The ongoing Companies' Creditors Arrangement Act [CCAA]1 proceeding of Nortel Networks Inc. et al. is certainly not the first Canadian-based restructuring with assets spread through different jurisdictions, to which creditors from those different jurisdictions have laid competing claims. Almost all major Canadian insolvencies experience this to some extent. However, Nortel is, it seems, the first such restructuring where the amounts at issue are large enough, and the affected creditor groups diverse and active enough, to prevent what Canadian insolvency professionals are usually able to do: agree on a consensual solution that is close enough to perfect.2 Unfortunately, in the Nortel insolvency, the difference between "close enough" and "perfect" could easily be hundreds of millions of dollars. One can only speculate that it is very hard to convince one's clients to take a settlement when so much might potentially be left on the table.
Having been unable to settle the matter, the parties are to be subject to the institution of a simultaneous, bi-jurisdictional trial to determine which court or courts shall be entitled to distribute what share of the remaining $7.3 billion of proceeds derived from the liquidation of Nortel.
A Cross-Border Matter from the Start
At the outset of the Nortel CCAA, a cross border protocol was established to manage the matter in the various jurisdictions. On January 14, 2009, Nortel Networks Corporation, Nortel Networks Limited, Nortel Technology Corporation, Nortel Networks International Corporation, and Nortel Networks Global Corporation filed for and obtained protection under the CCAA.3
The Initial Order provided a stay of proceedings4 and ordered that the cross-border protocol become effective upon its approval by the U.S. Bankruptcy Court and that the parties to these proceedings and any other Person shall be governed by it.5
Cross-Border Insolvency Protocol (the "Protocol") included the following criteria:
- None of the U.S. Debtors or Canadian Debtors are applicants in both the U.S. Proceedings and the Canadian Proceedings.6
- The Protocol shall not divest nor diminish the U.S. court's and the Canadian court's respective independent jurisdiction, and each court shall have sole and exclusive jurisdiction and power over the conduct of their respective proceedings.7
- Each court recognizes the validity of the stay of proceedings and actions against the Debtors.8
Effectively simultaneous with the filing in the U.S. and Canada, similar proceedings and orders were granted in the U.K. and in Israel.9,10,11,12
In this fashion, the framework was established for simultaneous bankruptcy proceedings in multiple jurisdictions. However, the question of how to divide the proceeds realized from this multijurisdictional web of assets was deferred to a later date. That is the matter now before the courts in Canada and the U.S. (the various Nortel estates, including Nortel UK and Nortel entities located in Europe, the Middle East, and Africa (known as EMEA Debtors), agreed to be bound by the jurisdiction of the U.S. and Canadian courts in 2009 pursuant to the terms of the Interim Funding and Settlement Agreement).
The Issue: Who Gets What?
The central issue that gives rise to the Allocation trial is the potential impact of the different priority of the different claims for different groups of stakeholders in different jurisdictions. Proceeds payable to the U.S. court proceedings may go to the bond holders first and then to the other creditors. Proceeds distributed by the Canadian courts may first go to the pension claimants and former employees. There is not enough to satisfy all.
For example, the approximately 20,000 Former Nortel employees in Canada, whose claims total $3 billion, worry the division of assets proposed by lawyers for Nortel's U.S. subsidiary would leave Canadian creditors with just 10.6 per cent of the assets, while the split proposed by European entities would give Canadian creditors just 11.4 per cent.13
U.S. lawyers have submitted that the money should go mostly to the U.S. division because the U.S. subsidiary owned the rights to the most valuable patents that were sold. On the other hand, European entities want the judges to decide the allocation, based on how much each unit contributed to the development of the research that lay behind the patents.14
The impasse has forced the parties into a trial and has led to something novel.
On March 8, 2013, Justice Morawetz issued an Endorsement approving an Allocation Protocol, which had been developed by the U.S. Debtors and the Canadian Debtors. The Allocation Protocol provides for a joint trial by the Ontario Superior Court of Justice and the United States Bankruptcy Court for the District of Delaware to determine how to allocate the Nortel funds between the various jurisdictions. It established binding procedures, including discovery, and an expedited schedule for the cross-border proceedings. On May 30, 2013, the courts approved an Amended and Restated Allocation Protocol, which is now in effect.
In his reasons for the Endorsement issued on March 8, 2013, Morawetz J. confirmed that the Ontario Superior Court had the discretionary authority under the CCAA to approve the Allocation Protocol. Justice Morawetz further confirmed that the Ontario Rules of Civil Procedure15 would apply in the Canadian proceeding, while also confirming that the U.S. court and the Ontario court would remain separate and independent jurisdictions.16
What was being proposed is in keeping with the Guidelines Applicable to Court-to-Court Communications in Cross-Border Cases (the "Guidelines") published by the American Law Institute in 2003 and adopted by the Commercial List of the Ontario Superior Court of Justice in 2004. It provides for courts to conduct joint hearings with other courts, subject to various requirements such as that each court can simultaneously hear the proceedings in the other court, and for all filings in one court to be available electronically and publicly in the other court.17
The Order implementing the Allocation Protocol was urgently appealed to the Ontario Court of Appeal. Leave to Appeal was required. The Ontario Court of Appeal denied leave. In doing so, it said the following:
[the Joint Administrators of Nortel Networks UK Limited, on behalf of 24 EMEA Debtors] contend that a joint trial by the Ontario and Delaware court is "a violation of the Ontario court's independence and sovereignty and will be fraught with irresolvable procedural and substantive problems."
The order requiring a joint Ontario-Delaware trial under the court-approved Allocation Protocol does not [emphasis added] infringe the Ontario court's independence and sovereignty. The order does not offend the classic definition of judicial independence in Beauregard v. Canada,  2 S.C.R. 56, at para. 21. Cooperation and communication between the two courts in accordance with the relevant protocols is not inconsistent with judicial independence, but rather is a sensible and effective response to a significant interjurisdictional commercial case.
we note in connection with the fourth component of the test set out above [on whether to grant leave] that the majority of the key stakeholders in the CCAA proceedings are prepared to proceed with the joint trial. Granting leave to appeal would impose additional costs and threaten further delay in proceedings that have already experienced too much of both.18
With the leave to appeal denied, preparation for the trial began in earnest.
The Nortel "Core Parties" (being those to participate in the Allocation Protocol) engaged in the collection of information and evidence for trial in accordance with the timetables set in the Allocation Protocol, as amended from time to time from May 2013 until May 2014. According to the Monitor's 105th (!) Report, the trial documents now include approximately 16,000 exhibits, excerpts from over 100 Fact Witness Deposition Transcripts, 49 expert reports, excerpts from over 35 expert deposition transcripts, 30 affidavits, and opening briefs.19
As noted above, the actual trial proceedings are to follow legal practices and rules of civil procedure in each country for portions of the trial conducted in each jurisdiction.20 On a technological level, the Nortel parties invested in special technology to allow for the trials to be conducted simultaneously in each jurisdiction. There is a private closed circuit feed of the live proceedings that can be watched in each jurisdiction, and lawyers can chat privately with each other online. The judges of each jurisdiction are conducting the trial live in each jurisdiction simultaneously. Counsel in one court wait while counsel and witnesses in the other court proceed. Both judges take note of the evidence produced in the other jurisdiction's court room. The judges are then to render independent decisions, which may or may not coincide.21 Although there have previously been simultaneous cross-border hearings (in Nortel if not others), a full-blown trial of this kind has never been attempted.22 As of the writing of this article, that trial was ongoing.
The final irony, of course, is that after all of the effort to get to this trial, it must be all but certain, given the amounts involved, that even if the two courts reach the same decision (which is not certain), any "final" decision will be appealed. The Allocation Protocol preserves this right. With respect to routes of appeal, the Allocation Protocol reserves to both countries have their "usual rights of appeal" from interlocutory and final orders, which could give rise to further potential for a conflicting outcome.23 Different appellant results in different jurisdictions are certainly possible.
It is also worth noting that in the midst of this Allocation trial, Nortel has become famous (or infamous) for a different reason. It is estimated that the total fees incurred by the professionals involved have increased from the already astounding approximately $630,000,000 (as of January 2013) to what one judge described as a "completely shocking" $1.3 billion (as of May 2014).24 At the time the Allocation Protocol was announced (after several failed mediations), it was touted as "the best option of the options that remain".25 We will see. Hopefully, the Allocation Protocol will produce a fair result, which will also bring this drain on the funds (which would otherwise have been available to the stakeholders) to an end. However, it may well be that when all is said and done, given the fees incurred, the risk of appeal and the accompanying further uncertainty for the future, the parties will realize with hindsight that perhaps aiming for a result that was just "close enough" would have been the better way to go after all.
[Editor's note: David Ullmann would like to thank Carly Caruso, Student-at-Law at Minden Gross LLP, for her research and helpful analysis.
Originally published in Commercial Insolvency Reporter.
1. R.S.C. 1985, c. C-36.
2. The amounts at issue in the Asset-Based Commercial Paper restructurings, totalling approximately $30 Billion, were larger but very different from the restructuring of an operating business like Nortel and therefore not a fair comparison. See Boyd Erman, "The ABCP Crisis and Its (Somewhat) Happy Ending", Globe and Mail, September 12, 2011, (http://www.theglobeandmail.com/report-on-business/streetwise/the-abcp-crisis-and-its-somewhat-happy-ending/article617299/).
3. First Report of the Monitor, para 1; all documents referred herein are available on the Monitor's website at (http://documentcentre.eycan.com/Pages/Main.aspx?SID=89&Redirect=1).
4. First Report of the Monitor, ibid., para. 1.
5. Initial Order of Justice Morawetz, Ontario Superior Court of Justice, para. 49, and Schedule A, Cross- Border Insolvency Protocol, supra note 3.
6. Cross-Border Insolvency Protocol, Schedule A to Initial Order of Morawetz J., Ontario Superior Court of Justice, para. 4, supra note 3.
7. Ibid., paras. 7–8.
8. Ibid., paras. 16–17.
9. First Report of the Monitor, para 29, supra note 3.
10. Ibid., para. 30.
11. Ibid., para. 31; Initial Order, para. 39; Group Supplier Protocol Agreement, Exhibit C to Doolittle Affidavit, supra note 3.
12. First Report of the Monitor, para. 32, supra note 3.
13. Jeff Gray and Janet McFarland, "Nortel Fight Pits Canada against the World", Globe and Mail, May 13, 2014, (http://www.theglobeandmail.com/report-on-business/industry-news/the-law-page/nortel-trial-sees-gang-up-on-canadian-parent/article18640387/).
15. R.R.O. 1990, Reg. 194.
16. Endorsement of Morawetz J., Ontario Superior Court of Justice, May 3, 2013, paras. 11 and 16, supra note 3.
17. American Law Institute, Guidelines Applicable to Court-to-Court Communications in Cross-Border Cases, 2000, as adopted by the Commercial List of the Ontario Superior Court of Justice in 2004.
18. Nortel Networks Corporation (Re),  O.J. No. 2854, 2013 ONCA 427, paras. 2, 5, and 9.
19. 105th Report of the Monitor, para. 16, supra note 3.
20. Endorsement of Morawetz J., Ontario Superior Court of Justice, May 3, 2013, paras. 11 and 16, supra note 3.
21. Allocation Protocol, para. 7, supra note 3.
22. Tom Hals, "U.S., Canadian Courts Begin Unusual Trial over Nortel Billions", Reuters, May12, 2014, (http://www.reuters.com/article/2014/05/12/nortel-bankruptcy-trial-idUSL1N0NY0W520140512); see also David Friend, "Lawyers Prepare to Battle over $7.3B in Nortel Assets in Cross-Border Trial", Canadian Press, May 11, 2014, (http://www.ctvnews.ca/business/lawyers-prepare-to-battle-over-7-3b-in-nortel-assets-in-cross-border-trial-1.1816623), and Yamri Taddese, "Procedural Feat at Nortel Trial. Unique Logistics Required for Simultaneous Proceeding", Law Times 25, no. 15 (April 28, 2014), (http://www.lawtimesnews.com/201404283937/headline-news/procedural-feat-at-nortel-trial).
23. "Nortel's Joint Canada-U.S. Bankruptcy Trial Begins", Cross Border Litigator (blog), May 16, 2014, (http://crossborderlitigator.blogspot.ca/2014/05/nortels-joint-canada-us-bankruptcy.html); see also the Allocation Protocol as amended and restated, para. 8, supra note 3.
24. Jeff Gray, "Billion-Dollar Nortel Tab Boosts Pressure over Runaway Legal Costs", Globe and Mail, May14, 2014, (http://www.theglobeandmail.com/report-on-business/industry-news/the-law-page/billion-dollar-nortel-tab-boosts-pressure-over-runaway-legal-costs/article18669475/); Jeff Gray, "Nortel Nightmare a $630-million Dream for Advisers", Globe and Mail, January16, 2013, (http://penny2.theglobeandmail.com/servlet/ArticleNews/story/gam/20130116/RBNORTELCOSTS0115ATL).
25. Jennifer Brown, "Joint Trial for Nortel Liquidation 'Best Option that Remains'", Legal Feeds (blog of Canadian Lawyer and Law Times), March 12, 2013, (http://www.canadianlawyermag.com/legalfeeds/1359/joint-trial-for-nortel-liquidation-best-option-that-remains.html).
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