Latest Updates to Toys“R”Us Bankruptcy Proceedings

April 11, 2018 | The Toy Association continues to monitor developments related to the Toys“R”Us bankruptcy proceedings. Below is a summary of a recent court filing by the official Unsecured Creditors Committee (UCC). The Association will continue to share any relevant news as quickly as possible. Members can access key Toys“R”Us bankruptcy documents on Prime Clerk’s website.

Official Unsecured Creditors Committee Response to Wind Down Budget [Docket No. 2618]:

On April 10, the official Unsecured Creditors Committee (UCC) filed a motion in support of Toys“R”Us’ proposed wind down budget on a provisional basis. Legal counsel to the UCC indicated that it has been advised by Toys“R”Us that, prior to March 5, it had approximately $393 million in claims for unpaid post-petition merchandise, $192 million in unpaid 503(b)(9) claims, and $26 million in additional unpaid non-503(b)(9) claims under post-petition critical vendor agreements. Toys“R”Us also estimated that there are approximately $39 million in non-merchandise vendor payables subject to offset. The UCC reserved its right to continue to investigate and pursue claims on behalf of administrative creditors.

The UCC indicated that it had obtained agreement with Toys“R”Us and DIP lenders for: 

• Reservation of Rights. The UCC negotiated for a reservation of rights to ensure that the rights of creditors to pursue any claims against the DIP lenders are not prejudiced by the granting of the relief requested in the wind down motion, including the paydown of the DIP facilities. The UCC will continue to have the ability to pursue any claims or causes of action (including, without limitation, claims for unjust enrichment, constructive trust, or other legal or equitable remedies or claims against the DIP lenders) that are available to such parties as of the date of the entry of the proposed order.

• Elimination of Releases. All other claims and causes of action against other parties (including, for example, directors and officers) in connection with the wind down, the bankruptcy cases, or any pre-petition transactions continue to be preserved.

• Payment of Ongoing Creditors On or After March 15. After negotiations, the DIP lenders agreed that third-party goods and services incurred by Toys“R”Us on or after March 15 will be paid, regardless of whether they are included in the wind down budget, thereby giving creditors comfort that they will be able to provide goods and services to Toys“R”Us during the wind down process without risk of nonpayment.

• Establishment of Reserve. The term DIP lenders have also agreed to provide for a carveout from their collateral of an amount equal to all merchandise received (including for goods in-transit) on or after March 5, regardless of the amounts estimated or provided in the budget but subject to a reconciliation (the “Reserve”). By preserving all parties’ rights and claims, coupled with the elimination of any releases, such rights will be an important factor in determining an appropriate allocation of the Reserve.

• Establishment of Greater Transparency. Toys“R”Us has now committed to providing the UCC with all reporting information provided to the DIP lenders and to giving the UCC access to representatives who can answer questions they may have on related topics, including the wind down. In addition, Toys”R”Us has agreed to not only provide certain information to the UCC so that it can be shared with UCC members, but also agreed to provide as much information as possible on a public basis so that the UCC can effectively coordinate and communicate with all unsecured creditors on the status of the wind down.

• Preserve Flexibility on Lease Treatment. The original waivers required rejection of all leases by June 30. The DIP lenders have agreed to provide Toys“R”Us with the flexibility to assume and assign real estate leases that can be monetized and provide value and to extend the rejection deadline for leases if they would be useful for the wind down.

• Agreement on a Provisional Wind Down Budget. The UCC reached resolution with Toys“R”Us and the DIP lenders on a wind down budget that the UCC believes is reasonable. The budget includes sufficient professional fees to allow the UCC to fulfill its obligations and work with the parties and the court to oversee the wind down and complete a more comprehensive resolution that benefits administrative creditors. The agreed upon wind down budget provides professionals to be subject to a separate carveout without benefit from funds in the Reserve.

Further, the UCC reserved its rights to pursue claims and:

• Did not agree that March 5 was a relevant or appropriate “cut-off” date to determine which creditors should be paid and reserves all rights to challenge such date or propose an alternative date.

• Wants to further provide that the timing of funding the Reserve will not impact the obligation to fund the Reserve in a wind down, since it claims this is an important first step towards the UCC’s ultimate goal of materially increasing the amounts in the Reserve and formulating an appropriate allocation in connection with a more comprehensive, global settlement.

• Objected to ongoing creditors being exposed to the risk of non-payment while still performing services that benefitted the liquidation. As a result, the DIP lenders agreed to provide a written notice of any future “Event of Default” and, importantly, to continue to fund claims for five business days following any such notice, thereby giving creditors sufficient opportunity to limit any further exposure following the DIP lenders’ determination to call an Event of Default.

 • Objected to Premature Paydown of DIP Facilities. The UCC was concerned that the use of all proceeds of the liquidation would be used to prematurely pay down the DIP Facilities (and potentially the Prepetition Secured Obligations) without recourse in the event creditors determined they had equitable or other remedies regarding such payments. The DIP lenders have agreed that the proceeds from the sale of inventory and other assets securing the ABL/FILO DIP Obligations on a senior basis to the Term DIP Obligations (the “ABL/FILO Priority DIP Collateral”) will be used to repay Term DIP Obligations and thereafter be stepped down. It was further agreed that the rights of any creditor or other party-in-interest will not be prejudiced or impaired and creditors will have the ability to pursue claims (including equitable remedies) to the extent such rights or remedies are available to them.

All matters are subject to the discretion of the court upon a hearing of objections from many parties, including trade creditors and the trustee.