IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE In re: Mervyns Holdings, LLC, et al.,1 Debtors.

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Chapter 11 Case No. 08-11586 (KG) Jointly Administered Re: D.I. 12

Hearing Date: August 26, 2008 at 10:00 a.m. Objection Deadline: August 22, 2008

OBJECTION OF GREGORY GREENFIELD & ASSOCIATES, LTD., JONES LANG LASALLE AMERICAS, INC., DEVELOPERS DIVERSIFIED REALTY CORP., AND WEINGARTEN REALTY INVESTORS TO THE DEBTORS MOTION FOR INTERIM AND FINAL ORDERS (A) AUTHORIZING DEBTORS TO OBTAIN POSTPETITION FINANCING AND GRANT SECURITY INTERESTS AND SUPERPRIORITY ADMINISTRATIVE EXPENSE STATUS; (B) MODIFYING THE AUTOMATIC STAY; (C) AUTHORIZING DEBTORS TO ENTER INTO AGREEMENTS WITH WACHOVIA CAPITAL FINANCE CORPORATION; (D) AUTHORIZING DEBTORS TO USE COLLATERAL SUBJECT TO LIENS AND SECURITY INTERESTS; AND (E) SCHEDULING INTERIM AND FINAL HEARINGS Gregory Greenfield & Associates, Ltd., Jones Lang LaSalle Americas, Inc., Developers Diversified Realty Corp., and Weingarten Realty Investors (collectively, the Landlords), by and through their attorneys, Kelley Drye & Warren LLP, hereby object (the Objection) to the motion of the above-captioned debtors Mervyns Holdings, LLC, et. al. (collectively, the Debtors) seeking entry of interim and final orders authorizing the Debtors to obtain postpetition financing and related relief. In support of the Objection, the Landlords respectfully state as follows: PRELIMINARY STATEMENT 1. The Landlords object to the entry of an order that would grant the

Debtors postpetition lenders (the DIP Lenders) liens directly on the Landlords Leases unless

The Debtors in these cases, along with the last four digits of their federal tax identification numbers, are Mervyns Holdings, LLC (7931), Mervyns LLC (4456), and Mervyns Brands, LLC (8850).

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those Leases explicitly allow such liens. If the Landlords Leases are silent on the issue of liens on leases, or the Leases explicitly disallow liens directly on the Leases, the Court should deny the Debtors request to grant liens directly on such leases and should allow liens only on the proceeds of such Leases. 2. The Debtors are attempting to nullify provisions in the Leases that prevent

liens directly on the Leases, and, in so doing, are attempting to avoid the protections of Section 365 of the Bankruptcy Code given to landlords when a lease is assigned. In the event of a default by the Debtors, liens directly on leases would allow the DIP Lenders to foreclose on those liens and step directly into the shoes of the Landlord, effecting a de facto assignment of the Lease without compliance with Section 365 of the Bankruptcy Code. The Motion contains no statutory authority or case law authorizing the Court to nullify any such provisions in the leases in connection with a postpetition financing motion or to avoid the assignment provisions of Section 365 of the Bankruptcy Code nor do the Landlords believe that such authority exists. Unless the Landlords have clearly agreed in writing to allow liens directly on the Leases, the DIP Lenders should receive liens only on the proceeds of the Debtors Leases. 3. The Landlords also object to the entry of an order that would grant the DIP

Lenders the unfettered right to use and occupy the Leased Premises (defined below) with minimal or no notice to the Landlords, no further order of the Court, or any limitation on the duration or scope of the DIP Lenders use and occupancy rights. The DIP Lenders should not be allowed to enter the leased premises to access their collateral unless (i) they already possess such rights under applicable non-bankruptcy law, (ii) they obtain the Landlords written consent, or (iii) they file another motion on appropriate notice to the Landlords and obtain a further order of the Court authorizing such collateral access.

BACKGROUND 4. On July 29, 2008 (the Petition Date), the Debtors filed voluntary

petitions for relief under chapter 11 of the Bankruptcy Code with this Court. 5. The Debtors remain in possession of their properties and continue to

manage their businesses as debtors-in-possession pursuant to Sections 1107 and 1108 of the Bankruptcy Code. No trustee, examiner or official committee of unsecured creditors has been appointed in the Debtors cases. THE LEASES 6. The Landlords are the owners or managing agents for the owners of

numerous shopping centers located throughout the United States. The Debtors lease retail space from the Landlords at the Debtors stores listed on Exhibit A hereto (collectively, the Leased Premises) pursuant to separate written lease agreements for each of the Leased Premises (collectively, the Leases). 7. All of the Leased Premises are located in shopping centers as that term is

used in Section 365(b)(3) of the Bankruptcy Code. See In re Joshua Slocum, Ltd., 922 F.2d 1081 (3d Cir. 1990). 8. Shopping center leases typically prohibit the tenants from granting liens

on their leases. Such restrictions on liens are included for good reason: the granting of liens on the leases will usually put the Landlords in default under the terms of their respective mortgages and loans with their respective lenders. Certain of the Landlords Leases are silent on the issue of liens being placed directly on them, or contain provisions prohibiting such liens and making clear that the Tenant is obligated to keep the leased premises free from any liens based on obligations incurred by the Tenant.

THE DIP FINANCING MOTION AND INTERIM ORDER 9. At the first day hearing held July 30, 2008, the Debtors requested

interim approval of the Motion. After argument from the Debtors, DIP Lenders, and various landlords, the Court granted the Motion in part, but denied the Debtors and DIP Lenders request for liens directly on the Debtors leases, unless such leases explicitly allowed liens to be placed directly on them. The Court made clear that if a lease explicitly disallowed direct liens, or was silent on the issue of liens, that no direct liens on the leases would be granted to the DIP Lenders. Instead, the DIP Lenders received liens only on the proceeds of such leases. 10. Since entry of the Interim Order, the Debtors and DIP Lenders have

provided no explanation as to why liens on the proceeds of the Debtors Leases are insufficient to adequately protect the DIP Lenders. ARGUMENT A. There Is No Authority to Render any Provisions in the Leases Unenforceable in Connection with Post-Petition Financing 11. The Interim Order, if approved as a final order, would nullify provisions in

the Leases that would otherwise prevent the Debtors from granting liens on their leasehold interests. See Interim Order Section 2.1.2 at 16-17. Further, in the event of a default, the Interim Order could effect a de facto assignment of the Leases to the DIP Lenders, with the DIP Lenders becoming the tenants under the Leases by foreclosing on the leasehold liens without complying with the adequate assurance requirements of Section 365 of the Bankruptcy Code. See Interim Order Section 2.1.2 at 16-17, Section 3.2 at 26-27. 12. The Motion cites to no authority that would authorize the Court to render

any provision in the Leases unenforceable in the context of a Motion to approve postpetition financing. In fact, Section 365(d)(3) of the Bankruptcy Code specifically requires the Debtors to

comply with the terms of the Leases on and after the Petition Date.2 It is settled law that a trustee takes the contracts of the debtor subject to their terms and conditions. Thompson v. Texas Mexican Railway Co., 328 U.S. 134, 141 (1946). 13. While under limited circumstances, Section 365(f)(1) of the Bankruptcy

Code authorizes a bankruptcy court to invalidate certain lease provisions that attempt to prohibit, restrict or condition an assignment of a lease, Section 365(f)(1) only applies when a debtor is attempting to assign a lease pursuant to the terms of Section 365 of the Bankruptcy Code.3 Section 364 of the Bankruptcy Code, which governs the request for post-petition financing, contains no provision that is similar to Section 365(f)(1). 14. In this case, the Debtors have not requested relief under Section 365 of the

Bankruptcy Code, thus they may not invoke Section 365(f)(1) to invalidate the provisions of the Leases that prohibit the Debtors from granting liens on the Leases. Having failed to provide the Court with any legitimate statutory basis or other legal authority for the relief they are seeking, the Debtors request to invalidate these provisions must be denied. 15. In one of the few decisions directly addressing the issue of liens on leases,

the Honorable Robert S. Barliant, sitting by designation in this Court, upheld the objections of
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Section 365(d)(3) of the Bankruptcy Code provides, in relevant part: The trustee shall timely perform all of the obligations of the debtor, except those specified in Section 365(b)(2), arising from and after the order for relief under any unexpired lease of nonresidential real property, until such lease is assumed or rejected, notwithstanding Section 503(b)(1) if this title. 11 U.S.C. 365(d)(3).

Section 365(f)(1) of the Bankruptcy Code provides, in relevant part: Except as provided in subsection (c) of this section, notwithstanding a provision in an executory contract or unexpired lease of the debtor, or in applicable law, that prohibits, restricts, or conditions the assignment of such contract or lease, the trustee may assign such contract or lease under paragraph (2) of this subsection; . . . . 11 U.S.C. 365(f)(1).

landlords to an attempt by the debtors to place liens directly on the debtors leases for the benefit of the post-petition lenders. In re Fannie May Holdings, Inc. and Archibald Candy Corp. (Case No. 02-11719-RSB). In Fannie Mae, the DIP lenders sought a security interest in the debtors real property leases. After extensive argument, Judge Barliant concluded that the lenders lien would extend only to the proceeds from the sale of the leases and would not attach directly to the leases. In reaching this decision, Judge Barliant noted that the purported liens on leases pursuant to the DIP financing did not constitute an assignment of the leases and that, therefore, Section 365(f) of the Bankruptcy Code was not implicated. Id. at 24-51. 16. The Landlords do not object to granting the DIP Lenders a lien on the

proceeds of the sale of the Leases. A lien on the potential proceeds of the disposition of Debtors Leases more than adequately protects the Lenders interests, while remaining consistent with the terms of the underlying Leases. The bonus value of the Leases has been recognized as property of the bankruptcy estate, see, e.g., In re Ernst Home Center, Inc., 209 B.R. 974, 985986 (Bankr. W.D. Wash. 1997), and a security interest in that bonus value, in the form of a lien on the proceeds of the disposition of Leases, strikes a balance between the Lenders economic interests, the Debtors need for financing, and the Landlords rights under the Leases and the Bankruptcy Code. 17. Again, neither the Debtors nor the DIP Lenders have explained why liens

on the proceeds of the Leases do not adequately protect the DIP Lenders, or what additional benefit, other than avoiding the assignment protections provided to the Landlords under Section 365 of the Bankruptcy Code, the DIP Lenders receive from liens directly on the Leases.

B.

The DIP Lenders Right to Enter, Use and Occupy the Leased Premises In the Event of Default Must be on Notice to the Landlords and Subject to Further Order of the Court 18. The Landlords object to the entry of an order that would authorize the DIP

Lenders to use and occupy the Leased Premises in the event that the Debtors default under the terms of the various DIP financing agreements collateral unless (i) they already possess such rights under applicable non-bankruptcy law, (ii) they obtain the Landlords written consent, or (iii) they file another motion on appropriate notice to the Landlords and obtain a further order of the Court authorizing such collateral access. 19. Pursuant to section 3.4 of the Interim Order, upon an event of default and

on five business days notice to the Debtors, the DIP Lenders have relief from the automatic stay to the extent necessary to permit the Agent and the DIP Lenders to exercise, any appointed committees and the US Trustee, all rights and remedies provided for in the DIP Documents. Interim Order Section 3.4 at 27-28. 20. The Interim Order, if approved as a final order, would effect a de facto

assignment of the Lease to the DIP Lenders/Agent, providing that the Agent on behalf of the DIP Lenders shall be entitled to take any action and exercise all rights and remedies provided to it by this Interim Order, the Financing Agreements or applicable law as Agent may deem appropriate in its sole discretion to, among other things, proceed against and realize upon the Collateral or any other assets or properties of Debtors Estates upon which Agent, for the benefit of itself and the other Lenders, has been or may hereafter be granted liens or security interests to obtain the full and indefeasible repayment of all Obligations. Interim Order Section 3.4 at 27-28. 21. The DIP Lenders do not have the right to use the Leased Premises to

liquidate their collateral without complying with all of the Debtors obligations under the Leases

and all of the requirements of Section 365 of the Bankruptcy Code. Not surprisingly, the Debtors have provided no authority to support such a request. Accordingly, the final order must prohibit the DIP Lenders from entering and using the Leased Premises collateral unless (i) they already possess such rights under applicable non-bankruptcy law, (ii) they obtain the Landlords written consent, or (iii) they file another motion on appropriate notice to the Landlords and obtain a further order of the Court authorizing such collateral access. CONCLUSION WHEREFORE, the Landlords respectfully request that the Court enter an order (i) denying the Debtors request grant liens to the DIP Lenders directly on the Debtors Leases unless such leases explicitly allow such liens; (ii) limiting the DIP Lenders collateral access rights as set forth herein; and (iii) granting such other and further relief as this Court deems just and proper. Dated: August 20, 2008 New York, New York KELLEY DRYE & WARREN LLP By: /s/ Gilbert R. Saydah Jr. James S. Carr (JC 1603) Robert L. LeHane (RL 9422) Gilbert R. Saydah Jr. (DE Bar No. 4304) 101 Park Avenue New York, New York 10178 Tel: (212) 808-7800 Fax: (212) 808-7897 ATTORNEYS FOR GREGORY GREENFIELD & ASSOCIATES, LTD., JONES LANG LASALLE AMERICAS, INC., DEVELOPERS DIVERSIFIED REALTY CORP., AND WEINGARTEN REALTY INVESTORS

EXHIBIT A
Mall Name Diversified Developers County East S/C Westfield Solano Mall Silver Creek Plaza Foothills Ranch Grand Canyon Parkway Eagle Station Ingram Park Sierra Town Center Westfield Shopping Town Anaheim Hills Festival Ctr Mervyn's Valencia Santa Rosa Plaza College Grove S/C Loma Vista S/C West Covina S/C Deer Valley Northridge Plaza Garden Grove Center Southland Plaza Santa Cruz Plaza Shasta Center Mervyn's Plaza Chino Town Square Nellis Crossing Antioch, CA Fairfield, CA Phoenix, AZ Foothill Ranch, CA SW Las Vegas, NV Carson City, NV San Antonio, TX Reno, NV El Cajon, CA Anaheim, CA Valencia, CA Santa Rosa, CA San Diego, CA Las Vegas, NV West Covina, CA Phoenix, AZ Northridge, CA Garden Grove, CA San Diego, CA Tucson, AZ Redding, CA Chandler, AZ Chino, CA Las Vegas, NV Location

Mall Name Sierra Vista Mall Town Center West Ukiah Madera Superstition Springs Burbank Town Center North Fullerton Arbor Faire S/C Porterville Marketplace Mission Plaza Antelope Valley Mall Sonora Crossroads Folsom Square Slatten Ranch S/C Jones Lang LaSalle, Inc. Serramonte Center Weingarten Realty Investors Jess Ranch Marketplace Las Tiendas Gregory Greenfield Santa Fe Place South Park Mall

Location Clovis, CA Santa Maria, CA Ukiah, CA Madera, CA Mesa, AZ Burbank, CA North Fullerton, CA Tulare, CA Porterville, CA Lompac, CA Palmdale, CA Sonora, CA Folsom, CA Slatten Ranch, CA

Daly City, CA

Apple Valley, CA McAllen, TX

Santa Fe, NM San Antonio, TX

CERTIFICATE OF SERVICE I, Sarah Kam, do hereby certify that I am not less than 18 years of age and that on the 20 day of August 2008, I caused a copy of the foregoing Objection of Gregory Greenfield & Associates, Ltd., Jones Lang LaSalle Americas, Inc., Developers Diversified Realty Corp., and Weingarten Realty Investors to the Debtors Motion for Interim and Final Orders (A) Authorizing Debtors to Obtain Postpetition Financing and Grant Security Interests and Superpriority Administrative Expense Status; (B) Modifying the Automatic Stay; (C) Authorizing Debtors to Enter Into Agreements with Wachovia Capital Finance Corporation; (D) Authorizing Debtors to Use Collateral Subject to Liens and Security Interests; and (E) Scheduling Interim and Final Hearings to be served upon the parties listed below in the manner indicated.
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VIA FAX Morgan, Lewis & Brockius, LLP 101 Park Avenue New York, NY 10178 Attn: Howard S. Beltzer, Esq. Fax: (212) 309-6001 Richards, Layton & Finger, P.A. One Rodney Square 920 North King Street Wilmington, DE 19801 Attn: Mark Collins, Esq. Fax: (302) 651-7701

Otterbourg, Steindler, Houston & Rosen, P.C. 230 Park Avenue New York, NY 10169-0075 Attn: Jonathan N. Helfat, Esq. Daniel F. Fiorillo, Esq. Fax: (212) 682-6104

Kirkland & Ellis LLP 153 East 53rd Street New York, NY 10022 Attn: Paul M. Basta, Esq. Joshua A. Sussberg, Esq. Fax: (212) 446-4900

Office of the United States Trustee for the District of Delaware 844 King Street, Suite 2207, Lockbox 35 Wilmington, DE 19801 Attn: Jane Leamy, Esq. Fax: (302) 573-6497

/s/ Sarah Kam Sarah Kam