Professional Fees in Nortel Networks Bankruptcy are Massive, With a High Burn Rate Continuing

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Fee Application Summary Page for One Professional Firm

By: Donald L. Swanson

Some not-surprising facts about professional fees in the Nortel Networks bankruptcy are:

–The total amount is massive; and

–The burn-rate continues without abatement.

Keep in mind that:

–The primary question in the Nortel Networks bankruptcy is this:

How should a $7.3 billion sale proceeds fund be distributed?

–Professional fees in the Nortel Networks bankruptcy are entitled to 100% payment before any general creditor ever sees a dime.

–Mediation efforts have been extensive . . . but largely ineffectual.

MASSIVE FEES AMOUNTS — As of April 30, 2016

A Law360 publication says that professional fees “paid” from that $7.3 billion fund (as of approximately April 30, 2016) total “at least $1.89 billion.”  Of such amount:

–35% ($671 million) is paid in the U.S.

–38% ($712 million) is paid in the UK

–27% ($507 million) is paid in the Middle East and Africa

Note:  Interim fee payments are 80% of allowed fees, because 20% of allowed fees are held back until the case ends.  So, for $1.89 billion fees paid, $2.36 billion are allowed.

$2.36 billion fees on a $7.3 billion fund is 32.33%.  That’s a hefty percentage of a very-large sum, as of April 30, 2016, with a long ways yet to go in the case.

THE BURN RATE IN 2016

The cash burn rate for professional fees, since April 30, 2016, is exceedingly high.   Many professional firms are being paid out of the $7.3 sales fund, and they are charging lots of money!  Here are some examples.

–Example:  “Consultant”

Consider, for example, the “Sixty-Eighth Monthly Application” for allowance of fees of a Nortel “Consultant” filed on January 19, 2017 (Doc. 17726).  This professional firm began working for Nortel on July 9, 2010, and has total allowed fees of $25.2 million thus far.

Monthly fee amounts approved for this firm during the 2016 calendar year (and being paid from the $7.3 billion fund) are as follows:

1/31/16 — $742,544

2/29/16 — $698,678

3/31/16 — $742,485

4/30/16 — $809,480

5/31/16 — $793,727

6/30/16 — $906,977

7/31/16 — $988,840

8/31/16 — $733,252

9/30/16 — $636,787

10/31/16 — $933,144

11/30/16 — $842,402

12/31/16 — $944,413

Such fees are billed at the rate of $590.00 per hour.  In their 12/31/16 Application, nine individuals worked a total of 1,600.7 billable hours that month to account for the $944,413 total.

[Editorial Comment:  The Delaware Bankruptcy Court issues an Order on May 12, 2015, determining how the $7.3 fund should be allocated among creditors (after payment of professional fees).  This Order is promptly appealed to the Third Circuit Court of Appeals.  One would assume that fee burn rates would diminish after such ruling and appeal.  This assumption, obviously, does not apply to the fees itemized above or below.]

–Example: “Consulting Expert”

Also consider, for example, the “Eighty-First Monthly Application” for allowance of fees of a Nortel “Consulting Expert” filed on December 30, 2016 (Doc. 17646).  This professional firm began working for Nortel on March 4, 2010, and has total allowed fees of $20.2 million thus far.  This firm has been charging a flat $250,000 per month for the entire time of its engagement.

In its December 30, 2016, Application, this professional firm identifies (at page 5 of 14) two professionals working a total of 202 hours from November 1 through November 30 of 2016.  That’s an effective rate of $1,237.62 per hour.

Example: “Attorneys”

Also consider, for example, the “Ninety-Fifth Interim Application” for allowance of fees of a Nortel “Attorneys” firm filed on December 20, 2016 (Doc. 17604) (a photo of a chart from this Application appears above).  This professional firm began working for Nortel on February 4, 2009, and has total allowed fees of $299 million.

Monthly fee amounts approved for this firm for the 2016 calendar year (and being paid from the $7.3 billion fund) are as follows:

1/31/16 — $   730,815

2/29/16 — $   827,881

3/31/16 — $1,058,755

4/30/16 — $   723,962

5/31/16 — $   575,132

6/30/16 — $1,033,934

7/31/16 — $1,039,830

8/31/16 — $1,207,890

9/30/16 — $1,866,199

10/31/16 — $2,640,166

11/30/16 — $2,244,891

In the 11/30/16 Application, there are fifty two different professionals logging time that month, including partners, counsel, associates, temp. attorneys, paralegals and law clerks.

CONCLUSION

Professional fees approved and paid to date in the Nortel Networks bankruptcy are massive, and the burn rate continues without abatement.  In fact, it looks like the fee burn rate is ticking upward.

Usual Formula [Unsecured Claim + Bankruptcy = You Lose] Doesn’t Apply (the Nortel Networks Bankruptcy, Part six)

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By: Donald L Swanson

Unsecured Claim + Bankruptcy = You Lose.

I came up with this formula back in 1983, while preparing for a seminar presentation on basic bankruptcy law.  I was trying to come up with something creative to say.  And . . . I must confess . . . I thought it was pretty clever at the time.

And now . . . I’m more-than-a-little pleased and proud [or as people say these days, “humbled”] that the formula proves to be accurate in the vast majority of all bankruptcy cases.

But what’s true in the vast majority of all bankruptcy cases has little to do with the Nortel Networks bankruptcy.

And so it is with my little formula — it has nothing to do with the Nortel Networks bankruptcy case.  Nothing.

Get this!

Back in July of 2015 (when total professional fees expended in the battle are only $1.3 billion), the Bankruptcy Court makes this finding:

–“A pro rata distribution would result in all Creditors receiving an approximate 71% return on their Claims.”

Say what?!  A 71% return?!

All this fighting has now cost $2 billion in professional fees.  And it’s over the last 29% of recovery?!

. . . Oh, my.

Unsecured creditors in nearly all bankruptcy cases would exult over a 71% return.

But no.  Not for Nortel Networks creditors.  “A 71% return” are fighting words.

“Don’t be settling these disputes in mediation,” seems to have been the battle cry.

Nortel Networks creditors apparently hope to dissipate the entire pot of gold — or at least most (or a large percentage) of it — to prove a point . . .  of some sort or other . . .  that is known only to themselves.

Here’s guessing that the continuing fight has a net-negative impact on everyone.  No one will ultimately win.

Surely there is a lesson in this for the rest of us?

 

 

A 2011 Judicial Scolding Had No Discernible Effect on Mediation Efforts (Nortel Networks Bankruptcy, Part Five)

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Chess Pieces — A Judicial Metaphor

By: Donald L Swanson

Back in 2011, the Third Circuit Court of Appeals wrote a scathing opinion about the behavior of the disputing parties in the Nortel Networks bankruptcy case.

The Third Circuit’s opinion is published at In re Nortel Networks, Inc., 669 F.3d 128 (3rd Cir. 2011).

However, the Third Circuit’s judicial scolding has had no discernible effect on the subsequent behavior of the parties.

Here is a portion of the Third Circuit’s scolding, which is also quoted in the “Conclusion” portion of the Bankruptcy Court’s allocation / distribution ruling:

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Pensioner as Pawn

“We are concerned that the attorneys representing the respective sparring parties may be focusing on some of the technical differences governing bankruptcy in the various jurisdictions without considering that there are real live individuals who will ultimately be affected by the decisions being made in the courtrooms. It appears that the largest claimants are pension funds in the U.K. and the United States, representing pensioners who are undoubtedly dependent, or who will become dependent, on their pensions. They are the pawns in the moves being made by the Knights and the Rooks.

“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.”

[Bold face added for emphasis.]

[Editorial Note: This is the same Third Circuit Court of Appeals that will, ultimately, rule on the Bankruptcy Court’s allocation / distribution ruling, if the parties fail to reach a settlement first.

–Hmmmm, it’s not looking real good for the appellants right now.]

The Third Circuit Court’s worst-case prophecy is being fulfilled, as noted in the prior articles in this series.

Doesn’t everyone involved deserve better?

 

A Suggestion: Shut-Off-The-Spigot Plus Mandatory-Mediation (the Nortel Networks Bankruptcy, Part Four)

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The “spigot” in the Nortel Networks Bankruptcy is huge.

By: Donald L Swanson

First of all, I know this suggestion will never happen.

But it should.

This suggestion, if implemented long ago, would have dramatically increased odds of a mediated settlement in the Nortel bankruptcy.  Such a settlement would have stopped the excessively-expensive and excessively-long-running legal battles in the Nortel Networks bankruptcy (Case No. 09-10138 in Delaware).

The suggestion is this:

–Shut off the spigot for payment of fees from the bankruptcy estate for non-debtor professionals; and

–Require another round of mediation.

This suggestion means, (i) disallowing all fee applications for committees and other non-debtor professionals, and (ii) continue disallowing such fees until a resolution of all pending disputes is reached.

For such period of time, each creditor and other constituency would be obliged to pay its own professional fees, instead of getting paid from the $7.3 billion pot of gold.

This approach would bring a more-realistic assessment of risks and benefits and costs to the mediation effort.

Wouldn’t this be a better way?

 

Intransigence = Mediation Failures (the Nortel Networks Bankruptcy, Part Three)

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Dogged

By Donald L. Swanson

Have you ever noticed that synonyms for “intransigence” often come from farm animals: e.g., bullheadedness, doggedness, pigheadedness, stubborn as a mule?

Such qualities aren’t very helpful on a farm.  But they are killers in mediation.

“Intransigence” describes the four-time failures of the Nortel Networks mediation efforts to reach a funds allocation and distribution solution.  All mediating parties hold very-large claims, all parties take intransigent positions, and no one is willing to concede anything.

Such failures seem to come from the farm animal characteristics noted above.

In reading what’s happened in the Nortel case, I hearken back to an experience where large claim-holders dominate a bankruptcy case and get their way throughout.  They are intransigent.  They are confident.  They are persistent.  They are inflexible.  They are dogged . . . bullheaded . . . stubborn as a mule . . . etc.  And they win.

By every outside-looking-in appearance, that’s exactly what’s happened in the Nortel bankruptcy.  And all parties are large claim-holders.

Here’s the prior experience:

A long time ago, I have my first-of-rare experiences in a Chapter 11 mega-case.  The case has a group of similarly-situated creditors with very-large unsecured claims.  It also has a large number of relatively-small claims that, collectively, add up to a substantial amount.

We’re sitting in the initial Official Committee meeting and interviewing candidates for Committee counsel.  I’m new to all this and am in a listen-and-learn and try-to-figure-out-how-this-works mode [and more-than-a-little intimidated too]. We interview a half-dozen law firms, all of whom are impressive.

Once the interviews conclude, consensus arises quickly for one of the law firms. And the next thing I know, we’ve decided on a firm to hire. The first parties to focus-in on this firm at the meeting are the very-large creditors. At the time, however, I can’t quite figure out how the law firm retention decision comes about so quickly, easily, with limited discussion, and with little dissent.

What I realize later is that the large creditors are old-hands at this: they know who they want, and they know how to handle newbies like us to get their way.

Fast forward toward plan-presentation time. Sec. 363 sales are concluded and distribution discussions are far along. All of a sudden, it seems, Committee counsel is proposing an allocation of assets among debtor entities that leaves our group of individual and small-business creditors without any material distribution. The vast bulk of all available funds go (after professional fees are paid) to the very-large claims.

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Bullheaded

Our group makes a push for a different allocation that seems proper and correct under the facts and law — which would get some money to our group. But, no, that’s not possible. There is little-to-no discussion permitted on the subject.  Compromise isn’t even a part of the equation.  Committee counsel pushes its position forward, and we are squelched.

Our view is that the Committee’s allocation scheme in favor of the very-large claimants is improper — maybe even fraudulent.  But it prevails.

My impression from this and other experiences is that very-large claimants can control a case.  So they tend to be intransigent on allocation / distribution issues. Intransigence appears to stem from a belief, based on historical successes, that they can and will dictate the resolution of such disputes.

So . . . back to the Nortel mediation failures and the expenditure of nearly $2 billion in legal fees from the $7.3 billion fund at issue:

–All constituencies in the case have very-large claims, so everyone has a sense that they can and will dictate the resolution of the case.

–And, apparently, everyone is in a fight-to-the-death mode to protect their turf and their positions on this.

Such is my impression / theory based on hard experience.

Does anyone have a better and more balanced perspective?

 

A 2015 Judicial Scolding for “Self-Serving” and “Narcissistic” Mediation Positions (the Nortel Networks Bankruptcy, Part Two)

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A Judicial Scolding

By: Donald L. Swanson

The primary issue in the Nortel Networks bankruptcy is this: How should the remainder of a $7.3 billion fund be allocated among creditors?  $2 billion or-so of this fund has already been used to pay professional fees in the fight.

The U.S. portion of the Nortel Networks case is in the Delaware Bankruptcy Court.  Such Court, in its Opinion dated May 12, 2015 on this primary issue, makes these findings (bold face is added for emphasis):

–The parties “have submitted widely varying approaches” for deciding the allocation issue, “leaving virtually no middle ground.” Both sides have “strong criticism” of the other’s allocation methodology.

–The “self-serving allocation positions” of various U.S. and Canada parties “are not determinative or helpful” and “suffer from fatal, substantive flaws.”

[Editorial note:  Aren’t all negotiating positions “self-serving”?]

–Allocation positions of various interests “are nothing short of narcissistic.”

[Editorial note:  Ouch!]

Allocation positions of the U.K. Pension Claimants are for a pro rata distribution to all claims, “irrespective of the entity against which they may have a claim,” because Nortel operated as “a highly integrated multinational” that “derived significant benefits” from operating as “one Nortel.”

Final Conclusion of the Court:

–It adopts the U.K. Pension Claimants position and rules that a “pro rata distribution model is the most appropriate and just.”

How could these disputes have failed to settle?  How could the parties fail to find middle ground on this?

The Bankruptcy Court’s ruling is now a major problem for the losing interests:

–The U.S. and Canada interests are now totally dependent upon a reversal on appeal.

–And the loss is problematic for the U.S. and Canada interests because the Bankruptcy Court says it’s allocation ruling should be a model for how future multinational cases are to be handled.  Here’s what the Court says on this:

–“The Courts have an opportunity to set a precedent that will avoid the time and expense” that has plagued the Nortel proceedings and prevent such delays and costs “from occurring again” in the future.

–“Territorial wrangling significantly diminishes value for stakeholders” and “ought not be condoned or rewarded.”

Appeal prospects aren’t looking very promising right now.  A Canadian appellate court, for example, has already approved the ruling.  Here is the  opinion of the “Court of Appeal for Ontario” on the matter.

And the following comments don’t help much, either: on appeal from the Delaware Bankruptcy Court’s allocation ruling, the U.S. Official Creditors’ Committee argues in its opening brief that:

–The Delaware Bankruptcy Court’s decision “is entirely inequitable” and “completely untethered from” any provision of the Bankruptcy Code; and

–In making this decision, the Bankruptcy Court “abdicated its responsibility,” it “acted well outside any” legal authority, and its actions are an “abuse of its equitable authority.”

Hmmmm . . . such arguments are going to go over well when everyone ends up back in the Delaware Bankruptcy Court.

It seems like the appealing parties are in a bit of a bind on this?

 

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?