Restructuring officers at First Brands have said the company presented false information to obtain inventory finance facilities from Evolution Credit Partners, amid a dispute between creditors over competing claims.
Boston-headquartered asset management firm Evolution is owed around US$230mn from inventory finance facilities extended to two First Brands special purpose vehicles (SPVs) in 2023 and 2024, covering the purchase and sale of brake parts, court filings show.
However, in the weeks after First Brands’ bankruptcy in late September, Evolution filed a complaint saying that collateral it had taken to secure those facilities had also been used to secure asset-backed loans from other lenders.
Daniel Jerneycic, a managing director at Alvarez & Marsal who was appointed as co-chief restructuring officer at First Brands following its bankruptcy, revealed this week that borrowing base certificates presented to Evolution did “not reflect actual business activity” recorded in First Brands’ systems.
Under the Evolution facilities, the two SPVs – Starlight and Patterson – would use the funds to purchase inventory from First Brands, which it would then sell back to the First Brands at a later date.
But Jerneycic said in a January 11 declaration that following an investigation of available records, the recorded value of those initial purchases appears to have been overstated by a total of around US$140mn.
“These substantial underpayments alone call into question whether the initial inventory purchases by Patterson and Starlight were properly effectuated,” he said.
In addition, Jerneycic said his team has investigated whether the inventory purchased was later sold back to First Brands, and the proceeds used to repay Evolution or purchase replacement inventory.
“These transactions do not appear to have occurred,” he said. “Furthermore, the books and records of First Brands and Patterson and Starlight do not reflect purchase or sales of replacement inventory to or from each other.”
He said the flow of funds between First Brands and the two SPVs was also “highly unusual”, with no evidence of direct cash transfers between them.
Instead, Jerneycic said invoices were issued to Brake Parts Inc – a First Brands company acquired in 2020 – by a different entity controlled by First Brands founder Patrick James.
Funds were first paid to Patterson or Starlight, which would then “round-trip essentially the same funds” back to Brake Parts Inc, via another James-controlled entity, he said.
He said these transfers appear to have been done “solely to generate bank statements activity” that would be presented to Evolution, “and do not correspond to any bona fide financial transactions between the parties”.
A spokesperson for James said he “has always acted ethically and continues to deny the baseless accusations against him”.
“Further, there has been nothing showing any wrongdoing related to Mr James taking money out of the business,” they told GTR. “We look forward to our day in court and as the facts unfold.”
Competing claims
The disclosures are part of a dispute involving Evolution, First Brands and other lenders.
Evolution and First Brands agreed in a November court order that inventory sales could continue in order to raise funds – but that Patterson and Starlight must hold a minimum level of US$335mn in collateral at certain locations to protect Evolution’s interests.
However, Evolution filed an emergency motion in December alleging that agreement had been breached, as the value of the collateral at those locations was around US$44mn lower than required. It has since pushed for either repayment equal to the shortfall or the acquisition of new inventory.
“Our principal concern at this point is they’re now out… selling inventory for cash and spending it,” counsel for Evolution told a January 13 hearing. “Something’s got to stop.”
But First Brands has argued that there is no breach of the agreement because there is sufficient inventory in other locations, meaning those sales can continue. Jerneycic told the hearing that was his “business understanding” of the agreed order.
Judge Christopher Lopez said at the hearing the “plain language” of the agreement did not specify the inventory had to be held at the specific locations claimed by Evolution, but said more evidence is required to determine whether there had been a breach.
Jerneycic’s declaration also argued that continuing to sell the inventory claimed by Evolution could result in a “value-destructive forced liquidation” that would devalue those goods and leave all parties – including Evolution – “worse off”.
The row is further complicated by the fact that other lenders have also claimed liens over the same collateral.
Bank of America, acting as administrative and collateral agent for a group of lenders that are owed around US$6bn from unpaid asset-backed loans to First Brands, argued in a January 12 filing that Evolution has “failed to meet its burden of proving that it holds a valid first-priority lien in the collateral at issue”.
That collateral, Bank of America said, was already subject to the liens of the asset-backed loan lenders before First Brands sold it to the two SPVs.
Jerneycic said he also believes those lenders hold higher-priority liens than Evolution.
This week’s hearing also revealed concerns at Evolution over the high cost of restructuring, the possibility that the Brake Parts Inc business is losing money, and that First Brands could be facing acute cash shortages.
Responding to questions from Evolution’s counsel, Jerneycic said that based on current assumptions and projections, “we could run out of cash as soon as the first week in February”.
Restructuring officers are currently seeking to sell First Brands, either certain assets or the company overall, with a January 30 deadline for qualified bids.
