As most of you have read by now, on May 21, 2009, Psystar filed for Chapter 11 bankruptcy in the Florida Federal Court System. While I can be a competitive over-achiever and chomp at the bit to be the first to break a story, there are advantages to waiting. One, I can think of something intelligent to say, and two, I can clear up any possible misinformation that was reported earlier. To begin this journey (and to give World of Apple readers information that has yet to be reported elsewhere), I am going to back up to the discovery dispute hearing that took place on May 5, 2009. It will be helpful to the reader to take a quick glance over my prior articles regarding this dispute:

Apple v. Psystar: Things Just Got Really Interesting

Psystar Responds to Apple’s Discovery Allegations, Calls Blogosphere “Rabid”

Apple v. Psystar: Apple Submits Joint Proposed Discovery Order to the Court

The hearing resulted in an order requiring the following:

Based on the parties’ agreement and the Court’s resolution of the disputes, the Court now orders that Psystar produce by NOON ON MAY 18, 2009, the following categories of documents:
• All the underlying documents used to prepare the June 2008 profit and loss statement and balance sheet bates stamped PS010327-328, to the extent the documents have not been produced.
• All the underlying documents used or being used to prepare the aggregated financial statement referenced in Psystar’s opposition letter brief (Dkt. No. 61).
• All of the tabulations created by Jennifer Perez regarding the components needed to build Psystar’s products.
• Documents bates stamped PS01383-2000.
• Bank statements for all of Psystar’s accounts from Commerce Bank and TD Bank from April 2008 through September 2008. To the extent that said statements are not immediately in the possession of Psystar either in physical or electronic form, Psystar shall ask Commerce Bank and TD Bank for these statements on an every other day basis until Commerce Bank and TD Bank provide said statements.
• A copy of all attachments to all previously produced emails and a copy of the corresponding email in hard copy or in electronic form.
In addition, Psystar will provide a designated representative to supplement Apple’s previously noticed 30(b)(6) deposition on Topic 2 (financial information) on JUNE 3, 2009, starting at 9 a.m. at the San Francisco office of Townsend and Townsend and Crew LLP. This date may be changed to another day during the week of June 3 so long as the Parties agree in writing in advance of the deposition date.
If Psystar does not completely produce the aforementioned financial documents by May 18, 2009, Apple will be allowed to take a deposition after the fact discovery deadline regarding any documents produced after the Court’s deadline of May 18, 2009. Should Psystar fully comply in producing all the financial documents listed above by May 18, Psystar does not have to pay Apple’s attorney’s fees and expenses.

In the coverage provided by other sites that I have read thus far, the timing of the bankruptcy filing has not been related to the deadline bolded above. I, however, cannot help but think that the two are closely related. I would speculate that Psystar did not produce the documents by that date and was facing monetary sanctions which provided the impetus for the bankruptcy filing as the straw which broke the cloner’s back.

Transcript of Discovery Hearing

As part of our effort to go a bit farther, I have obtained a copy of the transcript of the discovery dispute hearing which sheds even more light on events leading up to the declaration of bankruptcy. Specifically, as I predicted, Judge Alsup was in no mood for discovery shenanigans. He came as close as professionally possible to telling Psystar’s attorney Colby Springer that he wasn’t buying Psystar’s story whatsoever without outright calling anyone a liar. Specifically, please note this portion of the transcript beginning on Page 4:

THE COURT: These are issues that you agreed on, or
18 things that you want me to decide?
19 MS. CHUNG: No. These two issues are still
20 outstanding.
21 And we have agreed, in the sense that Mr. Springer
22 will check on the attachments to the e-mails which have not
23 been produced.
24 And now I understand that some of the e-mails
25 attachments were corrupted, as well as some of the attachments.
1 In the conversion from Psystar to its counsel, the export did
2 not function or did not work correctly.
3 MR. SPRINGER: That’s generally correct, your Honor.
4 The document attachments to e-mails that — Psystar
5 has produced a number of e-mails. A number of those e-mails
6 that have been produced reference the existence of an
7 attachment. In a number of instances, those attachments have
8 not been produced. It is a result of — not because Psystar is
9 withholding the attachments for any reason, but because the
10 attachments have been corrupted. And it appears that that
11 corruption of the attachment has something to do with the
12 e-mail system that they use as a whole.
13 So we have identified the make and model of the
14 e-mail system, as it were. And we’re going to try to work to
15 do something. Either the file itself — the original file is
16 still present with Psystar, we believe. And we’re going to try
17 to find some way that we can get Apple to have access to those
18 original attachments, those original documents somehow, because
19 there’s a problem moving the file from the electronic form into
20 the form that is actually produced to them. The corruption
21 occurs somewhere between there.
22 THE COURT: But if you went to Psystar now and went
23 on their e-mail system and sat in one of the employees’ desks
24 and called up that e-mail and opened the attachment, would it
25 be gobbledygook, or would it be a real — you know, would it
1 read properly?
2 MR. SPRINGER: I don’t want to say for certain. My
3 understanding is that if they were able to open — if someone
4 was sitting in front of a terminal and clicked on a file, or
5 whatever the case might be, some indication of — that there’s
6 an attachment — my understanding is that they would be able to
7 open the attachment.
8 The issue —
9 THE COURT: Why don’t you just open them up and print
10 them out in hard copy?
11 MR. SPRINGER: Because we’ve been producing documents
12 in electronic copy.
13 THE COURT: You can either do this. Produce them in
14 hard copy or electronically. You’ve got to do it one way are
15 the other.
16 MR. SPRINGER: Absolutely.
17 THE COURT: When are you going to do this?
18 MR. SPRINGER: It’s not an issue of are we not going
19 to do it. It’s an issue of: what’s the best way to do it?
20 THE COURT: And also when?
21 MR. SPRINGER: If Apple would like us to go back and
22 manually print out e-mails, to the extent that that’s possible,
23 if that’s the solution they want us to do, that’s the solution
24 we’ll take. If they’d rather have an electronic format —
25 THE COURT: The discovery cutoff in this case is
1 June 26th.
2 MS. CHUNG: Yes.
3 THE COURT: If it turns out this is a delay, I’m
4 going to let them take depositions the rest of the year —
5 MR. SPRINGER: Understood.
6 THE COURT: — because it sounds like a stall to me,
7 Mr. Springer.
8 MR. SPRINGER: It’s absolutely not, your Honor.
9 THE COURT: I’m going to take it as a good-faith
10 sign, but you — that’s it’s not a stall. I’ve never herd of
11 such a thing; of documents being corrupted. This is a new one
12 on me. So you’d better fix it, and fix it promptly.
13 And, Ms. Chung, if it turns out you need more time to
14 take depositions, your side’s going to get an extension if it
15 relates to these documents.
16 MS. CHUNG: I understand.
17 THE COURT: Now, if it’s not relating to these
18 documents, you don’t get an extension; but this doesn’t sound
19 right to me. All right.
20 MS. CHUNG: Well, regarding this issue we are also
21 still talking about how we could get the attachments so that
22 they come with the e-mail, because right now, they produce —
23 some are separate.
24 THE COURT: If they have to write — print it out,
25 they’re going to put on top of it, “This went with e-mail dated
1 June 28th,” or whatever.
2 Look. In the old-fashioned way, we used to do this
3 all the time: hard-copy documents. You could live with that
4 system, if you need to.

Note that this answer is entirely different from Psystar’s prior representations to the Court regarding the email attachments.

Apple’s Assertion

Financial Projections. Apple also requested financial projections for Psystar’s products (RFP No. 25). Psystar has produced one financial projection but has not produced the drafts of that financial projection. (See PSY009277.) Those drafts clearly exist. In fact, Psystar has produced emails sending such drafts *** as attachments to e-mails. Psystar, however, has not produced any attachments to e-mails in this case. Psystar should be required to produce the drafts of financial projections and all attachments to e-mails.

Psystar’s Assertion

Psystar has produced the financial projections related to its products that exist and that are in its possession or control. Despite Apple’s assumption to the contrary, drafts of the financial projection document that Psystar created to obtain funding do not exist. The document ultimately sent to possible venture capital investors was a work in progress; Psystar did not print and save a hard copy whenever a change to the document was made. Because Apple wants a document to exist does not make it so.

Let’s all sing: One of these things is not like the other!

Similarly, Judge Alsup was not satisfied with the efforts that Psystar had made in attempting to secure copies of missing bank records:

14 THE COURT: Well, but the customer can go, you know,
15 and complain. Maybe it’s not enough to just ask once. They’ve
16 got to ask, you know, every other day, “Where is it? Where is
17 it,” until they finally get it to you.

Also during the hearing it was disclosed that the deposition of Roberto Pedraza had also been taken. Roberto is the other director of the company with his brother Rodolfo (Rudy) Pedraza. That solves my prior question as to whether or not Roberto was really the one with the financial information, and thus, it appears not. So no one knew a thing? That might explain why they went bankrupt; it might be as simple as that. Or of course it can some more devious, such as trying to hide the identity of any financial backers that may be the entities referred to by Apple as John Does 1 through 10.

The Bankruptcy

Psystar filed for Chapter 11 Reorganization, not Chapter 7 Liquidation (Chapter 7 would be total liquidation and not Chapter 13 as erroneously reported by at least one blog). This means that they intend to attempt to get back on their feet. Whether that is realistic or not considering their debt to assets ratio remains to be seen. They may plan on getting an additional cash infusion in the future.

In its filings, Psystar does not blame the litigation with Apple for its current sorry state of financial affairs, but rather states:

Due to the weakened economy, Debtor has had no alternative but to commence these Chapter 11 proceedings. Debtor sales have been greatly affected by the decrease in consumer spending. The financial crisis has also caused creditors to tighten up their terms and become more demanding for immediate payment. Debtor’s vendors due to their own financial problems are not being able to supply all necessary items to allow Debtor to produce their product, thus, forcing Debtor to pay higher prices for parts in order to fulfill customer orders in a timely manner and to assure satisfaction with the product. These factors seriously contribute to the Debtor not being able to turn a significant profit in each sale. Debtor has continued doing business in this manner with diminutive profit in hopes of a turn around in our present economy but find that the long term roots of this crisis can only be overcome by directly implementing the restructuring of Debtor s business plan and can only do so with the requested Chapter 11 protection. Debtor plans on emerging from this Chapter 11 with a strong and effective plan to make an increasingly higher profit and still provide the consumer with the product that they have grown to enjoy and trust. Debtor possesses valuable intellectual property which will be implemented in a well thought out and more profitable business plan.

It seems like the cheap PC market isn’t the magic bullet that some people want Apple to bite.

Psystar filed its list of its top twenty unsecured creditors (twenty is the amount required to be disclosed by law, Psystar didn’t even have that many) which includes multiple credit card companies, shipping charges, the IRS, and Carr & Farrell, the law firm representing it in its case against Apple to the tune of $88,468.84. That amount is very likely NOT the total amount incurred thus far as the firm has likely already been paid substantial sums; this is just the balance due. The highest unsecured creditor is none other than Rudy Pedraza himself for the sum of $120,000.00 which was noted as an “officer loan.” Where did a kid still living at home with mom and dad get that kind of bling?

The latest filing in the bankruptcy court announces a meeting of Psystar’s creditors:

05/26/2009 – 16 – Notice of Meeting of Creditors.
Meeting of Creditors to be Held on 6/24/2009 at 02:30 PM at 51 SW First Ave Room 1021, Miami. Deadline to File a Complaint to Determine Dischargeability of Certain Debts is 8/24/2009. Proofs of Claim due by 9/22/2009. (Covington, Katrinka) (Entered: 05/26/2009)

Now the Apple web has been virtually (pun intended) salivating with the speculation that at long last, the shadowy deep pockets behind Psystar will be required to be disclosed. Just one moment’s careful reflection reveals the flaw in that logic. If there are backers who wish to remain secret, do we really believe that they are so unsophisticated that they had not thought of this? If they have decided Psystar is a lost cause, all they have to do is forgive the debt (if any), and all of a sudden they are not creditors that are required to be disclosed to the bankruptcy court. It took me about two seconds to think of that. I am sure that any large investors are way smarter than I am. Pamela at Groklaw made the same observation:

I’ve seen a couple of articles claiming that at the hearing we’ll find out who the investors were who were backing this adventure. However the same articles are saying that the investors have backed away, so both can’t be so. If they have pulled out, Psystar will not have to list them in their filings, I don’t think. That may be the point.I think this means we may never know.

Really the possibilities are myriad. Rather than investors bailing on Psystar it may be that this was part of their agreement all along if it looked like they were about to be outed. We just don’t know. However, I think the reasoned and undramatic bet would be that nothing spectacular is going to be revealed during the bankruptcy proceedings. I know that doesn’t make for much of a “wow!” story, but I suspect it is closer to the truth, which is by far more important.

The unsecured creditors have already been revealed and these alleged investors could easily be unsecured creditors. These names, if any, will almost certainly remain as shadowy as ever. Now is it possible that this may happen? Sure. Is it likely? No. However, I would be remiss not to note that there are some creditors who apparently have not yet been revealed:

8 – Filed: 05/21/2009 Entered: 05/22/2009 – Notice of Deficiency Re: Schedules
Notice of Deficiency. List of Equity Security Holders due 6/5/2009. Summary of Schedules due 6/5/2009. Schedule A due 6/5/2009. Schedule B due 6/5/2009. Schedule D due 6/5/2009. Schedule E due 6/5/2009. Schedule F due 6/5/2009. Schedule G due 6/5/2009. Schedule H due 6/5/2009.Statement of Financial Affairs Due 6/5/2009.Declaration Concerning Debtors Schedules Due: 6/5/2009. [Incomplete Filings due by 6/5/2009]. (Covington, Katrinka)

It would be prudent to wait until then before looking for the man behind the curtain.

Just Filed

A Suggestion of Bankruptcy has just been filed with the California Court putting it on notice of the Florida Bankruptcy proceeding. An automatic stay of proceedings is now in effect.