In re: Nortel Networks Corporation, et al

Filing 25

MEMORANDUM ORDER Denying Appeal and Affirming the Bankruptcy Court's 3/2/10 Order, ***Civil Case Terminated. Signed by Judge Leonard P. Stark on 11/15/13. (ntl)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELAWARE
INRE::
NORTEL NETWORKS CORP., eta/.,

Chapter 15
Case No. 09-10164-KG
(Jointly Administered)

Foreign Applicants in Foreign Proceedings
KIEN CHEN and MOREN MINTO,
Appellants/Applicants,

C.A. No. 10-314-LPS

v.

ERNST & YOUNG INC.,
Appellee.

MEMORANDUM ORDER

At Wilmington this 15th day of November, 2013, this matter coming before the Court
upon the appeal (the "Appeal") (D.I. 1) of Kien Chen and Moreno Minto ("Appellants" or "Lead
Plaintiffs"), from an order entered on March 2, 2010 by the Honorable Kevin Gross of the United
States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court") in the Chapter 15
proceedings ofthe Canadian Nortel Group 1 (the "Chapter 15 Cases"), denying Lead Plaintiffs'
Motion (the "Motion") (Bankr. Case No. 09-10164-KG, D.l. 230) for Limited Modification of
Stay (A) to Allow Service of a Document Preservation Subpoena and (B) to Pursue the Securities
Litigation under 11 U.S.C. § 1522(c) (the "Order") (Bankr. D.l. 265), and having considered the
parties' papers submitted in connection therewith;
1

The Canadian Nortel Group is comprised ofNortel Networks Corporation ("NNC") and
certain of its direct and indirect subsidiaries, Nortel Networks Limited, Nortel Networks
Technology Corporation, Nortel Networks Global Corporation, and Nortel Networks
International Corporation. (See D.l. 15 at 1)
1

l
:.

l

IT IS ORDERED that the Appeal is DENIED and the March 2, 2010 Order ofthe

I

1

Bankruptcy Court is AFFIRMED, for the reasons that follow:
Background. 2 On January 14, 2009, the Canadian Nortel Group commenced certain
proceedings (the "Canadian Proceedings") under Canada's Companies' Creditors Arrangement
Act ("CCAA"), R.S.C. 1985, c. C-36, as amended, before the Ontario Superior Court of Justice
(Commercial List) (the "Ontario Court"). (See D.I. 12 at 5; D.I. 15 at 1, 3) Also on that date,
Ernst & Young Inc. ("Monitor" or "Appellee"), the court-appointed monitor and authorized
foreign representative of the Canadian Nortel Group in the Canadian Proceedings, filed a petition
in the Delaware Bankruptcy Court seeking recognition of, and related relief in respect of, the
Canadian Proceedings under Chapter 15 of Title 11 of the United States Code (the "Bankruptcy
Code"). (See D.I. 3 at 1; D.I. 15 at 1, 3) On February 27,2009, the Bankruptcy Court entered an
order (the "Recognition Order"): (i) recognizing the Canadian Proceedings as foreign main
proceedings pursuant to 11 U.S.C. § 1517; (ii) recognizing the Appellee as the authorized foreign
representative of the Canadian Nortel Group; and (iii) giving full force and effect- pursuant to
11 U.S.C. § 1521- in the United States to the First Amended and Restated Initial Order of the

l

Ontario Court (as well as any further amendments or extensions thereof as may be granted by the
Ontario Court) (the "Initial Order"). (See D.I. 12 at 5; D.I. 15 at 3-4) The Initial Order stays all
proceedings against the Appellee, the Canadian Nortel Group, and any current, former, or future

l

I
1

j

2

M ore than 3 Y2 years have passed since the entry of the Bankruptcy Court Order that is
the subject of this Appeal; the appellate briefing was completed nearly three years ago. The
parties have not provided the Court with any supplemental briefing (other than in relation to a
motion to strike an errata, which the Court denied in May 2011 (D.I. 24)), status report, or notice
of subsequent developments. Hence, the Court will decide the issues presented in this Appeal
solely on the basis of the briefing and record the parties created several years ago.
2

I

officers and directors ofthe Canadian Nortel Group (the "Stay"). (See D.l. 12 at 5; D.l. 15 at 4)
The Stay has been extended a number oftimes. (See, e.g., D.I. 12 at 5; D.l. 15 at 4)
Additionally, as noted by Appellee, many affiliates of the Canadian Nortel Group are currently3
the subject of various plenary and ancillary insolvency proceedings in multiple jurisdictions
world-wide. (See D.I. 15 at 4)
Appellants are the appointed lead plaintiffs in the securities class action entitled "David
Lucescu, Individually and On Behalf ofAll Others Similarly Situated v. Mike Zafirovski, et al.,"

Civil Action No. 09-cv-04691-SAS (the "Securities Litigation"), commenced in the United
States District Court for the Southern District of New York in May, 2009, on behalf of all
persons (the "Putative Class") who purchased or otherwise acquired securities ofNNC between
May 2, 2008 and September 17, 2008, inclusive (the "Class Period"). (See D.I. 12 at 1; see also
D.I. 15 at 4-5) In relation to the Securities Litigation, Appellants filed their Motion in the
bankruptcy proceeding, seeking to modify the Stay to the limited extent of (a) permitting the
Securities Litigation to proceed against two individuals, former officers ofNNC, who are not

I

l

themselves debtors, and (b) serving a subpoena directed at preserving documents that would be
responsive to discovery requests in the Securities Litigation. (See id. at 3) After full briefing, on
February 26, 2010, the Bankruptcy Court heard argument on the Motion, and at the conclusion of
the hearing explained why it was denying the Motion. (See D.I. 12 at 6; D.I. 13 Ex. 19 (Tr. Feb.
26, 2010 Hr'g) ("Tr."); D.I. 15 at 2) Thereafter, on March 12, 2010 Appellants filed a Notice of
Appeal of the Order with the Bankruptcy Court (the "Notice of Appeal") (Bankr. D.l. 233; see
also D.I. 12 at 1, 6; D .I. 13 Ex. 8; D .I. 15 at 2, 6), which was entered on the docket of this Court

3

See footnote 2.
3

j

I

on April21, 2010 (see D.l. 4).
Contentions.

In their Appeal of the Order, Lead Plaintiffs assert that the Bankruptcy

Court erred in denying their motion to modify the Recognition Order, pursuant to 11 U.S.C.
§ 1522(c),4 to allow Appellants to: (i) serve a document preservation subpoena, and (ii) pursue
the Securities Litigation- alleging violations of Sections 1O(b) and 20(a) of the Securities

l

Exchange Act of 1934 and Rule 1Ob-5 promulgated thereunder- against the non-debtor
Defendants, Mike Zafirovski and Pavi Binning ("D&O Defendants"). (See D.l. 2 at 2; D.l. 12 at
3 n.2, 5)
First, with respect to the Recognition Order, entered pursuant to 11 U.S.C. §§ 1520 and
1521(a) in the Chapter 15 Cases and imposing a stay of the Securities Litigation- including
against the D&O Defendants - Appellants assert that proceeding against the D&O Defendants
"would involve, at least in the foreseeable future, only the filing of motions to dismiss by the
[D&O Defendants] requiring no perceptible action by the [D&O Defendants] or [NNC], as such
motions are entirely lawyer driven." (D.I. 12 at 3) Appellants further contend that, because the
D&O Defendants are non-debtors, they enjoy no Bankruptcy Code protections absent compelling
circumstances. (See id) They add:
The stay imposed by ... the Initial Order is clearly contrary to
[U.S.] public policy .... Where the CCAA provides for a stay of
any proceeding against current or former officers or directors of an
applicant under the CCAA, the Bankruptcy Code affords no such
extraordinary relief to non-debtors, including officers and directors
of a debtor. . . . [T]he automatic bankruptcy stay does not extend
to non-debtors and such relief is not available to non-debtor

4

"The court may, at the request of the foreign representative or an entity affected by relief
granted under section 1519 or 1521, or at its own motion, modify or terminate such relief." 11
U.S.C. § 1522(c).

4

l
l

I

I

I
j

l

l

defendants absent a showing of extraordinary circumstances.
Moreover, there is a significant public policy and interest in the
enforcement of the federal securities laws .... No such proof [of
extraordinary circumstances] was or has been provided by the
Monitor.
(D.I. 12 at 10-11)
Second, with respect to the document preservation subpoena, Appellants submit that
while "the discovery stay under the Private Securities Litigation Reform Act of 1995 (15 U.S.C.
§ 78u-4(b)(3)(B)) (the 'PSLRA Stay') prohibits Appellants from serving discovery on, inter alia,
the [D&O Defendants] and [NNC]," the "basic tenets ofthe PSLRA and the interests of justice
are best served by ensuring that the relevant documents in [NNC]'s possession and/or control are
maintained until after Appellants are permitted to obtain discovery, i.e., after motions to dismiss
are decided." (!d. at 3) Lead Plaintiffs sought service of a document preservation subpoena upon
NNC to avert loss, destruction, or unavailability of potentially relevant documents until the time
when Lead Plaintiffs could seek discovery subsequent to the lifting of the PSLRA Stay in the
Securities Litigation. (See id.) Appellants state that "[n]o action would be required on the part
of [NNC] other than to maintain documents and information as defined in the Motion;" as a
result, "[n]o interference with any reorganization (or more accurately liquidation) in Canada or
the United States would occur." (!d. at 3-4; see also D.l. 16 at 3-5; D.l. 18 at 1)

I
l
j

I

1

l
i
!

l

l

Appellants further urge that, absent reversal, they will suffer severe prejudice due to their
inability to pursue legitimate claims against non-debtors who hold no entitlement to any
protections ofthe Bankruptcy Code, as well as the potential loss and/or destruction of relevant
documents (particularly given the fact that NNC and affiliated Canadian and U.S. debtors "are
liquidating all of their assets through a series of sales of assets and business divisions"). (See

5

I

I
0.1. 12 at 4, 6; D.I. 16 at 5-6) Appellants contend that the Bankruptcy Court's reliance on its role
as a court of ancillary jurisdiction was stretched, and that "the interests of comity do not go so far
as to continue to support relief that is wholly unjustified under the Bankruptcy Code and relevant
precedent regarding litigation in the United States between non-debtors." (D.I. 12 at 4) Noting
that the Ontario Court's Initial Order does not stay U.S. proceedings, Appellants submit that the
Bankruptcy Court was the proper court in which to bring its Motion. (See D.l. 16 at 6-8)
Appellants also argue that the Recognition Order- the operative order establishing the Stay,
which impacts the Securities Litigation and which is the proposed subject of modification - was
entered by the Bankruptcy Court, meaning the Ontario Court has no jurisdiction or authority to
modify it. (See id.)
Appellee's response focuses primarily on the reasons the Bankruptcy Court did not
clearly err in finding that Appellants should have sought relief first from the Ontario Court. (See
0.1. 15 at 2-3; see also D.l. 3) These reasons include that the Stay was created pursuant to the
Initial Order of the Ontario Court and enforced in the United States through the Bankruptcy
Court's Recognition Order. (D.I. 15 at 2, 15-16) Appellee further argues that there was no error
in finding that the relief sought would have a "significant" impact on the Canadian Nortel Group,
placing a burden on Appellants under 11 U.S.C. § 1522(a) that they did not meet. (See id. at 2,
9-14) Appellee also contends that the Bankruptcy Court correctly determined that allowing
service of a document production subpoena on Nortel would prejudice the estate and its
creditors. (See generally D.l. 15)
Standard of review. Appeals from the Bankruptcy Court to this Court are governed by 28
U.S.C. § 158. Pursuant to§ 158(a), district courts have mandatory jurisdiction to hear appeals

6
f

I

I
"from final judgments, orders, and decrees" and discretionary jurisdiction over appeals "from
other interlocutory orders and decrees." 28 U.S.C. § 158(a)(l) and (3). In conducting its review
of the issues on appeal, the Court reviews the Bankruptcy Court's findings of fact for clear error
and exercises plenary review over questions oflaw. See Am. Flint Glass Workers Union v.
Anchor Resolution Corp., 197 F.3d 76, 80 (3d Cir. 1999). "A finding is 'clearly erroneous' when
although there is evidence to support it, the reviewing court on the entire evidence is left with the
definite and firm conviction that a mistake has been committed." United States v. US. Gypsum
Co., 333 U.S. 364, 395 (1948). The Court must "break down mixed questions of law and fact,
applying the appropriate standard to each component." Meridian Bank v. A/ten, 958 F.2d 1226,
1229 (3d Cir. 1992).
Analysis. The Court concludes that the Bankruptcy Court did not err with respect to its
findings of fact and its legal determinations. Emphasizing that "this is a Chapter 15 case as
opposed to a Chapter 11 case," the Bankruptcy Court properly relied heavily on principles of
comity, concluding correctly that the request for relief sought by Appellants "could have and
should have been brought before the Canadian court in the first instance, the court which is the
main proceeding here." (Tr. at 37)
Additionally, as the Bankruptcy Court stated in the Order, the requested modifications to
the Stay were unwarranted due to "the prejudice to the Debtors who are in the midst of a
complex case." (D.I. 1 Ex. A; see also D.I. 15 at 11-12) ("Nortel continues to be confronted with
a plethora of complex issues that will test the efforts of its increasingly strained personnel to
administer the restructurings and to maximize the value available to all stakeholders ....
Nortel's business functions are now being performed with minimal or skeletal staffing levels, as
7

!
I
I

l

I

there have been significant layoffs and employee transfers over the course of the Canadian
Proceedings and the Chapter 11 Cases.")
Appellants' citation to 11 U.S.C. § 1522(a) does not alter the outcome. Section 1522(a)
provides: "The court may grant relief under section 1519 or 1521, or may modify or terminate
relief under subsection (c), only if the interests of the creditors and other interested entities,
including the debtor, are sufficiently protected." 11 U.S.C. § 1522(a) (emphasis added). See
also, e.g., In re Qimonda AG Bank. Litig., 433 B.R. 547, 557 (E.D. Va. 2010) ("[A] bankruptcy

court, when modifying or terminating relief pursuant to § 1522(c), must ensure that 'the interests
of the creditors and other interested entities, including the debtor, are sufficiently protected."').
Here, Judge Gross examined the circumstances, drawn from the parties' presentations as well as
his own familiarity with the cases, and concluded that the relief sought was not warranted, given
"a balanc[e] ofthe hardships [which] ... clearly rests in favor ofthe debtors." (Tr. at 37-38) As
Appellee states, "[b ]y denying the Motion, the Bankruptcy Court correctly determined that
maintenance of the Stay benefited all parties with a stake in the restructuring of the Canadian
Nortel Group." (D.I. 15 at 10) Even assuming that the requested modifications could have been
accomplished while still sufficiently protecting the interests of all "other interested entities," the
Bankruptcy Court was within its discretion not to make such modifications.
With respect to the requested document preservation subpoena, which sought "to preserve
documents of the Canadian entity, not even an entity here in the United States," the Court finds
no error in the Bankruptcy Court's determination that "[t]here's no question that does not belong
here." (See Tr. at 37) Nor does the Court find error in the Bankruptcy Court's conclusion that "a
balancing of the hardships here clearly rests in favor of the debtors." (!d. at 38) As Appellee

t
1
1

8

I

explains, "the Document Preservation Subpoena on its face requires NNC to assume the constant
burden of identifying whether any information is responsive to the specific categories described
therein." (D.I. 15 at 25)
Conclusion. For the reasons explained, the Bankruptcy Court's decision is AFFIRMED.
The Clerk of Court is directed to CLOSE this case.

I
j

f

Wilmington, Delaware

UNITED STATES DISTRICT JUDGE

9

I

I