After a bankruptcy court hearing on July 27 that ran until 10:30 at night, Judge Kevin Gross went off to have a think about it and came back Wednesday with the decision to turn SCO over to a Chapter 11 trustee.
He denied everybody’s motions.
SCO can’t sell everything-but-its-litigation to Unxis. Novell and IBM can’t liquidate SCO on the spot and SCO’s current management presumably looses the jobs they’ve been angling to cling to. At least they’re no longer in control. The board is out at any rate.
So nobody gets what they wanted.
As Judge Gross points out his decision is “sua sponte,” meaning it’s his own idea and he says it’s based on the “unusual circumstances” that there might be something to the SCO litigation. He’s leaving it to the trustee to find out and then figure out what to do with SCO.
His decision advises the US Trustee’s Office (OUST) to go and find a retired judge or litigator to assess the litigation since that will be the trustee’s main job.
Whether OUST will or not is another matter since it sided with IBM and Novell in asking the court for a Chapter 7 conversion order.
Judge Gross’ decision presumably buys SCO the time to hear from the 10th Circuit Court of Appeals about whether or not it’s going to overturn the summary judgment handing Novell ownership of Unix.
It’s assumed that decision will be out by the end of August since one of the three judges who heard the expedited appeal is going off to teach at Stanford on August 31.
SCO obviously has Judge Gross’ sympathies.
Although he compares its “constant refrain of waiting for the litigation to succeed” to Beckett’s “Waiting for Godot,” he says his “decision is not intended as a criticism of debtors’ efforts or conduct. SCO found their Unix operating system under attack and sought redress through litigation. Their principal adversaries, IBM and Novell, are wealthy and have used their deep pockets in the litigation and in these bankruptcy cases to debtors’ disadvantage. As creditors, IBM and Novell are entitled to act in their self-interest and that is what they are doing. The reality is that eliminating debtors’ litigation against them is far more valuable to IBM and Novell than any recovery from debtors in the bankruptcy cases. The interests of debtors’ other creditors may differ.”
SCO fled to the bankruptcy court 23 months ago as Judge Gross says “to preserve litigation” against the imposition of a constructive trust by the federal court in Utah where Novell was looking for a judgment of $37 million, a claim that after a trial dwindled to $3.5 million, a sum that will shrink further if the 10th Circuit rules in SCO’s favor.
However, there are time limits in bankruptcy court and most of the sand has run out of SCO’s hourglass plus, as the judge says, it’s “an understatement to say that since the filing of their bankruptcy [SCO’s] financial situation has greatly declined.” It’s quickly going broke and has abandoned the idea of reorganizing and soldiering on in favor of selling out.
But it hasn’t had much luck with buyers either. The 11th hour conversion-avoiding sales agreement it put together in mid-June with Unxis for $5.25 million is full of holes.
Judge Gross says it’s unclear whether the price is fair especially since it’s just enough to get SCO out of bankruptcy court and the letter of credit ostensibly meant to pay a Novell judgment “terminates on December 31, 2009 with no guarantee that the Novell litigation will be concluded.”
The judge said he is “very disturbed that the sale agreement contains a provision (which [IBM and Novell] refer to a ‘poison pill’) requiring the transfer of assets to Unxis upon conversion or appointment of a trustee.” He feels it “calls into question whether the sale has a sound business purpose and raises doubts of the parties’ good faith. There is simply no record upon which the court can find that the sale is in the best interests of the creditors and the estate.”
He wants the trustee to figure out whether pursuing the litigation is in the best interests of the creditors and the estate. “The ‘potential’ of the litigation must, however, be weighed against the reality of the cost,” he said. “A trustee will be in a better position to make that assessment without the personal and emotional investment of SCO’s management. Similarly, a Chapter 11 trustee can evaluate an asset sale independent of debtors’ management’s pursuit of the litigation.”