CHARLOTTE, N.C. (CN) - FairPoint Communications claims it went bankrupt due to a "disastrous 2008 spinoff and merger" with "telecom behemoth" Verizon, which transferred its northern New England "antiquated landlines and DSL technology that was already disfavored by customers and expensive to maintain" to FairPoint, while grabbing the lion's share of the loan money it raised for the deal, to spend on newer technologies for Verizon.
FairPoint says it took on $2.5 billion in debt, while Verizon waltzed with $1.6 billion in cash and promissory notes. As a result, FairPoint "paid a princely sum for a collection of inferior assets that had no future," while Verizon kept its most advanced business products and business customers, FairPoint says in a lengthy complaint in Mecklenburg County Court.
Charlotte-based FairPoint provides telephone and Internet services in 18 states, mostly in rural areas.
The Verizon spinoff made headlines for months in New England, as FairPoint was plagued with service and billing problems. Even customers who were pleased by receiving no bills at all turned sour when they received bills for 6 months or more.
FairPoint claims that Verizon, the largest telecommunications provider in the United States, caused the bankruptcy of two other companies that acquired Verizon assets.
Faced with a revolution in the telecommunications industry, with customers switching to wireless, cable broadband and fiber optic cable, Verizon decided to spin off most of its landline assets and raise capital to expand its fiber optic network and other newer technologies.
The complaint states: "This $2 billion dollar fraudulent transfer suit arises from a disastrous 2008 spin-off and merger (the 'transaction') between FairPoint Communications Inc. ('Old FairPoint'), a small, once well-regarded, North Carolina-based telephone company and a short-lived corporation that telecom behemoth Verizon created for the sole purpose of 'spinning off' certain assets that Verizon considered undesirable - conventional landlines in northern New England.
"Old FairPoint and the Verizon spinoff entity that was immediately merged into FairPoint, Northern New England Spinco Inc. ('Spinco'), took on an enormous debt load, approximately $2.5 billion, in order to effect this transaction. Old FairPoint received sufficient loan proceeds to pay off its existing lenders and to pay some of the enormous bills incurred in putting the byzantine deal together. But the lion's share of the loan proceeds (principally $1.16 billion in cash) and new promissory notes ($551 million in principal) were transferred or conveyed to Verizon New England which, in turn, passed the money upstream to Verizon. Only 18 months after the transaction closed, the merged entity (the 'combined entity') filed for relief under Chapter 11 of the United States Bankruptcy Code.
"Some of Verizon's reasons for pursuing the transaction were clear. First, Verizon would rid itself of aging DSL networks in three states that were expensive to maintain and increasingly disfavored by residential and business customers who preferred the speed and reliability of more modern technology like cable broadband Internet and fiber optic cable. Second, the transaction would pay Verizon richly, and Verizon could devote that money to its more profitable technology. Third, Verizon could use a complex 'Reverse Morris Trust' structure for the transaction that would result in the cash passing to Verizon tax-free. Fourth, Verizon could utilize Old FairPoint's appeal as a well-regarded small telecommunications company to assuage, or help to assuage, any regulatory concerns over the transaction.