Former First Brands Group executives partially prevailed in their motion to access funds from directors and officers (D&O) insurance policies issued to a non-debtor to cover their legal defense costs.

The judge overseeing First Brands Group’s chapter 11 case punted a ruling on creditor Onset Financial’s motion to intervene in the debtor’s  against former CEO Patrick James and related parties.

Judge Christopher Lopez of the US Bankruptcy Court for the Southern District of Texas said that he would try to get the parties a ruling on Friday (Jan. 9) morning but that he would rule on the issue no later than Jan. 13.

First Brands’ lawsuit against James and other parties alleges that James fraudulently secured billions of dollars of financing for the debtor and misappropriated funds to enrich himself and his family. James and the other defendants filed a motion to dismiss the adversary proceeding on Dec. 15.

Onset counsel Anthony Fiotto of Morrison & Foerster argued that monies provided by Onset were “pilfered” by the defendants and the pilfering directly affect the title to over $1bn of collateral to which Onset has a claim.

While First Brands can argue that Onset is adequately represented in the litigation, Onset holds that divergent interests exist and that they have a narrower economic interest in the debtor, Fiotto said. The debtor’s complaint seeks the return of funds to the debtor’s estate, and Onset wishes enter distinct evidence to ensure that – as the purported sole creditor of certain special-purpose vehicle (SPV) debtors – the interest of those debtors are protected, he said.

Judge Lopez questioned how exactly Onset wished to intervene in the litigation, as certain causes of action are derivative to the debtor’s estate. Fiotto said that there are equitable remedies and that his client would like to show that money belongs to the Carnaby entities and to Onset. The debtor doesn’t have the motivation Onset does to introduce evidence to clarify the records supporting the transactions, he said.

First Brands opposed Onset’s intervention. Debtor counsel Robert Niles-Weed of Weil Gotshal & Manges said the claims First Brands is bringing aim to restore funds misappropriated from the estate and that they have nothing to do with creditor priority or distribution. The intervention would risk delay, add costs and complicate discovery, Niles-Weed said. There are many creditors with competing claims to a limited pool of funds, and parties will have the chance to pursue their claims at a later date, he said.

Onset’s claims are unclear, as the creditor says it is seeking the same relief and entirely different relief as the debtor, Niles-Weed said. The ambiguity of Onset’s request is indicative that the creditor lacks standing to bring those claims, he said. Onset may have claims against the estate that it can assert in connection with a plan process, but it doesn’t have standing to bring such claims against third parties who misappropriated funds from the debtors, he added.

Bryce Friedman of Simpson Thacher, counsel for various SPV debtor entities and their independent manager Benjamin Duster, said his client will protect the rights and positions of the SPV entities in the adversary proceeding. Estate causes of action and any funds recovered belong to SPV entities, he said.

Even counsel for the defendants, Erica Weisgerber of Debevoise & Plimpton, didn’t support Onset’s intervention. Onset lacks standing to intervene, and adjudication of the debtor’s claim wouldn’t address allocation of any recoveries to creditors, she said. Onset’s claim is unclear, and its interests do not align with the debtors, Weisgerber said.

The parties will return to court on Friday for a status conference.

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Kennedy Rose

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+1 646 943 6248

First Brands Group said it intends to kick off a marketing and sale process for its assets this month, and creditor Evolution Credit Partners asked the court to cut off the debtor’s access to collateral following alleged violations of an adequate protection order.

Debtor counsel Sunny Singh of Weil Gotshal & Manges provided a status update this morning (Jan. 7), alerting the court that First Brands would likely propose a bid procedures motion contemplating a sale process that would conclude by the end of January. The company doesn’t have a lot of time for an extended sale process unless it can find a way to enhance its liquidity, he said.

First Brands is focused on case funding and negotiating a path out of chapter 11, and the company is looking at all available sources of liquidity, as the $190mn of unrestricted cash that First Brands has on hand will get the case through the end of January, Singh said. The company received a term sheet for a potential capital injection from its existing debtor-in-possession (DIP) lenders, and the debtor will need to evaluate that offer and negotiate, he said.

Singh said he expects that the DIP lenders will participate in the sale process. The term sheet sent by the DIP lenders this week includes a bid for certain assets, he said. Investment banker Lazard began informal outreach this week, he added.

“We recognize that we’re asking the parties to move quickly, but we really do believe that this timeline is necessary and warranted under the circumstances,” Singh said.

Singh further noted that the debtor reached an agreement with secured lenders to debtors Carnaby Inventory II LLC and Carnaby Inventory III LLC to adjourn consideration of their  to dismiss those debtors’ chapter 11 cases and for stay relief as to those debtors to Jan. 22.

Elsewhere in the case, factoring counterparty Evolution Credit Partners said First Brands was actively violating adequate protection orders by using Evolution’s collateral without maintaining collateral thresholds. Evolution counsel Vincent Indelicato of Proskauer Rose said the debtor has at least a $43mn deficit on that collateral maintenance covenant threshold while continuing to use and sell Evolution’s collateral.

Evolution filed an emergency motion on Dec. 23 to enforce the stipulation and adequate protection order. Evolution and First Brands refrained from pressing the collateral issue with the court because the debtor assured Evolution that it would provide the adequate protection, and that a proposal from the DIP lenders was forthcoming, he said.

Indelicato asked the court to schedule an emergency hearing because every day that passes with First Brands’ “willful” violation of the adequate protection order leads to diminution and degradation of the collateral. He also asked that the court prevent First Brands from continuing to use the collateral until the court takes up the issue.

“They can’t continue to use our collateral to fund the optionality of their case,” Indelicato said.

Singh said that he doesn’t disagree that there is an issue with cash collateral but that First Brands is not blatantly violating a court order. First Brands is continuing to sell inventory in the ordinary course, and you can’t shut down a “massive operation” overnight and stop shipping because it would destroy the value of the business, he said.

Judge Christopher Lopez of the US Bankruptcy Court for the Southern District of Texas scheduled a hearing on the matter for Jan. 13.

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Kennedy Rose

kennedy.rose@levfininsights.com

+1 646 943 6248

Various parties in First Brands Group’s chapter 11 cases succeeded in their requests to quash deposition requests from the unsecured creditors committee (UCC) during a hearing today (Jan. 7).

The motions to quash came from former First Brands CEO Patrick James and other defendants targeted in adversary litigation–creditor Onset Financial and former First Brands manager Nigel Crighton. The UCC objected to all three motions, arguing that the discovery requests were critical to securing recoveries for unsecured creditors in light of the widespread fraud that led to First Brands’  into chapter 11. Post Petition will publish several more articles providing more details from today’s hearing.

Defendants’ counsel James Tecce of Quinn Emanuel Urquhart & Sullivan argued that there is no legal justification for the UCC to pursue Rule 2004 discovery of James and other defendants. Rule 2004 discovery cannot be duplicative, and the committee is essentially shadowing the debtor, he said. First Brands has made broad discovery requests, and the committee’s requests have significant overlap in the documents, he added.

The UCC is a statutory fiduciary that is uniquely situated, and any claims it would bring would come through derivative standing, Tecce said. The committee is not necessarily a typical non-party, he said. The UCC’s remedy is to seek intervention in the adversary proceeding, but the defendants are not inviting that, he said.

Counsel for Crighton, Jeffrey Levinson of Levinson LLP, also sought to quash the UCC’s discovery requests against his client. The committee’s requests are redundant, and it puts an undue burden on Crighton, he said.

Onset Financial counsel Brian Kotliar of Morrison & Foerster did not join the fellow quashers in their arguments. He said his client has been fully complying with the committee’s document requests because they are “innocent,” but that the issue surrounds depositions and the associated costs.

First Brands’ case may run out of money while the debtor “is on the operating table,” and Onset does not want the investigation to fall short of getting to the bottom of the truth, Kotliar said. The estate is running out of money, and the UCC seeks to “supercharge” discovery costs by doing “expedited, duplicative” depositions before an  can get involved, he said. The committee has much more work it can do to investigate before pursuing costly depositions, he added.

Kotliar accused the UCC of harassing his clients by sending process servers to their homes and filing an  to the motion to quash on Monday. In its objection, the UCC accused Onset of contributing to the fraud that led to First Brands’ descent into bankruptcy. Kotliar described the allegations as “highly defamatory, highly inaccurate, misleading and flat-out untrue.”

Committee counsel Jeffrey Jonas of Brown Rudnick said the discovery requests were critically important, and delaying discovery by the committee could dramatically limit or eliminate recoveries for unsecured creditors. The claims and causes of action may be the only sources of recovery for unsecured creditors, and the company is almost out of cash, he said.

The UCC has uncovered additional participants in fraud, including Onset and Patrick James’ brother, Edward James, Jonas said. The average internal rate of return on Onset loans to the debtors exceeded 300%, and no borrower could sustain borrowing at such a price or pace, he said. Onset got away with “pillaging the company” because they had an “inside man” with Edward James, who approved the company’s transactions with Onset, Jonas added. Onset “handsomely rewarded” Edward James by allowing him to personally invest in Onset’s financing with the company, to First Brands’ and creditors’ detriment, he said.

There remains many questions about non-special purpose vehicle financing, and of what lenders know or should have known, Jonas asserted. Waiting for an examiner would be a more “chaotic” approach and prejudice the UCC, he said. The committee’s continued discovery need not be duplicative of what the examiner will do, and the UCC invites the examiner to participate in depositions and receive documents the committee has collected, Jonas said.

It is “nonsense” to think that the committee should not be permitted to get discovery because there is an adversary proceeding and investigation, he said. The UCC has made substantial progress with discovery, even though James and other company executives have refused to comply with discovery requests, Jonas asserted.

When ruling, Judge Christopher Lopez of the US Bankruptcy Court for the Southern District of Texas said the court retains absolute discretion over whether to grant Rule 2004 discovery requests, and that he found virtually all of what was being requested by the committee would be requested by an examiner. The committee has every right to seek an investigation, but the court wants to “pause for a moment” and allow the examiner to take the lead, the judge said.

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Kennedy Rose

kennedy.rose@levfininsights.com

+1 646 943 6248