Lubert-Adler, Cerberus, Sun named in Mervyns' lawsuit

Mervyns, the California-based department store, has filed a lawsuit against its private equity owners claiming they “siphon[ed]” valuable real estate assets away from the company to leverage its buyout, eventually forcing it into bankruptcy.

Funds affiliated with Lubert-Adler Real Estate, Cerberus Capital Management and Sun Capital Partners were named as defendants in the suit, which alleges that around $1 billion (€709 million) of real estate assets were transferred out of Mervyns' control.

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 the time of going to press.

The 2004, $1.2 billion acquisition, 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.

However in a statement today, Mervyns argued 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 Mervyn’s to file for [Chapter 11] protection.” According to the lawsuit, Mervyns said 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 Co., Archon Financial, LaSalle Bank National Association and Greenwich Capital Financial Products.

Mervyns filed for Chapter 11 bankruptcy protection in July in order to reorganize its business. As part of a $465 million debtor-in-possession (DIP) 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.