UNITED STATES BANKRUPTCY COURT DISTRICT OF DELAWARE

In re: MERVYN'S HOLDINGS, LLC, et al., Debtors.

Chapter 11 Case No. 08-11586 (KG) Jointly Administered

Hearing Date: August 26, 2008 at 10:00 a.m. Objection Deadline: August 20, 2008 at 4:00 p.m. Related Docket Nos.: 12, 15 and 59

LIMITED OPPOSITION TO DEBTORS' MOTION SEEKING 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 Fifth Third Leasing Company ("Fifth Third"), Key Equipment Finance Inc. ("Key") and IDB Leasing, Inc. ("IDB", and together with Fifth Third and Key, collectively, the "Objectors") hereby file their Limited Opposition To Debtors' Motion Seeking 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

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Cash Collateral And Granting Adequate Protection In Respect Thereof (the "Motion"), and respectfully submit as follows: RELEVANT FACTUAL BACKGROUND 1. On May 8, 2007, Mervyn's LLC ("Mervyn's") entered into a Master Lease

Agreement (as at any time amended, the "Master Agreement") with General Electric Capital Corporation ("GECC"). Pursuant to the terms of the Master Agreement, Mervyn's leased from GECC certain equipment more particularly described in and on certain Equipment Schedules subject to the Master Agreement. In addition, Mervyn's granted a security interest to GECC in and to the equipment referenced in those certain Equipment Schedules subject to the Master Agreement, to secure the due and punctual payment of any and all of the present and future obligations of Mervyn's to GECC. A true and correct copy of the Master Agreement is attached herewith as Exhibit "A" and is incorporated by reference herein. 2. On or about May 8, 2007, in accordance with and subject to the Master

Agreement, Fifth Third and Mervyn's entered into that certain Equipment Schedule, described as Schedule No. F001 to the Master Agreement (as at any time amended, the "Fifth Third Schedule"), whereby Mervyn's leased certain equipment, more specifically described in the Fifth Third Schedule, from Fifth Third. A true and correct copy of the Fifth Third Schedule is attached herewith as Exhibit "B" and is incorporated by reference herein. 3. Concurrent with the entry into the Master Agreement, GECC assigned all of its

rights, title and interest in and to the Fifth Third Schedule, the equipment subject thereto (the "Fifth Third Collateral") and the Master Lease as it relates to the Fifth Third Schedule and the Fifth Third Collateral (as that term is defined below), to Fifth Third. A true and correct copy of the Specification of Assigned Interest is attached herewith as Exhibit "C" and is incorporated by

reference herein. Fifth Third perfected its security interests in and to the Fifth Third Collateral prior to the Petition Date (as that term is defined below). 4. On or about May 4, 2007, Wachovia Capital Finance Corporation (Western)

("Wachovia") and Fifth Third (together with Wachovia, collectively, the "Parties") entered into a Subordination Agreement (as at any time amended, the "Subordination Agreement"), whereby the Parties set forth the respective priorities of Fifth Third and Wachovia with respect to certain collateral. Specifically, the Parties agreed that Fifth Third shall have priority over Wachovia with respect to the Fifth Third Collateral. A true and correct copy of the Subordination

Agreement is attached herewith as Exhibit "D" and is incorporated by reference herein. 5. On or about May 8, 2007, in accordance with and subject to the Master

Agreement, Key and Mervyn's entered into that certain Equipment Schedule No. K001 (as at any time amended, the "Key Schedule 1") whereby Mervyn's leased certain equipment, more specifically described in the Key Schedule 1 (the Key Collateral 1)1, from Key. A true and correct copy of the Key Schedule 1 is attached herewith as Exhibit "E" and is incorporated by reference herein. 6. Concurrent with the entry into the Master Agreement, GECC assigned all of its

rights, title and interest in and to the Key Schedule 1, Key Collateral 1, and the Master Agreement as it relates to the the Key Schedule 1 and the Key Collateral 1, to Key. A true and correct copy of the Specification of Assigned Equipment Schedule and Notice and Acknowledgment of Assignment are attached herewith as Exhibit "F" and are incorporated by reference herein. Key perfected its security interests in and to the Key Collateral 1, prior to the Petition Date.

The detailed listing of Key Collateral 1 is voluminous and is not attached herewith, but will be provided upon request to any party-in-interest. 3

7.

On or about May 10, 2007, GECC and Mervyn's entered into a Master Security

Agreement (as at any time amended, the "MSA"), pursuant to which Mervyn's granted to GECC a security interest in and to certain equipment more particularly described in and on certain Collateral Schedules subject to the MSA, to secure the due and punctual payment of any and all of the present and future obligations of Mervyn's to GECC, including but not limited to payment and performance of certain Promissory Notes identified in the various Collateral Schedules. A true and correct copy of the MSA is attached herewith as Exhibit "G" and is incorporated by reference herein. 8. On or about June 4, 2007, Mervyn's executed a Promissory Note (as at any time

amended, the "Note 1") in favor of Key, whereby Mervyn's promised to re-pay the principal sum of $1,343,218.79, with interest, to Key upon terms and amounts as set forth in Note 1. A true and correct copy of the Note 1 is attached herewith as Exhibit "H" and is incorporated by reference herein. 9. Concurrent with the entry into Note 1, and in accordance with and subject to the

MSA, Mervyn's and Key executed a Collateral Schedule No. K002 (as at any time amended, the "Key Schedule 2"), pursuant to which Mervyn's granted a security interest in certain equipment, more particularly described therein (the "Key Collateral 2"), to Key, to secure payment and performance of any and all of the present and future obligations of Mervyn's to Key, including, but not limited to, the obligations of Mervyn's under the Note 1. A true and correct copy of Key Schedule 22 is attached herewith as Exhibit "I" and is incorporated by reference herein. 10. Concurrent with the entry into the Master Agreement, GECC assigned all of its

rights, title and interest in and to the Key Schedule 2, Key Collateral 2, and the Master

The detailed listing of Key Collateral 2 is voluminous and is not attached herewith, but will be provided upon request to any party-in-interest. 4

Agreement as it relates to the Key Schedule 2 and the Key Collateral 2, to Key. A true and correct copy of the Specification of Assigned Equipment Schedule and Notice and Acknowledgment of Assignment are attached herewith as Exhibit "J" and are incorporated by reference herein. Key perfected its security interests in and to the Key Collateral 2, prior to the Petition Date. 11. On or about July 17, 2007, Mervyn's executed a Promissory Note (as at any time

amended, the "Note 2") in favor of Key, whereby Mervyn's promised to repay the principal sum of $2,788,817.59, with interest, to Key upon terms and amounts as set forth in the Note 2. A true and correct copy of the Note 2 is attached herewith as Exhibit "K" and is incorporated by reference herein. 12. Concurrent with the entry into Note 2, and in accordance with and subject to the

MSA, Mervyn's and Key executed a Collateral Schedule No. K003 (as at any time amended, the "Key Schedule 3"), pursuant to which Mervyn's granted a security interest in certain equipment, more particularly described therein (the "Key Collateral 3"), to Key, to secure payment and performance of any and all of the present and future obligations of Mervyn's to Key, including, but not limited to, the obligations of Mervyn's under the Note 2. A true and correct copy of the Key Schedule 33 is attached herewith as Exhibit "L" and is incorporated by reference herein. 13. Concurrent with the entry into the Master Agreement, GECC assigned all of its

rights, title and interest in and to the Key Schedule 3, Key Collateral 3, and the Master Agreement as it relates to the Key Schedule 3 and the Key Collateral 3, to Key. A true and correct copy of the Specification of Assigned Equipment Schedule and Notice and Acknowledgment of Assignment are attached herewith as Exhibit "M" and are incorporated by

The listing of Key Collateral 3 is voluminous and is not attached herewith, but will be provided upon request to any party-in-interest. 5

reference herein. Key perfected its security interests in and to the Key Collateral 3, prior to the Petition Date. 14. On or about September 25, 2007, Mervyns executed a Promissory Note (as at

any time amended, "Note 3") in favor of Key, whereby Mervyn's promised to re-pay the principal sum of $3,412,893.18, with interest, to Key upon terms and amounts as set forth in the Note 3. A true and correct copy of the Note 3 is attached herewith as Exhibit "N" and is incorporated by reference herein. 15. Concurrent with the entry into Note 3, Mervyn's and Key executed a Collateral

Schedule No. K004 (as at any time amended, the "Key Schedule 4"), pursuant to which Mervyn's granted a security interest in certain equipment, more particularly described therein (the "Key Collateral 4"), to Key, to secure payment and performance of any and all of the present and future obligations of Mervyn's to Key, including, but not limited to, the obligations of Mervyn's under the Note 3. A true and correct copy of the Key Schedule 44 is attached herewith as Exhibit "O" and is incorporated by reference herein. 16. Concurrent with the entry into the Master Agreement, GECC assigned all of its

rights, title and interest in and to the Key Schedule 4, Key Collateral 4, and the Master Agreement as it relates to the Key Schedule 4 and the Key Collateral 4, to Key. A true and correct copy of the Specification of Assigned Equipment Schedule and Notice and Acknowledgment of Assignment are attached herewith as Exhibit "P" and are incorporated by reference herein. Key perfected its security interests in and to the Key Collateral 4, prior to the Petition Date.

The listing of Key Collateral 4 is voluminous and is not attached herewith, but will be provided upon request to any party-in-interest. 6

17.

The Key Collateral 1, Key Collateral 2, Key Collateral 3 and Key Collateral 4 are

collectively referred to as "Key Collateral." 18. On or about May 4, 2007, Wachovia and Key entered into a Subordination

Agreement whereby they set forth their respective priorities with respect to certain collateral. Specifically, they agreed that Key shall have priority over Wachovia with respect to the Key Collateral. A true and correct copy of the Subordination Agreement is attached herewith as Exhibit "Q" and is incorporated by reference herein. 19. On or about May 8, 2007, in accordance with and subject to the Master

Agreement, IDB and Mervyn's entered into an Equipment Schedule, described as Schedule No. I001 to the Master Agreement (as at any time amended, the "IDB Schedule") whereby Mervyn's leased certain equipment, more specifically described in the IDB Schedule (the IDB Collateral)5, from IDB. A true and correct copy of the IDB Schedule is attached herewith as Exhibit "R" and is incorporated by reference herein. 20. Concurrent with the entry into the Master Agreement, GECC assigned all of its

rights, title and interest in and to the IDB Schedule, the IDB Collateral and the Master Agreement as it relates to the IDB Schedule and the IDB Collateral, to IDB. A true and correct copy of the Specification of Assigned Equipment Schedule is attached herewith as Exhibit "S" and is incorporated by reference herein. IDB perfected its security interests in and to the IDB Collateral, prior to the Petition Date. 21. On or about May 4, 2007, Wachovia and IDB entered into a Subordination

Agreement, whereby they set forth their respective priorities with respect to certain collateral. Specifically, they agreed that IDB shall have priority over Wachovia with respect to the IDB

The listing of IDB Collateral is voluminous and is not attached herewith, but will be provided upon request to any party-in-interest. 7

Collateral. A true and correct copy of the Subordination Agreement is attached herewith as Exhibit "T" and is incorporated by reference herein. 22. The Fifth Third Collateral, Key Collateral and IDB Collateral are collectively

referred to as the "Objectors' Collateral". 23. On or about July 29, 2008 (the "Petition Date"), Mervyn's Holdings, LLC,

Mervyn's LLC and Mervyn's Brands, LLC (collectively, the "Debtors") filed Voluntary Petitions for relief under Chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the District of Delaware (the "Court") and Orders for Relief were entered on that date. 24. On or about July 31, 2008, the Debtors filed the Motion seeking, among other

relief, authorization to use cash collateral, to grant adequate protection in the form of perfected liens on all Collateral6 to the Lenders, and to grant superpriority administrative status to the Lenders. 25. On or about July 31, 2008, this Court entered an Interim Order granting the

Motion (the "Interim Order"), on an interim basis, subject to a final order and a final hearing. 26. The Interim Order contains certain provisions which may be deemed (i) to alter,

or modify the priority of the Objectors lien with respect to their respective Objectors Collateral pursuant to the terms of their Subordination Agreements with Wachovia, (ii) to prime the Objectors' liens in and to the respective Objectors' Collateral, and/or (iii) to prime the Permitted Liens. The Objectors' liens in and to the Objectors' Collateral are "Permitted Liens."

Capitalized terms used, but not otherwise defined herein, shall have the same meanings ascribed to them in the Motion and/or the Interim Order. 8

27.

Accordingly, the Objectors file this Limited Opposition to (i) preserve their rights

with respect to the Objectors' Collateral and (ii) generally preserve the rights of holders of Permitted Liens. As such, the Objectors object to the following provisions of the Interim Order and request that any Final Order with respect to the Motion be modified as set forth below. LIMITED OPPOSITION 28. Section 2.3.1 of the Interim Order provides, in relevant part, that after an Event of

Default, the liens in the Collateral are only subject to the Carve Out Expenses. The Objectors object to this provision as it may be interpreted that the liens in the Collateral are not subject to the Permitted Liens. Accordingly, the Objectors request that the Final Order provide that

"Nothing in this section shall alter the priority of Permitted Liens and Claims set forth in sections 2.1.1 and 2.1.2 of this Order". 29. Section 2.6.2 of the Interim Order provides that: (a) A/L Replacement Lien shall be junior and subordinate only to the Carve-Out Expenses and the liens and security interests granted to Agent and Lenders in the Collateral securing the Post-Petition Obligations, (b) Note Replacement Lien shall be junior and subordinate in all respects to (i) the right and payment of all Obligations owing to Agents and Lenders, (ii) the liens and security interests granted to Agent, for the benefit of all Secured Parties, pursuant to this Interim Order, including, without limitation, the A/L Replacement Lien, and (ii) all Carve Out Expenses, and (c) subject to the foregoing subsection (a) and (b), the Replacement Liens shall otherwise be senior in all other security interests in, liens on or claims against any of the Collateral. 30. The A/L Replacement Liens and Note Replacement Liens attach to the

"Collateral", which would include the Pre-Petition Collateral (which includes the Objectors' Collateral and all other collateral secured by the Permitted Liens). As such, once again, they would alter the priority of the Objectors' Liens and the holders of Permitted Liens. Accordingly,

the Final Order should provide that "the A/L Replacement Liens and Note Replacement Liens are also junior to Permitted Liens and Claims." 31. Section 3.2 (which provides for the Agent to set off any Obligations with

Collateral), Section 3.4 (which provides that the Agent to proceed against and realize upon the Collateral), Section 4.4.2 (which provides the Agent the right to enter upon and use any personal property, fixtures, equipment, leasehold interests etc.) and Section 5.3 (which provide that the Debtors may remit to Agent all proceeds of the Collateral) are all sections that may be interpreted as altering (a) the Permitted Lien's priority over the Agent's liens, (b) the rights of holders of Permitted Liens in and to the Collateral and (c) the Objectors' rights and priorities pursuant to their respective Subordination Agreements. 32. As such, the Final Order should provide that "Notwithstanding anything in this

Order or the Financing Agreements, (a) all rights and remedies of holders of Permitted Liens shall be unaltered and unimpaired and (b) holders of Permitted Liens shall retain all rights and remedies under applicable law with respect to the Collateral in which they hold a security interest, including (i) any rights to contest or object to any actions taken by the Agent and/or the Lenders with respect to the use, disposition and/or application of such Collateral and (ii) the priority of such Permitted Liens over the liens of the Agent and the Lenders. 33. The Objectors further object to the extent their rights under their respective

Subordination Agreements are impaired, truncated, or adversely impacted. 34. The Objectors reserve their right to amend, supplement, or modify this Limited

Opposition at any time prior to or at the hearing on the Motion. 35. Finally, the Objectors further request that they be granted such other and further

relief as the Court deems equitable or just under the circumstances.

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CONCLUSION WHEREFORE, the Objectors respectfully request that the Final Order provide the relief requested herein above and for such other and further relief as the Court deems proper.

Dated: August 20, 2008 Wilmington, Delaware

Respectfully submitted, MARGOLIS EDELSTEIN

/s/James E. Huggett James E. Huggett, Esq. (#3956) 750 Shipyard Drive, Suite 102 Wilmington, DE 19801 Telephone: (302) 888-1112 Facsimile: (302) 888-1119 E-mail: jhuggett@margolisedelstein.com -andAmish R. Doshi (AD5996) 7 Times Square New York, New York 10036 Telephone: (212) 297-5800 Facsimile: (212) 916-2940 E-mail: adoshi@daypitney.com Counsel to Fifth Third Leasing Company, Key Equipment Finance Inc. and IDB Leasing, Inc.

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