Court Denies First Brands Bid to Freeze Founder’s Assets Despite ‘Substantial Likelihood of Success’ on Fraudulent Transfer, Unjust Enrichment Claims

Relevant Document
Order Denying Application for Preliminary Judgment

In a bench ruling this morning, Judge Christopher M. Lopez denied the First Brands Group debtors’ motion for a preliminary injunction in their adversary proceeding against the company’s founder and former CEO Patrick James. First Brands alleges James misappropriated hundreds if not billions from the debtors and sought to freeze his and his affiliates’ funds. The judge took the motion under advisement after hearing oral argument on Nov. 10.

Judge Lopez noted the request for a preliminary injunction is an “extraordinary remedy” and found a broad freezing injunction is not supported by the law “at this time.” Judge Lopez said the concern James will continue to transfer estate assets is “speculative and not imminent” given that he has resigned from the company. The judge added that the merits of the suit against James will be “decided at the appropriate time.”

The preliminary injunction sought to continue the Nov. 3 temporary restraining order enjoining James, his affiliated entities and all financial institutions with control over the targeted assets from accessing, selling or otherwise disposing of the funds. The TRO expired on Nov. 10.

The debtors’ complaint alleges James misrepresented the company’s financials to obtain billions in funded debt, including incurring more than $2.3 billion in factoring liabilities using erroneous, duplicate and fabricated invoices. First Brands also accuses James of using off-balance-sheet special purpose vehicles to incur at least $2.3 billion in additional debt, partly by double-pledging collateral.

The debtors allege “hundreds of millions if not billions” were diverted to James, his family and affiliated entities to fund James and his family’s “lavish lifestyle.”

In his ruling, Judge Lopez found that while the debtors demonstrated a substantial likelihood of success on the merits on several of the claims, they failed to prove a substantial threat of irreparable injury in the absence of an injunction.

Judge Lopez reviewed the “serious” allegations in the complaint, noting the company entered bankruptcy with “little cash” despite incurring billions of dollars in debt. The judge commented he has not “heard a complete answer” how the company’s cash position deteriorated in the lead-up to the bankruptcy. The judge acknowledged that interim CEO Charles Moore and his team “have been working nonstop to get a handle on the situation” but cautioned that “it will take some time to sort all of this out.”

In his analysis of the Fifth Circuit’s standard for an injunction, Judge Lopez found the debtors showed a substantial likelihood of success on their claims for fraudulent transfer, unjust enrichment and turnover. The judge noted the record shows “highly questionable” transfers, including distributions of significant funds to James-affiliated entities unrelated to the company. Judge Lopez highlighted several substantial transfers involving the “same day movement” of sale-leaseback proceeds from certain of the SPV debtors that left the entities “undercapitalized.”

However, the judge found the debtors did not establish a “substantial likelihood of success for constructive trust,” as that equitable remedy requires a claimant to “trace the funds,” a process that has not been completed.

Judge Lopez reviewed the U.S. Supreme Court’s 1999 Grupo Mexicano decision, which prohibits the prejudgment attachment of funds in the absence of claims sounding in equity. The judge found the debtors’ fraudulent transfer claims are “legal rather than equitable,” noting “what First Brands wants is money.”

Judge Lopez concluded the debtors ultimately failed to establish that they would suffer irreparable harm without an injunction. The judge found that the debtors’ concern that James’ pattern of transferring and commingling funds, his alleged status as a Malaysian national and his personal use of funds do not demonstrate an “imminent” risk he would dissipate the funds sought in the complaint.

Judge Lopez added that there is insufficient evidence showing James and other defendants will transfer assets outside the court’s jurisdiction or make themselves “judgment proof.” The judge commented that the test requires more than the speculation that someone “who is sophisticated and with resources could do it.”

Turning to the balance of the harms resulting from an injunction, the judge said that the threat to the operation of James’ other businesses is “real,” and public policy concerns suggest “sticking” to the strictures of the Grupo decision.