Toys R Us creditors who were burned in the company’s bankruptcy have presented new evidence that Toys R Us executives and board members put their own financial interests, and the interests of private equity owners ahead of creditors as the toy retailer collapsed.
Lawyers representing the TRU Creditor Liquidation Trust have presented a 446-page brief to the court that oversaw the Toys R Us bankruptcy. It outlines how Toys R Us chose to pursue a costly and ill-fated restructuring, rather than an immediate liquidation that would have generated more cash to pay creditors.
Toys R Us executives and board members opted for the restructuring, and made false representations to secure debtor-in-possession loans needed for a restructuring, even though they knew they would be unable to meet the terms of the loans, according to the creditor’s complaint.
The latest filing, first reported by Bloomberg, adds fascinating details, harvested from company emails and depostions, about the manuevering that went on as Toys R Us was preparing to announce its bankruptcy filing on September 18, 2017. It builds on a complaint that the creditors group filed in March of 2020, which, among other things, claimed Toys R Us CEO Dave Brandon and other top executives received bonuses timed to circumvent bankruptcy rules.
The new document notes that the sudden decision in spring of 2018 to liquidate, after first embarking on a restructuring, created an unprecendented $800 million in administrative losses – unpaid claims by employees and vendors for goods and services provided after the bankruptcy – the largest administrative insolvency in U.S. history, according to the court filing.
“Administrative losses this large cannot be explained by innocent mistake,” the creditors argue. “They cannot be explained by reasonable decisions that just didn’t happen to work out. So how did it happen?”
The answer, the creditors claim, is “that those losses were the direct result of Defendants’ bad faith actions, knowing abdication of duties, fraudulent transfers, and fraudulent misrepresentations and concealments. The misconduct began before the petition date, and continued throughout the case.”
An attorney for the creditors, Greg Dovel, said “the Trust’s investigation produced overwhelming evidence of corporate wrong-doing, and we look forward to presenting it at trial.”
Robert Bodian, managing partner at Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, which is representing the Toys R Us executives and board members, responded with a statement calling the claims by the Trust “baseless and irresponsible.”
“They know that their case is legally unsupportable, so they seek to impugn the defendants through the media. Defendants will continue to refute these meritless claims in court, and we expect that the defendants, who always acted in the best interests of the company, will be fully vindicated,” Bodian said.
The executive bonuses cited by the creditors were a point of contention during bankruptcy proceedings in 2017, with U.S. Trustee Judy A. Robbins sternly criticizing a plan to pay between $16 million and $32 million to 17 executives to motivate them to stay with the company during the restructuring. “It defies logic and wisdom,” Robbins wrote in an objection.
Those bonuses were trimmed to $14 million, but Toys R Us also revealed that five senior executives, including Brandon, had received millions in bonuses four days before the bankruptcy filing,
Brandon received a $2.8 million bonus on top of a base salary of $3.75 million. Chief Financial Officer Michael Short received a $600,000 bonus on a $700,000 salary.
“Defendants knew these bonuses would not be permitted in bankruptcy, and knew that the cash paid for executives would otherwise be paid to creditors. Defendants knowingly evaded the bankruptcy restrictions and knowingly hindered and defrauded the creditors, thereby engaging in a fraudulent transfer. In doing so, they violated the law and their duty of loyalty,” the creditors argue in the latest filing.
One of the damning emails the creditors dug up in their investigation was a July, 2017 message by Brandon in which he wrote about the need to be “creative” in designing an erxecutive bonus plan that “works for us”. Brandon commented that Toys R Us executive salaries and bonuses already were “over indexed to the market,” making it difficult to justify additional compensation.
The creditors filing also argues that Brandon and other Toys R Us leaders misled the bankruptcy court about the company’s sales forecasts and ability to survive as a going concern, and that vendors were misled about the company’s ability to pay for merchandise Toys R Us desperately needed for the holiday season.
The creditors filing notes that defendants have called the argument that Toys R Us should have known restructuring was doomed, and moved immediately to liquidation to maximize assets, “Monday morning quarterbacking.”
“That is not Monday morning quarterbacking,” the creditors replied. “Those facts were known months before the game started. An even more apt analogy is that Defendants approved a Hail Mary pass attempt with no time on the clock, and without a quarterback who could throw the football.”