Growing up, my family would often spend Saturday mornings just visiting our local Toys R Us. If we couldn’t convince our parents to buy the latest Transformers or Game Boys, we’d hide them in the back shelves until we could return for them. Twenty years later though, Toys R Us has filed for Chapter 11 bankruptcy to resolve its $5 billion debt.
I wasn’t the only one who was unhappy to hear the bad news. One young boy, Andrew, went so far as to file a pleading with the bankruptcy court.
Andrew gives three persuasive reasons:
- It would be bad for kids
- They would be very unhappy
- And they would be rather promised a trip toys r us than any other store
Andrew’s pleadings were entered into the docket like all other documents.
Understanding Chapter 11 and Chapter 7 Bankruptcy
Gruesome metaphors aside, Chapter 11 can be a great tool for struggling businesses. In Chapter 11, the business is reorganized, hopefully into a stronger entity. Like Chapter 13 for individuals, businesses going through Chapter 11 are required to come up with a plan for restructuring. This may require repaying some creditors, selling off unprofitable portions of the company, and investing in parts of the company that are making money. In rare instances, the Chapter 11 may be converted into a Chapter 7 bankruptcy if the company cannot be salvaged through the restructuring plan.
Toys R Us owes $7.5 billion total to almost every major toymaker in the country: Crayola ($2.6 million), Hasbro ($59 million), Lego ($32 million), Mattel (owed $136 million), Radio Flyer ($12 million), and Spin Master ($33 million). Toys R Us is determined to keep its doors open as it goes through bankruptcy, but the decision may ultimately be out of the retail’s hands. If suppliers lose confidence in Toys R Us’s ability to repay them, they might decide not to ship their products to Toys R Us. With Black Friday and Christmas approaching, that would almost certainly put Toys R Us out of business for good.
Fortunately, Chapter 11 bankruptcy itself provides a way for Toys R Us to stabilize itself. When a business is under Chapter 11 bankruptcy, the business has the power to assume or reject executory contracts. An executory contract is a contract where both parties have yet to fulfill the material terms of the contract. For example, suppose that Toys R Us and Hasbro have a contract whereby Toys R Us agrees to buy 500 units of beanie babies for $1 million. Due to Toys R Us’s debt problems, the retail has yet to pay the order and Hasbro has yet to deliver the beanie babies. Since neither company has fulfilled its end of the bargain, Toys R Us can choose to assume or reject the agreement.
If the contract is assumed, then the parties will maintain the deal and the debtor can seek a court order to enforce it, if necessary. If the contract is rejected, then the contract will be null and void. For a struggling debtor like Toys R Us, the power to bind its creditors to contracts previously made can be a lifesaver. Young children like Andrew may have a few more years to enjoy their favorite toy store.