UNITED STATES BANKRUPTCY COURT DISTRICT OF DELAWARE In re: MERVYN'S HOLDINGS, LLC, et al., Debtors. Chapter 11 Case No.

08-11586 (KG) Jointly Administered

Hearing Date: August 26, 2008 at 10:00 a.m. Objection Deadline: August 20, 2008 at 6:00 p.m. Related Docket Nos.: 209, 211, 214 and 236

OBJECTION TO MOTION OF DEBTORS AND DEBTORS IN POSSESSION FOR AN ORDER APPROVING AUCTION PROCEDURES, AGENCY AGREEMENT, STORE CLOSING SALES AND RELATED RELIEF The Fifth Third Leasing Company ("Fifth Third"), Key Equipment Finance Inc. ("Key") and IDB Leasing, Inc. ("IDB", and together with Fifth Third and Key, collectively, the "Objectors") hereby file their Objection To The Motion Of Debtors And Debtors In Possession For An Order Approving Auction Procedures, Agency Agreement, Store Closing Sales And Related Relief (the "Motion"), and respectfully submit as follows: RELEVANT FACTUAL BACKGROUND 1. On May 8, 2007, Mervyn's LLC ("Mervyn's") entered into a Master Lease

Agreement (as at any time amended, the "Master Agreement") with General Electric Capital Corporation ("GECC"). Pursuant to the terms of the Master Agreement, Mervyn's leased from GECC certain equipment more particularly described in and on certain Equipment Schedules subject to the Master Agreement. In addition, Mervyn's granted a security interest to GECC in and to the equipment referenced in those certain Equipment Schedules subject to the Master Agreement, to secure the due and punctual payment of any and all of the present and future

0q/v((6

0811586080822000000000024

82

obligations of Mervyn's to GECC. A true and correct copy of the Master Agreement is attached herewith as Exhibit "A" and is incorporated by reference herein. 2. On or about May 8, 2007, in accordance with and subject to the Master

Agreement, Fifth Third and Mervyn's entered into that certain Equipment Schedule, described as Schedule No. F001, to the Master Agreement (as at any time amended, the "Fifth Third Schedule"), whereby Mervyn's leased certain equipment, more specifically described in the Fifth Third Schedule, from Fifth Third. A true and correct copy of the Fifth Third Schedule is attached herewith as Exhibit "B" and is incorporated by reference herein. 3. Concurrent with the entry into the Master Agreement, GECC assigned all of its

rights, title and interest in and to the Fifth Third Schedule, the equipment subject thereto (the "Fifth Third Collateral") and the Master Agreement as it relates to the Fifth Third Schedule and the Fifth Third Collateral, to Fifth Third. A true and correct copy of the Specification of Assigned Interest is attached herewith as Exhibit "C" and is incorporated by reference herein. In addition, Fifth Third perfected its security interests in and to the Fifth Third Collateral prior to the Petition Date (as that term is defined below). 4. On or about May 4, 2007, Wachovia Capital Finance Corporation (Western)

("Wachovia") and Fifth Third entered into a Subordination Agreement (as at any time amended, the "Fifth Third Subordination Agreement"), whereby Wachovia and Fifth Third set forth their respective priorities with respect to certain collateral. Specifically, they agreed that Fifth Third shall have priority over Wachovia with respect to the Fifth Third Collateral. A true and correct copy of the Fifth Third Subordination Agreement is attached herewith as Exhibit "D" and is incorporated by reference herein.

5.

On or about May 8, 2007, in accordance with and subject to the Master

Agreement, Key and Mervyn's entered into that certain Equipment Schedule No. K001 (as at any time amended, the "Key Schedule 1"), whereby Mervyn's leased certain equipment, more specifically described in the Key Schedule 1 (the "Key Collateral 1")1, from Key. A true and correct copy of the Key Schedule 1 is attached herewith as Exhibit "E" and is incorporated by reference herein. 6. Concurrent with the entry into the Master Agreement, GECC assigned all of its

rights, title and interest in and to the Key Schedule 1, Key Collateral 1, and the Master Agreement as it relates to the Key Schedule 1 and the Key Collateral 1, to Key. A true and correct copy of the Specification of Assigned Equipment Schedule and Notice and Acknowledgment of Assignment are attached herewith as Exhibit "F" and are incorporated by reference herein. In addition, Key perfected its security interests in and to the Key Collateral 1, prior to the Petition Date. 7. On or about May 10, 2007, GECC and Mervyn's entered into a Master Security

Agreement (as at any time amended, the "MSA"), pursuant to which Mervyn's granted to GECC a security interest in and to certain equipment more particularly described in and on certain Collateral Schedules subject to the MSA, to secure the due and punctual payment of any and all of the present and future obligations of Mervyn's to GECC, including but not limited to payment and performance of certain Promissory Notes identified in the various Collateral Schedules. A true and correct copy of the MSA is attached herewith as Exhibit "G" and is incorporated by reference herein.

The detailed listing of Key Collateral 1 is voluminous and is not attached herewith, but will be provided upon request to any party-in-interest. 3

8.

On or about June 4, 2007, Mervyn's executed a Promissory Note (as at any time

amended, the "Note 1") in favor of Key, whereby Mervyn's promised to repay the principal sum of $1,343,218.79, with interest, to Key upon terms and amounts as set forth in Note 1. A true and correct copy of the Note 1 is attached herewith as Exhibit "H" and is incorporated by reference herein. 9. Concurrent with the entry into Note 1, and in accordance with and subject to the

MSA, Mervyn's and Key executed a Collateral Schedule No. K002 (as at any time amended, the "Key Schedule 2"), pursuant to which Mervyn's granted a security interest in certain equipment, more particularly described therein (the "Key Collateral 2"), to Key, to secure payment and performance of any and all of the present and future obligations of Mervyn's to Key, including, but not limited to, the obligations of Mervyn's under the Note 1. A true and correct copy of Key Schedule 22 is attached herewith as Exhibit "I" and is incorporated by reference herein. 10. Concurrent with the entry into the MSA, GECC assigned all of its rights, title and

interest in and to the Key Schedule 2, Key Collateral 2, and the MSA as it relates to the Key Schedule 2 and the Key Collateral 2, to Key. A true and correct copy of the Specification of Assigned Equipment Schedule and Notice and Acknowledgment of Assignment are attached herewith as Exhibit "J" and are incorporated by reference herein. Key perfected its security interests in and to the Key Collateral 2 prior to the Petition Date. 11. On or about July 17, 2007, Mervyn's executed a Promissory Note (as at any time

amended, the "Note 2") in favor of Key, whereby Mervyn's promised to repay the principal sum of $2,788,817.59, with interest, to Key upon terms and amounts as set forth in the Note 2. A true

The detailed listing of Key Collateral 2 is voluminous and is not attached herewith, but will be provided upon request to any party-in-interest. 4

and correct copy of the Note 2 is attached herewith as Exhibit "K" and is incorporated by reference herein. 12. Concurrent with the entry into Note 2, and in accordance with and subject to the

MSA, Mervyn's and Key executed a Collateral Schedule No. K003 (as at any time amended, the "Key Schedule 3"), pursuant to which Mervyn's granted a security interest in certain equipment, more particularly described therein (the "Key Collateral 3"), to Key, to secure payment and performance of any and all of the present and future obligations of Mervyn's to Key, including, but not limited to, the obligations of Mervyn's under the Note 2. A true and correct copy of the Key Schedule 33 is attached herewith as Exhibit "L" and is incorporated by reference herein. 13. Concurrent with the entry into the MSA, GECC assigned all of its rights, title and

interest in and to the Key Schedule 3, Key Collateral 3, and the MSA as it relates to the Key Schedule 3 and the Key Collateral 3, to Key. A true and correct copy of the Specification of Assigned Equipment Schedule and Notice and Acknowledgment of Assignment are attached herewith as Exhibit "M" and are incorporated by reference herein. Key perfected its security interests in and to the Key Collateral 3 prior to the Petition Date. 14. On or about September 25, 2007, Mervyns executed a Promissory Note (as at

any time amended, "Note 3") in favor of Key, whereby Mervyn's promised to repay the principal sum of $3,412,893.18, with interest, to Key upon terms and amounts as set forth in the Note 3. A true and correct copy of the Note 3 is attached herewith as Exhibit "N" and is incorporated by reference herein. 15. Concurrent with the entry into Note 3, Mervyn's and Key executed a Collateral

Schedule No. K004 (as at any time amended, the "Key Schedule 4"), pursuant to which Mervyn's

The listing of Key Collateral 3 is voluminous and is not attached herewith, but will be provided upon request to any party-in-interest. 5

granted a security interest in certain equipment, more particularly described therein (the "Key Collateral 4"), to Key, to secure payment and performance of any and all of the present and future obligations of Mervyn's to Key, including, but not limited to, the obligations of Mervyn's under the Note 3. A true and correct copy of the Key Schedule 44 is attached herewith as Exhibit "O" and is incorporated by reference herein. 16. Concurrent with the entry into the MSA, GECC assigned all of its rights, title and

interest in and to the Key Schedule 4, Key Collateral 4, and the MSA as it relates to the Key Schedule 4 and the Key Collateral 4, to Key. A true and correct copy of the Specification of Assigned Equipment Schedule and Notice and Acknowledgment of Assignment are attached herewith as Exhibit "P" and are incorporated by reference herein. Key perfected its security interests in and to the Key Collateral 4 prior to the Petition Date. 17. The Key Collateral 1, Key Collateral 2, Key Collateral 3 and Key Collateral 4 are

collectively referred to as "Key Collateral." 18. On or about May 4, 2007, Wachovia and Key entered into a Subordination

Agreement (as at any time amended, the "Key Subordination Agreement"), whereby they set forth their respective priorities with respect to certain collateral. Specifically, they agreed that Key shall have priority over Wachovia with respect to the Key Collateral. A true and correct copy of the Key Subordination Agreement is attached herewith as Exhibit "Q" and is incorporated by reference herein. 19. On or about May 8, 2007, in accordance with and subject to the Master

Agreement, IDB and Mervyn's entered into an Equipment Schedule, described as Schedule No. I001 to the Master Agreement (as at any time amended, the "IDB Schedule"), whereby

The listing of Key Collateral 4 is voluminous and is not attached herewith, but will be provided upon request to any party-in-interest. 6

Mervyn's leased certain equipment, more specifically described in the IDB Schedule (the "IDB Collateral")5, from IDB. A true and correct copy of the IDB Schedule is attached herewith as Exhibit "R" and is incorporated by reference herein. 20. Concurrent with the entry into the Master Agreement, GECC assigned all of its

rights, title and interest in and to the IDB Schedule, the IDB Collateral and the Master Agreement as it relates to the IDB Schedule and the IDB Collateral, to IDB. A true and correct copy of the Specification of Assigned Equipment Schedule is attached herewith as Exhibit "S" and is incorporated by reference herein. IDB perfected its security interests in and to the IDB Collateral prior to the Petition Date. 21. On or about May 4, 2007, Wachovia and IDB entered into a Subordination

Agreement (as at any time amended, the "IDB Subordination Agreement"), whereby they set forth their respective priorities with respect to certain collateral. Specifically, they agreed that IDB shall have priority over Wachovia with respect to the IDB Collateral. A true and correct copy of the IDB Subordination Agreement is attached herewith as Exhibit "T" and is incorporated by reference herein. 22. The Fifth Third Collateral, Key Collateral and IDB Collateral are collectively

referred to as the "Objectors' Collateral". 23. On or about July 29, 2008 (the "Petition Date"), Mervyn's Holdings, LLC,

Mervyn's LLC and Mervyn's Brands, LLC (collectively, the "Debtors") filed Voluntary Petitions for relief under Chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the District of Delaware (the "Court") and Orders for Relief were entered on that date.

The listing of IDB Collateral is voluminous and is not attached herewith, but will be provided upon request to any party-in-interest. 7

24.

On or about August 15, 2008, the Debtors filed the Motion seeking an order

(a) authorizing the Debtors to close certain retail stores and other locations; (b) authorizing the Debtors to conduct store closing sales free and clear of liens pursuant to sections 363(b) and (f) of the Bankruptcy Code; and (c) authorizing the Debtors to enter into an agency agreement providing for the liquidation of merchandise inventory and other assets with the successful bidder at the auction, and granting the successful bidder liens pursuant to section 364(d) of the Bankruptcy Code. Attached as Exhibit A to the Motion is a list of stores and locations to be sold (the "GOB Locations"). Attached as Exhibit B to the Motion is a Proposed Order relating to the Motion (the "Proposed Order"). The Motion also indicates that the Agency Agreement6 will be filed at a later date. 25. 26. On or about August 19, 2008, the Debtors filed the Agency Agreement. It is clear from the Motion and the Agency Agreement that not only are the

Debtors seeking to sell Inventory at the GOB Locations, but the sale also may include "furniture, fixtures and equipment" ("FFE") at the GOB Locations. See Motion at paragraphs 15 and 37; See Agency Agreement at paragraph 5.2(a). 27. Some of the Fifth Third Collateral is located at the GOB Locations and may be

characterized as FFE namely, at Store Numbers 140, 150, 272, 276, 291 and 2927. 28. Some of the Key Collateral is located at the GOB Locations and may be

characterized as FFE namely, at Store Numbers 8, 11, 29, 69, 73, 100, 140, 142, 149, 150, 153, 157, 168, 194, 220, 261, 272, 276, 290, 291, 292, 298, 318 and 3198.

Capitalized terms used, but not otherwise defined herein, shall have the same meanings ascribed to them in the Motion. 7 It should be noted that the Fifth Third Collateral is also located at the Debtors other locations besides the GOB Locations. 8 It should be noted that the Key Collateral is also located at the Debtors other locations besides the GOB Locations. 8

29.

Some of the IDB Collateral is located at the GOB Locations and may be

characterized as FFE namely, at Store Numbers 8, 11, 73 and 1949. 30. For the reason set forth below, the Objectors object to the Motion and file this

Objection to preserve their rights with respect to the Objectors' Collateral at the GOB Locations. OBJECTION 31. As set forth above, the Objectors leased certain equipment to Mervyn's.

Specifically, pursuant to the Master Agreement, the Fifth Third Schedule, the Key Schedule 1 and the IDB Schedule (collectively, the "Lease"), the respective Objectors leased the equipment subject to those schedules (the "Leased Equipment") to Mervyns. As such, the respective Objectors are the owners of the Leased Equipment. Mervyn's is merely a lessee and has a leasehold interest to use the Leased Equipment as long as it is not in default of the Lease. By reason thereof, the Debtors cannot sell the Leased Equipment, but rather must assume or reject the Lease in accordance with the provisions of 11 U.S.C. 365. 32. Alternatively, in the event that the Lease is deemed not to be a "true lease", but

rather a "disguised security agreement", the Objectors object to the Motion on the basis that the Debtors have not satisfied any of the requirements of 11 U.S.C. 363(f). 33. Initially, it should be noted that (i) Mervyns granted a security interest in the

Leased Equipment to the Objectors and (ii) the respective Objectors have a properly protected first priority security interest in and to their respective Objectors' Collateral by virtue of their filed UCC-1 Financing Statements and their Subordination Agreements with Wachovia. 34. 11 U.S.C. 363(f) states, in relevant part, as follows: The trustee may sell property only if (a)
9

applicable non-bankruptcy law permits sale of such

It should be noted that the IDB Collateral is also located at the Debtors other locations besides the GOB Locations. 9

property; (b) (c) 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 in bona fide dispute; or such entity could be compelled in a legal or equitable proceeding to accept a money satisfaction of such interest.

(d) (e) 35.

Here, the Debtors have failed to establish any of the factors set forth in 11 U.S.C.

363(f) with respect to the rights, liens and claims of the Objectors. Accordingly, the Debtors cannot be permitted to include any of the Objectors' Collateral for sale at the GOB Locations, absent the Objectors' express consent. Furthermore, to the extent that the sales proceeds received from the sale of the Objectors Collateral are less than Objectors liens, the sale cannot be compelled without the consent of the Objectors. In re: WDH Howell, LLC, 298 B.R. 527 (D.N.J. 2003). 36. First, non-bankruptcy law does not permit the sale of the Objectors' Collateral at

the GOB Locations, without payment in full to the Objectors. 37. Second, the Objectors have not consented to the sale of the Objectors' Collateral

at the GOB Locations. In fact, the Objectors, specifically, object to the sale of the Objectors' Collateral at the GOB Locations, unless and until the Objectors (i) are paid, in full, all sums due to them under their respective agreements, or (ii) consent to the sale of their collateral at the GOB Locations. 38. Third, the Debtors have not established that the Guaranteed Amount will be

greater than the aggregate value of all liens on the Objectors' Collateral at the GOB Locations. 39. disputes.
10

Fourth, the Objectors' interests in the Objectors' Collateral are not in bona fide

40.

Finally, there is no legal or equitable justification for accepting a money

satisfaction of less than the amount owed to the Objectors with respect to the Objectors' Collateral at the GOB Locations. 41. Thus, the Motion should be denied to the extent that the Debtors intend to include

any of the Objectors' Collateral for sale at the GOB Locations, until the Debtors can establish one of the requirements of 11 U.S.C. 363(f). 42. Even if the Debtors are able to satisfy one of the requirements of 11 U.S.C.

363(f), the Objectors object to certain provisions of the Proposed Order and the Agency Agreement because they (i) seek to alter or modify the priority of the Objectors' liens with respect to the Objectors' Collateral at the GOB Locations pursuant to the terms of their Subordination Agreements with Wachovia, and (ii) seek to prime the Objectors' liens in and to the respective Objectors' Collateral at the GOB Locations. 43. To the extent that the Debtors can satisfy one of the requirements of 11 U.S.C.

363(f) or the Objectors consent to the sale of the Objectors' Collateral at the GOB Locations: (a) The Objectors should immediately and directly receive all proceeds from

the sale of the Objectors' Collateral, not the Agent nor any other party. As set forth above, the Objectors have a perfected first priority security interest in and to the Objectors' Collateral and a right to the proceeds from the sale of any such collateral. Furthermore, any proceeds received from the sale of the Objectors Collateral at the GOB Locations should not be commingled with any other sale proceeds. (b) Objectors object to any provision in the Proposed Order or the Agency

Agreement which provides that a commission should be paid to the Agent or any party by the Objectors for the sale of any of their collateral.

11

(c)

Prior to the sale of any of the Objectors' Collateral, the Agent must obtain

approval from the Objectors for the price at which the same is being sold. (d) Paragraph 6 of the Proposed Order and Section 2(b) (iii) of the Agency

Agreement provide that all Liens attach to the Guaranteed Amount. The Objectors object to these provisions on the basis that all of the Objectors' liens should attach to the proceeds of the sale of the Objectors' Collateral at the GOB Locations, not just the Guaranteed Amount. As set forth above, the Objectors have a perfected first priority security interest in and to the Objectors' Collateral and the proceeds from any sale thereof. (e) Paragraph 22 of the Proposed Order and Section 2(b)(xi) of the Agency

Agreement provide that upon certain conditions being met, the Agent shall have a superpriority administrative expense claim in the Debtors' Bankruptcy Cases and a valid and perfected first priority security interest in and lien upon, among other things, the Owned FFE, Proceeds and any other amounts due to the Agent under the Agency Agreement. The Objectors object to these provisions on the basis that the Objectors have a perfected first priority security interest in and to the Objectors' Collateral. Thus, the Agent shall not have any lien on proceeds from sale of the Objectors Collateral at the GOB Locations. As such, until the Objectors are paid in full, any liens granted to the Agent should, at a minimum, be junior to that of the Objectors' liens. Furthermore, the Agent's lien on the proceeds of the sale of the Objectors' Collateral should also be junior to that of the Objectors' liens. (f) Paragraph 26 of the Proposed Order provides that the Debtors may

abandon any Owned FFE on five (5) days notice to known third parties holding or asserting a Lien. As set forth above, the Objectors have numerous items of
12

collateral/equipment at the GOB Locations. As such, any abandonment should be on at least ten (10) business days prior notice to allow the Objectors a reasonable opportunity to remove and/or otherwise sell the Objectors' Collateral at the GOB Locations. Furthermore, the notice should be sent to the Objectors and their attorneys, not the landlords of the GOB Locations. (g) The Proposed Order should make clear that the Debtors and/or the Agent

shall be liable to the Objectors to the extent that the Objectors' Collateral at the GOB Locations is damaged, destroyed, lost or otherwise missing. (h) Any abandonment of the Objectors' Collateral as set forth in the Store

Closing Guidelines or in Section 15.9 of the Agency Agreement should be subject to the ten (10) days notice provision set forth above and any such abandonment should be to the Objectors, not the landlords of the respective GOB Locations or any third party. (i) The Agency Agreement at 3.2(b) provides that the Remaining

Merchandise shall become property of the Agent free and clear of all liens, claims and encumbrances. The Objectors object to this provision to the extent that any of the Objectors' interests in the Objectors' Collateral at the GOB Locations are transferred to the Agent prior to payment in full to the Objectors. Unless and until the Objectors are paid in full, the Agent has no right to the Objectors Collateral and should be abandoned to the respective Objectors, not to the Agent. 44. In summary, the Objectors object to the Motion to the extent (i) the Debtors are

attempting to sell some or all of the Objectors' Collateral at the GOB Locations, free and clear of the Objectors' interests therein without payment in full to the Objectors of all sums due under their respective agreements and/or (ii) the Objectors' recorded liens are released, or deemed released, prior to payment in full to the Objectors.
13

45.

Further, the Objectors reserve their rights to seek adequate protection for use of

any of the Objectors' Collateral. 46. The Objectors reserve their right to amend, supplement, or modify this Objection

at any time prior to or at the hearing on the Motion. 47. Finally, the Objectors further request that they be granted such other and further

relief as the Court deems equitable or just under the circumstances. CONCLUSION WHEREFORE, the Objectors respectfully request that the Order relating to Motion provide the relief requested herein above and for such other and further relief as the Court deems proper. Dated: August 22, 2008 Wilmington, Delaware Respectfully submitted, MARGOLIS EDELSTEIN /s/James E. Huggett James E. Huggett, Esq. (#3956) 750 Shipyard Drive, Suite 102 Wilmington, DE 19801 Telephone: (302) 888-1112 Facsimile: (302) 888-1119 E-mail: jhuggett@margolisedelstein.com -andAmish R. Doshi (AD5996) 7 Times Square New York, New York 10036 Telephone: (212) 297-5800 Facsimile: (212) 916-2940 E-mail: adoshi@daypitney.com Counsel to Fifth Third Leasing Company, Key Equipment Finance Inc. and IDB Leasing, Inc.

14

UNITED STATES BANKRUPTCY COURT DISTRICT OF DELAWARE In re: MERVYN'S HOLDINGS, LLC, et al., Debtors. Chapter 11 Case No. 08-11586 (KG) Jointly Administered Related Docket No. 209 Hearing Date: August 26, 2008 at 10:00 a.m. Objection Deadline: August 22, 2008 at 4:00 p.m.

CERTIFICATE OF SERVICE I, James E. Huggett, Esquire, hereby certify that on August 22, 2008, I served a copy of Objection To Motion Of Debtors And Debtors In Possession For An Order Approving Auction Procedures, Agency Agreement, Store Closing Sales And Related Relief on the parties listed on the attached service list via first class pre-paid U.S. mail. ___/s/ James E. Huggett James E. Huggett (#3956)

Mark D. Collins Richards Layton & Finger One Rodney Square PO ox 551 Wilmington, DE 19899 Howard S. eltzer Wendy S. Walker Morgan Lewis & ockius LLP 101 Park Avenue New York, NY 10178-0060 United States Trustee 844 King Street, Room 2207 Lockbox #35 Wilmington, DE 19899-0035 David M. Fournier Pepper Hamilton LLP Hercules Plaza, Suite 5100 1313 N. Market Street Wilmington, DE 19801 Jay R. Indyke Cooley Goodward Kronish LLP The Grace uilding 1114 Avenue of the Americas New York, NY 10036-7798