As the story developed last month surrounding the spectacular collapse of auto-parts giant First Brands Group, I kept waiting for the lawsuit. The tale of the CEO’s supposed lavish personal spending, as well as the company’s massive debt and apparently missing funds, seemed scripted for a securities class action complaint. The securities suit I thought surely was coming never materialized – because, it turns out, Patrick James, the company’s founder and CEO, was also its sole equity owner. So, no shareholder suit. Which is not to say that there would never be a lawsuit.

Indeed, last week, the perhaps inevitable lawsuit did materialize, but not as a securities suit; rather, the lawsuit is in the form of an adversary proceeding against the former CEO and his affiliated entities brought by the company as debtor in its bankruptcy proceeding. And the complaint? It’s a doozy. And as discussed below, it also raises some interesting D&O insurance coverage questions as well.

Background

Patrick James is a Malaysian by birth who moved to Ohio in the 80’s to attend college. After graduation, he stayed in Ohio. Following early investments in auto parts companies, he began to acquire automotive-related businesses under the name Crowne Group, which later became known as First Brands. The company eventually accumulated a total of 24 different brands, some of them – such as Fram motor oil and air filters and Trico windshield-wiper blades – are relatively well known in the automotive business. By 2024, the company had over 26,000 employees and annual revenue of $5 billion.

First Brands apparently financed its acquisition strategy using debt financing, raising billions in corporate loans. The company also obtained supply-chain financing from institutions that lent against the company’s inventory and receivables. As later emerged after the company filed for bankruptcy, many of the loans made based on the company’s accounts receivables were made through off-balance sheet special purpose vehicles.

Problems began to emerge at the company earlier this year. Among other things, the Trump administration’s imposition of tariffs on U.S. imports made it more expensive for the company to source goods and materials. Earlier this year, the company stopped making payments to one of the receivables financing companies and the company initiated a scramble to try to re-finance nearly $6 billion in corporate debt.

According to the subsequently filed adversary proceeding complaint, in July, prospective lenders began demanding specific financial reports. The complaint alleges that the reports requested “would not be done in any period of time necessary for a refinancing,” bringing the refinancing efforts to a halt, while at the same time the company was “exposed as undercapitalized and unable to meet their most basic payment obligations – including employee payroll.”

These revelations led to the appointment of an independent special committee to investigate the company’s finances. The committee’s investigation ultimately led to the company’s Chapter 11 filing, as well as to the adversary proceeding that the company, as debtor in possession and now under new management, filed against James and his related entities.

The Adversary Proceeding Complaint

The company and its affiliated entities (acting collectively as debtors) filed the adversary proceeding in the Southern District of Texas bankruptcy court against James and his affiliated entities on November 3, 2025. The complaint, a copy of which can be found here, comes out guns blazing. It accuses James of “grievous misconduct,” alleging that he “fraudulently secured billions of dollars of financing for First Brands, only to turn around and enrich himself and his family by misappropriating hundreds of millions (if not billions) of dollars from First Brands, which contributed to First Brands being insolvent and out of cash.”

The complaint alleges that James deployed “two discrete strategies to perpetuate this fraud and secure financing from third-party lenders”: First, the complaint alleges, he caused First Brands to “incur at least $2.3 billion in accounts receivable factoring liabilities based, at least in significant part, on non-existent or doctored invoices”; and Second, it alleges that James engaged in financing transactions using special purpose vehicles, which “incurred another at least $2.3 billion in debt including by double-pledging collateral that First Brands could not itself borrow against a second time.”

The complaint details examples of how invoices used to document the receivables to secure the financing (known as “factoring”) were doctored or fabricated. The complaint alleges that the factored invoices inflated the actual amount of the invoices ten times or more, or were submitted for third-party payment even when the invoices may not have existed. Some invoices allegedly were factored more than once.

Having secures the financing, James, the complaint alleges, “secretly pilfered” some of the company’s assets “to fund his and his family’s lavish lifestyle.” In short, James “lined his pockets at the expense of First Brands and its creditors.” The complaint alleges that hundreds of millions of dollars were transferred from First Brands directly to James or his affiliated entities between 2018 and 2025, with the majority of transfers occurring between 2023 and 2025.

The complaint includes allegations of the ways in which James allegedly used the funds. Among other things, he is alleged to have purchased a $23 million house in Malibu. The complaint also alleges that $500,000 was spent on a private chef, $150,000 went to a personal trainer, and $3 million was used to rent a New York townhouse.

The complaint alleges that as a result of James’s “staggering dissipation of assets,” First Brands, a company with revenues of $5 billion and approximately $9.3 billion in debt obligation, held just $12 million in cash in its corporate bank accounts at the time of its bankruptcy filing. The complaint also notes somewhat parenthetically that James and others are the subject of a criminal investigation by the United States Attorney for the Southern District of New York concerning potential misconduct related to the First Brands financing.

The complaint seeks to recover “significant sums of money” from James and his affiliated entities, for the benefit of the debtors’ estates and their creditors. The complaint also sought immediate relief from the Court in order to freeze any and all assets controlled by James and his affiliated entities, “before those moneys are irrevocably and irretrievably gone.”

According to the Wall Street Journal (here), the bankruptcy court granted the company’s asset freeze motion. Lawyers for James have subsequently moved to have the stay lifted.

Discussion

I will leave it to others to debate the merits of the company’s lawsuit or to analyze James’s actions or motivations. I want to focus on one particular issue that the lawsuit presents. That is, would there be coverage under a D&O insurance policy for the company’s lawsuit against James?

Many readers know that, at least in the U.S., the typical D&O insurance policy contains an exclusion precluding coverage for claims brought by one insured against another insured. This exclusion is usually referred to as the Insured vs. Insured exclusion, or the IvI exclusion.

Many (but not all) D&O insurance policies separately define the term Insured to include the company acting as debtor in possession. So all else equal, a lawsuit brought by a company acting as debtor in possession against its former CEO would represent a claim by one insured against another insured.

However, the typical Insured vs. Insured exclusion includes a carve-back provision preserving otherwise excluded claims brought by a bankruptcy receiver or trustee. Here is an example of typical Insured vs. Insured exclusion with the bankruptcy claim coverage carve-back: “This Coverage Section shall not cover any Loss in connection with any Claim … H. Brought by or on behalf of any Insured, provided however, that this Exclusion shall not apply to: … (6) any Claim brought or maintained by or on behalf of a bankruptcy or insolvency trustee, examiner, receiver or similar official for the Company or any assignee of such trustee, examiner, receiver or similar official.”

In this case, the claim against James as not brought by a trustee, examiner, or receiver. It was brought by the company itself acting as debtor in possession. Long time readers of this blog will recall that it is a perennial question whether or not a claim brought by a company acting as debtor in possession is precluded by the Insured vs. Insured exclusion or is not precluded because it comes within the exclusion’s bankruptcy carve back, about which I have written multiple times on this site (for example, here).

One recent coverage case in which these issues also came up, and which is discussed at length here, and which also is out of a bankruptcy court proceeding in Texas, addressed these very issues. In that case, involving the Walker County Hospital Corporation, the bankruptcy court, citing Bankruptcy Code provisions defining and relating to the term “debtor in possession,” concluded that coverage for the debtor in possession’s claim against a former company executive was not precluded from coverage under the Insured vs. Insured exclusion but instead that coverage was preserved by the bankruptcy coverage carve-back. A company acting as debtor in possession is, the court held in reliance on the definitions in the Bankruptcy Code, a “similar official” as that term is used in the carve-back.

Readers puzzling out the coverage issue in this case will want to read my prior post abou the Walker County Hospital, not only because that case (like this one) involved a bankruptcy court in Texas but also because it involved the court’s application of Texas law to the insurance policy interpretation issues.

But while there may be good arguments to support the contention that the company’s claim as debtor in possession against its former CEO is not precluded from coverage, there are arguments the other way. For starters, though the typical insurance policy expressly defines the term Insured to include the company as debtor in possession, an action by the company acting as debtor in possession is not among the list of claims for which coverage is expressly preserved in the bankruptcy carveback in the IvI exclusion. As I noted in my blog post discussing the prior case, parties on both sides of the coverage dispute were able to cite authority supporting their position.

So would First Brands’ D&O insurance policy coverage the company’s claim as debtor in possession against its former CEO? I suspect the parties are going to have to duke that one out. However, before they do, I respectfully suggest they review my blog post about the Walker County Hospital Corporation, as they may find the court’s analysis of the issues to be instructive.