Trustee vs. U.S. Trustee; Equity security holder rights; Notice requests

Al Petrofsky

Darlmclied wrote in InvestorVillage SCOX message #47394 at 2007-10-20
18:01 -0400:



Any way I can petition the Trustee?

I want him to replace the CEO.

You're free to petition the trustee (or rather, the closest thing
there is to a trustee right now), but I don't think the trustee is
likely to take your suggestion.

People seem to be very confused about the difference between a
"trustee" and the "United States Trustee". Those are two very
different things. Currently, there is not a trustee in this case, but
there is an entity that has pretty much all of the powers and duties
of a trustee, and that entity is *not* the U.S. Trustee. It is
The SCO Group, Inc. itself. I described the current status of the
case, of the estate, and of SCO's role, in my letter last week to
NASDAQ attorney Lanae Holbrook:



On September 14, 2007, SCO filed a Voluntary Petition under Chapter
11 of the Bankruptcy Code, in the United States Bankruptcy Court
for the District of Delaware, where it was assigned case number
1:07-bk-11337. A bankruptcy estate was thereby created, and
substantially all of SCO's property was transferred to the estate
(11 USC 541). SCO, as Debtor in Possession, temporarily assumed
most of the limited powers and duties of a trustee of the estate
(11 USC 1107).

Here's the full text of 11 USC 1107(a):



Subject to any limitations on a trustee serving in a case under
this chapter, and to such limitations or conditions as the court
prescribes, a debtor in possession shall have all the rights,
other than the right to compensation under section 330 of this
title, and powers, and shall perform all the functions and duties,
except the duties specified in sections 1106(a)(2), (3), and (4)
of this title, of a trustee serving in a case under this chapter.

I expect SCO will continue as the entity with the powers of a trustee
until either: (1) a creditor successfully moves the court to appoint a
trustee per 11 USC 1104(a); or (2) a creditor successfully moves the
court to convert the case to a Chapter 7 liquidation per 11 USC
1112(b). I'm guessing that neither of those two things will happen
before 2008. Option (1) would probably require a showing that there
had been "gross mismanagement" by SCO, and I think the movant would
probably need to show mismanagement multiple times over a few months
before the court would take the drastic step of appointing a trustee,
rather than just ordering SCO to correct whatever the movant had
complained about. Option (2) would probably require showing that no
reorganization plan could succeed. SCO's initial plan proposal is not
due until 120 days after the case began (11 USC 1121(b)), and I think
you have to give SCO at least one shot at coming up with a plan before
asking the court to declare that it cannot be done.

If and when a trustee is appointed, he will be chosen by the
creditors, and *not* by the U.S. Trustee. See 11 USC 1104(b) or 11
USC 702.

I believe the U.S. Trustee's role, which is completely different from
that of a trustee, is usually just to be there early on in the case
until all the parties have arrived. At the very beginning of this
case, the U.S. Trustee reviewed SCO's first-day motions and asked SCO
to put off some of the more substantial bits until the second hearing,
in order that the creditors would have more of a chance to raise any
objections that they might have had (see the transcript of the first
hearing, docket #59). The U.S. Trustee also presided over the
creditors meeting, and she is overseeing the formation of the
creditors committee. Once that is done, I expect the U.S. Trustee's
role in the case will pretty much be over. (I say "she" because the
U.S. Trustee in this case is Kelly Beaudin Stapleton, the U.S. Trustee
for Region 3 -- Delaware, New Jersey, and Pennsylvania -- who was
appointed to a five-year term in January 2005 by Attorney General John
Ashcroft, per 28 USC 581(a)(3) and (b). Like many other public
officials, she is, at any given time, nominally involved in hundreds
(or maybe thousands) of cases, but she isn't personally familiar with
any of the details of most of them. The assistant U.S. Trustee for
Delaware is Andrew Vara, and the attorney in the Delaware office who
is assigned to represent Stapleton in the SCO case is Joseph McMahon,
Jr..)

Codswallet responded in InvestorVillage SCOX message #47415 at
2007-10-21 07:28 -0400:



Sure. Buy 100 shares of SCOX and register it with them in your
name. Then file a notice like Al did.

That gives you standing. What I don't know is at what point such
petitions from stockholders will be heard.

Any equity security holder or other party has the right to be heard at
any point in the case. See 11 USC 1109(b):



Sec. 1109. Right to be heard

(b) A party in interest, including the debtor, the trustee, a
creditors' committee, an equity security holders' committee, a
creditor, an equity security holder, or any indenture trustee, may
raise and may appear and be heard on any issue in a case under
this chapter.

In Delaware, even if a party does not file any papers pertaining to a
motion, he can still call in and listen, live, to any hearing on the
motion. (There is a fee for doing so of roughly $40 per 1.5 hours.)
See:



Parties filing a motion, application or other pleading, including,
without limitation, an objection or response thereto, may
participate by telephonic appearance. Any party not submitting a
pleading, but interested in monitoring the Court's proceedings, may
participate by telephonic appearance in "listen-only" mode.

Pamela Jones wrote in Groklaw article 20071019130537565:


[as retrieved at 2007-10-22 00:40 -0400]

Oracle is asking for notices under Bankruptcy Code 2002(a) [

]. That reminds me. Some of you are shareholders. The rules on that
are a litle squishy. In some cases, you get to get notices if the
court agrees; in others, you only do if a committee of equity
security holders is set up, as the Notes on Rule 2002 [

] explains:

Subdivision (d) relates exclusively to the notices given to
equity security holders in chapter 11 cases. Under chapter 11, a
plan may impair the interests of the debtor's shareholders or a
plan may be a relatively simple restructuring of unsecured
debt. In some cases, it is necessary that equity interest
holders receive various notices and in other cases there is no
purpose to be served. This subdivision indicates that the court
is not mandated to order notices but rather that the matter
should be treated with some flexibility. The court may decide
whether notice is to be given and how it is to be given. Under
Sec. 341(b) of the Code, a meeting of equity security holders is
not required in each case, only when it is ordered by the court.
Thus subdivision (d)(2) requires notice only when the court
orders a meeting.

At least one shareholder asked for notices and is receiving them,
so either nobody noticed or nobody cared that there is no equity
security holder committee set up.

She seems to have concluded that the rules do not require any notices
to be sent to me unless and until an equity security holders committee
is appointed. That is incorrect. What Rule 2002(d) says is this:

(d) Notice to Equity Security Holders

In a chapter 11 reorganization case, unless otherwise ordered by
the court, the clerk, or some other person as the court may direct,
shall in the manner and form directed by the court give notice to
all equity security holders of (1) the order for relief; (2) any
meeting of equity security holders held pursuant to Sec. 341 of the
Code; (3) the hearing on the proposed sale of all or substantially
all of the debtor's assets; (4) the hearing on the dismissal or
conversion of a case to another chapter; (5) the time fixed for
filing objections to and the hearing to consider approval of a
disclosure statement; (6) the time fixed for filing objections to
and the hearing to consider confirmation of a plan; and (7) the
time fixed to accept or reject a proposed modification of a plan.

As you can see, this requires certain notices to be given to all
equity security holders "unless otherwise ordered by the court", and
in the SCO case, the court has not ordered otherwise. The final
sentences of the 1983 committee note that Jones quoted simply point
out that an equity security holders meeting (in contrast to a
creditors meeting) would only occur if the court ordered one, and
therefore subsection (d)(2) (which pertains to notices of such a
meeting) would also only come into play if there was a court order.
(Since 1986, the U.S. Trustee has been empowered to convene an equity
security holders meeting without a court order, and thus this 1983
committee note is no longer correct, anyway. See Pub. L. 99-554 and
the modified 11 USC 341(b).)

The only notice in this case, so far, that is covered by Rule 2002(d)
is the notice of the commencement of the case (docket #64), which was
filed on September 26 and belatedly served on all 402 equity security
holders on October 10 (see docket #124). Note that Rule 2002(d) does
not make any distinction between those equity security holders who
have requested notices and those who have not.

My request for notices (docket #114) was made, as it says, "pursuant
to Local Rule 2002-1(b) and Federal Rules of Bankruptcy Procedure
2002(i) and 3017(a)", and those are the rules that it would probably
be a good idea to read before writing about such requests in an
article. The local and federal rules can be found here:




Briefly, what those three rules require is that any equity security
holder who so requests must be served with copies of all (1) motions;
(2) notices; and (3) proposed plans of reorganization and their
accompanying disclosures.

(By the way, there is no "Bankruptcy Code 2002(a)". What that phrase
is linked to in the Groklaw article is Rule 2002(a) of the Federal
Rules of Bankruptcy Procedure. Those rules are prescribed by the
Supreme Court, per 28 USC 2075, and are not part of the Bankruptcy
Code (Title 11 of the U.S. Code), which is a collection of
congressionally-enacted statutes. The rules are, however, reprinted
in the appendix to Title 11, and that is probably the source of the
confusion.)

***

For copies of all documents filed in the case to date, see: