IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE -----------------------------------------------------------In re: MERVYNS HOLDING, LLC, et al.

, x ) ) ) ) ) ) ) ) x

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

Sale Procedures Hearing Date: October 23, 2008 at 1:30 p.m. Sale Procedures Objection Deadline: October 22, 2008 at 4:00 p.m. Related Docket Nos. 620, 621

Debtors. ------------------------------------------------------------

RESPONSE OF GE MONEY BANK 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 GE Money Bank, FSB (f/k/a Monogram Credit Card Bank of Georgia) (GE Bank), by and through its undersigned counsel, hereby files this Response (the Response) 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 Motion). The purpose of this Response is to ensure that the proposed Agency Agreement (defined below) or any contract of sale, agency agreement or other similar agreement which may be approved by this Court, and that any sale or liquidation pursuant to such agreement, is consistent with the terms of the Program Agreement (as defined below), which has been previously assumed by the Debtors pursuant to an Order of this Court. Among other things, GE Bank and the Debtors have already agreed that no new credit applications will be submitted or processed after October 22nd and that no gift cards will be sold on the private label accounts

#10197690 v1

0q/v(*6

0811586081022000000000018

2S

issued by GE Bank. Further, GE Bank does not anticipate accepting credit card charges on existing accounts in Liquidating Stores given how the liquidation sales will likely be conducted. GE Bank and the Debtors have commenced discussions and are working cooperatively to assure that GE Banks rights under the Program Agreement are not contravened, and if possible, to reach an orderly and consensual termination of the Program Agreement. Any order approving the Motion and approving the Agency Agreement or Stalking Horse Agreement should be consistent with such steps. In support of the Response, GE Bank respectfully represents as follows: JURISDICTION, VENUE AND STATUTORY BASIS 1. This court has jurisdiction over the subject matter of this Motion pursuant to 28

U.S.C. 1334. This matter is a core proceeding pursuant to 28 U.S.C. 157(b)(1), 157(b)(2)(A) and (G). Venue in this court is proper under 28 U.S.C. 1408 and 1409. The statutory basis for the relief sought herein is 11 U.S.C. 362. BACKGROUND 2. On July 29, 2008 (the Petition Date), Mervyns Holdings, LLC and certain of

its debtor subsidiaries (each a Debtor, and collectively, the Debtors) each filed a voluntary petition for relief under chapter 11 of title 11 of the United States Code (the Bankruptcy Code). 3. The Debtors continue to operate their business and manage their properties as

debtors in possession pursuant to sections 1107(a) and 1108 of the Bankruptcy Code. No trustee or examiner has been appointed in the Debtors cases. On August 7, 2008, the Unites States Trustee for the District of Delaware (the U.S. Trustee) appointed an official committee of unsecured creditors. 2
#10197690 v1

4.

As of the Petition Date, Mervyns operated 175 retail stores in California and six

states in the southwestern United States with retail stores averaging 80,000 retail square feet located primarily in community shopping centers, regional malls and freestanding locations. Through these retail stores, Mervyns sells its extensive selection of national brands, privatelabel apparel and housewares. 5. On or about October 17, 2008, the Debtors served GE Bank with the Motion

seeking approval from this Court to, among other things, enter into an agency agreement or stalking horse agreement substantially in the form attached to the Motion as Exhibit D (the Agency Agreement or Stalking Horse Agreement) and liquidate all or substantially all of their merchandise, inventory and other assets by conducting store closures, liquidation sales and/or going out of business sales at all of the Debtors remaining stores (the Remaining Stores). The Remaining Stores are identified on Exhibit C of the Motion. A. GE Credit Card Program Agreement 6. On July 29, 2004, Mervyns Holdings, LLC, Mervyns LLC, and Mervyns

Brands, Inc. (collectively, the Retailer) and GE Bank entered into that certain credit card program agreement (as amended, the Program Agreement)1 whereby GE Bank established a credit card program with the principal purpose of making credit available to the Debtors customers so that those customers who become cardholders through the opening of an Account2 (each an Account, and collectively, the Accounts) could finance purchases of the Debtors goods and services at their various store locations.

A redacted copy of the Program Agreement was filed under seal by order of this Court. See Docket No. 381. A courtesy copy of the unredacted Program Agreement was delivered to the Court as part of this Response. 2 All capitalized terms not defined herein shall have the meaning ascribed to them in the Program Agreement.

3
#10197690 v1

7.

The Program Agreement provides customers of the Debtors with what is known

as a private label card, namely a credit card which bears the name of Mervyns and is accepted only by the Debtors (and not by all merchants participating in a credit network such as Visa or MasterCard). The Program Agreement also provides that (i) GE Bank is the sole and exclusive owner of all the Accounts and is entitled to receive and deposit to its own account all payments made by Cardholders on Accounts, and that (ii) the Debtors acknowledge that they have no right, title or interest in any Accounts or in any proceeds thereof. 8. On or about September 25, 2008, this Court entered an Order authorizing the

Debtors assumption of the Program Agreement pursuant to section 365 of the Bankruptcy Code. See Docket No. 532. Accordingly, the Debtors obligations under the Program Agreement are binding upon the respective bankruptcy estates and all monetary obligations are valid, postpetition administrative expenses under section 503 of the Bankruptcy Code. In addition, pursuant to the terms of the Program Agreement, and as adequate assurance of future performance, the Debtors posted a $7 million letter of credit as security for any and all of the Debtors obligations under the Program Agreement. B. The Program Agreement Permits Termination of the Agreement if the Debtors Liquidate or Sell All or Substantially All of their Assets. 9. GE Bank obtains its revenues and its principal consideration only from the

successful operation of the Debtors numerous retail stores. As such, the Program Agreement provides GE Bank with rights of termination upon the occurrence of certain events, with various notice periods and effective dates, including, among others, (i) if Mervyns is in default under any loan agreement, indenture or other instrument relating to any financial obligation, (ii) if a material adverse change has occurred in the operations, financial condition or business of

4
#10197690 v1

Mervyns which has had a material adverse effect or is reasonably likely to have a material adverse effect on GE Bank, the Accounts or the ongoing operation or continued viability of the Program, (iii) if Mervyns breaches any covenant or agreement contained in the Program Agreement that has or would be reasonably likely to have a material adverse effect on GE Bank or its rights under, or interest in, the Program, or (iv) if all or substantially all of the assets or property of Mervyns are sold or otherwise disposed of in one transaction or series of related transactions. See Program Agreement 9.2. Moreover, GE Bank contends that in addition to the express contractual rights noted above, GE Bank is entitled to the exercise of its common law contract rights, including, but not limited to, being excused from performance where there is a material failure of performance by the other party. See Program Agreement 13.15 (all remedies are cumulative). 10. Given that Mervyns intends to conduct store closings at all of its Remaining

Stores and liquidate all of the inventory therein, the purpose and benefits of the Program Agreement have ended. The continued use of the credit cards for retail sales during a liquidation sale is contrary to the purpose and intent of the Program Agreement. In addition, the continued use of Mervyns private label credit card, especially during liquidation and going out of business sales, significantly increases chargebacks and other losses to GE Bank and the Debtors estates. Chargebacks occur when retail customers contend that the goods they were sold were defective, not provided, unacceptable or returnable under the Debtors return policy or that the charge for the goods was inaccurate, and then demand that GE Bank provide them a credit on their Account. Furthermore, under the terms of the proposed Agency Agreement, customers who purchase merchandise during the liquidation sale will not be able to return defective or unsatisfactory goods, and accordingly, may assert a claim for a refund against GE Bank. When

5
#10197690 v1

chargebacks occur, GE Bank must look to the Debtor for reimbursement of the chargeback which is an administrative claim under section 503 of the Bankruptcy Code. Given that the Debtors are selling all of their assets, and may lack funds to pay all creditors, the risk of such chargebacks is substantial and likely to create an unwarranted loss for the Debtors estate, its creditors and/or GE Bank. 11. In addition, Mervyns failure to provide 30 days notice prior to commencing

closures at its Remaining Stores has materially affected and impacted (i) GE Banks ability to put in place customized risk strategies to reduce GE Banks losses from individual cardholders (e.g., adjusting credit lines and collection strategies as a cardholder is more likely to pay his/her credit card debt if he/she perceives continuing utility from the credit card)3 and (ii) GE Banks ability to analyze the portfolio in order to issue substitute cards or find a buyer for some or all of the credit card portfolio. See Program Agreement 6.15(a), Fourth Amendment 1.3. GE Bank contends that this failure would also justify termination. 12. For all of the above reasons, GE Bank has commenced discussions with the

Debtors to agree to a consensual termination of the Program Agreement, which GE Bank contends would be an ordinary course transaction under sections 1107 and 363 of the Bankruptcy Code. 13. Given the above, GE Bank submits that those who seek to bid to acquire the

assets of the Debtors should not, and cannot properly rely upon the continued existence of the Program Agreement nor upon the continued right to use the private label card, as set forth herein. On October 21, 2008, in view of the Debtors determination and undertaking to liquidate all or

6
#10197690 v1

substantially all of their assets, GE Bank provided written notice to the Debtors of its intention to seek an orderly termination of the Program Agreement, and requested that the Debtors not open nor process new accounts once they began the liquidation process. A copy of such letter notice (the Notice Letter) is attached hereto and incorporated herein as Exhibit A. If necessary, GE Bank intends to seek further relief to terminate the Program Agreement, although it currently anticipates reaching agreement with the Debtors on a consensual termination. C. The Proposed Form of Agency Agreement 14. By the Motion, the Debtors seek entry of an order authorizing the Debtors to enter

into the Agency Agreement which shall provide for the liquidation of all or substantially all of the Debtors merchandise, inventory and other assets by the successful bidder (the Agent). 15. The Agency Agreement provides, among other things, that the Agent is to act as

the Debtors exclusive agent for the limited purpose of selling all of the merchandise located in all of the Debtors Remaining Stores and certain of the merchandise located in the Debtors distribution centers (the Sale). 16. Section 7.3 of the Agency Agreement, provides, as follows with respect to the use

of credit cards: To the extent available from credit card processors, the Agent shall have the right to use Merchants credit card facilities (including Merchants credit card terminals and processor(s), credit card processor coding. . . if the Agent elects to use the Merchants credit card facilities during the Sale, the Agent shall be required to make all arrangements necessary with the Merchants credit card processors regarding the establishment of reserves for credit card

GE Bank is a federal savings bank regulated by the Office of Thrift Supervision, and actively reviews and implements credit risk strategies given current market conditions.

7
#10197690 v1

sales during the Sale Term, and no funds of the Merchant shall be used to establish any such reserves. 17. It would appear from Section 7.3 of the Agency Agreement that the Agent

recognizes that it may not lawfully use the GE Banks private label credit card without GE Banks agreement and that the Agents will be required to make all arrangements necessary with the merchants credit card processors for use of Mervyns credit card terminals. 18. At least two sections of the Agency Agreement contemplate the Agent taking

actions which will trigger GE Banks right to cease extending credit to Mervyns customers (i.e., GE Banks right to cease allowing the use of the Mervyns private label credit card). Section 8.10 of the Agency Agreement provides, that [s]ubject to authorization in the Approval Order, agent may (but shall not be required to) supplement the Merchandise in the Stores with augmented goods, of like kind and quality, as is customarily sold in the Stores (the Augmented Goods). Second, section 9.1 of the Agency Agreement provides that the Agent will use Mervyns employees in the conduct of the Sale, but does not prohibit the Agent from using its own employees in the conduct of the Sale. 19. The Program Agreement expressly provides that GE Bank may, immediately and

without notice, cease extending credit to customers (i.e., cease allowing the use of the Mervyns private label credit card) and require that Mervyns cease taking in-store payments, if merchandise being sold in the Remaining Stores is merchandise other than Mervyns merchandise or Mervyns permits non-Mervyns employees to operate point-of-sale terminals or to accept in-store Account payments. Given that the Agency Agreement contemplates augmenting Mervyns merchandise with non-Mervyns merchandise and possibly using nonMervyns employees to conduct such liquidation sales, GE Bank has given notice in the Notice

8
#10197690 v1

Letter and by this Response of its intention to exercise its right to no longer accept credit card charges on existing accounts at the Remaining Stores. No third party submitting bids for the acquisition of the Debtors assets should rely on any right contrary to this provision. D. The Agency Agreement Cannot Create Greater Rights than Those of the Debtors 20. By this Response, GE Bank is seeking confirmation that the effect of the entry of

a Sale Order or the authorization to enter into the Agency Agreement with a successful bidder will not be inconsistent with the Program Agreement, nor in any way contravene, prohibit or limit the rights of GE Bank therein, including its termination rights and rights to cease extending credit, and that the Agent agree that it will not accept the private label credit card issued by GE Bank. As stated by the United States Supreme Court, [s]hould the debtor-in-possession elect to assume the executory contract ... it assumes the contract cum onere, and the expenses and liabilities incurred may be treated as administrative expenses, which are afforded the highest priority on the debtor's estate. NLRB v. Bildisco & Bildisco, 465 U.S. 513, 531, 104 S.Ct. 1188, 79 L.Ed.2d 482 (1984). 21. Moreover, a sale order under section 363 of the Bankruptcy Code cannot

authorize a sale which alters the terms of an existing agreement, and any order which does so would not be entitled to the protections of section 363(m). See e.g., Clear Channel Outdoor, Inc. v. Nancy Knupfer (In re PW, LLC), 391 B.R. 25 (9th BAP, 2008) ([C]ongress intended that 363(m) address only changes of title or other essential attributes of a sale, together with the changes of authorized possession that occur with leases. The terms of those sales, including the free and clear term at issue here, are not protected.). 22. In addition, the Agency Agreement purports to provide that any sales are free and

9
#10197690 v1

clear of all liens, claims and encumbrances. To the extent that such provision is deemed to impair or alter the rights of GE Bank to setoff or recoup against any Transaction Data as provided for under the Program Agreement, the Agency Agreement should not be approved. See id. 23. GE Bank respectfully submits that should this Court approve the Motion, that any

approved bidding procedures order, Agency Agreement or Stalking Horse Agreement should not be inconsistent with the Program Agreement, nor purport to authorize continued operation of the Program Agreement, nor use of the private label credit card, in connection with any liquidation or going out of business sale, except as expressly provided, and subject to the terms, in the Program Agreement. WHEREFORE, in view of the above, GE Bank respectfully requests that the Court revise the Bidding Procedures Order to reflect that: a. GE Bank has given notice to the Debtors that it will cease to accept applications

for new credit card accounts and require that Mervyns or its Agent cease performing account look-ups at all of Mervyns stores; b. GE Bank has given notice to the Debtors that it will cease to accept charge

transactions on existing credit card accounts from the Debtors or their agent at all of Mervyns stores where (i) Mervyns or its agent fails to comply with the Store Operating Procedures, (ii) merchandise being sold in the Remaining Stores is merchandise other than Mervyns merchandise, or (iii) Mervyns or its agent permits non-Mervyns employees to operate point-ofsale terminals or to accept in-store Account payments;

10
#10197690 v1

c.

Mervyns or its agent shall provide GE Bank with notice as soon as possible

whether and when any of the foregoing three conditions have been met at any of its Remaining Stores; d. That in conjunction with any proposed liquidation or going out of business sale,

GE Bank has given notice to the Debtors that neither Mervyns nor its agents will allow the purchase of gift cards and/or gift certificates using Mervyns private label credit card at any of its store locations; e. Nothing in the Bidding Procedures Order, Agency Agreement or Stalking Horse

Agreement shall contravene, prohibit or otherwise limit GE Banks rights under the Program Agreement, including GE Banks rights to terminate the Program Agreement; and f. For such further and additional relief as may be appropriate. Respectfully submitted, PEPPER HAMILTON LLP

Dated: October 22, 2008 Wilmington, Delaware

By: /s/ Leigh-Anne M. Raport David B. Stratton (DE No. 960) Leigh-Anne M. Raport (DE No. 5055) Hercules Plaza, Suite 5100 1313 Market Street P.O. Box 1709 Wilmington, Delaware 19899-1709 Telephone: (302) 777-6500 Facsimile: (302) 421-8390 Email: strattond@pepperlaw.com raportl@pepperlaw.com

11
#10197690 v1

and SIDLEY AUSTIN LLP David R. Kuney 1501 K. St. N.W. Washington, D.C. 20005 Telephone: (202) 736-8650 Facsimile: (202) 736-8711 Email: dkuney@sidley.com

SIDLEY AUSTIN LLP Alex R. Rovira 787 Seventh Avenue New York, NY 10019 Telephone: (212) 839-5989 Facsimile: (212) 839-5599 Email: arovira@sidley.com Counsel for GE Money Bank, FSB.

12
#10197690 v1

EXHIBIT A

CERTIFICATE OF SERVICE I, Leigh-Anne M. Raport, hereby certify that on the 22nd day of October, 2008, I caused the foregoing Response of GE Money Bank to Motion of Debtors and Debtors in Possession for Orders Authorizing and Approving (A) Auction and Bid Procedures, (B) Bid Protection 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 to be served upon the following parties in the manner indicated.

Mark D. Collins, Esq. Daniel J. DeFranceschi, Esq. Christopher M. Samis, Esq. L. Katherine Good, Esq. Richards, Layton & Finger, P.A. One Rodney Square 920 King Street Wilmington, DE 19801 Hand Deliver

Howard S. Beltzer, Esq. Neil E. Herman, Esq. Wendy S. Walker, Esq. Morgan, Lewis & Bockius LLP 101 Park Avenue New York, NY 10178-0060 Via Fax: 212-309-6001

/s/ Leigh-Anne M. Raport Leigh-Anne M. Raport

#10197632 v1