Mastermind Toys Bankruptcy: Restructuring and Severance

The Ontario Superior Court of Justice has approved the sale of Mastermind Toys to Unity Acquisitions Inc., according to reporting by The Globe and Mail.

The crucial court approval comes after the Canadian toy store chain received creditor protection through the Companies’ Creditors Arrangement Act (CCAA) to restructure its business on Nov. 23. Creditor protection gives companies experiencing financial difficulties a chance to restructure their business in order to return to profitability.

• Approval: Justice Jana Steele approved the purchase of Mastermind by Unity (owned by Joe Mimran, Frank Rocchetti and David Lui) from Birch Hill Equity Partners Management Inc. on Dec. 13.
• Stores: 48 of Mastermind’s 66 stores will remain in operation. The remaining 18 stores have undergone liquidation sales.
• Employees: The acquisition will save more than 500 jobs, or 85% of the 800 people employed by the speciality toy and children’s book chain before it sought creditor protection in November.
• More Details: The deal means that suppliers and landlords will continue to do business with Mastermind. The exact purchase price remains sealed by the court, but includes cash to pay down the remainder of the $18.5 million debt owed to CIBC.

The Toronto-based retailer says it made the “difficult but necessary” decision to restructure due to increasing competition, the impact of the COVID-19 pandemic, and a tough economic environment, according to the application.

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• Employee rights when their employer goes bankrupt

Mastermind is keeping all 66 of its stores in Canada open for business, and will continue to offer sales and promotions during the holiday season, as it did through Black Friday. Underperforming stores are being liquidated and closed.

The toy seller previously said that if it did not close the deal with Unity by the end of December, it would “have no choice but to commence a full liquidation of all 66 of their retail locations,” according to court documents.

Unity Acquisitions has been buying various Canadian retailers, including clothing store chain Kit and Ace, Casca Footwear earlier this year, and Tilly Endurables, which it acquired in 2020.

How did Mastermind get here?

Mastermind was originally founded as an educational software store in 1984 by brothers Andy and Jon Levy, who turned the shop into a chain with a broader assortment of merchandise.

• They rebranded the company as Mastermind Toys in the 2000s to focus on educational toys.
• The iconic chain has approximately 800 non-unionized employees working across locations in multiple provinces, including Ontario, Alberta and B.C.
• Companies like Mastermind have been affected by the decline of specialty retail and pressure from online marketplaces like Amazon.
• Children are increasingly interested in online or digital games instead of ‘analog’ toys.
• Mastermind had been trying to sell the business since April 2023, following net losses and financial issues. Store sales fell 22 per cent from 2022.
• At the time of filing, Mastermind owed $22.2 million to unsecured creditors, including merchandise and logistics vendors, and $25.7 million to Canadian Imperial Bank of Commerce, one of its secured creditors.
• There are $5.6 million in gift card liabilities.

Mastermind Toys Severance: Bankruptcy or Restructuring

When a company restructures or declares bankruptcy, it’s still responsible for paying its employees’ unpaid wages and severance packages.

Therefore, Mastermind Toys owes full severance pay to employees who lose their job.

However, because employees are classified as ‘unsecured creditors’ during restructuring or bankruptcy in Canada, the reality is that Mastermind staff will likely receive little to no severance pay.

Why: Unsecured creditors are lower in priority for repayment, behind secured creditors like banks and government tax claims. Often, by the time secured creditors are paid, there are not enough funds left to fully pay the employees.

The difference between what Mastermind employees are owed, and what little they might receive, could be tens of thousands of dollars.

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The Sears Act

Championed by Samfiru Tumarkin LLP, the Sears Act focuses on better protecting employees during a company’s bankruptcy.

It aims to make sure employees get treated as secured creditors, so they can be paid their severance and unpaid wages first, ahead of unsecured creditors.

When should I contact an employment lawyer?

You should contact the employment lawyers at Samfiru Tumarkin LLP immediately when you lose your job, your employer permanently closes the company and one of the following happens:

• Your employer doesn’t file for restructuring or bankruptcy.
• Your employer claims they will file for bankruptcy through the BIA or CCAA, but doesn’t actually follow through.

In these scenarios, non-unionized employees are still legally entitled to a full severance package, which can be as much as 24 months’ pay.

This is where an employment lawyer from Samfiru Tumarkin LLP can be invaluable. We can help you understand your rights and properly navigate the legal process to maximize your compensation.

Don’t do this alone. Contact Samfiru Tumarkin LLP for expert guidance and support in these unique situations.

Our employment lawyers in Ontario, Alberta, and B.C. have helped tens of thousands of individuals enforce their rights.

If you are a non-unionized worker who needs help with an employment issue, contact us or call 1-855-821-5900 to get the advice you need, and the compensation you deserve.