U.S. Bankrutpcy Judge Christopher Lopez on Friday said he'd never seen a debtor-in-possession (DIP) lender proposing to compromise billions to allow administrative and other creditors a shot at least some recovery.
But that's what's happening in the First Brands case.
"Especially in a case where not every dollar can be accounted for," he added. "The plan on file has a possibility of confirmation. But that's really all that's being asked for today. I want to be really clear, the debtors are going to have to satisfy every section of the code."
[RELATED: Judge balks at First Brands Chapter 11 reorganization approval]
DIP lenders who stepped in with nearly $6 billion in funding to help First Brands work its way through Chapter 11. Those loans mature later this month.
The sections of the Bankruptcy Code were what was at issue Friday. The U.S. Trustee had moved for conversion to Chapter 7 cases or dismissal, which would trigger a complete and urgent liquidation of anything remaining and line up most debtors behind DIP funding, effectively guaranteeing they wouldn't see a dime. The motion was necessary, the Trustee said, because First Brands couldn't pay administrative creditors, a key requirement of the Bankruptcy Code.
Jayson Ruff, representing the trustee in Friday's hearing, says the First Brands case is administratively insolvent "and have been for some time." Even a new plan and disclosure, one in a long line of plans and disclosures that creditors and the trustee's office have attacked, filed on Friday morning fails the test, Ruff argued.
Charles M. Moore, who is CEO of First Brands and has been since founder Frank James, now indicted in a federal fraud case, stepped down in October, was the only witness called Friday. He testified for hours about the plan before Lopez conditionally approved it.
"The debtors don't have $222 million or $185 million on hand, no," Moore testified, referring to estimates of the amounts of unpaid administrative claims First Brands has at present. "This plan, that's the whole purpose. To provide a mechanism for these claims to be paid."
Moore says First Brands has been forecasting cash flow and balancing that with its responsibilities, adding he doesn't know any business in Chapter 11 that have cash to pay claims at any point in time.
This new plan filed June 12, like others in the case, seeks to monetize estate claims — mainly adversary cases against other defendants, such as James and his brother, former executive Edward James — through a litigation trust. First Brands negotiated a series of agreements with groups of its creditors to guarantee certain groups, such as administrative claims, would be paid.
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However, as the plan documents show and as Moore testified, there are no guarantees if and when anyone will be paid. Moore says he has a high degree of confidence it will work, but he can't make promises.
In fact, just to allow First Brands to make it this far required extensive give-and-take between the company and its creditors. Without this plan, Moore says, those negotiations and agreements would collapse, along with Chapter 11 efforts.
"There's no additional funding that would allow the debtors to operate beyond that timeline [the end of July]," Moore said. "We are utilizing freed-up cash in this budget. In terms of any other parties allowing the use of proceeds of their cash collateral, it has been made very clear that there is no more available to the debtors."
