Skip to Main Content
August 08, 2014
Brattle Consultants Provide Expert Testimony and Litigation Support in Recently-Concluded Nortel Bankruptcy Proceedings

The Brattle Group was retained by counsel for the UK Pension claimants to opine on allocation and claims issues in Nortel’s bankruptcy proceedings. Brattle experts sponsored and supported two testifying experts in recently-concluded trials. In the allocation trial, occurring simultaneously before both the Delaware Court of Bankruptcy in the U.S. and the Superior Court of Toronto in Canada, Brattle principal Coleman Bazelon recommended a pro rata allocation of Nortel’s liquidation proceeds. Dr. Steve Felgran, a retired KPMG transfer pricing partner, testified on transfer pricing related issues in the allocation trial as well as a claims trial in the Canadian court.

Nortel was a leading telecom equipment manufacturer, which operated on a global scale. It went bankrupt in January 2009 and subsequently sold off all of its operating businesses, as well as around 6,000 patents for $7.3 billion. After three years of failed settlement negotiations and mediations, two legal proceedings were initiated by three bankruptcy estates of the former Nortel (one representing creditors in Canada, another representing creditors in the U.S., and a third representing those in Europe, the Mideast, and Africa along with other creditors concerning the allocation of total liquidation funds).

The core issue at dispute is the interpretation of an internal transfer pricing agreement, the Master Research and Development Agreement (MRDA), which allocated, for tax purposes, Nortel’s operating income or losses between 2001 and 2008 across Nortel’s worldwide legal entities. After bankruptcy, the bankruptcy estates and creditor groups disagreed about the meaning and applicability of the MRDA and, as a result, proposed different allocation methodologies over Nortel’s highly-valued intangible assets embodied in the surviving operations and the patent portfolio.

Because of the major disagreements on the MRDA over the allocation of liquidation proceeds among the parties involved, the Brattle team and Dr. Bazelon sought to develop an economically-rational allocation methodology that reflected the financial and management realities of Nortel’s business operations. Using analyses on Nortel’s patent citations, we found that Nortel's technologies and R&D activities were too entangled across both lines of business and international borders to be reasonably allocated across the bankruptcy estates. Dr. Bazelon concluded that Nortel's liquidation proceeds should be distributed to its bankruptcy estates so as to effect a pro rata distribution to its global creditors. Dr. Felgran opined, on behalf of the same claimants, that the MRDA is not applicable to the bankruptcy of the Nortel group because its purpose was solely to allocate Nortel’s group operating profits and losses for tax compliance purposes, and did not apply to the allocation of bankruptcy proceeds. In addition, Dr. Felgran showed that Nortel’s transfer pricing treatments of restructuring costs and pension costs, as well as interest-free intercompany loans from the UK to Canada, benefited the Canadian entity by hundreds of millions of dollars at the detriment of the UK entity.

The Brattle consulting team was led by principals William Zarakas and Bin Zhou, supported by principals Frank Graves and Bente Villadsen, senior associates Pavitra Kumar and Pallavi Seth, and associate Lucrezio Figurelli. The cases are now before the two courts.