LORDSTOWN, Ohio – Lordstown Motors Corp. has retained some of the best legal talent in the Chapter 11 bankruptcy business and that expertise will need to be on full display July 28 when U.S. Judge Mary F. Walrath conducts a hearing on numerous motions before her court in Wilmington, Delaware.
Many of the motions are mundane and procedural. Most seek authorization for LMC expenditures in the normal course of business and likely will be dispensed with quickly with few objections, if any, by attorneys representing creditors.
Judge Walrath, however, also is slated to hear arguments on two extremely contentious issues: how the dormant EV startup seeks to sell its assets and whether the slew of lawsuits pending against Lordstown Motors should be automatically stayed by the court.
On June 28, during a hearing on first-day motions, an attorney representing Foxconn told Walrath that the Taiwanese company will oppose LMC’s motion that outlines sale procedures and suggested that restructuring could be resolved by mid-September.
On June 27, as part of its Chapter 11 filing, Lordstown Motors sued Hon Hai Precision Industry Co. and its Foxconn affiliates, essentially casting the world’s largest electronics contract manufacturer as the villain in its bankruptcy saga.
Adam Kroll, LMC chief financial officer, declared in court papers that Foxconn failed to complete the $170 million investment agreement the parties signed in November. As a result, “a number of major customers and vendors terminated or cut back their business dealings with the company, and the company has had to initiate significant cost-cutting actions,” he said.
“Instead of building a thriving business for the benefit of all Lordstown stakeholders, Foxconn’s fraudulent actions have destroyed the company’s business and future, stripping its ability to continue as a going concern absent a strategic Chapter 11 transaction,” Kroll stated.
The lawsuit – termed an “adversary” in bankruptcy court – claims that Foxconn sabotaged Lordstown Motors “in an effort to strip plaintiff’s assets and poach its talent at little cost,” Kroll stated.
Foxconn denies the allegations and describes as “false comments and malicious attacks” statements Lordstown made against Foxconn when it announced the bankruptcy filing and related adversary lawsuit.
At press time, Foxconn had not filed a response to the lawsuit with the court.
KARMA SEEKS $1 BILLION
In a turnabout of LMC’s claims against Foxconn, Karma Automotive LLC of Irvine, California, has accused Lordstown Motors of stealing trade secrets and poaching its employees.
Karma describes itself as a manufacturer of luxury electric vehicles, EV components, hardware and software. Lordstown Motors approached Karma in 2019 about forming a development partnership for an infotainment system.
The company is seeking nearly $1 billion in damages in the lawsuit the company filed in October 2020 in U.S. District Court in California and is asking Judge Walrath to lift the automatic stay – which freezes civil litigation – that a bankruptcy filing provides debtors.
More than 12.5 million documents have been exchanged during discovery for the Karma lawsuit and more than 50 depositions have been conducted, court papers say. The district court had scheduled the jury trial to begin Sept. 5.
The trial was earlier scheduled to begin in April but a health issue involving an expert witness for Lordstown Motors caused the district court in California to delay the date.
Karma’s motion for relief from the automatic stay begins by stating that in 2019 Lordstown Motors “had yet to finalize a working vehicle for sale to the public, was under increasing scrutiny for its failure to do so and became subject to an investigation by the Securities and Exchange Commission for misrepresentations about alleged preorders for its products. Faced with pressure from investors, regulatory authorities, and the general public about its significant development and production delays, [Lordstown Motors] decided to take a shortcut and steal Karma’s trade secrets. By doing so, [it] hoped to avoid – in the words of its own executives – millions of dollars in costs, and months if not years of development time.”
In an affidavit supporting Karma’s motion, attorney Michael D. Wexler states, “Through feigned interest, [Lordstown Motors] entered into a five-month due diligence with Karma’s engineering and project management staff, culminating in a fraudulent letter of intent and a promise to issue payments to Karma in short order.
“The courtship was a ruse and the promised check never arrived. Instead, [LMC] used those five months to begin poaching and onboarding key Karma employees and to steal Karma’s confidential information and trade secrets – not just about the infotainment system being developed but about every aspect of Karma’s business,” Wexler states.
On July 13, Lordstown Motors filed a motion asking the court to establish a procedure and hold a hearing to estimate the amount of the claim held by Karma.
“The sheer size of the damages asserted by Karma relative to the value of the debtors’ estate threatens to derail the Chapter 11 process and renders estimation of the Karma claim necessary,” the motion states.
“Karma is a moribund company that has never successfully produced vehicles with the property allegedly stolen. Yet it seeks nearly a billion dollars in damages for alleged theft of trade secrets that neither Karma nor the company were ever able to monetize,” the motion continues.
“As the [Lordstown Motors’] experts will prove at the estimation hearing, when Karma’s theoretical sales figures are replaced with actual sales, Karma’s real damages are near zero.”
Karma’s motion to lift the litigation stay says, like Foxconn, it will oppose the sale procedures outlined by Lordstown Motors, which “presumably [would include] Karma’s stolen intellectual property.”
LEGAL COSTS
In its Chapter 11 petition, Lordstown Motors estimated “it has incurred more than $60 million in out-of-pocket fees associated with legal time and consulting and administrative costs, including costs to fulfill the company’s indemnification obligations to its current and former directors and officers.”
According to financial disclosures filed March 6 with SEC, the EV startup earmarked nearly $34 million last year toward legal expenses to address litigation and investigations by federal agencies.
White & Case LLP, a high-powered law firm based in New York City, is representing Lordstown Motors before bankruptcy court. The firm describes itself as a global practice. Rates charged by White & Case top off at $2,100 per hour for partners to a low of $640 per hour for paraprofessionals, according to court documents.
White & Case began providing legal services to Lordstown Motors “on or about April 5, 2003,” when the company deposited an initial $1 million retainer. By press time, it had reported total payments of nearly $4.3 million.
The firm’s Thomas E. Laurie argued on behalf of Lordstown Motors at the first-day motions hearing June 27. “The company is involved in numerous litigations that are costly to defend,” he said, and an automatic stay of those court cases by bankruptcy court “would bring them to an end so resources can be preserved for those holding claims when they become allowed claims.”
Meanwhile, the Securities and Exchange Commission continues to investigate potential civil claims against Lordstown Motors. “There have been confidential settlement negotiations but no settlement,” Laurie said.
The company filed Chapter 11 bankruptcy because it was “operating at a substantial cash loss since its expectation, its belief in its partnership with Foxconn would get it to the end of the road. … That didn’t happen,” Laurie said.
Countered Foxconn attorney Matthew Murphy, “That’s a story to tell, a litigation tactic,” which Lordstown Motors is using to disguise the cascade of management, legal and production problems that began almost as soon as Lordstown Motors began operations in 2019.
“The company had operational, financial, production and litigation issues long before Foxconn,” said Murphy, with Paul Hastings LLP, also a global law firm based in New York.
SECOND GO-AROUND
New York-based Jefferies LLC is serving as the investment banker for Lordstown Motors and will solicit bids for its assets. Jefferies operates more than 30 offices around the world. It is being paid a monthly retainer of $200,000 and will earn a $3 million restructuring fee when the reorganization is consummated.
Jefferies was first retained by Lordstown Motors in September 2021 “to explore all market alternatives.” That process resulted in the sale of its plant, formerly operated by General Motors, to Foxconn “and the intent to form a joint venture with Foxconn,” court papers say.
In June 2022, “Jefferies, in consultation with Foxconn, prepared a list of more than 50 potential investors and strategic original equipment manufacturing partners across the globe seeking potential acquirors and/or strategic partners.” Although Jefferies, LMC and Foxconn divided the list, each holding meetings with the prospects “and in-person evaluations” of the Endurance, no “actionable indications of interest” were received.
This go-round, Jefferies and LMC “have developed a list of contact parties whom they believe could be interested in, and would have the financial resources to consummate, a sale,” states the motion to establish bid procedures and a timetable. The plan is to “distribute a teaser to the contract parties and facilitate access to diligence materials.”
At the June 27 hearing, Foxconn’s attorney noted the previous failure to secure a buyer for the company and began to cite paragraphs in court documents that Lordstown Motors has filed to exonerate Foxconn from any culpability for the EV startup’s insolvency.
Save it for the adversary proceedings, the judge instructed.