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Focus: What can be learned from Nortel case?

Focus on: Restructuring & Insolvency Law
|Written By Michael McKiernan

The Nortel bankruptcy demonstrates the need for an international insolvency treaty to settle jurisdictional issues when cross-border companies go under, according to a lawyer involved in the case.

A joint hearing of the Ontario Superior Court and the U.S. Bankruptcy Court in Delaware on Jan. 24 finally dragged the Nortel case over the finish line when judges in both courts gave their blessing to a settlement to distribute the one-time telecommunications giant’s last $7.3 billion in assets among creditors.

That amount was a just a fraction of the company’s peak value in the early 21st century, when Nortel or its subsidiaries employed almost 100,000 people in around 75 different countries.

At one point, its market capitalization soared to an estimated $250 billion amid reported annual revenues of $30 billion.

The court approval in Re Nortel Networks Corporation et al came some eight years after Nortel filed for bankruptcy simultaneously in Canada, the U.S. and the U.K. and nearly two years after the same judges delivered their verdict on how to divide the company’s remaining cash following a 21-day cross-border trial.

“I think that there should be an international treaty to deal with jurisdictional issues so that cross-border insolvencies can be dealt with in a more efficient way,” says Ken Rosenberg, a partner at Toronto litigation boutique Paliare Roland Rosenberg Rothstein LLP, who acted for the Canadian Creditors’ Committee.

“If you sue someone in another OECD country, we have treaties on how to compel witnesses and collect evidence, yet we don’t have anything like that for insolvencies.

“Ultimately, this case appears to have resolved over a very long period, but courts and international treaties haven’t kept up with the times,” he adds.

Joseph Pasquariello, a partner at Goodmans LLP, and counsel to the court-appointed monitor in the Nortel case, says he would welcome the creation of an international body, but he says that even without progress on that front, the eight-year proceeding has provided a good roadmap for lawyers working on similar future matters.

“The working relationship has become very good between Canadian and U.S. courts, and I could see that happening again on a bilateral basis.

“If you can’t get a body, then at least some guidelines would be useful, many of which could be drawn from this particular experience,” Pasquariello says.

“We shouldn’t lose sight of what was accomplished here on a bilateral basis.

“It was huge in terms of complexity, the number of parties, depositions and experts, and we were establishing the rules of the game for the first time here.

“That is no small feat in and of itself.”

In any case, his co-counsel, Benjamin Zarnett, says Nortel may end up being a one-off.

“It has rightly been described as unprecedented in terms of the complexity, length and challenge it gave to everyone involved,” he says.

“I’m not sure we will ever see anything like it again.

“We certainly hadn’t seen anything like it up until now.”

Another unique feature of the Nortel bankruptcy has been the cost. Diane Urquhart, a financial analyst who has tracked the worldwide professional fees and disbursements spent on the matter using reports filed in court, says that by late 2016, the total came in just short of $2.6 billion.

U.K.-based legal and other professionals claimed the largest slice of the pie, at just less than $1 billion, followed by the U.S. with around $900 million in billings. Professionals’ fees in Canada over the course of the bankruptcy were about $700 million by late 2016.  

“I think it’s unacceptably high and offensive,” Urquhart says.

“The process enables it, because the money is coming out of the estate assets and there are limited incentives for restraint.

“It does not look good at all for the legal profession.

“They need to look at the process, and at the very least, something has to be done so that costs are not allowed to be this uncontrolled in the future.

“Otherwise, they will have to live with the consequences to their reputation,” she adds.  

According to Rosenberg, a cross-jurisdictional body could have helped cut the professional costs associated with the Nortel case.

“If we knew what system we were following, rather than filing in three countries and spending two years fighting over the process, that would have made things much more efficient and the legal fees would have been more constrained,” he says.

Despite the huge amounts spent, Rosenberg says most parties were happy to swallow the cost because of their satisfaction with the overall result.

“The fees had a context,” he says, noting that his clients, for example, ended up with a share of the proceeds almost six times larger than what they were originally offered thanks to the trial decision, which settled on a pro rata distribution of assets.

Zarnett says he wished the monitor’s work could have been done “without as much complexity and cost,” but he says that, in that case, it could not have fulfilled its role as an officer of the court.  

“Those fees were unfortunately necessary,” he says.

“We always have the interests of the stakeholders in mind.”

But Urquhart, who is supporting a group of former Nortel employees on long-term disability in their attempt to reopen the settlement, says she would have liked to see Ontario Superior Court Justice Frank Newbould send a message to the legal profession by refusing to sanction the full fees charged by Ernst and Young, the court-appointed monitor and its counsel at Goodmans, since they were the only professional fees subject to court approval in the matter.

“I think they should have been subject to a claw-back. It’s too much money,” she says.

However, in his Jan. 27 decision approving EY’s $123-million bill as well as a further $100 million for Goodmans, Newbould said it would be “unjust” to lay the blame for the file’s over-lawyering at their door.

In fact, Newbould found the unique circumstances of the case forced the monitor to take on a larger than normal role, that it resisted attempts to broaden the scope of the litigation at every turn and that it achieved “commendable” results.

“These amounts are enormous by any measure, even taking into account that they cover eight years of work.

“However, when one understands the enormity of the work that had to be done by the Monitor and its counsel to regularize the insolvency proceedings, to gather in the assets and to protect the interests of the Canadian creditors against the relentless attacks made by the other estates, these amounts become more understandable.

“It is unquestionable that the work of the Monitor added value to the assets,” Newbould wrote.  

Still, Newbould had harsh words for the other parties involved for bringing too many pre-trial motions and attending court in Toronto with “far too many” lawyers, “some of whom (not the Monitor’s counsel) spent much time on their blackberries.”

“That situation breeds disrespect for the legal system in general and particularly so in a case in which thousands of pensioners and disability claimants have had to wait far too long for this proceeding to end,” the judge wrote.

“Everyone should be mindful of these concerns,” Zarnett says.

“We worked all the time knowing that our fees would be subject to court approval, but all insolvency professionals should bear that in mind.”


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