INTERCREDITOR AND SUBORDINATION AGREEMENT

 

<PAGE>

Exhibit 10.2

 

                                                             [Execution Version]

 

                    INTERCREDITOR AND SUBORDINATION AGREEMENT

 

      THIS INTERCREDITOR AND SUBORDINATION AGREEMENT ("Intercreditor

Agreement"), dated as of July 8, 2004, is by and between CONGRESS FINANCIAL

CORPORATION, a Delaware corporation ("Senior Creditor" as hereinafter further

defined), and CHELSEY FINANCE, LLC, a Delaware limited liability company

("Junior Creditor" as hereinafter further defined). Senior Creditor and Junior

Creditor are sometimes individually referred to herein as a "Creditor" and

collectively as "Creditors."

 

                              W I T N E S S E T H:

 

      WHEREAS, Junior Creditor has made a loan or provided other financial

accommodations to Brawn of California, Inc., Gump's By Mail, Inc., Gump's Corp.,

Hanover Realty, Inc., The Company Store Factory, Inc., The Company Office, Inc.,

Silhouettes, LLC, Hanover Company Store, LLC, Domestications, LLC, Keystone

Internet Services, LLC, and The Company Store Group, LLC (collectively,

"Borrowers" as hereinafter further defined), which loans or other financial

accommodations are secured by assets and properties of Borrowers and Hanover

Direct, Inc. ("Hanover" as hereinafter further defined), Hanover Home Fashions

Group, LLC, Clearance World Outlets, LLC, Scandia Down, LLC, LaCrosse

Fulfillment, LLC, D.M. Advertising, LLC, American Down & Textile, LLC and

Hanover Gifts, Inc. (collectively, "Guarantors"; and together with Borrowers,

collectively, "Debtors"); and

 

      WHEREAS, Senior Creditor has entered or is about to enter into financing

arrangements with Debtors, pursuant to which Senior Creditor may, upon certain

terms and conditions, make loans and provide other financial accommodations to

Debtors secured by certain assets and properties of Debtors; and

 

      WHEREAS, Creditors desire to enter into this Intercreditor Agreement to

(i) confirm the relative priority of the security interests of each Creditor in

the assets and properties of Debtors, (ii) provide for the orderly sharing among

Creditors, in accordance with such priorities, of proceeds of such assets and

properties upon any foreclosure thereon or other disposition thereof, and (iii)

agree upon the terms of the subordination of the obligations of Debtors to

Junior Creditor and related matters;

 

      NOW, THEREFORE, in consideration of the mutual benefits accruing to

Creditors hereunder and other good and valuable consideration, the receipt and

sufficiency of which is hereby acknowledged, the parties hereto do hereby agree

as follows:

 

   1. DEFINITIONS

 

      As used above and in this Intercreditor Agreement, the following terms

shall have the meanings ascribed to them below:

 

<PAGE>

 

      1.1    "Agreements" shall mean, collectively, the Senior Creditor

Agreements and the Junior Creditor Agreements.

 

      1.2    "Asset Sales" shall have the meaning given in the Loan Agreement.

 

      1.3    "Borrowers" shall mean Brawn of California, Inc., a California

corporation, Gump's By Mail, Inc., a Delaware corporation, Gump's Corp., a

California corporation, Hanover Realty, Inc., a Virginia corporation, The

Company Store Factory, Inc., a Delaware corporation, The Company Office, Inc., a

Delaware corporation, Silhouettes, LLC, a Delaware limited liability company,

Hanover Company Store, LLC, a Delaware limited liability company,

Domestications, LLC, a Delaware limited liability company, Keystone Internet

Services, LLC, a Delaware limited liability, and The Company Store Group, LLC, a

Delaware limited liability company, and their respective successors and assigns.

 

      1.4    "Business Day" shall have the meaning given in the Loan Agreement.

 

      1.5    "Capital Stock" shall have the meaning given in the Loan Agreement.

 

      1.6     "Certificate of Designation of the Series D Preferred Stock" shall

have the meaning given in the Loan Agreement.

 

      1.7    "Chelsey Warrants" shall have the meaning given in the Loan

Agreement.

 

      1.8    "Collateral" shall mean all of the property and interests in

property, real or personal, tangible or intangible, now owned or hereafter

acquired by any Debtor in or upon which either or both of Creditors at any time

has a Lien, and including, without limitation, all proceeds of such property and

interests in property.

 

      1.9    "Creditors" shall mean, collectively, Senior Creditor and Junior

Creditor, and their respective successors and assigns.

 

      1.10   "Debtors" shall mean, collectively, Borrowers and Guarantors, and

their successors and assigns, including, without limitation, a receiver, trustee

or debtor-in-possession on behalf of such person or on behalf of any such

successor or assign.

 

      1.11   "EBITDA" shall have the meaning given in the Loan Agreement.

 

      1.12   "Excess Availability" shall have the meaning given in the Loan

Agreement.

 

      1.13   "Event of Default" shall have the meaning given in the Loan

Agreement.

 

      1.14   "Guarantors" shall mean, collectively, Hanover, Hanover Home

Fashions Group, LLC, a Delaware limited liability company, Clearance World

Outlets, LLC, a Delaware limited liability company, Scandia Down, LLC, a

Delaware limited liability company, LaCrosse Fulfillment, LLC, a Delaware

limited liability company, D.M. Advertising, LLC, a Delaware limited liability

company, American Down & Textile, LLC, a Delaware limited liability

 

                                       2

<PAGE>

 

company, and Hanover Gifts, Inc., a Virginia corporation, and their respective

successors and assigns.

 

      1.15   "Hanover" shall mean Hanover Direct, Inc., a Delaware corporation,

and its successors and assigns.

 

      1.16   "Incipient Default" shall have the meaning given in the Loan

Agreement.

 

      1.17 "Junior Creditor" shall mean Chelsey Finance, LLC, a Delaware limited

liability company, and its successors and assigns.

 

      1.18 "Junior Creditor Agreements" shall mean, collectively, the Loan and

Security Agreement, dated as of the date hereof, among Junior Creditor and

Debtors and all agreements, documents and instruments at any time executed

and/or delivered by Debtors or any other person to, with or in favor of Junior

Creditor in connection therewith or related thereto, as all of the foregoing now

exist or may hereafter be amended, modified, supplemented, extended, renewed,

restated or replaced.

 

      1.19 "Junior Debt" shall mean all obligations, liabilities and

indebtedness of every kind, nature and description owing by Debtors to Junior

Creditor, including principal, interest, charges, fees, premiums, indemnities

and expenses, however evidenced, whether as principal, surety, endorser,

guarantor or otherwise, whether arising under the Junior Creditor Agreements or

otherwise, whether now existing or hereafter arising, whether arising before,

during or after the initial or any renewal term of the Junior Creditor

Agreements or after the commencement of any case with respect to Debtors under

the U.S. Bankruptcy Code or any similar statute (and including, without

limitation, any principal, interest, fees, costs, expenses and other amounts,

whether or not such amounts are allowable in whole or in part, in any such case

or similar proceeding), whether direct or indirect, absolute or contingent,

joint or several, due or not due, primary or secondary, liquidated or

unliquidated, secured or unsecured, and whether arising directly or howsoever

acquired by Junior Creditor.

 

      1.20 "Lien" shall mean any mortgage, deed of trust, pledge, hypothecation,

assignment, deposit arrangement, security interest, encumbrance (including, but

not limited to, easements, rights of way and the like), lien (statutory or

other), security agreement or transfer intended as security, including without

limitation, any conditional sale or other title retention agreement, the

interest of a lessor under a capital lease or any financing lease having

substantially the same economic effect as any of the foregoing.

 

      1.21 "Loan Agreement" shall mean the Loan and Security Agreement, dated

November 14, 1995, among Senior Creditor, Borrowers and Guarantors, as

heretofore amended and as the same may hereafter be amended, modified,

supplemented, extended, renewed, restated, refinanced, replaced or restructured.

 

      1.22 "Net Proceeds" shall have the meaning given in the Loan Agreement.

 

      1.23 "Payment in full" or "payment in full" shall mean the indefeasible

payment and satisfaction in full in immediately available funds of all of the

Senior Debt and the termination of

 

                                       3

<PAGE>

 

the financing arrangements provided by Senior Creditor to Debtors (but not

including for this purpose the refinancing or replacement of the Senior

Creditor). If after receipt of any payment of, or proceeds of collateral applied

to the payment of, any of the Senior Debt or Senior Creditor is required to

surrender or return such payment or proceeds to any person for any reason, then

the Senior Debt intended to be satisfied by such payment or proceeds shall be

reinstated and continue and this Subordination Agreement shall continue in full

force and effect as if such payment or proceeds had not been received by Senior

Creditor.

 

 

      1.24 "Person" or "person" shall mean any individual, sole proprietorship,

partnership, corporation (including, without imitation, any corporation which

elects subchapter S status under the Internal Revenue Code of 1986, as amended),

limited liability company, limited liability partnership, business trust,

unincorporated association, joint stock company, trust, joint venture, or other

entity or any government or any agency or instrumentality or political

subdivision thereof.

 

      1.25 "Senior Creditor" shall mean Congress Financial Corporation, a

Delaware corporation, and its successors and assigns (and including any other

lender or group of lenders that at any time refinances, replaces or succeeds to

all or any portion of the Senior Debt or is otherwise party to the Senior

Creditor Agreements).

 

      1.26 "Senior Creditor Agreements" shall mean, collectively, the Loan

Agreement and all agreements, documents and instruments at any time executed or

delivered by Debtors or any other person to, with or in favor of Senior Creditor

in connection therewith or related thereto, as all of the foregoing now exist or

may hereafter be amended, modified, supplemented, extended, renewed, restated,

refinanced, replaced or restructured (in whole or in part and including any

agreements with, to or in favor of any other lender or group of lenders that at

any time refinances, replaces or succeeds to all or any portion of the Senior

Debt).

 

       1.27 "Senior Debt" shall mean any and all obligations, liabilities and

indebtedness of every kind, nature and description owing by Debtors to Senior

Creditor or its affiliates or participants, including principal, interest,

charges, fees, premiums, indemnities and expenses, however evidenced, whether as

principal, surety, endorser, guarantor or otherwise, in connection with or

related to the Senior Creditor Agreements, whether now existing or hereafter

arising, whether arising before, during or after the initial or any renewal term

of the Senior Creditor Agreements or after the commencement of any case with

respect to Debtors under the U.S. Bankruptcy Code or any state insolvency law or

similar statute (and including, without limitation, any principal, interest,

fees, costs, expenses and other amounts, which would accrue and become due but

for the commencement of such case, whether or not such amounts are allowed or

allowable in whole or in part in any such case), whether direct or indirect,

absolute or contingent, joint or several, due or not due, primary or secondary,

liquidated or unliquidated, secured or unsecured, and whether arising directly

or howsoever acquired by Senior Creditor.

 

      1.28 "Solvent" shall have the meaning given in the Loan Agreement.

 

      1.29 "Subsidiary" shall have the meaning given in the Loan Agreement.

 

                                       4

<PAGE>

 

      1.30 All terms defined in the Uniform Commercial Code as in effect in the

State of New York, unless otherwise defined herein shall have the meanings set

forth therein. All references to any term in the plural shall include the

singular and all references to any term in the singular shall include the

plural.

 

      2. SECURITY INTERESTS; PRIORITIES; REMEDIES

 

      2.1 Acknowledgement of Liens. Each Creditor hereby acknowledges that the

other Creditor has been granted a Lien upon the Collateral.

 

      2.2 Priority of Liens. Notwithstanding the order or time of attachment, or

the order, time or manner of perfection, or the order or time of filing or

recordation of any document or instrument, or other method of perfecting a

security interest in favor of each Creditor in any Collateral, and

notwithstanding any conflicting terms or conditions which may be contained in

any of the Agreements, the Liens upon the Collateral of Senior Creditor have and

shall have priority over the Liens upon the Collateral of Junior Creditor and

such Liens of Junior Creditor are and shall be, in all respects, subject and

subordinate to the Liens of Senior Creditor therein to the full extent of the

Senior Debt.

 

      2.3 Priorities Unaffected by Action or Inaction. The lien priorities

provided in Section 2.2 hereof shall not be altered or otherwise affected by any

amendment, modification, supplement, extension, renewal, restatement or

refinancing of either the Senior Debt or the Junior Debt, nor by any action or

inaction which any Creditor may take or fail to take in respect of the

Collateral.

 

      2.4 Rights of Third Parties; No Contest of Lien. Each Creditor shall be

solely responsible for perfecting and maintaining the perfection of its Lien in

and to each item constituting the Collateral in which such Creditor has been

granted a Lien. The foregoing provisions of this Agreement are intended solely

to govern the respective lien priorities as between the Creditors and shall not

impose on Senior Creditor any obligations in respect of the disposition of

proceeds of foreclosure on any Collateral which would conflict with prior

perfected claims therein in favor of any other person or any order or decree of

any court or other governmental authority or any applicable law. Junior Creditor

agrees that it will not contest the validity, perfection, priority or

enforceability of the Liens upon the Collateral of Senior Creditor and that, as

between Senior Creditor and Junior Creditor, the terms of this Intercreditor

Agreement shall govern even if part or all of the Senior Debt or the Liens

securing payment and performance thereof are not perfected or are avoided,

disallowed, set aside or otherwise invalidated in any judicial proceeding or

otherwise.

 

2.5 Right to Enforce Agreement. Senior Creditor shall have the exclusive right

to manage, perform and enforce the terms of the Senior Creditor Agreements with

respect to the Collateral, to exercise and enforce all privileges and rights

thereunder according to its discretion and the exercise of its business

judgment, including, without limitation, the exclusive right to take or retake

control or possession of such Collateral and to hold, prepare for sale, process,

sell, lease, dispose of, or liquidate such Collateral. Junior Creditor shall not

have any right to direct Senior Creditor to exercise any right, remedy or power

with respect to the Collateral and Junior Creditor consents to the exercise by

Senior Creditor of any such right, remedy or power. Junior Creditor

 

                                       5

<PAGE>

 

shall not institute any suit or assert in any suit, bankruptcy, insolvency or

other proceeding any claim against Senior Creditor seeking damages from or other

relief by way of specific performance, instructions or otherwise, with respect

to, and Senior Creditor shall not be liable for, any action take or omitted to

be taken by Senior Creditor with respect to the Collateral. Nothing contained in

this Section 2.5 shall be construed to relieve Senior Creditor from any

liability to Junior Creditor for any losses suffered by Junior Creditor as a

result of an action taken or omitted by Senior Creditor with respect to the

Collateral which is determined to constitute gross negligence or willful

misconduct pursuant to a final, non-appealable order of a court of competent

jurisdiction.

 

      2.6 Sale and Release of Collateral.

 

            (a) Notwithstanding anything to the contrary contained in any of the

Agreements, only Senior Creditor shall have the right to restrict or permit, or

approve or disapprove, the sale, transfer or other disposition of Collateral.

Junior Creditor shall, upon receipt of written notice from Senior Creditor of a

proposed sale or other disposition of Collateral:

 

                  (i) be deemed to have automatically and without further action

released and terminated any Liens it may have on the Collateral to the extent

such Collateral is sold or otherwise disposed of either by Senior Creditor, any

agent of Senior Creditor, or any Debtor with the consent of Senior Creditor,

 

                  (ii) be deemed to have authorized Senior Creditor to file UCC

amendments and terminations covering the Collateral so sold or otherwise

disposed of as to UCC financing statements between Debtors and Junior Creditor

to evidence such release and termination,

 

                  (iii) promptly upon the request of Senior Creditor execute and

deliver such other release documents and confirmations of the authorization to

file UCC amendments and terminations provided for herein, in each case as Senior

Creditor may reasonably require in connection with such sale or other

disposition by Senior Creditor, Senior Creditor's agents or any Debtor with the

consent of Senior Creditor to evidence and effectuate such termination and

release; provided, that, any such release or UCC amendment or termination by

Junior Creditor shall not extend to or otherwise affect any of the rights, if

any, of Junior Creditor to the proceeds from any such sale or other disposition

of Collateral; and

 

                  (iv) be deemed to have consented under the Junior Creditor

Agreements to such sale or other disposition. In the event that for any reason

Junior Creditor shall fail within five (5) days after the date requested by

Senior Creditor to execute and deliver to Senior Creditor any such release

documents, Senior Creditor is hereby irrevocably authorized to execute and

deliver such release documents on behalf of Junior Creditor.

 

            (b) Notwithstanding anything to the contrary contained in this

Section 2.6, Junior Creditor shall not be deemed to release or terminate the

Liens of Junior Creditor to the extent that any proceeds of the sale, transfer

or other disposition of Collateral are in excess of the amount necessary to pay

in full all of the Senior Debt in immediately available funds.

 

                                       6

<PAGE>

 

      2.7 Limitation on Remedies.

 

      (a) Notwithstanding any rights or remedies available to a Creditor under

any of the Agreements, applicable law or otherwise, Junior Creditor shall not,

directly or indirectly, (i) seek to collect from any Debtor (including, without

limitation, from or by way of any Collateral) any of the Junior Debt or exercise

any of its rights or remedies upon a default or event of default by any Debtor

under the Junior Creditor Agreements or otherwise, or (ii) seek to foreclose or

realize upon (judicially or non-judicially) its Lien on any Collateral or assert

any claims or interests therein (including, without limitation, by setoff or

notification of account debtors), or (iii) commence any action or proceeding

against any Debtor or its properties under the U.S. Bankruptcy Code or any state

insolvency law or similar present or future statute, law or regulation or any

proceedings for voluntary liquidation, dissolution or other winding up of any

Debtor's business, or the appointment of any trustee, receiver or liquidator for

any Debtor or any part of its properties or any assignment for the benefit of

creditors or any marshalling of assets of any Debtor, or (iv) take any other

action against any Debtor and the Collateral.

 

      (b) The foregoing provisions of Section 2.7(a) hereof shall not in any way

limit or impair the right of Junior Creditor (i) to bid for and purchase

Collateral at any private or judicial foreclosure upon such Collateral initiated

by Senior Creditor, or (ii) to participate in any administrative, legal or

equitable action or proceeding against any Debtor seeking any reorganization,

liquidation, bankruptcy or any other action involving the readjustment of all or

any part of the Junior Debt, or other similar relief under the United States

Bankruptcy Code, or (iii) to send such notices of the existence of, or any

evidence or confirmation of, the Junior Debt under the Junior Creditor

Agreements or the Liens of Junior Creditor in the Collateral to Debtors or any

court or governmental agency, or file or record any such notice or evidence to

the extent necessary to prove or preserve the Liens of Junior Creditor in the

Collateral or the Junior Debt.

 

      3. SUBORDINATION OF JUNIOR DEBT

 

      3.1 Subordination. Except as specifically set forth in Section 3.2 hereof,

Junior Creditor hereby subordinates its right to payment and satisfaction of the

Junior Debt and the payment thereof, directly or indirectly, by any means

whatsoever, is deferred, to the payment in full of all Senior Debt.

 

      3.2 Permitted Payments. Senior Creditor hereby agrees that,

notwithstanding anything to the contrary contained in Section 3.1 hereof,

Debtors may make and Junior Creditor may receive and retain from Debtors the

following payments of principal, cash interest and fees, on an unaccelerated

basis in respect of the Junior Debt in accordance with the terms of the Junior

Creditor Agreements as in effect on the date hereof (but not any prepayments,

non-mandatory payments or any payments pursuant to acceleration or claims of

breach or any payment to acquire any Junior Debt or otherwise in respect of any

Junior Debt):

 

      (a) Borrowers may pay the closing fee in respect of the Junior Debt on the

date hereof in the amount of $200,000 in accordance with the terms and

conditions of the Junior Creditor Agreements out of the initial loan proceeds

made available by Junior Creditor to Borrowers;

 

                                       7

<PAGE>

 

      (b) Borrowers and Guarantors may make regularly scheduled payments of

interest in respect of the Junior Debt in accordance with the terms and

conditions of the Junior Creditor Agreement so long as no Incipient Default or

Event of Default shall exist or have occurred;

 

      (c) during any fiscal quarter of Hanover and its Subsidiaries commencing

with the fiscal quarter of Hanover and its Subsidiaries ending September 25,

2004, Borrowers may make payments of principal in cash in respect of the Junior

Debt in accordance with the terms and conditions of the Junior Creditor

Agreements, so long as each of the following conditions shall have been

satisfied as determined by Senior Creditor:

 

            (i) as of the date of any such payment and after giving effect

thereto, the aggregate amount of the Excess Availability of Borrowers on such

date and th