Verizon Communications Inc. (VZ) began defending a $9.5 billion lawsuit brought by creditors of its former subsidiary Idearc Inc., the directory business that filed for bankruptcy after it was spun off by Verizon.
Creditors contend Verizon, knowing the directory business was in decline, engineered a deal that transferred $2.4 billion in cash out of the subsidiary and saddled it with $9 billion in debt.
Verizon loaded Idearc with debt and “sent it into the market to die,” Werner Powers, an attorney for Idearc creditors, said in his opening statement at a trial that began today in federal court in Dallas. “They knew in major markets they had been suffering a double-digit decline. They knew that was the canary in the mine shaft.”
Now named SuperMedia Inc. (SPMD), Idearc completed a bankruptcy reorganization that created a trust to bring lawsuits on behalf of creditors with claims of about $6 billion, according to court papers. Creditors contend the spinoff, designed to generate $9.5 billion for Verizon, left Idearc with so much debt it was insolvent and destined to collapse. It filed for bankruptcy 28 months after the spinoff.
An attorney for Verizon, Reid Figel, said Idearc wasn’t insolvent at the time of the spinoff and that Wall Street analysts valued the company from $12.5 billion to $14.5 billion.
“The value of Idearc on the day of the sale was $12.9 billion, and the plaintiff has failed to carry its burden of proof,” he said. Creditors are relying on “an extremely low outlier valuation,” he said.
Bill Kula, a spokesman for New York-based Verizon, called the lawsuit “baseless and without merit” in an e-mailed statement.
U.S. District Judge A. Joe Fish has turned back several efforts by Verizon, the second-largest U.S. phone company, to knock the suit out completely. He did rule against creditors by dismissing some of their claims.
Details of the spinoff aren’t publicly known because Verizon succeeded in having most of the court filings and many of Fish’s rulings sealed. Bloomberg News has filed papers asking Fish to unseal court papers and ensure the trial is open to the public.
Fish will rule on the case without a jury. He previously turned down the creditors’ request for a jury trial.
The creditors’ lawsuit is U.S. Bank National Association v. Verizon Communications Inc., 10-01842, U.S. District Court, Northern District Texas (Dallas). The bankruptcy case was In re Idearc Inc., 09-31828, U.S. Bankruptcy Court, Northern District of Texas (Dallas).
To contact the reporters on this story: David McLaughlin in New York at firstname.lastname@example.org; Tom Korosec in federal court in Dallas at email@example.com; Bill Rochelle in New York at firstname.lastname@example.org.