Schwent Law; Festus, MO
In In re Nortel Networks, Inc., the Delaware Bankruptcy Court concluded that noteholder objections to the Indenture Trustee’s attorney fees must be made “on a timely, not hindsight basis.” The court’s decision serves as sound guidance to indenture trustees that, as long as any attorney’s fees charged were reasonable and prudent when incurred, they need not worry about a court reviewing their work with the clear perspective of hindsight. Nortel also offers clear advice to noteholders that if they intend to object to attorney’s fees during a complicated, lengthy bankruptcy case, then they need to voice their objections and concerns throughout the case, and not attempt to do so relying on their skills as “Monday Morning Quarterbacks.”
In 2009, Nortel Networks filed for chapter 11. The case lasted for eight years, until, after three failed efforts, the disputing parties agreed to a settlement in their forth mediation attempt. Throughout the case, the Indenture Trustee was a “core party,” and was a member of the Official Committee of Unsecured Creditors. During the proceedings, the Indenture Trustee hired two law firms to monitor the bankruptcy process and protect the interests of the noteholders.
During the case, the noteholders voiced no objections to any of the ongoing attorney’s fees. However, at the end of the case, the noteholders objected to the reasonableness of the attorney’s fees, and questioned whether the Indenture Trustee had acted prudently.
The Trust Indenture Act of 1939 (“TIA”) mandates that issuers of securities include an indenture in securities documents. The indenture clause must include language appointing a trustee to protect the interests of noteholders. Section 310 of the TIA describes requirements for qualified financial institution to serve as a trustee at all times. When an issuer of securities defaults on a note obligation, the Indenture Trustee has a duty to alert security holders of the default within 90 days. Most importantly the indenture trustee has a duty to act to safeguard the interests of the noteholders:
Duties of the Trustee in Case of Default
(c) The indenture trustee shall exercise in case of default (as such term is defined in such indenture) such of the rights and powers vested in it by such indenture, and to use the same degree of care and skill in their exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs.
15 U.S.C. § 77ooo(c). Thus, the role of an indenture trustee is to take action to protect the interests of the noteholders once a default occurs.
The Nortel case lasted over eight years and was highly contested. This caused the Indenture Trustee to incur legal fees of $8.1 million. The noteholders objected to $4.4 million of the fees incurred on their behalf. When considering the objection, the court examined whether the Indenture Trustee acted “prudently in assigning work and supervising its lawyers, and were the fees reasonable.”
Section 601 of the Nortel Indenture contained language that mirrored the wording of a trustee’s duties under TIA. The Indenture Trustee was authorized to hire attorneys to perform work on the case under Section 602 of the Nortel Indenture. The Court looked to Section 612 of the Nortel Indenture for assistance in determining whether the Indenture Trustee had acted prudently. Section 612 required that disputes over the terms of the Indenture be resolved using New York law. Under New York law, the test to determine if a trustee acted prudently is whether the trustee acted “as in general, prudent men of discretion and intelligence in such matters, employ in their own like affairs." Relying on LNC Invs., Inc. v. First Fid. Bank, N.A., the Court determined “Trustee’s judgment must be informed at the time Trustee acted.”
Using New York’s “prudent person” standard, the Court found upon reviewing the detailed communication and billing records that the Indenture Trustee, “on balance” did not breach any duty. The Indenture Trustee’s attorneys performed many tasks such as monitoring key issues, performing legal research, and participating in found attempts at mediation during the eight years of litigation. Furthermore, the Court noted there was documentation of regular communication between the objecting noteholders and the Indenture Trustee, but there was no record of the noteholders complaining about the fees.
The noteholders further complained the Indenture Trustee’s attorneys duplicated the work of other attorneys on the Creditors Committee. The Court noted that due to the “the complexity of the case, the Court is unwilling to speculate that the Lawyers’ attendance at Committee meetings in person or by telephone was imprudent.” While it was prudent for the Indenture Trustee to have its legal agent attend the Creditor’s Committee meetings, the Court did remark that it was unnecessary to have multiple attorneys attend.
Additionally, the noteholders argued the Indenture Trustee’s attorney work on the Creditors Committee was unnecessary to safeguard their interests. Citing In re Worldwide Direct, Inc, the noteholders claimed the Indenture Trustee should only be reimbursed for legal work done to protect the noteholders’ rights. Again, the Court noted that in the moment the Indenture Trustee could not predict if what was learned at a Creditors Committee meeting would be important in advancing the interests of the noteholders. The Court found that it was prudent for the Indenture Trustee to have one attorney monitor the meetings to ensure obtaining all the necessary information to protect the noteholders.
An indenture trustee represents all the noteholders. Sometimes different noteholders have conflicting positions in a bankruptcy restructuring. In a long, difficult case there is bound to be tension between the indenture trustee and at least one of the major noteholders.
Firms serving as indenture trustees should review their current work practices in light of Nortel. Indenture trustees should review attorney bills and work product on a monthly basis, and update noteholders on work progress as soon as possible. Nortel ensures that indenture trustees don’t have worry about their decisions being judged using hindsight.
 In re Nortel Networks, Inc., 2017 WL 932947 (Bankr. D. Del. Mar. 8, 2017).
 15 U.S.C. § 77aaa et seq. (West. 2017).
 Id. at § 77eee.
 Id. at § 77jjj(a)(1).
 15 U.S.C. § 77ooo(b).
 In re Nortel Networks, Inc., 2017 WL 932947 at *2.
 In re Bank of N.Y., 323 N.E.2d 700 (1974).
 1997 WL 528283, 17 (S.D.N.Y. Aug. 27, 1997).
 In re Nortel Networks, Inc., 2017 WL 932947, slip op. at *8.
 Id. at *10.
 Id. at *15.
 In re Worldwide Direct, Inc., 335 B.R. 112 (Bankr. D. Del. 2005).
This article was originally published in the June 2017 edition of the Ethics & Professional Compensation Committee Newsletter. Participation in ABI's committees is one of the many benefits of becoming a member. Committees provide networking and leadership opportunities. For additional information on how you could become involved in ABI and our Committees please visit membership.abi.org