Here's what you need to know
- U.S. Bankruptcy Judge Christopher Lopez approved a deal to sell First Brands' Horizon North America business to a subsidiary of Flex-N-Gate.
- Lopez also heard arguments surrounding First Brands' plans to wind up its Chapter 11 case and provide recovery to its creditors.
- However, he denied a conditional approval to a first step in that process, urging parties to keep negotiating even as First Brands runs out of money.
First Brands Group entered Chapter 11 bankruptcy in September more than $11 billion in debt and, during the process, accrued even more debt — $5 billion in debtor in possession (DIP) financing and millions in administrative and professional fees.
The company and the U.S. government, along with various creditors of the 112 businesses under the First Brands umbrella, say at least some of that indebtedness is related to a shockingly broad and long-lived web of fraud perpetrated by some of First Brands’ former executives, including founder Patrick James and his brother, Edward, who will stand trial next year in New York on charges related to the case.
[RELATED: Judge signs off on sale of First Brands company TMD]
It’s an extraordinarily complex case involving some of the biggest names in the aftermarket, including Luber-finer and FRAM, Trico, Autolite and more. Thousands of jobs were shed as the company collapsed and factories suddenly shut their doors. Now, the company teeters on the brink of complete liquidation. Creditors stand to lose billions and the brands that haven’t been sold could vanish.
On Tuesday, U.S. Bankruptcy Judge Christopher Lopez declined to conditionally approve a disclosure statement that would clear the way for a plan and global settlement to monetize what’s left of First Brands and attempt recovery for its creditors. In the past few weeks, months of tense negotiations have come to multiple iterations of a plan and process for exiting Chapter 11 that’s still drawing the objections of creditors and other stakeholders.
“I think the proposed plan and the related settlement are the result of coming up with a solution that required creativity to address a multibillion-dollar issue,” Lopez said. “Time and money aren’t on anyone’s side.”
Horizon sale approved
Before arguments about how to move forward started, Lopez did approve the sale of Horizon North America’s business assets to a subsidiary of Flex-N-Gate for $64 million. He also approved a related settlement with Horizon’s European business that paved the way for the sale. The $64 million will be split among the DIP lenders and other priority lenders in the case. The sale includes real estate, equipment, contracts and more, and will also save hundreds of jobs, court filings say.
Lopez signed the orders for the sale on the spot, saying there were no issues of collusion and no other bids for the business.
“Based on the record before me, the market has spoken,” he said.
Moving Chapter 11 cases forward hits a roadblock
When the DIP financing was approved, a deadline was set for payback. That is looming in late June, and First Brands doesn’t have the money to pay it. In a May 18 court filing, interim CEO Charles Moore said First Brands has, at any given time, $10-$15 million in unrestricted cash above the $25 million minimum liquidity requirement.
“The debtors’ remaining operations have substantially wound down and the debtors are no longer generating meaningful cash flow from their businesses sufficient to support the continued administration of these Chapter 11 cases,” Moore wrote.
[RELATED: Sale of First Brands' IP closes as court approves agreement for sale of other assets]
OEMs have been propping the company up, but that will end with the Horizon sale, Moore says. In the filing, he estimated First Brands could limp along for two more weeks after OEM funding ended.
“If the debtors do not move expeditiously toward confirmation, I believe the debtors will be forced to pivot to a value-destructive conversion to Chapter 7,” he wrote. “I believe a forced liquidation would be value-destructive for all stakeholders.”
Moore wrote the filing in support of an earlier version of the Chapter 11 plan than the one Lopez heard on Tuesday. The first plan, filed at the end of April, sparked a wave of objections from creditors. Subsequent plans have answered some of those objections and spurred new ones, but one important objection has remained throughout: That of the U.S. trustee.
Chapter 11 or not?
In a bankruptcy case, the U.S. trustee is a watchdog who serves to protect the integrity and fairness of the proceedings. The trustee is neutral, neither for nor against creditor or debtor. Instead, they keep an eye on regulatory oversight and compliance.
[RELATED: Court filings detail alleged wrongdoing in First Brands’ collapse]
Kevin Epstein is the U.S. trustee in the First Brands case. Epstein’s office filed a motion to convert First Brands Chapter 11 case to Chapter 7 or to dismiss it on May 13. Among other things, Epstein says First Brands’ Chapter 11 plan and settlement doesn’t provide for the payment of administrative expenses.
“A fundamental requirement of Chapter 11 is that a plan cannot be confirmed unless all administrative expenses are paid in full on the effective date,” the motion said. “The debtors are administratively insolvent and have no ability to confirm a Chapter 11 plan that meets this requirement of the Bankruptcy Code.”
Other objectors latched onto that argument and expanded on it, further objecting to the compressed timeline First Brands proposed, which appears to be fueled primarily by that lack of liquidity. Onset, who is owed more than $2 billion by First Brands, says the timeline, which has extended some in later versions of the plan, prioritized speed over the due process rights of Onset and others.
“The timing of these filings was plainly inadequate to permit Onset or any other party in interest to conduct a meaningful review,” Onset’s objection said, adding First Brands has ignored their requests to negotiate thus far. “The debtors’ refusal to engage with a creditor holding billions in claims while simultaneously pursuing an aggressive timeline underscores the inadequacy of the process.”
Tuesday’s hearing
On March 20, First Brands filed an updated plan that answered some of Onset’s objections, it said, and on Tuesday, attorney Lisa Laukitis acknowledged the effort but also said there are still issues.
“We do not believe this is an appropriate situation for a conditional disclosure approval,” Laukitis told the court, citing a deadline schedule that left less than 14 days between when the last documents would be filed and the objection deadline.
While Tuesday’s hearing wasn’t to approve the plan and settlement, it was to conditionally approve procedures surrounding the plan and settlement, such as the disclosures, solicitation and voting procedures. Without a conditional approval on Tuesday, nothing could go forward.
Onset wasn’t alone. Several other stakeholders rose to object to the timeline, which First Brands initially chalked up to the liquidity constraints Moore discussed, but which were left out of the evidence presented at Tuesday’s hearing. Clifford Carlson, representing the debtors, argued between the first plan and today, First Brands had added to its compressed timeline and has worked diligently to address objections.
“These have been difficult cases from the outset. We crashed into bankruptcy with no liquidity,” he told the court. “Unfortunately, after doing the work and digging in, the company turned out not to be what we thought it was going to be.”
What Carlson outlined Tuesday was a plan and settlement that would monetize what was left to First Brands, largely litigation claims with some inventory, accounts receivable and intellectual property. The remaining assets would be sorted into three trusts. Creditors would also be sorted into classes in each trust that would correspond with how much they could recover and when. Those classes depended on several factors, the most contentious of which was if a creditor could be found to have engaged in adverse conduct, a term not codified in U.S. law or elsewhere.
“It’s basically made up,” says Emil Kleinhaus, attorney for Leucadia, who purchased invoices from First Brands and who says it is owed $715 million. “It’s not something Congress or any legislative body passed on.” Instead he and others argued, it would be up to a trustee to apply the definition.
Absent the trusts, Carlson says, most creditors have little hope of recovering anything as they’re behind the billions in DIP financing, which also put liens on everything First Brands owned or produced. With the plan, he argues, those junior creditors would have some hope of recovery as First Brands’ claims in court, such as those against the James brothers, hopefully reaped benefits. Proceeds from those cases would flow into a litigation trust, seeded with some money from DIP lenders and some money from First Brands’ balance sheet.
“Without this settlement and plan process, everybody’s worse off,” Carlson argued. “We don’t even think it’s close.”
Still, the objections came.
Vianey Garza, representing the U.S. trustee, when Lopez asked for if anyone who had an objection Tuesday to present evidence, looked exasperated.
“If they’re not putting on a witness, why are we here today,” she asked. Later, she called the plan and settlement “neither fair nor equitable,” and that, despite First Brands’ assurances administrative claims may be paid in full, the plan and settlement as exists still doesn’t pay administrative claims as the law intends.
Richard Stieglitz represents Katsumi, a factoring financier who says First Brands owes it $1.75 billion. His client objects to moving forward on many of the same grounds as others in the case. Though he acknowledged First Brands is “woefully administratively insolvent,” and said the novel plans put forth are probably “the only way they can get a plan confirmed,” it’s not the way to proceed.
“There’s a lot of victims in this case,” he said. “That doesn’t mean you should be confirming a plan and approving a disclosure statement that rewrites the propriety scheme set out in the bankruptcy code.”
Ultimately, Lopez agreed with First Brands' opponents on Tuesday.
“There’s a lot going on here,” he said. The plan, settlement, disclosures and other framework for moving forward are too entangled to give conditional approval now. He said there was no evidence Tuesday about why First Brands chose the timing it did, but “no one has come forward telling me they’re going to put more money in this case.”
That said, process is still important.
“There are due process issues,” Lopez said. “It’s not enough time for creditors, many of them trade creditors, to evaluate these documents and make decisions that may be irrevocable.”
The judge invited parties to continue to negotiate and said he was open to a new plan, settlement and related architecture, offering to make himself available whenever he could, and acknowledged First Brands’ back was against a funding wall.
“I don’t know if there’s time, but I’m open to it,” he said. “I don’t reach this conclusion lightly. I’m fully aware of the potential consequences.”
