Toys 'R' Us Creditors Call for Jury Trial on Executive Stay Pay
By Peg Brickley
Bankruptcy administrators for defunct retailer Toys "R" Us Inc.
are trying to put its former top leaders on trial before a jury
over the millions of dollars in bonuses they pocketed days before
the company's plunge into bankruptcy.
The proposed jury trial concerns the practice of corporate
executives collecting bonuses shortly before their businesses file
for bankruptcy, leaving debts unpaid and employees at risk. While
the Toys "R" Us bonus payments occurred in 2017, a range of
businesses paid similar bonuses during the Covid-19 pandemic as
they teetered on the brink of bankruptcy.
Companies including rental-car giant Hertz Global Holdings Inc.,
department store chain J.C. Penney Co. and oil-and-gas driller
Chesapeake Energy Corp. all dispensed bonuses shortly before they
filed for bankruptcy last year as Covid-19 upended the U.S.
economy. The stated rationale for the bonuses was retention -- to
persuade top executives to stick in their jobs despite their
By paying bonuses before bankruptcy, the companies got around
legal restrictions on such "stay pay," which kick in once a
business files for chapter 11. Creditors largely grumbled in
private, but few took action in bankruptcy court to try to get the
Now, however, the practice is being hotly disputed in the
aftermath of the 2017 bankruptcy of Toys "R" Us -- one of the few
times the legality of retention bonuses has been seriously tested
in bankruptcy court. Although the company's once-mighty fleet of
toy stores is long gone, a bankruptcy trust set up to scrounge up
money for unpaid suppliers is still around, as a vehicle for
The goal of the litigation trust: recover money for suppliers
that shipped goods to Toys "R" Us after it filed for bankruptcy and
are still owed roughly $800 million. Litigation targets include
former Toys "R" Us executives led by former Chief Executive David
Brandon. The trust is asking the U.S. Bankruptcy Court in Richmond
to examine the prebankruptcy bonuses they collected, along with
other alleged wrongdoing.
Mr. Brandon received $2.8 million as part of a program that
handed top executives 75% of their annual salary three days before
bankruptcy, according to the trust's court papers. The executives
have denied wrongdoing in their own court filings and said the
trust isn't entitled to put its claims before a jury.
Jury trials are rarities in corporate bankruptcy disputes, which
are usually decided by judges alone. A jury trial would allow
members of the public to weigh the executives' bonuses against the
31,000 people who lost their jobs and didn't get the severance pay
they expected because Toys "R" Us failed to reorganize.
Last year, the proliferation of retention pay among distressed
companies generated enough blowback for the Government
Accountability Office, the investigative arm of Congress, to begin
gathering data as part of a funding recommendation for the Justice
Department. The GAO report is due in October.
Rep. W. Gregory Steube (R., Fla.) introduced legislation in
January to ban executive bonuses for a year before and a year after
a bankruptcy filing.
But aside from some isolated cases, creditors of bankrupt
businesses have shown little appetite to demand that executives
return some or all of the retention pay they received. Only a
handful of creditor groups have raised formal objections to bonuses
paid out after Covid-19 hit by companies that later went bankrupt,
a review by The Wall Street Journal found.
They include West Texas fracker Sable Permian Resources LLC and
natural gas producer Gulfport Energy Corp., both of which improved
the treatment of their creditors after objections were filed around
retention bonuses they paid.
Corporate leaders' eagerness to collect stay pay from their own
troubled companies is an embarrassment to many bankruptcy
professionals, generating "widespread frustration over how this
practice has emerged and been tolerated," said Jared Ellias,
professor at University of California Hastings College of the
"It's usually a bad negotiating tactic to go after the wallet of
the person that you need stuff from," he said.
Write to Peg Brickley at firstname.lastname@example.org
(END) Dow Jones Newswires
May 05, 2021 19:26 ET (23:26 GMT)
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