First Brands Group, LLC reduced its request to release cash from a disputed factoring account, seeking approval to access $18.1 million instead of the $65.3 million originally at issue, according to a reply brief filed January 12, 2026, in the United States Bankruptcy Court for the Southern District of Texas. The auto parts manufacturer reached agreement with most of its third-party factoring lenders to narrow the dispute and defer resolution of approximately $35 million in contested receivables while an examiner investigates the company's prepetition factoring arrangements.
The revised proposal narrows a dispute over customer payments that remain frozen due to competing claims between First Brands and various factoring companies that purchased the company's receivables before bankruptcy. The compromise leaves only Evolution Credit Partners and Katsumi Servicing as holdouts objecting to the proposed procedures.
Background on the Factoring Dispute
First Brands filed its factoring procedures motion on December 1, 2025, seeking court approval to release what it characterized as trapped cash from customer payments collected after the bankruptcy filing. The company ceased all third-party factoring operations on September 12, 2025, before filing for Chapter 11 protection, but customer payments continued flowing into a segregated factored receivables account.
On December 22, 2025, the bankruptcy court approved the release of approximately $55 million related to certain categories of invoices with the consent of most third-party factors, overruling Evolution's objections. The court found that Evolution's interests were adequately protected.
The Revised Proposal
Under the revised proposal outlined in the reply brief, First Brands now seeks release of only three specific categories of funds totaling $18.1 million. Category 1 invoices, representing $1.9 million, cover invoices dated after September 12, 2025, when the company stopped factoring. Category 2A invoices, totaling $8.7 million, relate to debtor entities that were not sellers under any receivables purchase agreement and do not appear on any factor's list of purchased receivables. Category 2B invoices, amounting to $7.3 million, involve combinations of debtors and customers not identified on any factor's lists.
First Brands agreed to voluntarily adjourn its request for Category 3 invoices, which represent $35.4 million in disputed funds. These invoices date from before September 12, 2025, and relate to customers or sellers identified on at least one factor's list but which did not match any factored invoices based on records provided. The debtors state that if they seek access to these funds in the future, they will do so through an adversary proceeding rather than the current contested matter.
The proposed order creates a process allowing third-party factors until January 25, 2026, to assert any bona fide disputes regarding Category 1 and 2A invoices, with a February 2, 2026, deadline for Category 2B invoices. If the parties agree no bona fide dispute exists, the cash can be released by consent without an adversary proceeding. If they disagree about whether a dispute exists, the court will make that determination. Only if a bona fide dispute is established would an adversary proceeding be required for release.
Evolution's Opposition
Evolution Credit Partners has filed objections to the factoring procedures, pursuing litigation on multiple fronts. Evolution claims it holds a perfected first-priority lien in all prepetition receivables of certain First Brands entities based on a Master Receivables Purchase Agreement dated March 28, 2023, and related UCC-1 filings.
On January 5, 2026, Evolution appealed the court's initial order releasing $55 million to the United States District Court for the Southern District of Texas. On January 9, 2026, Evolution initiated a separate adversary proceeding against First Brands, certain prepetition lenders, and the debtor-in-possession lenders, seeking a declaratory judgment that it holds a perfected first-priority lien and security interest in the receivables. The District Court set Evolution's appeal for oral argument on January 29, 2026.
In its supplemental objection filed January 6, 2026, Evolution argued that releasing additional funds without providing it enhanced adequate protection would violate the Bankruptcy Code. Evolution contends that various subsections of Federal Rule of Bankruptcy Procedure 7001 require the disputed issues to be resolved through an adversary proceeding rather than the contested matter format First Brands has pursued.
The Court's Previous Rulings
According to the debtors' reply brief, at the December 22, 2025, hearing, the bankruptcy court stated that it did not believe Evolution held first priority in the receivables. The court noted that the Evolution receivables purchase agreement uses the term "grant" in Section 5(g), the provision allegedly creating a blanket security interest in all receivables, while using the word "transfer" throughout the rest of the agreement to refer to receivables actually sold to Evolution.
The court observed that these two terms are used differently and cannot mean the same thing, according to the debtors' characterization of the hearing. The court further noted that Evolution's UCC-1 financing statements describe the collateral as "receivables transferred or purported to be transferred" rather than using the language from the grant provision.
At a December 30, 2025, status conference, the court reiterated that everyone was receiving adequate protection under the initial order, including Evolution, while stating that the court had made no final determination of Evolution's lien scope and priority.
Legal Arguments Over Procedural Requirements
The dispute includes arguments over whether Federal Rule of Bankruptcy Procedure 7001 requires First Brands to pursue its requested relief through an adversary proceeding rather than a contested matter. Rule 7001 lists specific categories of proceedings that must be brought as adversary proceedings, including proceedings to recover money or property, determine the validity or priority of liens, obtain injunctions, or obtain declaratory judgments related to such matters.
First Brands argues that none of these categories apply to its narrowed request. The debtors contend they are not seeking to compel customers to turn over property under Rule 7001(a), since the proposed order states that if customers voluntarily remit payments, those funds will be segregated and customers will receive protection from double payment liability. The company states it is not currently seeking court determinations of the validity, priority, or extent of third-party factors' relative interests in receivables under Rule 7001(b), as the proposed order only covers non-disputed categories.
First Brands asserts the proposed order does not enjoin third-party factors from collecting from customers under Rule 7001(g), but rather provides protection to customers who choose to pay the debtors. Since the other subsections do not apply, the debtors argue Rule 7001(i) regarding declaratory judgments is also inapplicable.
Katsumi Servicing, which joined Evolution in objecting, argues that various aspects of the relief requested trigger Rule 7001 requirements and should be resolved in an adversary proceeding.
Adequate Protection Issues
First Brands contends that Evolution is adequately protected by the funds that will remain in the factored receivables account after the proposed $18.1 million release. According to the reply brief, approximately $47.2 million will remain in the segregated account, plus another $6.6 million in unapplied receipts pending reconciliation. Additionally, First Brands states it expects to collect approximately $90 million in outstanding prepetition accounts receivable from customers, which will flow into the factored receivables account.
The debtors argue that what constitutes adequate protection must be determined on a case-by-case basis. First Brands states that even if Evolution's claims are accepted, its liens would sit behind approximately six billion dollars in senior secured debt and are unlikely to receive any recovery from cash or accounts receivable.
The proposed order provides protections for third-party factors beyond the cash cushion, including a 45-day claim period to assert claims to any invoice relating to released funds, entitlement to assert administrative claims if released funds should have been paid to a factor, and the agreement to adjourn relief on the $35.4 million in Category 3 invoices pending the examiner's investigation.
The Invoice Reconciliation Dispute
First Brands states in its reply brief that its financial advisor's investigation revealed that the invoice numbers and values of most receivables sold to Evolution differ from the records of inventory sales to customers. According to the debtors, every single receivable sold to Evolution contains a completely fabricated invoice number that does not relate to any genuine transaction with customers.
The debtors state that the invoice numbers and values of receivables sold to the third-party factors that are outstanding differ from the genuine records of inventory sales to customers held by both First Brands and its customers. First Brands argues this means Evolution has no valid claims against any customers that would be affected by the customer protections in the proposed order.
Customer Double Payment Protections
A component of the proposed order addresses customer concerns about potential double payment liability. The debtors state that First Brands' customers received assignment notices from various factoring companies claiming ownership of receivables, creating confusion about whether payments should go to the debtors or the factors. The reply brief states that customers have withheld approximately $90 million in payments due to competing claims.
The proposed order would provide customers with protection from liability for claims relating to the specific invoices they paid, subject to enumerated exceptions. First Brands argues this limited protection is permissible and distinguishable from the non-consensual third-party releases that the Supreme Court addressed in Harrington v. Purdue Pharma.
The debtors compare the proposed protection to the discharge from liability that a stakeholder receives in an interpleader action when depositing disputed funds with the court. First Brands states that the proposed order allows customers to voluntarily deposit prepetition receivables to the debtors, which will be held in a segregated account overseen by the court, similar to an interpleader action.
Evolution objects to any customer releases, joining arguments that such provisions violate the Purdue decision. First Brands states that the Supreme Court limited its Purdue holding to non-consensual third-party releases pursuant to a plan of reorganization. The debtors state that each third-party factor's rights and claims against customers remain expressly preserved except for the narrow double-payment protection.
Agreement with Consenting Factors
The revised proposal reflects cooperation between First Brands and most of its factoring lenders. All third-party factors except Evolution, Katsumi, and Bank ABC agreed to the compromise approach reflected in the proposed order. These consenting factors include Leucadia Asset Management LLC acting through its Point Bonita Capital Division, LAM Trade Finance Group LLC, LAM Trade Finance Group II LLC, Raistone Purchasing Series LLC-Series XXXII, Raistone Purchasing LLC-Series XXVIII, and ING Belgium.
The proposed order includes provisions for the consenting factors beyond the cash releases, including an abeyance of depositions and discovery directed to First Brands and the creditors' committee in exchange for the debtors providing non-privileged factoring-related documents produced to the examiner and creditors' committee advisors. The debtors also agreed to continue providing information and data to the consenting factors and to provide access to their financial advisor to answer questions about reconciliation analysis.
The Examiner's Investigation
A court-appointed examiner is conducting an investigation into First Brands' prepetition factoring arrangements. The debtors agreed to hold Category 3 invoices representing $35.4 million in abeyance to allow the examiner to progress with this investigation.
First Brands states in the reply brief that if it seeks access to Category 3 funds in the future, it will proceed through an adversary proceeding.
Next Steps
The bankruptcy court scheduled a hearing for January 13, 2026, to consider procedural objections to the factoring procedures motion. Third-party factors face a January 25, 2026, deadline to assert bona fide disputes regarding Category 1 and 2A invoices, with a February 2, 2026, deadline for Category 2B invoices.
Evolution's appeal of the initial order releasing $55 million is set for oral argument before the United States District Court for the Southern District of Texas on January 29, 2026. The adversary proceeding Evolution initiated on January 9, 2026, seeking declaratory judgment regarding its lien priority will proceed separately.
The First Brands bankruptcy case is proceeding in the United States Bankruptcy Court for the Southern District of Texas, Houston Division, under case number 25-90399 (CML). Weil, Gotshal & Manges LLP represents the debtors.
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