U.S. Bank Nat'l Ass'n v. Verizon Commc'ns Inc.

• Decision Date: 14 September 2012
• Docket Number: Civil Action No. 3:10–CV–1842–G.
• Citation: 892 F.Supp.2d 805
• Parties: U.S. BANK NATIONAL ASSOCIATION, Litigation Trustee of the Idearc Inc. et al. Litigation Trust, Plaintiff, v. VERIZON COMMUNICATIONS INC., et al., Defendants.
• Court: U.S. District Court — Northern District of Texas

892 F.Supp.2d 805

U.S. BANK NATIONAL ASSOCIATION, Litigation Trustee of the Idearc Inc. et al. Litigation Trust, Plaintiff,
v.
VERIZON COMMUNICATIONS INC., et al., Defendants.

Civil Action No. 3:10–CV–1842–G.

United States District Court,
N.D. Texas,
Dallas Division.

Sept. 14, 2012.

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Patrick D. Keating, Charles M. Gearing, David R. Taubenfeld, John Marshall Bunting, Philip McCall Bridwell, Robin E. Phelan, Werner A. Powers, Haynes & Boone LLP, Douglas J. Buncher, John D. Gaither, Nicholas A. Foley, Seymour Roberts, Jr., Neligan Foley LLP, Dallas, TX, for Plaintiff.

T. Ray Guy, Weil Gotshal & Manges LLP, J. Robert Arnett, II, E. Leon Carter, Carter Stafford Arnett Hamada & Mockler, PLLC, Dallas, TX, Alfredo Perez, John B. Strasburger, Paige Holden Montgomery, Weil Gotshal & Manges LLP, Houston, TX, David Lawrence Schwarz, Joseph S. Hall, Reid M. Figel, Saritha K. Tice, Scott H. Angstreich, Steven F. Benz, William J. Rinner, Kellogg Huber Hansen Todd Evans & Figel PLLC, Washington, DC, Philip D. Anker, Wilmer Cutler Pickering Hale and Dorr LLP, New York, NY, for Defendants.

MEMORANDUM OPINION AND ORDER
A. JOE FISH, Senior District Judge.

This case involves claims arising out of Verizon's spin-off of its domestic directories business into a separate company, then known as Idearc. The plaintiff is U.S. Bank National Association (“U.S. Bank”), acting as litigation trustee of the Idearc Inc. et al. Litigation Trust. Plaintiff's Amended Complaint and Jury Demand (Filed Under Seal) (“Complaint”) at 1 (docket entry 216). The defendants are Verizon Communications Inc. (“Verizon”), GTE Corporation (“GTE”), John W. Diercksen (“Diercksen”), and Verizon Financial Services, LLC (“VFS”). Id. at 1.

This order decides a series of pending motions for summary judgment: ¹ (1)

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Plaintiff's Motion for Partial Summary Judgment (“Plaintiff's First Motion”) (docket entry 332); (2) Verizon Defendants' Consolidated Motion for Summary Judgment (“Verizon Defendants' Motion”) (docket entry 371); and (3) John W. Diercksen's Motion for Summary Judgment (“Diercksen's Motion”) (docket entry 373).

For the reasons set forth below, these motions are granted in part and denied in part.

I. BACKGROUND

While the plaintiff and the defendants generally agree on the facts underlying this case, they have very different interpretations of those facts. To highlight these differences, the court will present the background of this case as both sides have presented it to the court.

A. The Defendants' Version

The origins of the Idearc spin-off date back to 2005. Verizon Defendants' Brief in Support of their Consolidated Motion for Summary Judgment (“Verizon Defendants' Brief”) at 4 (docket entry 372). At that time, Verizon decided to divest itself of its domestic directories business, which consisted of print yellow pages, print white pages, an online yellow pages directory, and an information directory for mobile phone customers. Id. The domestic directories business was managed as a single unit within Verizon, known as Verizon Information Services (“VIS”). Id. at 4–5.

The defendants insist that the spin-off was designed to be in the best interests of both Verizon and the directories business. They characterize VIS as a “cash cow” that produced billions in steadily recurring revenue. Id. at 5. Notwithstanding the value of VIS, the defendants urge that they thought VIS would be better off if it were an independent company, because VIS management would be able to focus on the development of the directories business. Id. By allowing VIS to take on “a more flexible corporate structure,” Verizon also hoped that VIS would be better able to deal with the changes wrought in the industry by the internet. Id. at 5–6. According to the defendants, at least five leading investment banks agreed with Verizon's assessment that VIS would be worth more as a separate company than as a part of Verizon. Id. at 6. At this time, Goldman Sachs, Morgan Stanley, and Credit Suisse estimated that the enterprise value of a stand-alone VIS would be between $12 billion and $20 billion. Id.

In December of 2005, Verizon began to explore how it could restructure VIS and the directories business. Id. at 7. Verizon considered disposing of Idearc via an “outright sale.” Id. However, a straightforward sale would have subjected Verizon to billions of dollars in taxes. Brief in Support of Plaintiff's Omnibus Response in Opposition to Defendants' Motions for Summary Judgment (“Plaintiff's Omnibus Response Brief”) at 24–25 (docket entry 430). As a result, Verizon's investment banks, JPMorgan Chase (“JPMorgan”) and Bear Stearns, recommended to Verizon that the directories business be consolidated and spun off to Verizon shareholders in a tax-free transaction. Verizon Defendants' Brief at 7. In turn, Verizon received a private letter ruling from the Internal Revenue Service that the spin-off

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would qualify as a tax-free reorganization under the Internal Revenue Code. Plaintiff's Omnibus Response Brief at 25.

Verizon incorporated the Verizon Directories Disposition Corporation (“VDDC”) as a Delaware corporation in June of 2006. Verizon Defendants' Brief at 8. Diercksen served as VDDC's sole director. Id. On October 18, 2006, VDDC changed its name to Idearc. Id. at 9.

According to the defendants, JPMorgan and Bear Stearns estimated, after completing their due diligence, that the directories business would have a post-spin-off value of between $11.5 billion and $12.5 billion. Id. at 10. From this estimate, JPMorgan and Bear Stearns concluded that Idearc could support $9 billion in debt, and have the remaining capacity to pay $200 million in dividends to its shareholders. Id. The banks determined that Verizon could optimize shareholder value by having Idearc take on $9.1 billion in debt: Idearc would issue $7.1 billion in notes to Verizon, and then borrow $2 billion to fund part of a $2.4 billion cash distribution to Verizon. Id. At this time, Idearc's future managers were comfortable with this proposed capital structure. Id. at 10–11.

As part of the restructuring, Idearc filed a Form 10 registration statement with the Securities and Exchange Commission. Id. at 11. This form gave extensive information about the directories business, Idearc's future capital structure, and the anticipated spin-off of Idearc shares to Verizon shareholders. Id. at 11–12. This form also listed a number of “risk factors” that investors in Idearc should take into consideration. Id. The Form 10 filed by Idearc also disclosed that Verizon and Idearc were expected to enter into a number of long term contracts, including a tax sharing agreement. Id. at 12. According to the defendants, the agreement imposed limits on Idearc's ability to refinance its debt and its ability to pursue certain strategic transactions. Id.

In preparing for the spin-off, Verizon also retained financial advisory firm Houlihan Lokey to provide an independent assessment of whether Idearc would be solvent following the spin-off. Id. at 14. Based on its analysis, Houlihan valued the directories business at between $11.5 billion and $13.3 billion, which would exceed the $9.1 billion in debt that Idearc would be incurring as part of the spin-off. Id. at 14–15.

During the summer of 2006, Verizon management and Diercksen selected the five individuals who would become Idearc's directors after the spin-off. Id. at 16. These individuals—Kathy Harless, John Mueller, Stephen Robertson, Donald Reed, and Thomas Rogers—each had “significant experience in the directories, telecommunications, and electronic media industries.” Id. at 7, 16.

Throughout October and November of 2006, Idearc's future executive officers, VIS managers, JPMorgan, and Bear Stearns met with potential investors to generate financial support for Idearc. Id. at 13. According to the defendants, the financial community responded to Idearc “with enthusiasm.” Id. Analysts from Barclays and Wachovia issued reports estimating that Idearc, post-spin-off, would have a total enterprise value of approximately $12 billion. Id. Moreover, the Idearc debt offerings were oversubscribed, meaning that total orders for the debt ($19.5 billion) far exceeded the $9.1 billion in debt financing that Idearc sought. Id. at 13–14.

On October 18, 2006, the Verizon board of directors approved the proposed Idearc spin-off. Id. at 17–18. On October 31, 2006, Diercksen, as Idearc's sole director, authorized Idearc to participate in the restructuring. Id. at 18. Before the spin-off

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occurred, Diercksen resigned as director of Idearc. Id. On November 16, 2006, one day before the spin-off, the five new Idearc directors were formally appointed. Id. Each of the new directors then purported to execute a resolution ratifying and approving the spin-off. Id. at 18–19. In a previous order, the court has concluded that this resolution is invalid as a matter of law. See Memorandum Opinion and Order of August 8, 2012 (“August 8, 2012 Memorandum”) at 6–8 (docket entry 485).

The Idearc spin-off occurred on November 17, 2006. Verizon Defendants' Brief at 19. Verizon transferred to Idearc the domestic directories business. Id. In return, Idearc transferred cash and debt to Verizon worth approximately $9.6 billion. Id. This transfer consisted of $2.4 billion in cash ($1.95 billion in borrowed cash and $500 million in cash on hand) and $7.15 billion in debt ($2.850 billion in two promissory notes (“the notes”) and $4.3 billion pursuant to a Credit Agreement (“the Verizon Tranche B”)). Id.; see also Complaint ¶¶ 18–19. In addition, Idearc issued to Verizon an additional 145,851,861 shares of Idearc common stock. On the same day, Verizon distributed all of Idearc's common stock to its shareholders, with each shareholder receiving one share of Idearc stock for every twenty shares of Verizon common stock. Id. at 19–20. Verizon exchanged the $7.15 billion in Idearc debt with $7.08...