SCO in chapter 11

September 15, 2007, 12:08 AM UTC

SCO Group (SCOX) has just filed for voluntary reorganization under Chapter 11 of the bankruptcy laws while it “addresses potential financial and legal challenges,” according to a company press release (available here). The release states that the company “intends to maintain all normal business operations throughout the bankruptcy proceedings.”

The legal challenges faced by the company obviously include the ones discussed in the previous post, here.

By statute, a bankruptcy filing ordinarily stays all pending litigation against the filer, raising questions about whether SCO’s trial against Novell (NOVL), scheduled to start Monday(September 17), will proceed as planned. I am trying to find out now whether SCO will ask to lift that stay to allow the Novell case to proceed as quickly as possible — which might seem to be in its best interests, since it needs to appeal as quickly as possible — or whether its attorneys and board have some other strategy in mind now. [Update: SCO is not commenting today beyond the press release.]

The bankruptcy petition has been filed in the U.S. bankruptcy court for the district of Delaware, and has been assigned to Bankrupcy Judge Kevin Gross. (Docket number for the petition is 07-11337-KG.)

Here’s the list of SCO Operations’s 20 largest unsecured creditors. The largest are Amici LLC, an online document management company, which is owed about $500,000, and the Boies Schiller & Flexner firm, which is owed a little more than $287,000 in “trade debt,” which probably means reimbursement for out-of-pocket expenses. (The Boies firm has already been paid long ago all the attorneys fees that it is entitled to under its retainer agreement through appeal; any additional attorneys fees it will get are to come in the form of a contingency fee in the event that SCO ultimately recovers a judgment from someone–an eventuality that is beginning to seem remote.)

Fifth and sixth on the list are Microsoft (MSFT) and Sun Microsystems (JAVA), owed about $125,000 and $50,000 respectively.

UPDATE (Sept 15, 7:30 am): The automatic stay provision of the bankruptcy code has, in fact, acted to postpone indefinitely Monday’s trial.

Neither Novell nor SCO would comment on what to expect. On sleeping on it, I now think that SCO must hope somehow to wrench the case out of Kimball’s hands and place into those of the Delaware bankruptcy judge and of the U.S. District Judge in Delaware who will oversee that action. Such an eventuality seems like an extremely long shot; the more likely eventuality is that the bankruptcy judge will eventually send the case back to Kimball for trial.

In that trial Judge Kimball intended to decide, among other things, how much money SCO must return to Novell from its 2003 licensing agreements with Sun Microsystems (for about $10 million) and Microsoft (for about $26.75 million). Novell argues that these licenses were, in whole or in part, royalties on the Unix System V releases, to which Novell retained all royalty rights. Novell contends that SCO was not even empowered to enter into those licensing agreements without its permission and, accordingly, should turn over the entire sum.

SCO claims that the licenses were based on its newer UnixWare products, not on the older Unix System V releases, and that Novell’s rights to a share of the UnixWare royalty stream expired in 2002 under the terms of the 1995 Asset Purchase Agreement between Novell and SCO’s predecessor, Santa Cruz. SCO also claims that any System V rights involved were “incidental” to the UnixWare rights, and were to be treated as part of the UnixWare licenses. Judge Kimball appears to have already rejected SCO’s arguments, however, in his August 10 ruling on summary judgment.

CORRECTION: An earlier version of this post incorrectly described the purpose of the Microsoft and Sun licenses, whose terms remain confidential. SCO has described both agreements as part of its SCOsource campaign, whose purpose was to seek licenses from the Linux community for code SCO claimed to own. (Novell also seeks recovery of all SCOsource royalties SCO may have collected.) SCO and Sun have each said publicly that the main specific purpose of Sun’s license was to allow Sun to open-source its Solaris operating system.

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