Toys “R” Us creditors who were burned in the company’s bankruptcy presented new evidence that Toys “R” Us executives and board members pushed their own financial interests and the interests of private equity owners ahead of creditors when the toy retailer collapsed.
Lawyers representing the TRU Creditor Liquidation Trust presented a 446-page brief to the court that oversaw the bankruptcy of Toys “R” Us. 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 restructuring and misrepresented themselves to obtain the debtor-in-possession loans needed for a restructuring, even though they knew they would not be unable to meet the terms of the loans, according to the creditor’s complaint.
The last deposit, the first reported by Bloomberg, adds fascinating details, gleaned from company emails and depositions, about the maneuvers that unfolded as Toys “R” Us prepared to announce its bankruptcy filing on September 18, 2017. It relies on a complaint the group of creditors filed in March 2020, which, among other things, claimed that Toys “R” Us CEO Dave Brandon and other senior executives received timed bonuses for circumvent bankruptcy rules.
The new document notes that the sudden decision to liquidate in the spring of 2018, after first embarking on a restructuring, created an unprecedented $800 million in administrative losses – unpaid claims by employees and suppliers for goods and services provided after bankruptcy – the largest administrative insolvency in US history, according to court filings.
“Such significant administrative losses cannot be explained by an innocent error,” claim the creditors. “They can’t be explained by reasonable decisions that just didn’t work out. So how did it go?
The answer, according to the creditors, is “that these losses were the direct result of the defendants’ actions of bad faith, knowing abdication of office, fraudulent transfers, misrepresentations and fraudulent concealments. The misconduct began before the date of the motion and continued throughout the case.
A lawyer for the creditors, Greg Dovel, said the Trust’s “investigation produced overwhelming evidence of corporate wrongdoing, and we look forward to presenting it at trial.”
Robert Bodian, managing partner at Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, which represents Toys ‘R’ Us executives and board members, responded with a statement calling the Trust’s claims “without grounded and irresponsible”.
“They know their case is legally untenable, so they seek to attack the defendants through the media. Defendants will continue to refute these baseless claims in court, and we hope that defendants, who have always acted in the best interests of the company, will be fully vindicated,” Bodian said.
Executive bonuses cited by creditors were a point of contention during the 2017 bankruptcy proceedings, with US trustee Judy A. Robbins harshly criticizing a plan to pay out between $16 million and $32 million to 17 managers to motivate them to stay with the company during the restructuring. “It defies logic and wisdom,” Robbins wrote in an objection.
Those bonuses were reduced to $14 million, but Toys “R” Us also revealed that five top executives, including Brandon, received millions in bonuses four days before the bankruptcy filing,
Brandon received a bonus of $2.8 million in addition to a base salary of $3.75 million. CFO Michael Short received a $600,000 bonus on a salary of $700,000.
“Defendants knew that these bonuses would not be permitted in bankruptcy and knew that money paid to executives would otherwise be paid to creditors. Defendants knowingly evaded bankruptcy restrictions and knowingly obstructed and defrauded creditors, engaging thus to a fraudulent transfer. In doing so, they violated the law and their duty of loyalty,” claim the creditors in the latest filing.
One of the damning emails creditors unearthed in their investigation was a July 2017 message from Brandon in which he wrote about the need to be “creative” in designing a bonus plan for executives who “works for us”. Brandon noted that Toys “R” Us executive salaries and bonuses were already “over-indexed to the market,” making it difficult to justify additional compensation.
The creditors’ filing also argues that Brandon and other Toys “R” Us executives misled the bankruptcy court about the company’s sales forecast and its ability to survive as a going concern, and that sellers have been misled about the company’s ability to afford the Toys “R” merchandise we desperately need for the holiday season.
Creditors filing notes that defendants qualified the argument that Toys ‘R’ Us should have known the restructuring was doomed and immediately went into liquidation to maximize assets,” quarterback Monday morning”.
“It’s not the Monday morning quarterback,” the creditors replied. “These facts were known months before the match started. An even more apt analogy is that the defenders approved a Hail Mary pass attempt with no time on the clock and no quarterback who could throw the ball.