In Re: Nortel Networks, Inc. v. ( 2013 )

PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
_____________
No. 13-2739
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In re Nortel Networks Inc., et al.,
Debtors
JOINT ADMINISTRATORS FOR NORTEL NETWORKS
UK LIMITED AND CERTAIN OF ITS AFFILIATES
LOCATED IN THE REGION KNOWN AS EMEA,
Appellants
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On Appeal from the United States Bankruptcy Court
for the District of Delaware
(Case No. 09-10138)
Bankruptcy Judge: Honorable Kevin Gross
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Argued: October 8, 2013
Before: FUENTES, GREENBERG, and BARRY, Circuit
Judges
(Opinion Filed: December 06, 2013)
Edwin J. Harron
Robert S. Brady
John T. Dorsey
Jaime Luton Chapman
Young Conaway Stargatt & Taylor, LLP
Rodney Square
1000 North King Street
Wilmington, Delaware 19801
Derek J.T. Adler [Argued]
Amera Z. Chowhan
Gabrielle Glemann
Charles H. Huberty
Hughes Hubbard & Reed LLP
One Battery Park Plaza
New York, New York 10004
Attorneys for Appellants Joint Administrators for Nortel
Networks UK Limited and Certain of its Affiliates Located in
the Region Known as EMEA.
Howard S. Zelbo [Argued]
James L. Bromley
Lisa M. Schweitzer
Cleary Gottlieb Steen & Hamilton LLP
One Liberty Plaza
New York, New York 10006
Derek C. Abbott
Ann C. Cordo
Morris, Nichols, Arsht & Tunnell LLP,
1201 North Market Street, 18th Floor
P.O. Box 1347
Wilmington, Delaware 19801
Attorneys for Appellees Nortel Networks Inc., et al.
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Fred Hodara
David Botter
Abid Qureshi
Akin Gump Strauss Hauer & Feld LLP
One Bryant Park
New York, New York 10036
Patricia A. Millett [Argued]
Akin Gump Strauss Hauer & Feld LLP
1333 New Hampshire Ave., N.W.
Suite 400
Washington, D.C. 20036
L. Rachel Lerman
Akin Gump Strauss Hauer & Feld LLP
2029 Century Park East
Suite 2400
Los Angeles, California 90067
Attorneys for Appellee The Official Committee of Unsecured
Creditors of Nortel Networks Inc., et. al.
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OPINION OF THE COURT
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FUENTES, Circuit Judge.
After the multinational telecommunications firm Nortel
Networks declared bankruptcy in 2009, various debtors
comprising the Nortel brand auctioned their business lines
and intellectual property. They raised $7.5 billion. Since the
auctions, the selling debtors have disputed whether or not
they had previously agreed to allocate the auction funds
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through arbitration. As it stands, the debtors have $7.5 billion
and no agreed-upon method for dividing it.
The U.S. Bankruptcy Court for the District of Delaware
determined that the parties did not agree to arbitrate their
disputes about allocation. Because the contract at the center
of this controversy does not reflect the parties’ intent to
arbitrate disputes about the auction funds, we will not compel
the parties to do so. We therefore affirm.
We do not consider the Joint Administrators’ related, but
distinct, challenge to the Bankruptcy Court’s decision to
allocate the contested funds. A panel of this Court declined to
certify that question for appeal. In any event, the Bankruptcy
Court has not yet held the hearing to allocate the funds, so
review would be premature.
I. Background of the Case
A. The Facts
In early 2009, Nortel entities around the world declared
bankruptcy and filed petitions in U.S., Canadian, English, and
French courts to begin insolvency proceedings. See In re
Nortel Networks, Inc., 669 F.3d 128, 130-31 (3d Cir. 2011)
(summarizing history of the Nortel bankruptcy). The
following day, the U.S. Bankruptcy Court for the District of
Delaware and the Superior Court of Ontario, Canada, each
approved a cross-border protocol for coordinating U.S. and
Canadian proceedings.
As a transnational company with numerous subsidiaries
located in multiple jurisdictions, Nortel’s insolvency posed
challenges of coordination and timing. Among them, multiple
Nortel entities owned the business lines and intellectual
property that comprised the global Nortel brand. Thus, any
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plan to sell or reorganize Nortel property would have to
accommodate multiple, and possibly conflicting, interests. At
the same time, the value of Nortel’s business and intellectual
property stood to diminish over time. Therefore, any plan to
sell or reorganize Nortel’s assets had to be formed quickly in
order to maximize Nortel’s value. The debtors faced a
conflict between their mutual interest in quick sales and their
individualized interests in receiving a big share of each sale.
Enter the Interim Funding and Settlement Agreement
(“Interim Funding Agreement”). Broadly speaking, the
Interim Funding Agreement “provides for the parties’
cooperation in the global sales of Nortel’s business units and
agreement that the proceeds of any sale will be held in escrow
until the parties either reach a consensual allocation or obtain
a binding procedure for the allocation pursuant to an agreed
upon protocol.” Nortel, 669 F.3d at 131. The agreement thus
created a framework for Nortel debtors to sell assets without
first agreeing how to allocate the proceeds of any sale among
the relevant debtors.
Nortel debtors from the United States, Canada, Europe,
the Middle East, and Africa entered into the Interim Funding
Agreement on June 9, 2009. The debtors reduced the crux of
their sales arrangement to Section 12 of the agreement,
captioned “Entry into Sale Transactions.” That section
outlines a sale and escrow framework:
 Section 12(a) states that sales and auctions “shall not be
conditioned upon” an agreement between the sellers to
allocate sale proceeds or an agreement on the procedure
for allocating sale proceeds. App’x 1560, ¶ 12(a).
 Section 12(b) states that the sale proceeds shall be
deposited into escrow and not released “in advance of
either (i) agreement of all of the Selling Debtors or (ii) in
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the case where the Selling Debtors fail to reach
agreement, determination by the relevant dispute
resolver(s) under the terms of the Protocol (as defined
below) applicable to the Sale Proceeds, and subject in
each case to payment of the agreed or determined amount
of allocation of Sale Proceeds to all Selling Debtors.”
App’x 1560, ¶ 12(b).
 Section 12(c) states that the parties shall “negotiate in
good faith and attempt to reach agreement on a timely
basis on a protocol for resolving disputes concerning the
allocation of Sale Proceeds.” App’x 1560, ¶ 12(c).
 Section 12(d) states that, after a sale, the parties shall
“negotiate in good faith and on a timely basis to attempt to
reach agreement regarding the allocation of the Sale
Proceeds . . . , failing which the Interim Sales Protocol
shall apply to determine the allocation of the relevant Sale
Proceeds.” App’x 1560, ¶ 12(d).
Section 12 does not use the words “arbitrators” or
“arbitration,” or identify any arbitral association.
Separate from Section 12, the Interim Funding Agreement
contains choice-of-law and forum-selection clauses. The
parties placed these clauses in Section 16, captioned
“Governing Law and Jurisdiction.” App’x 1563-64. Section
16(a) specifies that the laws of the State of New York govern
the agreement except as to Section 17, which concerns the
personal liability of the representatives of the European,
Middle Eastern, and African debtors. Section 16(b) states that
the parties agree “to the non-exclusive jurisdiction of the US
and Canadian Courts (in a joint hearing conducted under the
Cross-Border Protocol adopted by such Court, as it may be in
effect from time to time), for purposes of all legal
proceedings to the extent relating to the matters agreed” in the
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Interim Funding Agreement. App’x 1564, ¶ 16(b). No part of
Section 16 discusses arbitrators, arbitration, or arbitral
associations.
The Bankruptcy Court and the Ontario Superior Court
held a cross-border hearing on the Interim Funding
Agreement on June 29, 2009. Both courts approved the
agreement. For its part, the Bankruptcy Court “authorized”
the U.S. debtors to “enter into the Interim Funding Agreement
pursuant to section 363 of the Bankruptcy Code and
Bankruptcy Rule 9019.” App’x 358, ¶ 2. In its order, the
Bankruptcy Court also stated that nothing in the order “shall
constitute a Protocol for determining the allocation of
proceeds” and that “no proceeds from a Sale Transaction may
be allocated . . . unless such allocation is in accordance with a
Protocol approved by this Court.” App’x 359, ¶ 8. Neither the
Bankruptcy Court’s nor the Superior Court’s order referenced
arbitration, arbitrators, or arbitral associations.
After the courts approved the Interim Funding Agreement,
Nortel debtors held nine auctions. The auctions raised
approximately $7.5 billion in proceeds. As agreed, the debtors
placed those proceeds into escrow.
During and after the auctions, the debtors attempted to
breathe life into the “Protocol” anticipated by the Interim
Funding Agreement. Apparently the parties made substantial
progress toward a protocol—even drafting a procedure for a
three-person arbitral panel to resolve disputes over proceeds.
But despite numerous meetings and multiple rounds of
mediation, the parties never executed that draft or any other.
B. The Bankruptcy Proceedings
The failure of the parties to negotiate a protocol left the
effort to disburse the escrow funds at a standstill. So the
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parties took the matter to the courts. The U.S. Nortel debtors
(“U.S. debtors”) and the U.S. Official Committee of
Unsecured Creditors of Nortel Networks Inc. (“U.S.
creditors”) moved the Bankruptcy Court to decide disputes
about asset allocation. The Joint Administrators for the Nortel
debtors in the UK proceedings (“Joint Administrators”) then
cross-moved to compel arbitration on behalf of Nortel debtors
located in Europe, Africa, and the Middle East. The U.S.
debtors and U.S. creditors (collectively, “U.S. parties”)
replied that the Interim Funding Agreement—the basis of the
Joint Administrators’ cross-motion—did not contain an
agreement to arbitrate.
In response to these filings, the Bankruptcy Court ruled
that “the parties agreed that the Courts will make the
allocation determination rather than an arbitrator or
arbitrators.” App’x 8. A few weeks earlier, the Superior Court
reached the same result in the Canadian proceeding; it, too,
denied a parallel motion to compel arbitration. (The Court of
Appeal for Ontario has since denied leave to appeal that
decision, stating that “there is no ambiguity” in the contract
and “no suggestion . . . that the parties must submit the
allocation issue to arbitration.” Supplemental App’x 55, ¶¶ 7-
8.) The Bankruptcy Court then approved a cross-border
judicial allocation protocol.
The Joint Administrators sought leave to appeal the
Bankruptcy Court’s order regarding arbitration. Thereafter,
the Bankruptcy Court certified a direct appeal from its order
regarding arbitration pursuant to 28 U.S.C. § 158(d)(2)(B).
This Court granted the petition to certify appeal of the
arbitration issue on June 13, 2013. See In re Nortel Networks
Inc., No. 13-8049 (3d Cir. June 13, 2013).
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The Joint Administrators separately moved the
Bankruptcy Court for leave to appeal the Bankruptcy Court’s
order approving the cross-border judicial allocation protocol.
The Bankruptcy Court denied the Joint Administrators’
request to certify the allocation issue for interlocutory appeal.
This Court then denied the Joint Administrators’ petition to
review the cross-border hearing dispute. See In re Nortel
Networks Inc., No. 13-8055 (3d Cir. June 13, 2013). The Joint
Administrators applied to the U.S. District Court for the
District of Delaware pursuant to 9 U.S.C. § 16(a) and 28
U.S.C. § 158(a). The District Court denied the Joint
Administrators’ request for leave to appeal the cross-border
issue.
II. The Bankruptcy Court Correctly Denied the Cross-
Motion to Compel Arbitration.
This contract dispute begins and ends with the text of the
Interim Funding Agreement. The language used by the parties
in their agreement does not reveal an intent to arbitrate
disputes about the allocation of the auction funds. Rather, the
parties used language that indicated they would negotiate the
procedure by which to divide the funds. Reasoning that the
arbitration of disputes arising out of bankruptcy proceedings
requires contractual consent—not the possibility of consent—
the Bankruptcy Court denied the Joint Administrators’ cross-
motion to compel arbitration.
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A. Legal Standards1
Arbitration “is a matter of consent, not coercion.” Volt
Info. Scis., Inc. v. Bd. of Trs. of Leland Stanford Junior Univ.,
489 U.S. 468, 479 (1989). “[A] party may not be compelled
under the [Federal Arbitration Act] to submit to . . .
arbitration unless there is a contractual basis for concluding
that the party agreed to do so.” Stolt-Nielsen S.A. v.
AnimalFeeds Int’l Corp., 559 U.S. 662, 684 (2010)
(discussing class arbitration). To determine whether the
parties agreed to arbitrate a dispute, we employ state
principles of contract law. See Century Indem. Co. v. Certain
Underwriters at Lloyd’s, London, 584 F.3d 513, 532 (3d Cir.
2009). New York law governs the relevant parts of the
Interim Funding Agreement. Thus, the agreement must be
interpreted and enforced according to its plain meaning. See
Greenfield v. Philles Records, Inc., 780 N.E.2d 166, 170
(N.Y. 2002).
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This Court has jurisdiction over the certified appeal of
the order denying arbitration pursuant to 28 U.S.C.
§ 158(d)(2)(B) and 9 U.S.C. § 16(a)(1)(B). We review a
bankruptcy court’s conclusions of law under a de novo
standard and its findings of fact under a clearly erroneous
standard. In re Mintze, 434 F.3d 222, 227 (3d Cir. 2006).
Because the Bankruptcy Court concluded as a matter of law
that the Interim Funding Agreement did not contain an
ambiguity and did not mandate arbitration, we exercise
plenary review of the Bankruptcy Court’s order. See Kirleis v.
Dickie, McCamey & Chilcote, P.C., 560 F.3d 156, 159 (3d
Cir. 2009).
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B. The Interim Funding Agreement
Two features of Section 12 of the Interim Funding
Agreement lie beyond dispute. The first is that Section 12(a)
divorces the sale of Nortel’s assets from an agreement
between the sellers on how to divide the sale proceeds.
Section 12(a) achieves this by stating that the debtors “shall
not” condition their agreement to a particular sale on first
agreeing to asset allocation. See App’x 1560.
The second undisputed feature of Section 12 is that it does
not include a protocol for resolving disputes concerning the
allocation of sale proceeds. Section 12(c) spells this out: the
parties agree to “negotiate in good faith and attempt to reach
agreement . . . on a protocol for resolving disputes concerning
the allocation of Sale Proceeds.” App’x 1560. The presence
of an agreement to “negotiate” a protocol signals the absence
of an agreement on that protocol.
The agreement to a sales framework in Section 12(a) and
the agreement to negotiate an allocation protocol in Section
12(c) provide baselines for interpreting Section 12(b). The
parties could have agreed to allocate the escrowed funds
through arbitration. Or the parties could have agreed to
negotiate the mechanism they would use to divide the
escrowed funds without limiting themselves to arbitration.
They could not have done both.
The text of the Interim Funding Agreement supports the
second interpretation but not the first. Section 12—“Entry
into Sale Transactions”—does not hint that the parties bound
themselves to arbitrate. Considered as a whole, Section 12
creates escrow accounts; it does not disburse them. In fact,
Section 12 does not mention arbitrators, arbitration, or arbitral
associations. Of course, parties may agree to arbitration
without using the word “arbitration.” See, e.g., Chris
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O’Connell, Inc. v. Beacon Looms, Inc., 652 N.Y.S.2d 24, 25
(N.Y. App. Div. 1997) (“mediate” meant “arbitrate”); Penn
Cent. Corp. v. Consol. Rail Corp., 441 N.Y.S.2d 266, 270
(N.Y. App. Div. 1981) (“appraisal” consistent with
“arbitration”). But the absence of common signal words does
not demonstrate that the parties agreed to take their disputes
to a third party. It means the parties did not agree to
arbitration in customary terms.
The parties did not agree to arbitrate in other words,
either. The Joint Administrators disagree, arguing that the
parties agreed to arbitrate by using the words “dispute
resolver(s)” in Section 12(b) of the Interim Funding
Agreement. The Court gives the words “dispute resolver(s)”
their plain meaning. See Greenfield, 780 N.E.2d at 170. The
noun “dispute” means “[t]he act of disputing or arguing
against; active verbal contention, controversy, debate.”
Dispute, Oxford English Dictionary,
http://www.oed.com/view/Entry/55213 (accessed Nov. 15,
2013). The noun “resolver” means “[a] person who or thing
which answers a question, solves a doubt or difficulty, effects
a resolution of a conflict or dispute, etc.” Resolver, Oxford
English Dictionary, http://www.oed.com/view/Entry/163739
(accessed Nov. 15, 2013). Thus, the plain meaning of
“dispute resolver(s)” encompasses those persons or things
that settle controversies. This includes arbitrators, as the Joint
Administrators argue. But the words do not exclude courts.
Indeed, as both parties acknowledge, courts have referred to
themselves as dispute resolvers. See, e.g., Lewis v. Sullivan,
279 F.3d 526, 528 (7th Cir. 2002) (“Federal courts are
subsidized dispute-resolvers . . . .”). Therefore, the use of the
words “dispute resolver(s)” does not, standing alone, show
that the Nortel entities intended to arbitrate their disputes. The
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words suggest a flexible concept that would permit, for
example, arbitrators, courts, or mediators.
The context confirms that Section 12 does not imbue the
words “dispute resolver(s)” with a narrower meaning than the
words suggest for themselves. Recall that Section 12(b)
forbids the release of escrowed funds in advance of either the
parties’ agreement or the determination of the “relevant
dispute resolver(s) under the terms of the Protocol.” App’x
1560. As defined by Section 12(c), the “Protocol” is “a
protocol for resolving disputes concerning the allocation of
Sale Proceeds . . . , which Protocol shall provide binding
procedures for the allocation of Sales Proceeds.” App’x 1560.
Section 12(c) thus makes it possible to have a different
“relevant dispute resolver” for different disputes, depending
on the Protocol, or multiple dispute resolvers for one
controversy and a single dispute resolver for another. The
parties matched the breadth of the words “dispute resolver(s)”
with an equally broad framework for negotiating a Protocol to
determine how, and by whom, the parties would resolve
allocation controversies. Nothing in the Interim Funding
Agreement indicates that the “relevant dispute resolver[]
under the terms of the Protocol” could not be a court.
Nonetheless, the Joint Administrators suggest that by
contemplating a negotiated protocol, the parties revealed their
intent to handle disagreements in a private forum. After all,
the Joint Administrators reason, litigants must take a court’s
rules of procedure as they find them. This reasoning fails
twice. First, the Joint Administrators ascribe too much
rigidity to court procedures. Bankruptcy courts confront fluid
legal and business problems. Consequently, bankruptcy
courts must work with the parties before them to apply the
bankruptcy framework to the demands and idiosyncrasies of
13
each case. The Bankruptcy Court and the parties did just that
when, for example, they collaborated on a cross-border
protocol. Second, the Joint Administrators’ interpretation
presupposes the “dispute resolver” will implement the
Protocol. But, as written, the Interim Funding Agreement
contemplates the Protocol will identify the “relevant dispute
resolver(s)” for a given controversy. Negotiating a protocol
therefore encompasses negotiations over dispute resolvers. By
agreeing to negotiate which disputes would be settled by
which dispute resolver (or resolvers), the parties did not
thereby restrict themselves to settling all disputes by the same
method, or agree that the method would be arbitration.
Because we conclude that the agreement contains no
promise to arbitrate, our analysis ends at the text. “As a
general rule, extrinsic evidence is inadmissible to alter or add
a provision to a written agreement.” Schron v. Troutman
Sanders LLP, 986 N.E.2d 430, 433 (N.Y. 2013). New York
law permits resort to extrinsic evidence, such as negotiating
history, when an agreement contains an ambiguity. See Brad
H. v. City of New York, 951 N.E.2d 743, 746 (N.Y. 2011). But
the disputed portions of the Interim Funding Agreement were
not “written so imperfectly that [they are] susceptible to more
than one reasonable interpretation.” See id. Therefore, no
legal ambiguity exists. Indeed, we reject as unreasonable the
Joint Administrators’ view that the Interim Funding
Agreement could be read to exclude the possibility of court
intervention. As demonstrated above, that reading finds no
support in the parties’ agreement.
Although we do not look to extrinsic evidence to interpret
the Interim Funding Agreement, we do note that the use of
extrinsic evidence presents a special interpretative challenge
for court-approved agreements. Consider Rule 9019(a) of the
14
Federal Rules of Bankruptcy Procedure, which empowers a
bankruptcy judge to “approve a compromise or settlement,”
and Bankruptcy Rule 9019(c), which empowers a bankruptcy
judge to “authorize” the parties to settle a controversy through
“final and binding arbitration.” If the parties’ agreements
could be discerned only by consulting extrinsic evidence, then
a bankruptcy court might unknowingly use its Rule 9019
power to “approve” or “authorize” a contract with hidden
promises. The Joint Administrators argue for just such a
result by suggesting that the Bankruptcy Judge authorized
arbitration when it approved the Interim Funding Agreement.
But how could a judge “authorize” arbitration within the
meaning of Rule 9019(c) if he or she did not recognize the
parties had agreed to arbitrate? And how could creditors
lodge their objections to arbitration if the agreement to
arbitrate did not plainly appear on the face of the contract?
These difficult questions underscore the usefulness of
reducing agreements to arbitrate to plain language that can be
recognized and enforced by courts examining only the text of
the agreement. Parties wishing to arbitrate should not hide
their intent to do so in the shadows of the text.
III. The Court Declines to Review the Bankruptcy
Court’s Order to Proceed to Joint Hearing.
Separate from the contractual dispute, the Joint
Administrators challenge the Bankruptcy Court’s order to
proceed with a joint hearing to determine allocation. A panel
of this Court denied the Joint Administrators’ petition to
certify this issue for appellate review pursuant to 28 U.S.C.
§ 158(d)(2). See In re Nortel Networks Inc., No. 13-8055 (3d
Cir. June 13, 2013) (order denying cross-petition for
permission to appeal). The District Court denied the Joint
Administrators’ separate motion for leave to take
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interlocutory appeal from the Bankruptcy Court’s order. In re
Nortel Networks Inc., No. 13 Civ. 757, Doc. 31 (D. Del. July
22, 2013) (Order Denying Motion for Leave to Appeal).
Notwithstanding these rulings, the Joint Administrators invite
us to consider the propriety of a joint hearing because the
Bankruptcy Court decided to allocate the escrowed funds in
the same order that it denied the motion to compel the
arbitration of fund allocation.
We decline the invitation. Although this Court has
jurisdiction over the “entire certified order” of the Bankruptcy
Court, including the aspects of that order relating to a joint
hearing, see Tristani ex rel. Karnes v. Richman, 652 F.3d 360,
366 (3d Cir. 2011), the ripe conflict before us concerns
whether or not the parties agreed to arbitrate. The Joint
Administrators’ challenge to the joint hearing and its
procedures would more appropriately follow the hearing,
when the parties have developed the record and raised their
procedural objections to the Bankruptcy Court.
IV. Conclusion
We affirm the U.S. Bankruptcy Court for the District of
Delaware’s order denying the Joint Administrators’ cross-
motion to compel arbitration. The Bankruptcy Court correctly
determined that the plain language of the Interim Funding
Agreement did not contain an arbitration clause. The Joint
Administrators’ reliance on the words “dispute resolver(s)”
does not show otherwise. In context, the words “dispute
resolver(s)” indicate that the parties allowed themselves
latitude to select courts or arbitrators or others to adjudicate
the parties’ disputes. To respect that contractual latitude, we
reject the idea that the parties must arbitrate disputes over
asset allocation.
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The Court declines to reach the merits of the dispute about
the joint hearing.
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