In re Nortel Networks, Inc.

Decision Date20 March 2012
Docket NumberNo. 09–10138(KG).,09–10138(KG).
Citation469 B.R. 478,56 Bankr.Ct.Dec. 60
PartiesIn re NORTEL NETWORKS, INC., et al., Debtors.
CourtU.S. Bankruptcy Court — District of Delaware

OPINION TEXT STARTS HERE

Cleary Gottlieb Steen & Hamilton LLP, New York, NY, Morris, Nichols, Arsht & Tunnell LLP, Wilmington, DE, for the Debtors and Debtors in Possession.

Young Conaway Stargatt & Taylor, LLP, Wilmington, DE, Herbert Smith LLP, Hughes Hubbard & Reed LLP, New York, NY, for Claimants.

Akin Gump Strauss Hauer & Feld LLP, New York, NY, Richards, Layton & Finger,P.A., Wilmington, DE, for the Official Committee of Unsecured Creditors.

OPINION ON JOINT OBJECTIONS TO AND MOTIONS TO DISMISS CLAIMS OF NORTEL NETWORKS UK LIMITED, NORTEL NETWORKS (IRELAND) LIMITED AND NORTEL NETWORKS S.A.1

KEVIN GROSS, Bankruptcy Judge.

INTRODUCTION

The size and complexity of this bankruptcy case cannot be overstated. Through Debtors' efforts, stewarded by their highly skilled and tireless lawyers, with the invaluable assistance and cooperation of the Official Committee of Unsecured Creditors and Ad Hoc Bondholders Committee and their able lawyers, Debtors now have nearly $9 Billion for distribution to creditors. The Court has been both taxed and invigorated by the challenge, never more than to decide the matters which lead to this decision. This opinion arises from a dispute over the allocation of the $9 Billion among related entities. The Court is addressing objections to and motions to dismiss (the “Motions”) [D.I. Nos. 5970, 5971, and 5972] filed by Nortel Networks Inc. (“NNI”), its affiliated debtors,2 (collectively, the “U.S. Debtors”) and the Official Committee of Unsecured Creditors (the “Committee,” and, together with the U.S. Debtors, the Movants). The Movants seek dismissal of the proofs of claim filed by the Joint Administrators of Nortel Networks UK Limited (“NNUK”); Nortel Networks S.A. (“NNSA”); Nortel Networks (Ireland) Limited (“NNIR”), (collectively, NNSA, NNIR, and NNUK are referred to as the Claimants and the Proofs of Claim are collectively, referred to as the “Claims”).3 In this complex and important contest, it is not surprising that the disputing parties have used every cause of action and defense imaginable. Adding to the challenge to the Court's decision is the presence and applicability of foreign law. The excellence and persuasiveness of the lawyers on both sides is a two-edged sword, making it both easier and more difficult to decide the Motions. The Claimants, located in a Nortel operating region known as Europe, the Middle East and Africa (“EMEA”), each filed proofs of claim containing similar allegations. The thrust of the Claimants' claims is that NNI improperly diverted or assisted in diverting cash and value from them for the benefit of Nortel Networks Limited (“NNL”), the Canadian parent company. The Movants argue that the Claimants cannot sustain their claims as a matter of law for several reasons, explained more fully below.

Upon consideration of the Motions, the oppositions, and the replies, and having held oral argument, the Court has determined that the Motions must be granted in part and denied in part.

JURISDICTION

The Court has jurisdiction over these contested matters pursuant to 28 U.S.C. §§ 157 and 1334(b). This is a core proceeding under 28 U.S.C. § 157(b)(2)(B). Venue is proper pursuant to 28 U.S.C. § 1409.

FACTS4
A. Corporate Structure

NNI is part of a highly stratified, but now defunct, corporate empire. NNI, incorporated under the laws of the state of Delaware, is a direct subsidiary of NNL and is the principal U.S. operating subsidiary of the entire corporate family. NNL is the principal Canadian operating subsidiary of Nortel Networks Corporation (“NNC,” together with NNL and their affiliates, including the U.S. Debtors, “Nortel”). NNC is the ultimate parent company of NNL and NNI, and is incorporated under the laws of Canada.

NNUK owned all but three of the nineteen Nortel European affiliates, 5 including the Claimants (the Claimants, together with the remaining European affiliates, are the “EMEA Debtors”) via ownership of Nortel International Finance and Holding, B.V. (“NNIF”), pursuant to a restructuring of the EMEA entities in December 2007.

B. Events Leading up to Bankruptcy

Originally founded in Canada in 1895 as an equipment provider for Canada's telephone system, Nortel expanded into the United States, Europe, Asia, Africa, and Latin America during a period from the mid–1980s through 2000. During this period, in addition to providing traditional land-line phone technology and equipment, Nortel began moving into the wireless and digital arenas. Eventually, Nortel supplied end-to-end networking products and solutions for a vast range of businesses and government agencies globally.

In 2000, Nortel reported approximately $30 billion of annual revenue, employed nearly 93,000 people, and had a market capitalization of over $250 billion. Nortel's business was essentially two-fold: the supply of physical hardware with embedded or bundled software and the deployment and support of that hardware.

However, with the burst of the “dot-com bubble” in early 2001, and the accompanying downturn in the telecommunications industry, the competition for market share rapidly became nearly insurmountable. Another challenge that Nortel faced was the constantly shifting technology landscape, as well as the difficult task of adjusting course to the changing industry.

In 2004, Nortel announced certain accounting irregularities and its intention to restate prior period financial results, at which point Standard & Poor's Corp. and Moody's Investors Service, Inc., lowered Nortel's credit rating to below investment grade. Nortel ultimately issued four successiverestatements of its consolidated financial statements for the fiscal years 2000 through 2005. In 2008, S & P and Moody's downgraded Nortel again. These downgrades further propelled Nortel toward a liquidity crisis because, coupled with Nortel's accounting irregularities, they effectively blocked Nortel's access to capital markets. Nortel relied on high yield/convertible debt for several years during this period.

These restatements also subjected Nortel to substantial shareholder litigation in Canada and the U.S. Nortel settled the litigation in 2006 for $575 million and a percentage of NNC's shares.

The highly leveraged debt position, due in large part to a number of acquisitions Nortel undertook in the 1990s, and the other challenges facing Nortel, caused Nortel to begin a series of restructuring measures in 2005, none of which were successful. Partly as a result of the significant cost of those restructuring efforts, Nortel began to experience negative cash flow in the years immediately preceding the filing of these chapter 11 cases. Competition for innovation in the telecommunications industry, high operating expenses, the deterioration of the global economy and a general decrease in demand for some of Nortel's products, in addition to previously described difficulties, caused Nortel to confront a full-blown liquidity crisis and the insolvency proceedings in Canada and here.

C. Commencement of Global Insolvency Proceedings

On January 14, 2009 (the “Petition Date”), the U.S. Debtors (except for Nortel Networks (CALA) Inc. (NN CALA), which filed on July 14, 2009) filed voluntary petitions for relief under chapter 11 of the Bankruptcy Code. Also on the Petition Date, NNC, NNL and certain of their Canadian affiliates (collectively, the “Canadian Debtors”) 6 filed applications with the Ontario Superior Court of Justice (the “Canadian Court) under the Companies' Creditors Arrangement Act (Canada) (the “CCAA”), seeking relief from their creditors (collectively, the “Canadian Proceedings”). The Honorable Geoffrey P. Morawetz, Justice of the Superior Court of Justice, Ontario, Canada, presides over the Canadian Proceedings.

On January 15, 2009, the Canadian Court entered an order recognizing these chapter 11 proceedings as foreign proceedings under section 18.6 of the CCAA. Also on that date, this Court entered an order approving the cross-border court-to-court protocol. (D.I. No. 54). On February 27, 2009, this Court entered an order recognizing the Canadian Proceedings as foreign main proceedings under chapter 15 of the Bankruptcy Code. (Case No. 09–10164, D.I. No. 40).

NNUK was the center of operations and headquarters for the EMEA region of Nortel. Accordingly, on January 14, 2009, pursuant to the English Insolvency Statute and the European Insolvency Regulation, the High Court of Justice, Chancery Division (the “English Court) placed the EMEA Debtors into administration and appointed individuals from Ernst & Young LLP, as administrators (the “Joint Administrators”).

On May 28, 2009, at the request of the Joint Administrators, NNSA entered into secondary insolvency proceedings in the Commercial Court of Versailles (the “French Court). Also on that date, the French Court issued a judgment appointing a liquidator (the “NNSA Liquidator”).

The EMEA Debtors performed their respective head office functions in England. Accordingly, England was identified as the center of main interests (the “COMI”) of each of the EMEA Debtors for purposes of NNUK's petition in this Court for recognition of the English insolvency proceedings as foreign main proceedings under chapter 15 of the Bankruptcy Code. The need for coordination in the proceedings prompted the Court to enter an order on June 26, 2009, recognizing the English Proceedings.

On July 12, 2010, the U.S. Debtors filed the Joint Chapter 11 Plan of Nortel Networks Inc. and its Affiliated Debtors. Docket No. 3580. Several months later, the U.S. Debtors filed their Proposed Disclosure Statement for the Joint Chapter 11 Plan of Nortel Networks Inc. and its Affiliated Debtors. D.I. No. 3874.

D. The Interim Funding Settlement Agreement

On June 9, 2009, the U.S. Debtors, the Canadian Debtors, and the EMEA Debtors (excluding NNSA and Nortel...

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