By  on September 5, 2008

Mervyns has filed suit against its former ownership group, alleging the private equity firms’ business dealings forced the department store chain into bankruptcy in July.

The suit filed in federal bankruptcy court in Wilmington, Del., on Sept. 2 charges that the ownership consortium, which included Sun Capital Partners Inc. and Cerberus Partners, stripped Mervyns of valuable real estate assets, such as owned stores and below-market leases, when it took over the company for about $1.2 billion in a leveraged buyout from Target Corp. in 2004.

The owners then leased the properties back to the retailer at substantially increased rates to service acquisition debt, according to the complaint. The retailer said the excess cash strain directly contributed to its need to file for Chapter 11 bankruptcy protection.

The suit alleges that “the 2004 transaction is a transaction that ultimately led Mervyns to bankruptcy and is a fraudulent transfer that cannot withstand scrutiny.” The company also named Target as a defendant, contending that the company agreed to the arrangements.

Mervyns filed as its window of opportunity to do so was closing, a fact it made clear Thursday.

“Mervyns brought legal action, in advance of the possible expiration of the statute of limitations, in order to preserve the value of the claims for the benefit of the company’s creditors and the estate,” the company said. “The creditors’ committee is aware of this action and shares the company’s concerns.”

A spokesman for Cerberus said the suit is without merit and that the private equity firm will vigorously defend itself. A spokesman for Sun Capital also said that the suit was without merit.

Target defended its actions. “Our 2004 sale of Mervyns was an arm’s-length transaction that was the result of a competitive bidding process,” said Hadley Barrows, a spokeswoman.

Mervyns is seeking an amount equal to the price paid for the chain by the consortium “or the proceeds of the loans made by the real estate secured lenders that were borrowed using Mervyns’ real estate assets as collateral” and other damages to be determined at trial.

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