Dive Brief:
- A years-long lawsuit against former executives and directors of Toys R Us reached a resolution on Friday after a bankruptcy judge approved a settlement between the litigants.
- The lawsuit, filed by a trust representing former creditors to the retailer, many of them suppliers, grew out of the retailer’s Chapter 11 case that began in the fall of 2017.
- In the order approving the agreement, Judge Keith Phillips wrote that the terms of the settlement, which were filed under seal and remain confidential, were fair.
Dive Insight:
Five years ago today, Toys R Us was early into the Chapter 11 process and its leaders at the time, including then-CEO Dave Brandon, were waxing optimistic about the big box toy store’s future.
The thesis the company and its lawyers brought into bankruptcy court was that Toys R Us was necessary — it was the last national toy store, and as such the last great toy showroom in the retail world.
Behind the scenes, Toys R Us executives were reassuring the toy makers that supplied it that the company was backed by a bankruptcy loan (known as debtor-in-possession financing). The loan meant it could meet the kinds of delayed payment terms common in the industry — trade credit extended by suppliers to their retail customer that allows for a gap of weeks or months to pass between delivering goods and getting paid for them.
What suppliers didn’t know were the terms of the loan. (As the plaintiffs later alleged, Toys R Us executives had also failed to fully analyze the loan and its likely consequences. The defendants denied that allegation, and others put forward by the plaintiffs.)
That matters because of what happened in the months following Toys R Us’ bankruptcy filing. The retailer had an abysmal holiday season, outflanked by its larger, healthier generalist rivals — namely Amazon, Walmart and Target — and suffering from operational snafus from years of underinvestment in systems and stores.
When Toys R Us fell short of targets, it breached the terms of its financing, and by early the next year lenders pulled the plug, sending the retailer into liquidation rather than putting up more capital.
Yet in the preceding months, creditors alleged, Toys R Us had been buying product, and its executives had led them to believe that the company would be good for payment. Instead, the retailer lost its funding, closed its stores, and suppliers collectively lost many millions of dollars.
The former creditors have also accused executives and Toys R Us’ private equity owners of bilking the company in the months and years leading up to the retailer’s bankruptcy. Among other things, they pointed to bonuses paid to Brandon and other top executives just days before the company filed for Chapter 11.
For unsecured creditors, lawsuits such as the one recently settled provide one of the few paths to repayment in many bankruptcies. In other words, many of the plaintiffs in the suit against Toys R Us’ former executives were trying to recoup payment for goods shipped and services provided to Toys R Us as much as five years ago or more.
The market has largely moved on from the death of the old Toys R Us. Amazon, Walmart and Target have become even bigger toy sellers. The Toys R Us brand is currently trying for (another) revival through shop-in-shops at Macy’s stores. And the segment as a whole has gotten a boost in the pandemic era.
But the way the Toys R Us bankruptcy played out rattled many suppliers, both in the toy sector and beyond. Retailers in Chapter 11 depend on maintaining their relationships with vendors if they are to have any hope of staying afloat beyond bankruptcy. And those relationships are based in no small part on trust.
