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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 Proposed Attorneys for Debtor and Debtor in Possession UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK ---------------------------------------------------------------x : In re : : DAFFYS, INC., : : Debtor. : : ---------------------------------------------------------------x
Chapter 11 Case No. 12-_____ (__)
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: Daffys, 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 Debtors 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 Debtors 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 Debtors 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 Debtors 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 Debtors 2
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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 Debtors 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 arms 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 Horses 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
Motion of the Debtor for an Order (I) Approving Debtors (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 Debtors 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 Debtors 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 Debtors 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
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Pursuant to the Purchase Agreement, certain furniture, fixtures, and equipment are being sold to the Purchaser.
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relief requested in the Motion. The Marketing Process and Selection of the Agents 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 Debtors 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 Debtors 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 Debtors 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 5
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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 Debtors 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 Agents 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
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 Debtors 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 Debtors 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 Debtors 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 7
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Date). 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 Debtors 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 Debtors Sound Business Judgment 14. Section 365 of the Bankruptcy Code provides, in relevant part, that a
debtor in possession, subject to the courts 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 (5th Cir. 1985) (More exacting scrutiny would slow the administration of the debtors estate and increase its cost, interfere with the Bankruptcy Codes provision for private control of administration of the estate, and threaten the courts 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. 8
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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 Debtors 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 Debtors 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 9
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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 Debtors assets and to minimize the Debtors 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 Dept 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 Dept 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 Goodys, 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 & Barrys 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 Debtors 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 12
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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 purchasers
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 [section 363(b)] . . . does not affect the validity of a sale . . . to an entity that purchased . . . 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(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 (7th Cir. 1983)). See also United States v. Salerno, 932 F.2d 117, 123 (2d Cir. 1991) (noting that section 363(m) furthers 13
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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 arms 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 Debtors customer lists when acting as the Debtors agent, in the same way those lists were used prior to the commencement of this chapter 11 case in the ordinary course of the Debtors 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 Debtors 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 Debtors 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 debtors 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 Debtors fiduciary duty to maximize estate assets); In re Ames Dept 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 Courts 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. Commn of Nev. (In re Baker & Drake), 35 F.3d 1348, 1353-54 (9th 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 Debtors 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 & Barrys 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). 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 Debtors 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 Debtors 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 20
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to 21 days after the commencement date. 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 Debtors 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 Debtors 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 Debtors estate; (c) Wells Fargo Bank, National Association, as the Debtors 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 Debtors 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 /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 : : DAFFYS, INC., : : Debtor. : : ----------------------------------------------------------------x
Chapter 11 Case No. 12-_____ (__)

Re: Docket No. _____
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 Daffys, 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 Debtors 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 Debtors 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 Debtors estate; (c) Wells Fargo Bank, National Association, as the Debtors 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 Debtors 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. H. Business Judgment. The Debtors decision to (i) enter into and assume the
Agency Agreement and (ii) perform and make payments thereunder is a reasonable exercise of the Debtors 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 Debtors ability to obtain the consideration provided for in the Agency Agreement and, thus, would impact materially and adversely the value that the Debtors 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 Debtors estate, its creditors and other parties in interest. L. Arms Length Transaction. The consideration to be paid by the Agent under the
Agency Agreement was negotiated at arms 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 arms 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 Debtors 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 Agents prospective performance and payment of amounts owing under the Agency Agreement are in
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good faith and for valid business purposes and uses. 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 Debtors 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 Debtors 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 Agents 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 Debtors 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. 1. 2. Motion Granted, Objections Overruled The relief requested in the Motion is granted as set forth herein. 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. 3. Assumption of Agency Agreement Approved The Debtors assumption of the Agency Agreement is hereby approved pursuant
to section 365 of the Bankruptcy Code, and the Agency Agreement is hereby assumed. 4. All existing defaults under the Agency Agreement are hereby deemed to be cured.
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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. 8. Order Binding 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 Debtors 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 Debtors 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. 10.
Good Faith 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. 11. Conduct of the Store Closing Sales 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 Debtors 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 mechanics 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 Debtors and Agents 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 Debtors or the Agents 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 email, 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 Debtors or the Agents 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 similarthemed 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 Debtors 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 Debtors 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 Debtors 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 Debtors 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 Debtors 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
Debtors 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 Debtors 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 landlords 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 Debtors 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 Debtors 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 Agents actions taken in respect of the Store Closing Sales shall be deemed to constitute an assumption by Agent of any of the Debtors obligations relating to any of the Debtors 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 Debtors 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 Debtors 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. 31. Liens Granted to Agent Upon issuance of the Guaranty L/C, and payment of the Initial Guaranty Payment,
and effective as of date of Merchants 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) Merchants rights to receive payment in full of the Agents 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 Agents Payment Obligations until Agents Payment Obligations have been paid. Upon payment of the Agents 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. 32. Other Provisions 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 Debtors 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 such advertising is not being conducted in a safe, professional and non-deceptive manner, (ii)
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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
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AGENCY AGREEMENT
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: Defined Terms. The terms set forth below are defined in the Referenced Section 1. sections of this Agreement: Defined Term Additional Agent Merchandise Adjustment Amount Agency Accounts Agency Documents Agent Agent Indemnified Parties Agent's Fee Agent's Payment Obligations Agent Recovery Percentage Agreement Applicable Cost Value
US ACTIVE:\44064318\5\39982.0003
Section Reference Section 8.10(a) Section 3.3(a) Section 3.3(c) Section 11.1(b) Preamble Section 13.1 Section 31(b) Section 16 Section 3.1(b) Preamble 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
GAG 72612
US ACT/VE:14406431815139982.0003
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)
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
GAG 72612
US ACT!VE:144 0 643 1 81513 9 9 82.0003
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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).
GAG 72612 US ACTIVE:1440643?815139982.0003
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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. 3.1 Consideration to Merchant and Agent.
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
GAG 72612 US ACT!VE:14406431815139982.0003
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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. The Guaranty Percentage has been fixed based upon the aggregate Cost Value of (e) 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) It is understood that the Guaranteed Amount has 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.
.
(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). Final Reconciliation. (e) (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. 3.5 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 GAG 72612 9
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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; (e) below; (f) 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) (h)
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Retention Bonuses for Retained Employees, as provided for in Section 9.4
local and long-distance telephone expenses incurred at the Stores; credit card fees, chargebacks and discounts with respect to Merchandise 10
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sold in the Sale; bank service charges (for Store and corporate accounts), check guarantee (i) fees, and bad check expenses to the extent attributable to the Sale; (j) costs for additional Supplies used at the Stores;
all fees and charges required to comply with Applicable General Laws in (k) 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) (o) housekeeping and cleaning expenses related to the Stores; Store trash removal;
on-site supervision of the Stores and the Distribution Centers, including (p) (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); postage, courier and overnight mail charges to and from or among the (q) 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.
" Occupant Expenses " means base rent, percentage rent, HVAC, utilities, (iii) 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. 4.2 Order: (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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Payment of Expenses . Effective from and after entry of the Assumption
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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. 5.1
Inventory Valuation; Merchandise .
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.
For purposes of this Agreement, "Merchandise" shall mean: (i) all finished goods (a) 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) forth below: As used in this Agreement, the following terms have the respective meanings set
"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. 5.3 Valuation.
(a) 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. Other than Excluded Defective Merchandise, in lieu of any other adjustments to (b) 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"). Excluded Defective Merchandise located in the Stores shall be identified and (c) 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 OnOrder 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. 5.4 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
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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.
Vacating the Stores . At the conclusion of the Sale, Agent agrees to leave the 6.2 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. Not later than ten (10) days after the Sale Commencement Date, Agent shall (b) 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 and Agent shall pay as an Expense hereunder, all bank fee 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. To the extent that Agent uses the Merchant's Designated Accounts as the Agency Accounts, Merchant shall pay by wire funds transfer, on a daily basis, to Agent all collected funds constituting Proceeds deposited in Merchant's Designated Deposit Accounts (but not any other funds, including, without limitation, any proceeds of Merchant's inventory sold prior to the Sale Commencement Date). 7.3 Credit Card Proceeds. Agent shall have the right to use Merchant's credit card facilities (including Merchant's credit card terminals and processor(s), credit card processor coding, Merchant identification number(s) and existing bank accounts) for credit card Proceeds (and Augment Proceeds) relating solely to the Sale. In the event that Agent elects to use Merchant's credit card facilities, Merchant shall process credit card transactions on behalf of Agent and for Agent's account, applying customary practices and procedures. Without limiting the foregoing, Merchant shall cooperate with Agent to down-load data from all credit card terminals each day during the Sale Term and to effect settlement with Merchant's credit card processor(s) and shall take such other actions necessary to process credit card transactions on
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behalf of Agent under Merchant's identification number(s). At Agent's request following the Payment Date and the payment of all amounts then due to Merchant by Agent, Merchant shall cooperate with Agent to establish Merchant identification numbers under Agent's name to enable Agent to process all such credit card proceeds for Agent's account. Merchant shall not be responsible for and Agent shall pay as an Expense hereunder, all credit card fees, charges and chargebacks related to the Sale, whether received during or after the Sale Term. 7.4 Petty Cash . In addition to the Guaranteed Amount, Agent shall purchase all cash in the Stores on and as of the start of business on the Sale Commencement Date and shall reimburse Merchant on a dollar for dollar basis therefor. Agent also shall purchase, on a dollar for dollar basis, all cash located in Merchant's bank accounts which are used by Agent hereunder, which shall be determined, and paid for, as of the Sale Commencement Date. Section 8.
Conduct of the Sale . From and after the entry of the Assumption Order:
Rights of Agent . Subject to the provisions of this Agreement, the Sale Guidelines 8.1 and the Assumption Order, the Agent shall be permitted to conduct the Sale as a "going-out-ofbusiness sale", "store closing," "sale on everything," "everything must go," or similar themed sale throughout the Sale Term. The Agent shall conduct the Sale in the name of and on behalf of the Merchant in a commercially reasonable manner and in compliance with the terms of this Agreement and, except as modified by the Assumption Order, all governing laws and applicable agreements to which Merchant is a party. The Agent shall conduct the Sale in accordance with the sale guidelines attached hereto as Exhibit 8.1(a) (the " Sale Guidelines ") In addition to any other rights granted to Agent hereunder in conducting the Sale, but subject to any applicable agreements to which Merchant is a party except as modified by the Assumption Order, as applicable, the Agent, in the exercise of its reasonable discretion, shall have the right:
(a) to establish Sale prices and Store hours which are consistent with the terms of applicable leases and local laws or regulations, including without limitation Sunday closing laws; provided , however , to the extent that Agent extends the hours of operation at one or more of the Stores beyond the hours historically operated by Merchant, which results in additional utilities and increased Occupancy Expenses in excess of the amounts set forth on Exhibit 4.1(r), Agent shall be obligated to reimburse Merchant the amounts, if any, of such additional costs and such additional costs shall constitute Expenses of the Sale. except as otherwise expressly included as an Expense, to use without (b) charge during the Sale Term all FF&E, Store-level customer lists, mailing lists and email lists for the Stores ( provided , however , Agent shall keep any such information confidential and that such access shall be provided solely through Merchant's outside advertisement services, and the Agent shall not have direct access to any personally identifiable information contained therein), computer hardware and software, websites, internet, social networking and social media sites and accounts, existing supplies located at the Stores, intangible assets (including Merchant's name, logo and tax identification numbers), Store keys, case keys, security codes and safe and lock combinations required to gain access to and operate the Stores, and any other assets of Merchant
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located at the Stores (whether owned, leased, or licensed) consistent with applicable terms of leases or licenses (except as modified by the Assumption Order); (c) so long as such access does not unreasonably disrupt the business operations of Merchant, to use (i) Merchant's central office facilities, central administrative services and personnel to process payroll, perform MIS and provide other central office services necessary for the Sale to the extent that such services are normally provided by Merchant in house, at no additional cost to Agent (except where otherwise designated as an Expense pursuant to Section 4.1(s) hereof); provided, however, that, in the event that Agent expressly requests Merchant to provide services other than those normally provided to the Stores and relating to the sale of merchandise by Merchant, Agent shall be responsible for the actual incremental cost of such services as an Expense; and (ii) sufficient office space located at Merchant's central office facility; (d) to establish and implement advertising, signage and promotion programs consistent with the "going out of business," "store closing" or similar theme (including, without limitation, by means of media advertising, A-frame and similar interior and exterior signs and banners and use of sign walkers) in a manner consistent with the Sale Guidelines and the Assumption Order; (e) to transfer Merchandise between and among the Stores, and between the Distribution Center and the Stores; provided, however, the Agent shall not transfer Merchandise between Stores unless the Inventory Taking at the transferring Store has been completed; (f) to supplement the Merchandise at the Stores with Additional Agent Merchandise in accordance with Section 8.10 hereof; and (g) upon entry of the Assumption Order, Agent shall be authorized to conduct the Sale in accordance with the provisions of the Sale Guidelines and Assumption Order. 8.2 Terms of Sales to Customers.
(a) All sales of Merchandise will be "final sales" and "as is," and all advertisements and sales receipts will reflect the same. Agent shall not warrant the Merchandise in any manner, but will, to the extent legally permissible, pass on all manufacturers' warranties to customers. All sales will be made only for cash, nationally recognized bank credit cards and, in Agent's discretion, personal checks, provided, however, if Agent determines to accept personal checks, Agent shall bear the risk of nonpayment or loss with respect thereto. Agent shall not accept or honor any coupons issued by Merchant or Merchant's competitors. Agent shall post signs in reasonable locations in the Stores indicating that coupons shall not be honored. Agent shall clearly mark all tickets and receipts for the Merchandise sold at the Stores during the Sale Term, so as to distinguish such Merchandise from the merchandise sold prior to the Sale Commencement Date.
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Gift Certificates . During the Sale Term, Agent shall accept Merchant's gift (b) certificates, gift cards and Merchandise credits issued by Merchant prior to the Sale Commencement Date. Merchant shall reimburse Agent in cash for such amounts during a weekly sale reconciliation provided for in Section 8.7.
8.3
Sales Taxes .
During the Sale Term, all sales, excise, gross receipts and other taxes attributable (a) to sales of Merchandise, as indicated on Merchant's point of sale equipment (other than taxes on income) payable to any taxing authority having jurisdiction (collectively, " Sales Taxes ") shall be added to the sales price of Merchandise and Additional Agent Merchandise and collected by Agent, on Merchant's behalf, at the time of sale. All Sales Taxes shall be deposited into a segregated account designated by Merchant and Agent solely for the deposit of such Sales Taxes (the " Sales Taxes Account "). Merchant shall prepare and file all applicable reports and documents required by the applicable taxing authorities, and Merchant shall promptly pay all Sales Taxes from the Sales Taxes Account. Merchant will be given access to the computation of gross receipts for verification of all such tax collections. Provided that Agent performs its responsibilities in accordance with this Section 8.3, Agent is hereby relieved of all liability to the taxing authorities for the Sales Taxes and reporting, and Merchant (and WFBNA to the extent WFBNA obtained any funds that were Sales Taxes and applied such funds to reduce the obligations owing to WFBNA) 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 Merchant to promptly pay such taxes to the proper taxing authorities and/or the failure by Merchant 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. If Agent fails to perform its responsibilities in accordance with this Section 8.3, and provided Merchant complies with its obligations hereunder, Agent shall indemnify and hold harmless Merchant from and against any and all costs, including, but not limited to, reasonable attorneys' fees, assessments, fines or penalties which Merchant sustains or incurs as a result or consequence of the failure by Agent to collect Sales Taxes and/or the failure by Agent to promptly deliver any and all reports and other documents required to enable Merchant to file any requisite returns with such taxing authorities. Without limiting the generality of Section 8.3(a) hereof, it is hereby (b) agreed that, as Agent is conducting the Sale solely as agent for Merchant, various payments that this Agreement contemplates that one party may make to the other party (including the payment by Agent of the Guaranteed Amount) do not represent the sale of tangible personal property and, accordingly, are not subject to Sales Taxes.
Supplies . Agent shall have the right to use, without charge, all existing supplies 8.4 located at the Stores and the Distribution Center, including, without limitation, boxes, bags, paper, twine and similar sales materials (collectively, "Supplies"). In the event that additional Supplies are required in any of the Stores during the Sale, Merchant agrees to promptly provide the same to Agent, if available, for which Agent shall reimburse Merchant at Merchant's cost
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therefor. Merchant does not warrant that the existing Supplies as of the Sale Commencement Date are adequate for the purposes of the Sale. 8.5 Returns of Merchandise . During the Sale Term, Agent shall accept returns of merchandise sold by Merchant prior to the Sale Commencement Date (" Returned Merchandise "), provided that such return is accompanied by the original Store register receipt and is otherwise in compliance with Merchant's return and price adjustment policy in effect as of the date such item was purchased. Subject to Merchant's right to return such defective goods to Merchant's vendors, unless such Returned Merchandise is Defective Merchandise (" Returned Defective Merchandise "), it shall be included in Merchandise and valued at the Cost Value (less the prevailing sale discount) applicable to such item as of the date of return. In the event that Returned Merchandise constitutes Returned Defective Merchandise, Merchant and Agent shall mutually agree upon the Cost Value for such item of Returned Defective Merchandise; provided , however , in the event that Merchant and Agent cannot mutually agree upon the Cost Value for such Returned Defective Merchandise, or such Returned Defective Merchandise constitutes Excluded Defective Merchandise, then such Returned Defective Merchandise shall constitute Merchant Consignment Goods or Excluded Defective Merchandise and be excluded from the Sale. The aggregate Cost Value of the Merchandise shall be increased by the Cost Value of any Returned Merchandise included in Merchandise (determined in accordance with this Section 8.5), and the Guaranteed Amount shall be adjusted accordingly. Merchant shall promptly reimburse Agent in cash for any refunds or credits Agent is required to issue to customers in respect of any Returned Merchandise; provided , however , to the extent that the Guaranteed Amount has been paid in full, unless and until Merchant and Agent agree to a mutually acceptable escrow or reserve sufficient to insure that Merchant will have sufficient funds to reimburse Agent pursuant to this Section 8.5, Agent shall have no further obligations pursuant to this Section 8.5. Returned Merchandise not included in Merchandise shall be disposed of by Agent (at Merchant's expense) in accordance with instructions received from Merchant or, in the absence of such instructions, returned to Merchant at the end of the Sale Term. Any increases in the Guaranteed Amount in connection with returned Merchandise shall be accounted for on a weekly basis. Except to the extent that Merchant and Agent agree that Merchant's POS or other applicable systems can account for returns of Merchandise, all returns must be noted and described in a detailed log and shall identify the receipt number for the original receipt and the date the item was purchased (the " Returned Merchandise Log "), to be maintained by Agent in a form acceptable to Merchant. Agent shall provide Merchant with a copy of any Returned Merchandise Log on a weekly basis during the Sale. Agent shall not be entitled to any adjustment, credit or payment for Returned Merchandise which is not properly noted and described in the Returned Merchandise Log (or otherwise reflected in Merchant's POS systems). 8.6. [Intentionally Omitted]
8.7 Sale Reconciliation . On each Wednesday during the Sale Term, commencing on the second Wednesday after the Sale Commencement Date, Agent and Merchant shall cooperate to reconcile Proceeds, Expenses of the Sale, receipts of Distribution Center Merchandise and/or On-Order Merchandise in the Stores and/or Additional Agent Merchandise, Augment Proceeds,
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Augment Recovery Amount, and such other Sale-related items as either party shall reasonably request, in each case for the prior week or partial week (i.e., Sunday through Saturday), all pursuant to procedures agreed upon by Merchant and Agent, with such information being set forth in a written Reconciliation Report and a copy thereof shall be provided to WFBNA. Within thirty (30) days after the end of the Sale Term, Agent and Merchant shall complete a final reconciliation of the Sale, the written results of which shall be certified by representatives of each of Merchant and Agent as a final settlement of accounts between Merchant and Agent. Force Majeure. If any casualty, act of terrorism, or act of God prevents or 8.8 substantially inhibits the conduct of business in the ordinary course at any Store, such Store and the Merchandise located at such Store shall, in Agent's discretion, be eliminated from the Sale and considered to be deleted from this Agreement as of the date of such event, and Agent and Merchant shall have no further rights or obligations hereunder with respect thereto; provided, however, that (i) subject to the terms of Section 7.1 above, the proceeds of any insurance attributable to such Merchandise shall constitute Proceeds hereunder, and (ii) the Guaranteed Amount shall be reduced to account for any Merchandise eliminated from the Sale which is not the subject of insurance proceeds, and Merchant shall reimburse Agent for the amount the Guaranteed Amount is so reduced prior to the end of the Sale Term. Merchant's Right to Monitor. Merchant and WFBNA shall each have the right to 8.9 monitor the Sale and activities attendant thereto and to be present in the Stores during the hours when the Stores are open for business; provided that Merchant's and/or WFBNA's presence does not unreasonably disrupt the conduct of the Sale. Merchant and WFBNA shall also have a right of access to the Stores at any time in the event of an emergency situation and shall promptly notify Agent of such emergency. 8.10 Additional Merchandise. Agent shall be entitled, at its expense, to include in the Sale at the Stores (a) additional merchandise procured by Agent which is of like kind, and no lesser quality to the Merchandise located in the Stores ("Additional Agent Merchandise"). (b) At all times and for all purposes, the Additional Agent Merchandise and its proceeds shall be the exclusive property of Agent. The transactions relating to the Additional Agent Merchandise are, and shall be construed as, a true consignment from Agent to Merchant. The Additional Agent Merchandise shall be at all times subject to the control of Agent. In order to distinguish the Additional Agent Merchandise from the Merchandise (c) located in the Stores, Agent shall mark the Additional Agent Merchandise using either a "dummy" SKU or department number or in such other manner so as to distinguish the sale of Additional Agent Merchandise from the sale of Merchandise. Additionally, Agent shall provide signage in the Stores notifying customers that the Additional Agent Merchandise has been included in the Sale.
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Section 9.
Employee Matters.
Merchant's Employees. Agent may use Merchant's employees in the conduct of 9.1 the Sale to the extent Agent deems expedient, and on the same terms and conditions as such employees were employed prior to this Agreement and Agent may select and schedule the number and type of Merchant's employees required for the Sale. To the extent a nonmanagement function can be performed by one of the Merchant's employees, Agent must use such employee to perform such function and may not retain an additional Agent employee to perform such function. Agent shall identify any of Merchant's employees to be used in connection with the Sale (each such employee, a "Retained Employee") prior to the Sale Commencement Date. Notwithstanding the foregoing, Merchant's employees shall at all times remain employees of Merchant. Agent's selection and scheduling of Merchant's employees shall at all times comply with all applicable laws and regulations. Merchant and Agent agree that, except to the extent that wages and benefits of Retained Employees constitute Expenses hereunder, nothing contained in this Agreement and none of Agent's actions taken in respect of the Sale shall be deemed to constitute an assumption by Agent of any of Merchant's obligations relating to any of Merchant's employees including, without limitation, Excluded Benefits, Worker Adjustment Retraining Notification Act ("WARN Act") claims and other termination type claims and obligations, or any other amounts required to be paid by statute or law; nor shall Agent become liable under any employment agreement or be deemed a joint or successor employer with respect to such employees. Agent shall comply in the conduct of the Sale with all of Merchant's employee rules, regulations, guidelines and policies which have been provided to Agent in writing prior to the execution of this Agreement. Merchant shall not, without the prior consent of Agent, raise the salary or wages or increase the benefits for, or pay any bonuses or other extraordinary payments to, any Store employees prior to the Sale Termination Date. Merchant shall not transfer any Retained Employee during the Sale Term without Agent's prior consent, which consent shall not be unreasonably withheld. Termination of Employees. Agent may in its discretion stop using any Retained 9.2 Employee at any time during the Sale, subject to the conditions provided for herein. In the event that Agent desires to cease using any Retained Employee, Agent shall notify Merchant at least seven (7) days prior thereto, so that Merchant may coordinate the termination of such employee; provided, however, that, in the event that Agent determines to cease using an employee "for cause" (which shall consist of dishonesty, fraud or breach of employee duties), the seven (7) day notice period shall not apply, provided further, however, that Agent shall immediately notify Merchant of the basis for such "cause" so that Merchant can arrange for termination of such employee. From and after the date of this Agreement and until the Sale Termination Date, Merchant shall not transfer or dismiss employees of the Stores except "for cause" without Agent's prior consent. Notwithstanding the foregoing, Agent shall not have the right to terminate the actual employment of any employee, but rather may only cease using such employee in the Sale and paying any Expenses with respect to such employee. Payroll Matters. During the Sale Term, Merchant shall process the base payroll 9.3 for all Retained Employees as well as payroll for any of Merchant's former employees or
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temporary labor retained by Agent for the Sale. Each Wednesday (or such other date as may be reasonably requested by Merchant to permit the funding of the payroll accounts before such payroll is due and payable) during the Sale Term, Merchant shall transfer, or, to the extent that the Payment Date has passed, Agent shall transfer, to Merchant's payroll accounts an amount equal to the base payroll for Retained Employees plus related payroll taxes, workers' compensation and benefits for such week which constitute Expenses hereunder. 9.4 Employee Retention Bonuses . Agent may pay, as an Expense, retention bonuses (" Retention Bonuses ") (which bonuses shall be inclusive of payroll taxes, but as to which no benefits shall be payable), up to a maximum of ten percent (10%) of base payroll for all Retained Employees, to such Retained Employees who do not voluntarily leave employment and are not terminated "for cause," as it may determine in its discretion. The amount of such Retention Bonuses shall be in an amount to be determined by Agent, in its discretion, and shall be payable within thirty (30) days after the Sale Termination Date, and shall be processed through Merchant's payroll system. Agent shall provide Merchant with a copy of Agent's Retention Bonus plan within five (5) business days after the Sale Commencement Date. 9.5 Employees of Licensees . For the avoidance of doubt, and notwithstanding anything in this Agreement to the contrary, employees, contractors, and representatives of any license/consignment/leased departments shall not be deemed to be Retained Employees hereunder, and the costs and expenses of all such persons shall not be Expenses hereunder. Section 10. Conditions Precedent and Subsequent . The willingness of Agent and Merchant to enter into the transactions contemplated under this Agreement are directly conditioned upon the satisfaction of the following conditions at the time or during the time periods indicated, unless specifically waived in writing by the applicable party: (a) All representations and warranties of Merchant and Agent hereunder shall be true and correct in all material respects and no Event of Default shall have occurred at and as of the date hereof and as of the Sale Commencement Date. (b) 10, 2012. (c) Section 11. Merchant shall have obtained the consent of WFBNA to this Agreement. Merchant shall have obtained the Assumption Order on or before August
Representations, Warranties and Covenants .
11.1 Merchant's Representations, Warranties and Covenants . Merchant hereby represents, warrants and covenants in favor of Agent as follows: (a) Merchant (i) is a corporation duly organized, validly existing and in good standing under the laws of the state of its formation (except as may be a result of the commencement and/or pendency of the Merchant's Chapter 11 Case); (ii) has all requisite
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corporate power and authority to own, lease and operate its assets and properties and to carry on its business as presently conducted; and (iii) is, and during the Sale Term will continue to be, duly authorized and qualified to do business and in good standing in each jurisdiction where the nature of its business or properties requires such qualification, including all jurisdictions in which the Stores are located, except, in each case, to the extent that the failure to be in good standing or so qualified could not reasonably be expected to have a material adverse effect on the ability of Merchant to execute and deliver this Agreement and perform fully its obligations hereunder. Except as may be required in connection with the issuance of the (b) Assumption Order, as applicable, and subject to the consent of WFBNA: (i) the Merchant has the right, power and authority to execute and deliver this Agreement and each other document and agreement contemplated hereby (collectively, together with this Agreement, the "Agency Documents") and to perform fully its obligations thereunder; (ii) Merchant has taken all necessary actions required to authorize the execution, delivery and performance of the Agency Documents, and no further consent or approval is required for Merchant to enter into and deliver the Agency Documents, to perform its obligations thereunder and to consummate the Sale, except for any such consent the failure of which to be obtained could not reasonably be expected to have a material adverse effect on the ability of Merchant to execute and deliver this Agreement and perform fully its obligations hereunder; and (iii) each of the Agency Documents has been duly executed and delivered by Merchant and constitutes the legal, valid and binding obligation of Merchant enforceable against it in accordance with its terms. (c) Merchant owns, and will own at all times during the Sale Term, good and marketable title to all of the Merchandise and Merchant FF&E to be included in the Sale, free and clear of all liens, claims and encumbrances of any nature, other than the liens listed on Exhibit 11.1(c) and any applicable statutory liens; provided however, it is understood that with respect to On-Order Merchandise, Merchant shall not have title to such goods until such time as title passes and provided for under the respective vendor agreements and purchaser order. Merchant shall not create, incur, assume or suffer to exist any security interest, lien or other charge or encumbrance upon or with respect to any of the Merchandise or the Proceeds other than as provided for herein (including those listed on Exhibit 11.1(c)). Any Assumption Order shall provide that all such liens shall be transferred to and attach only to the Guaranteed Amount or other amounts payable to Merchant hereunder. Merchant has maintained its pricing files and Cost File in the ordinary (d) course of business, and prices charged to the public for goods are the same in all material respects as set forth in such pricing files for the periods indicated therein (without consideration of any point of sale markdowns, where the point of sale markdown is reflected in the price files, and all pricing files and records are true and accurate in all material respects as to the actual cost to Merchant for purchasing the goods referred to therein and as to the selling price to the public for such goods (without consideration of any point of sale markdowns) as of the dates and for the periods indicated therein. Merchant represents that (i) the ticketed prices of all items of Merchandise do not and shall not include any Sales Taxes and (ii) all registers located at the
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Stores are programmed to correctly compute all Sales Taxes required to be paid by the customer under applicable law, as such calculations have been identified to Merchant by its retained service provider. (e) Except with respect to Merchant's termination of point of sale events prior to the Sale Commencement Date in the manner previously disclosed to Agent, Merchant has not marked up or raised, and shall not up to the Sale Commencement Date mark up or raise, the price of any items of Merchandise, or removed or altered any tickets or any indicia of clearance merchandise, except in the ordinary course of business and except for the effects of the termination of promotional events. (f) Through the Sale Commencement Date, Merchant shall ticket or mark all items of inventory received at the Stores prior to the Sale Commencement in a manner consistent with similar Merchandise located at the Stores and in accordance with Merchant's ordinary course past practices and policies relative to pricing and marking inventory. To the extent Merchandise is not pre-ticketed prior to its receipt in the Distribution Center, Merchant shall be responsible for ticketing Distribution Center Merchandise and/or On-Order Merchandise before same is shipped to the Stores after the Sale Commencement Date. (g) Since June 1, 2012 Merchant has not, and through the Sale Commencement Date Merchant shall not purchase for or transfer to or from the Stores any merchandise or goods outside the ordinary course, except for the transfer of Distribution Center Merchandise to the Stores prior to the Sale Commencement Date in a manner consistent with Merchant's disclosures. Since June 1, 2012 Merchant has continued and will continue to replenish goods in the Stores in a manner and at levels consistent with Merchant's replenishment of on-going stores, it being understood and agreed that such replenishment has not and will not be consistent with historic and customary levels or practices, as a result of, among other things, Merchant's Chapter 11 filing and/or delays in procuring shipments from its vendors. From and after the date hereof, Merchant shall discontinue issuing new orders for replenishment for the Stores; provided, however, On-Order Merchandise earmarked for the Stores prior to the date hereof, to the extent received, may continue to flow through to the Stores, with some arriving after the Sale Commencement Date, but in any event prior to the DC Receipt Deadline. Merchant reserves the right to cancel any orders for On-Order Merchandise after the Sale Commencement Date and to exclude from the Sale any On-Order Merchandise received in the Distribution Center after the Sale Commencement Date, provided that, such election is made by the On-Order Election Deadline. (h) To the Merchant's knowledge, all Merchandise is in compliance in all material respects with all applicable federal, state or local product safety laws, rules and standards. Merchant shall provide Agent with its historic policies and practices, if any, regarding product recalls prior to the Sale Commencement Date. (i) Subject to the provisions of the Assumption Order, throughout the Sale Term, the Agent shall have the right to the unencumbered use and occupancy of, and peaceful
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and quiet possession of, each of the Stores, the assets currently located at the Stores and the utilities and other services provided at the Stores. Merchant shall, throughout the Sale Term, maintain in good working order, condition and repair all cash registers, heating systems, air conditioning systems, elevators, escalators and all other mechanical devices necessary for the conduct of the Sale at the Stores. Except any amounts owing as a result of the commencement of the Chapter 11 Case, and absent a bona fide dispute, throughout the Sale Term Merchant shall remain current on all expenses and payables necessary for the conduct of the Sale (other than those relating to any period prior to the commencement of the Chapter 11 Case), subject to any restrictions that may be imposed under the Bankruptcy Code. (j) Merchant will pay all self-insured or Merchant funded employee benefit programs for Store employees, including health and medical benefits and insurance and all proper claims made or to be made in accordance with such programs (other than those relating to any period prior to the commencement of the Chapter 11 Case), which Merchant is required to pay through the Sale Termination Date. Since June 1, 2012, Merchant has not intentionally taken, and shall not (k) throughout the Sale Term intentionally take, any actions with the intent of increasing the Expenses of Sale, including, without limitation, increasing salaries or other amounts payable to employees, except (i) there may have been instances that, in an effort to encourage one or more employees to remain in Merchant's employ, Merchant increased the salaries of such employees (such action not being with any intent to increase any Expense of the Sale or in anticipation thereof); and (ii) to the extent an employee was due an annual raise. (1) Except as may be impacted by the filing for Chapter 11 protection or otherwise restricted by the Chapter 11 filing, Merchant covenants to continue to operate the Stores in all material respects in the ordinary course of business from the date of this Agreement to the Sale Commencement Date by: (i) selling inventory during such period at customary prices consistent with the ordinary course of business; (ii) not promoting or advertising any sales or instore promotions (including POS promotions) to the public (except for Merchant's pending advertisements as of the date of this Agreement and/or Merchant's promotions for the period through the Sale Commencement Date, as reflected on Exhibit 11.1(1)) ; (iii) except as may occur in the ordinary course of business, not returning inventory to vendors and not transferring inventory or supplies between or among Stores; and (iv) except as may occur in the ordinary course of business, not making any management personnel moves or changes at the Stores without prior written notice to and consultation with (but not approval of) Agent. (m) The aggregate Cost Value of the Merchandise as a percentage of the aggregate Retail Price of the Merchandise (as determined in accordance with Section 5) (the " Cost Factor ") shall not be greater than 42.8% (the " Cost Factor Threshold "). To the extent that the actual Cost Factor for the Merchandise is greater than the Cost Factor Threshold, then such deviation shall not constitute a breach of any representation or warranty, or an Event of Default; provided , however , that, then the Guaranty Percentage shall adjust (in addition to any adjustment applicable pursuant to section 3.1(c) hereof) in accordance with Exhibit 11.1(m) For purposes
.
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of this Agreement, the Cost Factor shall be calculated by dividing the aggregate Cost Value of the Merchandise by the aggregate Retail Price of the Merchandise. All documents, information and supplements provided by Merchant to (n) Agent in connection with Agent's due diligence and the negotiation of this Agreement were true and accurate in all material respects at the time provided. To the Merchant's knowledge, Merchant has not since June 1, 2012 (o) shipped any Excluded Defective Merchandise from the Distribution Center to the Stores. Merchant will not ship any Excluded Defective Merchandise from the date of this Agreement from the Distribution Center to the Stores. (p) If the Sale Termination Date is sixty (60) or more days after the Commencement Date, Merchant will seek from the Bankruptcy Court entry of an order under section 365(d)(4) of the Bankruptcy Code extending the time to assume or reject the leases associated with the Stores, and/or seek the consent from the landlord(s) for each Store. 11.2 Agent's Representations, Warranties and Covenants. Each entity comprising Agent hereby represents, warrants and covenants in favor of Merchant as follows: Each entity comprising Agent: (i) is a limited partnership, corporation or (a) limited liability company (as the case may be) duly and validly existing and in good standing under the laws of the State of its organization; and (ii) has all requisite power and authority to carry on its business as presently conducted and to consummate the transactions contemplated hereby. (b) Agent has the right, power and authority to execute and deliver each of the Agency Documents to which it is a party and to perform fully its obligations thereunder. Agent has taken all necessary actions required to authorize the execution, delivery and performance of the Agency Documents, and no further consent or approval is required on the part of Agent for Agent to enter into and deliver the Agency Documents, to perform its obligations thereunder and to consummate the Sale. Each of the Agency Documents has been duly executed and delivered by the Agent and constitutes the legal, valid and binding obligation of Agent enforceable in accordance with its terms. No court order or decree of any federal, state or local governmental authority or regulatory body is in effect that would prevent or impair, or is required for, Agent's consummation of the transactions contemplated by this Agreement (other than the Assumption Order), and no consent of any third party which has not been obtained is required therefor, other than as provided herein. No contract or other agreement to which Agent is a party or by which Agent is otherwise bound will prevent or impair the consummation of the transactions contemplated by this Agreement. (c) No action, arbitration, suit, notice or legal administrative or other proceeding before any court or governmental body has been instituted by or against Agent, or has been settled or resolved or, to Agent's knowledge, has been threatened against or affects
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Agent, which questions the validity of this Agreement or any action taken or to be taken by Agent in connection with this Agreement or which, if adversely determined, would have a material adverse effect upon Agent's ability to perform its obligations under this Agreement. (d) The Sale shall be conducted in compliance with all applicable state and local laws, rules and regulations and Merchant's leases and other agreements, except as provided for in the Sale Guidelines and Assumption Order. Section 12. Insurance.
12.1 Merchant's Liability Insurance. Merchant shall continue until the Sale Termination Date, in such amounts as it currently has in effect, all of its liability insurance policies, including, but not limited to, products liability, comprehensive public liability, auto liability and umbrella liability insurance, covering injuries to persons and property in, or in connection with, Merchant's operation of the Stores and shall endeavor to cause Agent to be named as an additional named insured (as its interest may appear) with respect to all such policies. Merchant shall deliver to Agent certificates evidencing such insurance setting forth the duration thereof and naming Agent as an additional named insured, in form reasonably satisfactory to Agent. All such policies shall require at least thirty (30) days' prior notice to Agent of cancellation, non-renewal or material change during the Sale Term. In the event of a claim under any such policies, Merchant shall be responsible for the payment of all deductibles, retentions or self-insured amounts thereunder, unless it is determined that liability arose by reason of the wrongful acts or omissions or negligence of Agent, or Agent's employees, independent contractors or agents (including Merchant's employees being supervised by Agent). 12.2 Merchant's Casualty Insurance. Merchant will provide throughout the Sale Term, at Agent's cost as an Occupancy Expense hereunder, fire, flood, theft and extended coverage casualty insurance covering the Merchandise in a total amount equal to no less than the retail value thereof. Merchant represents that under Merchant's current property and casualty insurance the deductible is $25,000 per occurrence and under Merchant's current liability insurance the deductible is $0, and there is no self-insured retention with respect to either policy. From and after the date of this Agreement until the Sale Termination Date, all such policies will also name Agent as loss payee (as its interest may appear). In the event of a loss to the Merchandise on or after the date of this Agreement, the proceeds of such insurance attributable to the Merchandise shall constitute Proceeds hereunder. Merchant shall deliver to Agent certificates evidencing such insurance, setting forth the duration thereof and naming the Agent as loss payee (as its interest may appear), in form and substance reasonably satisfactory to Agent. All such policies shall require at least thirty (30) days' prior notice to the Agent of cancellation, non-renewal or material change during the Sale Term. Merchant has not, since June 1, 2012, made and Merchant shall not make any change in the amount of any deductibles or self insurance amounts prior to the Sale Termination Date without Agent's prior written consent. 12.3 Agent's Insurance. Agent shall maintain as an Expense hereunder throughout the Sale Term, in such amounts as it currently has in effect, comprehensive public liability insurance
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policies covering injuries to persons and property in or in connection with Agent's agency at the Stores, and shall cause Merchant to be named as additional insureds and loss payees with respect to such policies. Agent shall deliver to Merchant certificates evidencing such insurance policies setting forth the duration thereof and naming Merchant as additional insureds, in form and substance reasonably satisfactory to Merchant. In the event of a claim under any such policies, Agent shall be responsible for the payment of all deductibles, retentions or self-insured amounts thereunder, unless it is determined that liability arose by reason of the wrongful acts or omissions or negligence of Merchant or Merchant's independent contractors or agents, other than Agent or Agent's employees, agents or independent contractors (including Merchant's employees under Agent's supervision). 12.4 Worker's Compensation Insurance . Merchant shall at all times during the Sale Term maintain in full force and effect workers' compensation insurance (including employer liability insurance) covering all Retained Employees in compliance with all statutory requirements. Section 13. Indemnification 13.1 Merchant Indemnification . Merchant shall indemnify and hold Agent and its officers, directors, employees, agents and independent contractors (collectively, "Agent Indemnified Parties ") harmless from and against all claims, demands, penalties, losses, liability or damage, including, without limitation, reasonable attorneys' fees and expenses, directly or indirectly asserted against, resulting from, or related to: (i) Merchant's material breach of or failure to comply with any of its agreements, covenants, representations or warranties contained in any Agency Document; (ii) subject to Agent's satisfaction of its obligations pursuant to Section 4.1(a) and (b) hereof, any failure of Merchant to pay to its employees any wages, salaries or benefits due to such employees during the Sale Term; (iii) subject to Agent's compliance with its obligations under Section 8.3 hereof, any failure by Merchant to pay any Sales Taxes to the proper taxing authorities or to properly file with any taxing authorities any reports or documents required by applicable law to be filed in respect thereof; (iv) any liability or other claims asserted by customers, any of Merchant's employees, or any other person against any Agent Indemnified Party (including, without limitation, claims by employees arising under collective bargaining agreements, worker's compensation or under the WARN Act); or (v) the gross negligence (including omissions) or willful misconduct of Merchant, or its officers, directors, employees agents or representatives; provided , however this Section 13.1 shall not apply to any claims, demands, penalties, losses, liability or damage resulting from, or related to, the gross negligence (including omissions), or willful misconduct, or breach of this Agreement of the Agent Indemnified Parties. 13.2 Agent Indemnification . Agent shall indemnify and hold Merchant and its officers, directors, employees, agents and representatives (collectively, the " Merchant Indemnified Parties ") harmless from and against all claims, demands, penalties, losses, liability or damage, including, without limitation, reasonable attorneys' fees and expenses, directly or indirectly asserted against, resulting from, or related to: (i) Agent's material breach of or failure
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to comply with any of its agreements, covenants, representations or warranties contained in any Agency Document; (ii) any claims by any party engaged by Agent as an employee or independent contractor arising out of such employment; and (iii) the gross negligence (including omissions) or willful misconduct of Agent, its officers, directors, employees, agents or representatives; provided, however this Section 13.2 shall not apply to any claims, demands, penalties, losses, liability or damage resulting from, or related to, the gross negligence (including omissions), or willful misconduct, or breach of this Agreement of the Merchant Indemnified Parties. Section 14. Defaults. The following shall constitute "Events of Default" hereunder:
(a) The Merchant or Agent shall fail to perform any material obligation hereunder if such failure remains uncured ten (10) days after receipt of written notice thereof, or (b) Any representation or warranty made by Merchant or Agent proves untrue in any material respect as of the date made and, to the extent curable, continues uncured ten (10) days after written notice to the defaulting party. (c) The Sale is terminated or materially interrupted or impaired for any reason other than (i) an Event of Default by Agent; or (ii) any other material breach or action by Agent not authorized under the Agency Agreement. Any party's damages or entitlement to equitable relief on account of an Event of Default shall be determined by the Bankruptcy Court. Section 15. Miscellaneous.
15.1 Notices. All notices and communications provided for pursuant to this Agreement shall be in writing and sent by email, by hand, by facsimile or by Federal Express or other recognized overnight delivery service, as follows (with Merchant and Agent to receive all notices regardless of their origin): If to the Agent: GORDON BROTHERS RETAIL PARTNERS, LLC 101 Huntington Avenue, 10th Floor Boston, MA 02199 Attn: Michael Chartock Tel: (617) 210-7116 Fax: (617) 531-7906 Email: mchartock@gordonbrothers.com
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HILCO MERCHANT RESOURCES, LLC 5 Revere Drive Northbrook, IL 60062 Attn: Ian Fredericks Fax: (847) 897-0859 Tel: (847) 418-2075 If to the Merchant: DAFFY'S INC. One Daffy's Way Secaucus, New Jersey 07094 Attn: Sid Taubman Email: smt@daffys.com
With a copy to: WEIL, GOTSHAL & MANGES LLP 767 Fifth Avenue New York, New York 10153 Attn: Debra A. Dandeneau, Esq. Email: debra.dandeneau@weil.com
If to WFBNA: WELLS FARGO BANK, NATIONAL ASSOCIATION One Boston Place, 18th Floor Boston Massachusetts 02108 Attn: Lynn S. Whitmore, Managing Director Email: lynn.whitmore@wellsfargo.com With Copies to: CLEAR THINKING GROUP 401 Towne Centre Drive Hillsborough, New Jersey 08844 Attn: Stuart H. Kessler, President Email: skessler@clearthinkinggrp.com And: RIEMER & BRAUNSTEIN LLP Three Center Plaza, 6th Floor
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Boston, Massachusetts 02108 Attn: Donald E. Rothman Email: drothman@riemerlaw.com 15.2 Governing Law. This Agreement shall be governed and construed in accordance with the law of the State of New York without regard to conflict of laws principles thereof, except where governed by the Bankruptcy Code in the event of the commencement of the Chapter 11 Case. 15.3 Entire Agreement. This Agreement contains the entire agreement between the parties hereto with respect to the transactions contemplated hereby and supersedes and cancels all prior agreements, including, but not limited to, all proposals, letters of intent or representations, written or oral, with respect thereto other than the Confidentiality Agreement between Merchant and the respective members of Agent. 15.4 Amendments. This Agreement may not be modified except in a written instrument executed by each of the parties hereto (including WFBNA, with respect to Sections 3.3, 8.3, 15.6, and 16). 15.5 No Waiver. No consent or waiver by any party, express or implied, to or of any breach or default by the other in the performance of its obligations hereunder shall be deemed or construed to be a consent or waiver to or of any other breach or default in the performance by such other party of the same or any other obligation of such party. Failure on the part of any party to complain of any act or failure to act by the other party or to declare the other party in default, irrespective of how long such failure continues, shall not constitute a waiver by such party of its rights hereunder. 15.6 Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon Agent and Merchant and their respective successors and assigns; provided, however, that this Agreement may not be assigned by Merchant or Agent to any party without the prior written consent of the other, except that the Agent's rights under this Agreement may be assigned or pledged to its lender as collateral security for loans or other financial accommodations that may be extended to Agent in connection with the liquidation sale contemplated hereunder. WFBNA is an intended third-party beneficiary of this Agreement. 15.7 Execution in Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original but all of which together shall constitute but one agreement. This Agreement may be executed by facsimile, and such facsimile signature shall be treated as an original signature hereunder. 15.8 Section Headings. The headings of sections of this Agreement are inserted for convenience only and shall not be considered for the purpose of determining the meaning or legal effect of any provisions hereof.
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15.9 FF&E. With respect to the FF&E located in the Stores or the Distribution Center and owned by Merchant (the "Merchant FF&E") that is not (1) 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, Agent shall sell the Merchant FF&E in any such Stores or in the Distribution Center, and at Merchant's sole option, exercisable by Merchant in writing within thirty (30) days after the Sale Commencement Date. Agent be entitled to receive a commission equal to twenty percent (20%) of the net proceeds from the sale of such Merchant FF&E in the Stores and the designated Distribution Center(s), if any, (net of sales taxes and the expenses of disposing of the FF&E); provided, however Merchant shall be responsible for payment of expenses incurred in connection with the disposition of the Merchant FF&E in accordance with a budget to be mutually agreed upon between Merchant and Agent. As of the Sale Termination Date, Agent may abandon, in place, any unsold Merchant FF&E, at the Stores and the Designated Distribution Center, if any. All net proceeds from the disposition of the Merchant FF&E at the Stores and/or Designated Distribution Center, net of sales taxes, Agent's commission, and the expenses associated with the disposition of such Merchant FF&E (collectively, the "Net FF&E Proceeds"), shall be deposited in a segregated account designated solely for the deposit of the Net FF&E Proceeds. 15.10 Reporting. If requested, Agent shall furnish Merchant with weekly reports reflecting the progress of the Sale, which shall specify the Proceeds received to date and shall furnish Merchant with such other information regarding the Sale as Merchant reasonably requests. The Agent will maintain and provide to Merchant sales records to permit calculation of and compliance with any percentage of rent obligations under Store leases. During the course of the Sale, Merchant shall have the right to have representatives continually act as observers of the Sale in the Stores, so long as they do not interfere with the conduct of the Sale. Section 16. Security Interest. Subject to the 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, and subject to the provisions of this Section 16, Merchant hereby grants to Agent pursuant to Bankruptcy Code 364(d) a valid and perfected first priority security interest (subject to the subordination provisions set forth below in this Section 16) in and lien upon (i) the Merchandise; (ii) the Proceeds and the Augment Proceeds; and (iii) 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 hereof), in the Merchant FF&E in the Stores and/or the Designated Distribution Center(s); 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 of the Guaranteed Amount, Expenses, the Merchant's Recovery Amount, and the Augment Recovery amount, all in full (collectively, the "Agent's Payment Obligations"), and (b) the liens, security interests and claims of the WFBNA (other than the Augment Proceeds, in which WFBNA has no security interest or other lien), but, with repect 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; provided, further, upon payment of the Agent's Payment Obligations, the security interest, liens granted to the Agent hereunder shall be first priority and senior to all other security interests and liens (including those of
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WFBNA) in all respects and no longer be junior and subordinate in any respect to any other liens claims or encumbrances. Upon entry of the Assumption Order and payment of the Initial Guaranty Payment pursuant to Section 3.3 hereof, and the issuance of any required letters of credit, the security interest granted to Agent hereunder shall be deemed properly perfected without the need for further filings or documentation under the UCC or otherwise (but such security interests shall have the priority afforded thereto (and shall be subordinated as set forth) in the two (2) immediately preceding sentences).
[Signature Pages Follow]
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IN WITNESS WHEREOF, the Agent and Merchant hereby execute this Agreement by their duly authorized representatives as a sealed instrument as of the day and year first written above. DAFFY'S, INC. As Mehant
By: Nar1ie: Marcia Wilson Its: President and chief Exeutive Officer
GORDON BROTHERS RETAIL PARTNERS, LLC As Agent By: _ Name: Title:
HILCO MERCHANT RESOURCES, LLC As Agent
By: _ Name: Title:
CONSENTED AND AGREED TO AS IT RELATES TO SECTIONS 3.3, 8.3, 15.6 AND 16 HEREOF, BY: WELLS FARGO BANK, NATIONAL ASSOCIATION
By:_ Name Lynn S. Whitmore Title: Managing Director

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IN WITNESS WHEREOF, the Agent and Merchant hereby execute this Agreement by their duly authorized representatives as a sealed instrument as of the day and year first written above.
DAFFY'S, INC. As Merchant
By: Name: Marcia Wilson President and Chief Executive Officer Its:
GORDON BROTHERS RETAIL PARTNERS, LLC As Agent

By: Name: Title:
z C
G.
-And-

By: Name: Title:
By: Name: Lynn S. Whitmore Title: Managing Director

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By: Name: Marcia Wilson Its: President and Chief Executive Officer
By: Name: Title: -And-

ti
By: Name: Ian S . Fre Bricks Title: VP, Assistant General Counsel, Managing Member
By: Name: Lynn S. Whitmore Title: Managing Director

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By: _ Name: Marcia Wilson Its: President and Chief Executive Officer

By: Name: Title: -And-

By:_ Name: Title:
CONSENTED AND AGREED TO AS IT RELATES TO SECTIONS 3.3, 8.3. 15.6 AND 16 HEREOF, BY: WELLS FARGO BANK, NATIONAL ASSOCIATION
Name:
I
l1it1ore
Tide: Managing Director

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Daffys, Inc. Exhibit 11.1(c) Existing Liens on Merchandise
Wells Fargo Bank, National Association, pursuant to Senior Secured, Super-Priority Debtor-inPossession Loan and Security Agreement.
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DAFFYS SALE GUIDELINES A. The Sale shall be conducted so that the Stores in which sales are to occur will remain open no longer than during the normal hours of operation provided for in the respective leases for the Stores. B. The Sale shall be conducted in accordance with applicable state and local Blue Laws, where applicable, so that no Sale shall be conducted on Sunday unless the Merchant had been operating such Store on a Sunday. C. On shopping center property, the Agent shall not distribute handbills, leaflets or other written materials to customers outside of any Stores premises, unless permitted by the lease or, if distribution is customary in the shopping center in which such Store is located; provided that Agent may solicit customers in the Stores themselves. On shopping center property, the Agent shall not use any flashing lights or amplified sound to advertise the Sale or solicit customers, except as permitted under the applicable lease or agreed to by the landlord. D. At the conclusion of the Sale, the Agent shall vacate the Stores in broom clean condition, and shall leave the Locations in the same condition as on Sale Commencement Date, ordinary wear and tear excepted, in accordance with Section 6 of the Agency Agreement, provided, however, that the Merchant and the Agent hereby do not undertake any greater obligation than as set forth in an applicable lease with respect to a Store. For the avoidance of doubt, as of the Sale Termination Date, the Agent may abandon, in place and without further responsibility or obligation, any unsold FF&E located at a Store. E. Agent shall be permitted to utilize display, hanging signs, and interior banners in connection with the Sale; provided however that such display, hanging signs, and interior banners shall be professionally produced and hung in a professional manner. The Merchant and the Agent may advertise the Sale as a going out of business, store closing sale on everything, or similar themed sale. The Merchant and the Agent shall not use neon or day-glo on its display, hanging signs, or interior banners. Furthermore, with respect to enclosed mall locations, no exterior signs or signs in common areas of a mall shall be used unless otherwise expressly permitted in these Sale Guidelines. Nothing contained herein shall be construed to create or impose upon the Agent any additional restrictions not contained in the applicable lease agreement. In addition, the Merchant and the Agent shall be permitted to utilize exterior banners at (i) non-enclosed mall Stores and (ii) enclosed mall Stores to the extent the entrance to the applicable Store does not require entry into the enclosed mall common area; provided, however, that such banners shall be located or hung so as to make clear that the Sale is being conducted only at the affected Store, shall not be wider than the storefront of the Store, and shall not be larger than 4 feet x 40 feet. In addition, the Merchant and the Agent shall be permitted to utilize sign walkers in a safe and professional manner and in accordance with the terms of the Approval Order. F. Conspicuous signs shall be posted in the cash register areas of each of the affected Stores to effect that all sales are final.
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G. Except with respect to the hanging of exterior banners, the Agent shall not make any alterations to the storefront or exterior walls of any Stores. H. The Agent shall not make any alterations to interior or exterior Store lighting. No property of the landlord of a Store shall be removed or sold during the Sale. The hanging of exterior banners or in-store signage and banners shall not constitute an alteration to a Store. I. The Agent shall keep Store premises and surrounding areas clear and orderly consistent with present practices. J. Subject to the provisions of the Agency Agreement the Agent shall have the right to sell certain furniture, fixtures, and equipment located at the Stores and Distribution Center (the Merchant FF&E). The Agent may advertise the sale of the Merchant FF&E in a manner consistent with these guidelines. The purchasers of any Merchant FF&E sold during the sale shall be permitted to remove the Merchant FF&E either through the back shipping areas at any time, or through other areas after store business hours. For the avoidance of doubt, as of the Sale Termination Date, the Agent may abandon, in place and without further responsibility or obligation, any unsold FF&E. K. The Agent shall be entitled to include Additional Agent Merchandise in the Sale in accordance with the terms of the Approval Order and the Agency Agreement. L. At the conclusion of the Sale at each Store, pending assumption or rejection of applicable leases, the landlords of the Stores shall have reasonable access to the Stores premises as set forth in the applicable leases. The Merchant, the Agent and their agents and representatives shall continue to have exclusive and unfettered access to the Stores. M. Post-petition rents shall be paid by the Merchant as required by the Bankruptcy Code until the rejection or assumption and assignment of each lease. Agent shall have no responsibility therefor. N. The rights of landlords against Merchant for any damages to a Store shall be reserved in accordance with the provisions of the applicable lease. O. If and to the extent that the landlord of any Store affected hereby contends that the Agent or Merchant is in breach of or default under these Sale Guidelines, such landlord shall email or deliver written notice by overnight delivery on the Merchants counsel and the Agents counsel as follows: If to the Merchant: Weil, Gotshal & Manges LLP 767 Fifth Avenue New York, NY 10153 Attention: Debra A. Dandeneau Phone: 212-310-8000 Email: debra.dandeneau@weil.com
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If to the Agent: Curtis, Mallet-Prevost, Colt & Mosle LLP 101 Park Avenue New York, NY 10178 Attention: Steven Reisman Phone: 212-696-6065 Email: sreisman@curtis.com P. To the extent there are any inconsistencies between this Exhibit and the Agency Agreement, the terms of the Agency Agreement shall control.
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12-13312-mg

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Chapter 11 Case No. 12-_____ (__)

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The Debtor, exercising its sound business judgment and in consultation

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Debtor to this or any other court.

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Exhibit A Proposed Order

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Chapter 11 Case No. 12-_____ (__)

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Exhibit 1 Agency Agreement

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Compensation to Agent . Subject to entry of the Assumption Order:

Chapter 11 Case No. 12-___ ()

Chapter 11 Case No. 12-___ ()