UNITED STATES BANKRUPTCY COURT DISTRICT OF DELAWARE Chapter 11 In re: Case No.

08-11586 (KG) MERVYN'S HOLDINGS, LLC, et al., Jointly Administered Debtors.

Requested Sale Procedures Hearing Date: October 27, 2008 at 11:00 a.m. Requested Sale Procedures Objection Deadline: October 23, 2008 at 4:00 p.m. Lease Sale Hearing Date: November 10, 2008 at 1:00 p.m. Lease Sale Objection Deadline: November 7, 2008 at 4:00 p.m. Related Docket No.: 619

OBJECTION TO MOTION OF DEBTORS AND DEBTORS IN POSSESSION FOR ORDERS (I) ESTABLISHING AUCTION AND BID PROCEDURES FOR SALE OF DEBTORS' INTEREST IN 26 REAL PROPERTY LEASES FOR STORES CURRENTLY UNDERGOING STORE CLOSING SALES; (II) APPROVING AND AUTHORIZING SALE OF LEASES TO WINNING BIDDERS FREE AND CLEAR OF ALL LIENS, INTERESTS, CLAIMS AND ENCUMBRANCES; AND (III) GRANTING RELATED RELIEF The Fifth Third Leasing Company ("Fifth Third"), Key Equipment Finance Inc. ("Key") and IDB Leasing, Inc. ("IDB", and together with Fifth Third and Key, collectively, the "Objectors") hereby file their Objection to the Motion Of Debtors And Debtors In Possession For Orders (I) Establishing Auction And Bid Procedures For Sale of Debtors' Interest in 26 Real Property Leases For Stores Currently Undergoing Store Closing Sales; (II) Approving and Authorizing Sale of Leases To Winning Bidders Free And Clear Of All Liens, Interests, Claims And Encumbrances; And (III) Granting Related Relief (the "Sale Motion")1, and respectfully submit as follows:
1

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

0q/v(*8

0811586081024000000000002

"Q

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, Mervyn's 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.

The Leased Equipment can generally be described as point-of-sale equipment. 2

5.

On or about May 4, 2007, Wachovia Capital Finance Corporation (Western)

("Wachovia") entered into Subordination Agreements with each of the Objectors, whereby 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, Mervyn's 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".

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

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

(a) establishing the terms and conditions for conducting an auction and bidding

procedures relating to selling the Debtors' interests in 26 of their unexpired non-residential real property leases, which are presently the subject of the stores closing sales (the "GOB Locations") and (b) approving certain bid protections to a Stalking Horse Bidder, if applicable, (c) fixing the manner and extent of notice, and (d) scheduling a Lease Sale Hearing to consider those assignment or lease terminations agreements as a result of the Auction. Attached as Exhibit B to the Sale Motion is the list of the Schedule of Leases for the currently ongoing GOB sales. 13. 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 20. 14. 15. The Objectors' Collateral is located at various of the GOB Locations. For the reasons set forth below, the Objectors object to the Sale Motion with

respect to the Objectors' Collateral at the GOB Locations. OBJECTION 16. follows: "Unless otherwise indicated by the Debtors at the Auction, sales of the Leases shall not include personal property, inventory, fixtures, Specifically, the Objectors object to one of the Terms of Sales that provides as

trade fixtures, or other furnishings or equipment located in the premises whether or not owned by the Debtors. The Debtors reserve the right either to sell such personal property to the Winning Bidder or to any other party, to abandon any or all of the personal property located at each of the leased premises, or to make such other arrangements as may be appropriate. See, Sale Motion at 20. 17. Foremost, the Objectors object to the sale of any of their collateral without their

consent or without satisfying 363(f) of the Bankruptcy Code. Specifically, the Sale Motion gives the Debtors absolute discretion at the Auction to sell personal property, which could include the Objectors' Collateral, presumably without any further notice to the Objectors. Accordingly, the Objectors object to the Sale Motion. Not only can the Debtors not sell any of the Objectors Collateral without the Objectors consent, they certainly cannot do so without any further notice to them. (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 Mervyn's. 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) Mervyn's granted a security interest in the

Leased Equipment to the Objectors, and (ii) the respective Objectors have properly perfected 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. 25. 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. Fifth, there is no legal or equitable justification for accepting a money satisfaction

of less than the amount owed to the Objectors. 28. Finally, 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. 29. 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 GOB Locations in the Auction or otherwise, until the Debtors can establish one of the requirements of 363(f) of the Bankruptcy Code or the Objectors consent to such sale.

CONCLUSION WHEREFORE, the Objectors respectfully request that any Order relating to Sale Motion provide that the Objectors' Collateral may not be sold without the express written consent of the Objectors and for such other and further relief as the Court deems proper.

Dated: October 23, 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 jhuggett@margolisedelstein.com E-mail: -andAmish R. Doshi (NY-AD5996) (Admitted pro hac vice) DAY PITNEY LLP 7 Times Square New York, New York 10036 Telephone: (212) 297-5800 Facsimile: (212) 916-2940 E-mail: adoshi@daypitney.com Counsel to Fifth Third Leasing Company, Key Equipment Finance Inc. and IDB Leasing, Inc.