Background on the First Brands Case
U.S. auto parts manufacturer First Brands (FB) filed for bankruptcy protection on September 29, 2025, revealing liabilities exceeding $10 billion. The rapid deterioration of FB’s finances took debt investors by surprise, and reports suggest that off-balance sheet financing, including factoring arrangements, totaling nearly $2 billion may be implicated, according to the Wall Street Journal.
On September 24, 2025, Global Assets LLC and 12 affiliated entities (the “Initial Debtors”) filed voluntary Chapter 11 petitions in the United States Bankruptcy Court for the Southern District of Texas. Subsequently, First Brands Group, LLC and 98 affiliated debtors filed Chapter 11 petitions, all jointly administered under Case No. 25-90399 before Hon. Christopher M. Lopez.
Key dates in the proceedings include:
- October 29, 2025 – Final hearing on certain First Day Motions
- October 30, 2025 – Meeting of Creditors
To assist with the bankruptcy process, FB retained Alvarez & Marsal as restructuring advisor and appointed Charles M. Moore as Chief Restructuring Officer. Moore submitted a declaration to the court describing early findings, including accounting irregularities and the potential for double pledging of collateral and receivables (the “Alvarez Report”). A Special Committee has been formed to investigate these irregularities, and no definitive conclusions have been drawn at this stage.
What Happened
Early investigations indicate that FB’s collapse may have stemmed not just from operational pressures, but from structural and procedural failures in its financing relationships.
FB entered into credit facility agreements with multiple lenders using inventory as collateral. In practice, affiliate entities engaged in cyclical inventory transactions that allowed collateral to be pledged multiple times:
- Company A purchased inventory from Company B and pledged it to a lender.
- Company A then resold the inventory back to Company B.
- Company C purchased the same inventory from Company B, pledged it to a different lender, and resold it back to Company B.
This cyclical process effectively allowed the same inventory to secure multiple loans without the lenders’ knowledge. The Alvarez Report also notes that collateral may have been commingled across different credit facilities, creating further uncertainty and risk for lenders.
Factoring Accounts Receivables More Than Once
FB’s factoring arrangements fell into two categories:
- Direct-to-factor payments, where the customer pays the factor directly.
- Customer payments collected by FB, where FB then remits funds to the factor.
The second category, which includes $2.3 billion in outstanding receivables, created a situation where the same receivables could potentially have been factored multiple times, as FB could collect cash before sending it to the factor firm. The Alvarez Report notes that segregation of funds is being addressed as part of the ongoing investigation.
In total, the First Brands Group companies had the following financial obligations:
- $6.1B of on-balance sheet debt
- $2.3B of off-balance sheet financing
- $800M of supply chain finance liabilities
- $2.3B of factoring liabilities
Motions and Objections by Lenders and Factor Firms
Following the Chapter 11 filing, FB submitted two key motions:
- DIP Financing Motion – Requesting permission to borrow new funds for ongoing operations, giving new lenders super-priority over existing creditors.
- Cash Management Motion – Allowing FB to maintain its existing banking practices for payroll and operationas, including the ability to open and close accounts.
Several lenders and factor firms filed objections or clarifications to protect their interests:
- Katsumi Servicing, which purchased ~$1.7B in FB receivables, requested that:
- Cash receivables sold to Katsumi remain segregated and not included in the bankruptcy estate or DIP financing collateral.
- Existing bank accounts collecting Katsumi’s receivables remain open to comply with factor agreement terms.
- Aequum, an asset-backed lender, asked the court to segregate its collateral from any DIP financing because existing protections may be insufficient. Other lenders and factor firms echoed these requests.
Objections have been limited so far, but further filings are expected as the investigation progresses.
How CapFlow Funding Group Protects Against These Risks
At CapFlow Funding Group, we prioritize transparency, verification, and control, directly addressing the vulnerabilities exposed by the First Brands case.
- Notice of Assignment
- All account debtors are formally notified when invoices are factored, ensuring clarity on receivable ownership and payment redirection.
- Direct Payment Controls
- Payments flow directly to CapFlow-controlled accounts, preventing clients from misdirecting funds or collecting on their own.
- Accounts Receivable Verification
- Before purchasing invoices, CapFlow confirms with account debtors that:
- Goods or services were delivered and accepted.
- Payment instructions are accurate and current.
- Before purchasing invoices, CapFlow confirms with account debtors that:
- Comprehensive Lien Management
- CapFlow files a blanket lien on all client assets and actively monitors UCC filings to prevent conflicting liens from arising, both at onboarding and throughout the client relationship.
The Takeaway
The First Brands bankruptcy underscores that factoring and asset-based lending are only as secure as the controls behind them. Situations like double pledging of collateral, multiple factoring of the same receivables, and commingled assets illustrate the importance of rigorous oversight.
When executed with diligence and transparency, factoring remains a reliable and flexible financing tool for small and mid-sized businesses. At CapFlow Funding Group, our mission is to protect the integrity of factoring, safeguarding both clients and investors through disciplined underwriting and responsible funding practices.
Sources
- Wall Street Journal: “Auto Supplier First Brands Files for Bankruptcy Amid Accounting Questions,” September 2025
- Bloomberg Law: “First Brands Files for Bankruptcy After Lender Scrutiny,” September 2025
- Reuters: “First Brands files for bankruptcy, revealing billions of dollars in liabilities,” September 2025
- United States Bankruptcy Court, Southern District of Texas. (2025). Declaration of Charles M. Moore in support of the debtors’ Chapter 11 petitions (Case No. 25-90399). Retrieved from Dow Jones Bankruptcy Proxy
