Case LSS Doc 619 Filed 07/22/16 Page 1 of 10 UNITED STATES BANKRUPTCY COURT DISTRICT OF DELAWARE. Chapter 11

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1 Case LSS Doc 619 Filed 07/22/16 Page 1 of 10 UNITED STATES BANKRUPTCY COURT DISTRICT OF DELAWARE In re Chapter 11 PACIFIC SUNWEAR OF CALIFORNIA, INC., a California corporation et al., 1 Debtors. Case No.: (LSS) (Jointly Administered) Hearing Date: TBD Objection Deadline: TBD DEBTORS' MOTION FOR AN ORDER, PURSUANT TO SECTIONS 363 AND 364 OF THE BANKRUPTCY CODE AND BANKRUPTCY RULE 6004, AUTHORIZING THE DEBTORS TO MAINTAIN, CONTINUE, AND RENEW THEIR SURETY BOND PROGRAM WITH INTERNATIONAL FIDELITY INSURANCE COMPANY Pacific Sunwear of California, Inc. ( PacSun ) and its subsidiary debtors and debtors in possession (the Debtors ) in the above-captioned jointly administered chapter 11 cases (the Cases ), hereby submit this motion (the "Motion") for entry of an order, substantially in the form attached hereto as Exhibit A, pursuant to sections 363 and 364 of title 11 of the United States Code (the "Bankruptcy Code") and Rule 6004 of the Federal Rules of Bankruptcy Procedure (the Bankruptcy Rules ), (i) authorizing the Debtors to maintain, continue, and renew their surety bond program (the Surety Bond Program ) with International Fidelity Insurance Company ( IFIC ) and (ii) granting related relief. In support of this Motion, the Debtors respectfully state as follows: I. JURISDICTION 1. The United States Bankruptcy Court for the District of Delaware (the Court ) has jurisdiction over these Cases and the Motion pursuant to 28 U.S.C. 157 and 1334, and the Amended Standing Order of Reference from the United States District Court for 1 The Debtors and the last four digits of their respective federal taxpayer identification numbers are as follows: Pacific Sunwear of California, Inc. (9463-CA); Miraloma Borrower Corporation (0381-Del.); and Pacific Sunwear Stores Corp. (5792-CA). The Debtors address is 3450 East Miraloma Avenue, Anaheim, CA NAI v4

2 Case LSS Doc 619 Filed 07/22/16 Page 2 of 10 the District of Delaware dated February 29, This is a core proceeding within the meaning of 28 U.S.C. 157(b)(2). Venue of these Cases and the Motion in this district is proper under 28 U.S.C and Pursuant to Local Rule (f), the Debtors consent to the Court s entry of a final judgment or order with respect to the Motion if it is determined that the Court, absent consent of the parties, cannot enter final orders or judgments consistent with Article III of the United States Constitution. 3. The statutory and legal predicates for the relief requested herein are sections 105(a), 363 and 364 of the Bankruptcy Code and Bankruptcy Rule A. General Background II. BACKGROUND 4. On April 7, 2016 (the Petition Date ), each of the Debtors commenced a voluntary case under chapter 11 of the Bankruptcy Code. 5. The Debtors are authorized to continue to operate their business and manage their property as debtors in possession pursuant to sections 1107(a) and 1108 of the Bankruptcy Code. 6. On April 19, 2016, the Office of the United States Trustee for the District of Delaware (the U.S. Trustee ) appointed an official committee of unsecured creditors (the Committee ) pursuant to section 1102 of the Bankruptcy Code. See Docket No No trustee or examiner has been requested or appointed in these Cases. 7. The detailed factual background relating to the Debtors and the commencement of these Cases is set forth in the Declaration of Gary H. Schoenfeld in Support of First Day Motions [Docket No. 2] and the Declaration of Chris Tedford in Support of First Day Motions [Docket No. 3] NAI v4

3 Case LSS Doc 619 Filed 07/22/16 Page 3 of 10 B. Background Specific to the Relief Requested 8. In the ordinary course of business, the Debtors engage in certain activities that require them to provide financial assurance of payment to third parties. A common and reasonable means to do so is through the issuance of surety bonds. 9. Prior to the Petition Date, and in the ordinary course of business, the Debtors entered into an agreement with IFIC for the issuance of certain surety bonds ( Surety Bonds ) on the Debtors behalf for the benefit of their customers and governmental agencies, under the terms and conditions of various agreements, including certain General Indemnity Agreements and related documents and agreements Indemnity Agreement(s) ). One such Surety Bond (the Existing Surety Bond ), in the amount of $200,000 secures the Debtors obligations relating to certain sales taxes payable from time to time to the Government of Puerto Rico in connection with the shipment and delivery of the Debtors inventory. Maintenance of the Existing Surety Bond permits the Debtors to promptly obtain possession of merchandise imported into Puerto Rico. 10. As of the Petition Date, the Existing Surety Bond was fully secured by a standby letter of credit in favor of IFIC in the amount of $200, The Existing Surety Bond is coming up for renewal on July 23, The Debtors intention is to renew the Existing Surety Bond in the same amount and without the need to provide additional collateral. 12. The Debtors and IFIC have agreed to the following terms and conditions of renewal, which terms are substantially similar to those that were in effect with respect to the Existing Surety Bond prior to the Petition Date: NAI v4

4 Case LSS Doc 619 Filed 07/22/16 Page 4 of 10 Surety Bond to Be Issued Amount of Surety Bond to Be Issued Security to be Provided Indemnity Required Bankruptcy Court Order Bond to guarantee payment of taxes $200, Letter of credit A copy/copies of the indemnity agreement(s) is/are attached hereto as Exhibit B. The renewal is conditioned on the Debtors obtaining an order of the Court substantially in the form attached hereto as Exhibit A. III. RELIEF REQUESTED 13. The Debtors believe that the renewal of surety bonds and the issuance of new surety bonds are ordinary course transaction for the Debtors. Similarly, the posting of collateral to secure surety bond obligations is also ordinary course for the Debtors. Thus, the Debtors believe that they could proceed without Court authorization with respect to such transactions pursuant to section 363(c)(1) of the Bankruptcy Code, and reserve their rights with respect to this argument should any party in interest object to the relief requested herein at any hearing on this Motion. Nonetheless, out of abundance of caution, and at the request of IFIC, the Debtors respectfully request entry of an order, substantially in the form attached hereto as Exhibit A, confirming their ability to maintain, continue, and renew the Surety Bond Program (including the provision of collateral and indemnity to IFIC) as described herein, and granting other relief related necessary for the continuation and maintenance of the Surety Bond Program, as specifically set forth in the attached order. 14. In particular, the proposed order would, among other things, authorize the Debtors to maintain their Surety Bond Program without interruption, and to pay all post-petition obligations relating to the Surety Bond Program, and, in connection therewith, authorize the Debtors to (i) provide cash collateral and/or letter of credit collateral to secure the Surety Bonds, solely to the extent agreed upon by the Debtors and the Surety and as otherwise permitted by the NAI v4

5 Case LSS Doc 619 Filed 07/22/16 Page 5 of 10 Debtors Debtor-in-Possession Credit Agreement (the DIP Facility ); (ii) execute any other agreements in connection with the Surety Bond Program, including, without limitation new Indemnity Agreements, and all related instruments, documents, and papers; and (iii) take all actions reasonably appropriate with respect thereto, in each case in accordance with the applicable documents governing the Surety Bond Program. 15. In addition, the proposed order would clarify that any claim asserted by IFIC for indemnification under any Indemnity Agreement, related to or arising out of any actual, potential, or asserted liability of IFIC to any beneficiary or obligee under any Surety Bond shall be treated as a postpetition claim to the extent that the actual, potential, or asserted liability of the Debtors to any beneficiary or obligee under the applicable bonded contract arises out of a postpetition breach of such bonded contract, and, to the extent that any Surety Bond is issued or renewed postpetition as part of the Surety Bond Program and is subject to a prepetition Indemnity Agreement, the Debtors' indemnification obligations to IFIC under such prepetition Indemnity Agreement arising on account of such postpetition Surety Bond (including any reasonable fees and expenses of counsel as provided for in such Indemnity Agreement) shall be deemed to be postpetition obligations of the Debtors. IV. BASIS FOR RELIEF REQUESTED 16. Section 363(c)(1) of the Bankruptcy Code provides that a chapter 11 debtor-in-possession "may enter into transactions... [or] may use property of the estate in the ordinary course of business without notice or a hearing." 11 U.S.C. 363(c)(1). 17. Section 105(a) of the Bankruptcy Code permits the Court to "issue any order... that is necessary or appropriate to carry out the provisions of this title." 11 U.S.C. 105(a). Section 363(b) of the Bankruptcy Code provides, in relevant part, that a debtor in possession "after notice and a hearing, may use,... other than in the ordinary course of business, NAI v4

6 Case LSS Doc 619 Filed 07/22/16 Page 6 of 10 property of the estate." 11 U.S.C. 363(b). The use, sale or lease of property of the estate, other than in the ordinary course of business, is authorized when there is a "sound business reason" that justifies such action. See Comm. of Equity Sec. Holders v. Lionel Corp. (In re Lionel Corp.), 722 F.2d 1063, 1070 (2d Cir. 1983); Comm. of Asbestos-Related Litigants v. Johns-Manville Corp. (In re Johns-Manville Corp.), 60 B.R. 612, 616 (Bankr. S.D.N.Y. 1986) ("Where the debtor articulates a reasonable basis for its business decisions (as distinct from a decision made arbitrarily or capriciously), courts will generally not entertain objections to debtor's conduct."). If a debtor puts forth such a sound business purpose, a presumption arises that the debtor's decision was made on an informed basis, in good faith, and in the honest belief that the action was in the debtor's best interest. In re Integrated Res., Inc., 147 B.R. 650, 656 (S.D.N.Y. 1992). 18. Section 364(c) of the Bankruptcy Code provides that, if a debtor is unable to obtain unsecured credit allowable under section 503(b)(1) as an administrative expense, the court, after notice and a hearing, may authorize the obtaining of credit or the incurring of debt 11 U.S.C. 364(c). (1) with priority over any or all administrative expenses of the kind specified in sections 503(b) or 507(b); (2) secured by a lien on property of the estate that is not otherwise subject to a lien; or (3) secured by a junior lien on property of the estate that is subject to a lien. 19. It is important that the Debtors have the ability to have surety bonds issued on an ongoing and uninterrupted basis. If the Existing Surety Bond lapses without renewal, or if the Debtors are unable to obtain a new Surety Bond, the Debtors could be required to post cash collateral to fully secure the amount required to be bonded, which could be significantly more costly to the Debtors than their arrangement reached with IFIC. Failure to do so could significantly delay receipt of the Debtors inventory imported into Puerto Rico (which would be NAI v4

7 Case LSS Doc 619 Filed 07/22/16 Page 7 of 10 detained at the port pending actual payment of taxes), causing substantial financial harm to the Debtors and disrupting their operations in Puerto Rico. 20. As noted above, the Debtors believe that the relief sought herein is within the ordinary course of business for them and their industry. To the extent that the relief sought herein is considered to fall outside the ordinary course of business, the Court should approve the relief requested herein pursuant to sections 105(a) and 363(b)(1) of the Bankruptcy Code. The Debtors have determined, in their sound business judgment, that maintaining, continuing, and renewing the Surety Bond Program, as described above, is a reasonable and effective method by which the Debtors are able to satisfy certain financial assurances that certain third parties require of the Debtors. 21. Moreover, the Debtors respectfully submit that paying any indemnification obligations to IFIC arising under the Indemnity Agreement and based on an alleged post-petition breach is necessary to prevent the interruption of the Surety Bond Program, which could have a negative effect on the Debtors business. Accordingly, the Debtors and IFIC agree that any claim asserted by IFIC for indemnification under any Indemnity Agreement, related to or arising out of any actual, potential, or asserted liability of IFIC to any beneficiary or obligee under any Surety Bond shall be treated as a postpetition claim to the extent that the actual, potential, or asserted liability of the Debtors to any beneficiary or obligee under the applicable bonded contract arises out of a postpetition breach of such bonded contract. 22. In addition, the Debtors and IFIC have agreed that to the extent that any Surety Bond is issued or renewed postpetition as part of the Surety Bond Program and is subject to a prepetition Indemnity Agreement, the Debtors' indemnification obligations to IFIC under such prepetition Indemnity Agreement arising on account of such postpetition Surety Bond NAI v4

8 Case LSS Doc 619 Filed 07/22/16 Page 8 of 10 (including any reasonable fees and expenses of counsel as provided for in such Indemnity Agreement) shall be deemed to be postpetition obligations of the Debtors. 23. To the extent the maintenance, continuance, and renewal of the Surety Bond Program is deemed a secured extension of credit, the Debtors request authority under section 364(c) of the Bankruptcy Code to provide the Collateral as required under the Indemnity Agreement. Given the Debtors' current financial circumstances, the Debtors cannot obtain financial accommodations comparable to those offered by IFIC on an unsecured basis. The Debtors further submit that, pursuant to section 364(e) of the Bankruptcy Code, any reversal or modification on appeal of any authorization to obtain credit under section 364 should not affect the validity of the debt incurred or any priority of a lien granted since the Surety Bond Program is being renewed and extended by IFIC to the Debtors in good faith. 24. The relief requested is consistent with orders granted by courts in this District. See In re Unitek Global Services, Inc., No (PJW) (Bankr. D. Del. Dec. 3, 2014) [Docket No. 192]; In re GSE Environmental, Inc., No (MFW) (Bankr. D. Del. May 6, 2014) [Docket No. 56]; In re Longview Power, LLC, No (BLS) (Bankr. D. Del. Sept. 4, 2013) [Docket No. 103]; In re Exide Technologies, (KJC) (Bankr. D. Del. July 11, 2013) [Docket No. 334]; In re Synargo Technologies, Inc., No (BLS) (Bankr. D. Del. May 23, 2013) [Docket No. 196]. 25. The Debtors have sufficient funds to pay any amounts related to the Surety Bond Program in the ordinary course of business. Under the Debtors existing cash management system, the Debtors have made arrangements to readily identify checks or wire transfer requests relating to the Surety Bond Program, as applicable. The Debtors believe there is minimal risk that checks or wire transfer requests that the Court has not authorized will be inadvertently made NAI v4

9 Case LSS Doc 619 Filed 07/22/16 Page 9 of 10 Thus, the Debtors request that the Court authorize all applicable financial institutions to receive, process, honor, and pay any and all checks or wire transfer requests in respect of the Surety Bond Program. V. WAIVER OF ANY APPLICABLE STAY 21. The Debtors also request that the Court waive the stay imposed by Bankruptcy Rule 6004(h), which provides that [a]n order authorizing the use, sale, or lease of property other than cash collateral is stayed until the expiration of 14 days after entry of the order, unless the court orders otherwise. Fed. R. Bankr. P. 6004(h). As described above, the relief that the Debtors seek in this Motion is necessary for the Debtors to operate their business without interruption and to preserve value for their estates. Accordingly, the Debtors respectfully request that the Court waive the fourteen-day stay imposed by Bankruptcy Rule 6004(h), as the exigent nature of the relief sought herein justifies immediate relief. VI. NOTICE 22. Notice of this Motion has been given to: (i) the U.S. Trustee; (ii) counsel to the Committee; (iii) the ABL Agent and DIP Agent; (iv) the Term Loan Agent; and (v) all parties who have filed a notice of appearance and request for service of papers pursuant to Bankruptcy Rule In light of the nature of the relief requested, the Debtors submit that no further notice is necessary NAI v4

10 Case LSS Doc 619 Filed 07/22/16 Page 10 of 10 WHEREFORE, the Debtors respectfully request that the Court: (i) enter an order substantially in the form attached hereto as Exhibit A; and (ii) grant such other and further relief to the Debtors as the Court may deem proper. Dated: July 22, 2016 /s/ Travis G. Buchanan Michael R. Nestor, Esq. (DE Bar No. 3526) Joseph M. Barry, Esq. (DE Bar No. 4221) Maris J. Kandestin, Esq. (DE Bar No. 5294) Travis G. Buchanan, Esq. (Bar No. 5595) YOUNG CONAWAY STARGATT & TAYLOR, LLP Rodney Square 1000 North King Street Wilmington, Delaware Tel: (302) Fax: (302) and- Michael L. Tuchin, Esq. (CA Bar No ) David M. Guess, Esq. (CA Bar No ) Jonathan M. Weiss, Esq. (CA Bar No ) Sasha M. Gurvitz, Esq. (CA Bar No ) KLEE, TUCHIN, BODGANOFF & STERN LLP 1999 Avenue of the Stars, 39th Floor Los Angeles, CA Telephone: (310) Facsimile: (310) Co-counsel to the Debtors and Debtors in Possession NAI v4

11 Case LSS Doc Filed 07/22/16 Page 1 of 6 EXHIBIT A Proposed Order NAI v4

12 Case LSS Doc Filed 07/22/16 Page 2 of 6 UNITED STATES BANKRUPTCY COURT DISTRICT OF DELAWARE In re PACIFIC SUNWEAR OF CALIFORNIA, INC., a California corporation et al., 1 Debtors. Chapter 11 Case No.: (LSS) (Jointly Administered) Re Docket No. ORDER, PURSUANT TO BANKRUPTCY CODE SECTIONS 363 AND 364 AND BANKRUPTCY RULE 6004, AUTHORIZING DEBTORS TO MAINTAIN, CONTINUE, AND RENEW THEIR SURETY BOND PROGRAM WITH INTERNATIONAL FIDELITY INSURANCE COMPANY Upon consideration of Debtors motion (the Motion ) of the above-captioned debtors and debtors in possession (collectively, the Debtors ) in the above-captioned jointly administered bankruptcy cases (the Cases ), pursuant to sections 363 and 364 of title 11 of the United States Code (the "Bankruptcy Code") and Rule 6004 of the Federal Rules of Bankruptcy Procedure (the "Bankruptcy Rules"), authorizing, but not directing, the Debtors to maintain, continue, and renew, in their sole discretion, their surety bond program with International Fidelity Insurance Company ( IFIC ) (the surety bond program, hereinafter referred to as the Surety Bond Program, refers to the Debtors arrangement with IFIC, by which IFIC issues certain surety bonds ( Surety Bonds ) on the Debtors behalf for the benefit of their customers and governmental agencies, under the terms and conditions of various agreements, including certain General Indemnity Agreements and related documents and agreements Indemnity Agreement(s) ); and due and sufficient notice of the entry of this Order having been given under the particular circumstances; and it appearing that no other or further notice need be provided; 1 The Debtors and the last four digits of their respective federal taxpayer identification numbers are as follows: Pacific Sunwear of California, Inc. (9463-CA); Miraloma Borrower Corporation (0381-Del.); and Pacific Sunwear Stores Corp. (5792-CA). The Debtors address is 3450 East Miraloma Avenue, Anaheim, CA NAI v4

13 Case LSS Doc Filed 07/22/16 Page 3 of 6 and it appearing that the relief requested set forth herein is in the best interests of the Debtors, their estates, their creditors, their stakeholders, and other parties in interest; and after due deliberation thereon, and sufficient cause appearing therefor, it is hereby ORDERED, ADJUDGED AND DECREED that: 1. The Motion is GRANTED as set forth herein. 2. Pursuant to sections 363 and 364 of the Bankruptcy Code, the Debtors are authorized, but not directed, to maintain their Surety Bond Program without interruption, and to pay all post-petition obligations relating to the Surety Bond Program. 3. The Debtors are authorized, but not directed, to maintain and renew existing Surety Bonds and to procure new Surety Bonds with IFIC. In connection with the maintenance, continuation and/or renewal of existing Surety Bonds or the procurement of new Surety Bonds, the Debtors are authorized, but not directed, to (i) provide cash collateral and/or letter of credit collateral to secure the Surety Bonds, solely to the extent agreed upon by the Debtors and the Surety and as otherwise permitted by the Debtors Debtor-in-Possession Credit Agreement (the DIP Facility ); (ii) execute any other agreements in connection with the Surety Bond Program, including, without limitation new Indemnity Agreements, and all related instruments, documents, and papers; and (iii) take all actions reasonably appropriate with respect thereto, in each case in accordance with the applicable documents governing the Surety Bond Program. 4. Any claim asserted by IFIC for indemnification under any Indemnity Agreement, related to or arising out of any actual, potential, or asserted liability of IFIC to any beneficiary or obligee under any Surety Bond shall be treated as a postpetition claim to the extent that the actual, potential, or asserted liability of the Debtors to any beneficiary or obligee under the applicable bonded contract arises out of a postpetition breach of such bonded contract NAI v4

14 Case LSS Doc Filed 07/22/16 Page 4 of 6 5. To the extent that any Surety Bond is issued or renewed postpetition as part of the Surety Bond Program and is subject to a prepetition Indemnity Agreement, the Debtors' indemnification obligations to IFIC under such prepetition Indemnity Agreement arising on account of such postpetition Surety Bond (including any reasonable fees and expenses of counsel as provided for in such Indemnity Agreement) shall be deemed to be postpetition obligations of the Debtors. 6. Provided that the Debtors maintain their Surety Program in the ordinary course, including paying premiums, and are not in default with respect to any such Surety Bond or have promptly upon demand cured any default thereunder, IFIC shall not seek relief from the automatic stay to, or take any other action to, cancel any outstanding Surety Bond; provided, however, that nothing herein shall preclude IFIC from either (i) declining to renew any existing Surety Bond, (ii) declining to extend any existing Surety Bond beyond its term, (iii) declining to issue any new or additional Surety Bond; or (iv) undertaking any action permitted under the existing Indemnity Agreement or any future Indemnity Agreements between IFIC and the Debtors. Notwithstanding anything in this Order to the contrary, nothing shall preclude IFIC from providing notice of its intention not to renew or extend any existing Surety Bond. 7. The failure to specifically describe or include any particular feature of the Surety Bond Program in this Order shall not diminish or impair the effectiveness of such feature, it being in intent of this Court that the Surety Bond Program be approved in its entirety. 8. All applicable banks and other financial institutions are hereby authorized, when requested by the Debtors in their sole discretion, to receive, process, honor, and pay all prepetition and post-petition checks, drafts, and other forms of payment, including fund transfers, NAI v4

15 Case LSS Doc Filed 07/22/16 Page 5 of 6 on account of the Surety Bond Program, whether such checks or other requests were submitted prior to or after the Petition Date. 9. The Debtors' banks and other financial institutions shall rely on the direction and representations of the Debtors as to which checks and fund transfers should be honored and paid pursuant to this order, and any such bank shall not have any liability to any party for relying on such direction and representations by the Debtors as provided for in this Order or for inadvertently honoring or dishonoring any check or fund transfer. 10. The Debtors' banks shall, at the direction of the Debtors, receive, process, honor, and pay all prepetition and post-petition checks and fund transfers on account of the Surety Bond Program that had not been honored and paid as of the Petition Date, provided that sufficient funds are on deposit in the applicable accounts to cover such payments and any such bank shall not have any liability to any party for relying on such direction by the Debtors as provided for in this order or for inadvertently failing to follow such direction. 11. To the extent the Debtors have not yet sought to remit payment on account of the Surety Bond Program, the Debtors are authorized, but not directed, to issue checks or provide for other means of payment of amounts owing under the Surety Bond Program. 12. The Debtors shall be and hereby are authorized, but not directed, to issue new post-petition checks or effect new post-petition fund transfers on account of the Surety Bond Program to replace any prepetition checks or fund transfer requests that may be dishonored or rejected. 13. All letters of credit and proceeds thereof securing any Surety Bonds, as described in par. 3 hereof, are not, and shall not be deemed to be, property of the Debtors estates under NAI v4

16 Case LSS Doc Filed 07/22/16 Page 6 of 6 section 541 of the Bankruptcy Code or otherwise, and may be drawn upon by IFIC in accordance with their respective terms and conditions and without further order of this Court. 14. Nothing in this Order or in the Motion shall be construed as waiving, releasing, or prejudicing the Debtors' right to contest the amount or validity of any claim against the Debtors by IFIC or the amount or validity of any claim against the Debtors in connection with the Surety Bond Program, all of which rights are expressly reserved. 15. Nothing in this Order is intended to conclude or decide that any Surety Bond or Indemnity Agreement is an executory contract, and to the extent any Surety Bond or Indemnity Agreement is an executory contract, nothing in this Order shall constitute the assumption of such Surety Bond or Indemnity Agreement under section 365 of the Bankruptcy Code. 16. Notwithstanding Bankruptcy Rules 4001(c) and 6004(h), if applicable, this order shall be effective and enforceable immediately upon entry hereof. 17. This Court shall retain jurisdiction with respect to all matters arising from or related to the implementation or interpretation of this order. Dated:, 2016 Wilmington, Delaware UNITED STATES BANKRUPTCY JUDGE NAI v4

17 Case LSS Doc Filed 07/22/16 Page 1 of 17 EXHIBIT B Indemnity Agreement NAI v4

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26 Case LSS Doc Filed 07/22/16 Page 10 of 17 AGREEMENT OF INDEMNITY Commercial Bond (II) THIS AGREEMENT of Indemnity, made and entered into this day of, by Pacific Sunwear of California, Inc., 3450 E. Miraloma Avenue, Anaheim, CA, Pacific Sunwear Stores, Corp., 3450 E. Miraloma Avenue, Anaheim, CA, Miraloma Borrower Corporation, 3450 E. Miraloma Avenue, Anaheim, CA, (Insert full name and address of Principal) (hereinafter called the Principal) and (Insert full name and addresses of Indemnitors, if any) (hereinafter called the Indemnitors, if any) and INTERNATIONAL FIDELITY INSURANCE COMPANY and/or ALLEGHENY CASUALTY COMPANY, One Newark Center, 20th Floor, Newark, NJ (hereinafter called the Surety), WITNESSETH: WHEREAS, in the transaction of business one, some or all of the Principal and Indemnitors are required, or may desire to give Bonds, undertakings, guarantees or other instruments of suretyship (hereinafter referred to as Bonds ); and WHEREAS, at the request of the Principal and Indemnitors and upon the express understanding that this Agreement of Indemnity should be given, the Surety has executed or procured to be executed, and may from time to time hereafter execute or procure to be executed, said Bonds on behalf of the Principal and Indemnitors or the Surety may have already issued such Bonds in reliance upon execution of this Agreement; and WHEREAS, the Principal and Indemnitors have a substantial, material and beneficial interest in the obtaining of the Bonds or in the Surety's refraining from cancelling said Bonds. NOW, THEREFORE, in consideration of the premises, the Principal and Indemnitors for themselves, their existing and future subsidiaries and affiliates, heirs, executors, co-venturers, administrators, successors and assigns, jointly and severally, hereby covenant and agree with the Surety, its successors and assigns, as follows: PREMIUMS FIRST: The Principal and Indemnitors will pay to the Surety in such manner as may be agreed upon all premiums and charges of the Surety for the Bonds in accordance with its rates, whether filed or not, until the Principal and Indemnitors shall serve evidence satisfactory to the Surety of its discharge or release from the Bonds and all liability by reason thereof. DOCID 2.1 Commercial Bond (II) Page 1 of 8

27 Case LSS Doc INDEMNITY Filed 07/22/16 Page 11 of 17 SECOND: The Principal and Indemnitors shall exonerate, indemnify, and keep indemnified the Surety from and against any and all liability for losses and/or expenses of whatsoever kind or nature (including, but not limited to, interest, court costs and the cost of services rendered by counsel, investigators, accountants, engineers or other consultants, whether consisting of in-house personnel or third party providers) and from and against any and all such losses and/or expenses which the Surety may sustain and incur: (1) By reason of having executed or procured the execution of the Bonds, (2) By reason of the failure of the Principal and/or Indemnitors to perform or comply with the covenants and conditions of this Agreement or (3) In enforcing any of the covenants and conditions of this Agreement. The Principal and Indemnitors agree to promptly reimburse the Surety for all sums paid on account of any such loss. In the event of any payment by the Surety, the Principal and Indemnitors further agree that in any accounting between the Surety and the Principal and Indemnitors, the Surety shall be entitled to charge for any and all disbursements made by it in good faith in and about the matters herein contemplated by this Agreement under the belief that it is or was liable for the sums and amounts so disbursed, or that it was necessary or expedient to make such disbursements, whether or not such liability, necessity or expediency existed. The vouchers or other evidence of any such payment(s) made by the Surety shall be prima facie evidence of the fact and amount of the liability to the Surety, and of the Surety s good faith in making the payment(s). Good Faith, as used in this paragraph and elsewhere in this Agreement, shall mean honesty in fact and the absence of willful misfeasance or malfeasance. Neither negligence nor gross negligence shall be deemed the absence of good faith. The Surety is not a fiduciary and owes no fiduciary obligations to the Principal and Indemnitors. Payments not made by the Principal and Indemnitors within 10 days after demand for such payment is made upon such party by the Surety shall bear interest at maximum rate allowed by law, with such interest accruing from the date payment was made by the Surety for which reimbursement is demanded. The Principal and Indemnitors shall have no rights of indemnity, contribution or right to seek collection of any other outstanding obligation against each other or each other s property until the Principal s and Indemnitors obligations to the Surety under this Agreement have been satisfied in full. No action or failure to act by the Surety shall constitute a waiver of any right, power, or remedy afforded it by this Agreement, at law, or otherwise, nor shall such action or inaction constitute approval of or acquiescence in any breach by the Principal and/ or Indemnitors, except as may be specifically agreed in writing. The Principal and Indemnitors also understand and agree that their obligations remain in full force and effect for any and all Bonds issued in reliance upon this Agreement, notwithstanding that the entity on whose behalf said Bonds were issued has been sold, dissolved or whose ownership has been otherwise altered in any way. COLLATERAL SECURITY THIRD: The Principal and Indemnitors shall deposit with the Surety on demand an amount of money or other collateral security acceptable to the Surety, as soon as liability exists or is asserted against the Surety, whether or not the Surety shall have made any payment therefor, equivalent to such amount that the Surety, in its sole judgement, shall deem sufficient to protect it from loss. The Surety shall have the right to use the deposit, or any portion thereof, in payment or settlement of any liability, loss, or expense for which the Principal and Indemnitors would be obligated to indemnify the Surety under the provisions of this Agreement. If for any reason the Surety deems it necessary to demand an additional amount of collateral security to cover any possible additional liability or loss, the Principal and Indemnitors shall deposit with the Surety, immediately upon the Surety s demand, an additional amount of collateral security equal to such demand. The Surety shall have no obligation to invest or to provide a return on any such deposits. The Surety may sell or realize upon any and all such collateral security, at public or private sale, with or without notice to the Principal and Indemnitors, or by any other method permitted or applicable by law. DISCHARGE AND ADDITIONAL SECURITY FOURTH: The Principal and Indemnitors will, upon the written request of the Surety, promptly procure the full and complete discharge of the Surety from any Bonds specified in such request and all potential liability by reason of such Bonds. If such full and complete discharge is unattainable, the Principal and Indemnitors will, if requested by the Surety, within five (5) business days, place the Surety in funds that are immediately available and sufficient to meet all of the Surety s liabilities that are in force prior to the date of the Surety s demand. The Surety may make such demand for funds at any time and without regard to whether it has sustained any loss or received any claim. The amount of such demand, including reasonable attorney fees and expenses is at the sole discretion of the Surety. DOCID 2.1 Commercial Bond (II) Page 2 of 8

28 The Principal and Case Indemnitors LSS waive, to the fullest Doc extent permitted Filed by 07/22/16 applicable law, Page each and 12 every of 17right which they may have to contest such payment. Failure to make immediate payment to Surety as herein provided shall cause the Principal and Indemnitors to be additionally liable for any and all reasonable costs and expenses, including attorneys fees, incurred by the Surety in enforcing this provision. In the event that any or all of the Principal and Indemnitors fail to comply with such demand as stated in this provision, the Principal and Indemnitors hereby authorize and empower any attorney of any court of record of the United States or any of its territories or possessions, to appear for them or any of them in any suit by Surety and confess judgment against them or any of them for any sum or sums of money up to the amount of any or all Bond or Bonds, with costs, interest and attorney s fees; such judgment, however, to be satisfied upon the payment of any and all such sums as may be found due by the Principal and Indemnitors to Surety under the terms of this provision. The authority to confess judgment as set forth herein shall not be exhausted by one exercise thereof, but may be exercised from time to time and more than one time until all liability of the Principal and Indemnitors to the Surety shall have been paid in full. Demand shall be sufficient if sent by registered or certified mail, hand delivered, or via overnight mail to the last known address of the Principal and Indemnitors, whether or not actually received. CHANGES FIFTH: The Surety is authorized and empowered, without notice to or knowledge of the Principal and Indemnitors, to assent to any change whatsoever in the Bonds, and/or any contracts referred to in the Bonds, and to assent to or take any assignment or assignments, to execute or consent to the execution of any continuations, extensions or renewals of the Bonds and to execute any substitute or substitutes therefor, with the same or different conditions, provisions and obligees and with the same or larger or smaller penalties, it being expressly understood and agreed that the Principal and Indemnitors shall remain bound under the terms of this Agreement even though any such assent by the Surety does or might substantially increase the liability of said Principal and Indemnitors. CONTINUING DUTY OF DISCLOSURE TO SURETY SIXTH: At any time, and until such time as the liability of the Surety under any and all said Bonds is terminated, if the Principal and/or Indemnitors become aware of any materially adverse change in the Principal's financial condition, or any fact (s) suggesting the possibility of any such change (including, but not limited to, pending legal actions against the Principal), the Principal and/or Indemnitors shall immediately advise the Surety of same in writing. As used herein, "materially adverse change" shall be defined to include: (a) any event or circumstance which, when considered individually or together with other events, could be expected to have a materially adverse effect on (i) the financial condition of the Principal, or on the earnings, operations, assets, business affairs or business prospects of the Principal; (ii) the ability of the Principal to perform or observe any of its obligations under this Agreement or under any contract that is the subject of the Surety's Bond obligations; (iii) the rights and remedies of the Surety under this Agreement; and/or (iv) the Surety's evaluation of risk in determining whether to continue to extend surety credit to the Principal and/or in determining the terms and conditions of any such extension of credit. BOOKS AND RECORDS SEVENTH: At any time, and until such time as the liability of the Surety under any and all said Bonds is terminated, the Surety shall have the right to reasonable access to the books, records, and accounts of the Principal and Indemnitors; and any bank depository, materialman, supply house, or other person, firm, or corporation when requested by the Surety is hereby authorized to furnish the Surety any information requested. The Principal and Indemnitors agree to execute, as requested by the Surety, any additional documents to cause the release of records and information authorized by this paragraph. DECLINE EXECUTION EIGHTH: Unless otherwise specifically agreed in writing, the Surety may decline to execute any Bond and the Principal and Indemnitors agree to make no claim to the contrary in consideration of the Surety's receiving this Agreement; and if the Surety shall execute a Bid or Proposal Bond, it shall have the right to decline to execute any and all of the bonds that may be required in connection with any award that may be made under the proposal for which the Bid or Proposal Bond is given and such declination shall not diminish or alter the liability that may arise by reason of having executed the Bid or Proposal Bond. NOTICE OF EXECUTION NINTH: The Principal and Indemnitors hereby waive notice of the execution of said Bonds and of the acceptance of this Agreement, and the Principal and Indemnitors hereby waive all notice of any default, or any other act or acts giving rise to any claim under said Bonds, as well as notice of any and all liability of the Surety under said Bonds, and any and all liability on their part hereunder, to the end and effect that, the Principal and Indemnitors shall be and continue to be liable hereunder, notwithstanding any notice of any kind to which they might have been or be entitled, and notwithstanding any defenses they might have been entitled to make. DOCID 2.1 Commercial Bond (II) Page 3 of 8

29 Case LSS Doc HOMESTEAD Filed 07/22/16 Page 13 of 17 TENTH: The Principal and Indemnitors hereby waive, so far as their respective obligations under this Agreement are concerned, all rights to claim any of their property, including their respective homesteads, as exempt from levy, execution, sale or other legal process under the laws of any State, Territory, or Possession. SETTLEMENTS ELEVENTH: The Surety shall have the right to adjust, settle or compromise any claim, demand, suit or judgment upon the Bonds, unless the Principal and Indemnitors shall demonstrate to the Surety s satisfaction that there is a valid basis to dispute said claim, demand, suit or judgment, and shall in good faith request the Surety to litigate such claim or demand, or to defend such suit, or to appeal from such judgment, and shall deposit with the Surety, at the time of such request, cash or collateral satisfactory to the Surety in kind and amount, to be used in paying any judgment or judgments rendered or that may be rendered, with interest, costs, expenses and attorneys' fees, including those of the Surety. CO-SURETIES AND REINSURERS TWELFTH: In the event the Surety procures the execution of the Bonds by other sureties, or executes the Bonds with cosureties, or reinsures any portion of said Bonds with reinsuring insurers and/or sureties, then all the terms and conditions of this Agreement shall inure to the benefit of such other sureties, co-sureties and reinsuring insurers and/or sureties, as their interests may appear. SUITS THIRTEENTH: Separate suits may be brought hereunder as causes of action accrue, and the bringing of suit or the recovery of judgment upon any cause of action shall not prejudice or bar the bringing of other suits upon other causes of action, whether theretofore or thereafter arising. The Principal and Indemnitors hereby consent and submit to personal jurisdiction in the courts of New Jersey with regard to claims and actions against them by the Surety hereunder and consent that any process necessary or proper for the initiation of any court action in New Jersey or for entry of judgment may be served upon them by certified and ordinary mail, addressed to them or to their attorneys, at their last known addresses. The Indemnitors furthermore hereby agree to submit to personal jurisdiction in any forum in which the Surety may be sued on an obligation for which the Principal and Indemnitors have agreed to indemnify the Surety. OTHER RIGHTS FOURTEENTH: All rights and remedies of the Surety under this Agreement shall be cumulative, and the exercise of or failure to exercise, any right or remedy at any time shall not be an election of remedy or a waiver of any other right or remedy. Failure of the Surety to pursue any remedy against any one or more of the Principal and Indemnitors shall not release or waive any right against any other of the Principal and Indemnitors. The rights, powers and remedies given to the Surety by this Agreement shall be and are in addition to, and not in lieu of, any and all other rights, powers, and remedies which the Surety may have or acquire against the Principal and Indemnitors or others whether by terms of any other agreement, by operation of law or otherwise. OTHER INDEMNITY FIFTEENTH: The Principal and Indemnitors shall continue to remain bound under the terms of this Agreement even though the Surety may have from time to time heretofore or hereafter, with or without notice to or knowledge of the Principal and Indemnitors, accepted or released other agreements of indemnity or collateral in connection with the execution or procurement of said Bonds, from any and all of the Principal and Indemnitors or others, it being expressly understood and agreed by the Principal and Indemnitors that any and all other rights which the Surety may have or acquire against the Principal and Indemnitors and/or others under any such other or additional agreements of indemnity or collateral shall be in addition to, and not in lieu of, the rights afforded the Surety under this Agreement. DOCID 2.1 Commercial Bond (II) Page 4 of 8

30 Case LSS Doc INVALIDITY Filed 07/22/16 Page 14 of 17 SIXTEENTH: In case any of the parties mentioned in this Agreement fail to execute the same, or in case the execution hereof by any of the parties be defective or invalid for any reason, such failure, defect or invalidity shall not in any manner affect the validity of this Agreement or the liability hereunder of any of the parties executing the same, but each and every party so executing shall be and remain fully bound and liable hereunder to the same extent as if such failure, defect or invalidity had not existed. It is understood and agreed by the Principal and Indemnitors that the rights, powers, and remedies given the Surety under this Agreement shall be and are in addition to, and not in lieu of, any and all other rights, powers, and remedies which the Surety may have or acquire against the Principal and Indemnitors or others whether by the terms of any other agreement or by operation of law or otherwise. If any part of this Agreement shall be void or unenforceable under the laws of any jurisdiction governing its construction, this Agreement shall not be void or vitiated thereby, but shall be construed and enforced with the same effect as though such part was omitted. ATTORNEY IN FACT SEVENTEENTH: The Principal and Indemnitors hereby irrevocably nominate, constitute, appoint and designate the Surety or its designee as their attorney-in-fact with the right, but not the obligation, to exercise all of the rights granted, assigned, and/or transferred to the Surety in this Agreement, and in the name of the Principal and Indemnitors to make, execute, and deliver any and all additional or other assignments, documents or papers deemed necessary and proper by the Surety in order to give full effect not only to the intent and meaning of the within rights granted, assigned and/or transferred, but also to the full protection intended to be herein given to the Surety under all other provisions of this Agreement. The Principal and Indemnitors hereby ratify and affirm all acts and actions taken and done by the Surety or its designee as such attorney-in-fact. NOTICE EIGHTEENTH: Upon becoming aware of any demand, notice, or proceeding preliminary to fixing any liability with which the Surety may be subsequently charged under any Bond, the Principal and Indemnitors shall immediately notify the Surety in a writing delivered at its Home Office, One Newark Center, 20th Floor, Newark, New Jersey to the attention of the Claims Department. The Surety reserves the right to change periodically the address for delivery of notification by the Surety s written direction delivered to the Principal and Indemnitors. Any notification by the Surety to any one individual or entity comprising the Principal and Indemnitors shall constitute notice to the remaining individuals and entities comprising the Principal and Indemnitors. TERMINATION NINETEENTH: This Agreement may be terminated by the Principal and Indemnitors upon twenty days' written notice sent by certified or registered mail to the Surety at its home office at One Newark Center, 20th Floor, Newark, New Jersey 07102, but any such notice of termination shall not operate to modify, bar, or discharge the Principal and Indemnitors from their obligations under this Agreement as to the Bonds that may have been theretofore executed or executed pursuant to Consent of Surety issued prior to notice of termination or with respect to Bonds executed after the date of such termination which the Surety has become obligated, prior to such date, to execute. Further, such notice of termination shall operate only with respect to those parties upon whose behalf such notice of termination shall have been given. THIRD PARTIES TWENTIETH: In the event that an Indemnitor and/or Indemnitors and/or their subsidiaries or affiliates request that a Bond or Bonds be issued on behalf of a third party as principal, the provisions of this Agreement shall apply with equal force to any such Bond or Bonds. This Agreement applies to Bonds executed by the Company on behalf of any and all of their wholly or partially owned subsidiary companies, subsidiaries, divisions or affiliates, partnerships, joint ventures or co-ventures whether open or silent, jointly, severally, or in any combination with each other, now in existence or which may hereafter be created or acquired. DOCID 2.1 Commercial Bond (II) Page 5 of 8