IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE --------------------------------------------------------------x : Chapter 11 In re: : : Case No.

08-11586 (KG) MERVYNS HOLDINGS, LLC, et al. : : Jointly Administered Debtors. : Re: DI No. 6814 : Hearing Date: October 29, 2012 at 2:00 p.m. (EST) : Objection Deadline: October 22, 2012 at 4:00 p.m. (EST) -------------------------------------------------------------x MERVYNS LLC, MERVYNS HOLDINGS, LLC: and MERVYNS BRANDS, LLC, : Adv. Pro. No. 08-51402 (KG) : Plaintiffs, : : - against : : LUBERT-ADLER GROUP IV, LLC, et al., : : Defendants. : : --------------------------------------------------------------x THE OFFICIAL COMMITTEE OF UNSECURED : CREDITORS OF MERVYNS HOLDINGS, LLC, : et al. : Adv. Pro. No. 09-50887 (KG) : Plaintiffs, : : - against : : SCSF MERVYNS (OFFSHORE), INC. and : SCSF MERVYNS (US), LLC, : : Defendants. : : --------------------------------------------------------------x LIMITED OBJECTION OF LIQUIDITY SOLUTIONS, INC. TO MOTION OF THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS FOR ENTRY OF ORDER PURSUANT TO 11 U.S.C. 105(a) AND FED. R. BANKR. P. 9019(a) APPROVING THE COMPROMISE AND SETTLEMENT OF ESTATE ACTIONS AND THE PAYMENT OF CERTAIN ALLOWED ADMINISTRATIVE EXPENSE PRIORITY CLAIMS PURSUANT TO THE SETTLEMENT AGREEMENT

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TO:

THE HONORABLE KEVIN GROSS, CHIEF UNITED STATES BANKRUPTCY JUDGE Liquidity Solutions, Inc. (LSI), by its undersigned counsel, for its limited objection (the

Objection) to the Motion of the Official Committee of the Unsecured Creditors (the Committee) for Entry of an Order pursuant to 11 U.S.C. 105(a) and Rule 9019(a) of the Federal Rules of Bankruptcy Procedure Approving the Compromise and Settlement of Estate Actions and the Payment of Certain Allowed Administrative Expense Priority Claims Pursuant to the Settlement Agreement [Docket No. 6814] (the Motion),1 respectfully represents: INTRODUCTION 1. LSI holds administrative expense claims and general unsecured claims against the

Debtors. LSI objects to the Motion because (a) it does not contain adequate information and disclosure for LSI, and similarly situated holders of administrative expense claims, to make an informed decision with respect to the Discount Election, and (b) approval of the Administrative Discount and Discount Election, even if disclosure were adequate, is not under the circumstances appropriate under Rule 9019.2 OBJECTION A. The Motion Does Not Contain Adequate Information for Parties to Make an Informed Decision Concerning the Discount Election 2. The proposed settlement provides for what is referred to as the Administrative

Discount. That provision or feature of the Motion and proposed settlement requires that the Court deny the Motion. The Motion and the Settlement Agreement each provide that holders of

Capitalized terms used but not defined herein shall have the respective meanings ascribed to such terms in the Motion. Notwithstanding the dearth of information and data from which to ascertain whether $161-166 million is a reasonable settlement - - see Objection, 8 - - LSI does not oppose the approval of the aggregate dollar amount of the proposed settlement. As discussed herein, the focus of LSIs objections relates to the Administrative Discount and the Discount Election.
2

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allowed administrative expense claims have the opportunity to elect to be paid on an allegedly expedited basis (on or before December 15, 2012, or such other unidentified Payment Date), provided they accept a reduced payment of 90% of their allowed claim (the Discount Election) as opposed to payment in full, or 100%, to which they are entitled. See Motion at 21(b); Settlement Agreement at 10. According to the Motion, holders of allowed administrative expense claims who do not make the Discount Election will be paid 100% of their allowed administrative claim at some later date after a chapter 11 plan is confirmed. See Motion at 21(b), fn. 3. No legal or factual basis exists not to pay administrative expenses promptly after receipt of the settlement proceeds. 3. The Motion fails to explain a number of significant things that make it impossible

for LSI (and other holders of administrative expense claims) to make an informed and educated judgment on whether they should vote their ballots to exercise the Discount Election. See, e.g., Westland Oil Dev. Corp. v. MCorp Mgmt Solutions, Inc., 157 B.R. 100, 102 (Bankr. S.D. Tex. 1993) ([d]isclosure is the pivotal concept in chapter 11 reorganization.); see also, generally, Matter of Cajun Electric Power Cooperative, Inc. 150 F.3d 503 (5th Cir. 1998) (adequate information constitutes information that would allow a hypothetical investor typical of the holders of the claims or interests in the case . . . to make an informed judgment). 4. Neither the Motion nor the Settlement Agreement provides any information

concerning the timing of filing of any chapter 11 plan under which such holders would be paid in full. The Motion and the Settlement Agreement also fail to describe the risk, if any, that such plan would not provide for 100% payment of administrative expense claims.3 Indeed, there is no mention of any risk factors as to whether and/or when such a plan would be confirmed,

The Motion states that allowed administrative and priority claims aggregate approximately $93 million. See Motion at 33.

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whether the parties foresee any material delays in distributions (under such chapter 11 plan or otherwise) or, significantly, why payments on administrative expense claims require a confirmed plan before they can be made. There is no justification not to pay administrative expense claims in full if the Debtors estates have the cash on hand to do so, which they would upon approval and consummation of the proposed settlement. That alone constitutes inadequate disclosure which requires that the Motion be denied. See, e.g., Protective Committee for Independent Stockholders of TMT Trailer Ferry, Inc. v. Anderson, 390 U.S. 414, 424 (1968) (a court must apprise [itself] of all facts and other factors relevant to a full and fair assessment of the wisdom of the proposed compromise.); see also, generally, Frys Metals, Inc. v. Gibbons (In re RFE Indust., Inc.), 283 F.3d 159, 164-65 (3d Cir. 2002) (the court must make detailed enough findings so that it is clear that the proper factors were considered and an informed judgment was made). 5. The Motion merely states - - in a footnote, no less - - that a future 100% payment

will be made on administrative expense claims if the Discount Election is not exercised. See Motion at 21(b), fn. 3. As a consequence, holders of allowed administrative expense claims do not have sufficient information reasonably necessary to consider the Discount Election and the effect of not voting to accept the Administrative Discount. Full disclosure is required before the Motion and Settlement Agreement containing the Discount Election can be considered for approval by this Court. See Cajun Electric, 150 F.3d 503. 6. What is sorely missing from the Settlement Agreement is a description or

discussion of how the concept of, or provision for, the Administrative Discount and the Discount Election came about. Who devised that concept or aspect of the Settlement, and why? Who were the intended beneficiaries? It seems clear that, whether the Defendants pay an aggregate of

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$161 million or $166 million, there would exist more than sufficient funds to pay all holders of administrative expense claims in full. As indicated above, no explanation is provided in the Motion as to why administrative claims are not being paid in full promptly after approval and consummation of the proposed settlement. Because the Debtors and/or the Committee

apparently, and inexplicably, do not want to pay administrative claims promptly after the consummation of the proposed settlement and receipt of the settlement proceeds, disclosure of what the settlement proceeds would be used for or how they would be invested is most relevant here. 7. LSI suspects it is not holders of administrative expense claims who are the

intended beneficiaries of the Discount Election. LSI, however, has no ability to ascertain that given the dearth of disclosure and information contained in the Motion (including, as discussed above, information relating to an impediment, if any, to a prompt 100% distribution of estate funds to holders of administrative expense claims). Is there an estate representative who views itself as representing, or looking after, holders of administrative expense claims? It appears that none exists and that the leverage over holders of administrative expense claims to induce them to agree to a discount seems to be the potential for significant delays in payment that would make an earlier payment, albeit at a lower amount, more attractive. These matters, however, should not be the subject of guesswork by LSI and others. 8. Further, and more generally, there is no way of ascertaining from the Motion

whether $161-$166 million is within the range of reasonableness. In order for the proposed settlement to be approved under Rule 9019, the proponents must provide this Court and parties in interest (including holders of administrative claims) with significantly more information relating to the litigation that is being settled, including, among other things, the aggregate amount the

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Debtors/Plaintiffs are suing for in the various Estate Actions, their estimated ranges of (unacceptable, reasonable and extraordinary) recoveries, and the likely collectability of such amounts from the various Defendants. See In re Nutraquest, 434 F.3d at 644-45 (in order to approve a settlement under Rule 9019, a court must consider, inter alia, the probability of success in the litigation, the difficulties to be encountered in the matter of collection, the complexity of the litigation, and the expense, inconvenience and delay attending the litigation.). This is particularly important so there can be some context for those who are not parties to, or otherwise close to, the proposed settlement to evaluate its bona fides.4 B. Even if Disclosure Were Adequate, the Discount Election Should Not Be Approved in a Proceeding Pursuant to Rule 9019 9. The payment of distributions to holders of administrative expense claims that

exercise the Discount Election and the allocation of the Administrative Discount funds among the parties5 constitutes a distribution scheme and allocation of estate assets to parties, including Defendants, that only could be appropriate under a chapter 11 plan with the requisite, adequate disclosure associated with the plan process. See, e.g., PBGC v. Braniff Airways, Inc. (In re Braniff Airways, Inc.), 700 F.2d 935, 940 (5th Cir. 1983) (courts should deny settlements when they attempts to short circuit the requirements of Chapter 11); In re Global Vision Prods., Inc., 2009 WL 2170253, at *6 (S.D. N.Y. 2009) (a court may not approve a settlement under Rule 9019 if it results in a de facto or sub rosa plan of reorganization). Such a mechanism, however, is wholly inappropriate under a settlement pursuant to Rule 9019. See, e.g., Riverside Contracting LLC v. Unsecured Creditors Committee (In re State Line Hotel, Inc.), Case No. NV03-1523 (9th Cir. B.A.P. June 9, 2004) ([s]ome matters are not appropriate for settlement, either

See Motion at 31 for a very general description of the bona fides of the litigation. See also footnote 2 supra. See Settlement Agreement at 10, 11; Motion at 21.

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because they impermissibly interfere with the rights of third parties or because they are more properly resolved through the plan confirmation process.). Settlements under Rule 9019 simply cannot replace the need for adequate disclosure and informed voting under a proposed chapter 11 plan. In re Braniff, 700 F.2d at 940. As a consequence, the Motion should be denied at this time. RESERVATION OF RIGHTS 10. LSI reserves its right to amend and/or supplement this Objection.

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WHEREFORE, LSI respectfully requests that the Court deny the Motion and grant such other relief as may be just and proper. Dated: October 22, 2012 Wilmington, Delaware ANDREWS KURTH LLP By: /s/ Paul N. Silverstein Paul N. Silverstein (N.Y. Bar No. PS 5098) Jeremy Reckmeyer (N.Y. Bar No. JR 7536) 450 Lexington Avenue, 15th Floor New York, New York 10017 Telephone: (212) 850-2800 Facsimile: (212) 850-2929 Counsel to Liquidity Solutions, Inc.

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