Psystar's legal costs in Apple fight push it into bankruptcy

Bill from law firm accounts for 63% of Mac clone maker's outside debt

Psystar, the Mac clone maker battling with Apple that filed for bankruptcy last week, owes the bulk of its outstanding debt to the California law firm that's represented it for almost a year, court documents show.

The Florida-based company, which filed for Chapter 11 protection May 21, owes Carr & Ferrell LLC more than US$88,000, and a court-mandated mediator nearly US$7,000, according to the bankruptcy petition.

Psystar hired Palo Alto, Calif.-based Carr & Ferrell, a firm noted for its intellectual property expertise, last July, after Apple sued the company over its practice of installing Mac OS X on generic Intel-powered computers.

The money Psystar owes its legal team amounts to 34% of the $259,000 listed as debts to its top 20 creditors. Only a $120,000 loan to the company made by Rudy Pedraza, Psystar's CEO and co-founder, accounts for a larger percentage of the debt. If Pedraza's loan is factored out of the equation -- reducing the "outside" debt to $139,000 -- Carr & Ferrell's bill represents a whopping 63% of the total money owed.

Colby Springer, the lead Carr & Ferrell attorney on the Psystar case, did not respond to questions today, including whether the firm would continue to represent the clone builder.

Psystar also owes $6,800 to the mediation firm Judicial Arbitration and Mediation Services (JAMS). Last October, a federal judge ordered both Psystar and Apple to enter what's called Alternative Dispute Resolution (ADR), a legal process that can include mediation, in an attempt to work out their differences.

Together, the JAMS and Carr & Ferrell debts amount to 37% of Psystar's total debt, and 68% of the money owned to outsiders.

Other creditors include the IRS -- Psystar owes nearly $12,000 in taxes -- and the DHL and FedEx delivery services ($12,700 and $8,000, respectively). But in its bankruptcy petition, Psystar didn't even mention its legal bills. Instead, it blamed the "weakened economy" and "the decrease in consumer spending" for its financial problems. It also said it was making less profit per sale because its suppliers, beset with their own money troubles, were unable to provide necessary parts, "[thus] forcing Debtor to pay higher prices for parts in order to fulfill customer orders in a timely manner."

The company promised it would come out of Chapter 11 intact. "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 they have grown to enjoy and trust," it said in a court filing. "Debtor plans to make payment of all debts and also, continue to provide support for its customers."

Psystar first made news in April 2008, when it starting selling Mac clones with Apple's Leopard operating system preinstalled. Apple began the legal wrangling when it accused Psystar of copyright and software licensing violations, and Psystar struck back with a countersuit that charged Apple with, among other things, antitrust violations. Those claims were tossed out by U.S. District Court Judge William Alsup last November.

The lawsuits are on hold for at least several months while the bankruptcy case works it way through the court. On Monday, Alsup ordered the stay, and scheduled a conference with both parties for Dec. 10, 2009.

Psystar's financial problems shouldn't be a surprise. Last year, noted intellectual property attorney Carole Handler, a partner at Wildman, Harrold, Allen & Dixon, said that Apple's lawsuit was aimed at killing the clone maker.

When Apple sued Psystar in July 2008, it demanded that the clone maker recall computers it sold with Mac OS X 10.5 preinstalled, a move that Handler said "would likely put Psystar out of business."

Psystar must provide the bankruptcy court with numerous documents by Friday, including recent tax returns and a current financial statement.

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