First Brands sues founder Patrick James over alleged fraud

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First Brands has sued its founder and longtime chief executive Patrick James, alleging he engaged in “fraudulent conduct” at the now bankrupt automotive parts supplier.

James enriched himself and his family by “misappropriating hundreds of millions (if not billions) of dollars from First Brands,” said the lawsuit filed in a Houston federal bankruptcy court on Monday.

“James . . . secretly pilfered some of the company’s assets to fund his and his family’s lavish lifestyle”, according to court documents.

First Brands crashed into bankruptcy in late September after the company was unable to refinance its debt. The company, which had a $12mn cash balance when it entered bankruptcy, revealed in court that it had racked up $12bn in both conventional loans and off-balance-sheet financing.

Lawyers for two different creditor groups have accused First Brands of “massive fraud” in court filings. 

The lawsuit against James, who resigned on October 13, stems from an investigation launched by the company’s newly appointed chief executive and directors.

“Mr. James categorically denies the baseless and speculative allegations contained in the First Brands complaint,” said a spokesperson for the founder.

“Mr. James was given no opportunity to respond before the complaint was filed and he intends to immediately challenge it. Mr. James has always conducted himself ethically and is committed to doing everything he can to support First Brands’ stakeholders during the restructuring process.”

On Monday, Quinn Emanuel lawyers representing James said in a court filing that he was in support of a third-party examiner to investigate the company’s financial practices leading up to the bankruptcy filing.

The lawsuit against James alleged he “commandeered the enterprise to engage in a fraudulent conduct to enrich himself and his family at the expense of debtors and their creditors”.

In one example, First Brands said that James transferred $8mn to his son-in-law’s “wellness” company Archive Health to help “cover payroll”. “It is unclear if fair value was received by First Brands for the funds transferred,” said the court documents.

The spokesperson for James said that those costs were “legitimate expenses” linked to the company providing healthcare services to thousands of factory employees for First Brands in the US and Mexico.

The lawsuit detailed cash transfers from the company to James that appeared to fund a New York City townhouse, as well as a “celebrity personal trainer” and a “private celebrity chef”.

First Brands also alleged in the court documents that in “certain instances the Debtors sold erroneous or fabricated invoices to the third-party factors”.

In one example listed in the lawsuit, a package of invoices was sold to Japan’s Katsumi Global for $11mn when the associated sales were just $2mn.

The First Brands implosion has put the spotlight on the arcane practice of working capital finance where companies sell or borrow against accounts receivable or inventory in order to quickly raise cash to recycle into the business.

The company’s debt load includes billions of dollars that flowed through off-balance-sheet special purpose vehicles.

First Brands has told the court that it plans to sell the company and it has secured a $1.1bn bankruptcy loan as it goes through the Chapter 11 process.

However, several of its creditors have said in court filings that they are concerned senior lenders at First Brands will quickly bid for the company’s assets, making recovery of the missing cash a lesser priority.

Later this week, a hearing is scheduled to take place in Houston in which First Brands is expected to outline how the case will move forward and hear creditors’ concerns.