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The New York State Supreme Court on Thursday dismissed a seminal lawsuit filed by an activist bondholder that sought to have Mpower Communications, a struggling telecommunications company, declared insolvent. Fir Tree Partners, a New York investment firm that holds Mpower bonds, filed the first-ever suit that questions a nonbankrupt company’s fiduciary duty to bondholders. An attorney for Fir Tree said his client expects to file a notice of appeal this week. In an effort to limit its losses, Fir Tree filed the lawsuit to get Mpower to stop spending before it defaults on its bonds. The investment firm owns nearly $70 million of Mpower’s 13 percent senior notes due in 2010. Mpower then filed a motion to dismiss the bondholder’s case, as well as its own, separate lawsuit seeking $100 million in punitive damages from Fir Tree. The latter suit is still pending. “Fir Tree basically wanted us to close down our business and give them their money back,” Rolla P. Huff, Mpower’s chief executive, said in a phone interview shortly after the decision was handed down. “That’s just not the way the business world works,” Huff continued. “We’re going to do the right thing for all constituencies. We’re certainly not going to give preference to one bondholder.” What Fir Tree representatives heralded as a watershed lawsuit for bondholders’ rights, Judge Helen E. Freedman deemed impermissible, based on a so-called “no-action” clause standard within the note’s indenture that says a bondholder can only sue for nonpayment. Freedman heard arguments in the matter Nov. 1. “According to the judge’s opinion, the no-action clause means exactly what it says,” said R. Paul Wickes, a partner with Shearman & Sterling in New York and counsel to Mpower. “Fir Tree has said it wanted to open a whole new avenue with its lawsuit. This decision says there’s no avenue there.” Michael F. Perlis, a partner with Stroock & Stroock & Lavan in Los Angeles and counsel to Fir Tree, said he will ask a higher court to decide the issue. “This case is about whether this type of litigation is precluded by that clause,” Perlis said. “[The New York Supreme Court] thinks so, and my client disagrees.” While Mpower has a court victory under its belt, it’s still struggling to survive in a battered telecom sector that has seen several high-profile bankruptcies. During its third-quarter earnings release conference call earlier Thursday, Mpower said it ended the quarter with $265.6 million in cash, and based on current quarter business trends, the company’s present cash position is projected to fund its operations into the first quarter of 2003. Mpower reported revenue for the third quarter of $49.8 million, a 42 percent increase from the third quarter of 2000. The company improved its EBITDA loss to $34.2 million for the quarter from $43.9 million in the second quarter. Mpower said it’s actively working with its financial adviser Rothschild Inc. to evaluate additional sources of funding and other strategies to strengthen its balance sheet. “The whole sector is under extreme pressure,” CEO Huff said. “There is no company in the telephony sector that isn’t being absolutely hammered and that isn’t concerned about funding. “This sector has a lot of challenges in front of it, and we will continue to work through those challenges,” Huff said. “We were among the first to slow down our market build and get out of new markets. The vast majority of bondholders understand the investments that they are making.” Fir Tree, however, “is the only bondholder that took this action, and no one else joined their suit,” Huff said. “I think that speaks volumes on how far in left field Fir Tree is.” Copyright (c)2001 TDD, LLC. All rights reserved.

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