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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 Hearing Date: October 30, 2008 Sale Hearing Objection Deadline: (extended by agreement) Related Docket Nos. 620, 621

Debtors.

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OBJECTION 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 Objection (the 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 The purpose of this Objection is to ensure that the proposed Stalking Horse Agreement (as defined below), proposed form of agency agreement or any other 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 GE Program Agreement (as defined below), which has been previously assumed by the Debtors pursuant to

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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 credit card issued by GE Bank. GE Bank and the Debtors have commenced discussions and are working cooperatively to try to assure that GE Banks rights under the GE Program Agreement are not contravened, and if possible, to reach an orderly and consensual termination of the GE Program Agreement. GE Bank believes that it has reached a consensual agreement with the Debtors, however, to the extent the Committee opposes the consensual termination agreement, GE Bank files this Objection to the Sale Motion to preserve its rights under the Program Agreement and requests that the Court not approve the use of any Agency Agreement or Stalking Horse Agreement which is inconsistent with the GE Program Agreement. In support of this Objection, GE Bank respectfully represents as follows: JURISDICTION, VENUE AND STATUTORY BASIS 1. This court has jurisdiction over the subject matter of this Objection 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. RELEVANT BACKGROUND A. The Debtors Chapter 11 Cases 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

Counsel for the Debtors agreed to extend the time for the filing of this Objection until Wednesday, October 29, 2008.

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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 (the Committee). 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 August 26, 2008, this Court entered a final order (A) Authorizing

Debtors to Obtain Post-Petition Financing and Grant Security Interests and Superpriority Administrative Expense Status pursuant to 11 U.S.C. 105 and 364(c); (B) Modifying the Automatic Stay Pursuant to 11 U.S.C. 362; (C) Authorizing Debtors to Enter into Agreements With Wachovia Capital Finance Corporation (Western), In Its Capacity As Administrative And Collateral Agent For Itself And Certain Other Lenders; And (D) Authorizing Debtors to Use Collateral Subject to Liens and Security Interests Including Cash Collateral and Granting Adequate Protection In Respect Thereof (the Final DIP Order) [Docket No. 323]. The Final DIP Order grants valid and perfected first priority security interests and liens, superior to all other liens, claims or security interests that any creditor of the Debtors Estates may have to secure the prompt payment and performance of any and all Obligations (including, without

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limitation all Pre-Petition Obligations and Post-Petition Obligations) which, pursuant to the Existing Loan Agreement and Ratification Agreement, includes any and all pre-petition and post-petition obligations due and owing to GE Bank under the GE Program Agreement.2 See Final DIP Order, 2.1.1. B. The 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 GE Program Agreement)3 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 Account4 (each an Account, and collectively, the Accounts) could finance purchases of the Debtors goods and services at their various store locations. 7. The GE Program Agreement provides customers of the Debtors with what is

known as a private label credit 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 GE 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.

Therefore, GE Bank submits that any claims by any creditor of the Debtors Estates (except for the Senior Claims under the Final DIP Order) would be subordinate to GE Banks claims under the GE Program Agreement, including, any and all additional chargebacks, damages or other losses sustained by GE Bank under the GE Program Agreement. As such, GE Bank submits that the increase of chargeback claims of GE Bank from the continued use of the GE Program Agreement directly reduces the potential recovery of unsecured creditors.

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8.

On or about September 25, 2008, this Court entered an Order authorizing the

Debtors assumption of the GE Program Agreement pursuant to section 365 of the Bankruptcy Code. See Docket No. 532. Accordingly, all of the Debtors obligations and duties under the GE Program Agreement, including GE Banks termination rights, are binding upon the respective bankruptcy estates and all monetary obligations arising under the GE Program Agreement, or related thereto, are valid, post-petition administrative expenses under section 503 of the Bankruptcy Code. In addition, pursuant to the terms of the GE 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 GE Program Agreement. C. The Sale Motion and Bid Procedures Hearing 9. On or about October 17, 2008, the Debtors served GE Bank with the Sale 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 Sale Motion as Exhibit D 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 Sale Motion. 10. On October 21, 2008, in view of the Debtors determination and undertaking to

liquidate all or substantially all of their assets, GE Bank provided written notice to the Debtors of its intention to seek an orderly termination of the GE Program Agreement, and requested that the

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 Objection. All capitalized terms not defined herein shall have the meaning ascribed to them in the GE Program Agreement.

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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. 11. On October 22, 2008, GE Bank filed a limited response (the Limited Response)

to the Sale Motion. See Docket No. 642. GE Banks Limited Response stated, among other things, its contention that it would be improper and impermissible for either the Stalking Horse bidder, or any other bidder, to condition approval of the Sale Motion upon the approval of an Agency Agreement which would permit the continued use of the GE Banks private label credit card because of GE Banks rights of termination under the GE Program Agreement. GE Bank also sought to put all parties on notice of its termination rights under the GE Program Agreement, and that the Debtors and GE Bank were in discussions concerning GE Banks right to terminate the GE Program Agreement and the entry into a possible consensual termination. As noted, GE Bank believes that it has reached a consensual agreement with the Debtors to terminate the Program Agreement. 12. On October 27, 2008, this Court conducted a hearing on only the bidding

procedures portion of the Sale Motion. GE Bank appeared telephonically and again advised the Court, all potential bidders, and all interested parties, that it had filed a Limited Response, objecting only to the conduct of the Auction and any bid which was premised on the further use of the private label credit card or the continuation of the GE Program Agreement. At the time of the hearing, the Agency Agreement had not yet been executed by the Stalking Horse bidder, and was represented as being in the courtroom but only in blackline. Moreover, at the hearing, Debtors counsel stated that among other things, that all bidders had been made aware of GE Banks position and that it had been factored into their bids.

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13.

Counsel for the Debtors further stated that GE Banks Limited Response was

essentially an objection to the sale, and not to the bidding procedures, and that only the bidding procedures were then before the Court. Debtors counsel further stated that GE Banks Limited Response would be heard and considered as an objection to the sale portion of the Sale Motion on October 30, 2008. GE Bank therefore incorporates by reference into this Objection, its prior Limited Response and would respectfully request that the Court take judicial notice of the contents and exhibits of such. Counsel for the Debtors separately approved an extension of time until October 29, 2008 for the filing of this specific Objection to the sale portion of the Sale Motion. 14. Counsel for the Committee thereafter stated on the record during the course of the

same hearing, that the Committee understood that GE Bank had given notice of termination but stated that in the Committees view such termination would not be effective for 60 days, and that the Committee would presumably be willing to proceed with the sale knowing that the use of the card would terminate in 60 days. Counsel for the Committee did not state which section of the GE Program Agreement she relied upon. As noted below, GE Bank has provided notice of its intention to terminate on at least two prior occasions, has renewed such notice as of October 28, and contends that the Debtors have waived the 60 day period. 15. On October 27, 2008, this Court entered an Order authorizing the Bidding

Procedures. However, at the time of the entry of the Order, the proposed Stalking Horse Agreement was not yet on file with the Court. 16. On October 29, 2008, the Debtors served GE Bank with a Notice of Stalking

Horse Selection and Filing of Stalking Horse Agreement which attached as Exhibit 1 an executed

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Agency Agreement by and between Mervyns Holdings, LLC and a joint venture comprised of Great American Group WF, LLC, Hudson Capital Partners, LLC, Tiger Capital Group, LLC and SB Capital Group, LLC (the Stalking Horse Agreement). See Docket No. 705. BASIS FOR OBJECTION 17. GE Bank hereby submits this Objection in order to further supplement its prior

Limited Response, and to respectfully request that the Court not approve any Sale Order which approves an Agency Agreement or Stalking Horse Agreement which permits continued use of the GE Bank private label credit card, violates the terms of the GE Program Agreement, is inconsistent with the termination rights of GE Bank, impairs the contract rights of GE Bank, or fails to provide GE Bank with adequate protection of its DIP liens and other rights. To the extent the Court rules that the Agent shall be allowed to augment merchandise with non-Mervyns merchandise, GE Bank requests the right to withhold reasonable sums of payment from the settlement of Charge Transaction Data under section 3.1 of the GE Program Agreement for reasonably anticipated additional chargebacks on account of the Agent selling non-Mervyns merchandise. A. The Proposed Stalking Horse Agreement Seeks to Permit Going Out of Business Sales (GOB Sales) Which Will Improperly Permit Use of GE Banks Private Label Credit Card. 18. As set forth above, the Debtors Sale Motion seeks entry of an order authorizing

the Debtors to enter into the Stalking Horse Agreement or other Agency Agreement which provides for the liquidation of all or substantially all of the Debtors merchandise, inventory and other assets by the successful bidder (the Agent). As set forth below, the Stalking Horse Agreement is in direct contravention of the GE Program Agreement, and gives rise to grounds for (a) termination of the GE Program Agreement; (b) GE Bank ceasing to permit use of the 8
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credit card; and/or (c) requiring that GE Bank be provided with additional collateral or adequate protection. 19. The Stalking Horse 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). 20. Section 7.3 of the Stalking Horse Agreement, provides, as follows with respect to

the use of credit cards: The Agent shall have the right to use Merchants credit card facilities (including Merchants credit card terminals and processor(s), credit card processor coding. . . The Agent shall comply with the terms of the private label credit card agreement with GE Money Bank, including, without limitation, the requirement that only the Merchants employees can operate the POS systems. 21. It would appear from Section 7.3 of the Stalking Horse Agreement that the Agent

recognizes that it must comply with all of the terms of the private label credit card agreement with GE Bank, including, without limitation, the requirement that only the Merchants employees can operate the POS systems. (emphasis added). 22. However, at least two sections of the Stalking Horse 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 GE Banks private label credit card). 23. First, although section 7.3 of the Stalking Horse Agreement provides that the

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Agent will comply with the requirement under the GE Program Agreement that only the Merchants employees can operate the point-of-sale terminals or to accept in-store Account payments, sections 9.1 and 9.2 do not prohibit the Agent from using its own employees in the conduct of the Sale. In fact, to the contrary, the Stalking Horse Agreement grants the Agent broad discretion to stop using any Retained Employee at any time during the Sale, and provides that the Agent may use the Merchants employees in the conduct of the Sale to the extent Agent deems expedient. These provisions seem inconsistent with the Agents recognition that it must comply with the requirement that only the Merchants employees can operate the point-of-sale terminals or to accept in-store Account payments. In addition, section 6.11 of the GE Program Agreement prohibits Mervyns from permitting any licensee, subtenant or third party operating in or from a Store Location to accept the Credit Cards for purchase by cardholders without first obtaining Banks prior written approval, which approval will not be unreasonably withheld. GE Bank has not provided consent to allow the proposed Agent to operate in Mervyns stores, and for the reasons set forth in more detail below, believes that such consent is not being unreasonably withheld. To the extent the Stalking Horse Agreement seeks to allow the Agent to operate in Mervyns stores and accept credit cards for purchases without the consent of GE Bank, the Stalking Horse Agreement would be in contravention of GE Banks rights under the Program Agreement and as such should not be approved in its current form. Indeed, this concept is consistent with the overall bargain and benefit of a private label credit card which establishes a relationship with a specific Retailer such as Mervyns and would not subject GE Bank to any other retailer, unlike a general purpose MasterCard or Visa card which is used by many merchants/retailers. 24. Second, although the Stalking Horse Agreement acknowledges that the Agent

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must comply with all of the terms of the private label credit card agreement with GE Bank, the Stalking Horse Agreement in Section 8.10 seeks to have this Court change the clear and unambiguous terms of the GE Program Agreement which were negotiated between the parties through arms length negotiations. Specifically, section 8.10 of the Stalking Horse Agreement provides that the Agent may supplement the Merchandise in the Stores with augmented goods, of like kind and quality, as is customarily sold in the Stores (the Augmented Goods). Section 8.10 goes on to provide that [b]ecause the Augmented Goods is of like kind and quality sold in the Stores, such Augmented Goods shall be deemed Mervyns merchandise under the agreements with GE Money Bank. The GE Program expressly provides that GE Bank has the right to cease extending credit to the Debtors customers (i.e., prohibit the use of the GE Bank private label credit cards) if non-Mervyns merchandise is sold in a liquidating store. Section 8.10 of the Stalking Horse Agreement clearly triggers GE Banks right to prohibit the use of the GE Bank private label credit cards. B. The Court Should Prohibit the Use of the GE Bank Private Label Credit Card Because the GOB Sales Will Use Augmented Merchandise Which is Contrary to the Terms of the GE Program Agreement.

25.

GE Bank respectfully requests that the Court not approve the Sale Motion to the

extent that the Agency Agreement or Stalking Horse Agreement contemplates or permits either the use of augmented merchandise or non-Mervyn employees. 26. The GE 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, among other things, the sale of merchandise being sold in the Liquidating Store is merchandise

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other than Mervyns merchandise or Mervyns permits non-Mervyns employees to operate point-of-sale terminals or to accept in-store Account payments. See GE Program Agreement 6.15(b), Fourth Amendment 1.1. 27. GE Bank was previously notified that the agent for the sale of the inventory from

the initial group of 26 liquidating stores had started to sell augmented merchandise. GE Bank thereafter notified the Debtors that it was exercising its right to prohibit further use of the private label card in conjunction with the GOB Sales held in conjunction with the 26 store closings which were the subject of an earlier motion. 28. Given that section 8.10 of the currently proposed Stalking Horse Agreement

expressly provides that the Agent intends to sell merchandise other than Mervyns merchandise, GE Bank believes and therefore alleges that the Agent intends to trigger GE Banks right to immediately and without notice, cease extending credit to customers (i.e., cease allowing the use of the Mervyns private label credit card). As noted, the GE Program Agreement expressly permits GE Bank to prohibit the use of the GE Bank private label credit card if non-Mervyns merchandise is being sold. The GE Program Agreement is not ambiguous, and this Court may rule as a matter of law that the GE Program Agreement expressly requires only Mervyns merchandise, and none other. The Sale Order cannot permit the use of GE Banks private label credit card in violation of the clear and unambiguous contract terms of the GE Program Agreement, and GE Bank respectfully submits that this court should not supplant GE Banks rights as intended by the parties and reflected in the clear and unambiguous terms of the GE Program Agreement. See Terwilliger v. Terwilliger, 206 F.3d 240, 245 (2d Cir. 2000) (matters extrinsic to the agreement may not be considered when the intent of the parties can fairly be gleaned from the face of the instrument and thus, [a] court may neither rewrite, under the guise 12
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of interpretation, a term of the contract when the term is clear and unambiguous, nor redraft a contract to accord with its instinct for the dispensation of equity upon the facts of a given case) (citations omitted); E.I. du Pont de Nemour & Co. v. Allstate Ins. Co., 693 A.2d 1059, 1061 (Del. 1997) ([e]xtrinsic evidence is not used to interpret contract language where language is plain and clear on its face). 29. In addition, Section 6.15(b) of the GE Program Agreement is properly viewed as

a condition precedent to the use of the card, and as such, is to be strictly construed, and does not require any showing of a material breach, or the like. See Midwest Builder Distrib., Inc. v. Lord and Essex, Inc., 383 Ill. App. 3d 645, 891 (2007) ([w]hen contracts contain express conditions precedent, strict compliance with such conditions is required.)(citing Regency Commercial Assoc., LLC v. Lopax, Inc., 373 Ill. App. 3d 270, 282 (2007). That is, Mervyns right to use the card was conditioned on it only selling its own Merchandise and not that of others. Because it is undisputed that the Debtors and/or the Agent do not intend to comply with this condition, the use of the card is no longer permissible. 30. Any assertion by the Committee that the sale of merchandise of like kind and

quality is not a violation should be disregarded. If like kind could be used, then the contract requirement would have no meaning. Under the Committees view, it would be permissible for Mervyns to replace 100% of the inventory with goods and merchandise that came from other non-Mervyns stores, and hence to utterly defeat the plain meaning of the GE Program Agreement. 31. Moreover, the augmentation or bringing in of non-retailer goods is the subject

of local and state regulation, and in some instances, is regarded as an unfair trade practice. For

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example, in California, if a home furnishings store conducts a going out of business sale, it is permitted to only use merchandise which was on the premises or in transit the day before the sale was announced. See Cal. Code Regs. tit. 4, 1312 (2008). Likewise in New York, GOB Sales are highly regulated, and goods may not be brought in from other stores unless they are segregated from the regular goods and not commingled. See N.Y. General Business Law 586 (McKinney 1996). Other states have likewise held that a seller in a going out of business sale can not order additional goods for the sale. Jonathan Sheldon and Carolyn Carter, Unfair and Deceptive Acts and Practices, 6th ed., 2004, 4.6.3.2.5 The Debtors may have obtained an Order from this Court which permits certain GOB Sales to occur despite inconsistent provisions in state or local laws. See Docket No. 327 (Order Approving Agency Agreement, Store Closing Sales and Related Relief for initial 26 store closures). However, the Debtors did not, and cannot, obtain an order that permits a sale to be conducted in contravention of an assumed contract right, which is binding on the Debtors and their estates. 32. In addition, GE Bank is entitled to protect itself from claims and customer

disputes that arise from potentially unfair business practices, even if otherwise lawful, but which generate claims and refusals to make payment for goods obtained from Mervyns or its agent. Indeed, the purpose of the Mervyns only clause is to provide a safeguard against customer disputes and other losses resulting from non-Mervyns merchandise which GE Bank has not assessed or incorporated into its credit risk strategies, in contrast to Mervyns merchandise which it has analyzed and incorporated into its credit risk strategies. GE Bank expressly protected itself
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The authors cite as authority the following: Commonwealth v. Mirror World, Inc., Clearinghouse No. 26,022 (Pa. C.P. Phil City 1978); Hawaii Rules Relating to Unfair or Deceptive Practices in Advertising, 16 Haw. Admin. Code 303-4, Unfair or Deceptive Practices in Advertising: Idaho Consumer Protection Regulations, Idaho Admin. Code 04.02.01.090-091; Ohio Admin Code 1094-3-17. The authors also point out that in two cases the courts found that it was not deceptive to add new merchandise when actually going out of business. Id. This Court is

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from this unknown risk by contract - through the non-Mervyns merchandise clause - and should not be required to take on higher chargeback and other loss risks without its consent or adequate protection. 33. Notwithstanding the fact that the Agent intends to sell merchandise as is and on

a final basis, the risks of disputes, losses and/or chargebacks at GOB Sales is exponentially increased for several reasons, including: (i) customers will nonetheless seek returns, demand repayment and/or determine not to pay charges for defective or lower quality goods and (ii) customers of bankrupt entities and/or entities holding GOB Sales are more likely not to pay their credit card charges specifically because the entity is in bankruptcy and they will no longer have the utility of the card. In addition, GE Bank suffer additional losses because it will not have appropriate screens to prevent fraud at liquidating stores and the likeliness of fraudulent acts by employees, agents and/or customers tend to increase at liquidating stores. Further, GE Bank should not be required to take on larger exposure to losses from higher chargbacks due to higher sales with high rates of loss given the loss of utility of the credit card. 34. Moreover, Mervyns current return policy provides its customers with up to 90

days to return or exchange goods. In the event, as is proposed, that the Debtors do not accept returns or exchange goods after the initial 14 days for merchandise sold prior to the start of the liquidation and GOB Sales, GE Bank will be exposed to increased chargebacks for any goods purchased with the GE Bank private label credit card for the remainder of the 90 day return policy. Given the Debtors liquidation and GOB Sales and the failure to honor Mervyns 90 day return policy, GE Banks risk of loss will be greater because a greater percentage of returns are

not being asked to rule on whether the various state or local laws would prohibit this, but only that the issue is the subject of regulation and has been found to be unlawful, questionable, or subject, at least, to regulation.

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likely to become chargebacks because the merchandise will not be able to be exchanged. 35. Additionally, the augmentation of merchandise with higher priced goods exposes

GE Bank to a greater risk of exposure to more expensive chargebacks and higher frequency of challenge and/or failure to pay because customers are more likely to challenge or not pay higher priced items that are defective or of lower quality regardless if sold as is or on a final basis. GE Bank has also conducted an informal survey of some of the Debtors stores which are operating under the previously approved agency agreement for the initial 26 liquidating stores. As an example, in the Livermore, California store the liquidators were selling framed pictures ranging in price from $299 to $719, and ranging in size from 4 feet by 3 feet to 1 foot by 1.5 feet, respectively. In addition, the Livermore store was selling carpets ranging in price from $325 to $3,500. No similar items were ever previously sold by Mervyns and such items cannot possibly be viewed as of like kind let alone like quality. Mervyns does not customarily sell such high priced goods and GE Bank should not be exposed to such higher chargebacks and higher loss rates when it never contemplated doing so and expressly protected itself from doing so through the terms it negotiated with the Debtors in the GE Program Agreement. 36. Furthermore, continued use of the GE Bank private label credit card is also

detrimental to the bankruptcy estate and the recovery available to the Debtors unsecured creditors. The continued use of the GE Bank private label credit card, especially during liquidation and GOB Sales, significantly increases chargebacks and other losses to the Debtors estates and their creditors because each chargeback is an administrative and secured claim against the Debtors. Chargebacks occur when retail customers, among other things, 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 16
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Bank provide them a credit on their Account. When chargebacks occur, GE Bank must look to the Debtors 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 increased levels of chargebacks is substantial and likely to create an unwarranted loss for the Debtors estate, its creditors and/or GE Bank. C. The Court Should Not Approve the Sale Motion insofar as it permits Use of the GE Credit Cards Because GE Bank is Entitled to Terminate the GE Program Agreement for Breach And Notice has been waived or should be shortened. 37. In addition to its right to terminate the use of the private label credit card, GE

Bank respectfully requests that the Court not approve the Sale Motion on the separate grounds that GE Bank is entitled to exercise its rights to terminate the GE Program Agreement, and to seek any monetary damages as an administrative claim for such breach. 38. The GE Program Agreement provides GE Bank with rights of termination upon

the occurrence of certain events, including if there is a material adverse change (a MAC) in the operations, financial condition, or business of a party. . .6 In full, this provision states as follows: (f) If a material adverse change has occurred in the operations, financial condition or business of a party. . . which the other party has determined in good faith has had a material adverse effect, or is reasonably likely to have a material adverse effect, on such other party, the Accounts or the ongoing operation or continued viability of the Program, then the other party shall have the right to
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In addition, termination is permitted (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 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 GE Program Agreement 9.2.

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terminate this Agreement. The parties agree that store closing and sales in a manner consistent with maintaining the retail operation of Retailer shall not give rise to the right of Bank to terminate this Agreement pursuant to this paragraph (f). In order to be effective, the notice of termination must be delivered within ninety (90) days of other party making such determination. This Agreement will terminate sixty (60) days after delivery of such notice of termination.(emphasis added) 39. The GE Program Agreements plain language demonstrates that only store closing

which are consistent with maintaining the retail operation are not material adverse changes; conversely, where, as here, the retail operation will not be maintained, the plain language of the MAC clause permits termination. If a complete liquidation of a business is not a material adverse change, then neither would any lesser showing satisfy the standard, and in essence, the clause would have no meaning. No party can seriously contend that a complete liquidation of a counter-partys business operations is not a material change, nor that the effect is adverse. The case law establishes that events far short of full liquidation have been seen as material adverse changes which justify termination.7 D. This Court Should Rule that the Notice Period of 60 days Has been Waived or Altered by the Failure to Provide Notice of the Store Closings 40.
7

GE Bank understands that the Committee contends that termination under the

While there is no bright-line test for determining if a MAC has occurred in a particular transaction, in the context of mergers and acquisitions, courts have held that [m]ateriality. . .is an objective cross-matching of the significance of a fact to the essence of the transaction in question, and requires a showing of the potentially adverse effect of the former on the latter. See, e.g., Northern Heel Corp. v. Comp. Indus. Inc., 851 F.2d 456, 463 (1st Cir., 1988); see also Allegheny Energy Inc. v. DQE Inc., 74 F. Supp. 2d 482 (W.D. Pa. 1999) ([I]n addition to the common and plain meaning of [material], one must consider the event in light of the size and nature of the transaction and the nature of the parties business). Specifically, courts have held that a precipitous drop in a companys revenues or profits is material. See, e.g., Pan Am Corp. v. Delta Air Lines Inc., 175 B.R. 438, 492-493 (S.D.N.Y. 1994) (a company suffered a revenue shortfall of $23 million in one month and continued to be plagued by ticket sales problems in subsequent months). In addition, at least one court has held that an undisclosed, openended liability is also material. Coastal Power Intern., Ltd. v. Transcon. Capital Corp., 10 F.Supp.2d 345 (S.D.N.Y. 1998), a case involving the sale of a floating power plant in the Dominican Republic, the target knew, and failed to disclose, it was likely that the plants windstorm insurance would be canceled unless certain, unspecified modifications to the plant were made. The court found this information to be material.

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MAC clause does not become effective until 60 days after notice. However, this Court should rule that the Debtors have waived any right to a 60 day notice, or that such notice period has been substantially reduced due to the failure to give GE Bank advance notice of the closing of its stores as bargained for and expressly required under the Program Agreement. 41. GE Bank specifically bargained for a right to received significant advance

indication from the Debtors as to when any large scale store liquidation would occur. Section 6.15(a) of the GE Program Agreement, as amended by section 1.3 of the Fourth Amendment provides as follows: Retailer shall provide to Bank at least 30 days prior written notice of any public announcement of any closure or sale of any Store Location after the date hereof. . . Retailer also shall use commercially reasonable efforts to give Bank at least 30 days prior written notice of the date on which any liquidation or going out of business sale will actually commence (Liquidation Date) with respect to a Store Location (Liquidating Store) that cease to conduct the Retailers business. 42. The Debtors failed to provide the notice required by this provision, nor any other

reasonable notice. Mervyns failure to provide 30 days notice prior to publicly announcing store closures or prior to commencing closures at its Remaining Stores is a separate breach of the GE Program Agreement, for which no notice is required, and which, on its own, would justify immediate termination. 43. The failure to give the required 30 day notice 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

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from the credit card)8 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 GE Program Agreement 6.15(a), Fourth Amendment 1.3. GE Bank contends that this failure would also justify termination. 44. Alternatively, the Court should rule that the notice and effective period have been

substantially reduced based on the failure to give timely notice. The public announcement of the GOB Sales was no later than October 17, 2008, when the Sale Motion was filed. Therefore, GE Bank was entitled to notice from the Debtors on September 17, 2008. Had GE Bank been given prompt notice it could have issued its notice of a MAC breach on or about September 18, 2008. Accordingly, this Court should rule that the 60 day period, if applicable, should be measured from September 18, 2008. E. GE Bank is Entitled to Preserve Its Rights to Assert a Claim for Breach if the Court Permits the Use of the Private Label Card. 45. Alternatively, GE Bank also submits and requests that the Court, should it rule

that the Stalking Horse Agreement may be entered into as is, despite this Objection, expressly reserve all rights of GE Bank to contend later, in an adversary proceeding or claim objection process, that the use of its private label credit card, and the breaches set forth herein, and others, constitute valid administrative claims, and/or secured claims under the Final DIP Order, and/or other claims as may be established under applicable law, and that no ruling on this highly expedited Sale Motion be deemed to be a substantive determination of GE Banks final rights. 46. In addition to the express contractual rights noted above, GE Bank is entitled to

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.

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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 GE Program Agreement 13.15 (all remedies are cumulative). This material failure of performance is evidenced by, among other things, the following material alterations in the bargained for performance of Mervyns: The complete liquidation of Mervyns by approximately January 1, 2009 so that all customers who seek to return defective or unsatisfactory goods after such date will almost certainly make a demand for a chargeback or credit against GE Bank. The use of non-Mervyns merchandise, which may be irregular or defective or returned for other reasons substantially increases chargebacks. Limiting customers right to return goods to only 14 days rather than Mervyns customary 90 day return policy increases chargebacks. Mervyns ceasing to accept reward certificates and maintain its rewards program. Mervyns failure to maintain its retailer business causing GE Bank significant loss of program volume and other revenues.

47.

GE Bank submits that any such determination on the shortened notice and

procedures herein would be a serious violation of its due process rights. LEGAL ARGUMENT A. The Agency Agreement Cannot give the agent Greater Rights than Those of the Debtors under the GE Program Agreement. 48. This Court should not approve a Sale Motion which permits or authorizes a

Debtor or its agent to breach an assumed contract between the debtor and its counterparty. Indeed, section 363 does not authorize any adjustment to a contract for such purposes without the counterparties consent and adequate protection.

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49.

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). 50. 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.). 51. In addition, GE Bank is entitled to adequate protection should the Court permit a

sale free and clear of its lien rights, or otherwise interfere with its contractual rights. When a debtor uses or sells property in which a entity has an interest, it must provide adequate protection for such entitys interest. 11 U.S.C. 363(e); see, e.g., In re Archibald Allan Assocs., 2004 Bankr. LEXIS 266 (Bankr. E.D. Pa. Feb. 20, 2004). What constitutes adequate protection is decided on a case-by-case basis. See In re Mosello, 195 B.R. 277, 289 (Bankr. S.D.N.Y. 1996); In re Realty Southwest Assocs., 140 B.R. 360 (Bankr. S.D.N.Y. 1992). By adequate protection the Bankruptcy Code seeks to shield a secured creditor from the diminution in the value of its interests in the particular collateral during the period of use. See In re 495 Central Park Avenue Corp., 136 B.R. 626, 631 (Bankr. S.D.N.Y. 1992).

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52.

As a part of the contemplated liquidation and GOB Sales, the Debtors seek

authorization to (i) sell inventory, merchandise and other goods in which GE Bank under the Final DIP Order has the benefit of valid and perfected first priority security interests and liens, and (ii) utilize the GE Program Agreement, GE Banks Accounts and other related property in conducting such sales. Accordingly, GE Banks interest in the inventory, merchandise, the GE Program Agreement, the Accounts and all other property must be adequately protected, particularly in light of the fact that the GE Banks exposure to chargebacks and other liabilities would be sharply increased if it were required to sell Augmented Goods as a part of its liquidation sales and by terminating operations thereafter, thus depriving GE Bank of the ability to setoff or recoup from proceeds of future transactions. The $7 million letter of credit presently posted by the Debtors is intended to address a much lower risk for chargebacks under a very different set of assumptions and, thus, is insufficient to cover the risks posed by the proposed liquidation sale. As such, GE Bank respectfully requests that to the extent the Court rules that the Agent shall be allowed to augment merchandise with non-Mervyns merchandise, the Court authorize GE Bank to withhold reasonable sums of payment from the settlement of Charge Transaction Data under section 3.1 of the GE Program Agreement for reasonably anticipated additional chargebacks in an amount to be shown at the hearing on this matter. 53. Furthermore, the Stalking Horse Agreement purports to provide that any sales are

free and 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 Charge Transaction Data as provided for under the GE Program Agreement, the Stalking Horse Agreement should not be approved. WHEREFORE, in view of the above, GE Bank respectfully requests that the Court not 23
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approve the Sale Order except upon the following conditions: a. That the Agent be prohibited from using the GE Private Label Card in any Store

in which augmented goods will be sold; b. That the Agent be prohibited from using the GE Bank private label credit card in

all of the Remaining Stores on the grounds that GE Bank has exercised its rights to terminate the GE Program Agreement; c. That GE Bank is entitled to prohibit the use of the GE Bank private label credit

card because it has made a prima facie showing that the Debtors have breached the GE Program Agreement and that such breach would justify termination. d. Alternatively, should the Court permit the use of the GE Bank private label credit

card, that such usage is without prejudice to GE Banks right to later contend and establish that the usage was a violation of the GE Program Agreement, and to seek whatever damages, claims or other rights, if any, it may have as a result of such breach; f. Alternatively, should the Court permit the use of the GE Bank private label credit

card that GE Bank is authorized to withhold reasonable sums of payment from the settlement of Charge Transaction Data under section 3.1 of the GE Program Agreement for reasonably anticipated additional chargebacks or that the Debtors be required to post additional adequate protection in an amount to be shown at the hearing on this matter;

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g.

For such further and additional relief as may be appropriate. Respectfully submitted, PEPPER HAMILTON LLP

Dated: October 29, 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

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.

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CERTIFICATE OF SERVICE I, Leigh-Anne M. Raport, hereby certify that on the 29th day of October, 2008, I caused the foregoing Objection 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 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

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