By Tracy Rucinski
(Reuters) - Toys 'R' Us will set aside about $156 million to pay vendors for toys and merchandise shipped after the U.S. retailer's Chapter 11 bankruptcy filing last September, a lawyer for the company said on Tuesday.
The vendor reserve fund will be carved out of a broader budget meant to cover some expenses as the retailer winds down its business in the largest-ever U.S. retail liquidation, Toys 'R' Us lawyer Joshua Sussberg said at a hearing at U.S. Bankruptcy Court in Richmond, Virginia.
However, the amount fails to cover total trade claims worth roughly $760 million, lawyers who represent trade vendors said at the hearing.
Vendors ranging from heavyweights such as handicraft company Crayola to smaller toy manufacturers have said in court papers that they were taken by surprise when Toys 'R' Us announced the largest-ever U.S. retail liquidation in March, putting payments at risk.
Many vendors believed that payment for shipments after the Sept. 18 Chapter 11 filing would be covered by a $3.1 billion bankruptcy loan, but that loan gives priority to lenders and other expenses such as legal fees, lawyers said on Tuesday.
"It's a really hard pill to swallow," said Erika Morabito, a lawyer who represents a group of trade vendors. At the hearing, she said vendors remain in a "dire" situation even after laying off employees and closing stores.
More than a dozen executives, specialists and lawyers have told Reuters that many small vendors are at risk of bankruptcy due to the disappearance of Toys 'R' Us and Babies 'R' Us in the United States.
In a court filing late Monday, Morabito said that absent a more comprehensive settlement, the group's members and other vendors will likely pursue litigation "against the persons or entities responsible for the severe losses suffered."
Both Morabito's group and an official committee of unsecured creditors are pushing for reserve funds to be paid on a pro rata basis.
U.S. Bankruptcy Judge Keith Phillips approved the proposed wind-down budget at the hearing.
Phillips also authorized the sale of Toys 'R' Canada to Toronto-based Fairfax Financial Holdings Ltd for $237 million. The company has said it is in talks over the sale of its Asian and Central European businesses.