It was a $2 billion deal that went drastically wrong, and now creditors of FairPoint Communications want Verizon Communications to pay dearly.
In a North Carolina lawsuit that describes a deceptive Verizon and a naive and stubborn FairPoint management, creditors are demanding that New York-based Verizon and related defendants disgorge the value from the sale of landline telephone operations in northern New England more than three years after FairPoint acquired the assets under an agreement that made it the eighth-largest U.S. telephone company. The deal proved disastrous for FairPoint and its stakeholders, culminating in a 2009 bankruptcy.
Verizon, the suit asserts, transferred to FairPoint a legacy, low-margin business Northern New England Spinco Inc., or Spinco that was shrinking more rapidly than FairPoint knew and excluded two essential components from the sale: “Internet protocol-based business products targeted at business customers” and “the IT networks and back office functions that were essential to billing customers, servicing customers, and collecting payments.”
“Verizon, for itself and its short lived subsidiary, Spinco, misrepresented facts, concealed facts, blocked due diligence efforts, and stood silent when candor required speech,” asserts the lawsuit, which was filed in Mecklenburg County, N.C., General Court of Justice, Superior Court Division, by a litigation trust representing creditors of FairPoint.
Before the transaction even closed, the lawsuit claims, Verizon was soliciting Spinco business customers in northern New England, offering them alternatives like wireless voice and data; meanwhile, FairPoint faced financial problems before the deal was complete, moving close to defaulting on its credit facility and finding itself unable to pay pre-closing costs estimated at $110 million, according to the suit.
The lawsuit also describes a pigheaded FairPoint management that gave “uninformed” and “wildly optimistic” revenue projections for the business in Maine, Vermont and New Hampshire and plowed ahead with the agreement despite a number of red flags alerting FairPoint executives that the business was in serious trouble.
“The natural and probable consequence of Old FairPoint’s decision to go forward with the Transaction resulted in a loss of approximately a billion dollars by its creditors,” the lawsuit declares. “The alternative more beneficial to creditors was for Old FairPoint to walk away. Because it didn’t more creditors were left unpaid.”
Jonathan D. Sasser, one of the attorneys representing the plaintiff litigation trust, said the suit was filed on Oct. 25 and that Verizon has been served with the court papers.
Verizon characterized the lawsuit as “meritless” and vowed to “vigorously” contest the case against it.
“FairPoint Communications’ 2008 acquisition of Verizon’s northern New England wire-line operations occurred after thorough due diligence on the part of FairPoint and its lenders and lawyers, as well as extensive review and approvals from telecommunications regulators in Maine, Vermont, and New Hampshire,” a Verizon spokesman said. “The claims now raised by the Litigation Trust two years after FairPoint’s bankruptcy wrongly blame Verizon for financial losses suffered by sophisticated lenders that resulted from operational, financial and other difficulties encountered by FairPoint after the closing of the acquisition, and not from actions by Verizon.”
The plaintiffs claim Verizon’s transfer of the landline business in northern New England was fraudulent under North Carolina and federal law. The lawsuit is seeking a monetary judgment against Verizon and the other defendants that is “equal to the Fraudulent Consideration transferred to or incurred by Spinco, Old FairPoint, the Combined Entity, and/or its subsidiaries” for the defendants’ benefit in connection with the agreement, plus court costs, interest and attorney’s fees.
The suit is The FairPoint Communications, Inc. Et Al. Litigation Trust v. Verizon Communications, Inc., Nynex Corporation, Verizon New England, Inc., Cellco Partnership d/b/a Verizon Wireless and Verizon Wireless of the East LP.
FairPoint emerged from bankruptcy in January, shaving its debt from $2.8 billion to $1 billion. The Charlotte, N.C.-based company will release its third-quarter results today after the market closes.