Mervyns Sues its Owners, Target

By James Mammarella -- Home Textiles Today, 9/8/2008 12:00:00 AM

Wilmington, Del. —

Filing a Sept. 2 lawsuit alleging a "fraudulent transfer action," Mervyns LLC is suing 37 financial defendants — the private equity sponsors and private equity owners that bought it from Target — plus Target Corp. itself, which may offer the biggest prize, or perhaps the biggest trouble.

The equity firms (mainly Cerberus Capital, Lubert-Adler, and Sun Capital) that acquired Mervyns from Target for $1.175 billion in September 2004 also formed additional corporate entities at that time to act as landlords to Mervyns.

Now, the $2.5 billion mid-tier retailer, operating in Chapter 11 bankruptcy since July 29, cites "increased occupancy costs and inadequate capital resulting from the 2004 transaction" as a key reason it was compelled to declare that bankruptcy.

The suit alleges that at the time of the acquisition, its stripped-away real estate generated loan proceeds — $800 million in total — that were mainly paid to Target as part of the acquisition price, while Mervyns has been strapped with "aggregate annual rent expense in excess of $172 million, which far exceeds … what its annual occupancy expenses would have been" otherwise.

Mervyns LLC also alleges the transfer of its real property assets "was made with actual intent to hinder, delay or defraud creditors of Mervyns." The company cites six factors of the Uniform Fraudulent Transfer Act that it says were violated in its case, among other charges.

Importantly, Mervyns LLC alleges that Target breached its fiduciary duty by its actions related to the strip-away of the real estate assets. The lawsuit names Target in three of the five counts for which it seeks relief.

The suit was filed in the U.S. Bankruptcy Court for the District of Delaware under Case No. 08-11586 (KG).

Reacting to the lawsuit, Target issued a brief official statement, which it provided in its entirety to HTT: "Target emphatically disagrees with the claims against Target in this lawsuit. Our 2004 sale of Mervyns was an arms-length transaction that was the result of a competitive bidding process."