Toys ‘R’ Us creditor trust lawsuit accuses executives of fraud, breach of duty

By Caroline Salls

Pittsburgh, March 13 – The TRU Creditor Litigation Trust today filed a lawsuit in New York Supreme Court alleging fraud and breaches of fiduciary duty by senior executives and corporate directors in connection with the bankruptcy and later liquidation of Toys “R” Us, according to a Thursday news release from law firm Dovel & Luner.

The firm said the trust, which was charged with investigating and bringing claims against the former directors and officers of Toys “R” Us for their wrongful acts, uncovered substantial evidence of wrongdoing. Specific examples were quoted in the complaint extensively from Toys “R” Us’ own internal e-mails made available to the trust under a bankruptcy court order.

“Toys ‘R’ Us is yet another unfortunate example of corporate greed resulting in executives and private equity firms benefiting at the expense of others,” trust attorney Greg Dovel said in the release.

“The defendants prioritized their own financial well-being, as well as the financial well-being of three private equity companies, ahead of the company that they were entrusted to run. They siphoned desperately needed funds out of Toys ‘R’ Us as it tumbled into bankruptcy and then misrepresented TRU’s financial situation to induce toymakers to provide goods on credit.

The release said it has been widely reported that private equity firms KKR, Bain Capital and Vornado Realty Trust acquired Toys “R” Us in 2005 for $6.6 billion, financed with more than $5 billion in debt secured by Toys “R” Us’ own assets. Dovel & Luner said the private equity firms took millions of dollars of fees out of the company, leaving it overleveraged and unable to pay down its debt.

According to the complaint, just days before filing for bankruptcy, chief executive officer David Brandon caused Toys “R” Us to pay $16 million in bonuses to top executives, including a $2.6 million bonus for himself.

The suit also alleged that directors, hand-selected and employed by private equity firms Bain, KKR, and Vornado, had the company pay millions of dollars in advisory fees, even though TRU was strapped for cash and unable to pay its debt.

In addition, the trust alleged that Brandon and other defendants told toymakers that the company would be able to pay for goods shipped on credit throughout the bankruptcy process because Toys “R” Us had secured $3.1 billion in new financing, but by mid-December 2017, company directors and officers learned that the company could not meet financial milestones required by the lenders, which meant the financing would terminate, and the company would not have the ability to pay for goods shipped on credit.

The complaint alleges that the defendants concealed and never disclosed the truth, and Brandon, former chief financial officer Michael Short and former chief marketing officer Richard Barry misrepresented the status of Toys “R” Us’ financial condition and urged vendors to ship more product on credit. When Toys “R” Us liquidated in March 2018, the toymakers lost over $600 million, according to the lawsuit.

The suit also alleges that the defendants took the company down the path of obtaining $3.1 billion in debtor-in-possession financing that could benefit themselves and the private equity firms to whom they were beholden to the detriment of Toys “R” Us and its creditors.

“The DIP financing strategy was a foolish, ill-considered and selfish gamble that cost Toys “R” Us more than $500 million,” the release said.

Toys ‘R’ Us is a Wayne, N.J., toy retailer. The company filed for bankruptcy on Sept. 19, 2017 in the U.S. Bankruptcy Court for the Eastern District of Virginia under Chapter 11 case number 17-34665.

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