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

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Chapter 11 Case No. 08-11586 (KG)

Objection Deadline: October 22, 2008 at 4:00 p.m. Hearing Date: October 23, 2008 at 1:30 p.m.

UNITED STATES TRUSTEES OBJECTION TO THE MOTION OF THE DEBTORS 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 In support of her objection (the Objection) to the Motion of the Debtors 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), Roberta A. DeAngelis, the Acting United States Trustee for Region 3 (U.S. Trustee), by and through her undersigned counsel, states as follows: 1. 2. This Court has jurisdiction to hear this Objection. Pursuant to 28 U.S.C. 586, the UST is charged with the administrative oversight

of cases commenced pursuant to chapter 11 of title 11 of the United States Code (the Bankruptcy Code). This duty is part of the USTs overarching responsibility to enforce the bankruptcy laws as written by Congress and interpreted by the courts. See United States Trustee v. Columbia Gas Sys., Inc. (In re Columbia Gas Sys., Inc.), 33 F.3d 294, 295-96 (3d Cir. 1994) (noting that UST has public interest standing under 11 U.S.C. 307, which goes beyond mere pecuniary interest); Morgenstern v. Revco D.S., Inc. (In re Revco D.S., Inc.), 898 F.2d 498, 500 (6th Cir. 1990)

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(describing the UST as a watchdog). 3. Response. Background 4. On July 29, 2008 (the Petition Date), each of the Debtors1 filed a voluntary petition Pursuant to 11 U.S.C. 307, the UST has standing to be heard with regard to this

for relief under Chapter 11 of the Bankruptcy Code. 5. 6. On August 7, 2008, the UST appointed a statutory committee of unsecured creditors. 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. The Motion 7. The Debtors filed the Motion after the close of business on Friday, October 17, 2008,

along with a Motion to Shorten Notice of Debtors Sale Procedures and Sale Motion. On Monday, October 20, 2008, the Court entered an order scheduling (i) the hearing on the sales procedures portion of the Motion for October 23, 2008 and (ii) the hearing on the sale portion of the Motion for October 30, 2008. In the Motion, the Debtors seek approval of bidding procedures for the selection of the successful bidder who will serve as the Debtors agent in conducting the store closing sales. 8. The U.S. Trustee objects to the shortened notice that has been provided with respect

to the Motion, which has likely resulted in most parties receiving less than three business days notice of the sales procedures hearing. The U.S. Trustee also objects to the Debtors proposed sale procedures to the extent that the Debtors seek approval of a Break-Up Fee and Expense Reimbursement for a stalking horse bidder prior to a stalking horse bidder being identified. Finally,
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All capitalized terms not defined herein shall have the meaning ascribed to them in the Motion.

the U.S. Trustee requests that the proposed form of order be revised to include the requirements set forth in Local Rule 6004-1 (c)(ii) (A)-(D). Argument Inadequate Notice 9. The U.S. Trustee objects to the Motion to the extent that the time table set forth in

the Motion denies parties in interest an opportunity to effectively participate in the proposed sale process. Although the Debtors indicated that they have served all parties required to be served pursuant to Bankruptcy Rule 2002, given the timing of filing and service and assuming that such parties had access to the ECF system or that the Motion was served via hand delivery or overnight mail, it is likely that most parties were given less than three business days notice of the hearing and two business days notice of the objection deadline. Further, they will have had only 10 days notice of the sale hearing. At this juncture, it is doubtful that all interested parties have had sufficient time or information to evaluate the Debtors proposed procedures for the disposition of the Remaining Stores. 10. The aggressive schedule proposed limits the opportunity for notice, comment and

participation in any meaningful manner in the sale by parties in interest and may result in the approval of procedures related to the GOB sales without meaningful comment by all interested parties. Although the Debtors have indicated in the Motion that they believe the greatest profit can be realized if the sales are conducted from early November through the end of December, it is not clear why at least an additional week of notice could not have been provided, while still meeting the expedited sale schedule proposed by the Debtors. 11. Due process requires that notice be reasonably calculated, under all circumstances, 3

to apprise interested parties of the pendency of an action. Folger Adam Security v. DeMatteis/MacGregor, 209 F.3d 252 (3d Cir. 2000). Accordingly, the U.S. Trustee objects to the Debtors proposed sale process as it completely fails to allow meaningful participation in the sale process by all interested parties. 12. Section 363(e) reserves for bankruptcy courts the discretion to condition the time,

place and manner of GOB sales, thereby providing adequate safeguards to protect shopping center landlords and their other tenants, while allowing the debtor-in-possession to fulfill its fiduciary obligations. In re Ames Department Stores, Inc., 136 B.R. 357, 359 (Bankr. S.D.N.Y. 1992). Thus, the Court must balance the alleged exigent circumstances with the rights of all of the various parties to have adequate notice of the process and to be adequately involved in the process. Break Up Fee and Expense Reimbursement Provisions 13. The Debtors seek authority to provide to the Stalking Horse Bidder a Break-Up

Fee not to exceed 3% of its bid, plus Expense Reimbursement. Together, such protections shall not exceed $2 million. 14. As no stalking horse has been identified, the U.S. Trustee objects to the approval

of any break up fee in these circumstances. No break up fee should be awarded, if at all, until a after a sale has been consummated, all interested parties are given notice and an opportunity to be heard, and the Court has determined that the fee was an actual and necessary cost and expense of preserving the estates. See Calpine Corp. v. OBrien Environmental Energy, Inc. (In re OBrien Environmental Energy, Inc.), 181 F.3d 527 (3d Cir. 1999). In OBrien, the Third Circuit Court of Appeals stated that . . . the allowability of break-up fees, like that of other administrative 4

expenses, depends upon the requesting partys ability to show that the fees were actually necessary to preserve the value of the estate. OBrien, 181 F. 3d 527, 535 (3d Cir. 1999) (emphasis added). The emphasized text suggests that the review of necessity to preserve the value of the estate is backward-looking, not forward-looking, and necessarily takes place after a sale has been consummated. 15. Accordingly, as the Stalking Horse Bidder has not yet been identified and no

information has been disclosed regarding the value of the transaction, the Break Up Fee is not warranted. Break up fees are ordinarily predicated on the stalking horse having somehow placed the estates property in a sales configuration mode to attract other bidders to the auction, served as a catalyst to attract additional bids, or in some other way served to preserve or enhance the value of the estates. As no Stalking Horse Bidder has been identified such predicates are lacking here and the Debtors request to offer a prospective breakup fee should be denied. Local Rule Requirements 16. The proposed order attached to the Motion does not contain the language that Local

Rule 6004-1 requires in a sales procedures order. Specifically, the proposed order should be revised to add the language set forth at Local Rule 6004-1 (c)(ii) (B)-(D): (B) each bidder participating at the auction will be required to confirm that it has not engaged in any collusion with respect to the bidding or the sale; (C) the auction be conducted openly and all creditors will be permitted to attend, and (D) the requirement that bidding at the auction will be transcribed or videotaped. The Debtors have not sought, nor does there appear to be justification for waiver of these requirements in this case. WHEREFORE the UST requests that this Court issue an order denying the Motion as 5

written and/or granting such other relief as this Court deems appropriate, fair and just. Respectfully submitted, ROBERTA A. DeANGELIS ACTING UNITED STATES TRUSTEE By: /s/ Jane M. Leamy Jane M. Leamy Trial Attorney J. Caleb Boggs Federal Building 844 King Street, Suite 2207, Lockbox 35 Wilmington, DE 19801 (302) 573-6491 (302) 573-6497 (Fax)

Dated: October 22, 2008

IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE In re: MERVYNS HOLDINGS, LLC, et al. : : Chapter 11 : Case No. 08-11586 (KG) : : : CERTIFICATE OF SERVICE IT IS HEREBY CERTIFIED that on October 22, 2008, the United States Trustees Objection to the Motion of the Debtors 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, was caused to be served via facsimile to the following persons:
Daniel DeFranceschi Christopher Samis Richards Layton & Finger, P.A. One Rodney Square Wilmington, DE 19899 Fax: 302 - 651-7701 Jay R. Indyke Cathy Hershcopf Seth Van Aalten Cooley Goodward Kronish LLP 1114 Avenue of the Americas New York NY 10036-7798 Fax: (212) 479-6275

Debtors.

Howard Beltzer Wendy Walker Morgan Lewis & Bockius LLP 101 Park Avenue New York, NY 10178-0060 Fax: 212-309-6001

W illiam Bowden Amanda W infree Karen Skomorucha Ashby & Geddes P.A. 500 Delaware Avenue, 8 th Floor W ilmington, DE 19899 Fax: 302-654-2067

Jonathan Helfat Daniel Fiorillo Otterbourg, Steindler Houston & Rosen PC 230 Park Avenue New York, NY 10169-0075 Phone: 212-661-9100 Fax:212-682-6104

Frank Monaco Womble Carlyle 222 Delaware Avenue, Suite 1501 Wilmington, DE 19801 Phone:302-252-4340 Fax:302-661-7730

/s/ Jane M. Leamy Jane M. Leamy, Esquire Trial Attorney