360networks Sues Nortel for $101M

360networks Inc. is suing Nortel Networks Corp. (NYSE/Toronto: NT) for more than US$101 million, in an effort to recoup the money it paid Nortel prior to settling its Chapter 11 bankruptcy, filed in June 2001.

The motion, filed in U.S. bankruptcy court in the Southern District of New York yesterday, was made by attorneys for 360networks (USA) Inc. and the Official Committee of Unsecured Creditors of 360networks.

As strange as it may seem, the formerly bankrupt company, which has since emerged from reorganization, is trying to get back some of the money it paid Nortel for equipment and services. Nortel was listed as a creditor in the bankruptcy. The crux of the suit has to do with so-called "preferential transfers." According to U.S. bankruptcy laws, a creditor that obtains payment within a 90-day period of a company's bankruptcy and meets a set of other criteria can later be sued for repayment by the trustees of the bankrupt company.

Analysts don't seem too upset by the news. "I'm not worried about this. I can't believe Nortel would be sued for getting paid what it was owed," says Steve Levy of Lehman Brothers. "And if they expect a small percentage from Nortel, I don't think it will hurt."

The law exists, experts say, to avoid the situation in which voracious creditors rush to a troubled company, shouldering one another aside to get paid. In such a situation, some creditors stand to get paid before others, and to get paid more than they would otherwise get later from the bankruptcy court.

360networks' lawyers say Nortel was paid over $55.4 million in cash and $45.7 million in equipment within the 90-day cutoff period before the carrier filed for bankruptcy on June 28, 2001. In an exhibit attached to the motion, 360networks claims multiple hefty payments made by check to Nortel in March, April, and May 2001, plus over $6 million in cash issued to Nortel on June 22, 2001.

360networks says it asked Nortel to return the amounts paid out in cash and equipment in March 2002, but "Nortel failed to return the Transfers."

Nortel and 360networks had announced nearly three years ago their agreement that Nortel would supply the carrier with OPTera long-haul gear as part of its network buildout on the East Coast of North America (see 360Networks Deploys Nortel System and 360networks Touts Global Mesh ).

This kind of lawsuit's not uncommon, lawyers say, but apparently litigation is usually settled before making it to trial.

Nortel's not alone in being sought by 360networks to pay back money paid out while it was insolvent. An undated letter sent to unsecured creditors by the Official Committee of Unsecured Creditors, which is published on the 360networks Website, says the company's restructuring plan, which was approved by government authorities in Canada and the U.S. this past fall (see 360networks Restructuring Approved), holds out the chance for about $250 million in "Net Preference Recoveries," that is, money to be returned by companies that allegedly fall, like Nortel, into the "preferential transfer" category.

The Committee letter states that the company has given it "initial funding of $1 million to pursue" the preferential transfer claims. The unsecured creditors would get about 80 percent of anything gleaned from efforts to track down paybacks, according to the letter.

Chris Mueller, a spokesman for 360networks, acknowledges that the company expects to get back "a fraction" of the money it believes it is owed. Typically, proving preferential transfers is difficult, he says.

But the carrier's going to try. The Nortel lawsuit, which represents the heftiest portion of the money in question, is one of many to come. "I guess they decided to start with the biggest," Mueller says.

For its part, Nortel plans to fight. "Nortel Networks believes this suit is without merit and we will vigorously defend ourselves," says company spokesman David Chamberlin.

Investors seemed unfazed by the news. This afternoon, Nortel shares were trading at $2.12, up $0.13 (6.53%).

— Mary Jander, Senior Editor, Light Reading