Bankrupt auto parts maker First Brands Group is nearing a settlement with its creditors, aiming to wind down most operations and sell four business lines separately. Despite this, federal officials argue the company's liquidation should be managed by a court-supervised trustee under Chapter 7 bankruptcy. This move, they contend, would significantly reduce costs, given that First Brands has already accrued at least $245 million in advisory fees. The U.S. Trustee, acting as a watchdog, suggests a trustee could liquidate assets and pursue litigation claims for a fraction of current expenses.
First Brands and some creditors are considering shifting some units to Chapter 7 liquidation due to dwindling cash reserves. This could help sell assets and cut down on advisory costs that have consumed its bankruptcy loan. Lawyers for First Brands are urging a federal bankruptcy judge in Houston to approve a restructuring plan to fund civil lawsuits, particularly against those allegedly involved in a multi-year "Ponzi scheme" that looted the company. They warn that a Chapter 7 conversion would be disastrous for junior creditors, who would likely receive nothing.
The restructuring plan's core is a "litigation trust" designed to pursue up to $1 billion from First Brands executives, including founder Patrick James who faces criminal fraud charges. Senior lenders are contributing $75 million to fund this trust and have agreed to share some legal winnings with junior creditors. However, the U.S. Trustee's Office opposes this plan, arguing for Chapter 7 conversion because First Brands admits it cannot pay the nearly $2 billion in top-ranked "administrative" and "priority" claims by the plan's confirmation date, as required by bankruptcy law. These claims include vendors who kept the company afloat, and the U.S. Trustee's lawyer noted that nearly $200 million in legal and advisory fees have already been disbursed.
First Brands' CEO, Charles Moore, has identified potential claims of $1 billion against James and other insiders, and an additional $24 billion against a network of lenders allegedly involved in the wrongdoing. The company's bankruptcy loan is currently trading at 18 cents on the dollar, and the planned payments for administrative and priority claims are delayed until 2028, contingent on litigation proceeds. Despite objections from James's lawyers and several lenders, a lawyer for unsecured creditors, who helped negotiate the plan, dismissed these as attempts to spoil the settlement. The judge has yet to rule on the bankruptcy plan.
