Judge Rules Against Lordstown Motors, Lifts Stay on Trade Secrets Case

LORDSTOWN, Ohio – Consider it karma.

Karma Automotive LLC won a big victory Thursday in U.S. Bankruptcy Court as U.S. Judge Mary F. Walrath lifted the stay on Karma’s litigation against Lordstown Motors that could seal the fate of how – and if – the EV startup can sell its assets as a going concern.

The Karma lawsuit, filed in October 2020 in U.S. District Court in California, centers on what transpired in 2019, during the early days of the EV startup when Lordstown was producing the Endurance prototype.

Karma claims that founder and former Lordstown CEO Steve Burns, his executive team and certain Karma employees conspired to steal trade secrets in what court papers say was a “classic corporate espionage case.” 

The “scheme” involved a proposed joint venture that was a “ruse,” claims Karma, which is seeking nearly $1 billion in damages.

Over the course of three years of litigation, more than 12 million documents have been exchanged through discovery, 54 depositions have been taken and Lordstown Motors has spent $2.5 million to defend Burns and other former employees named as defendants.

The company has been sanctioned twice by the judge in California for withholding evidence, according to court papers. Details of what was withheld is sealed, unavailable for public review.

The civil trial was set to begin Sept. 5 until it was automatically stayed when Lordstown Motors filed Chapter 11 bankruptcy. Now the trial will go forward.

“The issue is whether property was stolen from Karma,” Judge Walrath said. …“I agree with Karma that the debtor cannot sell something that the debtor cannot establish is its property. …It’s critical to have that issue decided.”

The judge then handed Lordstown Motors another loss by continuing the hearing on its motion to set bidding procedures and ordering the company to tell her by Monday “if there are any indications of interest” by potential bidders, which she seemed to doubt.

“I am very concerned” that the investment banking company seeking bidders for Lordstown’s assets has not “informed the parties that there is a dispute about the title of the assets,” she said. “We should have a verdict sometime in September” in the Karma case. “And quite frankly, I think that will show whether the debtor gets any bids.”

Jeffrey Finger, managing director of Jefferies, the restructuring firm retained by Lordstown, said bid solicitations began after the Chapter 11 petition was filed June 27. “We have not had explicit conversations with prospective buyers about the [Karma] litigation,” he said when questioned by Karma’s attorney.

As of today, there are no offers for the company’s assets, he said, and a stalking horse bidder has not emerged.

That was also true 2021 and 2022, when Jefferies was retained by Lordstown to “explore all market alternatives,” Karma’s attorney pointed out.

At the start of the hearing, which was conducted via Zoom, Adam Kroll, Lordstown Motors’ chief financial officer, testified that only 37 Endurance vehicles have been sold. He updated total production figures to “closer to 80” pickup trucks manufactured by the company since it began operations in 2019 – a gain of 15 vehicles from the number Kroll declared as part of the Chapter 11 petition.

As Kroll explained, “We continued to build vehicles through the end of the month [of June].”

As of June 27, Lordstown Motors had $136 million cash on hand, no encumbered debt and trade debt of just $20 million, Kroll reiterated. The company’s monthly “burn rate” is $6.2 million with $2.5 million going to pay litigation, legal and restructuring costs.

Attorneys for the EV startup argued that an expedited asset sale process would preserve the cash for creditors and Lordstown’s engineering staff would likely be retained as an asset.

“We are selling a vehicle that is complex in nature. A buyer is going to expect to understand all the componentry, how they fit together,” Kroll said.

“You need a specific engineer who understands how the body works … all the history and trials the company has gone through in the prototype phases.”

Judge Walrath pushed back on Lordstown’s argument that the asset sale must be expedited to stop the erosion of cash or loss of employees.

“If this is an emergency, it may be an emergency of the debtors’ own creation,” she said.


Lawsuit Claims Lordstown Motors Execs Misled Investors over Foxconn Problems
Foxconn to Court: Dismiss Lordstown’s Chapter 11 or Order Liquidation
Exclusive: Who’s to Blame? Failing Business or Foxconn?
Exclusive: Lordstown Motors Insiders Cash Out $95M
Bankruptcy Judge OKs LMC Motions – and Exception Raised by Foxconn
Lordstown Motors to Lay Off Nearly 100 at Michigan Tech Centers
Hearings Start Today in Lordstown Motors’ Bankruptcy
Foxconn EV System LLC Among LMC’s Largest Unsecured Creditors
In Wake of Chapter 11 Filing, Officials Envision Future Beyond Lordstown Motors
Affidavit: Foxconn’s Actions ‘Destroyed’ Lordstown Motors; Foxconn Responds
Lordstown Motors Files Chapter 11, Sues Foxconn for Fraud

Copyright 2024 The Business Journal, Youngstown, Ohio.