The Monstrous Costs of Mediation Failures (the Nortel Networks Bankruptcy, Part One)

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POT OF GOLD

By Donald L. Swanson

A sale in bankruptcy of assets owned by Nortel Networks Inc. results in a $7.3 billion (yes, that’s $7,300,000,000) pot of gold for creditors.

Guess what: creditors can’t agree on how to divide the pot.

So what do creditors do instead? They spend $2 billion from the pot of gold on professional fees to fight over the pot. And the fight isn’t finished.

It’s not as if the parties have refused to negotiate. They’ve held at least four rounds of mediation. But all mediation rounds fail. So . . . the parties are still battling . . . and using up the pot of gold in the process.

The U.S. bankruptcy case is pending in Delaware at Case No. 09-1018 (yes, the “09” in the case number reveals the 7-year age of the case).

The Bankruptcy Court, in its Opinion dated May 12, 2015 (Doc. 15,544) on how the $7.3 billion sale funds should be allocated and distributed, makes this finding:

–The parties “have submitted widely varying approaches” for deciding the distribution issue, “leaving virtually no middle ground.” Both sides have “strong criticism” of the other’s distribution methodology and are “sparing no expense” in fighting the battle.

How could this using-up-the-pot-of-gold happen? Here are two explanations:

1. Vexing complexity.

Daniel Fischer, Forbes Staff, covering “finance, the law and how the two interact,” writes on April 5, 2016, that the high fees

–“reflect the vexing complexity” of the Nortel bankruptcy that “is taking place across three countries and two continents” and deals with “the increasingly common clash between” bondholders and pensioners.

[Editorial Note:  Many of pension claimants are from the UK.  The Bankruptcy Court explains their situation like this: “There is a deficit in excess of $3 billion in the (UK) pension plan of which they are members.”]

2. Too much money in the golden pot!

Too-much-money is an explanation by Julie Triedman of The Am Daily, in an article published on January 14, 2016, by The American Lawyer. She says:

–At one time, Nortel’s bankruptcy cases stood as “a shining example of international cooperation in a global insolvency.”

–In 2009 and 2010, Nortel professionals coordinated a sale of all Nortel assets, “rather than allowing” assets to be sold “piecemeal.”

–Such sales are described as “hugely successful” and a “$7.3 billion windfall.”

–The successful sales bring previously inattentive claimants “out of the woodwork,” with everyone wanting a piece of the pot.

–“Close to two dozen” firms are “feasting richly” on this case.

Both explanations appear to be valid. But Ms. Triedman’s cynicism has a certain appeal.

Other professionals who handle every-day cases requiring efficiency and cost-effectiveness will look at this situation with a degree of skepticism . . . and, perhaps, more-than-a-little-scorn.

Moreover, other bankruptcy cases are complex, have billions or millions of dollars at risk and involve a conflict between general creditors (such as bondholders) and pensioners–and the parties and professionals in such cases are able to agree upon resolutions that are beneficial to all (e.g., the Detroit and diocese cases).

Here is a copy of a slightly-redacted (name of firm is omitted) summary page from one law firm’s fee application in the Nortel Networks case for the month of January, 2016:

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Nortel — Summary of One Month’s Fees for One Law Firm

This summary page identifies $503,875.50 to be paid by Nortel to one law firm for fees incurred in a single month — and there are numerous other professional firms with their own fee applications to be paid by Nortel for the same month. Wow!

Other pages of this same fee application identify hourly rates of this law firm for 15 timekeepers:

–4 between $1,325 and $1,050 per hour

–5 between $900 and $700 per hour

–3 between $690 and $580

–3 between $455 and $215 per hour.

The timekeeper who works most on the case in January 2016 is a $1,050 per hour attorney, who logs 137.7 hours.

That’s a pretty sweet gig.

Is Ms. Tiedman’s cynical inclination well-founded?

 

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