Unprecedented Joint Trial for Nortel
Nortel, the defunct Canadian multinational that achieved iconic status for its cutting-edge technology, is now poised to make its mark on the legal world. Early in 2014, teams of lawyers representing Canadian, US and European creditors will square off in an unprecedented cross-border joint trial aimed at allocating Nortel's remaining assets. Justice Geoffrey Morawetz of the Ontario Superior Court of Justice and Judge Kevin Gross of the US Bankruptcy Court for the District of Delaware will preside over the trial.
"You'll have two courts with independent jurisdiction that will hear the common evidence simultaneously and have to arrive at independent decisions on that evidence," says Mark Zigler of Toronto's Koskie Minsky LLP, who represents the Canadian Creditors Committee. "That's never been done before."
There's a great deal at stake. Following the surprisingly successful sale of Nortel's intellectual property, the company and its subsidiaries were left with approximately US$9 billion, which is now being held in an escrow account. The difficulty is that there is $12 billion in outstanding claims: Canadian creditors seek $4.5 billion, the Americans are looking for $3 billion, and the Europeans are claiming up to $10 billion.
Three failed mediations (two with the same mediator) are an indication of just how entrenched the parties are in their positions and how hard this case will be fought. As if the complexity of the substantive and procedural issues did not make the trial daunting enough, the clash of law, advocacy styles and culture suggest that only disciplined and firm judicial oversight will avoid chaos.
At a recent joint hearing intended to produce a discovery plan, the difficulties were manifest. US pleadings, for example, routinely include references to the law and legal argument, while Canadian pleadings tend to stick to the facts. Canadian lawyers are accustomed to amending their pleadings with regularity and often a minimum of fuss, while Americans take a more aggressive approach in opposing changes. "So your first shot at the pleadings had better be your best shot," says one lawyer close to the case.
There are also significant issues around what needs to be disclosed on discovery because the approaches are so different. American practice, for example, includes depositions from third parties and witnesses, a practice that is the exception rather than the rule in Canada. "But the differences in pleading and discovery rules are only the beginning," Zigler says. "When we get to trial, someone's going to have to rule on the admissibility of evidence, and since each judge is, in theory at least, making independent decisions, the two courts could come up with conflicting rulings."
The clash of culture isn't just legal in nature. The parties have yet to file their initial pleadings, but preliminary indications are that national pride will be an integral component of the arguments advanced on the merits. The Canadians are expected to rely on a legal doctrine known as "substantive consolidation," an equitable remedy that consolidates the assets of all the companies involved, wherever located, and without regard to intra-corporate relationships. Counsel are expected to emphasize that Nortel was a true Canadian success story, the entity that funded the R&D behind the patents, which generated $4.5 billion of the $9 billion in play.
The Americans will likely hone in on the fact that Nortel generated most of its revenue in the US. "The Americans are internally focused and both they and the Europeans have a bit of a nose-up, 'it's just Canada' attitude, that is reflective of their cultures," says one lawyer familiar with the case. For their part, the Europeans are also expected to focus on North American corporate wrongdoing. "There's even been talk regarding allegations of shadow directors out to exploit Europe," one observer says.
Still, counsel on the case remain hopeful. "There's no doubt that this case has unique aspects and challenges, but they will be overcome by coordination between the two jurisdictions and the application of the various cross-border protocols governing the case," says Benjamin Zarnett of Toronto's Goodmans LLP, who represents the monitor, Ernst & Young.
Julius Melnitzer is a legal-affairs writer and regular contributor to Lexpert.