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UNITED STATES BANKRUPTCY COURT DISTRICT OF DELAWARE ---------------------------------------------------------------x : In re : Chapter 11 : MERVYNS HOLDINGS, et al., : Case No.

08-11586-KG : (Jointly Administered) Debtors. : Re: Docket No. 644 : Hearing Date: October 30, 2008
at 12:00 p.m.

---------------------------------------------------------------x OBJECTION OF WACHOVIA CAPITAL FINANCE CORPORATION (WESTERN) IN OPPOSITION TO COMMITTEES CROSS-MOTION TO CONVERT CASES AND IN SUPPORT OF DEBTORS MOTION TO APPROVE SALE PROCEDURES AND FOR RELATED RELIEF PURSUANT TO BANKRUPTCY CODE 363(B) TO THE HON. KEVIN GROSS UNITED STATES BANKRUPTCY JUDGE Wachovia Capital Finance Corporation (Western) (Wachovia), by its attorneys, Otterbourg, Steindler, Houston & Rosen, P.C. and Womble Carlyle, Sandridge & Rice PLLC, respectfully submits this Objection in opposition to the cross-motion of The Official Committee of Unsecured Creditors (the Committee) for an order pursuant to Sections 1112(b) and 105(a) of Title 11 of the United states Code (the Bankruptcy Code), converting the above captioned Chapter 11 cases to cases under Chapter 7 of the Bankruptcy Code (the Cross-Motion) and in support of the Debtors motion to conduct a going-out-of-business sale, pursuant to Bankruptcy Code 363(b), of the Debtors remaining retail department stores and for related relief (the Sale Motion), and represents as follows: PRELIMINARY STATEMENT 1. The Sale Motion is driven by an absolute certainty -- maximizing the

value of the Debtors retail inventory in the critical weeks leading to and through the Christmas

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holiday sale season is necessary in order to obtain the highest and best return possible under the circumstances. Converting the cases, by contrast, as the Committee seeks (unless, of course, its demand for a substantial legal fee carve-out from Wachovia and its lenders is fully funded) will drastically reduce the orderly liquidation value of the inventory, because the conversion and passage of time pending the appointment of a Chapter 7 trustee will result in the layoff of the entire employee population and the failure of the Debtors to consummate the GOB offer provided by the stalking horse bidder Great American (GA). The sale procedures, including the designation of GA as the stalking horse bidder, were approved by order of this Court dated October 27, 2008, with the Committee expressly stating its recognition that a sale of the Debtors assets is the right decision. Despite this acknowledgment, the Committee now seeks to eliminate the benefit of the sale by converting the cases to Chapter 7 proceedings, which can only serve to delay the sale and increase costs, to the detriment of all constituencies. 2. For the reasons that follow, the Cross-Motion should be denied and the

Sale Motion granted, in its entirety: A. Conversion will materially disrupt the sale process, which all constituencies agree is necessary, just before the critical Christmas selling season, resulting in increased costs and substantially decreased recoveries, to the detriment of all concerned. B. Allowing the stores to go dark, pending the appointment of a trustee and the retention of his or her professionals will likely lead to the revocation of GAs sale offer, which guarantees an inventory recovery of 105% at cost, and the immediate loss of some 5,000 jobs, with untold financial and emotional consequences to people the least able to afford them. -2-

C.

The Committees economic analysis is flawed and does not take into consideration the fact that numerous categories of ostensible administrative claims, such as the 20-day pre-petition suppliers, do not have to be paid now, and may in fact not have administrative claims.

D.

An economic analysis of the orderly liquidation of the inventory through the proposed GOB sales shows that in Chapter 11 there is a best case scenario of approximately $164 million that will be left after payment of the senior secured debt, with the potential for a net amount available for unsecured creditors of about $100 million. The worst case scenario, assuming the unlikely allowance in full of all asserted administrative claims, shows only a slight shortfall -- a shortfall that would exponentially worsen in Chapter 7. The middle ground leaves excess proceeds that would be available for administrative and/or unsecured creditors.

E.

This case is not, as the Committee argues, being run for the exclusive benefit of the senior secured creditors, as the economic analysis described above demonstrates. Moreover, even under the Committees analysis, there will be money available for creditors other than the DIP Lenders, once the GOB and real estate sales conclude.

F.

The Debtors budget is projected to be cash flow positive over the course of the liquidation, so the aggregate amount of unpaid administrative claims is not expected to increase during the GOB sales.

G.

The Committees concern that any surplus proceeds over the senior debt will only go to the junior secured creditors is mitigated by the fact that the -3-

Committee itself believes the junior secured debt should be subordinated. The Committee cannot have it both ways -- i.e., argue on the one hand that there is no money for administrative creditors due to the junior secured debt, while at the same time argue that the junior secured debt should be subordinated (or disallowed or recharacterized). 3. In short, conversion is the wrong relief at the wrong time. The GOB sales

are necessary, and are scheduled to begin immediately following the entry of the order granting the Sale Motion. Any delay, disruption or addition of another level of administrative expense can only harm creditors, reduce recoveries and impair jobs. BACKGROUND 4. The fairly short history of these cases is well known to this Court. The

Debtors filed for bankruptcy on July 29, 2008, a casualty of a hostile retail environment. According to the First Day Affidavit of Charles R. Kurth, the Debtors then CFO, a continuing and worsening housing crisis and recent upheavals and tightening in the credit markets resulted in substantial declines in discretionary consumer spending, directly impacting the Debtors ability to pay their Chapter 11 suppliers and furnish their stores with inventory essential to their continuing operations. Simply put, the Debtors lost their vendor and factor support and were unable to put inventory on the shelves, including goods for the critical back-to-school season. Wachovia, as administrative agent for a syndicate of lenders (collectively the DIP Lenders) provided pre-petition secured financing to the Debtors. On July 30, 2008 the Court granted the DIP Motion on an interim basis, authorizing the Debtors, among other things, to borrow under a $465 million lending facility from the DIP Lenders. While the Committee originally filed what it termed a limited objection to the DIP Facility, it ultimately withdrew its objections and the -4-

final DIP order was approved on August 26, 2008. The final DIP order contained, inter alia, substantial carve outs for administrative expenses, including funding the Committees investigation into claims against the pre-petition secured lenders and other parties in interest. For this reason the Committees assertion that the DIP was established solely to benefit the DIP Lenders at the expense of the bankruptcy estate is both erroneous and hypocritical. After extensively shopping other potential financing prior to the commencement of these cases, the Debtors concluded that the DIP financing offered by the DIP Lenders, essential to its operations, was the most favorable available and provided them the best opportunity to reorganize. 5. Moreover, unlike the typical DIP lending facility, in which the lender will

only advance funds in strict compliance with a fixed budget, the facility in these cases was based on availability, consistent with the pre-petition facility open to the Debtors. Wachovia has advanced funds throughout this case in full compliance with the agreed upon pre-petition lending formulas, which allowed the Debtors additional freedom, not generally present in Chapter 11 cases, to exercise their business judgment to restructure their operations in order to reorganize. 6. At the present time the DIP Lenders financial analysis performed by RAS

Management Advisors, LLC shows various potential outcomes if the Sale Motion is approved and the Debtors are subjected to an orderly, and just as importantly, immediate liquidation. It shows that in a worst case scenario the estate would be marginally administratively insolvent -by an estimated $6.602 million before any recovery under the avoidance actions and then only if all administrative claims, including some $31 million in asserted Section 503(b)(9) claims, are allowed in full. In a best case scenario $98.304 million will remain in excess of administrative expenses. Under either scenario, or something in between, the estate will possess sufficient resources, including adequate funds to pay the reasonable, ongoing administrative expenses of -5-

the going-out-of-business process. 7. The DIP Lenders have considered the narrow analysis of the Committees

advisor BDO Seidman, LLP filed under seal on October 27. The Committees view constitutes a draconian forecast which is not supported by reasonable estimates. More importantly, even were it proved accurate, it does not support converting the cases now. The conversion would only result in making a bad situation much worse. 8. If the Sale Motion is approved, the liquidation process will occur

immediately, with going-out-of-business sales commencing this weekend at the Debtors remaining retail locations through to the Christmas season, utilizing the best of the Debtors existing work force. This process will result in the maximum realizable value from the Debtors inventory, furniture and equipment, based on GAs stalking horse bid, as opposed to Chapter 7, where GAs 105% guaranteed inventory recovery at cost, along with all of the other benefits an orderly wind down of the Debtors real estate basehold interests, will be lost. 9. Furthermore, the Committees statutory basis for a conversion does not

withstand scrutiny. The Committee cites as grounds for conversion, substantial or continuing loss to the estate and the absence of a reasonable likelihood of rehabilitation, pursuant to Bankruptcy Code 1112(b)(4)(A). However, conversion will most likely result in the diminution of the Debtors assets. The relief requested by the Committee will in fact precipitate and compound the injury it asks this Court to cure. Nor is it fair to state that only the DIP Lenders benefit from the Debtors remaining in Chapter 11. The entire estate will benefit from the ongoing Chapter 11 process, albeit now in the form of a liquidating Chapter 11. 10. It is equally without merit for the Committee to argue that conversion is

required because the estates will incur substantial or continuing loss by remaining in Chapter 11. -6-

Indeed, the opposite appears true. The going-out-of-business sales will be cash-flow positive, and the DIP Lenders economic analysis shows that there may be up to $100 million available for other constituencies after the senior secured debt is paid in full. 11. Similarly, there can be little question that the sale of the Debtors real

estate assets is better accomplished under Chapter 11 than by a Chapter 7 trustee. The Debtors real estate advisor, Hilco Real Estate, LLC, is in place, potential bidders exist and an auction process is set up to commence as early as November 1. While a trustee may be able to solicit potential bids or retain existing Chapter 11 professionals and agents for that purpose, the process is cumbersome and likely only to increase costs and diminish recoveries, as GAs offer will not remain in place following a conversion. 12. Finally, the Committees suggestion that expenses will decrease under

Chapter 7 is erroneous. It is premised on the costs incurred by the Debtor as an ongoing business, which will cease either through an orderly liquidation under Chapter 11, or if the Committee gets what it says it wants, through the liquidation of the debtors assets by a Chapter 7 trustee. Chapter 7 merely adds an additional layer of administrative expense, enjoying priority over the administrative expenses incurred in chapter 11. The DIP Lenders financial consultant, RAS Management Advisors, LLC, projects that those add on expenses could easily exceed $2 million. THE CROSS-MOTION SHOULD BE DENIED AND THE SALE ORDER GRANTED 13. The relief requested by the Committees Cross-Motion is unwarranted

based upon the financial realities that face the Debtors and should be denied. The Debtors, Wachovia and the Committee all agree that the Debtors assets must be liquidated to maximize -7-

the benefit to the bankruptcy estate. Regardless of whether this case is finally administered pursuant to a Chapter 11 liquidating plan, or is subsequently converted to Chapter 7 or dismissed, there is no sound reason for converting the cases now, when the agreed upon necessity of liquidating the Debtors assets can most quickly, economically and with the highest possible return occur in the pending Chapter 11 cases. 14. The question before this court, therefore, is not whether the Debtors Nor does it mean, if a liquidating

should liquidate, all parties concede that must occur.

Chapter 11 at some point proves untenable, that a conversion or dismissal may not later prove preferable. Rather the question is what should happen now, under the present circumstances, to best maximize the Debtors estate. A Section 363(b) sale provides a timely, cost effective and reasonable solution to that problem and is based upon a sound exercise of the Debtors business judgment. By contrast, the Cross-Motion is without any business justification, will merely increase the costs and reduce dramatically the value of the Debtors estates, and put thousands of jobs at immediate risk of termination.

-8-

WHEREFORE, Wachovia respectfully requests that the Court enter an order denying the Cross-Motion for Conversion, granting the Sale Motion and granting Wachovia such other and further relief as the Court deems just and proper. Dated: October 29, 2008 WOMBLE CARLYLE SANDRIDGE & RICE, PLLC /s/ Francis A. Monaco, Jr. Francis A. Monaco, Jr. (#2078) Michael G. Busenkell (#3933) 222 Delaware Avenue, Suite 1501 Wilmington, Delaware 19801 Tel: (302) 252-4320 Fax: (302) 252-4330 OTTERBOURG, STEINDLER, HOUSTON & ROSEN, P.C. 230 Park Avenue New York, New York 10169 Tel: (212) 661-9100 Fax: (212) 682-6104
1136879

Attorneys for Wachovia Capital Finance Corporation (Western)

-9WCSR 4008022v1

CERTIFICATE OF SERVICE I, Heidi E. Sasso, certify that I am not less than 18 years of age, and that service of the foregoing document was made via electronic mail on October 30, 2008 upon: Daniel J. DeFranceschi Richards Layton & Finger One Rodney Square PO Box 551 Wilmington, DE 19899 Email: defranceschi@rlf.com David M. Fournier Pepper Hamilton LLP Hercules Plaza, Suite 5100 1313 Market Street Wilmington, DE 19899-1709 United States Trustee 844 King Street, Room 2207 Lockbox #35 Wilmington, DE 19899-0035 William Bowden, Esq. Amanda Winfree, Esq. Ashby & Geddes PA 500 Delaware Avenue, 8th Floor Wilmington, DE 19801 Jay Indyke, Esq. Cooley Goward Kronish LLP 1114 Avenue of the Americas New York, NY 01136 Under penalty of perjury, I declare that the foregoing is true and correct.

October 30, 2008 Date

/s/ Heidi E. Sasso Heidi E. Sasso

Document #: 41517

WCSR

4008024v1

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