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First Brands creditors expect upcoming asset sales at the bankrupt car parts maker to bring in less than $200mn, leaving holders of its $12bn in debt nursing heavy losses.
Advisers to First Brands hope to sell several assets in the coming weeks, with two potential buyers interested in the businesses, said people familiar with the matter.
The company, senior lenders and unsecured creditors were discussing clawback efforts through a “litigation trust” to pursue the James family, Onset Financial and potentially other parties, said multiple people involved in the bankruptcy.
Court filings say company founder Patrick James funded a lavish lifestyle of multiple mansions and fancy cars with money that did not belong to him, though it remains unclear if sales of those assets could make creditors whole.
Recovering money through lawsuits is a costly process that can take years and is not guaranteed.
First Brands collapsed last September after rumours of financial irregularities prevented the company from completing a multibillion-dollar refinancing transaction over the summer. Federal prosecutors charged James with fraud in January, alleging a wide-ranging scheme of “double pledging” collateral to obtain more loans as well as fabrication of company invoices.
James and his brother Edward, who worked in a senior finance role at the company, have separately been sued by the First Brands bankruptcy estate which is hoping to recover billions of dollars that it alleges James improperly took out of the business.
First Brands has also sued Onset, a Utah-based lender, seeking potentially billions of dollars in damages for charging steep interest rates on sale-leaseback transactions with the car parts maker in which it financed inventory and hard assets for short-term cash.
First Brands in early January announced that instead of reorganising as a standalone business, it would instead pursue a sale of all or parts of the company, which makes air filters, windscreen wipers and spark plugs.
Patrick and Edward James and Onset have denied wrongdoing.
“Patrick James is presumed innocent and unequivocally denies all allegations and charges against him,” a spokesperson said.
“He built First Brands from nothing into a global industry leader and has always been devoted to the success of the company.”
A spokesperson for Onset accused First Brands of trying to evade responsibility.
“Onset was a victim of their fraud and attempts by various parties to suggest otherwise continue to be strategic and self-serving posturing in the bankruptcy matter.”
First Brands declined to comment. Representatives for Edward James did not respond to a request for comment.
The bankruptcy case has been hobbled by First Brand’s difficulty in increasing production and sales to fund the case and show potential buyers that its operations are worth purchasing.
The company raised $1.1bn in a bankruptcy loan last autumn but quickly burned through the money. Lenders were unwilling to extend additional financing, with the bankruptcy loan now trading at less than 20 cents on the dollar. Many of the lenders have sold off their pieces of the loan for heavy losses.
The FT previously reported that carmakers including Ford had pitched in tens of millions of dollars to keep the company afloat in order to continue the flow of components they need.
However, because many industry players switched to other suppliers after First Brands collapsed, demand for additional car parts inventory was limited, said a person familiar with the asset sales.
“The market can only take so much, even at a steep discount,” the person said.
Recovering value from overseas assets, including its car brake manufacturing plants in Mexico, was also difficult, especially considering potential tariffs, the person said.
“These assets might not be worth pursuing given all these complications,” the person added.
First Brand’s complex capital structure, which includes traditional bank loans as well as financings underpinned by inventory and accounts receivable, has complicated the bankruptcy, with various lenders and counterparties making competing collateral claims for the company’s remaining assets.
One lawyer involved in the case said the squabbles were ultimately irrelevant because the company’s underlying business was far less meaningful than realised.
“We’re fighting about basically a box of rocks,” said the lawyer.
Court filings show First Brands has paid more than $50mn in the bankruptcy case to its law firm Weil, Gotshal and its turnaround consultants at Alvarez & Marsal.
“In hindsight, people are seeing that the [alleged] fraud was a lot more extensive than they initially thought,” said one person involved in the case. “But nobody ever put forward that this was going to be clean or simple.”