Toys ‘R’ Us’ former executives to stand trial over fraud allegations

By Sarah Lizee

Olympia, Wash., June 28 – Former executives of Toys “R” Us will stand trial over allegations of fraud and breach-of-duty, according to an order filed Monday with the U.S. Bankruptcy Court for the Eastern District of Virginia.

A date for the trial was not given.

As previously reported, in January, the TRU Creditor Litigation Trust, which was formed with the purpose of investigating and bringing claims against the former executives, renewed its allegations of fraud and breach-of-duty against the individuals.

In March of 2020, the trust had filed its original complaint alleging fraudulent concealment, misrepresentation, and breaches of fiduciary duties, among other things.

An extensive 426-page filing made with the court in January includes documents and testimony that the trust said provides “overwhelming evidence” that the company’s whopping $800 million of administrative losses were the direct result of the former director and officers’ bad-faith actions, knowing abdication of duties, fraudulent transfers, and fraudulent misrepresentations and concealments.

“Administrative losses this large cannot be explained by innocent mistake,” the trust said in the documents.

“They cannot be explained by reasonable decisions that just didn’t happen to work out. So how did it happen?”

The trust claims that misconduct started before the petition date and continued throughout the case.

The company had secured over $3 billion in debtor-in-possession financing at the beginning of the case. The trust said the DIP facility was “without milestones, giving it a 16-month runway to successfully reorganize in Chapter 11, with $1 billion to spend on capital improvements, to fund a turnaround plan.”

However, the former directors and officers had no actual turnaround plan in place.

The trust said that at that point, the company met all of the criteria for a business that needed to wind down.

“It had been losing money for years, had a broken business model, had no plausible path for a turnaround, and sales and margins were in an accelerating spiral downward,” the trust said.

“But rather than directing an orderly liquidation of the company, the defendant directors voted to pledge all of the company’s remaining assets to DIP financing in support of a purported ‘turnaround plan’ that would commence ‘immediately.’”

The trust called the move a ‘hail Mary’ with no plausible chance of succeeding, and which wiped out the previously unencumbered assets, incurred over $500 million in costs for financing costs, restructuring professional fees, and operating losses, and resulted in $800 million in unpaid administrative claims.

The trust said the former directors and officers “entirely abdicated their fiduciary duties,” and knew that the turnaround strategy was highly improbable, and that delaying liquidation would generate large losses.

“But those losses would be borne by the company’s creditors, not by the three controlling shareholders,” the trust said.

The trust also claims the former directors and officers knew the covenants under the DIP facility were “too dangerous” and would result in a default.

The trust added that the former officers and directors received millions in executive bonuses just four days before the petition date.

“Defendants knew these bonuses would not be permitted in bankruptcy, and knew that the cash paid for executives would otherwise be paid to creditors,” the trust 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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