Transcript of SCO's Bankruptcy Hearing, September 18, 2007 - updated as text(Groklaw)

Well, I think additional thanks are in order for those who prepared early reports on the hearing. I think they all did a fine job.

In reading the transcript now, I tried to pay special attention to just how Judge Gross responded to Novell's oral motion. It was denied of course. But, I think the judge can not be faulted for holding off a bit. It is true that the judge does not know yet what other claims may lie against the SCO estate. But, he has a heads up if nothing more.

I have written other commentary on Novell's claims and whether they will eventually gain a priority on funds. And I think those earlier statements remain for now.

But, I also think that whether or not Novell gets some kind of priority on funds, SCO is fully cooked.

I see no reason why Judge Gross will not lift the stay on the Novell case and have Judge Kimball go ahead and make the decision on the amount of funds belonging to Novell. Judge Kimball may most likely go ahead and issue a constructive trust with the stated amount. But, a lot of good that will do if SCO can not fund the account.

And as earlier articles have discussed, if Novell can not trace the funds to particular parties who can not qualify as bona fide purchasers, Novell may not be able to get that money back. And if so, they may be left with a claim against the bankrupt estate. And that residual claim may not get preferential treatment. It is hard to do that if there is no money to pay to Novell.

The real problem may be that the unsatisfied claim from Novell may greatly exceed any financial resources available to SCO. And that spells real trouble. It spells Chapter 7, is what it spells.

Coming up we can expect a couple of motions from Novell. One will act to set up a separate bank account or escrow for all SVRX royalties received by SCO such that those funds do not get commingled with SCO money. I expect Judge Gross to approve that order despite his reluctance to do so at the first hearing. Those amounts are undisputed. And it is important for the court to keep those monies separate as they consider these other matters. The second will lift the stay in the SCO v Novell case. And I expect Judge Gross to agree to that as well once it is formally made and a hearing is held. It makes little sense not to have that dollar amount determined by the court up to speed on all of the legal issues and the facts. It is the bankruptcy court's call however. If Judge Gross wanted to decide the issue himself, he could not lift the stay and litigate the issue himself. I doubt he will see any value in doing so.

No doubt SCO will push for that since they know their creditability is shot with Judge Kimball. And liars always want new people on which to try out their luck.

If you assume that Novell's claim reaches $25 million or so, it is going to really put a damper on the bankruptcy. SCO assets can not pay the claim either way.

If Judge Gross decides that the money is not in the SCO bankruptcy estate, then the estate has next to nothing to do anything with. And that includes paying employees. If Judge Gross decides that any money that Novell can not trace down and get back directly from those paid but who knew it was Novell's money and not SCO's, is just a general unsecured claim before the bankruptcy court, the assets still come up short. So it would look like Chapter 7 either way.

SCO can be as optimistic as it wants in painting a rosy picture if it can somehow just continue in operation through bankruptcy. But, the judge could care less. He is not a venture capitalist. He is not a bank. And he is not an investor. Sales puffery just does not count. All he wants to know is what are the assets, what are the liabilities and what can the assets be sold for? Cash is going to come up short. And it is very unlikely that the judge is going to allow the bankruptcy to proceed on converted monies from Novell. And that is true whether or not they can convince the court to give all of Novell's property to them up front. Even the court can not give to Novell what it does not have.

This is what you call being caught between a rock and hard spot. And SCO is pinched. And it is their own fault. Lawyers now can lie all they want about how confusing the APA was. But, Judge Kimball, deciding the issues, did not seem confused at all. And the cry that “we had this really great case against Novell and we should have won” is just not going to count against this bankruptcy judge. It was litigated. SCO lost in summary judgment. Losing everything in two major cases due to one summary judgment decision is not “being close”. That is loosing badly.

Everyone in the picture here are lawyers. They know that in most jurisdictions, including California whose laws applied to the APA, you first read the contract. That is what Judge Kimball did. They did too. They are just trying to justify throwing a company into bankruptcy due to their incorrect advice. Advice to sue IBM, Novell, AutoZone? and even DaimlerChysler? when they did not hold the requisite ability to sue or did not have the rights they needed. And the lawyers to a person knew it.

And I can add a few comments about knowing something and basing your decisions on what you know.

Legal rights and their values are considered or valued just like other business evaluations.

You come up with the most likely scenarios and assign a rough but important probability to their likelihood of playing out.

1.IBM folds, offers settlement and SCO sues everyone else
2.IBM litigates and perhaps wins without any monies payable to SCO
3.IBM litigates and perhaps has to pay Sco some money and SCO sues everyone else
4.RED HAT, etc, etc
5.Novell settles slander of title suit and SCO sues everyone else
6.Novell litigates and ends up holding the copyrights
7.Novell litigates and ends up being able to waive the litigation against IBM

And you can make up a few more possibilities. I omitted detailing the possibility of counter claims against SCO including the decision that SCO converted Novell's money.

But, the point here is that lawyers have to assess those scenarios and assign some rough probabilities. You calculate the product of the money earned or payed out in each scenario and the probability it will occur. What you end up with is a matrix of numbers that paint what you can expect.

All SCO lawyers are doing now is trying to sell how rosy one of the possible scenarios appeared to be. But, the probability of Novell getting the judgment it has now is 1 (one). 100% Sure, it could be overturned. Or, it is even possible that the bankruptcy court will see some things differently. But, the probabilities just took a dive on those options.

Now about the only rosy (if you want to call it that) scenario is that SCO manages to get into and out of bankruptcy. And I put that probability pretty close to nil.

Remember a point I made about corporations earlier once bankruptcy was filed. Corporations are not forgiven their debts through bankruptcy. Corporations do not get the benefit given to individuals. If IBM does not get paid, those liabilities remain in place. Same for Red Hat. SCO can not slip through bankruptcy and escape liability to IBM, Red Hat or Novell. The only question is whether Novell or the others see any cash. Or, whether SCO is fully liquidated.

We have not heard from IBM or Red Hat. And we may not. But, if we do not hear from them and SCO does manage to come out of bankruptcy those legal actions could commence again. Those claims while suspended are not forgiven. Do I think IBM or Red Hat are going to see any damages recovered. Not on your life. SCO is gone. And they may not even bother submitting a claim to the bankruptcy court. (Actually IBM was listed. And they are taking side bets how much of that they see. Little to none is my chit.)