Toys ‘R’ Us Bankruptcy Plan Ties Payouts to Manager Lawsuits

(Bloomberg) -- Toys “R” Us Inc. won court approval on Tuesday for a bankruptcy exit plan that ties creditor recoveries -- including severance pay for 33,000 fired workers -- to lawsuits against the defunct retailer’s former officers and directors.

The decision by U.S. Bankruptcy Judge Keith L. Phillips means a litigation trust will be set up to try to hold Toys “R” Us’s former managers responsible for the company’s demise by suing them. Under a settlement approved by Phillips in August, that trust can also go after officers who worked for the company’s owners, Bain Capital and KKR & Co. which led a 2005 leveraged buyout that saddled Toys “R” Us with $5 billion in debt it couldn’t repay.

No matter how much that trust raises, however, the fired “workers expect to get just a fraction” of the $75 million they claim they are owed, said Carrie Gleason, policy director for the labor activist group, Organization United for Respect.

“We know that working people are at the bottom of the barrel in the bankruptcy process,” Gleason said in an interview as the court hearing began.

Competing Creditors

Under the wind-down plan for the U.S. operation of Toys “R” Us, before much money can be paid to former employees, senior lenders need to collect about $1 billion. The staffers can tap a pool of $180 million designated to pay post-bankruptcy bills, but they will be competing with other creditors, like toy suppliers as well as the lawyers and financial advisers who helped dismantle the company. The suppliers alone are entitled to more than 85 percent of the pool at its current size.

Lenders will take over the Toys “R” Us name and other intellectual property, the only assets left of the U.S. business after the company liquidated hundreds of stores and sold its businesses in Canada and Europe. The Asia operation will be sold under a separate reorganization plan that comes before Phillips later this month.

The workers’ efforts to get severance pay is just one part of the long drama of the decline and fall of Toys “R” Us, which was based in Wayne, New Jersey. The company took on $5 billion of debt in the buyout, a burden that left it ill-equipped to handle competition from Walmart Inc. and Amazon.com Inc.

In July, Toys “R” Us lenders as well as Bain Capital, KKR & Co. and Vornado Realty Trust agreed to set aside $180 million to cover "administrative claims," or bills the company generated after it filed for bankruptcy.

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

To contact the reporter on this story: Steven Church in Wilmington, Delaware at schurch3@bloomberg.net

To contact the editors responsible for this story: Nikolaj Gammeltoft at ngammeltoft@bloomberg.net, Dan Wilchins

©2018 Bloomberg L.P.