SONICblue Inc.

UNITED STATES BANKRUPTCY COURT
For The Northern District Of California
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MEMO. DECISION AND ORDER ON MOTION FOR CLARIFICATION
UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
In re:
SONICBLUE INCORPORATED,
DIAMOND MULTIMEDIA SYSTEMS,
INC., REPLAYTV, INC., and SENSORY
SCIENCE CORPORATION,
Debtors.
Cases No. 03-51775, 03-51776,
03-51777, and 03-51778-MM
Chapter 11 cases
Jointly administered
MEMORANDUM DECISION AND
ORDER ON MOTION OF
SENIOR NOTEHOLDERS FOR
CLARIFICATION, OR IN THE
ALTERNATIVE, RECONSIDERATION
Let there be no doubt that the words and findings of my Memorandum Decision of March 26,
2007 were carefully selected to respond to the issues then before the court, which were whether to
appoint a chapter 11 trustee pursuant to § 1104, whether to convert the case to chapter 7, and whether
to disqualify counsel for the debtor. The findings made in support or denial of those motions must be
understood in context. After considering the argument of counsel and the record before me, the motion
for clarification, or in the alternative, reconsideration by Portside Growth & Opportunity Fund Ltd.,
Smithfield Fiduciary LLC, and Citadel Equity Fund Ltd. (previously described as the “senior
debtholders,” “senior bondholders” or “senior noteholders,” but hereinafter “senior noteholders”) is
denied as explained below.
The following constitutes
the order of the court. Signed May 04, 2007
Marilyn Morgan
U.S. Bankruptcy Judge
________________________________________
Entered on Docket
May 04, 2007
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
Case: 03-51775 Doc# 2279 Filed: 05/04/07 Entered: 05/04/07 15:34:30 Page 1 of
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MEMO. DECISION AND ORDER ON MOTION FOR CLARIFICATION
1. 	Noting a Distinction Between a Right to Payment and a Claim for Compensation, the Joint
Venture Agreement Expressly Grants VIA a Claim for Compensation Upon Breach.
Article 5.6(a) of the joint venture agreement expressly provides that both VIA and the joint
venture are entitled to be compensated for damages resulting from loss of the Intel license. 	The
preamble to Article 5.6(a) reads in pertinent part that: 	“If JV is Enjoined from Utilizing the Intel
License . . . , then the following liquidated damages shall apply to compensate JV and VIA for any and
all losses they may suffer as a result thereof. . . . 	(Emphasis added.) 	The senior noteholders
conveniently omitted in their motion the phrase “to compensate JV and VIA for any and all losses they
may suffer as a result thereof . . . ,” replacing it with ellipses in a manner that is misleading to the reader.
Article 5.6(a) makes a distinction between the right to be compensated for losses suffered and
the right to receive a distribution of damages for those losses. 	While it provides that damages are
payable to the joint venture, it states unambiguously that VIA, as well as the joint venture, is entitled
to compensation for losses resulting from an inability to use the Intel cross-license. 	As noted, the
distinction is meaningful because the determination whether VIA is entitled to priority turns on whether
it has a claim against SONICblue. More importantly, whether VIA has a claim may affect the amount
of the distributions to the senior noteholders absent subordination by VIA.
The term “claim” is broadly defined in § 101(5), is not limited to rights to payment, but includes
rights to an equitable remedy for breach of performance. In fact, VIA asserted a claim in this case.
Modification of the decision at the senior noteholders’ request for purposes of clarification on this point
is unwarranted.
2. 	The Senior Noteholders Appear Not to Have Disclosed Significant Information to the
Committee Notwithstanding its Unusually High Level of Involvement.
The senior noteholders object to the characterization that they inserted themselves into the VIA
litigation, that they had a hidden agenda, and that their counsel, Bruce Bennett, 	operated in the
shadows. However, it was not apparent until SONICblue’s litigation counsel, Albert J. Boro, Jr., filed
his declaration on March 5, 2007 that the senior noteholders were involved at the highest levels of
strategy development and settlement negotiations in the VIA litigation. Bennett was consulted with
Case: 03-51775 Doc# 2279 Filed: 05/04/07 Entered: 05/04/07 15:34:30 Page 2 of
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MEMO. DECISION AND ORDER ON MOTION FOR CLARIFICATION
respect to proposed settlement terms even when committee counsel was not contacted. Yet, the senior
noteholders were not a party to the VIA adversary proceeding and did not file their own objections to
the claims of VIA and S3 Graphics. While standing to participate is not at issue, it is unusual for non-
parties to be involved to the degree that the senior noteholders were.
At the disclosure statement hearing held January 23, 2007, it became apparent that the senior
noteholders had not revealed to committee counsel, Ron Bender, that the VIA settlement contained a
waiver by VIA of senior indebtedness status or that the waiver would directly benefit the senior
noteholders, who were members of the committee. Based on the concerns of a taint raised by the claims
traders, I directed Bender to conduct an investigation of the settlement negotiations and how the waiver
provision was inserted into the VIA settlement. The following exchange highlights the problem:
The Court: 	So you’re saying that even at the time that the agreement was approved,
the Committee was not aware of this provision?
Mr. Bender: 	Not aware, not focused, or any of the like. Now I don’t want to mislead
the Court. It’s my responsibility to read a document. The document does
say that Via agrees that its claim is not senior indebtedness, but I would
have no reason to focus on it being an important point.
Bennett, as counsel for the senior noteholders, attended the January 23 hearing by telephone.
Thereafter, Bender filed a twenty-three page Preliminary Status Report on February 12, 2007 regarding
his investigation. From reviewing that report, it does not appear that Bennett ever volunteered relevant
information despite the ongoing investigation and Bender’s active efforts to pursue answers. At a time
when Bender was seeking transparency and making inquiries of other parties as to their motivations,
Bennett and his clients did not come forward.
When further facts came to light on February 15, 2007 prompting the motions to appoint a
chapter 11 trustee, to convert the case, and to disqualify debtor’s general bankruptcy counsel, I set these
motions for hearing on March 19, 2007. Bennett himself acknowledged on March 19 that the hearing
was the first time that he had personally addressed the court in this case. Even then, however, Bennett
did not reveal his role in securing the waiver provision that arguably benefitted his clients’ interests at
the expense of the unsecured creditor class. More significantly, Bennett apparently never disclosed to
the committee or Bender the senior noteholders’ potential conflict in connection with the subordination
provisions of the senior indenture, of which Bennett was acutely aware. That debtor’s counsel may have
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MEMO. DECISION AND ORDER ON MOTION FOR CLARIFICATION
been aware of the subordination provision in the senior indenture and the waiver of senior status in the
VIA settlement is of no moment for purposes of this motion for clarification. 	The appearance of
concealment by the senior noteholders and Bennett was one of the grounds for the appointment of a
trustee. 	For the reasons stated, the motion for clarification or reconsideration on this point is also
denied.
At the hearing on this motion, much emphasis was placed on who knew what when, posturing
for the benefit of the trustee, and putting spin on a bad situation. 	However, it is incumbent on all
interested parties not to lose sight of the big issues necessary to move this case forward: what to do
about the fact that there was no meaningful disclosure of the effect of VIA’s waiver of priority, and how
to revise the disclosure statement and plan in order to provide a reasonably prompt distribution to
creditors. There will be time later to focus attention on the conduct of the attorneys and fiduciaries
involved.
Good cause appearing, IT IS SO ORDERED.
* * * END OF ORDER * * *
Case: 03-51775 Doc# 2279 Filed: 05/04/07 Entered: 05/04/07 15:34:30 Page 4 of
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MEMO. DECISION AND ORDER ON MOTION FOR CLARIFICATION
Case No. 03-51775-MM
SERVICE LIST
CRAIG A BARBAROSH
PILLSBURY WINTHROP LLP
650 TOWN CENTER DRIVE 7TH FLOOR
COSTA MESA CA 92626-7122
BRUCE BENNETT
HENNIGAN BENNETT & DORMAN LLP
865 SOUTH FIGUEROA ST SUITE 2900
LOS ANGELES CA 90017
RON BENDER
LEVENE NEALE BENDER RANKIN &
BRILL LLP
1801 AVENUE OF THE STARS STE 1120
LOS ANGELES CA 90067
NANETTE DUMAS
OFFICE OF THE UNITED STATES
TRUSTEE
280 SOUTH FIRST ST SUITE 268
SAN JOSE CA 95113-0002
K JOHN SHAFFER
STUTMAN TRIESTER & GLATT PC
1901 AVENUE OF THE STARS 12TH FL
LOS ANGELES CA 90067
BERNARD BURK
HOWARD RICE NEMEROVSKI CANADY
FALK & RABKIN
3 EMBARCADERO CENTER 7TH FLOOR
SAN FRANCISCO CA 94111-4024
DENNIS J CONNOLLY
ALSTON& BIRD LLP
1201 WEST PEACHTREE STREET
ATLANTA GA 30309
GRANT STEIN
ALSTON& BIRD LLP
1201 WEST PEACHTREE STREET
ATLANTA GA 30309
CECILY A DUMAS
FRIEDMAN DUMAS & SPRINGWATER
LLP
150 SPEAR STREET SUITE 1600
SAN FRANCISCO CA 94105
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