A trustee for Tops Friendly Markets creditors can move forward with a lawsuit against Morgan Stanley and other company backers over dividends paid before the grocery chain filed for chapter 11, WSJ Pro Bankruptcy reported. The creditors filed the claims in 2020 against Morgan Stanley Investment Management and other former owners of Tops, alleging the private-equity owners paid themselves $375 million in dividends while leaving Tops insolvent, unable to cover its debts and pension obligations. Bankruptcy Judge Robert Drain of the U.S. Bankruptcy Court in White Plains, N.Y., on Wednesday declined to dismiss the lawsuit, saying the trustee made a plausible argument to support the case despite the private-equity owners’ objections. The judge went beyond the Tops case to comment on how the Bankruptcy Code allows private-equity owners to “loot privately-held companies to the detriment of their non-insider creditors with effective impunity.” The lawsuit alleged that the private-equity owners made four separate dividend payments to themselves worth hundreds of millions of dollars while they were aware the company’s pension plans were significantly underfunded. The first $105 million paid out in October 2009 was made when the company was insolvent, the lawsuit said.
