First Brands' Rescue Loan Trades at 16 Cents on the Dollar as New CEO Details Alleged Fraud in Court

First Brands Group's bankruptcy has moved from allegations on paper to sworn testimony in federal court, and creditors appear skeptical about the company's recovery prospects.

Current CEO Charles Moore testified in U.S. Bankruptcy Court last week that founder and former CEO Patrick James directed finance employees to transfer hundreds of millions of dollars in corporate funds into bank accounts under his personal control, according to WFIW Radio. The hearing centered on whether James' personal assets should stay frozen while litigation drags on.

Moore said he found evidence of falsified invoices and the same collateral pledged to multiple lenders to secure overlapping loans, according to WFIW Radio. Former finance employees told Moore that invoices had been altered to pull in financing. Internal company messages from 2022, referenced in testimony, reportedly show employees discussing the creation of "dummy invoices" to secure additional funding, with one employee expressing no concern about falsifying the records.

James is currently awaiting trial on federal fraud and conspiracy charges. Federal prosecutors allege he orchestrated a scheme diverting billions of dollars from First Brands to fund an extravagant personal lifestyle, according to WFIW Radio.

The Money Problem

While the fraud allegations pile up in court, the financial market for First Brands debt is delivering its own verdict. The company's $1.1 billion rescue loan, despite sitting first in line for repayment, is being quoted at around 16 cents on the dollar, according to broker runs seen by Bloomberg News.

That's a brutal discount for senior-secured bankruptcy financing. Bloomberg News notes such steep paper losses are exceedingly rare, because lenders who finance Chapter 11 cases typically structure deals so a company has enough value to repay them even if the reorganization ultimately fails. First Brands is looking like an exception.

Marc Kirschner, the litigation consultant hired by First Brands' estate, told the court earlier this month there's still a good chance of recovering about $2 billion over the next two and a half years through lawsuits. The main targets are James himself and the firms that backed First Brands' financing, including Jefferies Financial Group Inc. and Onset Financial, according to Kirschner's court filing cited by Bloomberg News.

Kirschner was careful to frame that $2 billion figure as conservative. "This amount represents less than 8% of the total amount of Estate Claims that I believe could be asserted by a litigation trustee," he said in the filing, adding that it accounts for "the uncertainty and time associated with litigation, and the potential that the First Brands Group Debtors might settle certain litigation claims for less than the asserted amounts."

Creditors aren't buying it, literally or figuratively. Bloomberg News reported that people with knowledge of the matter, who asked not to be identified because they aren't authorized to speak publicly, said several creditors are leaning toward cutting their losses rather than contributing to a proposed $75 million litigation trust that would preserve their priority claim on any recoveries. After a year of being, in their words, "stung time and again," some simply want out.

That skepticism reflects the reality on the ground. No lawsuits against James, Jefferies, or Onset have been resolved. No court has ordered any recovery. Kirschner's $2 billion estimate is a projection, not a judgment, and it depends on years of litigation going the estate's way. Creditors betting on a steep discount now, rather than a drawn-out fight for a distant payout, aren't being irrational.

The Human Cost

The bankruptcy's fallout extends well past bondholders and Wall Street trading desks. First Brands' collapse triggered the closure of dozens of manufacturing facilities and cost more than 4,000 jobs, according to WFIW Radio, including the shutdown of Champion Laboratories in Albion, Illinois, earlier this year.

Champion Laboratories has since restarted operations under new ownership. Premium Guard Inc., based in Memphis, Tennessee, purchased the company's assets and intellectual property and has begun rehiring workers as automotive filter production resumes at the Albion facility, according to WFIW Radio.

Neither Kirschner nor First Brands responded to requests for comment from Bloomberg News. Lawyers for James did not respond to requests for comment, nor did representatives for Jefferies.

What's Unresolved

James still hasn't gone to trial on the federal fraud and conspiracy charges against him. Until that trial happens, the criminal allegations remain allegations, however detailed the testimony from Moore and however specific the internal messages about "dummy invoices."

The central question for creditors is whether the estate's lawsuits will actually recover money, or whether the $75 million litigation trust will turn into another sunk cost in a case that's already destroyed value at a pace bankruptcy lawyers rarely see. With the rescue loan trading at 16 cents on the dollar, the market has already placed its bet.