Key facts
- A U.S. bankruptcy judge rejected First Brands' Chapter 11 plan.
- The judge converted the case to a Chapter 7 liquidation.
- The plan sought to pay creditors by pursuing lawsuits against insiders.
- The judge cited insufficient recovery prospects and deferred payments on significant debts.
- First Brands owes billions in liabilities from before and during its bankruptcy.
A U.S. bankruptcy judge has rejected auto parts maker First Brands' proposal to repay creditors through litigation against insiders, opting instead to convert the case to a Chapter 7 liquidation. U.S. Bankruptcy Judge Christopher Lopez stated that the proposed Chapter 11 plan was unacceptable, partly because it sought to defer payment on at least $222 million in debts incurred during the bankruptcy proceedings.
First Brands, which owes billions more from before its bankruptcy filing, had its efforts to sell business lines generate only a fraction of its outstanding debts. The company's preferred liquidation plan involved setting up litigation trusts to pursue lawsuits, but Judge Lopez noted that these lawsuits would need to raise $1.9 billion before administrative claims could be fully repaid.
Creditors opposing the plan, along with the U.S. Justice Department's bankruptcy watchdog, expressed skepticism about the potential recovery from lawsuits against individuals like the company's indicted founder, Patrick James, and his brother Edward James, who have pleaded not guilty to fraud charges.
First Brands filed for bankruptcy in September with approximately $14 million in cash and over $9 billion in liabilities. Despite borrowing an additional $1.1 billion early in the bankruptcy, the company depleted most of these funds by January, forcing reliance on prepayments from major buyers like Ford and GM. The company was unable to find a buyer for its entirety and managed to sell only a few business lines, including its Horizon towing business for $64 million, Toledo Molding & Die for $80 million, and Walbro for $50 million.