SCO'S DESPERATE flight to bankruptcy to avoid facing trial in SCO v. Novell has failed.

Judge Kevin Gross lifted the automatic bankruptcy stay of that lawsuit today in Delaware US Bankruptcy Court. The legal battle will be met in Utah US District Court in due course.

SCO had filed bankruptcy on the very eve of trial in September, with the obvious motive of seeking to deflect or postpone what looked like a nearly certain corporate death sentence.

Utah US District Court Judge Dale Kimball's previous decisions on a veritable thicket of partial summary judgment motions had cut down the issues at trial to just three questions:

* How much SCO owed -- and has so far refused to pay -- Novell for UNIX SVRX licences it sold to Microsoft and Sun for $25 million;

* Whether SCO had the right to sell those new UNIX SVRX licences without first asking for Novell's permission; and,

* Whether, and/or how much of, SCO's dwindling, remaining funds should be placed into a constructive trust by the court to ensure that Novell will be paid.

In bankruptcy court, SCO has admitted that it has less than $10 million in cash remaining, and that its liability to Novell for royalties and interest on those Microsoft and Sun UNIX SVRX licences could amount to as much as $37 million.

It's easy to see why SCO so desperately wanted to get out of Judge Kimball's court in Utah.

SCO opposed Novell's motion to lift the automatic bankruptcy stay, of course, and tried to talk the bankruptcy judge into taking over SCO v. Novell so it could relitigate everything that had already been ruled upon in Utah. But Judge Gross didn't fall for SCO's arguments.

In his Opinion lifting the stay, Judge Gross ruled that there is no prejudice to SCO in letting the trial in Utah proceed since it's ready for trial and SCO has lawyers paid and ready, the balance of hardships favours Novell, it looks like Novell is likely to prevail on the merits, the litigation is technical and complex, and Judge Kimball in Utah has already spent years mastering the issues so it only makes sense for time and judicial economy to let him finish.

He might also have pointed out that SCO filed the lawsuit and chose that forum, but didn't.

He noted that a decision is SCO v. Novell is necessary in order for the bankruptcy court to ascertain what assets SCO actually owns in equitable interest and not just legal title. The Utah court has already determined that SCO had breached its fiduciary duty to Novell and converted Novell's assets to its own use. It does appear he's read Judge Kimball's rulings.

He wrote, "...the Debtors simply cannot file a confirmable plan of reorganization until they know what liability they have to Novell." He also wrote that the lack of a decision in SCO v. Novell could prejudice Novell: "An example of Novell's dilemma, and the Court's, arose recently in the bankruptcy cases. Debtors moved to sell substantially all of their assets. Without a ruling on the Liability Issues it was unclear if the sale would adversely affect Novell's rights. Debtors subsequently withdrew the sale motion, but the problem remains."

His Order makes clear what issues in SCO v. Novell he will allow the Utah court to decide.

He granted relief from the automatic stay for determining how much money SCO owes to Novell for having sold those UNIX SVRX licences to Microsoft and Sun, and whether it had to ask Novell's permission to sell them. He didn't lift the stay regarding constructive trust, so that matter will return to bankruptcy court for him to adjudicate, as that is only proper.

So SCO must go back to Utah to pick up the tab for lawsuits pursued with Novell's money, including this one against Novell itself. One doubts the court will show it much sympathy. µ

L'INQ
Groklaw