* Creditors seeking $20 bln square off over $9 bln in cash
* No agreement on which laws to apply
* Bondholders cite legal rights, pensioners cite hardship
By Tom Hals
Jan 11 Nortel Networks was once the largest
telecommunication equipment company in North America, but since
it filed for bankruptcy in 2009 it has earned a new label: one
of the world's most complicated legal proceedings.
Bondholders, suppliers, governments and former employees
from around the globe hold $20 billion in claims based on
different insolvency laws and are competing for Nortel's last
remaining asset - $9 billion in cash.
On Monday, Ontario Chief Justice Warren Winkler, who has
spent the past few months analyzing proposals, begins a week of
talks in a Toronto hotel intended to find common ground.
Winkler has called the case "one of the most complex
transnational legal proceedings in history." Failure of the
mediation would mean years of litigation, with the possibility
that parallel legal fights in different countries could reach
inconsistent outcomes, according to Winkler, who was appointed
to mediate by the U.S. and Canadian courts.
John Penn, a bankruptcy attorney who is not involved in the
case, said the mediation is comparable to a football playoff
between the New England Patriots, the Hamilton (Ontario)
Tiger-Cats, Manchester United and Australia's Sydney Swans.
"Each calls it 'football' but they all do something that's
quite different," said Penn, of Haynes and Boone in Fort Worth,
Texas. "Before you get to the actual games, there will have to
be a lot of negotiation and agreement."
The complex disputes stem from Nortel's former might as a
global telecom empire with a web of intercompany finances and a
workforce that once stood at 93,000.
Since seeking protection from creditors in courts in the
United States, Canada and across Europe, its assets, including a
$4.5 billion patent portfolio, were sold as whole global
businesses, generating the $9 billion. How to divide that value
among the various Nortel insolvency and bankruptcy proceedings
was never resolved.
COURT CONCEDES RETIREES ARE 'PAWNS'
Another problem is who gets paid first.
In the United States, hedge funds that hold $4 billion in
bonds issued by Nortel will be a major force in next week's
talks. They can block any U.S. bankruptcy plan that would
determine how to distribute cash allocated to Nortel's U.S.
Those funds, including Centerbridge Partners and George
Soros' Quantum Partners, specialize in buying debt of bankrupt
companies at bargain prices and then signing up top lawyers to
fight for full repayment. In this case the bondholders are also
seeking to collect an additional $1 billion of interest that has
accrued on their bonds during Nortel's drawn-out bankruptcy.
A spokesman for bondholders declined to comment ahead of
next week's talks.
Taking aim at that $1 billion of accrued interest on the
bonds are Nortel's retirees and former employees in Canada, who
have asked the Minister of Industry for a declaration that the
country's insolvency law does not entitle bondholders to that
interest. The group is still waiting for a reply.
While the hedge funds point to their legal rights in the
bond agreements that entitle them to the interest, the retirees
and former employees have emphasized fairness. They have
suggested distributing Nortel's cash equally among all claims.
"That's to me what would be the morally right thing to do,"
said Anne Stewart-Clark, a spokeswoman for the retirees and
She said many pensioners have lost up to half of their
retirement benefits. Some retirees have told her they are being
forced to sell homes or seek public housing.
"These are people who worked 35 to 40 years for the company,
and it's a shame they are being forced onto public welfare."
Nortel's failure has also pitted retirees against former
colleagues in other countries.
One of Stewart-Clark's big fears is that the company's
receiver in Britain will be able to successfully press its claim
for as much as $3 billion for underfunded British pensions.
The British receiver has argued that by not fully funding
the pensions of up to 40,000 British retirees, Nortel entities
in other countries benefited. Therefore, the British pensioners
deserve a claim on the cash ahead of those other creditors.
The retirees have received some sympathetic words from
courts, even as the courts have ruled against them.
The U.S. Court of Appeals for the Third Circuit wrote that
attorneys squabbling over "technical differences" were not
considering their impact on pensioners. The appeals court said
retirees "are the pawns in the moves being made by the knights
Still, the federal appeals court upheld lower court rulings
against British retirees' claims on the U.S. estate.
Some claims that were outstanding when Winkler started his
talks in April have been resolved. Last month, a dispute over a
U.S. employee deferred-compensation fund was settled, and
Nortel's U.S. retirees accepted $67 million to terminate medical
In addition, hearings over a plan to end U.S. employees'
long-term disability benefits have been postponed - often an
indication of a deal in the works. A lawyer for the disabled
employees, Rafael Zahralddin, declined to comment on the
The proposal to end those benefits has been cast as a
life-and-death battle against greedy bondholders. A letter by a
disabled employee to Judge Kevin Gross, who is overseeing the
bankruptcy in the United States, does not suggest much room for
The letter described scores of very sick former employees
who would lose money for medicine without the benefits,
including one woman with terminal cancer. "If she loses her life
insurance (her family) will not even have enough money to bury
her," the letter said.
An administrator for Nortel's estate in Canada and the
Cleary Gottlieb Steen & Hamilton law firm, which represents
Nortel in the United States, declined to comment ahead of next