First Brands formally accused of ‘massive fraud’ by lenders

Creditors have formally accused failed car parts maker First Brands of “massive fraud” in court filings ahead of a crucial hearing next week that will pit different groups of lenders against each other.

Lawyers for two different creditor groups alleged that First Brands committed misconduct before it collapsed into bankruptcy last month with $12bn in liabilities.

They object to the decision by First Brands’ board to give repayment priority to a different group of about 80 creditors in exchange for a $1.1bn loan to tide it through its bankruptcy process. One of the objectors, Evolution Credit Partners, is seeking to have an independent bankruptcy trustee take over the running of an affiliate of the company.

This appears to be the first time First Brands has been explicitly accused of “fraud” in legal filings, according to one adviser involved in the case. “These bankruptcy cases are far from run-of-the-mill: they are a house of cards tainted by financial impropriety and fraud,” lawyers for Evolution, which is owed hundreds of millions of dollars, wrote in a filing on Thursday.

About 80 hedge funds and other financial institutions banded together to give First Brands a $1.1bn bankruptcy loan on the condition that more than $3bn of their existing debt would be given repayment priority.

Those terms have angered Evolution and other creditors, who have argued in filings that the agreement could compromise their existing collateral. First Brands has more than $12bn of total debt on and off its balance sheet.

The agreement to give priority to the bankruptcy loan providers “virtually guarantees that fraud victims will receive little or no recovery”, wrote the lenders behind the Carnaby, special purpose vehicles that provided off-balance sheet financing primarily against the group’s brakes and windscreen wipers.

First Brands made “misrepresentations in numerous financial statements, credit agreements and borrowing base certificates” the Carnaby lenders wrote. First Brands has previously identified AB CarVal, a specialist credit firm, as the primary lender behind the Carnaby vehicles, which raised $160mn in debt.

First Brands did not immediately respond to a request for comment

The company’s advisers and creditors have previously alluded to the possibility of improper behaviour and “commingled” collateral in court filings.

Rich Handler, the chief executive of Jefferies, said on an investor call earlier this month that he believed the bank had been “defrauded” by First Brands Group, without providing more details.

Vincent Indelicato, a lawyer for Evolution, said during a bankruptcy hearing earlier this month that “someone” had taken his client’s collateral and pledged it to a different loan from another lender. “How in the world that could possibly happen within a sophisticated multibillion-dollar enterprise, is a mystery to us and to our clients.”

The federal bankruptcy court in Houston is holding a hearing next week to check on the case’s progress and consider full approval for the bankruptcy loan.

However, the financing is facing challenges from multiple creditors, including an official committee of unsecured creditors who believe the terms are too rich and give too much power to the bankruptcy loan providers, who also hold more than $5bn in term loans. They include Marathon Asset Management and Monarch Alternative Capital.

Evolution has filed motions to terminate the engagement of Weil, Gotshal, and Manges as the lawyer representing both the company and the special purpose vehicles.

“As lead restructuring counsel for all Debtors, WGM would be put into a position where it would represent both the victim and perpetrator of a massive fraud,” wrote Evolution in its filing.