A fund co-managed by investment firms Knighthead Capital Management and Certares Management objected Sunday to Brightline's proposed $258 million bankruptcy loan, saying the financing could impede their lawsuit over an alleged fraudulent asset transfer.

Brightline, owned by private-equity firm Fortress Investment Group, put the holding company for its East Coast railroad in bankruptcy last week, burdened by $5.5 billion in debt. Its Florida trains continue to run under the operating company, which isn't part of the chapter 11 proceedings. A separate Brightline entity, BL West Holdings, that operates trains in California and Nevada is also independent of the bankrupt Brightline Florida.

Brightline is seeking roughly $258 million in debtor-in-possession financing led by bond insurer Assured Guaranty and other existing investors. Knighthead and Certares argue in court filings that the financing package could interfere with their ability to recover value through legal claims.

The investment firms sued Brightline and its lender, Morgan Stanley, in 2023, alleging fraud and breach of contract over an asset transfer that shifted equity in BL West to Fortress's hands, according to court papers.

The equity transfer removed BL West as a subsidiary of Brightline and as a guarantor of the $191 million Knighthead and Certares had lent.

"It bears many hallmarks of an intentional fraudulent transfer," the fund said in the objection, arguing Brightline carried out the deal with the "intent" to sidestep contractual obligations.

Brightline and Morgan Stanley denied the allegations, saying the loan documents allowed the transaction and that the fund failed to identify specific fraudulent misrepresentation by Brightline.

The fund is expected to receive ownership of certain East Coast Brightline subsidiaries under the chapter 11 restructuring, which would "presumptively" include the subsidiary that employs the Florida railroad's workers, but Brightline never discussed that arrangement with the fund before filing for bankruptcy, according to the objection.

Fortress took a 40% stake in BL West for $260 million in 2022 at a price the investment firms alleged was far below market value, according to the objection. Once separated from Brightline and the restrictions of Knighthead and Certares's credit agreement, a BL West-associated entity raised $2.5 billion of debt, which wouldn't have been permitted under the credit agreement otherwise, the objection says. The firms argued that the proceeds should have been used to repay their loans.

The New York state court lawsuit remains pending, and the fund argued approval of the financing package would "sweep very complex issues under the rug."

Brightline spent more than a year negotiating with creditors and sounding out third parties for fresh capital in an attempt to avert bankruptcy but ultimately succumbed to the weight of municipal bonds, taxable debt and so-called commuter bonds.

In addition to the bankruptcy loan, the company plans to tap $490 million in exit financing from Assured and other Brightline investors, including First Eagle, Invesco, BlackRock, Nomura and Nuveen. Fortress's equity is expected to be written down to zero in bankruptcy while taxable bondholders are likely to be heavily impaired.

Brightline is scheduled to appear Tuesday for the first time since its bankruptcy filing before Judge Mark Edward Hall of the U.S. Bankruptcy Court in Newark, N.J., who will consider the company's requests, including approval of the financing package.