Oct 8 (Reuters) - Two private equity firms agreed to a $166 million settlement of a lawsuit that accused them of stripping assets from the Mervyn's retail chain and pushing the former unit of Target Corp into bankruptcy, according to court documents.
Creditors had sued Sun Capital Partners, Cerberus Partners and others in Delaware's bankruptcy court for a series of transactions stemming from the $1.25 billion leveraged buyout of Mervyn's from Target in 2004.
The creditors blame the funds along with others of stripping Mervyn's of valuable real estate, leaving the company insolvent and unable to repay creditors when it filed for Chapter 11 on July 29, 2008. The chain was liquidated and went out of business during its bankruptcy.
At the time of its bankruptcy, Mervyn's operated 175 stores in California and the southwestern United States, and employed 18,000. While the company had reported sales of $2.5 billion in its final year before its bankruptcy, it had a net loss of $64 million.
Under the terms of the settlement, creditors will release all claims against the investment funds. The funds denied all allegations made in the creditors' lawsuit, which was filed in 2008.
The investment funds were accused of transferring Mervyn's real estate to entities they controlled which were beyond the reach of creditors. The funds were also accused of raising Mervyn's rent as well as extracting hundreds of millions of dollars in management fees and dividends.
Spokesmen for Cerberus and Sun did not immediately return a call for comment.
The case was brought by the Cooley law firm.
A hearing to approve the settlement has been scheduled for Oct. 29 in Wilmington.
The bankruptcy case is Mervyn's Holdings LLC, Delaware Bankruptcy Court, No. 08-11586 and the creditors lawsuit is Mervyn's LLC et al v Lubert-Adler Group IV et al, No. 08-51402.