Contributed by Joshua Nemser
As we have written in prior posts (see here, here, here, here, and here), the arbitrability of disputes in bankruptcy is still largely uncharted territory when the disputes involve consideration of bankruptcy and non-bankruptcy issues. Every freshly published case that tackles the topic is a valuable nugget that sheds light on the judicial analysis leading to the grant or denial of arbitration in cases pending before bankruptcy courts. What appears to be clear, though, is that without an agreement to arbitrate, “there is no obligation to arbitrate.” This is the recent holding of Judge Gross of the United States Bankruptcy Court for the District of Delaware. The decision is straightforward and sensible. It stands to reason that when prompted with the same issue in the future, courts may very well choose to follow the decision.
The Nortel group of companies comprised a massive telecommunications conglomerate. At the height of the “dot com bubble,” Nortel employed nearly 93,000 and reported annual revenues of $30 billion. After a series of setbacks and accounting irregularities related to the subsequent “burst” of the bubble, Nortel spent nearly a decade attempting to return its operations to success. Such attempts were not fruitful, and in 2009, Nortel Networks, Inc., the United States subsidiary of Canadian Nortel Networks Corporation, filed for bankruptcy protection. Nortel Canada filed similar proceedings in Canada, and a major group of approximately 20 European subsidiaries were placed into joint administration in the United Kingdom. Being one of the most significant multinational bankruptcies of the 21st century, the Nortel cases continue to raise novel cross-border insolvency issues.
This matter revolves around a dispute between the debtors in the United States and Canada on one side, and the debtors in Europe on the other. Nortel U.S. and Nortel Canada sold nearly all of their businesses and intellectual property, leading to sales proceeds just shy of $9 billion. As Judge Gross described, this created a “stickey wicket.” With numerous debtors around the world competing for their share of the sales proceeds, an agreement providing for allocation of such proceeds was necessary. To address the issue, the Nortel debtors in the United States, Canada, and Europe entered into, and courts overseeing their respective cases approved, an Interim Funding and Settlement Agreement. The settlement agreement provided, among other things, that
- sales proceeds would be placed into an escrow account;
- the numerous Nortel debtors would then agree upon a protocol for resolving disputes regarding the allocation of proceeds; and
- any disputes arising under the settlement agreement would be decided in a joint hearing of U.S. and Canadian bankruptcy courts.
The Nortel debtors could not agree upon a protocol to resolve disputes regarding the allocation of proceeds, which led to the instant cases. The U.S. debtors filed motions with both the U.S. and Canadian bankruptcy courts to establish a timeline and protocol for joint hearings to determine the allocation of sale proceeds. This motion outlined procedures for the U.S. and Canadian bankruptcy courts to determine the allocations jointly. The European debtors opposed the motion in the U.S. proceedings, arguing that the settlement agreement contained an implicit and enforceable agreement to arbitrate. The European debtors also argued that the U.S. and Canadian bankruptcy courts lacked jurisdiction to allocate the proceeds, but the court found “beyond cavil” that they had submitted to such jurisdiction under the plain language of the settlement agreement.
Agreement to Arbitrate?
The issue before the U.S. bankruptcy court was whether there was an agreement to arbitrate sales proceeds allocation disputes. The joint administrators for certain European Nortel debtors argued that the settlement agreement reflects that all parties agreed to arbitrate and that “arbitration is the only practical and efficient procedure.” Although the words “arbitrator” or “arbitrators” appear nowhere in the settlement agreement, the joint administrators argued that the language of the agreement evidenced the intent to submit the allocation disputes to arbitration.
The court held that the settlement agreement was unambiguous on its face and evidenced no agreement to arbitrate. The court’s holding accordingly read something like a 1L contracts case, discussing standard principles of contract formation and the admissibility of extrinsic evidence. Addressing the particularities of agreements to arbitrate, the court acknowledged the public policy in favor of arbitration. At the same time, Judge Gross noted, “[W]hile courts favor enforcing arbitration provisions that exist, courts are not predisposed to find parties agreed to arbitration.” Among the factors considered in the court’s holding was that the parties were represented by sophisticated counsel. Thus, they were capable of drafting an express arbitration clause if their intent was to arbitrate.
Fitting Nortel into the Bankruptcy and Arbitration Rubric
In our earlier posts, we discussed a framework outlining how courts generally analyze arbitration in bankruptcy (see here). We have not, however, addressed the first step of any bankruptcy and arbitration analysis, which is whether an agreement to arbitrate exists in the first place. The Nortel court’s analysis was complete without any inquiry into conflict between arbitration and the Bankruptcy Code. And although the takeaway may be rather simple, it is worth repeating: notwithstanding the public policy in favor of arbitration, courts will not compel arbitration in the absence of a clear, valid, and binding agreement.