and what they're saying is
certainly within the bounds, but IBM is not a creditor of this
estate. They were given notice because they assert a claim -- I
know technically they're a creditor because they assert a claim,
but we sued them. They counterclaimed against us. Our claim is
multiples of what they claim is owed to them.
We intend to file an objection to the claim. I was hoping we
wouldn't have to get to this, but we have an objection to the
claim, and ultimately, I think the Court will have to do, and I
wasn't wishing this on the Court either, an estimation so we know
who it is talking about this, and if - and if IBM is seen not to
have a claim or not to have a claim in excess of our claim against
IBM, then notwithstanding perhaps some of the wisdom that they
impart, you've got to realize they're not a creditor in good
standing to be making that argument.
Novell has a claim. It has a judgment, but in the year and a
half since this claim commenced, their claim went
from 40.0 million to 3.5 million. Let's give some credit on the
balance sheet for that.
There was an IPO claim against us for $50.0 million. That's
disappeared. Let's give us some credit for that.
There is a case called Gray -- you don't even know about it --
Dwayne Gray in -- pending in Tampa. That case was dismissed a
couple weeks ago. It was stayed here, but the underlying case was
dismissed a couple weeks. I don't know how many millions were
involved in that. That's -- and we weren't active in it, so I don't
want to take too much credit for it. It just went away. In fact, I
don't even think we filed a proof of claim, which might have been a
bar in the first place, but we have -- and there are shareholders
that filed claims -I mean, those are going to go away or have gone
So, I mean, there are changes in the -- in that area, but let me
just try to address one other tiny matter I want to get to, and I
don't want to hold Your Honor to this. You know, there are a lot of
things I said that I wish we had invisible ink and -- and couldn't
quote it back, and that's happened to me in a lot of different
contexts in my life recently where I wish I hadn't said what I
said, and sometimes you say it because it's true at the time and
subsequent facts make it unachievable, but Your Honor indicated --
I don't know if it was in the September hearing or whenever --
that, you know, your view of the matter was that this case really
commenced once we got the ruling on the Novell judgment, which
was in July, and you can't -- you're powerless to give us 18 months
from July, and we're not asking for that, but, you know, in
essence, what we are is now -- what are we, six, nine months from
that, only halfway exclusivity, and you can't give us more but
we're asking for another, you know, few weeks.
Now, let's address the -- the many, many comments that were
raised, and I'm not doing this in any particular order, because I
just took notes as they were speaking. About the losses every
quarter, Mr. Petrofsky was the first to raise that and everybody
has since followed up and then they extrapolated from that, that
there is a remedy for losses every quarter, and that's called
conversion, dismissal, appointment of a Chapter 11 trustee, any of
the above, and yes, that's true, but that -- that would have been
true six months ago too, and I -- and I don't fault them for not
bringing it before, and I'm not wishing them to bring it now, but
the fact of the matter is if we have -- if we have to go that
route, we will. The motion is filed. Evidence will be taken, and
we'll have our day in court like they say we're entitled to. Not
only are we entitled to it, we must have.
And what I'm telling you by way of opening argument will be
supported or not as the case may be by the record, the actual
record. We'll bring in Mr. McBride to testify after he's been
deposed and so forth, and he'll show that we had
$100,000 of revenue this month in -- in Mobility (phonetic). I
didn't bother you with those numbers, because at this point, it's
insignificant, but by the time we get to a hearing, it may be quite
significant, and so if it's to be, it's to be, and we'll deal with
Is that me?
THE COURT: I hit the mic. I'm sorry.
MR. SPECTOR: Okay. Mr. Petrofsky raised this $500,000
figure. The only thing that comes to my mind is the hold backs, 80
percent of your fee application, 20 percent hold backs. I think
that's probably what the 500,000 is.
I have no idea -- I have no idea what the $2.0 million is all
about. As I understand it from my client, you know, they are paying
their ongoing trade debt as -- as it comes in. There isn't any such
number. It may be an item of accounting that I can't explain, but,
you know, when we have our day in court and we're now on notice of
that and we'll explain that away or we won't.
We are not going to be calling witnesses in light of the -- the
point made by Mr. Levin. It's a valid point. We only talked about
in December, which is when the motion was filed, facts that hadn't
come about yet, and so I think it's fair -- I think his point is
well taken that we -- he invited us to and I will accept, file a
new motion for the May 14th date, let him take his discovery, and
we'll bring on the -- the
case if we can fit it in before that time.
THE COURT: When you say file a new motion, just so I'm
MR. SPECTOR: Exclusivity motion.
THE COURT: Okay.
MR. SPECTOR: The one we filed in December didn't include
all the facts that I -- I rendered in my opening statement today,
and he properly complained of lack of notice, how can we try that
today, he didn't even know about it.
THE COURT: Right.
MR. SPECTOR: And I don't mean to ambush him. I didn't
THE COURT: But that leaves us with the conundrum of where
are we today insofar as you can extend exclusivity only if it so
exists. Does it exist today?
MR. SPECTOR: Well, we'd just asked for a continuation of
this hearing and will be supplemented with a new motion, an amended
motion for the new date. Under our local rules in Delaware, you
know, Your Honor, if you file a motion in time, you don't need a
THE COURT: Right.
MR. SPECTOR: So I -- I relied on that rule. Let's see.
There was some argument made by Mr. Lewis that we're totally
focused -- it was totally focused on litigation. Well, you would
think that we would be focused on litigation but not
the detriment of other parts.
Frankly, the management of SCO had a decision tree, and one of
them was do we shut everything down, hoard cash, come up with a
plan that just says we can turn a profit every month until we get
to the denouement with the 10th Circuit, however long that takes,
or do we continue to grow a business that's got long-term
viability, and they made a choice, and the choice was get Mobility
out there, let it start working, development UNIX virtualization,
do these things like we're a real company and we are and keep our
customers satisfied, and that required people to work on that, and
that ran the cash balance lower than it would have been if they had
taken the other decision tree, decision option, but as a result, we
have a real company doing real business. Mobility sells real
products, and when you get -- when you get to the hearing, there
will be testimony about the revenue.
Novell -- pardon me. UNIX is a real business. It still generates
revenue. The problem is -- and I'm assured by Mr. McBride very
recently that the company on an operating basis does -- is in the
black. It's the reorganization expenses that overlay it that makes
it a loss.
Now, we'll have to examine that. I didn't put that in my
opening, because I'm not prepared today to -- to go into the kind
of things that we'll have to be addressing in any kind of motion
that is contemplated, but if -- you know, the
evidence will come in at that time that the company is a
business operating, generating revenues, and but for the
reorganization expenses, is in the black.
We can implement not just a sale-based plan. I would rather, if
I -- if I had a vote on this, rather, had we done this sooner, had
eschewed all possibilities of sale because of the -- you know,
we're not in a good position to sell with all the unknowns.
Now, I should tell you that without going into too much detail,
both suitors with SCO right now have offered sufficient money to
pay creditors in full including the Novell judgment in full. That's
not from our cash. That's from cash generated from the sale of the
Now, UNIX business, how can we sell the UNIX business with all
the problems we've had that Your Honor pointed out way back a year
ago? Well, there is a thing that we wrote up in that first time
called the Novell exception, and it was problematic until July 16th
ruling which made it much more viable, and as a result, as I said
at that time, when we had that ruling, it would clarify a lot, and
it did clarify a lot, and so there are people willing to take the
UNIX business with the Novell exception. That part isn't the part
we're talking about. We have other issues, but that's on the table,
and we -- you know, so I just want to say that even if we don't
have the cash in hand, even a Chapter 7 trustee can -- you know,
brief operation, can sell those assets for sufficient money,
just the business UNIX to pay the creditors in full.
So -- and, of course, I'm now giving an opening statement on a
motion that isn't before Your Honor, but I have to.
Let's see. The MORs are late. No. We got extensions on those
from the U.S. Trustee who was gracious enough to give it with --
the company is a public company. It has it's 10K and 10Q. We have
been cutting staff to try, you know, keep our head above water and
some of those staff that were let go were accounting staff, and
when the auditors are in and so forth, it can only be pulled in one
direction, and with that, Mr. McMahon has been kind enough to allow
us an extension when we needed it. So they're not really late,
although, again, I'm presaging a defense to a motion that hasn't
Okay. There is one other thing I think I should address that
wasn't specifically raised, but I think it's worth bringing it up
Every business executive deposed in the Novell litigation,
including executives of Novell as high as the CEO who were there
when the transaction of the Santa Cruz operations took place, the
sale of this property, every one of them testified that it was the
intent and understanding of the parties that the UNIX copyrights
were transferred to Santa Cruz
operations as part of the transaction. That's in the case and
it's in the appeal brief that SCO has filed.
Accordingly, SCO would love to see what the jury has to say
about this transaction if there is a reversal. Don't tell us,
please, well, you know, the best you can get is a remand for trial.
We'd love that. We'd love that. We'd love to see what Novell is
going to offer us when that day comes and there is going to be a
jury trial, and we'd love to see what the jurors are going to say
about this transaction when the evidence gets before them. We know
what the market thought about it, because the company was worth
$35.0 million then before the rug was pulled out from under us, and
we -- we would be very happy taking our chances at a trial a year
from now or months from now because the company will be greened up
by then, and I say it in both senses. There will be cash available,
because people will be willing to finance us. They might want to
buy new stock in the company now that things are set on the proper
Mr. Lewis addressed that the management is not only focused
entirely -- and he really -- this is something he really wasn't
right on -- is focused entirely on litigation to the detriment of
the business. I've already shown or I haven't shown but explained
why the evidence will show otherwise, but he intimated maybe
strongly and maybe more than just intimation that a neutral should
be appointed to look into the merits of
the business and the litigation prospects.
Your Honor, they didn't use the word, although it seems to me if
you're looking into the -- the validity of its business and the
going forward ability of the business and looking for -- to the
viability of its claims against IBM and Novell, that perhaps the
proper word that wasn't raised here is an examiner, and frankly,
Your Honor, I don't know why he didn't ask for it sooner and I'm
not speak -- I don't have authority of my client, the Board of
Directors or anybody else or the ability to tell you what budget
would need to do that, but I think that's the -- probably when a
motion comes in, I may want to say we'll counter that with a
consent to the appointment of examiner. I think it's something that
ought to be kept on the table. It's one of the available choices
Your Honor would have, and if -- as I said, the purpose is what is
the -- what kind of business is this? Is it really a business? An
examiner would be there rather than somebody to kill the business,
which is if you convert the case to a 7, oops, there really was a
business, sorry about that, oops, this really was a valid cause of
action which is now gone. Billions of dollars down the tubes. Maybe
we should take a half step instead of a full step. Again, I'm
arguing a motion not before Your Honor.
Let me take a minute to -- to check with co-counsel to see if
there is anything else I want to address so I do
THE COURT: Certainly, Mr. Spector.
MR. SPECTOR: -- back and forth with you. I'd rather get
THE COURT: Thank you.
MR. SPECTOR: I think I've concluded my remarks in
THE COURT: All right.
MR. SPECTOR: Thank you.
THE COURT: Thank you, sir. Response.
MR. LEWIS: Judge, did Mr. Petrofsky wants to speak.
THE COURT: Oh, I'm so sorry. Mr. Petrofsky, did you wish
to be heard first sir, in response I mean?
MR. PETROFSKY: Oh, thank you, but no.
THE COURT: All right. Thank you, Mr. Petrofsky.
MR. LEWIS: Oh, I thought Mr. Petrofsky had taken --
THE COURT: Oh, he did not. No, sir. I was trying to turn
on my fan here. It gets warm sitting here. Mr. Lewis, yes, sir.
MR. LEWIS: Your Honor, I don't think I'm inclined to
respond to a lot of the comments we've just heard. I don't think it
serves any purpose --
THE COURT: Right.
MR. LEWIS: -- at this juncture. It's pretty obvious
I think that we're going to at least hear a motion to convert
soon or -- or appoint a Chapter 11 trustee, and so I think what I
want to focus on now is exclusivity again.
THE COURT: Yes.
MR. LEWIS: And I want to draw an analogy to the notion --
in discussing the notion that we're somehow going to have a
continued exclusivity motion. This is really a new exclusivity
motion. It's not a continued exclusivity motion.
The exclusivity motion that was filed in December was filed
based upon a plan that we have heard this morning and we knew all
along anyhow is not real. It's -- it's a placeholder. It's nothing
more than that.
So we're not talking about a continued exclusivity motion. We're
really talking about a new one, because the old one doesn't have
anything to support it anymore, and a new one is out of time. It's
as simple as that. I think exclusivity has expired if for no other
reason than that, and I would object -- I mean, the debtor can file
its motion if it wants to, but I -- or file an amended motion, but
one of the objections that we would be bringing would be it's not
an amended motion. There is no more exclusivity.
I think it's -- it's important for this Court to rule today that
there is no more exclusivity so that as counsel for IBM so ably
pointed out, the debtor doesn't get a free head start on other
people if there is anyone else who wants to file
a plan. There has been plenty of time. A month and a half is not
going to give the debtor a great chance to come up with something
new and get a plan confirmed. In fact, the notion that somehow we
can have a confirmation hearing on a plan after a proper hearing on
a disclosure statement without appropriate discovery in this case
and all of that get done by the middle of May just doesn't fly.
It's just not going to happen, Your Honor.
So I would suggest the Court -- I would ask the Court to rule
that exclusivity has terminated as of today, and as far as a motion
to appoint a trustee or convert to Chapter 7 or if the debtor wants
to suggest an examiner, which I think is a very different thing,
because examiners can't make decisions.
THE COURT: Right.
MR. LEWIS: And what we need here is a neutral party
making a decision. We may be -- have our axe to grind, and I don't
deny that we do. So does the debtor. That doesn't put us or the
debtor in a different place. A neutral might be in a different
So that would be the only thing I would add this morning, Your
Honor, and perhaps we could get a hearing and maybe specially set,
and if I may be so bold, this happens now and again. If the Court
is inclined to set a hearing date in -- in April with some briefing
schedule, I will be away from about the 10th to the 20th. So
something outside of that would
be helpful towards maybe the end of April, but obviously,
subject to your calendar and everyone else's schedules.
THE COURT: I always take into consideration counsel's
MR. LEWIS: Yeah. I was just sort of saving time, Your
THE COURT: Sometimes it becomes, you know, impossible,
too many --
MR. LEWIS: Of course.
THE COURT: -- too many moving schedules, but certainly, I
take -- I take --
MR. LEWIS: Okay. Thank you, Your Honor. I have nothing to
THE COURT: All right. Anyone else?
(No verbal response)
THE COURT: I hear no one else. If you don't mind, just
for a personal reason, I'm going to take about a five-minute
recess, and then I'll come back out and rule. Thank you.
THE CLERK: Please rise.
THE COURT: Thank you again, everyone. Please be seated.
Thank you. I took that break, because my little mind was spinning
so fast, I was afraid I was going to lift up off the ground here in
a minute, because a lot has been said, and I
do understand the debtors are faced with a lot of obstacles and
are doing the best they can, but the fact is that either
exclusivity has already terminated. A motion was filed many months
ago, but, you know, our whole concept of the bridge order is that a
motion when filed operates as a bridge order, in effect, as a
bridge order, but that the motion will then be brought on promptly
and won't be left, you know, sitting indefinitely as this one was.
So I think that the concept of the bridge order is simply not
applicable in this -- under these circumstances.
Moreover, I just don't have cause, and I don't -- I don't have
cause to extend exclusivity in any event, and I don't think that --
nothing I've heard suggests that anything will change in the next
very very short term, which is what I would be talking about in any
So I do think that I'm going to have to deny the motion to
extend exclusivity to the extent it hasn't already terminated,
although again, I do believe that it has terminated.
Having said that, I do think that it is appropriate to schedule
a hearing on whatever motions will be brought. I've heard reference
to a motion perhaps to convert, a motion for the appointment of a
Chapter 11 trustee. I'm not sure what will be before me, and I know
-- and I'm not asking the parties to tell me right now, but I do
think we ought to set down a
hearing date with I think also a date certain for the filing of
any such motions, and I would like to give the parties at least a
little bit of an opportunity to take some very limited discovery to
the extent you think it's necessary. So --
MR. LEVIN: Your Honor, were you suggesting --
THE COURT: Yes.
MR. LEVIN: -- discovery before or after the filing of the
THE COURT: Well, I think you have to have a motion on
file before you take discovery. Otherwise, it's too -- it's just
too indefinite as to what discovery is even relevant to that
particular motion. So let's just look first to the hearing date,
because I want to allow a significant amount of time.
Mr. Lewis, you said you're out from April 10th to 20th?
MR. LEWIS: Yes, Your Honor.
THE COURT: So we're going to be looking at a date after
that, and --
MR. SPECTOR: May I suggest a date some time after May
6th, Your Honor?
THE COURT: After May the 6th?
MR. SPECTOR: Yeah. Mr. Tibbits, who will be instrumental
on any motion that comes down, will be very much involved in
preparation for the oral argument in the 10th
Circuit. So if we could --
THE COURT: Oh.
MR. SPECTOR: -- scheduling a hearing.
THE COURT: That's right. You have that on May the
MR. SPECTOR: Yes. That's May the 6th, Your Honor. If we
could get past that date, and then we can concentrate on this,
whatever is coming down the pike.
THE COURT: I don't think a couple of weeks is going to
make a huge difference, because the earliest that I could have done
this in any event, and I mean the earliest, was the 30th of April.
So why don't we do this. I have a wide open day which I think I
ought to allow, May the 13th, if that works for people, and I -- if
that doesn't work for you, don't be bashful. Speak up.
MR. SPECTOR: Do you mind if I turn my Blackberry on?
THE COURT: Please, no. Not at all. Check your schedules,
and we'll make sure that that date works. I have some other
possibilities as well, but that's --
MR. LEWIS: What are the other possibilities, Your
THE COURT: Well, I could possibly do it May the 11th.
That's a good possibility at this moment.
MR. LEVIN: I currently have a hearing in New York on the
13th, but --
THE COURT: oh.
MR. LEVIN: -- it's likely -- highly likely not to go
forward, and it's a morning hearing and would be done and I could
probably be here for a two or three o'clock hearing on the 13th if
you prefer, but I can do it on the 11th definitely.
THE COURT: All right. Let's now look at the 11th. That's
a Monday. I don't know if that makes life difficult for people
traveling from the west coast. Mr. Lewis, in your case, are you
spending more time in New York now?
MR. LEWIS: Are we looking at the 13th or the 11th
THE COURT: The 11th.
MR. LEWIS: The 11th works fine for me, Your Honor.
THE COURT: It does?
MR. LEWIS: Thank you.
THE COURT: Okay.
MR. SPECTOR: That -- I can't say there is any problem on
my calendar for that, but the only thing I would say about May 11th
is if there is going to be discovery leading up to that date, it
will be right in the middle of the argument.
THE COURT: Well --
MR. SPECTOR: That's only five days after the argument. If
we're going to be doing depositions, Mr. Tibbits will have to be
there and other important people would have to be there. You know,
if they're not doing discovery, it's not
going to be a problem. Showing up on the 11th is not a problem.
It's the discovery that I'm worried about.
THE COURT: What is the conflict with Mr. Tibbits.
schedule? I'm sorry, and forgive me for asking. Mr. Tibbits is with
-- is he with the Boyce firm? Oh, our Mr. Tibbits.
MR. SPECTOR: Yes.
THE COURT: I'm sorry. Certainly.
MR. SPECTOR: Yeah. He's the chief legal officer, the
general counsel of the firm and has been in charge of the
litigation and the briefing.
MR. LEVIN: Your Honor, if we may just have a moment.
We're conferring on the issue of discovery.
THE COURT: Of course. You certainly may.
MR. SPECTOR: And for what it's worth, the 13th, I do have
a doctor's appointment.
THE COURT: Okay. That one is off.
MR. SPECTOR: If you're going another week, May 18th is
open the whole day. May 19th is open.
THE COURT: Okay.
MR. SPECTOR: The 20th is open. I'm fine there. The 21st,
that whole week looks like is fine as it now stands.
MR. LEVIN: Your Honor, I think we don't know what we
THE COURT: Understood.
MR. LEVIN: And therefore, without discovery - excuse me.
Without discovery --
THE COURT: You can remain seated. That's all right. We're
picking you up, Mr. Levin. Certainly.
MR. LEVIN: We don't know what we're missing. On the other
hand, given the state this case is in, to say we shouldn't have a
hearing for two more months, I would have thought this would be
something we'd hear in two or three weeks, not two or three
If the -- I think May 11th is -- is six weeks already. That's a
long time. I understand the issue with the oral argument, but if we
were to do this -- well, in any event, I understand the issue with
the oral argument. I think it's an unfortunate imposition on this
bankruptcy estate and the continuing loss, but be that as it may,
if we can have the March operating report on time without an
extension, which would be in -- I think April 20th would be the due
date -- I think we would be willing to proceed without
I'm sorry. Let me add to that. If we can have the operating
report and any evidence on which the debtor intends to rely by that
date, I think we would be willing to proceed on May 11th without
any further discovery.
MR. SPECTOR: I don't know about the rest of that, Your
Honor. All I know is that the rules -- I don't know why we're
talking about two weeks or anything like that. The basic
rule is -- Federal Rules of Bankruptcy Procedure, 2002, provide
for 20 days I believe notice of motions to convert or dismiss.
This case has been here for 18 months. The losses they're going
to say have been continuing. Why all of a sudden is this on an
accelerated track? There is -- nothing untoward is going to happen
another week or two either direction except that we'll be
We obviously will have the burden of proof. We've got to gear up
for it. If their motion is filed, you know some time later this
week, we've got to go into trial mode at a time when we're very
stressed with other affairs.
I would ask, Your Honor, this is a make or break issue in the
case. This is not something we should be doing in a couple of
weeks. The rules -- there is nothing emergency that requires us to
expedite this matter.
I'm not saying we should set it off until September. I'm saying
that, you know, if they did it in the normal course, they filed the
motion on April 1st, two days from now --
THE COURT: Yes.
MR. SPECTOR: -- normally, the Court -- what would the
Court -- I'll ask Your Honor, what would normally be a typical
motion to convert or appoint a trustee or something that wouldn't
be coming up April 20th or something like that? I assume there
would be some -- some lag beyond the normal 20 days, and I'm not
asking for the moon. I'm asking for
something like the week of May 18th, 19th, or 20th, 21st. I've
got that whole week open, and we'll be past -- significantly enough
past the May 6th oral argument that we can then concentrate on this
make or break motion.
MR. LEVIN: Your Honor --
THE COURT: Mr. Levin, yes.
MR. LEVIN: Mr. Spector was prepared to put on the
evidence today. I don't know what the problem is. I will be candid
with the Court that my client has not authorized us to file such a
motion. I wanted to hear what happened at the hearing today and
then we will consult. As you said yourself, there may or may not be
such a motion filed. We will consult, and we will determine whether
to file such a motion.
I will note, however, that Section 1112(b)(3) as amended in 2005
-- I'll quote it just for the record, if I may, Your Honor. I know
that you know the -- the statute.
"The Court shall commence the hearing on a motion made
under this subsection not later than 30 days after the filing of
the motion and shall decide the motion not later than 15 days after
commencement of such hearing..."
THE COURT: Yes.
MR. LEVIN: "...unless the movant expressly consents to a
THE COURT: Yes.
MR. LEVIN: So I will consult with our client. I
understand the May 11th date is open. I understand the May - do I
understand correctly that the May 18th and 19th dates are open as
THE COURT: Yes. May 18th and 19th are open. Here is what
we're going to do then, if you will. I understand the parties'
schedules. I understand that there is a significant oral argument
before the 10th Circuit, but when you file your motion, I will set
this down for a hearing.
Let's do it that way, because at the moment, we're talking to
some extent speculatively, and I am well aware of the time
restrictions, Mr. Levin. I do appreciate your raising it, but it
comes as no surprise to me, because I've had it here before, not in
this case but in other cases. The 30 days I think is sacrosanct
under the -- under the code, and so we will see based upon when you
file your motion and what that motion is.
MR. LEVIN: And we will --
THE COURT: I will set it down with in mind your schedules
as well as the possibility, I must tell you, of an April 30th date.
I didn't even mention April 30, but if you filed it, for example,
on the 1st of April --
MR. LEVIN: I assure you, Your Honor, we will not file it
on the 1st of April.
THE COURT: Okay. All right. So let's be looking at
different -- and also, a factor is how much discovery the
parties are talking about here. That may become a factor as well
and whether there is disruption to either side.
MR. SPECTOR: Your Honor, I think --
THE COURT: Mr. O'Neill?
MR. SPECTOR: Mr. O'Neill has some comments. Rather than
pass it through, I'll let him speak for himself.
THE COURT: All right.
MR. O'NEILL: It's just a suggestion for all parties and
also for the Court, Your Honor. Perhaps we should wait and see
whether such a motion is filed --
THE COURT: Yes.
MR. O'NEILL: -- and then we -- the parties can confer
about scheduling and discovery and also reach out to the Court if
necessary to have a scheduling conference --
THE COURT: Perfect.
MR. O'NEILL: -- to see what the timing should be, what
dates are going to work, what discovery there should be if any is
needed rather than try to --
THE COURT: All right.
MR. O'NEILL: -- set those parameters --
THE COURT: That's --
MR. O'NEILL: -- now, and that would give everybody a
chance for input and the Court an opportunity to decide issues
which we would not be able to decide among ourselves.
THE COURT: And to talk about schedules at that point as
well which may be in flux to some extent.
MR. LEVIN: That's certainly acceptable to IBM, Your
THE COURT: All right. Mr. Lewis?
MR. LEWIS: Your Honor, one other request, and it could --
it's only a request, and even at that, I suppose it isn't
extraordinary, and that is that I ask that the parties - we have
heard some dates that are available now, and I would ask that
people try to keep those dates open at least so that when we do
have a scheduling conference, we don't all of a sudden find out
none of us can do it until August.
THE COURT: Right. My schedule fills up, you know, here
and there, and I don't like to hold too many dates open, but I will
make sure that there is time available.
MR. LEWIS: Thank you, Your Honor.
THE COURT: You bet. All right, counsel. Is there anything
further to discuss?
COUNSEL: No, Your Honor.
THE COURT: All right. Thank you all, and I wish you all a
COUNSEL: Thank you.
COUNSEL: Thank you.
MR. SPECTOR: Who's going to be -- are you going to be
providing your own order or do you want somebody to do --
THE COURT: I'll do an order. Yes.
MR. SPECTOR: Okay.
THE COURT: I will do an order on this. Thank you.
COUNSEL: Thank you, Your Honor.
* * * * *
C E R T I F I C A T I O N
I, Maureen Emmons, court approved transcriber, certify that the
foregoing is a correct transcript from the official electronic
sound recording of the proceedings in the above-entitled
(digital signature of Maureen Emmons) Date:
DIANA DOMAN TRANSCRIBING