First Brands, Ad Hoc Group Defend ‘Risky’ DIP, Offer Administrative Carve-Out, ‘Cram-Up’ Plan Option to UCC in Push for Final Approval; Debtors Raise ‘Serious Issues’ With SPV Lender Collateral

The First Brands Group debtors and the ad hoc group of cross-holders mounted a vigorous defense of their $1.1 billion new-money DIP financing in filings ahead of Nov. 6’s final DIP hearing. The debtors responded to objections lodged by the official committee of unsecured creditors and lenders to the debtors’ special purpose vehicles, factoring agents and landlords and filed a revised proposed final DIP order, while the ad hoc group submitted its own reply in support of final DIP approval.

The debtors and prepetition lenders argue that the DIP facility is the only viable option to prevent an immediate “collapse” of the company that would “destroy any chance of recoveries.” The ad hoc group asserts the financing is “arguably among the riskiest in recent history,” and they are funding into a “black box” amid “allegations of rampant fraud.”

Although they have failed to reach a “comprehensive settlement” with the UCC, the debtors and DIP lenders say they made “significant modifications” to the proposed final DIP order to address many of the committee’s concerns, including agreeing to a $200 million administrative claim basket that ranks senior to the rolled-up DIP claims and a “Cram-Up Option” to allow for a nonconsensual chapter 11 plan.

The debtors and DIP lenders urge the court to overrule any remaining objections, summarizing the revisions to the DIP order and responses to objections in a reply chart HERE.

The debtors filed supplemental declarations in support of final DIP approval yesterday, Nov. 4, by Charles Moore of Alvarez & Marsal North America, the debtors’ interim CEO, and Tyler Cowan of Lazard, the debtors’ investment banker. The declarations defend the economics of the facility and the debtors’ intent to propose an adequate protection package ahead of the final DIP hearing for each of the SPV lenders aimed at preserving the status quo while disputes over the SPV lenders’ interests play out. Moore’s declaration asserts that there are “serious concerns and questions about whether certain SPV lenders have any collateral at all or, if they do, what the status of their liens are relative to prepetition lenders.” The debtors filed an amended version of Cowan’s supplemental declaration today correcting a case citation.

As a preliminary point, the debtors dispose of the various motions seeking appointment of a chapter 11 trustee, dismissal of the SPV debtor cases and stay relief, insisting they have “no bearing” on final DIP approval and will be addressed at the “appropriate time.” Judge Christopher M. Lopez indicated at an Oct. 31 hearing that he will not consider these motions until after the final DIP hearing.

The financial irregularities in the cases have prompted a flurry of activity to sort out priorities and entitlements to assets across the First Brands debtors and SPV debtors’ structure. The U.S. Trustee and factoring creditor Raistone have moved to appoint an independent examiner in the cases to investigate the debtors’ assets and inability to account for funds attributable to factoring arrangements and off-balance-sheet financing. The examiner motions are scheduled to be heard on Nov. 17 at 2 p.m. ET.

Inventory lender Evolution filed an emergency motion on Oct. 30 to appoint a chapter 11 trustee to operate the Carnaby SPV debtors. The Carnaby secured lenders also sought emergency relief to dismiss the cases of the SPV debtors, appoint a chapter 11 trustee and secure the lenders’ collateral if the SPV cases are not dismissed. Evolution and the Carnaby lenders insist that the First Brands debtors cannot advocate for the SPV debtors’ best interests, as they are deeply conflicted.

In their reply brief, the debtors argue that the DIP modifications directly address the UCC’s primary concerns that the DIP financing would trigger administrative insolvency and constitutes an improper sub rosa plan ✐. The debtors and DIP lenders say the $200 million administrative claim carve-out will ensure that “specified administrative expense claims,” including postpetition trade claims, non-insider employee wages, taxes and tariffs will be paid.

To counter arguments that the DIP facility dictates the terms of a reorganization, the DIP lenders have agreed to allow the debtors to pursue a nonconsensual chapter 11 plan that could “cram [ ] down the Roll-Up Obligations” with noncash consideration: a direct response to the UCC’s argument that the rollup locks in a specific case outcome.

The debtors and lenders also review other key concessions reflected in the proposed final DIP order, including:

• Soft marshaling: The DIP lenders have agreed to use “commercially reasonable efforts” to seek recovery from other DIP collateral first before tapping unencumbered avoidance action proceeds.
• Milestone extensions: The debtors’ milestones for delivering a business plan and a quality of earnings report are both extended to Jan. 31, 2026, from the Oct. 28, 2025, deadline for the business plan and Dec. 12, 2025, deadline for the quality of earnings report. The debtors’ deadline to enter a restructuring support agreement with the ad hoc group has also been pushed to March 28, 2026, from Oct. 28, 2025. This deadline is also the new milestone for launching a sale process.
• Extended challenge period: The UCC’s deadline to file a DIP challenge is extended to Jan. 31, 2026, from Dec. 8, 2025, subject to automatic tolling if the committee files a standing motion before the deadline.
• Increased investigation budget: The DIP lenders have agreed to an investigation budget of $250,000 for the UCC.
• Maturity extensions: The DIP lenders agreed to reduce the DIP extension fees by “half,” with the fee of 0.75% of outstanding DIP term loans now allowing for two 90-day extensions at the debtors’ discretion, rather than two 45-day extensions.

While offering concessions, the debtors and DIP lenders vigorously defended the DIP’s economic terms as essential for securing funds in a uniquely perilous situation. The ad hoc group says its members have
“assumed the risk of funding into a black box with no diligence, no assurances, and no certainty as to the continued viability of the business,” having already funded $500 million into the company since the petition date.

The debtors argue that the objectors assert “contradictory” demands for the DIP lenders to both fund more money and strip the funding of “typical legal protections and commercial terms that would make such financing economically viable.” The ad hoc group rejects the assertion that they sought to “underly leverage their negotiating position” and underscore the difficulties in underwriting the facility given the “massive liquidity hole” and “lack of reliable financial information.”

The debtors say that the “uncertainty and risk” to the DIP lenders has only increased since Judge Lopez approved the DIP financing on an interim basis at the Oct. 1 first day hearing.

The debtors’ banker, Cowan, counters the UCC’s claim that the 3:1 rollup of $3.3 billion in prepetition debt is “unprecedented,” citing cases with similar or higher ratios. Cowan also refutes the UCC expert’s cost analysis, arguing that including interest on the rollup is an “improper” because it is “not a true incremental cost to the estate” because the estates would otherwise be required to make interest payments to provide adequate protection to the prepetition lenders.

The debtors assert that the UCC’s estimates of the fees are significantly overstated. The debtors calculate the fees at $517 million (assuming no maturity date extension) and $659 million (assuming a three-month maturity date extension), below the UCC’s estimate of between $769 million and $993 million.

The debtors also defend the sufficiency of the DIP funding, which a revised budget projects will carry the cases through Jan. 30, 2026 (detailed below). The debtors say their liquidity is now “tracking ahead” of the budget, and they are taking further steps to stabilize the business and boost liquidity. The debtors note there are approximately $75 million in receivables held up due to “confusion as to where customers should remit funds,” and approximately $95 million in cash is subject to a reconciliation process to determine if it relates to factored or non-factored receivables.

The debtors note that if additional financing is necessary, the DIP facility can be upsized with the consent of supermajorities of the new-money and rollup lenders.

Further, the debtors argue that the DIP liens on avoidance action proceeds are justified by the risks and lack of “opportunity to conduct meaningful diligence.” Likewise, the debtors defend the modified waiver of marshaling rights with respect to the new-money DIP obligations and surcharge and equities of the case waivers are necessary under the circumstances.

Turning to the objections from the SPV lenders and the prepetition ABL agent, the debtors observe that the SPV lenders – including Evolution, Onset and Carnaby secured lenders – oppose the only available “lifeline” for both the operational and SPV debtors, despite not putting forward “actionable offers to finance even their own [SPV] silos.”

As previously set out in the debtors’ supporting declarations, the core of the dispute, according to the debtors, is that there are “serious issues as to what claims and collateral” to which the SPV lenders are entitled. The debtors say their ongoing investigation suggests that, in “many instances,” the parties “did not follow the terms of the applicable agreements or otherwise respect corporate formalities and the separateness of the FBG Debtors and the SPV Debtors.”

According to the debtors, “no transfer of inventory or PP&E ever occurred” in connection with transactions with the SVP debtors, and, when transfers did occur, “no consideration or inadequate consideration was paid to the FBG Debtors.” Further, the debtors say that there are instances where inventory subject to the ABL borrowing base was sold, the inventory was still reflected in the borrowing base. The debtors observe that this could mean the prepetition ABL and term loan liens on that collateral purportedly transferred to the SPV debtors were never released.

The debtors are investigating whether the ABL lenders’ liens were automatically released under sales for fair-market value or under allowed payment conditions that require an absence of default and satisfaction of fixed coverage and availability requirements. The debtors review that the ABL and term loan agreements provides for the automatic release of liens “if assets are either sold at fair market value with no less than 75% cash consideration or exchanged at fair value for like assets.”

The debtors assert that their investigation raises “serious questions” regarding the perfection of the SPV lenders’ liens and their priority relative to the ABL and term loan lenders.

The debtors say they have “not located” documentation relating to inventory transfers to either the Onset or Evolution facilities. Because “most if not all” of the inventory was transferred or sold out of the borrowing SPV debtors, the debtors say “neither Onset nor Evolution may be able to prove that the ABL Lender’s inventory liens were ever released under the ABL Credit Agreement.” Likewise, the debtors say they have not been able to confirm if the proper procedures were followed to release the ABL liens with respect to the Carval and Aequum facilities.

The debtors contend that the SPV lenders cannot demonstrate they are entitled to adequate protection, but, until these disputes are resolved, the debtors propose to replicate the interim adequate protection arrangements with the SPV lenders to maintain the status quo. The debtors propose adequate protection terms that would exclude the SPV debtors (other than the SPV parent debtor Viceroy Private Capital) from the DIP and adequate protection liens, exclude disputed collateral from the liens subject to a final determination, and reserve the parties rights with respect to lien issues, postpetition interest and other disputes.

Additionally, the adequate protection arrangement would require the debtors to maintain the gross value of disputed inventory at or above petition date value either by replenishment or by posting cash to a segregated account, and the FBG debtors would then be able to purchase this disputed inventory at “102% of cost.”

The debtors defend the DIP guarantee granted by the SPV parent entity on the grounds that the DIP proceeds are being used to fund operations across the entirety of the enterprise, including the SPV debtors.

As to Onset’s master leases, the debtors propose to reserve approximately $11 million per month beginning in December as adequate protection and reserve their rights to seek to recharacterize the leases as financing arrangements.

Evolution submitted a declaration by Jeffrey Racy of Berkeley Research Group in support of its asserted first-priority interest in inventory held by the Starlight and Patterson SPV debtors. Racy reports on inventory inspections at the Patterson and Starlight debtors’ warehouses. According to Racy, the inspections did not reveal any “material discrepancies” and, as of Oct. 3, the inventory at the warehouses had an “aggregate cost value in excess of $296 million.”

The debtors also dismiss objections from factoring parties Raistone and Katsumi. The debtors concede that receivables purchased through true sales are not estate property but assert that any demand for turnover is not an issue ripe for determination in connection with final DIP approval. The debtors note that they are segregating funds and have identified approximately $95 million in receipts that may have been factored. However, the debtors say the ongoing reconciliation process suggests only $3.7 million of that amount matches receivables purchased by the factors. The debtors say the factors are not entitled to postpetition interest because Raistone and Katsume have not demonstrated that they are oversecured.

Finally, the debtors acknowledged the ABL agent Bank of America’s objection regarding the company’s failure to provide weekly inventory reporting. The debtors say their existing accounting and reporting procedures made “satisfying these reporting obligations impossible.” Although the reporting procedures are improved, the debtors argue that this should not derail the DIP, as the ABL lenders are “one of the primary beneficiaries” of the DIP financing, adding that the ABL lenders’ inventory collateral “will continue to grow.”

The debtors add that both the debtors and U.S. Bancorp failed to deliver necessary certifications of the supply chain financing component of the ABL facility and, consequently, have determined that “at this time, U.S. Bank’s obligations under the ABL Credit Agreement are unsecured obligations” (emphasis added).

The debtors submitted a revised DIP budget as an attachment to the proposed final DIP order. The debtors’ ending liquidity surplus at the end of the 13-week budget on the week of Dec. 26 has decreased to $26.9 million from the $125.4 million projected in the original budget, and the debtors now expect to draw only $607 million on the DIP facility, rather than the entire amount of the $1.1 billion new-money component, as reflected below:

Editor’s Note: Click the ✐ symbol to read our RX 101 primer article for more on the topic.