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 24, 2008 at 4:00 p.m.1 Hearing Date: October 27, 2008 at 11:00 a.m.

UNITED STATES TRUSTEES OBJECTION TO THE MOTION OF THE DEBTORS FOR ORDERS (I) ESTABLISHING AUCTION AND BID PROCEDURES FOR SALE OF DEBTORS INTERESTS 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 In support of her objection (the Objection) to the Motion of the Debtors for Orders (I) Establishing Auction and Bid Procedures for Sale of Debtors' Interests 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 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

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The objection deadline was extended by agreement of the parties.

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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) (describing the UST as a watchdog). 3. Response. Background 4. On July 29, 2008 (the Petition Date), each of the Debtors2 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. On Monday, October 20, 2008, the Court entered an order scheduling the hearing on the sales procedures portion of the Motion for October 27, 2008. In the Motion, the Debtors seek approval of bidding procedures for the sale of 26 store leases for stores currently undergoing store closing sales. 8. The U.S. Trustee 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. The U.S. Trustee also requests that the proposed form of order be revised to include the requirements set forth in Local Rule 6004-1 (c)(ii)
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All capitalized terms not defined herein shall have the meaning ascribed to them in the Motion.

(A)-(D). Argument Break Up Fee and Expense Reimbursement Provisions 9. 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. The expense reimbursement is up to a maximum cap to be established by the Debtors after consultation with the Committee, the DIP Agent and the Prepetition Second Lien Lenders. As no stalking horse has been identified, the U.S. Trustee objects to the approval of any break up fee in these circumstances. In addition, the amount of any expense reimbursement should be subject to review and approval by the Court, rather than subject to the parties discretion. 10. No break up fee should be awarded, if at all, until 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 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. 11. Accordingly, as the Stalking Horse Bidder has not yet been identified and no 3

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 12. 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 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 24, 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 24, 2008, the United States Trustees Objection to Motion of the Debtors for Orders (i) Establishing Auction and Bid Procedures for Sale of Debtors' Interests 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 , 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

William Bowden Amanda Winfree Karen Skomorucha Ashby & Geddes P.A. 500 Delaware Avenue, 8 th Floor Wilmington, 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