July 8, 2015
Ground-breaking Result for TGF Clients in Nortel Allocation Saga
On May 12, 2015, Justice Newbould of the Ontario Superior
Court of Justice[i] and
Judge Gross of the United States Bankruptcy Court for the District of Delaware[ii] simultaneously
issued rulings to allocate the approximately US$7.3 billion proceeds of sale of
the Nortel group’s assets amongst insolvent estates administering the now
defunct company in each of Canada, the United States (“US”) and Europe.
Both Courts ruled that Nortel’s proceeds should be split
among the insolvent estates on a pro rata basis. TGF
represented the Nortel Networks UK Pension Trust Limited and the Board of
Directors of the Pension Protection Fund (collectively, the “UK Pension
Claimants”) who in turn represent the interests of approximately 36,000
surviving pensioners of Nortel’s British subsidiary, Nortel Networks UK Limited[iii].
The buy-out deficit of the Nortel Networks UK pension plan was in excess
of US$3 billion, making the UK Pension Claimants the second largest creditor of
the Nortel group.
TGF advocated for a pro rata result on
allocation and the Courts’ rulings represent an unprecedented victory for the
UK Pension Claimants. The decision will also have a significant impact on
future global insolvencies involving highly integrated multinational enterprise
groups of companies.
History and Global Insolvency Proceedings
Nortel was once the crown jewel of Canada’s technology
sector. In 2000, Nortel employed more than 100,000 people across the
globe and had a market capitalization of approximately US$260 billion. On
January 14, 2009, Nortel’s Canadian entities filed for protection under the Companies’
Creditors Arrangement Act (“CCAA”).[iv] On
that same day, Nortel’s US subsidiaries filed for protection under Chapter 11
of the US Bankruptcy Code and a number of its subsidiaries in
Europe, the Middle East and Africa (“EMEA”) were granted Administration
Orders under the UK Insolvency Act, 1986, which is similar to
a Canadian CCAA proceeding.
The Canadian and US insolvent estates had sought and
obtained recognition orders from the Courts in those two jurisdictions, but
neither chose to seek recognition of the CCAA or Chapter 11 proceedings from
the UK Court overseeing the EMEA insolvency proceedings. As a result, the
UK Court was not involved in the determination of the allocation of the global
proceeds of sale, which was determined solely by the Canadian and US Courts.
Nortel’s Unique Structure
Nortel’s global business was profoundly integrated and
organized across geographic boundaries and legal entities, with employees in
all regions sharing information and performing research and development (“R&D”),
sales and other functions. Both Courts found that no one single entity or
jurisdiction could have carried on a portion of Nortel’s business alone.
While the bulk of Nortel’s patents were registered in the name of its
Canadian parent, important and valuable R&D was performed by a number of
Nortel’s subsidiaries around the world to create the intellectual property that
gave rise to the patents.
The Asset Sales
Shortly after the insolvency proceedings were commenced it
was determined that a global liquidation of the Nortel group’s assets would be
necessary, involving cooperation by the Administrators of the Canadian, US and
EMEA insolvency estates. The Nortel group then sold its four major lines of
business and its residual patent portfolio through various sales for aggregate
proceeds of approximately US$7.3 billion.[v] These
funds were placed in a lockbox (the “Lockbox Fund”), the allocation of
which was to be either: (i) agreed upon by the Canadian, US and EMEA estates or
(ii) determined by the Canadian and US Courts if the debtor estates could not
reach an agreement.
The Joint Allocation Determination
In 2013, after several failed rounds of formal mediation,
the Canadian and US Courts directed the allocation of the Lockbox Fund to be
determined by way of a historic and precedent-setting joint trial before the
two Courts. Lasting 24 days, the joint trial was conducted by video link
between the Ontario and Delaware Courts between May and September, 2014.
Canadian and US counsel were permitted to appear and make submissions in
both Courts. The litigation process involved the review of over 3 million
documents, depositions of over 140 witnesses around the world and the
submission of more than fifty expert reports.
In addition to the Canadian, US and EMEA debtor estates, the
Judges permitted key stakeholders to participate equally in the dispute as
“Core Parties”. These additional stakeholders included representatives of
Nortel’s Ad Hoc Bondholder Committee (the “Bondholders”),
the Canadian Creditors’ Committee representing the former Canadian employees
and pensioners (the “CCC”), the US Unsecured Creditors’ Committee (the “UCC”)
and the UK Pension Claimants. The debtor estates and all Core Parties other
than the UK Pension Claimants advocated for diametrically opposed
allocations of the Lockbox Fund based, in part, on their own interpretation of
a Master R&D Agreement (“MRDA”) previously reached between Nortel
entities in Canada, the US, the UK, France and Ireland.
The Canadian estate (through its Court-appointed Monitor) argued
that it was entitled to US$6.3 billion dollars of the Lockbox Fund
(approximately 82%) on the basis that: (i) it was the legal title holder to all
of the patents in the residual patent portfolio; and (ii) as the registered
title-holder of most of the patents transferred in the business line sales, it
was also entitled to approximately 55% of the value of the business line sales.
The CCC adopted the Canadian Monitor’s position as its main allocation theory.[vi]
The US estate argued that it was entitled to US$5.3 billion
dollars of the Lockbox Fund (approximately 72%) on the basis that the majority
of the Nortel’s group’s world-wide revenue was earned in the US market, in which
the US operating subsidiary had the exclusive right to sell products. The
Bondholders and the UCC adopted the position of the US estate.
The EMEA estate argued that each debtor estate was entitled
to an allocation of the Lockbox Fund commensurate with its relative
contribution to the creation of Nortel’s intellectual property. This
contribution could be measured by the amount each party to the MRDA had spent
over a number of years in developing the intellectual property giving rise to
The UK Pension Claimants argued that each debtor estate was
entitled to a share of the Lockbox Fund so as to provide all creditors of the
Nortel group (irrespective of the Nortel entity against which they had a claim)
with a pro rata, pari passu recovery on their
claims. This argument was premised on the following factors: (i) prior to its
insolvency, the Nortel group operated as one highly integrated multinational
corporation; (ii) Nortel’s most valuable assets were collaboratively developed
and jointly sold by all of the debtor estates – no one entity or debtor group
could claim ownership to them; and (iii) a pro ratadistribution of
the Lockbox Fund was the most equitable, credible and economically rational way
to disentangle the assets that ultimately formed the Lockbox Fund.
Throughout, the UK Pension Claimants took the position that
the MRDA had no application to the distribution of the Nortel group’s proceeds
of sale in an insolvency. The pro rata allocation
position advanced by the UK Pension Claimants also provided the Courts with
mechanisms by which prior court-approved settlement of claims, inter-company
claims and claims based on guarantees against other members of the Nortel group
could be accommodated if the Courts chose to do so.
On May 12, 2015, Justice Newbould and Judge Gross
simultaneously issued rulings on the allocation of the Lockbox Funds. Both
judges agreed that the Lockbox Fund should be allocated among the debtor
estates on a pro rata basis by reference to the aggregate
amount of proven claims against each entity within that debtor estate, and that
the MRDA had no application to the distribution of the Lockbox Fund. In
reaching this decision, both Judges had regard to the highly integrated nature
of Nortel’s business and intellectual property assets and the manner in which
the Nortel group operated prior to its collapse. Justice Newbould observed that
the creation of Nortel’s valuable intellectual property was a joint effort
contributed to by all of the now defunct Nortel entities:
This was not one corporation and one set of employees
inventing IP that led to patents. Nortel was a highly integrated multi-national
enterprise with [various subsidiaries] doing R&D that led to patents being
This is an unprecedented case involving insolvencies of many
corporations and bankrupt estates in different jurisdictions. The intangible
assets that were sold, being by far the largest type of asset sold, were not
separately located in any one jurisdiction or owned separately in different
jurisdictions. They were created by all of the RPEs [intellectual property
producing entities] located in different jurisdictions. Nortel was organized along
global product lines and global R&D projects pursuant to a horizontally
integrated matrix structure and no one entity or region was able to provide the
full line of Nortel products and services. R&D took place in various labs
around the world in a collaborative fashion. R&D was organized around a
particular project, not particular geographical locations or legal entities,
and was managed on a global basis. The fact that Nortel ensured that legal
entities were properly created and advised in the various countries in which it
operated in order to meet local legal requirements does not mean that Nortel
operated a separate business in each country. It did not.[viii]
Both Judges rejected the various allocation theories
advanced by the debtor estates and their supporters on the basis that the
theories were unworkable, unfair and in no way reflected the manner in which
the Nortel group operated. As Judge Gross observed in his judgment:
The Courts also agree that the self-serving allocation
positions of the Canadian Interests, the US Interests and the EMEA Debtors are
not determinative or helpful.[ix]
Despite the fact that a pro rata allocation
of the Lockbox Fund was a novel solution that had not arisen in other global
insolvency proceedings, both Courts found that they had the jurisdiction to
order such a remedy in light of the unique circumstances of the case.[x] In
particular, Justice Newbould found that after six years of legal wrangling and
the expenditure of enormous costs, a global solution was required that
comported with the fundamental tenet of insolvency law that all debts
should be paid pari passu and all unsecured creditors receive
equal treatment. “A pro rata allocation in this case goes partway towards such
Implications of the Decisions
While the Nortel case arose from a unique set of
circumstances, its importance and future precedential value should not be
underestimated. The Courts’ rulings will be carefully considered in the
context of the burgeoning body of work on the treatment of insolvent corporate
enterprise groups by academics andpractitioners alike.
TGF is proud to have had the opportunity to represent the UK
Pension Claimants in achieving this successful and groundbreaking result.[xii]
For more information on the Nortel allocation
rulings or to discuss their implications, please contact any member of TGF’s
Nortel team: D.J. Miller, John Finnigan, Andrea McEwan, Rebecca Kennedy, Michael Shakra or Henry Wiercinski.
Nortel Networks Corporation, 2015 ONSC 2987.
[ii] In re Nortel Networks Inc., 2015 WL 2374351 (Bkrtcy.D.Del.).
[iii] Approximately 5,000 beneficiaries
under the UK pension plan had died prior to the commencement of the joint
allocation trial in 2014.
1985, c C-36.
[v] Rockstar Bidco, which subsequently
became Rockstar Consortium LLC, was a consortium formed by Apple, Microsoft,
Research in Motion (now Blackberry), EMC, Sony and Ericsson to acquire Nortel’s
residual patent portfolio.
[vi] As an alternative allocation
position, the CCC argued that if the “Canadian ownership” position was not
accepted by the Courts, they supported a pro rata allocation
of the Lockbox Funds.
[vii] Supra note 1 at para. 197.
[viii] Supra note
1 at para. 202.
[ix] Supra note
2 at p. 27.
Newbould found that the Canadian Court had broad inherent jurisdiction to “do
what is just in the circumstances” and make orders as required to fill in gaps
or lacunae not covered by specific provisions in the CCAA, pursuant to section
11 of the CCAA. Similarly, Judge Gross ruled that the US Bankruptcy Code
permits courts to “issue any order, process, or judgment that is necessary or
appropriate to carry out the provisions of the US Bankruptcy Code. Moreover,
the Third Circuit has determined that this provision gives US Courts “broad
authority” to provide appropriate equitable relief to assure the orderly
conduct of reorganization proceedings, and to “craft flexible remedies that,
while not expressly authorized by the Code, effect the result the Code was
designed to obtain.”
[xi] Supra note
1 at para. 209.
after the release of the allocation rulings, certain parties, including the US
Estate, the Bondholders and the UCC filed motions to have the Courts reconsider
or clarify their rulings. The motions were heard by a joint sitting of the
Ontario Superior Court of Justice and the Delaware Bankruptcy Court on June 25,
2015. On July 6, 2015, Justice Newbould and Judge Gross denied substantially
all of the relief sought by the moving parties.