Court Denies Confirmation of First Brands’ Plan

Speculative Litigation Proceeds Doesn’t Make a Plan Feasible

Southern District of Texas Bankruptcy Court denies confirmation of First Brands chapter 11 plan of reorganization in case 25-90399.

First Brands manufactured and sold aftermarket automotive parts. Plagued by a lack of capital, allegedly resulting in part from insider malfeasance, First Brands sought relief under chapter 11 of the Bankruptcy Code. During the case, the debtors incurred substantial post-petition debt, including debtor-in-possession (DIP) financing, to fund the administration of the bankruptcy cases. Under the Bankruptcy Code, administrative expenses such as these must generally be paid in full under a chapter 11 plan unless the holder agrees to different treatment.

The debtors attempted to sell their operating assets to fund the bankruptcy and liquidation process. Those sales, however, did not generate sufficient proceeds to satisfy the estate’s administrative and other priority obligations. As a result, First Brands proposed an alternative method of funding its plan.

The proposed plan established a litigation trust to pursue and monetize the debtors’ principal remaining assets: billions of dollars in potential litigation claims against insiders and other parties. Plans frequently contemplate post-confirmation litigation as a source of distributions to creditors. First Brands presented a more unusual structure because the litigation claims were effectively the sole source of funding for the plan. The plan contemplated that DIP lenders would provide $50 million of new money to fund the litigation trust and, in return, could acquire litigation assets through a credit bid—that is, by using the value of their administrative claims rather than cash as consideration.

The Bankruptcy Court denied confirmation for three principal reasons.

First, the proposed sale of the litigation claims could not be authorized under 11 U.S.C. § 363(k). The court concluded that the proposed purchasers could not credit bid claims that were not secured by the assets being sold. Section 363(k) permits a secured creditor to credit bid its secured claim in a sale of property securing that claim. The court distinguished between liens on proceeds that might ultimately be generated by litigation and liens on the underlying causes of action themselves. Because the litigation claims were not collateral securing the lenders’ claims, 11 U.S.C. § 363(k) did not authorize the proposed credit bid.

Second, the plan failed the feasibility requirement of 11 U.S.C. § 1129(a)(11). The court held that the feasibility requirement applies to a liquidating Chapter 11 plan as well as to a plan of reorganization. Because the proposed plan depended entirely on recoveries from future litigation, the debtors were required to demonstrate a reasonable basis for concluding that those litigation claims could generate sufficient recoveries. The court found the evidence insufficient to establish that the plan was likely to produce the required recoveries and therefore found the plan infeasible.

Third, the plan improperly treated the DIP lenders administrative expense claims as a voting class of impaired claims. Although the holders of the DIP lenders agreed to receive treatment different from the treatment otherwise required by 11 U.S.C. § 1129(a)(9), their agreement did not change the statutory character of those claims for classification and voting purposes. The plan, therefore, could not rely on those claims to create the impaired accepting class required by 11 U.S.C. § 1129(a)(10). Without a properly classified impaired class accepting the plan, the debtors could not satisfy the confirmation requirements.

In its oral ruling on the record, the bankruptcy court denied confirmation and ordered conversion of the case to chapter 7, where the ligation claims could be administered by a chapter 7 trustee.

First Brands illustrates the limits of using post-petition financing, negotiated administrative-claim treatment, and contingent litigation recoveries to fund a liquidating Chapter 11 plan. The decision also highlights important distinctions between secured collateral and litigation causes of action, the scope of 11 U.S.C. § 363(k) credit bidding, and the separate requirements governing administrative claims, feasibility, and impaired-class acceptance under chapter 11.

The oral ruling may be heard here.