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A U.S. bankruptcy court judge in Delaware has cleared the path for a civil case alleging Lordstown Motors Corp. and some of its employees stole trade secrets to proceed in a California federal court, while the troubled electric-vehicle company works its way through bankruptcy.
Judge Mary F. Walrath decided Thursday to lift a stay automatically imposed on Karma Automotive LLC's case against Lordstown Motors when it filed for Chapter 11 protection June 27.
Karma sued Lordstown Motors in October 2020, claiming Lordstown Motors stole trade secrets about Karma's infotainment system and plundered a specialized team of Karma employees who were designing it for use in the Lordstown Motors' truck, the Endurance.
The company is seeking nearly $1 billion in relief.
"I think it is critical to have that issue decided," Walrath said. "I think the appropriate thing is for the California court that has devoted three years to conducting discovery, addressing pretrial motions and is fully familiar with these facts" to decide the issue.
The trial is scheduled to begin Sept. 5.
"Let me be clear, I am not going to try that issue," Walrath said. "The issue involves 12 million documents, it involves 54 depositions, 14 experts who intend to testify. I don't see how I can do it."
Lordstown Motors asserted it would be prejudiced if the West Coast trial were allowed to go forward, arguing management's focus would be diverted from the bankruptcy; that allowing it to proceed put at risk losing employees who are critical to helping sell the company; and the cost to defend itself in court.
"Debtors' (Lordstown Motors) management are going to have to deal with this issue whether it's tried in this court or it's tried in California, so that is not prejudiced to the debtor," Walrath said, adding Lordstown Motors has legal means to protect and preserve employees, but has yet to file any motions relative to those means to protect workers during the sale process.
Lordstown Motors estimates it will cost about $2.5 million more to complete the trial. It has, however, more than $130 million on hand, Walrath said, and it still would spend that much in bankruptcy court to decide the intellectual property rights issue.
A verdict in the California case, expected in September, would push the sale process in bankruptcy back by only a couple of weeks.
"Quite frankly, I think it might inform whether or not the debtor gets any bids for its assets or gets any going concern bid," Walrath said.
"In this case, I find it makes good sense to let the Karma case proceed in California before I decide the title issues that might be impacted by the sale process," Walrath said.
Karma argued, in part, the sale of Lordstown Motors cannot proceed while the dispute over intellectual property remains unsettled. The company also argued the stay should be lifted because the case is nearly ready to start and the company has shown enough evidence it would be successful based on the merits of the case.
OTHER MOTION
Walrath held off ruling on a motion to determine Lordstown Motors asset sale procedures until next week, in part, to see if any potential buyers show interest in acquiring the company.
Other reasons for waiting, she said, involve concerns over the bid procedures.
"I am very concerned that Jefferies is not informing the parties that there is a dispute about the title to assets," Walrath said, referring to the Karma case.
Jefferies LLC is a New York City-based investment banking firm hired by Lordstown Motors to help find a buyer in bankruptcy. Lordstown Motors previously used the firm to try to attract additional investment in the company in 2021.
Jefferies managing director, Jeffery Finger, who co-heads the firm's U.S. Debt Advisory & Restructuring division, testified the firm has not "had explicit discussion with buyers to explain to them the pending litigation," which he said "likely could" negatively impact a sale if it is determined that Karma owns all or most of the disputed intellectual property.
Walrath said she believes the expedited nature of the process is manufactured by Lordstown Motors, given "there are no deadlines for sale or milestone imposed by any secure creditor because there is no secured creditor."
The company has more than $130 million, enough to repay the top 30 creditors.
Lordstown Motors argued it might lose employees necessary for sale as a going concern, "but given the allegations of Karma, it is unclear whether any going concern bid will be received," Walrath said. "In addition, the debtor ceased production, fired much of its workforce before and after bankruptcy, so if this is an emergency," it's an "emergency of the debtors own creation."