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Value Tracing and Priority in Cross-Border Group Bankruptcies: Solving the Nortel Problem from the Bottom Up
Janger, Edward
Janger, Edward
Abstract
The Nortel bankruptcy case is simultaneously the biggest success and biggest failure in the recent history of cross-border restructuring practice. On the plus side, the coordinated sale of an insolvent telecom firm's key assets created a pool of value worth $7 billion-much larger than could have been accomplished through piecemeal local liquidation of spectrum licenses and intellectual property rights. Indeed, that pool of assets was much more valuable than anybody imagined when the firm filed its
bankruptcy petition. On the minus side, the fights over value allocation swallowed up a gargantuan part of that value-an estimated $2.6 billion.
The fights centered on alleged entitlements to priority-upward deviations from equal treatment and pro rata distribution. These fights were complicated by Nortel's structure as a global corporate group. The claims were based on, among other things: (1) liens; (2) corporate structure; (3) territorial jurisdiction; and (4) local statutory priorities. Interactions among these claims to priority made it virtually impossible to unscramble the egg.
The court's answer to the problem, dividing the pool of value amongst all proceedings pending for the Nortel group, has been characterized as a partial substantive consolidation and has proven controversial. In our view, the court's solution- pari passu distribution by estate-reached the right substantive result but got there by the wrong route. By calling the approach "partial substantive consolidation," the court framed its order as relying on "substantive consolidation," an extraordinary remedy that
disrespects the corporate form and is available only when the court finds bad behavior or disrespect of corporate formalities.'