Bankruptcy
Aug. 10, 2002
Bankruptcy Deal Leaves Shareholders Talking Lawsuit
SAN FRANCISCO - Telecommunications giant Verizon has agreed to pay a defunct San Francisco Internet company $175 million to settle a lawsuit over their failed merger.
But that sum is "tiny," according to some with a stake in the case, a "pittance," a "mere $175 million."
Such dissatisfaction may preview a fight in bankruptcy court and could ultimately unravel the deal, lawyers involved in the case warned.
Verizon, the nation's largest wireless telecommunications provider, bought a 55 percent share in San Francisco DSL provider NorthPoint Communications in August 2000. Then NorthPoint's stock plummeted after the purchase, and Verizon canceled the merger.
Verizon claimed NorthPoint's deteriorating financial state qualified as a "material adverse impact" under the merger agreement, allowing it to cancel the deal. NorthPoint insisted the stock price tumble was well within the range considered by lawyers drafting the agreement, and it sued Verizon for breach of contract, fraud and negligent misrepresentation. It sought more than $3 billion. NorthPoint v. Verizon, 317249.
NorthPoint filed for bankruptcy weeks later and then sold its operations to AT&T Corp. In re: NorthPoint Communications Group, 01-30127.
On July 23, days before a San Francisco jury was scheduled to hear the suit, Verizon agreed to pay $175 million and forfeit $31 million in bankruptcy claims to settle the case. Verizon officials said they settled to avoid the costs of trial.
The settlement payment is the main asset in the bankruptcy. It is contingent on approval from U.S. Bankruptcy Court Judge Thomas E. Carlson. If he approves, the money would be used to repay secured creditors but could leave nothing for stockholders and bondholders, who claim to be owed about $500 million.
Shareholders have written letters to Carlson, asking him to reject the settlement. The letters have harsh words for NorthPoint trustee E. Lynn Schoenmann.
"After hearing of her agreement to accept a tiny settlement from Verizon, I wonder at that word 'trustee,'" wrote Cheryl Lindsoe, of Eagle River, Alaska. "Her willingness to accept a settlement was in direct opposition to everything she repeatedly stated publicly and in e-mail, which was, she had a good case, she was ready to go to trial, and that $4 billion or more was within reach."
"Her acceptance of a mere $175 million from Verizon at this late date ... leaves most of the creditors and bondholders, as well as all of the shareholders, with nothing," wrote Rudolph J. Stabj of Schaumberg, Ill.
Bondholders are considering whether to object, and they have hired a lawyer, according to other lawyers in the bankruptcy. Attorneys said that if the dissatisfied parties are going to object to the settlement, they will file a motion within the next few weeks.
Tyler Cunningham
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