- Texas bankruptcy court orders First Brands into liquidation
- First Brands had proposed to seek over US$25bn in claims against third-party financiers
- Court finds plan not in keeping with bankruptcy rules
A US bankruptcy court has ruled that a proposal by First Brands to recover billions of dollars through lawsuits against non-bank lenders is “not feasible”, ordering instead that the company enters liquidation.
First Brands’ court-appointed managers had proposed in June to establish a litigation trust, which would oversee claims and return funds to certain creditors and a group of ad-hoc lenders that provided US$1.1bn in October to fund the company’s operations.
Court documents filed last month argued more than US$25bn was “potentially available” through litigation against third-party financing companies, including Katsumi, Jefferies subsidiary Leucadia Asset Management (LAM), and leasing firm Onset Financial – as well as First Brands founder Patrick James.
Bankruptcy lawyer and consultant Marc Kirschner, who was appointed by First Brands’ counsel to provide expert testimony, argued in a July declaration that potential lawsuits could allege that financing companies received payments from a Ponzi scheme, or should have been aware First Brands was carrying out fraud.
However, in an oral order delivered on August 24, Texas bankruptcy Judge Christopher Lopez found the plan was not feasible.
Several creditors had opposed the plan, including Katsumi, LAM and Onset, as well as the Office of the US Trustee. Some argued there was no assurance that litigation would result in billions of dollars being returned to the First Brands estate, and that there was uncertainty over the administrative costs involved.
First Brands and some lenders had argued that many of the objecting creditors were potential targets of litigation “and that’s what’s really driving their objections”, Judge Lopez noted.
For instance, Kirschner’s declaration said Katsumi – which was owed over US$1.7bn at the time of First Brands’ collapse – discovered in 2023 that receivables it had purchased “did not match the underlying invoices”.
Although Katsumi informed First Brands of the discrepancies, it continued to finance the company’s receivables for two more years, he said. The company also sought to resell purchased receivables after that 2023 audit, the declaration added.
Because Katsumi had “direct evidence of falsified invoices”, it knew or should have known payments received were the result of fraud, and so could face liability, Kirschner argued.
He also said LAM should have been aware of potentially fraudulent activity from 2023 onwards, after company executives resisted attempts at due diligence, and added that Jefferies had separately identified possible red flags in First Brands’ financial reporting.
Kirschner also suggested litigation could be pursued against PrimeRevenue, a supply chain finance platform used by First Brands.
He said PrimeRevenue employees contacted First Brands in 2024 instructing them to check document properties before submitting files, which he argued showed PrimeRevenue was aware the documents were authored by First Brands employees and not external suppliers.
A spokesperson for PrimeRevenue said: “We are familiar with the court’s ruling and want to make clear that the court did not consider any evidence regarding PrimeRevenue in reaching its ruling. As the First Brands bankruptcy unfolds, we will continue to engage constructively with the process.”
A spokesperson for Onset Financial said: “The court’s rejection of debtors’ flawed plan is another telling sign that their earlier allegations against Onset wholly lack merit.”
Katsumi and LAM did not comment when contacted.
Judge Lopez did not assess the merits of Kirschner’s arguments, but said objectors argued he was given only “cherry-picked fragments” of information to assess, such as incomplete email chains, rather than carrying out an independent investigation.
Judge Lopez noted that a separate declaration, filed by First Brands interim CEO Charles Moore, a managing director at Alvarez & Marsal, accepted the US$25bn figure but did not make adjustments for potential defences, and provided “no real analysis” about whether claims could be successfully resolved before a 2028 deadline.
He also noted Moore did not take a position on whether federal authorities would seek forfeiture of assets from Patrick James as part of separate criminal proceedings, which could limit funds available through litigation.
The judge identified a further issue with the plan relating to special purpose vehicles (SPVs), which are not part of the First Brands estate but are subject to claims from some third-party financing companies, such as Evolution Credit Partners.
He said the plan would involve transferring claims from those SPVs, but that First Brands debtors “can’t sell what they don’t own”.
Judge Lopez ordered instead that the company enters Chapter 7 bankruptcy, meaning its remaining assets will be liquidated.
First Brands declined to comment when contacted. Patrick James has denied allegations of fraud.
