Wednesday, November 15, 2017

New York Times: Why Companies Like Toys ‘R’ Us Love to Go Bust in Richmond, Va.

By Michael Corkery and Jessica Silver Greenberg

The Toys “R” Us world headquarters are on a sprawling wooded campus next to a
reservoir in Wayne, N.J., on a street that bears the name of the company’s iconic
mascot, Geoffrey the giraffe.

But in September, when Toys “R” Us filed for one of the largest bankruptcies of
the year, it did not go to nearby Newark.

Instead, the toy company followed an increasing number of corporations —
from Gymboree to a major coal company to a Pennsylvania fracking company — that
are choosing to file for bankruptcy in Richmond, Va.

In recent years, Richmond has become the destination wedding spot for failed companies. The United States Bankruptcy Court there offers several features attractive to the executives, bankers and lawyers trying to get an edge in the proceedings.

First, Richmond’s bankruptcy court offers a so-called rocket docket that moves cases along swiftly. Chapter 11 bankruptcy filings can be laborious proceedings that drag on for years. Gymboree’s bankruptcy was completed in less than four months.

Second, the legal record in that court district includes precedents favorable to
companies, like making it easier to walk away from union contracts.

But perhaps one of the biggest draws, according to bankruptcy lawyers and
academics, is the hefty rates lawyers are able to charge there. The New York law firm
representing Toys “R” Us, Kirkland & Ellis, told the judge that its lawyers were
charging as much as $1,745 an hour. That is 25 percent more than the average
highest rate in 10 of the largest bankruptcies this year, according an analysis by The
New York Times.

“The numbers are stratospheric,” said Kevin Barrett, a lawyer at the firm Bailey
Glasser, who represented the State of West Virginia in two coal bankruptcy cases
filed in Richmond.

Companies can file for bankruptcy in a court district where they have an affiliate
— a loophole that allows them to shop for the court they think will provide the best

For an affiliate to be incorporated in Virginia, it can use a “registered agent”
with a local address, according to the state. For its bankruptcy filing, state records
show, Toys “R” Us used a Richmond affiliate whose registered agent has an office in
downtown Richmond.

Representatives for Kirkland & Ellis and Toys “R” Us declined to comment for
this article. So did a spokesman for the federal bankruptcy court in Richmond.

It’s not just the lawyers who stand to gain from the Toys “R” Us bankruptcy. The
bankers and other professionals who helped arrange $3.1 billion in new debt to keep
the company operating in bankruptcy will collect $96 million in fees, according to a
court document filed by Toys “R” Us.

Executives at bankrupt companies typically agree to the high fees, bankruptcy
experts say, because they think the cost will have been worth it if the lawyers and
bankers can save their business. Kirkland & Ellis has a long track record of getting
companies back on their feet in bankruptcy.

The two judges in Richmond are also known for their expertise. “The judges understand the complexities of large corporate bankruptcies and can handle cases expeditiously,” said Dion Hayes, a local bankruptcy lawyer.

Still, the huge fees can eat into the money that is left over for small creditors —
typically vendors, suppliers and pensioners.

In the Toys “R” Us case, dozens of suppliers of scooters, rubber duckies and
teething rings could lose millions in the bankruptcy.

Linda Parry Murphy, chief executive of Product Launchers, a distributor for
several small toy suppliers, said her clients were owed about $1.2 million from Toys
“R” Us. She worries that they may recover as little as $120,000.

“For some of these clients it was very devastating,” she said.

Nationally, professional fees for bankruptcies have been increasing about 9.5
percent a year, about four times the rate of inflation, according to Lynn LoPucki, a
bankruptcy professor at the University of California, Los Angeles.

Mr. LoPucki said the higher fees were fueled, in part, by court shopping. Lawyers advising troubled companies tend to gravitate to courts that approve their fees, he said. Judges who balk at high fees see far fewer cases.

“They become pariah courts,” Mr. LoPucki said.

Down the road, creditors in the Toys “R” Us bankruptcy can challenge how
many hours the lawyers bill at the high rates. Another check on the costs is the
United States Trustee Program, which helps oversee the process and can object if the
legal bill seems unreasonable.

The vast majority of companies — more than 76 percent — now file for
bankruptcy in a different state from where they are based, Mr. LoPucki said.
Delaware and New York — which have long been popular bankruptcy
destinations — still see the lion’s share of the filings.

But Richmond is gaining ground. In July, an article in The Virginia Lawyers Weekly declared the city a “bankruptcy haven” and quoted a local lawyer who said the high legal fees charged there would give judges in other courts a “heart attack.”the high legal fees charged there would give judges in other courts a “heart attack.”

Then in September, the court landed the Toys “R” Us bankruptcy.

Toys “R” Us started out in 1948 as a company that sold cribs and strollers out of
the ground floor of a house in Washington, D.C.

It expanded into the world’s leading toy retailer with about 2,000 stores and an
advertising jingle — “I Don’t Want to Grow Up, I’m a Toys ‘R’ Us Kid” — that could
stick in its customers’ heads like glue.

Seeing opportunity in a consolidated toy industry, the private equity investors
Bain Capital and Kohlberg Kravis Roberts and the real estate firm Vornado Realty
Trust bought the company in 2005 and loaded it up with debt that today stands at
$5.3 billion. It was a burden that proved too much to overcome.

Toys “R” Us has dozens of affiliates around the globe employing 64,000 people.

But when it came time to file for bankruptcy, the company opted for Richmond,
where its law firm, Kirkland & Ellis, had success in the past.

The law firm had represented Patriot Coal, a coal miner based in West Virginia
that filed for bankruptcy twice in four years, most recently in Richmond in 2015.

In that case, the most profitable mines went to another coal company backed by
Patriot’s lenders, while the others were closed.

Mr. Barrett, the lawyer who represented the State of West Virginia in that case,
was stunned by the fees.

“I remember five lawyers in one meeting, and I joked that meeting cost
$10,000,” he said.

This year, Kirkland worked on another bankruptcy case in Richmond —
Gymboree, the children’s clothing retailer, based in San Francisco.

Like Toys “R” Us, Gymboree was owned by private equity and was weighed siwn bt debt.

After emerging from bankruptcy in September, the company closed 350 of its
stores across the country, but the retailer is still in business.

The Toys “R” Us bankruptcy case kicked off in September at a packed hearing.
Kirkland & Ellis set the stage by playing the Toys “R” Us theme song for the judge.
The toy company, the lawyer explained, had tried to turn around its business.

But it couldn’t afford to sufficiently spruce up its stores and compete with retailers
like Walmart and Amazon because it had billions of dollars in debt. He emphasized
how Toys “R” Us had brought joy to many children and how the bankruptcy process
would help the company survive.

“We are all Toys ‘R’ Us kids,” he said.

Copyright 2017 The New York Times Company.  All rights reserved.

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