UNITED STATES BANKRUPTCY COURT DISTRICT OF DELAWARE

IN RE: MERVYNS HOLDINGS, LLC, et al., Debtors.

. . . . . . .

Chapter 11 Case No. 08-11586(KG) (Jointly Administered) Sept. 12, 2008 (10:03 a.m.) (Wilmington)

TRANSCRIPT OF PROCEEDINGS BEFORE THE HONORABLE KEVIN GROSS UNITED STATES BANKRUPTCY COURT JUDGE

Proceedings recorded by electronic sound recording; transcript produced by transcription service.

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2 INDEX DEBTORS EVIDENCE Direct WITNESS: Stuart Erickson 29 36 Cross Redirect Recross

3 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 seated. THE CLERK: Please rise. THE COURT: Good morning, everyone. Thank you. Mr. Herman? Please be

MR. HERMAN: Good morning, Your Honor. THE COURT: Good morning, sir. MR. HERMAN: Neil Herman, Morgan, Lewis & Bockius, for the debtor. Your Honor, I believe we only have one item Its the debtors motion

on the Mervyns calendar today.

under 365(d)(4) to extend the time to assume or reject leases for an additional 90 days. As the Court is aware, this is a

very common motion, especially in retail cases where, as here, we have a large number of leases, and the leases are a primary asset of the estate. The Bankruptcy Code previously

gave the debtor, in essence, an indefinite time to assume or reject since debtors could seek and often obtained a series of extensions often until confirmation of a plan, but as we all know, the Code changed that, and now theres only a one 90-day extension thats permitted without landlord consent, and thereafter, all further extensions need landlord consent, in fact, prior written landlord consent. This motion seeks

that one 90-day extension that Congress gave to the debtor. We have a minimum number of objections that were filed, Your Honor. It was actually a small number. I think weve

resolved at least three of them.

So, when I conclude my

remarks, we can have whatever remaining objectors there are

4 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 come up, but I believe it probably only one or two at this point. THE COURT: Good, Mr. Herman, thank you. MR. HERMAN: We proposed to proceed with a proffer of the debtors witness on the factual reasons for the extension, and then we can hear if theres any objections. Is that acceptable to Your Honor? THE COURT: Thats fine, certainly. MR. HERMAN: Thank you, Your Honor. THE COURT: Absolutely. MR. HERMAN: Your Honor, by way of proffer, we have Mr. Stuart Erickson. Hes managing director at Miller If called

Buckfire, which is the debtors financial advisor.

to testify, Mr. Erickson would testify as follows: He is fully familiar with the motion and the relief requested. is personally familiar with the company and its assets and its business plan and the plan formulation process and of course with the debtors debtor-in-possession loan. He would He

further testify that no lease is being assumed or rejected as part of this motion and all rights of any landlord to object to a proposed assumption or assignment or rejection of their lease and to any adequate assurance issues will be addressed by way of a separate motion. He would further testify that

the motion seeks a 90-day extension of time to assume or reject leases from the current deadline of November 25, 08

5 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 through and until February 23, 09. Mr. Erickson would

testify that the factual support for the motion is four primary areas as follows: First, Mr. Erickson would testify that the debtors recently moved to retain Hilco as their real estate expert to produce a valuation of each leasehold interest and to negotiate potential rent reductions with landlords. The hearing date for Hilcos retention is not Before making a final and informed

until September 25, 08.

decision of whether to assume or reject leases, the debtors need time to review the Hilco appraisal, to discuss it with the Committee and the banks, and to have Hilco engage in substantive discussions with the landlords. Since the

debtors have 173 store locations plus a headquarters and several distribution centers, this process is large and time consuming and is unlikely to be completed by November of 08. The second area that Mr. Erickson would testify to, Your Honor, relates to the debtors real estate structure. would testify as follows: The debtors real estate structures extremely complex. As part of a September 04 He

acquisition, all of the debtors real estate properties were removed and transferred to more than 24 related entities, known as the MDS entities, who then leased or subleased such properties back to the debtors pursuant to several purported master or unitary leases. The debtors need time to review

the master leases and to negotiate with the MDS entities and

6 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 perhaps to even litigate some of these issues which will be fact intensive and time consuming if no resolution can be had on consent with MDS. Moreover, since 2004, many of the

stores were carved out of the master leases and sold by MDS to a large number of existing landlords. need to be reviewed. These leases also

Further, Your Honor, there were

approximately 40 leases which did not get assigned to MDS in the 2004 transaction due to prohibitions on assignment in those leases. created. Instead a complex agency arrangement was

The debtors current legal rights to these leases

is extremely complex and will require extensive legal research and negotiations with MDS. completed by November of 08. None of this will be

The third factual basis that He

Mr. Erickson would testify to deals with the DIP loan.

would testify as follows: The debtor-in-possession lenders have a lien on all the debtors inventory and the lease proceeds and on many of the underlying leases. Therefore,

the DIP lender needs to be certain that its collateral will not be subject to any sudden or premature, large-scale, or assumption or rejection decisions. As a result, the DIP

loan, as approved by this Court, allows Wachovia to take a reserve against the inventory at any store if the lease for such store has not been assumed within 10 weeks prior to the assumption or rejection deadline, unless such deadline has been extended by this Court. Under the current deadline,

7 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 using the 10-week formula, the reserve would occur next week, and that is why the motion needs to be resolved today. Under

the current 10-week deadline, if the reserve were taken next week, this would significantly reduce the debtors borrowing availability and would dramatically undermine the debtors efforts to restore vendor confidence and trade terms, to restore customer confidence and employee morale at a critical early stage in the Chapter 11 cases. Consequently, this

reason alone, in the debtors view, is sufficient and satisfies the Boards reasonable business judgment to justify the relief being sought today. Finally, Your Honor, the

fourth area that Mr. Erickson would testify to relates to the business plan development process. Mr. Erickson would

testify that he and Miller Buckfire are working with the debtors to currently evaluate several distinct exit strategies for the case. Miller Buckfire is actively working

with senior management at the debtors to develop a formal business plan and to evaluate all the exit alternatives and to make a recommendation to the Board. The Board will then

need to review the plan, discuss it, and make decisions on which strategy to pursue. This process is also extensive and

time consuming and will entail discussions and negotiations with the Committee, the DIP lenders, the pre-petition secured creditors, and all constituencies in the case. It is simply

impossible for the debtors to make an informed and rational

8 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 business decision on the assumption or rejection of more than 170 real estate leases until it first formulates a business plan and vets that plan the key constituents in these cases. Mr. Erickson would testify that the process of evaluating the exit strategies and vetting them with the key constituents and that implementing the strategy will not be completed before the current deadline in the DIP loan of next week, and is not likely to be completed by the November deadline which currently exists. For these reasons and the reasons set

forth in the motion, the debtors believe its a reasonable exercise of its business judgment to extend the time to assume or reject leases for an additional 90 days and to do so today to avoid a default next week under the DIP loan. That would complete the proffer, Your Honor. THE COURT: Thank you. Thank you, Mr. Herman.

MR. MacDONALD (TELEPHONIC): Your Honor, Mark MacDonald appearing on behalf of DeRito Pavillions 140, LLC. THE COURT: Yes, sir. MR. MacDONALD (TELEPHONIC): We would object to the proffer at least . . . (microphone not recording) it applies to us in that if Your Honor wants to take that as the basis for dealing with the other 172 or 173 leases . . . proffer deals with issues that the debtor has, but that doesnt in any way deal with cause concerning my clients property which is Scottsdale Pavilions in Arizona. Well, we dont have a

9 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 problem with 170 leases or 172 leases, we have a problem, perhaps with 1 to 3 leases. There is not a situation in

which we know that this property is going to be reopened or continue to be operated. The order authorizing store In some typical cases expected

closings included our store.

that all the sales under the store closing will be done by October 30th. In any event, all sales are supposed to occur My clients represent less than half of

by November the 25th.

one percent of the overall leaseholds in the case and especially when theres been a store closing sale going on for a series of weeks, the . . . change with respect to the inventory in our own case would be de minimis as it applies to my client. Over and above that, there is no long-term

plan to indicate if the store will ever be reopened nor is there any prediction as to why the store would not have exhausted its inventory by October 31st, which is well within the 120 day period. Over and above that, the borrowing date

argument which is framed in the proffer as being a default really . . . only a reserve against the inventory in a particular store. If we have one-half of one percent of the

stores and the borrowing base is . . . even 90 or 85 percent and theyve been conducting a store closing sale for a period of weeks, the number gets so close to zero that its no material impact on the estate and thus although it might be a justification as to the bulk of the leases, it is not the

10 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 justification as to my clients lease and the statutory standard requires attention on all leases . . . individual objecting party. Apart from that, we have a series of legal

points, but it would seem that if the proffer was being proffered solely for the limited purpose of getting rid of 172 to 174 . . . we would not object to . . . THE COURT: Well, thank you, Mr. MacDonald. I think

what well do is this: Ill allow Mr. Herman to address some of the other objections and then to the extent you would wish to cross-examine the witness, you certainly may. MR. MacDONALD (TELEPHONIC): Thank you. MR. HERMAN: Thank you, Your Honor. Let me first

say that the point about being 2 percent of the stores, that doesnt really make much rational sense to me. Everyone of

the 173 stores you could say that in a vacuum, each particular store is only 2 percent so why should we extend for that one particular store and why should we care about the DIP loan reserve? But the point is that when you add We

them together, its all of the liquidity in the estate. cant treat his lease separately under the DIP loan. not done that way. Wachovia has the right to take the

Its

reserve against his store and all the other stores, so theres no difference in his store. There is currently

inventory at that store, and next week we would lose liquidity for all the leases. So looking at them in a

11 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 vacuum, I dont think makes a lot of sense. Secondly, Your

Honor, I just - one of the key issues, and well get to this, I think its premature. Were going to address the

objections after we complete our case in chief, but the key issue for me is that for this particular store, theres no continuous operations close. So, outside of bankruptcy, we

could stay dark forever, as long as we pay the monthly rent and the common area maintenance and the other obligations. So, the landlord gets no greater rights to the mere happenstance of the bankruptcy filing of the debtor. You

have USB Butner (phonetical) a Supreme Court case that uses that quote, and of course there are many Third Circuit cases with that quote. So, the fact that a store is dark is He bargained for

exactly what the landlord bargained for.

the right to have a store that stays dark forever as long as he gets his rent. rights. So, hes getting his full contractual

So, Your Honor, with respect to this particular

lease, I suggest that we reserve his rights, and well get back to him on that THE COURT: Thats what I think too. - yes. MR. HERMAN: Okay. THE COURT: Yes. MR. HERMAN: Your Honor, we did settle a few The first

objections, and I want to put those on the record.

one is the limited objection of North 3 Holdings, LLC.

12 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 THE COURT: Yes. MR. HERMAN: This is a landlord of the headquarters. The landlord and the debtors have been talking, and the landlord has made a compelling case that the headquarters lease should be treated differently than the retail stores, and we have tentatively agreed that that makes some sense. So what weve done with the North 3 Holdings, LLC, objection is to do the following, Your Honor: Weve settled the objections to both the (d)(4) motion as well as the debtors pending motion to establish lease procedures for assumption or rejection which is going to be heard on the 25th of September. So this is sort of a global settlement of both.

Heres what weve done, and Ive been asked to put this on the record. The landlord will withdraw its objection to the

(d)(4) motion today, and the debtor will confirm that the landlord may move to compel assumption or rejection of its headquarters lease at any time, and of course, the debtor reserves its rights to object. With respect to the lease

procedures motion on for the 25th, the debtor will withdraw the headquarters lease from that motion, and that resolves the objection of North 3 Holdings, and perhaps we should see if their counsel is on the phone or here today. THE COURT: Counsels here. MS. BROWN: Good morning, Your Honor. Morgan Sullivan on behalf of North 3 Holdings. Amy Brown,

13 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Honor. THE COURT: Yes, it is. MR. HERMAN: And we did some digging and as it turns out, the chain of title for this particular store is different than all of the other objectors. The chain of the case. MR. HERMAN: That is the case for every landlord, Your Honor. THE COURT: Yes. MR. HERMAN: The next settlement that we would like to put on the record is with Byer Properties, B-y-e-r Properties. THE COURT: Yes. MR. HERMAN: This was an interesting objection, Your THE COURT: Good morning. MS. BROWN: That representation is accurate. also our understanding that post-petition rent will be continued to be paid timely and will be continued to be paid in full at this time. Thank you. Mr. Herman, I assume thats Its

THE COURT: Thank you.

title for this store appears to be that a Byer Properties entity owns the fee, leases it to MDS, who then subleases the store to the debtor, and this is true for both the stores, Cupertino and Santa Clara, for both stores. We have

confirmed with our special real estate counsel that that is

14 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 courtroom. in fact the state of the title, and therefore, Byer Properties is willing to withdraw its objection based on the debtor confirming that its particular lease with MDS, a nondebtor, is not affected by this motion, and its rights against its tenant are completely reserved. If Byers

counsel is here, they can comment, if theyd like. THE COURT: I think we have someone on the telephone for Byer; is that correct? MR. SULLIVAN (TELEPHONIC): Your Honor MS. SCHARDT: Yes, Your Honor THE COURT: Oh, Im sorry. Good morning. MS. SCHARDT: Good morning, Your Honor. Magdalena Someone is also in the

Schardt from the firm of Fox, Rothschild on behalf of Byer Proprties and Im accompanied, as youre aware, by my lead counsel THE COURT: Yes. MS. SCHARDT: So, Ill let them address the Court. THE COURT: Thank you, thank you very much. Sullivan or Mr. Greenfield? MR. SULLIVAN (TELEPHONIC): Your Honor, this is Chris Sullivan from McGrane Greenfield on behalf of Byer Properties. THE COURT: Yes, sir. MR. SULLIVAN (TELEPHONIC): That agreement sounds Mr.

15 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Inland. like . . . (microphone not recording) and we greatly appreciate the Courts time and the cooperation of debtors counsel. THE COURT: Thank you, Mr. Sullivan, thank you. MR. HERMAN: Thank you, Your Honor. objection that we resolved is Inland. The third

I believe its a -

Macerich is the landlord that the - the name of the property is the Inland Center THE COURT: Yes. MR. HERMAN: - so we affectionately call it

I think there may be a landlord named Inland, so I For the Inland Center

just want to make sure its clear. store, this is -

THE COURT: This is a new construction. MR. HERMAN: This is the new construction THE COURT: Yes. MR. HERMAN: - exactly right. This is a store

which has not yet opened.

So, therefore, there is no

inventory at that store, and therefore, the Wachovia reserve would not affect it. Accordingly, we have agreed with

Inlands counsel to withdraw the Inland store from this particular motion. Of course, its without prejudice to our

rights to seek an extension of time later, but we are withdrawing the Inland store from this particular (d)(4) motion today.

16 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Macerich? courtroom. THE COURT: Okay. Is there anyone on the phone for

Yes - Oh, Im sorry, another counsel in the Good morning. MR. BRANCH: Good morning, Your Honor. Dustin

Branch, Katten Muchin Rosenman, LLP THE COURT: Yes, sir. MR. BRANCH: - on behalf of the Macerich Company, The deal as stated on the record

landlord for Inland Center. is correct.

Macerich also reserves its right to compel

assumption or rejection at any time as to scheduled new construction and the parties have agreed that all steps will be taken to maintain the security and protect the property in the interim. THE COURT: Thank you, Mr. Branch. MR. HERMAN: Thank you, Your Honor. Theres a

security fence around the construction site and counsel for the landlord and I have agreed to work on an email that we would confirm how to treat the safety issues while the construction project is gong on. So, were going to work

that out amongst ourselves, Your Honor, and come up with some sort of writing. THE COURT: Excellent. MR. HERMAN: Finally, Your Honor, I think before we turn it over to the objectors, we want to make it clear that this motion is without prejudice to any landlords right to

17 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 move at any time to compel a shorter deadline for assumption or rejection if they have a particular harm or prejudice or reason that would justify it. So, this is an extension of Its a fixed and

time for 90 days that Congress gave us. certain time.

After that we get no further extensions except So, I saw that some of

without their prior written consent.

the objections used language about their leases being put in limbo or a blanket extension. Its not. To the contrary,

this is a fixed and certain 90-day extension and thats it, with no further extensions unless they consent in writing. So, given that, I believe that the cause requirement under the Code is construed much more liberally these days than it was in the past where you could come back to the Court many, many times over, and of course in fact in some cases over years THE COURT: Yes. MR. HERMAN: This is 90 days, and thats it. So I

would think that the cause requirement or the hurdle for the debtor is much lower than it used to be. Honor, thats it. I think, Your

We, of course, intend to pay the rent Theres no allegation of

currently as we go forward.

administrative insolvency, so - and the Court did approve the DIP loan and were not in default. THE COURT: Right. MR. HERMAN: So with that I would turn it over to

18 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 any remaining objectors who want to be heard. THE COURT: Thank you. Mr. MacDonald. MR. MacDONALD (TELEPHONIC): Thank you. it sounds like Im the only one - Did I miscount? THE COURT: I think you may have miscounted. think there may be one other. MR. MacDONALD (TELEPHONIC): Right. Well, first, if I Your Honor, Why dont I hear first from

thats the sole presentation that theyre making with respect to our lease, thats no demonstration whatsoever that a single lease, that is less than or approximately half of one percent of the overall leasehold is going to have any impact whatsoever . . . (microphone not recording). The Courts

already approved the store closing sales, the store closing sales in process, due to be completed before October 30th, and there was no showing whatsoever as to what amount of inventory or breakdown or reserve would be caused by whatever modification there was in an amount that should be substantially less than half of one percent of the overall inventory located at the debtor. Over and above that,

counsel indicated that we were only getting what we bargained for and that we had a relatively soft going dark clause. agree. We

There is a relatively soft going dark clause in which

the debtor could even go partially dark for a period of time without breaching the lease. What we did, however, negotiate

19 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 for, was a provision that said explicitly that the debtor would make a decision within 60 days, which was the statutory time . . . appropriate at the time that the lease was executed to determine to assume or reject, and they would not be requesting an extension of time even under the more highly discretionary standard that existed before Congress put the new not-more-than-one-bite rule into effect. So, if they

both say, Well, gee, you can sit there was it dark at a point in time, that the debtor is not bringing any income from the store, its only required to extend rent with respect to the store and do so within a period, not within the first 120 days, which the statute currently permits, but within 270 days. We submit that . . . were not deciding today or

shouldnt decide today whether or not that clause could constitute an ipso facto clause that thats the provision that Your Honor should take into account in terms of denying the motion . . . the other 174 . . . How would that differ

in any reasonable sense than the deal that the debtor is agreeing to cut in which various parties were . . . pulled from the scope of the order under special circumstances. We

are the only lease, to the extent of my understanding, out of the entire 177 that has that kind of a clause contained in it and although the debtor acts as if the 120 days is automatic, the fact of the matter is, is that the current Code only says that the debtor must assume or reject within 120 days. It

20 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 does not state that a . . . for that reason . . . the time when 50 days was the relevant time that it is unreasonable or enforceable to have such a clause in the lease. So . . . can

proceed in terms of interrogation, but, you know, with respect to their basically resting on that record without anything more, I believe that Your Honor should rule in my favor before we even start into the cross because the facts that are . . . are simply evidenced from the record and from the prior orders of the Court. THE COURT: Well, just so that Im clear, Mr. MacDonald, are the parties in effect in disagreement over 30 days - in other words, if under the lease they have the 60 days and theyre asking for 90 days, thats a 30-day difference; is that correct? MR. MacDONALD (TELEPHONIC): No. THE COURT: No? MR. MacDONALD (TELEPHONIC): No, under the lease they said that they would assume within 60 days and theyre asking for 270 days. MR. HERMAN: Your Honor, if I could just interject. What he is arguing is that, notwithstanding the fact that federal law gives me 120 plus 90 THE COURT: Right. MR. HERMAN: - he has a lease that says, Forget Forget federal law, my lease

what Congress has given you.

21 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 60 days. says day 61 your lease is deemed rejected unless you assume or reject within 60 days, no extensions. THE COURT: Oh. MR. HERMAN: His lease gives me two more weeks to assume or reject. THE COURT: Okay. MR. HERMAN: From the petition date, going forward, Not a 60-day extension, Your Honor, but hes

arguing that THE COURT: Okay. MR. HERMAN: - as a matter of law, hes got a

clause in a pre-petition agreement that restricts my rights despite federal law. THE COURT: Okay. MR. MacDONALD (TELEPHONIC): And thats why I say that that is not what Im arguing. Im expressly saying that

because this clause was entered into at a point in time that it was totally consistent with federal law, but there was an issue that was ongoing in the courts during that period of time as to how many times debtors would proceed to request extensions, they agreed up front that the initial . . . (microphone not recording) in essence would be no requests for extensions, and that if they hadnt moved to assume by close to the 60-day period, it would be rejected. Now, with

respect to possession, that doesnt mean that Im saying that

22 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 I have to go and kick them out after 60 days. It simply says

because Your Honor by statute can leave them in for up to 120 days, but what it does say is, that when we come around to the assumption side of the argument that 365(d) now requires them to comply with all the obligations under the lease. of those obligations is the giving of this notice. One

I havent

hid behind the law or popped out after the period and said, Gotcha, Ive an unusual provision here. Ive been trying to

get debtors counsel and/or Hilco to pay attention to us for some period of time with multiple telephone calls, and weve gotten nowhere. way its been. I dont quite understand why, but thats the So, what were saying simply is, even if the

Court were inclined to say that you might not, when we got down to the assignment issue, rule in my favor as to whether or not that mandatory provision in order to prevent cure, you should take it into account in terms of whether or not youre going to let a period that is twice as long be turned into a period thats more than 4 times as long as the parties agreed to when they originally negotiated the lease in good faith at a point in time that they were . . . under a statute that was 60 days plus discretion. the time to extend. So, the only thing . . . today is

There is no question that by the

expiration of the 120 days this property will be vacant, all of the inventory will have been sold, and theres no reason for it to sit there especially in light of the fact that

23 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 fine. THE COURT: Okay. MR. MacDONALD (TELEPHONIC): Especially if you believe that the proffer is adequate because I need to show Congress didnt say that there was a lower standard for cause, didnt . . . change, it said for cause, and for cause is supposed to be measured not just with respect to all the leases in the case, but with respect to the parties that care enough about a particular issue to raise an objection, and there needs to be a presentation of cause that demonstrates why there should be an extension as to what I believe is . . . landlord taking a position that it was simply going to be pimple on an elephant with respect to any economics in this case. This is not a primary operating asset of the debtor.

It is not going to be an operating asset of the debtor during the period of time of the extension, and there is no, like I said, reason for you to grant the extension as of . . . even though you will undoubtedly grant it to parties that didnt object or who negotiated their own particular deal. THE COURT: Well, Im satisfied that the debtor has made out a prima facie case through the proffer of cause for the extension subject, Mr. MacDonald, to your right to crossexamine their witness, Mr. Erickson, if you would like to do so. MR. MacDONALD (TELEPHONIC): Yes, that would be

24 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 that it doesnt really apply at all. THE COURT: Yes, sir. MR. HERMAN: Your Honor, I think that what he is missing is the proffer said that we have retained Hilco to market his lease. THE COURT: Correct. MR. HERMAN: And Hilco is not even going to be retained until the 25th. THE COURT: Well, that would be certainly of MR. HERMAN: This is clearly an asset of the estate that may have value. THE COURT: Correct. MR. HERMAN: So, forget about the inventory issue for a second. We need to market the lease to see if we can So the

assume and assign it for value, period, end of story.

proffer has successfully proven at least on that issue that we have a factual basis of cause, reason to extend the time. We need to hire a real estate expert to look at the lease and start contacting possible tenants and also contact the landlord to see if the landlord wants the store back, and that process takes time. So, in addition -

THE COURT: I understand your argument certainly, and where the proffer was directed toward that issue, but Mr. MacDonald, I think, is not willing to accept that argument at this point, and I think he has a right to cross-examine Mr.

25 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Erickson under the circusmtances. MR. HERMAN: Sure, well MR. MacDONALD (TELEPHONIC): Could I clarify that point, Your Honor. THE COURT: Yes. MR. MacDONALD (TELEPHONIC): Number one, it is not correct that Hilco isnt already dealing with people. Hilco

has been dealing with people whether or not theyre formally retained or not. Number two, the statute permits 120 days,

which Congress believed was a normal amount of time necessary to market a lease. To this circumstance, Hilco would still

have until November 25th to market the lease, which would be a period of at least 60 days after the retention. So, you

know, once again, I dont think that the proffer goes to the special circumstances that my client has raised. THE COURT: All right, well, lets hear your crossexamination of Mr. Erickson. forward. MR. HERMAN: Your Honor, if you could give us two minutes, we may actually have a basis to carve out the lease. Can we put this on hold for one second? THE COURT: Of course, and if youd like an opportunity to talk with Mr. MacDonald that would be acceptable too. I would take a recess if thats the case. Its Mr. Erickson, if you would come

MR. HERMAN: I dont think we need to do that.

26 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 been used. THE COURT: Yes. MR. HERMAN: I am pleased to advise Mr. MacDonald that we will pull this lease out of the pending motion, and everyone can simply reserve their rights. THE COURT: Including your right, I assume, to seek an extension at a later time. MR. HERMAN: Yes, of course, and, of course, we would simply reserve our rights to argue that his clause where we raise the right to seek an extension or that we have to assume or reject it within 60 days is completely unenforceable, but again, I dont think its on for today, and he can reserve his rights on that point and all of the rights and well reserve our rights, but well pull it out of todays (d)(4) extension motion. MR. MacDONALD (TELEPHONIC): Thats perfectly acceptable to me, Your Honor. THE COURT: All right, Mr. MacDonald. Thats fine just that Mr. Erickson is advising me as to what potential range of value this lease may have. If it turns out that the

lease has minimal real estate value for Hilco to market, then the debtor may consider just pulling out of the motion. if you could just give me 90 seconds. THE COURT: Absolutely. MR. HERMAN: Your Honor, less than 90 seconds have So,

27 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 forward. MS. MASON (TELEPHONIC): This is Lyndel Mason . . . (microphone not recording) in Dallas. We represent C.E. with the Court, obviously, as well, and thats what well do. MR. HERMAN: Is there anyone else, Your Honor, who still has a pending objection? Ive lost track myself. Oh, yes, come

THE COURT: I dont - Is there?

Bassett 1, LP, a shopping center landlord in El Paso, Texas, as well as Carlyle/Smith-Cypress 37th Avenue, a shopping center landlord in Phoenix, and I hope counsel Kathleen Miller is also in the courtroom. THE COURT: She certainly is. Good morning.

MS. MASON (TELEPHONIC): Your Honor, I dont want to rehash what has already been said, however, as our limited objection set forth, we have raised many of the same issues that attorney MacDonald has raised concerning the proffer with regard to his client. as to these two leases. We have a limited objection only

It is disingenuous for the debtor to

argue that they havent had time to look at these leases particularly the 35th Avenue lease in Phoenix as that lease was already included in the going-out-of-business sale and like Mr. MacDonalds clients we are looking at diminution inventory and having that store go dark. Counsel is right

that that store may potentially stay dark for 120 days if we dont run in to ask for an or earlier rejection. But the

28 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 statement that the store could stay dark forever is not what the statute provides. beginning of the case. The debtor has 6 months in the The debtors already represented in

their own motion that as early as at least April, they were working on its plan, and as well as Mr. MacDonalds client, Hilco has had extensive discussions with the landlord at 37th Avenue seeking to . . . (microphone not recording) these terms may be able to be changed. Now whether or not that

such an agreement would come about, thats not cause for the debtor to move . . . into next year. The Bankruptcy Code The burden

does not give an automatic extension of 90 days.

is on the debtor, and we object as well that the debtor hasnt met the burden by his proffer as to our particular property. Its also 3 months before 120 days is done. A lot

can happen within that time frame.

The debtor is arguing

that there may be a default, but frankly, theres been no proffer of evidence that there would be a default. The DIP

loan allowed the interim financer to take reserve, but it is not automatic by the wording set forth in the motion and in the earlier interim order on the DIP financing. only talking about a maybe here. So were

A maybe that as to these

two stores would have a very inconsequential effect on the debtors operations, and that is why we are taking the position, Your Honor, that the debtor has not met his burden of showing cause at this time, almost 3 months before the

29 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 original deadline, that theyre going to need another 3 months. Certainly, we expect at least one of our stores will If there is

not have anything in it by November 25, 2008.

other cause that the debtor can establish at that point, the Court certainly can consider it, but we would have our day in court with evidence as to the circumstances at that time, but the circumstances at this time with regard to these two leases and the lack of evidence as to any cause for the debtor to prematurely get an extension, is just not before the Court. I would like the opportunity to cross-examine Mr.

Erickson if the Court is going to rely on that testimony concerning our two stores. THE COURT: All right, you certainly have that opportunity, and I am going to rely on the proffer. I think

it made out a strong prima facie case for cause, and I will give you the opportunity to cross-examine Mr. Erickson. Would you like to do so? MS. MASON (TELEPHONIC): Yes. THE COURT: All right, Mr. Erickson. THE CLERK: Please state your full name and spell your last name for the Court. THE WITNESS: Stuart Erickson, E-r-i-c-k-s-o-n. STUART ERICKSON having been duly sworn testifies as follows: THE COURT: Ms. Mason, you may proceed with your

Erickson - Cross 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 BY MS. MASON: Q. Mr. Erickson, when did you begin your relationship with examination. CROSS-EXAMINATION

30

the debtor. A. Q. In early July of this year. And have you any documentation concerning the analysis

that the debtor represented in its motion began in April? A. Im sorry, would you repeat the question - analysis

representing the Q. The debtor represented that it started its analysis, Did you review any

reorganization back in April.

documentation concerning that analysis? A. Im not aware of any reorganization plan that we began in

April. Q. Were you at all involved in the analysis to add the 37th

Avenue property in Phoenix, Arizona to the debtors short motion last month to conduct going-out-of-business sales and to hire Hilco as its agent for that purpose? A. Q. I was. Are you familiar with the 37th Avenue property in Phoenix,

Arizona? A. Q. On a general basis, yes, from a financial perspective. When you say from a financial perspective, what financial

information do you have personal knowledge of concerning the

Erickson - Cross 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 37th Avenue property? A. General revenue characteristics, profitability

31

characteristics, although I couldnt relate them to you right now off the top of my head. Q. You said before today you could not tell the Court what

you know about the revenue or the profitability of the 37th Avenue store in Phoenix? A. For that specific property that is correct. What the

debtor did was go through - with the help of Miller Buckfire, my firm, is go through an analysis of each and every property to determine which stores were profitable and not profitable, and thats how we made the list of the 26 stores that were for shut-down and GOB. Q. So, its your testimony that the debtor has already

determined that the 37th Avenue Phoenix property is not profitable? A. It is not a core part of the business on a going-forward

basis. Q. Well, you just said that your firm made an analysis as to Are you able to testify as to

what stores were profitable.

whether the debtor concluded that the 37th Avenue Phoenix store is not profitable? A. Profitability is one part of the equation that the

company looked at in determining which was part of the core and non-core stores on a going-forward basis.

Erickson - Cross 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. Okay. Im going to ask you once again.

32 Are you able to

testify whether the debtor concluded that the 37th Avenue property in Phoenix, Arizona was not profitable? A. I do not know off the top of my head whether the 37th Based upon all

Avenue store is profitable or not profitable.

of the analysis that the company went through during the month of August, the stores that were put on the list were deemed non-core stores within the estate, and one of the key criteria that the company looked at was profitability, but I cannot speak today to the specific nature of the 37th Street store. Q. Is it reasonable to conclude that the analysis done by

your firm in connection with the debtor was that the debtor was not going to need that 37th Avenue, Phoenix, Arizona store for its reorganization when it decided to do a going-out-ofbusiness sale? A. Q. I think thats a fair statement. Okay. And are you aware that Hilco is representing the

debtor in connection with the 37th Avenue store in communications with the landlord? A. Q. Yes. So, the debtor has already started said communications

even before the 120 day deadline; is that correct? A. Q. That is correct. The debtor has started.

And do you know any facts concerning the 37th Avenue

Erickson - Cross 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 property that would impair the debtors ability to make a determination as to whether or not the 37th Avenue property should be assume or rejected by November 25th? A. As far as I know, its an ongoing process. Hilco

33

continues to work with many of the 173 landlords, and its obviously a complex and large undertaking that theyre in the process of pursuing. Q. But you have no knowledge whether they can . . .

(microphone not recording). MR. HERMAN: Your Honor, Im going to object. If

she wants to subpoena Hilco she can do so, but this witness is not involved in that process. THE COURT: Ill sustain that objection. BY MS. MASON: Q. So, just for clarification on the record, you are not

involved in the process of determining whether or not the 37th Avenue property in Phoenix, Arizona is a property of the debtors to assume or reject. A. Im not party to the lease negotiations between Hilco and

the 37th Avenue or any other landlord process. Q. Do you have any personal knowledge as to the Bassett

property in El Paso, Texas? A. Q. No, not that I - sitting here. Do you have any personal knowledge as to the terms of the

DIP loan represented in your proffer?

Erickson - Cross 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A. Q. A. Q. Yes. Were you involved in the neogtiations of that loan? Yes. And the representation that the debtor - that the DIP

34

financer may create a reserve concerning a store if that store is . . . (microphone not recording); is that your understanding? A. Q. That is correct, the agent has the discretion. Okay. And have you been advised in writing by the agent

that they would in fact do a reserve . . . Bassett store or the 37th Avenue store if they are assumed? A. Q. Weve not be advised in writing, no. And do you have any personal knowledge as to the amount

of inventory in the Bassett store? A. Q. I do not. Do you have any personal knowledge as to the amount of

inventory in the 37th Avenue store? A. Q. I do not. Based on your knowledge as a whole of the debtors

inventory, isnt it true that the inventory in the Bassett and the 37th Avenue stores, especially in the 37th Avenue, having a going-out-of-business sale, are probably very minimal in impact to the debtors even if the agent decided to do a reserve? A. I wouldnt say that. Each store has approximately $2

Erickson - Cross 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 million of inventory on average. critical in this case. Liquidity is absolutely

35

So to the extent the company were to

lose availability of $4 million, I would say thats very important to the debtor. Q. And the debtor would consider that in their analysis in

the next 90 days? A. Q. Consider what with respect to what analysis? Consider the inventory in each store and the possibility

of a reserve in determining whether to assume or reject? A. Q. Thats the basis for the motion in general. But Im asking to your knowledge is the debtor going to

make those considerations within the next 90 days? A. Q. Im sorry, which considerations are you referring to? The consideration as to whether the inventory . . .

(microphone not recording) in a particular store should cause them to reject that store? A. Q. Yes, well continue to evaluate that. Okay. And as you sit here today, do you have any reason

to believe that the debtor will not have sufficient facts to make a determination as to the Bassett or 37th Avenue stores by November 25? A. Im not in a position today to comment on any specific Obviously, theres an analysis of the existing total We havent broken that down into an

stores.

going-forward chain.

individual store basket at this point in time, so I cant

Erickson - Redirect 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 BY MR. HERMAN: Q. Mr. Erickson, with respect to the underlying lease for Herman? MR. HERMAN: Sure, Your Honor, just a couple. REDIRECT-EXAMINATION speak to whether that will all be concluded by November of this year.

36

Its obviously a very complex undertaking and an

analysis that the companys in the process of working through. Q. Will you admit that the negotiations with the landlord

are different if the landlord knows that the debtor has the burden to seek an additional 90 days MR. HERMAN: Your Honor, Im going to object MS. MASON (TELEPHONIC): - at the end of November

as opposed to the debtor getting that today. MR. HERMAN: Your Honor, Im going to object. calls for a legal conclusion about burdens of proof. THE COURT: And I will sustain that objection. It That

also requires some speculation, and I dont know that it is relevant to this particular motion. MS. MASON (TELEPHONIC): Thats all the questions I have, Your Honor. THE COURT: Thank you, Ms. Mason. Any followup, Mr.

the two locations, is it fair to say that these may have value to the debtors estate?

37 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Erickson. Herman? MR. HERMAN: Thank you, Your Honor. the landlord here has lost focus. I think that have. THE COURT: Thank you. Anything further, Ms. Mason, A. Q. A. Q. They could possibly. Okay, and is Hilco going to be marketing those leases? They are. Do you know if Hilco has completed its marketing process

today? A. It has not. MR. HERMAN: Your Honor, thats all the cross I

as far as with the witness is concerned? MS. MASON (TELEPHONIC): No, Your Honor. THE COURT: Thank you. You may step down, Mr. All right. Mr.

Thank you for your testimony.

This is simply a motion to

assume - to extend the time to assume or reject leases for 90 days. We heard in oral argument, I counted three references Again, its not going to be in

to the lease being in limbo. limbo.

This is a final and absolute and certain extension of We know that we

time for 90 days, so we know the length.

cannot seek a further extension of time without the landlords prior written consent. to be in limbo. So, the lease is not going

Moreover, during this 90-day period, the The

debtors going to continue to pay the lease obligations.

38 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 debtor will timely comply with its lease obligations. In

addition, this lease does not have a continuous operation clause. We are entitled to stay dark under this lease.

Moreover, Your Honor, you heard that the reserve could be $4 million for these two stores. of money. That is a significant amount

You also heard that the lease may be a valuable

asset, and Hilco has not determined yet whether the lease has value and needs time to assume or reject. factual basis, we more than met out burden. So, I think from a On the legal

side, I just want to make it clear yet again, that this landlord can move at any time, including next week if they want, to compel an earlier assumption or rejection deadline if the landlord thinks that it has a particular reason or justification. So I do not think that the landlord is

prejudiced by this one time certain 90-day final extension, and if they want to come back, Your Honor, the door of the courthouse is open, and theyre free to make that motion. This order is without prejudice to their rights to come back if they have a particular set of facts. Honor. THE COURT: Thank you, Mr. Herman. Ms. Mason. Thank you, Your

MS. MASON (TELEPHONIC): Your Honor, the argument that our client can move for assumption or rejection early is an argument that shifts the burden that is properly set forth in the statute. It is the debtors burden to go beyond the

39 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 date certain of November 25, 2008. The debtor must show

cause in order for that burden to be met, and that cause must relate to the specific shopping center lease. The blanket

testimony thats been given and the fact that Mr. Erickson does not have any specific information even to testify to as to the Bassett or to the 37th Avenue stores. So that as to my

two clients stores, this is the only store that we are objecting to, cause has not been shown. The debtors

argument that we can move is putting . . . (microphone not recording) on the landlord to come in and undo something that the debtor has not shown entitlement to in the first place. That is a financial burden upon the landlord that Congress did not intend. 120 days. Congress intended to give the debtor up to We are

At that point, the debtor must show cause.

almost three months before that 120-day period and no evidence has been presented to show that the debtors cannot accomplished its analysis as to these store within the remaining almost 90 days. So, we would ask the Court that as

to the Bassett store and the 37th Avenue store that the Court find sufficient cause has not been shown to extend it beyond November 25 without prejudice to the debtor coming in closer to November 25th and establishing cause as to these specific stores. THE COURT: Thank you, Ms. Mason. Mr. Herman? I

MR. HERMAN: Your Honor, just one final word.

40 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 think the evidence is un-rebutted that next week this debtor faces a potential $4 million reduction in liquidity for these two stores if we do not get the (d)(4) extension. So I think

there has been evidence for these particular stores as to not just cause in general but why it has to be today and not in November. THE COURT: Thank you, Mr. Herman. Well, based upon

the proffer and the cross-examination, the Court is satisfied that the debtor has demonstrated cause for the requested extension of time to assume or reject. There are significant

financial risks that the debtor faces without the extension at this time, namely the loss of $4 million of liquidity which is clearly significant. The fact that the lease itself

does not require continuous operations is of great significance to the Court, and also the fact that this case is at an early stage where, although it is true that the Court is required to examine each lease individually, it is also true that were not operating in a vacuum here and that the debtors are faced with the rather daunting task of analyzing a large number of leases, and at this early stage where there has been testimony that this lease may have value to the debtors estate, the financial harm that may result from loss of liquidity, the fact that Hilco itself has not yet been formally retained by this Court or the approval has not been formally retained and the fact that the lease itself

41 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 does not require continuous operation, all of those accumulate sufficient to allow the Court to find that cause has been demonstrated by the debtor for the granting of its motion, and I will be prepared to enter an order - and lastly, I might just add as an afterthought, although it certainly is not of overwhelming importance to the Court, the fact that the landlords - or the landlord does have the opportunity to move to compel is certainly a mollifying, if you will, mitigating factor here. the order on the motion. MR. HERMAN: Thank you, Your Honor. We are So, I am prepared to enter

circulating a draft of the order to the landlords whose leases got pulled out of the motion today THE COURT: Certainly. MR. HERMAN: - here in the pews today. It basically So,

says that this order shall not apply to the following. Your Honor, if you would just let us submit the order to chambers later today? THE COURT: Absolutely. MR. HERMAN: Thank you. THE COURT: Thats fine.

MR. MacDONALD (TELEPHONIC): Excuse me, Your Honor. THE COURT: Yes, Mr. MacDonald. MR. MacDONALD (TELEPHONIC): Could you please send a copy to Richard Riley, my local counsel. I dont know if

42 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 /s/ Elaine M. Ryan Elaine M. Ryan 2801 Faulkland Road Wilmington, DE 19808 (302) 683-0221 September 15, 2008 I, Elaine M. Ryan, approved transcriber for the United States Courts, certify that the foregoing is a correct transcript from the electronic sound recording of the proceedings in the above-entitled matter. hes still there in the courtroom or not. THE COURT: That would be fine. I see him now in

the back, but in any event, certainly that will be provided. MR. MacDONALD (TELEPHONIC): Thank you so much. THE COURT: Yes, sir. MR. HERMAN: Thank you, Your Honor. the Mervyns calendar for today. THE COURT: All right. stand in recess. I thank counsel and we will That concludes

Good weekend, all.

(Whereupon at 11:01 a.m., the hearing in this matter was concluded for this date.)