Toys “R” Us will have to defend itself against allegations that it shortchanged an overseas supplier whose faulty product saddled it with a $20.6 million wrongful-death judgment.
U.S. District Judge Katharine Hayden in Newark on Monday declined to dismiss a suit charging the retailer fraudulently induced Manley Toys of Hong Kong to ship a new line of products it had no intention of paying for.
Manley manufactured an inflatable six-foot pool slide that collapsed and caused a fatal injury to a Massachusetts woman in July 2006. A jury found that Toys “R” Us sold the slide despite its noncompliance with federal safety standards and awarded Robin Aleo’s family $20.6 million — $2.6 in compensatory and $18 million in punitive damages.
Following that 2011 verdict, Toys “R” Us refused to pay $1 million owed to Manley, pointing to a clause in its vendor agreement allowing withholding of payment to fund product-liability litigation connected to Manley products.
Toys “R” Us initially demanded indemnification, but the parties agreed in January 2012 to a plan allowing the retailer to hold 5 percent of invoices in escrow pending appeal of the judgment. Toys “R” Us would have “no other holdback or offset rights with respect to security for” the judgment.
Following the deal, Manley made a shipment of products worth $5 million. Toys “R” Us again failed to pay, allegedly demanding indemnification as it had before. Manley sued, claiming that Toys “R” Us negotiated the holdback agreement solely to obtain products but had no intention of paying for them.
Toys “R” Us CEO Gerald Storch visited Manley’s showroom right after the holdback agreement, said he was glad there’d been a resolution and asked for confirmation of a new shipment, Manley alleged.
Also, another Toys “R” Us employee promised payment but later “did an about-face” and said payment was being withheld, Manley claimed.
The Massachusetts Supreme Judicial Court affirmed the Aleo judgment just weeks ago, on Sept. 13.
Hayden declined a defense motion for dismissal of the federal suit, Manley Toys Ltd. v. Toys “R” Us Inc., finding “enough facts to render plausible the inference” that Toys “R” Us didn’t intend to honor its promise to pay but “had an incentive to take steps to fulfill its business needs.”
The company’s “unexplained about-face and motive are sufficient circumstantial evidence … that [it] fraudulently promised to pay Manley for future shipments solely to obtain the spring product line,” the judge wrote.
Hayden waved off Toys “R” Us’ contention that the fraud allegations were not specific enough, finding that Manley adequately pleaded reliance on Storch’s showroom visit to make the shipment.
It’s “reasonable to infer that Storch’s statements were offered to induce Manley to ship products quickly,” and the complaint “contains factual information that provides a plausible basis from which to infer that TRU lacked the intent to honor the agreement at the time of or prior to its execution,” Hayden wrote.
She also declined to reconsider Manley’s motion for a writ of attachment in the amount of $5 million against Toys “R” Us’ Wayne property.
Toys “R” Us spokesman Kathleen Waugh declines comment.
George Talarico of Edwards Wildman Palmer in Morristown, Toys “R” Us’ counsel, did not return a call Wednesday.
Neither did Gabriel Halpern of PinilisHalpern in Morristown, Manley’s counsel.