Diving brief:

  • A U.S. bankruptcy judge for the Southern District of New York ruled on Wednesday that a lawsuit filed by a Tops Markets receiver can be pursued against private equity backer Morgan Stanley, which owned Tops for six years. .
  • The case, which was filed in February 2020, accuses Morgan Stanley of driving the regional grocery chain out of business by adding to the grocery company’s debt load while paying itself substantial dividends. itself and to other private equity investors.
  • Morgan Stanley had asked the bankruptcy court for the Southern District of New York to dismiss the lawsuit, but the judge ruled against it and allowed the case to proceed. The plaintiffs are asking for a jury trial.

Overview of the dive:

The judge’s decision on Wednesday means Morgan Stanley must now face charges of orchestrating “a series of massive and illegal dividends” that ultimately forced Tops to file for bankruptcy protection.

Morgan Stanley led the private equity group that bought Tops in 2007 for about 300 million dollars of Ahold and then sold the supermarket chain to a group of food company executives in 2013. Morgan Stanley owned more than 70% of Tops and controlled the company and its management for those six years, the lawsuit notes.

The lawsuit alleges that Morgan Stanley knew before the acquisition that Tops’ liabilities related to its pension plans jeopardized the company’s financial health. When Ahold refused to agree to terms that would shield Morgan Stanley from legal liability for pension plans, private equity investors took on the liability at a lower purchase price, the lawsuit claims.

“Although private equity investors purchased Tops’ equity for approximately $300 million, they only contributed $100 million in cash towards the purchase price. The balance of the purchase price, coupled with transaction fees and expenses, came from $227 million of debt issued by Tops,” the lawsuit alleges.

The lawsuit claims that Morgan Stanley raked in Tops’ debt, primarily due to millions of dollars in ‘lavish’ dividends paid to the finance company and other private equity investors, as the grocery company made in front of his unfunded pension liabilities.

“In total, Morgan Stanley ordered the company to pay over $375 million in total in four dividends, with Morgan Stanley receiving over $270 million. … As a result of these illegal dividends, private equity investors realized a return of more than three times their investment in Tops,” according to the complaint.

The company’s pension fund contribution deficit grew from $85 million in 2007 to more than $515 million in May 2013, the suit notes.

At the time of the 2013 sale, Tops’ debt was nearly $650 million, nearly triple the $227 million debt it had in 2007, according to the lawsuit. Tops filed for Chapter 11 bankruptcy protection in early 2018.

“Morgan Stanley dominated and controlled Tops and treated it like a piggy bank for private equity investors by loading it with debt to issue dividends, while doing little to maintain Tops and its stores,” the lawsuit alleges.

Besides Morgan Stanley, the lawsuit lists nearly a dozen other defendants, including five people who were on Tops’ board of directors, including the then chairman, when the dividends were approved and paid.

Alain HalperinThe trustee of the litigation trust created under the 2018 bankruptcy plan, filed the lawsuit against Morgan Stanley on behalf of creditors, including workers and pension plan retirees, according to The Wall Street Journal. The case was filed with the judge who oversaw Tops’ bankruptcy, The Wall Street Journal noted. The lawsuit seeks to hold private equity owners accountable and recover money for Tops’ creditors.

“We are pleased with the decision and look forward to pursuing the case for the benefit of Tops’ creditors,” Kyle said. Lonergandirector of a testing company Mccool Smith and the plaintiffs’ lead attorney in the case, said in an emailed statement.

The law firm representing Morgan Stanley did not return a request for comment on the decision.

Morgan Stanley has already come under scrutiny over its ownership of Tops. When Tops filed for Chapter 11, court documents from the time claimed the financial firm had played a role in the grocery chain by racking up an “unsustainable” amount of debt while owned by the company.