IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE In re: MERVYN'S HOLDINGS, LLC, et al., 1 Debtors.

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Chapter 11 Case No. 08(__)

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Joint Administration Pending

MOTION OF THE DEBTORS AND DEBTORS IN POSSESSION FOR ENTRY OF AN ORDER (A) AUTHORIZING DEBTORS TO (I) PAY CERTAIN PREPETITION EMPLOYEE OBLIGATIONS, AND (II) CONTINUE CERTAIN EMPLOYEE OBLIGATIONS IN THE ORDINARY COURSE POSTPETITION AND (B) AUTHORIZING AND DIRECTING FINANCIAL INSTITUTIONS TO HONOR ALL RELATED CHECKS AND ELECTRONIC PAYMENT REQUESTS

The above-captioned debtors and debtors in possession (collectively, the "Debtors"), by and through their undersigned counsel, hereby file this motion (the "Motion") for entry of an order, substantially in the form attached hereto as Exhibit A, (a) authorizing, but not directing, the Debtors to (i) pay certain prepetition Employee Obligations (as defined below), and (ii) continue to honor certain Employee Obligations postpetition in the ordinary course of business; and (b) authorizing and directing financial institutions to receive, process, honor and pay all checks presented for payment in connection with the foregoing and electronic payment requests relating thereto. In support of the Motion, the Debtors rely on the Affidavit of Charles R. Kurth,

Executive Vice President and Chief Financial and Administrative Officer of the Debtors, in Support (){the First Day Motions and respectfully state as follows:
JURISDICTION
1.

This Court has jurisdiction over this matter pursuant to 28 U.S.C. 157 and

1334. This is a core proceeding pursuant to 28 U.S.C. 157. Venue is proper pursuant to 28 U.S.C. 1408 and 1409.

The Debtors in these cases, along with the last four digits of their federal tax identification numbers, are Mervyn's Holdings, LLC (7931), Mervyn's LLC (4456), and Mervyn's Brands, LLC (8850).

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2.

The statutory bases for the relief requested herein are Sections I 05(a) and

507(a)(4) and (5) of title 11 of the United States Code, 11 U.S.C. 101 et seq. (the "Bankruptcy Code") and Rule 6003 of the Federal Rules of Bankruptcy Procedure (the "Bankruptcy Rules").

BACKGROUND A. Introduction
3. On July 29, 2008 (the "Petition Date"), each of the Debtors filed a voluntary

petition for relief under Chapter 11 of the Banlauptcy Code. 4. The Debtors continue to operate their business and manage their properties as

debtors in possession pursuant to Sections 11 07(a) and 1108 of the Bankruptcy Code. No trustee, examiner or official committee of unsecured creditors has been appointed in the Debtors' cases.

B.

Overview of the Debtors' Corporate Structure and Business

5. Mervyn's LLC ("Mervyn's") traces its roots to a mid-range department store

opened by Mervin Morris in San Lorenzo, California in 1949 and has grown over the last 60 years into a 177-store chain of family friendly, promotional department stores. Mervyn's was incorporated in 1954 and, in 1978, became a wholly-owned subsidiary of Dayton Hudson Corporation (now The Target Corporation). In late August 2004, Mervyn's converted into a California limited liability company in conjunction with its acquisition by Mervyn's Holdings, LLC ("Mervyn's Holdings"), a Delaware limited liability company formed by affiliates of Sun Capital Partners, Inc. ("Sun"), Cerberus Capital Management, L.P. ("Cerberus"), Lubert-Adler and Klaff Partners, L.P. ("KLA"). 2 Mervyn's Brands, LLC ("Mervyn's Brands") is a wholly-

The 2004 transaction divided the former Mervyn's Inc.'s retail business from substantially all of its real estate assets, consisting of 262 properties previously owned or leased by Mervyn's. The remaining real estate assets, consisting of certain leases that were not assignable (the "Restricted Leases") remained with Mervyn's. The real estate entities, including MDS Realty Holdings I, LLC, MDS Realty Holdings II, LLC, MDS Realty I, LLC,

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owned subsidiary of Mervyn's and a Minnesota limited liability company which owns all or substantially all of Mervyn's intellectual property. 6. As of the Petition Date, Mervyn's employed more than 18,000 people and

operated 177 retail stores in California and six states in the southwestern United States. Mervyn's retail stores average 80,000 retail square feet and are located primarily in community shopping centers, regional malls and freestanding locations. Through these retail stores,

Mervyn's sells its extensive selection of national brands and private-label apparel and housewares. 7. All of the retail stores are subject to leases with aggregate annual rent expense in

excess of $172 million. In addition to the retail stores, Mervyn's also leases two distribution centers and its headquarters facility located in Hayward, California. 8. For the fiscal year ended February 2, 2008, Mervyn's recorded net sales of

approximately $2.5 billion and incurred a net loss of approximately $64 million. C. The Debtors' Debt Structure 9. Mervyn's and Mervyn's Brands are party to that certain Loan and Security

Agreement, dated September 2, 2004, by and among Mervyn's, as borrower, Mervyn's Brands as guarantor, Wachovia Capital Finance Corporation (Western) (as successor to Congress Financial Corporation (Western)), as administrative agent and collateral agent, the lenders party thereto from time to time (the "Prepetition First Lien Lenders") and other parties thereto, under which the Prepetition First Lien Lenders provided a loan facility of up to $600 million to Mervyn's (the "Prepetition Senior Loan Facilitv") consisting of a $550 million revolving loan A facility and a

MDS Realty II, LLC, MDS Realty III, LLC, MDS Realty IV, LLC, MDS I Texas Realty, LP and MDS II Texas Realty, LP (collectively, the "MDS Entities"), each of which is directly or indirectly owned by KLA, Sun and Cerberus, did not file Chapter I I petitions on the filing date. Such entities have lending arrangements separate from the prepetition lending arrangements of the Debtors.

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$50 million revolving loan B facility, each of which is subject to a borrowing base. 10. Amounts outstanding under the Prepetition Senior Loan Facility are secured by a

first priority security interest in all or substantially all of Mervyn's and Mervyn's Brands' accounts, general intangibles (including, without limitation, intellectual property), goods (including, without limitation, inventory and equipment), commercial tort claims, receivables, real property' and fixtures, chattel paper, instruments, documents and credit card sales drafts, credit card sales slips, charge slips or receipts and other forms of store receipts, deposit accounts, letters of credit, bankers acceptances and similar instruments (including letter of credit rights, supporting obligations and present and future liens, security interests, rights, remedies, title and interest in, to and in respect of receivables and other collateral), investment property, monies, credit balances and other similar property, records, all products and proceeds of the foregoing, and Mervyn's membership interests in Mervyn's Brands (the "Prepetition Collateral"). As of the Petition Date, an aggregate amount of approximately $329,381,571.02, plus interest, costs and expenses, was outstanding under the Prepetition Senior Loan Facility. 11. In addition to the Prepetition Senior Loan Facility, Mervyn's is party to that

certain Subordinated Promissory Note in the aggregate principal amount of $30 million, dated as of November 27, 2007 (the "SCSF Note"), by and among Mervyn's, as borrower, and SCSF Mervyn's (Offshore), Inc. and SCSF Mervyn's (US), LLC, 4 as lenders. The SCSF Note is

guaranteed by Mervyn's Brands, and the obligations of Mervyn's and Mervyn's Brands

No mortgages were filed in respect of the Debtors' real estate interests, including leaseholds, by the ?repetition Agent, the ?repetition First Lien Lenders, or the ?repetition Second Lien Lenders. 4 SCSF Mervyn's (Offshore), Inc. and SCSF \1ervyn's (US), LLC are affiliates of Sun, and also hold 39.59598% and 15.94846%, respectively, of the Retail Investor Percentage Interest membership interests in the Retail Series of Mervyn's Holdings (series relating to the operation of the retail business), 20.17961% and 8.64765%, respectively, of the common membership interests in the Restricted Leases Series of Mervyn's Holdings (series relating to the Restricted Leases), and 20.40651% and 8.74349%, respectively, of the prefened membership interests in the Restricted Leases Series of Mervyn's Holdings.

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thereunder are secured by a second lien in the Prepetition Collateral.

D. Events Leading to the Bankruptcy Filing

12.

During the first quarter of 2008, Mervyn's instituted a long-term turnaround plan

designed to differentiate itself from its competitors, grow sales, and improve store productivity, and thereby improve profitability and cash flow. However, rollout of the plan coincided with a variety of external economic factors which have led to a precipitous decline in the Debtors' profitability aod liquidity. 13. Chief among those external factors are the decline in the housing market and the

tightening of the credit markets which have led, respectively, to a decline in consumer discretionary spending, including in the apparel and home decor sectors, and to a tightening of credit terms by Mervyn's suppliers and their factors. These negative external factors have

worsened in recent months. As a result of the foregoing, the ability of Mervyn's to pay its suppliers, maintain an uninterrupted flow of merchandise into the stores and service its debt has been severely negatively impacted. As economic conditions continued to deteriorate aod

liquidity continued to tighten, the commencement of these cases became necessary to rationalize Mervyn's finances and operations, with the objective of reorganizing the Debtors as profitable entities.
RELIEF REQUESTED

14.

Prior to the Petition Date and in the ordinary course of their business, the Debtors

paid their employees wages, salaries, and other compensation and benefits. By this Motion, the Debtors seek the entry of an order, pursuant to Sections 105(a) and 507(a)(4) and (5) of the Bankruptcy Code, authorizing, but not directing (a) the Debtors to (i) pay certain prepetition employee obligations described below (collectively, the "Employee Obligations"), and (ii) continue to honor certain Employee Obligations in the ordinary course of business postpetition;
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and (b) authorizing and directing financial institutions to receive, process, honor and pay all checks presented for payment and electronic payment requests relating thereto. As set forth below, the payment of the Employee Obligations is consistent with applicable law and practice and critical to employee morale and the Debtors' ongoing business.
EMPLOYEE OBLIGATIONS

A.

Salaries and Wages

15. The Debtors employ over 18,000 full-time and part-time employees in their home

office and across approximately 177 store locations in seven states, including executives, store managers, sales associates, and support staff. Salaried employees are paid twice a month, on the 15th (or closest business day) and on the last business day of the month. Hourly employees are paid every other Friday. Salaried employees are paid on a current cycle while hourly employees are paid through the Saturday of the previous week. 5 All employees are paid either through direct deposit or by physical check. 16. The Debtors utilize an outside service provider, Hewitt Associates, LLC

("Hewitt"), for human resources, 40 I (k) plan and payroll processing in order to facilitate payment of wages and salaries and deductions for benefits and 401 (k) contributions. In

exchange for services provided, Hewitt is paid a monthly fee which fluctuates depending upon time spent by Hewitt. The average monthly cost to the Debtors for services provided by Hewitt is approximately $485,000. The Debtors are seeking authorization to pay prepetition obligations to Hewitt in an amount not to exceed $515,000 and to continue to honor their obligations to
5

The Debtors maintain miscellaneous leave policies with respect to full time employees who are entitled to leave as a result of illness, military service and maternity. Such policies, other than with respect to maternity leave, provide for payment of all or a portion of any affected employee's regular compensation (including related withholdings and deductions) during aU or a portion of the leave in conjunction with the Debtors' regular payroll cycle. Maternity leave is treated as a short or long term disability. The Debtors' policies with respect to same are described below.

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Hewitt postpetition in the ordinary course of business in an amount not to exceed $515,000 per month. 17. All wage and salary payments, withholdings for taxes, deductions for 40l(k)

contributions, garnishments, child support payments and similar deductions, and deductions for health benefits are processed by Hewitt. The Debtors fund such amounts through a separate concentration account at Bank of America, N.A. on the day of payment (i.e., every other Friday and the 15th and last business day of the month). The Debtors' average monthly payroll for all employees is approximately $25.7 million. 18. The Debtors' most recent payroll cycle was completed on July 15, 2008 for

salaried employees and July 18, 2008 for hourly employees and the next cycle will be completed on July 31 (salaried employees) and August I, 2008 (hourly employees). Prior to the Petition Date, the Debtors partially funded the July 31, 2008 payroll. As a result, the Debtors seek permission to pay the balance of the July 31, 2008 payroll and the entire August 1, 2008 payroll, in the aggregate amount of approximately $12,750,000,' the bulk of which relates to the prepetition period. 19. The Debtors hereby further seek permission to pay prepetition wages, salaries and

related withholdings and deductions in respect of checks drawn prepetition which have not yet been presented for payment. The Debtors do not know the number of employees who have not yet presented checks for payment but represent that no individual check exceeds $10,950. Accordingly, the Debtors request that Bank of America, N.A. be authorized and directed to honor any remaining physical paychecks for prepetition payroll periods, which may not have been presented as of the Petition Date.
The Debtors prepare payroll numbers at the end of each payroll cycle after all information relevant to the pay cycle is known. As the Petition Date occurred in between two payroll cycles, the dollar amounts to be paid on July 31 and August I are not yet fixed.
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20.

Finally, the Debtors seek permission to continue to pay wages and salaries in the

ordinary course of business postpetition in an amount not to exceed $29 million per month.

B.

Employment Agencies
21. The Debtors utilize employment agencies to provide additional support in the

Debtors' home office, distribution centers, and retail stores on a temporary or project-oriented basis, including Beeline, Inc., which provides temporary personnel in various areas, and Kal Serve, which supplies over 300 temporary employees in two of the Debtors' distribution centers. Beeline and Kal Serve are each paid on a monthly basis. 22. As of the Petition Date, the Debtors estimate that approximately $133,000 is due

or will become due to Beeline and $800,000 is due or will become due to Kal Serve, in each case, for the month of July with respect to temporary employees provided to the Debtors and fees owed to the agencies, all or most of which relates to the prepetition period. The Debtors hereby request authority to pay such amounts and to continue to honor any postpetition obligations to such temporary employment agencies in the ordinary course of business up to a maximum of $1 million per month.

C.

Payroll Taxes and Other Deductions

23. The Debtors are required by law to withhold from employees' wages and salaries

amounts related to federal, state, and local taxes (the "Withholding Taxes") and to remit such Withholding Taxes to the appropriate taxing authorities. The Debtors are also required to make matching payments on account of social security, Medicare and FICA taxes (together with the Withholding Taxes, the "Payroll Taxes"). In addition, the Debtors may be required by law to process other deductions, including garnishments and child support payments, none of which

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increases the overall compensation amounts paid by the Debtors. Payroll Taxes are administered by Hewitt through the payroll process. 24.

All such deductions and

Consistent with the relief sought herein with respect to wages and salaries, the

Debtors respectfully request permission to withhold and pay prepetition Payroll Taxes and to process other mandated deductions for the next pay period ending on July 31, 2008 for salaried employees and August I, 2008 for hourly employees, and to continue to do so postpetition in the ordinary course of business.

D.

Reimbursable Business Expenses

25. The Debtors maintain a business expense policy pursuant to which employees are

reimbursed for certain business related expenses incurred in the scope of their employment, including business-related travel, business meals and entertainment, and other miscellaneous expenses (collectively, the "Reimbursable Expenses"). 7 Reimbursable Expenses are reimbursed to the employees through the Debtors' regular payroll process and administered through Hewitt. The Debtors' average monthly cost for Reimbursable Expenses for the last 12 months is approximately $277,000. 26. As of the Petition Date, the Debtors estimate that prepetition Reimbursable The Debtors hereby seek authority to pay such

Expenses are approximately $177,000.

prepetition obligations and to pay Reimbursable Expenses as they arise in the ordinary course of business, up to a maximum of $300,000 per month.

E.

Employee Health Insurance Plans

27. In the ordinary course of their business, and as is customary for most large

retailers, the Debtors maintain various employee benefit plans and policies that provide eligible
Charges on the Debtors' corporate credit card with JPMorgan Chase Bank, N.A. made by employees on behalf of the Debtors (and where the employees have retained personal liability on the debt) are included in the definition of Reimbursable Expenses.
7

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employees with medical, dental, vision, disability and life insurance, prescription drug coverage, employee savings, and other similar benefits. Only full-time salaried employees and hourly benefited employees are eligible to participate in the employee benefits. 28. An important component of the employee benefits provided by the Debtors is the

health insurance, including medical, prescription, dental and vision coverage (collectively, the "Health Benefits"). Employees may choose from various PPO, HMO and Debtor self-insured plans provided through third party carriers.' For all health insurance plans, the Debtors pay all administrative fees as well as a portion of the insurance premiums thereunder on a monthly basis and the employees pay the remainder through payroll deductions. For self-insured plans, the Debtors pay the claims on a rolling basis. The Debtors also offer flexible spending accounts, which are fully funded by employee contributions (the "Flex Spending Account Program"), 29. The Debtors also utilize an outside vendor, Mercer Health and Welfare

Consulting Services ("Mercer") for various Health Benefits related services including, interfacing with the Debtors' health insurance carriers, administering the Debtors' self-insured benefit plans, reporting to various governmental authorities such the Department of Labor, and providing actuarial valuations. For such services, the Debtors pay Mercer a monthly fee based on the number of employees, in the average amount of about $15,000 per month. The Debtors are seeking authorization to pay prepetition obligations to Mercer in an amount not to exceed $18,000 monthly and to continue to honor their obligations to Mercer in the ordinary course of business postpetition, in the maximum amount of$18,000. 30. The Debtors are current with respect to (i) all premiums and administrative fees in

connection with Health Benefits through June 30, 2008, and (ii) claims under self-insured plans

The Debtors maintain three self-insured plans- Lumenos/Blue Cross PPO Plan, Medco prescription plan (partially self-insured) and Delta Dental of California.

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through on or about July 15, 2008. The aggregate amount for premiums, administrative fees and claims for all Health Benefit policies currently due or which will become due postpetition with respect to the prepetition period is approximately $556,000.' The Debtors hereby seek authority to pay such prepetition premiums, fees and claims in an amount not to exceed $556,000, and to continue paying the employee Health Benefit premiums, administrative fees and claims postpetition in the ordinary course of business up to a maximum of $950,000 on a monthly basis. Finally, the Debtors seek authority to continue to offer flexible spending accounts to their employees.

F.

Employee Life Insurance and Disability Insurance

31. The Debtors also provide all eligible employees with basic life and disability

insurance, including long- and short-term disability insurance (collectively, the "Other Insurance Benefits") in amounts corresponding to the employee's salary. The Debtors pay the premiums for basic life and long-term disability insurance on behalf of their employees. With respect to short term disability insurance, the Debtors are self insured and thus pay related costs and claims. Employees may elect additional supplemental life insurance at their own expense. 32. The Debtors believe that they are current with respect to premiums, administrative

fees and claims for the Other Insurance Benefits through June 30, 2008. Amounts due or which will become due postpetition for the prepetition period in respect of Other Insurance Benefits total approximately $45,000. 10 The Debtors hereby seek authority to pay such amounts, and to continue to pay obligations accruing in respect of the Other Insurance Benefits in the ordinary course postpetition in an amount not to exceed $50,000 per month.

10

This amount is net of employee contributions. This amount is net of employee contributions.

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G.

401(k) Plan
33. The Debtors offer all eligible U.S. employees the opportunity to participate in a

401(k) savings plan (the "401(k) Plan"). State Street Corporation acts as the plan trustee and Mercer Investment Consulting, Inc. serves as the investment advisor. Under the 401(k) Plan, employees may contribute from 1% to 80% of their eligible earnings either on a pre- or post-tax basis. The Debtors make matching contributions to the 401(k) Plan at 100% of the first 3% of the employee contribution, plus 50% of the next 2% of the employee contribution. On average, the Debtors' matching contributions total approximately $200,000 per payroll cycle. 34. For the payroll periods ending on July 31 and August 1, 2008, the Debtors seek

permission to continue to process 401(k) deductions and to make matching contributions in an aggregate amount not to exceed $200,000. In addition, the Debtors seek permission to continue processing 401 (k) deductions and making matching contributions postpetition, consistent with their prepetition practices described herein in an amount not to exceed $200,000 per pay cycle.

H.

Vacation and Personal Days

35. The Debtors' "Time Away from Work" policy provides for paid vacation and Hourly employees

personal days for benefitted hourly employees and salaried employees.

accrue vacation days on a rolling basis (for each hour worked) and salaried employees accrue vacation days based on the number of months of continuous service and rank. Accruals for vacation time and personal days for each employee are capped at twice such employee's annual vacation accrual. Three personal days are awarded to each employee per year at the beginning of January. Upon termination of employment, whether voluntarily or involuntarily, the employee's unused vacation time is calculated and paid in his/her final paycheck. Employees in California and Colorado are also entitled to payment for unused personal days upon termination. As of the

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Petition Date, the Debtors estimate that they have approximately $12.6 million of accrued and unpaid obligations for vacation and personal days. 36. The Debtors hereby seek permission to continue to honor such obligations

postpetition in the ordinary course of business in an aggregate amount not to exceed $12.6 million.
I.
Severance Packages

37.

The Debtors maintain a "Severance Plan II," for associate employees, including

part-time associates, who meet certain eligibility conditions." Under the Severance Plan II, any associate employee whose employment is terminated without cause is entitled to receive a lump sum severance payment, the amount of which is calculated based upon the employee's classification, length of service and base compensation at the time of termination, up to a maximum of26 weeks ofbase compensation." 38. In com1ection with the April - June 2008 outsourcing of the Debtors Ontario,

California and Fremont, California distribution centers, as well as the closing of the Debtors' store in Alameda, California on July 25, 2008, there remain 131 employees who are currently entitled to but have not yet received lump sum severance benefits for lost wages in the aggregate amount of approximately $286,000. prepetition obligations. 39. As a result of the outsourcing of the Ontario and Fremont distribution centers, the The Debtors hereby seek permission to honor such

Debtors issued checks for severance pay to an additional 253 employees in the aggregate amount of $1,838,841. The Debtors are seeking permission to honor any physical checks for such
11

The Debtors are not currently seeking approval of the payment of severance benefits to officers or other

insiders.
Additionally, severed employees may elect to continue health insurance benefits at their expense under COBRA, which the Debtors are legally required to provide.
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severance benefits which have not yet been presented for payment. The Debtors do not know the number of employees who have not yet presented checks for payment. Eighty-seven of these unpresented checks were in excess of $10,950. The Debtors request that their banks be

authorized and directed to honor any remaining physical checks for severance benefits which may not have been presented as of the Petition Date.

J.

Relocation Plan

40.

The Debtors maintain a relocation policy applicable to newly hired and existing

employees, which is administered by GMAC Global Relocation Services. Under such relocation policy, employees who are relocated from one store, distribution center or other work location to another and, as a result, move to a new home, are reimbursed for relocation expenses if their new home and work location is 50 miles or more from their prior home and work location. 13 Specifically, employees are reimbursed for expenses, including travel, temporary lodging, and moving. Employees who rent their homes are also entitled to reimbursement of the costs

associated with lease cancellations, up to a maximum of two month's rent. Certain employees are reimbursed for the foregoing expenses and are also entitled to have the Debtors advance the equity in their homes to allow them to purchase their new homes, in connection with relocations. 41. As of the Petition Date, the Debtors have committed to pay an aggregate amount

of $1,951,669.59, consisting of $1,903,969.59 for reimbursable expenses described above, $26,700 for housing subsidies for relocated employees in temporary housing and $21,000 for the net cost of an equity advance, as set forth above, to a single employee. The Debtors estimate that, during the next 30 days, approximately $85,000 will be expended in respect of the foregoing and are seeking authority to pay such amount.

All or a portion of reimbursed relocation expenses are subject to recapture by the Debtors if the reimbursed employee terminates his/her employment prior to the expiration of 18 months.

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42.

The Debtors are also seeking approval on an interim basis only, with a final

hearing to be scheduled, to pay the remainder of the prepetition amounts set forth above up to a maximum of $1,951,669.59, less any amounts expended prior to the final hearing, and to continue to honor their obligations under their Relocation Plan in an amount not to exceed $195,000 per month.

K.

Miscellaneous
43. The Debtors maintain the following miscellaneous employee programs with

respect to which they hereby seek authority to pay prepetition obligations and continue in the ordinary course of their business postpetition: an employee referral program (referring employees receive $3,000 for successfully referring new employees who remain employed by the Debtors for 90 days) (the "Employee Referral Program"), employee merchandise discounts (whereby employees are entitled to a 15% discount for purchases) (the "Employee Discounts"), tuition assistance (for education related to an employee's job function, subject to an annual cap of $3,000 per employee) (the "Tuition Assistance Program"), and the Dollar-per-Application program (whereby store employees receive $1 for every customer who submits an application for a Mervyn's credit card account) (the "Dollar Per Application Program"). The Employee

Discounts do not involve any cash payments by the Debtors. Payments under the Employee Referral Program, the Tuition Assistance Program and the Dollar Per Application Program are disbursed through the Debtors' main operating account and are funded on a pay-as-you-go basis and not as part of the Debtors' regular payroll. 44. The Debtors hereby request authority to continue to offer Employee Discounts in

the ordinary course of business postpetition. The Debtors hereby further request authority to honor prepetition and postpetition obligations in connection with the Employee Referral, the

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Dollar Per Application and the Tuition Assistance Programs in an aggregate amount not to exceed $40,000.
BASIS FOR RELIEF

45.

Pursuant to Section l05(a) of the Bankruptcy Code, the "court may issue any

order, process, or judgment that is necessary or appropriate to carry out the provisions of this title." 11 U.S.C. l 05(a). The Debtors submit that the relief requested herein is necessary and appropriate to carry out the provisions of the Bankruptcy Code. 46. The Debtors believe that authorization of payment of prepetition amounts relating

to Employee Obligations is necessary to the continuation of their business in the ordinary course. "The ability of the Bankruptcy Court to authorize the payment of prepetition debt when such payment is needed ... is not a novel concept." In re Ionosphere Clubs, Inc., 98 B.R. 174, 175 (Bankr. S.D.N.Y. 1989). This equitable common law principle "was first articulated by the United States Supreme Court in Miltenberger v. Logansport, C & S.W.R. Co., 106 U.S. 286, 1 S.Ct. 140,27 L.Ed 117 (1882) and is commonly referred to as either the 'doctrine of necessity' or the 'necessity of payment' rule." In re Ionosphere Clubs, Inc., 98 B.R. at 176. "The Supreme Court, the Third Circuit and the District of Delaware all recognize the court's power to authorize payment of pre-petition claims when such payment is necessary for the debtor's survival during chapter II." In re Just for Feet, Inc., 242 B.R. 821, 825 (D. Del. 1999). 47. Under the doctrine of necessity, a bankruptcy court may exercise its equitable

power to authorize a debtor to pay certain critical prepetition claims, where, as here such payment is essential to the debtor's business. See In re Columbia Gas System, 136 B.R. 930, 939 (Bankr. D. Del. 1992) (citing In re Lehigh & New England Rwy Co., 657 F.2d 570, 581 (3rd Cir. 1981) (recognizing that "if payment of a prepetition claim 'is essential to the continued operation of [the debtor], payment may be authorized"')). 16
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48.

Specifically with respect to employees, Section 507(a)(4)(A) of the Bankruptcy

Code provides that claims of employees of a debtor for "wages, salaries, or commissions, including vacation, severance, and sick leave pay" earned within 180 days prior to the petition date are afforded priority status up to $10,950 per employee. Similarly, Section 507(a)(5) of the Bankruptcy Code provides that employee claims for contributions to certain employee benefit plans are also afforded priority unsecured status to the extent of $10,950 per employee covered by such plan, less any amount paid pursuant to Section 507(a)(4). Moreover, the Payroll Taxes are designated by law for deduction or withholding from employees' paychecks. Indeed, such amounts have been held not to constitute property of the estate. See Beiger v. IRS, 496 U.S. 53 (1990). 49. Courts in this district have generally authorized the payment of similar prepetition

employee obligations and their continuance in the ordinary course under appropriate circumstances. See,
~,

In re Linens Holding, Co., No. 08-10832 (CSS) (Bankr. D. Del. May 2,

2008); In re Hoop Holdings, LLC, No. 08-10544 (BLS) (Bankr. D. Del. July 18, 2008); In re Pope & Talbot, Inc., No. 07-11738 (CSS) (Bankr. D. Del. Nov. 21, 2007); In re Tweeter Home Entm't Group, Inc., No. 07-10787 (PJW) (Bankr. D. Del. June 13, 2007); In re Hancock Fabrics, Inc., No. 07-10353 (BLS) (Bankr. D. Del. Mar. 22, 2007). 50. The maintenance of the Debtors' workforce is vital to their continued operations

and to the success of these cases. The Debtors have entered their Chapter 11 cases at the begim1ing of the critical back-to-school selling season. Any deterioration in employee morale or departures at this critical juncture would undoubtedly have a devastating impact on the Debtors, the value of their assets and business, their operations, and ultimately, their ability to reorganize.

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51.

Any interruption in the payment of wages, salaries, withholding taxes,

reimbursable business expenses and health benefits, or policies with respect to vacation and personal days, matching 40l(k) contributions and the Other Employee Programs would have a devastating effect on employee morale and dedication likely prompting large numbers of employees to seek other employment and having a material, negative impact on the Debtors' performance. Indeed, for many employees, the loss of a single paycheck or health benefits would cause hardship for the employees and their families which would likely provoke these consequences in short order. 52. For the limited number of employees covered by the Severance Plan II and the

relocation policy, the Debtors respectfully submit that they should be authorized to honor their obligations under such plans for the sake of the morale of their entire workforce. Employees of any debtor in Chapter I I are likely concerned about their treatment upon a termination. Honoring the Debtors' obligations under the Severance Plan II will help ease those concerns. Similarly, honoring the Debtors' obligations under the relocation plan will ease the concerns and preserve the morale of the employees affected thereby. 53. In furtherance of the foregoing, the Debtors request that financial institutions be

authorized and directed to receive, process, honor and pay any prepetition checks presented for payment and electronic payment requests, as well as post-petition checks and electronic payments in the ordinary course, relating to Employee Obligations. 54. The Debtors hereby reserve all of their rights with respect to the Employee

Obligations, including the right to contest any claim, and nothing herein should be deemed an assumption of any executory contracts pertaining to Employee Obligations.

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55.

The Debtors further request that because the relief requested in this Motion is

necessary to avoid immediate and irreparable harm to the Debtors for the reasons set forth herein, Bankruptcy Rule 6003 has been satisfied.
REQUEST FOR WAIVER OF STAY

56.

The Debtors further seek a waiver of any stay of the effectiveness of the order Pursuant to Rule 6004(h) of the Bankruptcy Rules, "[a]n order

approving this Motion.

authorizing the use, sale, or lease of property other than cash collateral is stayed until the expiration of ten (I 0) days after entry of the order, unless the court orders otherwise." As set forth above, the payments proposed herein are essential to prevent potentially irreparable damage to the Debtors' operations, value and ability to reorganize. Accordingly, the Debtors submit that ample cause exists to justify a waiver of the ten (! 0) day stay imposed by Bankruptcy Rule 6004(h), to the extent it applies.
NOTICE

57.

The Debtors shall provide notice of this Motion by facsimile and/or overnight

mail to: (i) the Office of the United States Trustee for the District of Delaware; (ii) the Debtors' thirty (30) largest unsecured creditors on a consolidated basis; (iii) counsel to the agent for the Debtors' proposed post-petition secured lenders; (iv) counsel to the agent for the Debtors' prepetition senior secured lenders; (v) counsel to the Debtors' prepetition junior secured lenders; (vi) the Internal Revenue Service; (vii) the Securities and Exchange Commission; (viii) the Office of the United States Attorney General for the District of Delaware; (ix) counsel to the Debtors' equity sponsors; (x) counsel to the MDS Entities; and (xi) counsel to Cerberus. As this Motion is seeking first-day relief, notice of this Motion and any order entered hereon will be served on all parties required by Del. Bankr. L.R. 9013-l(m). Due to the urgency of the

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circumstances surrounding this Motion and the nature of the relief requested herein, the Debtors respectfully submit that no further notice of this Motion is required.
NO PRIOR REQUEST

58.

No previous application for the relief requested herein has been made by the

Debtors to this or any other court.

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WHEREFORE, the Debtors respectfully request the entry of an order, substantially in the form attached hereto as Exhibit A: (a) authorizing, but not directing, the Debtors to (i) pay certain prepetition Employee Obligations, and (ii) continue such Employee Obligations in the ordinary course; and (b) authorizing and directing financial institutions to receive, process, honor and pay all checks presented for payment and electronic payment requests relating thereto; and (c) granting such other and further relief as the Court may deem just and proper. Dated: July 29, 2008 Wilmington, Delaware Respectfully submitted,

Mark D. Collins (No. 2981) Daniel J. DeFranceschi (No. 2732) Christopher M. Samis (No. 4909) L. Katherine Good (No. 5101) RICHARDS, LAYTON & FINGER, P.A. One Rodney Square 920 North King Street Wilmington, Delaware 19801 Telephone: (302) 651-7700 Facsimile: (302) 651-7701 Email: collins@rlf.com defranceschi@rlf.com samis@rlf.com good@rlf.com and HowardS. Beltzer Wendy S. Walker MORGAN LEWIS & BOCKIUS LLP 101 Park Avenue New York, New York 10178-0060 Telephone: (212) 309-6000 Facsimile: (212) 309-6001 Email: hebeltzer@morganlewis.com wwalker@morganlewis.com
Proposed Attorneys for the Debtors and Debtors in Possession

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EXHIBIT A
Proposed Order

RLFI-3306793-1

IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE In re: MERVYN'S HOLDINGS, LLC, et al., 1 Debtors. )
)
)

Chapter 11 Case No. 08(__)

Joint Administration Pending

INTERIM ORDER (A) AUTHORIZING DEBTORS TO (I) PAY CERTAIN PREPETITION EMPLOYEE OBLIGATIONS, AND (II) CONTINUE CERTAIN EMPLOYEE OBLIGATIONS IN THE ORDINARY COURSE POSTPETITION, AND (B) AUTHORIZING AND DIRECTING FINANCIAL INSTITUTIONS TO HONOR ALL RELATED CHECKS AND ELECTRONIC PAYMENT REQUESTS
Upon the Motion of the Debtors and Debtors in Possession for an Order (A) Authorizing,

Debtors to (I) Pay Certain ?repetition Employee Obligations, and (II) Continue Certain Employee Obligations in the Ordinary Course Postpetition, and (B) Authorizing and Directing Financial Institutions to Honor all Related Checks and Electronic Payment Requests (the
"Motion"), filed by the above-captioned debtors and debtors in possession (the "Debtors"), in the above-captioned Chapter 11 cases; and upon the Affidavit of Charles R. Kurth Executive Vice

President and Chief Financial and Administrative Officer of the Debtors, in Support of the First Day Motions; the Court finding that (i) the Court has jurisdiction over this matter pursuant to 28
U.S.C. 157 and 1334, (ii) this is a core proceeding pursuant to 28 U.S.C. 157(b)(2)(A), and (iii) notice of the Motion was sufficient under the circumstances and that no other or further notice need be provided; and the Court having determined that the legal and factual bases set forth in the Motion establish just cause for the relief granted herein; and the Court having determined that the relief sought in the Motion is in the best interests of the Debtors and their estates; and after due deliberation and sufficient cause appearing therefor it is hereby

The Debtors in these cases, along with the last four digits of their federal tax identification numbers, are Mervyn's Holdings, LLC (7931), Mervyn's LLC (4456), and Mervyn's Brands, LLC (8850).

RLFI-3306793-1

ORDERED, that, subject to the limitations contained in Sections 507(a)(4) and (a)(5) (except as provided for herein) of the Bankruptcy Code, the Motion is granted; and it is further ORDERED, that the Debtors are authorized, but not required, to pay Employee Obligations and to continue to honor certain Employee Obligations as follows:

(a)

the Debtors are authorized to pay (i) prepetition wages, salaries and other compensation to their employees in an amount not to exceed $12,750,000 and (ii) postpetition wages, salaries and other compensation to their employees, as they come due in the ordinary course of their business in an amount not to exceed $29 million per month; the Debtors are authorized to pay prepetition amounts due and owing to Hewitt2 in an amount not to exceed $525,000 and to pay postpetition amounts due and owing to Hewitt in the ordinary course of business in an amount not to exceed $525,000 on a monthly basis; the Debtors are authorized to pay prepetition amounts due and owing to temporary employment agencies in an amount not to exceed $883,000 and postpetition amounts as they come due in the ordinary course of business in an amount not to exceed $1 million per month; the Debtors are authorized to deduct from employee compensation and pay prepetition and postpetition Payroll Taxes and to process other deductions owing to various taxing authorities and appropriate parties in the ordinary course of business; the Debtors are authorized to pay (i) Reimbursable Expenses incurred prior to the Petition Date in an amount not to exceed $177,000, and (ii) Reimbursable Expenses incurred during the Chapter II cases as they accrue in the ordinary course of business, in an amount not to exceed $300,000 per month; the Debtors are authorized to continue to honor their Flex Spending Account Program and their Employee Discounts postpetition in the ordinary course of business; the Debtors are authorized to pay prepetition amounts due in respect of Health Benefits, including premiums, administrative fees and claims under the self insured plans, (i) incurred prior to the Petition Date in an amount not to exceed $580,000, and (ii) as they come due in the ordinary course of business postpetition in an amount not to exceed $950,000 per month;

(b)

(c)

(d)

(e)

(f)

(g)

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

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(h)

the Debtors are authorized to pay prepetition amounts due and owing to Mercer in an amount not to exceed $15,000 and to pay postpetition amounts due and owing to Mercer in the ordinary course of business in an amount not to exceed $15,000 on a monthly basis; the Debtors are authorized to pay amounts due in connection with the Debtors' Other Insurance Benefits (i) in an amount not to exceed $45,000 with respect to amounts outstanding as of the Petition Date, and (ii) in an amount not to exceed $55,000 with respect to the period after the Petition Date; the Debtors are authorized to continue processing deductions under the 401 (k) Plan and to pay amounts due in respect of matching contributions under the Debtors' 40l(k) Plan (i) in an amount not to exceed $200,000 with respect to amounts outstanding as of the Petition Date, and (ii) in the ordinary course of business postpetition not to exceed $200,000 per pay cycle; the Debtors are authorized to (i) pay obligations for vacation and personal days under the Debtors' vacation policy in the ordinary course of business postpetition in an aggregate amount not to exceed $6.7 million pending a final hearing, provided however, that such obligations can be paid in excess of $6.7 million prior to a final hearing to the extent such payments are required to be made before such a final order is entered pursuant to applicable state law, and (ii) upon entry of a final order, pay obligations for vacation and personal days under the Debtors' vacation policy in the ordinary course of business postpetition in an aggregate amount not to exceed $13.4 million. the Debtors are authorized to pay prepetition obligations related to the Severance Plan II for the employees terminated prepetition in an amount not to exceed $286,000; the Debtors are authorized to (i) pay prepetition obligations under the Relocation Plan in an amount not to exceed $85,000 pending a final hearing, (ii) upon entry of a final order, pay prepetition and postpetition obligations under the Relocation Plan in an aggregate amount not to exceed $1,950,000, less any amounts paid between the interim and final hearings; and (iii) subject to the entry of a final order, continue to honor their obligations under their Relocation Plan; and the Debtors are authorized to pay prepetition and postpetition amounts due under the Employee Referral, Tuition Assistance and Dollar Per Application Programs in the ordinary course of business in an aggregate amount not to exceed $40,000.

(i)

(j)

(k)

(l)

(m)

(n)

and it is further
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ORDERED, that the Debtors are authorized, but not directed, to pay costs and expenses incidental to the payment of the Employee Obligations, including all administration and processing costs and payments to outside professionals in the ordinary course of business, in order to facilitate the administration and maintenance of the Debtors' programs and policies related to the Employee Obligations; and it is further ORDERED, that the Debtors are authorized to pay prepetition wages and salaries and prepetition obligations under Severance Plan II in respect of checks drawn prepetition which have not yet been presented for payment; ORDERED, that all applicable banks and other financial institutions are authorized, when requested by the Debtors in the Debtors' sole discretion, to receive, process, honor, and pay any and all checks drawn on the Debtors' payroll or disbursement accounts and any other transfers that are related to Employee Obligations and the costs and expenses incident thereof, whether those checks were presented prior to or after the Petition Date, provided that sufficient funds are available in the accounts to make such payments; and it is further ORDERED that each such banlc or financial institution may rely on the representations of the Debtors with respect to whether any check or other transfer drawn or issued by the Debtors prior to the Petition Date should be honored pursuant to this Order, and such bank or financial institution shall not have any liability to any party for relying on such representations by the Debtors as provided for herein; and it is further ORDERED, that the Debtors are authorized to issue postpetition checks or to effect postpetition fund transfer requests in replacement of any checks or fund transfer requests related to Employee Obligations dishonored or rejected as a consequence of the commencement of the Debtors' Chapter 11 case; and it is further

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ORDERED, that a final hearing will be held on the Motion on _ _ _ _ _, at .m.; and it is further ORDERED, that nothing in the Motion of this Order shall be construed as impairing the Debtors' right to contest the validity or amount of any Employee Obligations, including without limitation Payroll Taxes that may be due to any taxing authority; and it is further ORDERED, that nothing in this Motion shall be deemed a request by the Debtors for authority to assume, and nothing in this Order shall be deemed authorization to assume, any executory contract or unexpired lease pursuant to Section 365 of the Bankruptcy Code; and it is further ORDERED, that Rule 6003 of the Federal Rules of Bankruptcy Procedure has been satisfied; and it is further ORDERED, that notwithstanding the possible applicability of Rule 6004(h) of the Bankruptcy Rules, or otherwise, the terms and conditions of this Order shall be immediately effective and enforceable upon its entry; and it is further ORDERED, that the requirements of Bankruptcy Rule 6004(a) are waived and it is further ORDERED, that nothing in the Motion or this Order shall be deemed to violate or permit a violation of section 503( c) of the Bankruptcy Code. ORDERED, that this Court shall retain jurisdiction over any and all matters arising from the interpretation or implementation of this Order Dated: , 2008 Wilmington, Delaware UNITED STATES BANKRUPTCY JUDGE

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