Toys R Us creditors sue former Bain Capital, KKR execs

Toys R Us might be basically dead, but the fight over the company's untimely end hasn't wrapped up just yet. 

A trust representing the creditors who lost hundreds of millions of dollars in the company's liquidation filed a lawsuit Thursday in New York, alleging former CEO Dave Brandon and several company executives tied to Bain Capital, KKR and Vornado Realty Trust inappropriately took out millions before the company filed for Chapter 11 protection in September 2017.

The lawsuit, filed by TRU Creditor Litigation trust, alleges the losses constitute "breaches of fiduciary duty, fraudulent concealment and misrepresentation" from executives who acted in their own self-interest rather than the interest of the company. The trust is seeking to be compensated for losses, awarded punitive damages, have its costs covered and more.

Specifically, the trust takes issue with nearly $18 million in fees paid by Toys R Us to executives at Bain Capital, KKR and Vornado and Brandon from 2014 to 2017 while they served on the company's board. In addition, the lawsuit alleges Brandon paid himself $2.8 million in bonuses days before the Chapter 11 filing, knowing the payout wouldn't be approved in bankruptcy court.

Bain Capital, KKR and Vornado acquired Toys R Us in 2005 for roughly $6.6 billion, using more than $5 billion in debt. Brandon, a former athletic director at the University of Michigan, was installed as CEO in 2015. The company filed for Chapter 11 bankruptcy protection in 2017, then creditors liquidated it the following spring, leading to more than 30,000 job losses.

"On its face, the agreement made no sense," the lawsuit said of fees paid to the board. "Toys R Us paid large fees each quarter to Bain, KKR, and Vornado — the equity owners of the company. But Bain, KKR, and Vornado were not required to provide any actual services in exchange for these fees. Moreover, Toys R Us was already paying expensive outside consultants, such as McKinsey and AlixPartners, for business advice."

The lawsuit also says Toys R Us placed $600 million worth of orders on credit between December 2017 and March 2018 while assuring creditors the company would emerge from bankruptcy thanks to it securing a $3.1 billion debtor-in-possession financing facility. Instead, the company defaulted on the loan after missing sales targets. Hedge funds including Solus Alternative Asset Management then took over after the company filed for Chapter 11. As a result of the liquidation, creditors and vendors were left with $800 million in unpaid bills, a record for a Chapter 11 case, according to the filing.

The lawsuit also alleges Brandon's relationship with the company's private equity backers was too reciprocal, noting he helped set up meetings between Bain Capital and Jimmy John's when the firm was looking to invest in the sandwich chain. According to the lawsuit, Brandon was also paid above market rate for his CEO role and allowed to invest in the firm's funds without the typical management fees. Bain Capital co-chairman Joshua Bekenstein and KKR executive Paul Raether are also named in the lawsuit.

"At all times, the former directors and officers of Toys R Us and members of management acted in the best interests of the company and its stakeholders," said Bob Bodian, a lawyer at Mintz representing the defendants. "Because none of the named defendants has any financial exposure, this lawsuit is just a misguided effort to pressure insurance carriers to pay meritless claims. We will defend against this baseless lawsuit vigorously."

When reached for comment, both Bain Capital and KKR referred to Bodian's statement.

Bain Capital, KKR and Vornado have claimed they did everything to save Toys R Us, even investing billions back into the company. But unable to combat declining sales, huge debt payments and the rise of Amazon, Toys R Us still had to file for Chapter 11. Both KKR and Bain Capital have said they were against the decision to liquidate.

Congress subsequently launched an investigation, and Bain Capital and KKR then set up a $20 million fund that paid out a portion of the $75 million in owed severance to the company's former employees. 

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