Toys 'R' Us Judge Orders Fung to Halt Hong Kong Court Action

(Bloomberg) -- Toys “R” Us Inc.’s joint venture partner must drop a court action it filed against the retailer in Hong Kong because the case threatens the sale of Toys’ Asia operation, a federal judge ruled.

The decision is designed to negate an order by a Hong Kong court to suspend the auction of the retailer’s Asia operation. Fung Retailing Ltd. owns a 15 percent stake in that business and filed a case in Hong Kong, claiming it would be harmed by the way Toys was pursuing a sale.

The defunct U.S. toy retailer has been trying to sell its most valuable remaining asset for months, but has been bogged down by a dispute with Fung and by disagreements among creditors. Fung says Toys must set aside enough money to pay any damages related to Fung’s breach of contract claims. Toys accuses Fung of using Hong Kong court proceedings to scare off rival bidders so it can buy out Toys’ 85 percent stake at a discount.

In a victory for Toys, U.S. Bankruptcy Judge Keith L. Phillips ruled Thursday in Richmond, Virginia, that he had authority over Fung and therefore could order a halt to the Hong Kong proceedings. Because the dispute could affect the bankruptcy case, he said Fung must bring its complaints to his court instead of Hong Kong.

Fung Retailing didn’t immediately respond to a request for a comment.

A group of Toys lenders has agreed to trade the debt they hold for ownership of Toys’ stake in the Asia operations in a deal valued at $760 million.

The case is Toys “R” Us, 18-03090, U.S. Bankruptcy Court, Eastern District of Virginia (Richmond)

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