After mediation fails, court fight over Nortel begins

Bankrupt telecoms equipment giant Nortel Networks once boasted of a global operation, but now its former world-wide units are squaring off over its last remaining asset: $9 billion in cash.

Two judges, one in Wilmington, Delaware, and the other in Toronto, will jointly hear arguments on Thursday that will ultimately decide how, and when, to carve up that money.

The outcome will determine how much will be available for tens of thousands of retirees, governments and hedge funds investors.

"The issues which remain for decision are imposing," U.S. Bankruptcy Court Judge Kevin Gross of Delaware wrote on February 14 in an order scheduling the hearing.

The hearing was preceded in January by a third failed attempt to resolve the dispute through mediation. Warren Winkler, the chief justice of Ontario who oversaw those talks, said further attempts at mediation were no longer worthwhile.

He had warned before the final mediation that failure to reach an agreement could tie the disputes up in the courts for years, burning through Nortel's cash to pay the army of lawyers and advisers working on the case.

The last time the two courts heard arguments on the issue, 78 lawyers appeared, according to the court transcript.

The two judges will hear arguments on who should determine how to allocate Nortel's cash: the Delaware court, the Canadian court or an arbitrator.

"A lot of what you see is the jostling for home court advantage, literally and figuratively," said John Penn, a bankruptcy attorney with Haynes and Boone in Fort Worth, Texas.

Only after that issue is resolved will the courts be able to tackle the thorny problem of how to carve up the money.

Gross and Ontario Superior Court Justice Geoffrey Morawetz may also consider a timeframe for the proceedings.

The complex disputes stem from Nortel's former might as a global telecom empire with a web of intercompany finances and a workforce that once stood at 93,000.

Since seeking protection from creditors in courts around the world in 2009, Nortel's assets, including a $4.5 billion patent portfolio, were sold as whole global businesses, generating most of its $9 billion.

However, the question of how to divide that cash among the various Nortel insolvency and bankruptcy proceedings was never resolved.

Until each Nortel unit knows how much money it has, it is nearly impossible for those businesses to negotiate and settle the claims of their creditors. The matter is further complicated because some creditors are owed money by several Nortel businesses, and Nortel's businesses have also brought claims against one another.

Nortel's U.S. estate and its creditors want U.S. and Canadian courts to decide how to divide up the cash pile. They also want each party to lay out publicly their theory for dividing the cash.

"No longer should recalcitrant parties be permitted to hide their extreme and indefensible positions from public view and direct scrutiny," an ad hoc group of holders of Nortel bonds wrote in a court filing. They said private mediation failed and it was time to bring the dispute "out of the confines of conference rooms and into the light of the public courtroom."

Nortel's former businesses in Europe tell a different story. They argue that joint U.S. and Canadian court hearings will eventually lead to judicial "chaos," with conflicting rulings and no appeals court to bind both judges.

The European businesses want a three-member arbitration panel appointed by the Nortel units in the United States, Canada andEurope.

While the European businesses see arbitration as the only way to avoid a costly drawn-out court fight, one bankruptcy expert doubted the judges would go that route.

"I just think the contentious nature of this requires a judge to weigh in," said Tom Salerno, a bankruptcy attorney with Squire Sanders & Dempsey in Phoenix.

Regardless of who decides how to divide the money, other issues need to be tackled. The European businesses have billions of dollars of claims against the North American units. The Canadian court must resolve if bondholders are entitled to interest on their securities and whether British pensioners can claim some of the money that will be available for Canada's creditors.

The courts also face one issue beyond their control: the possibility that Thursday's hearing could be postponed by a late winter storm that is bearing down on Wilmington.

© Thomson Reuters 2013