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FairPoint trust sues Verizon for $2 billion

By Clarke Canfield
Associated Press / November 1, 2011

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PORTLAND, Maine—A litigation trust created for FairPoint Communications Inc. creditors is blaming Verizon Communications for FairPoint's bankruptcy.

In a $2 billion fraudulent transfer lawsuit filed in North Carolina last week, the FairPoint litigation trust claims FairPoint went bankrupt because of its "disastrous" $2.3 billion purchase of Verizon's landline and Internet operations in Maine, New Hampshire and Vermont in 2008. FairPoint filed for bankruptcy 18 months after the acquisition.

The complaint alleges that Verizon lured FairPoint into the deal and dealt it a bad hand, resulting in FairPoint buying "inferior assets that had no future." FairPoint exhibited a blend of naiveté and optimism on its part, but FairPoint executives felt trapped by the time they saw the writing on the wall, the suit alleges.

"The company had no chance given the hand it was dealt by Verizon," the complaint reads.

Verizon called the lawsuit meritless.

"FairPoint Communications' 2008 acquisition of Verizon's northern New England wire-line operations occurred after thorough due diligence on the part of FairPoint and its lenders and lawyers, as well as extensive review and approvals from telecommunications regulators in Maine, Vermont, and New Hampshire," the company said in a statement.

"The claims now raised by the litigation trust two years after FairPoint's bankruptcy wrongly blame Verizon for financial losses suffered by sophisticated lenders that resulted from operational, financial and other difficulties encountered by FairPoint after the closing of the acquisition, and not from actions by Verizon."

FairPoint is based in Charlotte, N.C., and has operations in 18 states, with its largest holdings by far being in northern New England.

When FairPoint proposed buying Verizon's landline operations in northern New England, skeptics warned that the small rural telephone provider was taking on more than it could handle.

Critics of the deal said FairPoint was assuming too much debt and wasn't up to the task of taking on such a large network. At the time of the transaction, FairPoint had 975 employees and some 300,000 access lines, while Verizon had more than 3,000 employees and 1.6 million access lines in northern New England alone.

After the deal was completed, FairPoint was weighted down with a heavy debt load and plagued with customer-service, order-fulfillment and billing problems. With a battered reputation and financial sheet, it filed for Chapter 11 bankruptcy protection in October 2009.

The 47-page lawsuit, filed in Mecklenburg County Court in Charlotte, alleges that Verizon lured FairPoint into the transaction so it could rid itself of its aging networks and focus on markets more profitable than traditional landlines. It further claims that Verizon took advantage of delays in regulatory approval for the deal to cannibalize business customers and stopped performing routine maintenance on the assets that FairPoint was acquiring.

FairPoint declined to comment, saying the complaint was filed by a litigation trust -- not the company -- that was created for the benefit of FairPoint creditors who lost money during the bankruptcy settlement.

FairPoint has continued to struggle since emerging from bankruptcy in January.

In its last earnings report, FairPoint reported losing $27.1 million for the April-June period. Its stock price has fallen from over $24 a share after emerging from bankruptcy to under $5 a share, where it was trading Tuesday. It's scheduled to release another quarterly earnings report on Wednesday.

In September, the company announced it was cutting 400 jobs in northern New England, representing about 10 percent of the company's workforce.