The United States District Court for the Southern District of Texas remanded a dispute over $60 million in cash collateral to the bankruptcy court on January 31, 2026, in litigation between Evolution Credit Partners and First Brands Group, LLC. The district court ruled that the bankruptcy court may inquire into lien validity only to determine if a prima facie claim exists and that genuine factual disputes prevent resolution of whether Evolution currently has adequate protection.
First Brands' Business and Financial Condition
First Brands Group, LLC operates as a supplier of aftermarket automotive parts, including brakes, filters, wipers, lights, pumps, and towing solutions. Various First Brands entities filed for bankruptcy on September 24, 28, and 29, 2025.
At the bankruptcy filing, First Brands reported approximately $11.5 billion in financing obligations against roughly $12 million in corporate bank accounts. Approximately $2.3 billion of the liabilities relate to accounts receivable factoring arrangements.
The Accounts Receivable Factoring Dispute
The litigation concerns First Brands' accounts receivable factoring arrangement with Evolution Credit Partners. Under accounts receivable factoring, First Brands sold rights to customer receivables at a discount to maintain cash flow. First Brands received immediate cash while Evolution would collect the full value when customers paid.
Evolution asserts a first-lien security interest on approximately $60.5 million worth of First Brands' receivables. First Brands contests this claim, arguing that significant irregularities in prior factoring practices undermine Evolution's rights to these receivables.
First Brands represents that its forensic expert determined the $60.5 million claim does not match any valid invoices in First Brands' records. This factual dispute forms the background for the adequate protection litigation.
The Bankruptcy Court Proceedings
After filing bankruptcy, First Brands moved for permission to use funds from the Factored Receivables Account, which collects receivables paid back to First Brands. The account contained between $105.9 million and $109 million when the bankruptcy court considered the motion.
First Brands requested authority to spend $63 million representing certain categories of receivables. Evolution objected, arguing that if First Brands spent this amount, insufficient funds would remain in the account to satisfy Evolution's asserted first-priority security interest.
The bankruptcy court authorized First Brands to draw up to $60 million from the account. The court did not definitively rule on the validity or priority of Evolution's interest, cautioning that its assessment was preliminary. The court authorized the release based on its determination that any creditor's interest would be adequately protected by the remaining funds.
After the authorized withdrawal, approximately $49 million would remain in the Factored Receivables Account.
Evolution's Appeal
Evolution appealed the bankruptcy court order on grounds that the $49 million remaining in the account would leave Evolution's lien underprotected by approximately $20 million. Evolution argued the bankruptcy court erred in ruling that its interest was adequately protected, asserting that $49 million does not adequately secure its claimed right to $60.5 million.
The district court expedited the appeal based on the record showing First Brands would likely exhaust the collateral by early February 2026.
First Brands responded that the bankruptcy court did not err for two reasons. First, additional receivables collected during the pendency of the appeal brought the account balance to over $67 million, allegedly sufficient to adequately protect Evolution's interest. Second, even if the bankruptcy court initially authorized withdrawal of more than Evolution's lien amount, the court appropriately balanced remaining cash against the likelihood that Evolution could establish a first-priority security interest.
The District Court's Analysis
The district court addressed two principal issues: the proper scope of bankruptcy court inquiry into asserted property interests, and whether Evolution had adequate protection.
Scope of Lien Validity Inquiry
The district court ruled that bankruptcy courts addressing cash collateral use under section 363 may conduct limited examination of lien validity. Section 363(p) provides that entities asserting property interests bear the burden of proof on validity, priority, and extent.
The court held that in the absence of an adversary proceeding, bankruptcy courts should assess only whether a prima facie showing or colorable claim exists. Courts may consider evidence that clearly refutes a creditor's claim but should stop inquiry once a colorable claim is established.
The court reasoned that permitting broader inquiry would bypass Rule 7001(b)'s requirement for adversary proceedings to challenge lien validity and section 363(c)(3)'s rules for preliminary hearings on cash collateral use.
The district court noted this legal question was not dispositive because the bankruptcy court had reserved ruling on Evolution's asserted security interest. The bankruptcy court had instead focused on adequate protection assuming Evolution held the claimed interest.
Adequate Protection Analysis
The district court ruled that at the time Evolution appealed, its interest was not adequately protected because the Factored Receivables Account did not contain enough funds to cover Evolution's $60.5 million interest. The court found the bankruptcy court likely miscalculated the amount in the account, believing it held $56 million to $59 million rather than the lesser amount actually present.
However, the court found that additional receivables flowing into the account during the appeal created genuine factual disputes about current adequate protection. The Factored Receivables Account now allegedly holds over $67 million, and First Brands represents the estate is owed approximately $230 million in outstanding prepetition receivables.
The district court determined it could not resolve these factual disputes. The court also noted it could not make the initial ruling on Evolution's security interest validity without the benefit of evidentiary or adversary proceedings.
Remand and Path Forward
The district court remanded the case for proceedings consistent with its opinion. The court ruled that parties may litigate through appropriate procedures whether Evolution has a first-priority security interest. The parties may also litigate whether Evolution is adequately protected by receivables that may flow into the estate.
In determining adequate protection, the bankruptcy court may consider the amount of funds in the segregated account, the likelihood additional funds may enter the account, and other potential recovery sources for Evolution. If the bankruptcy court finds adequate protection exists, it must specify what funds or property, whether currently in the estate or projected, adequately protect Evolution.
The bankruptcy court may grant release of additional funds consistent with the district court's opinion or with agreement of directly affected parties. The district court retained jurisdiction over the appeal if the bankruptcy court rules on adequate protection.
First Brands agreed not to seek release of additional funds before February 19, 2026, the date of a scheduled evidentiary hearing in bankruptcy court on a related matter.
This article was prepared using Stretto Conductor, our new AI-powered assistant that's here to help. Stretto Conductor was able to create this summary of an 11 page court filing in less than a minute. Always review the underlying docket filings for accurate information. The information and responses generated by Stretto Conductor may contain errors or inaccuracies and should not be relied upon as a substitute for professional or legal advice.