Dovel & Luner: Toys "R" Us Bankruptcy Creditor Trust Files Lawsuit Against Former CEO David Brandon, Directors from Private Equity Firms KKR, Bain Capital, and Vornado Realty Trust, and Others
NEW YORK, March 12, 2020 /PRNewswire/ -- The TRU Creditor Litigation Trust today filed a lawsuit in New York Supreme Court. The hundred-page Complaint alleges fraud and breaches of fiduciary duty by senior executives and corporate directors in connection with the ill-fated bankruptcy and later liquidation of Toys "R" Us.
The TRU 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. The Complaint includes a laundry list of specific examples, quoting extensively from Toys "R" Us' own internal emails 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," said Greg Dovel, attorney for the TRU Trust. "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. Some toymakers lost almost everything."
It has been widely reported that private-equity firms KKR, Bain Capital, and Vornado Realty Trust acquired Toys "R" Us in 2005 for about $6.6 billion, financed with over $5 billion in debt secured by Toys "R" Us' own assets. They took millions of dollars of fees out of the company, leaving it overleveraged and unable to pay down its debt.
The Complaint lays out the following facts:
- Improper Executive Bonuses – Just days before filing for bankruptcy, CEO David Brandon caused Toys "R" Us to pay $16 million in bonuses to top executives. Although his compensation was already above market, Brandon included a $2.6 million bonus for himself. The officers and directors had these bonuses paid just before bankruptcy to avoid any scrutiny by the Bankruptcy Court.
- Wrongful Advisory Fees – Directors, hand-selected and employed by private equity firms Bain, KKR, and Vornado, had Toys "R" Us pay millions of dollars in "advisory fees" to these same private equity firms, even though TRU was strapped for cash and unable to pay its overwhelming debt.
- Misrepresentations and Fraudulent Concealment – David Brandon and other Defendants represented to toymakers that Toys "R" Us 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 Toys "R" Us would not have the ability to pay for goods shipped on credit. Defendants concealed and never disclosed the truth. Instead, Defendants Brandon, Michael Short (former CFO), and Richard Barry (former CMO) continued throughout January, February, and early March 2018, to misrepresent the status of Toys 'R' Us financial condition and to urge vendors to ship more product on credit. When Toys "R" Us liquidated in March 2018, the toymakers lost over $600 million.
- Wrongful Decision to Take on $3.1 Billion in DIP Financing and Pledge all Remaining Assets to Lenders – For years, the Defendants took money out of Toys "R" Us and underinvested in critical resources. As a result, in 2017, Toys "R" Us was at a financial crossroads. To satisfy their fiduciary duties, Defendants should have carefully considered all possible paths to determine which would be in the best interest of all stakeholders. Instead, Defendants took Toys "R" Us down the path of obtaining $3.1 billion in debtor-in-possession (DIP) 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. In doing so, they abdicated their fiduciary duties. The DIP financing strategy was a foolish, ill-considered, and selfish gamble that cost Toys "R" Us more than $500 million.
The case is TRU Creditor Litigation Trust v. David A. Brandon, Joshua Bekenstein, Matthew S. Levin, Paul E. Raether, Nathaniel H. Taylor, Joseph Macnow, Wendy A. Silverstein, Richard Goodman, Michael Short, Richard Barry, New York Supreme Court, Case No. 651637/2020.
Link to complaint: www.dovel.com/tru-complaint
About Dovel & Luner
Dovel & Luner is a high-stakes business litigation law firm handling a variety of cases on a contingency-fee basis in courts across the country.
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