The collapse of the Nortel bankruptcy mediation in January demonstrates once again that parties to complex commercial disputes can be just as irrational as the parties in any other conflict.
If there was ever a dispute where rational self-interest would argue in favour of a negotiated settlement, this is it. News that the mediation had been terminated, caused the value of Nortel bonds to drop by $67 million (4% of their value) while former employees, pensioners and other stakeholders were no closer to getting the money they are owed.
Meanwhile, the tab for legal and professional fees is approaching $1 billion and the meter is continuing to run.
There is about $9 billion on the table to be divvied up among the various claimants -pensioners, employees, disabled former employees, bondholders, trade creditors and governments. Although the total value of the claims is much greater than that, the costs of continuing the litigation are astronomical. According to filings with the US bankruptcy court, one law firm alone has billed almost $200 million to the end of 2012.
There were many reasons why the mediation should have succeeded: the sheer complexity of the claims; the prospect of conflicting results in Canada, the United States, the United Kingdom and other countries; appeals that will last many years; and the certainty that continued fighting will drain the pot of money that will be available when it’s all over.
As Ontario Chief Justice Warren Winkler, the court appointed mediator, told the parties in his opening remarks when he began the mediation process in April 2012:
“Simply put, there does not appear to be any realistic “litigation option” to resolve this dispute. The circumstances cry out for a mediated resolution. … What I mean is that the alternative to a mediated outcome is a lengthy litigation process… Even if judgments are rendered, it would be entirely possible that those judgments would have no legal effect beyond the jurisdiction of the courts rendering them. It will take years to get through this process, with an uncertain outcome, and significant amounts of the assets now available will have been depleted as a result. This would be a catastrophic outcome for some, and unsatisfactory for most, of those affected by this case.”
So why did this round of mediation fail?
One reason may be that it was just too complicated to succeed. About 120 representatives for the major stakeholder groups attended the Toronto meetings in January. Perhaps there were just too many divergent interests to reconcile them all.
Justice Winkler is one of Canada’s most experienced bankruptcy and restructuring mediators. As a judge, he has mediated many national and international disputes, including the Air Canada Restructuring; Walkerton Tainted Water; Ontario Hydro and Power Workers; Windsor-Michigan Tunnel and CanWest/Shaw Cable restructuring.
When he began the mediation in April 2012, he noted that previous attempts at mediation had not worked.
“[I]t is obvious from the prior mediation attempts that the complexities of the Nortel proceedings require something different than putting all parties together in the same room, the same hotel or, for that matter, the same city for concentrated and extended mediation sessions. That process has not worked and it is not manageable. I intend to take a fresh approach to this mediation. In the coming weeks, I will be meeting with the parties separately in order to explore possible avenues toward a global resolution. This process may evolve into broader meetings of multiple parties if I begin to see the alignment of interests and the emergence of a foundation for possible agreement.”
During the summer and fall of 2012, Justice Winkler held a series of meetings with the various groups. He asked questions and requested that each stakeholder group provide a confidential settlement proposal. After reviewing the proposals with his own legal advisors, he decided it would be productive to bring representatives from all the groups together for a mediation session. (Source: The Nortel Mediation website, http://www.nortelmediation.com)
In January, one week of scheduled mediation meetings was extended for a further week, as participants tried to bridge their differences. But ultimately they failed to reach a settlement and the mediation was terminated on January 24.
Another possible reason for failure was the animosity between key stakeholder groups. Press reports after the talks ended indicate that there was bitter impasse between bondholders and groups representing former employees and pensioners.
Both groups had a lot at stake in the talks and it appears that neither was willing to make concessions needed to reach a settlement. Naturally, each group blamed the other.
The conflict between the retirees and the so-called “vulture funds” – bondholders who scooped up Nortel bonds at deep discounts hoping to make a profit in the bankruptcy – seems to be particularly bitter.
The value of $1.7 billion Nortel bonds fell 4% (about $67 million) the day after the failure of the mediation was announced.
“The bondholder representatives were not the ones that walked away from this mediation,” one group said in an e-mailed statement published by Bloomberg. “It is unfortunate that others appear to have chosen litigation rather than a consensual resolution that would get distributions out to creditors.”
“For four years, our retirees and former employees have been fighting for a fair share of the pie. We have been treated as pawns in this game by vulture bond funds,” said the president of a group representing about 20,000 Canadian retirees, who have already taken large pension cuts and refused to see bondholders make a profit at their expense.
(The pensioners may now be in a weaker position against some other creditors following the decision of the Supreme Court of Canada released on February 1 in another bankruptcy case, which overturned an earlier Ontario Court of Appeal ruling that gave under-funded pension funds priority over other creditors. Both that case and the Nortel case have led to calls for pension law reform to protect the interests of retirees.)
Meanwhile, bankruptcy administrators in the UK pension are seeking $2.67 billion from Nortel’s US unit, setting the stage for continued fighting in those jurisdictions as well.
Apart from the large amount of money at stake, the Nortel mediation faces many of the same challenges as any other mediation. One of the issues was confidentiality.
Justice Winkler acknowledged these concerns in his April 2012 opening remarks:
“The usual conditions will apply to this mediation. It will be a confidential, without prejudice process. Nothing disclosed to me or anyone else in the course of this mediation can be used in any other process. I will not communicate a party’s position to any other party unless I am expressly authorized to do so.
“Some parties have expressed concerns regarding the confidentiality and distribution of the mediation briefs which have been provided to me and my counsel. As I have previously indicated, in recognition of these concerns, I will not distribute briefs. Should the parties wish to exchange briefs amongst themselves, they may do so on their own terms.
“In any event, there will be no rebuttal or responding briefs. I must emphasize above all that this is not an adversarial process. Mediation is primarily concerned with crafting a solution which addresses the interests of all parties. Positional bargaining and adversarial mindsets do nothing to advance a mediated settlement.”
Good advice, apparently not headed by the parties. Perhaps there was some progress in the latest talks that will lead to a settlement down the road. Or maybe there will be further attempt to mediate a settlement when the parties have suffered the further pain of litigation.