TORONTO - Competing groups of creditors at the Nortel bankruptcy trial are focusing on the legal interpretation of a 10-year-old agreement to determine how to divide billions of dollars in proceeds from the sale of Nortel's patents and intellectual property.
In total, the trial is expected to determine how $7.3 billion of remaining Nortel assets are allocated among the various legal entities that are undergoing court-supervised windups in several jurisdictions.
That total includes about $4.5 billion from the sale of patents and other intellectual property owned by the Nortel companies that sought creditor protection in January 2009.
A key question for the courts to decide is: which of the Nortel companies owned the patents and IP.
In a cross-border court hearing Monday, lawyers focused on a 2004 agreement between the company's Canadian parent and several of its subsidiaries in the United States, the United Kingdom and other countries where the company had operations.
"There are three competing characterizations of the relative interests in the most important asset affecting allocations," said lawyer Benjamin Zarnett of Goodmans LLP, who represents the monitor Ernst & Young.
The Canadian position is that Nortel Networks Ltd., the Canadian parent, owned the patents and intellectual property and just licensed rights to the subsidiaries under a master research and development agreement, or MRDA
That position is being supported by the monitor and the Canadian creditors, including former employees and pensioners, and opposed by U.S. bondholders who say the agreement effectively transferred beneficial ownership to the subsidiaries.
The U.S. bondholders argue that much of the money from patent sale should be allocated to the Nortel Networks Inc., the U.S. business, based on a different reading of the MRDA.
"The irony here is that the Canadian interests rely on the contract to deny shared ownership. But the contract itself recognizes shared ownership," said Bill McGuire, one of the lawyers for the U.S. position.
McGuire said that the all the participants in the agreement — the parent company and the relevant subsidiaries — shared beneficial ownership of Nortel Networks Technology Corp., an entity that held the intellectual property.
"In fact . . . the parties amended the MRDA five times over four years and every single time they kept those critical words about the participants' ownership of NN Technology."
The European creditors, which include British pensioners, also assert they have a claim from the patent auctions to reflect the research and development costs borne by Nortel's U.K. subsidiary.
The decision rests with two judges who are presiding over the closing arguments Monday and Tuesday by video link: Justice Frank Newbould of Ontario Superior Court in Toronto and Judge Kevin Gross of the U.S. Bankruptcy Court, in Delaware.
Mark Zigler, a lawyer for the Canadian creditors, said that they aren't seeking all the money from the patents — just a fair and equitable division to all the creditors.
"Because no matter what happens, they will suffer some loss," Zigler said.
A spokesman for the Canadian Nortel employees and pensioners says its members could get just 11 per cent of their benefits under the U.S. approach to dividing the patent money, compared with about 60 under the Canada approach and about 70 per cent under a third approach proposed by the U.K. creditors.
Since the claims against Nortel are bigger than the money available to distribute, their hopes for recovering some of their retirement and health benefits hinge on how much money is allocated to the Canadian parent.
Nortel shareholders are unlikely to get anything for their stock, which has been delisted.
At its height, Nortel was the most valuable company on the Toronto Stock Exchange and employed more than 90,000 people around the world. The company filed for bankruptcy in 2009 in North America and Europe, shedding thousands of jobs after it was hurt by changing market conditions, economic upheaval and an accounting scandal that sent its stock price plunging.