decoration decoration

When you want to know more...
For layout only
Site Map
About Groklaw
Legal Research
ApplevSamsung p.2
Cast: Lawyers
Comes v. MS
Gordon v MS
IV v. Google
Legal Docs
MS Litigations
News Picks
Novell v. MS
Novell-MS Deal
OOXML Appeals
Quote Database
Red Hat v SCO
Salus Book
SCEA v Hotz
SCO Appeals
SCO Bankruptcy
SCO Financials
SCO Overview
SCO v Novell
Sean Daly
Software Patents
Switch to Linux
Unix Books
Your contributions keep Groklaw going.
To donate to Groklaw 2.0:

Groklaw Gear

Click here to send an email to the editor of this weblog.

To read comments to this article, go here
Blank Rome Files a 4th Bill in the SCO Bankruptcy
Thursday, June 24 2010 @ 04:23 AM EDT

Another Blank Rome bill has been filed in the SCO bankruptcy, their fourth, this one covering January and February of 2010, which brings us closer to up-to-date, but we are not there yet. That means there will be more bills to come. The total bill is $244,836.50 for fees plus $3,783.55 for expenses, but for now they ask for the usual 80% of the fees, or $195,869.20.

Most of the time reflected in this bill was given to business operations, but a nice chunk of time, $72,029.50's worth, was time that went into the sale of assets and the asset purchase agreement, the sale of the mobility assets to Darl McBride. The bill also covers the loan from Ralph Yarro, the sale of the Caldera domain name, and a bit about the failed Norris deal.

But wait. If $72,000+ is what Blank Rome is charging for their work on selling the mobility assets to Darl and Ocean Park filed bills already for working on the same deal (January, February, March), and Darl only paid $100,000, then wouldn't that mean SCO actually lost money on the sale?

Here's the bill:

06/22/2010 - 1129 - Monthly Application for Compensation of (Fourth) Blank Rome LLP for the period January 1, 2010 to February 28, 2010 Filed by Edward N. Cahn, Chapter 11 Trustee for The SCO Group, Inc., et al.. Objections due by 7/12/2010. (Attachments: # 1 Notice # 2 Exhibit A # 3 Exhibit B # 4 Certificate of Service) (Fatell, Bonnie) (Entered: 06/22/2010)

If you notice on page 34 onward in Exhibit A, there is a particularly great flurry of activity in connection with the sale of the mobility assets. There are "transfer issues" discussed with Franklin Covey on page 39. And the Open Group was brought into the discussion regarding trademark issues, as you can see on page 41. You'll see Blank Rome emailed and edited emails and called and wrote up agreements and then reviewed and revised them and negotiated and teleconferenced and researched and had meetings over the sale to the degree that between them and OPA, they seem to have lost money. Unless the deal provided some other benefit that can't be expressed in dollars, SCO would have been better off to keep the assets. I don't rule out intangible benefits, like getting Darl out of their hair, for example.

One other thing stands out to me. On page 11 of Exhibit A, which is an unbelievable 45 pages long, you see Blank Rome researching the issue of exclusive and non-exclusive copyright license agreements. My first thought was that this was an issue Boies Schiller raised in the SCO v. Novell trial. Why, I asked myself, would Blank Rome charge SCO for doing that research, when Boies Schiller is supposed to represent SCO in that litigation for free, having been prepaid? Isn't it kind of double billing, since Boies Schiller is already paid for that litigation and hence should be doing research itself for the case? But then I saw on pages 35 and 36 notations about the licensing of source code, in the context of the mobility assets sale to McBride, so that might in a stretch explain the research.

I highlight it as significant to historians, because it was this original deal term that turned out to help sink SCO's ship in the Novell trial in Utah, when it was pointed out that SCO was proposing to sell assets and retain the copyrights, while they were arguing in Utah that this never happens in real life and made no sense. That may be why their expert G. Gervaise Davis never took the stand, since his testimony [PDF] was to be that he'd never seen that happen in his entire career, and that SCO needed the copyrights to run its business, and here SCO was proposing to do it and with Darl McBride, of all people. In the end, Darl bought the copyrights instead of licensing them, but that first deal plus Darl's statement to the SEC, and on the stand when reminded about it, that he didn't need the Unix and UnixWare copyrights to run SCO's business were the two killer items, as I saw it, at trial.

On page 27, you see "possible settlement meetings" with Novell, about possible mediation. This however is in the context of the pretrial conference, which is a standard thing in litigation, where just before trial, the parties have to meet with the judge to see if a trial can be avoided. Usually it can't be, but they have to meet anyhow. The items as listed tell me that this was SCO coming up with a proposal, since I see a strategy session prior to the email discussion. And we know how it ended. The trial went forward, so Novell wasn't interested.

There are some mysteries in the bill, though. I wonder why Blank Rome doesn't have to be more specific in their item descriptions. I wonder what "carve out concept needed in financing order" means. And what does it mean on page 19 "confer with B. Fatell regarding 'deemed dividend' issue with respect to pledge of stock in foreign subsidiaries"? And what are we supposed to make of an item about "vendor issue" if no vendor is named and the issue isn't described? And what does it mean on page 22 that S. Tarr was conferring with B. Fatell regarding a shareholder request? What shareholder? Requesting what? They might as well compose the bill in some dead language spoken only in ancient Babylon, if we, the public, are not supposed to be able to decipher this bill.

And on page 7 of Exhibit A there is a reference to a "proposed distribution and services agreement with Nyxis" and a mention of the "Norris deal". Is Nyxis referencing unXis? Or the small medical laboratory company in Illinois, Nyxis Neurotheraphies? Heaven only knows, SCO could use some neurological therapy, but I think it must be an early name for what became the now defunct deal with unXis.

How does any of this benefit SCO? Maybe some directors and executives personally were going to benefit, if SCO had won in Utah, but that isn't Blank Rome's job, is it? I guess equity holders are part of the job, but first on the list? I don't think so. Not even in bankruptcy court in Delaware. Not at the expense of creditors. But my impression of the whole bankruptcy picture is that the equity holders' interests got a lot of attention; the creditors not so much. Do you see any entries about creditors anywhere on this bill? Does anybody care about them at all? If so, where is the billing to demonstrate it?

Page 10 is intriguing. They were spending time on stock options, and you see an item, "Research and respond to various issues regarding director exercise of stock options." And on page 29, you see Darl McBride has sent them a letter about options. SCO won that stock options motion, as they win everything in bankruptcy court, more or less. But of what value are those options now? This is all elaborate work done in hopeful anticipation of a dream that just died.

I see Herb Jackson is still hanging in there with SCO. He shows up on pages 14 and 22, when Blank Rome emails him about the monthly operating reports and then about "financing". OPA did a report on the EU subsidiaries. I gather Cahn thinks there is some hope of selling off the EU assets.

And whatever the legal issue in Germany is, it's still going on in this bill, as you can see on page 16. Many mysteries. Like this: who besides Yarro offered a loan? At the hearing about the loan, SCO represented to the court that there were two loan offers, one rejected out of hand, from a hedge fund. Perhaps my ability to decipher the hieroglyphics in this very long and tedious bill is the problem and I missed it, but I don't on first reading see them spending any time on that. Maybe one of you can find it.

I see an interesting notation on page 28:

Feb. 04 10 - Additional email correspondence about K. McBride - Fatell - 0.20
It doesn't say correspondence *with* K. McBride, but rather *about* him. On page 31 you see a notation about a letter agreement with him. Again, no details provided.

They spent time looking into insurance issues regarding directors and officers. And then they spent a lot of time preparing bills and filing them for themselves and OPA and you'll see a lot of phone calls about professional fees. But what is the benefit to SCO? Clearly, most of the money from the sales never reaches them, or only to touch base before moving on, since the professionals scoop off the top and the middle with their endless fees.

Is SCO any more likely to survive as a company now because of all this billed work? Is it even easier to sell off its parts? Or would it have made more sense to go to Chapter 7 long ago? Look at it from the perspective of the creditors before you answer, and imagine how they feel watching the professionals pick the meat off the SCO bones, leaving nothing for them. At the hearing about the Yarro loan, SCO admitted there's nothing in the litigation budget from that loan that covers any appeal of the Novell verdict.

If you recall, at the hearing about the loan in March, the question was asked, why not just sell? Bonnie Fatell asked the OPA guy on the stand, Mark Fisler, why SCO hadn't just shut down, and he likened the situation to putting a "For Sale" sign outside a house while the roof is on fire, that he wanted to get SCO into a more advantageous position before selling. Have they achieved even that goal? Would you say that post-trial, SCO looks like a better deal to a prospective buyer? I can't see how. Fisler was asked by Novell's attorney, Adam Lewis, if they had looked at budgets in case SCO were to lose in Utah to Novell, which it has since done. And Fisler's answer was clear. They hadn't done as much of that. And here's what one of our reporters said he said about the creditors:

He said that they were aware of the unsecured creditors, and when asked if they would be able to pay he replied that they had not done any detailed analysis, but he believed that they would be able to pay.
With what? Seriously. With what? The Yarro loan comes ahead of creditors, according to the deal. Novell vigorously opposed the loan, saying it was risking creditors' money for the benefit of equity holders' litigation lottery dreams:
The real beneficiaries of the risk are the holders of the Debtors' equity, including Mr. Yarro, who Novell believes is a major shareholder. Both the Debtors and now the Trustee have been willing to risk the creditors' recovery essentially for the benefit of equity. If the litigation thrives, equity stands to profit.
Novell suggested they should wait on any loan until after the litigation, but SCO wouldn't accept that very sensible suggestion, and the court went along. And now look at them. Everything Novell warned about came true. At the hearing, from my notes, I recall this exchange from Blank Rome's Bonnie Fatell and Novell's Lewis:
Fatell: The estate needs this money, quite aside from the litigation. It's not week to week cash flow positive. There is a significant amount that needs to be paid and it comes ahead of creditors anyway. They need the money to do the European phase two. And it will better position it for sale.

There could be appeals after the trial, so to hold this in abeyance would be a great detriment to the estate. We believe there is interest in buying these assets, but we don't think we can get best value today.

Lewis: The test isn't a best business judgment. This is not ordinary course. The test is the creditors' protection. Counsel noted that if the trial doesn't do well, they won't be in such a great situation to sell. Everybody knows there will be appeals, but the trial itself will also have an impact, and when we know what that situation is, we'll know if this runway funding is even needed.

Later, Cahn indicated the loan would be used to pay the professionals. But how will he pay it back? They are letting the engineers go, so what is there to sell? Cahn may not realize it, but code that is stagnant, not keeping up with drivers, for example, loses its sale value rapidly, and that is what I see happening. So the house is on fire, and the firefighters are leaving to go to work elsewhere, one might say. The longer this goes on, the less value OpenServer and UnixWare will have. And from reports, it's even the virtualization engineers being let go, with one reporting he was let go yesterday after more than 20 years with the company, and wasn't that the big hope, virtualization?

I don't really understand the concept of the phrase "European phase two", in that at the 341 creditors meeting in 2007, Darl McBride told the US Trustee Joseph McMahon, that if SCO went down the drain, the subsidiaries would go right down the drain with SCO.

None of this bill makes a particle of sense to me, in short. Because considering the outcome of the trial, has SCO's money been prudently spent? Cahn gambled and lost. Now what's the plan?

Update: A comment reminded me that under the terms of the Yarro loan, anything SCO takes in from a sale of assets must go in part to Yarro and the gang to help pay back the loan. So how could they imagine they'd make any money on this deal, particularly when you consider that at first the offer was only $35,000? So why did it happen? To pay the professionals their fees to do it? That can't be it, surely, if it would have been cheaper not to do it at all. To give the equity holders something? Most of the loan is from equity holders, after all.

And in going back to review the Credit Agreement [PDF] to verify what the comment said, I couldn't help but notice that one of the terms in the agreement is that the Yarro people are obligated to make their loan money available in a gradual schedule, unless:

(g) There shall not have occurred any event, circumstance, change, development or effect that, individually or in the aggregate with all other events, circumstances, conditions, changes, developments or effects, has had, or would reasonably be expected to have, a Material Adverse Effect.
Like losing totally in Utah in SCO v. Novell, perchance? It reads like a total get out of jail free card.

There's an interesting case in the Third Circuit a member just posted, In re Integrated Telecom Express Inc., 384 F.3d 108 (3d Cir. 2004). You can read about the 2004 case in this article by Timothy P. Duggan in the National Law Journal [PDF]. One snip:

In framing the issue, the 3d Circuit restated the two basic purposes of Chapter 11: "(1) preserving going concerns and (2) maximizing property available to satisfy creditors." 384 F.3d at 119. These two purposes, the 3d Circuit noted, guide the court in its application of the doctrine of good faith. The 3d Circuit found that courts focus "on two inquiries that are particularly relevant to the question of good faith: (1) whether the petition serves a valid bankruptcy purpose, e.g., by preserving a going concern or maximizing the value of the debtor's estate, and (2) whether the petition is filed merely to obtain a tactical litigation advantage." Id....

The financial problems causing it to close its business had no relation to the debts it owed to its creditors. Some level of financial distress must be present and capable of being relieved by the bankruptcy filing. Merely going out of business and losing money is not enough.

Assuming this is still good law, what might SCO argue? They would say that they entered Chapter 11 with a fear that the Utah District Court would assess damages against them of $34 million. OK. But what about after it didn't, after it valued the damages SCO owed at 2.something million? Then what bankruptcy purpose was being served by SCO remaining in Chapter 11? Has either bankruptcy purpose been served? Is SCO being preserved as a going concern? No. Mr. Cahn's lawyer, Bonnie Fatell, told the court they are selling off the assets. That can be done outside of bankruptcy, obviously. Is SCO maximizing property available to satisfy creditors? I see no evidence of that happening so far, and I don't even see a plan to make it happen. So where is the good faith? Maybe someone more expert than I can find it.

Here's the opening section from the Opinion by the US Court of Appeals for the Third Circuit, which will probably give you a clue as to what I'm thinking about SCO filing for Chapter 11 protection while it was still solvent and then ending up with absolutely nothing but a loan from the former Chairman of the Board, who gets all the assets for a song should SCO not pay back its loan, which it has little hope of ever doing from all we've been told in this bankruptcy:

This appeal tests the limits of the good faith requirement applicable to petitions filed under Chapter 11 of the Bankruptcy Code. Appellant NMSBPCSLDHB, L.P. (the "Landlord") appeals from an order of the District Court affirming the Bankruptcy Court's denial of its motion to dismiss for lack of good faith. The Landlord contends that the Debtor, Integrated Telecom Express, Inc. ("Integrated"), was never in financial distress and that the petition in this case was instead filed to frustrate the Landlord's claims and to increase the distribution of the Debtor's estate to Integrated's shareholders at the Landlord's expense. These contentions are corroborated by the record. First, according to schedules filed with the Bankruptcy Court, Integrated had $105.4 million in cash and $1.5 million in other assets at the time that it filed for bankruptcy, and yet the Landlord's proof of claim lists the present discounted value of Integrated's lease obligations at approximately $26 million.

Integrated's schedules also list miscellaneous liabilities of approximately $430,000. Thus Integrated was highly solvent and cash rich at the time of the bankruptcy filing. Even if the IPO class action claim, which was capped at $25 million with Integrated's liability limited to a $5 million reserve (the balance to be paid by insurance) was listed at its full alleged value, Integrated was still solvent at the time of filing. Second, in a smoking gun resolution approved by the Board, and notwithstanding its strong financial position, Integrated authorized a letter to the Landlord threatening that if it did not enter into a settlement of the lease in the amount of at least $8 million, Integrated would file for bankruptcy so as to take advantage of 502(b)(6), which sharply limits the amount that a landlord can recover in bankruptcy for damages resulting from the termination of a lease.

The issue on appeal is whether, on the facts of this case, a Chapter 11 petition filed by a financially healthy debtor, with no intention of reorganizing or liquidating as a going concern, with no reasonable expectation that Chapter 11 proceedings will maximize the value of the debtor's estate for creditors, and solely to take advantage of a provision in the Bankruptcy Code that limits claims on long-term leases, complies with the requirements of the Bankruptcy Code. We conclude that such a petition is not filed in good faith and will therefore reverse....

Neither Integrated nor the OCESH offer any authority that the Code can be used to effectuate a liquidation that has no hope of maximizing the value of the company, 203 N. LaSalle, 526 U.S. at 453, 119 S.Ct. 1411; Toibb, 501 U.S. at 163, 111 S.Ct. 2197, but simply facilitates dissolution on terms favorable to equity interests.

  View Printable Version

Groklaw © Copyright 2003-2013 Pamela Jones.
All trademarks and copyrights on this page are owned by their respective owners.
Comments are owned by the individual posters.

PJ's articles are licensed under a Creative Commons License. ( Details )