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The Assets of “One Nortel” To Be Allocated Equitably On A Modified Pro Rata Basis
In re Nortel Networks, Inc., Case No. 09-10138 (KG), 2015 WL 2374351 (Bankr. D. Del. May 12, 2015)
In an “unprecedented, complex, and massive dispute involving highly integrated multinational enterprises,” Judge Gross of the Delaware Bankruptcy Court, along with Justice Newbould of the Ontario Superior Court of Justice (Commercial List), issued simultaneous opinions after a truly unique twenty-one day cross-border trial, determining how to allocate $7.3 billion to creditors of Nortel Networks Corporation (“NNC”), the indirect parent of more than 130 subsidiaries, located in more than 100 countries. Consistent with its unprecedented nature, Judge Gross ruled that a modified pro rata allocation of the funds is required, which by his own admission is “an extraordinary result.” Op. at 111. Grounded in the Court’s broad authority to craft equitable relief under Bankruptcy Code section 105(a), Judge Gross relies principally on the following: (i) Nortel had no agreement that governed the allocation of assets in the event of an insolvency; (ii) each of the proponent’s flawed approaches to allocation resulted in a disproportionate share of the proceeds; and (iii) Nortel functioned as a unified, wholly integrated global enterprise. The Canadian Court concurred in the outcome.
As a general and brief background, Nortel was a telecommunications and technology company headquartered in Canada that developed wireless networking solutions for providers of mobile voice, data, and multimedia communication services, such as long-term evolution wireless technology (known to most of us as “LTE”). It also provided enterprise communications solutions and optical networking solutions. In 2000, Nortel had a market capitalization of $260 billion, but for a variety of reasons, its market capitalization shrunk to just $2 billion by 2002. In 2009, Nortel Networks, Inc. (“NNI”) and its affiliates (the “US Debtors”) filed voluntary chapter 11 petitions for relief. NNC together with its affiliates (the “Canadian Debtors”) commenced insolvency proceedings in Canada, and Nortel’s European affiliates (the “EMEA Debtors”) commenced insolvency proceedings in England. Soon after, the liquidation of Nortel’s assets through a series of sales began. The business line sales yielded $3.285 billion of which $2.85 billion is now available (see Op. at App’x B), and the IP sales yielded approximately $4.6 billion. Agreements between the various Nortel debtors allowed the sales to proceed but deferred issues with respect to the allocation of funds. Three failed mediations and a mega-trial later, this Opinion rules on the allocation dispute.
The Court held (and the Canadian Court concurred albeit for different reasons) that Nortel had no agreement governing the allocation of assets in the event of an insolvency proceeding. Importantly, the Master R&D Agreement dated December 22, 2004 (“MRDA”) does not govern the dispute. The MRDA was an agreement reached by the Nortel entities promulgated by Nortel’s tax group in order to avoid potential auditing issues, vested legal title to certain IP in NNL, and granted certain Nortel entities exclusive IP licenses. As such, the Court noted that “[t]he MRDA, a tax document, was clearly not meant to, nor does it even purport to govern inter-company allocation of the proceeds from liquidated Nortel assets.” Op. at 61 (emphasis added). In reaching its conclusion, the Court recited the “overwhelming and undisputed” evidence that the MRDA was not intended to address the global insolvency or liquidation of Nortel, including former employee testimony that insolvency was never considered when the MRDA was created and that the MRDA was not meant to address such contingencies. Despite this holding, and in dicta, the Court stated that under Canadian Law, the Canadian Debtors held only bare legal title to the IP, favoring the arguments of the US Debtors and EMEA Debtors that the factual matrix contravenes the ownership claim of the Canadian Debtors. Op. at 64 (noting that the Canadian Court stated that under the MRDA the Canadian Debtors owned the IP and thus, should have received a majority of the allocated assets). For the benefit of the parties, the Court analyzed and rejected each of the parties’ allocation methodologies based on the MRDA. For the Court’s concise synopsis of the flaws in each of the parties’ allocation positions, see Op. at 62 (rejecting the Canadian Debtors’ “Ownership”, the US Debtors’ “Revenue”, and the EMEA Debtors’ “Contribution” allocation theories).
Instead of a decision based upon the MRDA, the Court focused its ruling on Nortel’s true nature—a highly-integrated global multi-national enterprise or “One Nortel.” Op. at 97. The Court explained that the modified pro rata allocation crafted by the Courts is the only sensible and just result for an enterprise that had “employees and assets from many countries and subsidiaries contributing to the R&D which led to the businesses, IP, products and licenses to which they now lay claims of ownership and beneficial interest.” Op. at 99. The Court went on: “The ramifications of the insolvency must be borne by all of the Nortel Entities and, consequently, all of its creditors.” Id. (emphasis added). For support, the Court stressed, in part, Nortel’s global general and administrative support functions, and that Nortel’s R&D was distributed and conducted globally. Therefore, the Court found that, absent guiding law or precedent, devoid of a governing agreement, and without a reliable and just allocation approach proposed by the parties, a modified pro rata allocation is the only allocation mechanism that reflects the true nature of the enterprise as a highly-integrated global entity.
The Court’s modified pro rata allocation approach can be found on pages 111-112 of the Opinion and in the Order, but essentially the Court will determine all claims (including intercompany claims and previous settlements), and divide the assets (excluding cash-on-hand) by the total claims and each estate will be allocated its proportionate amount. Despite the moniker “One Nortel”, the Court ruled that the Opinion is not effectuating a substantive consolidation of the cases. See In re Owens Corning, 419 F.3d 195 (3d Cir. 2005).
Finally, the Court warned the parties of the costs of further litigating these issues (including on appeal), citing the Third Circuit’s previous comments in these cases, and seemingly encouraging the parties to let the decision lie. See In re Nortel Networks, Inc., 669 F.3d 128, 143-44 (3d Cir. 2011). However, on May 26, 2015, multiple parties filed motions for reconsideration (tolling the deadline to file an appeal) and indicated that further issues may be the subject of appellate review.