By Dietrich Knauth
June 12 (Reuters) – A U.S. bankruptcy judge in Houston said on Friday bankrupt auto parts maker First Brands could move ahead with a liquidation plan that would fund lawsuits against the company’s indicted founder and other insiders in an attempt to recoup money for creditors.
U.S. Bankruptcy Judge Christopher Lopez allowed First Brands to solicit votes on its preferred proposal for winding down its business, rejecting demands from a government watchdog and some creditors who asked the judge to convert the case to a quicker and more straightforward Chapter 7 liquidation that would be managed by a court-appointed trustee.
Lopez said First Brands deserves a chance to see if its creditors will support its litigation strategy, and he will consider approving the wind-down plan at a court hearing in July.
First Brands collapsed into bankruptcy in September after its lenders began investigating allegations that the company fraudulently double-pledged its assets as collateral on multiple loans.
First Brands failed to reorganize in bankruptcy, leaving it unable to repay more than $11 billion in debts. After the company went bankrupt, its founder Patrick James and his brother Edward James were indicted on federal fraud charges.
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.
First Brands’ financial state has only worsened in the months since it filed for bankruptcy, and its lenders stand to take losses even on the additional $1.1 billion in new money that they provided at the start of First Brands’ bankruptcy.
That money ran out in January, forcing First Brands 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. First Brands sold its Horizon towing business for $64 million, its Toledo Molding & Die business for $80 million and its Walbro business for $50 million.
First Brands does not have enough money to repay debts racked up after its bankruptcy filing, which are typically treated as “administrative expenses” that must be repaid before all other debts.
The Office of the U.S. Trustee, which acts as the U.S. Justice Department’s bankruptcy watchdog, said in court filings that First Brands is $223 million behind on administrative expenses, including debts to vendors who shipped parts to First Brands after it filed for bankruptcy.
First Brands’ bankruptcy plan, if approved at the July court hearing, would set up a litigation trust to pursue lawsuits in hopes of raising additional money for creditors.
The trust would be funded with at least $75 million to start filing lawsuits, including $25 million in First Brands’ existing cash and $50 million in additional litigation funding supplied by the same lenders who provided the $1.1 billion bankruptcy loan. The litigation would target James and others who allegedly took money out of the business in the months before it went bankrupt.
(Reporting by Dietrich Knauth; Editing by Alexia Garamfalvi and Will Dunham)