Here's what you need to know
First Brands Group has a new Chapter 11 plan to monetize litigation claims, the most valuable asset the company has remaining.
Creditors committee calls company a Ponzi scheme.
U.S. government joins list of company's creditors, alleging First Brands underpaid tariffs by $286 million.
First Brands Group wasn’t an aftermarket success story, the Official Committee of Unsecured Creditors in the company’s Chapter 11 bankruptcy case says.
It was a Ponzi scheme, the committee says, orchestrated by founder and former CEO Patrick James; his brother, Edward James and other insiders.
“For years, the company reported growing sales, engaged in significant M&A activity seemingly supported by synergistic opportunities, otherwise seemed healthy and profitable,” a court filing says. “Considerable investment poured in, including from many top Wall Street firms. But, as often happens with Ponzi schemes, the music abruptly stopped, and First Brands crashed into bankruptcy.”
First Brands has indeed crashed through bankruptcy with a tangle of some $12 billion in liabilities, allegedly double- and triple-pledged collateral, and records investigators say were forged or completely fraudulent. Lawyers and other professionals are burning through millions of dollars every month as it works to sell some of the 20-plus lines of business the company accumulated, untangle what the U.S. government calls bank fraud, and recoup other losses as the liquidity crisis after liquidity crisis ripples through the whole process.
One of the last steps in the cases is to file a plan to exit bankruptcy, be that as a reorganized, rejuvenated company or as a liquidated fever dream. As the bank account ticked down, one plan after another failed to pass court or creditor muster. The latest was pitched on June 8.
Chapter 11 plan of First Brands Group LLC
“There’s been a lot of activity since the disclosure statement hearing on May 26,” said Sunny Singh, counsel for First Brands, in U.S. Bankruptcy Court before Judge Christopher Lopez. The latest plan clears up many of the issues creditors and others had and, for now, avoids the specter of Chapter 7 liquidation.
But this may be the last pitch.
“I can’t be more clear about this,” Singh said. “We have stretched this timeline and proposed budget as far as we possibly can.”
Two groups of creditors have signed off on the plan, but as of June 8, First Brands was still trying to convince the last. Another person that needs to be convinced is the U.S. Trustee. The trustee is a representative of the federal government, charged with making sure the case is fair and adheres to the law.
In mid-May, the trustee filed to convert the cases to Chapter 7 or dismiss them entirely, which would force a rapid liquidation of First Brands’ remaining assets. Among other things, the trustee says First Brands has no way to pay its mounting administrative expenses, a requirement for Chapter 11 bankruptcy.
“The Debtors [First Brands] are administratively insolvent and have no ability to confirm a Chapter 11 plan that meets this requirement of the Bankruptcy Code,” the trustee says in the motion to convert or dismiss.
The latest plan addresses that issue, First Brands says. Jayson Ruff, representing the trustee in court June 8 wasn’t so sure.
“This is a lot to digest here. We had hundreds of pages filed over the weekend,” Ruff said in court. However, the trustee understands the urgency. The debtors, he said, “have themselves in a situation” where they must hit a grand slam home run. “They don’t have chances to keep striking out.”
Lopez is slated to hear the trustee’s motion and conditionally approve or deny the latest plan on Friday.
The Ponzi scheme and the lawsuits
Before the latest plan was filed, the Official Committee of Unsecured Creditors asked for permission to commence and prosecute claims on behalf of the debtors’ estates. In that June 2 filing, the committee says First Brands’ former management brazenly weaponized the company for enormous personal gain.
“All told, billions of dollars of value were siphoned away from this company to management and certain co-participants,” the filing says. “Creditors are now left to sift through the wreckage and recover what they can to fill the enormous loss.”
One of the few remaining ways for creditors to recover anything from First Brands’ debris are through the company’s claims against, among others, the James brothers. The committee, in its filing, is seeking permission to pursue some of those claims — and reap the proceeds. First Brands, for its part, proposes to put the claims into a litigation trust to monetize them for the benefit of its creditors through a years-long waterfall of distributions.
“The plan provides for a structure to (i) monetize all of the FBG debtors’ remaining assets and (ii) allocate recoveries on estate claims among creditors in accordance with an agreed waterfall without litigation,” the accompanying disclosure statement says. The disclosure statement helps creditors to make a decision on the plan.
First Brands argues the litigation trust will allow administrative and professional claims and junior creditors to get paid earlier whereas if the company was liquidated, most creditors would be behind nearly $6 billion in funding the company borrowed at the commencement of the Chapter 11 case in September.
Among the claims the company is pursuing:
Adversary cases against Patrick James and others (an adversary case is a lawsuit in bankruptcy court), in which First Brands seek to recover assets transferred to the former executives. Suspect transfers to the James brothers and others identified so far add up to more than $700 million from 2018-2025.
Claims against Onset, one of the largest creditors in the case. First Brands claims Onset worked in concert with Edward James and others to milk the company of money. It has identified more than $2 billion in alleged fraudulent transfers.
Avoidance and recovery actions against certain creditors.
Any government forfeiture proceeds from enforcement actions, insurance recoveries and other claims.
Tariff charges
There is one more creditor added to First Brands’ list — the U.S. government. The feds are looking for $286 million, alleging the company underpaid tariffs for years.
It’s part of several tariff enforcement actions, including California company Perfectus Aluminum paying $549.5 million on improperly described aluminum extrusions and a trio of Canadian companies agreeing to pay $19 million to settle tariff claims on flat-rolled steel that originated in China, Indonesia, Italy, Turkey or Vietnam.
President Donald J. Trump has promised more enforcement on tariff actions, signing an executive order earlier this month directing agencies to more strenuously prosecute tariff mispayments or avoidance activities.
