Nortel sued over 360 payments

Creditors of recently revitalized service provider 360networks Inc. are suing Nortel Networks Corp., claiming that US$100 million that was paid to Nortel before 360 declared bankruptcy in 2001 was transferred outside the “ordinary course of business.”

Under U.S. law, money that was paid out by a firm within 90 days of its bankruptcy declaration can later be identified by its creditors as “preferential” transfers – money that changed hands in unusually large amounts or in a time frame much more compact or irregular than what had normally been the case when business was better.

The suit was filed early last month in the U.S. Bankruptcy Court in New York.

“Basically, [the law] means that if you have a contract that says…, ‘I pay you in 30-day terms,’ and you in fact pay in 30 days, that would generally be considered to be the ordinary course (of business),” said Norman Kinel, a partner with Sidley Austin Brown & Wood LLP in New York, the firm representing 360 creditors.

“If, however, the contract says 30 days but you hadn’t paid in 60 days, that would probably not be ordinary course. So it has to be according to its ordinary terms, according to the original agreement between the parties; it can’t be an unusual payment that was the result of any pressure or anything like that.”

Kinel said that his team had looked at 360’s situation and “we believe the payments were not made in an ordinary course of business.” He added that these suits are fairly common in bankruptcy cases, but what is uncommon in this one is its size.

“This is one of the bigger ones,” he said, adding that half of the US$100 million that 360 wants to recover was in the form of cash, with the other half being equipment that was returned to Nortel.

For its part, Nortel issued a statement saying it believed the suit was “without merit” and that the Brampton, Ont.-based equipment maker would defend itself vigorously.

According to Mark Quigley, an analyst with Ottawa-based The Yankee Group Canada, the timing of the suit could not be worse for Nortel as it begins to see investor confidence return in the wake of its recent disastrous downfall.

“They’re in a better position today than they were six months ago, so from that point of view, the last thing that is needed is a number of these kinds of lawsuits that are bound to be very public ones,” he said.

Quigley added that the next 12 to 18 months would be a “delicate” time for Nortel.

“They’re still going to be faced with capital expenditures that are not increasing, and given the financial situation as a whole, the less of this kind of outside stuff that they have to deal with the better.”

And although a positive outcome in the suit for 360 would “certainly add cash to their coffers,” Quigley opined that the reinvigorated company has more pressing issues with which to deal.

“They’ve got to figure out what business model is going to see success for them. Quite clearly, the model that they had pursued in the past…certainly didn’t lead them to the promised land, so I would think that that will be a much more important piece of their puzzle rather than the outcome of any kind of lawsuit.”

Kinel said that if the suit gets as far as the courtroom, there will be a pretrial conference in March, followed by what the lawyer expects to be a four- to six-month battle. He added, however, that a “fairly high” percentage of these types of actions are settled out of court.