Along with injustices, Nortel saga shows strengths of Canada’s legal system

Friday, July 21, 2017

Some five days after Canada celebrated its 150th birthday, and after almost a decade of litigation, unsecured creditors in the Nortel bankruptcy were scheduled to receive their first distribution of funds from the settlement reached in January.

It’s a shame that the distribution of what was left of Nortel, still an imposing sum that exceeded $10 billion, could not have been scheduled on Canada Day. Because what was missing in the celebration, as I saw it, was fitting recognition of the integrity, flexibility and sustainability of our legal system and the respect it has earned on the international stage — of which the Nortel proceedings are a prime example.

Maybe that’s because the system is not perfect. Justice, for example has been denied to too many for too long: just thinking “First Nations” is quite enough to make the point. There are also seemingly intractable and divisive issues including access to justice, systemic delay, the conduct of sexual assault trials and victims’ rights, to name just a few.

But our strength is that however belatedly we wake up to the issues, ultimately we do not ignore them. In that context, results that are “the best that could be expected” are exemplary — because our system never treats them as “good enough.” In our system, failing to find perfection is a stimulant, not an obstacle, to seeking it.

That’s why, as Supreme Court of Canada Justice Rosalie Abella pointed out in a recent speech, Canada is a groundbreaker on so many issues in the common law world, ranging from the rights of common law spouses, to gay rights to assisted suicide. So it is with Nortel, the perfect insolvency storm that turned out to be the perfect platform for groundbreaking decisions, in what amounted to a global forum watched by the entire world.

To be sure, the injustices the system generates, all in the name of justice, were out there for all to see in Nortel: former executives responsible for the company’s demise walking away with millions and U.S. bondholders whose legal fees were completely funded from the company’s shrivelled assets are just a few of the things that linger painfully in the lives and psyches of Canadian pensioners, whose futures are now shaped by just 45 per cent of the retirement income they expected, and in the lives and psyches of the U.K. pensioners who walked away from hundreds of millions of dollars to make a final settlement possible. Former employees on long-term disability suffered harshly as professional services firms, mostly lawyers and accountants, walked off with some US$2.5 billion in fees.

But in its prime, Nortel was a national icon and a multinational success. As the end neared, the unwinding of its downfall mirrored the best of our elusive identity, so difficult to define because it is so accepting. So is our system of justice, laden with and trusting broad discretion to individual judges to do what is fair and equitable, but constrained always by the overarching rule of law we so cherish, even as we consistently and vociferously mark its failings.

It’s the flexibility of our procedures that opened the gate to the unprecedented joint U.S.-Canada trial and subsequent concurring judgments from Ontario Superior Court Justice Frank Newbould and U.S. Bankruptcy Court Judge Kevin Gross that finally forced the parties to settle. Invaluable to the process was the Canadian concept of a court-appointed independent monitor (in this case, Ernst & Young and its lawyers, Goodmans LLP) who has historically been a significant resource to the court.

The unique proceedings saw pensioners, creditors, vulture funds in the guise of bondholders and governments from 20 countries and every continent but Antarctica put their cases to the court with the assistance of a no less diverse group of lawyers, accountants and expert witnesses. So complicated was the case that Warren Winkler, former chief justice of Ontario, concluded there was no realistic “litigation option” to resolve the dispute.

The judges came to the proceedings from worlds apart. Gross, who sits in Delaware, was bound by the constraints of  American bankruptcy law, which is a rigid code of rules that allows little discretion to the court. Newbould’s bible was our Companies’ Creditors Arrangement Act, a loose assortment of principles and guidelines that unabashedly rely on the presiding judge to do the right thing.

Both judges arrived at the same conclusion, but by vastly differing mental machinations. The proceeds, they decided, were to be divided pro rata so that available funds were allocated to each Nortel debtor in proportion to the aggregate amount of proven claims against that debtor. It was, as it turned out, the result the Canadian pensioners, among others, had put forward — though to some, it was no more than a necessary selection among evils.

Gross, however, arrived at that result kicking and screaming. He really had no other choice. It was only after he dismissed an array of alternatives by pointing to statutory or practical obstacles to their acceptance that he adopted pro rata as the only viable option.

Newbould, as is apparent from his judgment, didn’t feel constrained at all. Instead of resorting to a process of elimination (which the rigidities of the U.S. Code forced Gross to adopt) he approached the matter as a blank slate. Absent a clear legal framework that dictated a particular result, he sought the “right” answer. His judgment is a testament to his leadership and the trust our system puts in its jurists.

It’s a system that breeds creativity and fairness. It respects the rule of law, most vigorously in its process. At the same time, our system recognizes that the rule of law is a state of mind, one that ensures consistency even as it foments flexibility as our response to diversity.

It is Canada. And we should have celebrated our legal system more.

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