Verizon Beats $9 Billion Suit over Idearc Spin-off

, The Litigation Daily

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A federal judge in Dallas handed Verizon Communications Inc. a big defense win on Tuesday in a $9.5 billion lawsuit stemming from the collapse of the company's former phone directory unit, Idearc Inc.

Idearc's litigation trustee, U.S. Bank National Association, had claimed that Verizon saddled its subsidiary with debt during its November 2006 spin-off, dooming Idearc to file for Chapter 11 protection a little more than two years later. But in Tuesday's 22-page decision, U.S. District Judge A. Joe Fish knocked out U.S. Bank's fraudulent transfer claims, finding that Idearc was solvent at the time of the spin-off.

The decision is a victory for Verizon and its lawyers at Weil, Gotshal & Manges; Kellogg, Huber, Hansen, Todd, Evans & Figel; and Wilmer Cutler Pickering Hale and Dorr, who've worked on the litigation for almost three years.

Counsel for U.S. Bank at Haynes and Boone and Neligan Foley first sued Verizon back in September 2010. In their amended complaint, they brought fraudulent transfer claims against Verizon as well as breach of fiduciary duty claims against John Diercksen, a Verizon executive who was on Idearc's board. Diercksen, who also saw all charges against him dismissed in Tuesday's decision, is represented by counsel at Carter Stafford Arnett Hamada & Mockler.

Although the guts of the plaintiff's claims survived early motions for dismissal and summary judgment, the case ran aground soon after a bench trial last fall. Judge Fish concluded in a January ruling that Idearc had an enterprise value of at least $12 billion when spun off from Verizon in November 2006, and was therefore solvent at the time. On the same day, Fish ordered the trustee to show cause why, in light of finding on solvency, judgment should not be entered for the defendants.

On Tuesday, the other shoe dropped, and Judge Fish finally tossed the case. "The fatal flaw in [the plaintiff's] theory, in light of the court's finding about Idearc's solvency, is that, in fact, the late-2006, post-spinoff Idearc was not 'saddled' with unsupportable debt," the judge wrote. "Subsequent events—including the Great Recession—intervened, and Idearc later became unable to support its debt."

Werner Powers at Haynes and Boone told us Wednesday that the litigation trustee plans to appeal, but he declined to comment further.

We reached out to Verizon counsel T. Ray Guy at Weil, Gotshal but didn't immediately hear back.

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