The creditors of bankrupt Mervyn's, the former Target Corp. clothing subsidiary, will collect a $166 million settlement from Target, Cerberus Capital Management and about 40 other investors in connection with a 2008 lawsuit.

Judge Kevin Gross of the U.S. Bankruptcy Court in Wilmington, Del., on Friday agreed to the settlement, which was disclosed Tuesday.

"Target is pleased this matter is resolved," said Jessica Deede, a Target spokeswoman. She declined to elaborate.

Mervyn's, based in Hayward, Calif., landed in bankruptcy in 2008, nearly four years after Target sold Mervyn's to Cerberus Capital Management, Sun Capital and other investors for $1.25 billion.

Unpaid creditors sued more than three dozen entities linked to the deal, including Target, Sun and Cerberus. Lawyers for Mervyn's creditors said the deal was designed to defraud them by stripping the department store chain's valuable real estate from the retailing operation.

The suit alleged that after Target was paid and the investors profited from the 2004 transaction, Mervyn's retailing operation was on the hook to pay for the deal. The suit alleged that Mervyn's was forced to make overpriced lease payments on stores it once owned. The real estate payments proved too much for a 177-store chain left with $22 million in working capital and saddled with $800 million in debt, the lawsuit alleged.

The settlement will enable a Chapter 11 plan that provides a "meaningful distribution'' to unsecured creditors, according to the creditor committee's court filing.

Bloomberg News contributed to this report. Steve Alexander • 612-673-4553