Toys ‘R’ Us workers seek higher status for severance

Former Toys 'R” Us workers will be asking a judge to award them severance and grant them the same priority for getting paid as the lawyers, financial advisers and suppliers who were considered vital to winding down the retailer's U.S. stores.

Toys 'R” Us Inc. agreed to give the workers until July 23 to file the request, according to a July 16 court document.

The concession leaves open the possibility that a severance agreement could be reached, although the company said it still reserves the right to fight the demand from its former staffers.

By submitting an administrative claim in the Toys 'R” Us bankruptcy liquidation, the 33,000 workers would be setting up a confrontation with other creditors who customarily are given high priority under the U.S. bankruptcy code because their services are considered crucial.

Any severance deal that taps the shrinking pool of cash left at Toys 'R” Us would need court approval, and would likely be opposed by other creditors as they'd be less likely to get full payment on their claims.

Toys 'R” Us put two limits on any severance claim. One restricts participation to workers on the job after Feb. 16, when company directors canceled a benefits program.

The other says Toys 'R” Us must be able to show the court that it had been paying out 'proper compensation” under its old severance plan.

Even if those two hurdles are cleared, any payment to workers may still be subject to challenge by other creditors and may be reduced based on how much money is left over after secured lenders - the ones with top claims on collateral and assets - are paid off.

After the biggest U.S. toy retailer sought court protection in September, the company spent six months trying to reorganize itself and exit bankruptcy as a smaller, profitable company. That effort failed, and Toys 'R” Us announced in March that it would liquidate U.S. operations and sell its Canadian, European and Asian businesses.

Following the announcement that Toys 'R” Us would liquidate its U.S. operations, suppliers and other creditors with administrative claims complained that there may not be enough money for all of them to be fully repaid, an unusual situation in big Chapter 11 cases.