Judge Rejects Foxconn Motion to Dismiss Lordstown Motors Bankruptcy
LORDSTOWN, Ohio – Before Judge Mary F. Walrath convened bankruptcy court Monday, she had dispatched the first matter on the hearing agenda – the $40 million settlement that Lordstown Motors Corp. had reached with Karma Automotive LLC of California.
Walrath had already signed an order approving the settlement of the trade secrets case, which was noted with appreciation by attorneys. The second item on the agenda, Foxconn’s motion to dismiss the Chapter 11 bankruptcy case or convert it to liquidation, would now proceed.
The hearing, conducted via Zoom from Walrath’s courtroom in Wilmington, Delaware, lasted nearly four hours. At times, the video screen showed the judge with her eyes closed, perhaps in contemplation of what she was hearing or signaling to attorneys to wrap it up.
She didn’t say.
When they finally reached their summations, it took Walrath about five minutes to tell why she was ruling against Foxconn and allowing the assets sale process to continue.
The Taiwanese company, the world’s largest contract manufacturer, purchased the Lordstown Motors plant for $250 million in 2021 and entered into an investment agreement with the EV startup. Its dismiss-or-liquidate motion claimed that Lordstown filed Chapter 11 in “bad faith and without a valid bankruptcy purpose” to gain “a tactical litigation advantage” against Foxconn.
“In contemplating this,” Walrath ruled, “I want to state it is not in the best interests of creditors to either convert this case [to Chapter 7 liquidation] or dismiss this case.
“There are employees. There is an effort to sell the assets of the business. … I can’t say the debtors’ prepetition conduct was improper, and there was no indication of management committing fraud,” she said.
Shortly after the hearing started, Walrath advised Foxconn attorney Michael Whalen not to spend time rebutting the adversary fraud complaint that Lordstown Motors filed against Foxconn on June 27 when it also filed for bankruptcy protection. That case has not been set for hearing, and Foxconn has yet to formally respond to the pleadings.
Later, in the ruling against Foxconn, she emphasized, “I don’t view this as a two-party dispute.”
But for Foxconn, the dispute amounts to a “shakedown,” said attorney Matthew Murphy.
“Lordstown filed bankruptcy for no other reason than to shake down Foxconn. … The debtors wanted to sell Foxconn the assets, and Foxconn wasn’t interested, and Foxconn certainly wasn’t interested in a shakedown,” he said.
“The debtors also tried to shake down Karma,” Murphy continued. By seeking court protection from creditors, Lordstown was attempting to thwart “litigation hangover” from numerous lawsuits it must defend that have been filed by Karma, securities holders and other stakeholders.
Moreover, Lordstown received a settlement offer months ago from the U.S. Securities and Exchange Commission but has failed to respond, according to Murphy.
Lordstown Motors also failed to respond to Foxconn’s proposal, transmitted June 22, to buy the company’s assets for $47 million in cash and $30 million in securities, he said.
“They ignored the offer for 77 million [dollars] and decided to take a chance on bankruptcy. And now they are offering a sale process that takes up to $500 million in investment” for the buyer to become a “going concern,” he said.
Murphy was referring to testimony in which Lordstown’s executive chairman, Daniel Ninivaggi, and CEO Edward Hightower stated that to scale production of the Endurance pickup, the EV startup would need $500 million to buy hard tooling and then seven years of full production to achieve a return on investment.
Ninivaggi and Hightower were questioned about the failure of Lordstown’s vertical manufacturing business model. The high cost to build the Endurance– more than $250,000 per vehicle – made the venture unsustainable, the executives testified.
There are only five unique buyers of the pickup truck, of which only 40 have been sold, they said. Lordstown entered into the joint venture and investment agreement with Foxconn so it could innovate and manufacture a second vehicle with an OEM.
As for Foxconn’s attempt to purchase substantially all of Lordstown’s assets, an offer was received in “the first half of 2023. But it was not binding, and it had conditions that as a board we did not see it as actionable,” Ninivaggi said.
A second letter from Foxconn that restated the offer was received June 22 – five days before the bankruptcy filing.
“The decision to file bankruptcy and contemporaneously sue Foxconn was made before the company received the [June 22] offer,” Ninivaggi said.
Added Hightower, “It appeared to be just the latest delay tactic. Given the conditions [of the offer] and the fact it wasn’t binding, we didn’t believe they [Foxconn] would go through with it,” he said.
In upholding the validity of Lordstown’s bankruptcy petition, and denying Foxconn’s motion to liquidate, Walrath said “part of the reason for filing bankruptcy was they could not run a sale process without the consent of Foxconn. … There is value in a court order that allows a sale to close promptly and without the possibility of appeal,” she said.
The deadline is Sept. 8 for Lordstown Motors to receive bids for its assets.
No stalking horse bid has been received that would set the low bar for the sale price.
“There is always the possibility of the court taking action if anything changes,” the judge said, leaving open the possibility of liquidation.
“But that does not mandate dismissing this case.”
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