Mervyns suedhired Hilco RealEstate LLC

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Mervyns said in a prepared state that its board of directorsdetermined that "holding going out of business sales during theholiday season is the best way to maximize value for the company'screditors." Mervyns said it intends to retain an outsideprofessional services firm to assist in the liquidation sales ofinventory. Hilco is currently handling the going-out-of-businesssales now occurring at 26 Mervyns locations previously earmarkedfor closure.

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"We are disappointed with this outcome but the company'sdeclining liquidity position and the extremely challenging retailenvironment, together with the fact that we have exhausted allother possibilities, requires that we take this action," statedMervyns CEO John Goodman. "We are confident that the deep discountsavailable through going out of business sales will drivesignificant traffic in our stores."

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As part of Target Corp's 2004 sale of Mervyns to private equityfirms, all of Mervyns' real estate property were removed from thecompany and transferred to 24 related entities, known as the MDSentities, which then leased or subleased such properties back toMervyns pursuant to several master or unitary leases.

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Mervyns filed Chapter 11 at the end of July. Wachovia CapitalFinance arranged for a $465-million debtor-in-possession facilityfor Mervyns, which is being used to fund the company's ongoingoperations. In early September, Mervyns' sued Target and theprivate equity firms that acquired it for more than $1 billion,alleging that they structured a transaction that "stripped" thecompany's owned properties and below-market leaseholds, thenheavily leveraged the assets and jacked up Mervyns' rent by$80-million annually to cover it, effectively forcing the westernUS retailer into bankruptcy.

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"Mervyns' began the day of the closing with more than $1 billionof real estate and, within the blink of an eye, it was gone;Mervyns received nothing in return," states the lawsuit. "The 2004transaction is a transaction that ultimately led to Mervynsbankruptcy and is a fraudulent transfer that cannot withstandscrutiny."

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Representatives of Cerberus and Sun Capital have said thelawsuit, which is ongoing, is without merit; Target sent thefollowing statement to GlobeSt.com: "Target emphatically disagreeswith the claims against Target in this lawsuit. Our 2004 sale ofMervyns was an arms-length transaction that was the result of acompetitive bidding process."

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Prior to the bankruptcy filing, Mervyn's operated 177 storesaveraging 80,000 sf in California and six other states in thesouthwestern US. It employed 18,000 people. In its fiscal yearended Feb. 2, it recorded a net loss of $64 million on net sales of$2.5 billion.

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After the company's real estate was separated out and the twopieces sold to private equity firms, some of Mervyns leaseholdswere re-traded. In the most well-known of those deals, a jointventure between Developers Diversified Realty and Macquarie Trustin mid-2005 acquired 36 open and operating Mervyns stores for$396.2 million. The stores total 2.74 million sf and are locatedprimarily in California and are generally leased to Mervyns for thenext 15 years. DDR president/COO Dan Hurwitz spoke about theportfolio and speculation regarding Mervyns in a second quarterconference call held just days before Mervyns bankruptcyfiling.

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"We acquired 36 of our 38 Mervyns stores in 2005. Notably webought the first portfolio they sold post LBO and were able toselect what we believe are the most attractive locations," he said."Approximately 70% of the assets are based in California includingnearly one million sf in and around Los Angeles and over 500,000 sfin the Bay Area. If our Mervyns locations should become availableto release, we believe there will be significant retailer interestin the sites we own, based on their desirable West Coast locationswith high barriers to entry, infill locations and strongdemographics."

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