Judge prevents SCO from selling off assets

A bankruptcy court judge has denied a request by the SCO Group to sell off part of its business, a move that could have helped it pursue court cases against Novell and IBM.

SCO, which has been in bankruptcy court since 2007, had proposed to sell off most of its Unix business assets to a company called Unxis, the latest in a series of proposals aimed at allowing the company to exit bankruptcy and continue its high-profile Unix litigation.

IBM and Novell, on the other hand, had requested that SCO's assets be liquidated, effectively putting an end to the cases against them.

On Wednesday, U.S. bankruptcy court judge Kevin Gross denied both motions. Instead, he appointed a trustee to take control of SCO and evaluate how the company should proceed in its efforts to exit bankruptcy protection. Part of the trustee's remit will be to evaluate SCO's chances of winning its Unix case, Gross said.

"The 'potential' of the litigation must...be weighed against the reality of the cost," Gross wrote. "A trustee will be in a better position to make that assessment without the personal and emotional investment of SCO's management."

In 2003, SCO launched a lawsuit against IBM, saying the company infringed on SCO's intellectual property by including code from Unix in Linux. However, in 2007 a judge found that Novell, rather than SCO, owns the copyrights covering Unix. As a consequence of that decision, Novell is pursuing SCO in court for a share of the fees SCO received from licensing Unix to Sun and Microsoft.

From the Linux Journal:

Trusting SCO

**************************EXCERPT*******************

August 7th, 2009 by Justin Ryan

The SCO litigation against — well, let's be honest, against anyone they can think of — has gone on and on and on. As 2007 drew to a close, it seemed the end was in sight, after the company was forced to seek bankruptcy protection to avoid being thrashed in court — which eventually happened anyway. Now it seems the end may really be in sight.

SCO's bankruptcy "protection" has turned out to be a sieve rather than a safe — what was supposed to preserve the company's assets in order to protect the interests of its creditors has turned into an opportunity to funnel out as much cash as possible so IBM and Novell can't recover it. For some time, those familiar with SCO and its abnormal way of doing business have wondered how long it would take for the Bankruptcy Court to wake up and realize what they were up to. It would appear from Wednesday's activities that it finally has.

Wednesday's hearing in the United States Bankruptcy Court for the District of Delaware covered two very, very different proposals. SCO's plan, as it has been who knows how many times before, was to sell off basically all of its assets except the right to pursue its claims against IBM, Novell, and who ever else it has plans to sue. They've tried this over and over with a string of buyers, most of whom turned out to be the same people with a freshly registered name. The court, after two years, has apparently finally caught on to this, and told SCO its not buying it — and nobody else will be either.

Interestingly, Novell, IBM, and the U.S. Trustee made a similar motion, but with an altogether different motive. Where SCO wanted to sell off its business to keep fighting its creditors, the Novell/IBM/Trustee trio wanted to sell SCO off to pay its creditors, specifically by converting the Chapter 11 reorganization into a Chapter 7 liquidation. That would have ended SCO, permanently, and seen all of its assets sold off to cover its debts — though the possibility remains that the Court overseeing the Chapter 7 could allow SCO's litigation claims to be sold to someone who could then pursue them. Though that remains a very real possibility, the trio did not get their way, as their motion to covert was denied as well.

So, what did happen? A nice middle ground, it seems, at least at this point. The court finally came out and questioned SCO's good faith — which is much like asking about Satan's ski gear — and decided that they would be more likely to produce a purple cow giving Pepsi than a workable rehabilitation plan. From the ruling: "No one can fairly argue that the court has not been patient with the debtors. The court is now unwilling to continue to wait while debtors' losses mount." Further, he no longer believes SCO's management can or have any desire to run the company in a manner consistent with rehabilitation. [Read: To do something other than bet the whole ball of wax on baseless litigation.]

The judge also found, however, that liquidation isn't quite right either, or at least, that he isn't in the right position to decide that it is. To that end, and given the management's inability to effectively manage, the court ordered that an independent trustee¹ be appointed to oversee SCO's affairs. What exactly does that mean? It means that SCO's management — including Darl McBride, the architect of the Sue & Screw™ strategy — just lost their driving privileges. From now on SCO's board and officers have no authority to do anything of any importance. They will, presumably, go on doing their jobs — unless the Trustee axes them — but all the decisions about the company's future are the exclusive purview of the trustee (and, of course, the Bankruptcy Court).

One particular item of note, which has generated a great deal of discussion, is the court's decision to place the matter of continuing the lawsuits in the trustee's hands. In his decision, the judge held that the court is not in a position to determine, without conducting a "mini-trial," whether the debtor has any chance of succeeding in its litigation, and that even if such a trial was held, any outcome would still be speculation. The part that has generated considerable comment is the apparent reversal of this position in the appointment of the trustee — while the court states it can't decide whether there is any chance of prevailing, it places the responsibility of doing so squarely on the trustee.

While there certainly appears to be an inconsistency between the two, it would seem to make more sense with a shift of perspective. The court's remit — and by extension, the judge's — is to determine the facts, draw conclusions from the law, and then rule. To that end, it must hold trials and hearings, take evidence, and base its decision only on the facts presented in light of the applicable law. This is the reason that speculation and hearsay are prohibited at trial — it's not evidence. Given this, the judge is correct — the court cannot make a decision that would amount to speculation and then proceed based on it. The decisions it makes must be supported by the facts and the law.

The question to ask, however, is: "What is the trustee's remit?" A trustee, like anyone else, must follow the law, and would not remain in their position for long if they ignored the facts before them, but a trustee isn't a court, and isn't a judge. The trustee isn't charged with finding facts, deciding the law, and issuing decisions — they are entrusted with managing the affairs of the debtor. The United States Trustee Program Chapter 11 Trustee Handbook sums up the duties of the trustee as: "In short, a chapter 11 trustee is a fiduciary charged with protecting the interests in the bankruptcy estate of all parties, including all classes of creditors and the debtor. The trustee must protect and preserve estate assets."

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