Unusual rulings on Nortel assets provide some solace for pensioners

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A pair of U.S. and Canadian judges have ruled that the collapsed Nortel Networks Corp.'s remaining billions of dollars should be distributed equally among the company's creditors around the world, leaving more money for its pensioners and less for its bondholders.

The outcome is unusual in a corporate bankruptcy, where secured bondholders often receive a full payout and lesser-ranked creditors such as a company's pensioners see only a fraction of what they are owed.

The dramatic fall of what was once a Canadian champion worth $260-billion (U.S.) and employing 100,000 people worldwide resulted in a six-year bankruptcy court battle over the company's remaining $7.3-billion in assets, much of it garnered from a windfall sale of Nortel's patents.

Since the company sought bankruptcy protection in 2009, lawyers for Nortel's Canadian parent, its U.S. and worldwide subsidiaries, and the company's creditors have spent more than $1.3-billion on legal and other professional fees wrangling over how those leftover assets should be carved up.

Last year, in an unprecedented video-linked parallel bankruptcy trial held in courtrooms in Toronto and Wilmington, Del., lawyers for Nortel's various subsidiaries and some of its creditors argued they each deserved the lion's share of those assets.

On Tuesday, Judge Kevin Gross of the U.S. Bankruptcy Court for the District of Delaware and Justice Frank Newbould of the Ontario Superior Court issued rulings concluding Nortel's remaining assets should be distributed on a "pro rata" basis among the company's subsidiaries.

"The court's task is to arrive at a fair and equitable mechanism to allocate the billions of dollars of sales proceeds to numerous international entities for the benefit of their creditors who have now waited years for their recoveries," Judge Gross said in his decision. "The court's decisions will impact investors and pensioners as well as other unsecured creditors."

The formula laid out by the judges in their rulings would result in all creditors receiving about 71 per cent of their claims against Nortel's various subsidiaries, Judge Gross said.

That's good news for Nortel's 20,000 Canadian pensioners and former employees, who have seen their benefits slashed since the company filed for court protection. But just how much they will recover remains to be worked out.

Lawyers for the pensioners had argued for just such a "pro rata" distribution of Nortel assets. But Mark Zigler, a lawyer for the pensioners, said his group should not expect to receive 71 per cent of what they are owed once the dust settles.

That's because the rulings still allow for a $2-billion payment owed by Nortel's Canadian parent to its U.S. arm, he said, and certain Nortel assets held by its subsidiaries are not part of the pro-rata distribution.

"There's some twists and turns on it but we're very pleased with a result that upheld the approach that our clients were taking," Mr. Zigler said late Tuesday. "…The math changes. It will not be 71 per cent. I don't think it will be anywhere near there."

Both the U.S. and Canadian decisions could also be appealed, prolonging the legal battle over Nortel's demise.

The rulings divide Nortel's assets only by region and do not actually allocate funds to specific creditor groups, such as pensioners or bondholders.

At the trial last year, lawyers for Nortel's Canadian parent argued that since it was the legal owner of the company's intellectual property, it deserved all of proceeds. Lawyers for the company's former Canadian employees proposed a division of assets that would see Canadian creditors recover 59 per cent of their claims.

But U.S. creditors argued most of Nortel's remaining assets belonged to its U.S. subsidiary, so they deserved full recovery of their claims against it. Lawyers for European creditors proposed solutions that would see their creditors recover over 70 per cent of their claims.

Judge Gross said in his ruling that all of the positions advanced by Nortel's entities in Canada, the U.S. and Europe suffered from "fatal, substantive flaws."

He said the Canadian parent's claims that it deserves all the proceeds was "nothing short of narcissistic." But he also concluded the other jurisdictions had flawed proposals that would lead to extreme outcomes favouring one group of creditors over another.

Justice Newbould said both the Canadian and U.S. units would be "unjustly enriched" by being allowed to keep virtually all the proceeds of the asset sales. He said he had to "do what is just" in the unique circumstances of Nortel's bankruptcy, arguing that judges have broad discretion to make decisions in the best interests of all parties under Canada's bankruptcy-protection laws.

"A global solution in this unprecedented situation is required and perforce, as this situation has not been faced before, it will by its nature involve innovation," he wrote. "Our courts have such jurisdiction."

A lawyer for Nortel's Canadian parent company declined to comment.