US Trustee: Lordstown Plan Unfair to Shareholder Litigants
LORDSTOWN, Ohio – The myriad lawsuits that accuse past and present directors and officers of Lordstown Motors Corp. of securities fraud suggest a long and contentious hearing when the failed EV startup’s Chapter 11 disclosure and reorganization plan goes before bankruptcy court.
A hearing was scheduled to take place Oct. 18 before Judge Mary F. Walrath in Wilmington, Delaware. On Wednesday, however, attorneys for Lordstown Motors filed a notice with the court to delay that hearing until Oct. 25.
The delay notice came as U.S. Trustee Andrew R. Vara, appointed to represent equity security holders – which includes the shareholder plaintiffs – told the court he opposes Lordstown’s plan that would automatically release some of the company’s current directors from being held accountable for damages in pending litigation.
“Five of the debtors’ nine current directors, who would apparently receive third-party releases, are defendants in pre-petition securities litigation involving the debtors,” Vara said in his objection. “Specifically, David Hamamoto, Keith Feldman, Jane Reiss, Dale Spencer and Angela Strand are current board members who signed the Chapter 11 petitions for Lordstown Motors Corp. and Lordstown EV Corp.
The court document states: “It appears the Debtors’ current directors would receive third-party releases under the plan, even though five of the nine current directors are defendants in pending shareholder derivative litigation. Any such third-party releases should be consensual and should receive close scrutiny in light of the extensive prepetition litigation involving the debtors and their current and former directors and officers.”
The plan sets forth how Lordstown Motors proposes to pay its creditors – setting five descending classes of unsecured creditors. The shareholder plaintiffs would be third in line – and Foxconn, which holds $30 million in stock preference, would be last, the sole occupant of the fifth class and unable to recoup one dime, if the plan is approved.
Foxconn, the Securities and Exchange Commission and certain shareholder plaintiffs have all filed objections to Lordstown’s plan.
Foxconn argues Lordstown Motors can’t have it both ways: Sue Foxconn for damages in a separate adversary complaint before bankruptcy court and separately petition the court in the Chapter 11 case to deny its equity claim.
The SEC notes the proposed buyer of the remaining assets of Lordstown Motors – LAS Capital’s major stakeholder and the founder and former CEO of Lordstown, Steve Burns – is “a former insider.”
The SEC is investigating whether the company and others “may have engaged in prepetition activities that violated the federal securities laws.”
If so, the SEC would be entitled to “disgorgement of ill-gotten gains and/or civil monetary penalties” – payment of which is not specifically carved out and set aside in the disclosure plan.
Copyright 2023 The Business Journal, Youngstown, Ohio.