Since its bankruptcy filing in September 2007, SCO has tried, and failed three times to liquidate or restructure its business and is continuing to “rapidly lose money,” trustee Roberta A. DeAngelis wrote in court documents filed in federal court in Delaware earlier this week.

In asking the U.S. Bankruptcy judge in Delaware for permission to convert SCO’s Chapter 11 into a Chapter 7 liquidation, DeAngelis argued “there is a substantial or continuing loss to or diminution of the estate and the absence of a reasonable likelihood of rehabilitation.”

“By their own admission, [SCO] has had in excess of $3.5 million of negative cash flow post-petition in its March report,” she wrote.

A court hearing on the matter will be held June 20.

SCO executives declined to specify their plans for the 66-worker company should it be forced into a Chapter 7 liquidation.

“We are reviewing the motion with counsel and will have a detailed response for the court in due course,” said CEO Darl McBride in an e-mailed statement. “We plan to oppose the motion and present our own suggested course of action to the court.”

In light of the current uncertain economic climate, the company is planning to reduce its operating expenses by cutting base salaries paid to four senior executive managers, including McBride, by 10 percent starting July 1. The proposal is pending approval of the bankruptcy court.

To date, the company postponed an auction that was supposed to have been held in January to sell its OpenServer product line and mobile business. The proposed auction was the third attempt after New York private equity firm Stephen Norris Capital Partners and a group of Middle Eastern investors last year backed off from their initial $100 million offer to fund SCO’s comeback. York Capital Management, another New York private equity firm, also failed in its efforts to buy the company in 2007.

In a letter issued Dec. 9 to shareholders and customers, the company said it has been working over the past nine months with several investment groups to sell its assets, but the recession and tightening credit markets have made it “difficult to secure a plan sponsor prior to the restructuring plan filing deadlines.”

The company hopes to secure bids of at least $6 million for both the OpenServer product and mobile business, according to bankruptcy court documents. OpenServer accounts for two-thirds of SCO’s Unix revenues and has thousands of customers including small- to mid-sized businesses and large companies such as McDonald’s.

DeAngelis’s proposal came on the eve of a pivotal court hearing Wednesday in the 10th Circuit Court of Appeals in Denver over SCO’s appeal of U.S. District Judge Dale Kimball’s ruling in August 2007 that found Novell, not SCO, rightfully owns the copyrights on the Unix operating system.

SCO officials on Thursday declined to comment on how the trustee’s move would impact its appeal.

For the past six years, SCO waged a legal battle against IBM, Novell and other advocates of the freely distributed Linux operating system, claiming that it owned the copyrights to Unix. SCO also claimed IBM violated the confidentiality of its copyrights when it took code from Unix and put it into Linux.

But Kimball’s ruling in August 2007 dealt a death blow to SCO’s claims and forced the company into Chapter 11 bankruptcy one month later on the eve of a major trial over the remainder of its controversial intellectual property lawsuit against Novell.

After a four-day trial last April over their long-standing dispute over Unix licensing fees, SCO was ordered last July to pay Novell $2.6 million in royalty payments on Unix licenses collected from Sun Microsystems.