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March 22, 2016

Bankruptcy Claims Trader Demands Cash as Nortel Fights Rage On Liquidity Solutions owns about $11.6 million worth of unsecured claims, court papers say

By Peg Brickley
The Wall Street Journal

A company that invests in bankruptcy claims is pounding the table in Nortel Networks’ long-running bankruptcy, demanding cash now from a stash of billions of dollars that has been locked up for years.

Liquidity Solutions Inc. is calling on U.S. Bankruptcy Judge Kevin Gross to order Nortel to start handing out the money, even though fights continue over how to divide the cash among various national units of the former Canadian global telecommunications giant.

“These cases should not continue to be held hostage by warring creditor and debtor factions while NNI’s creditors remain unpaid,” lawyers for the claims-trading entity wrote. NNI is shorthand for Nortel Networks Inc., the U.S. unit of the defunct telecommunications technology company.

Claims traders are companies that buy up the debts of bankrupt companies, from vendor bills to employee claims for unpaid benefits and severance pay. Liquidity Solutions and other traders paid top dollar for unsecured claims in the chapter 11 bankruptcy of Nortel’s U.S. unit, only to see their hopes of big windfalls held up in continuing court fights.

Liquidity Solutions owns about $11.6 million worth of unsecured claims and is tired of waiting for its money, court papers say.

Nortel collapsed in early 2009 and sold its sprawling businesses and a portfolio of patents, raising some $7.3 billion in the process. In the five years since the money came in, few creditors have been paid. Bankruptcy lawyers and advisers, however, have raked in well over $1.6 billion in fees, collecting their bills monthly as the litigation drags on.

The toll the litigation has taken on the company’s coffers is evident in filings with the U.S. Bankruptcy Court in Delaware. Aside from the $7.3 billion in sale proceeds that is sitting in a lockbox, each of the Nortel entities has cash of its own.

In 2012, Nortel’ U.S. business had more than $1 billion in cash stored up in the coffers of a company that essentially had no ongoing operations. The U.S. unit, however, had litigation to fund and legal bills to pay.

By the end of January this year, Nortel’s U.S. business had about $600 million in cash. Some $400 million was spent on settlements with retirees and a few other creditors. Most, however, was used as a war chest for the fights against the Canadian parent company and British pensioners.

According to Liquidity Solutions, Nortel’s U.S. estate can spare at least $321 million, and probably more, of that cash for creditors. The claims trader did the math on the possible outcomes of the international cash fight and concluded that Nortel’s U.S. unit should be able to dish out $2.2 billion, pretty quickly to unsecured creditors like former employees who have been waiting for years for their severance pay.

Bondholders, which are mostly institutional investors that also have unsecured claims, can wait for the outcome of the legal fighting, which continues with no apparent end in sight, according to the claims trader.

A mediation is ongoing involving Nortel Canada, Nortel U.S. and Nortel in Europe. The businesses have been arguing for years about which unit, and which group of creditors, is entitled to the money. In May 2015, judges in the U.S. and Canada ruled against Nortel U.S. and its bondholder allies, and in favor of Nortel Canada and a large group of British pensioners on the question.

Appeals followed in the U.S., as the bondholders that account for the bulk of the U.S. claims attempt to upset a ruling that they say unfairly thwarts their entitlement to payment in full, plus interest, on their bonds.

Typically, unsecured creditors are paid after a chapter 11 plan is confirmed and implemented. Nortel’s U.S. unit filed a chapter 11 plan years ago, but a final resolution hangs on the outcome of the litigation or a successful end to the mediation, which is the latest in a series of efforts to reach an agreed peace among the Nortel creditors.

To read the article online, please go here.

Thornton Grout Finnigan LLP, Suite 3200, 100 Wellington Street West, P.O. Box 329, Toronto-Dominion Centre, Toronto, ON M5K 1K7 Canada T 416.304.1616 E info@tgf.ca

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