First Brands Off-Balance-Sheet Lenders Seek Bankruptcy Shift
TL;DR
First Brands creditors demand independent advisers for off-balance-sheet units, citing conflicts in the bankruptcy case. They allege fraud and seek to prevent asset disputes, with a court ruling pending.
Key Takeaways
- •Creditors are pushing for new, independent advisers for SPVs to avoid conflicts of interest in the bankruptcy.
- •Allegations of fraud by the founder include fake invoices and double-pledged assets, complicating creditor repayments.
- •Key restructuring firms may be removed from SPV oversight, and some SPVs could exit bankruptcy for separate asset recovery.
- •The bankruptcy case involves disputes over assets between First Brands and SPVs, with ongoing legal actions against the founder.
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A group of First Brands Group creditors is demanding new, independent advisers for company units that issued nearly $2.5 billion in off-balance-sheet debt, claiming conflicts of interest threaten to disrupt the sprawling insolvency case of auto-parts maker.
Aequum Capital Financial and other lenders owed more than $200 million argue that the same set of lawyers and advisers cannot represent the interest of First Brands while simultaneously overseeing the off-balance sheet units, known as special purpose vehicle debtors.
UMB Bank, the agent for lenders to one of SPVs, argued in court papers that new lawyers and day-to-day managers are necessary to prevent creditors of the SPVs from being harmed.
It’s the latest push by creditors of the SPVs to prevent First Brands from using collateral that the lenders claim as their own to help pay debts owed by non-SPV units.
The founder and former chief executive of First Brands allegedly used fake invoices and double-pledged assets to fraudulently convince investors to lend the company billions of dollars, according to court documents. The fraud allegations, along with incomplete and confusing financial records, increase the chance that different sets of creditors will wind up fighting over the same set of assets.
First Brands filed bankruptcy in September with just $14 million in cash in the bank, even though the firm had about $5 billion in revenue in 2024. Since coming under court protection, company advisers have been trying to untangle First Brands’ financial woes as they search for a way to repay as many creditors as possible.
Three of the most prestigious restructuring firms in the US have taken over management of First Brands since founder Patrick James resigned amid accusations of misconduct. Law firm Weil, Gotshal & Manges is handling the bankruptcy case, restructuring advisory Alvarez & Marsal is providing day-to-day management and Lazard Frères & Co. is acting as First Brands’ investment banker.
All three should be removed from oversight of the SPVs, lenders said in court documents. Representatives of the three firms did not immediately respond to requests for comment. Aequum has also asked that the unit which owes it money be completely removed from the bankruptcy case so the lender can try to get repaid separately.
US Bankruptcy Judge Christopher Lopez, who is overseeing First Brands’ Chapter 11 case, will rule on the lenders’ request for independent advisers. No timeline on the has been set.
Meanwhile, Aequum and another group known as the Carnaby Secured Lenders have asked Lopez to remove certain SPVs from the insolvency case, with a Nov. 17 hearing scheduled. A removal would strip those SPVs from bankruptcy court protection and allow creditors to try to seize assets that are currently under First Brands’ control.
If the bankruptcy goes on without any changes, First Brands and the SPVs will fight over assets and cash because of the way money and auto parts flowed between them, the lenders said in court papers filed on Wednesday.
First Brands has sued James, seeking to claw back hundreds of millions of dollars he allegedly took from the company. Lopez has said that transfers between the company and James, a personal trust and businesses were “highly questionable.” James has denied wrongdoing, saying in statements to the media that he always acted ethically.
The company’s lawsuit will proceed over the coming months as First Brands and its creditors negotiate over the best way to repay debts.
The case is First Brands Group versus Patrick James, 25-03803, US Bankruptcy Court, Southern District of Texas (Houston).