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Bills submitted by lawyers and other advisers working on the Nortel case have topped $2.04-billion since the company filed for court protection in 2009.

Salvatore Sacco/Bloomberg News

Last-ditch mediation talks are under way to try to settle a global dispute over the windup of Nortel Networks Corp. as legal costs in the case soar to more than $2-billion, eroding the money remaining for pensioners and other creditors.

The unprecedented legal bills have prompted mysterious protesters – one handing out leaflets in a wolf costume in New York last week – to launch a public campaign to urge all sides to reach a deal and drop appeals of the joint U.S.-Canada bankruptcy rulings from May that outlined a plan to divide the $7.3-billion (U.S.) Nortel raised selling its assets.

Although mediation talks began last week in New York and will resume next Monday, it is uncertain that global bondholders and other creditors will be able to settle the complex cross-border issues involved. One source says the talks are "a long shot" and are only occurring because they were ordered by a U.S. judge as a required first step when a bankruptcy court ruling is under appeal.

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If there is no settlement, the Nortel case will head back to court next year as lawyers for U.S. bondholders challenge the May rulings in courts on both sides of the border. The U.S. appeal is scheduled to be heard April 5, while the Canadian appeal is still awaiting approval.

Another source close to the mediation said appeals will mean years of delays and millions more paid out in legal fees – with little hope of a resolution.

"In order for this to be done without a settlement, both court judgments, Canada and U.S., have to be final and unappealable and match," the source said. "And the likelihood of that happening is just like getting struck by lightning while being attacked by a shark. It's not going to happen."

Many of the former U.S. bondholders, who had demanded large post-bankruptcy interest payments, sold their positions after the court rulings earlier this year largely rejected their arguments, the source said. This means some in a new group of bondholders, who bought their Nortel bonds at a steep discount, are now gunning for a quick settlement that would see the money flow and make them a profit, the source said.

U.S. bondholders proposed a settlement in June, which the source said called for a distribution that was "close to" or "comparable" with the framework outlined in the judges' rulings, although clearly the Canadian side, seen to have won in the original rulings, would have to give up some ground. The source declined to provide more details.

However, the first source said the offer was "aggressive" and unacceptable to the other creditors.

The appeal route is an outcome the two judges overseeing the case warned against in their parallel May decisions when they urged all sides to abide by their ruling or risk incurring fees for years to come. Judge Kevin Gross of the U.S. Bankruptcy Court in Wilmington, Del., said the wrangling has "plagued" Nortel since it filed for court protection in 2009 and has harmed "real live individuals" who are pawns in the dispute, while Justice Frank Newbould of the Ontario Superior Court said the case has disintegrated into "scorched earth litigation."

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A new analysis of legal costs by independent analyst Diane Urquhart, who has worked with Nortel employees receiving long-term disability payments, shows that bills submitted by lawyers and other advisers working on the Nortel case have topped $2.04-billion since the company filed for court protection in 2009. Ms. Urquhart said the totals are undoubtedly higher because the last fee filings are months old.

And she noted that Ernst & Young, Nortel's Canadian court monitor, filed a report in September forecasting that Canadian bankruptcy fees are estimated to be $19-million (U.S.) for the period from Sept. 13, 2015, to April 16, 2016, so more costs are anticipated.

"No one is in charge of controlling these fees," Ms. Urquhart said. "I place responsibility on the two [bankruptcy] judges for failing to set budgets or limits."

In the face of mounting costs, an unidentified group has emerged to lobby for a settlement, creating a Facebook page and website called "Settle Nortel Now" to build support. The group provides no contact information for itself, but says it was formed by Canadian pensioners.

Last week, a member of the group donned a wolf suit and sandwich board saying "Lawyers: Stop wolfing down Nortel pensions. Settle now!" and handed out leaflets on a Manhattan sidewalk outside the building where mediation talks were under way. The leaflets purported to include photographs of the houses of lawyers working on the case, suggesting they are growing wealthy as the case drags on.

Don Sproule, president of the association representing Nortel's Canadian pension plan members, said he has no idea who is behind the protest, but it is not his group. He said he suspects the protest may not have been launched by Canadian retirees, adding that the founders have refused to identify themselves and their website is anonymously registered in the United States. He also questioned who would have paid for Canadian pensioners to go to New York to protest outside the mediation talks.

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Mr. Sproule said his group would love to see the case settled quickly, but on terms similar to the May rulings.

"We've always been open to discussions, but it's got to be on the right terms," he said.

Mr. Sproule said retirees should at least get the deal outlined in the June court decisions, which said the remaining money should be divided equally on a "pro rata" basis among Nortel's U.S., Canadian and European divisions.

He said legal costs are soaring because the May rulings are being appealed by U.S. bondholders. If the U.S. bondholders adhered to the rulings, a settlement deal wouldn't be needed, he said.

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