Judge Mary Walrath generally granted the first day relief
sought by the Lordstown Motors debtors on a largely uncontested basis at a first day hearing this afternoon, with some proposed orders sent back for revisions. However, today’s hearing set the stage for several contentious litigation matters that could derail the debtors’ proposed section 363 sale process - including material disputes with equityholder Foxconn and Karma Automotive (fka Fisker Automotive, which emerged
from chapter 11 in 2014).
Along with the petition, the debtors filed an adversary proceeding seeking damages from Foxconn and several affiliates for fraud and breach of partnership agreements with the debtors. Karma has sued the debtors and several employees in a California federal court for more than $900 million in damages arising from alleged misappropriation of trade secrets.
In addition to the Foxconn and Karma suits, Thomas Lauria of White & Case, counsel for the debtors, cited four other proceedings that must be resolved in the bankruptcy: consolidated shareholder suits by investors in the debtors’ special purpose acquisition company parent entity in the Delaware Chancery Court, a federal securities fraud multidistrict litigation proceeding in Ohio, derivative actions by shareholders against management, and an “ongoing” investigation by the U.S. Securities and Exchange Commission.
Matthew Murphy of Paul Hastings, counsel for Foxconn, appeared today to voice his opinions on both the debtors’ allegations against Foxconn and the entire purpose of the bankruptcy. According to Murphy, the debtors had serious operational, financial and litigation issues that threatened their ability to continue as a going concern even before Foxconn agreed to purchase the debtors’ Lordstown, Ohio, plant and collaborate on electric vehicle manufacturing.
Murphy also suggested that the debtors’ bidding procedures motion reads more like a complaint against Foxconn than a “real effort to sell assets.” Murphy asserted that Foxconn believes the sale process and the bankruptcy itself are an “inappropriate effort” to “exert leverage” against Foxconn as a litigation tactic by a “solvent debtor.”
James Sowka of Seyfarth Shaw, counsel for Karma, told Judge Walrath that Karma intends to object to the debtors’ bidding procedures motion and seek relief from the automatic stay to pursue its claims against the debtors in the California federal court, where a trial is set for Sept. 5. Regarding the bidding procedures, Sowka said it appears the debtors intend to sell intellectual property misappropriated from Karma - including source code - to a buyer free and clear of Karma’s claims before the claims can be adjudicated.
Prior to the hearing, Karma also objected to the debtors’ motion
to confirm and enforce the worldwide effect of the automatic stay - a standard motion in chapter 11 cases involving non-U.S. creditors. Sowka asked Judge Walrath to direct the debtors to add language to the proposed order clarifying that the automatic stay does not automatically protect nondebtors (including the employees sued by Karma).
This language is necessary, Sowka said, to eliminate confusion caused by the debtors’ suggestion of bankruptcy in the California case, which provides that any action against the nondebtor employees “constitutes an ‘act to obtain’ property of the Debtors’ estates, including proceeds of the Debtors’ shared liability insurance coverage, and is subject to the Automatic Stay.”
According to Sowka, the California court stayed the entire litigation, including claims against the nondebtor employees, based in part on the suggestion of bankruptcy, which he said mischaracterizes the law on nondebtor litigation stays.
David Turetsky of White & Case, for the debtors, argued that Karma’s issues with the suggestion of bankruptcy are not before the bankruptcy court and noted that the proposed stay enforcement order specifically preserves Karma’s right to argue the stay issues in the California court or seek relief from stay.
Judge Walrath agreed with Karma and called the issue a “problem of the debtors’ own making.” The suggestion of bankruptcy, the judge said, “seems to go far beyond what the automatic stay provides,” and she ordered the debtors to file a “proper” amended or replacement suggestion of bankruptcy and add language to the proposed stay enforcement order clarifying that the stay does not automatically protect nondebtors and their property.