A Texas bankruptcy judge on Monday rejected First Brands Group's Chapter 11 plan and converted its case to a Chapter 7 liquidation, ruling that the company's bid to pay administrative creditors from the proceeds of future litigation was not feasible. According to reports from Law360, US Bankruptcy Judge Christopher Lopez sided with a group of objecting creditors, including some who are targets of lawsuits alleging First Brands was undone by fraud. The ruling means Lopez will convert the Chapter 11 case into a Chapter 7 bankruptcy that will be overseen by a court-approved trustee to take over management of any potential lawsuits.
Although company advisors concluded the lawsuits would likely claw back about $2 billion by the end of 2028, Judge Lopez found that wasn't enough to guarantee payment of the highest priority creditors. As reported by Bloomberg, under the US bankruptcy code, creditors who hold so-called administrative claims must be paid in full under a payout plan. Lopez found that it would take too long to pay those claims, leading to the conversion decision. The judge specifically ruled that the company's plan to pay administrative creditors from future litigation proceeds was not feasible under the circumstances.
The ruling comes after weeks of extreme skepticism in the market for the auto-parts maker's $1.1 billion rescue loan. According to Bloomberg News, the debt, despite being first in line to get repaid, was being quoted at around 16 cents on the dollar weeks before Lopez's ruling. This market pricing reflected widespread doubts about the feasibility of the proposed payout plan, with investors and creditors questioning whether the company could actually recover the projected $2 billion through litigation.
The conversion to Chapter 7 bankruptcy means the small army of lawyers and advisors who have been selling off the company's assets and closing its operations will no longer manage the case. Instead, a court-approved trustee will oversee any potential lawsuits that could claw back money for creditors. The case is being handled in the US Bankruptcy Court, Southern District of Texas (Houston), under case number 25-90399. This conversion effectively ends the Chapter 11 reorganization process and moves the case toward liquidation of remaining assets.
