Trouble in paradise. A subset of the group that lent $2 Million to SCO in 2010, including Ralph Yarro, has retained a lawyer who has sent a letter [PDF] to the SCO Group's Chapter 11 Trustee, Edward Cahn, claiming to be putting him on notice that he is in breach of the Secured Super-Priority Credit Agreement of March 5, 2010 and they want him to either cure by paying them their half of the UnXis sale proceeds or they demand the collateral. He has five days to fix the breach. Collateral would be mainly the right to any litigation proceeds, if any ever were to materialize, in that pretty much everything else was sold to UnXis. Here's the document [PDF] that listed the collateral the lenders were to get on a default.
Cahn, after some negotiations, filed
a motion [PDF] with the court, asking the court to rule that there is no default and that the notices are wrongful and null and void. He is considering asking for sanctions.
In the motion, he points out that he has to ask for the hearing:
Article VII of the Credit Agreement requires the Trustee, absent cure of any default within five (5) Business Days, to seek a hearing with regard to the default or have the automatic stay automatically vacated without further order of this Court....
In the correspondence during the negotiations, Cahn's lawyer,
Bonnie Fatell, explains to the lenders' lawyer that according to the deal, the individual lenders all agreed that there would be a Collateral Agent, namely Seung Ni Capital Partners, with Ralph Yarro as Manager. Only Seung Ni can take any enforcement actions, she says, and she's communicated with Yarro, who said that Seung Ni didn't retain this new lawyer. Anyway, there's no default, she says [PDF], as the proceeds from the sale to unXis are in escrow, and SCO intends to fully comply. But the response [PDF] comes back that Yarro has indeed retained him and they want what they want and they want it now. Further, the lawyer writes, while the Credit Agreement said that only Seung Ni Capital Partners could act to enforce in the event of a default, the actual Order [PDF] by the court used different language, saying that *any* of the Lenders could act. And indeed it does.
Accordingly, the only means by which the Trustee can evade unilateral action by the Subset Lenders in respect of purported breaches of the Credit Agreement is to request an Article VII Hearing.
But here's the weird part. The Lenders, as they refer to themselves -- the letter lists them as Steven Shin, Jan Loeb and Leap Tide Capital Management, Inc., plus eventually Yarro -- aren't all the lenders
we saw back when they were seeking approval of the loan by the bankruptcy court.
Rex Lewis is not mentioned by the new lawyer or
Dan Campbell or
Darcy Mott. Maybe they are still there, just not joining in sending the letters. When SCO
filed with the SEC the news about the loan, we saw yet another list of lenders:
As of March 5, 2010, The SCO Group, Inc., (the “Company”) obtained funding for $2.0 million in postpetition financing (the “Loan”) in the form of a secured super-priority credit agreement (the “Secured Credit Agreement”), from a group of private lenders including Seung Ni Capital Partners, LLC, Jan Loeb, Leap Tide Capital Management, Inc., Steven Shin, Henry C. Beinstein, Stanley A. Beinstein, Neil J. Gagnon, Robert Dyson, WBS LLC, Ne Obliviscaris, Ltd., Darcy Mott, Clemons F. Walker and Herbert W. Jackson (collectively, the “Lenders”). Where are they now in this picture?
Is it possible that the subset lenders feel they are getting the short end of the stick and they're making a move to get what they can? Or are they worried that Cahn will pay his own lawyer and there will be nothing left at all from the unXis proceeds for them after the bills are paid?
The lawyer retained is Edward E. Neiger, a New York City bankruptcy lawyer who is a partner in the firm, which
launched in 2008. He complains that when his client provided the money, the trustee "through Ocean Park, represented that the assets would net over $3,000,000. This was not the case..." Ah, the joys of doing business with SCOfolk.
Loeb, if you recall, is President and Portfolio Manager of Leap Tide, or he was back when he sent a letter [PDF] to the bankruptcy judge in 2009, objecting to IBM's and Novell's suggestion that SCO convert to Chapter 7, telling the court that Leap Tide had invested in SCO since 2005, after doing research that convinced them that its claims against IBM and Novell had merit. It offered additional capital "under certain circumstances and terms", so SCO could "pursue its claims against IBM and Novell and continue to develop its products and services." So, true believers indeed. The dream never dies with these people.
I asked at the time the loan was first being considered, which was just before the trial in SCO v. Novell, "How does SCO plan to pay off a loan if it loses later this month in SCO v. Novell?" Why not wait, I suggested, to see if there was at least a hope of paying back the loan. Well, lose they did. But by then the loan had been approved and was a done deal. Didn't these lenders contemplate that a loss was possible?
Here's how SCO defined the litigation proceeds in the SEC filing:
Litigation Proceeds means the amount of any final non-appealable verdict or other award received by the Company in connection with the two pending litigation matters of the Company or other litigation matters between the Company and such parties, including, settlements, interest and attorney fees paid by the other parties to such litigation, as well as proceeds from the sale of Company assets occurring in connection with the settlement of such litigation (“Litigation Proceeds”).
But notice what Neiger writes to Fatell in one of the letters:
You will note that the Borrower agreed to indemnify the Lenders for expenses "incurred by the Lender in connection with the enforcement or protection of its rights in connection with this Agreement." DIP Agreement, Section 8.05. The Borrower also agreed to waive claims against the Lenders. DIP Agreement, paragraph 8.05(c). Here is the Order [PDF], and here is the very language cited:
15. So long as the Obligations (as defined under the Credit Agreement) are outstanding, the happening of any Event of Default, as such term is defined in Article VII of the Credit Agreement, and during the continuance of any Event of Default, without further order of, application to, or action by, this Court, the Lenders: (a) may by notice to the Debtors declare that all the Lenders' portion of the Commitment be terminated, whereupon any and all obligations of the Lenders to make a portion of the Loan shall immediately terminate; and (b) may by notice to the Debtors, declare the Loan, all Basic Interest and Default Interest owed thereon and all other amounts and Obligations payable under the Credit Agreement in respect thereof to be forthwith due and payable, whereupon the Loan, all such interest and all such amounts and Obligations,
shall become and be forthwith due and payable. In addition, subject solely to any requirement of the giving of notice by the terms of this Order, the Debtors shall have a period of five (5) business days in which to either cure the Default or obtain a scheduled court hearing with regard to the Default. In the event the Debtor fails to either cure the Default or obtain a scheduled court hearing with regard to the Default, the automatic stay provided in Bankruptcy Code section 362 shall be deemed automatically vacated without further action or order of this Court, and the Lenders shall be entitled to exercise all of their respective rights and remedies under the Loan Documents, including all rights and remedies with respect to the Collateral as provided in the Loan Documents; provided however, Lenders shall have no right to take any action with respect to the Litigation. Notwithstanding the foregoing provisions, upon the occurrence of an Event of Default, the Debtors shall have the right to use any cash available at such time for the payment of its fees and administrative expenses. Upon the occurrence and during the continuance of an Event of Default under the Loan Documents, payments of any amounts on account of the
Secured Liens and the Superpriority Claims shall be subject and subordinate only to payment of all accrued and unpaid wages, salaries, benefits and severance and all taxes associated therewith
for employees of the Debtors and the foreign subsidiaries of the Debtors (collectively, the "Employee Carve-Out Amounts"). In the event that the Lenders exercise any rights or
remedies under the Loan Documents, the Lenders shall deposit all collections and proceeds of Collateral (as defined in the Credit Agreement) into a segregated account until all Employee Carve-Out Amounts are paid in full. You can see that Cahn had five days to cure or seek a hearing, and he has opted to seek a court hearing.
If you look at the Security and Pledge Agreement, Exhibit E on this page, it says that only the Agent can act:
r. Collateral Agent Agreement. Debtor acknowledges and agrees that Secured Party, as Agent and alone, shall have the right to enforce all Lenders’ rights relating to the Collateral under the Loan Documents and under duplicate originals of all of the Loan Documents executed by the Lenders (other than the Lender) and Debtor.
When SCO filed the 8K/A with the SEC, it did indeed say what the Lenders' attorney quoted:
The Loan is secured by a lien on substantially all of the assets of the Company. Pursuant to applicable bankruptcy law and the Bankruptcy Court Order approving the Secured Credit Agreement, the Lenders’ lien is senior in priority to all other liens and claims and administrative expenses of the Company.
Everything SCO filed with the SEC on this can be found
here, the 8K/A at the top. And if you look at the final document on this page, the Stock Pledge Agreement, you will see in Section 5.1 the same wording:
So long as the Loan is outstanding, upon an event of default, as such term is defined in the Secured Credit Agreement (“Event of Default”) and during the continuance of any Event of Default, the Lenders: (a) may by notice to the Company declare that all the Lenders’ loan commitment be terminated, whereupon any and all obligations of the Lenders to make a portion of the Loan shall immediately terminate; and (b) may by notice to the Company, declare the Loan, including all interest owed thereon and all other amounts and obligations payable under the Secured Credit Agreement due and payable. The Company shall have a period of five (5) business days in which to either cure the default or obtain a scheduled court hearing with regard to the default. In the event the Company fails to either cure the default or obtain a scheduled court hearing with regard to the default, the automatic stay provided in the Bankruptcy Code Section 362 shall be deemed automatically vacated without further action or order by the Bankruptcy Court, and the Lenders shall be entitled to exercise all of the respective rights and remedies under the Secured Credit Agreement and related documents, including all rights and remedies with respect to the collateral as provided in such agreements. In the event of default under the Secured Credit Agreement that continues after notice, upon demand of the Lenders, the Company shall pay a late fee equal to 5% of any past due amount, and the interest rate applicable shall be increased by 6% per annum until the default is cured.
In addition, the Lenders have agreed that the Company may sell core assets, as defined in the Secured Credit Agreement, provided the Company utilizes 50% of proceeds from such core asset sales to pay the amounts due to the Lenders. Sales of non-core assets are not subject to such restriction. The Secured Credit Agreement contains representations, warranties and financial covenants which are typical for agreements of this type entered into by companies in bankruptcy, including a prohibition on the incurrence of additional indebtedness and incurring additional liens on the collateral securing the Loan.
In connection with entering into the Secured Credit Agreement, the Company also entered into a Stock Pledge Agreement with the Lenders pursuant to which the Company and its subsidiaries pledged shares of stock owned by them in their subsidiary companies (the “Shares”) as security for the Loan. Except as otherwise provided in the Stock Pledge Agreement, and subject to the rights of the Lenders in the event of a default, the Company retains voting rights over the Shares, as well as the right to receive dividends or distributions with respect to such Shares. In the event of default under the Secured Credit Agreement, the Lenders are entitled to exercise all rights under the Secured Credit Agreement and may sell the Shares pledged as collateral as described in the Share Pledge Agreement.
The Company and the Lenders also entered into a Security and Pledge Agreement and a Collateral Agent Agreement which provides a lien and security interest in favor of the Lenders in substantially all of the assets and properties owned or acquired by the Company or its subsidiaries as security for the Loan and related obligations. The Security and Pledge Agreement contains representations, warranties, covenants and remedies provisions which are typical for agreements of this type entered into by a company in bankruptcy.
In connection with entering into the Secured Credit Agreement, the Company also entered into the Collateral Agent Agreement pursuant to which Seung Ni Capital Partners, L.L.C. agreed to act as collateral agent for the Lender.
The foregoing description of the Secured Credit Agreement and related documents does not purport to be complete and is qualified in its entirety by reference to the text of the agreements which are attached hereto as exhibits to this Form 8-K and are incorporated by reference herein.
This financing is intended to allow for the preservation of the value of the Company’s business while enabling the Company to proceed with asset sales, continue supporting SCO’s loyal UNIX customer base and to pursue litigation against, among others, IBM and Novell. The Secured Credit Agreement provides that up to 50% of the Loan proceeds may be used to pay litigation trial costs and related expenses, including compensating employees assisting with the litigation and the remaining 50% of the Loan proceeds may be used for the payment of administrative expenses, in the Trustee’s discretion.
SECTION 12.2 Pledgor shall pay or reimburse Pledgee (or cause Pledgee to be paid or reimbursed) on demand for all reasonable out of pocket costs and expenses (including without limitation reasonable attorneys' fees and legal expenses) paid or incurred by Pledgee in connection with (a) the administration of this Pledge Agreement during the existence of an Event of Default, and (b) the exercise and enforcement of any of Pledgee’s rights, powers and remedies hereunder, including without limitation its right to perform Pledgor's covenants and agreements hereunder to the extent Pledgor fails to do so.
By now, you are wondering why anyone would want to be a lawyer, I suppose. I confess I've never understood wanting to be a bankruptcy lawyer, myself. But let's see how Cahn decided to handle this dispute. First, here
are all the filings, so you can follow along meaningfully:
Here's the Preliminary Statement from Cahn's motion, and what you may find interesting is that Fatell in the negotiations didn't tell the lawyer for the subset lenders all the reasons that she lists in the motion for why they are not entitled to what they are seeking:
05/05/2011 - 1269 - Motion to
Approve // Motion Of The Chapter 11 Trustee For (I) Hearing Pursuant To
Article VII Of The Credit Agreement And (II) Entry Of An Order (A)
Determining There Is No Default By The Trustee Under The Loan Documents,
(B) Directing That The Automatic Stay Remains In Full Force And Effect,
And (C) Deeming Wrongful Default Notices Null And Void Filed by Edward
N. Cahn, Chapter 11 Trustee for The SCO Group, Inc., et al.. Hearing
scheduled for 5/23/2011 at 11:00 AM at US Bankruptcy Court, 824 Market
St., 6th Fl., Courtroom #3, Wilmington, Delaware. Objections due by
5/16/2011. (Attachments: # 1 Notice # 2 Exhibit A # 3
Exhibit B #
4 Exhibit C
# 5 Exhibit
D # 6 Proposed Form of
Order # 7 Certificate of
Service) (Fatell, Bonnie) (Entered: 05/05/2011)
So, Cahn says the first notice was null and void, because the lenders at that time had no authority to act. He calls them "Noncontrolling Lenders". Then Yarro joined in, but Cahn points out that he isn't the Agent, Seung Ni is, and they've seen no evidence that Seung Ni has retained this lawyer, only Yarro personally. And finally, there is no default. The sale just happened, the proceeds are in escrow, there's no deadline to figure out the net proceeds, and they are still figuring it out. According to the deal everyone signed, SCO keeps 50% of any sale, plus "reasonable closing fees and expenses of the sale". And he says since there is no default, he believes the "Subset Lenders" are violating the automatic stay, and he is considering sanctions:
During the evening of Thursday, April 28, 2011, the Chapter 11 Trustee received the First Wrongful Default Notice from counsel to three (3) lenders who are parties to the Credit Agreement – Steve Shin, Jan Loeb and Leap Tide (the “Non-Controlling Lenders”) – purportedly declaring a default by the Trustee under the Credit Agreement. A true and correct copy of the First Wrongful Default Notice is attached as Exhibit “A” hereto. The First Wrongful Default Notice was sent improperly by the Non-Controlling Lenders because they lacked authority, as of April 28th, to take action or even threaten to take action, on behalf of themselves or any of the other Lenders, with respect to rights and remedies under the Credit Agreement. [See Collateral Agent Agreement, Section 4(e)]3. Thereafter, by letter response dated May 3, 2011 (the “Trustee’s Response”), the Trustee, among other things, advised the Non-Controlling Lenders, they lacked authority to enforce rights and remedies under the Credit Agreement. A true and correct copy of the Trustee’s Response is attached as Exhibit “B” hereto.
After an exchange of emails between counsel for the Trustee and the Non-Controlling Lenders, and in an attempt to cure the authority defect in connection with the First Wrongful Default Notice, counsel to the Non-Controlling Lenders sent the Second Wrongful Default Notice to the Trustee, which adds Richard J. Yarro III (as collateral agent) to the parties represented by counsel for the Non-Controlling Lenders (together with Yarro, the “Subset Lenders”). True and correct copies of the exchange of emails by the respective counsel are attached as Exhibit “C” hereto; a true and correct copy of the Second Wrongful Default Notice is attached as Exhibit “D” hereto. The Second Wrongful Default Notice does not indicate that counsel to the Subset Lenders has been retained by Seung Ni Capital Partners, L.L.C. (“SNCP”), the Collateral Agent.
Notwithstanding the foregoing however, the Trustee submits that there is not an existing default under the Credit Agreement. It is curious that at no time prior to sending the Wrongful Default Notices did the Subset Lenders or their counsel reach out to the Chapter 11 Trustee or his counsel to seek information regarding the status of the sale proceeds and/or the two alleged breaches of Section 5.10(b) of the Credit Agreement - the pivotal issues raised by the Subset Lenders: specifically, that after the closing of the sale to unXis, Inc., the Trustee did not (1) give “prior written notice to...Lender...[to] use fifty percent (50%) of the net proceeds..from any Core Asset Sale4”; nor (2) “pay the remaining fifty percent (50%) of such net sales or license proceeds toward retirement and payment of the amount due under the Note, other than payment of the Loan Fee.” [Credit Agreement, Section 5.10(b)].
Those purported breaches of the Credit Agreement cannot be the basis for a proper default notice since (1) the proceeds from the sale to unXis, Inc. are still being held in escrow and have not been used or disbursed by the Trustee and (2) the Trustee’s financial advisors are still in the process of determining the net proceeds from the sale (for which there is no deadline by which such determination must be made under the terms of the Credit Agreement). Accordingly, the Chapter 11 Trustee respectfully submits that this Court should enter an order granting the relief requested herein.
3 Specifically, the Non-Controlling Lenders waived their right to enforce rights and remedies under the Credit Agreement by agreeing in the Collateral Agent Agreement “that none of [the Lenders] shall have, and each of them hereby waives, the right to take or threaten to take any action to enforce any term or provision in any of the Security Documents or to enforce any rights with respect to any or all of the Collateral, it being understood that the Collateral Agent alone shall have the right to seek and enforce any and all rights and remedies in the Collateral and under this Agreement.” [Collateral Agent Agreement, Section 4(e)].
4 “Core Asset Sale” means the sale, license, transfer or other disposition (by way of merger, casualty, condemnation or otherwise) by the Borrower to any Person (other than the Borrower) of any SCO assets other than Borrower’s rights in the Litigation and the Litigation Proceeds and other than SCO’s Non-Core Assets...” [Credit Agreement, Section 1.01.] “Non-Core Assets” means SCO’s excess equipment and other miscellaneous assets in storage (truck, forklifts and excess office equipment), the Java Patent, more particularly described and known as US Patent No. 6,931,544, and assets related to SCO’s mobility business. Id.
17. The Subset Lenders have violated the automatic stay by (1) declaring a default when none has occurred and such facts could readily have been ascertained through inquiry of
the Trustee, (2) seeking to exercise and exercising control over estate assets by instructing the Trustee that “no monies or assets leave the estate until further notice,” and (3) sending the Wrongful Default Notices without authority to act in place of the Collateral Agent. The Credit Agreement specifically provides that “[n]otwithstanding the [default provisions of Article VII], upon the occurrence of an Event of Default, the Debtors shall have the right to use any cash available at such time for the payment of its fees and administrative expenses.” [Credit Agreement, Article VII]. As a result of the foregoing violations, the Trustee reserves his right to seek sanctions for the knowing and willful violation of the automatic stay by the Subset Lenders.
Note footnotes 5 and 6:
5 To the extent the Subset Lenders cannot show authority for causing the filing of this Motion in response to the Wrongful Default Notices, the Trustee reserves his right to pursue sanctions against the Subset Lenders as well as recovery for actual damages, including costs and attorneys’ fees, for their knowing and willful violation of the automatic stay. Cahn doesn't take kindly to threats, if you remember the dustup with Darl McBride. He doesn't get mad. He gets even. And this is bankruptcy court. Has the judge there ever said no to Cahn? If so, I can't recall it off the top of my head. But as in any motion, objections can be filed, and there will be a hearing on this later this month.
6 Based upon the identity of the Subset Lenders represented by counsel, the Trustee remains unsure whether the Subset Lenders even have authority to enforce the Lenders’ rights in the Collateral and the Obligations of the Debtors’ estates under to the Loan Documents.
And a little voice inside my head keeps asking, is this all just so much Kabuki theater?