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Nortel Judge Upholds Indenture Trustee’s Fees

In the Nortel Networks Inc. bankruptcy cases, Judge Kevin Gross rejected a challenge by two bondholders to fees charged by an indenture trustee and its professionals.  In re Nortel Networks Inc., 2017 Bankr. LEXIS 674 (Bankr. D. Del. Mar. 8, 2017).

Counsel for both the bondholders and the trustee had worked closely together throughout the complex Nortel cases.  They shared drafts of pleadings, had multiple phone calls, discussed strategy, and more.  But as confirmation approached, the bondholders asked Judge Gross to cut the fees by over 50 percent.   After discovery and a one-day trial, Judge Gross rejected the bondholders’ arguments.

Background

Starting in early 2009, Nortel and its affiliates filed insolvency cases in the United States, Canada, the UK, and elsewhere.  The debtors liquidated and auctioned intellectual property and other assets.  The auctions fetched $7.3 billion.  The money was escrowed while the estates litigated over how the proceeds should be allocated. 

In 2014, the Courts in the US and Canada held a 20-day joint trial.  A year later, both judges issued lengthy decisions and multiple appeals were filed.  The parties ultimately resolved the dispute in mediation.  Earlier this year, plans in the US and Canada were confirmed and went effective.  In June, creditors received initial distributions.

The bondholders who complained about fees held 90 percent of the bonds issued by debtor Nortel Networks Capital Corp., a financing entity that had issued notes with a face amount of $150 million.  The indenture trustee for those bonds served in the US case on the Official Committee of Unsecured Creditors (“UCC”).  The bankruptcy judges in the US and Canada appointed the trustee to serve as one of the core parties in the allocation proceeding.  The trustee participated in court-appointed mediations as well.

Estate professionals reportedly incurred fees totaling $2 billion.  The fees of the indenture trustee and its professionals totaled just over $8 million.  The US plan provided that the debtors would pay $4.25 million of those fees.  The balance would be paid from the charging lien embodied in the Indenture. 

The Fee Dispute

The bondholders argued that the trustee wasn’t necessarily entitled to the $4.25 million that the US debtors had agreed to pay.  They also asserted that the trustee shouldn’t have served on the UCC and participated in the allocation trial. 

Judge Gross issued his decision eight days after trial.  He noted that an indenture trustee’s duties are largely governed by the terms of the Indenture and the Trust Indenture Act, 15 U.S.C. § 77ooo(c).  Both the Indenture and the Act required the trustee to “use the same degree of care and skill in their exercise, as a prudent person would exercise or use under the circumstances in the conduct of his own affairs.” 2017 Bankr. LEXIS 674, at *7.  Judge Gross said a trustee’s prudence cannot be judged in hindsight.  “The Indenture Trustee is charged with acting with prudence at the time in question.  In other words, the Trustee’s judgment must be informed at the time the Trustee acted.”  Id.

The Indenture allowed a majority of holders to give an instruction to the trustee to take certain action or refrain from taking action.  The bondholders never gave the trustee a direction concerning issues about which they complained.

Judge Gross noted that the trustee’s “submission of detailed time records satisfied their prima facile burden to establish their entitlement to the fees they requested and the burden then shifted to the [n]oteholders.”  2017 Bankr. LEXIS 674, at *6.  Judge Gross further ruled “that for the most part the Indenture Trustee acted prudently throughout the progress of the complex and contentious bankruptcy case . . . .”  Id. at *10.  Judge Gross ruled that just one attorney for the trustee should have participated on UCC calls.  Therefore, he cut fees where more than one attorney joined UCC calls.  Otherwise, he awarded the trustee and the firms their fees in full. 

With respect to the trustee’s service on the UCC, Judge Gross concluded that “[g]iven the complexity of the case, the Court is unwilling to speculate that the [l]awyers’ attendance at Committee meetings in person or by telephone was imprudent.”  Id. at *14.  Judge Gross also noted both that indenture trustees often serve on creditors’ committees and that the Indenture here permitted the trustee to “act through agents or attorneys” on UCC matters.  Id. 

With respect to work by the Trustee and its counsel on the allocation trial and at the mediations, Judge Gross observed that he and the Canadian court “named the Indenture Trustee as a ‘Core Party’ in the Allocation Dispute.  The Court (and likely the Canadian Court) expected the Indenture Trustee’s full participation in the Allocation Dispute and the Indenture Trustee did fully engage in deposition and at trial.  The Court finds the Noteholders’ position on Allocation is strained” and added that “[t]he Noteholders are clearly wrong on their objection to fees billed on the Allocation Dispute.”  2017 Bankr. LEXIS 674, at *19-20.

Finally, Judge Gross ruled that counsel for the trustee that tried the fee dispute was entitled to its fees for doing so.  Id. at *23-25.  The bondholders had argued that Baker Botts L.L.P. V. ASARCO LLC, 135 S. Ct. 2158 (2015), did not apply to fees incurred by an indenture trustee defending fees.  ASARCO held that estate professionals cannot be reimbursed fees incurred defending against challenges to their fees. 

The bondholders sought to apply ASARCO to this dispute as well.  Judge Gross rejected their argument, saying that “the Indenture is a contract which qualifies for an exception to the American Rule” that parties should bear their own fees.  Id. at *25.  The Indenture permitted the trustee to be reimbursed for challenges to its fees.  “The Indenture Trustee and its lawyers are therefore awarded their fees for the fee dispute.”  Id.

PBWT has represented the trustee in the Nortel Networks cases since May 2012 and was lead trial counsel in the fee dispute.