Article Summary
Bankruptcy expert Marc Kirschner estimates First Brands' litigation claims against former executives, lenders, and others could be worth up to $25 billion.
- Major claim categories: Third-party factoring ($15.4B), supply chain factoring ($4.7B), special purpose vehicles ($2.5B), insider claims ($1B), and suspicious acquisitions ($1.6B)
- Key fraudulent activity: $12 billion funneled through Bowery account controlled by Patrick James from 2022-2025, with falsified invoices inflated up to 180,000%
- Lender involvement: Multiple lenders including Katsumi, Apollo, Leucadia, and Onset either knew or should have known of fraudulent practices but continued funding
Marc S. Kirschner has more than 50 years of experience working with companies in bankruptcy proceedings as a lawyer, Chapter 11 trustee, litigation trustee, financial advisor, investment professional and in other roles.
As an expert paid by First Brands’ lawyers, he says the bankrupt aftermarket parts company’s litigation claims against former executives Patrick and Edward James, lenders and others may be worth up to $25 billion, with at least $2 billion — enough to cover required payments in the bankruptcy plan — recoverable by the end of 2028.
In an expert’s report filed with the U.S. Bankruptcy Court in Houston on Tuesday, Kirshchner outlined each cause of action and potential causes of action and the chances of recovery, including whether or not the defendants in those actions could pay up.
Underpinnings of fraud
Kirschner starts out by laying the foundation for why he things recovery in many of the causes of action is possible. First, he believes First Brands’ conduct before its bankruptcy petition in September more than meets the Fifth Circuits’ Ponzi scheme presumption, which allows courts to presume a company’s insolvency and an intent to hinder, delay or defraud if the plaintiff can prove the company operated as a Ponzi scheme.
The federal government itself has called the James brothers’ operation of First Brands a Ponzi scheme.
“The defendants operated First Brands as a Ponzi scheme in which new loan proceeds were used to pay back old lenders and to fund their extravagant lifestyle,” says Kareem Carter, executive special agent in charge of the IRS-Criminal Investigations Washington, D.C., field office.
[RELATED: Layoffs top 3,500 at First Brands companies]
Kirschner also reviews the badges of fraud he says courts rely on. These are, he writes:
- A lack or inadequacy of consideration, meaning a business didn’t matching value for the amount it paid out.
- The family, friendship or close associate relationship between the parties in a transaction.
- The retention of possession, benefit or use of the property in question.
- The existence or cumulative effect of the pattern or series of transactions or course of conduct after the incurring of debt, onset of financial difficulties, or pendency or threat of suits by creditors.
- The general chronology of the events and transactions under investigation.
Significant work has already been undertaken, Kirschner points out, by the court’s examiner and other investigators, including the government. That should hasten recoveries, he says.
“It is significant that substantial work has already been undertaken to investigate the FBG debtors’ claims and causes of action and to understand the various transactions that support these claims,” Kirschner says. “Because a litigation trustee will not be starting from scratch, and indeed there are already at least two adversary proceedings that have been commenced. I believe this will allow the litigation trustee to hit the ground running in pursuing these estate claims.”
Pursuing the fraud cases
First Brands has several different kinds of claims, Kirschner says. They are:
- Third-party factoring claims valued at $15.4 billion.
- Supply chain factoring claims valued at $4.7 billion.
- Special purpose vehicle (SPV) lender claims valued at $2.5 billion.
- Insider claims valued at $1 billion.
- Suspicious acquisition claims valued at $1.6 billion.
- Other claims valued at $280 million.
In total, Kirschner says he expects First Brands can recover up to $25.4 billion.
Factoring claims and supply chain claims: $20.1 billion
Investigations throughout the First Brands case have alleged problematic third-party factoring and supply chain factoring deals. These include, Kirschner says, transactions in which invoices and financial statements were falsified, exaggerated or hidden.
“Based on my experience and review of the relevant documents and the facts set out in the Moore Declaration, it is my belief that FBG’s prepetition practices involving third-party factoring and supply chain factoring support a claim that they were Ponzi schemes,” Kirschner writes. “… The investigation uncovered pervasive manipulation and doctoring of the FBG debtors’ financial records and the improper commingling of funds of the FBG debtors and certain affiliates used to conceal other financial misconduct.”
A notable example, he says, is the $12 billion was funneled through Bowery, controlled by Patrick James, from 2022-2025. Even if the litigation trustee couldn’t rely on the Ponzi scheme presumption, Kirschner says, there’s still hope for recovery through the presence of the badges of fraud.
“[B]ased on my review and understanding of the facts relevant to FBG’s financial condition at the time, including documentary evidence and analysis of FBG’s financial condition demonstrating, among other things, unreported liabilities in excess of $5 billion and guilty pleas from executive admitting that the fraudulent conduct dated back to as early as 2018, I believe there is a good faith basis to conclude that the FBG debtors were insolvent when making the subject transfers,” the filing says.
[RELATED: Former First Brands execs released from home confinement]
Furthermore, Kirschner says, some of FBG’s lenders knew or should have known of the company’s precarious position. Katsumi purchased $4.9 billion of prepetition factored invoices from First Brands starting in 2023. In September 2023, he says, Katsumi conducted an audit and found receivables it purchased were falsified, fabricated and inflated, in some cases up to an eye-popping 180,000%. Instead of backing away from FBG, however, Kirschner says the company continued to purchase receivables.
He also says another company, Apollo, looked at information available to anyone interested in First Brands and determined it had serious misgivings about the condition of the company.
“I believe it is reasonable to conclude that Katsumi, which had access to even more specific information plus direct evidence of falsified invoices, knew or should have known that it was being paid on invoices that were, at least in part, fraudulent.”
And that’s just one example Kirschner cites. Crescendo Asset Management was delivered an invoice for $2.1 million in freight invoices that never actually existed, he says. Leucadia Asset Management became suspicious of First Brands in 2023, Kirschner says, sending a series of questions about accounts receivable and financing and requesting a call and on-site visit with First Brands’ CFO, then Stephen Graham, who has since pled guilty to federal wire fraud charges. That request was met with threats from Edward James, Kirschner says.
Special purpose vehicles (SPVs): $2.5 billion
First Brands Group also used a variety of special purpose vehicles (SPVs) that were off its balance sheet prior to its bankruptcy filing.
On their face, SPVs aren’t nefarious. They are legally distinct subsidiaries of a parent company created for a specific reason, such as isolating financial risk, securitizing assets or pooling capital for a project. It has its own balance sheet, assets and liabilities and is legally independent from — and bankruptcy-remote from — a parent company. But they can also be used to hide debt or financial risk.
First Brands operated several SPVs, notably Carnaby Inventory II and Carnaby Inventory III, Broad Street Financial, Heatherton Holdings, Bowery Finance and others. SPVs helped First Brands accrue more than $2 billion in financing.
[RELATED: Jeffries Financial Group sued over First Brands exposure]
“I believe the SPV facilities, from a structural standpoint, were unworkable,” Kirschner says, “as they could not function as independent SPVs from the face of their transaction documents alone and the SPV facilities give rise to what I believe are numerous cognizable claims for fraudulent transfer and other avoidance actions against the counterparties to the SPV facilities … .
“There is a good faith basis to believe that the SPV entities were insolvent from the start and FBG could not generate from sales of inventory or its legitimate operations more generally the amounts required to satisfy its debts.”
Kirschner says those debts were more than $200 million per month in 2025. The SPV financing, instead, was repaid by more debt from more SPV financing, factoring and supply chain financing, he says. A litigation trustee could argue transfers to SPV lenders were made as part of a fraudulent scheme and, Kirschner claims, like the factoring and supply chain lenders, SPV lenders knew or should have known about the scheme.
First of all, the SPV entities couldn’t meet their obligations on paper, much less in reality, Kirschner charges. Secondly, the debt issued was well above market terms and issued to a company whose executive control should’ve raised red flags, he says. Key documentation was also incomplete or deficient, First Brands employees performed the functions of each SPV and, finally, the SPVs had no employees, assets or inventory of their own.
An example he cites is the funding through Onset to Carnaby FA. Onset lent First Brands more than $2 billion through that SPV, purportedly to purchase inventory, materials or equipment, or a combination thereof, from a First Brands brand. The Carnaby SPV would then sell whatever it purchased to Onset in exchange for the funds and Carnaby would then lease it back from Onset in exchange for monthly rental payments. Carnaby would have to replace or replenish inventory used in the ordinary course of business. It’s a long-winded way of putting up collateral for a loan, but in a specialized, supposedly bankruptcy-remote way.
“However, from a basic structural standpoint, the facts support that this facility could not operate as papered,” Kirschner says. “For example, Onset might provide a Carnaby entity with $100 million. The Carnaby entity would have to use this $100 million to purportedly purchase $100 million in inventory from an FBG entity, replace any inventory sold, and service its debt obligations to Onset with interest rates as high as approximately 200%.”
Onset, he says, should have known this was impossible. Furthermore, the SPVs didn’t operate independently as they were supposed to. They held no board meetings, adopted no resolutions and relied on First Brands and other Patrick James entities to pay their bills. Because the money sent to the SPVs flowed right out.
“I understand facts demonstrating that proceeds that flowed into the SPVs were promptly transferred out, commingled and disbursed to affiliates or to pay creditors,” Kirschner says. “Many funds flowed to Bowery, the bank account described above that was used to commingle funds and facilitate transfers to a host of Patrick James entities.”
SPV debt was kept off First Brands’ books, so the collateral in those deals was often pledged in new deals that were on the books. Nor does documentation support any of the transactions that were supposed to have happened actually happened.
“I understand that the general ledgers of Carnaby II and III do not show increases for the subsequent purchases of raw materials or decreases for the sale of finished goods but instead show that the inventory was reduced monthly for cash received from assorted Patrick James entities to make debt service payments to the CarVal lenders,” Kirschner says. “… I understand the FBG debtors were unable to locate any supplements reflecting the repurchase of finished goods following any initial transaction documents. Instead, it appears that the FBG debtors recycled funds from SPV lenders to pay preexisting creditors, including other SPV lenders.”
Like the supply chain financers and factoring lenders, Kirschner says the SPV financers should have known there were problems. He cites late-filed financing statements in response to pushback from Edward James, insistence that Edward James be the only one to communicate with SPV lender Onset. Also, Edward James was an investor in Onset in the SPV deals.
“[T]he facts support the reasonable conclusion that the SPV entities were not truly separate and distinct corporate entities and were instead part and parcel of a larger scheme to secure additional funding for the FBG debtors,” Kirschner says. “Additionally, in my opinion, the fact that the transactions with Onset involved triple-digit interest rates and the inability of the Carnaby entities to repay their debt would provide substantial evidence that these transactions were made for inadequate consideration.”
Insider claims: $1 billion
These claims include the actions against former executives Patrick and Edward James, among others. Kirschner believes a litigation trustee would be able to prove Patrick James misappropriated First Brands funds, falsified invoices and entered into fraudulent SPV transactions.
Misappropriates include, Kirschner says, a transfer of $708 million to the Patrick James Trust; a $38 million transfer to Larchmont, a Patrick James-controlled entity; a transfer of more than $18 million to Battery Park Holdings, another Patrick James entity; and the use of $455,000 to pay for a private chef, rent and interior design expenses. He also cites at least $10.6 billion in total payments he says came on the backs of fraudulent invoices.
“The evidence of fraudulent intent that I have seen is overwhelming,” Kirschner says. “I understand that the debtors and their advisors’ investigations uncovered that more than $708 million in misappropriated funds was transferred to the Patrick James Trust with no apparent consideration to First Brands.”
Suspect acquisition claims: $1.6 billion
Part of the bankruptcy code allows for a transaction to be avoided if a debtor received less than a reasonably equivalent value in exchange for the transaction or if the company was insolvent on the date of the transfer or if the company became insolvent as a result of the transfer.
[RELATED: First Brands asks court to approve sale of filter, wiper and lift support brands]
Kirschner alleges First Brands acquired companies for more than fair market value. He points to acquisitions in 2023 and 2024 in which First Brands paid $488 million for assets already owned or controlled by Patrick James.
“While it is possible these assets may have increased in value following acquisition by the FBG debtors, the gross disparity in purchase prices paid by the FBG debtors and the purchase prices paid by the James-controlled entities (approximately $422 million) strongly suggests the FBG debtors did not receive reasonably equivalent value in the acquisitions,” he says. “… [E]vidence indicates that James used the acquisitions as an opportunity to extract value from the FBG debtors and to support his prepetition scheme.”
[RELATED: First Brands reaches deal to sell Jasper Rubber for $8 million]
There’s also evidence, Kirschner says, there are discrepancies between internal acquisition values and transaction payments. Between 2022 and 2024, he says First Brands paid $1.6 billion for 10 acquisitions. Only three of those acquisitions sold during the Chapter 11 cases for $195 million in total versus an acquisition cost of $641 million. Seven other businesses were unable to be sold and were liquidated, generating just $35 million.
Other claims: $280 million
These claims include fraud actions against Helios Strategic Advisors, the broker that helped First Brands identify and secure sources of funding in exchange for fees. Edward James had an interest in Helios to the tune of $20.5 million, Kirschner says.
“On the transactions it brokered, Helios collected fees which, based on the evidence uncovered, were used in part to funnel kickback payments to Edward James,” he says. “… [I]t is my opinion that substantial value from the debtors in the form of brokerage fees and related payments, and that Helios served as a conduit for the diversion of estate assets to Edward James.”
First Brands also hold preference claims against creditors and counterparties who received payments from the company before it filed bankruptcy. To establish liability, Kirschner says, the litigation trustees will need to prove a transfer was made to or for the benefit of a creditor, on account of a debt incurred before the transfer, while the applicable debtor was insolvent, within the applicable statutory period and allowed the creditor to receive more than they otherwise would have if this were a Chapter 7 liquidation.
“I understand that the total gross transfers that may be subject to avoidance under section 547 of the bankruptcy code is more than $1.7 billion,” Kirschner says, but that total may be reduced by certain defenses those parties could put forth.
“I believe the litigation trust will be able to resolve a significant majority, if not all, of the preference claims by the second half of 2028,” he says. “Based on my experience, litigation trustees recover approximately 10% of the amount of preference claims."
