A court fight to split more than $7 billion among creditors of Nortel Networks Corp. will be delayed unless a judge finds that European units of the defunct telephone maker filed a “frivolous” appeal, company lawyers said yesterday.
The European units want to ask a federal appeals court in Philadelphia to force all sides into private, binding arbitration. U.S. units, backed by their Canadian counterparts, responded by trying to have the appeal declared frivolous.
The wrangling over legal details could delay the case for years unless the parties compromise, Kevin Starke, a senior analyst with CRT Capital Group Inc., said in a telephone interview today. All sides are being unreasonable, he said.
“Each side can blame all of the others,” Starke said in a follow-up e-mail. “It’s just that some sides have a stronger legal leg to stand on.”
All of the units have been in bankruptcy since 2009 and have no operations left. They are battling each other over more than $7 billion raised mostly by the sale of U.S. assets.
The U.S. units have the strongest legal position, which may be encouraging hedge funds that own Nortel’s U.S. bonds to refuse to compromise, Starke said. Canadian pensioners have a weaker case that they can push in front of a Canadian judge in Toronto, while the European units, led by bankruptcy administrators in the U.K. are “running on legal fumes,” he said.
Get to Yes
“U.S. bondholders have to realize that they are not going to get to ‘yes’ if they stick with the straight-forward legal solution,” Starke said. “Unless you want to wait five more years for a payout.”
The U.S. units blame the European divisions, known as the EMEA debtors.
“The EMEA debtors are taking their litigation cues from Dickens’s ‘Bleak House,’” James L. Bromley, Nortel’s lead U.S. bankruptcy attorney Bromley said in an interview after yesterday’s court hearing. In the 19th-century book by Charles Dickens, a court case lasts so long that all the money from an English estate is eaten up by legal fees.
The EMEA units plan to appeal a decision by U.S. Bankruptcy Judge Kevin Gross in Wilmington, Delaware, rejecting arbitration and scheduling next year’s court fight over how best to divide the cash.
The appeal may prevent parties from preparing for the court fight until the appellate panel ruled, causing a delay, Bromley said in court yesterday.
The EMEA units say arbitration is the quickest way to distribute the $7 billion because it will put all of the legal issues in front of a private judge who will make a final decision. The court hearing on how the split the money is scheduled to begin early next year in a joint session overseen by a U.S. and Canadian judge.
“Arbitration is the only way out of this two-court track process that will lead to a train wreck,” EMEA lawyer Derek Adler said yesterday in court. “We’re the only ones pointing to a way out of avoiding that train wreck.”
Nortel’s U.S. unit and its U.S. bondholders and creditors want Gross to declare the appeal frivolous, a finding that would allow preparations for next year’s court fight to start. Gross is also being asked by both sides to certify that the appeal of his decision is important enough to merit quicker-than-normal action by the U.S. Court of Appeals in Philadelphia.
“I wonder what the Third Circuit is going to say if it sees I am certifying a frivolous appeal,” Gross said, prompting laughter from attorneys in the room.
Nortel, which was based in Mississauga, Ontario, filed for bankruptcy in Canada, the U.S., the U.K. and France, with various units under the control of separate teams of lawyers and under the jurisdiction of different courts.
Gross said he is confident his decision rejecting arbitration will be upheld on appeal. He said he wanted to spend the next few days deciding how he would rule and would try to issue a decision next week.
Units of the bankrupt company in the U.S., Canada and Europe are scheduled to battle over the money in U.S. Bankruptcy Court in Wilmington next year. Before that showdown can begin, the units, which no longer have any operations, must spend months preparing their cases by exchanging documents and interviewing witnesses under oath.
Since the company filed bankruptcy in January 2009, one set of Nortel bonds climbed from less than 14 cents on the dollar to a high of 118 cents. The value climbed as bankruptcy lawyers, led by the law firm Cleary Gottlieb Steen & Hamilton LLP, organized a series of auctions that netted billions of dollars more than the opening bids.
The U.S. company spends more on attorneys for itself and various creditor groups than it does on employees, according to operating reports filed monthly with the bankruptcy court in Delaware.
U.K. bankruptcy officials are leading the fight for the European for a share of the $7 billion raised by selling Nortel’s U.S. assets. The U.K. officials claim Nortel’s U.S. and Canadian units siphoned money from the European units for years, leaving them unable to pay pensioners and other creditors. The U.K. administrators are demanding $2.67 billion from Nortel’s main U.S. unit to pay retirees, according to court papers.
The groups have been fighting over a shrinking pile of cash that won’t cover all of the debts owed by Nortel and its units. Creditors have presented more than $36 billion in claims in Canada, according to a status report filed in October.
Nortel’s U.S. and Canadian units have $9 billion in cash to distribute to creditors, with more than $7 billion held in escrow accounts until courts decide how it should be divided.
Nortel’s zero-coupon bonds that matured in 2011, fell 1 percent to 102.5 cents on the dollar as of 9:18 a.m. today, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
The case is Nortel Networks Inc., 09-bk-10138, U.S. Bankruptcy Court, District of Delaware (Wilmington).