TRADEMARK COLLATERAL ASSIGNMENT AND SECURITY AGREEMENT

EXHIBIT 10.16

TRADEMARK COLLATERAL ASSIGNMENT
AND SECURITY AGREEMENT

     This TRADEMARK COLLATERAL ASSIGNMENT AND SECURITY AGREEMENT (this “Trademark Agreement”), dated as of August 1, 2008, is by and between each of the undersigned (each individually, an “Assignor” and, collectively, the “Assignors”), and GENERAL ELECTRIC CAPITAL CORPORATION, a Delaware corporation, in its capacity as agent (in such capacity “Agent”) under the Loan Agreement (as defined below) acting for and on behalf of the Lenders (as defined in the Loan Agreement).

W I T N E S S E T H :

     WHEREAS, each Assignor is the owner of the entire right, title, and interest in and to its particular trademarks, trade names, terms, designs and applications therefor described in Exhibit A hereto and made a part hereof; and

     WHEREAS, Agent and the Lenders have entered or are about to enter into financing arrangements pursuant to which Lenders (or Agent on behalf of Lenders) may make loans and advances and provide other financial accommodations to Borrowers (as defined below), and certain affiliates of Borrowers as set forth in the Loan and Security Agreement, dated of even date herewith, by and among Hancock Fabrics, Inc, a Delaware corporation (“Parent”), HF Merchandising, Inc., a Delaware corporation (“Merchandising”), Hancock Fabrics of MI, Inc., a Delaware corporation (“Fabrics MI”), hancockfabrics.com, Inc., a Delaware corporation (“Fabrics.com”), Hancock Fabrics, LLC, a Delaware limited liability company (“Fabrics LLC”, and together with Parent, Merchandising, Fabrics MI and Fabrics.com, each individually a “Borrower” and, collectively, “Borrowers”), certain affiliates of Borrowers, Agent and Lenders (as the same now exists or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced, the “Loan Agreement”; capitalized terms used herein without definition shall have the meanings ascribed to such terms in the Loan Agreement) and other agreements, documents and instruments referred to therein or at any time executed and/or delivered in connection therewith or related thereto, including, but not limited to, this Agreement (all of the foregoing, together with the Loan Agreement, as the same now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced, being collectively referred to herein as the “Financing Agreements”); and

     WHEREAS, in order to induce Agent and Lenders to enter into the Loan Agreement and the other Financing Agreements and to make loans and advances and provide other financial accommodations to Borrowers pursuant thereto, each Assignor has agreed to grant to Agent certain collateral security as set forth herein.

     NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, each Assignor hereby agrees as follows:

     1.  GRANT OF SECURITY INTEREST

     As collateral security for the prompt performance, observance and indefeasible payment in full of all of the Obligations, each Assignor hereby grants to Agent, for itself and for the benefit of Lenders, a continuing security interest in and a general lien upon the following (being collectively referred to herein as the “Collateral”): (a) all of such Assignor’s now existing or hereafter acquired right, title, and interest in and to: (i) all of such Assignor’s trademarks, trade names, trade styles and service marks and all applications, registrations and recordings relating to the foregoing as may at any time be filed in the United States Patent and Trademark Office or in any similar office or agency of the United States, any State thereof, any political subdivision thereof or in any other country, including, without limitation, the trademarks, terms, designs and applications described in Exhibit A hereto, together with all rights and privileges arising under applicable law with respect to such Assignor’s use of any trademarks, trade names, trade styles and service marks, and all reissues, extensions, continuation and renewals thereof (all of the foregoing being collectively referred to herein as the “Trademarks”); and (ii) all prints and labels on which such trademarks, trade names, trade styles and service marks appear, have appeared or will appear, and all designs and general intangibles of a like nature; (b) the goodwill of the business symbolized by each of the Trademarks, including, without limitation, all customer lists and other records relating to the distribution of products or services bearing the Trademarks; (c) all present and future license and distribution agreements (subject to the rights of the licensors therein) pertaining to the Trademarks; (d) all income, fees, royalties and other payments at any time due or payable with respect thereto, including, without limitation, payments under all licenses at any time entered into in connection therewith; (e) the right to sue for past, present and future infringements thereof; (f) all rights corresponding thereto throughout the world; and (g) any and all other proceeds of any of the foregoing, including, without limitation, damages and payments or claims by such Assignor against third parties for past or future infringement of the Trademarks.

     2.  OBLIGATIONS SECURED

     The security interest, lien and other interests granted to Agent, for the benefit of Lenders, pursuant to this Trademark Agreement shall secure the prompt performance, observance and payment in full of any and all Obligations.

     3.  REPRESENTATIONS, WARRANTIES AND COVENANTS

     Each Assignor hereby represents, warrants and covenants with and to Agent the following (all of such representations, warranties and covenants being continuing so long as any of the Obligations are outstanding):

     (a) Such Assignor shall pay and perform all of the Obligations according to their terms.

     (b) All of the existing Collateral owned or held by such Assignor is valid and subsisting in full force and effect, and such Assignor owns the sole, full and clear title thereto, and the right and power to grant the security interest and collateral assignment granted hereunder. Such Assignor shall, at such Assignor’s expense, perform all acts and execute all documents necessary to maintain the existence of the Collateral owned or held by such Assignor consisting of

registered Trademarks as registered trademarks and to maintain the existence of all of the Collateral owned or held by such Assignor as valid and subsisting, including, without limitation, the filing of any renewal affidavits and applications. The Collateral owned or held by such Assignor is not subject to any liens, claims, mortgages, assignments, licenses, security interests or encumbrances of any nature whatsoever, except: (i) the security interests granted hereunder and pursuant to the Loan Agreement, (ii) the security interests permitted under the Loan Agreement, and (iii) the licenses permitted under Section 3(e) below.

     (c) Such Assignor shall not assign, sell, mortgage, lease, transfer, pledge, hypothecate, grant a security interest in or lien upon, encumber, grant an exclusive or non-exclusive license relating to the Collateral owned or held by such Assignor, or otherwise dispose of any of the Collateral owned or held by such Assignor, in each case without the prior written consent of Agent, except as otherwise permitted herein or in the Loan Agreement. Nothing in this Trademark Agreement shall be deemed a consent by Agent or any Lender to any such action, except as such action is expressly permitted hereunder.

     (d) Such Assignor shall, at such Assignor’s expense, promptly perform all acts and execute all documents requested at any time by Agent to evidence, perfect, maintain, record or enforce the security interest in and collateral assignment of the Collateral owned or held by such Assignor granted hereunder or to otherwise further the provisions of this Trademark Agreement. Such Assignor hereby authorizes Agent to execute and file one or more financing statements (or similar documents) with respect to the Collateral owned or held by such Assignor. Such Assignor further authorizes Agent to have this Trademark Agreement or any other similar security agreement filed with the Commissioner of Patents and Trademarks or any other appropriate federal, state or government office.

     (e) As of the date hereof, such Assignor does not have any Trademarks registered, or subject to pending applications, in the United States Patent and Trademark Office or any similar office or agency in the United States, any State thereof, any political subdivision thereof or in any other country, other than those described in Exhibit A hereto, and such Assignor has not granted any licenses with respect thereto other than as set forth in Exhibit B hereto.

     (f) Such Assignor shall, concurrently with the execution and delivery of this Trademark Agreement, execute and deliver to Agent five (5) originals of a Special Power of Attorney in the form of Exhibit C annexed hereto for the implementation of the assignment, sale or other disposition of the Collateral owned or held by such Assignor pursuant to Agent’s exercise of the rights and remedies granted to Agent hereunder.

     (g) Agent may, in its discretion, pay any amount or do any act which such Assignor fails to pay or do as required hereunder or as requested by Agent to preserve, defend, protect, maintain, record or enforce the Obligations, the Collateral owned or held by such Assignor, or the security interest and collateral assignment granted hereunder, including, but not limited to, all filing or recording fees, court costs, collection charges, attorneys’ fees and legal expenses. Such Assignor shall be liable to Agent for any such payment, which payment shall be deemed an advance by Agent to Borrowers, shall be payable on demand together with interest at the rate then applicable to the indebtedness of Borrowers to Agent set forth in the Loan Agreement and shall be part of the Obligations secured hereby.

     (h) Such Assignor shall not file any application for the registration of a Trademark with the United States Patent and Trademark Office or any similar office or agency in the United States, any State thereof, any political subdivision thereof or in any other country, unless such Assignor has given Agent prompt written notice of such action. If, after the date hereof, such Assignor shall (i) obtain any registered trademark or trade name, or apply for any such registration in the United States Patent and Trademark Office or in any similar office or agency in the United States, any State thereof, any political subdivision thereof or in any other country, or (ii) become the owner of any trademark registrations or applications for trademark registration used in the United States or any State thereof, political subdivision thereof or in any other country, the provisions of Section 1 hereof shall automatically apply thereto. Upon the request of Agent, such Assignor shall promptly execute and deliver to Agent any and all assignments, agreements, instruments, documents and such other papers as may be requested by Agent to evidence the security interest in and collateral assignment of such Trademark in favor of Agent.

     (i) Such Assignor has not abandoned any of such Assignor’s Trademarks, and such Assignor will not do any act, nor omit to do any act, whereby such Assignor’s Trademarks may become abandoned, invalidated, unenforceable, avoided, or avoidable. Such Assignor shall notify Agent immediately if it knows or has reason to know of any reason why any application, registration, or recording with respect to such Assignor’s Trademarks may become abandoned, canceled, invalidated, avoided, or avoidable.

     (j) Such Assignor shall render any assistance, as Agent shall determine is necessary, to Agent in any proceeding before the United States Patent and Trademark Office, any federal or state court, or any similar office or agency in the United States, any State thereof, any political subdivision thereof or in any other country, to maintain such application and registration of such Assignor’s Trademarks as such Assignor’s exclusive property and to protect Agent’s interest therein, including, without limitation, filing of renewals, affidavits of use, affidavits of incontestability and opposition, interference, and cancellation proceedings.

     (k) No material infringement or unauthorized use presently is being made of any of such Assignor’s Trademarks that would adversely affect in any material respect the fair market value of the Collateral owned or held by such Assignor or the benefits of this Trademark Agreement granted to Agent and Lenders, including, without limitation, the validity, priority or perfection of the security interest granted herein or the remedies of Agent and Lenders hereunder. There has been no judgment holding any of such Assignor’s Trademarks invalid or unenforceable, in whole or part nor is the validity or enforceability of any of the Trademarks presently being questioned in any litigation or proceeding to which such Assignor is a party. Such Assignor shall promptly notify Agent if such Assignor (or any affiliate or subsidiary thereof) learns of any use by any person of any term or design which infringes on any Trademark or is likely to cause confusion with any Trademark. If requested by Agent, such Assignor, at such Assignor’s expense, shall join with Agent in such action as Agent, in Agent’s discretion, may deem advisable for the protection of Agent’s interest in and to such Assignor’s Trademarks.

     (l) Such Assignor assumes all responsibility and liability arising from the use of such Assignor’s Trademarks, and such Assignor hereby indemnifies, jointly and severally with the other Assignors, and holds Agent and Lenders harmless from and against any claim, suit, loss, damage, or expense (including attorneys’ fees and legal expenses) arising out of any alleged

defect in any product manufactured, promoted, or sold by such Assignor (or any affiliate or subsidiary thereof) in connection with such Assignor’s Trademarks or out of the manufacture, promotion, labeling, sale or advertisement of any such product by such Assignor (or any affiliate or subsidiary thereof). The foregoing indemnity shall survive the payment of the Obligations, the termination of this Trademark Agreement and the termination or non-renewal of the Loan Agreement.

     (m) Such Assignor shall promptly pay Agent and Lenders for any and all expenditures made by Agent pursuant to the provisions of this Trademark Agreement or for the defense, protection or enforcement of the Obligations, the Collateral owned or held by such Assignor, or the security interests and collateral assignment granted hereunder, including, but not limited to, all filing or recording fees, court costs, collection charges, travel expenses, and attorneys’ fees and legal expenses. Such expenditures shall be payable on demand, together with interest at the rate then applicable to the indebtedness of Borrowers to Agent set forth in the Loan Agreement and shall be part of the Obligations secured hereby.

     4.  EVENTS OF DEFAULT

     All Obligations shall become immediately due and payable in full, in cash, without notice or demand, at the option of Agent, upon the occurrence of any Event of Default.

     5.  RIGHTS AND REMEDIES

     At any time an Event of Default exists or has occurred and is continuing, in addition to all other rights and remedies of Agent or any Lender, whether provided under this Trademark Agreement, the Loan Agreement, the other Financing Agreements, applicable law or otherwise, Agent shall have the following rights and remedies which may be exercised without notice to, or consent by, any Assignor except as such notice or consent is expressly provided for hereunder:

     (a) Agent may require that no Assignor nor any affiliate or subsidiary of any Assignor make any use of the Trademarks or any marks similar thereto for any purpose whatsoever. Agent may make use of any Trademarks for the sale of goods, completion of work-in-process or rendering of services or otherwise in connection with enforcing any other security interest granted to Agent by any Assignor or any subsidiary or affiliate of any Assignor or for such other reason as Agent may determine.

     (b) Agent may grant such license or licenses relating to the Collateral for such term or terms, on such conditions, and in such manner, as Agent shall in its discretion deem appropriate. Such license or licenses may be general, special or otherwise, and may be granted on an exclusive or non-exclusive basis throughout all or any part of the United States of America, its territories and possessions, and all foreign countries.

     (c) Agent may assign, sell or otherwise dispose of the Collateral or any part thereof, either with or without special conditions or stipulations except that if notice to the applicable Assignor of intended disposition of Collateral is required by law, the giving of ten (10) days prior written notice to such Assignor of any proposed disposition shall be deemed reasonable notice thereof and each Assignor waives any other notice with respect thereto. Agent shall have the power to buy the Collateral or any part thereof, and Agent shall also have the power to

execute assurances and perform all other acts which Agent may, in its discretion, deem appropriate or proper to complete such assignment, sale, or disposition. In any such event, the Assignors shall be liable for any deficiency.

     (d) In addition to the foregoing, in order to implement the assignment, sale, or other disposition of any of the Collateral pursuant to the terms hereof, Agent may at any time execute and deliver on behalf of any Assignor, pursuant to the authority granted in the Powers of Attorney described in Section 3(f) hereof, one or more instruments of assignment of the Trademarks (or any application, registration, or recording relating thereto), in form suitable for filing, recording, or registration. Assignors agree to pay Agent on demand all costs incurred in any such transfer of the Collateral, including, but not limited to, any taxes, fees, and attorneys’ fees and legal expenses. Assignors further agree that Agent and Lenders have no obligation to preserve rights to the Trademarks against any other parties.

     (e) Agent may first apply the proceeds actually received from any such license, assignment, sale or other disposition of any of the Collateral to the costs and expenses thereof, including, without limitation, attorneys’ fees and all legal, travel and other expenses which may be incurred by Agent. Thereafter, Agent may apply any remaining proceeds to such of the Obligations as Agent may in its discretion determine. Assignors shall remain jointly and severally liable to Agent for any of the Obligations remaining unpaid after the application of such proceeds, and Assignors shall pay Agent on demand any such unpaid amount, together with interest at the rate then applicable to the indebtedness of Borrowers to Agent set forth in the Loan Agreement.

     (f) Each Assignor shall supply to Agent or to Agent’s designee, such Assignor’s knowledge and expertise relating to the manufacture, sale and distribution of the products and services bearing such Assignor’s Trademarks and such Assignor’s customer lists and other records relating to the Trademarks and the distribution thereof.

     (g) Nothing contained herein shall be construed as requiring Agent to take any such action at any time. All of Agent’s rights and remedies, whether provided under this Trademark Agreement, the other Financing Agreements, applicable law, or otherwise, shall be cumulative and none is exclusive. Such rights and remedies may be enforced alternatively, successively, or concurrently.

     6.  JURY TRIAL WAIVER; OTHER WAIVERS AND CONSENTS; GOVERNING LAW

     (a) The validity, interpretation and enforcement of this Trademark Agreement and the other Financing Agreements and any dispute arising out of the relationship between the parties hereto, whether in contract, tort, equity or otherwise, shall be governed by the internal laws of the State of New York but excluding any principles of conflicts of law or choice of law (other than Section 5-1401 and Section 5-1402 of the General Obligations Laws of the State of New York).

     (b) Each Assignor and Agent irrevocably consents and submits to the non-exclusive jurisdiction of the Supreme Court of the State of New York in New York County and the United