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Petrofsky's Objection to SCO's Yarro "Loan" Motion - Update: November MORs
Monday, March 01 2010 @ 12:43 PM EST

Novell objected vigorously to SCO's Motion for PostPetition Financing, the proposed Ralph Yarro "loan" to SCO which also involves granting "security interests and superpriority administrative expense status", and now there's a second objection, from Al Petrofsky. This will not surprise us. What would surprise us would be the court granting the motion. To give you a taste of the flavor of this filing, here's the first paragraph of the introduction:
2. The trustee, carrying on the tradition of the debtors-in-possession before him, has submitted another half-baked proposal to obtain funding from a non-existent counterparty. Should this party soon come into existence and execute the agreement, but never produce a dime of funds, the trustee wishes to provide it with a parting gift of up to $50,000.
I can't defend the proposed loan terms, but I think Mr. Petrofsky has overstated them. I read the contract as saying that if the deal doesn't, for listed reasons, happen, then SCO has to pay Yarro's legal fees associated with trying to set up the loan, up to $50,000, with any unpaid expenses over that to come from litigation winnings, if any. That isn't really the same as saying SCO wants to provide Yarro with a parting gift. And when you overstate in a court of law, you greatly increase your odds of losing, because you may lead the judge to defend the very entity you hoped he would not rule for by making it seem your complaints are over the top. I also think the objection wasn't timely filed.

Here's the filing:
1068 - Filed & Entered: 02/28/2010
Objection
Docket Text: Objection of Petrofsky to Motion of Chapter 11 Trustee For Order (I) Authorizing Debtors' Estates to Obtain Postpetition Financing and to Grant Security Interests and Superpriority Administrative Expense Status Pursuant to 11 U.S.C. secs. 105, 363(c), 364(c), 364(e) and 507(b); (II) Modifying the Automatic Stay Pursuant to 11 U.S.C. sec. 362; and (III) Granting Other Relief (related document(s)[1051]) Filed by Alan P. Petrofsky (Attachments: # (1) Exhibit A: Electronically searchable text PDF of the Secured Super-Priority Credit Agreement# (2) Exhibit B: Pages from the website of the Delaware secretary of state regarding the status of "Seung Ni Capital Partners, L.L.C." as of February 26, 2010) (Petrofsky, Alan)
He filed on the 28th, which thanks to the dance that the Trustee and the judge went through may be too late, in that the final order filed on February 23rd said objections were due on the 26th, not in March. Novell's objection was timely filed.

The alleged LLC, he says, isn't even a legal entity in Delaware, but Novell already pointed that out. Petrofsky's main point is that if the loaned money is used to "continue to operate the business", it is actually a threat to the estate, in that operating *this* business means losing yet more money at a steady pace, judging from its behavior so far, because that is all that has happened since SCO entered Chapter 11. That's likely true, but to the judge it will be more hyperbole that I doubt he'll care much about. He knows they are losing money.

No MORs have been filed, Petrofsky points out, for November, December or January, despite representations from the Trustee that they would be filed by now, and again, Novell has already told the court about that.

The proposal certainly earns some scorn. Novell expresses what I think can only be described as righteous indignation, in fact, saying in effect that this is a plan to stiff the creditors for the benefit of Yarro and whoever the other lenders may be. In fact, I notice some wording about the other lenders that worries me:

SECTION 8.04.

Successors and Assigns. (a) Whenever in this Agreement any of the parties hereto is referred to, such reference shall be deemed to include the permitted successors and assigns of such party; and all covenants, promises and agreements by or on behalf of the Borrower and the Lender that are contained in this Agreement shall bind and inure to the benefit of their respective successors and assigns.

(b) The Lender may assign to one or more assignees all or a portion of its interests, rights and obligations under this Agreement (including all or a portion of its Commitment and its portion of the Loan at the time owing to it).

(c) The Lender may without the consent of the Borrower sell participations to one or more banks or other entities in all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitment and the Loan owing to it); provided, however, that: (i) the Lender' s obligations under this Agreement shall remain unchanged; (ii) the Lender shall remain solely responsible to the other parties hereto for the performance of such obligations; (iii) the participating banks or other entities shall be entitled to the benefit of the protections given to the Lender hereunder and shall be bound by the confidentiality provisions contained in Section 8.16 hereof to the same extent as if they were the Lender; and (iv) the Borrower shall continue to deal solely and directly with the Lender in connection with the Lender' s rights and obligations under this Agreement, and the Lender shall retain the sole right to enforce the obligations of the Borrower relating to the Loan and to approve any amendment, modification or waiver of any provision of this Agreement (other than amendments, modifications or waivers decreasing any fees payable to such participating bank or Person hereunder or the amount of principal of or the rate at which interest is payable on the Loan in which such participating bank or Person has an interest, extending any scheduled principal payment date or date fixed for the payment of interest on the Loan in which such participating bank or Person has an interest, increasing or extending the Commitment of such participating bank or Person or releasing all or substantially all of the Collateral). All amounts payable by the Borrower to the Lender hereunder in respect of any Loan and the applicability of the protection provisions contained herein shall be determined as if the Lender had not sold or agreed to sell any participation in the Loan, and as if the Lender were funding the participated portion of the Loan the same way that it is funding the portion of the Loan in which no participation has been sold.

(d) The Lender or participant may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section 8.04, disclose to the assignee or participant or proposed assignee or participant any information relating to the Borrower furnished to the Lender by or on behalf of the Borrower; provided that, prior to any such disclosure of information designated by the Borrower as confidential, each such assignee or participant or proposed assignee or participant shall execute an agreement whereby such assignee or participant shall agree (subject to customary exceptions) to preserve the confidentiality of such confidential information on terms no less restrictive than those applicable to the Lender pursuant to Section 8.15.

(e) The Lender may at any time assign all or any portion of its rights under this Agreement to secure extensions of credit to the Lender or in support of obligations owed by the Lender; provided that no such assignment shall release the Lender from any of its obligations hereunder or substitute any such assignee for the Lender as a party hereto. If the Lender is a fund that invests in bank loans it may (without the consent of the Borrower) pledge all or any portion of its rights in connection with this Agreement to the trustee for holders of obligations owed, or securities issued, by such fund as security for such obligations or securities, provided that any foreclosure or other exercise of remedies by such trustee shall be subject to the provisions of this Section 8.04 regarding assignments in all respects. No pledge described in the immediately preceding sentence shall release such Lender from its obligations hereunder.

(f) The Borrower shall not assign or delegate any of its rights or duties hereunder without the prior written consent of the Lender, which the Lender may grant or withhold in its sole discretion, and any attempted assignment without such consent shall be null and void.

Does this indicate that we never find out who these shadowy lenders are? They benefit equally with Yarro, but only Yarro deals directly with the borrower and he alone is responsible? How weird is that? I mean, if there is no control over who gets to be the beneficiary of this loan's terms, can Yarro sell to the Mob, just to pick the most extreme example I can think of? And yet, despite any interest or benefits going to the lenders, SCO can't sue them or hold them accountable in any way? Anyone see some light around the edges of this clause, some gaming possibilities?

And what does this definition mean?

" Loan Termination Date" means the earlier to occur of: (a) the date on which the Commitment is permanently reduced to zero pursuant to Section 2.06; and (b) the date that is five (5) days after the Closing Date.
Five days after the closing? Later there is this wording:
The Lender' s portion of the Commitment shall: (a) reduce to zero immediately after the borrowing of the Loan pursuant to this Section 2.01; and (b) terminate immediately and without further action on the Loan Termination Date. Amounts paid or prepaid in respect of Loan may not be re-borrowed.
Put those two together, and factor in that at first the lender, as I read the document, only has to put up some of the proposed monies immediately, and I have no idea what it's saying except that it feels like a back door. Do you know what it means? What exactly happens five days after the closing? Here's the wording in the Promissory Note:
2. Loan. The Lender shall make a portion of the Loan set forth on Exhibit " A" hereto in accordance, subject to, and in the manner set forth in terms and conditions of the Credit Agreement, the aggregate amount of which Loan shall not exceed Two Million and 00/100 Dollars ($2,000,000.00).
OK, but what's the minimum? What exactly is the Lender obligated to do?

I have a question. If the Trustee and Yarro meant for this proposal to be taken seriously as what it purports to be for, wouldn't someone at least file to register as a legal entity in Delaware? If it's true they have not, how serious are they? This isn't the first bogus sounding deal, Petrofsky points out, as Novell has as well. So, if it's not about the loan, what is this all about? Lets try to figure out what it might be about.

In the past examples, I viewed the various proposals as useful mainly for delay or to head off Chapter 7. SCO has to file the MORs some time or other, and they probably know that as soon as they do, there will be calls to send SCO to Chapter 7. They'd like to stay ambulatory until the SCO v. Novell trial is done in March. Filing a motion like this might be their last hope to keep standing long enough to try to win in court. I'm not saying I approve of such tactics, just saying that I wonder if this is what it's really about.

Could it be something worse? I mean, the Trustee has hinted that there is something odd about the subsidiaries. In all the MORs they are filing they have the disclaimer:

Historically, the Company may not have distinguished between direct liabilities of debtor and non-debtor companies. The Trustee with its financial advisors is conducting a thorough analysis of the intercompany arrangement among the debtors and the non-debtor subsidiaries and reserves the right to modify these MOR's upon completion of its review.
We noticed too that suddenly Japan and Germany seemed to be mighty flush. Something is holding back filing the MORs, I think, beyond being too busy, since it's a situation they said they thought would be resolved by now. I don't know what the X factor is, but I am kind of waiting for that shoe to drop.

If it's just a money crunch, if the loan were to happen, then they could file the MORs and tell the court that the problems revealed are now solved, or if it's denied, then they at least bought enough time arguing about it that the trial will have begun.

But what if the motion is granted? My, what terms! This is like in a movie borrowing from a loan shark, to me. You wouldn't do it unless you were, say, a gambling addict, and you were desperate to keep gambling at any cost.

Petrofsky quotes the Trustee's motion:

The Trustee is advised that Seung Ni Capital Partners, L.L.C. is a newly formed entity formed by Ralph J. Yarro III (“Yarro”) and was created for the purpose of providing postpetition financing to the Debtors.
He says it isn't formed in Delaware, which Novell said too, but I want to focus elsewhere. Remember I told you that if someone writes that they are advised that such and such is so, it means they can't put their hand on a Bible and swear to the truth of such and so? It means someone told them that and they are telling the court what they were told. This is the second time we've seen this Trustee use that language. It's possible that the trustee put forward this plan without even checking, in which case one has to ask why that could ever happen. Or, from that language, it is possible they did check, and they can't find any such entity either. And yet Cahn submitted this motion *anyway*!??! So what might that tell us, if Cahn knows or at least has reason to suspect that there may be no such legal entity?

It makes me wonder if there is some X factor we don't know, beyond the MORs, that has the Trustee worried enough that he'd like an exit strategy for himself, passing the football, so to speak, to Yarro and whoever the other possible lenders may be, and he's done. Then the litigation can proceed with no consequences to the estate and less to all the enablers.

Or, they anticipate various outcomes from the litigation, and the insiders would like to either benefit hugely, at the expense of creditors, by pushing, so to speak, to the head of the line, or get away with what SCO tried to pull. I wondered if the loan idea sprang from what they viewed as a chance to get money from Novell from the resurrected slander of title claim, perhaps.

Or, various shadowy figures in the background wish to fund SCO's litigation follies, or see some way to make money by interesting other investors in the litigation, or future litigation, but for some reason feel they must stay in the background, so Yarro is fronting for them and angling for what he needs to keep the game rolling. I mean, between this "loan" offer and Darl McBride's attempt to buy the mobility "business", what is the end result, if both motions were to be approved? To me, we are back at square one with the same old folks, same old dream, only with them getting off with no real consequences for the SCO litigation follies, in that they morphed into supposedly new entities, not responsible for what SCO Group did, with SCO left a bloodless corpse on the ground with no money for creditors or Novell or IBM or Maureen O'Gara or the pizza restaurant or anybody. All the assets are either moved elsewhere or under the lender's thumb. Here's the list of collateral for the loan:

EXHIBIT " B"

LIST OF COLLATERAL

1. Cash, checking, savings, and other accounts.

2. Security deposits paid by the Borrower, as tenant, under various leases.

3. Ownership interests in partnerships or joint ventures.

4. Accounts receivable.

5. Inventory.

6. Equipment, furnishings, and supplies.

7. Intellectual Property, as defined in the attached Credit Agreement.

8. Contract and similar rights.

See what I mean? Between them, the IP could end up in the hands of Misters Yarro and McBride. The creditors get nothing from this deal, in that the loan must be used only for the following things:
SECTION 3.06. Use of Proceeds. The Borrower will use the proceeds of the Loan solely: to pay fees and expenses related to the administration of the Bankruptcy Case, the operation of the Debtors and the costs related to the Litigation and the consummation of the Transactions contemplated by and subject to the terms of this Agreement. The Borrower shall use the entire amount of the proceeds of each Loan solely in accordance with this Section 3.06; provided, however, that nothing herein shall in any way prejudice or prevent the Lender from objecting, for any reason, to any requests, motions or applications made in the Bankruptcy Court, including any applications for interim or final allowances of compensation for services rendered or reimbursement of expenses incurred under clause (a) of Section 105, or Section 330 or 331 of the Bankruptcy Code, by any party in interest. For avoidance of doubt, no proceeds of the Loan or any cash collateral shall be available for any fees or expenses incurred in connection with the initiation or prosecution of any claims, causes of action, adversary proceedings or other litigation against the Lender.
So if SCO goes belly up, the creditors don't even get the fork lift, let along the intellectual property? They get nothing? Here's how the credit agreement defines Intellectual Property:
" Intellectual Property" means: (a) all right, title and interest of Borrower in and to patent applications and patents, including, without limitation, all proceeds thereof (such as, by way of example, license royalties and proceeds of infringement suits), the right to sue for past, present and future infringements, all rights corresponding thereto throughout the world, and all reissues, divisions, continuations, renewals, extensions, and continuations-in-part thereof (collectively, the " Patents" ); (b) all right, title and interest of Borrower in and to trademark applications and trademarks, including, without limitation, all renewals thereof, all proceeds thereof (such as, by way of example, license royalties and proceeds of infringement suits), the right to sue for past, present and future infringements, and all rights corresponding thereto throughout the world (collectively, the " Trademarks" ), and the good will of the business to which each of the Trademarks relates; (c) all copyrights of Borrower and all rights and interests of every kind of Borrower in copyrights and works protectible by copyright, and all renewals and extensions thereof, and in and to the copyrights and rights and interests of every kind or nature in and to all works based upon, incorporated in, derived from, incorporating or relating to any of the foregoing or from which any of the foregoing is derived, and all proceeds thereof (such as, by way of example, license royalties and proceeds of infringement suits), the right to sue for past, present and future infringements, and all rights corresponding thereto throughout the world (collectively, the " Copyrights" ); (d) all of Borrower' s trade secrets and other proprietary information, and all proceeds thereof (collectively, the " Trade Secrets" ); (e) all right, title, and interest of Borrower in, to and under license agreements and contracts concerning Patents, Trademarks, Copyrights, and Trade Secrets, all amendments, modifications, and replacements thereof, all royalties and other amounts owing thereunder, and all proceeds thereof (collectively, the " Licenses" ); and (e) All internet domain names and addresses of Borrower and all proceeds thereof.
My understanding was that SCO couldn't sell the IP, because so far, the only court decision is that the copyrights belong to Novell. Unless or until that changes, I was under the impression SCO couldn't sell, even to a willing entity who knew about the encumbrance. Can they use it as collateral? Are they?

Why would Cahn go along with any of this? Maybe my joke about the mob is true, and Cahn is strapped to his chair in the office, and they're threatening to kneecap him if he doesn't file this motion.

To be serious for a moment, I don't know. Maybe he's realized who he's dealing with, and doesn't want them to sue him? Maybe he just wants an exit strategy for himself, and he tried to find other solutions, but no one wants to buy or fund this company but the same folks who brought it to the dance to begin with? But it's all very disturbing.

Whatever this is about, it doesn't seem possible to me that they think this will fly. I mean, if they tried to make the terms any more egregiously unacceptable, what could they possibly add?

Update: The MORs for November and another bill from Ocean Park:

03/01/2010 - 1069 - Debtor-In-Possession Monthly Operating Report for Filing Period November 2009 (Debtor: The SCO Group, Inc.) Filed by Edward N. Cahn, Chapter 11 Trustee for The SCO Group, Inc., et al.. (Fatell, Bonnie) (Entered: 03/01/2010)

03/01/2010 - 1070 - Debtor-In-Possession Monthly Operating Report for Filing Period November 2009 (Debtor: SCO Operations, Inc.) Filed by Edward N. Cahn, Chapter 11 Trustee for The SCO Group, Inc., et al.. (Fatell, Bonnie) (Entered: 03/01/2010)

03/01/2010 - 1071 - Monthly Application for Compensation / Fourth Monthly Fee Application of Ocean Park Advisors, LLC, Financial Advisor to the Chapter 11 Trustee of the SCO Group, Inc., et al., for Compensation and Reimbursement of Expenses for the Period of January 1, 2010 through January 31, 2010 Filed by Ocean Park Advisors, LLC. Objections due by 3/22/2010. (Attachments: # 1 Notice # 2 Exhibit A # 3 Exhibit B # 4 Certificate of Service) (Fatell, Bonnie) (Entered: 03/01/2010)

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

IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE

__________

In re: The SCO GROUP, INC., et al.,

Debtors.

____________

Chapter 11

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

Hearing: March 5, 2010 at 11:00 a.m.
Related Docket No.: 1051

_________________________

OBJECTION OF PETROFSKY TO MOTION OF CHAPTER 11 TRUSTEE FOR ORDER (I) AUTHORIZING DEBTORS’ ESTATES TO OBTAIN POSTPETITION FINANCING AND TO GRANT SECURITY INTERESTS AND SUPERPRIORITY ADMINISTRATIVE EXPENSE STATUS PURSUANT TO 11 U.S.C. SECS. 105, 363(c), 364(c), 364(e) AND 507(b); (II) MODIFYING THE AUTOMATIC STAY PURSUANT TO 11 U.S.C. SEC. 362; AND (III) GRANTING OTHER RELIEF

1. I, Alan P. Petrofsky, an equity security holder of Debtor The SCO Group, Inc., hereby object to the Motion of Chapter 11 Trustee For Order (I) Authorizing Debtors’ Estates to Obtain Postpetition Financing and to Grant Security Interests and Superpriority Administrative Expense Status Pursuant to 11 U.S.C. secs. 105, 363(c), 364(c), 364(e) and 507(b); (II) Modifying the Automatic Stay Pursuant to 11 U.S.C. sec. 362; and (III) Granting Other Relief, docket no. 1051, filed February 19, 2010 (the “Motion”).

INTRODUCTION

2. The trustee, carrying on the tradition of the debtors-in-possession before him, has submitted another half-baked proposal to obtain funding from a non-existent counterparty. Should this party soon come into existence and execute the agreement, but never produce a dime of funds, the trustee wishes to provide it with a parting gift of up to $50,000.

3. The trustee also asks for approval to use the funding, should it actually be obtained, “to operate the Debtors’ businesses as a going concern”, despite his failure to provide any current information about the profitability of those businesses, and despite the fact that the most recent reports that he has filed report that the operation of those businesses continues to damage the estates in the amount of hundreds of thousands of dollars per month.

4. Creditor Novell, Inc. states in its opposition to the motion that “If the litigation thrives, equity stands to profit” (docket no. 1065 at para. 9). However, all parties, including equity holders (other than Ralph Yarro), will be harmed if the estates pay a $50,000 fee for nothing, or if they receive some financing but spend it on continuing the debtors’ money-losing operations.

THE MOTION’S PREMATURITY AND THE TRUSTEE’S LACK OF DILIGENCE

5. The motion has attached to it an incomplete and unexecuted proposed “Secured Super-Priority Credit Agreement” with “Seung Ni Capital Partners, L.L.C., a Delaware limited liability company” (the “Credit Agreement”)1, and in the motion it states:

2

The Trustee is advised that Seung Ni Capital Partners, L.L.C. is a newly formed entity formed by Ralph J. Yarro III (“Yarro”) and was created for the purpose of providing postpetition financing to the Debtors.
(motion at para. 8)

6. Whoever provided the trustee with this advice appears to have been unwilling to perform even one minute of diligence. Seung Ni Capital Partners, L.L.C., was not a “formed entity” that had been “formed” or “created” for any purpose. More than a week later, it still isn’t. In fact, Yarro hasn’t even bothered to spend two minutes and seventy-five dollars on filing a name reservation with the Delaware secretary of state. Therefore, some unrelated person could use or reserve the name at any moment, which would then necessitate choosing a different name and revising the proposed order and the loan documents to reflect it. See the pages from the website of the Delaware secretary of state regarding the status of “Seung Ni Capital Partners, L.L.C.” as of February 26, 2010, attached hereto as Exhibit B; and 6 Del. C. 18-201(b) (a Delaware LLC is not a legal person until after the certificate of formation has been filed) and 18-102(3) (an LLC may not use a name that has already been used or reserved).

7. This is not the first time in these cases that the Court has been asked to approve a deal with a party that did not legally exist. See the “Memorandum of Understanding” with “Stephen Norris Capital Partners, LLC, a Delaware limited liability company”, dated February 13, 2008, Ex. A to docket no. 346; and my objection, docket no. 414 at paras. 7-15.

8. Furthermore, there is a long and consistent history in these cases of purported financiers offering the estates funding that never materializes. See the offer in October 2007 of $20,000,000 in cash and financing from JGD Management Corp. d/b/a York Capital Management (motion to approve in docket no. 149, withdrawn in docket no. 225); the offer in February 2008 of $105,000,000 in cash and financing

3

from Stephen Norris Capital Partners, LLC (motion to approve in docket no. 346, permanently taken off calendar in docket no. 421); and the offer in June 2009 of $5,000,000 from Unxis, Inc. (motion to approve in docket no. 815, denied in docket no. 891, after Unxis’s president, Stephen Norris, testified that Unxis had only $10,000 to its name (see July 27, 2009 transcript, docket no. 892, at 354:3-6)).

9. To prevent wasting the Court’s and the parties’ resources on examining such stillborn proposals, the trustee should refrain from making any motion to approve a funding deal until after: (1) the proposed counterparty entity actually exists; (2) the entity has actually executed an agreement that is binding if the court approves it; and (3) there is evidence that the entity is capable of actually producing the funding that it has promised. Before filing the current motion, the trustee didn’t even make it to step one.

10. Other problems indicating the general unreadiness of the proposal include:

(a) The Credit Agreement states that a “Collateral Agent Agreement” is “attached hereto” (Credit Agreement at sec. 1.01, p. 7), but no such agreement is attached; and

(b) it also states that a list of “Security Documents” is “attached hereto” (Id. at sec. 1.01, p. 13), but no such list is attached.

THE IMPROPER $50,000 FOR THE LENDER DESPITE THE LACK OF ANY COMMITMENT

11. The Credit Agreement purports to commit the lender to provide at least $800,000 by the closing date, which is to be no later than March 8, 2010 (Credit Agreement at sec. 2.01 and sec. 1.01, p. 8). However, there is no adverse consequence for the lender if it fails to provide the funds. Thus, producing the funds (and thereby obtaining the lien) is simply an option that the lender may or may not decide to take, and the agreement explicitly provides that if the lender opts not to produce the funds, it will nevertheless receive $50,000:

4

If for any reason the amount of the Loan is less than Eight Hundred Thousand and 00/100 Dollars ($800,000.00), Borrower may, in its discretion, either elect to waive such minimum Loan amount requirement and close the Transactions, or Borrower may elect not to close the Transactions, in which event Borrower shall nonetheless pay Lender’s legal fees, subject to the foregoing $50,000.00 cap.
(Credit Agreement at sec. 8.17(c), p. 37-38)

12. This proposal to pay all of an alleged suitor’s expenses even if there is no evidence that it ever even had a dime to its name, let alone any obligation or intention of actually parting with any of its money, is wholly meritless.

13. This aspect of the agreement is reminiscent of the motion made by the debtors in possession (who were controlled by a board of directors chaired by Ralph Yarro) to pay a $150,000 expense reimbursement to former suitor York Capital, as a “moral matter” (docket no. 367, February 29, 2008, at para. 4).

14. As the U.S. trustee and other objectors pointed out, that motion was ridiculous. See docket nos. 411, 440, and 443. The debtors never went through with a hearing on it.

15. The current proposal, to pay the lender $50,000 even if the lender never lends anything, fails for similar reasons. It would be a breakup fee for a lender that is controlled by a long-time insider and was never even contingently obligated to provide any funds. This does not come close to meeting the requirement that breakup fees be “actually necessary to preserve the value of the estate” In re O’Brien Environmental Energy, Inc., 181 F.3d 527 (3rd Cir. 1999).

16. Furthermore, if the agreement is to include the possibility that the lender produces, and the trustee accepts, less than the $800,000 minimum, then the $50,000 legal fee cap should be prorated down according to the size of the funding actually produced (just as the “Loan Fee” is prorated down according to the amount of funding produced; see Credit Agreement at sec. 1.01, p. 11). If, for example, the lender comes

5

up with only $100,000 and the trustee decides to accept it, then paying a full $50,000 of fees would be an unreasonably large surcharge by any standard.

CONTINUING THE BUSINESS OPERATIONS WILL NOT PRESERVE ESTATE ASSETS

17. The trustee acknowledges that one test he must meet to be entitled to financing under sec. 364(c) is that “the credit transaction is necessary to preserve the assets of the estate” (motion at para. 17(b), quoting In re Crouse Group, Inc., 71 B.R. 544, 549 (Bankr. E.D. Pa. 1987)).

18. The proposed agreement provides that up to 50% of the collateral may be used to fund business operations (agreement at sec. 5.10(a)), and the trustee asserts that “Without postpetition financing, the Trustee would be unable to operate the Debtors’ businesses as a going concern, which would significantly impair the value of their assets to the detriment of all stakeholders.” (motion at para. 18)

19. There is no evidence that continuing to operate the businesses will “preserve the assets of the estate”, and there is overwhelming evidence to the contrary.

20. The primary source of information about the state of the businesses should be the monthly operating reports (“MOR”s):

Timely and accurate financial disclosure is the life blood of the Chapter 11 process. Monthly operating reports are much more than busy work imposed upon a Chapter 11 debtor for no reason other than to require it to do something. They are the means by which creditors can monitor a debtor’s post-petition operations. In re Chesmid Park Corp., 45 B.R. 153, 159 (Bankr. E.D.Va. 1984). As such, their filing is very high on the list of fiduciary obligations imposed upon a debtor in possession.
(In re Berryhill, 127 B.R. 427, 433 (Bankr. N.D. Ind. 1991))

21. Unfortunately, the trustee has failed to file any MORs for November 2009, December 2009, or January 2010. This is despite his assurances – given at the December 30 hearing as part of his successful effort to persuade the Court not to take

6

any action regarding his numerous reporting delinquencies – that the November and December reports would be filed by January 31.

22. The most recent month for which the trustee has filed any MORs is October 2009, and the most recent month for which he has filed MORs without an extraordinary disclaimer and reservation of the right to amend is September 2009.2

23. It has now been more than half a year since the trustee’s appointment, and he has yet to report a single month in which the debtors’ continuing operations were not a disaster. In the last three reported months, the debtors’ business operations have resulted in net losses, before reorganization items, of another $1,068,209: $370,984 in August, $132,138 in September, and $565,087 in October. (See docket nos. 1003, 1005, and 1056, each at p. MOR-2)

24. These ongoing losses show that continuing to operate the business is destroying, not preserving, the assets of the estate. Accordingly, any deal to obtain financing for the purpose of operating the business does not meet the requirements of sec. 364(c), per Crouse, 71 B.R. at 549.

25. Also, the diminution of the estates that is attributable to the consistently unprofitable operations has been ongoing for nearly two and a half years now, and it strongly suggests that these cases should be converted to Chapter 7 (and, indeed, should have been converted long ago). Thus, it would be imprudent to enter into any agreement that obligates the estates to stay in chapter 11, as the Credit Agreement does at sec. VII(i) (defining conversion as an Event of Default).

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THERE IS NO SHOWING THAT THE FINANCING IS CURRENTLY NECESSARY

26. The motion does not provide any information about the estates’ current cash balances and their projected cash needs over the next few months. Thus, regardless of whether the financing is to be used to fund the litigation expenses or to continue the business operations, there has been no showing that the financing is in any way “necessary to preserve the assets of the estate” (Crouse, 71 B.R. at 549.).

CONCLUSION

27. I respectfully request that the Court enter an order denying the motion.

Dated: February 28, 2010

/s/ Alan P. Petrofsky
Alan P. Petrofsky, equity security holder

[address, phone, fax, email]

______________

1 An electronically searchable copy of the proposed agreement is attached hereto as Exhibit A.

2 The July through September MORs originally included a similar reservation, but the trustee elaborated that “[t]he Trustee is mindful of his responsibilities and will file revised MORs, if he determines such re-filing is needed, for July, August and September 2009, before the end of January 2010” (docket no. 1006 at para. 9, fn. 3), and the absence on the docket of any such re-filing before the end of January 2010 shows that he determined that no such re-filing was needed and the reservation has now expired.

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