Toys ‘R’ Us creditors lawsuit accuses directors and private equity owners of fraud

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The creditors of Toys “R” Us Inc. have filed a trial accusing the executives of the late retailer and the owners of private funds of fraud and breach of trust.

Former CEO David Brandon and other directors have distorted the toy seller’s ability to pay off creditors after filing for bankruptcy in 2017 while collecting millions in bonuses and advisory fees, according to the lawsuit filed in court Supreme of New York. The case is carried by a trust created for creditors, including the toy manufacturers.

Toys “R” Us was wound up in 2018, leaving these salespeople and workers to scramble for funds too limited to meet any claims. This sparked years of recrimination against former owners KKR & Co., Bain Capital and Vornado Realty Trust, who bought the company in 2005 as part of a deal that critics say prevented the retailer from making any deals. investments to remain competitive.

A lawyer representing the former officers and directors of Toys called the lawsuit “without merit” and said the group would defend itself “vigorously”.

“At all times, the former directors and officers of Toys“ R ”Us and members of management have acted in the best interests of the company and its stakeholders. Because none of the named defendants have financial exposure, this lawsuit is just a misguided effort to pressure insurance companies to pay baseless claims, ”Bob said. Bodian of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo PC in an emailed statement.

Hopeless

The lawsuit claims the company’s directors did not disclose that Toys was due to reach certain milestones that it had no hope of reaching when it took out a $ 3.1 billion bankruptcy loan, and that he distorted the company’s financial position to avoid losing that funding.

“The DIP fundraising strategy was not just a foolish bet, it was a very expensive gamble,” the complaint states, claiming it cost Toys over $ 700 million in fundraising costs, interest, fees. professionals and additional operating losses that have not been borne. by Bain, KKR and Vornado, but trade creditors and employees.

Officials assured suppliers that Toys will not default and that they could continue to ship on credit until the company announces its liquidation, resulting in losses of more than $ 600 million for suppliers, according to the lawsuit. .

“The directors gave no consideration – none at all – to assessing the likelihood of the DIP funding strategy failing,” creditors say, and declined to consider alternatives such as selling parts of the company. Executives also failed to make the necessary cost cuts, even as sales collapsed and the chances of a business takeover diminished.

Exceptionally contentious

The situation has been unusually controversial, according to Greg Dovel, one of the lawyers who brought the case, which he says came months after negotiations between the parties ended. Dovel said in an interview that he spoke to more than 100 parties during the preparation of the litigation.

“We have spoken to many commercial creditors to collect evidence,” he said. “Years later, they’re still very angry about it. They really want to spend their day in court.

The lawsuit also claims Brandon and other executives awarded themselves $ 16 million in bonuses on the eve of the company’s bankruptcy filing, while KKR, Bain and Vornado received more than $ 250 million in advisory fees. since their acquisition, including after the company became insolvent in 2014.

Executives on a December 2017 earnings conference call, “failed to mention the disastrous vacation results,” and Brandon spoke about the company’s plan to come out of bankruptcy and its “bright future,” according to court documents. The company also twisted its situation when it met with manufacturers at a major trade show in February – although at that point they knew a large group of lenders were in favor of a liquidation, the creditors said in court documents. Instead, Brandon told attendees at a panel discussion that the company would come out of bankruptcy.

The company did not stop ordering goods before March 14, the day before the announcement of its liquidation.

After the company’s collapse left 33,000 workers without severance pay, its owners came under intense pressure from former employees and prominent politicians like former presidential candidates Elizabeth Warren and Cory Booker to create a compensation fund. KKR and Bain created a $ 20 million fund at the end of 2018.

Copyright 2021 Bloomberg.

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