There can be little doubt Nortel wins the title for the cross-border insolvency case of the young century. Not only is it a huge case (US$7B or so), but as I noted in my last post it has established several milestones, including a joint televised trial in Toronto and New York and a common result in the two courts. Even more important are the substantive results in the universalist mode: the initial agreement on a global sale of assets without reference to territorial or corporate boundaries and the new ruling that orders global distribution on a quasi pro rata basis. The ruling is also notable for what it is not. It is not an acceptance of substantive consolidation. It is not territorialist; the result was unrelated to the situs of assets or creditors. It is also not fully universalist, although it does represent a species of modified universalism.
The key to the global distribution ruling, discussed below, is a finding that ownership of the sold assets could not be attributed to any one corporation in the corporate group and thus the proceeds should be distributed globally. I refer the reader to the opinions for the details, especially paragraph 250 of Judge Newburgh’s opinion. In summary, the proceeds of the sales are distributed pro rata among the estates. That result differs from a pure pro rata among all creditors of the corporate group primarily for three reasons. First, some cash stays in place. Second, intra-group claims share in the distribution from each estate, including an established $2B claim by the US sub against the Canadian parent. Third, an intra-group guarantee is potentially recognized.
The fundamental issue presented was entitlement to the proceeds of the sale of various assets. The first step necessarily was to determine ownership of those assets, primarily IP. The two judges agreed that the highly integrated nature of Nortel made it impossible to arrive at a fair and accurate determination of ownership within the Nortel group. By contrast, they obviously felt that the intra-group claim ($2B) against the parent and the parent’s guarantees were firmly attached to the US sub. No doubt they were also keenly aware of the Third Circuit precedent limiting substantive consolidation. Given a decision to avoid a result equivalent to substantive consolidation, and therefore to honor the corporate form as to claims, they were stuck with the problem of allocating the sale proceeds, a problem that substantive consolidation would have enabled them to avoid as discussed below.