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’ collapse 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 examiner 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 objection 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.
Related Documents:
UCC objection to James motion to quash
UCC objection to Onset motion to quash
UCC objection to Crighton motion to quash
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
