Mervyns takes on ex-owners

Mervyns, the mid-priced department store chain in bankruptcy proceedings, has filed a lawsuit against its former owners, including Target Corp., saying that the Wall Street investment firms that bought it in 2004 stripped Mervyns of its valuable real estate assets and set the company up to fail.

The $1.2-billion acquisition of Mervyns by a group of investors led by Sun Capital Partners Inc. and Cerberus Capital Management was a “fraudulent transfer,” according to the suit filed Tuesday in federal Bankruptcy Court against 37 defendants.

Before the sale, Hayward, Calif.-based Mervyns owned stores in desirable locations and held leases at favorable below-market rates on other stores in its 177-outlet chain, the lawsuit said.

To finance their leveraged buyout, the buyers borrowed hundreds of millions of dollars against that real estate while separating it from Mervyns retail operations.

Sun Capital, Cerberus Capital and their partners then leased Mervyns’ former properties back to the retailer at “substantially increased” rents to service debt incurred during the acquisition and to take profit from rising property values.

The transaction “ultimately led to Mervyns’ bankruptcy,” the lawsuit said.

Spokesmen for Sun Capital and Cerberus Capital both said the lawsuit was without merit. “We will defend ourselves vigorously,” said Peter Duda of Cerberus Capital.

Mervyns filed for Chapter 11 bankruptcy protection in July and blamed the “state of the economy and difficult operating environment for our industry.”

The firm said last month it would close 26 locations in California, Arizona, Idaho, Nevada and Texas by late October or early November.

In Southern California, the earmarked stores are in Canoga Park, Foothill Ranch, Huntington Beach, Irvine, Laguna Niguel, Palm Desert and Thousand Oaks. Four stores in Northern California also will be shut.

--

roger.vincent@latimes.com