By Lance Duroni
A Delaware bankruptcy judge gave his blessing Friday to a $166 million settlement between Mervyn's LLC creditors and private equity firms over the 2004 leveraged buyout of the department store chain, overruling an objection from a distressed debt investment firm.
U.S. Bankruptcy Judge Kevin Gross cleared the settlement, ending a four-year fight in litigation where unsecured creditors accused Sun Capital Partners Inc., Cerberus Capital Management LP and others of leaving Mervyn's insolvent after stripping it of valuable real estate assets in the $1.26 billion buyout.
"I think it is clearly a fair and reasonable settlement," Judge Gross said.
United States Debt Recovery LLC, which holds over $10 million in unsecured claims, had objected to the deal, claiming the official committee of unsecured creditors behind the litigation had not disclosed enough information to prove the settlement was preferable to fighting it out in court.
The settlement lacks a cost-benefit analysis showing the probability of success in the litigation or potential recovery if creditors won at trial, according to David Holmes of Cross & Simon LLC, an attorney for USDR, which estimated the suit could yield around $400 million.
But Jay Indyke of Cooley LLP, an attorney for the committee, countered that USDR was likely just fishing for information upon which it could execute more profitable trades of creditor claims. He said the settlement will allow the estate to cover $93 million in unpaid administrative claims and confirm a liquidation plan with some recovery for unsecured creditors owed around $400 million.
"That's a success story," he said, adding that "creditors can't wait for this to be approved so they can start getting paid."
The committee's complaint accused the private equity buyers of engaging in a series of fraudulent transfers that stripped owned real estate and favorable leases from Mervyn's to back $800 million in buyout loans when they purchased the chain from Target Corp. in 2004, reaping $58 million of fees in the process.
In settling the suit, the defendants were largely concerned with the "astronomical" costs of the litigation, according to David Hillman of Schulte Roth & Zabel LLP, who represents Cerberus. The private equity firms went into the buyout believing they could separate Mervyn's from some of its real estate assets and create two viable companies, he said.
The firms also held that the department store chain was successful for many years after the buyout and was not rendered insolvent by the deal, according to Hillman.
"There are complications in pursuing litigation even when you have a firm conviction in the truth and merits of your position," he said.
Mervyn's filed for bankruptcy in July 2008, and liquidated its 175 stores later that year after failing to reorganize at the height of the financial crisis. Before filing for bankruptcy, Mervyn's had 18,000 employees in locations throughout California and the Southwest.
The committee is represented by Jay R. Indyke, Ronald R. Sussman, Cathy Hershcopf and Seth Van Aalten of Cooley LLP and Neil B. Glassman and Ashley B. Stitzer of Bayard PA.
USDR is represented by Michael J. Joyce and David G. Holmes of Cross & Simon LLC.
Cerberus is represented by Schulte Roth & Zabel LLP. Sun Capital is represented by Kirkland & Ellis LLP.
The cases are Mervyn's LLC v. Lubert-Adler and Klaff Partners LP et al., case number 1:08-ap-51402, and the Official Committee of Unsecured Creditors of Mervyn's Holdings LLC et al. v. SCSF Mervyn's (Offshore) Inc. et al., case number 1:09-ap-50887, in the U.S. Bankruptcy Court for the District of Delaware.
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