UNITED STATES BANKRUPTCY COURT DISTRICT OF DELAWARE

In re: MERVYN'S HOLDINGS, LLC, et al., Debtors.

Chapter 11 Case No. 08-11586 (KG) Jointly Administered

Requested Sale Procedures Hearing Date: October 23, 2008 at 1:30 p.m. Requested Sale Procedures Objection Deadline: October 22, 2008 at 4:00 p.m. Requested Sale Hearing Date: October 30, 2008 at 12:00 PM Requested Sale Objection Deadline: October 27, 2008 at 4:00 PM

Related Docket No.: 620

OBJECTION TO MOTION OF DEBTORS AND DEBTORS IN POSSESSION FOR ORDERS AUTHORIZING AND APPROVING (A) AUCTION AND BID PROCEDURES, (B) BID PROTECTIONS TO STALKING HORSE BIDDER, IF APPLICABLE, (C) STORE CLOSING SALES FREE AND CLEAR OF LIENS, (D) AGENCY AGREEMENT, AND (E) RELATED RELIEF, WITH RESPECT TO THE DEBTORS REMAINING STORES The Fifth Third Leasing Company ("Fifth Third"), Key Equipment Finance Inc. ("Key") and IDB Leasing, Inc. ("IDB", and together with Fifth Third and Key, collectively, the "Objectors") hereby file their Objection to the Motion Of Debtors And Debtors In Possession For Orders Authorizing And Approving (A) Auction And Bid Procedures, (B) Bid Protections To Stalking Horse Bidder, If Applicable, (C) Store Closing Sales Free And Clear of Liens, (D) Agency Agreement, And (E) Related Relief, With Respect To The Debtors Remaining Stores (the Sale Motion)1, and respectfully submit as follows:

Capitalized terms used, but not otherwise defined herein, shall have the same meanings ascribed to them in the Sale Motion.

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SUMMARY OF RELEVANT FACTUAL BACKGROUND 1. On August 22, 2008, the Objectors filed that certain Objection To Motion Of

Debtors And Debtors-In-Possession For An Order Approving Auction Procedures, Agency Agreement, Store Closing Sales And Related Relief. See Docket Entry No. 293. The Court (defined herein) is respectfully referred to the Factual Background section in that pleading for a compete recitation of the facts and said section is incorporated herein by reference. A brief summary of the relevant facts is set forth below. 2. On May 8, 2007, Mervyn's LLC ("Mervyn's") entered into a Master Lease

Agreement (as at any time amended, the "Master Agreement") with General Electric Capital Corporation ("GECC"). Pursuant to the terms of the Master Agreement, Mervyn's leased from GECC certain equipment more particularly described in and on certain Equipment Schedules subject to the Master Agreement. In addition, Mervyn's granted a security interest to GECC in and to the equipment referenced in those certain Equipment Schedules subject to the Master Agreement, to secure the due and punctual payment of any and all of the present and future obligations of Mervyn's to GECC. 3. On or after the entry into the Master Agreement, Mervyns entered into a separate

equipment schedule with each of Fifth Third, Key and IDB. 4. Concurrent with the entry into the Master Agreement, GECC assigned all of its

rights, title and interest in and to each of these three equipment schedules, the equipment subject thereto (collectively, the Leased Equipment)2 and the Master Agreement as it relates to these equipment schedules (collectively, the Lease) to each of the respective parties. 5. On or about May 4, 2007, Wachovia Capital Finance Corporation (Western)

("Wachovia") entered into Subordination Agreements with each of the Objectors, whereby
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The Leased Equipment can generally be described as point-of-sale equipment. 2

Wachovia and each of the Objectors set forth their respective priorities with respect to certain collateral. Specifically, Wachovia agreed that each of the Objectors shall have priority over Wachovia with respect to each of their equipment schedules and the equipment subject thereto. 6. On or about May 10, 2007, GECC and Mervyn's entered into a Master Security

Agreement (as at any time amended, the "MSA"), pursuant to which Mervyn's granted to GECC a security interest in and to certain equipment more particularly described in and on certain Collateral Schedules subject to the MSA. 7. On various dates in 2007, Mervyns executed three (3) separate Promissory Notes

(collectively, the Notes) in favor of Key, whereby Mervyn's promised to repay the principal sum of each of the Notes, with interest, to Key upon terms and amounts as set forth therein. 8. Concurrent with the entry into each of the Notes, Mervyn's and Key executed

three Collateral Schedules (collectively, the Key Schedules), pursuant to which Mervyn's granted a security interest in certain equipment, more particularly described therein (collectively, the "Key Collateral")3, to Key. 9. Concurrent with the entry into the MSA, GECC assigned all of its rights, title and

interest in and to the Key Schedules, the Key Collateral and the MSA as it relates to the Key Schedules, to Key. 10. The Leased Equipment and the Key Collateral are collectively referred to as the

Objectors Collateral. 11. On or about July 29, 2008 (the "Petition Date"), Mervyn's Holdings, LLC,

Mervyn's LLC and Mervyn's Brands, LLC (collectively, the "Debtors") filed Voluntary Petitions for relief under Chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code") in the

The Key Collateral can generally be described as electric lighting equipment and fixtures. 3

United States Bankruptcy Court for the District of Delaware (the "Court") and Orders for Relief were entered on that date. 12. On or about October 17, 2008, the Debtors filed the Sale Motion, which seeks the

entry of two (2) orders (collectively, the "Proposed Orders") as follows: (a) a Procedures Order (A) (i) approving proposed auction procedures, (ii) setting the date, time and place for the auction, and (iii) approving the form of the notice of the Auction and Store Closing Sales; (B) setting a sale hearing to be held on October 30, 2008 at 12:00 PM to consider the entry of the Approval Order; and (C) approving the break-up fee and expense reimbursement sought by the Stalking Horse; and (b) an Approval Order at the Sale Hearing (A) approving (i) the Agency Agreement and (ii) Store Closing Sales, and (B) waiving the Debtors' compliance with state and local laws, statutes, rules ordinances and/or lease provisions restricting the Store Closing Sales. 13. Attached as Exhibit A to the Sale Motion is the proposed Procedures Order.

Attached as Exhibit B to the Sale Motion is the proposed Approval Order. Attached as Exhibit C to the Sale Motion is the listing of the remaining stores (Remaining GOB Locations) where GOB sales are to be conducted. 14. It is clear from the Sale Motion that the Debtors either reserve the right to sell or

are actually seeking authorization to sell some or all of the Objectors Collateral. See Sale Motion at 14. 15. 16. The Objectors' Collateral is located at various of the Remaining GOB Locations. For the reasons set forth below, the Objectors object to the Sale Motion and seek

to preserve their rights with respect to the Objectors' Collateral at the Remaining GOB Locations.

OBJECTION 17. Primarily, the Objectors object to the sale of any of their respective Objectors

Collateral without their consent. Specifically, the Objectors object to the Sale Motion, the Proposed Orders and the Agency Agreement, to the extent that they seek authorization for the sale of any of the Objectors Collateral without their consent or without satisfying any element of 363(f) of the Bankruptcy Code. Here, the Objectors do not consent to the sale of their respective Objectors Collateral and the Debtors have not satisfied 363(f) of the Bankruptcy Code. As such, the Objectors object to the sale of their equipment and/or collateral. (a) 18. The Debtors Do Not Own The Leased Equipment As set forth above, the Objectors, as lessors, leased certain equipment to

Mervyn's, as lessee. Specifically, pursuant to the Master Agreement and the related equipment schedules, the respective Objectors leased the Leased Equipment to Mervyns. As such, the respective Objectors are the owners of the Leased Equipment. Mervyn's is merely a lessee and has a leasehold interest to use the Leased Equipment, so long as it is not in default under the terms of the Lease. By reason thereof, the Debtors cannot sell the Leased Equipment, but rather must assume or reject the Lease in accordance with the provisions of 365 of the Bankruptcy Code. Accordingly, to the extent that the Debtors seek to sell the Leased Equipment, the Objectors object to such sale. (b) 19. The Debtors Have Not Satisfied 363(f) Of The Bankruptcy Code Alternatively, in the event that the Lease is deemed not to be a "true lease", but

rather a "disguised security agreement", the Objectors object to the Sale Motion on the basis that the Debtors have not satisfied any of the requirements of 363(f) of the Bankruptcy Code. 20. Initially, it should be noted that (i) Mervyns granted a security interest in the

Leased Equipment to the Objectors, and (ii) the respective Objectors have properly perfected
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first priority security interests in and to their respective Objectors' Collateral by virtue of their filed UCC-1 Financing Statements and their Subordination Agreements with Wachovia. 21. 11 U.S.C. 363(f) states, in relevant part, as follows: The trustee may sell property only if (a) (b) (c) applicable non-bankruptcy law permits sale of such property; such entity consents; such interest is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property; such interest is in bona fide dispute; or such entity could be compelled in a legal or equitable proceeding to accept a money satisfaction of such interest.

(d) (e) 22.

Here, the Debtors have failed to establish any of the factors set forth in 363(f) of

the Bankruptcy Code with respect to the rights, liens and claims of the Objectors. Accordingly, the Debtors cannot be permitted to include any of the Objectors' Collateral for sale at the Remaining GOB Locations, absent the Objectors' express consent. 23. First, non-bankruptcy law does not permit the sale of the Objectors' Collateral at

the Remaining GOB Locations, without payment in full to the Objectors. 24. Second, the Objectors have not consented to the sale of the Objectors' Collateral

at the Remaining GOB Locations. In fact, the Objectors, specifically object to the sale of the Objectors' Collateral at the Remaining GOB Locations, unless and until the Objectors (i) are paid, in full, all sums due to them under their respective agreements or (ii) consent to the sale of their collateral at the Remaining GOB Locations.

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Third, the Debtors have not established that the amount received from the sale of

the Remaining GOB Locations will be greater than the aggregate value of all liens on the Objectors' Collateral at the Remaining GOB Locations. 26. Fourth, the Objectors' respective interests in the Objectors' Collateral are not in

bona fide dispute. 27. Finally, there is no legal or equitable justification for accepting a money

satisfaction of less than the amount owed to the Objectors. 28. Thus, the Sale Motion should be denied to the extent that the Debtors intend to

include any of the Objectors' Collateral for sale at the Remaining GOB Locations, until the Debtors can establish one of the requirements of 363(f) of the Bankruptcy Code or the Objectors consent to such sale. (c) 29. Other Objections To The Sale Motion Even if the Debtors are able to satisfy one of the requirements of 363(f) of the

Bankruptcy Code, the Objectors object to any provision of the Sale Motion, the Proposed Orders or the Agency Agreement to the extent that it (i) seeks to alter or modify the priority of the Objectors' liens with respect to the Objectors' Collateral at the Remaining GOB Locations pursuant to the terms of their Subordination Agreements with Wachovia, (ii) seek to prime the Objectors' liens in and to the respective Objectors' Collateral at the Remaining GOB Locations, or (iii) seek to sell any of the Objectors' Collateral without their consent. 30. To the extent that the Debtors can satisfy one of the requirements of 363(f) of

the Bankruptcy Code or the Objectors consent to the sale of the Objectors' Collateral at the Remaining GOB Locations: (a) The Objectors object to any provision in the Proposed Orders or the Agency Agreement that provides that the Agent shall be granted a first priority lien on any of the
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Objectors Collateral and/or the proceeds thereof. See, Remaining GOB Sale Motion at 22 (xiii); See, Agency Agreement 16. The Objectors object to these provisions on the basis that all of the Objectors liens should attach to the proceeds of the sale of the Objectors' Collateral at the Remaining GOB Locations to the same extent, validity and priority as they attached to the Objectors Collateral. As set forth above, the Objectors have an ownership interest or a

perfected first priority security interest in and to the Objectors Collateral and the proceeds from any sale thereof. Any interest to be granted to the Agent must not take priority over the Objectors liens and interests in the Objectors Collateral or proceeds of their sale. (b) The Objectors object to the Sale Motion to the extent that it does not provide that, with respect to the sale of any personal property, all liens, claims and encumbrances shall attach to the proceeds of such sale to the same extent and with the same validity and priority as existed upon such property prior to the sale. (c) The Objectors object to any provision in the Proposed Orders or the Agency Agreement that does not provide that the Objectors immediately and directly receive all proceeds from the sale of the Objectors' Collateral. The proceeds of the sale of the Objectors Collateral should be received directly by the respective Objectors, not the Agent or any other party. As set forth above, the Objectors have an ownership interest or a perfected first priority security interest in and to the Objectors' Collateral and a right to the proceeds from the sale of any such collateral. Furthermore, any proceeds received from the sale of the Objectors Collateral at the Sale Locations should not be commingled with any other sale proceeds. (d) Paragraph 23 of the Approval Order provides, in relevant part, that the Debtors may abandon any Owned FF&E on five (5) days notice to known third parties holding or asserting a Lien. As set forth above, the Objectors have numerous items of

collateral/equipment at the Remaining GOB Locations. As such, any abandonment should be on

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either: (i) at least ten (10) business days prior notice as to the Leased Equipment and at least twenty (20) business days as to Key Collateral, to allow the Objectors a reasonable opportunity to make arrangements for and remove and/or otherwise sell the Objectors' Collateral at the Remaining GOB Locations, or (ii) such other time period as agreed to by the Objectors, the Debtors and/or the landlords. Furthermore, the notice should be sent to the Objectors and their attorneys, not just the landlords of the Remaining GOB Locations. (e) The Proposed Orders should make clear that the Debtors and/or the Agent shall be liable to the Objectors to the extent that the Objectors' Collateral at the Sale Locations is damaged, destroyed, lost or otherwise missing. (f) The Objectors object to any provision in the Agency Agreement or the Proposed Orders that provides that the Debtors or Agent can use any of the Objectors Collateral without making payment directly to the Objectors. The Debtors are directly benefiting from the use of the Objectors Collateral. To the extent that the Debtors use any of the Objectors Collateral, the Debtors should be required to make the monthly payments directly to the Objectors that are due under the underlying agreements between Mervyns and the respective Objectors. (g) Finally, the Objectors object to sections 3.3(c) and 15.9 of the Agency

Agreement on the following basis: (i) the respective Objector; (ii) To the extent that the Agent (as that term is defined in the Agency Any sale of the Objectors Collateral is subject to the consent of

Agreement) does not sell any of the Objectors Collateral because the Merchant (as that term is defined in the Agency Agreement) elected to exclude such asset from sale or the Objectors do

not consent, then the Agent shall not be entitled to receive any anticipated commission with respect such sold asset. (iii) There should be no reimbursement obligation from any of the

Objectors for any expenses included by the Merchant for removal of any of the Objectors Collateral. The Merchant should not take any action or incur any expense with respect to the Objectors Collateral, without prior consent from the Objectors. (iv) In the event that the Objectors consent to the sale of their

respective Objectors Collateral and the Merchant elects to receive in lieu of proceeds net of expenses and the Agents commission, a lump sum payment, on a per Closing Location basis, such sale amount and terms must be subject to the respective Objectors (not just the Lenders) approval and the proceeds of such sale should to paid directly to the respective Objectors. (v) To the extent that the Objectors consent to the sale of their

collateral, there should be no setting off by the Agent of any of the proceeds of the sale of the Objectors Collateral against the amounts owing by the Merchant to the Agent. As set forth above, the Objectors have an ownership interest or a perfected first priority security interest in and to the Objectors Collateral. As such, all proceeds of such sale must be turned over directly to the respective Objectors.

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CONCLUSION WHEREFORE, the Objectors respectfully request that any Orders relating to the Sale Motion provide the relief requested hereinabove and for such other and further relief as the Court deems proper. Dated: October 22, 2008 Wilmington, Delaware Respectfully submitted, MARGOLIS EDELSTEIN

/s/James E. Huggett James E. Huggett, Esq. (DE #3956) 750 Shipyard Drive, Suite 102 Wilmington, Delaware 19801 Telephone: (302) 888-1112 Facsimile: (302) 888-1119 E-mail: jhuggett@margolisedelstein.com -andAmish R. Doshi (NY-AD5996) (Admitted pro hac vice) DAY PITNEY 7 Times Square New York, New York 10036 Telephone: (212) 297-5800 Facsimile: (212) 916-2940 E-mail: adoshi@daypitney.com

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