Cerberus, Sun Capital named in Mervyns lawsuit

The US department store, which filed for Chapter 11 bankruptcy protection in July, has filed a lawsuit against its buyers, including funds controlled by Cerberus Capital, Sun Capital and Lubert-Adler, alleging the firms stripped it of its real estate assets in order to leverage the buyout.

Mervyns, the California-based department store, has filed a lawsuit against Cerberus Capital Management, Sun Capital Partners and Lubert-Adler Real Estate, claiming they “siphon[ed]” around $1 billion (€709 million) in real estate assets from the company to leverage its $1.2 billion buyout, eventually forcing the company into bankruptcy.

Spokesmen for both Cerberus and Sun Capital said the lawsuit was “without merit”, with the Cerberus spokesman adding that the firm would “vigorously defend itself”. Lubert-Adler was unavailable for comment at press time.

The department store chain's 2004 buyout, led by Cerberus and Sun Capital, involved two separate deals for Mervyns' retail business and its real estate assets, which were subsequently leased to Mervyns and sold and leased to other retailers.

Mervyns said in a statement today that the private equity firms, through “complex and sophisticated real estate transactions”, transferred control of Mervyns’ real estate assets, leasing the properties back to the retail company at more than double the previous rent.

The restructuring, it added, “contributed to the need for Mervyns to file for [Chapter 11] protection”. According to the lawsuit, Mervyns says it was a “helpless pawn” in the deal, in which it “received nothing in return”.

Cerberus sold its stake in the department store company to Sun Capital last November, according to media reports at the time. Others named in the suit include Target; Klaff Partners’ joint venture with Lubert-Adler; Goldman Sachs Mortgage Company; Archon Financial; LaSalle Bank National Association and Greenwich Capital Financial Products.

Mervyns filed for Chapter 11 bankruptcy protection in July in order to reorganise its business. As part of a $465 million debtor-in-possession loan refinancing loan, the company plans to shut 26 of its 177 stores and lay off around 1,700 workers as well as sell some assets.