Toys “R” Us – Toys Labuan Objects to Toys Delaware Debtors and Geoffrey Debtors Plan, Views Rejection of ITASSA as “Coercive…Risky Strategy”

October 5, 2018 – Toys (Labuan) Holding Limited (hereinafter, “Toys Labuan” or the “Asia JV”) objected [Docket No. 5152] to confirmation of the Second Amended Chapter 11 Plans of the Toys Delaware and Geoffrey Debtors [Docket No. 4542]. Toys Labuan asserts, “The Debtors’ 84.47% indirect equity interest in the Asia JV is by far the single largest source of value available to the Taj Debtors’ estates for distribution to their creditors and, potentially, creditors of the Debtor Toys Inc….Still, Toys Delaware proposes to reject a mission-critical contract—the ITASSA—pursuant to which the Asia JV receives information technology applications development services, infrastructure services, and operations services necessary to perform day-to-day functions. Toys Delaware proposes to reject the ITASSA on the plan’s Effective Date without affording the Asia JV any time to transition to another service provider and without turning over the Asia JV’s source codes and historical data, thereby impeding the ability of the Asia Business to operate….There is no rational explanation for Toys Delaware’s decision. Instead of acting in the best interests of Toys Delaware, the company appears to be implementing the coercive— but risky—strategy of its affiliate, Geoffrey, to renegotiate the terms of the previously-assumed MLA and the integrated Subsidy Agreement between the Asia JV and Geoffrey. The Asia JV licenses intellectual property from Geoffrey under the MLA, and Geoffrey owes the Asia JV no less than $22 million under the Subsidy Agreement. Geoffrey and its creditors (who also are creditors of Toys Delaware) seek to obtain leverage over disputes concerning the MLA and the Subsidy Agreement and know well that the prospect of an immediate rejection of the ITASSA without a reasonable transition period and the turnover of the Asia JV’s property creates enormous pressure. They hope to extract concessions under the MLA and the Subsidy Agreement by applying that pressure—even at the risk of depleting the ‘single-largest source of value’ to creditors. To the extent Toys Delaware decided to reject the ITASSA in order to enable Geoffrey’s strong-arm negotiation tactics with respect to the MLA and Subsidy Agreement, then the business-judgment standard of section 365 of the Bankruptcy Code is not satisfied.”