Judges rip into squabbling Nortel lawyers

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Some of the world's top bankruptcy lawyers must be smarting after reading parallel rulings issued by judges in Canada and the United States setting out how Nortel Networks Corp.'s remaining assets will be distributed among its subsidiaries.

Lawyers and other professionals working on Nortel's liquidation have put in thousands of hours and have billed well over $1-billion (U.S.) in fees since Nortel filed for court protection from its creditors in 2009.

Yet the judges decided to essentially reject or rework most of the lawyers' main arguments, and craft another way to allocate Nortel's $7.3-billion in remaining assets on a pro rata or proportional basis, saying it will be more equitable to all the parties. So much for all that lawyering.

In their decisions, Justice Frank Newbould of the Ontario Superior Court and Judge Kevin Gross of the U.S. Bankruptcy Court in Wilmington, Del., expressed disappointment that the Nortel dispute dragged on as long as it has. Both noted the immense cost that has been incurred to pay lawyers' fees while former employees and pensioners have waited for years for a decision about how much they can collect.

Independent analyst Diane Urquhart, who has worked with a group of Nortel's employees receiving long-term disability payments, said her tally of the global professional fees billed in the Nortel case has hit $1.52-billion – $476-million in Canada, $621-million in the United States and $421-million in Europe. And she forecast the fees will grow as various creditors appeal Tuesday's parallel rulings on the asset distributions.

"The most vulnerable in Canadian society, both pensioners and the long-term disabled, have unnecessarily suffered immensely," she said, while lawyers and accountants have been the main beneficiaries of Nortel's bankruptcy.

Lawyers have argued that the complex global restructuring and numerous court proceedings have created a massive volume of work, leading to large bills. But Toronto bankruptcy lawyer David Ullmann of Minden Gross LLP, who is not working on the Nortel case, said he cannot help but feel that much of the work and the resulting massive fees were unnecessary given that the judges ultimately ruled that assets should be divided on familiar principles of equity.

"In hindsight, it is a shame that the parties had to spend hundreds of millions of dollars twisting themselves into legal knots trying to deconstruct agreements or counter arguments from the bondholders, none of which the Canadian court ultimately found to be controlling in this situation," he said.

Judge Gross raised the most pointed concerns about the process in his decision Tuesday, saying the lawyers' positions for each group were so far apart that there was "virtually no middle ground" and each of the parties' arguments "go around and around without end and without a definitive correct answer."

In the meantime, the case "remains in stasis" and the debtors "have lost sight of the irrationality of their respective positions."

"The court compares the allocation dispute to three people trying to reach the top of a mountain by pulling the others down. In other words, no one gets to the top," he said.

Judge Gross said fighting among the Canadian, U.S. and European divisions has "plagued" Nortel's proceedings, and the judges have to set a new precedent to stop it from ever happening again.

"Territorial wrangling significantly diminishes value for stakeholders in a global insolvency … and ought not to be condoned or rewarded," he wrote.

Justice Newbould, while more restrained, also took issue with the lawyers in his decision. Bankruptcy experts and others around the world, he wrote, watched while Nortel's early success in selling its assets "disintegrated into value-erosive adversarial and territorial litigation described by many as scorched earth litigation."

Judge Gross wrapped up his ruling by pointedly quoting from a judge of the U.S. Third Circuit Court of Appeals, who practically begged all the lawyers to reach a mediated settlement in 2011, reminding all the parties "there are real live individuals who will ultimately be affected by the decisions being made in the courtrooms. … They are pawns in the moves being made by knights and rooks," the appeal court said. "Mediation, or continuation of whatever mediation is ongoing, by the parties in good faith is needed to resolve the differences. No party will benefit if the parties continue to clash over every statement and over every step in the process. This will result in wasteful depletion of the available assets from which each seeks a portion."

Despite that warning, three rounds of mediation failed to reach an agreement, bringing everyone to court in a cross-border trial held in two courtrooms last year in Toronto and Wilmington, connected by video conferencing. Judge Gross issued a final plea to all parties to finally stop the fighting.

He said they can accept the two courts' latest rulings and "give them effect," or can use them to reach a resolution among themselves, or can "take appeals and thereby prolong the hardship and deplete the remaining estate."

There has been no word yet on how the groups plan to proceed.