Evolution Credit Partners

IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION
IN RE FIRST BRANDS GROUP, LLC
EVOLUTION CREDIT PARTNERS,
Appellant,
v.
FIRST BRANDS GROUP, LLC, et al.,
Appellees.
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CIVIL ACTION NO. H-26-73
BANKRUPTCY CASE NO. 25-90399
MEMORANDUM OPINION AND ORDER
Evolution appeals a bankruptcy court order allowing First Brands to use up to $60 million
in cash collateral in which Evolution claims a first-lien security interest. This case is remanded to
the bankruptcy court for further proceedings consistent with the following opinion, which rules:
(1) under § 363, bankruptcy courts may inquire into the validity of an asserted property interest
only to see if the creditor can establish a prima facie or colorable claim to that property interest;
(2) the bankruptcy court did not rule that Evolution lacked a security interest in the $60 million
cash collateral; (3) Evolution likely was not adequately protected when the bankruptcy court
allowed First Brands to use the cash collateral; (4) new facts have created a genuine factual dispute
material to determining whether Evolution is currently adequately protected; and (5) the parties
may, on remand, litigate whether Evolution is currently adequately protected or, through
appropriate procedures, whether it has a first-lien security interest.
United States District Court
Southern District of Texas
ENTERED
January 31, 2026
Nathan Ochsner, Clerk
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I. 	Background
First Brands Group, LLC is a supplier of aftermarket automotive parts, including brakes,
filters, wipers, lights, pumps, and towing solutions. 	(Bankr. Docket Entry No. 22 ¶ 8). 	On
September 24, 28, and 29, 2025, the various First Brands entities filed for bankruptcy. When they
did so, First Brands reported approximately $11.5 billion in financing obligations but about $12
million in its corporate bank accounts. 	(Id. ¶¶ 34–35). 	About $2.3 billion of First Brands’s
liabilities relate to accounts receivable factoring. (Id.).
Accounts receivable factoring is a commonsense business arrangement. 	When First
Brands sells parts to customers, those sales may include long-dated payment terms, allowing the
customers to pay First Brands several months later. The generous terms may attract customers,
but First Brands suffers a period without cash and without inventory of commensurate value. To
maintain its cash flow, First Brands sells the rights to those receivables at a discount to a third
party. 	First Brands receives immediate cash, and the third party receives the full value of the
receivables when the customer pays. This dispute concerns First Brands sale of the right to the
receivables to Evolution.
After the sale, First Brands declared bankruptcy. Evolution is concerned that it will not
recover the full value of the receivables it believes it is entitled to. (Docket Entry No. 16 at 3–5).
Evolution asserts a first-lien security interest on approximately $60.5 million worth of First
Brands’s receivables. (Id. at 3). First Brands argues that Evolution does not have a right to these
receivables because of significant irregularities in First Brands’s previous factoring practices.
(Docket Entry No. 21 at 4–5). 	First Brands claims that its forensic expert “uncovered that the
$60.5 million claim of unpaid factored receivables asserted by Evolution does not match to any
valid invoices in First Brands’ records.” (Id. at 5).
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This dispute arose when First Brands moved for permission to draw on funds from the
Factored Receivables Account, the account in the bankruptcy estate that has collected the
receivables recently paid back to First Brands. 	(Bankr. Docket Entry No. 807). 	The Factored
Receivables Account had somewhere between $105.9 million and $109 million when the parties
litigated the motion in the bankruptcy court. (See Docket Entry No. 16 at 10 (including a table
depicting the categories of cash in the account)). 	First Brands asked the bankruptcy court’s
permission to spend $63 million representing certain categories of receivables in the Factored
Receivables Account. (Bankr. Docket Entry No. 1046-1 at 3). Evolution objected, arguing that
First Brands was going to use the cash to which it was entitled under its first-priority security
interest; if First Brands burned through $63 million, then the Factored Receivables Account would
not have enough funds that Evolution could claim priority to that would satisfy Evolution’s
interest. (Bankr. Docket Entry No. 1031).
The bankruptcy court ruled that First Brands could draw up to $60 million from the
Factored Receivables Account. (Bankr. Docket Entry No. 1133). Although the bankruptcy court
did not definitively rule on the validity or nature of Evolution’s interest, (Docket Entry No. 17-4
at 588), and cautioned that its assessment was preliminary, it explained that it was not convinced
that Evolution had priority over other creditors, (id. at 588–90). The bankruptcy court authorized
the release of the funds because, whoever held the priority interest, that interest was adequately
protected. (Id. at 591–92, 598, 658–59). If First Brands drew up to the amount permitted by the
order, about $49 million would remain in the Factored Receivables Account.
Evolution appealed on the ground that the $49 million left in the Account would leave
Evolution’s lien underprotected by approximately $20 million. (Docket Entry No. 1; see Docket
Entry No. 17-4 at 693 (explaining that Evolution cannot assert a right to all $49 million left in the
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Account)). This court expedited the appeal because the record showed that First Brands is likely
to burn through the collateral by early February. (Docket Entry No. 14). Evolution argues that
the bankruptcy court erred in ruling that its interest was adequately protected; in its view, the $49
million does not adequately secure its right to $60.5 million. 	(Docket Entry No. 16 at 11–12).
First Brands responds that the bankruptcy court did not err, for two reasons: (1) the Factored
Receivables Account has, during the pendency of this appeal, collected enough receivables to
adequately protect Evolution’s interest; and (2) even if the bankruptcy court authorized First
Brands to withdraw and spend an amount greater than Evolution’s lien, the bankruptcy court
appropriately did so after balancing how much cash remained in the account against the likelihood
that Evolution could establish a first-priority security interest. (Docket Entry No. 21 at 11–12).
II. 	Analysis
“Secured creditors are entitled to ‘adequate protection’ where the debtor retains use or
possession of collateral during the pendency of a proceeding.” 	In re Triplett, 87 B.R. 25, 26
(Bankr. W.D. Tex. 1988). Section 363 of the Bankruptcy Code prohibits debtors from using cash
collateral without the consent of “each entity that has an interest in such cash collateral,” unless
the bankruptcy court, “after notice and a hearing, authorizes such use . . . in accordance with the
provisions of this section.” 	11 U.S.C. § 363(c)(2). 	Section 363(e) then mandates that the
bankruptcy court “prohibit or condition such use . . . as is necessary to provide adequate
protection.” Id. § 363(e). “[R]estriction of the use of cash collateral should only occur where the
facts show that failure to restrict use may ‘impair’ the creditor and deny the creditor adequate
protection.” In re Triplett, 87 B.R. at 27. “The protection afforded a creditor whose cash collateral
is permitted by the court to be used by a debtor in possession is whatever condition is deemed
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necessary to provide adequate protection of the creditor’s interest.” In re Quality Beverage Co.,
Inc., 181 B.R. 887, 896 (Bankr. S.D. Tex. 1995).
The parties dispute: (1) whether Evolution has a secured interest in the cash collateral; and
(2) whether Evolution is adequately protected in its alleged secured interest.
A. 	The Assessment of Property Interests
First Brands frames the issue on appeal as a review of the bankruptcy court’s assessment
of the likelihood that Evolution can establish its priority interest against the amount of collateral
remaining. 	It frames the question as a holistic assessment of whether the expected value of
Evolution’s interest is adequately protected. 	Evolution raises two problems: whether the
bankruptcy court erred in not holding an adversary proceeding; and whether the court failed to
apply the correct standard for finding adequate protection.
Bankruptcy courts may conduct preliminary hearings on the use of cash collateral. After a
preliminary hearing, “the court may authorize such use, sale, or lease only if there is a reasonable
likelihood that the trustee will prevail at the final hearing under” § 363(e). 11 U.S.C. § 363(c)(3).
“Bankruptcy Rule 4001(b)(2) provides that a court may conduct a preliminary hearing on a motion
for authorization to use cash collateral, ‘but the court may authorize the use of only that amount of
cash collateral as is necessary to avoid immediate and irreparable harm to the estate pending a final
hearing.’” In re Premier Ent. Biloxi LLC, No. 06-50975 ERG, 2006 WL 2884541, at *2 (Bankr.
S.D. Miss. Oct. 10, 2006) (quoting F ED. R. BANKR. P. 4001(b)(2)). The bankruptcy court did not
consider its ruling authorizing First Brands to use up to $60 million in funds to be an “interim”
determination. (Bankr. Docket Entry No. 1133; Docket Entry No. 17-4 at 591 (“It’s not interim,
but just granting relief to allow the debtors to use the cash.”)). Nor did the bankruptcy court make
findings that allowing First Brands to use the funds was necessary to avoid immediate and
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irreparable harm to the estate pending a final hearing. (See Bankr. Docket Entry No. 1133). The
ruling allowing First Brands to spend up to $60 million in cash collateral was a final determination
under § 363(e).
First Brands is correct that bankruptcy courts ruling under § 363(e) may conduct some
examination of lien validity. 	Section 363(p) provides that “the entity asserting an interest in
property has the burden of proof on the issue of the validity, priority, or extent of such interest.”
11 U.S.C. § 363(p)(2). Courts appear to resolve some disputes under § 363(e) on the ground that
the entity asserting a property interest could not bear its burden of proving that interest. See, e.g.,
In re TM Vill., Ltd., No. 18-32770-BJH, 2019 WL 1004571, at *6 (Bankr. N.D. Tex. Feb. 28, 2019)
(authorizing the sale of property without providing adequate protection because the parties
asserting a property interest could not meet their burden of proof but declining to expunge their lis
pendens without an adversary proceeding); In re Aircomm Commc’ns, Inc., No. 10-80444-G3-11,
2010 WL 5014000, at *2 (Bankr. S.D. Tex. Dec. 2, 2010) (“Movant has not met its burden of proof
to establish that any of Debtor’s cash is its cash collateral.”); In re TWL Corp., No. 08-42773-
BTR-11, 2008 WL 5246069, at *5 (Bankr. E.D. Tex. Dec. 15, 2008) (“Skill Ventures failed to
sustain its burden of proof as required by Section 363(p)(2) as to the existence, validity priority,
and extent of the interest entitled to such protection, and, accordingly, no adequate protection by
the Debtors or the Buyer shall be required in order for the Sale to proceed free and clear of the
Distribution Agreement.”).
This is in tension with the Bankruptcy Rules and other case law, which suggest that, in the
absence of an adversary proceeding, bankruptcy courts addressing requests for relief that raise
questions about an asserted property interest should assess only whether the party asserting the
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interest has made a prima facie showing of the validity and scope of that interest.1 Consistent with
this limited burden, courts may consider whether there is evidence that “clearly refutes a creditor’s
claim to the property.” Grella v. Salem Five Cent Sav. Bank, 42 F.3d 26, 34 (1st Cir. 1994). But
“the substantive consideration of such evidence should stop as soon as it appears that the” party
asserting the property interest “has a ‘colorable claim’ to the property in question.” 	In re
Montgomery, 262 B.R. 772, 775 (B.A.P. 8th Cir. 2001) (quoting Grella, 42 F.3d at 32); see also
In re Keen, No. 13-71705, 2014 WL 6871867, at *6 (Bankr. W.D. Va. Dec. 3, 2014) (“Most courts
require that, in the summary nature of stay proceedings, the movant show at least a ‘colorable’
claim to property of the estate.” (quoting In re Vitreous Steel Prods. Co., 911 F.2d 1223, 1232 (7th
Cir. 1990)).
Permitting a broader or deeper inquiry into the validity of an asserted property interest at a
preliminary hearing on the use of cash collateral would bypass Rule 7001(b)’s general requirement
that parties must challenge lien validity through an adversary proceeding, not an adequate-
protection hearing. 	See FED. R. B ANKR. P. 7001(b). Weighing the likelihood of success on the
merits of establishing a secured interest against the likelihood of success in showing that available
1 First Brands relies heavily on Collier on Bankruptcy for the proposition that § 363(e)’s requirement “of
adequate protection may have to be applied in a flexible manner to meet emergencies in which prompt
authorization to use collateral, particularly cash collateral, is necessary,” and “permit[s] some examination
of lien validity.” 3 Collier on Bankruptcy ⁋ 363.05 (16 th ed. 2026). But the cases Collier cites do not seem
to permit the approach that First Brands asks the court to take, which is to bypass the adequate-protection
analysis (or to permit some hybrid, expected-value analysis) based on tentative doubts about whether an
asserted security interest could otherwise be shown prima facie to be valid, without adhering to the specific
rules and procedures for preliminary determinations. See, e.g., In re Placid Oil Co., 102 B.R. 538, 542
(Bankr. N.D. Tex. 1988) (holding that the asserted liens were prima facie valid); In re Collins, 180 B.R.
447, 452 & n.8 (Bankr. E.D. Va. 1995) (addressing the debtor’s motion for authority to sell property, but
not addressing the issue of the validity or priority of the asserted lien on the property because that had to be
addressed in an adversary proceeding); In re K-Fabricators, Inc., 135 B.R. 654, 658 (Bankr. W.D. Wash.
1992) (“A sale pursuant to 11 U.S.C. § 363(f) does not establish the validity of a claimed lien, which
requires an adversary proceeding.”); cf. In re Megan-Racine Assocs., Inc., 192 B.R. 321, 326 (Bankr.
N.D.N.Y. 1995) (ruling that § 363(e) does not apply to contingent property interests); In re Wright Grp.,
Inc., 443 B.R. 795, 806–07 (Bankr. N.D. Ind. 2011) (ruling that the parties implicitly waived their right to
an adversary proceeding).
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cash collateral would adequately protect that interest would also bypass § 363(c)(3)’s and Rule
4001(b)(2)’s rules and regulations for preliminary hearings on the use of cash collateral.
Preliminary rulings, tied to the irreparable harm the estate might suffer, may allow for more of an
assessment of an interest’s validity, similar to the one First Brands thinks that the bankruptcy court
employed here, until a full adversary proceeding and § 363(e) hearing can take place. The parties
did not address this issue in the context of preliminary relief under § 363. Otherwise, the court is
persuaded that, absent clear evidence or legal precedent that refutes the claimant’s right to an
asserted property interest, the claimant is entitled to adequate protection until an adversary
proceeding determines the validity, extent, and priority of the asserted property interest.
The court offers this guidance because it may prove helpful on remand; the resolution of
this legal question is ultimately unnecessary to determining this appeal. Although the bankruptcy
court doubted that Evolution would ultimately prevail on the validity and scope of its asserted first-
priority security interest, the record shows that the bankruptcy court reserved ruling on the issue.
(Docket Entry No. 17-4 at 587–88). 	Instead, the court focused on whether Evolution—or any
other creditor—would still be adequately protected. (Id.). This court will not affirm on the basis
that Evolution lacks a property interest; the bankruptcy court assumed, without deciding, that it
did and moved to determine adequate protection. The present record requires this court to take the
same approach.
B. 	Adequate Protection
The question squarely presented on appeal is whether Evolution’s assumed interest in $60.5
million was adequately protected. The Debtors represent that the Factored Receivables Account
now includes over $67 million, (Docket Entry No. 21 at 11 (Debtors’ representation))—allegedly
more than enough to adequately protect Evolution’s asserted first-priority security interest. The
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Debtors represent that the estate is owed about $230 million in outstanding prepetition receivables,
“which, if and when received, would be transferred to the segregated account and held pending
further order of the Bankruptcy Court.” 	(Id. at 11). 	The Debtors also “agreed not to seek the
release of any further funds from the Factored Receivables Account before February 19, 2026,
which is the date of an evidentiary hearing on” a related “matter set by the Bankruptcy Court.”
(Id. at 10 (citing Bankr. Docket Entry No. 1681)). The Debtors argue that, under these conditions,
Evolution’s interest is adequately protected.
Evolution responds that this court should not consider facts outside the appellate record
and that, even taking this additional information about forthcoming funds into account, Evolution
would lack adequate protection because these receivables may match invoices owed to other
entities and because vendors may have offsetting credits that make the collection of these
receivables uncertain. (Docket Entry No. 22 at 5 n.4).
Evolution’s arguments are persuasive, in part. The court must consider the updated facts
and cannot confine itself to the appellate record. 	The parties disputed whether to expedite this
appeal. 	First Brands resisted an expedited appeal in part because the record in the bankruptcy
court was likely to continue to develop rapidly during the pendency of the appeal. 	Evolution
assumed the risk of a developing record when it moved to expedite the appeal. (See Docket Entry
No. 14 at 2 (“Developments in the bankruptcy court may moot the appeal or materially alter the
record as the briefs are filed.”)). But without a firmer determination on the validity of Evolution’s
asserted first-priority security interest—or at least adherence to the procedures for the preliminary
use of cash collateral or a ruling that Evolution did not make a prima facie showing of its first-
priority interest—Evolution is entitled to adequate protection.
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At the time Evolution appealed, its interest was not adequately protected because the
Factored Receivables Account did not include enough to cover Evolution’s $60.5 million interest.
The bankruptcy court thought there was an equivalent amount—around $56 to 59 million, (Docket
Entry No. 17-4 at 592)—but that was likely a miscalculation, (Docket Entry No. 16 at 9–13, 20–
21 (explaining the miscalculation)).2 The Factored Receivables Account did not have enough cash
to completely compensate Evolution. 	In re Cage, 357 B.R. 99, 101 (Bankr. S.D. Tex. 2004)
(quoting In re Murel Holding Corp., 75 F.2d 941, 942 (2nd Cir. 1935)). But additional receivables
have since come into the Factored Receivables Account, which may afford Evolution adequate
protection. 	There are genuine factual disputes material to determining whether Evolution has
adequate protection. This court is not in a position to resolve them. Nor is this court in the position
to make the first ruling on the validity of Evolution’s asserted security interest, which it would do
without the aid of either an evidentiary or adversary proceeding.
III. 	Conclusion
For these reasons, the appeal is remanded to the bankruptcy court for additional
proceedings consistent with this opinion. The parties may litigate, through appropriate procedures,
2 At the hearing held by this court, First Brands stated that the bankruptcy court’s adequate-protection
finding was supported by the court’s consideration of the amount of receivables that was expected to
continue to flow into the estate. But the bankruptcy court’s ruling appears closely tied to the amount of
cash already in the Factored Receivables Account. (Docket Entry No. 17-4 at 591–92). It is unclear how
much evidence the bankruptcy court had before it on the projected incoming receivables. The bankruptcy
court made a passing reference, in its discussion of adequate protection, to the fact that the dollar amounts
would change and that the adequate-protection analysis would have to change with them. (Docket Entry
No. 17-6 at 1037). But it is not clear what evidence allowed the bankruptcy court to find that the incoming
receivables would change the numbers in the Factored Receivables Account to give Evolution adequate
protection. See Endrex Expl. Co. v. Pampell, 97 B.R. 316, 321 (N.D. Tex. 1989) (“Notwithstanding the
considerable deference due the bankruptcy court’s fact-finding function, the bankruptcy judge is required
to make findings of fact that are sufficiently comprehensive to enable appellate review.”). 	Evolution
asserted at oral argument that it had a superior security interest only in the funds already in the estate and
would not have the same priority position on new, incoming receivables. The parties’ briefs do not squarely
address that distinction, and the record in the bankruptcy court does not offer sufficient additional insight.
As stated above the line, there are too many open factual issues that this court is not in a position to resolve.
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whether Evolution has a first-priority security interest. They may also litigate whether Evolution
is adequately protected by the receivables that may flow into the estate in the coming weeks or
months. 	In determining whether Evolution is adequately protected, the bankruptcy court may
consider, consistent with the applicable law and in addition to other relevant facts, the amount of
funds remaining in the segregated account, the likelihood that additional funds may enter the
account, as well as other potential sources of recovery for Evolution. If the bankruptcy court finds
that Evolution is adequately protected, it must state specifically what funds or other property,
whether currently in the estate or projected to be in the estate (and on what basis), adequately
protect Evolution.
The bankruptcy court may grant the release of additional funds in a manner consistent with
this opinion, or with the agreement of the directly affected parties. This court retains jurisdiction
over the appeal if the bankruptcy court rules on the adequate-protection issue.
The court recognizes that this resolution does not offer either party a final resolution on an
important issue in this difficult reorganization. 	But the record is too infirm to support a more
definitive ruling. 	The validity of Evolution’s security interest is not before this court, and the
factual determination of adequate protection is still in dispute based on developing facts, a risk
taken when Evolution moved to expedite the appeal. The court thanks the parties’ counsel and the
bankruptcy court for their quick, thorough, and excellent work.
REMANDED.
SIGNED on January 31, 2026, at Houston, Texas.
________________________________
Lee H. Rosenthal
Senior United States District Judge
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