U.S. Trustee Moves to Convert SCO Bankruptcy to Chapter 7 - Updated
By Pamela Jones
May 05 2009Here it is, the moment many of you have been waiting for: the U.S. Trustee's office, through its counsel Joseph J. McMahon, Jr., has filed a motion in the SCO bankruptcy proceeding to convert the SCO's Chapter 11 to Chapter 7. And I think this will be your favorite sentence:
Additionally, not only is there no reasonable chance of "rehabilitation" in these cases, the Debtors have tried — and failed — to liquidate their business in chapter 11.So what's left? Dismissal or, more logically, Chapter 7. SCO's been in Chapter 11 as long as it's supposed to be, and it's tried three times to figure out a "rehabilitation" plan, and nothing panned out. Meanwhile, SCO reports a net negative cash flow of more than $3.5 million in its March 2009 report. $3.5 million since the bankruptcy was first filed in September 2007, and that represents cause to switch to Chapter 7, the Trustee's Office argues, due to "substantial or continuing loss to or diminution of the estate and the absence of a reasonable likelihood of rehabilitation." That's $3.5 million that could have been paid to Novell.
I never expected SCO to be rehabilitated. Oh. Different definition. The Trustee's Office means "to put back in good condition; re-establish on a sound, firm basis." I mean to admit it was wrong, turn around and sin no more. Like *that* will ever happen.
It's conceivable SCO could come into court with a done deal, I suppose, with all their paperwork done and in order, as a counter. With SCO, I never say never. I'd want to see the real buyers in the flesh, though, if I were the judge, with their right hands on their heart and their left holding their wallets up before the judge, spilling over with dollars, so to speak.
Um. Real ones.
Here is the filing:
[ Update: Right on cue, SCO says it will try again, according to Tom Harvey's report [ http://www.sltrib.com/business/ci_12302270 ] in the Salt Lake Tribune:
05/05/2009 750 [ http://www.groklaw.net/pdf/SCOGBK-750.pdf ] Motion to Convert Chapter 11 Case to a Case Under Chapter 7. Fee Amount $15. Filed by United States Trustee. Hearing scheduled for 6/12/2009 at 02:00 PM at US Bankruptcy Court, 824 Market St., 6th Fl., Courtroom #3, Wilmington, Delaware. Objections due by 5/26/2009. (Attachments: # 1 Notice of Motion [ http://www.groklaw.net/pdf/SCOGBK-750-1.pdf ] # 2 Proposed Form of Order [ http://www.groklaw.net/pdf/SCOGBK-750-2.pdf ] # 3 Certificate of Service [ http://www.groklaw.net/pdf/SCOGBK-750-3.pdf ]) (McMahon Jr., Joseph) (Entered: 05/05/2009)
The timing of the filing caught SCO officers by surprise. CEO Darl McBride had flown into Denver to attend the 10th Circuit hearing.You are surprised? Incidentally, going into Chapter 7 would not necessarily end the litigation. In fact, it can't on its own. It would be up to the appointed trustee to try to figure out what to do, and the trustee's interest will not dovetail with SCO executives, I'm guessing. For one thing, he'll be wanting to pay the creditors. Like, for example, Novell. And the trustee has no power to terminate the IBM counterclaims. Then there is Red Hat. They are not necessarily willing to drop their claims, since the goal is to establish that there are no legitimate claims against Linux.
“We are reviewing the motion that was filed in Delaware today with counsel and will have a detailed response for the court in due course,” McBride said in an e-mailed statement. “We plan to oppose the motion and present our own suggested course of action to the court.”
As for being surprised today, I'd point out that the SCO lawyers at least knew about this motion yesterday, as you can see for yourself by reading the Certificate of Service [ http://www.groklaw.net/pdf/SCOGBK-750-3.pdf ] Plus, at the last hearing [ http://groklaw.net/article.php?story=20090330173729611 ], the judge ruled that the period of exclusivity was over, and it was obvious to me, at least, that IBM, Novell and the Trustee's attorney would argue for Chapter 7, and it was left that if anyone wished to file such a motion, the judge would entertain it then, and it was pretty obvious that at least one of the three would do this. So I question why, if I figured this was next, anyone at SCO would be surprised by a motion like this. - End update.]
And we have the motion as text for your reading pleasure, followed, after the double row of stars, by the relevant parts of the statute [ http://www4.law.cornell.edu/uscode/11/usc_sec_11_00001112----000-.html ] governing this motion, 11 U.S.C. § 1112, which is referenced throughout:
THE SCO GROUP, INC., et al.,
Case Number 07-11337 (KG)
Hearing Date: June 12, 2009 at 2:00 P.M.
Objection Deadline: May 26, 2009
MOTION OF THE UNITED STATES TRUSTEE
TO CONVERT CASES TO CASES UNDER CHAPTER 7
In support of her motion for an order converting the above-captioned cases to cases under chapter 7, Roberta A. DeAngelis, Acting United States Trustee for Region 3 ("U.S. Trustee"), by and through her counsel, and based upon information and belief, avers:
The above-captioned cases should be converted to cases under chapter 7 because there is a "continuing loss to or diminution of the [Debtors'] estate[s] and the absence of a reasonable likelihood of rehabilitation" under 11 U.S.C. § 1112(b)(4)(A). The Debtors are a technology "startup" venture. Since the inception of the above-captioned cases nearly two years ago, the Debtors have continued to rapidly lose money; by their own admission, the Debtors have had in excess of $3.5 million of negative cash flow post-petition. This fact, by itself, is sufficient to establish a continuing loss to, or diminution of, the Debtors' estates. Additionally, there is not a reasonable likelihood that the Debtors will be rehabilitated. On three separate occasions over the past twenty-one months, the Debtors have started sale and/or plan processes designed to liquidate and/or
reorganize their business. All three of those attempts to resolve the cases failed. Under these circumstances, this Court is obligated to either convert the Debtors' cases to cases under chapter 7 or dismiss the cases, whichever is in the best interests of creditors and the estates pursuant to 11 U.S.C. § 1112(b)(1). The U.S. Trustee submits that conversion of the cases to cases under chapter 7 will be in the best interest of creditors and the Debtors' estates.
1. Under (i) 28 U.S.C. § 1334, (ii) (an) applicable order(s) of the United States District Court for the District of Delaware issued pursuant to 28 U.S.C. § 157(a) and (iii) 28 U.S.C. § 157(b)(2)(A), this Court has jurisdiction to hear and determine the Motion.
2. Under 28 U.S.C. § 586, the U.S. Trustee is generally charged with monitoring the federal bankruptcy system. See United States Trustee v. Columbia Gas Sys., Inc. (In re Columbia Gas Sys., Inc.), 33 F.3d 294, 295-96 (3d Cir. 1994) (noting that U.S. Trustee has "public interest standing" under 11 U.S.C. § 307 which goes beyond mere pecuniary interest); Morgenstern v. Revco D.S., Inc. (In re Revco D.S., Inc.), 898 F.2d 498, 500 (6th Cir. 1990) (describing the U.S. Trustee as a "watchdog"). "[I]n any case in which the United States trustee finds material grounds for any relief under section 1112 of [the Bankruptcy Code]," the U.S. Trustee is obligated to apply promptly after making that finding to the court for relief." 28 U.S.C. § 586(a)(8).
3. Under 11 U.S.C. § 307, the U.S. Trustee has standing to be heard on this Motion.
GROUNDS/BASIS FOR RELIEF
4. On September 14, 2007, the Debtors filed the petitions which initiated the above-captioned cases.
5. To date, this Court has not directed the appointment of a trustee or an examiner in the above-captioned cases.
6. On September 18, 2007, the Office of the U.S. Trustee ("OUST") mailed a notice to the Debtors' top twenty unsecured creditors informing them of the meeting to form an official committee of unsecured creditors. The scheduled date/time for the meeting was September 28, 2007. As of that date, the OUST had not received sufficient expressions of interest to appoint an official committee of unsecured creditors in the above-captioned cases. Accordingly, on September 28, 2007, the OUST filed a statement indicating that an official committee of unsecured creditors had not been formed.
7. The U.S. Trustee submits that these cases are ripe for conversion to cases under chapter 7. 11 U.S.C. § 1112(b)(1) provides:
Except as provided in paragraph (2) of this subsection, subsection (c) of this section, and section 1104(a)(3), on request of a party in interest, and after notice and a hearing, absent unusual circumstances specifically identified by the court that establish that the requested conversion or dismissal is not in the best interests of creditors and the estate, the court shall convert a case to a case under chapter 7 or dismiss a case under this chapter, whichever is in the best interests of creditors and the estate, if the movant establishes cause.1
8. Under 11 U.S.C. § 1112(b)(4)(A), the term "cause" in 11 U.S.C. § 1112(b)(1) includes "substantial or continuing loss to or diminution of the estate and the absence of a reasonable likelihood of rehabilitation."
9. 11 U.S.C. § 1112(b)(2)(B) indicates that, if the U.S. Trustee moves for conversion under 11 U.S.C. § 1112(b)(4)(A) and establishes "cause" for relief, there are no "unusual circumstances" that would allow this Court to refrain from converting the above-captioned case to a case under chapter 7.
10. Through the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. No. 109-8, 119 Stat. 23 (2005), Congress eliminated this Court's discretion that was previously reflected in the appearance of the permissive word "may" in to 11 U.S.C. § 1112(b) and, through substitution of the mandatory word "shall" for "may," directed this Court to convert or dismiss the case, "whichever is in the best interests of the creditors and the estate," if "cause" is established. 7 COLLIER ON BANKRUPTCY § 1112.04(1) (15th ed. rev. 2005) (". . . as amended in 2005, section 1112(b) circumscribes the court's discretion by directing certain instances in which the court must, and must not, convert or dismiss the case."); cf. Association of Civilian Technicians v. FLRA, 22 F.3d 1150, 1153 (D.C. Cir. 1994) ("The word 'shall' generally indicates a command that admits of no discretion on the part of the person instructed to carry out the directive.").
11. The purpose of 11 U.S.C. § 1112(b)(4)(A) is to "preserve estate assets by preventing the debtor in possession from gambling on the enterprise at the creditors' expense when there is no hope of rehabilitation." In re Lizeric Realty Corp., 188 B.R. 499, 503 (Bankr. S.D.N.Y. 1995) (quoted in Loop Corp. v. United States Trustee (In re Loop Corp.), 379 F.3d 511, 516 (8th Cir. 2004)).
12. "Substantial or continuing loss to or diminution of the estate" is established where a debtor has continuing, negative cash flow post-petition. See Loop Corp., 379 F.3d at 515-16.
13. "Rehabilitation," as the term is used in 11 U.S.C. § 1112(b)(4)(A), means "to put back in good condition; re-establish on a sound, firm basis." 5 COLLIER ON BANKRUPTCY § 1112.03(2) (15th ed. 1980) (quoted in In re L.S. Good & Co., 8 B.R. 315, 317 (Bankr. N.D. W.Va. 1980)).
14. In these cases, the "continuing loss/diminution" prong of 11 U.S.C. § 1112(b)(4)(A) is satisfied by statements in the Debtors' most recent monthly operating reports, where SCO Operations, Inc. reports net negative cash flow of more than $3.5 million in its March 2009 report (Docket Entry # 743).
15. Additionally, not only is there no reasonable chance of "rehabilitation" in these cases, the Debtors have tried — and failed — to liquidate their business in chapter 11. In the fall of 2007, the Debtors filed a motion seeking approval of emergency sale and bidding procedures and, later, the Debtors filed a copy of their proposed asset purchase agreement with York Capital Management, Inc. The sale process with York failed to move forward. Next, in or about February, 2008, the Debtors proposed that Stephen Norris Capital Partners, LLC ("SNCP") would fund a "100 percent" plan that would make allowed, general unsecured claims whole. Like the York deal, the SNCP deal never materialized. Most recently, in January 2009 the Debtors again initiated a sale/plan process that was abandoned. In sum, there have been three unsuccessful attempts by the Debtors over the span of nearly two years to bring these cases to closure.
16. Under these circumstances, and consistent with 11 U.S.C. § 1112(b)(1), this Court is required to convert the above-captioned cases to cases under chapter 7 or dismiss the cases. In light of the facts and circumstances of these cases, the U.S. Trustee submits that conversion of the cases to cases under chapter 7 is the appropriate course of action.
RESERVATION OF RIGHTS/CONCLUSION
17. The U.S. Trustee reserves the right to amend and/or supplement this motion.
18. The U.S. Trustee reserves the right to conduct discovery in connection with this motion.
WHEREFORE the U.S. Trustee requests that this Court issue an order converting the above-captioned cases to cases under chapter 7.
ROBERTA A. DeANGELIS
ACTING UNITED STATES TRUSTEE
BY: /s/ Joseph J. McMahon, Jr.
Joseph J. McMahon, Jr., Esquire
United States Department of Justice
Office of the United States Trustee
J. Caleb Boggs Federal Building
Date: May 5, 2009
1 11 U.S.C. § 1112(b)(3) requires that this Court commence a hearing on the U.S. Trustee's conversion motion "not later than 30 days after the filing of the motion . . . unless the movant expressly consents to a continuance for a specific period of time . . . ." The U.S. Trustee consents to the initial scheduling of this motion for June 12.
[Here's the referenced statute, and I've marked in red the parts that apply:]
11 U.S.C. § 1112
§ 1112. Conversion or dismissal
(1) Except as provided in paragraph (2) of this subsection, subsection (c) of this section, and section 1104 (a)(3), on request of a party in interest, and after notice and a hearing, absent unusual circumstances specifically identified by the court that establish that the requested conversion or dismissal is not in the best interests of creditors and the estate, the court shall convert a case under this chapter to a case under chapter 7 or dismiss a case under this chapter, whichever is in the best interests of creditors and the estate, if the movant establishes cause.
(2) The relief provided in paragraph (1) shall not be granted absent unusual circumstances specifically identified by the court that establish that such relief is not in the best interests of creditors and the estate, if the debtor or another party in interest objects and establishes that—(A) there is a reasonable likelihood that a plan will be confirmed within the timeframes established in sections 1121 (e) and 1129 (e) of this title, or if such sections do not apply, within a reasonable period of time; and(3) The court shall commence the hearing on a motion under this subsection not later than 30 days after filing of the motion, and shall decide the motion not later than 15 days after commencement of such hearing, unless the movant expressly consents to a continuance for a specific period of time or compelling circumstances prevent the court from meeting the time limits established by this paragraph.
(B) the grounds for granting such relief include an act or omission of the debtor other than under paragraph (4)(A)—(i) for which there exists a reasonable justification for the act or omission; and
(ii) that will be cured within a reasonable period of time fixed by the court.
(4) For purposes of this subsection, the term “cause” includes—(A) substantial or continuing loss to or diminution of the estate and the absence of a reasonable likelihood of rehabilitation;
(B) gross mismanagement of the estate;
(C) failure to maintain appropriate insurance that poses a risk to the estate or to the public;
(D) unauthorized use of cash collateral substantially harmful to 1 or more creditors;
(E) failure to comply with an order of the court;
(F) unexcused failure to satisfy timely any filing or reporting requirement established by this title or by any rule applicable to a case under this chapter;
(G) failure to attend the meeting of creditors convened under section 341 (a) or an examination ordered under rule 2004 of the Federal Rules of Bankruptcy Procedure without good cause shown by the debtor;
(H) failure timely to provide information or attend meetings reasonably requested by the United States trustee (or the bankruptcy administrator, if any);
(I) failure timely to pay taxes owed after the date of the order for relief or to file tax returns due after the date of the order for relief;
(J) failure to file a disclosure statement, or to file or confirm a plan, within the time fixed by this title or by order of the court;
(K) failure to pay any fees or charges required under chapter 123 of title 28;
(L) revocation of an order of confirmation under section 1144;
(M) inability to effectuate substantial consummation of a confirmed plan;
(N) material default by the debtor with respect to a confirmed plan;
(O) termination of a confirmed plan by reason of the occurrence of a condition specified in the plan; and
(P) failure of the debtor to pay any domestic support obligation that first becomes payable after the date of the filing of the petition....
07:32 PM EDT
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