The First Brands Saga Continues

What Might an Investigation Look Like

The First Brands Chapter 11 filing, the questions raised regarding its use of off-balance sheet financing and its new leadership, is setting the stage for an investigation. In this article, the author shares what may ensue at this early stage of the controversy.

Introduction

Automotive News^[1] reported that, on October 13, 2025, First Brands reported its founder, Patrick James, had stepped down as CEO and will be succeeded by Chief Restructuring Officer, Charles Moore, on an interim basis, as the auto parts maker advances its Chapter 11 bankruptcy process. On the same day, the Wall Street Journal^[2] reported that First Brands filed for bankruptcy in late September with more than $10 billion in debt. New directors have said they are investigating accounting irregularities tied to its complex financing arrangements and that he will be succeeded as interim CEO by Charles Moore, an executive at advisory firm Alvarez and Marsal, who took over as chief restructuring officer when First Brands entered bankruptcy protection. Also, that new directors are leading an investigation into First Brands’ off-balance-sheet financing while Moore works on a process to sell the company’s portfolio of brands.

Scope of an Investigation

So, what might such an investigation look like? Generally, in a First Brands–type Chapter 11 bankruptcy, an investigation into off-balance-sheet financing might be an internal corporate investigation or it could be a more formal, court-supervised inquiry into whether the company concealed liabilities, misstated assets, or transferred value improperly before filing.

There are several possibilities as to who might perform the investigation. Sometimes more than one investigation may be ongoing at the same time. New directors acting for the debtor-in-possession could act independently of prior management. They often engage outside counsel and a forensic accounting firm to investigate specific transactions or allegations such as unrecorded liabilities, intercompany transactions, related-party dealings, and possible clawbacks (preferences, fraudulent transfers/conveyances, and possible breaches of fiduciary duties).

The Official Committee of Unsecured Creditors has statutory authority under Chapter 11 of the Bankruptcy Code to investigate “the acts, conduct, assets, liabilities, and financial condition of the debtor.” A forensic accounting firm, acting on behalf of the creditors’ committee, can do its own investigation or follow and track the debtor’s investigative work.

If allegations of wrongdoing are serious enough, which may well happen in this particular bankruptcy proceeding, the U.S. Trustee may move for appointment of a Bankruptcy Examiner or a Chapter 11 Trustee. While an Examiner would be neutral, report to the court, and only investigate specific topics listed in the appointment order, the Chapter 11 Trustee replaces management entirely and assumes operational control, including seeking for all prepetition wrongdoing.

Focus of the Investigation

Any investigation in these circumstances may focus on special-purpose entities, variable interest entities, and side agreements used with lenders to finance receivables (or maybe inventory) not reflected in the consolidated annual financial statements. The investigator could examine related-party financing, factoring arrangements, moving of money within corporate entities and trace pre-petition payments or transfers that could constitute preferences or fraudulent conveyances. Clawing back money from those who received monies preparation would enable creditors to receive a greater amount than they otherwise might receive

If the independent directors’ special committee runs the review, the investigators report to that committee, which will update the new Board of Directors and the debtor’s legal counsel. If an Examiner is appointed, the findings should be presented in an Examiner’s Report filed directly with the Bankruptcy Court and the U.S. Trustee. The Bankruptcy Court may hold a hearing to review the findings and the nature, timing, and extent of the investigative procedures performed.

The Court itself will not conduct the investigation but authorizes, supervises, and receives the results. The bankruptcy judge will approve the scope of work, the budgets, and may compel discovery. The U.S. Trustee monitors scope and expenses and may require periodic status updates.

Investigative costs are paid as administrative expenses of the debtor in possession’s estate. Under Chapter 11 of the Bankruptcy Code, the Debtor’s estate pays professionals hired by the special committee, the examiner, or the Official Committee of Unsecured Creditors, subject to court approval of fee applications submitted by the forensic accountant and legal counsel. If the court appoints an examiner or trustee, their fees are paid from the company’s bankruptcy estate; not by any individual creditors or directors.

The investigative findings can lead to the filing of recovery actions, claims objections, a restatement of previously issued annual financial statements, and (if fraud is found), criminal referrals

Recovery Actions Following the Investigation

The Litigation Services Handbook[3] explains what these recovery actions can look like.

The underlying philosophy of the Bankruptcy Code seeks to ensure fair and equal treatment of creditors. A preference is a pre-petition payment to a creditor at the expense of other creditors in the bankruptcy. The law seeks to deter and recover transactions between a debtor and preferred creditors that occur just before a company files a bankruptcy petition, which gives financial advantage to some creditors over others. A debtor can devise to make such preferential payments to preserve business relationships, to protect insiders from loss, to establish goodwill with certain creditors for dealings during and after the bankruptcy, or for other reasons. For example, management could execute transactions that strip the company of assets before filing (such as pre-petition dividends or one-sided transfers) or could prefer one set of creditors over another (for example, settling vendor accounts in full, pre-petition, while allowing others to remain unpaid until the bankruptcy filing). Similarly, the Bankruptcy Code also seeks to deter and undo other pre-petition transactions that are actually or constructively fraudulent, and unfairly deprive creditors of assets to satisfy claims. Courts will consider transfers as (1) fraudulent if the debtor made the transfer with intent to hinder, delay, or defraud (i.e., intentionally fraudulent) or (2) constructively fraudulent, which does not require guilty intent (referred to as scienter). These types of transactions are described as either fraudulent conveyances or fraudulent transfers. Claims and the related litigation surrounding these potentially voidable transactions are called recovery actions. If these actions succeed, the court will avoid the transfer and take action to recover the value for the estate.

Conclusion

The unfolding First Brands bankruptcy offers a real-time case study in how forensic accountants can operate within large corporate Chapter 11 restructurings. The company’s new leadership and potential court-appointed examiners will likely probe complex off-balance-sheet financing, related-party dealings, and pre-petition transfers that may have misstated the previously reported annual financial statements or unfairly favored certain creditors over others. Forensic accountants should continue to watch this case closely because it will likely illustrate how investigators trace hidden liabilities, unwind questionable financing structures, and support recovery actions under the Bankruptcy Code. The scope and findings of this investigation could set useful precedents for future engagements involving off-balance-sheet financing, misstated annual financial statements, fraudulent transfers, and how Chapter 11 proceedings deal with distressed companies.

[1] https://www.autonews.com/retail/service-and-parts/an-first-brands-ceo-resigns-1013/

[2] https://www.wsj.com/finance/first-brands-ceo-patrick-james-resigns-cc41acab?gaa_at=eafs&gaa_n=ASWzDAgvtxNBt3TjpgX3aY3m1l53cM1Xp-f5IoOsXhUlxfPofHL6v-KWX8GOSNDUOsE%3D&gaa_ts=68ed488f&gaa_sig=oLlf38ZNcfgu3koINBqye8oHw4lZUuqm2Ljte-CORxfcuhJz9sthZghId3u9h4LzW6b6rABbQTiMM6Hn-jx68w%3D%3D

[3] The Litigation Services Handbook Chapter 25, Section 25.27.

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Michael D. Pakter, CPA, CFF, CGMA, CFE, CVA, MAFF, CA, CIRA, CDBV, has more than 45 years of experience in forensic accounting, investigations, and litigation services, including more than 25 years of experience in economic damages and business valuations. State, federal, and bankruptcy courts have recognized him as an expert in forensic accounting, economic damages, business valuation, alter ego, marital dissolution, and bankruptcy core proceedings.

Mr. Pakter can be contacted at (312) 229-1720 or by e-mail to  mpakter@litcpa.com.