First Brands lawsuits seek to recoup billions

Patrick James arrives at federal court in New York in February. (Michael Nagle/Bloomberg

The pitch to creditors of bankrupt First Brands goes like this: Stick with us just a while longer, and you’ll get a full recovery as we claw back $2 billion from suing a long list of insiders and business partners who allegedly perpetrated a widespread fraud.

The market for the auto parts maker’s $1.1 billion rescue loan shows the extreme skepticism that such an outcome, made by its litigation consultant, will actually play out.

The debt, despite being first in line to get repaid, is being quoted at around 16 cents on the dollar, according to broker runs seen by Bloomberg. Creditors who’ve been stung time and again over the course of the past year are growing increasingly frustrated with the situation, people with knowledge of the matter said.

Several are leaning toward cutting their losses and moving on, rather than contributing to a new $75 million litigation trust that would preserve their priority claim on any recoveries from the court battles, they added, asking not to be identified because they’re not authorized to speak publicly.

Regardless of which way the next chapter of the First Brands saga goes, it’s already been one of the swiftest cases of value destruction in recent memory for a senior-secured bankruptcy financing. Such losses, even if only on paper for now, are exceedingly rare because lenders that finance Chapter 11 cases typically go to great lengths to ensure a company has enough value to repay them even if the reorganization fails.

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Marc Kirschner, a litigation consultant hired by First Brands’ estate in part to assess how much value may be recoverable for creditors, said earlier this month there’s still a good chance of recouping about $2 billion over the next 2½ years via lawsuits. The main targets include founder Patrick James and the firms that backed First Brands’ questionable financing, including Jefferies Financial Group Inc. and Onset Financial, Kirschner said in a court filing.

“This amount represents less than 8% of the total amount of Estate Claims that I believe could be asserted by a litigation trustee and accounts for the uncertainty and time associated with litigation, and the potential that the First Brands Group Debtors might settle certain litigation claims for less than the asserted amounts,” Kirschner said.

Messages left with Kirschner and First Brands were not returned.

Lawyers for James didn’t respond to requests for comment, nor did representatives for Jefferies and Onset. All three have previously denied wrongdoing. 

After rescue-finance lenders and certain tax claims get repaid, lower-ranking creditors who refinanced $3.3 billion of debt at the start of the Chapter 11 case last year would come next.

“It is my belief that First Brands Group’s prepetition practices involving third-party factoring and supply chain financing support a claim that they were Ponzi schemes, and that a litigation trustee would be able to invoke the Ponzi Scheme Presumption for actual fraudulent transfer claims,” Kirschner wrote in the filing.

First Brands is seeking court approval of its bankruptcy plan July 28.