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Debra A. Dandeneau WEIL, GOTSHAL & MANGES LLP 767 Fifth Avenue New York, New York 10153 Telephone: (212) 310-8000 Facsimile: (212) 310-8007

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Proposed Attorneys for Debtor and Debtor in Possession

UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK

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:

In re

:

Chapter 11

:

DAFFY’S, INC.,

:

Case No. 12-

(

)

:

Debtor.

:

:

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MOTION OF DEBTOR FOR AN ORDER (I) AUTHORIZING DEBTOR TO SELL ASSETS THROUGH STORE CLOSING SALES, (II) APPROVING (A) ASSUMPTION OF AGENCY AGREEMENT AND (B) STORE CLOSING SALE PROCEDURES, (III) EXEMPTING DEBTOR FROM COMPLIANCE WITH CONTRACTUAL AND STATUTORY STORE CLOSING SALE RESTRICTIONS, AND (IV) GRANTING RELATED RELIEF PURSUANT TO SECTIONS 105(a), 363, AND 365 OF THE BANKRUPTCY CODE AND BANKRUPTCY RULES 2002, 6003 AND 6004

TO THE HONORABLE UNITED STATES BANKRUPTCY JUDGE:

Daffy’s, Inc., as debtor and debtor in possession (the “Debtor”), hereby moves

(the “Motion”) for entry of an order substantially in the form annexed hereto as Exhibit “A” (the

Proposed Order”) (i) authorizing the Debtor to (a) sell certain assets, including merchandise

and certain furniture, fixtures, and equipment, through store closing sales (the “Store Closing

Sales”), (ii) approving (a) the Debtor’s assumption of that certain Agency Agreement, dated July

31, 2012, between the Debtor and a joint venture comprised of Gordon Brothers Retail Partners,

LLC and Hilco Merchant Resources, LLC, attached as Exhibit “1” to the Proposed Order (the

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Agency Agreement”) and (b) certain store closing sale procedures set forth on Exhibit “2” to

the Proposed Order (the “Store Closing Sale Procedures”), (iii) exempting the Debtor from, and

overriding, any contractual provisions or state or local laws that may restrict the Debtor’s Store

Closing Sales, and (iv) granting ancillary and related relief. In support of the Motion, the Debtor

submits the Declaration of Richard F. Kramer in Support of the Debtor’s Chapter 11 Petition and

Request for First Day Relief (the “Kramer Declaration”), filed contemporaneously herewith,

and respectfully represents as follows:

Background

1. On the date hereof (the “Commencement Date”), the Debtor commenced

with this Court a voluntary case under chapter 11 of title 11 of the United States Code (the

Bankruptcy Code”). The Debtor is authorized to continue to operate its business and manage

its properties as debtor in possession pursuant to sections 1107(a) and 1108 of the Bankruptcy

Code.

2. The Debtor is an off-price retailer of designer fashions for women, men,

children, and the home, located in the New York metropolitan area and Philadelphia. For

additional background on the Debtor’s business, see the Kramer Declaration.

Jurisdiction

3. This Court has subject matter jurisdiction to consider and determine this

matter pursuant to 28 U.S.C. § 1334. This is a core proceeding pursuant to 28 U.S.C. § 157(b).

Venue is proper pursuant to 28 U.S.C. §§ 1408 and 1409.

Preliminary Statement

4. As further discussed in the Kramer Declaration, the Debtor began to face

financial difficulties in 2011. In the spring of 2012, the Debtor, in consultation with its advisors,

determined that it could no longer operate as a going concern and that the value of the Debtor’s

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assets would be maximized through a sale of its leasehold interests and a liquidation of its

inventory.

5. To that end, on July 18, 2012, the Debtor entered into an agreement (the

Purchase Agreement”) with Jericho Acquisitions I LLC (the “Purchaser”), pursuant to which,

generally speaking, the Debtor intends to sell its leasehold interests and certain fixtures related

thereto. Concurrently herewith, the Debtor has filed a motion 1 in which the Debtor is seeking

court approval to assume the Purchase Agreement.

6. In order to maximize the value of the merchandise in the Debtor’s stores

(the “Stores”) and distribution center (the “Merchandise”) and to efficiently and effectively

liquidate the Merchandise, the Debtor determined it was in its best interests to retain a

professional liquidating agent. To do so, the Debtor sent bid packages to five different

liquidating agents and, following execution of a non-disclosure agreement, granted each such

agent access to a data room. Four of the five liquidating agents submitted competitive bids to the

Debtor. After extensive and good faith arm’s length negotiations, the Debtor entered into a

preliminary agreement with Great American Group WF, LLC (the “Stalking Horse”) and, the

following week, held an auction (the “Auction”) to ensure that the Stalking Horse’s offer was the

highest and best offer the Debtor could receive for the Merchandise. Three firms attended the

Auction, and two firms, including the Stalking Horse, placed numerous bids at the Auction.

Ultimately, the Debtor concluded that a bid from a joint venture comprised of Gordon Brothers

Retail Partners, LLC and Hilco Merchant Resources, LLC (together, the “Agent”) was the

1 Motion of the Debtor for an Order (I) Approving Debtor’s (A) Assumption of Asset, Purchase, Assignment, and Support Agreement, (B) Assumption, Assignment, and Sale of Unexpired Lease to Purchaser, (C) Entry into Assignment Agreement, and (D) Payment of Purchaser Transaction Expenses and (II) Extending the Time to Assume or Reject Unexpired Leases Pursuant to Sections 363 and 365 of the Bankruptcy Code and Bankruptcy Rules 2002, 6004, 6006, and 9014.

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highest and best offer for the Merchandise. Accordingly, the Debtor entered into the Agency

Agreement on July 31, 2012. Based on this competitive bidding process, and the Debtor’s books

and records, the value received from the liquidation pursuant to the Agency Agreement and the

sale to the Purchaser pursuant to the Purchase Agreement will be sufficient to pay all of the

Debtor’s creditors in full.

Relief Requested

7. By this Motion, pursuant to sections 105(a), 363, and 365 of the

Bankruptcy Code and Rules 2002, 6003, and 6004 of the Federal Rules of Bankruptcy Procedure

(the “Bankruptcy Rules”), the Debtor seeks entry of the Proposed Order (i) authorizing the

Debtor to conduct Store Closing Sales and sell certain assets, including merchandise and certain

furniture, fixtures, and equipment, 2 (ii) approving (a) the Agency Agreement and (b) the Store

Closing Sale Procedures, (iii) exempting the Debtor from, and overriding, any contractual

provisions or state or local laws that may restrict the Debtor’s Store Closing Sales, and

(iv) granting ancillary and related relief.

The Proposed Store Closing Sales

8. The Debtor seeks approval of the assumption of the Agency Agreement so

that the Agent can conduct the Store Closing Sales in accordance with the Agency Agreement,

this Order, and the Store Closing Sale Procedures. To maximize the value the Debtor will

receive pursuant to the Agency Agreement, and to save the Debtor from incurring the expense

associated with continuing to operate the Stores, the Debtor proposes that the Store Closing Sales

begin as soon as possible. Although the Debtor is not requesting that the Court hear the Motion

as a “first day motion,” it is requesting that the Court set an expedited hearing to consider the

2 Pursuant to the Purchase Agreement, certain furniture, fixtures, and equipment are being sold to the Purchaser.

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The Marketing Process and Selection of the Agent’s Bid

9. In early July, after consultation with advisors and key constituents, the

Debtor began a marketing process through which it solicited offers to conduct store closing sales

from five of the leading national liquidation firms. On July 11, 2012, the Debtor reached out to

four leading national liquidation firms asking that they submit initial bids for liquidating the

Stores. On July 18, 2012, the Debtor reached out to a fifth firm. Upon receipt of signed

confidentiality agreements from each firm, the Debtor made extensive information regarding the

Stores, Merchandise, past profits, and expense structure available to each firm. Additionally,

three of the liquidation firms visited the Debtor’s distribution center, and two of the liquidation

firms visited one or more of the Stores to evaluate the Merchandise. On or before July 25, 2012,

the Debtor received three initial bids for the right to serve as Agent and conduct the Store

Closing Sales. After further discussions and negotiations, the Debtor selected the bid of the

Stalking Horse to serve as the stalking horse bid (the “Stalking Horse Bid”).

10. On July 26, 2012, the Debtor and the Stalking Horse entered into an initial

agreement, which was subject to higher or better offers, authorizing the Stalking Horse to

conduct Store Closing Sales in the Debtor’s Stores (the “Stalking Horse Agreement”). The

Stalking Horse Agreement contemplated that if the Stalking Horse was not chosen as the agent,

the Stalking Horse would receive a break-up fee in the amount of 1.5% of the Debtor’s

guaranteed recovery amount in the Stalking Horse Agreement (the “Break-Up Fee”). The

Debtor submits that the Break-Up Fee was fair and reasonable and consistent with break-up fees

in comparable cases.

11. On July 30, 2012, the Debtor held the Auction to subject the Stalking

Horse Bid to higher and better offers. Three bidders, including the Stalking Horse and the

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Agent, attended the Auction. The third bidder chose not to bid and thus exited the Auction early.

The Stalking Horse Bidder and the Agent each made multiple bids that were higher and better

than the Stalking Horse Bid. Ultimately the Debtor determined that a bid from the Agent was the

highest and best offer the Debtor had received. The Stalking Horse was unwilling to match or

exceed this bid. Accordingly, the Debtor and the Agent entered into the Agency Agreement.

The Agency Agreement

12. On July 31, 2012, the Debtor entered into the Agency Agreement, which

provides for Store Closing Sales at all of the Debtor’s Stores.

13. The pertinent terms of the Agency Agreement are set forth below for

summary and notice purposes only. To the extent any terms are inconsistent with the Agency

Agreement, the Agency Agreement controls: 3

Merchandise. Merchandise means (i) all finished goods inventory that is owned by the Debtor and located at the Stores or the Distribution Center as of the Sale Commencement Date, including (A) Distribution Center Merchandise, (B) Display Merchandise, and (C) Merchandise subject to Gross Rings; (ii) On-Order Merchandise received in the Distribution Center on or prior to August 24, 2012; and (iii) returned Merchandise subject to Section 8.5 of the Agency Agreement.

Guaranteed Amount. As a guaranty of the Agent’s performance under the Agency Agreement, the Agent guarantees that the Debtor will receive 99.5% (the “Guaranty Percentage”) of the aggregate Cost Value of the Merchandise included in the Sale as of the Sale Commencement Date. The Debtor estimates that the Guaranteed Amount will be $16,915,000.

Split of Proceeds that Exceed the Guaranteed Amount. To the extent that Proceeds from the Store Closing Sales exceed the sum of the Guaranteed Amount, Expenses of the Sales, and 2.5% of the aggregate Cost Value of the Merchandise, all remaining Proceeds will be shared with 50% going to the Debtor and 50% going to the Agent.

Payment Date. On the first business day following entry of the Proposed

3 Capitalized terms used but not otherwise defined herein shall have the meanings ascribed to them in the Agency Agreement annexed to the Proposed Order as Exhibit “1.

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Order, the Agent will pay the Debtor 90% of the Guaranteed Amount. To ensure payment of the balance, the Agent will deliver to the Debtor a letter of credit for the remaining 10% of the Guaranteed Amount, naming the Debtor as the beneficiary and the Debtor’s DIP lender, Wells Fargo Bank, National Association (the “DIP Lender”), as an additional beneficiary.

Additional Agent Merchandise. The Agent is entitled, at its expense, to include in the Store Closing Sales additional merchandise procured by the Agent which is of like kind, and no lesser quality to, the Merchandise located in the Stores. The Agent will pay the Debtor an amount equal to 5% of the gross proceeds of the sale of any Additional Agent Merchandise. The Agent agrees that the aggregate cost of the Additional Agent Merchandise shall not exceed 20% of the aggregate Cost Value of the Merchandise.

Sale of Merchant FF&E. The Agent will sell the Merchant FF&E in the Stores or the Distribution Center, at the Debtor’s sole option, exercisable by the Debtor in writing within 30 days after the Sale Commencement Date. The Merchant FF&E means the FF&E located in the Stores or the Distribution Center and owned by the Debtor that is not (i) a real estate fixture or improvement located at a Store or (ii) personal property affixed to a Store or personal property at a Store used to display or hold merchandise for retail sale.

Expenses of Sale. The Agent will be unconditionally responsible for all documented Expenses incurred in conducting the Store Closing Sales, meaning Store-level operating expenses of the Sale that arise during the Sale Term, including the costs of employees, store maintenance, rent and associated fees and expenses, and fees incurred during or as a result of the Store Closing Sales.

Cost Value of Merchandise. The Cost Value of Merchandise means the actual cost for the SKU for each item of Merchandise as reflected on the Debtor’s inventory item master cost file identified as “41 Store Warehouse Inv DNS & Dock.xls” and posted to the due diligence electronic data room on July 24, 2012, updated only for the actual cost for the SKU of each item of Merchandise received from and after July 24, 2012 through August 24, 2012. The Cost Value for an item of Merchandise cannot exceed the retail price for such item of Merchandise.

Sale Term. As long as the conditions precedent set forth in Section 10 of the Agency Agreement are met, the Store Closing Sales will commence on the first business day following entry of the Proposed Order (which must occur no later than August 10, 2012) (the “Sale Commencement Date”). The Agent must complete the Store Closing Sales and vacate the Stores by no later than October 14, 2012 unless the Sales are extended by mutual written agreement of the Debtor and the Agent (the “Sale Termination

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Sale Guidelines. The Store Closing Sales shall be conducted in accordance with the Store Closing Sale Procedures.

Merchandise Returns. All sales of items of Merchandise sold during the Sale Term will be “final sales.” The Agent, however, will accept returns of Merchandise sold prior to the Sale Commencement Date so long as such returns are accompanied by the original Store register receipt and are otherwise in compliance with the Debtor’s return and price adjustment policy.

Gift Certificates. During the Sale Term, the Agent will accept gift certificates, gift cards, and Merchandise credits issued by the Debtor prior to the Sale Commencement Date. The Debtor will reimburse the Agent in cash for such amounts on a weekly basis.

Assumption of the Agency Agreement Is Authorized Under Section 365 of the Bankruptcy Code and Is an Exercise of the Debtor’s Sound Business Judgment

14. Section 365 of the Bankruptcy Code provides, in relevant part, that a

debtor in possession, “subject to the court’s approval, may assume or reject any executory

contract or unexpired lease of the debtor.”

15. In determining whether an executory contract or unexpired lease should be

assumed, courts apply the “business judgment” test. NLRB v. Bildisco & Bildisco, 465 U.S. 513,

523 (1984); Orion Pictures Corp. v. Showtime Networks, Inc. (In re Orion Pictures Corp.),

4 F.3d 1095, 1099 (2d Cir. 1993); Control Data Corp. v. Zelman (In re Minges), 602 F.2d 38, 43

(2d Cir. 1979); see also Richmond Leasing Co. v. Capital Bank, N.A., 762 F.2d 1303, 1311 (5 th

Cir. 1985) (“More exacting scrutiny would slow the administration of the debtor’s estate and

increase its cost, interfere with the Bankruptcy Code’s provision for private control of

administration of the estate, and threaten the court’s ability to control a case impartially.”).

Under this test, a court should approve the assumption of a contract under section 365(a) of the

Bankruptcy Code if it finds that a debtor exercised its sound business judgment in determining

that assumption of the agreement is in the best interests of its estate.

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16. The Debtor, exercising its sound business judgment and in consultation

with its advisors and key constituents, has determined that assumption of the Agency Agreement

is in the best interest of its estate because it will allow the Debtor to begin liquidating the Stores

promptly and thus maximize the value of its assets. In order to maximize profits, the Store

Closing Sales must begin immediately because much of the Merchandise is seasonal and will

decrease in value over time. Further, the Debtor is incurring costs operating its stores, and, upon

assumption of the Agency Agreement, certain of those costs can be passed on to the Agent.

Moreover, the Auction, through its competitive bidding procedures, ensured that the Agent was

chosen in good faith and that the terms and conditions of the Agency Agreement are fair and

reasonable and represent the highest and best offer for the Merchandise. In light of the

foregoing, the Debtor submits that the assumption of the Agency Agreement represents a

reasonable exercise of the Debtor’s business judgment, is in the best interest of its estate, and

should be approved.

17. As of the Commencement Date, the Debtor has fully performed all of its

obligations under the Agency Agreement and thus does not have any defaults to cure under

section 365(b) of the Bankruptcy Code.

The Store Closing Sales Are Authorized Under Section 363 of the Bankruptcy Code and Are an Exercise of the Debtor’s Sound Business Judgment

18. Section 363(b) of the Bankruptcy Code provides, in relevant part, that

“[t]he trustee, after notice and a hearing, may use, sell, or lease, other than in the ordinary course

of business, property of the estate…” Moreover, section 105(a) of the Bankruptcy Code

provides, in pertinent part, that “[t]he Court may issue any order, process, or judgment that is

necessary or appropriate to carry out the provisions of this title.”

19. The decision to sell assets outside the ordinary course of business is based

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on the sound business judgment of the debtor. See, e.g., Official Comm. of Unsecured Creditors

of LTV Aerospace & Defense Co. v. LTV Corp. (In re Chateaugay Corp.), 973 F.2d 141, 145 (2d

Cir. 1992) (approving a sale of the debtors’ assets because a “good business reason” existed to

proceed with such a sale); Comm. of Equity Security Holders v. Lionel Corp. (In re Lionel

Corp.), 722 F.2d 1063, 1071 (2d Cir. 1983) (“The rule we adopt requires that a judge

determining a § 363(b) application expressly find from the evidence presented before him at the

hearing a good business reason to grant such an application.”); In re Boston Generating, LLC,

440 B.R. 302, 321-22 (Bankr. S.D.N.Y. 2010); see also Official Comm. of Subordinated

Bondholders v. Integrated Res., Inc. (In re Integrated Res., Inc.), 147 B.R. 650, 656 (S.D.N.Y.

1992) (stating that “the business judgment rule ‘is a presumption that in making a business

decision the directors of a corporation acted on an informed basis, in good faith and in the honest

belief that the action taken was in the best interests of the company,” which has continued

applicability in bankruptcy) (quoting Smith v. Van Gorkom, 488 A.2d 858, 872 (Del. 1985)).

20. Ample business justification exists in this case to approve the proposed

Store Closing Sales. The Debtor, exercising its business judgment and in consultation with its

advisors and key constituents, has determined that it is in the best interests of the Debtor and its

estate to assume the Agency Agreement with the Agent and begin the Store Closing Sales

immediately. Time is of the essence to preserve and maximize the value of the Debtor’s assets

and to minimize the Debtor’s expenses. The Stores and distribution center contain significant

levels of Merchandise that will be subject to the Store Closing Sales. The realization of fair

value for these assets as promptly as possible will inure to the benefit of all parties in interest.

21. Store closing or liquidation sales are a routine occurrence in chapter 11

cases involving retail debtors. See In re Ames Dep’t Stores, Inc. (Ames I), 136 B.R. 357, 359

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(Bankr. S.D.N.Y. 1992) (holding that “going out of business” sales are an important part of the

“overriding federal policy requiring [a] Debtor to maximize estate assets”); see also In re Ames

Dep’t Stores, Inc. (Ames II), Ch. 11 Case No. 01-42217 (REG) (Bankr. S.D.N.Y. Aug. 20, 2001)

[Docket No. 51] (authorizing store closing sales and agency agreement on first day). Bankruptcy

courts in this district and others have approved similar requests by debtors to conduct store

closing sales. See e.g., In re Blockbuster, Inc., Ch. 11 Case No. 10-14997 (BRL) (Bankr.

S.D.N.Y. Jan. 20, 2011) [Docket No. 864] (authorizing debtors to continue store closing sales);

In re Finlay Enters., Inc., Ch. 11 Case No. 09-14873 (JMP) (Bankr. S.D.N.Y. Sept. 25, 2009)

[Docket No. 262]; In re Goody’s, LLC, Ch. 11 Case No. 09-10124 (CSS) (Bankr. D. Del. Jan.

20, 2009) [Docket No. 122] (approving debtors’ assumption of prepetition agency agreement and

authorizing store closing sales); In re Linens Holding Co., Ch. 11 Case No. 08-10832 (CSS)

(Bankr. D. Del. May 30 2008) [Docket No. 513] (approving agency agreement and store closing

sales of certain locations) (Bankr. D. Del. Oct. 16, 2008) [Docket No. 1861] (approving store

closing sales for all remaining store locations and distribution centers); In re Steve & Barry’s

Manhattan LLC, Ch. 11 Case No. 08-12579 (ALG) (Bankr. S.D.N.Y. Aug. 22, 2008) [Docket

No. 628] (authorizing store closing sales and related relief); In re Sharper Image Corp., Ch. 11

Case No. 08-10322 (KG) (Bankr. D. Del. Mar. 14, 2008) [Docket No. 271] (approving

liquidation agreement and store closing sales).

Sale of Assets Should Be Free and Clear of All Liens, Claims, and Encumbrances

22. The Debtor requests approval to sell assets subject to the Agency

Agreement on a final “as is” basis, free and clear of any and all liens, claims, and encumbrances

in accordance with section 363(f) of the Bankruptcy Code. A debtor in possession may sell

property under sections 363(b) and 363(f) of the Bankruptcy Code “free and clear of any interest

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in such property of an entity other than the estate” if any one of the following conditions is

satisfied:

applicable nonbankruptcy law permits sale of such property free and clear of such interest;

such entity consents;

such interest is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property;

such interest is a bona fide dispute; or

such entity could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest.

See Citicorp Homeowners Servs., Inc. v. Elliot (In re Elliot), 94 B.R. 343, 345 (E.D. Pa. 1988)

(noting that, because section 363(f) is written in the disjunctive, the court may approve a sale

free and clear of liens or encumbrances if any subsection is met).

23. As an initial matter, the DIP Lender has consented to the Store Closing

Sales and the Debtor’s assumption of the Agency Agreement and, particularly, to the sale of the

Merchandise free and clear of its liens, claims and encumbrances, with all such obligations to

attach to the proceeds of the Store Closing Sales with the same validity and priority that such

liens, claims, encumbrances, or interests had against the assets.

24. Other than the liens granted to the DIP Lender, the Debtor is not aware of

any liens relating to the Merchandise that will be liquidated through the Store Closing Sales.

Further, parties in interest will have received notice of the Motion and will be given sufficient

opportunity to object to the relief requested. Any such entity that does not object to the sale will

be deemed to have consented. See Hargrave v. Township of Pemberton (In re Tabone, Inc.), 175

B.R. 855, 858 (Bank. D.N.J. 1994) (finding that failure to object to sale after receiving notice of

such sale constitutes consent and satisfies section 363(f)); Elliot, 94 B.R. at 345 (same); see also

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In re Enron Corp., No. 01-16034, 2003 WL 21755006, at *2 (Bankr. S.D.N.Y. July 28, 2003)

(order deeming all parties who did not object to proposed sale to have consented under section

363(f)(2)). As such, to the extent that no party holding a lien objects to the relief requested by

this Motion, the sale of the purchased assets free and clear of all liens, claims, and encumbrances

satisfies section 363(f)(2) of the Bankruptcy Code.

25. Accordingly, the Debtor submits that, to the extent applicable, the Court

should authorize the Debtor to sell the Merchandise free and clear of any liens, claims,

encumbrances, or other interests that may exist, with any of the same to be transferred and

attached to the net proceeds of the sale, with the same validity and priority that such liens,

claims, encumbrances, or interests had against the assets.

The Agent Should Be Afforded All Protections Under Section 363(m) of the Bankruptcy Code

26. Section 363(m) of the Bankruptcy Code protects a good faith purchaser’s

interest in property purchased from the debtor notwithstanding that authorization of the sale

conducted under section 363(b) is later reversed or modified on appeal. Specifically, section

363(m) provides, in relevant part, as follows:

The reversal or modification on appeal of an authorization under

to an

such property in good faith, whether or

not such entity knew of the pendency of the appeal, unless such authorization and such sale or lease were stayed pending appeal.

[section 363(b)] entity that purchased

does not affect the validity of a sale

Section 363(m) “reflects the

‘policy of not only affording finality to the judgment of the

bankruptcy court, but particularly to give finality to those orders and judgments upon which third

parties rely.’” In re Abbotts Dairies of Penn., Inc., 788 F.2d 143, 147 (3d Cir. 1986) (quoting

Hoese Corp. v. Vetter Corp. (In re Vetter Corp.), 724 F.2d 52, 55 (7 th Cir. 1983)). See also

United States v. Salerno, 932 F.2d 117, 123 (2d Cir. 1991) (noting that section 363(m) furthers

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the policy of finality in bankruptcy sales and “assists bankruptcy courts in maximizing the price

for assets sold in such proceedings”); In re Stein & Day, Inc., 113 B.R. 157, 162 (Bankr.

S.D.N.Y. 1990) (same).

27. As discussed above, the selection of the Agent and the terms and

conditions of the Agency Agreement were the product of arm’s length, good faith negotiations

after an extensive and highly competitive bidding process. Based on the foregoing, the Debtor

requests that the Court determine that the Agent is a good faith purchaser entitled to the

protections of section 363(m) of the Bankruptcy Code.

Sale of the Merchandise Does Not Require the Appointment of a Consumer Privacy Ombudsman

28. Section 363(b)(1) of the Bankruptcy Code provides that a debtor may not

sell or lease personally identifiable information about individuals unless such sale or lease is

consistent with its policies or upon appointment of a consumer privacy ombudsman pursuant to

section 332 of the Bankruptcy Code.

29. Pursuant to the Agency Agreement, the Agent will only be permitted to

use the Debtor’s customer lists when acting as the Debtor’s agent, in the same way those lists

were used prior to the commencement of this chapter 11 case in the ordinary course of the

Debtor’s business. The Debtor will not sell or lease any personally identifiable information to

the Agent. Therefore, appointment of a consumer privacy ombudsman is unnecessary.

The Court Should Invalidate Any Contractual Restrictions that May Impair the Debtor’s Ability to Conduct the Store Closing Sales

30. The Debtor respectfully requests that the Court override or invalidate any

contractual restrictions that may impair the Debtor’s ability to close stores and conduct the Store

Closing Sales (the “Contractual Restrictions”). The Stores are located on properties that are

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leased by the Debtor. In certain cases, the contemplated Store Closing Sales may be inconsistent

with certain provisions of leases, subleases, or other documents with respect to any such leased

premises, including (without limitation) reciprocal easement agreements, agreements containing

covenants, conditions, and restrictions (including, without limitation, “go-dark” provisions and

landlord recapture rights), or other similar documents or provisions.

31. Store closing or liquidation sales are a routine part of chapter 11 cases

involving retail debtors. Such sales are consistently approved by courts, despite provisions of

recorded documents or agreements purporting to forbid such sales. Indeed, courts in this district

and others have deemed such restrictive contractual provisions unenforceable in other chapter 11

cases as impermissible restraints on a debtor’s ability to maximize the value of its assets under

section 363 of the Bankruptcy Code. See In re Blockbuster Inc., Ch. 11 Case No. 10-14997

(BRL) [Docket No. 864] (any restrictions in leases or comparable documents purporting to limit

the debtors’ ability to conduct store closing sales are unenforceable); In re Bradlees Stores, Inc.,

Ch. 11 Case No. 00-16035 (BRL) (Bankr. S.D.N.Y. Jan. 4, 2001) [Docket No. 70] (authorizing

debtors to conduct “going out of business” sales notwithstanding restrictive lease provisions

restricting debtors’ ability to conduct such sales); In re R.H. Macy & Co., 170 B.R. 69, 77

(Bankr. S.D.N.Y. 1994) (finding anti-store closing sale covenant in lease unenforceable against

debtor “because it conflicts with the Debtor’s fiduciary duty to maximize estate assets”); In re

Ames Dep’t Stores, Inc., 136 B.R 357, 359 (Bankr. S.D.N.Y. 1992) (finding that “to enforce the

anti-[going out of business] sale clause of the Lease would contravene overriding federal policy

requiring Debtor to maximize estate assets by imposing additional constraints never envisioned

by Congress”); see also In re Tobago Bay Trading Co., 112 B.R. 463, 467 (Bankr. N.D. Ga.

1990) (“Enforcement of [anti-liquidation sale lease provision] would be inconsistent with federal

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policy and with the legislative design as expressed by the Bankruptcy Code.”); In re Libson

Shops, Inc., 24 B.R. 693, 695 (Bankr. E.D. Mo. 1982) (finding that a lease could not restrict the

debtor from conducting “going out of business” sales).

32. Based on well-established precedent, the Court should ensure that no

Contractual Restriction is an impediment to the Store Closing Sales, the closing of the Stores, or

the activities in connection therewith. To the extent such Contractual Restrictions exist, they

should not be permitted to interfere with, or otherwise restrict, the Debtor from conducting Store

Closing Sales or the closing of any Stores.

Any Liquidation Should Be Exempt from Certain Federal, State, and Local Laws, Statutes, Rules, and Ordinances Related to Store Closing and Liquidation Sales

33. Certain states in which the Debtor operates may have licensing and other

requirements governing the conduct of store closing, liquidation, or other inventory clearance

sales, including (but not limited to) federal, state, and local laws, statutes, rules, regulations, and

ordinances related to store closing and liquidation sales, establishing licensing, permitting, or

bonding requirements, waiting periods, time limits, bulk sale restrictions, augmentation

limitations, or consumer fraud laws, with the exception of deceptive advertising laws

(“Liquidation Sale Laws”). Typically, however, these statutes and regulations provide that, if a

liquidation or bankruptcy sale is authorized by a court, a company need not comply with

Liquidation Sale Laws. Moreover, pursuant to section 105(a) of the Bankruptcy Code, the Court

has the authority to permit the Store Closing Sales to proceed notwithstanding contrary

Liquidation Sale Laws.

34. Accordingly, the Debtor requests that, pursuant to section 105(a) of the

Bankruptcy Code, this Court authorize the Debtor to conduct the Store Closing Sales without the

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necessity of, and the delay associated with, complying with the Liquidation Sale Laws.

35. This Court will be able to supervise the Store Closing Sales because the

Debtor and its assets are subject to this Court’s exclusive jurisdiction. See 28 U.S.C. § 1334.

The Store Closing Sales are legitimate methods by which the Debtor can maximize the return

from the sale of the Merchandise for the benefit of the Debtor and its estate. Further, creditors

and the public interest are adequately protected by the notice of this Motion and the ongoing

jurisdiction and supervision of this Court.

36. Moreover, 28 U.S.C. § 959, which requires trustees (and, thus, debtors in

possession) to comply with state and other laws in performance of their duties, does not apply to

the Store Closing Sales. Courts have held that 28 U.S.C. § 959 does not apply to debtors or their

agents when they are liquidating assets. See e.g., In re Borne Chemical Co., 54 B.R. 126, 135

(Bankr. D.N.J. 1984) (holding that 28 U.S.C. § 959(b) is only applicable when property is being

managed or operated for the purpose of continuing operations).

37. Even if a state or local law does not expressly except bankruptcy sales

from its ambit, the Debtor submits that, to the extent that such state or local law conflicts with

federal bankruptcy laws, it is preempted by the Supremacy Clause of the United States

Constitution. To hold otherwise would severely impair the relief otherwise available under

section 363 of the Bankruptcy Code. Consistent with this premise, bankruptcy courts have

recognized that federal bankruptcy laws preempt state and local laws that contravene the

underlying policies of the Bankruptcy Code. See e.g., Belculfine v. Aloe (In re Shenango Grp.,

Inc.), 186 B.R. 623, 628 (Bankr. W.D. Pa. 1995) (“Trustees and debtors-in-possession have

unique fiduciary and legal obligations pursuant to the bankruptcy code

[A] state statute [ ]

cannot place burdens on them where the result would contradict the priorities established by the

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federal bankruptcy code.”). While preemption of state law is not always appropriate, as when

the protection of public health and safety is involved, see Baker & Drake, Inc. v. Pub. Serv.

Comm’n of Nev. (In re Baker & Drake), 35 F.3d 1348, 1353-54 (9 th Cir. 1994) (finding no

preemption when state law prohibiting taxicab leasing was promulgated in part as a public safety

measure), it is appropriate when, as here, the only state laws involved concern economic

regulation. Id. at 1353 (finding that “federal bankruptcy preemption is more likely

where a

state statute is concerned with economic regulation rather than with protecting the public health

and safety”).

38. Here, section 363 of the Bankruptcy Code, which requires the Debtor to

operate its business in a way that maximizes recoveries for creditors, will be undermined if the

Court does not provide for the waiver of Liquidation Sale Laws because Liquidation Sale Laws

may constrain the Debtor’s ability to marshal and maximize assets for the benefit of its estate.

Similar relief has been granted in bankruptcy cases in this district. See In re Blockbuster Inc.,

Ch. 11 Case No. 10-14997 (BRL) (Bankr. S.D.N.Y. Jan. 20, 2011) [Docket No. 864]

(authorizing the debtors to conduct store closing sales notwithstanding federal, state, and local

laws governing the conduct of store closing and liquidation sales); In re Finlay Enters., Inc., Ch.

11 Case No. 09-14873 (JMP) (Bankr. S.D.N.Y. Sept. 25, 2009) [Docket No. 262] (authorizing

debtors to conduct “going out of business” sales “without the necessity of compliance” with

certain “going out of business” laws); In re Steve & Barry’s Manhattan LLC, Ch. 11 Case No.

08-12579 (ALG) (Bankr. S.D.N.Y. Aug. 22, 2008) [Docket No. 628] (authorizing store closing

sales without requiring compliance with laws affecting store closing or liquidation sales); In re

Bradlees Stores, Inc., Ch. 11 Case No. 00-16035 (BRL) (Bankr. S.D.N.Y. Jan. 4, 2001) [Docket

No. 70] (authorizing debtors to conduct “going out of business” sales notwithstanding state rules

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or statutes governing such sales).

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39. Importantly, given the supervision of this Court, the requested waiver will

not unduly undermine state and local requirements that otherwise would apply to the Store

Closing Sales. The Debtor only requests that this Court authorize the Debtor to conduct the

Store Closing Stores without the necessity of, and the delay associated with, obtaining various

state licenses or permits, observing state and local waiting periods or time limits, and/or

satisfying any additional requirements with respect to advertising, conducting such transactions

as store closings or similar type sales, or transferring merchandise to or between the closing

locations. The Debtor fully intends to be bound by and comply with remaining statutes and

regulations, such as environment, health, and safety laws.

40. The Debtor also requests that no other person or entity, including (but not

limited to) any lessor or federal, state, or local agency, department, or governmental authority, be

allowed to take any action to prevent, interfere with, or otherwise hinder consummation of the

Store Closing Sales or the advertising and promotion (including through the posting of signs) of

Store Closing Sales, in the manner set forth in the Proposed Order.

The Need for Expedited Relief

41. The Debtor respectfully requests that the Court hold an expedited hearing

on this Motion and grant related relief. Expediency is warranted in this case because entry of the

Proposed Order will infuse the Debtor with much-needed cash, the terms of the Agency

Agreement are conditioned on expedited relief, and the Debtor will realize greater benefits under

the Agency Agreement if the Proposed Order is entered as promptly as possible.

42. Upon entry of the Proposed Order and commencement of the Store

Closing Sales, the Debtor will receive a payment from the Agent of 90% of the Guaranteed

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Amount. This cash will give the Debtor greater liquidity and will allow the Debtor to repay its

rolled-up obligations to the DIP Lender quickly and thus stop interest from accruing on that

obligation, thereby preserving estate assets. Further, once the Debtor has satisfied that

obligation, it will also have access to cash collateral. Although the Debtor anticipates access to

the proceeds of the loan from the DIP Lender, the proceeds of the Agency Agreement will

provide the Debtor with additional liquidity and flexibility. The earlier the Debtor obtains such

liquidity, the better positioned the Debtor will be throughout the course of this chapter 11 case.

43. Additionally, any delay in the liquidation of the Merchandise will cost the

Debtor unnecessary operating expenses and thus reduce the value of the Debtor’s estate. Further,

the Agency Agreement, and the terms and conditions therein, contemplates that the Store

Closing Sales will begin immediately, and in no event later than August 11, 2012. The

Guaranteed Amount assumes a minimum level of Merchandise. If the level of Merchandise

drops below such minimum, the Guaranty Percentage will be reduced as to all inventory.

Because the Debtor's inventory levels will decline with every day that the Sale Commencement

Date is postponed, it is important that the Debtor be authorized to commence its Store Closing

Sales as expeditiously as possible to ensure that the Debtor receives the full value of its bargain

and maximizes the estate assets available for distribution to the Debtor’s creditors. Finally, the

Agency Agreement requires the Proposed Order be entered no later than August 10, 2012.

The Court Should Grant the Debtor Relief From Bankruptcy Rule 6003

44. Bankruptcy Rule 6003 provides that, to the extent the relief requested is

necessary to avoid immediate and irreparable harm, a bankruptcy court may approve “a motion

to assume or assign an executory contract or unexpired lease in accordance with § 365” or “a

motion to use, sell, lease, or otherwise incur an obligation regarding property of the estate” prior

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to 21 days after the commencement date.

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45. As discussed more fully above and in the Kramer Declaration, the Debtor

and its estate will be irreparably harmed if entry of the Proposed Order is delayed for 21 days

after the Commencement Date. The Debtor submits that Bankruptcy Rule 6003 has been

satisfied and the relief requested herein should be granted.

The Court Should Grant the Debtor Relief From Bankruptcy Rule 6004(h)

46. Pursuant to Bankruptcy Rule 6004(h), unless the court orders otherwise,

all orders authorizing the sale of property pursuant to section 363 of the Bankruptcy Code are

automatically stayed for fourteen days after entry of the order. The Debtor requests that any

order authorizing the Store Closing Sales and approving the Agency Agreement be effective

immediately by providing that the 14-day stay under Bankruptcy Rule 6004(h) is waived. As

discussed more fully above and in the Kramer Declaration, this relief is warranted because the

Debtor’s estate will be harmed by any delay in the commencement of the Store Closing Sales.

47. For the foregoing reasons the Debtor respectfully submits that it will be

irreparably harmed if entry of the Proposed Order is stayed and requests that this Court waive the

stay requirement under Bankruptcy Rule 6004(h).

The Court Should Grant the Debtor Relief From Bankruptcy Rule 2002

48. Generally, pursuant to Bankruptcy Rule 2002, debtors are required to give

parties in interest 21 days’ notice of “a proposed use, sale, or lease of property of the estate other

than in the ordinary course of business.” However, Bankruptcy Rule 2002(a)(2) provides that

the court may shorten this time for cause. As discussed more fully above and in the Kramer

Declaration, the Debtor and the Debtor’s estate will suffer irreparable harm if a hearing on the

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Proposed Order is not heard on an expedited basis and the Proposed Order is not entered as soon

as possible, but in no event later than August 10, 2012.

49. For the foregoing reasons, the Debtor respectfully submits that cause

exists to waive the 21 day notice requirement under Bankruptcy Rule 2002.

Notice

50. No trustee or examiner has been appointed in this chapter 11 case. Notice

of this Motion has been provided to the following: (a) the United States Trustee for Region 2;

(b)

those creditors holding the thirty largest unsecured claims against the Debtor’s estate;

(c)

Wells Fargo Bank, National Association, as the Debtor’s prepetition and postpetition lender;

(d)

the attorneys for Wells Fargo Bank, National Association; (e) Jericho Acquisitions I LLC;

(f) the attorneys for Jericho Acquisition I LLC; (g) Gordon Brothers Retail Partners, LLC, and

Hilco Merchant Resources, LLC; (h) the attorneys for Gordon Brothers Retail Partners, LLC,

and Hilco Merchant Resources, LLC; (i) the attorneys general for the States of New York and

New Jersey and the Commonwealth of Pennsylvania; (j) all applicable state consumer protection

agencies; (k) all of the Debtor’s landlords; (l) all applicable state and local taxing authorities, and

(m) each of the utilities for the affected Stores (collectively, the “Notice Parties”). The Debtor

submits that no other or further notice need be provided.

51. No previous request for the relief sought herein has been made by the

Debtor to this or any other court.

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WHEREFORE the Debtor respectfully requests that this Court grant the relief

requested herein and such other and further relief as is just.

Dated: August 1, 2012 New York, New York

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/s/ Debra A. Dandeneau

WEIL, GOTSHAL & MANGES LLP Debra A. Dandeneau 767 Fifth Avenue New York, New York 10153 Telephone: (212) 310-8000 Facsimile: (212) 310-8007 Proposed Attorneys for Debtor

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Exhibit A

Proposed Order

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UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK ----------------------------------------------------------------x

 

:

In re

:

Chapter 11

:

DAFFY’S, INC.,

:

Case No. 12-

(

)

:

Debtor.

:

Re: Docket

:

----------------------------------------------------------------x

ORDER (I) AUTHORIZING DEBTOR TO SELL ASSETS THROUGH STORE CLOSING SALES, (II) APPROVING (A) ASSUMPTION OF AGENCY AGREEMENT AND (B) STORE CLOSING SALE PROCEDURES, (III) EXEMPTING DEBTOR FROM COMPLIANCE WITH CONTRACTUAL AND STATUTORY STORE CLOSING SALE RESTRICTIONS, AND (IV) GRANTING RELATED RELIEF PURSUANT TO SECTIONS 105(a), 363, AND 365 OF THE BANKRUPTCY CODE AND BANKRUPTCY RULES 2002, 6003 AND 6004

Upon the motion (the “Motion”) 1 dated August 1, 2012 of Daffy’s, Inc., as debtor

and debtor in possession (the “Debtor”) in the above-captioned chapter 11 case, pursuant to

sections 105(a), 363, and 365 of the Bankruptcy Code, for an order (i) authorizing the Debtor to

sell assets through store closing sales; (ii) approving (a) assumption of the Agency Agreement

and (b) the Store Closing Sale Procedures, attached hereto as Exhibit “1”; (iii) exempting the

Debtor from compliance with contractual and statutory store closing sale restrictions; and

(iv) granting related relief, all as more fully set forth in the Motion; and upon consideration of

the Kramer Declaration; and due and proper notice of the Motion having been provided to the

Notice Parties; and the Court having held a hearing with respect to the Motion on

, 2012

(the “Hearing”); and the relief requested in the Motion being in the best interests of the Debtor

and its estate; and the Court having reviewed the Motion; and the Court having determined that

1 Capitalized terms used but not otherwise defined herein shall have the meanings ascribed to them in the Motion and the Agency Agreement.

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the legal and factual bases set forth in the Motion establish just cause for the relief granted

herein; and upon all of the proceedings had before the Court, and upon the record of the Hearing,

and after due deliberation and sufficient cause appearing therefor, it is

FOUND AND DETERMINED AS FOLLOWS:

A. Jurisdiction. This Court has jurisdiction to consider the Motion and the relief

requested therein pursuant to 28 U.S.C. §§ 157 and 1134 and the Amended Standing Order of

Reference M-431, dated January 31, 2012 (Preska, C.J.). Approval of the Debtor’s assumption

of the Agency Agreement and the transactions contemplated thereby is a core proceeding under

28

U.S.C. §§ 157(b).

B.

Venue. Venue of these cases and the Motion in this district is proper pursuant to

28

U.S.C. §§ 1408 and 1409.

C. Statutory Predicates. The statutory predicates for authorization to conduct the

Store Closing Sales and the approval of the Debtor’s assumption of the Agency Agreement and

transactions contemplated therein are sections 105(a), 363, and 365 of the Bankruptcy Code and

Bankruptcy Rules 2002, 6003 and 6004.

D. Notice. Proper, timely, adequate and sufficient notice of the Motion, assumption

of the Agency Agreement, and the Hearing has been provided in accordance with sections 102(1)

and 363 of the Bankruptcy Code and Bankruptcy Rules 2002 and 6004. No other further notice

is required.

E. Opportunity to Be Heard. A reasonable opportunity to object or be heard

regarding the relief requested in the Motion, assumption of the Agency Agreement, and the

transactions pursuant thereto has been afforded to all interested persons and entities, including,

without limitation, the following: (a) the United States Trustee for Region 2; (b) those creditors

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holding the thirty largest unsecured claims against the Debtor’s estate; (c) Wells Fargo Bank,

National Association, as the Debtor’s prepetition and postpetition lender; (d) the attorneys for

Wells Fargo Bank, National Association; (e) Jericho Acquisitions I LLC; (f) the attorneys for

Jericho Acquisition I LLC; (g) Gordon Brothers Retail Partners, LLC, and Hilco Merchant

Resources, LLC; (h) the attorneys for Gordon Brothers Retail Partners, LLC, and Hilco

Merchant Resources, LLC; (i) the attorneys general for the States of New York and New Jersey

and the Commonwealth of Pennsylvania; (j) all applicable state consumer protection agencies;

(k) all of the Debtor’s landlords; (l) all applicable state and local taxing authorities, and (m) each

of the utilities for the affected Stores.

F. Marketing Process. As demonstrated by (i) the Kramer Declaration, (ii) the

testimony and other evidence proffered or adduced at the Hearing, and (iii) the representations of

counsel made on the record at the Hearing, the Debtor has thoroughly marketed the Merchandise

and has conducted the bidding solicitation fairly, with adequate opportunity for parties that either

expressed interest in acquiring or liquidating the Merchandise, or who the Debtor believed may

have an interest in acquiring or liquidating the Merchandise, to submit competing bids. The

Debtor and the Agent have respectively negotiated and undertaken their roles leading to the Store

Closing Sales and assumption of the Agency Agreement in a diligent, noncollusive, fair, and

good faith manner.

G. Highest and Best Offer. The Agency Agreement, including the form and total

consideration to be realized by the Debtor pursuant to the Agency Agreement, is (i) the highest

and best offer received by the Debtor for the Merchandise, (ii) fair and reasonable, and (iii) in the

best interests of the Debtor and its estate. There is no legal or equitable reason to delay entry

into the Agency Agreement, and the transactions contemplated therein, including, without

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limitation, the Store Closing Sales.

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H. Business Judgment. The Debtor’s decision to (i) enter into and assume the

Agency Agreement and (ii) perform and make payments thereunder is a reasonable exercise of

the Debtor’s sound business judgment.

I. Personally Identifiable Information. The transactions contemplated by the

Agency Agreement do not include the sale or lease of personally identifiable information as

defined in section 101(41A) of the Bankruptcy Code or assets containing such personally

identifiable information.

J. Time of the Essence. Time is of the essence in assuming and effectuating the

Agency Agreement and proceeding with the Store Closing Sales contemplated therein without

interruption. Based on the record of the Hearing and the Motion, the Store Closing Sales must

be commenced as soon as practicable after the Commencement Date to maximize the value that

the Agent may realize from the Store Closing Sales and the value that the Debtor may realize

from entering into the Agency Agreement. Accordingly, cause exists to modify the stay to the

extent necessary, as contemplated by Bankruptcy Rule 6004(h), and permit the immediate

effectiveness of this Order.

K. Sale Free and Clear. A sale of the Assets other than one free and clear of liens,

claims, encumbrances, defenses (including, without limitation, rights of setoff and recoupment)

and interests, including, without limitation, security interests of whatever kind or nature,

mortgages, conditional sales or title retention agreements, pledges, deeds of trust,

hypothecations, liens, encumbrances, assignments, preferences, debts, easements, charges, suits,

licenses, options, rights-of-recovery, judgments, orders and decrees of any court or foreign or

domestic governmental entity, taxes (including foreign, state and local taxes), licenses,

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covenants, restrictions, indentures, instruments, leases, options, off-sets, claims for

reimbursement, contribution, indemnity or exoneration, successor, product, environmental, tax,

labor, ERISA, CERCLA, alter ego and other liabilities, causes of action, contract rights and

claims, to the fullest extent of the law, in each case, of any kind or nature (including, without

limitation, all “claims” as defined in section 101(5) of the Bankruptcy Code), known or

unknown, whether pre-petition or post-petition, secured or unsecured, choate or inchoate, filed or

unfiled, scheduled or unscheduled, perfected or unperfected, liquidated or unliquidated, noticed

or unnoticed, recorded or unrecorded, contingent or non-contingent, material or non-material,

statutory or non-statutory, matured or unmatured, legal or equitable (collectively,

Encumbrances”) and without the protections of this Order would hinder the Debtor’s ability to

obtain the consideration provided for in the Agency Agreement and, thus, would impact

materially and adversely the value that the Debtor’s estate would be able to obtain for the sale of

such Assets. But for the protections afforded to the Agent under the Bankruptcy Code and this

Order, the Agent would not have offered to pay the consideration contemplated in the Agency

Agreement. In addition, each entity with an Encumbrance upon the Assets, (i) has consented to

the Store Closing Sales or is deemed to have consented to the Store Closing Sales, (ii) could be

compelled in a legal or equitable proceeding to accept money satisfaction of such interest, or

(iii) otherwise falls within the provisions of section 363(f) of the Bankruptcy Code, and

therefore, in each case, one or more of the standards set forth in section 363(f)(1)-(5) of the

Bankruptcy Code has been satisfied. Those holders of Encumbrances who did not object, or who

withdrew their objections, to the Motion are deemed to have consented pursuant to section

363(f)(2) of the Bankruptcy Code. Therefore, approval of the Agency Agreement and the

consummation of the Store Closing Sales free and clear of Encumbrances is appropriate pursuant

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to section 363(f) of the Bankruptcy Code and is in the best interests of the Debtor’s estate, its

creditors and other parties in interest.

L. Arm’s Length Transaction. The consideration to be paid by the Agent under the

Agency Agreement was negotiated at arm’s length and constitutes reasonably equivalent value

and fair and adequate consideration for the Merchandise under the Bankruptcy Code, the

Uniform Fraudulent Transfer Act, the Uniform Fraudulent Conveyance Act and the laws of the

United States, any state, territory, possession thereof, or the District of Columbia. The terms and

conditions set forth in the Agency Agreement are fair and reasonable under these circumstances

and were not entered into for the purpose of, nor do they have the effect of, hindering, delaying

or defrauding the Debtor or its creditors under any applicable laws.

M. Good Faith. The Debtor, its management, and its board of directors, and the

Agent, its members and their respective officers, directors, employees, agents and

representatives, actively participated in the bidding process and acted in good faith. The Agency

Agreement was negotiated and entered into in good faith, based upon arm’s length bargaining,

and without collusion or fraud. The Debtor was free to deal with any other party interested in

buying or selling on behalf of the Debtor’s estate some or all of the Merchandise. Neither the

Debtor nor the Agent has engaged in any conduct that would cause or permit the Store Closing

Sales, the Agency Agreement, or any related action or the transactions contemplated thereby to

be avoided under section 363(n) of the Bankruptcy Code, or that would prevent the application

of section 363(m) of the Bankruptcy Code. The Agent has not violated section 363(n) of the

Bankruptcy Code by any action or inaction. Specifically, the Agent has not acted in a collusive

manner with any person and was not controlled by any agreement among bidders. The Agent’s

prospective performance and payment of amounts owing under the Agency Agreement are in

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N. Insider Status. The Agent is not an “insider” as that term is defined in section

101(31) of the Bankruptcy Code. No common identity of directors or controlling stockholders

exists between the Agent and the Debtor.

O. Security Interests. The security interests and liens provided for in the Agency

Agreement and this Order to secure the Debtor’s obligations under the Agency Agreement to the

Agent are necessary to induce the Agent to agree to terms for the Agency Agreement that

maximize value for the Debtor’s estate. The absence of such protections would impact

materially and adversely the value available to the Debtor in the liquidation of their stores in

partnership with a liquidation agent. But for the protections afforded to the Agent under the

Bankruptcy Code, this Order, and the Agency Agreement, the Agent would not have agreed to

pay the Debtor the compensation provided for under the Agency Agreement. In addition, the

DIP Lender, which holds a security interest in the property to which the Agent’s security

interests attach, has consented to the security interests provided for in the Agency Agreement,

subject to the satisfaction of the conditions set forth in the Agency Agreement and in Paragraph

30 of this Order

P. No Successor Liability. No sale, transfer, or other disposition of the

Merchandise pursuant to the Agency Agreement or assumption of the Agency Agreement will

subject the Agent to any liability for claims, obligations, encumbrances, or interests asserted

against the Debtor by reason of such transfer under any laws, including, without limitation, any

bulk-transfer laws or any theory of successor or transferee liability, antitrust, environmental,

product line, de facto merger or substantial continuity or similar theories. The Agent is not a

successor to the Debtor or its estate.

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Q. Corporate Authority. The Debtor (i) has full corporate or other power to

execute, deliver and perform its obligations under the Agency Agreement and all other

transactions contemplated thereby, and entry into the Agency Agreement has been duly and

validly authorized by all necessary corporate or similar action, (ii) has all of the corporate or

other power and authority necessary to consummate the transactions contemplated by the

Agency Agreement, and (iii) has taken all actions necessary to authorize and approve the Agency

Agreement and the transactions contemplated thereby. No consents or approvals, other than

those expressly provided for herein or in the Agency Agreement, are required for the Debtor to

consummate such transactions.

R. No Sub Rosa Plan. Entry into and assumption of the Agency Agreement and the

transactions contemplated thereby neither impermissibly restructure the rights of the Debtor’s

creditors, nor impermissibly dictates the terms of a liquidating plan of reorganization for the

Debtor. Entry into the Agency Agreement does not constitute a sub rosa chapter 11 plan.

NOW, THEREFORE, IT IS HEREBY ORDERED, ADJUDGED AND DECREED AS FOLLOWS:

A. Motion Granted, Objections Overruled

1. The relief requested in the Motion is granted as set forth herein.

2. All objections to the Motion or the relief requested therein that have not been

withdrawn, waived, or settled, and all reservations of rights included in such objections, are

overruled in all respects on the merits.

B.

Assumption of Agency Agreement Approved

3.

The Debtor’s assumption of the Agency Agreement is hereby approved pursuant

to section 365 of the Bankruptcy Code, and the Agency Agreement is hereby assumed.

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5. All amounts payable to the Agent under the Agency Agreement shall be payable

to the Agent without the need for any application of the Agent therefor or any further order of the

Court.

6. Subject to the provisions of this Order, the Debtor and the Agent are hereby

authorized, pursuant to sections 105(a) and 363(b)(1) of the Bankruptcy Code, to conduct the

Store Closing Sales in accordance with the Agency Agreement and the Store Closing Sale

Procedures, which Store Closing Sale Procedures are hereby approved in their entirety.

7. Pursuant to section 363(b) of the Bankruptcy Code, the Debtor, the Agent, and

each of their respective officers, employees, and agents are hereby authorized and directed to

execute such documents and to do such acts as are necessary or desirable to carry out the Store

Closing Sales and effectuate the Agency Agreement and each of the transactions contemplated

therein. The transactions set forth in the Agency Agreement are approved pursuant to section

363 of the Bankruptcy Code. The Debtor is hereby authorized and empowered to and perform

under the Agency Agreement, and the Agency Agreement (and each of the transactions

contemplated therein) is hereby approved in its entirety and is incorporated herein by reference.

The failure to include specifically any particular provision of the Agency Agreement in this

Order shall not diminish or impair the effectiveness of such provisions, it being the intent of the

Court that the Agency Agreement and all of its provisions, payments and transactions, be

authorized and approved in their entirety. Likewise, all of the provisions of this Order are

nonseverable and mutually dependent.

C.

Order Binding

8.

This Order shall be binding upon and shall govern the acts of all entities,

including, without limitation, all filing agents, filing officers, title agents, title companies,

recorders of mortgages, recorders of deeds, registrars of deeds, administrative agencies,

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governmental departments, secretaries of state, federal, state and local officials, and all other

persons and entities who may be required by operation of law, the duties of their office, or

contract, to accept, file, register or otherwise record or release any documents or instruments, or

who may be required to report or insure any title or state of title in or to the Merchandise.

9. This Order and the terms and provisions of the Agency Agreement shall be

binding on all of the Debtor’s creditors (whether known or unknown), the Debtor, the Agent, and

their respective affiliates, successors and assigns, and any affected third parties including, but not

limited to, all persons asserting an interest in the Merchandise, notwithstanding any subsequent

appointment of any trustee, party, entity or other fiduciary under any section of the Bankruptcy

Code with respect to the forgoing parties, and as to such trustee, party, entity or other fiduciary,

such terms and provisions likewise shall be binding. The provisions of this Order and the terms

and provisions of the Agency Agreement, and any actions taken pursuant hereto or thereto, shall

survive the entry of any order that may be entered confirming any plan of the Debtor or

converting the Debtor’s case from chapter 11 to chapter 7, and the terms and provisions of the

Agency Agreement, as well as the rights and interests granted pursuant to this Order and the

Agency Agreement, shall continue in these or any superseding cases and shall be binding upon

the Debtor, the Agent and their respective successors and permitted assigns, including any

trustee or other fiduciary hereafter appointed as a legal representative of the Debtor under

chapter 7 or chapter 11 of the Bankruptcy Code. Any trustee appointed in these cases shall be

and hereby is authorized to operate the business of the Debtor to the fullest extent necessary to

permit compliance with the terms of this Order and the Agency Agreement, and the Agent and

the trustee shall be and hereby are authorized to perform under the Agency Agreement upon the

appointment of the trustee without the need for further order of this Court.

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D.

Good Faith

10.

Entry into the Agency Agreement was undertaken by the parties thereto in good

faith, as that term is used in section 363(m) of the Bankruptcy Code, and the Agent shall be

protected by section 363(m) of the Bankruptcy Code in the event that this Order is reversed or

modified on appeal. The reversal or modification on appeal of the approval provided herein to

assume the Agency Agreement and consummate the transactions contemplated thereby shall not

affect the validity of such transactions, unless such approval is duly stayed pending such appeal.

The Agent is entitled to all of the benefits and protections afforded by section 363(m) of the

Bankruptcy Code. The transactions contemplated by the Agency Agreement are not subject to

avoidance pursuant to section 363(n) of the Bankruptcy Code.

E.

Conduct of the Store Closing Sales

11.

Pursuant to section 363(f) of the Bankruptcy Code, the Agent shall be authorized

to sell all Merchandise free and clear of any and all liens, claims, encumbrances, or interests,

including, without limitation, the liens and security interests of the DIP Lender and the Debtor’s

prepetition lenders whether arising by agreement, any statute or otherwise and whether arising

before, on, or after the Commencement Date, with any presently existing liens encumbering all

or any portion of the Merchandise therefor attaching only to the Guaranteed Amount or other

amounts payable to the Debtor under the Agency Agreement, with the same validity, force, and

effect as the same had with respect to the assets at issue, subject to any and all defenses, claims,

and/or counterclaims or setoffs that might exist.

12. Unless otherwise ordered by the Court, all newspapers and other advertising

media in which the Store Closing Sales may be advertised and all landlords are directed to accept

this Order as binding authority so as to authorize the Debtor and the Agent to consummate the

Agency Agreement and to consummate the transactions contemplated therein, including, without

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limitation, to conduct and advertise the Store Closing Sales in the manner contemplated by the

Agency Agreement, including, without limitation, conducting and advertising the Store Closing

Sales in accordance with the Agency Agreement, the Store Closing Sale Procedures, and this

Order.

13. If any person or entity that has filed financing statements, mortgages, construction

or mechanic’s liens, lis pendens or other documents or agreement evidencing liens on or interests

in the Assets shall not have delivered to the Debtor, in proper form for filing and executed by the

appropriate parties, termination statements, instruments of satisfaction, or releases of any

Encumbrances which the person or entity has with respect to the Assets, each such person or

entity is hereby directed to deliver all such statements, instruments and releases and the Debtor

and the Agent are hereby authorized to execute and file such statements, instruments, releases

and other documents on behalf of the person or entity asserting the same and the Agent is

authorized to file a copy of this Order which, upon filing, shall be conclusive evidence of the

release and termination of such interest. Each and every federal, state and local governmental

unit is hereby directed to accept any and all documents and instruments necessary or appropriate

to give effect to the Store Closing Sales and related transactions.

14. All entities that are presently in possession of some or all of the Assets or other

property in which the Debtor holds an interest that are or may be subject to the Agency

Agreement hereby are directed to surrender possession of such Assets or other property to the

Agent.

15. Nothing in this Order or the Agency Agreement releases, nullifies, or enjoins the

enforcement of any liability to a governmental unit under environmental laws or regulations (or

any associated liabilities for penalties, damages, cost recovery, or injunctive relief) to which any

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entity would be subject as the owner, lessor, lessee, or operator of the property after the date of

entry of this Order. Nothing contained in this Order or in the Agency Agreement shall in any

way (i) diminish the obligation of any entity to comply with environmental laws, or (ii) diminish

the obligations of the Debtor to comply with environmental laws consistent with its rights and

obligations as debtor in possession under the Bankruptcy Code. Nothing herein shall be

construed to be a determination that the Agent is an operator with respect to any environmental

law or regulation. Moreover, the Store Closing Sales shall not be exempt from, and the Agent

shall be required to comply with, laws of general applicability, including, without limitation,

public health and safety, criminal, tax, labor, employment, environmental, antitrust, fair

competition, traffic and consumer protection laws, including consumer laws regulating deceptive

practices and false advertising (collectively, “General Laws”). Nothing in this Order shall alter

or affect the Debtor’s and Agent’s obligations to comply with all applicable federal safety laws

and regulations. Nothing in this Order shall be deemed to bar any Governmental Unit from

enforcing General Laws in the applicable non-bankruptcy forum, subject to the Debtor’s or the

Agent’s right to assert in that forum or before this Court that any such laws are not in fact

General Laws or that such enforcement is impermissible under the Bankruptcy Code, this Order,

or otherwise. Notwithstanding any other provision in this Order, no party waives any rights to

argue any position with respect to whether the conduct was in compliance with this Order and/or

any applicable law, or that enforcement of such applicable law is preempted by the Bankruptcy

Code. Nothing in this Order shall be deemed to have made any rulings on any such issues.

16. To the extent that the Store Closing Sales are subject to any federal, state or local

statute, ordinance, or rule, or licensing requirement solely directed at regulating “going out of

business,” “store closing,” similar inventory liquidation sales, or bulk sale laws, including laws

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restricting safe, professional and non-deceptive, customary advertising such as signs, banners,

posting of signage, and use of sign-walkers solely in connection with the Store Closing Sales and

including ordinances establishing license or permit requirements, waiting periods, time limits or

bulk sale restrictions that would otherwise apply solely to store closing or liquidation sales (each

a “Liquidation Sale Law” and together, the “Liquidation Sale Laws”), the following provisions

shall apply:

a. Provided that the Store Closing Sales are conducted in accordance with

the terms of this Order, the Agency Agreement and the Store Closing Sale Procedures, and in

light of the provisions in the laws of many Governmental Units that exempt court-ordered sales

from their provisions, the Debtor shall be presumed to be in compliance with any Liquidation

Sale Laws and is authorized to conduct the Store Closing Sales in accordance with the terms of

this Order and the Store Closing Sale Procedures without the necessity of further showing

compliance with any Liquidation Sale Laws.

b. Within three (3) business days after entry of this Order, the Debtor shall

serve copies of this Order, the Agency Agreement and the Store Closing Sale Procedures via e-

mail, facsimile or regular mail, on the following: (i) the Attorney General's office for each state

where the Store Closing Sales are being held, (ii) the county consumer protection agency or

similar agency for each county where the Store Closing Sales will be held, (iii) the division of

consumer protection for each state where the Store Closing Sales will be held, and (iv) the chief

legal counsel for the local jurisdiction.

c. To the extent there is a dispute arising from or relating to the Store

Closing Sales, this Order, the Agency Agreement, or the Store Closing Sale Procedures, which

dispute relates to any Liquidation Sale Laws (a “Reserved Dispute”), the Court shall retain

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exclusive jurisdiction to resolve the Reserved Dispute. Any time within ten (10) days following

service of this Order, any Governmental Unit may assert that a Reserved Dispute exists by

serving written notice of such Reserved Dispute to counsel for the Debtor and counsel for the

Agent at the addresses set forth in the Agency Agreement so as to ensure delivery thereof within

one (1) business day thereafter. If the Debtor, the Agent and the Governmental Unit are unable

to resolve the Reserved Dispute within fifteen (15) days after service of the notice, the aggrieved

party may file a motion with this Court requesting that this Court resolve the Reserved Dispute (a

Dispute Resolution Motion”).

d. In the event a Dispute Resolution Motion is filed, nothing in this Order

shall preclude the Debtor, a landlord, the Agent or other interested party from asserting (i) that

the provisions of any Liquidation Sale Laws are preempted by the Bankruptcy Code or (ii) that

neither the terms of this Order nor the conduct of the Debtor or the Agent pursuant to this Order,

violates such Liquidation Sale Laws. Filing a Dispute Resolution Motion as set forth herein shall

not be deemed to affect the finality of this Order or to limit or interfere with the Debtor’s or the

Agent’s ability to conduct or to continue to conduct the Store Closing Sales pursuant to this

Order and the Agency Agreement, absent further order of this Court. The Court grants authority

for the Debtor and the Agent to conduct the Store Closing Sales pursuant to the terms of this

Order, the Agency Agreement, and/or the Store Closing Sale Procedures and to take all actions

reasonably related thereto or arising in connection therewith. The Governmental Unit shall be

entitled to assert any jurisdictional, procedural, or substantive arguments it wishes with respect to

the requirements of its Liquidation Sale Laws or the lack of any preemption of such Liquidation

Sale Laws by the Bankruptcy Code. Nothing in this Order shall constitute a ruling with respect

to any issues to be raised in any Dispute Resolution Motion.

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e. If, at any time, a dispute arises between the Debtor and/or the Agent and a

Governmental Unit as to whether a particular law is a Liquidation Sale Law, and subject to any

provisions contained in this Order related to the Liquidation Sale Laws, then any party to that

dispute may utilize the provisions of subparagraphs (b) and (c) hereunder by serving a notice to

the other party and proceeding thereunder in accordance with those paragraphs. Any

determination with respect to whether a particular law is a Liquidation Sale Laws shall be made

de novo.

17. Notwithstanding anything herein to the contrary, and in view of the importance of

the use of sign-walkers, banners, and other advertising to the Store Closing Sales, to the extent

that disputes arise during the course of the Store Closing Sales regarding laws regulating the use

of sign-walkers and banner advertising, and the Debtor and the Agent are unable to resolve the

matter consensually with the Governmental Unit, any party may request an immediate telephonic

hearing with this Court pursuant to these provisions. Such hearing will, to the extent practicable,

be scheduled initially within three (3) business days after such request. This scheduling shall not

be deemed to preclude additional hearings for the presentation of evidence or arguments as

necessary

18. Except to the extent of the reserved rights of Governmental Units expressly

granted elsewhere in this Order, the Debtor and the Agent are hereby authorized to take such

actions as may be necessary and appropriate to implement the Agency Agreement and to conduct

the Store Closing Sales without necessity of further order of this Court as provided in the Agency

Agreement or the Store Closing Sale Procedures, including, but not limited to, advertising the

Store Closing Sales as “going out of business,” “total liquidation,” “store-closing,” or similar-

themed sales through the posting of signs, use of signwalkers and street signage.

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19. Except as expressly provided in the Agency Agreement, the Store Closing Sales

shall be conducted by the Debtor and the Agent notwithstanding any restrictive provision of any

lease, sublease or other agreement relative to occupancy affecting or purporting to restrict the

conduct of the Store Closing Sales, the rejection of leases, abandonment of assets or “going

dark” provisions. The Agent and landlords of the Stores are authorized to enter into agreements

(“Side Letters”) between themselves modifying the Store Closing Sale Procedures without

further order of the Court, and such Side Letters shall be binding as among the Agent and any

such landlords, provided that nothing in such Side Letters affects the provisions of Paragraphs

15, 16 and 17. In the event of any conflict between the Store Closing Sale Procedures and any

Side Letter, the terms of such Side Letter shall control.

20. Except as expressly provided for herein or in the Store Closing Sale Procedures,

and except with respect to any Governmental Unit (as to which Paragraphs 14 and 15 shall

apply), no person or entity, including but not limited to any landlord, licensor, or creditor, shall

take any action to directly or indirectly prevent, interfere with, or otherwise hinder

consummation of the Store Closing Sales, or the advertising and promotion (including the

posting of signs or the use of signwalkers) of the Store Closing Sales, and all such parties and

persons of every nature and description, including landlords, licensors, creditors and utility

companies and all those acting for or on behalf of such parties, are prohibited and enjoined from

(i) interfering in any way with, or otherwise impeding, the conduct of the Store Closing Sales

and/or (ii) instituting any action or proceeding in any court or administrative body seeking an

order or judgment against, among others, the Debtor, the Agent, or the landlords at the Debtor’s

stores that might in any way directly or indirectly obstruct or otherwise interfere with or

adversely affect the conduct of the Store Closing Sales and/or seek to recover damages for

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breach(es) of covenants or provisions in any lease, sublease or license based upon any relief

authorized herein.

21. The Agent shall have the right to use the Debtor’s stores and all related store

services, furniture, fixtures, equipment and other assets of the Debtor for the purpose of

conducting the Store Closing Sales, free of any interference from any entity or person, subject to

compliance with the Store Closing Sale Procedures and this Order.

22. Nothing in this Order shall (a) alter or affect the Debtor’s obligations to comply

with section 365(d)(3) of the Bankruptcy Code or (b) alter or modify the rights of any lessor or

other counterparty to a lease with the Debtor to file an appropriate motion or otherwise seek

appropriate relief if the Debtor fails to comply with section 365(d)(3) of the Bankruptcy Code;

provided that the conduct of the Store Closing Sales in accordance with the Store Closing Sale

Procedures shall not be a violation of section 365(d)(3) of the Bankruptcy Code.

23. During the Sale Term, the Agent shall accept the Debtor’s gift cards and

Merchandise credits that were issued by the Debtor prior to the Sale Commencement Date, and

the Debtor shall reimburse the Agent for such amounts in cash during the weekly sale

reconciliation provided for in Section 8.7 of the Agency Agreement. During the Sale Term, the

Agent shall accept returns of merchandise sold by the Debtor prior to the Sale Commencement

Date so long as such returns are accompanied by the original store register receipts and are

otherwise in compliance with the Debtor’s return and price adjustment policy in effect as of the

date such item was purchased. The Debtor shall promptly reimburse the Agent in cash for any

refunds the Agent is required to issue to customers in respect of any such returns.

24. During the Sale Term, Agent shall be granted a royalty-free license to use the

Debtor’s trade names, trademarks, and logos and customer, mailing and e-mail lists, websites

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and social media relating to and used in connection with the operation of the Stores, solely for

the purpose of advertising the Store Closing Sales in accordance with the terms of the Agency

Agreement; provided, however, that the Agent shall not receive Personally Identifiable

Information from the Debtor.

25. Pursuant to section 554(a) of the Bankruptcy Code, the Debtor and the Agent, as

applicable, are permitted to abandon property of the Debtor’s estate in accordance with the terms

and provisions of the Agency Agreement, without incurring liability to any person or entity

provided, however, that, unless the Agent otherwise consents, the Debtor may only abandon

property located in any Store on or after the applicable Sale Termination Date. In the event of

any such abandonment, all applicable landlords shall be authorized to dispose of such property

without any liability to any individual or entity that may claim an interest in such abandoned

property, and such abandonment shall be without prejudice to any landlord’s right to assert any

claim based on such abandonment and without prejudice to the Debtor or other party in interest

to object thereto.

26. Before any sale, abandonment or other disposition of the Debtor’s computers

(including software) and/or cash registers and any other point of sale FF&E located at the Stores

(collectively, “POS Equipment”) which may contain customer lists, identifiable personal and/or

confidential information about the Debtor’s employees and/or customers, or credit card numbers

(“Confidential Information”) takes effect, the Debtor shall remove or cause to be removed the

Confidential Information from the POS Equipment.

27. All state and federal laws relating to implied warranties for latent defects shall be

complied with and are not superseded by the sale of said goods or the use of the terms “as is” or

“final sales.” The Debtor and/or the Agent shall accept return of any goods purchased during the

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Store Closing Sales that contain a defect which the lay consumer could not reasonably determine

was defective by visual inspection prior to purchase for a full refund, provided that the consumer

must return the merchandise within twenty-one (21) days of their purchase, the consumer must

provide a receipt, and the asserted defect must in fact be a “latent” defect. The Debtor shall

promptly reimburse Agent in cash for any refunds Agent is required to issue to customers in

respect of any goods purchased during the Store Closing Sales that contain such a latent defect.

28. Except as expressly provided for in the Agency Agreement, nothing in this Order

or the Agency Agreement, and none of the Agent’s actions taken in respect of the Store Closing

Sales shall be deemed to constitute an assumption by Agent of any of the Debtor’s obligations

relating to any of the Debtor’s employees. Moreover, the Agent shall not become liable under

any collective bargaining or employment agreement or be deemed a joint or successor employer

with respect to such employees.

29. The Agent shall not be liable for sales taxes except as expressly provided in the

Agency Agreement and the payment of any and all sales taxes is the responsibility of the Debtor.

The Debtor is directed to remit all taxes arising from the Store Closing Sales to the applicable

federal, state, and local taxing authorities (collectively, the “Taxing Authorities”) as and when

due, provided that in the case of a bona fide dispute the Debtor is only directed to pay such taxes

upon the resolution of the dispute, if and to the extent that the dispute is decided in favor of the

Taxing Authority. The Agent shall collect, remit to the Debtor and account for sales taxes as and

to the extent provided in the Agency Agreement. If Agent fails to perform its responsibilities in

accordance with Section 8.3 of the Agency Agreement, Agent shall indemnify and hold harmless

the Debtor from and against any and all costs, including, but not limited to, reasonable attorneys’

fees, assessments, fines or penalties which the Debtor sustains or incurs as a result or

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consequence of the failure by Agent to collect and/or remit Sales Taxes and/or the failure by

Agent to promptly deliver any and all reports and other documents required to enable the Debtor

to file any requisite returns with Taxing Authorities. If Agent performs its responsibilities in

accordance with Section 8.3 of the Agency Agreement, Agent shall be relieved of all liability to

the Taxing Authorities for the Sales Taxes and reporting, and Debtor (and the DIP Lender to the

extent the DIP Lender obtained any funds that were Sales Taxes) shall indemnify and hold

harmless Agent from and against any and all costs, including, but not limited to, reasonable

attorneys’ fees, assessments, fines or penalties that Agent sustains or incurs as a result or

consequence of the failure by Debtor to promptly pay such taxes to the proper Taxing

Authorities and/or the failure by Debtor to promptly file with such Taxing Authorities all reports

and other documents required, by applicable law, to be filed with or delivered to such Taxing

Authorities. This Order does not enjoin, suspend or restrain the assessment, levy or collection of

any tax under state law, and does not constitute a declaratory judgment with respect to any

party's liability for taxes under state law.

30. Subject to the terms set forth in the Agency Agreement, the Debtor and/or the

Agent (as the case may be) are authorized and empowered to transfer Assets among the Debtor’s

Distribution Center and/or the Stores. As set forth in the Agency Agreement, the Agent is

authorized to include in the Sale Additional Agent Merchandise. The Agent is authorized to sell

the Debtor’s furniture, fixtures and equipment and abandon the same, in each case, as provided

for and in accordance with the terms of the Agency Agreement.

F.

Liens Granted to Agent

31.

Upon issuance of the Guaranty L/C, and payment of the Initial Guaranty Payment,

and effective as of date of Merchant’s receipt of the Initial Guaranty Payment, Agent is hereby

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granted valid and perfected first priority, senior security interests in and liens upon (subject to the

subordination provisions set forth herein below): (i) the Merchandise; (ii) the Proceeds; (iii) the

Augment Proceeds, (iv) to the extent that Merchant and Agent agree upon a lump sum payment

for the Merchant FF&E in the Stores and/or the designated Distribution Center(s), if any,

pursuant to Section 15.9 of the Agency Agreement), in the Merchant FF&E in the Stores and/or

the Distribution Center, and (v) the “proceeds” thereof, to secure all obligations of Debtor to

Agent under the Agency Agreement, provided, however, that the security interest granted to

Agent hereunder shall remain junior and subordinate in all respects to (a) Merchant’s rights to

receive payment in full of the Agent’s Payment Obligations, and (b) the liens, security interests

and claims of the DIP Lender (other than the Augment Proceeds, in which the DIP Lender has no

security interest or other lien), but, with respect to (a) and (b), only to the extent of the unpaid

portion of Agent’s Payment Obligations until Agent’s Payment Obligations have been paid.

Upon payment of the Agent’s Payment Obligations the security interests and liens granted to the

Agent hereunder shall be first priority and senior to all other security interests and liens

(including those of WFBNA) in all respects and no longer be junior and subordinate in any

respect to any other liens claims, or encumbrances and shall be deemed properly perfected

without the necessity of filing financing statements or other documentation under the Uniform

Commercial Code or otherwise, and the Agent shall have, in addition to all other rights and

remedies, the rights and remedies of a secured party under applicable law.

G.

Other Provisions

32.

The Agent is a party in interest and shall have the ability to appear and be heard

on all issues related to or otherwise connected to this Order, the various procedures contemplated

herein, any issues related to or otherwise connected to the Store Closing Sales, and the Agency

Agreement.

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33. Nothing contained in any plan confirmed in the Debtor’s chapter 11 case or any

order of this Court confirming such plan or in any other order in this chapter 11 case (including

any order entered after any conversion of this case to a case under chapter 7 of the Bankruptcy

Code) shall alter, conflict with, or derogate from, the provisions of the Agency Agreement or the

terms of this Order and any attempt to do so shall be void.

34. The Agency Agreement and related documents may be modified, amended or

supplemented by the parties thereto in accordance with the terms thereof without further order of

this Court, provided that any such modification, amendment or supplement is not material and

adverse to the Debtor and, provided further, that at least three business days prior notice of any

such modification, amendment or supplement shall be provided to the UST and the DIP Lender.

35. The Agent shall not be liable for any claims against the Debtor, and the Debtor

shall not be liable for any claims against the Agent, in each case, other than as expressly

provided for in the Agency Agreement.

36. The Agency Agreement and related documents may be modified, amended or

supplemented by the parties thereto in accordance with the terms thereof without further order of

this Court, provided that any such modification, amendment, or supplement is not material and

adverse to the Debtor.

37. Except with respect to any Governmental Unit (as to which the provisions of

Paragraph 16, 17 and 18 shall apply), this Court shall retain exclusive jurisdiction with regard to

all issues or disputes relating to this Order or the Agency Agreement, including, but not limited

to, (i) any claim or issue relating to any efforts by any party or person to prohibit, restrict or in

any way limit banner and signwalker advertising, including with respect to any allegations that

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any claim of the Debtor, the landlords and/or the Agent for protection from interference with the

Store Closing Sales, (iii) any other disputes related to the Store Closing Sales, and (iv) to protect

the Debtor and/or the Agent against any assertions of Encumbrances. No such parties or person

shall take any action against the Debtor, the Agent, the landlords or the Store Closing Sales until

this Court has resolved such dispute. This Court shall hear the request of such parties or persons

with respect to any such disputes on an expedited basis, as may be appropriate under the

circumstances.

38. Notwithstanding Bankruptcy Rule 6004, or any other law that would serve to stay

or limit the immediate effect of this Order, this Order shall be effective and enforceable

immediately upon entry and its provisions shall be self-executing.

39. To the extent that anything contained in this Order explicitly conflicts with a

provision in the Agency Agreement or the Store Closing Sale Procedures, this Order shall govern

and control.

Dated:

,

2012

New York, New York

UNITED STATES BANKRUPTCY JUDGE

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Exhibit 1

Agency Agreement

Main Document

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AGENCY AGREEMENT

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This Agency Agreement (this "Agreement") is made as of July 31, 2012, by and between DAFFY'S, INC., a New Jersey corporation (the "Merchant"), and a joint venture comprised of Gordon Brothers Retail Partners, LLC, a Delaware limited liability company, and Hilco Merchant Resources, LLC, a Delaware limited liability company (together, the "Agent").

RECITALS:

WHEREAS, the Merchant operates retail stores in the United States and desires that the Agent act as the Merchant's exclusive agent for the limited purpose of: (a) selling all of the Merchandise (as hereinafter defined) located in (i) Merchant's retail store location(s) identified on Exhibit lA attached hereto (collectively, the "Stores"), and (ii) Merchant's distribution center listed on Exhibit lB attached hereto (the "Distribution Center"), by means of a promotional, "going out of business", "store closing", or similarly themed sale, all in accordance with the terms of this Agreement (as further described below, the "Sale"); and (b) subject to Section 15.9 hereof, disposing of the Merchant FF&E in the Stores.

WHEREAS, Merchant intends to file a voluntary petition for relief and commence a case (the "Chapter 11 Case") under chapter 11 of title 11 of the United States Code, 11 U.S.C. § 101, et sec . (the "Bankruptcy de") in the United States Bankruptcy Court for the Southern District of New York (the "Bankruptcy").

NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Agent and the Merchant hereby agree as follows:

Section 1. Defined Terms. The terms set forth below are defined in the Referenced sections of this Agreement:

Defined Term

Section Reference

Additional Agent Merchandise

Section 8.10(a)

Adjustment Amount

Section 3.3(a)

Agency Accounts

Section 3.3(c)

Agency Documents

Section 11.1(b)

Agent

Preamble

Agent Indemnified Parties

Section 13.1

Agent's Fee

Section 31(b)

Agent's Payment Obligations

Section 16

Agent Recovery Percentage

Section 3.1(b)

Agreement

Preamble

Applicable Cost Value

Section 5.3(a)

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Applicable General Laws Assumption Order Augment Proceeds Augment Recovery Amount Bankruptcy Court Bankruptcy Code Benefits Cap Central Service Expenses Chapter 11 Case Commencement Date Cost File Cost Value DC Receipt Deadline Defective Merchandise Designated Deposit Accounts Display Merchandise Distribution Center Distribution Center Expenses Distribution Center Merchandise Distribution Center Occupancy Period Estimated Merchant Amount Events of Default Excluded Benefits Excluded Defective Merchandise Expenses FF&E Final Inventory Report Final Reconciliation Global Inventory Adjustment Gross Rings Guaranteed Amount Guaranty L/C Guaranty Percentage Initial Guaranty Payment Interim Receipt Deadline Inventory Completion Date Inventory Date Inventory Taking Inventory Taking Service Liquidation Sale Laws Merchandise Merchandise Threshold Merchant Merchant Consignment Goods

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Section 2.2(c) Section 2.2(b) Section 3.1(c) Section 3.1(c) Recitals Recitals Section 4.1(b) Section 4.1(i) Recitals Section 2.2(b) Section 5.3(a) Section 5.3(a) Section 5.2(a) Section 5.2(b) Sections 3.3(d) Section 5.2(b) Recitals Section 5.5(a) Section 5.2(b) Section 5.5(a) Section 3.3(a) Section 14 Section 4.1 (ii) Section 5.2(b) Section 4.1 Section 5.2(a) Section 3.3(a) Section 3.3(e) Section 5.3(b) Section 6.3 Section 3.1(a) Section 3.3(b) Section 3.1(a) Section 3.3(a) Section 5.3(a) Section 5.1(a) Section 5.1(a) Section 5.1(a) Section 5.1(a) Section 2.2(c) Section 5.2(a) Section 3.1(e) Preamble Sections 5.4

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Merchant's Recovery Amount Occupancy Expenses On-Order Election Deadline On-Order Merchandise Merchant FF&E Payment Date Proceeds Reconciled DC Merchandise Receipts Remaining DC Merchandise Remaining DC Merchandise Count Remaining Merchandise Retained Employee Retention Bonuses Returned Defective Merchandise Returned Merchandise Returned Merchandise Log Sale Sale Commencement Date Sale Guidelines Sale Term Sale Termination Date Sales Taxes Sales Taxes Account Service Revenue Sharing Threshold Shipping Plan Shipping Variance Shipping Variance Response Store(s) Store Final Inventory Report Supplies Vacate Notice WARN Act WFBNA

Section 2.1 Intentiontionally omitted.

Section 3.1(b) Section 4.1 (iii) Section 5.2(a) Section 5.2 Section 15.9 Section 3.3(a) Section 7.1 Section 5.1(c) Section 5.1(c) Section 5.1(c) Section 3.2(b) Section 9.1 Section 9.4 Section 8.5 Section 8.5 Section 8.5 Recitals Section 6.1 Section 8.1 Section 6.1 Section 6.1 Section 8.3 Section 8.3 Section 3.2(c) Section 3.1(b) Section 5.3(d) Section 5.1(c) Section 5.1(c) Recitals Section 3.5 Section 8.4 Section 6.1 Section 9.1 Section 2.2(b)

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Section 2.2 Appointment of Agent/Liquidation Sale Laws/Assumption Order . The

Merchant hereby appoints the Agent, and the Agent hereby agrees to serve, as the Merchant's exclusive agent for the limited purpose of conducting the Sale at the Stores and disposing of the Merchant FF&E in the Stores in accordance with the terms and conditions of this Agreement.

(b) As soon as practicable after the commencement of the Chapter 11 Case (the "Commencement Date "), and in no event later than one (1) business day after the

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Commencement Date, the Merchant will file a motion with the Bankruptcy Court, for entry of an order assuming this Agreement and authorizing Merchant and Agent to conduct the Sale with respect to the Merchandise and Merchant FF&E in accordance with the terms hereof (the "Assumption Order"), and Merchant shall use its commercially reasonable efforts to obtain the entry of the Assumption Order as soon as possible after the Commencement Date, but in no event later than August 10, 2012. The Assumption Order shall provide, in a form reasonably satisfactory to the Merchant and Agent, inter alia, that: (1) this Agreement (and each of the transactions contemplated hereby) is approved in its entirety; (ii) Merchant and Agent shall be authorized to continue to take any and all actions as may be necessary or desirable to implement this Agreement and each of the transactions contemplated hereby; (iii) Agent shall be entitled to sell all Merchandise hereunder free and clear of all liens, claims or encumbrances thereon, with any presently existing liens encumbering all or any portion of the Merchandise or the Proceeds thereof, from and after such sale, attaching only to the Guaranteed Amount and other amounts to be received by Merchant and Wells Fargo Bank, National Association ("WFBNA") under this Agreement; (iv) Agent shall have the right to use the Stores and all related Store services, furniture, fixtures, equipment and other assets of Merchant as designated hereunder for the purpose of conducting the Sale, free of any interference from any entity or person subject to compliance with the Sale Guidelines and Assumption Order; (v) subject to Section 8.1 hereof Agent, as agent for Merchant, is authorized to conduct, advertise, post signs and otherwise promote the Sale as a "going out of business", "store closing", "total liquidation", "everything must go", or similarly themed sale, in accordance with the Sale Guidelines (as the same may be modified and approved by the Bankruptcy Court) and without further compliance with the Liquidation Sale Laws, subject to compliance with this Agreement, the Sale Guidelines and Assumption Order; (vi) Agent shall be granted a limited license and right to use until the Sale Termination Date the trade names, logos and customer lists relating to and used in connection with the operation of the Stores, solely for the purpose of advertising the Sale in accordance with the terms of the Agreement; (vii) the Bankruptcy Court shall retain jurisdiction over the parties to enforce this Agreement; (viii) Agent shall not be liable for any claims against the Merchant other than as expressly provided for in this Agreement; (ix) subject to Agent having satisfied the Agent's Payment Obligations (as defined in Section 16 hereof), any amounts owed by Merchant to Agent under this Agreement shall be granted the status of administrative expense priority claims in the Chapter 11 Case pursuant to Section 507(a) of the Bankruptcy Code, with such claims being subordinate and junior to the liens, claims, and interests of WFBNA, and, in any event, to any credit extensions made by and other obligations owing to WFBNA arising under or in connection with any post-petition debtor in possession financing or cash collateral usage approved by the Bankruptcy Court; (x) Agent shall be permitted to include in the Sale Additional Agent Merchandise in accordance with the terms and provisions of this Agreement, and to the extent that Agent complies with Section 8.10(c) hereof, Agent shall be deemed to be in compliance with the Liquidation Sale Laws and consumer protection laws (including consumer laws relating to deceptive practices and false advertising); and (xi) Agent shall be granted a valid, binding, enforceable and perfected security interest in the Merchandise and the Proceeds as provided for in, and subject to the subordination provisions of, Section 16 hereof (without the necessity of filing financing statements to perfect the security interests).

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(c) Subject to entry of the Assumption Order, and subject to the terms hereof Agent shall be authorized to advertise the Sale as a "going-out-of-business", store closing," "sale on everything," "everything must go," or similar-themed sale, and the Assumption Order shall provide that Agent shall be required to comply with applicable federal, state and local laws, regulations and ordinances, including, without limitation, all laws and regulations relating to advertising, permitting, privacy, consumer protection, occupational health and safety and the environment, together with all applicable statutes, rules, regulations and orders of, and applicable restrictions imposed by, governmental authorities (collectively, the "Applicable General Laws"), other than all applicable laws, rules and regulations in respect of "going out of business," "store closing" or similar-themed sales (collectively, the "Liquidation Sale Laws"), provided that such Sale is conducted in accordance with the terms of this Agreement, the Applicable Sale Guidelines and the Assumption Order.

Section 3. Consideration to Merchant and Agent.

3.1

Payments to Merchant.

(a)

As a guaranty of Agent's performance hereunder, Agent guarantees that

Merchant shall receive: ninety-nine and one half percent ( 99.5%) (the "Guaranty Percentage") of the aggregate Cost Value of the Merchandise included in the Sale (the "Guaranteed Amount").

(b) (i) To the extent that Proceeds from the Sale of the Merchandise exceed the sum

of (x) the Guaranteed Amount, (y) Expenses of the Sale and (z) two and one half percent (2.5%)

of the aggregate Cost Value of the Merchandise (the "Agent's Fee") (the aggregate of (x), (y) and (z) being defined as the "Sharing Threshold"), then all remaining Proceeds above the Sharing Threshold shall be fifty percent (50)% to Merchant (the "Merchant's Recovery Amount") and fifty percent (50)% to Agent (the "Agent Recovery Percentage").

(c) Augment Recovery Amount. In addition to the Guaranteed Amount, Agent shall

pay the Merchant an amount equal to five percent (5%) of the gross proceeds (net of sales taxes) of the sale of Additional Agent Merchandise (the "Augment Recovery Amount"). Agent agrees that the aggregate cost of the Additional Agent Merchandise shall not exceed twenty percent (20%) of the aggregate Cost Value of the Merchandise. All proceeds of the sale of Additional Agent Merchandise in excess of the Augment Recovery Amount shall be retained by Agent (the "Augment Proceeds"). Agent shall provide Merchant with an accounting of the sale of all Additional Agent Merchandise within three (3) business days following the Sale Termination Date. Agent shall be responsible for the cost of the Additional Agent Merchandise, freight associated with the delivery of Additional Agent Merchandise, labor associated with processing the receipt of Additional Agent Merchandise in the Distribution Center as well as the transfer of Additional Agent Merchandise to the Stores, and labor associated with ticketing Additional Agent Merchandise.

(d) The Guaranteed Amount, Merchant's Recovery Amount, if any, and the Augment

Recovery Amount, if any, shall be paid in the manner and at the times specified in Section 3.3

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below. The Guaranteed Amount and the Merchant's Recovery Amount will be calculated based upon the aggregate Cost Value of the Merchandise as determined by (A) the final certified report of the Inventory Taking Service after verification and reconciliation thereof by Agent and Merchant, (B) the aggregate Cost Value of the Distribution Center Merchandise and On-Order Merchandise included in the Sale; and (c) the amount of Gross Rings, as adjusted for shrinkage per this Agreement. To the extent that Merchant is entitled to receive Merchant's Recovery Amount from Proceeds, Agent shall pay the Merchant's Recovery Amount as part of a weekly sale reconciliation commencing on the first week after the Proceeds reached the Sharing Threshold, but in no event later than the first business day following the completion of the Final Reconciliation under Section 8.7.

(e) The Guaranty Percentage has been fixed based upon the aggregate Cost Value of the Merchandise, without taking into account the Global Inventory Adjustment, not being less than an amount equal to $17.2 million (floor) and no more than $18.0 million (ceiling) (the "Merchandise Threshold "). To the extent that the aggregate Cost Value of the Merchandise included in the Sale, without taking into account the Global Inventory Adjustment, is less than or more than the Merchandise Threshold, the Guaranty Percentage shall be adjusted in accordance with Exhibit 3.1(e) annexed hereto (in addition to any adjustment applicable pursuant to section 11.1(m) hereof), as and where applicable.

3.2

Compensation to Agent . Subject to entry of the Assumption Order:

(a) Agent shall receive, as its compensation for services rendered to

Merchant, the Agent's Fee, the Agent Recovery Amount, and the Augment Proceeds. Agent shall also be entitled to receive a commission based on the net proceeds of the sale of Merchant FF&E in the Stores, and the Merchant FF&E in the Distribution Center to the extent Merchant exercises its option to have Agent dispose of the Merchant FF&E in the Designated Distribution Center(s) as provided for in Section 15.9 hereof.

(b) After payment of (i) the Guaranteed Amount in full and (ii) the

Merchant's Recovery Amount, if any, and all other amounts payable to Merchant from Proceeds hereunder (which shall, in each case, be subject to WFBNA's security interests, liens and claims

in respect thereof), all Merchandise remaining at the Sale Termination Date (the " Remaining Merchandise") shall become the property of Agent, free and clear of all liens, claims and encumbrances of any kind or nature, and the proceeds received by Agent from the disposition, in a commercially reasonable manner, of such unsold Merchandise shall constitute Proceeds hereunder; provided, however that within ten (10) days following the Termination Date, the Agent shall, at the Agent's expense, which shall not constitute an Expense under this Agreement, remove all unsold Merchandise from the Stores and the Distribution Center. Notwithstanding the foregoing, Agent shall exercise commercially reasonable efforts to dispose of all of the Merchandise during the Sale Term.

(c) Agent shall receive the total amount (in dollars) of all service revenue

(including without limitation license/consignment fees payable under leased department

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agreements for sales made in the Stores during the Sale Term), exclusive of Sales Taxes (the "Service Revenue").

3.3

Time of Payments.

(a) Payment of Guaranteed Amount. On the first business day following

entry of the Assumption Order (the "Payment Date"), Agent shall pay Merchant (i) ninety (90%)

percent of the Guaranteed Amount (the "Initial Guaranty Payment"), by wire transfer to such

account(s) as are designated on Exhibit 3.3(a) .

been calculated based upon the represented, estimated aggregate Cost Value of the Merchandise to be included in the Sale, of $16.8 million (the "Estimated Merchandise Amount"). The unpaid portion of the Guaranteed Amount shall be paid by Agent to Merchant on the first business day following the issuance of the final report of the aggregate Cost Value of the Merchandise by the Inventory Taking Service, after verification and reconciliation thereof by Agent and Merchant (the "Final Inventory Report"). Agent's failure to pay such balance shall entitle Merchant to draw upon the Guaranty L/C to the extent of such balance; provided, however, that the Inventory Taking shall be reconciled within fourteen (14) days after its completion (and the Agent and Merchant shall use their commercially reasonable efforts to accomplish such reconciliation within such within fourteen (14) day period). In the event that the Final Inventory Report shows that the Initial Guaranty Payment results in an overpayment of the Guaranteed Amount, the Merchant (or, to the extent that any of the Guaranteed Amount has been funded to it, WFBNA), as the case may be, shall, within two (2) business days after the Final Inventory Report has been issued, pay to the Agent the amount (the "Adjustment Amount") by which the actual, aggregate Cost Value of the Merchandise is less than the Estimated Merchandise Amount multiplied by the Guaranty Percentage. In the event there is any dispute with respect to the reconciliation of the aggregate Cost Value of the Merchandise following the Inventory Taking, then any such dispute shall be resolved in the manner and at the times set forth in Section 3.4 hereof.

It is understood that the Guaranteed Amount has

(b) Guaranty L/C. To secure payment of the balance of any unpaid portion of

the Guaranteed Amount (subject to the adjustments set forth herein) and any other amounts due from Agent to Merchant hereunder, Agent shall deliver to Merchant an irrevocable standby letter of credit in the original face amount equal to ten percent (10%) of the Guaranteed Amount, naming Merchant, as the beneficiary, and WFBNA as additional beneficiary, substantially in the form of Exhibit 3.3(b) attached hereto (the "Guaranty L/C"). The Guaranty L/C shall be delivered to Merchant one (1) business day following the Sale Commencement Date, and shall be issued by a U.S. national bank selected by Agent and reasonably acceptable to Merchant. In the event that Agent shall fail to pay to Merchant any amount required to be paid hereunder, or fail to perform any obligation hereunder, Merchant shall be entitled to draw on the Guaranty L/C to fund such amount or obligation following five (5) days' written notice to Agent of Merchant's intention to do so. The Guaranty L/C shall expire no earlier than sixty (60) days after the Sale Termination Date; provided that, in the event that at the scheduled expiry date of the Guaranty L/C there remains any unresolved dispute as to the amount of the Guaranteed Amount, Merchant may, in its discretion, exercise the right to require Agent to have the expiry date of the Guaranty

L/C extended for thirty (30) day intervals (or such other longer duration as Merchant and Agent

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may agree) until such time as the subject dispute has been resolved and any additional amounts due hereunder have been paid to Merchant, it being agreed that if Agent has for any reason not so extended the expiry date of the Guaranty L/C by the date that is five (5) days prior to the then expiry date, Merchant shall have the right to make a drawing under the Guaranty L/C in an amount equal to the amounts Merchant asserts are then owing to Merchant; provided further, that, in the event that Agent shall have paid to Merchant all amounts due hereunder prior to such date, Merchant agrees to surrender the original Guaranty L/C to the issuer thereof together with written notification that the Guaranty L/C may be terminated. Merchant and Agent agree that, after payment of the unpaid portion of the Guaranteed Amount (determined based upon the Guaranteed Amount calculated pursuant to the Final Inventory Report), the Guaranty L/C shall be returned by Merchant to Agent.

(c) Control of Proceeds. Within ten (10) days after the Sale Commencement

Date, Agent shall establish its own accounts, dedicated solely for the deposit of the Proceeds and

the disbursement of amounts payable to Agent hereunder (the "Agency Accounts"); provided, however, Agent may elect to continue to use Merchant's Designated Deposit Accounts (as defined herein) as the Agency Accounts. Merchant shall promptly upon Agent's request execute and deliver all necessary documents to open and maintain the Agency Accounts. Agent shall exercise sole signatory authority and control with respect to the Agency Accounts; provided, however, upon request, Agent shall deliver to Merchant copies of all bank statements and other information relating to such accounts. Merchant shall not be responsible for and Agent shall pay as an Expense hereunder, all bank fees and charges, including wire transfer charges, related to the Agency Accounts, whether received during or after the Sale Term. Upon Agent's designation of the Agency Accounts, all Proceeds of the Sale (including credit card proceeds) shall be deposited into the Agency Accounts.

(d) Designated Deposit Accounts. During the period between the Sale

Commencement Date and the date Agent designates the Agency Accounts, all Proceeds of the Sale (including credit card proceeds) and Augment Proceeds shall be collected by Agent and deposited on a daily basis into depository accounts designated by Merchant, which accounts shall be designated solely for the deposit of Proceeds of the Sale (including credit card proceeds) and Augment Proceeds and the disbursement of amounts payable by Agent hereunder (the "Designated Deposit Accounts"). Commencing on the first business day following the payment of the Initial Guaranty Payment and the posting of the Guaranty L/C, and on each business day thereafter (or as soon thereafter as is practicable), Merchant shall promptly pay to Agent by wire funds transfer all collected funds constituting Proceeds (including credit card proceeds) deposited into the Designated Deposit Accounts (but not any other funds, including, without limitation, any proceeds of Merchant's inventory sold prior to the Sale Commencement Date regardless of whether such proceeds are collected by Merchant after the Sale Commencement Date).

(e) Final Reconciliation.

(a) Within thirty (30) days after the Sale

Termination Date, Agent and Merchant shall jointly prepare a final reconciliation of the Sale

including, without limitation, a summary of Proceeds, taxes, Expenses, Augment Recovery

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Amount, and any other accountings required hereunder (the " Final Reconciliation "). Within five (5) days after completion of the Final Reconciliation, any undisputed and unpaid Expenses shall be paid by Agent. In the absence of an order of the Bankruptcy Court, no such disputed amount(s) shall be paid until the dispute has been resolved by agreement of the parties or as determined in the manner prescribed in Section 3.4 hereof. During the Sale Tenn, and until all of Agent's obligations under this Agreement have been satisfied, Merchant and Agent shall have reasonable access to Merchant's and Agent's records with respect to Proceeds, sales of Additional Agent Merchandise, taxes and Expenses to review and audit such records.

(f) In the event that there is any dispute with respect to either (i) the

determination of the aggregate Cost Value of the Merchandise as reflected in the Final Inventory Report and/or (ii) the Final Reconciliation, such dispute shall be promptly (and in no event later than the third business day following the request by either Merchant or Agent) submitted to the Bankruptcy Court for resolution. In the event of a dispute as to (i) or (ii) above, Agent shall take such steps as are necessary or appropriate to extend the Guaranty L/C, as the case may be, until the date that is not less than thirty (30) days after the resolution of the subject dispute. If Agent has for any reason not so extended the expiry date of the Guaranty L/C by the date that is five (5) days prior to the then applicable expiry date, Merchant shall have the right to make a drawing under the Guaranty L/C, as appropriate, in an amount equal to the amounts Merchant asserts are then owing to Merchant.

(g) All amounts required to be paid by Agent or Merchant under any

provision of this Agreement shall be made by wire transfer of immediately available funds which shall be wired by Agent or Merchant, as applicable, no later than 2:00 p.m. (Eastern Time) on the date that such payment is due so long as all of the information necessary to complete the wire transfer has been received by Agent or Merchant, as applicable, by 10:00 a.m. (Eastern Time) on the date that such payment is due. In the event that the date on which any such payment is due is

not a business day, then such payment shall be made by wire transfer on the next business day.

(h) Merchant and Agent agree that (A) if at any time during the Sale Term

Merchant holds any undisputed amounts due to Agent as Proceeds hereunder (or other amounts payable to Agent hereunder), Agent may, in its discretion, offset such Proceeds (or other such amounts) being held by Merchant against any amounts due and owing to Merchant pursuant to this Section 3.3 or otherwise under this Agreement, and (B) if at any time during the Sale Term, Agent holds any undisputed amounts due to Merchant under this Agreement, Agent may, in its

discretion, offset such amounts being held by it against any amounts due and owing by, or required to be paid by, Merchant hereunder.

3.4

In the event there is any dispute with respect to this Agreement that the Merchant

and the Agent are unable to resolve, such dispute shall be promptly submitted to the Bankruptcy Court for resolution.

Inventory Reconciliation . Within thirty (30) days after the completion of the

Inventory Taking, Merchant and Agent shall review, reconcile and verify the final report of the

aggregate Cost Value of the Merchandise included in the Stores by the Inventory Taking Service

3.5

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(the "Store Final Inventory Report"). Within fifteen (15) days after the Distribution Center Occupancy Period, Merchant and Agent shall review, reconcile and verify the final report of the aggregate Cost Value of the Merchandise, which shall include the Store Final Inventory Report plus the Distribution Center Merchandise included in the Sale as determined by Section 5.1(c) hereof (the "Final Inventory Report").

Section 4.

Expenses of the Sale.

4.1

Expenses. Agent shall be unconditionally responsible for all documented

Expenses incurred in conducting the Sale during the Sale Term, which documented expenses shall be paid by Agent in accordance with Section 4.2 below. As used herein, "Expenses" shall mean the Store-level operating expenses of the Sale which arise during the Sale Term set forth below:

(a) all payroll and commissions, if applicable, for all Retained Employees

used in conducting the Sale for actual days/hours worked during the Sale Term as well as payroll, to the extent retained by Agent for the Sale, for any of Merchant's former employees or temporary labor;

(b) actual amounts payable by Merchant for benefits for Retained Employees

(including FICA, unemployment taxes, workers' compensation and healthcare insurance, and vacation benefits that accrue during the Sale Term, but excluding Excluded Benefits) for Retained Employees used in the Sale, in an amount not to exceed twenty two and one half percent (22.5%) of the base payroll for each of the Retained Employees in the Stores (the `Benefits Cap");

(c) costs of all security in the Stores (to the extent customarily provided in the

Stores), including, without limitation, security systems, courier and guard service, building alarm service and alarm service maintenance;

(d) fifty percent (50)% of the fees and costs of the Inventory Taking Service

to conduct the Inventory Taking at the Stores; provided that Merchant shall be responsible for the actual payroll and related costs for the Retained Employees who work at a Store during the Inventory Taking at such Inventory Location;

below;

(e)

(f)

Retention Bonuses for Retained Employees, as provided for in Section 9.4

advertising and direct mailings relating to the Sale, and Store interior and

exterior signage and banners relating to the Sale, in an amount not to exceed $140,000 per week

(g)

local and long-distance telephone expenses incurred at the Stores;

(h)

credit card fees, chargebacks and discounts with respect to Merchandise

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(i) bank service charges (for Store and corporate accounts), check guarantee

fees, and bad check expenses to the extent attributable to the Sale;

(j)

costs for additional Supplies used at the Stores;

(k)

all fees and charges required to comply with Applicable General Laws in

connection with the Sale;

(1)

Store cash theft and other store cash shortfalls in the registers;

(m)

any and all costs relating to the processing, transfer and consolidation of

Merchandise between and among the Stores, and between the Distribution Center and any Stores, including delivery and freight costs, it being understood that Agent shall be responsible for coordinating such transfer of Merchandise;

(n)

housekeeping and cleaning expenses related to the Stores;

(o)

Store trash removal;

(p)

on-site supervision of the Stores and the Distribution Centers, including

(without limitation) base wages, benefits, fees and bonuses of Agent's field personnel, travel to

and from the Stores or the Distribution Centers and incidental out-of-pocket and commercially reasonable travel expenses relating thereto (including reasonable and documented corporate travel to monitor and manage the Sale);

(q) postage, courier and overnight mail charges to and from or among the

Stores and'central office to the extent relating to the Sale;

(r) actual Occupancy Expenses for the Stores and the Distribution Center on a

per location and per diem basis in an amount up to the per Store/Distribution Center per diem amount set forth on Exhibit 4.1(r) hereto;

(s)

Central Service Expenses equal to $10,000 per week; and

(u)

Agent's reasonable out-of-pocket costs and expenses, including but not

limited to, legal fees and expenses, incurred in connection with the review of data, preparation,

negotiation and execution of this Agreement, the Assumption Order and any ancillary documents, in an amount not to exceed $75,000

Notwithstanding anything herein to the contrary, to the extent that any Expense listed in Section 4.1 is also included on Exhibit 4.1(r) , then Exhibit 4.1(r) shall control, and such Expenses shall not be double counted.

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As used herein, the following terms have the following respective meanings:

(i) "Central Service Expenses " means costs and expenses for Merchant's

central administrative services necessary for the Sale, including, but not limited to, MIS services,

payroll processing, cash reconciliation, inventory processing and handling and data processing and reporting.

(ii)

`Excluded Benefits " means benefits in excess of the Benefits Cap.

(iii)

"Occupant Expenses" means base rent, percentage rent, HVAC, utilities,

CAM, storage costs, real estate and use taxes, commercial rent tax, merchant's association dues and expenses, a pro rata portion of property insurance attributable to the Merchandise subject to the Sale and a pro rata portion of comprehensive public liability insurance attributable to the Stores, personal property leases (including, without limitation, point of sale equipment), cash register maintenance, building maintenance, and rental for furniture, fixtures and equipment, all of the foregoing as categorized and reflected on Exhibit 4.1(r) hereto.

"Expenses" shall not include: (i) Excluded Benefits; (ii) Central Service Expenses, except as provided in Section 4.1(s); (iii) expenses related to the Distribution Center in excess of Distribution Center Expenses; (iv) Occupancy Expenses (including any portion of the percentage rent obligations allocable to the sale of Merchandise during the Sale under applicable leases or occupancy agreements), except as provided in Section 4.1(r); (v) expenses of the type set forth in 4.1(a) — (u) above to the extent the same shall not have been approved in advance by Agent; and (vi) any other costs, expenses or liabilities payable by Merchant not provided for herein.

Order:

4.2

Payment of Expenses . Effective from and after entry of the Assumption

(a) Agent shall be responsible for the payment of all Expenses, whether or not

there are sufficient Proceeds collected to pay such Expenses after the payment of the Guaranteed

Amount. All Expenses incurred during each week of the Sale (i.e., Sunday through Saturday) shall be paid by Agent to or on behalf of Merchant, or paid by Merchant and thereafter reimbursed by Agent as provided for herein, immediately following a weekly sale reconciliation by Merchant and Agent pursuant to Section 8.7 below; provided, however, in the event that the actual amount of an Expense is unavailable on the date of the reconciliation (such as payroll), Merchant and Agent shall agree to an estimate of such amounts, which amounts will be reconciled once the actual amount of such Expense becomes available. Agent and/or Merchant may review or audit the Expenses at any time.

(b) Notwithstanding anything herein to the contrary, (i) to the extent that

Proceeds are insufficient, Merchant shall not be required to fund or otherwise pay any Expenses of Sale and (ii) without limitation on Expenses that may be funded in advance by Agent at Merchant's reasonable request, to the extent that Proceeds are insufficient, Agent shall fund, in

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advance, all payroll and related expenses for Retained Employees at least two (2) business days prior to the date that such payments are due by Merchant.

Section 5. Inventory Valuation; Merchandise .

5.1 Inventory Taking .

(a) Subject to the provisions of this paragraph, the parties have agreed to use

the current book value of inventory as of the Sale Commencement Date, to determine the aggregate Cost Value of the Merchandise located in the Stores on the Sale Commencement Date in accordance with this Agreement. In order to test the validity of the aggregate Cost Value of the Merchandise as reflected on Merchant's current books and records, subject to the availability of the Inventory Taking Service, on or within ten (10) days after the Sale Commencement Date (the "Inventor Completion Date") , Merchant and Agent shall cause to be taken a SKU and retail value physical inventory (the " Inventory Taking") of the Merchandise located in the Stores. The date of the Inventory Taking at each Store shall be referred to as the " Inventory Date " for such Store. Merchant and Agent shall jointly employ RGIS or another mutually acceptable inventory taking service (the " Inventory Taking Service ") to conduct the Inventory Taking in accordance with procedures set forth on Exhibit 5.1 annexed hereto.

(b) The Agent and Merchant agree that they will, and agree to cause their

respective representatives to, cooperate and assist in the preparation and the calculation of the

aggregate Cost Value of the Merchandise included in the Sale, including, without limitation, the making available to the extent necessary of books, records, work papers and personnel.

(c) With respect to Distribution Center Merchandise, such Distribution Center

Merchandise shall be counted and reconciled within five Store business days after receipt of such goods in the Stores in accordance with the procedures set forth herein (" Reconciled DC Merchandise Receipts"), and absent prior notification and agreement of Merchant, failure to report any variance between the received shipment from the respective shipping documents (each a " Shipping Variance"), within such five Store business day period shall, result in such receipts being automatically confirmed received consistent with the applicable shipping documents. Merchant shall have five Distribution Center business days to verify a timely issued Shipping Variance (each a " Shipping Variance Response "), and absent prior notification and agreement of Agent, failure to respond to an asserted Shipping Variance within such five Distribution Center business day period shall result in such Shipping Variance being deemed valid. If Merchant timely issues a Shipping Variance Response that disputes the asserted Shipping Variance, Merchant and Agent shall cooperate with each other to verify and resolve such dispute. Unless Merchant and Agent otherwise agree, and subject to both Merchant's and Agent's compliance with their obligations under Section 5.5 hereof, to the extent that there is any Distribution Center Merchandise remaining in the Distribution Center at the end of the Distribution Center Occupancy Period provided for in Section 5.5 hereof (the " Remaining DC Merchandise "), such Remaining DC Merchandise shall be jointly counted by Merchant and Agent ( Remaining DC Merchandise Count") and included as Merchandise. Agent shall have five (5) days after the

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reconciliation of the Remaining DC Merchandise Count to remove such Remaining DC Merchandise from the Distribution Center, at Agent's sole cost (including any Distribution Center Expenses incurred after the expiration of the Distribution Center Occupancy Period), and any Remaining DC Merchandise not timely removed shall be deemed abandoned by Agent and Merchant shall be free to dispose of such abandoned Merchandise as it deems appropriate.

5.2

Merchandise Subject to This Agreement.

(a)

For purposes of this Agreement, "Merchandise" shall mean: (i) all finished goods

inventory that is owned by Merchant and located at the Stores or the Distribution Facility as of the Sale Commencement Date, including (A) Distribution Center Merchandise; (B) the Display Merchandise, and (C) Merchandise subject to Gross Rings; (ii) On-Order Merchandise received in the Distribution Center on or prior to August 24, 2012 (the "DC Receipt Deadline"), and (iii) returned Merchandise subject to Section 8.5 hereof. Notwithstanding the foregoing, "Merchandise" shall not include: (1) goods which belong to sublessees, licensees, department lessees, or concessionaires of Merchant; (2) goods held by Merchant on memo, on consignment, or as bailee; (3) furnishings, trade fixtures, equipment and/or improvements to real property which are located in the Stores (collectively, "FF&E"); provided that, art, paintings, sculpture, photography or similar items shall not constitute FF&E under this Agreement; and provided further that Agent shall be permitted to sell Merchant FF&E as set forth in Section 15.9; (4) Excluded Defective Merchandise; (5) Merchant Consignment Goods; (6) Additional Agent Merchandise; (7) On-Order Merchandise received in the Distribution Center after the Sale Commencement Date and either on or before the DC Receipt Deadline that Merchant elects to exclude from the Sale, provided that, such election is made by the Interim Receipt Deadline ("On-Order Election Deadline"), and (9) On-Order Merchandise received in the Distribution Center after the DC Receipt Deadline.

(b) As used in this Agreement, the following terms have the respective meanings set

forth below:

"Defective Merchandise" means any item of Merchandise that is defective or otherwise not saleable in the ordinary course of the Merchant's business because it is so worn, scratched, broken, faded, torn, mismatched, tailored, or affected by other similar defenses rendering it not of the quality of other similar items of Merchandise. Display Merchandise shall not per se be deemed to be Defective Merchandise.

"Display Merchandise" means those items of inventory used in the ordinary course of business as displays or floor models, including inventory that has been removed from its original packaging where such items of inventory have been removed from its original packaging for the purpose of putting such item on display but not customarily sold or saleable by Merchant, which goods are not otherwise damaged or defective. For the avoidance of doubt, Merchandise created for display and not saleable in the ordinary course of business shall not constitute Display Merchandise.

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"Distribution Center Merchandise" means those items of inventory identified by SKU on the Cost File, that were located in Merchant's Distribution Center and, which goods, to the extent not delivered to the Stores prior to the Sale Commencement Date, shall be delivered by Merchant to the Stores as directed by Agent after the Sale Commencement Date, in accordance with Section 5.5 hereof, which goods shall be delivered by Merchant pursuant to the Agent's direction and at Agent's expense as set forth in Section 5.5 to the Stores on or before August 24, 2012.

"Excluded Defective Merchandise" means those items of Defective Merchandise that are not saleable in the ordinary course because they are so damaged or defective that such inventory cannot reasonably be used for their intended purpose.

"On-Order Merchandise" means items of inventory that were ordered by Merchant in the ordinary course of business as identified by SKU on Exhibit 5.2(b) annexed hereto, which inventory was not received in the Stores or Distribution Center as of the Sale Commencement Date, but which may be received in the Distribution Center prior to the DC Receipt Deadline.

"Retail Price" means the lower of the lowest retail file price or ticketed price.

(a)

5.3

Valuation.

For purposes of this Agreement, "Cost Value" shall mean with respect to each item of

Merchandise, the actual cost for the SKU for such item of Merchandise as reflected on Merchant's inventory item master cost file identified as "41 Store Warehouse Inv DNS & Dock.xls" and posted to the due diligence electronic "data room" on July 24, 2012, updated only for the actual cost for the SKU of each item of Merchandise received from and after July 24, 2012 through August 24, 2012 (the "Cost File"); provided that in no event shall the Cost Value of any Merchandise exceed the Retail Price for such item of Merchandise; provided however, any adjustment to the Cost Value as a result of the immediately preceding proviso shall not be factored into the calculation for purposes of determining whether the aggregate Cost Value of the Merchandise has satisfied the Merchandise Threshold provided for in Section 3.1(e) hereof. Items of On-Order Merchandise received in the Distribution Center on or prior to the earlier of seven days after the Sale Commencement Date or August 24, 2012 (the "Interim Receipt Deadline"), will be included in Merchandise at the applicable Cost Value for Merchandise (the

"Applicable Cost Value"), for each such item; provided, however, that items of On-Order Merchandise received at the Distribution Center after the Interim Receipt Deadline but prior to the DC Receipt Deadline shall be included in Merchandise at the Applicable Cost Value for each such item multiplied by the inverse of the prevailing discount on similar items of Merchandise as of the date of receipt in the Distribution Center; provided further, items of On-Order Merchandise received in the Distribution Center after the DC Receipt Deadline shall not constitute Merchandise, shall be given no Cost Value, and shall be excluded from Merchandise, and shall, at Merchant's option either be sold by Agent as Merchant Consignment Goods pursuant to Section 5.4 hereof, or excluded from the Sale and removed by Merchant from the

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Distribution Center. Items of Distribution Center Merchandise received in the Stores in accordance with the Shipping Plan or on or prior to August 24, 2012 will be included in Merchandise; provided, however, that items of Distribution Center Merchandise received at the Stores after such date (as a result of Merchant's inability to execute the transfer of the Distribution Center Merchandise in accordance with its maximum weekly capacity) shall be included in Merchandise at the applicable Cost Value for each such item multiplied by the inverse of the prevailing discount on similar items of Merchandise as of the date of receipt in the Stores. The Cost File does not account for any advertising co-op allowances or discounts associated with expedited payment terms offered by any vendor, and, further, the Applicable Cost Value of any item of Merchandise shall not be adjusted for any such amounts.

(b) Other than Excluded Defective Merchandise, in lieu of any other adjustments to

the Cost Value of Merchandise under this Agreement (g. adjustments for Defective Merchandise, clearance merchandise, mis-mates and near-mates and/or sample merchandise), the aggregate Cost Value of the Merchandise shall be adjusted (i.e., reduced) by means of a single global downward adjustment equal to one percent (1%) of the aggregate Cost Value of the

Merchandise included in the Sale (the "Global Inventory Adjustment").

(c) Excluded Defective Merchandise located in the Stores shall be identified and

counted during the Inventory Taking and thereafter removed from the sales floor and segregated. Excluded Defective Merchandise included in Distribution Center Merchandise and/or On-Order Merchandise must be identified jointly by Merchant and Agent (with written notice provided to WFBNA), within five (5) business days of such Distribution Center Merchandise and/or On- Order Merchandise receipt in the Stores. Other than as identified during the Inventory Taking at a Store, or as provided for in this Section 5.3 with respect to Distribution Center Merchandise and/or On-Order Merchandise, no other goods can be categorized as Excluded Defective Merchandise, regardless of their condition.

(d) As used in this Agreement, the following term has the meaning set forth below:

"Shipping Plan" mean a shipping plan to be provided by the Agent to the Merchant and agreed to by the Merchant in its reasonable discretion prior to the Sale Commencement Date which sets forth the amount of items to be shipped from the Distribution Center to each Store and the date of each such shipment. The Shipping Plan shall take into account the Distribution Center's shipping capacity and provide for a shipping schedule which enables the Merchant to be in compliance with Section 5.3, 5.5 and all other provisions of this Agreement.

Excluded Goods. Merchant shall retain all responsibility for any goods not

included as "Merchandise" hereunder. If Merchant elects at the beginning of the Sale Term, Agent shall accept goods not included as "Merchandise" hereunder for sale as "Merchant Consignment Goods" at prices established by the Agent. The Agent shall retain 20% of the sale price for all sales of Merchant Consignment Goods, and Merchant shall receive 80% of the receipts in respect of such sales. Merchant shall receive its share of the receipts of sales of

5.4

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Merchant Consignment Goods on a weekly basis, immediately following a weekly sale reconciliation by Merchant and Agent pursuant to Section 8.7 below. If Merchant does not elect to have Agent sell goods not included as Merchandise, then all such items will be removed by Merchant from the Stores at its expense as soon as practicable after the Sale Commencement Date. Except as expressly provided in this Section 5.4, Agent shall have no cost, expense or responsibility in connection with any goods not included in Merchandise. For the avoidance of doubt, no amounts received by the Merchant or the Lenders in respect of Merchant owned goods not included as "Merchandise" hereunder shall be credited towards the Guaranteed Amount.

5.5 Distribution Center Expenses .

(a) Agent shall be responsible for allocating and designating the shipment of the

Distribution Center Merchandise to the Stores in accordance with the Shipping Plan. The actual costs and expenses, including use and occupancy at the Distribution Center, transfer and delivery (ticketed in the ordinary course consistent with historic practices), related to the processing, transfer and consolidation of Distribution Center Merchandise from the Distribution Center to the Stores (collectively, the " Distribution Center Expenses ") for a period commencing on the Sale Commencement Date through the earlier of: (a) the Sale Termination Date, and (b) the date that the Distribution Center is vacated (the " Distribution Center Occupancy Period ") shall be the obligation of the Agent; provided, however, other than in the circumstances set forth in the next sentence, the Distribution Center Expenses shall not exceed $200,000; and provided further that there shall be no cap on expenses paid by the Agent with respect to its obligations under Section 3.1(c) of this Agreement.

(b) In the event that all Distribution Center Merchandise has not been removed at the conclusion of the Distribution Center Occupancy Period, other than as a result of Merchant's inability to execute the transfer of the Distribution Center Merchandise in accordance with the Shipping Plan, Agent shall be obligated to pay all Distribution Center Expenses incurred after such date.

Section 6.

Sale Term.

6.1

Term (a) Subject to satisfaction of the conditions precedent set forth in Section

10 hereof, the Sale shall commence at each Store on the first business day following the entry of

the Assumption Order, but, subject to the entry of the Assumption Order, in no event later than August 11, 2012 (the " Sale Commencement Date "). Subject to the prior expiration of the term of any Store Lease (as reflected on Exhibit 4.1(r)) , the Agent shall complete the Sale at each Store and vacate such Store in broom-clean condition by no later than October 14, 2012, unless the Sale is extended by mutual written agreement of Agent and Merchant (the " Sale Termination Date"; the period from the Sale Commencement Date to the Sale Termination Date as to each Store being the " Sale Term"). The Agent may, in its discretion, terminate the Sale at any Store upon not less than ten (10) days' prior written notice (a " Vacate Notice ") to Merchant. In the event the Agent fails to provide Merchant with such timely notice, Agent shall be liable for and

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pay the actual amounts payable to landlords for the days by which notice of a Store closing was less than ten (10) days.

6.2

Vacating the Stores . At the conclusion of the Sale, Agent agrees to leave the

Stores in "broom clean" condition, ordinary wear and tear excepted, except for unsold items of FF&E and remaining Supplies (except as provided for in Section 15.9 below). Agent shall vacate the Stores on or before the Sale Termination Date, as provided for herein, at which time Agent shall surrender and deliver the Store premises and Store keys to Merchant. Agent's obligations to pay all Expenses, including Occupancy Expenses, for each Store subject to Vacate Notice shall continue until the later of (a) the applicable vacate date for such Store, or (b) the 15th day of the calendar month in which the vacate date for such Store occurs. All assets of Merchant used by Agent in the conduct of the Sale (e.g., FF&E, etc.) shall be returned by Agent to Merchant at the end of the Sale Term to the extent the same have not been consumed in the conduct of the Sale or sold (e.g., Supplies). Agent shall be responsible for all Occupancy Expenses (irrespective of any per diem cap on Occupancy Expenses) for a Store for which

Merchant is or becomes obligated resulting from Agent's failure to vacate such Store in a timely manner.

6.3

Gross Rings. In the event that the Sale commences at any Store subject to

Inventory Taking prior to the completion of the Inventory Taking at such Store, then, for the period from the Sale Commencement Date for such Store until the Inventory Date for such Store, Agent and Merchant shall jointly keep (i) a strict count of gross register receipts less applicable Sales Taxes but excluding any prevailing discounts (" Gross Rings"), and (ii) cash reports of sales

within such Store. Agent and Merchant shall keep a strict count of register receipts and reports to determine the actual Cost Value and retail price of the Merchandise sold by SKU. All such records and reports shall be made available to Agent and Merchant during regular business hours upon reasonable notice. Any Merchandise included in the Sale using the Gross Rings shall be included in Merchandise using the Gross Rings method and, as soon as determinable, Agent shall pay that portion of the Guaranteed Amount calculated on the Gross Rings basis, to account for shrinkage, on the basis of one percent (1%) of the aggregate Cost Value of the Merchandise (without taking into account any of Agent's point of sale discounts or point of sale markdowns) sold during the Gross Rings period.

Section 7. Sale Proceeds .

7.1

Proceeds . For purposes of this Agreement, " Proceeds " shall mean the aggregate

of (a) the total amount (in dollars) of all sales of Merchandise made under this Agreement, exclusive of Sales Taxes; (b) Service Revenue; and (c) all proceeds of Merchant's insurance for

loss or damage to Merchandise or loss of cash arising from events occurring during the Sale Term. Proceeds shall also include any and all proceeds received by Agent from the disposition, in a commercially reasonable manner, of unsold Merchandise at the end of the Sale, whether through salvage, bulk sale or otherwise. For the avoidance of doubt, "Proceeds" shall not include Augment Proceeds.

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7.2

Deposit of Proceeds.

(a)

Prior to the issuance of the Store Final Inventory Report and payment of the

undisputed Merchant's Recovery Amount, all Proceeds of the Sale (including credit card proceeds) shall be collected by Agent and deposited on a daily basis into the Designated Deposit Accounts. The Designated Deposit Accounts shall be dedicated solely to the deposit of Proceeds and the disbursement of amounts payable hereunder, and Merchant (or WFBNA, as the case may be) shall exercise sole signatory authority and control with respect to the Designated Deposit Accounts subject in all respects to the first lien and security interests in, and control of, such Designated Deposit Accounts by WFBNA. Upon request, Merchant shall deliver to Agent copies of all bank statements and other information relating to such accounts. Merchant shall not be responsible for, and Agent shall pay as an Expense hereunder, all bank fees and charges, including wire transfer charges, related to the Designated Deposit Accounts, whether received during or after the Sale Term. All Augment Proceeds will be distributed to Agent upon receipt by the Merchant and WFBNA of the weekly reconciliation report provided in accordance with Section 8.7 below.

(b) Not later than ten (10) days after the Sale Commencement Date, Agent shall

establish the Agency Accounts and Merchant shall promptly upon Agent's request execute and deliver all necessary documents to open and maintain the Agency Accounts; provided, however, Agent may elect to continue to use Merchant's Designated Deposit Accounts (as defined above) as the Agency Accounts. The Agency Accounts shall be dedicated solely to the deposit of Proceeds and the disbursement of amounts payable hereunder, and Agent shall exercise sole signatory authority and control with respect to the Agency Accounts. Upon request, Agent shall deliver to Merchant copies of all bank statements and other information relating to such accounts. Merchant shall not be responsible for an