Key insights
- A US bankruptcy judge has allowed auto parts maker First Brands to proceed with a liquidation plan, which includes funding lawsuits against insiders to recover money for creditors. The company faces over $11 billion in debt and allegations of pledging the same assets as collateral for multiple loans. The founder and his brother have been indicted on federal fraud charges. This case highlights risks in the private credit market and could lead to further scrutiny of corporate governance and lending practices.
Investing.com -- A U.S. bankruptcy judge on Friday allowed auto parts maker First Brands to move forward with a liquidation plan, Reuters reported.
The proposal would fund lawsuits against the company’s founder and other insiders in an effort to recover money for creditors.
U.S. Bankruptcy Judge Christopher Lopez approved First Brands’ request to solicit creditor votes on its proposed wind-down plan, rejecting requests from a government watchdog and some creditors to convert the case into a Chapter 7 liquidation overseen by a court-appointed trustee.
Lopez said the company should have an opportunity to determine whether creditors support its litigation strategy. A hearing to consider final approval of the plan is scheduled for July.
First Brands filed for bankruptcy in September after lenders began investigating allegations that the company had pledged the same assets as collateral for multiple loans.
The company was unable to reorganize and has more than $11 billion in debt. Following the bankruptcy filing, founder Patrick James and his brother Edward James were indicted on federal fraud charges.
The collapse triggered losses for several major investment firms and raised concerns about risks in the private credit market.
According to court filings, First Brands’ financial condition has deteriorated since entering bankruptcy. The company exhausted a $1.1 billion bankruptcy loan in January and has since relied on prepayments from customers, including Ford and General Motors.
Efforts to sell the entire business were unsuccessful. First Brands instead sold several business units, including its Horizon towing business for $64 million, Toledo Molding & Die for $80 million, and Walbro for $50 million.
The Office of the U.S. Trustee said the company is approximately $223 million behind on administrative expenses, including obligations owed to vendors that continued supplying parts after the bankruptcy filing.
Under the proposed plan, a litigation trust would be established with at least $75 million to pursue claims against James and other parties accused of removing money from the company before its collapse.
The trust would initially be funded with $25 million of existing company cash and an additional $50 million from the same lenders that provided the bankruptcy financing.
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