IAC loses appeal over ex-unit that went bankrupt

By Jonathan Stempel

NEW YORK (Reuters) - IAC/InterActiveCorp <IACI.O>, a media holding company chaired by billionaire Barry Diller, lost its bid to dismiss a lawsuit accusing it of deceiving a private equity firm into buying a call center operator that quickly went bankrupt.

Thursday's ruling by a New York State appeals court in Manhattan is a victory for Diamond Castle Holdings LLC, which sought $138.5 million of damages stemming from its $277.6 million purchase of the Florida-based operator, PRC LLC.

The court said Diamond Castle could pursue the case even though the entity it set up to actually buy PRC no longer exists.

Diamond Castle accused IAC of falsely overstating the expected financial impact of a services contract that PRC had with Verizon Wireless.

It said it learned the truth only after the November 2006 closing. PRC filed for bankruptcy protection 14 months later, wiping out Diamond Castle's equity stake.

IAC argued Diamond Castle could not recover because it formed an entity called "Panther" to buy PRC and the merger agreement barred recovery by "third-party beneficiaries."

But the unanimous five-justice appeals panel said the agreement was "plainly intended" to give Diamond Castle enforceable rights.

It pointed to a provision protecting Panther and its "affiliates" from losses caused by various breaches.

"Further, it would leave plaintiffs without remedy since Panther, the contracting entity, was merely an acquisition vehicle which was merged into PRC immediately following the closing," the court added.

IAC and Diamond Castle both are based in New York. Verizon Wireless is a joint venture of Verizon Communications Inc <VZ.N> and Vodafone Group Plc <VOD.L>.

Stephen DiPrima, a partner at Wachtell, Lipton, Rosen & Katz representing IAC, said his client is reviewing the opinion and may appeal, and will proceed to defend its claims.

Diamond Castle spokeswoman Maureen Connelly said the parties are now engaged in discovery.

The case is Diamond Castle Partners IV PRC LP v. IAC/InterActiveCorp, New York State Supreme Court, Appellate Division, 1st Department, No. 3694.

(Reporting by Jonathan Stempel in New York; editing by Andre Grenon, Gary Hill)