The U.S. Justice Department has accused Jia Yueting, founder of electric car start-up Faraday Future, of “dishonesty” in bankruptcy proceedings and has filed a motion to appoint new trustees to control and dispose of his property,media reported. If approved, the new motion could dramatically change the course of Jia’s bankruptcy case, which involves more than 100 Chinese creditors and billions of dollars in debt.
The case has been controversial in the two months since Jia filed for bankruptcy. While Mr Jia claims his bankruptcy is not directly related to FF, he acknowledges that in order to help the company raise $850m, FF urgently needs to put its first car into production by the end of next year, so the current problem needs to be resolved quickly.
Pictured: Jia Yueting, founder of electric car start-up Faraday Future
Jeffrey Dulberg, A.J.’s lawyer and partner at Pachulski Stang Ziehl and Jones LLP, said he thought the motion was “based on inaccurate facts” and “doesn’t make any sense.”
A lawyer for one of Mr Jia’s creditors called the motion a “nuclear bomb” and a “fierce attack”. The lawyer also said they were shocked that The U.S. trustees took such drastic action at a relatively early stage. “It’s almost unheard of for them to step in so early, but American trustees have a lot of weight in the eyes of the judges, ” he said. “
Mr Jia filed for bankruptcy protection as early as October, trying to settle nearly $4bn in personal debt and debt owed by LeEco. He developed a plan to split his FF stake among these creditors.
In short, Mr Jia does not have enough liquid assets to pay off debts, most of his wealth is frozen and a few are tied to FF, so he wants to transfer some of his stake to creditors in an attempt to cash in on an INITIAL public offering or sale.
But in the past two months, no creditors have come out in support of the plan, and instead they have repeatedly filed increasingly bitter opposition motions, leaving little progress on the plan. Hearings on the plan are not expected to take place and have even been postponed until early January 2020.
The U.S. Attorney’s Office, the U.S. Department of Justice’s U.S. trustees’ office, blamed Jia Yueting for trying to intervene in the case. In the new motion, Andrew Vara, the US trustee’s representative, argues that Mr Jia “failed to uphold his fiduciary responsibility for the remaining assets by engaging in dishonestconducty”.
Mr Vara also said Mr Jia had “proved his inability to manage his assets” and had “failed to secure creditor support” and had “blurred his financial position”. He also accused Mr Jia of “failing to make any significant progress in bankruptcy cases so far”, all of which increased the risk that creditors would never be repaid.
“Based on Jia Yueting’s untrustworthiness, financial mismanagement and breach of fiduciary duties, the court should direct the appointment of an independent and impartial person to act as trustee of the bankruptcy process,” Mr Vara wrote. “
One of the evidence Mr Vara submitted in support of the allegations was that Mr Jia used a $2.7m loan from FF Holdings to pay part of the lawyer’s fees before filing for bankruptcy in October. It is reported that, as a condition of the loan, Jia Yueting gave the holding company all his assets “guarantee interest.”
But as Mr Vara points out, Mr Jia has lost a creditor’s lawsuit against him. In September, the judge in the case ordered the freezing of Jia’s assets. Mr Vara also said Mr Jia had breached his fiduciary duty by obtaining a loan without court approval. For all these reasons, Mr Vara called the loan a “fraudulent” transaction.
Mr Vara also opposed Mr Jia’s move to appoint a “chief restructuring officer”, in part because of a clause in the proposal requiring him to “permanently delete” any information relating to the billionaire at Jia’s request. This, Mr. Vara said, is “completely contrary to the debtor’s fiduciary duty and he needs to disclose information openly and honestly to the court and creditors.” The U.S. trustee’s office declined to comment further on its motion.
Mr Vara is not the only one strongly opposed to Mr Jia’s bankruptcy plan. Shanghai Lazy Financial Asset Management, a creditor that froze Jia’s assets, said Jia’s bankruptcy filing was “malicious” and accused him of trying to mislead Chinese creditors. At least five creditors joined Lazy’s motion to dismiss the case.
More creditors, represented by the Unsecured Creditors Committee, responded more aggressively. They claim that Mr Jia’s refusal to produce documents has hampered their investigation into his finances. The committee also said Mr Jia was “pinning all his hopes on the success of the debt-servicing scheme, which may be just a company with little real value.” “
In a letter to creditors published last month, Mr Jia said he was “deeply sorry and ashamed” of LeEco’s failure and the accumulation of nearly $4bn in personal debt. He said he would have “nothing” after bankruptcy, but added that it was “the only and best solution for all parties”.