Buyout firms pay $166 mln to end suit over Mervyn's sale

Oct 8 (Reuters) - Two private equity firms agreed to a $166million settlement of a lawsuit that accused them of strippingassets from the Mervyn's retail chain and pushing the formerunit of Target Corp into bankruptcy, according to courtdocuments.

Creditors had sued Sun Capital Partners, Cerberus Partnersand others in Delaware's bankruptcy court for a series oftransactions stemming from the $1.25 billion leveraged buyout ofMervyn's from Target in 2004.

The creditors blame the funds along with others of strippingMervyn's of valuable real estate, leaving the company insolventand unable to repay creditors when it filed for Chapter 11 onJuly 29, 2008. The chain was liquidated and went out of businessduring its bankruptcy.

At the time of its bankruptcy, Mervyn's operated 175 storesin California and the southwestern United States, and employed18,000. While the company had reported sales of $2.5 billion inits final year before its bankruptcy, it had a net loss of $64million.

Under the terms of the settlement, creditors will releaseall claims against the investment funds. The funds denied allallegations made in the creditors' lawsuit, which was filed in2008.

The investment funds were accused of transferring Mervyn'sreal estate to entities they controlled which were beyond thereach of creditors. The funds were also accused of raisingMervyn's rent as well as extracting hundreds of millions ofdollars in management fees and dividends.

Spokesmen for Cerberus and Sun did not immediately return acall for comment.

The case was brought by the Cooley law firm.

A hearing to approve the settlement has been scheduled forOct. 29 in Wilmington.

The bankruptcy case is Mervyn's Holdings LLC, DelawareBankruptcy Court, No. 08-11586 and the creditors lawsuit isMervyn's LLC et al v Lubert-Adler Group IV et al, No. 08-51402.

(Reporting By Tom Hals; Editing by Kenneth Barry)

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