First Brands, an Ohio-based auto parts company, is reportedly considering a Chapter 11 filing in the near term. Concerns have been raised over the company’s off-balance sheet financing, which reportedly includes USD 2bn in invoice-factoring facilities, which could become a significant issue in a bankruptcy. Because we have not seen the factoring agreements, we do not know whether their terms are standard or unique to the company and its factors. However, given the reported amounts of the agreements, they are likely to significantly impact the company’s way forward, including determinations of reorganizing versus liquidating portions of the business, and identifying the fulcrom security.

In light of these reports, the Debtwire legal analyst team takes a look at the extent to which a potential Chapter 11 filing could impact the company’s factoring agreements. Also, as an ad hoc lender group has reportedly formed, we discuss why lenders and unsecured creditors would want to review the terms of these agreements to determine, among other things, who would own the subject accounts receivables, and what various creditor constituencies could stand to gain – or lose – by how they are dealt with in a potential bankruptcy filing.

Factoring agreements generally

Factoring agreements can speed up the time by which a company’s unpaid invoices yield cash payments, albeit at a reduced amount, allowing the company to access such funds on an expedited basis. Under these arrangements, a company sells its receivables to a factoring provider (i.e., a factor) at a price below the face value of the receivables. This typically gives the factor who purchases the receivables title to, and the right to collect, such receivables. Also, the factor would assume the credit risk of the company’s client that owes the receivable. Consequently, before entering into a factoring agreement, a factor typically would assess the creditworthiness of a company’s clients owing the receivables, rather than the company itself. While factoring agreements can thus benefit companies with poor credit, they also benefit factors to the extent that the factor recovers more on the receivable than the amount it paid the company to purchase the receivable.

The terms of factoring agreements can vary widely to suit the parties’ particular needs. For example, factoring agreements can be recourse or non-recourse. Under a recourse agreement, the factor would have recourse to the company for unpaid balances if the company’s client fails to pay an invoice in full when it becomes due for indefensible reasons such as inability to pay (as opposed to non-performance or inadequate performance by the company). Under a non-recourse agreement, the company would not be responsible for its clients’ nonpayment. Factors can demand higher fees or offer discounted purchase prices for non-recourse factoring agreements.

Speaking of fees, factors also charge various fees, including for termination. For example, an agreement could include a minimum volume charge for the calendar year in which the factoring agreement is terminated. Under such a provision, if a factoring agreement were to be terminated in October 2025, the company would be obligated to pay a minimum volume charge for 2025 (i.e, the full year). Moreover, a company typically makes standard representations and warranties to a factor in a factoring agreement regarding the company’s operations and its ability to perform.

Treatment in Chapter 11 – who owns the accounts receivables

The terms of a factoring agreement can have serious consequences related to its treatment in Chapter 11 including, most notably, whether the subject accounts receivables become property of the debtor’s estate or whether they instead are the factor’s property because they were sold to the factor under the factoring agreement. Construction of each factoring agreement will also turn on the state law governing the agreement. Generally speaking, however, if the agreement looks more like a loan or financing agreement, courts rule that the accounts receivables were not sold to the factor under the factoring agreement and consequently are property of the debtor’s estate. If on the other hand, the factoring agreement appears more like a sale, then the accounts receivables subject to the factoring agreement will be owned by the factor, keeping them out of reach of the debtor’s creditors.

Several variables are relevant to determining whether a factoring agreement is a true sale or a financing agreement and will be relevant to the treatment of First Brands’ factoring agreements in a potential Chapter 11 case. For example, if the factoring agreement provides the factor with a security interest in the receivables and/or refers to the factor as a lender, this would weigh in favor of a finding that the debtor company – rather than the factor – retains a property interest in the accounts receivables because the  arrangement would be more akin to a financing agreement than a factoring agreement – i.e., a sale. Courts also find that factoring agreements with recourse to the company (as opposed to nonrecourse agreements) are also more akin to a financing transaction than a sale because the risk of non-collection remains with the company.[1] Under a true sale scenario, the risk of non-collection would shift to the buyer – i.e., the factor. Another feature of a factoring agreement that would sway a court to view it as a financing agreement is the filing of UCC financing statements. If the factor filed UCC statements on the accounts receivables, this would be more characteristic of a loan transaction than a factoring transaction.

Potential bankruptcy ramifications for First Brands’ factoring agreements

First Brands’ lenders and unsecured creditors would benefit if a bankruptcy court were to conclude that the agreements are financing agreements (rather than factoring agreements) because it would bring the accounts receivables into the estate, thereby enlarging the pool of assets from which they could recover. As such, we would expect the financial advisors engaged by lender groups and any unsecured creditors committee to look to examine the terms of these agreements to assess whether are more likely to qualify as a true sale or a financing. Because this determination also would impact the valuation of the company, as it would determine whether these assets belong to the debtor, we would also expect First Brands’ professionals to be undergoing the same investigations.

As discussed above, however, whether First Brands’ accounts receivables that are subject to factoring agreements would, in the event of a Chapter 11 filing, be found to be First Brands’ property or the factors’ property will depend on the language of the factoring agreements provisions (including whether they are non-recourse) and the governing law. As these transactions reportedly were off the company’s balance sheet, their terms are not known and thus it is unclear whether they would qualify as true sales or financing agreements.  However, it is also worth noting that if it is determined that the agreements are actually financing agreements, then the factors likely would assert liens against the subject accounts receivables. Without having access to the agreements, it is unclear how any such liens would rank as against those of the company’s other secured lenders.

We also note that, if a bankruptcy court were to conclude that a factoring agreement is more akin to an asset sale, the agreement could be subjected to scrutiny as a fraudulent transfer if it was entered into within two years of the bankruptcy filing and First Brands received less than a reasonably equivalent value in exchange for the asset sale and either (i) was insolvent when the agreement was entered into, or became insolvent as a result of the agreement, (ii) was engaged in business or a transaction for which it was undercapitalized, or (iii) intended to incur, or believed that it would incur, debts that would be beyond its ability to repay when they became due.  This could be another potential avenue for creditors looking to bring the accounts receivables into First Brands’ estate in the event of a Chapter 11 filing.

An additional consideration for factoring agreements in Chapter 11 would be whether, if First Brands were to pursue an asset sale and consequently terminate its factoring agreements, it would be obligated to pay any termination fees or minimum volume charges owing under those agreements as a result. The enforceability of such provisions would depend, in large part, on whether (i) damages resulting from termination of the agreement (including any minimum volume charge) were readily ascertainable at the time First Brands entered into the factoring agreement, or (ii) the damage or fee amount provided for in the factoring agreement is disproportionate to the losses that were capable of being foreseen, making it more like a penalty. Many states, including New York, provide that a liquidated damages clause is enforceable if the amount fixed is a reasonable forecast of the harm that is caused by the breach and actual damages were difficult to ascertain as of the time the parties entered into the contract. If, on the other hand, the damages provision bears no relationship to damages likely to be sustained in the event of a termination or breach, then the provision would be viewed as a penalty, and thereby unenforceable. Thus, any fees First Brands may be obligated to pay for terminating its factoring agreements likely would be subjected to such scrutiny if the company looks to terminate the agreements. Creditors looking to minimize amounts that First Brands would have to pay under such provisions (and thereby maximize assets available for payment to creditors) would be motivated to investigate whether any termination fees might qualify as a penalty rather than an enforceable liquidated damages provision.

Also, as noted above, factoring agreements typically contain representations and warranties made by the seller of the accounts receivables concerning its operations and ability to perform under the agreement. Consequently, if First Brands made any representation or warranty as to its financial health that could be proven untrue at the time it was made, once its financials become disclosed in a Chapter 11 case, its factors could assert claims against First Brands for such misrepresentations. Such claims, if successful, would likely yield unsecured claims for the factors.

We also note that First Brands would be able to reject its factoring agreements in a Chapter 11 case.[2] Such a rejection would give the factor a claim for breach of the agreement, which would be treated as a pre-petition general unsecured claim. Rejecting the factoring agreements, while subjecting the company to an unsecured damages claim, would also free it up to sell its receivables to a third party if it could do so on better terms – i.e., at a better price. In any event, given the company’s apparent reliance on these agreements, if the goal is to reorganize rather than liquidate and the company believes that its current agreements reflect the most favorable terms, we would expect them to seek to assume the contracts, which would require the debtor to bring current any past due amounts, subject to limited exceptions, and provide the factor with adequate assurance concerning its ability to perform under the agreements in the future.

Lastly, we note that First Brands could look to continue its prepetition factoring agreements in any potential Chapter 11 case with the factoring agreements becoming post-petition obligations. While this would continue to provide the company with additional liquidity, it would also provide the factor with superpriority claims. Such an arrangement would be subject to bankruptcy court approval, and has been approved by other Chapter 11 debtors, including Javo Beverage Company in 2011, Mee Apparel in 2014, Kal Freight in 2024, Sysorex Government Services in 2025, and Publishers Clearing House, also in 2025, to name a few. We would not be surprised to see First Brands look to enter into a similar post-petition arrangement, but would expect lenders to push back with respect to any proposed findings, especially upon interim approval, concerning the characterization of the pre-petition agreements until they have had an opportunity to thoroughly review those agreements. Similarly, we would expect the US Trustee to argue that any such findings should not be made until the factoring agreement is approved on a final basis, once an unsecured creditors committee has been appointed, retained professionals, and its professionals have had time to review the pre-petition agreements.

Prior to joining Debtwire, Sara was a law clerk to two judges in the United States Bankruptcy Court, S.D.N.Y. and practiced in the Financial Restructuring Group at Clifford Chance, where she represented financial institutions (as secured and unsecured creditors, defendants in adversary proceedings, and participants in DIP financings) in high-profile restructurings. She also represented foreign representatives in Chapter 15 cross-border cases.

This report should not be relied upon to make investment decisions. Furthermore, this report is not intended and should not be construed as legal advice. ION Analytics does not provide any legal advice, and clients should consult with their own legal counsel for matters requiring legal advice. All information is sourced from either the public domain, ION Analytics data or intelligence, and ION Analytics cannot and does not verify or guarantee the adequacy, accuracy or completeness of any source document. No representation is made that it is current, complete or accurate. The information herein is not intended to be used as a basis for investing and does not constitute an offer to buy or sell any securities or investment strategy. The information herein is for informational purposes only and ION Analytics accepts no liability whatsoever for any direct or consequential loss arising from any use of the information contained herein.

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[1] See, e.g., In re Siskey Hauling, 456 B.R. 597 (Bankr. N.D. Ga. 2011); S&H Packing & Sales v. Tanimura Distrib’g, 883 F.3d. 797 (9th Cir. 2018).

[2] See In re Servicom, Case No. 18-31722 (Bankr. D. Conn. 2025) (finding that a factoring agreement is an executory contract that can be rejected in bankruptcy).