Article
Court Says First Brands Must Return $25.7M to Factored Receivables Account as Adequate Protection for Evolution Credit, Holds Off on Deciding Lien Priorities
Ruling from the bench today, Judge Christopher Lopez directed the First Brands debtors to return $25.7 million of cash to their factored receivables account from their general operating account by March 19, granting Evolution Credit Partners’ motion for adequate protection of its $60.5 million receivables claim.
“No additional segregation is warranted or needed based on the record,” Judge Lopez said. He noted Evolution filed an adversary proceeding seeking a ruling that it has a first-priority security interest in the funds relating to the Evolution receivables sellers.
The judge emphasized that nothing in his order granting the adequate protection motion “is going to constitute a finding about validity, priority or the extent of Evolution or any other party’s security interest” in the funds to be returned to the factored receivables account.
The debtors moved $55 million from the factored receivables account to the operating account after Judge Lopez authorized the release of the funds in December 2025 over Evolution’s objection. Evolution appealed, U.S. District Judge Lee Rosenthal remanded the dispute to determine whether Evolution was adequately protected and Judge Lopez held a further hearing on March 9.
At the hearing, Evolution argued the debtors needed to either return about $25.7 million of the released amounts relating to the Evolution receivables sellers, or provide the indubitable equivalent through unencumbered cash or replacement liens. The debtors, prepetition lenders and other third-party factors opposed the motion, with the debtors pointing out that they have no unencumbered cash.
The objectors also argued Evolution did not establish it has a colorable first-priority security interest – and even if Evolution’s liens were perfected, it would still be junior to $6 billion in senior secured debt. The official committee of unsecured creditors warned that the parties are “close to a case resolution” in mediation scheduled to run until tomorrow, March 13, but a remedy that violates the minimum liquidity requirements under the DIP order could scuttle a settlement.
The debtors maintained that any interests Evolution may have are already adequately protected by about $158 million either held in the debtors’ segregated factored receivables account or held by customers. However, today Judge Lopez said that “the evidence at the hearing was that the debtors don’t know what amount, if any will ever enter the factored receivables account, could be collected” from the customers and “the debtors have collected some additional amount, but nothing meaningful.”
“When and how much could be collected is at best speculative,” the judge continued, and “speculative future receipts can’t be the indubitable equivalent of cash collateral.”
Judge Lopez also said the accounting presented at the hearings “raised some accuracy issues.” For example, the judge pointed out the debtors stated Evolution was adequately protected by $42.8 million in the factored receivables account, then “revised that number down to about $32 million.”
This “doesn’t mean that anyone submitted a false or misleading declaration” or the case professionals “aren’t doing their very best,” the judge said, but he concluded there is not enough evidence to show that “Evolution or any other party with an interest in these funds” is adequately protected.
After finding Evolution is not adequately protected, Judge Lopez said the appropriate remedy is for the debtors to return $25.7 million to the factored receivables account. The parties’ rights to argue their entitlement to the funds is preserved, the judge stressed, saying these issues will be decided in the Evolution lien priority adversary proceeding.
Judge Lopez also explained that he is “close to converting” the debtors’ and prepetition secured lenders’ motions to dismiss the suit to a motion for summary judgment. “That way, I can analyze all the relevant docs and rule in the next few months on what the parties really want an answer to,” the judge remarked.
“Regardless, whoever is entitled to these funds at the end of the day, the funds will be there,” Judge Lopez said.
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