First Brands Faces “Massive Fraud” Allegations in $12B Bankruptcy

According to Financial Times News, creditors have formally accused failed car parts maker First Brands of “massive fraud” in court filings ahead of a crucial hearing next week. Lawyers for two creditor groups alleged misconduct before the company’s collapse last month with $12 billion in liabilities, objecting to a decision giving repayment priority to about 80 creditors who provided a $1.1 billion bankruptcy loan. Evolution Credit Partners, owed hundreds of millions, seeks to have an independent trustee in bankruptcy take over an affiliate, while lenders behind Carnaby special purpose vehicles wrote that the agreement “virtually guarantees that fraud victims will receive little or no recovery.” The federal bankruptcy court in Houston will hold a hearing next week to consider full approval for the controversial financing.

A Bankruptcy Battlefield Emerges

What makes this case particularly explosive is the timing and specificity of the fraud allegations. While most bankruptcy proceedings involve routine disputes over asset distribution, the formal accusation of “massive fraud” represents a significant escalation that could trigger criminal investigations beyond the civil bankruptcy proceedings. The fact that Jefferies CEO Rich Handler publicly stated his bank was “defrauded” suggests institutional lenders are preparing for a protracted legal war that could extend well beyond the bankruptcy court. This isn’t just about recovering assets—it’s about establishing culpability for what creditors allege was systematic deception.

The Collateral Crisis Deepens

The core allegation about “commingled” collateral strikes at the heart of secured lending practices. When Vincent Indelicato, Evolution’s lawyer, questioned how collateral could be pledged to multiple lenders within a “sophisticated multibillion-dollar enterprise,” he highlighted a fundamental breakdown in corporate governance and financial controls. This suggests either deliberate fraud or such severe operational chaos that the company lost track of which assets backed which liabilities. For an auto parts manufacturer, this could involve physical inventory, intellectual property, or accounts receivable being improperly pledged multiple times—a scenario that would undermine the entire secured lending market’s confidence in collateral verification processes.

Restructuring Ethics Under Fire

The motion to remove Weil, Gotshal, and Manges raises profound questions about legal ethics in complex bankruptcies. Evolution’s argument that the firm cannot simultaneously represent “both the victim and perpetrator of a massive fraud” touches on fundamental conflict of interest concerns that could reshape how large law firms approach multi-entity bankruptcies. If the court agrees that the fraud allegations create an unmanageable conflict, it could establish new precedent requiring separate counsel for different corporate entities even within the same bankruptcy estate—dramatically increasing costs and complexity for future corporate restructurings.

Broader Industry Implications

This case arrives amid growing concerns about the auto parts sector’s financial health following pandemic-era supply chain disruptions and the electric vehicle transition. First Brands’ collapse with $12 billion in liabilities could trigger tighter lending standards across the automotive supply chain, particularly for companies with complex off-balance sheet financing structures similar to the Carnaby vehicles. The specific mention of brakes and windshield wipers as collateral suggests creditors are worried about the valuation of relatively commoditized automotive components—a concern that could ripple through lending to other parts manufacturers.

The Legal Landscape Ahead

Next week’s hearing represents just the opening salvo in what promises to be a lengthy legal battle. The fraud allegations, if substantiated, could transform this from a routine bankruptcy proceeding into a multi-front legal war involving not just the creditors but potentially regulatory agencies and law enforcement. The reference to “financial impropriety” alongside the fraud allegations suggests creditors may be building a case that extends beyond simple breach of contract into potential securities law violations. How the bankruptcy court handles these initial allegations will set the tone for whether this remains a civil matter or escalates into something far more serious for First Brands’ former leadership.