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 adversary litigation 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.
Related documents:
First Brands Group chapter 11 docket
First Brands Group company page
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Kennedy Rose
kennedy.rose@levfininsights.com
+1 646 943 6248
