You misunderstand. The calculation is not about a single lawsuit costing billions. It's about potential damages from ALL possible lawsuits from pissed off short-sellers. And that's not absurd at all - it's a real possibility, since Tesla stock is one of the most popular on the stock market.
What happens if you bought calls for a price higher than $420? They are worthless. You don't have to be a short-seller to have been burned by this.
To be fair, they always were worthless at best, the company would be bought at $420 (and no higher).
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I think you mean "bought calls at strike price $400" (leaving ~$20 buffer before the presumed buyout price). If Tesla were bought at $420, then calls at strike $400 would be worth $20 each.
Of course, as the $420 buyout price is falling apart, a call@400 is looking pretty worthless right now.