Court Denies Aequum’s Motion to Dismiss First Brands Lenders’ Cardone Inventory Suit, Finding ‘Live Dispute’ on Validity, Priority of Liens 

Relevant Document:
Order

Judge Christopher Lopez has denied Aequum Capital’s motion to dismiss the lien priority suit brought by First Brands’ prepetition lenders over the inventory of debtor Cardone Industries Inc., finding that there is “a live dispute about the validity and priority of liens on the inventory.” The lien priority suit is among the many disputes that the court continues to oversee after converting the First Brands chapter 11 cases to chapter 7.

In a Sept. 29 order, Judge Lopez finds that the lender plaintiffs adequately pleaded their declaratory judgment claims. The plaintiffs allege that their liens on automotive parts held as inventory in a Texas warehouse – and the inventory proceeds – are valid, perfected and senior to any interest Aequum claims on behalf of Broad Street Financial, a special purpose vehicle allegedly used by First Brands’ former executives Patrick and Edward James to facilitate a multibillion-dollar fraud. The prepetition lender plaintiffs include Bank of America NA as ABL agent, Wilmington Savings Fund Society FSB as first lien, second lien and DIP agent, and GLAS USA LLC as sidecar collateral agent.

The conflict centers on approximately $43.8 million in undisclosed financing Aequum provided to Broad Street. The prepetition lenders allege that Cardone owned the inventory and that, as a result, the inventory is subject to their senior, perfected security interests. Aequum’s claim rests on an alleged sale of the inventory from debtor First Brands Group LLC, or FBG LLC, to Broad Street. The plaintiffs argue that FBG could not transfer or sell Cardone’s interest in the inventory because FBG never owned any interest in it. In their view, the transfer was a “fiction,” Broad Street never acquired an interest in the inventory and Aequum’s asserted security interests never attached.

Conversely, Aequum argued that the complaint must be dismissed because there is no “actual controversy” for the court to resolve. It says the inventory sales to Broad Street were “permitted dispositions” under the credit agreements that automatically released senior liens and allowed Broad Street to acquire the inventory “free and clear” before pledging it to Aequum.

In the order, Judge Lopez denies Aequum’s motion to dismiss because “[e]ach party contends that its credit documents support its claims” and there is a live dispute about the parties’ lien priority on the inventory. Aequum, the judge says, is effectively asking the court to adopt its reading of the lien release provisions and find that the liens were released, which is a decision on the merits of the suit that is improper at the pleading stage. The credit agreements “do not, on their face, foreclose Plaintiffs’ claims,” Judge Lopez writes.

Judge Lopez also rebuffs Aequum’s alternative argument that the suit should be dismissed because Broad Street exercised enough control over the inventory to grant an enforceable security interest. “Whether the facts ultimately establish that Broad Street nonetheless acquired superior rights in the inventory is not a question the Court can resolve on the pleadings,” the order states.

Based on his finding that the complaint adequately pleads the basis for the plaintiffs’ asserted liens in the inventory and their alleged priority over Aequum’s liens, Judge Lopez also denies Aequum’s alternative request for a more definite statement.

The ruling leaves the status quo intact. Judge Lopez already granted the lenders a preliminary injunction in June, finding at that stage a prima facie case that none of the credit agreements’ lien-release conditions were satisfied, and an August amendment requires Aequum to deposit Cardone inventory sale proceeds in the court’s registry with all parties’ liens attaching to them. With the motion to dismiss denied, those proceeds remain in the registry pending final judgment while the priority dispute moves forward on the merits.