Here's the IBM objection [PDF] to SCO's proposed sale of assets to unXis, as text. Novell's objection is here, PDF and text. And here's SCO's proposed sales agreement which they each reference.
You've never read anything like this, not in the entire history of the SCO saga. The picture is getting darker.
The really stunning parts begin on page 7 of the filing, where IBM reports on what it has found out in discovery. There is one sentence that I don't believe even a skillful attorney can dance around. There will have to be some explanation for it, paragraph 13, about the payments to Stephen Norris by SCO's German affiliate:
None of the German affiliate's payments appear to have been disclosed previously to this Court. Worse, for SCO, is that IBM is not yet done with discovery. Remember when we were trying to figure out SCO's finances, comparing the MORs with the SEC filings, and we couldn't get the subsidiaries' money to add up? Read on and light bulbs will go on in your head.
Here's an explanation of bankruptcy fraud, and here's the DOJ's page of resources on the topic. Here's the page that explains what kinds of things the law categorizes as fraud. Because I know that is the next thing you will be asking me to explain.
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE
The SCO GROUP, INC., et al.,
Case No, 07-11337 (KG)
Hearing Date: July 27, 2009 at 9:00 a.m.
prevailing Eastern Time
Objection Deadline: July 20, 2009 at 4:00
p.m. prevailing Eastern Time
Related Docket No.: 815
OBJECTION OF INTERNATIONAL BUSINESS MACHINES
RESPONSE TO DEBTORS' MOTION FOR AUTHORITY TO SELL PROPERTY
OUTSIDE THE ORDINARY COURSE OF BUSINESS FREE
AND CLEAR OF INTERESTS AND FOR APPROVAL OF ASSUMPTION
AND ASSIGNMENT OF EXECUTORY CONTRACTS AND
UNEXPIRED LEASES IN CONJUNCTION WITH SALE
The SCO Group, Inc. ("SCO Group") and SCO Operations,
Inc. ("Operations", and, collectively with SCO Group,
"SCO" or the "Debtors"), the debtors and debtors in
possession, filed their "Motion for Authority to Sell Property
Outside the Ordinary Course of Business Free and Clear of Interests
and for Approval of Assumption and Assignment of Executory
Contracts and Unexpired Leases in Conjunction with Sale," on June
22, 2009 (the "Motion").
International Business Machines Corporation ("IBM"), a
creditor and stockholder in these Chapter 11 cases, objects to the
Motion based on the deficiencies in the record for approval of the
Motion and in the underlying Purchase and Sale Agreement.
A. The Purchase and Sale Agreement
1. The Purchase and Sale Agreement. The Motion
seeks, among other things, authority to sell the "Purchased Assets"
(as defined below) free and clear of interests and claims in a
private sale under and in accordance with the Purchase and Sale
Agreement dated June 15, 2009 (the "PSA"), by and among SCO
Group, Operations, SCO Global, Inc, (collectively, SCO Group,
Operations and SCO Global, Inc., the "Sellers") and unXis,
Inc. (the "Purchaser").
2. Purchased Assets. Under the PSA, the "Purchased
Assets" are defined to include:
substantially all of the Debtors' assets related to the UNIX and
certain of the Debtors' nondebtor subsidiary companies (the
certain of the Debtors' mobile platform products, other than
certain Mobility applications (including the Debtors' "Me Inc,"
technology and products),
all right, title and interest of the Sellers in and to the
rights of SCO Group, if any, with respect to certain agreements
between AT&T Technologies, Inc. and IBM and certain agreements
between AT&T Technologies, Inc. and Sequent Computer Systems,
Inc. (collectively, the "Litigated Contract Rights"), in
each case as finally determined in the litigation pending in the
United States District Court for the District of Utah (the "Utah
Court") between SCO Group and Novell, Inc. ("Novell")
and presently on appeal
before the United States Court of Appeals for the Tenth Circuit
(the "Novell litigation") and subject to certain provisions
of the PSA relating to SCO Group's retention of rights,
all right, title and interest of the Sellers in and to all
copyrights the ownership of which is claimed by SCO Group in the
Novell litigation (the "Litigated Copyrights"), as finally
determined in the Novell litigation and subject to certain
provisions of the PSA relating to SCO Group's retention of rights,
all rights to recover past, present and future damages from
third parties for the breach, infringement or misappropriation, as
the case may be, of any of the foregoing. (Mot. ¶ 4; PSA
3. Excluded Assets and the Retained SCO Rights.
The PSA provides for the Debtors to retain, inter alia,
certain Mobility applications, including the Debtors' "Me Inc."
technology and products, (PSA at Ex. D.); and
the "Retained SCO Rights," defined as:
all right, title and interest in and to the "Pending SCO
Litigation Claims" (which are the pending actions against Novell,
IBM, AutoZone and Red Hat), and
"such right, title and interest in and to the Litigated
Copyrights and the Litigated Contract Rights as are finally
determined in the Novell Litigation to have been owned by SCO Group
as [sic] the Closing Date."
(PSA § 12.1,) The PSA provides that the proceeds of any of
the claims under the Retained SCO Rights will not be transferred to
the Purchaser under any circumstances and shall be free of any
claim of Purchaser. (PSA at § 12.1.) The Motion describes the
reason for the Retained SCO Rights provision as follows:
SCO Group retains its claims... for the purposes of
continuing the pending litigation and also asserting claims against
third parties on the grounds that the Linux operating system and
Linux-based products infringe those rights.
(Mot. ¶ 7.)
4. Excluded Liabilities. The PSA provides that
"the Purchaser shall not assume [or] be liable for" any Excluded
Liabilities, including any liabilities (i) in connection with any
"Action," including "the Novell litigation, the IBM Litigation, the
AutoZone Litigation and the Red Hat Litigation" and (ii) for "SVRX
Royalties under any Contracts that are determined in any Action to
be SVRX Licenses as a result of a final determination in the Novell
Litigation that SCO Group is the owner of the Litigated
Copyrights." (PSA §§ 2.5(g), (h).)
5. The Base Purchase Price. In exchange for the
Purchased Assets, the Purchaser will pay the Debtors $2.4 million,
consisting of a $250,000 deposit plus $2,150,000 payable by
delivery of a letter of credit (the "Letter of Credit -
Balance") at closing. (Mot. ¶ 5.)
6. The Letter of Credit-Sun. In addition, the
Purchaser will post a $2,850,000 letter of credit (the "Letter
of Credit-Sun") for the benefit of the Debtors to provide for
the payment through escrow of Novell's judgment against SCO Group
arising from the Novell litigation (the "Novell Summary
Judgment"). The PSA provides that if the Novell Summary
Judgment "is affirmed in whole or in part by the United States
Court of Appeals for the Tenth Circuit" on or before August 31,
2009, then the Letter of Credit-Sun shall be drawn to pay the
amount owing to Novell. (PSA § 3.3(a).) The PSA also provides
that if the Novell Summary
Judgment is "reversed and/or remanded in whole or in part" on or
before August 31, 2009, then the escrow agent shall continue to
hold the Letter of Credit-Sun and that it may not be drawn until
the United States District Court for the District of Utah rules on
the remand. (PSA § 3.3(b).) (The PSA does not describe the
treatment of the Letter of Credit-Sun if the Novell Summary
Judgment is affirmed in part and reversed or remanded in
part.) The PSA also provides that the Purchaser may elect at its
sole discretion to require the Debtors to seek further appellate
review, which the "Purchaser shall direct and control" (PSA §
3.3(a)), and if the Novell litigation is returned to the District
Court, the Purchaser shall direct and control the litigation while
the Letter of Credit-Sun is in effect and subject to being drawn.
(PSA § 3.3(b).) Finally, if the Court of Appeals does not rule
by August 31, 2009 or if the Letter of Credit-Sun is not drawn by
December 31, 2009, then the Letter of Credit-Sun terminates. (PSA
7. Additional Assets. In addition, the PSA grants
the Purchaser additional rights and assets in the future without
If "the rights of Sellers or of any Purchased Subsidiary to the
Company Technology [technology and intellectual property used in
the operation of the UNIX business, including the Litigated
Copyrights, by any Seller and/or by any Purchased Subsidiary] and
related Purchased Assets are expanded through Sellers' appeal of
prior rulings in the Novell Litigation, and subsequent trial or
other proceedings, those expanded rights will also be transferred
to Purchaser as part of this] transaction (including subject
Article XII hereof [relating to SCO Group's retention of rights
described below]) without further payment by Purchaser." (PSA
§ 2.2.), and
If the Debtors are unable to sell the "Java Patents" (as defined
in the PSA) by December 31, 2009, then they are assigned to the
Purchaser as of January 1, 2010 without further consideration. (PSA
8. The Later Transfer of the Retained SCO Rights.
The PSA also provides for the later transfer to the Purchaser of
the SCO Retained Rights, under specified circumstances:
All right, title and interest of Sellers and their affiliates
(including any rights as a licensee) in and to the Litigated
Copyrights and the Litigated Contract Rights immediately and
automatically become vested in, owned by, and assigned and
transferred to the Purchaser, without any further act or deed or
consideration being required of the Purchaser, upon the first to
occur of any of the following:
A final, non-appealable determination is made in the Novell
litigation that none of the Litigated Copyrights are owned by SCO
- Prior to confirmation and substantial consummation of
a plan of reorganization in the Chapter 11 Cases, the Bankruptcy
Court enters an order in the Chapter 11 Cases converting either of
the Chapter 11 Cases to a case under Chapter 7 of title 11 of the
United States Code, (b) [sic] appointing a Chapter 11 trustee in
the Chapter 11 Cases, or (c) appointing an examiner having enlarged
powers beyond those set forth under Bankruptcy Code section
1106(a)(3) in the Chapter 11 Cases; ... and
the tenth anniversary of the Closing Date.
(PSA § 12.4.)
9. Timing of the Closing. The Closing will take
place "on the Business Day selected by Purchaser that is after the
Sale Order is entered and in any event by no later than the
Termination Date, or such other date as Sellers and Purchaser shall
mutually agree, subject to satisfaction of all conditions to
Closing...." (PSA § 4.1.) The "Termination Date" is defined as
the date that is 90 days from the date of the PSA (Monday,
September 14, 2009) or such later
date as the Debtors and the Purchaser agree. (PSA § 1.1.)
The PSA does not require the Purchaser to close as promptly as
practicable after the Sale Order is entered.
10. Deposit, Termination and Liquidated Damages
Provisions. The PSA acknowledges the Purchaser's $250,000
cash deposit concurrently with the execution and delivery of the
PSA. (PSA § 3.1.) The Debtors may terminate the PSA under
specified circumstances, including with the Purchaser's consent, if
the Court does not approve the PSA or if a Governmental Authority
enjoins the sale. (PSA § 4.4.) If the PSA is terminated under
any of these circumstances, the Purchaser has no liability to the
Debtors and is entitled to a return of the $250,000 deposit. (PSA
§ 3.2(b),(d).) In addition, the Debtors may terminate if the
Purchaser breaches the PSA, including by failing to close. (PSA
§ 4.4(f).) In that case, the Debtors "shall be entitled to
receive the Cash Deposit [of $250,000] as liquidated damages and
not as a penalty as Sellers' sole and exclusive remedy as a result
of such termination." (PSA §4.6(c).) The Purchasers would have
no other liability to the Debtors or the estates.
B. Testimony about the Negotiation of the Purchase and
11. The discovery that IBM has taken over the past two weeks
reveals previously undisclosed facts that are inconsistent with the
full disclosure requirements and fiduciary duties imposed on a
Chapter 11 debtor in possession and imply that the transaction is
no more real than the previous transactions the Debtors have
proposed in these Chapter 11 cases. Because discovery has not yet
been completed and not all final deposition transcripts are
complete, IBM reserves the right to supplement this Statement and
to present evidence at the hearing on the Motion in addition to the
matters set forth below.
12. CEO Darl McBride's Payments to Stephen Norris.
It appears that the Debtors' CEO Darl McBride made payments from
his own personal funds to or for the benefit of Stephen Norris,
apparently in connection with the pending sale and prior,
to obtain a buyer for the Debtors' assets. According to Mr.
McBride's deposition testimony, he made the payment or payments
through Mark Robbins, whom he knew socially and who said he would
"backstop", through his company AIP, any deal with Mr. Norris.
(McBride Dep. Tr. 35:13-19, 42:1-18, 83:18-23.1 Mr. McBride claimed he
loaned Mr. Robbins $300,000, $100,000 of which went to Mr. Norris.
(McBride Dep. Tr. 84:18-21, 86:18-23, 87:14-24.) McBride insisted
this was a loan to Mr. Robbins and not a payment to Mr. Norris
related to the Debtors, but he produced no documentation supporting
the claim that it was a loan or otherwise reflecting the
transaction. (McBride Dep. Tr. 84:4-19, 88;19-23.)
13. For his part, Mr. Norris testified that he received $200,000
from affiliates of the Debtors. He testified that Mr. McBride paid
him the first $100,000 for Mr. Norris's work in helping the Debtors
look for buyers and that the Debtors' German affiliate paid him the
second $100,000 as a consulting fee in or around the fall of 2008.
(Norris Dep. Tr. 56:4-56:21, 60;24-61:16.) Mr. Norris admitted that
the first $100,000 was not paid under a written agreement. (Norris
Dep. Tr. 59:19-60:6.) He claimed, however, that he had a consulting
agreement with the German entity for the second $100,000, although
he has not produced a copy. (Norris Dep. Tr. 60;24-62;10.) Mr.
Norris also admitted that the German affiliate paid for travel he
took to Europe. (Norris Dep. Tr. 64:13-17.) None of the German
affiliate's payments appear to have been disclosed previously to
this Court. (Norris Dep. Tr. 60:24-62:10.) Mr. Norris testified
that he might also seek additional compensation for his work on the
PSA. (Norris Dep. Tr. 65:15-22.)
14. Of course, the very involvement of Mr. Robbins in
introducing Mr. McBride to Mr. Norris calls into question the good
faith of the contemplated transaction. In its January 8, 2009,
disclosure to the Court, the Debtors represented that Mr. Robbins
— Mr. Norris's "partner" — had "extensive experience in
structured finance and private equity as co-founder and managing
partner of Peninsula Advisors" and "served as Investment Director
and lead negotiator with several leading financial institutions."
(Disclosure Statement in Connection With the Debtors' Amended Joint
Plan of Reorganization (filed January 8, 2009), at 20.) [Docket No.
655] And Mr. Robbins first introduced Mr. Norris to the Debtors,
laying the foundation for the PSA. (See Norris Dep. Tr. at
34:19-35:17; see also McBride Dep. Tr. at 35:6-16.) But both
Mr. McBride and Mr. Norris have testified that they believe Mr.
Robbins to be involved in fraud. (McBride Dep. Tr. 62:6-15; Norris
Dep. Tr. 45:21-48:16.) Mr. Norris "had come to find out and pretty
definitively that Robbins had been lying to everyone and
misrepresenting essentially everything to everyone and had probably
engaged in a whole variety of frauds." (Norris Dep. Tr.
15. Financing for the PSA Transaction. Mr. Norris
claimed that he had fairly firm plans to line up capital for the
transaction proposed under the PSA, but he did not provide
particulars. (Norris Dep. Tr. 92:14-93:7.) He admitted, however,
that he has no executed agreements from anyone to invest in this
transaction, that there are no written commitments to back up
either the Letter of Credit-Balance or the Letter of Credit-Sun and
that he has no scheduled meetings over the next two weeks with any
potential investors (Norris Dep. Tr. 96;12-25, 97:9-23, 179:15-21.)
He claimed to have a variety of interested bidders, but did not
clearly explain his solicitation process and, apparently on the
advice of counsel, refused to identify any of the potential
bidders. (Norris Dep. Tr. 159:1-160:18, 165:8-166:18.)
16. Explanations for the Letter of Credit-Sun and Retained
SCO Rights Provisions in the PSA. Mr. McBride testified
that he had no explanation for the expiration of the Letter of
Credit-Sun or for the Retained SCO Assets provision in Section
12.4(iv) of the PSA noted above and discussed in more detail below.
(McBride Dep. Tr. 151:18-153:17, 164:23- 167:21.) The Motion also
does not provide any explanations.
C. Additional Discovery and Evidence
17. In anticipation of the hearing, IBM asked the Debtors to
produce documents important to the Motion and the pending motions
to convert, including documents concerning: (1) communications
between the Debtors and unXis or Stephen Norris; (2) offers or bids
to acquire, or expressions of interest in acquiring, any or all of
the Debtors' assets; and (3) the Debtors' financial and other
performance. Debtors essentially declined to cooperate. So far as
IBM can tell, they made no more than a token effort to search for
the requested documents and produced only a few documents, while
withholding a much larger set of relevant documents. Debtors'
refusal to conduct a reasonable search for and produce the
requested documents materially impedes IBM's, Novell's, the U.S.
Trustee's and this Court's ability properly to test the assertions
underlying the Motion and their opposition to the motions to
convert. IBM respectfully requests that the Court require the
Debtors to produce the requested documents and decline to approve
the Motion unless the Debtors do so in advance of the hearing.
* * *
18. As more fully described below, the Motion does not provide
adequate evidence that the proposed sale meets the requirements for
court approval of a sale under Section 363 of the Bankruptcy Code.
In addition, the PSA contains provisions that violate Section 363's
"good faith" requirement and includes terms that unfairly benefit
the Purchaser at the expense of creditors and the estate. The sale
process also has been tainted both by non-disclosure of
important payments and by other circumstances that call into
question the intention and ability of the parties to consummate the
transaction. Therefore, the Court should not grant the Motion.
A. The Requirements for Approval of a Sale Under Section
19. This Court has clearly summarized what is required for a
sale of assets out of the ordinary course of business:
(1) there is a sound business purpose for the sale; (2) the
proposed sale price is fair; (3) the debtor has provided adequate
and reasonable notice; and (4) the buyer has acted in good faith.
In re Delaware & Hudson Railway Co., 124 B.R. 169, 176
(D. Del. 1991). The element of "good faith" is of particular
importance, as the Third Circuit made clear in In re Abbotts
Dairies of Pennsylvania, Inc., 788 F.2d 143, 149-50(3d Cir.
1986) ("... when a bankruptcy court authorizes a sale of assets
pursuant to section 363(b)(1), it is required to make a finding
with respect to the ('good faith' of the purchaser.").
In re Exaeris Inc., 380 B.R. 741, 744 (Bankr. D. Del.
2008). The meaning of these four requirements and their reasons are
20, The court must scrutinize a sale of a substantial portion of
a debtor's assets under Section 363 of the Bankruptcy Code closely
because of the danger that such a sale might deprive parties of
substantial rights inherent in the Chapter 11 plan confirmation
process. 3 Alan N. Resnick & Henry J. Sommer, Collier on
Bankruptcy, ¶ 363.02 (15th rev. ed. 2005). Therefore,
where a debtor in possession seeks approval of a sale or
disposition of property of the estate outside of the ordinary
course of business, "there must be some articulated business
justification" before the court may authorize such disposition
under Section 363(b) of the Bankruptcy Code. In re Lionel
Corp., 722 F.2d 1063, 1070 (2d Cir. 1983); In re Del. &
Hudson Ry. Co, 124 B.R. 169, 176 (D. Del 1991); In Re
Montgomery Ward Holding Corp., 242 B.R. 147, 153 (Bankr. D.
21. As to the fair sale price requirement, as the Debtors
recognize, "[t]he auction procedure has developed over the years as
an effective means for producing an arm's length fair value
transaction." (Mot. ¶ 11 (citing Ramsay v. Vogel, 970
F.2d 471, 473 (8th Cir. 1992))). "It is the burden of the
proponents of the Sale to establish that the price is fair which
would require information on the value of the assets being sold,
including the business, claims being released, inventory and the
like." In re Exaeris Inc., 380 B.R. at 745.
22. The Debtors also acknowledge the importance of the "good
faith" requirement, noting "judicial approval under section 363 of
the Bankruptcy Code requires a showing that the proposed action is
fair and equitable, in good faith and supported by a good business
reason." (Mot. ¶ 9 (citing In re Phoenix Steel Corp.,
82 B.R. 334, 335-36 (Bankr. D. Del. 1987))).
23. Although the Bankruptcy Code does not define "good faith"
for purposes of determining whether a purchaser acted in good faith
in a Section 363 sale, most courts have adopted a traditional
equitable definition, stating that a purchaser who acts in good
faith is "one who purchases the assets for value, in good faith and
without notice of adverse claims". In re Made in Detroit
Inc., 414 F.3d 576 (6th Cir. 2005) (quoting In re Rock
Indus. Mach Corp., 572 F.2d 1195 (7th Cir. 1978)). The good
faith of a purchaser is shown by the integrity of his conduct
during the course of the sale proceedings; where there is a lack of
such integrity, a good faith finding may not be made. A purchaser
will not be found to have acted in good faith where there is
"fraud, collusion between the purchaser and other bidders or the
trustee, or an attempt to take grossly unfair advantage of other
bidders." In re Gucci, 126 F.3d 380, 390 (2d Cir. 1997);
In re Rock Indus., 572 F.2d at 1198.
24. And of course, disclosure is a fundamental requirement of
good faith. A sale is not in good faith where "the relationship
between the seller and the buyer has been concealed". In re
Wilde Horse Enters., Inc., 136 B.R. 830, 842 (Bankr. C.D. Cal.
1991) (citing In re Tri-Can, Inc., 98 B.R. 609, 618-619
(Bankr. Mass. 1989). The court in Wilde Horse stressed the
importance of full disclosure, noting:
Of course, the court and the creditors can only make an
"articulated business" judgment regarding the prudence of the sale
where there has been a full disclosure of the details of the
proposed sale by its proponent. "The key to the reorganization
Chapter... is disclosure... ." The essential purpose served
by disclosure is to ensure that parties in interest are not left
entirely at the mercy of the debtor and others having special
influence over debtor.
Id. at 841 (citations omitted; emphasis in original).
Although Wilde Horse involved disclosure of an insider's
dealings with the debtor in possession, the court's prescription
for disclosure in connection with a sale ensures good health for
the sale process even for non-insider transactions: "Clearly then,
a debtor who proposes a sale of all of its assets to an insider
must fully disclose to the court and creditors the relationship
between the buyer and the seller, as well as the circumstances
under which the negotiations have taken place, any marketing
efforts, and the factual basis upon which the debtor determined
that the price was reasonable." Id. at 842; see also
In re Medical Software Solutions, 286 B.R. 431, 440 (Bankr.
D. Utah 2002) ("In order to approve a sale of substantially all the
[d]ebtor's assets outside the ordinary course of business, ...
[t]he debtor must show... there has been adequate and reasonable
notice to interested parties, including full disclosure of the sale
terms and the [d]ebtor's relationship with the buyer."); In re
Betty Owens Schools, Inc., No. 96 Civ. 3576(PKL), 1997 WL
188127 at 4 (S.D.N.Y. 1997) ("[A] debtor-in-possession who proposes
a sale of all of its assets to an insider must fully disclose the
relationship between the buyer and the seller."). Belated
disclosure after the truth
has been uncovered should not suffice to cure earlier
non-disclosure. A debtor's response of disclosing only after being
caught cannot constitute good faith.
25. Additionally, courts also assess the fiduciary duty of a
debtor in possession, as a fiduciary of the creditors and the
estate, and prohibit the debtor in possession from self dealing
with assets of the estate or taking self-interested actions, unless
the debtor in possession proves that the self-interested
transaction is inherently fair. See In re Schipper,
109 B.R. 832, decision aff'd, 112 B.R. 917 (N.D. Ill. 1990),
aff'd, 933 F.2d 513 (7th Cir. 1991).
26. The Motion does not show at all how the PSA meets at least
three of these four sale requirements. The Motion does not show a
sound business purpose for the sale. Rather, the timing of the
sale, especially the dramatic eleventh hour, fifty-ninth minute
signing before the hearing on the conversion motions, suggests just
the opposite. The Motion does not show how the price was
determined, whether it is fair or whether the proposal for a
private sale will generate a sufficient market test and a fair
price. There is no evidence of the good faith of the Debtors or of
the Purchasers, and certain PSA provisions, the testimony of the
principal parties involved in its negotiation and the lack of
disclosure of payments from the Debtors' affiliate to Mr. Norris,
who arranged the sale and signed the PSA on behalf of the
Purchaser, imply a lack of good faith. Finally, there is no
evidence that the Purchaser has the financing available to close
27. IBM objects to the Motion because of, among other reasons,
the inclusion of the Retained SCO Rights "poison pill" provision,
the Letter of Credit-Sun provisions and the termination rights
discussed below and because of the undisclosed and unexplained
payments and the absence of committed financing. But even if the
Debtors address those matters, this Court cannot approve the sale
unless the Debtors make a complete record in support of the
Motion, including not only on the matters to which IBM objects,
but also on all of the requirements for approval of a sale under
Section 363 of the Bankruptcy Code. IBM therefore reserves the
right to object to additional aspects of the Motion and the
B. The Sale Is Not In Good Faith
l. The PSA's Poison Pill Provision Is Not in Good
28. The Debtors have repeatedly touted (over IBM's objections)
the supposed significance and allegedly astronomical value of the
Litigated Copyrights and the Litigated Contract Rights, including
recently in the Debtors' Response to Motions to Dismiss or
Convert Filed by United States Trustee (D.E. #750), International
Business Machines Corporation (D.E. #751), and Novell, Inc. (D.E.
#753) ("Response to Conversion Motions") [Docket No.
778], stating that
SCO represents a daunting threat to IBM and Novell,
even setting aside the billions of dollars that SCO stands to
recover directly if it prevails in court .... If SCO establishes
[its claimed copyrights and contractual rights in UNIX] in court,
SCO also would have profitable claims in countless Linux
distributions to customers....
(Response to Conversion Motions, at 3.) Yet in the face of motions
to convert the Chapter 11 cases, the Debtors include a provision in
the PSA, Section 12.4(iv), that would forfeit those assets if their
cases are converted to Chapter 7 or if a trustee is appointed.
Certainly, any such provision in a prebankruptcy agreement would
run afoul of Section 365(e) of the Bankruptcy Code, invalidating
ipso facto clauses in executory contracts, or Section 541(c)
of the Bankruptcy Code, invalidating any transfer restriction based
on an ipso facto clause.
29. There is no more reason to permit such a provision here,
even if conversion motions were not pending. If approved, the
provision would create a penalty for the estates if the pending
conversion motions were granted, improperly interfering with the
exercise of the Court's discretion to make an appropriate
disposition of these Chapter 11 cases and
imposing a limitation on the Court's authority to determine what
is in the best interests of creditors and the estate.
30. The Motion offers no reason for such a provision. Nor can
one readily imagine how such a provision would benefit the estates
or any reason why a purchaser in general or this Purchaser in
particular would reasonably demand transfer of an asset for no
additional consideration only if the cases were converted or a
trustee were appointed. In fact, Mr. McBride, the Debtors' CEO,
could not name a legitimate business reason for the poison pill.
(McBride Dep. Tr. 167;10-21.) Under circumstances where the Court
may otherwise have determined that the best interests of creditors
and the estate would be served by conversion of these Chapter 11
cases or the appointment of an examiner or a Chapter 11 trustee,
this provision invites the Court to tie its own hands in
considering the conversion motions, without any basis or
explanation. The inclusion of the poison pill when the conversion
motions are pending is indicative of a self-interested motive, lack
of good faith in the sale or other breach of fiduciary duty to the
31. Therefore, the Motion should not be approved if this poison
pill against fair consideration of the conversion motions remains a
part of the PSA.
2. The Undisclosed Payments Are Not in Good Faith
32. While the Debtors have largely refused to produce the
documents IBM has requested, discovery has unearthed undocumented
payments by the Debtors' affiliates in connection with the PSA that
have not been previously disclosed to this Court. The payments
appear to have totaled $200,000, although some of the testimony
suggests that they exceeded $300,000, including expense
reimbursement. That amount exceeds the $250,000 deposit the
Purchaser has made under the PSA. Full disclosure is the hallmark
of good faith in a Chapter 11 case. Without full disclosure of all
the payments, their sources and their purposes and a determination
by this Court that the payments were proper and did not divert
value away from
these estates, this Court cannot approve the Motion. Payments
from the Debtors' affiliates to the putative purchaser that cover
nearly all the money the Purchaser has deposited in escrow suggest
anything but a good faith commitment to consummating the deal.
C. The Sale Price Is Not Fair.
1. The Letter of Credit-Sun Terms Are Not Fair
33. As currently constructed, the PSA provides that the Purchase
Price will include a draw of all or a portion of the Letter of
Credit-Sun if any payment obligation of SCO Group to Novell under
the Novell Summary Judgment is affirmed by a final, nonappealable
judgment. (PSA § 3.3.) By contrast, the Purchase Price will
not include any amount under the Letter of Credit-Sun if the Novell
Summary Judgment is reversed or remanded in whole or in part. (Mot.
¶ 5; PSA § 3.3.) Thus, the Purchaser would pay a higher
price if it is determined that the Litigated Copyrights, which the
Debtors have valued so highly, and contractual rights that the
Debtors claim to own are not owned by the Debtors, and
consequently, not included in the Purchased Assets. The Purchaser
would pay a lower price if those allegedly valuable assets
are included. It does not require citation of authority to
show that a purchase and sale agreement that provides for a lower
price upon the transfer of higher value assets does not provide a
fair sale price to the estate.
34. What's more, whether or not the Tenth Circuit's ruling on
the Novell Summary Judgment enhances or diminishes the Debtors'
assets, a purchase price that fluctuates based only on the Debtors'
liabilities rather than on its assets cannot be a fair price,
either from the perspective of the creditors who would be left
unpaid if the Letter of Credit-Sun were terminated or devoted
solely to payment of a single creditor or, if assets were adequate
to pay all creditors, from the perspective of the Debtors'
35. The Letter of Credit-Sun provisions put the estate at risk
in another way. If the Court of Appeals reverses or remands the
Novell Summary Judgment, the Purchaser may control the litigation
on remand in its sole discretion while the Letter of Credit-Sun is
in effect. Alternatively, the Purchaser may require the Debtors to
pursue further appellate review. The Letter of Credit-Sun expires
under all circumstances on December 31, 2009. Therefore, it would
not be a difficult for the Purchaser to extend the matter for a few
months until the Letter of Credit-Sun expires, depriving the estate
of the additional value it would otherwise represent. Such a
provision does not represent a fair price.
2. The Closing and Termination Provisions Are Not
36. The Debtors have made clear they expect a ruling from the
Tenth Circuit on or before August 31, 2009. (See Response to
Conversion Motions, at 3.) The Purchaser has the right under the
PSA to delay closing until after August 31, 2009, regardless of
whether the conditions to closing are actually satisfied by then.
Thus, the Purchasers can wait until at least mid-September to see
if the Tenth Circuit's ruling is favorable to the Debtors before
having to close on the deal. If the ruling is favorable to the
Debtors, the Purchaser may close for only $2,400,000, If it is
unfavorable, the Purchaser can choose to close for that amount or
choose not to close, forfeiting only its $250,000 deposit and
suffering no other liability. Such a provision is not a fair
purchase price. It is an option for about 5% of the total purchase
price. The "Purchase Price" touted by the Debtors masks the
contingency and optionality upon which it is based.
37. A sale agreement that provides the purchaser only an option
and does not require the purchaser to close is of even greater
concern where the purchaser does not have committed financing for
the transaction and no agreements in place to obtain financing. Mr.
Norris testified that there is no financing in place for this
transaction. Lining up an additional $2,150,000 of financing must
certainly be easier than lining up an additional $5,000,000. By
structuring the PSA as an option, the Purchaser has the ability
and, without committed financing in place yet, the incentive to
walk away from the deal if the Tenth Circuit's ruling is not
favorable to the Debtors.
38. Furthermore, where only an option is involved, there does
not seem to be any basis on which to dispense with an auction and
proceed with a private sale, as the Debtors propose to do here. The
very structure of the transaction belies any supposed urgency. As
the Debtors acknowledge in their Motion, an auction is the
effective means to determining a fair price. The option arrangement
here, coupled with a private sale, does not ensure that the estates
are receiving a fair sale price.
39. Therefore, the Motion should not be approved if PSA is not
amended to provide that the Letter of Credit-Sun is available to
the estates under all circumstances and that the Purchasers are
required to close, whatever the outcome of the Tenth Circuit
D. Additional issues
40. IBM has not completed discovery in connection with the
Motion and the PSA and therefore reserves its rights to object to
the sale on all grounds and based on any additional matters
revealed during discovery, including the lack good faith of both
the Purchaser and the Debtors, the lack of disclosure of the
Debtors' relationship with the Purchaser, the Debtors' business
justification for the sale and for particular terms of the sale,
such as the exclusion of the Me Inc. assets and its effect on the
Purchase Price, and the competing offers that the Debtors received
and rejected in the weeks leading up to the signing of the PSA.
For the foregoing reasons, IBM respectfully requests that this
Court deny the Motion and the PSA in its present form.
Dated: July 20, 2009
POTTER ANDERSON & CORROON LLP
Laurie Selber Silverstein (DE No. 2396)
R. Stephen McNeill (DE No. 5210)
CRAVATH, SWAINE & MOORE LLP
David R. Marriott
INTERNATIONAL BUSINESS MACHINES CORPORATION
Alec S. Berman
Attorneys for Creditor
International Business Machines Corporation
||Citations to depositions are to the rough versions as final
transcripts were not completed in time to be used in connection
with this memorandum, and not all depositions have yet been taken.
IBM will offer pertinent deposition testimony at trial if and as