Another company's experience..about 10 months ago....
<<Scour Files for Chapter 11 Reorganization, and Gets Automatic Injunction to Stay Major Labels' Lawsuits
The Saturday, October 14 issue of the New York Times noted the bankruptcy filing by Scour, Inc., the Los Angeles based company that "abets the trading of music and movies over the Internet." Scour.com has over $100 million in RIAA sponsored litigation against it, with $4 million in uncontested debt invested by venture firms, and only $1.2 million in assets. It's clearly insolvent, unless its search engine and web business have long-term value as technology, shall we say comparable to Napster or MyMP3--If Scour's technology does have real value, it's a corporation with many millions in intangible assets and could be reorganized effectively.
The cited Times article does not mention the automatic stay to which any bankrupt company is entitled, against the prosecution of any litigation against it pending an opportunity to reorganize or liquidate. Scour, in which the famous talent agent Michael Ovitz is a 20%, but inactive, shareholder, says it wants to reorganize under Chapter 11, which means time to look for new investors and to formulate a plan which creditors will accept. The Bankruptcy Law is designed to give breathing room to a corporation in such circumstances, and the automatic "stay" is a court order to the Major labels and studios to "standstill" and give Scour a chance for six months, a year or maybe much longer.
We note the RIAA in its typical forthright fashion, "declined to comment on what effect the bankruptcy would have on the lawsuits." The RIAA cannot bear to admit that the law automatically stays the $100 million in lawsuits indefinitely. And if Scour has no fundamental technology value, the lawsuits are a waste of time anyway, because no judgement would be collectible even after millions were spent litigating.
Debtor-In-Possession Financing Now Available
The Chapter 11 filing also means that any investor can loan money to Scour, Inc. as a "super-priority" mortgage holder in bankruptcy, entitled to being paid off the top before any other creditors can receive any payment. This feature of Chapter 11, called Debtor In Possession financing, opens the door to a super-preferred, secured, position to anyone who sees $1 million, or $10 million, or more in intrinsic value in the Scour technology. They can loan money as senior creditors, and take a big piece of any ultimate equity action by warrants, or conversion rights on their debt paper. Many indebted corporations go into Chapter 11 just to create this attractive super-priority level of debt paper, and big banks have done extensive business over the years encouraging such a filing, so they can obtain this senior creditor position and thereby make new secured loans. In bankruptcy, Scour has made itself financeable again by somebody, not necessarily a bank, if its essential search engine product is in fact, valuable.
Bankruptcy Counsel Have Skillfully Checkmated the Major Labels
We all remember the anger and aggression of the Majors to put Napster out of business by an all inclusive injunction, now being stayed and reviewed on appeal, with a decision expected in several weeks or months. In sum, the Majors do not have an injunction, i.e. stay order, against Napster until the 9th Circuit Court of Appeals says they do. If the Appeals Court refuses to affirm or reverses the stay order entered in the lower court, and sends the case back for an immediate, but scaled down injunction (a distinct possibility), that is all the Majors have. Their next shot is a right to petition the Supreme Court to hear their case, by no means a sure thing, then to argue and reinstate a full-blown injunction there. This is a one to two year judicial process with no assurance of winning.
This posture in Napster redounds to the clear advantage of Scour and owner Ovitz. The Majors are effectively enjoined from pursuing their cases against Scour for several months to several years. Tearing off its garments in bankruptcy court has gotten Scour an injunction as useful to it, nearly, as the one the Majors could not hold onto against Napster. Good lawyering is a wonderful thing.
Next Move
Now if Napster gets the injunction order in its case reversed or drastically slimmed down in the next few weeks or months, peer-sharing technology on the Internet to distribute music is given a new lease on life. The Majors are stalled in court, but if the highly effective Ovitz and counsel at Scour can wave a strong opinion in the Ninth circuit before an investor, they have bought survival time. The opinion would have to uphold Napster's peer-sharing technology in some meaningful format. This could make Scour a candidate for big-time financing again with its peer-to-peer sharing technology, on a debtor-in-possession preferred basis. The automatic stay in the Scour bankruptcy gives it what all-sick companies dream of, i.e. the time to wait and see what happens elsewhere in the marketplace of ideas, to resuscitate its fortunes. For a start-up company, bankruptcy is no real disgrace assuming there were no false statements made to its initial investors, and a fresh start is what the law was designed to achieve.
Every sick corporation I ever worked with wanted the same thing from its creditors--the time to get on its feet with a new product or new market, or a little more financing to get there. This whole discussion presupposes that Scour has some thing that is real, and was not a con game on the highly intelligent, sophisticated Ovitz. With $1.2 million in the bank, a skeleton crew and no requirement to pay anyone but employees for several months or more, Scour can now wait and see what happens. There are fundamental copyright and constitutional arguments being decided sooner or later in the Napster litigation, and some of the best in the business are fighting for Napster, and effectively, for Scour as well.
You have to respect business and legal gamesmanship being fought on this level by the tiny Scour that started with $4 million and some bright college kids who wanted to start a new search engine and entertainment hub. The game isn't over till its over.
Larry Powers 10/14/00>> |
