Mervyns Suit Blames Ex-Owners for Bankruptcy

NEW YORK (Reuters) – Department-store chain Mervyn’s Holdings LLC has sued its former private-equity owners, saying the firms stripped out real estate then leased it back to Mervyn’s at higher rates, pushing it into bankruptcy, according to court documents.

Mervyn’s was purchased in 2004 by a group of investors including Cerberus Capital Management and Sun Capital Partners. The deal forced Mervyn’s to transfer nearly all of its real estate assets to a newly formed entity, according to documents filed on September 2.

As a result, Mervyn’s had to pay rents for locations that, before the deal, it had either owned or leased at rates that were often below market rates, the company said in papers filed at the bankruptcy court in Delaware.

“By separating Mervyn’s real-estate assets from its retail operations, the private equity players made sure that any residual value or upside in the real estate assets were reserved for themselves and not for Mervyn’s,” according to the documents. “The 2004 transaction is a transaction that ultimately led to Mervyn’s bankruptcy and is a fraudulent transfer that cannot withstand scrutiny.”

When Hayward, California-based Mervyn’s filed for bankruptcy in July, it had 177 stores in seven states, employed about 18,000 people and had annual revenue of about $2.5 billion. The retailer has so far announced plans to close 26 stores and cut about 1,700 workers as part of a restructuring plan.

“We believe the lawsuit is without merit and we will vigorously defend ourselves,” said Cerberus spokesman Peter Duda.

Representatives at Mervyn’s and Sun Capital were not immediately available for comment.

(Reporting by Chelsea Emery, additional reporting by Sweta Singh in Bangalore; Editing by Maureen Bavdek