Re Nortel Networks Corporation et al, 2015 ONSC 1354

COURT FILE NO.: 09-CL-7950

DATE: 20150304

SUPERIOR COURT OF JUSTICE – ONTARIO

COMMERCIAL LIST

IN THE MATTER OF THE COMPANIES' CREDITORS ARRANGEMENT ACT, R.S.C. 1985, c. c-36, AS AMENDED

AND IN THE MATTER OF A PLAN OF COMPROMISE OR ARRANGEMENT OF NORTEL NETWORKS CORPORATION, NORTEL NETWORKS LIMITED, NORTEL NETWORKS GLOBAL CORPORATION, NORTEL NETWORKS INTERNATIONAL CORPORATION and NORTEL NETWORKS TECHNOLOGY CORPORATION

APPLICATION UNDER THE COMPANIES' CREDITORS ARRANGEMENT ACT, R.S.C. 1985, c. C-36, AS AMENDED

BEFORE: Newbould J.

COUNSEL: Harvey G. Chaiton and George Benchetrit, for SNMP Research International, Inc. and SNMP Research, Inc.

Joseph Pasquariello and Christopher G. Armstrong, for the Monitor, Ernst & Young Inc.

Alan Merskey and Vasuda Sinha, for the Nortel applicants

Scott A. Bomhoff, for the U.S. Debtors

Shayne Kukulowicz, for the US Unsecured Creditors’ Committee

Jonathan Bell, for the Ad Hoc Group of Bondholders

Aubrey E. Kauffman, for Avaya Inc.

HEARD: February 27, 2015

Ruling on SNMPRI Stay motion

[1] SNMP Research International, Inc. and SNMP Research, Inc. moved for an order to lift the stay of proceedings contained in the Initial Order to permit an action in the United States to proceed against a number of Nortel entities, including NNC and NNL. At the conclusion of the hearing I dismissed the motion for reasons to follow. These are my reasons.

Background to this litigation

[2] SNMP Research, Inc. and SNMP Research International, Inc. (together “SNMPRI”) are corporations in the business of producing and distributing software for the simple network management protocol (“SNMP”). The basic purpose of the SNMP is to manage and monitor network-attached devices.

[3] Prior to the commencement of the CCAA Proceedings on January 14, 2009, SNMPRI licensed its software to Nortel for use in a number of Nortel products and from which Nortel purchased SNMP technologies and products. This relationship was governed by a license agreement between Nortel Network Corporation and SNMP Research International, Inc. dated December 23, 1999 together with certain schedules.

[4] Following Nortel’s insolvency filings, SNMPRI filed proofs of claim in the CCAA proceedings and the U.S Chapter 11 proceedings for pre-filing claims.

[5] In the spring of 2011, SNMPRI indicated that it also intended to file a complaint for alleged post-filing unauthorized use, distribution, license and sale of SNMPRI software by certain of the Nortel entities after January 14, 2009 (the “Complaint”). The Complaint also asserted claims against certain parties who purchased assets from Nortel in the CCAA and chapter 11 proceedings, including Avaya Inc. SNMPRI seeks to recover at least $86 million from the Canadian and U.S. Debtors on an “administrative expense” basis, including damages based on the proceeds of the sales of certain Nortel lines of business approved by this Court and the U.S. Bankruptcy Court. By the administrative expense claim, SNMPRI seeks to collect 100 cents on the dollar as it is a post-filing claim.

[6] On September 21, 2011, SNMPRI filed this motion for relief from the stay imposed by the Initial Order to permit the Complaint to proceed in the U.S. Bankruptcy Court against the Canadian Debtors and the U.S. Debtors. In the circumstances, because there was some risk of the Complaint becoming statute barred, SNMPRI and Nortel entered into a letter agreement on October 25, 2011 under which Nortel permitted SNMPRI to initiate the Complaint in the U.S. Bankruptcy Court on the condition that the proceeding be immediately stayed. The letter agreement provided that the parties would mediate the issues in the SNMPRI claims and that the stay of proceedings would continue until the parties had completed mediation. It also provided that if the mediation was not successful, SNMPRI could not to proceed with its Complaint until its motion to lift the stay was decided. An order was made on consent permitting the stay in the Initial Order to be lifted for the limited purpose as agreed.

[7] On December 27, 2013, SNMPRI filed an amended complaint (the “First Amended Complaint”) with the U.S. Bankruptcy Court. The First Amended Complaint contains additional allegations arising from the post-filing sales of Nortel’s assets and of copyright infringement by Nortel.

[8] As with the original Complaint, in the First Amended Complaint SNMPRI seeks to pursue all of its claims, including those against the Canadian Debtors, by way of a jury trial in the U.S. Shortly before amending the Complaint, SNMPRI filed notice of its intent to “withdraw the reference” from the U.S. Bankruptcy Court, meaning that it would seek to have the Complaint heard not by the U.S. Bankruptcy Court but by the United States Court for the District of Delaware. Thus on this record, SNMPRI seeks a jury trial in the U.S. District Court for Delaware.

[9] The mediation failed. It concluded on March 14, 2014.

The SNMPRI claims

[10] In the SNMPRI claim made in this CCAA proceeding for pre-filing claims, SNMPRI claims:

(a) A claim for approximately $22,000 for certain stayed royalty payments owing for Q4 2008.

(b) A claim for $3.6 million for fees and pre-filing interest resulting from an alleged unauthorized and illegal usage by the Nortel debtors of SNMPRI’s EMANATE software in its MG9000 software.

(c) A claim for $3.8 million for fees and pre-filing interest resulting from an alleged unauthorized and illegal usage by the Nortel debtors of SNMPRI’s EMANATE software used in Nortel’s Bay Software.

(d) SNMPRI claims further amounts to be determined under the U.S. Copyright Act, applicable trade secret law, and other intellectual property law for unauthorized use and distribution of SNMPRI software with the MG9000 software and Bay Software and other products of the Canadian Debtors.

[11] In the Complaint that SNMPRI filed in the U.S. Bankruptcy Court, SNMPRI sues to recover from the Canadian and U.S. Debtors damages and post-petition profits from Nortel’s alleged unauthorized post-petition use, distribution, license or sale of SNMPRI software and Nortel’s post-petition asset sale to Aveya. Pleaded is an alleged improper use by Nortel of SNMPRI’s EMANATE software in Nortel’s MG9000 software and in its MG9000 Bay Software. SNMPRI claims to recover from Aveya damages and profits from Aveya’s alleged unauthorized possession, use, distribution, license or sale of SNMPRI software, including the SNMPRI Bay Software.

[12] The nub of the claims asserted in the Complaint is that Nortel post-filing improperly used or sold SNMPRI software that was not licensed to Nortel and that Aveya purchased a line of business which contained the SNMPRI software and has not paid anything for it. It is essentially a claim for the same alleged illegal activity as claimed in the pre-filing claim against the Canadian Debtors in this CCAA proceeding.

Analysis

[13] A court has wide powers under the CCAA. Section 11(1) of the CCAA provides that a court may make any order it considers appropriate in the circumstances. Section 11.02(1) and (2) grants jurisdiction in an Initial Order or a later order to stay any action already commenced against a debtor and to stay any proposed action for any period that the court considers necessary. It is a discretionary matter. The onus is on the party applying to lift the stay of proceedings.

[14] There is little authority in how the court’s consideration of a request to lift a stay should be dealt with in a liquidating insolvency. In one such case, ICR Commercial Real Estate (Regina) Ltd. v. Bricore Land Group Ltd. (2007), 2007 SKCA 72, 33 C.B.R. (5th) 50 (Sask. C.A.), the supervising trial judge refused to lift the stay to permit an action to proceed against the debtor because the claimant failed to establish that it had a tenable claim. That order was upheld on appeal. In the Court of Appeal, Jackson J.A. stated that there ought not to be rigid requirements on how a supervising judge is to exercise his or her discretion. She stated:

66 Given the broad discretion granted to a supervisory judge under the CCAA, as well as the knowledge and experience he or she gains from the ongoing dealings with the parties under the proceedings, it would be contrary to the purpose of the CCAA for the law under it to develop in a restrictive way. Having regard for this, there ought not to be rigid requirements imposed on how a supervising CCAA judge must exercise his or her discretion with respect to lifting the stay.

[15] Jackson J.A. went on to discuss guidance from previous decisions. She stated:

68 In determining what constitutes "sound reasons," much is left to the discretion of the judge. However, previous decisions on this point provide some guidance as to factors that may be considered:

(a) the balance of convenience;

(b) the relative prejudice to the parties;

(c) the merits of the proposed action, where they are relevant to the issue of whether there are "sound reasons" for lifting the stay (i.e., as was said in Ma, Re, if the action has little chance of success, it may be harder to establish "sound reasons" for allowing it to proceed).

[16] In this case, no one raises the point that the merits of the proposed action against the Canadian Nortel are so lacking that the motion should be decided on that ground. The issue is whether the action should proceed in this Court or in a U.S. court.

[17] SNMPRI contends that the parties agreed to a trial in the U.S., albeit Knoxville Tennessee. Section 9.11 of the License Agreement between Nortel and SNMPRI contains a forum and choice of law clause providing that New York law is to apply to the license and for disputes to be heard in Knoxville, Tennessee. It states:

This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without reference to its choice of law provisions, and the federal laws of the United States applicable therein. The venue for any disputes arising under or in respect to this Agreement shall be Knoxville, Tennessee, U.S.A. All proceedings shall be conducted in English.

[18] SNMPRI contends that as the parties have agreed on a forum to resolve their disputes, the onus lies on the Monitor and the Canadian Nortel debtors to displace the forum chosen by the parties. It relies on Z.I. Pompey Industrie v. ECU-Line N.V., 2003 SCC 27, [2003] 1 S.C.R. 450 as authority for the proposition that to displace a forum selection clause in a commercial agreement, strong cause must be shown.

[19] SNMPRI also relies on a statement of Jurianz J.A. in Expedition Helicopters Inc. v. Honeywell Inc. (2010), 2010 ONCA 351 that a departure from a forum selection clause should only be permitted in exceptional circumstances. He went on to state:

24. A forum selection clause in a commercial contract should be given effect. The factors that may justify departure from that general principle are few. The few factors that might be considered include the plaintiff was induced to agree to the clause by fraud or improper inducement or the contract is otherwise unenforceable, the court in the selected forum does not accept jurisdiction or otherwise is unable to deal with the claim, the claim or the circumstances that have arisen are outside of what was reasonably contemplated by the parties when they agreed to the clause, the plaintiff can no longer expect a fair trial in the selected forum due to subsequent events that could not have been reasonably anticipated, or enforcing the clause in the particular case would frustrate some clear public policy. Apart from circumstances such as these, a forum selection clause in a commercial contract should be enforced.

[20] I note that included in the factors referred to by Jurianz J.A. that might justify a departure from a forum selection clause was if the circumstances that have arisen are outside of what was reasonably contemplated by the parties when they agreed to the clause or that enforcing the clause would frustrate some clear public policy.

[21] The Monitor and the Canadian Debtors say that because of the insolvency of Nortel, the onus lies on the SNMPRI to justify lifting the stay of proceedings. They say that all matters involving the Canadian Debtors should be dealt with in the CCAA court in Toronto. They rely on Sam Lévy & Associés Inc v Azco Mining Inc, 2001 SCC 92, [2001] 3 SCR 978. That case involved a Quebec bankrupt company under bankruptcy administration in Quebec. The Trustee commenced a petition in Quebec to recover assets against a British Columbia company, which moved to transfer the matter to B.C. under section 187(7) of the BIA which permitted the transfer if there was “sufficient cause”. The B.C. company relied on a type of forum selection clause, although Binnie J. held it to be only a choice of law clause.

[22] In Sam Lévy, Binnie J. referred to and adopted a “single control” model that favours litigation involving an insolvent company to be dealt with in one jurisdiction. He stated that a choice of forum clause in an insolvency situation should be taken into account but it is not binding or controlling. He stated in particular:

26 The trustees will often (and perhaps increasingly) have to deal with debtors and creditors residing in different parts of the country. They cannot do that efficiently, to borrow the phrase of Idington J. in Stewart v. LePage (1916), 1916 CanLII 626 (SCC), 53 S.C.R. 337, at p. 345, "if everyone is to be at liberty to interfere and pursue his own notions of his rights of litigation"….

27 Stewart was, as stated, a winding-up case, but the legislative policy in favour of "single control" applies as well to bankruptcy. There is the same public interest in the expeditious, efficient and economical clean-up of the aftermath of a financial collapse….

63 Leaving aside, then, the inapplicable directives of the Civil Code of Québec, the question is whether a choice of forum clause would amount to "sufficient cause" for the purpose of s. 187(7) to the extent that it would be an error of law for the motions judge to have declined to give it effect in the circumstances of this case. In my view a choice of forum clause (where there really is one) ought to be taken into careful consideration by a motions judge but it is not binding: [authorities omitted].

64 It could be argued that the public policy favouring a "single control" of bankruptcy proceedings and opposition to their fragmentation demands that a choice of forum clause receive lesser effect in bankruptcy than in the context of ordinary commercial litigation: Industrial Packaging Products Co. v. Fort Pitt Packaging International, Inc., 161 A.2d 19 (Pa. 1960); In re Treco, 239 B.R. 36 (S.D.N.Y. 1999), aff'd 240 F.3d 148 (2d Cir. 2001).

67 The implementation of these public policies might be expected to take priority over private "choice of forum" agreements where the two come into conflict, as indeed Robert J.A. concluded in the Quebec Court of Appeal. A similar position is expressed in I. F. Fletcher, Insolvency in Private International Law (1999), at p. 47, fn. 73:

[P]rivate contractual arrangements between parties cannot prevail over the exercise of bankruptcy jurisdiction, which belongs to the realm of public policy, serving a wider spread of interests including, ultimately, those of society at large.

In the United States, however, there is a competing body of judicial opinion that a trustee in bankruptcy who sues on an agreement containing a forum selection clause should, as a general rule, be bound by that clause to the same extent as the parties thereto: see Coastal Steel Corp. v. Tilghman Wheelabrator Ltd., 709 F.2d 190 (3d Cir. 1983); In re Diaz Contracting, Inc., 817 F.2d 1047 (3d Cir. 1987), and Hays and Co. v. Merrill Lynch, 885 F.2d 1149 (3d Cir. 1989).

68 In my view, for the reasons previously mentioned, the choice of forum clause would be a significant factor under s. 187(7) but not, in the context of the public policies expressed in the Act, a controlling factor.

[23] Justice Binnie stated that a creditor who was not a stranger to the bankruptcy had the onus to establish that multiple jurisdictions should be available for claims. He said:

76 …Single control is not necessarily inconsistent with transferring particular disputes elsewhere, but a creditor (or debtor) who wishes to fragment the proceedings, and who cannot claim to be a "stranger to the bankruptcy", has the burden of demonstrating "sufficient cause" to send the trustee scurrying to multiple jurisdictions….

[24] Sam Lévy involved a BIA proceeding. In it, Binnie J. referred to Stewart, a winding-up application. I see no reason why the principles in Sam Lévy should not be applicable in a CCAA proceeding. In Century Services Inc. v. Canada (Attorney General), 2010 SCC 60, [2010] 3 S.C.R. 379, it was noted that the CCAA offers more flexibility and greater judicial discretion than the rules-based mechanism under the BIA and the principle was enunciated that the harmonization of insolvency law common to the BIA and CCAA is desirable to the extent possible. The central nature of insolvency and the resolution of issues caused by insolvency are common to both BIA and CCAA proceedings and so too should the underlying principles.

[25] In Century Cities, nearly 10 years after Sam Lévy, Deschamps J. made clear why public policy prefers the resolution of all claims against a debtor to be determined in a single proceeding model. She stated:

22 While insolvency proceedings may be governed by different statutory schemes, they share some commonalities. The most prominent of these is the single proceeding model. The nature and purpose of the single proceeding model are described by Professor Wood in Bankruptcy and Insolvency Law:

They all provide a collective proceeding that supersedes the usual civil process available to creditors to enforce their claims. The creditors' remedies are collectivized in order to prevent the free-for-all that would otherwise prevail if creditors were permitted to exercise their remedies. In the absence of a collective process, each creditor is armed with the knowledge that if they do not strike hard and swift to seize the debtor's assets, they will be beat out by other creditors. [pp. 2-3]

The single proceeding model avoids the inefficiency and chaos that would attend insolvency if each creditor initiated proceedings to recover its debt. Grouping all possible actions against the debtor into a single proceeding controlled in a single forum facilitates negotiation with creditors because it places them all on an equal footing, rather than exposing them to the risk that a more aggressive creditor will realize its claims against the debtor's limited assets while the other creditors attempt a compromise. With a view to achieving that purpose, both the CCAA and the BIA allow a court to order all actions against a debtor to be stayed while a compromise is sought.

[26] Justice Jurianz in Expedition Helicopters listed as one of the factors that might justify a departure from a forum selection clause is if the circumstances that have arisen are outside of what was reasonably contemplated by the parties when they agreed to the clause. The license agreement between SNMPRI and Nortel Networks Corporation was made on December 23, 1999. It is inconceivable that an insolvency of NNC, the parent company of all of the Nortel entities, was within the contemplation of the parties at that time. If it were, the license agreement presumably would not have been made. That is a significant change in circumstances.

[27] Another factor referred to by Justice Jurianz was if enforcing the forum selection clause would frustrate some clear public policy. I think it follows from Sam Lévy that public policy in this country at least precludes a forum selection clause from being controlling in an insolvency situation. A CCAA insolvency proceeding serves a wider spread of interests than the parties to the agreement, including in this case the interests of pension and other claims asserted by the former employees of Nortel. A method that results in the most expeditious and fair determination of the claims of SNMPRI is clearly in the interests of all stakeholders in this CCAA process.

[28] It is to be noted that whereas the forum selection clause provides for Knoxville, Tennessee to be the venue for any dispute, SNMPRI has stated in its filings that it wishes a jury trial in Delaware. Thus SNMPRI is not following the clause. During argument counsel for SNMPRI said that if successful in having the case sent from the U.S. Bankruptcy Court to the Delaware District Court, it then might seek a transfer to Tennessee. Whether that could be done I do not know, but it would not bode well for a timely disposition of the action. The prospect of the Nortel Debtors being dragged around in different U.S. courts is not an appealing one. For them to become entangled in a drawn-out, foreign litigation process that will likely have no regard for the practical concerns of this insolvency, including the importance of resolving all remaining unresolved claims against the Canadian Debtors in a timely and efficient manner so that these proceedings, already pending for six years, can be brought to their conclusion, is a situation that should be avoided.

[29] So far as the forum selection clause providing that the license is to be governed by and construed in accordance with New York law and the federal laws of the United States applicable therein, no evidence has been filed as to what those laws are or to indicate that those laws are in any substantial way different from the laws of this country. Even if they were, Canadian courts can and often have applied foreign law. The recent UKPC claims against NNC and NNL is but one such example. I do not consider this much of a factor, if any, in favour of lifting the stay of proceedings.

[30] I also do not think that the location of witnesses in the U.S. or in Canada is a compelling factor, as contended for by SNMPRI. In any event, material was not provided in any detail as to expected witnesses and where they reside.

[31] SNMPRI says that the claims against the Canadian Debtors arise from common issues of fact and law as in the claim against the U.S. Debtors and against Aveya. Therefore SNMPRI says these claims should be heard together in the U.S. with the claims against the U.S. Debtors and against Aveya. This is particularly so, it asserts, because of its right to a jury trial in the U.S. in its claim against Avaya.

[32] There would appear to be nothing to stop SNMPRI from claiming against the U.S. Debtors and Aveya in Canada, although it might be that Aveya would attempt to challenge the claim against it being tried in Canada. There would certainly be nothing to stop SNMPRI from claiming against the Canadian Debtors in this CCAA proceeding and against the U.S. Debtors in the U.S. Bankruptcy Court and having a joint trial under the protocols established between the two courts. SNMPRI could make Aveya a defendant in the action in the U.S. Bankruptcy Court, and Mr. Kauffman who appeared for Aveya said it would be content to have the claim against it dealt with in the U.S. Bankruptcy Court.

[33] I agree with all of those opposing SNMPRI’s motion to lift the stay that the supposed difficulties that may be caused by its rights to a jury trial in its claim against Aveya are of its own choosing. SNMPRI may want to have the claim against Aveya tried together with the claims against Nortel, and try to have them all tried by a jury, but should that require the claim against the Canadian Debtors to be tried that way? It could be said, as one counsel did, that the tail is wagging the dog.

[34] If the claim against the Canadian Debtors for its post-filing conduct is tried in a separate U.S. jury proceeding, it means that there will be a multiplicity of proceedings against the Canadian Debtors. The pre-filing claim must be determined in the CCAA proceedings. The post-filing claims would be tried before a jury. It is quite evident that there is overlap between these claims. Indeed the issues are the same except as to the timing of the alleged unauthorized use of SNMPRI software, one claim being for pre-filing unauthorized use and the other being for post-filing unauthorized use. The risk of inconsistent findings of fact is obvious.

[35] A CCAA court should not lightly lose control of the process whereby claims against the debtor are to be determined. I agree that procedures should be imposed to ensure that the process for resolving the Canadian SNMPRI claims does not become more expensive or complicated than the circumstances permit or the claims merit. Such an approach would be consistent with this Court’s earlier orders in these proceedings. The allocation and inter-estate claims trials were, among other things, ordered to proceed on an accelerated timetable, with a controlled process for documentary and oral discovery. There is nothing in the materials that would indicate that a Delaware District Court would have any interest in a controlled process that would take into account the insolvency of the Canadian Debtors and the need for a timely resolution of all claims and preserving the debtors’ resources as much as is reasonably possible.

[36] Is SNMPRI a stranger to the bankruptcy in the sense articulated by Binnie J. in Sam Lévy? I think not. SNMPRI has participated in and objected to the sales of Nortel’s lines of business and it has filed a CCAA proof of claim against the Canadian Debtors. It has not met its burden of demonstrating sufficient reason to displace this Court’s jurisdiction to keep all of the SNMPRI claims against the Canadian Debtors within a single proceeding. Even if the onus were on the Monitor and the Canadian Debtors to prevent the stay from being listed, I am of the view that they would have met that onus.

[37] In the circumstances, the motion by SNMPRI to lift the stay of proceedings to permit the post-filing claims against the Canadian Debtors to be tried in the U.S. was dismissed.

Newbould J.

Date: March 4, 2015