U.S. Bankruptcy Judge Christopher Lopez rejected First Brands Group LLC's controversial plan to exit bankruptcy, which aimed to establish trusts funded by litigation against former officers and lenders to pay back creditors. The decision aligns with creditors' concerns that the proposal was too speculative and lacked sufficient funding, especially as the auto parts maker was running low on cash to continue its Chapter 11 case. Creditors had expressed broad skepticism over the plan during a status conference, highlighting doubts about its ability to generate meaningful recoveries through fraud claims.
First Brands had filed its bankruptcy plan on April 28, seeking approval to initiate this litigation-centric approach. The company argued its Chapter 11 plan was reasonable and offered creditors the best chance of recovering on billions of dollars worth of claims, defending it against numerous objections during closing arguments in a plan confirmation trial. Previously, in June, Judge Lopez had given First Brands a second chance to pursue its liquidation proposal and scheduled a hearing to consider replacing the company's expensive lawyers and financial advisers with a court-appointed Chapter 7 trustee, which would likely abandon the proposed payout plan.
The rejection means First Brands, which has been plagued by allegations of massive fraud, must reconsider its path forward. Its primary assets after selling remaining operations and liquidating factories were lawsuits designed to collect money for creditors. The company had planned to put at least $25 million into a trust to pursue various claims. The court's decision underscores the challenges faced by the bankrupt firm in securing creditor approval for its proposed recovery strategy, especially given the ongoing funding issues and the speculative nature of the litigation claims.
