DOJ intervenes in Faraday Future founder bankruptcy after “dishonest behavior”

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The Justice Department accused Faraday Future founder Jia Yueting of “engaging in dishonest behavior” during his Chapter 11 bankruptcy proceedings, and he filed a petition to appoint a new trustee to take control of the Chinese billionaire’s estate.

The new petition, if approved, could dramatically change the course of Jia’s bankruptcy case, which involves billions of dollars in debt owed to more than 100 creditors in China, and which has been hotly contested in the past two months. followed its deposit. Although Jia claims that his bankruptcy does not directly implicate Faraday Future, he claimed that a quick result is needed for the EV startup to be able to raise the $ 850 million it desperately needs to finally put its first vehicle into production at the end of next year.

One of Jia’s attorneys, Jeffrey Dulberg, partner at Pachulski Stang Ziehl & Jones LLP, recounts The edge he believes the complaint is “based on factual inaccuracies and misapplications of the law to the facts” and says it is “unfounded”.

A lawyer for one of Jia’s creditors, who was granted anonymity to speak freely about the case, called the deposit a “nuclear bomb” and a “scathing attack.” The lawyer also said he was shocked the US trustee was taking such drastic action in what he sees as relatively early stages. “For them, getting involved so early is almost unheard of, [but] the American trustee has a lot of weight with the judge.

Jia filed for Chapter 11 bankruptcy in October to try to settle nearly $ 4 billion in personal debt and money owed by its bankrupt Chinese tech conglomerate, LeEco. He presented a plan that would offer each of those creditors varying-sized slices of their stake in his struggling electric vehicle startup, Faraday Future. Jia’s rhetoric, basically, is that he doesn’t have enough liquid assets to pay them back, especially since much of his wealth is tied up in stocks and bank accounts in China that have been frozen by the Chinese government. (Jia self-exiled to the United States in 2017 after being named on a debtor blacklist in his home country.) The rest of his wealth is tied to Faraday Future, so he wants to transfer chunks of this participation to its creditors in an attempt to make them whole in the event of an IPO or sale of Faraday Future.

But in the past two months, none of the creditors have come out in favor of the plan. Instead, there has been a relentless and increasingly vitriolic wave of motions and objections from Jia and many of her biggest creditors, and little progress has been made. One of the first scheduled hearings, for example, did not take place and was postponed to at least early January 2020.

The US Department of Justice’s Office of the Trustee, which serves as a watchdog for the bankruptcy process, accuses Jia of this and tries to intervene and restore order. Representative of US trustee Andrew Vara argues in the new motion that Jia “breached her fiduciary duty to the estate by engaging in dishonest behavior” and said Jia “has shown an inability to manage her estate.” Vara claims that Jia “took steps to frustrate [his] creditors “, a” obscure[d] his financial affairs, ”and accuses him of“ having made no significant progress in his Chapter 11 case to date. ”All of this behavior increases the risk that creditors will never be repaid, Vara said.

“Based on [Jia’s] lack of confidence, mismanagement of its financial affairs and breach of its fiduciary responsibilities, the court should order the appointment of an independent and disinterested person to serve as chapter 11 administrator, ”writes Vara.

Among the evidence Vara submits to support these claims, Jia paid some of her lawyers before she filed for bankruptcy in October (and some of her expenses) using a $ 2.7 million loan from one. holding companies of Faraday Future. In exchange for the loan, Jia gave the holding company “guaranteed interest” on all of its assets, according to a file with the California Secretary of State. But as Vara points out, Jia has already lost a lawsuit against one of his creditors, and in September the judge in that case ordered his assets frozen. Vara also says that Jia violated his “fiduciary duty” by obtaining the loan without court approval, which he is required to do once the bankruptcy process has started. For all these reasons, Vara calls the loan a “fraudulent” transaction.

Vara also opposes Jia’s motion to appoint a “director of restructuring”, in part because of a clause in the proposal that would instruct that person to “irretrievably remove[ing]»Any information related to the billionaire at his request. Vara says this is “entirely against the debtor’s fiduciary duty to maintain open and honest disclosure with the court and the creditors in this matter.” The US trustee’s office declined to comment further on its motion.

Vara isn’t the only one to strongly reject Jia’s bankruptcy plan. Shanghai Lan Cai – the creditor who secured the freeze on Jia’s assets – said Jia filed for bankruptcy in “bad faith” and accused him of trying to mislead his Chinese creditors. At least five creditors joined Shanghai Lan Cai’s petition to dismiss the case.

A much larger group of creditors, represented by the “Unsecured Creditors Committee”, issued an even more dazzling response. They claimed that Jia hampered their investigation into his finances by refusing to produce any documents. The committee also said that Jia “is asking the creditor organization to take a giant leap of faith and to base all its hopes for recovery on the success of Faraday, a business that may have little or no current value.”

In a letter to his creditors published last month, Jia said he felt “deeply sorry and ashamed” for LeEco’s failure and its accumulation of nearly $ 4 billion in debt. He said he would have “nothing left” after the bankruptcy, but added that it was “the only and best solution for all parties”.

“The hard way is my way,” he wrote.




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