Nortel Networks Corp. et al., Re, (2016) 348 O.A.C. 131 (CA)

• Judge: Hoy, A.C.J.O., Blair and Pepall, JJ.A.
• Court: Court of Appeal (Ontario)
• Case Date: May 03, 2016
• Jurisdiction: Ontario
• Citations: (2016), 348 O.A.C. 131 (CA);2016 ONCA 332

Nortel Networks Corp., Re (2016), 348 O.A.C. 131 (CA)

MLB headnote and full text

Temp. Cite: [2016] O.A.C. TBEd. MY.005

In The Matter Of the Companies' Creditors Arrangement Act, R.S.C. 1985 c. C-36, as amended

And In The Matter Of a Plan of Compromise or Arrangement of Nortel Networks Corporation, Nortel Networks Limited, Nortel Networks Global Corporation, Nortel Networks International Corporation and Nortel Networks Technology Corporation

Application under the Companies' Creditors Arrangement Act, R.S.C. 1985, c. C-36, as amended

(M45307; M45309; M45310; M45311; M45312; M45313; 2016 ONCA 332)

Indexed As: Nortel Networks Corp. et al., Re

Ontario Court of Appeal

Hoy, A.C.J.O., Blair and Pepall, JJ.A.

May 3, 2016.

Summary:

In 1999, Nortel Canadian debtors filed for insolvency protection under the Companies Creditors' Arrangement Act (CCAA). That same day, U.S. debtors filed voluntary petitions for relief under the U.S. Bankruptcy Code. Other Nortel entities were placed under administration under the U.K. Insolvency Act. In 2009, the decision was made to liquidate Nortel's assets. The parties agreed to cooperate with the sales process. Some $7.3 billion (U.S.) in sale proceeds were placed in escrow. In 2014, a joint Canadian and U.S. trial commenced on the issue of the allocation of the sale proceeds among the debtor estates. The outcome was the same.

The Ontario Superior Court, in a decision reported as 2015 ONSC 2987, concluded that the sale proceeds be allocated on a pro rata basis among the debtor estates. The trial judge cited the "fundamental tenet of insolvency law that all debts shall be paid pari passu" and that "all unsecured creditors receive equal treatment". Six parties, led by the U.S. debtors, moved for leave to appeal pursuant to s. 13 of the CCAA. They submitted that the trial judge made fundamental errors and that the proposed appeal was of significance to the practice of insolvency and to the parties, and would not delay the completion of the CCAA proceedings.

The Ontario Court of Appeal dismissed the motions. The test for leave had not been met.

Creditors and Debtors - Topic 8581.3

Debtors' relief legislation - Companies' creditors arrangement legislation - Application of concepts of fairness and equity - [See fourth Creditors and Debtors - Topic 8599 ].

Creditors and Debtors - Topic 8599

Debtors' relief legislation - Companies' creditors arrangement legislation - Appeals (incl. leave to appeal) - The Ontario Court of Appeal discussed the test for leave to appeal under the Companies Creditors' Arrangement Act (CCAA) - "Section 13 of the CCAA provides that any person dissatisfied with an order or a decision made under the Act may appeal from the order or decision with leave. Leave to appeal is granted sparingly in CCAA proceedings and only where there are serious and arguable grounds that are of real and significant interest to the parties. In addressing whether leave should be granted, the court will consider whether: (a) the proposed appeal is prima facie meritorious or frivolous; (b) the points on the proposed appeal are of significance to the practice; (c) the points on the proposed appeal are of significance to the action; and (d) whether the proposed appeal will unduly hinder the progress of the action." - See paragraph 34.

Creditors and Debtors - Topic 8599

Debtors' relief legislation - Companies' creditors arrangement legislation - Appeals (incl. leave to appeal) - Nortel Canadian debtors filed for insolvency protection under the Companies Creditors' Arrangement Act (CCAA) - U.S. debtors filed voluntary petitions for relief under the U.S. Bankruptcy Code - Other Nortel entities were placed under administration under the U.K. Insolvency Act - The decision was made to liquidate Nortel's assets - Some $7.3 billion in sale proceeds were placed in escrow - The trial judge concluded that pro rata allocation of the sale proceeds among the debtor estates was appropriate and that it did not amount to substantive consolidation, either actual or deemed - Six parties, led by the U.S. debtors, moved for leave to appeal (CCAA, s. 13) - The Ontario Court of Appeal, in dismissing the motion, held that there was no prima facie merit to the argument - See paragraphs 36 to 53.

Creditors and Debtors - Topic 8599

Debtors' relief legislation - Companies' creditors arrangement legislation - Appeals (incl. leave to appeal) - In 1999, Nortel Canadian debtors filed for insolvency protection under the Companies Creditors' Arrangement Act (CCAA) - U.S. debtors filed voluntary petitions for relief under the U.S. Bankruptcy Code - Other Nortel entities were placed under administration under the U.K. Insolvency Act - The decision was made to liquidate Nortel's assets - Some $7.3 billion in sale proceeds were placed in escrow - The parties took competing positions on the meaning of the parties' Master Research and Development Agreement (MRDA) that dealt with transfer-pricing arrangements, effective from 2001 onwards - The trial judge concluded that the MRDA did not govern allocation on Nortel's insolvency, and that pro rata allocation of the sale proceeds among the debtor estates was appropriate - Six parties, led by the U.S. debtors, moved for leave to appeal (CCAA, s. 13) - They argued that the trial judge erred in his interpretation of the MRDA, and failed to pay heed to the Supreme Court of Canada's decision in Sattva - The Ontario Court of Appeal, in dismissing the motion, held that the arguments were not prima facie meritorious - See paragraphs 54 to 65.

Creditors and Debtors - Topic 8599

Debtors' relief legislation - Companies' creditors arrangement legislation - Appeals (incl. leave to appeal) - Nortel Canadian debtors filed for insolvency protection under the Companies Creditors' Arrangement Act (CCAA) - U.S. debtors filed voluntary petitions for relief under the U.S. Bankruptcy Code - Other Nortel entities were placed under administration under the U.K. Insolvency Act - The decision was made to liquidate Nortel's assets - Some $7.3 billion in sale proceeds were placed in escrow - The trial judge was required to "determine the allocation of the sale proceeds among the selling debtors" - He concluded that the funds were to be allocated on a pro rata basis among the U.S., Canadian and other debtor estates - Six parties, led by the U.S. debtors, moved for leave to appeal (CCAA, s. 13) - They argued that they were denied procedural fairness - The Ontario Court of Appeal held that the argument was not prima facie meritorious - "All parties knew that a pro rata allocation was in play. The fact that the specifics of the allocation ordered by the trial judge were not identical to those advanced by any of the parties does not, in our view, create unfairness to the parties. This is not a situation where the trial judge addressed an issue that was not before him, failed to grapple with the arguments or evidence, or came up with a new theory of the case." - See paragraph 78.

Creditors and Debtors - Topic 8599

Debtors' relief legislation - Companies' creditors arrangement legislation - Appeals (incl. leave to appeal) - Nortel Canadian debtors filed for insolvency protection under the Companies Creditors' Arrangement Act (CCAA) - U.S. debtors filed voluntary petitions for relief under the U.S. Bankruptcy Code - Other Nortel entities were placed under administration under the U.K. Insolvency Act - The decision was made to liquidate Nortel's assets - Some $7.3 billion in sale proceeds were placed in escrow - The trial judge concluded that the funds were to be allocated on a pro rata basis among the U.S., Canadian and other debtor estates - Six parties, led by the U.S. debtors, moved for leave to appeal (CCAA, s. 13) - They submitted that the issues were of significant interest to the practice - The Ontario Court of Appeal disagreed - "The facts of this case are unique and exceptional. ... [S]ubstantive consolidation is not engaged and so this case would not provide an opportunity for this court to provide guidance on that question. Nor does this case engage any issues that require any clarification on the application of Sattva. In short, granting leave would not provide an opportunity for this court to provide guidance on legal issues of significance to the practice" - See paragraphs 90 to 93.

Creditors and Debtors - Topic 8599

Debtors' relief legislation - Companies' creditors arrangement legislation - Appeals (incl. leave to appeal) - Nortel Canadian debtors filed for insolvency protection under the Companies Creditors' Arrangement Act (CCAA) - Nortel's were sold and the sale proceeds placed in escrow - These leave motions arose from the trial judge's judgment that the sale proceeds be allocated on a pro rata basis among the various Nortel debtor estates - The Ontario Court of Appeal rejected the submission that the proposed appeal would not unduly hinder the progress of the CCAA proceeding - "Consistent allocation decisions have been issued by the Canadian and U.S. courts. A further appeal proceeding in Canada would achieve nothing but more delay, greater expense, and an erosion of creditor recoveries. There are asymmetric appeal routes in Canada and the U.S. However, we do not accept that the separate appeal proceedings in the U.S. somehow diminish the need to bring these proceedings in Canada to a conclusion. In our view, any additional step is a barrier to progress. Furthermore, the fact that this case is a liquidation and not a restructuring does not render delay immaterial, where so many individuals and businesses continue to await a resolution of this proceeding. The potential of an interim distribution, remote or otherwise, does not alter this reality. In addition, the parties acceded to a liquidation under the CCAA. They cannot now reject the parameters of that statute, which requires leave to appeal, and where the jurisprudence on the applicable test is settled and long-standing." - See paragraphs 102 and 103.

Counsel:

Sheila Block, Scott A. Bomhof, Andrew Gray, Adam M. Slavens and Jeremy Opolsky, for the moving parties, the U.S. Debtors [see footnote 1];

Richard B. Swan, S. Richard Orzy and Gavin H. Finlayson, for the moving party, the Ad Hoc Group of Bondholders;

David R. Byers and Daniel S. Murdoch, for the moving party, the Conflicts Administrator of Nortel Networks S.A.;

Shayne Kukulowicz, Michael Wunder, Ryan Jacobs, Geoffrey Shaw and Jane Dietrich, for the moving party, the Official Committee of Unsecured Creditors of Nortel Networks Inc. et al.;

Andrew Kent, Brett Harrison and Laura Brazil, for the moving party, The Bank of New York Mellon as Indenture Trustee;

Steven L. Graff, Ian Aversa and Miranda Spence, for the moving party, the Nortel Trade Claims Consortium;

Michael E. Barrack, D.J. Miller, John L. Finnigan, Michael S. Shakra and Andrea McEwan, for the responding parties, the Board of the Pension Protection Fund and Nortel Networks U.K. Pension Trust Ltd.;

Benjamin Zarnett, Jessica Kimmel, Peter Ruby and Peter Kolla, for the responding party, the Monitor, Ernst & Young Inc.;

Kenneth Kraft and John Salmas, for the responding party, Wilmington Trust, National Association;

Derrick Tay and Jennifer Stam, for the responding parties, the Canadian Debtors [see footnote 2];

Kenneth Rosenberg, Lily Harmer and Massimo Starnino, for the responding party, the Superintendent of Financial Services as Administrator of the Pension Benefits Guarantee Fund;

Mark Zigler and Ari Kaplan, for the responding parties, the Former Employees of Nortel and LTD Beneficiaries;

Arthur O. Jacques, Paul Steep and Byron Shaw, for the responding party, the Canadian Creditors' Committee;

Barry E. Wadsworth, for the responding party, CAW-Canada;

Matthew P. Gottlieb and Matthew Milne-Smith, for the responding parties, the Joint Administrators of the EMEA Debtors [see footnote 3] other than Nortel Networks S.A.

These motions for leave to appeal were heard before Hoy, A.C.J.O., Blair and Pepall, JJ.A., of the Ontario Court of Appeal. The Court delivered the following judgment and reasons, released on May 3, 2016.