RealTime IT News

NorthPoint Lawsuit Might End Before it Begins

Verizon Communications officials are confident a jury will take their side in a $1 billion lawsuit filed in December, 2000, by shareholders in a now-defunct company. The trial is expected to get underway on July 29.

But whether NorthPoint Communications shareholders will get to press forward with their case intact is in question; a judge at the San Francisco District Court will rule on a motion for summary judgment on one of the case's two claims. The Verizon filed the motion this week.

A summary judgment is a motion stating the plaintiff has put forth no real evidence to be tried, putting the onus on the defendant to present material evidence to support the defendant's claims.

A decision is scheduled for Friday morning.

The lawsuit hinges on two major allegations: that Verizon was in breach of contract for reneging on its merger deal and that the company was guilty of fraud in the course of events surrounding the nixed deal.

Michael Kahn, one of the lawyers representing NorthPoint, said the summary judgment motion relates to the charge of fraud in the lawsuit. The breach of contract claim remains untouched.

"Regardless, we are going to court on July 29 on the breach of contract claim," he said. "We'll find out tomorrow if the fraud claim is thrown out."

Verizon Communications officials wouldn't comment on the details of the lawsuit, but any favorable ruling would certainly help Verizon's cause.

"What we have been saying is we have been entitled to cancel the pact," said Peter Thonis, a Verizon spokesperson. "We believe that we were certainly within our rights to cancel the agreement because of the material adverse clause that enabled us (to cancel the merger).

"That's usually a big hurdle to overcome, if you can get by that then you can get a trial," said Elliott Cappuccio, a telecom lawyer with Texas-based Stumpf Craddock Massey & Pulman, P.C.

A federal trustee board filed the lawsuit for $1 billion.

Even if the plaintiff gets a favorable hearing, it could be some time before shareholders get recompense, if ever.

According to Cappuccio, a couple of items stand in the way. First, unsecured shareholders are usually at the back of the line when it comes to getting their money back. Secured holders are first in line, and he expects that group will grab between $600-700 million first.

A decision for less than $1 billion would considerably lower the return on investment to unsecured shareholders who will have to divvy up the remainder. Investors are hoping a much larger penalty -- around $4 billion -- is levied against Verizon, something a jury is empowered to award.

The second item stopping shareholders from getting their money is the appeals process. Even if a jury finds Verizon responsible and rewards the plaintiffs, they aren't going to get their money anytime soon.

"(Telephone companies) don't take unfavorable rulings very well," Cappuccio said.

The appeals process could be tied up in the courts for as long as two years, he said.

NorthPoint Communications, once one of the largest independent digital subscriber line (DSL) providers in the nation, filed for Chapter 7 bankruptcy shortly after Verizon backed out of an $800 million merger deal in November, 2000. The bankruptcy left shareholders with stock not worth the price of the paper it was written on and stranded thousands of DSL customers.

Back in August, 2000, Verizon signed a contract with NorthPoint, putting a $150 million down payment on the carrier and promising another $650 million when the two companies merged.

Verizon pulled out of the deal three months later, citing the material adverse change clause in its contract.

When NorthPoint assets were later sold off, money went first to the creditors and the bondholders and left shareholders with nothing.

Particularly galling to shareholders is the fact Verizon went to the Federal Communications Commission (FCC) in March to get credit for its initial $150 million down payment in NorthPoint. Verizon, when it acquired GTE in 2000, was required to invest $500 million in out-of-region broadband companies.