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After Zany Brainy filed for Chapter 11 bankruptcy on May 15, its executives wanted a quick resolution to its problems. So a team of Morgan Lewis & Bockius lawyers was instructed to move fast to find a suitable buyer for the financially strapped toy retailer. Less than two months later, company officials and their creditors got their wish as the assets for the King of Prussia, Pa.-based company were sold July 9 to Waterton Management of Los Angeles for $115 million. The deal is contingent upon receiving approval from U.S. District Chief Judge Sue Robinson in Wilmington, Del., on Aug. 10. “Most of the company’s vendors had identified potential purchasers during the pre-petition period,” Morgan Lewis bankruptcy partner Michael Bloom said. “And we received several significant offers. But the Waterton offer was far and away the best one.” Bloom said Zany Brainy and its vendors were looking for a buyer that understood the value of the company’s brand of high-end toys, games, books and multimedia products. Aside from also wanting to assure payback to creditors, Zany Brainy also wanted to maintain most, if not all, of its current 187 locations across the country and the largest number of jobs possible. Bloom said his work in this matter is far from over. Upon the expected approval from Robinson, Zany Brainy will transfer substantially all of its employees, assets and certain liabilities, including post-petition trade payables and store leases, to a newly created subsidiary whose operations are not subject to the Bankruptcy Court proceedings. Waterton will arrange for a new secured loan facility for this subsidiary. Bloom said Zany Brainy will utilize cash received from the new subsidiary to pay off the existing debtor-in-possession facility, pay certain other expenses and obligations and, under a plan of reorganization, fund payments to its unsecured creditors. The new operating subsidiary will also retain substantial working capital at the time of closing. As soon as practicable after the closing, Bloom said Zany Brainy intends to file a plan of reorganization. Provided that Zany Brainy meets its sales targets and other projections prior to closing, officials said they anticipate that unsecured creditors will receive a distribution on their pre-petition claims in the range of 15 cents to 20 cents on the dollar. Existing Zany Brainy shareholders are not expected to receive any distribution. When Zany Brainy realized it was in financial trouble during the early part of the year, their representation at Morgan Lewis shifted quickly from business and finance lawyers to bankruptcy lawyers such as Bloom. When he assumed a lead role in late February, Bloom said he worked with lenders and an informal creditors’ committee in an effort to keep the situation from turning into a Chapter 11. But the attorneys involved felt it was necessary to assure payment to vendors by filing for Chapter 11 in U.S. Bankruptcy Court in Wilmington. Zany Brainy maintains a retail store in Wilmington, and has 52 stores in mid-Atlantic states, making Delaware an acceptable jurisdiction in which to file. But Bloom admitted that the “sophistication and expertise of the Delaware bankruptcy court” also contributed to the company’s decision to seek Chapter 11 there. Other Morgan Lewis attorneys working on the deal were business and finance partners Joanne Soslow, Michael Pedrick and Richard Aldridge along with bankruptcy associate Joel Soloman and business and finance associates Michael Silberman and Megan Timmins. Zany Brainy has been a client of Philadelphia-based Morgan Lewis for quite some time. Only last year Soslow was among the lawyers who spearheaded the company’s acquisition of competitor Noodle Kidoodle. Bloom, though, said he is not certain about whether Morgan Lewis will continue its longstanding representation of Zany Brainy if the deal with Waterton is approved as expected. But he probably won’t have much time to ponder that, being that he has not only maintained his existing client roster but also assuming work from business and finance department clients that have fallen on hard times this year. “It’s great if you like to work 18-hour days,” Bloom said. Serving as co-counsel with Morgan Lewis were Mark Collins and Daniel DeFranceschi of Wilmington’s Richards Layton & Finger. Waterton was represented by Joseph Eisenberg of Los Angeles-based Jeffer Mangles Butler & Marmaro, while the creditors’ committee was represented by Paul Troub and Michael Fox of New York City’s Troub Bonacquist & Fox.

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