SAN FRANCISCO-Mervyn’s LLC this week sued its former owners for more than $1 billion. The suit alleges that they structured a transaction that “stripped” the Hayward, CA-based department-store chain of owned properties and below-market leaseholds, then heavily leveraged the assets and jacked up Mervyn’s rent by $80 million annually to cover it, effectively forcing the western US retailer into bankruptcy.

Among others, the defendants include Target Corp., and Cerberus Capital Management and Sun Capital Partners, two of the private equity firms to which Target sold Mervyn’s four years ago.

The lawsuit was filed on Sept. 2 as part of its bankruptcy case, which was filed on July 29. The story begins four years earlier when a group including Cerberus and Sun Capital acquired Mervyn’s from Target for $1.26 billion in a deal that was structured as two separate transactions, one for the real estate and another for the company itself. The lawsuit claims the structure of the deal and the private equity firms’ subsequent actions unduly enriched them at the expense of Mervyn’s solvency.

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