Bad Idearc? Is Verizon On The Hook For Bankrupt Spinoff’s Debt?

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In 2006, Verizon(VZ), spun off its declining directory business as Idearc, saddled with billions in debt. Just 28 months later, the company filed for bankruptcy, Idearc has since restructured and reemerged as SuperMedia(SPMD), but trustees for the debtors are continuing their fight against Verizon for the repayment of debt. On Friday, the trustee for the creditors filed suit, alleging that Verizon is liable for $2.85 Billion worth of Idearc debt.

“Because Verizon never properly incorporated Idearc (for which it acted as promoter in arranging the indebtedness and was a direct beneficiary thereof) Verizon is liable for the indebtedness at this time,” the trustee said in yesterday’s court filing.

Verizon has so far been successful in defending against liability here, most recently in a January ruling

A federal judge in Dallas in January said Verizon would probably win a lawsuit over the 2006 spinoff of Idearc, rejecting claims that the business was insolvent at the time of the deal.

Idearc had a value of at least $12 billion, and the “only credible evidence” shows the business was solvent when it was spun off, U.S. District Judge A. Joe Fish in Dallas said in the January decision.

Fish ordered U.S. Bancorp, which sued Verizon on behalf of Idearc creditors, to explain why its claims were viable following the ruling on valuation. The judge said it “appears” creditors will be unable to prove their case “so that all of the plaintiff’s remaining legal claims will fail.”

This is a risk investors must clearly keep in mind in spinoff situations- is the spin well-capitalized, and, if not, will there be residual liability to the parent.

Disclosure: The author holds no shares of any stock mentioned

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