An influential group of Tops Markets creditors is taking aim at transactions that helped push the supermarket chain into bankruptcy protection by piling on hundreds of millions of debt, much of it used to pay dividends to its private-equity owner at the time.
A group of unsecured creditors is seeking a "full examination" of dividend payments made following the 2007 acquisition of Tops by Morgan Stanley Private Equity, as well as other payments made after its subsequent sale in 2013 to a group of six high-ranking Tops executives in a highly leveraged management buyout.
The reason: The unsecured creditors stand to collect very little on the debts they are owed by Tops. Their debts don't give them a direct claim to any of Tops' assets, unlike a group of hedge funds and investors who own the vast majority of the more than $700 million in the secured debt issued by the company. Their secured debt has first dibs on those assets. That means the secured debt holders stand to be repaid more – but not nearly all – of what they are owed, likely through a proposed deal to swap that debt for a likely sizable ownership stake in the restructured company.
By getting the bankruptcy court to review the past deals, which they say enriched Morgan Stanley and, to a far lesser extent, Tops' current management, the unsecured creditors are hoping to free up more money that could be used to repay more of the debts they are owed.
At the heart of the issue are dividend payments and other transactions that, in the unsecured creditors view, put Tops in such a weakened financial state that it ultimately led the supermarket chain to file for bankruptcy protection in February.
Those transactions loaded the company with $450 million in additional debt, largely so the company could pay $347 million in dividends to Morgan Stanley.
Those transactions "all but ensured the ultimate filing of these Chapter 11 cases," the committee representing Tops unsecured creditors said in Bankruptcy Court papers filed on Friday.
Those transactions "appear to have resulted in a significant and improper transfer of value from the debtors to various insiders," the unsecured creditors said in the filing. "The magnitude of the pre-petition transactions alone indicates that a full examination is warranted."
The creditors said the transactions should be examined further to determine if they were fair and the result of "arm's length" negotiations and whether any of the payments were made at a time when Tops already was insolvent.
If the bankruptcy court determines that any of the payments were improper under bankruptcy law, Tops and Morgan Stanley could be ordered to return some of the money involved in those transactions, potentially freeing up more money to repay the unsecured creditors, attorneys said.
A Tops spokeswoman declined to comment.
Morgan Stanley acquired Tops in December 2007 from Dutch retail giant Ahold for $300 million. While Tops Chairman and CEO Frank Curci has credited Morgan Stanley with providing Tops with the funds it needed to invest in store upgrades and to acquire new stores in new markets across upstate New York, the private-equity firm also borrowed heavily to pay itself $347 million in dividends from 2009 to 2013. A Morgan Stanley affiliate also was paid $1 million a year as a "monitoring fee," the creditors said.
All told, Morgan Stanley was paid at least $377 million in dividends, fees and reimbursements by Tops.
Those dividends saddled Tops with $450 million in additional debt, forcing the chain to pay more than $80 million in interest last year alone. Those interest payments, coupled with stagnant sales in its highly competitive upstate markets, caused Tops' losses to swell and led the company to run short on cash by late last year.
The unsecured creditors also said that Curci, who served on the Tops board of directors under Morgan Stanley and had a small ownership stake in the business, and other senior Tops executives were paid $11.8 million in 2012 and 2013 to reimburse them for the decline in the value of the stock options they held in the company under one of its incentive plans. The price of Tops' privately held stock declined each time it issued more debt, making it less likely that the options to buy additional Tops stock in the future at a fixed price would have any value.
Those payments could be considered "apparent self-dealing" if they influenced the company's directors' decision to approve the Morgan Stanley dividend payments, the creditors said.
The creditors, who are asking the bankruptcy court to require Tops to turn over additional internal documents related to those transactions, said further review is needed to determine whether Tops was already insolvent when those payments were made and whether the company received "fair consideration" for the payments.
When Morgan Stanley sold Tops in December 2013 to a management group that included six high-ranking executives, the price was $20.9 million, plus the new owners assumed the company's debt, which ultimately topped $700 million. About 80 percent of the $20.9 million purchase price was "directly or indirectly funded" by the company, the creditors said.
Once the current management took over, the six executives held every seat on the company's board of directors, which also was responsible for setting the compensation of those same executives.
"In light of the clear conflict of interest, the committee is investigating how the board determined base salary and bonus amounts for each of the senior executives and whether those decisions were the product of self-dealing," the filing said.
The creditors also requested more information about $2 million in dividend payments that Tops' senior executives were paid in 2016 and $775,000 in dividends they received in 2015 – both years when the supermarket chain was posting annual losses.
"Available information suggests that the debtors were insolvent when both dividend payments were made," the creditors said.