By Dietrich Knauth
NEW YORK, Aug 24 (Reuters) – A U.S. bankruptcy judge on Monday rejected auto parts maker First Brands’ proposal to pay back creditors by pursuing litigation against insiders, instead converting the case to a more straightforward Chapter 7 liquidation.
U.S. Bankruptcy Judge Christopher Lopez said that First Brands’ proposed Chapter 11 plan was not acceptable, in part because it sought to defer payment on at least $222 million in debts racked up during the company’s bankruptcy. First Brands owes billions more from before its bankruptcy, and its efforts to sell off business lines generated only a fraction of what it owes to its creditors.
“Unfortunately, time was not on the debtor’s side,” Lopez said. “The sales process did not render the types of sales prices I’m sure everybody wanted.”
First Brands’ collapse caused losses for some of the largest investment firms on Wall Street and sparked concerns about fund managers’ exposure to troubled borrowers in the opaque markets for private credit.
The company’s preferred liquidation plan would have set up litigation trusts to help pursue lawsuits in hopes of raising additional money for creditors over time. But under First Brands’ proposal, the lawsuits would need to bring in $1.9 billion before the company could fully repay the administrative claims that must be paid first, Lopez said.
Creditors who opposed the bankruptcy plan, as well as the U.S. Justice Department’s bankruptcy watchdog, expressed doubt that the company’s litigation would result in a meaningful recovery from people like the company’s indicted founder, Patrick James. James and his brother Edward James were indicted on fraud charges in January, and they have pleaded not guilty.
First Brands did not immediately respond to a request for comment.
First Brands filed for bankruptcy in September with about $14 million in cash and more than $9 billion in liabilities. The company borrowed an additional $1.1 billion from its existing group of lenders early in its bankruptcy but burned through most of that cash by January, forcing it to rely on prepayments from key parts buyers like Ford and GM.
First Brands sought to find a buyer for the whole company but was able to sell only a few business lines to generate a fraction of the amount it borrowed under the bankruptcy loan. It sold its Horizon towing business for $64 million, its Toledo Molding & Die business for $80 million and its Walbro business for $50 million.
(Reporting by Dietrich Knauth; Editing by Jamie Freed)
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