The U.S. Trustee’s office announced this week that they have major concerns about the viability of the Chapter 11 bankruptcy plan for Toys R Us (and subsidiary Geoffrey Holdings LLC) due to the fact that the current arrangement fails to adequately compensate vendors and other creditors. The bankruptcy watchdog office filed an official objection due to the so-called “death trap” provision currently written into the plan, which only allows creditors to collect from a $180 million fund if they agree to sign third-party releases.
Such coercive action directly flies in the face of protections written into the U.S. Bankruptcy Code, hence the Trustee’s objection. The Code requires that creditors consent to the Chapter 11 plan; the Trustee argues that the “take it or leave it” nature of the signing of third-party releases in exchange for payment invalidates the plan.
Background on the Toys R Us bankruptcy filing
In September of 2017, Toys R Us filed for Chapter 11 bankruptcy protection. At that time, the plan was for the struggling retailer to use a $3 billion bankruptcy loan to shore up its 700 stores and other investments, paying off some creditors and infusing cash into the business. After a lackluster holiday shopping season, however, the bankruptcy direction changed, converting from a reorganization into a liquidation of both foreign and domestic assets.
From that change in direction came the very same plan that the U.S. Trustee’s Office now objects to. The objection isn’t necessarily a death knell for seeking approval of the bankruptcy plan, but it does mean that some modifications are likely. The fact that Toys R Us is a global corporation and is still struggling mightily with the bankruptcy process underscores how complicated these proceedings really are. If your business is considering Chapter 11 bankruptcy, it is vitally important to work with an experienced bankruptcy attorney.