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.
