Hard assets and customer lists of bankrupt NorthPoint Communications Group Inc. were long ago disposed of by creditors of the bankrupt San Francisco-based telecom services provider, but speculators in the company's common stock and bonds may have now cleared the first hurdle in a long-odds bet that a lawsuit against one-time suitor Verizon Communications can bring home some return.

San Francisco Superior Court Judge James McBride ruled on Saturday, July 13, that NorthPoint's bankruptcy trustee can proceed with a $4 billion claim against Verizon which charges fraud and includes $3 billion in punitive damages. A negative ruling would still have retained a $1 billion claim for actual damages against Verizon for reneging on an acquisition bid just prior to NorthPoint's December 2000 bankruptcy filing, but the judge's action leaves Verizon subject to the full penalty in jury trial set to begin July 29.

Verizon spokesman Robert Varettoni said the company stands by its position that the lawsuit has no merit, and will proceed with a vigorous defense in the face of the ruling.

"We continue to be confident that a jury will recognize that Verizon was entitled to withdraw from the merger agreement," Varettoni said. "This court ruling does not change that fact, which will ultimately defeat all of NorthPoint's claims. Our decision to terminate the merger agreement was based solely on the material adverse effect resulting from the ongoing deterioration in NorthPoint's business."

NorthPoint's lawsuit seeks $1 billion each in damages for actual harm, fraud, negligent misrepresentation, and punitive charges for a takeover bid proffered in August 2000, then withdrawn in November after NorthPoint reported third quarter sales 20% less than first reported, and just weeks before the competitive independent telecommunications startup filed for Chapter 11 protection in January 2001.

At the time the Verizon deal was struck, NorthPoint was a fast-growing startup that had attracted huge amounts of capital to provide high-speed Internet access to consumers and businesses. Verizon agreed to invest $800 million in cash and $513.5 million of equipment assets in exchange for 55% ownership. Verizon pumped $150 million into NorthPoint before backing out as the telecommunications and Internet investment bubble began to burst and its own investors began to balk.

NorthPoint's assets and operations were sold out of bankruptcy to AT&T Corp., and its case was converted to Chapter 7 liquidation in June 2001.

The current lawsuit may test the degree of protection offered by so-called MAC-out clauses, which allow for cancellation of deals based on material adverse change, or MAC, rationales. The clause was invoked at an unprecedented pace during the period of the NorthPoint-Verizon cancellation — due to the rate at which the fortunes of Internet and telecommunications companies were declining.

NorthPoint claims that Verizon specifically ruled out a decline in revenues as appropriate grounds for canceling its bid. On that basis, speculators have kept the company's stock alive in the ensuing months based on the promise of the lawsuit against Verizon.

Doug Sullivan, a lawyer with an Francisco's Folger Levin & Kahn LLP, which represents the NorthPoint bankruptcy trustee, expressed approval with the judge's most recent action. "We are pleased with the ruling, and it is significant in that we will go to trial not only on the breach of contract, but on the fraud claims, and a jury will rule on all these aspects," Sullivan said.

The lawsuit is essentially the only asset remaining in NorthPoint, and has kept the company's stock trading for about 19 cents a share, and its bonds at 24 cents a piece.