[This is the unofficial transcript posted at scofacts.org of the proceeding of which a copy of the official audio recording can be found here: part 1 mp3; part 2 mp3; Full FTR CD.

See also the hearing's agenda, minutes, and sign-in sheet.
See http://scofacts.org/bankruptcy.html for links to recordings of other hearings in this case.
Scofacts is not endorsed by the "SCO Group" Delaware corporation, nor by any of the registered owners of "SCO" trademarks.

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Motion Hearing and Status Conference

In re:
The SCO GROUP, INC., et al.,
Chapter 11
Case No. 07-bk-11337-KG
(Jointly Administered)

(The debtors' current names, file numbers at the Delaware Division of Corporations, and Rule 1005 information (IRS employer identification ("EID") numbers and all names used within the eight years before the filing of their petitions (September 14, 1999 to September 14, 2007)) are as follows: (1) The SCO Group, Inc., Del. Corp. #3266987, EID 87-0662823, which was named "Caldera International, Inc." prior to May 16, 2003; and (2) SCO Operations, Inc., Del. Corp. #3187414, EID 97-0617393, which was named "Caldera Systems, Inc." prior to September 23, 2002.)

Monday, March 30, 2009
14:04:01 Eastern Daylight Time (-0400)

Before the Honorable Kevin Gross, U.S. Bankruptcy Judge

Courtroom 3, 824 N Market St Fl 6, Wilmington DE 19801
Courtroom clerk: Sherry Scaruzzi
Audio recording operator: Brandon McCarthy

Agenda and Minutes

(See also the "Notice of Agenda of Matters Scheduled for Hearing on March 30, 2009, at 2:00 P.M." (Docket No. 727, filed March 26, 2009) and the "Minute Entry" (Docket No. 731, March 30, 2009)).

Item 1: "Fourth Motion by Debtors Under Section 1121(d) for Extension of Exclusivity Deadlines" (Docket No. 649, December 30, 2009), with proposed order (#649-3) and notice (#649-2), setting objection deadline of January 22, 2009 and hearing date of January 29, 2009.

Item 2: "Disclosure Statement in Connection with Debtors' Amended Joint Plan of Reorganization" (Docket No. 655 (non-compliant scanned images, see #670-5 for an electronically-converted PDF), January 8, 2009), and notice (#656), setting objection deadline of February 18, 2009 and hearing date of February 25, 2009.

Item 3: "Debtors' Revised Motion for an Order (I) Scheduling Confirmation Hearing; (II) Approving Form and Contents of Solicitation Package; (III) Approving Form and Manner of Notice of Confirmation Hearing; (IV) Establishing Record Date and Approving Procedures for Distribution of Solicitation Packages; (V) Approving Forms of Ballot; (VI) Establishing Voting Deadline for Receipt of Ballots; (VII) Approving Procedures for Vote Tabulations; (VIII) Establishing Deadline and Procedures for Filing Objections to Confirmation of the Plan; and (IX) Granting Related Relief" (Docket No. 694 (non-compliant scanned images, see #700-4 for an electronically-converted PDF), January 8, 2009), setting objection deadline of February 18, 2009 and hearing date of February 25, 2009. (Note: no proposed order was ever filed (in violation of Local Rule 9013-1(f)))


See also the "SIGN-IN-SHEET" (#731-2)

Identified Speakers (in order of appearance)

Sherry Scaruzzi
Deputy Clerk of Court
824 N Market St Fl 6, Wilmington DE 19801
Kevin Gross autograph Hon. Kevin J. Gross (Pennsylvania Bar #27160, admitted 1978 (inactive); Delaware Bar #209)
United States Bankruptcy Judge (appointed 2006)
824 N Market St Fl 6, Wilmington DE 19801
(image from http://ecf.deb.uscourts.gov/cgi-bin/show_case_doc?232,109446,0,,)
James E. O'Neill III James E. O'Neill III (Pennsylvania Bar #44247, admitted 1985; Delaware Bar #4042, admitted 2001)
Attorney for Debtors The SCO Group, Inc. et al.
Pachulski Stang Ziehl & Jones LLP
919 N Market St Fl 17, PO Box 8705, Wilmington DE 19899
(image from http://pszjlaw.com/assets/images/1504.jpeg)
Arthur Jay Spector Arthur Jay Spector (New York Bar #3748621, admitted 1975; Florida Bar #620777, admitted 2002)
Attorney for Debtors The SCO Group, Inc. et al.
Berger Singerman, P.A.
200 S Biscayne Blvd Ste 1000, Miami FL 33131
(image from http://www.bergersingerman.com/images/image_bio/Arthur_Spector.gif)
Alan P. Petrofsky Alan P. Petrofsky
Equity Security Holder, pro se (appearing telephonically)
3618 Alameda Apt 5, Menlo Park CA 94025
(image from http://petrofsky.org/csua-alpetrof-mirror/al-head.gif)
Adam Aiken Lewis Adam Aiken Lewis (California Bar #88736, admitted 1979)
Attorney for Creditor Novell, Inc.
Morrison & Foerster LLP
425 Market St, San Francisco CA 94105
(image from http://www.mofo.com/images/attorney/407.jpg)
Richard B. Levin Richard B. Levin (D. Columbia Bar, admitted 1976; New York Bar #4412862, admitted 2006)
Attorney for Creditor International Business Machines Corp.
Cravath, Swaine & Moore LLP
825 Eighth Ave, New York NY 10019
(image from http://web.archive.org/web/20040806085447/www.skadden.com/bioImages/836.jpg)
Joseph James McMahon, Jr. autograph Joseph James McMahon, Jr. (Pennsylvania Bar #77570, admitted 1996; Delware Bar No. 4819)
Attorney for Acting United States Trustee Roberta DeAngelis
United States Department of Justice
844 King St Rm 2207, Wilmington DE 19801
(image from http://ecf.deb.uscourts.gov/cgi-bin/show_case_doc?193,109446,1,,)

Other Attendants

Kathleen P. Makowski Kathleen P. Makowski (Delaware Bar #3648, admitted 1997; Pennsylvania Bar #79859, admitted 1997)
Attorney for Debtors The SCO Group, Inc. et al.
Pachulski Stang Ziehl & Jones LLP
919 N Market St Fl 17, PO Box 8705, Wilmington DE 19899
(image from http://web.archive.org/web/20060327032357/www.saul.com/attorneys/AttorneyPdf/attorney431p0lgy0.pdf)
Darl Charles McBride Darl Charles McBride
Proffered Witness for Debtors The SCO Group Inc., et al.
President of The SCO Group, Inc.
355 S 520 W, Lindon UT 84042
(image from http://sco.com/images/execs/McBride34.jpg)
Ryan E. Tibbitts Ryan E. Tibbitts (Utah Bar #4423, admitted 1984)
Proffered Witness for Debtors The SCO Group Inc., et al.
General Counsel of The SCO Group, Inc.
355 S 520 W, Lindon UT 84042
(image from http://www.sco.com/2005forum/breakouts/images/rtibbitts_reg.gif)
Sean T. Greecher Sean T. Greecher (Delaware Bar #4484, admitted 2004)
Attorney for Creditor Novell, Inc.
Young Conaway Stargatt & Taylor
1000 West St Fl 17, PO Box 391, Wilmington DE 19899
(image from http://www.ycst.com/inc/attimage.php?att=43)
Gabriel R. MacConaill Gabriel R. MacConaill (Delaware Bar #4734, admitted 2005)
Attorney for Creditor International Business Machines Corp.
Potter Anderson & Corroon LLP
1313 N Market St Fl 6, Wilmington DE 19801
(image from http://www.pacdelaware.com/assets/images/52.jpeg)




(14:04:01/+00:00:00) Please rise
(14:05:16/+00:01:15) Debtors' status report
(14:19:48/+00:15:47) Debtors make oral motion for an exclusivity extension through May 14
(14:22:18/+00:18:17) Objection of Petrofsky
(14:25:58/+00:21:57) Objection of Novell
(14:38:17/+00:34:16) Objection of IBM
(14:51:53/+00:47:52) Objection of U.S. Trustee
(14:58:59/+00:54:58) Reply by Debtors
(15:15:08/+01:11:07) Sur-reply by Novell
(15:18:47/+01:14:46) Recess

(15:24:13/+00:00:00) Please rise
(15:24:17/+00:00:04) Ruling denying exclusivity motions
(15:25:54/+00:01:41) Discussion of scheduling discovery and a hearing on a motion for conversion or for appointment of a trustee
(15:35:12/+00:10:59) Decision not to schedule anything until after such a motion is filed
(15:38:22/+00:14:09) Court states it "will do an order on this"
(15:38:27/+00:14:14) Recess

First Session

(audio: 14:04:01 to 15:18:47 (36MB mp3))

(14:04:01/+00:00:00) CLERK: Please rise.

(14:04:06/+00:00:05) Kevin Gross autograph THE COURT: Good afternoon, everyone. Please be seated. Thank you. Good to see you all. Mr. O'Neill, Good afternoon.

(14:04:12/+00:00:11) James E. O'Neill III MR. O'NEILL: Good afternoon, Your Honor.

(14:04:13/+00:00:12) Kevin Gross autograph THE COURT: It's a double-header for you today.

(14:04:14/+00:00:13) James E. O'Neill III MR. O'NEILL: It is a double-header. Nice to see you again in such a short time span. Your Honor, James O'Neill, for the record, appearing today on behalf of the Debtors The SCO Group, and I'm joined today by my colleague Kathleen Makowski, and my co-counsel Arthur Spector, who the Court knows.

(14:04:33/+00:00:32) Kevin Gross autograph THE COURT: Welcome back, Mr. Spector.

(14:04:34/+00:00:33) James E. O'Neill III MR. O'NEILL: Also in the courtroom from the company, who the Court knows, are Darl McBride and Ryan Tibbitts.

(14:04:39/+00:00:38) Kevin Gross autograph THE COURT: Yes. Welcome, gentlemen.

(14:04:41/+00:00:40) James E. O'Neill III MR. O'NEILL: Your Honor, we have a couple of matters that are on the agenda for today, and I'm gonna -- I think that really we're going to start with the status conferences for items number two and three to give the Court a picture of where we are, and Mr. Spector is going to give the status report.

(14:04:57/+00:00:56) Kevin Gross autograph THE COURT: Thank you, Mr. O'Neill, and certainly that relates I think to item number one, so it's probably helpful to do it in this order.

(14:05:04/+00:01:03) Arthur Jay Spector MR. SPECTOR: Your Honor, I don't know the Court's preference. Do you want to take appearances first, or do you want me to --

(14:05:07/+00:01:06) Kevin Gross autograph THE COURT: No, that's all right. I -- Everyone has returned, I think, and I know who everyone is and they'll just rise when they're ready.

(Debtors' status report)

(14:05:16/+00:01:15) Arthur Jay Spector MR. SPECTOR: Thank you, Your Honor. Once it became public knowledge that SCO was planning to auction its business, UNIX, which was, of course, public on January 8th when we filed a plan that proposed that, various parties including prospective purchasers approached the management and asked SCO to take the auction away, so they could do a deal privately. Included within this group were several players that were, uh, we'll call them interested in the company, pre-Judge Kimball's ruling of July 16th, 2008, and some that were also there after that. So we're not necessarily dealing with new players, but some of the old players came back and said don't auction it off to the public, we still want to buy it. Eventually SCO implicitly acquiesced --

(14:06:12/+00:02:11) Jupiter Tonans (whereupon, the displeasure of the Gods was made known by a low rumbling noise)

(14:06:15/+00:02:14) Kevin Gross autograph THE COURT: It sounds worse than it is, I think. That rumbling -- that rumbling is not thunder.

(14:06:21/+00:02:20) Arthur Jay Spector MR. SPECTOR: I didn't need that today. And I had no lunch, so it's not that, either.

(14:06:27/+00:02:26) Kevin Gross autograph THE COURT: All right.

(14:06:28/+00:02:27) Arthur Jay Spector MR. SPECTOR: By withdrawing -- well, eventually SCO implicitly acquiesced by withdrawing the motion that was set for hearing on the 16th of this month asking for approval of bid procedures. These talks were making sufficient progress so that we had hoped to have definitive documents that would have made a status report unnecessary. I concede, and -- to say, that I spoke with Mr. Lewis on behalf of Novell, Mr. Levin on behalf of IBM, several weeks ago, saying we are withdrawing that because we have talks in the works and I hope to have a disclosure statement fixed in a fashion that you would find less objectionable than what you had previously seen, and see if we can work out any differences so that on March 30th we can come in and say we've kind of worked those things out and here's our disclosure statement, and let's have approval. And I told them, it's not going to be a lot like the January 8th version because we have a private sale going now, and so forth.

(14:07:31/+00:03:30) Arthur Jay Spector And I -- and I -- I only said that because I believed it, based on the status of the talks at the time. Those talks have not come to the level that would be necessary for me to make any changes to the documents, because I'd be writing and then erasing and then writing and then erasing. And I promised Your Honor some time ago, with -- the wake of another fiasco, that I would not burden this court any further with plans and disclosure statements based on LOIs, and that's what we've been offered.

(14:08:01/+00:04:00) Kevin Gross autograph THE COURT: Okay.

(14:08:01/+00:04:00) Arthur Jay Spector MR. SPECTOR: And I've told that to our negotiating partners on the other side, saying, now -- a LOI doesn't -- isn't worth anything -- well pointed-out a year ago in one transaction. So, since I don't have such definitive documents, we don't have an amended disclosure statement, and we don't have, of course, anything worked out with IBM and Novell over it.

(14:08:24/+00:04:23) Arthur Jay Spector In addition, there's another reason why we don't have an amended disclosure statement, and that's because we don't have our negotiating partners at a place we want them. The deal isn't at a point that we want to close a deal. Now, I don't want to -- don't want to make disclosures about the status of negotiations, but we're not happy with where they are. Although there's progress, we're not there yet. We had -- one of the bidders had a counsel that was going to join at this hearing and testify -- not testify, but speak to their -- her client's continuing interest in doing a deal, but she had a conflict and just said that she couldn't make it but we could relay that, of course. But that's obvious.

(14:09:12/+00:05:11) Arthur Jay Spector In a matter of five weeks, SCO will finally have its biggest day in court in its history. May 6th, just around the corner. It's the date set for oral argument on SCO's appeal of the August 10th, 2007 summary judgment ruling in the Novell litigation and the subsequent money judgment rendition on July 16th, 2008. How did we get a May 6th hearing date, oral argument hearing date, on an appeal in which the record wasn't even submitted until January. Answer: following the suggestion of a clerk, I guess it was, at the Tenth Circuit that maybe this case was worthy of expedited attention, SCO filed a motion for expedited briefing, which was granted, I don't know, a couple days later. Within days thereafter -- then SCO filed its brief on March 5th, and the very next day the Tenth Circuit set oral argument for May 6th. I think that's unusual. The order also discouraged, and that's a word that was in the order, quote discouraged Novell from seeking an extension of its time to file a responsive brief.

(14:10:30/+00:06:29) Arthur Jay Spector Wouldn't it be a shame if SCO ultimately wins the appeal in the Tenth Circuit, but had already sold all of its UNIX assets just to stay in business, or to see -- or to stay alive, to see that date come to fruition. Before the August 10th, 2007 ruling SCO had a market capitalization of thirty-five million dollars. Within weeks after that ruling, the price of SCO's stock plummeted, so that the market capitalization just a few weeks after that ruling was one point five million -- approximately one point five million dollars. If the ruling is overturned, it's fair to say that the share value will improve dramatically. Consequently, SCO's ability to obtain conventional financing would improve markedly. Or, if it's still then inclined to do a sale-based transaction, the demands that SCO will make to do it, will be far more commensurate with the interests of its constituents than what's being discussed today. And this is all common sense.

(14:11:33/+00:07:32) Kevin Gross autograph THE COURT: Certainly.

(14:11:34/+00:07:33) Arthur Jay Spector MR. SPECTOR: The three underlying factors that lead to these conclusions are, one, the three and a half million dollar judgment against us -- against SCO, by Novell, would be gone. That's part of the premise of the argument. We believe that the marketplace has always felt -- always felt that SCO clearly owned the UNIX copyrights -- the UNIX technology all together, including the copyrights. Even certain IBM documents acknowledge that SCO is the owner of the UNIX copyright. And that will all be in evidence when we get to a trial. We believe the market still holds this view, but the firmness of its view was shaken by the August 10th, 2007 ruling. By removing that opinion, the market will likely reassume the validity of SCO's ownership in the copyright. Third, major customers went into a holding pattern upon the release of that ruling, not knowing what to do -- just wanted to sit it out. Now, they didn't necessarily quit UNIX and go to some other platform because, frankly, it's a very major task for them to do. I'll get into that a little bit later, but there were loads of orders for other upgrades and things that were frozen. That's revenue that's sitting on the shelf waiting to come to SCO, if the fear that the customers have is taken away.

(14:13:01/+00:09:00) Arthur Jay Spector When we first came before you in September 2007, we talked a bit about SCO's future technology, the mobility business through its subsidiary Me, Inc.. The technology at that time had not been fully developed nor marketed. It was a future technology. In the worst economic times since the first great depression, SCO finished the development of the products and began the marketing in earnest, but due to the economic climate, SCO's strategic partners in this endeavor, folks like Day-Timer, Franklin-Covey, RIM, and Rogers Communications, either pulled out or slowed down their marketing efforts, because of their own financial problems -- I don't want to say they're problems, but, concerns. Now, both Franklin-Covey and Apple, a new player in this marketplace, in this space, are aggressively marketing the products that have now come to market. Revenue stream has now commenced. This is no longer future technology, it's present technology. Remember where we were in September 2007, and what hill we had to climb, to get revenue. There were people, who are not friendly disposed towards the company, who said that the mobility products were a fiction, there really wasn't anything there, it was like Billie Sol Estes, if you're old enough to remember--

(14:14:26/+00:10:25) Kevin Gross autograph THE COURT: I remember.

(14:14:27/+00:10:26) Arthur Jay Spector MR. SPECTOR: -- the oil from one place to another, if you came and looked it wouldn't be there -- there are other apt analogies since then, I know. It's not true. It not only exists, but it's being marketed and revenues have started to be produced. As a result of this success -- early success with the first product that SCO delivered, it's called FC tasks -- FC stands for Franklin Covey, Tasks is jobs -- it's the first application SCO did in conjunction with Franklin Covey for the Iphone. That application made it to the top twenty paid productivity applications for the Iphone, in days coming on the market. It's still in the top something, but it is a phenom -- and that's before Franklin Covey sent out the email to its loyal base of Franklin planner customers --

(14:15:20/+00:11:19) Kevin Gross autograph THE COURT: Hm.

(14:15:21/+00:11:20) Arthur Jay Spector MR. SPECTOR: -- to push the thing. This is just on word of mouth at this point. SCO now has a pipeline -- oh, by the way, this is on the Iphone, there's twenty million of them, last count, on the marketplace. This is a paid, additional application you get for your Iphone, and this is in the top twenty, or was in the top twenty last we looked, I guess, of paid productivity applications for the Iphone.

(14:15:44/+00:11:43) Arthur Jay Spector That's without -- I'm repeating myself -- that's without the pushing of Franklin Covey. It's brand new. I think it only hit the market February 27th. SCO now has a pipeline of new products being developed for other companies for the Iphone. People coming to SCO and asking for that. That's with all of the problems, A, in the world marketplace, B, with this company, being in Chapter 11, and facing the competition that it has and everything else thrown its way.

(14:16:11/+00:12:10) Arthur Jay Spector Now let's talk about UNIX, after all that's what this company was all about. Thousands of SCO customers -- loyal SCO customers, have millions of SCO servers to run their basic business applications. It's a major task, as I said earlier, for them to switch, off of a UNIX-based system to something else. They would have to rewrite their own business applications that run on UNIX. They have lots and lots of business applications. I suppose some companies, like McDonald's, have the wherewithal to do it. A lot of them don't have the wherewithal to do that, or not easily. They would love to have the ability -- all of these customers -- love to have the ability to run their applications on a variety of platforms, if they could, of hardware and software configurations.

(14:17:01/+00:13:00) Arthur Jay Spector SCO has developed a new product that will be released in a matter of weeks that answers this demand. Although UNIX sales have been on a steady decline for years, this product is designed to reverse that trend. The product is called SCO UNIX V. V is for virtual. It will allow SCO customers to access Windows operating system, over top of the existing UNIX, which would save them the necessity of making the changes.

(14:17:33/+00:13:32) Arthur Jay Spector So, that's what's happen -- this is a status report, I'm telling you what's happened in the core business, and the litigation is one of the core businesses, unfortunately to say, in the SCO bus-- in the SCO company. We touched on UNIX, mobility, the litigation. It's a three-legged stool, largely. And it's largely been a race against time, as the Court well knows.

(14:17:59/+00:13:58) Arthur Jay Spector I'll now turn to the -- well, that's the status report, we didn't touch about the third -- I think, item one, which is talking about the exclusivity, but it kind of runs into that. If you want me to sit down now and stop, or I can cover the --

(14:18:12/+00:14:11) Kevin Gross autograph THE COURT: No, continue, continue Mr. Spector. That's fine.

(14:18:14/+00:14:13) Arthur Jay Spector MR. SPECTOR: Thank you. As we said at the hearing on the first-day motions in September 2007, SCO filed this case to protect itself from a forty million dollar claim by Novell, with the poisoned dagger of a constructive trust that would immediately shut the doors.

(14:18:30/+00:14:29) Arthur Jay Spector This would have been calamitous to the thousands of loyal customers that we talked about, because they wouldn't have anybody to provide ongoing support or upgrades. As they get new applications, business applications for their business, to run on UNIX -- we have to do things to make it run on UNIX, and there wouldn't be a SCO company to do that. So that was one of the major considerations. If we go out of business, a lot of people would be harmed by that.

(14:18:56/+00:14:55) Arthur Jay Spector Second, it would have killed SCO's budding mobility business. At the time there was a -- the products had been mostly developed and we were on the verge of coming to market with product, and then of course it slowed down because of the economy, but we finally have gotten there. And so that goal has been realized.

(14:19:19/+00:15:18) Arthur Jay Spector And third, it would have cost SCO its valuable intellectual property rights, which, when and if we get to court and prevail, at a trial, can be worth BILLIONS of dollars. That's what this case is largely about.

(14:19:40/+00:15:39) Arthur Jay Spector Chapter 11 has helped SCO achieve these objectives, so far. It's still here.

(Debtors make oral motion for an exclusivity extension through May 14)

(14:19:48/+00:15:47) Arthur Jay Spector We are now on the last lap of the race against time. Therefore, we are making an ore tenus motion, for the last extension possible. Under 1121(d)(2)(B), the Court may allow an extension of the time for exclusivity under 1121(d)(3) [sic, should be (c)(3)], for twenty months. In this case, that's May 14th. Then we can't ask you for anything more, except confirmation of a plan, when that day comes. And that -- I know that the motion we had on file said March 16th [sic, it said 18th], but we all know -- first of all, we asked for January 16th for the exclusivity, we filed on January 8th -- the dates got all jumbled up, but let's look at the statute. The statute doesn't say anything about what we -- although -- the minutiae of facts that we have on dates. It simply says the debtor has to -- has their exclusivity if the Court so grants it, for not longer than twenty months from the date of the order for relief, for getting a plan confirmed.

(14:20:51/+00:16:50) Arthur Jay Spector Now, I am fully aware that if we filed a plan April 15th, and we went to a disclosure hearing somewhere around May 14th, not shortening schedules, just the normal 30 day -- 25 days plus a little bit of notice -- if we did that, and we got here May 14th and the Court granted approval of that disclosure statement, on May 15th we wouldn't have exclusivity anymore. I know that. I can't change that. Congress thought it was wise to put those limits in, and we live with them. We have to live with them.

(14:21:22/+00:17:21) Arthur Jay Spector But if that's -- I hate to -- I'm thinking of things, words like [transcribology exam problem one], I'm thinking of words like [transcribology exam problem two] -- I'm thinking of wor-- and I don't know how you're going to put that on the transcript -- I'm thinking that will suffice us, okay, because at that point, we're out of the gate, we've got the horse in front, and we can -- and we can get to a confirmation in June, if necessary, but ahead of any competing plan, unless the Court wanted to slow it down and put it on a track it, and we would argue against that for obvious reasons. So, I mean I can't ask for any more than that, but I really can't ask for any less than that. So, that is what the request is for today, and it's the only real request we have for you today, and with that I'll either take questions of Your Honor, or sit down and let someone else speak.

(14:22:08/+00:18:07) Kevin Gross autograph THE COURT: Let me hear from others who might want to be heard first.

(14:22:09/+00:18:08) Arthur Jay Spector MR. SPECTOR: Thank you.

(14:22:10/+00:18:09) Kevin Gross autograph THE COURT: Thank you, Mr. Spector.

(14:22:14/+00:18:13) Alan P. Petrofsky MR. PETROFSKY: Your Honor, this is Al Petrofsky.

(14:22:16/+00:18:15) Kevin Gross autograph THE COURT: Yes, Mr. Petrofsky.

(Objection of Petrofsky)

(14:22:18/+00:18:17) Alan P. Petrofsky MR. PETROFSKY: Thank you. Well, let me start by addressing a couple points that came up there. That May 6th oral argument date in the SCO versus Novell appeal. That is, that is an argument date, that's not a decision date.

(14:22:32/+00:18:31) Kevin Gross autograph THE COURT: That's right.

(14:22:33/+00:18:32) Alan P. Petrofsky MR. PETROFSKY: And the court's ruling -- I don't think that's been submitted to you -- but the court's ruling in that case on expediting the appeal did not say anything about expediting the decision after the argument.

(14:22:46/+00:18:45) Kevin Gross autograph THE COURT: Correct.

(14:22:47/+00:18:46) Alan P. Petrofsky MR. PETROFSKY: Of course there are no -- unlike some state appellate courts, there are no limits on how long they can mull that thing over after the argument, and the appendix in that case is 16,000 pages, so I don't think they're going to be turning around in one day with the decision.

(14:23:05/+00:19:04) Alan P. Petrofsky Secondly, on the supposed success of the mobility business: SCO is still reporting losses every quarter on its operations, and that's even when you exclude all the reorganization expenses.

(14:23:19/+00:19:18) Alan P. Petrofsky Okay, and then one other thing that may just be a misunderstanding. The Debtors claimed in their motion that they are paying their debts as they come due. However, as I pointed out in my objection, the Debtors contradict this in their operating reports, in which they say that there are more than half a million dollars of past-due unpaid post-petition debts. Since I filed the objection, the Debtors have filed two more operating reports, which continue to show past-due debts in similar amounts. Now, maybe these are all just mistakes in the operating reports, but, if so, you know, it's troubling that the Debtors continue to make this mistake after it's been brought to their attention.

(14:24:03/+00:20:02) Alan P. Petrofsky And now, getting at the heart of the matter, it's the Debtors' burden to show cause for an extension. And congress said, quote, the granted extension should be based on a showing of some promise of probable success, end quote. And we haven't seen anything of the sort.

(14:24:21/+00:20:20) Alan P. Petrofsky Back in September, Mr. Spector said, quote, We promised Your Honor that we wouldn't come in again with a half-baked or quarter-baked plan. We would make sure that everything is there. We would do what Mr. Lewis says we should have done the first time, make sure there's a real commitment, that there's financing behind it, that it's not just pie-in-the-sky, that people could walk away from in the due diligence period and -- and that, Your Honor, is why we need a further extension of exclusivity. End quote.

(14:24:50/+00:20:49) Alan P. Petrofsky Now the Court then generously gave the Debtors until the end of the year to come up with a plan that wasn't half-baked or quarter-baked, but was completely baked. And the Debtors failed to do so.

(14:25:00/+00:20:59) Alan P. Petrofsky Now, three months into the year, we haven't seen any progress toward confirmation. It's just more false starts and promises that the next time will be different. We've had three hearing dates set and then canceled. This is not progress. Success has not been shown to be probable.

(14:25:15/+00:21:14) Alan P. Petrofsky This case has been held hostage for too long to the Debtors' ineffective efforts. There is no cause to continue to silence all of the other parties while the Debtors get us nowhere. Let's open up the floor to all parties, including the Debtors -- I'm not suggesting that their plan should be, you know, completely rejected right now. Let's just open it up to all parties and find out which parties, if any, can propose a viable plan.

(14:25:38/+00:21:37) Alan P. Petrofsky And I think that's all I have to say. Thank you.

(14:25:41/+00:21:40) Kevin Gross autograph THE COURT: Thank you, Mr. Petrofsky. Mr. Lewis, it's good to see you again, sir. It's been awhile.

(Objection of Novell)

(14:25:58/+00:21:57) Adam Aiken Lewis MR. LEWIS: Thank you, Your Honor, it's always a pleasure to be here. Your Honor, um, I'm going to just kind of address the whole package at this point --

(14:26:08/+00:22:07) Kevin Gross autograph THE COURT: Okay.

(14:26:09/+00:22:08) Adam Aiken Lewis MR. LEWIS: -- and you'll hear my specific comments about the exclusivity motion along the way. Um, but looking at the larger picture, I'm not quite sure whether I'm hearing Paraclitus say that the uphill path is the downhill path, or vice versa, or whether we're hearing people in the government say, well the really bad economic news is really good news!

(14:26:36/+00:22:35) Kevin Gross autograph THE COURT: Yes.

(14:26:37/+00:22:36) Adam Aiken Lewis MR. LEWIS: Because that's essentially what we've heard, and in fact that's what we've heard every time we've come in here for an extension or something else, a new reason why, Didn't quite happen this time, but things are just looking great. But the fact is, that's all we've ever heard. We have no evidence of anything solid happening. Mr. Petrofsky has referred to the operating statements. The Debtors continue to lose money, and while if everything goes right, and the debtor somehow manages to stay in business and continue its appeal, if the debtor wins I suppose there are billions of dollars at the end of the rainbow, as the debtor says, or maybe there are. On the other hand, if the debtor loses, where are we? Your Honor, when we were here one or two times ago on this issue, in fact I think it was back in April, when the debtor withdrew the SNCP plan, we heard that really this case is not about the creditors, they're going to get paid in full, the only real stakeholders are the shareholders. Well, Your Honor, if all of this doesn't happen as the debtor would like it to happen, there won't be enough money to pay the creditors, even. The creditors are being sacrificed to this pot at the end of the rainbow. And I don't think that's appropriate.

(14:27:59/+00:23:58) Adam Aiken Lewis If it were ever true that the creditors were going to get paid in full even if everything goes wrong, it's not true now. And it's only going to get worse. The Court may recall Mr. McBride's testimony and Mr. -- and counsel's comments at the September extension motion hearing, where we were told really the UNIX business was a dying business. That's what we were told. Mr. -- the counsel put it a little bit more aggressively than Mr. McBride did, but essentially that's what we were told. And we were told the mobility business was right on the verge of a real breakthrough, they were ready to go. And what we finally heard is that there are some revenues. We didn't hear anything about the size of the revenues. We didn't hear anything about how they might increase and when they might increase. In fact, those are all issues that should have been addressed, the Court may recall, in the last disclosure statement, and we made objections that they were not addressed. There was no substantiation for all these claims about business was going to operate and was going to be wonderful and money was going to come in and everything going to be just fine. And I suspect the reason -- one of the reasons we didn't see any substantiation is because it couldn't be substantiated.

(14:29:10/+00:25:09) Adam Aiken Lewis So here we are again in a case where the Debtor has continued with its single-minded focus on this litigation, which, I suppose it may be true that if they win, they win big, but if they lose, and they have lost so far, and we have to keep that in mind, however the Debtor would like you to think that their prospects are wonderful, and would like you to draw that inference from the mere fact that the Court ordered an accelerated oral argument, the fact remains that we won. And even if our claim isn't forty but three and a half million, we don't even know what IBM's claim is yet, when it gets liquidated, if we win and IBM wins, and we know there are several million other dollars in creditor claims.

(14:29:56/+00:25:55) Adam Aiken Lewis How is that all going to get paid? Who's going to make up for the deficit? Who's going to compensate the creditors for the shareholders, if that's who's behind this, speculating at their expense?

(14:30:10/+00:26:09) Adam Aiken Lewis Under these circumstances, Your Honor, I think the notion that there should be an extension just doesn't make any sense. In fact, I think the notion that this should remain in Chapter 11 doesn't make any sense. There should be a neutral installed here, by conversion to Chapter 7, which this court has the power to do even sua sponte, or the appointment of a Chapter 11 trustee to make an independent assessment, which is made not by someone who's been committed to whatever this company's prospects thought -- they thought they were for years and years, but can make an independent assessment of whether the litigation is worth pursuing in light of the damage to the creditors that may well ensue if it is pursued, rather than resolved in some fashion. I can't control whether it gets resolved, but we have what it seems to me is a clearly biased party adhering to this litigation endlessly, no matter what, willing to come in and tell this court again and again, well we made a mistake this time but next time we won't make a mistake and next time it'll be for real. And as Mr. Petrofsky pointed out, this last plan was not for real. It was something that was filed because exclusivity was about to run out. It wasn't for real because it wasn't substantiated in the disclosure statement and it wasn't for real because it had its own inherent problems, impairment problems, problems with the absolute priority rule.

(14:31:38/+00:27:37) Adam Aiken Lewis In fact, the notion that exclusivity hasn't expired already I think is doubtful, because while there is a plan on file, the Debtor has all but admitted that that's not its plan. It's just a -- it's a placeholder. That's not a plan. The debtor's not going to pursue that thing, whatever it was. The debtor's going to file something new, if it gets the chance to, maybe someday, maybe by mid-May, maybe not. But, you know, I recall the Court saying at the first extension motion that we opposed -- the Court may recall the first extension motion was filed in January of 2008.

(14:32:17/+00:28:16) Kevin Gross autograph THE COURT: Yes.

(14:32:28/+00:28:27) Adam Aiken Lewis MR. LEWIS: We didn't even oppose that. We did oppose the next two, and we were told that the Debtor was going to bring in something for real, and was never again going to come to this court with anything that wasn't for real, and that's exactly, unfortunately, what the debtor did do. The SNCP plan wasn't for real, the -- this plan that was filed in January wasn't for real. And I think that there comes a time where the Court's admonition, that each time you ask for an extension it gets harder, needs to be taken seriously. They're now asking for another extension, when there's no reason to believe that -- we've heard from counsel this morning, and I appreciate the candor, it's to his credit, that there is no deal. In fact, doesn't sound like they're really close to anything. Sounds like they're still talking and they don't like what they're hearing. And maybe, uh, maybe -- maybe it's because the market isn't at all convinced that they're going to win on appeal. Maybe that's part of the problem. They want this court to almost assume that they're going to win on appeal, but the market apparently doesn't believe that's so. And you can bet there are people out there, Your Honor, who have a lot of money, and a lot of sophistication, and can hire high-priced lawyers like counsel, and me, and Mr. Levin, and can make their own assessment, and they're apparently not quite taken with what they see, or we would be seeing investments now, of one kind of another, people willing to step up. Probably what we're seeing is people who are low-balling because they don't believe it. And the market is telling us something right now and it's not simply because there's a cloud hanging over the Debtors' assets, it's because the cloud is a serious cloud.

(14:34:08/+00:30:07) Adam Aiken Lewis I can't rule out that the Debtor will win on appeal, although even if it did, the most likely result would not be it's all over. The most likely result would be a remand, and how much longer are we going to wait for that to be decided? And we'll hear, well if it gets remanded, Your Honor -- you may recall when we were here in September we heard that -- or that parties were waiting to see what happened. In fact, we were told that last June. Waiting for the appeal to get started was somehow a magic -- a magic moment. Or the debtor was waiting for the outcome of the trial. We've known of the outcome of the trial since mid-July. The appeal's been on file -- or we knew there was going to be an appeal filed and it got started -- and we're still waiting. After a while, the story just doesn't have any credibility anymore. And the interests of other parties, which have been subordinated here, including my client, which is after all a creditor, and we do have a judgment. We may have interests that are adverse to the Debtor, but we do have a judgment and we are a creditor, and it's not an insignificant judgment, and it's cost us a lot of money to get to that point.

(14:35:19/+00:31:18) Adam Aiken Lewis So I suggest, Your Honor, that exclusivity not only can't be extended, it doesn't even exist anymore. There has not been a plan on file that's been a real plan, in the time during which exclusivity still existed, and as a consequence I think it's expired. But even if that were not so, there's no absolutely no reason to cause another month and a half's delay here based upon another reassurance that we're talking to somebody and something might happen. And on the notion that -- the implicit notion in this entire argument that the -- that the debtor's going to win the appeal. That's really what we're hearing from this, and counsel wants you to draw the conclusion that there's this signal from the Tenth Circuit in its ordering expedited oral argument right after the debtor filed its motion that that somehow is a signal that the Ninth [sic] Circuit looks favorably on the appeal. It's a completely neutral thing, it --

(14:36:20/+00:32:19) Kevin Gross autograph THE COURT: I agree.

(14:36:21/+00:32:20) Adam Aiken Lewis MR. LEWIS: -- could just as well be a signal that it wants to get this thing over with and understands the problem. Or it could be noting at all. It could take six months or eight months or whatever for -- I have an appeal before the Ninth Circuit, which I grant is not necessarily a paragon of timeliness among the circuits, but I have an appeal from the Ninth Circuit where the last appellate brief was filed on the 29th of April of last year, and I still don't even have an oral argument set. So, you know, appeals can take a long time

(14:36:51/+00:32:50) Kevin Gross autograph THE COURT: Oh, lawyers love to read a lot into orders for expediting and so on, and I've learned of course that they really don't mean very much.

(14:37:01/+00:33:00) Adam Aiken Lewis MR. LEWIS: Exactly, Your Honor. I mean, our clients want to hear what we think, but --

(14:37:05/+00:33:04) Kevin Gross autograph THE COURT: And we give them that positive spin.

(14:37:08/+00:33:07) Adam Aiken Lewis MR. LEWIS: With a King's Ex behind our back.

(14:37:09/+00:33:08) Kevin Gross autograph THE COURT: That's right.

(14:37:10/+00:33:09) Adam Aiken Lewis MR. LEWIS: So I think not only should the Court deny the exclusivity motion, but the Court should take a step to set this case on a rational path, which it has not followed to date, because the management of the debtor has been entirely too focused on the big payday. Now maybe an independent party, a trustee in a Chapter 7 case -- which would be appropriate here, because there's really no business to run. The business is losing money. That's the record in this case. The contrary record, there is none. There's only counsel's assurances this morning that there's some revenue somewhere, from the new mobility products, but we're losing money in the meantime. There should be -- this case should be, as it were, shut down, and an independent third party, a trustee, should be appointed, either as a Chapter 7 trustee or a Chapter 11 trustee, to make an independent assessment of where to take this case. Thank you, Your Honor.

(14:38:08/+00:34:07) Kevin Gross autograph THE COURT: Thank you, Mr. Lewis. Mr. Levin, good to see you sir.

(Objection of IBM)

(14:38:17/+00:34:16) Richard B. Levin MR. LEVIN: Good to see you, Your Honor. Thank you. Good to be back. I haven't been here in quite a while because we've been very patient with this debtor, but there's a time at which patience runs out, and that's why our client has asked that we come back and be heard on this -- on the exclusivity extension, on the status conference on the disclosure statement, and the plan confirmation motion.

(14:38:43/+00:34:42) Richard B. Levin I was thinking to thank Mr. Spector, Your Honor, for his consideration of all of our time of not wasting time with putting a witness on the stand but just testifying himself for us, but my real concern here is a procedural concern, which is real, it's substantive, it's not -- it's not just lawyers testifying.

(14:39:07/+00:35:06) Kevin Gross autograph THE COURT: Well I wasn't sure that we weren't still going to have --

(14:39:12/+00:35:11) Arthur Jay Spector MR. SPECTOR: I have witnesses --

(14:39:13/+00:35:12) Kevin Gross autograph THE COURT: Yes.

(14:39:13/+00:35:12) Arthur Jay Spector MR. SPECTOR: -- in the court. If the Court were willing to accept, we would put witnesses on. We can do that.

(14:39:18/+00:35:17) Kevin Gross autograph THE COURT: That's what I had understood, Mr. Levin.

(14:39:19/+00:35:18) Arthur Jay Spector MR. SPECTOR: I was just making a status report on the case.

(14:39:21/+00:35:20) Kevin Gross autograph THE COURT: And sort of an opening argument, so to speak, but --

(14:39:23/+00:35:22) Arthur Jay Spector MR. SPECTOR: Exactly.

(14:39:24/+00:35:23) Richard B. Levin MR. LEVIN: Fine. I will take it as such, but --

(14:39:26/+00:35:25) Kevin Gross autograph THE COURT: That's how I understood it.

(14:39:27/+00:35:26) Richard B. Levin MR. LEVIN: -- but here's -- there's still a major procedural problem with this --

(14:39:30/+00:35:29) Kevin Gross autograph THE COURT: Yes.

(14:39:31/+00:35:30) Richard B. Levin MR. LEVIN: -- before I get to the substantive issue. The exclusivity motion was filed in December. It had none of those facts in it. In fact, that was three months ago. Those facts didn't exist at the time.

(14:39:46/+00:35:45) Kevin Gross autograph THE COURT: Right.

(14:39:46/+00:35:45) Richard B. Levin MR. LEVIN: There's been no supplemental motion filed that would give anybody any notice of the evidence that Mr. Spector intends to introduce this afternoon, would give us any opportunity to take discovery, to investigate on our own, to put on any kind of a counter case, to cross-examine or to put on contrary witnesses in opposition. If he's relying on his December motion, then we should proceed on the December motion. If he wants to file a new motion, properly noticed, with adequate evidence and argument on it that we can then test in the Court, that may be appropriate to do so, but it's a little late in the day for that, especially given the May 17, May 14, whatever the day is, expira-- mandatory expiration of exclusivity. So, I'm going to object, Your Honor, to any testimony, along the lines of what Mr. Spector proferred in his either status report or opening statement or however it's characterized. That's number one.

(14:40:53/+00:36:52) Richard B. Levin Let's turn to the substance, Your Honor. Two points to make here. One is just the timing of the mandatory expiration along with the timing of the plan. If exclusivity is extended to May 17, there's no chance, absent shortening time on both the hearing on approval and on the voting and on the notice of the confirmation hearing, that we're going to have acceptances by May 17. Exclusivity will expire. Other parties in interest will be permitted to file their plans. Don't know if they want to, but they certainly will be permitted to. So all that Mr. Spector is really asking for, all the debtor is asking for today is, We want a head start on that process. We've had a head start for eighteen months, but it isn't enough. We still need another month and a half of a head start on that process. And that doesn't seem like -- if there are going to be competing plans anyway, let's put them on parallel tracks. I don't know if there will be competing plans, but if there are, there's no sense to start solicitation on one, only to have one come in several weeks later and then start solicitation on that. They ought to be done together. So the-- we might as well terminate now, and allow those competing plans, if they're to be filed, if the debtor is to file a new plan -- we still don't know about that -- to allow them to go in parallel, rather than one ahead of the other.

(14:42:33/+00:38:32) Richard B. Levin And to Mr. Lewis's point, whether exclusivity still exists. As I recall the state of the record, Your Honor, and I may be mistaken, exclusivity expired on December 31. The plan was filed on January 8 or January 9. There was a motion to extend but I don't recall that there was a bridge order, or anything else that would have extended the exclusivity. So, even if that plan, which Mr. Spector has told us is going to be amended or withdrawn or superseded in some fashion, counted for the exclusivity preservation, I think the record reflects that it expired before that plan was filed. Something to consider.

(14:43:15/+00:39:14) Richard B. Levin Now, going forward. The debtor has had eighteen months to file a plan. Through a technical reading, if I'm wrong about exclusivity having -- not yet having expired, and if we can't count the plan that was filed in January as a real plan, if we suspend disbelief on that for a moment, congress has said the debtor should have eighteen months of exclusivity to file a plan. I suppose you could construe that to mean any plan, whether the debtor intends to proceed with it or not, but I don't think that's what congress had in mind in 2005 when it said cases should be moved along at a faster pace. So, we're past that eighteen months, we don't have a plan -- a viable plan on file. So, again, there's no reason to extend, even if it's technically still in effect, the policy behind 1121(d) suggests that this court should not extend it any further. But the facts of this case lead to the same result.

(14:44:26/+00:40:25) Richard B. Levin Over the first sixteen and a half months of this case, and that's through the January 31 operating report, the Debtor SCO Operations, which is the main operating company, not counting SCO Group, the Debtor SCO Operations lost over eleven million dollars, on an accrual basis, on revenues of just slightly over twenty million dollars. They've lost over three million dollars in case in that same period. I haven't gone and tried to tie cash to accrual and see why one is so much larger than the other, but the debtor started the case with just slightly over six million in cash and now it has somewhat less than three million in cash, so it's less than half. I cite those figures as of January 31, Your Honor, because the operating report for February 28th has not yet been filed, it's overdue. In fact, the operating report for January was way overdue. It was filed mid to late March, I think it was the twentieth or twenty-third of March that it was filed, so it was at least a month late as well. So we're not quite current on all that's happened in February, and certainly March is still here so we can't -- can't know that, but we don't know how much more was lost in February.

(14:45:46/+00:41:45) Richard B. Levin What those operating reports show us, Your Honor, is that there's no real remaining business. The disclosure statement that was filed in January almost admits as much, that, as Mr. Lewis has said, the ability to pay claims has seriously been compromised. The December -- I'm sorry, the January disclosure statement, notes that there are approximately one point nine million dollars in general unsecured claims at Operations. There's about five hundred thousand dollars of unsecured claims at Group. There's the three point five million dollar Novell claim. There's a disputed, uncertain amount of an IBM claim. And if you look at the January operating report, there's over two million dollars in current administrative expenses that have not been paid. And I don't mean to say that the debtor is late in paying those, but just in the normal operation of the business, that get paid routinely, there's -- as we stand at the end of January, and I have no reason to believe it's different today -- there's over two million dollars in unpaid administrative expenses.

(14:46:54/+00:42:53) Richard B. Levin You start adding those numbers against the less than three million dollars in cash, and who knows if the business will sell for anything -- and that's another topic which I'll get to in a moment -- um, creditors are seriously at risk. This is no longer a case about how much the shareholders will recover. It's about whether even the prepetition unsecured creditors will recover anything, let alone be paid in full. If you look at the administrative expenses, by the way that number does not include unpaid professional fees, uh, and it's hard to tell exactly from the operating report how much the -- how far the cash would have to go, but looking at the liquidation analysis that was filed in the January disclosure statement suggests that there's a real question as to whether unsecureds would be paid anything at all given the current level of cash and operations at the company.

(14:47:52/+00:43:51) Richard B. Levin Section 1112(b) lists cause for converting a case, (b)(4)(A) says it's cause if there is continuing loss or diminution of the estate, and no reasonable prospect for rehabilitation, and I emphasize rehabilitation rather than just confirmation of a plan, they are different. And 1112(b)(4)(F) says it's grounds for conversion if there's an unexcused failure to satisfy timely any filing or reporting requirements imposed by the statutes or the rules. Both of those circumstances are present here, Your Honor, and both of those circumstances, because they constitute cause and because 1112(b) has now been amended to make conversion mandatory, should provide grounds for conversion of this case, or, under 1104(a)(3), the appointment of a trustee as Mr. Lewis suggests.

(14:48:58/+00:44:57) Richard B. Levin Now, this debtor, as I've noted, has been given an ample chance to reorganize. The Court I recall in one of the earlier hearings said it was incumbent on the debtor to come up with a plan that was not dependent on waiting for the outcome of the litigation, and yet the debtor by feinting plans, proposing, pulling back, proposing, pulling back, we're now at the third time on that, Your Honor, has accomplished, or attempted to accomplish, exactly that. The statements that Mr. Spector made today almost sound like a replay of the prior hearings. We have a buyer, we have York Capital Partners. We have a termsheet, but we don't have the definitive documents yet, but we're working on it and we're really close. We have a buyer, Stephen Norris Capital Partners. We have a term sheet. We don't have the definitive documents, but we're negotiating, and we're really close. This time, we have a buyer, but we're not going to tell you who it is. We don't even have a term sheet yet. We don't have a substantive deal, but we're negotiating, and we're really close.

(14:50:08/+00:46:07) Richard B. Levin Your Honor, sometimes -- I understand, they may be close to getting products out there, they may be close to generating revenues. And it's un--- and it has been hampered, apparently, according to Mr. Spector's opening statement, by the state of the economy. Well the fact is that sometimes the economy just doesn't cooperate with the best-laid plans of business, and particularly of debtors. All we have to do is look to President Obama's address this morning about the car companies. Whether the car companies were right or wrong, the economy sure caught up with them. And that's what may have happened with this debtor. I can't tell you whether the debtor's business plan was right or whether it was wrong, but as Mr. Spector said, the economy is substantially hampering that.

(14:50:59/+00:46:58) Richard B. Levin Now, I believe Your Honor has ample authority under section 105(a), on a sua sponte basis, to convert this case, or order the appointment of a Chapter 11 trustee. Harking back to my statement at the opening, however, about proper procedure, I think it only appropriate that the Debtor be given an opportunity to be heard, yet again, on why this case is going to be a success, some day, just around the corner. And what I would suggest the purpose of this status conference should be, Your Honor, would be to set a date for the hearing on the motion to dismiss [sic], not on a disclosure statement, which has not yet been filed. Thank you, Your Honor.

(14:51:43/+00:47:42) Kevin Gross autograph THE COURT: Thank you. Yes, Mr. McMahon. Good afternoon.

(Objection of U.S. Trustee)

(14:51:53/+00:47:52) Joseph James McMahon, Jr. autograph MR. MCMAHON: Good afternoon. This is, uh -- these cases have been difficult to be assigned to --

(14:52:03/+00:48:02) Kevin Gross autograph THE COURT: Yes.

(14:52:03/+00:48:02) Joseph James McMahon, Jr. autograph MR. MCMAHON: -- on one level, to say the least, Your Honor, and perhaps that's the way bankruptcy is. If every set of debtors had an unlimited supply of free money in the form of equity or credit from which it could operate, things would be easy, to say the least. And, I've been doing a fair amount of thinking recently, especially today leading up to the hearing, as to why, why this is difficult. And you've got a debtor -- debtors whose business is caught -- presumably caught in the cross-hairs of litigation.

(14:52:52/+00:48:51) Joseph James McMahon, Jr. autograph And the temptation, the immediate temptation, Your Honor, is to relegate your mind to the thought that, well, if I try to make sense of the litigation I can determine the course of the bankruptcy case, or if we give the debtors a bit more time, this will resolve itself. If we see things from IBM's and Novell's perspective, then we can just dispense with this and move on, and, I think really probably the easiest way of thinking about the case and that's really where we're at. I know the -- we're -- the -- there was a status presentation and then the exclusivity motions before the Court. Let's be candid here. I said this at an earlier hearing, the purpose of exclusivity is to put things in a package in a bow, to bring it before Your Honor, to allow Your Honor to consider something in a more streamlined fashion. Exclusivity has not served any purpose whatsoever to date in these cases. It's basically been the cause for interim opportunity for the parties to come to court and state their respective positions.

(14:54:25/+00:50:24) Joseph James McMahon, Jr. autograph But here we are, more than eighteen months into the cases, and the bottom line is, you have to step back, and I think that's the perspective that our office approaches the matters from, it's not a matter of who's right with respect to the litigation. But that's the way every case comes in, you know, Your Honor takes debtors, our office takes debtors, as we find them.

(14:54:53/+00:50:52) Kevin Gross autograph THE COURT: Right.

(14:54:55/+00:50:54) Joseph James McMahon, Jr. autograph MR. MCMAHON: And if you move -- if you look at things through that prism, then I think that after eighteen months, after the erosion of the cash base to date, on an actual basis, and IBM's counsel correctly notes that there is an accrued number to be factored in on top of that, then, we're at a point where at a minimum there has to be a hearing to determine where we go next. And the creditors have certainly had their position with respect to the fact that dispositive motion should be scheduled, and we would support a hearing to test that subject.

(14:55:43/+00:51:42) Joseph James McMahon, Jr. autograph Section 1112 of the bankruptcy code is clear that a debtor, to avoid having its business being transferred to Chapter 7 has to demonstrate that there is no continuing loss to -- a diminution of the estate. That's beyond satisfied at this point, Your Honor. There's going to be no debate about that if and when there's a hearing -- at least from our perspective. And the second element of that is the absence of a reasonable likelihood of rehabilitation. And if anything has occurred after eighteen months, Your Honor, that ball has been put in the Debtors' court at this juncture, fairly clearly. And to underscore something about what congress intended, Your Honor, in the 2005 amendments to the Bankruptcy code, that's the one item in 1112 that the Court has no discretion to sidestep. If Your Honor makes those findings, there's a [indecipherable] -- exceptional circumstances situation where the Court can give the Debtor more time if someone objects to the relief sought, but that's one of the code's subsections where the Court is just powerless to do anything but grant the relief requested by a party in interest.

(14:57:03/+00:53:02) Joseph James McMahon, Jr. autograph So, I think that our office shares IBM's view that the Debtors are certainly entitled to present their evidence with respect to their position that there is a valuable business to be salvaged here, notwithstanding the litigation, but the difficulty, again that I noted at the outset of my comments, is extracting oneself, the people who are in neutral positions -- our office, the Court -- with respect to thoughts about the litigation and accepting -- evaluating the here and now. Novell's counsel correctly notes that the Tenth Circuit result is not necessarily the end. It's a summary judgment motion, so it goes back down. And it's a significant piece of litigation, and it could go on interminably. So, what's the purpose of this court? Well, after -- given the Debtor a fair opportunity, after going through as much cash as these debtors have, with respect to their operations in Chapter 11, our office does believe that it's high time to have a fulsome consideration of the direction of these cases. Thank you.

(14:58:42/+00:54:41) Kevin Gross autograph THE COURT: Thank you, Mr. McMahon. Anyone else before I hear from Mr. Spector? All right.

(14:58:48/+00:54:47) Arthur Jay Spector MR. SPECTOR: I didn't hear, Your Honor.

(14:58:49/+00:54:48) Kevin Gross autograph THE COURT: No, I was just asking if anyone else had anything before you spoke.

(Reply by Debtors)

(14:58:59/+00:54:58) Arthur Jay Spector MR. SPECTOR: Well, if I were in positions of the gentlemen that just preceded me, I would be saying exactly -- not as well -- but I would have been saying basically the same things they said. And there's a lot of merit to what they said, but we've got to remember who this is coming from. There are hundreds of creditors in these cases. You haven't heard a single one in those eighteen months on anything -- anything. What you've heard, and I'm not saying that IBM is beating us up, they really have been gentlemanly, and what they're saying is certainly within the bounds. But IBM is not a creditor of this estate. They were given notice because they assert a claim -- I know, technically, they're a creditor because they assert a claim, but we sued them. They counterclaimed against us. Our claim is multiples of what they claim is owed to them. We intend to file an objection to the claim. I was hoping we wouldn't have to get to this, but we have an objection to the claim, and ultimately I think the Court will have to do, and I wasn't wishing this on the Court either, an estimation, so we know who it is talking about this. And if IBM is seen not to have a claim, or not to have a claim in excess of our claim against IBM, then notwithstanding perhaps some of the wisdom that they impart, they're not a creditor with standing to be making that argument.

(15:00:26/+00:56:25) Arthur Jay Spector Novell has a claim, it has a judgment, but in the year and a half since this case commenced, their claim went from forty million to three and a half million. Let's give some credit on the balance sheet for that. There was an IPO claim against us for fifty million dollars. That's disappeared. Let's give us some credit for that. There was a case called Gray, you don't even know about, Wayne Gray, pending in Tampa, that case was dismissed a couple weeks ago. It was stayed here, but the underlying case was dismissed a couple weeks ago. I don't know how many millions were involved in that, and we weren't active in it, so I don't want to take too much credit for it -- just went away. In fact, I don't even think he filed a proof of claim, which might have been a bar in the first place. But we have -- and there are shareholders that have filed claims as if they were -- those are going to go away, or have gone away, so I mean, there are changes in that area.

(15:01:19/+00:57:18) Arthur Jay Spector But let me just try to address one other tiny matter I want to get to, and I don't want to hold Your Honor to this. You know, there are lot of things I said that I wish we had invisible ink and couldn't quote it back, and that's happened to me in a lot of different contexts in my life recently, where I wish I hadn't said what I said. And sometimes you say it because it's true at the time, and subsequent facts make it unachievable. Your Honor indicated, I don't if it was in the September hearing or whenever, that, you know, your view of the matter was that this case really only commenced once we got to ruling on the Novell judgment, which was in July, and you can't -- you're powerless to give us eighteen months from July, and we're not asking for that, but in essence where we are is now, what are we six, nine months from that, only half way through that exclusivity, and you can't give us more, but we're asking for another few weeks.

(15:02:15/+00:58:14) Arthur Jay Spector Now let's address the many, many comments that were raised, and I'm not doing this any particular order because I just took notes as they were speaking.

(15:02:23/+00:58:22) Arthur Jay Spector About the losses every quarter. Mr. Petrofsky was the first to raise that, and everybody since followed up, and then they extrapolated from that that there's a remedy for losses every quarter, it's called conversion, dismissal, appointment of a Chapter 11 trustee, any of the above. And yes, that's true, but that would have been true six months ago, too. And I -- and I don't fault them for not bringing it before, and I'm not wishing them to bring it now, but the fact of the matter is, if we have -- if we have to go that route we will. The motion will be filed, evidence will be taken, and we'll have our day in court, like they say, we're entitled to -- not only are we entitled to, we must have. And what I'm telling you by way of opening argument will be supported, or not, as the case may be, by the record, the actual record. We'll bring in Mr. McBride to testify after he's been deposed, and so forth, and he'll show that we had a hundred thousand dollars of revenue this month, in mobility. I didn't bother you with those numbers because at this point it's insignificant, but by the time we get to a hearing, it may be quite significant. And so, if it's to be, it's to be, and we'll deal with it.

(15:03:38/+00:59:37) Kevin Gross autograph THE COURT: Excuse me.

(15:03:40/+00:59:39) Arthur Jay Spector MR. SPECTOR: Is that me?

(15:03:42/+00:59:41) Kevin Gross autograph THE COURT: I hit the mic, I'm sorry.

(15:03:43/+00:59:42) Arthur Jay Spector MR. SPECTOR: Okay. Um, Mr. Petrofsky raised this five hundred thousand dollar figure. The only thing that comes to my mind is the holdbacks. You get eighty percent of your fee application and twenty percent holdback. I think that's probably what the five hundred thousand is.

(15:04:00/+00:59:59) Arthur Jay Spector I have no idea, I have no idea what the two million dollars is all about. As I understand it from my client, they are paying their ongoing trade debt as it goes -- as it comes in. There isn't any such number, and may be an item of accounting that I can't explain, but, you know, when we have our day in court, we are now on notice of that, and we'll explain that away, or we won't.

(15:04:30/+01:00:29) Arthur Jay Spector We are not going to be calling witnesses in light of the point made by Mr. Levin. It's a valid point. We only talked about, in December, which is when the motion was filed, facts that hadn't come about yet. And so I think it's fair -- I think his point is well taken, that we -- he invited us to, and I will accept, file a new motion for the May 14th date, let him take his discovery, and we'll bring on the case, if we can fit it in before that time.

(15:04:59/+01:00:58) Kevin Gross autograph THE COURT: When you said file a new motion, just so I'm clear.

(15:04:02/+01:00:01) Arthur Jay Spector MR. SPECTOR: Exclusivity motion.

(15:04:03/+01:00:02) Kevin Gross autograph THE COURT: Okay.

(15:04:05/+01:00:04) Arthur Jay Spector MR. SPECTOR: The one we filed in December didn't include all the facts that I rendered in my opening statement today, and he properly complained of lack of notice. How can we try that today, we didn't even know about it.

(15:05:18/+01:01:17) Kevin Gross autograph THE COURT: Right.

(15:05:18/+01:01:17) Arthur Jay Spector MR. SPECTOR: and I don't mean to ambush him, I didn't intend to, but --

(15:05:21/+01:01:20) Kevin Gross autograph THE COURT: But that leaves us with the conundrum of where are we today, and so far as -- you can extend exclusivity only if it still exists. Does it exist today?

(15:05:34/+01:01:33) Arthur Jay Spector MR. SPECTOR: Well, we just ask for -- to continuation of this hearing, and will be supplemented with a new motion -- an amended motion for the new date. Under our local rules in Delaware, you know Your Honor --

(15:05:43/+01:01:42) Kevin Gross autograph THE COURT: The filing of a motion.

(15:05:43/+01:01:42) Arthur Jay Spector MR. SPECTOR: -- if you file the motion in time, you don't need a bridge order

(15:05:46/+01:01:45) Kevin Gross autograph THE COURT: Right.

(15:05:47/+01:01:46) Arthur Jay Spector MR. SPECTOR: So, I relied on that rule.

(15:05:53/+01:01:52) Arthur Jay Spector Let's see. There was some argument made by Mr. Lewis that we're totally focused -- SCO is totally focused on litigation. Well, you would think that we would be focused on litigation, but not to the detriment of other parts. Frankly, the management of SCO had a decision tree, and one of them was, do we shut everything down, horde cash, come up with a plan that just says we can turn a profit every month until we get to the denouement with the Tenth Circuit, however long that takes? Or do we continue to grow a business that's got long-term viability? And they made a choice. And the choice was, get mobility out there, let it start working. Develop UNIX virtualization. Do these things like we're a real company, and we are, and keep our customers satisfied, and that required people to work on that, and that ran the cash balance than it would have been if they had taken the other decision tree -- decision option. As a result, we have a real company doing real business. Mobility sells real products, and when you get to the hearing, there will testimony about the revenue. Novell -- pardon me, UNIX, is a real business, it still generates revenue. The problem is, and I'm assured by Mr. McBride very recently, that the company on an operating basis does -- is in the black. It's the reorganization expenses that overlay it that makes it a loss. Now, we'll have to examine that. I didn't put that in my opening because I'm not prepared today to go into the kind of things that we'll have to be addressing in any kind of motion that is contemplated, but -- if -- you know, the evidence will come in at that time that the company is a business operating -- generating revenues, and but for the reorganization expenses, is in the black.

(15:07:50/+01:03:49) Arthur Jay Spector We can implement, not just a sale-based plan. I would rather, if I had a -- if I had a vote on this, rather, had we done this sooner, had eschewed all possibilities of sale, because of the -- you know, you're not in a good position to sell with all the unknowns. Now I should tell you, without going into too much detail, both suitors, with SCO right now, have offered sufficient money to pay creditors in full, including the Novell judgment in full. That's not from our own cash, that's from cash generated from the sale of the UNIX business. Now, the UNIX business -- how can we sell the UNIX business with all the problems we've had that Your Honor pointed out way back a year ago. Well, there's a thing that we wrote up in that first time called the Novell exception, and it was problematic until July 16th ruling, which made it much more viable, and as a result, as I said at that time, that when we had that ruling it would clarify a lot, and it did clarify a lot. And so there are people willing to take the UNIX business, with the Novell exception. That part isn't the part we're talking about, we have other issues, but that's on the table. And we, you know, so -- I just want to say that even if we don't have the cash in hand, even a Chapter 7 trustee, can oper-- in a brief operation, can sell those assets for sufficient money -- just the business UNIX -- to pay the creditors in full. So -- and of course, I'm now giving an opening statement on a motion that isn't before Your Honor, but --

(15:09:27/+01:05:26) Kevin Gross autograph THE COURT: Right.

(15:09:28/+01:05:27) Arthur Jay Spector MR. SPECTOR: -- I have to.

(15:09:32/+01:05:31) Arthur Jay Spector Uh, let's see. The MORs are late. No, we got extensions on those from the U.S. Trustee, who was gracious enough to give it, with -- the company is a public company. It has its 10-K and 10-Q, and we have been cutting staff to try to keep our head above water, and some of those staff that were let go were accounting staff, and when the auditors are in, and so forth, it can only be pulled in one direction. And with that, Mr. McMahon has been kind enough to allow us an extension when we needed it. So, they're not really late, although, again, I'm presaging a defense to a motion that hasn't been filed.

(15:10:14/+01:06:13) Arthur Jay Spector Okay, there's one other thing I think I should address, that wasn't specifically raised, but I think it's worth bringing up now. Every business executive deposed in the Novell litigation, including executives of Novell, as high as the CEO, who were there when the transaction with Santa Cruz Operations took place, the sale of this property. Every one of them testified that it was the intent and understanding of the parties that the UNIX copyrights were transferred to Santa Cruz Operations, as part of the transactions. That's in the case, and it's in the appeal brief that SCO has filed. Accordingly, SCO would love to see what the jury has to say about this transaction, if there's a reversal. Don't tell us, please, Well, you know the best you could get is a remand for trial. We'd love that. We'd love that. We'd love to see what Novell is going to offer us when that day comes and there's going to be a jury trial. And we'd love to see what the jurors are going to say about this transaction when the evidence gets before them. We know what the market thought about it, because the company was worth thirty-five million dollars then, before the rug was pulled out from under us. And we will be very happy taking our chances in a trial a year from now, or eighteen months from now, because the company will be greened up by then. And I say it in both senses. There'll be cash available because people will be willing to finance us, they may like to be new stock in the company, now that things are set on the proper track.

(15:12:02/+01:08:01) Arthur Jay Spector Mr. Lewis addressed that the management is not only focused entirely -- and erroneously -- this is something he really wasn't right on -- is focused entirely on litigation to the detriment of the business. I've already show, or I haven't shown, but explained why, the evidence will show otherwise. But he intimated, maybe strongly and maybe more than just intimation, that a neutral should be appointed to look into the merits of the business and the litigation prospects.

(15:12:32/+01:08:31) Arthur Jay Spector Your Honor, they didn't use the word, although it seems to me if you're looking into the validity of its business and the going-forward ability of the business and looking for-- to the viability of its claims against IBM and Novell, that perhaps the proper word that wasn't raised here is an examiner. And frankly, Your Honor, I don't know why I didn't ask for it sooner, and I'm not speak-- I don't have authority of my client, the board of directors, anybody else, or the ability to tell you what budget we'd need to do that, but I think that's the -- probably, when a motion comes in, I may want to say we'll counter that with a consent to the appointment of an examiner. I think it's something that ought to be kept on the table. It's one of the available choices Your Honor would have. And if it -- as I said, the purpose is, What kind of business is this? Is it really a business? An examiner would be there, rather than somebody to kill the business, which is a conver-- you convert the case to a seven -- Oops, there really was a business, sorry about that. Oops, this really was a valid cause of action, which is now gone. Billions of dollars down the tubes. Maybe we should take a half-step, instead of a full step. Again, I'm arguing a motion not before Your Honor.

(15:13:50/+01:09:49) Arthur Jay Spector Um, let me take a minute to check with co-counsel to see if there's anything else I want to address --

(15:14:00/+01:09:59) Kevin Gross autograph THE COURT: Certainly, Mr. Spector.

(15:14:00/+01:09:59) Arthur Jay Spector MR. SPECTOR: -- so I'm not back and forth with you, I'd rather get it all.

(15:14:02/+01:10:01) Kevin Gross autograph THE COURT: Thank you.

(15:14:25/+01:10:24) Arthur Jay Spector MR. SPECTOR: I think I've concluded my remarks in response. Thank you.

(15:14:28/+01:10:27) Kevin Gross autograph THE COURT: All right, thank you. Response.

(15:14:34/+01:10:33) Adam Aiken Lewis MR. LEWIS: Does Mr. Petrofsky want to speak?

(15:14:36/+01:10:35) Kevin Gross autograph THE COURT: Oh, I am so sorry. Mr. Petrofsky, did you wish to be heard first sir, in response, I mean?

(15:14:43/+01:10:42) Alan P. Petrofsky MR. PETROFSKY: Oh, thank you, but no, others can go.

(15:14:46/+01:10:45) Kevin Gross autograph THE COURT: All right, thank you, Mr. Petrofsky.

(15:14:48/+01:10:47) (brief silence)

(15:14:59/+01:10:58) Adam Aiken Lewis MR. LEWIS: Oh, I thought Mr. Petrofsky had taken you.

(15:15:01/+01:11:00) Kevin Gross autograph THE COURT: Oh, he did not, no sir, I was trying to turn on --

(15:15:04/+01:11:03) Adam Aiken Lewis MR. LEWIS: You're back!

(15:15:04/+01:11:03) Kevin Gross autograph THE COURT: -- my fan here. It gets warm sitting here. Mr. Lewis, yes sir.

(Sur-reply by Novell)

(15:15:08/+01:11:07) Adam Aiken Lewis MR. LEWIS: Your Honor, I don't think I'm inclined to respond to a lot of the comments we've just heard. I don't think it serves any purpose --

(15:15:15/+01:11:14) Kevin Gross autograph THE COURT: Right.

(15:15:15/+01:11:14) Adam Aiken Lewis MR. LEWIS: -- at this juncture. It's pretty obvious, I think, that we're going to at least hear a motion to convert soon, or appoint a Chapter 11 trustee, and so I think what I want to focus on now is exclusivity again.

(15:15:33/+01:11:32) Kevin Gross autograph THE COURT: Yes.

(15:15:34/+01:11:33) Adam Aiken Lewis MR. LEWIS: And I want to draw an analogy to the notion -- in discussing the notion that we're somehow now going to have a continued exclusivity motion. This is really a new exclusivity motion. It's not a continued exclusivity motion. The exclusivity motion that was filed in December was filed based upon a plan that we have heard this morning, and we knew all along anyhow, is not real. It's a placeholder. It's nothing more than that. So we're not talking about a continued exclusivity motion. We're really talking about a new one, because the old one doesn't have anything to support it anymore, and the new one is out of time. It's as simple as that. I think exclusivity has expired, if for no other reason than that. And I would object to -- I mean, the Debtor can file its motion, if it wants to -- or file an amended motion, but one of the objections we would be bringing would be, it's not an amended motion. There is no more exclusivity.

(15:16:35/+01:12:34) Adam Aiken Lewis I think it's important for this court to rule today that there's no more exclusivity, so that as counsel for IBM so ably pointed out, the Debtor doesn't get a free head start on other people, if there's anyone else who wants to file a plan. There's been plenty of time, a month and a half is not going to give the debtor a great chance to come up with something new and get a plan confirmed. In fact, the notion that somehow we can have a confirmation hearing on a plan, after a proper hearing on a disclosure statement, without appropriate discovery in this case, and all of that get done by the middle of May, just doesn't fly. It's just not going to happen, Your Honor. So, I would suggest the Court -- I would ask the Court to rule that exclusivity has terminated, as of today. And, as far as a motion to appoint a trustee, or convert to Chapter 7, or if the Debtor wants to suggest an examiner -- which I think is a very different thing, because examiners can't make decisions --

(15:17:36/+01:13:35) Kevin Gross autograph THE COURT: Right.

(15:17:37/+01:13:36) Adam Aiken Lewis MR. LEWIS: And what we need here is a neutral party making a decision. We maybe have our axe to grind, and I don't deny that we do. So does the debtor. That doesn't put us or the debtor in a different place. A neutral might be in a different place. So, that would be the only thing I would add this morning, Your Honor. And perhaps we could get a hearing and maybe specially set. And if I may be so bold -- this happens now and again -- if the Court is inclined to set a hearing date in April with some briefing schedule, I will be away from about the 10th to the 20th, so something outside of that would be helpful, towards maybe the end of April, but obviously subject to your calendar and everyone else's schedules.

(15:18:21/+01:14:20) Kevin Gross autograph THE COURT: I always take into consideration counsel's schedules.

(15:18:23/+01:14:22) Adam Aiken Lewis MR. LEWIS: I was just sort of saving time, Your Honor.

(15:18:24/+01:14:23) Kevin Gross autograph THE COURT: Sometimes it becomes, you know, impossible, if too many --

(15:18:28/+01:14:27) Adam Aiken Lewis MR. LEWIS: Of course.

(15:18:28/+01:14:27) Kevin Gross autograph THE COURT: -- you have too many moving --

(15:18:29/+01:14:28) Adam Aiken Lewis MR. LEWIS: Of course.

(15:18:29/+01:14:28) Kevin Gross autograph THE COURT: -- schedules but certainly I take -- I take --

(15:18:30/+01:14:29) Adam Aiken Lewis MR. LEWIS: Okay, thank you, Your Honor, I'm --

(15:18:30/+01:14:29) Kevin Gross autograph THE COURT: -- I take that --

(15:18:31/+01:14:30) Adam Aiken Lewis MR. LEWIS: -- not -- nothing to add.

(15:18:32/+01:14:31) Kevin Gross autograph THE COURT: All right. Anyone else? I hear no one else. If you don't mind, just for a personal reason, I'm going to take about a five minute recess, and then I'll come back out and rule. Thank you.

(15:18:47/+01:14:46) *** RECESS ***

Second Session

(audio: 15:24:13 to 15:38:27 (7MB mp3))

(15:24:13/+00:00:00) CLERK: Please rise.

(Ruling denying exclusivity motions)

(15:24:17/+00:00:04) Kevin Gross autograph THE COURT: Thank you again, everyone. Please be seated, thank you. I took that break because my little mind was spinning so fast I was afraid I was going to lift up off the ground here in a minute, because a lot has been said, and I do understand the Debtors are faced with a lot of obstacles and are doing the best they can, but the fact is, that either exclusivity has already terminated -- a motion was filed many months ago, but, you know, our whole concept of the bridge order is that a motion, when filed, operates as a bridge order, in effect is a bridge order, but that a motion will then be brought on promptly and won't be left, you know, sitting indefinitely as this one was, so I think that the concept of the bridge order is simply not applicable in this -- under these circumstances.

(15:25:15/+00:01:02) Kevin Gross autograph Moreover, I just don't have cause. and I don't have cause to extend exclusivity in any event, and I don't think, uh, nothing I've heard suggests that anything will change in the next -- very, very short term, which is what I would be talking about in any event. So I do think I'm going to have to deny the motion to extend exclusivity, to the extent it hasn't already terminated, although again I do believe that it has terminated.

(Discussion of scheduling discovery and a hearing on a motion for conversion or for appointment of a trustee)

(15:25:54/+00:01:41) Kevin Gross autograph Having said that, I do think that it is appropriate to schedule a hearing on whatever motions will be brought. I've heard reference to a motion, perhaps, to convert, a motion for the appointment of a Chapter 11 trustee -- I'm not sure what will be before me, and I'm not asking the parties to tell me right now, but I do think we ought to set down a hearing date, with I think also a date certain for the filing of any such motions, and I would like to give the parties at least a little bit of an opportunity to take some very limited discovery to the extent you think it's necessary.

(15:26:40/+00:02:27) Richard B. Levin MR. LEVIN: Your Honor, were you suggesting discovery before or after the filing of the motion?

(15:26:44/+00:02:31) Kevin Gross autograph THE COURT: Well, I think you have to have a motion on file before you take discovery. Otherwise, it's too -- it's just too indefinite as to what discovery is even relevant to that particular motion. So, let's just look first to the hearing date, because I want to allow a significant amount of time. Mr. Lewis, you said you're out from April 10 to 20.

(15:27:09/+00:02:56) Adam Aiken Lewis MR. LEWIS: Yes, Your Honor.

(15:27:09/+00:02:56) Kevin Gross autograph THE COURT: So we're going to be looking at a date after that.

(15:27:19/+00:03:06) Arthur Jay Spector MR. SPECTOR: May I suggest a date sometime after May 6th, Your Honor?

(15:27:22/+00:03:09) Kevin Gross autograph THE COURT: After May the 6th?

(15:27:23/+00:03:10) Arthur Jay Spector MR. SPECTOR: Yes, Mr. Tibbitts, who will be instrumental in any motion that comes down, will be very much involved in preparation for the oral argument in the Tenth Circuit, so if we could schedule the hearing

(15:27:33/+00:03:20) Kevin Gross autograph THE COURT: Oh, that's right, you have the -- that on May the 6th.

(15:27:35/+00:03:22) Arthur Jay Spector MR. SPECTOR: Yes, that's May the 6th, Your Honor. If we could get past that date, then we can concentrate on this, um, whatever's coming down the pike.

(15:27:44/+00:03:31) Kevin Gross autograph THE COURT: I don't think a couple of weeks is going to make a huge difference, because the earliest that I could have done this in any event, and I mean the earliest, was the 30th of April. So, why don't we do this. I have a wide-open day -- which I think I ought to allow -- May the 13th. If that works for people, and I -- if that doesn't work for you, don't be bashful, speak up.

(15:28:09/+00:03:56) VOICE: Do you mind if I turn my back to you?

(15:28:09/+00:03:56) Kevin Gross autograph THE COURT: Please. No, not at all. Check your schedule. Make sure that that date works. I have some other possibilities as well.

(15:28:19/+00:04:06) Richard B. Levin MR. LEVIN: What are the other possibilities, Your Honor?

(15:28:21/+00:04:08) Kevin Gross autograph THE COURT: Well, I could possibly do it May the 11th. That's a good possibility at this moment.

(15:28:28/+00:04:15) Richard B. Levin MR. LEVIN: I currently have a hearing in New York on the Thirteenth, but it's likely, highly likely, not to go forward, and it's a morning hearing and it'd be done, and I could probably be here for a two or three o'clock hearing on the thirteenth if you prefer, but I can do it on the eleventh, definitely.

(15:28:42/+00:04:29) Kevin Gross autograph THE COURT: All right, let's -- let's now look at the eleventh. That's a Monday. I don't know if that makes life difficult for people traveling from the west coast, Mr. Lewis, in your case, or are you spending more time in New York now?

(15:28:57/+00:04:44) VOICE: Are we looking at the thirteenth or the eleventh?

(15:28:59/+00:04:46) Kevin Gross autograph THE COURT: The eleventh.

(15:29:00/+00:04:47) Richard B. Levin MR. LEVIN: The eleventh works fine for me, Your Honor.

(15:29:01/+00:04:48) Kevin Gross autograph THE COURT: It does?

(15:29:02/+00:04:49) Richard B. Levin MR. LEVIN: Thank you.

(15:29:03/+00:04:50) Kevin Gross autograph THE COURT: Okay.

(15:29:05/+00:04:52) Arthur Jay Spector MR. SPECTOR: That -- I can't see there's any problem on the calendar, but the only thing I would say about May 11th is, if there's going to be discovery leading up to that date, it will be right in the middle of the argument.

(15:29:18/+00:05:05) Kevin Gross autograph THE COURT: Well.

(15:29:18/+00:05:05) Arthur Jay Spector MR. SPECTOR: That's five days after the argument. We're going to be doing depositions. Mr. Tibbitts will have to be there and other important people will have to be there. If they're not doing discovery, it's not going to be a problem. Showing up on the eleventh is not a problem. It's the discovery that I'm worried about.

(15:29:40/+00:05:27) Kevin Gross autograph THE COURT: What is the conflict with Mr. Tibbitts's schedule? I'm trying -- forgive me for asking, Mr. Tibbitts is with -- is he with the Boies firm? Oh -- our Mr. Tibbitts.

(15:29:48/+00:05:35) Arthur Jay Spector MR. SPECTOR: Yes.

(15:29:49/+00:05:36) Kevin Gross autograph THE COURT: I'm sorry. Certainly.

(15:29:50/+00:05:37) Arthur Jay Spector MR. SPECTOR: He's the chief legal officer of the -- helps with the lit-- general counsel of the firm, and has been in charge of the litigation, and if we --

(15:30:06/+00:05:53) Richard B. Levin MR. LEVIN: Your Honor, if we may just have a moment, we're conferring on the issue of discovery.

(15:30:10/+00:05:57) Kevin Gross autograph THE COURT: Of course. You certainly may.

(15:30:18/+00:06:05) Arthur Jay Spector MR. SPECTOR: And for what it's worth, the thirteenth I do have a doctor's appointment.

(15:30:20/+00:06:07) Kevin Gross autograph THE COURT: Okay. That one's off.

(15:30:30/+00:06:17) Arthur Jay Spector MR. SPECTOR: If you're going another week, May 18th is open the whole day, May 19th is open.

(15:30:35/+00:06:22) Kevin Gross autograph THE COURT: Okay.

(15:30:36/+00:06:23) Arthur Jay Spector MR. SPECTOR: The twentieth is open, I'm fine there. May 21st -- the whole week looks like it's fine, as it now stands.

(15:30:47/+00:06:34) Richard B. Levin MR. LEVIN: Your Honor, I think, uh -- we don't know what we don't know.

(15:30:54/+00:06:41) Kevin Gross autograph THE COURT: Understood.

(15:30:55/+00:06:42) Richard B. Levin MR. LEVIN: And therefore, without discovery, excuse me, without discovery--

(15:30:59/+00:06:46) Kevin Gross autograph THE COURT: You may -- you can remain seated. That's all right, we're picking you up, Mr. Levin. Certainly.

(15:31:04/+00:06:51) Richard B. Levin MR. LEVIN: We don't know what we're missing. On the other hand, given the state this case is in, to say we shouldn't have a hearing for two more months? I would have thought this would be something we'd hear in two or three weeks, not two or three months. If the -- I think May 11th is six weeks already. That's a long time. I understand the issue with the oral argument, but if we were to do this -- well, in any event, I understand the issue with the oral argument. I think it's an unfortunate imposition on this bankruptcy estate. And the continuing loss. But be that as it may, if we can have the March operating report on time, without an extension, which would be in -- I think April 20th would be the due date, I think we would be willing to proceed without discovery. I'm sorry, let me add to that. If we can have the operating report, and any evidence on which the debtor intends to rely, by that date, I think we would be willing to proceed on May 11th without any further discovery.

(15:32:25/+00:08:12) Arthur Jay Spector MR. SPECTOR: I don't know about the rest of that, Your Honor. All I know is that the rules-- I don't know why we're talking about two weeks or anything like that. The basic rules is that -- Federal Rules of Bankruptcy Procedure 2002 provides for twenty days of, I believe, notice of motions to convert or dismiss. This case has been here for eighteen months. The losses, they're going to say, have been continuing. Why, all of a sudden, is this on a --- on this accelerated track. There's -- nothing untoward is going to happen in another week or two either direction, except that we'll be pressed -- We, obviously, will have the burden of proof. We've got to gear up for it. If the motion is filed, you know, sometime later this week, we've got to go into trial mode, at a time when we're very stressed with other affairs. I would ask, Your Honor -- this is a make or break issue in the case. This is not something we should be doing in a couple of weeks. Rules -- there's nothing emergency that requires us to expedite this matter. I'm not saying we should set it off to September. I'm saying that, you know, if they did it in the normal course, they filed the motion on April 1st, two days from now.

(15:33:33/+00:09:20) Kevin Gross autograph THE COURT: Yes.

(15:33:34/+00:09:21) Arthur Jay Spector MR. SPECTOR: Normally, the Court -- what would the Court -- I don't -- I'll ask Your Honor, what would normally be a typical motion to convert or appoint a trustee or something -- That wouldn't be coming up April 20th or something like that. I assume there would be some -- some lag, beyond the normal twenty days, and I'm not asking for the Moon, I'm asking for something like the week of May 18th, 19th, or 20th, or 21st. I've got that whole week open, and would be past -- significantly -- enough past the May 6th oral argument that we could then concentrate on this make or break motion.

(15:34:07/+00:09:54) Richard B. Levin MR. LEVIN: Your Honor.

(15:34:09/+00:09:56) Kevin Gross autograph THE COURT: Mr. Levin, yes, sir.

(15:34:10/+00:09:57) Richard B. Levin MR. LEVIN: Mr. Spector was prepared to put on the evidence today. I don't know what the problem is. I will be candid with the Court, that my client has not authorized us to file such a motion. We wanted to hear what happened at the hearing today, and then we will consult. As you said yourself, there may or may not be such a motion filed. We will consult, and we will determine whether to file such a motion. I will note, however, that section 1112(b)(3), as amended in 2005, I'll quote it just for the record if I may, Your Honor -- I know that you know the statute -- The court shall commence the hearing on a motion made under this subsection not later than thirty days after the filing of the motion; it shall decide the motion not later than fifteen days after commencing such hearing --

(15:34:57/+00:10:44) Kevin Gross autograph THE COURT: Yes.

(15:34:57/+00:10:44) Richard B. Levin MR. LEVIN: -- unless the movant expressly consents to a continuance.

(15:35:00/+00:10:47) Kevin Gross autograph THE COURT: Yes.

(15:35:00/+00:10:47) Richard B. Levin MR. LEVIN: So, I will consult with our client. I understand the May 11th date is open. I understand the May -- do I understand correctly that the May 18th, 19th dates are open as well?

(Decision not to schedule anything until after such a motion is filed)

(15:35:12/+00:10:59) Kevin Gross autograph THE COURT: Yes. May 18th and 19th are open. Here's what we're going to do then, if you will. I understand the parties' schedules. I understand that there is a significant oral argument before the Tenth Circuit, but when you file your motion, I will set this down for hearing. Let's do it that way, because at the moment we're talking, to some extent speculatively, and I am well aware of the time restrictions, Mr. Levin, and I do appreciate your raising it, but it comes as no surprise because I've had it here before -- not in this case, but in other cases. The thirty days, I think is sacrosanct, under the code. So we will see, based upon when you file your motion and what that motion is, I will set it down, with in mind your schedules, as well as the possibility, I must tell you, of an April 30th date. I didn't even mention April 30, but if you filed it, for example, on the 1st of April --

(15:36:28/+00:12:15) Richard B. Levin MR. LEVIN: I assure you, Your Honor, we will not file on the 1st of April.

(15:36:30/+00:12:17) Kevin Gross autograph THE COURT: Okay, all right, so let's be looking at different -- and also, a factor is how much discovery the parties are talking about here. That may become a factor as well, whether there's disruption to either side.

(15:36:53/+00:12:40) VOICE: Your Honor, I think --

(15:36:55/+00:12:42) Kevin Gross autograph THE COURT: Mr. O'Neill?

(15:36:56/+00:12:43) Arthur Jay Spector MR. SPECTOR: Mr. O'Neill has a [inaudible] and wanted to speak for himself.

(15:37:00/+00:12:47) Kevin Gross autograph THE COURT: All right.

(15:37:01/+00:12:48) James E. O'Neill III MR. O'NEILL: It's just a suggestion for all parties, and also for the Court, Your Honor. Perhaps, we should wait and see whether such a motion is filed --

(15:37:09/+00:12:56) Kevin Gross autograph THE COURT: Yes.

(15:37:09/+00:12:56) James E. O'Neill III MR. O'NEILL: -- and then the parties can confer about scheduling and discovery, and also reach out to the Court, if necessary, to have a scheduling conference --

(15:37:19/+00:13:06) Kevin Gross autograph THE COURT: Perfect.

(15:37:19/+00:13:06) James E. O'Neill III MR. O'NEILL: -- to see what the timing should be, what dates are going to work, what discovery there should be -- if any is needed -- rather than try to set those parameters --

(15:37:29/+00:13:16) Kevin Gross autograph THE COURT: That's an excel--

(15:37:30/+00:13:17) James E. O'Neill III MR. O'NEILL: -- now, and that would give everybody a chance for input and the Court an opportunity to decide issues which we would not be able to decide among ourselves.

(15:37:36/+00:13:23) Kevin Gross autograph THE COURT: And to talk about schedules at that point, as well, which may be in flux, to some extent.

(15:37:40/+00:13:27) Richard B. Levin MR. LEVIN: That's certainly acceptable to IBM, Your Honor.

(15:37:41/+00:13:28) Kevin Gross autograph THE COURT: All right, Mr. Lewis?

(15:37:42/+00:13:29) Adam Aiken Lewis MR. LEWIS: Your Honor, one other request, and it's only a request, and even at that I suppose isn't extraordinary, and that is that I ask that the parties -- we have heard some dates that are available now, and I would ask that people try to keep those dates open, at least, so that when we do have a scheduling conference, we don't all of a sudden find out none of us can do it until August.

(15:37:59/+00:13:46) Kevin Gross autograph THE COURT: Right. My schedule fills up, you know, here and there, and I don't like to hold too many dates open, but I will make sure that there is time available.

(15:38:08/+00:13:55) Adam Aiken Lewis MR. LEWIS: Thank you, Your Honor.

(15:38:09/+00:13:56) Kevin Gross autograph THE COURT: You bet. All right, counsel, is there anything further to discuss?

(15:38:14/+00:14:01) VOICES: No, Your Honor.

(15:38:15/+00:14:02) Kevin Gross autograph THE COURT: All right, thank you, all, and I wish you all a good day, thank you.

(15:38:19/+00:14:06) Arthur Jay Spector MR. SPECTOR: Who's going to be -- are you going to be providing your own order, or do you want us --

(Court states it "will do an order on this")

(15:38:22/+00:14:09) Kevin Gross autograph THE COURT: I'll do an order, yes. I will do an order on this. Thank you.

(15:38:27/+00:14:14) *** RECESS ***

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