Toys ‘R’ Us Workers to Seek Higher Priority Status for Severance

(Bloomberg) -- Former Toys “R” Us workers will be asking a judge to award them severance and grant them the same priority for getting paid as the lawyers, financial advisers and suppliers who were considered vital to winding down the retailer’s U.S. stores.

Toys “R” Us Inc. agreed to give the workers until July 23 to file the request, according to a July 16 court document. The concession leaves open the possibility that a severance agreement could be reached, although the company said it still reserves the right to fight the demand from its former staffers.

By submitting an administrative claim in the Toys “R” Us bankruptcy liquidation, the 33,000 workers would be setting up a confrontation with other creditors who customarily are given high priority under the U.S. bankruptcy code because their services are considered crucial. Any severance deal that taps the shrinking pool of cash left at Toys “R” Us would need court approval, and would likely be opposed by other creditors since they’d be less likely to get full payment on their claims.

Toys put two limits on any severance claim. One restricts participation to workers on the job after Feb. 16, when company directors canceled a benefits program. The other says Toys must be able to show the court that it had been paying out “proper compensation” under its old severance plan.

Creditor Reaction

Even if those two hurdles are cleared, any payment to workers may still be subject to challenge by other creditors and may be reduced based on how much money is left over after secured lenders -- the ones with top claims on collateral and assets -- are paid off.

After the biggest U.S. toy retailer sought court protection in September, the company spent six months trying to reorganize itself and exit bankruptcy as a smaller, profitable company. That effort failed, and Toys announced in March that it would liquidate U.S. operations and sell its Canadian, European and Asian businesses.

Following the announcement that Toys “R” Us would liquidate its U.S. operations, suppliers and other creditors with administrative claims complained that there may not be enough money for all of them to be fully repaid, an unusual situation in big Chapter 11 cases.

Administrative claims are considered debts that are so necessary for a company to reorganize that they are given higher priority than most others. Typically only secured lenders are paid ahead of them. Suppliers have demanded that if they must take less than what they are owed, the attorneys and other advisers working on the case should also take a cut. Certain unpaid worker benefits are treated as unsecured, putting them among the second-to-last in line to get paid when a company collapses. Shareholders are generally the last to be paid, and only if every creditor above them is paid in full.

Retail Liquidations

The shutdown of Toys “R” Us is among the biggest in a string of retail liquidations in recent years that has engulfed other big-box brands such as Sports Authority, clothing sellers like American Apparel and department-store chains such as Gordmans and Bon-Ton.

Like other retailers, Toys had to contend with competition from Walmart Inc. and Amazon.com, but the strong attachment many customers -- and workers -- had for the chain could have led to a better outcome, if the company weren’t burdened by $5 billion in debt from its leveraged buyout.

KKR, one of the private equity firms that controlled Toys “R” Us, told members of Congress in a July 6 letter that it has been in touch with representatives for the workers in an effort to help them. It didn’t provide specifics, and a company spokesman last week declined to elaborate on how KKR would follow through.

The severance claim will be set up in the name of Ann Marie Reinhart Smith on behalf of all Toys “R” Us employees who lost their jobs after the company canceled its severance policy in February. Reinhart, 59, spent 29 years at the retailer, most recently at a Babies “R” Us in Durham, North Carolina.

The job gave her flexibility as she was raising her family, the ability to be at football games and school Halloween parades. “It did for me what it needed to do,” she said in an interview. Her store shuttered in April, leaving her and her husband without health insurance. Her unemployment was due to expire last week.

Reinhart is looking for another job, but it won’t be a retail gig if she can help it. She cited the stress of watching the company unravel, including the day a customer threw a box of Converse sneakers at her.

“It didn’t have to end this way,” Reinhart said.

The case is Toys “R” Us, 17-34665, U.S. Bankruptcy Court, Eastern District of Virginia (Richmond)

©2018 Bloomberg L.P.