Target Corp. lost a bid to avoid a lawsuit over its role in the sale of the Mervyn's department-store chain, instead drawing a warning from a bankruptcy judge that accusations about the deal, if proven, "make a troubling case of wrongdoing."
A Target spokesman said Wednesday its conduct in the sale was "completely proper," adding "we expect to prevail" during trial.
Denying Target's motion to dismiss the case against it, Judge Kevin Gross of the U.S. Bankruptcy Court in Wilmington, Del., said the complex series of transactions should be viewed as a single deal, one that had "devastating" consequences for Mervyn's creditors.
Mervyn's 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.
Target was paid and the investors profited from the 2004 transaction, which left Mervyn's retailing operation on the hook to pay for the deal. Mervyn's was forced to make allegedly 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 alleges.
The judge's ruling against dismissal gives creditors a chance to prove allegations that Target breached its duties to Mervyn's.
"Although Target points at others to blame, it is at the center of the 2004 sale," Gross wrote.
WALL STREET JOURNAL