March 20, 2017
A recent Law 360 story by Matt Chiappardi, “Nortel Creditors Seek $4M Cut to Indenture Trustee Fee Bid,” reports that two hedge funds that held senior notes issued by a Nortel Networks Inc. unit pushed the Delaware bankruptcy court to cut their indenture trustee’s roughly $8 million attorney fee request in half, arguing that Delaware Trust Co. didn’t properly discharge its duties.
During a daylong hearing in Wilmington, PointState Capital LP and Solus Alternative Asset Management LP argued that roughly $4 million of Delaware Trust’s fee request comes from work connected to the defunct telecom’s official committee of unsecured creditors, the massive allocation dispute to decide how to divide $7 billion in sale proceeds among Nortel’s global units, fighting to protect its legal fees, or other duplicative efforts, none of which benefited the noteholders directly.
The hedge funds argued that as an indenture trustee, Delaware Trust has a duty of undivided loyalty to its constituency, but didn’t manage its professionals in such a way that limited the scope of their work to tasks directly benefiting the noteholders, and is looking for an outsized fee that doesn’t comport with its role in the case.
Arguing for the hedge funds, attorney James C. Tecce of Quinn Emanuel Urquhart & Sullivan LLP stressed that the dispute was not about the “qualifications, caliber or integrity” of the counsel Delaware Trust retained, but how the trustee chose to utilize them and whether the fee request, some of which could be taken out of their recoveries, now pending is reasonable.
“This is not an objection we took lightly,” Tecce told U.S. Bankruptcy Judge Kevin Gross. “The duty was not properly discharged … [professionals] were not managed in a way to avoid duplicating expenses.” Delaware Trust countered that its fee bid was indeed reasonable, calling the Nortel case “unprecedented, complex and massive,” and arguing that it, and its predecessor Law Debenture Trust Co. of New York, “carried the torch” for the noteholders throughout the eight-year-long case.
Decisions about where to focus efforts were prudently made on a day-to-day basis throughout the case, and that work ultimately led to the noteholders receiving a full recovery on their roughly $300 million in claims, Delaware Trust attorney Daniel A. Lowenthal of Patterson Belknap Webb & Tyler LLP said in court. “The irony is that now that they are receiving a 100 percent recovery, they now object to the amount of the work done,” Lowenthal said. “These are the same holders who demanded we not sit on the sidelines.”
The issue stems from an objection the hedge funds lodged against Nortel’s Chapter 11 plan, which Judge Gross confirmed in January, not to the strategy itself, but to the fees, and how it plays out could have wide-reaching implications for indenture trustee fees in bankruptcy cases.
Indenture trustee attorney fees that are not covered by a debtor’s estate are typically paid by the noteholders or charged against their recoveries, but the hedge funds argue that the full amount of such costs are not reasonable when the indenture trustee is also working as a member of a statutory committee with different or overlapping constituents.
The hedge funds additionally argue that the indenture trustee is mischaracterizing its arguments, claiming that they object to its decision to sit on the unsecured creditors committee when they only take issue with charging fees for work there. They also contend that the indenture trustee hadn’t kept the hedge fund in the loop about the expenses, only springing them at the end of an eight-year case.
Delaware Trust took issue with that argument, asserting that the noteholders were informed about the expenses at periodic intervals during the case. Judge Gross did not rule, but did question whether the hedge funds were engaging in a “hindsight exercise.” He said he would issue a decision in writing shortly.
The fee dispute is only one of several vestiges left hanging after Nortel came to a major peace deal that allowed for confirmation of a Chapter 11 plan earlier this year for a case that has been pending since 2009. The major sticking point was how to divide more than $7 billion raised in asset sales, a good potion of it intellectual property transactions, among the various Nortel units around the globe, a dispute that was adjudicated through an unprecedented simultaneous cross-border trial in Delaware and Toronto in 2014.
Professional fees throughout the case have been estimated to exceed $2 billion, making it one of the most expensive Chapter 11 cases in history. The case is In re: Nortel Networks Inc. et al., case number 1:09-bk-10138, in the U.S. Bankruptcy Court for the District of Delaware.