First Brands Group, LLC's major inventory lender is seeking to dismiss the Chapter 11 bankruptcy case of a related special purpose entity, alleging the filing was improperly authorized and made to circumvent contractual protections designed to keep the entity out of bankruptcy.
Aequum Capital Financial II LLC, which serves as administrative agent for lenders that provided a $45 million revolving credit facility, filed a motion November 10 in the U.S. Bankruptcy Court for the Southern District of Texas asking the court to dismiss the Chapter 11 case of Broad Street Financial, LLC. The motion argues that Broad Street was deliberately structured as a "bankruptcy-remote" special purpose entity and that its September bankruptcy filing violated the very agreements that were supposed to prevent such an occurrence.
The dispute centers on Broad Street's role as a financing vehicle for First Brands, a Cleveland-based automotive parts company that filed for Chapter 11 protection in late September along with multiple affiliates. Broad Street was created specifically to facilitate inventory financing, holding approximately $66 million in brake parts, electronics, steering components and other automotive inventory that serves as collateral for the Aequum lenders.
According to court documents, Broad Street's limited liability company agreement required that any "Material Action" - including filing for bankruptcy - be authorized by unanimous written consent of the company's member, manager and an independent manager meeting specific qualification requirements. The Credit Agreement with Aequum also mandated at least 10 days' prior notice before any change of independent manager.
However, Aequum alleges that on the eve of Broad Street's September 24 bankruptcy filing, the company's long-serving independent manager was replaced without the required notice to lenders. "To date, the Debtors have failed to provide Administrative Agent with any information regarding [the new managers'] backgrounds, qualifications and compliance with the requirements," the motion states.
The lender argues this last-minute management change undermines the validity of the bankruptcy filing itself. "Without evidence that [the new managers] satisfied qualification requirements, their actions were void and undertaken without lawful corporate authority," according to the motion filed by attorneys representing Aequum.
Beyond the authorization issues, Aequum contends the bankruptcy filing lacks legitimate reorganization purpose, noting that Broad Street "has little to no employees" and "minimal operations" with Administrative Agent and the Aequum Lenders as "the only material creditors." The motion characterizes the case as "nothing more than a two-party dispute" that lacks meaningful bankruptcy purpose.
The timing of the filing also raises concerns for the lenders. Broad Street filed for bankruptcy less than 24 hours after Aequum delivered a default notice, and while the parties were engaged in good faith negotiations for a forbearance agreement that would have kept the entity out of bankruptcy.
"The Broad Street Chapter 11 Case was filed in contravention of the express purposes for which Broad Street was formed," the motion argues. "Broad Street was formed as a bankruptcy-remote SPE for the express purpose of entering into the Credit Agreement."
If the court declines to dismiss the case entirely, Aequum seeks alternative relief including lifting the automatic stay to allow enforcement of its contractual rights, or appointing an independent Chapter 11 trustee.
The motion also invokes Section 305 of the Bankruptcy Code, which allows courts to dismiss cases where "the interests of creditors and the debtor would be better served by such dismissal." Aequum contends that the existing contractual framework provides adequate mechanisms for resolving disputes without the administrative burden and costs of bankruptcy proceedings.
The challenge highlights broader tensions in structured finance deals where lenders rely on bankruptcy-remote structures to limit credit risk. Such arrangements have become increasingly common in inventory financing and other asset-based lending, but can create complex legal issues when the broader corporate family encounters financial distress.
According to a declaration filed by Eric Weisheit, an executive director at Aequum, the company's outstanding obligations under various facilities total approximately $77.8 million in principal as of the bankruptcy filing date. The inventory financing arrangement allows Broad Street to purchase inventory from First Brands entities and use it as a borrowing base, with subsequent sales back to the First Brands family.
The broader First Brands bankruptcy case involves multiple entities in the automotive aftermarket parts business. The company has been working under an adequate protection stipulation with Aequum regarding use of cash collateral, though the lender alleges the debtors breached reporting and sale provisions within two weeks of that agreement's entry.
The motion is pending before Chief Judge Christopher M. López in the Southern District of Texas, Houston Division, under case number 25-90399.
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 a 32 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.