Mervyns Sues Its Ex-Owners Over 'Fraudulent Transfer' of Stores
In a sign of the economically troubled times, a struggling department store chain has sued its former owners over its 2004 sale, contending that they improperly stripped it of its equity in a two-pronged transaction.
Mervyns characterizes the sale, in which its department stores and the company’s real estate were sold separately for approximately $1.2 billion, as a “fraudulent transfer” in the suit, which was filed Tuesday in federal bankruptcy court in Delaware, according to the Los Angeles Times.
Representatives of private equity investors who are lead defendants reportedly say the claims are without merit.
“By separating Mervyns’ real-estate assets from its retail operations, the private equity players made sure that any residual value or upside in the real estate assets were reserved for themselves and not for Mervyns,” court documents contend, Reuters reported. “The 2004 transaction is a transaction that ultimately led to Mervyn’s bankruptcy and is a fraudulent transfer that cannot withstand scrutiny.”
Such litigation ordinarily is brought by creditors of a bankrupt company, rather than the company itself, notes a Wall Street Journal article (sub. req.) on the suit. However, “as more private-equity-backed companies file for bankruptcy protection, creditors and the companies themselves are expected to increase attacks on the financial structures used in the buyout deals,” the article states.
It explains that Mervyns originally was sold for $1.26 billion by its former parent, Target Corp. The private-equity purchasers then more than doubled their money, as they leased many stores back to Mervyn’s at much higher rent and sold or leased some properties to different retailers. Appreciating real estate values, at that time, also helped pump up their profits.
Mervyns filed for Chapter 11 bankruptcy protection in federal court in Delaware in July, and its reorganization plan was approved late last month, as a company press release details.
