In re Nu Ride Inc.

1

In re: Nu Ride Inc., et al., ^[1] Reorganized Debtors.

Lordstown Motors Corp. and Lordstown EV Corporation, Plaintiffs, v. Hon Hai Precision Industry Co., Ltd (a/k/a Hon Hai Technology Group), Foxconn EV Technology, Inc., Foxconn Ventures Pte. Ltd., Foxconn (Far East) Limited, and Foxconn EV System LLC, Defendants.

No. 23-10831 (MFW)

Adv. No. 23-50414(MFW)

United States Bankruptcy Court, D. Delaware

October 1, 2024

MARY F. WALRATH UNITED STATES BANKRUPTCY JUDGE

TABLE OF CONTENTS

I. FACTUAL AND PROCEDURAL BACKGROUND 1

II. JURISDICTION ....................... 6

III. DISCUSSION ........................... 8

A. Standard of Review .......................... 8

1. Rule 12(b)(6) ........................ 8

2. Arbitration ..................... 11

B. Do the Arbitration Clauses Mandate Dismissal? ........................ 11

1. Continuing Validity of the JVA ................................ 13

2. Claims not Made Under the CMA or JVA ................................. 17

a. Contract Claims under the APA and the Investment Agreement ............................. 18

b. Tort Claims ................................ 19

c. Equitable Subordination Claim .................................. 21

3. Enforcement of Arbitration on All Parties .............................. 24

C. Failure to State a Claim? ............................ 30

1. Breach of Contract Claims ................................... 30

2. Common Law Fraud Claims ............................. 36

a. Duplicative .................................. 36

b. Misrepresentation ............................... 40

c. Scienter .............................. 42

d. Reliance .............................. 45

3. Tortious Interference with Contract ............................. 49

4. Equitable Subordination .............................. 51

a. Proper Standard ............................... 52

b. Egregious Conduct .................................... 53

i. Breach of Contract ............................ 53

ii. Fraud .......................... 55

c. Harm ....................... 56

d. Extent of Subordination ........................ 58

IV. CONCLUSION ............................... 59

AMENDED MEMORANDUM OPINION

Before the Court is the Defendants'^[2] Motion to Dismiss, or in the alternative, to compel arbitration and stay the Plaintiffs'^[3] Complaint which asserts claims related to the parties' prior business dealings. Because the Court finds that most of the claims are not subject to arbitration and that most of the claims are viable, the Court will grant the Motion in part and deny it in part.

I. FACTUAL AND PROCEDURAL BACKGROUND^[4]

On June 27, 2023, LMC and its affiliates (the "Debtors") filed petitions for relief under chapter 11 of the Bankruptcy Code. On that same day, the Plaintiffs commenced the instant adversary proceeding against the Defendants. The Debtors sold substantially all of their physical assets during the bankruptcy case,^[5] and the Court confirmed the Debtors' plan of reorganization which vested certain of the Debtors' causes of action (including this adversary proceeding) in the Reorganized Debtors.^[6]

Prior to the bankruptcy filing, the Debtors had developed and manufactured a line of full-size electric pickup trucks at a plant in Lordstown, Ohio, which the Debtors had purchased from General Motors in 2019.^[7] While the Debtors at one point had been valued at $5.3 billion,^[8] the bankruptcy sale of their remaining assets generated only $10 million.^[9]

The Plaintiffs blame their misfortunes on the Defendants. The gist of the Plaintiffs' Complaint is that the Defendants induced the Plaintiffs to enter into a series of agreements, promising support through investment and expertise, while harboring the intent to acquire the Plaintiffs' most valuable asset, their manufacturing plant, for themselves without fulfilling those promises.

The dealings between the companies began in September 2021 when the parties entered into an agreement in principle to form a partnership.^[10] The agreement contemplated that the Defendants would (a) buy the Debtors' manufacturing plant, (b) enter into an agreement to manufacture and supply vehicles to the Plaintiffs, and (c) collaborate with the Debtors on the development of future vehicles.^[11] As part of that agreement, a Plant Asset Purchase Agreement ("APA") was executed on November 10, 2021.^[12] The Plaintiffs allege that the price to be paid by the Defendants for the plant was extremely favorable to them because most of the promised benefits for the Plaintiffs would be realized in the contemplated partnership.^[13]

The Plaintiffs allege that the Defendants subsequently delayed executing a partnership agreement.^[14] On May 11, 2022, only after the Plaintiffs raised their concerns, the Defendants finally executed a Joint Venture Agreement (the "JVA") with the Plaintiffs and closed the sale of the plant under the APA.^[15] On that same day, the parties executed a Contract Manufacturing Agreement (the "CMA") whereby Foxconn System agreed to manufacture the Endurance at the Plant for a fee per vehicle, in accordance with the LMC designs and with components approved by LMC.^[16] The CMA required Foxconn System to use commercially reasonable efforts to negotiate better terms with the Plaintiffs' suppliers and to take advantage of sourcing synergies.^[17]

The Plaintiffs allege that the Defendants did not fulfill their obligations under the JVA and obstructed the Plaintiffs' efforts to develop the EV vehicle program contemplated by the parties.^[18] After the Plaintiffs complained about the Defendants' breaches of the JVA, the parties entered into a new agreement to reflect the Defendants' agreement to invest in the EV program (the "Investment Agreement").^[19] Instead of investing in a joint venture, the investment agreement contemplated purchases of LMC stock by FVP.^[20] The initial investment occurred on November 22, 2022.^[21] Additional purchases of stock by FVP were subject to approval by the Committee on Foreign Investment in the United States.^[22] The Plaintiffs allege that the Defendants delayed requesting that approval.^[23] Ultimately, on April 24, 2023, the Defendants did receive approval for the additional investment, but by then the Plaintiffs' stock price had plummeted due to the uncertainty of its business dealings with the Defendants.^[24] The Plaintiffs allege that the Defendants used this as a pretext to attempt to improperly terminate the agreement.^[25]

After realizing that the Defendants never intended to fulfill their obligations, the Plaintiffs filed their bankruptcy petitions and the Complaint.^[26]

The Complaint contains eleven counts: seven for breach of contract, two for fraud, one for tortious interference with contract, and one seeking equitable subordination of the Defendants' claims and equity interests pursuant to section 510(c) of the Bankruptcy Code.

The Defendants' Motion to Dismiss was filed on September 29, 2023. The Plaintiffs filed their response on November 6, 2023. The Equity Committee intervened on October 12, 2023, and filed a joinder to the Plaintiffs' response on November 6, 2023. The Defendants filed their Reply on November 30, 2023. The matter is now ripe for decision.

II. JURISDICTION

The Bankruptcy Court has jurisdiction over all "proceedings arising under title 11 or arising in or related to a case under title 11."^[27] The Court finds that the claims in the Plaintiffs' Complaint, while not arising under title 11 or arising in the bankruptcy case, are related to the bankruptcy case because the Debtors' estate consisted of all property of the Debtors as of the petition date, including causes of action that arose pre-petition such as the claims made by the Plaintiffs in the Complaint.^[28]

The Defendants do not consent to the entry of a final order or judgment by the Court if it is determined that the Court cannot enter a final order or judgment consistent with Article

III of the United States Constitution.^[29]

It is not necessary to decide that issue at this time, however, because the Court does have authority to enter orders on preliminary matters to the extent they do not constitute a final adjudication of a matter over which the Court does not have constitutional authority to enter a final order.^[30] That includes specifically the authority of the Court to determine whether a matter is core or non-core,^[31] whether a matter is governed by an enforceable arbitration clause,^[32] and whether a complaint states a plausible claim on which relief can be granted.^[33]

III. DISCUSSION

The Defendants ask the Court to dismiss (or stay) all of the claims in the Complaint due to the existence of enforceable arbitration provisions in the JVA and the CMA. In the alternative, the Defendants ask the Court to dismiss all of the claims for failure to state a claim.

A. Standard of Review

1. Rule 12(b)(6)^[34]

The Defendants base their Motion to Dismiss on Rule 12(b)(6), which provides for dismissal for "failure to state a claim upon which relief can be granted."^[35] Under Rule 12(b)(6), a complaint "does not need detailed factual allegations, [but] a plaintiff's obligation to provide the 'grounds' of his 'entitle[ment] to relief' requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do."^[36]

To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, "to state a claim to relief that is plausible on its face."^[37] Two working principles underlie this pleading standard:

First, the tenet that a court must accept a complaint's allegations as true is inapplicable to threadbare recitals of a cause of action's elements, supported by mere conclusory

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