What The First Brands Implosion Teaches Lenders About Cash Collateral In Bankruptcy

You know the phrase: Cash is king. Never is it truer than in the early days of Chapter 11 bankruptcy.

If you make asset-based loans secured by accounts receivable, you need to understand what happens when your borrower files bankruptcy and wants to spend the money you thought was yours. A recent federal court decision from Texas offers a stark lesson about the automatic stay, adequate protection, and why even secured lenders can find themselves in a precarious position when the bankruptcy court allows a debtor to use cash collateral.

First Brands Implodes

The case spun out of the First Brands Group multi-billion-dollar fraud scheme that captured headlines, rattled Wall Street, and led to perp walks by its founders. First Brands supplied aftermarket automotive parts—brakes, filters, wipers, and the like. Like many suppliers, First Brands offered generous payment terms to attract customers, which meant it often waited months to get paid on invoices. To maintain cash flow while waiting on those receivables, First Brands factored those invoices to Evolution Credit Partners.

Evolution thought it had a first-priority security interest in about $60.5 million worth of First Brands’s receivables. Then First Brands filed Chapter 11 bankruptcy in September 2025. At filing, First Brands owed about $11.5 billion but had only about $12 million in cash on hand. The company’s accounts receivable factoring obligations totaled around $2.3 billion.

When customers paid those receivables, the money went into a segregated “Factored Receivables Account” in the bankruptcy estate. That account grew to between $106 million and $109 million. First Brands wanted to spend $63 million to keep operating. Evolution objected, arguing that the money was its cash collateral and there wouldn’t be enough left to cover its claim.

The Bankruptcy Court Says: “Let Them Have It.”

The bankruptcy court authorized First Brands to spend up to $60 million from the Factored Receivables Account, leaving about $49 million behind. The court didn’t definitively rule on whether Evolution actually had a valid security interest or whether it had priority over other creditors. Instead, the bankruptcy court said that whoever held the priority interest—Evolution or someone else—that interest was “adequately protected” by the remaining funds and future receivables expected to come into the account.

Evolution appealed right away, arguing that $49 million didn’t adequately protect its $60.5 million claim, leaving it under-secured by about $20 million. The district court expedited the appeal because First Brands was burning through cash quickly and would probably deplete the remaining collateral without a fast ruling.

What Is “Adequate Protection?”

When a debtor files bankruptcy, Section 363 of the Bankruptcy Code prohibits the debtor from using “cash collateral”—money in which a creditor has a security interest—without either the creditor’s consent or court authorization. The court can only authorize that use if the creditor’s interest is “adequately protected.”

But what does adequate protection mean? The bankruptcy court must essentially ensure that the creditor won’t be harmed by the debtor’s use of the collateral during the bankruptcy case. For a lender with a security interest in cash, adequate protection might mean the debtor must maintain a certain cash cushion, provide replacement liens on other assets, or make periodic cash payments.

The problem Evolution faced was that after First Brands spent $60 million, there wouldn’t be enough cash left in the account to cover Evolution’s claimed $60.5 million lien. The bankruptcy court thought there was enough—somewhere between $56 million and $59 million—but the district court found that was probably a miscalculation. Evolution was under-protected, not adequately protected.

The District Court Disagrees and Assigns Homework

The district court made several important rulings. First, the court clarified the standard for assessing whether a creditor has a valid security interest at a cash collateral hearing. The bankruptcy court shouldn’t conduct a full-blown trial on lien validity at these hearings. That can wait for an adversary proceeding (a lawsuit in bankruptcy). Instead, the court should only assess whether the creditor has made a prima facie case that it has a valid security interest. As long as there isn’t clear evidence that refutes the creditor’s claim, the creditor has the right to adequate protection until a full adversary proceeding determines the validity and priority of its lien.

Second, the court found that Evolution’s interest was not adequately protected at the time of the appeal because the Factored Receivables Account didn’t have enough cash to cover Evolution’s claimed $60.5 million interest. First Brands countered that by the time of the appeal, more than enough receivables had been collected to cover Evolution’s interest. First Brands also represented that the estate was still owed about $230 million in outstanding prepetition receivables that, if collected, would go into the segregated account.

The district court remanded the case back to the bankruptcy court because there were too many unresolved factual disputes. Evolution argued those incoming receivables were uncertain because they might match invoices owed to other entities, and vendors might have offsetting credits that would reduce the amounts actually collected. The district court sent the case back to the bankruptcy court to sort it.

The Upshot

This case offers three pointers for asset-based lenders secured by accounts receivable:

First, if your borrower files bankruptcy, don’t assume your security interest automatically protects you. Even if you have a perfected first-priority lien, the bankruptcy court can authorize the debtor to use your cash collateral if the court finds your interest is adequately protected. You need to negotiate with the debtor and object quickly to protect your interests.

Second, courts have flexibility and discretion in determining what is adequate protection, and what seemed adequate when the bankruptcy started might not be adequate as circumstances change. A promise of future collections may not provide the same protection as cash already in the account. Lenders should negotiate with the debtor – or argue to the court – that cash collateral orders should be subject to an approved budget. The cash collateral order also should be “interim” and for short durations. That gives all parties and the court the chance to track the debtor’s progress or decline in bankruptcy and re-visit the cash collateral issue at regular intervals.

Third, disputes about whether you have a valid security interest or your priority position will be resolved in an adversary proceeding, not at cash collateral hearings. This is good news for lenders because you aren’t required to try your case on day one. But bankruptcy courts can—and do—make preliminary assessments about whether you’ve shown a colorable claim to the collateral, so you have to clear that hurdle on short notice or you may not get adequate protection. Lenders will want their counsel to review their loan and security documents and UCC filings for potential issues.

This case highlights a fundamental tension in bankruptcy law: The debtor needs cash to operate and reorganize, but secured creditors have rights to that cash. Courts try to balance these interests through the adequate protection requirement, but determining whether protection is adequate can be a moving target based on changing facts and disputed claims. If you’re a secured lender and your borrower files bankruptcy, you need experienced bankruptcy counsel and you need them yesterday. Debtors will seek authority to use your cash on the first day and you need to be ready to protect yourself.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.