SCO Does It, Quite Frankly, As Usual

If you're not sick of the SCO litigation by now, you've obviously not been following it very closely. As we've reported before, the SCO v. Novell lawsuit has concluded, and now sits before the 10^th Circuit Court of Appeals. SCO's business is in bankruptcy, and as of our last report, awaits a decision on the U.S. Trustee's motion to convert from a Chapter 11 reorganization to a Chapter 7 liquidation. But as anyone who's been paying attention knows, nothing involving SCO ever goes as planned — we warn you, this is a long one, you may want to pack a lunch.

Today was the scheduled hearing in the United States Bankruptcy Court for the District of Delaware, and according to witnesses Groklaw had on the scene, it was a circus of epic proportions. All manner of documents were filed at the last minute, including a number of letters from SCO cronies, all of dubious admissibility, as usual. In addition to the Trustee, IBM filed a motion to convert, and as expected, SCO filed an objection to it.

Attorneys representing company calling itself Gulf Capital Partners, LLC, moved for admission pro hoc vice^PDF — that is, to appear before the court without actually being admitted to the court's normal bar — and were granted such. P.J., of Groklaw, suggests that the fact that one of the attorneys dispatched is a partner in the firm — a well respected firm — indicates "someone cares enough about this to send the very best." We would argue it means someone wants to make a big show — if the eyewitness reports of the hearing are correct, our assessment is frighteningly right.

The show started with a bang — out of SCO's cannon, of course. Completely out of nowhere — well, as far as having given the required notice to all parties is concerned — SCO pranced into the hearing with an agreement, signed just minutes before, for the above-mentioned Gulf Capital Partners to buy out SCO's Unix business, but leave them with a license sufficient to let them continue to harass Linux users via the courts. Such a last-minute admission is highly unorthodox; despite what is shown on television, having someone run in just before the final gavel with evidence is incredibly unusual. Courts have discovery rules for a reason — when you pop a surprise like that on the other side, they have no time to review it, much less prepare an argument in opposition.

The lawyers for IBM, Novell, & the U.S. Trustee raised exactly that objection, particularly after being given a single copy of the agreement to review.¹ The bankruptcy judge allowed forty-five minutes for the parties to review the agreement, hardly enough time for a speed-reader to finish it, let alone three teams of lawyers to look over one copy and prepare their remarks. Such, however, is standard operating procedure in the SCO litigation.

The creditors — IBM & Novell in principal — made the expected arguments — the agreement was filed with no notice, they had insufficient time to review it, and it should not be admitted for use in the scheduled hearing. The hearing, after all, was on the motions to convert, not on approving a sale. SCO argued they'd just signed it, and that it was relevant to the matter at hand — probably true, but a lot of things relevant to the matter at hand are excluded by courts because the party introducing them failed to follow the rules. Courts are charged with administering justice according to law, not equity, and there is a reason for the maxim "equity follows the law." It may be fair, but it has to be legal too.

An evidentiary hearing of sorts took place, with SCO putting CEO cum litigation mastermind Darl McBride — who has a habit of saying some very interesting things under oath — and Franklin Kaplan of Berer Singerman on the stand. IBM, Novell, and the Trustee didn't put anyone on the stand — that would have required following the rules about giving parties due notice, like Fed. R. Bankr. P. 9014(e), requiring notice a reasonable time before any scheduled hearing of whether there will be an evidentiary hearing at which witnesses may testify, and Local Rule 9006-1(c)(i), which requires fifteen days notice of pleadings and other documents.

McBride testified that SCO was working on four different deals, which was confirmed by Mr. Kaplan. The Gulf Capital deal, which involves Stephen Norris — who was part of an earlier failed bid — in some manner that is not entirely clear, was apparently the one that worked out. Novell & IBM continued to make the argument that SCO has been pulling these tricks all along, and shouldn't be allowed to continue, while the Trustee questioned whether the burden required by the relevant statute, that there be unusual circumstances, had been met.

Having heard all of this, the judge, who obviously hasn't leaned anything about SCO from the multitude of failed sale agreements submitted to date, decided it was a legitimate agreement that had to be considered, and that SCO wasn't trying to blindside anyone or delay the process. No wonder they say justice is blind.

Given that nobody was prepared for any of this — except for SCO, of course — it was decided that the hearing on the motion to convert would be postponed until July 16, and SCO's motion to approve the sale would be heard the same day. The Trustee raised the issue of 11 USC 1112(b)(3) — the statute authorizing the motion to convert — which requires that the court hold a hearing on the motion within thirty days of its filing, and render a decision within fifteen days of the hearing. The judge apparently answered the Trustee's concern about following federal law with "What happens if I don't meet that deadline? Will they take me out back and shoot me?"

As P.J. rightly noted on Groklaw, judges are not, at least, not usually, shot for ignoring the law — they're overturned on appeal. However, Mr. McMahon, the Trustee, apparently was relying on memory — 11 USC 1112(b)(3) goes on to say that the requirement is waived if the movant agrees to a continuance or the court is prevented from complying due to "compelling circumstances." Given that the parties reportedly consented to the continuance, the matter would appear to be moot. What is not moot, however, is the judge's obvious blasé attitude towards the laws he is charged with upholding.

On the subject of appeals, were we among the creditors, we would appeal the court's ruling on admitting the sale agreement into evidence to the District Court, contending that the bankruptcy judge erred in ignoring Fed. R. Bankr. P. 9014(e) and Local Rule 9006-1(c)(i), and to a lesser extent, Local Rule 9013-3. Given that that the parties apparently consented to the continuance, and that the judge would have likely found "compelling circumstances" regardless, there doesn't appear to be much room for an appeal on that basis.

The court's extensive history of bending over backwards to allow SCO to run roughshod over the creditors, though, would likely be quite compelling on appeal — not only has it allowed consideration of more bad deals than SCO has lawsuits, but also repeatedly extended the period in which the creditors were prevented from filing their own proposed reorganization plans. The Bankruptcy Court's job is to protect the debtor — there is a reason it's referred to as "taking shelter under the bankruptcy code" — but it also has a responsibility to ensure the creditors are treated fairly, and to administer justice according to the law. There would appear to be very legitimate questions about how well this particular court is doing on the last two.

As it stands, everything remains up in the air — the proposed sale is by no means final, and if it is like any of the others, is likely nothing more than a delaying tactic. If the judge has any sense about him, when and if this deal falls through like all the rest, he'll wake up and finally start sanctioning SCO for treating the Bankruptcy Code like kindling. If it falls through by next month's hearing, SCO will need a miracle even Satan couldn't help them get to avoid conversion into a Chapter 7 — once the Chapter 7 trustee gets his hands on them, they'll find themselves sold off faster than $5 Ferraris. By the time it finally happens, that champagne we all put away in 2002 will be just about right.