You probably recall seeing me post this before:
"Just when I thought it couldn't get worse"
We just hit another one.
They could not retain three of their seven accountants, so they had to ask for permission to use accountemps. It is possible that the three just left because they didn't want to be associated with a company in Bankruptcy (yes, I know one of them was terminated. that makes it even worse.) More likely, when we hear the real story, I think it will turn out that they sequentially left - one of them was asked to do something, was fired for refusing, and the other two resigned rather than do it, as well. It looks very bad for this to happen.
Now it turns out that just before the filing, they gave a $50,000-75,000 bonus to the company lawyer.
That smells. IMHO it is also really stupid. It would have been stupid for anybody to have done it. For him to have done it calls into question his legal skills.
IMHO, as corporate counsel, his first obligation was to tell them not to do it. First, the mere fact of it will cause the Trustee and Judge to question everything else in the petition, and tend to believe everything the creditors say (like Novell). The mere fact of it puts the bankruptcy itself into jeopardy. IMHO, that, alone, is unethical to the point of being professional malpractice.
Second, he either will have to pay it back, or, if he has not cashed the check yet, will never get it.
Let's analyze this: either they gave him a check and he cashed it the same day, or he is holding it now.
If he is holding it now, it is currently worthless. Judge Gross and the Trustee may authorize payment of the check later. I wouldn't give you ten dollars for it right now, because I don't think it will ever be honored. Certainly, Judge Gross did not authorize enough funding to cover the check.
I think Judge Gross would be very surprised to learn that SCO management considered a $50,000 - $75,000 preference to be an ordinary business expense. I am certain that Judge Gross will not agree that it is an ordinary business expense.
If he deposited it in his own bank, for collection from the bank used by SCO, then the check may have been in transit when the bankruptcy was filed. If so, the bank should not honor it. In that event, he just bounced a $50,000 check.
If he took it to the bank on which it was drawn, SCO's bank, and cashed it before the bankruptcy was filed, then it was only doubly stupid.
It was, by definition, a Preference, and a Preference in several ways.
Here is the statute. - I cut out a lot of it as irrelevant.
Special note on interpretation. As most of you are aware by now, the technical language that lawyers use (legalese) is a very special variant of English. I must warn you that the bankruptcy code is not written in pure legalese. It is its own weird little dialect (bankruptese). I will try to translate or explain a term when I notice that it is pretty far from ordinary English. If you happen to see other words or phrases in here that are confusing, please let me know, and I will try to explain that as well.
To start off, "avoid" has a special meaning. It means the Trustee can go back and declare a transaction or transfer to be a nullity. The Trustee can then demand that the recipient return the money, and if not returned, can sue the recipient for the money. 11 U.S.C. 547 Preferences
In this section—
“inventory” means personal property leased or
furnished, held for sale or lease, or to be furnished under a contract
for service, raw materials, work in process, ... ;
“new value” means money or money’s worth in
goods, services, or new credit, or ... ;
“receivable” means right to payment, whether or not such right has been earned by performance; and
Except as provided in subsections (c) and (i) of
this section, the trustee may avoid any transfer of an interest of the
debtor in property—
to or for the benefit of a creditor;
for or on account of an antecedent debt owed by the debtor before such transfer was made;
made while the debtor was insolvent;
on or within 90 days before the date of the filing of the petition; or
between ninety days and one year before the date
of the filing of the petition, if such creditor at the time of such
transfer was an insider; and
that enables such creditor to receive more than such creditor would receive if—
the case were a case under chapter 7 of this title;
the transfer had not been made; and
such creditor received payment of such debt to the extent provided by the provisions of this title.
The trustee may not avoid under this section a transfer—
to the extent that such transfer was—
intended by the debtor and the creditor to or for
whose benefit such transfer was made to be a contemporaneous exchange
for new value given to the debtor; and
in fact a substantially contemporaneous exchange;
to the extent that such transfer was in payment
of a debt incurred by the debtor in the ordinary course of business or
financial affairs of the debtor and the transferee, and such transfer
made in the ordinary course of business or financial affairs of the debtor and the transferee; or
made according to ordinary business terms;
For the purposes of this section, the debtor is
presumed to have been insolvent on and during the 90 days immediately
preceding the date of the filing of the petition.
For the purposes of this section, the trustee has
the burden of proving the avoidability of a transfer under subsection
(b) of this section, and the creditor or party in interest against whom
recovery or avoidance is sought has the burden of proving the
nonavoidability of a transfer under subsection (c) of this section.
If the trustee avoids under subsection (b) a
transfer made between 90 days and 1 year before the date of the filing
of the petition, by the debtor to an entity that is not an insider for
the benefit of a creditor that is an insider, such transfer shall be
considered to be avoided under this section only with respect to the
creditor that is an insider.
A bonus check for $50,000 - 75,000 is a candidate for avoidance. The Trustee would have to prove that the check was:
to a creditor (to the extent of their paychecks, employees and corporate counsel are creditors)
for an debt (nope. This is not antecedent at all)
made while the debtor was insolvent (there is a presumption that the debtor is insolvent for 90 days before the filing of the petition)
within 90 days of the filing of the petition (without question)
within one year of the filing of the petition if the creditor is an insider (corporate counsel - yes, indeed, an insider)
the creditor gets more than he would have gotten
under a chapter 7 proceeding,
if the transfer had not happened (this is the one the Trustee will use. No one will mention it, it will be assumed)
and the transfer had been done under the provisions of Title 11 (IMHO, it was).
That bonus is attached to a bungee cord, and I think it will come back.
In my experience, and IMHO, the likelihood of a bonus to an insider paid within the previous year being avoided and collected by the Trustee is inversely proportional to the length of time between the payment of the bonus and the filing of the petition.
Ten or eleven months ago? Probably will be avoided. (this is not about fair, this is about collecting property of the estate. it is collection work.)
A couple of days before the filing? I don't know what to say. I am just holding my head in my hands.
IMHO, seriously, they would have been better off to have not paid the bonus, and appeared at the first hearing carrying a sign saying "We intend to strip the estate for our own enrichment." At least then the attorney for the debtor could have told the judge they didn't mean it and it was a really stupid joke in bad taste.
This is so stupid that they can't even talk their way out of it. Either the Trustee has to file for an avoidance, or file to prevent the payment of the bonus check. Either way, there will be a motion that the Judge will have to sign. This is true even if it is all voluntary on the part of the corporate counsel and he drives to Delaware to hand the check over to the Trustee.
There is a little mantra that bankruptcy lawyers give their clients. You do it to keep the clients from trashing the proceedings with stupid tricks.
"Don't make any extra payments. Don't make any big or unusual payments. Don't make unnecessary payments to family members. Anything other than a payment for goods received or utilities, will be undone by the bankruptcy trustee, and he will get the money back anyway. "
I cannot imagine that the bankruptcy attorney did not tell this to the board and president of "The SCO Group".
Not every attorney handles bankruptcies, but this is pretty fundamental stuff. First Year Law, Contracts, to be precise. Contracts made within 90 days of filing of a petition are also "avoidable". That is an important factor in enforcing a contract.
I cannot imagine a corporate counsel not knowing about it. I can't type while I hold my head in my hands. I can't conceive of a lawyer so stupid that he cannot foresee bad consequences, even if he does not recall the 90 day provision in the bankruptcy code.
If this guy talks the bank into paying him the money on a bonus check drawn before the petition was filed, but cashed afterwards without explicit consent of the Trustee and the Judge, he is looking at very serious trouble. No joke on this one. It is stealing from the estate, and the Trustee can ask the FBI to investigate. The FBI will investigate, too. It is a Federal crime.
In my opinion, we may have found the person we have all been looking for. This guy is a good candidate for the title of "intern" that we have been accusing of writing up all the motions in the other cases.
This just makes me ill.
AllParadox - Retired Attorney, no legal opinions, just my opinions.