TRU Creditor Litig. Trust v. Brandon (In re Toys "R" US, Inc.)
| Decision Date | 27 June 2022 |
| Docket Number | Case No. 17-34665-KLP,Adv. Pro. No. 20-03038-KLP |
| Citation | 642 B.R. 727 |
| Parties | IN RE TOYS "R" US, INC., et al., Debtors. TRU Creditor Litigation Trust, Plaintiff, v. David A. Brandon, Paul E. Raether, Nathaniel H. Taylor, Joseph Macnow, Wendy A. Silverstein, Richard Goodman, Michael Short, Richard Barry, David A. Brandon, Joshua Bekenstein, and Matthew S. Levin, Defendants. |
| Court | U.S. Bankruptcy Court — Eastern District of Virginia |
Michael Gregory Wilson, Michael Wilson PLC, Richmond, VA, for Plaintiff.
James C. Cosby, John B. Sieg, O'Hagan Meyer PLLC, Richmond, VA, for Defendants.
Keith L. Phillips, United States Bankruptcy Judge Before the Court is the Defendants’ Motion for Summary Judgment2 (the "Motion"). Plaintiff, TRU Creditor Litigation Trust (the "Trust"), commenced this suit against Defendants, former directors and officers of Toys "R" Us, alleging various breaches of fiduciary duty, fraudulent misrepresentation and concealment, negligent misrepresentation and concealment, and negligence. In the Motion, the Defendants contend that the suit is barred by the law of the case, estoppel principles, contractual mandates, and insufficient evidence. In response, the Trust asserts that the Defendants are not entitled to summary judgment because they have failed to apply the appropriate standard of review, failed to apply the correct legal principles, failed to properly address the Trust's theories of recovery, and failed to acknowledge the Trust's evidence.
After considering the applicable statutory and procedural authority, the case law, the pleadings, and the arguments of counsel, the Court has determined that the Motion should be granted in part and denied in part. This Memorandum Opinion sets forth the Court's findings of fact and conclusions of law pursuant to Rule 7052 of the Federal Rules of Bankruptcy Procedure.3
On September 18 and 19, 2017, Toys "R" Us, Inc. and twenty-four affiliated entities (collectively, "TRU" or "the Debtors") filed voluntary Chapter 11 petitions for relief in the United States Bankruptcy Court for the Eastern District of Virginia (the "Court" or "Bankruptcy Court"). The cases were jointly administered pursuant to Bankruptcy Rule 1015(b), Fed. R. Bankr. P. 1015(b), the lead case being In re: Toys R Us, Inc., et al. , Case No. 17-34665-KLP.4 At the time of the bankruptcy filing, the Debtors and other related non-filing entities conducted the business of selling toys, childcare items, and related products on a global basis.
On March 22, 2018, the Court entered an Order authorizing TRU to wind down U.S. operations, authorizing U.S. store closings, establishing administrative claims procedures, and granting related relief.5 On July 17, 2018, in connection with its wind-down, TRU filed with the Court a settlement agreement (the "Settlement Agreement") by and among multiple parties. The Settlement Agreement resolved numerous issues relating to the liquidation of TRU's U.S. businesses.6 The parties to the Settlement Agreement agreed to release all claims against each other. Further, the Settlement Agreement provided that a Non-Released Claims Trust (the "Trust") would be established for the purpose of administering all remaining non-released claims, including claims held by TRU and its creditors against TRU's directors and officers. The Court entered an order approving the Settlement Agreement on August 8, 2018.7
On December 17, 2018, the Bankruptcy Court confirmed the Third Amended Chapter 11 Plan of TRU (the "Plan").8 On April 30, 2019, the Debtors filed the Non-Released Claims Trust Agreement.9 Section 2.3(a) of that agreement provides in part that:
The TRU Creditor Litigation Trust shall be the successor-in-interest to the Debtors with respect to any Non-Released Claims that were or could have been commenced or asserted by, or on behalf of, any of the Debtors or their estates prior to the applicable Effective Date, shall be deemed substituted for each such Debtor as the party in any such litigation and shall have the right to proceed in the name, right and stead of the Debtors with respect to all such Non-Released Claims.
In furtherance of its duty to pursue the non-released claims, the Trust initiated this litigation against the Defendants. It originally filed its complaint (the "Complaint") in the Supreme Court of the State of New York, County of New York.10 The case was subsequently removed to the U.S. District Court for the Southern District of New York and then transferred, upon Defendants’ motion, to the District Court for the Eastern District of Virginia (the "District Court"). The District Court then referred the case to this Court by Order dated May 5, 2020.11
The Complaint, as amended on April 30, 2021,12 asserts breach of fiduciary duty claims on behalf of TRU and direct claims on behalf of TRU's trade vendors against Defendants. Specifically, the Trust alleges that Defendants breached their fiduciary duties to TRU by (i) taking on DIP financing at the start of the Bankruptcy Proceeding (Complaint ¶¶ 169-201, 226-232); (ii) authorizing pre-petition retention payments to 114 company executives before the commencement of the Bankruptcy Proceeding (Id . ¶¶ 56-89, 213-217); and (iii) authorizing the payment of advisory fees to TRU's private equity shareholders from the fourth quarter of 2014 through the first quarter of 2017. (Id . ¶¶ 45-55, 207-225).13 These claims (the "Fiduciary Breach Claims") comprise Counts 1-4 of the Complaint.
The Trust further alleges that to induce trade vendors to ship goods and provide services to TRU on credit after the commencement of the bankruptcy cases, the Defendants misrepresented facts concerning TRU's ability to make payments for those goods and services. The Trust alleges that because of these misrepresentations, goods and services ordered by TRU on credit from trade vendors were delivered to TRU but were not paid for during the period from December 2017 through March 14, 2018. The Trust claims that the total amount due to vendors for those goods exceeds $600 million (Id. ¶¶ 90-135). It also alleges that TRU continued its misrepresentations to trade vendors, both fraudulently and negligently concealing and omitting material facts concerning TRU's ability to pay for goods and services ordered on credit, upon which misrepresentations the trade vendors reasonably relied. (Id . ¶¶ 136-168, 233-265). These claims are referred to as the "Vendor Claims."
On December 13, 2021, the Defendants filed the Motion,14 to which the Trust filed a lengthy opposition. The matter has been extensively briefed and oral arguments were held on February 23, 2022.
The Court has subject matter jurisdiction over this Adversary Proceeding pursuant to 28 U.S.C. §§ 157(a) and 1334 and the General Order of Reference from the United States District Court for the Eastern District of Virginia dated August 15, 1984. The District Court has determined that none of the counts set forth in the Complaint constitute core proceedings under 28 U.S.C. § 157(b)(2) and that the Trust is entitled to a jury trial on all counts; however, the District Court has not withdrawn the reference pursuant to 28 U.S.C. § 157(d), pending the parties’ decision on whether to jointly consent to having the trial conducted by the Bankruptcy Court.15 ,16 Venue is appropriate in this Court pursuant to 28 U.S.C. § 1408.
Rule 56 of the Federal Rules of Civil Procedure, Fed. R. Civ. P. 56, made applicable by Rule 7056 of the Federal Rules of Bankruptcy Procedure, Fed. R. Bankr. P. 7056, governs summary judgment in an adversary proceeding. Summary judgment is proper under Rule 56(c), "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Celotex Corp. v. Catrett , 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). A moving party, in this case the Defendants, has the burden of showing that there is no genuine issue of material fact. Anderson v. Liberty Lobby, Inc. , 477 U.S. 242, 256, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). In addition, "reasonable inferences should be drawn in favor of the nonmoving party" and the "court must view the evidence in the light most favorable to the opposing party." Tolan v. Cotton , 572 U.S. 650, 657, 660, 134 S.Ct. 1861, 188 L.Ed.2d 895 (2014) (quotations omitted).
Defendants maintain that the Court's final order approving the DIP financing and finding that the financing was an exercise of the Debtor's prudent business judgment consistent with their fiduciary duties is the binding law in this case. On October 24, 2017, over a month after conducting first day hearings and approving DIP financing on an interim basis, the Court held a final hearing on the Debtors’ motion for authorization to obtain postpetition financing. No party opposed the proposed financing or its terms, and it was approved by the Court on a final basis. The Court subsequently entered an order (the "Final DIP Order") authorizing the Debtors to access the financing on the terms set forth therein.17
The Final DIP Order concluded that the financing was "necessary and vital to the preservation and maintenance of the going concern values of the DIP Loan Parties and to a successful reorganization ...."18 The Final DIP Order also found that the terms of the financing were "fair and reasonable, reflect the DIP Loan Parties’ exercise of prudent business judgment consistent with their fiduciary duties and constitute reasonably equivalent value and fair consideration."19
The Defendants emphasize that the Final DIP Order specifically provides that it "shall be binding...
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