Key facts
- U.S. Bankruptcy Judge Christopher Lopez allowed First Brands to solicit votes on its liquidation plan.
- The plan aims to fund lawsuits against the company's indicted founder and insiders.
- First Brands collapsed into bankruptcy in September after lenders investigated allegations of fraudulent asset pledging.
- The company is unable to repay more than $11 billion in debts.
- The liquidation plan includes a litigation trust to be funded with at least $75 million.
A U.S. bankruptcy judge in Houston has permitted bankrupt auto parts maker First Brands to proceed with a liquidation plan that includes funding lawsuits against its indicted founder and other insiders. U.S. Bankruptcy Judge Christopher Lopez allowed the company to solicit votes on its preferred proposal for winding down its business, rejecting demands from a government watchdog and some creditors for a quicker Chapter 7 liquidation.
First Brands collapsed into bankruptcy in September after its lenders began investigating allegations that the company fraudulently double-pledged its assets as collateral on multiple loans. The company has been unable to reorganize and repay more than $11 billion in debts. Its founder, Patrick James, and his brother Edward James have been indicted on federal fraud charges.
Even with an additional $1.1 billion in new money provided by lenders at the start of the bankruptcy, First Brands' financial state has worsened. That money ran out in January, forcing the company to rely on prepayments from buyers like Ford and GM. While First Brands sought a buyer for the entire company, it only managed to sell a few business lines, including Horizon towing for $64 million, Toledo Molding & Die for $80 million, and Walbro for $50 million.
The Office of the U.S. Trustee noted that First Brands is $223 million behind on administrative expenses, including debts to vendors who supplied parts after the bankruptcy filing. The proposed liquidation plan would establish a litigation trust to pursue lawsuits aimed at raising additional funds for creditors. This trust would be initially funded with $75 million, comprising $25 million in existing cash and $50 million from litigation funding supplied by the same lenders who provided the bankruptcy loan. The lawsuits would target James and others accused of taking money from the business before its bankruptcy.