The Secaucus, N.J., retailer of discounted designer clothing filed for Chapter 11 on Wednesday with a liquidation plan that would be funded by more than $59 million in asset sales, enabling all creditors to be paid in full. Daffy's will fund its bankruptcy case with a $10 million debtor-in-possession loan from prepetition lender Wells Fargo Bank NA.

Judge Martin Glenn of the U.S. Bankruptcy Court for the Southern District of New York in Manhattan approved interim use of cash collateral and the DIP on Thursday. A final DIP hearing is scheduled for Aug. 27.

Daffy's owes Wells Fargo $6.2 million on a prepetition revolving credit facility and $10.2 million on a prepetition term loan. The debtor also owes Wells Fargo $610,000 from the termination of a swap agreement.

The DIP will roll up the prepetition revolver and swap agreement claim and provide for roughly $2.5 million in new money, court documents said.

The postpetition loan is priced at prime plus 1.5% and matures on Dec. 31. It has a $300,000 to $400,000 closing fee, a $5,000 per month service fee, a 0.375% unused line fee and a 1.5% letter-of-credit fee. The debtor also will reimburse the DIP lender for professional fees.

Daffy's blamed its petition on the continued economic downturn and increased competition in the discount fashion market, including an increase in online discount retailers, which caused its formerly profitable business to suffer a net loss in 2011.

Daffy's, which has operated 19 leased stores in New York, New Jersey and Pennsylvania, posted an $11.36 million net operating loss on $151.26 million in net sales for the fiscal year ended Jan. 1.

The debtor hired a new senior management team in February 2011 in an attempt to restructure its business and return to profitability. To increase its liquidity, the debtor entered into an option agreement with Herald Center Department Stores Tenant LLC, a subsidiary of New York real estate developer, investor and manager JEMB Realty Corp., for its most valuable lease on its 97,124-square-foot Herald Square store in New York. A JEMB affiliate is the landlord for the property, court papers show.

Through the option agreement, Herald Center Department Stores had the right to acquire the debtor's interest in the Herald Square store lease.

Despite its efforts to improve its liquidity, though, the debtor continued to operate at a loss with declining sales performance. Daffy's fired its new management team in early 2012 and attempted to improve its situation by cutting its costs.

In March it began analyzing its options for selling its leases and liquidating its inventory. Daffy's defaulted on its prepetition revolver on June 5 and its term loan on June 7.

The retailer held an auction Monday to determine who would liquidate its remaining inventory. It entered into an agreement with a joint venture between Gordon Brothers Retail Partners LLC and Hilco Merchant Resources LLC to liquidate its inventory on Tuesday. Under the agreement, the liquidators would guarantee Daffy's a minimum 99.5% recovery of the cost of its inventory, equal to roughly $16.91 million. The agreement also gives the debtor 5% of the gross proceeds from the sale of any augmented inventory, court filings said.

The liquidation sales won't start until after the agency agreement is approved by the court, debtor counsel Debra A. Dandeneau of Weil, Gotshal & Manges LLP said.

Daffy's, meanwhile, plans to sell its portfolio of leases, as well as its fixtures and intellectual property, to another JEMB affiliate, Jericho Acquisitions I LLC, for $43 million. The buyer has provided the debtor with a $20 million deposit.

Glenn is scheduled to consider the assumption of the liquidation and sales agreements on Aug. 7. Once the sale agreement is assumed, the sale would be approved through the confirmation of the liquidation plan, Dandeneau said. There will not be an auction held for the sale, she said.

In addition, nondebtor affiliates of Daffy's seek to sell three properties to JEMB affiliate Jericho Acquisitions II LLC and Morris Bailey for $40 million. The retailer's majority owner, Marcia Wilson, also owns the nondebtors, which lease the properties to Daffy's. The real estate includes Daffy's headquarters and distribution center in Secaucus and two of its stores in Philadelphia and East Hanover, N.J.

Daffy's guaranteed certain real estate loans, totaling $9.4 million, that were made to the nondebtor affiliates. The sale of the three properties will repay the debt and satisfy the debtor's guarantee, thereby providing a "significant benefit to the debtor and its estate," court documents said.

The retailer doesn't require court approval for the sale, because it's of the nondebtor affiliates' assets, Dandeneau said.

Daffy's liquidation plan would repay all of its creditors in full in cash on the plan's effective date. Since all creditors are being repaid in full, the debtor isn't required to file a disclosure statement for its plan, Dandeneau said.

Daffy's expects to generate at least $59 million in cash from its sales to satisfy its $37 million in claims.

General unsecured creditors would receive payment in full in cash plus interest at the federal judgment rate.

Equity holders would retain their interests and would receive any distribution after all creditors were repaid in full.

The debtor will look for confirmation of its plan on Oct. 16, Dandeneau said.

The family-owned discount retailer of apparel, accessories and home goods opened its first store in 1961 as Daffy Dan's Bargaintown in Elizabeth, N.J. In addition to the 19 stores it operates, the debtor also has a distribution and storage facility in Secaucus. Its business model is to sell fashionable clothing at deep discounts. It sells brands such as Coach, Calvin Klein, Kenneth Cole and Timberland.

Before it filed for Chapter 11, it began a process to wind down its merchandising office in Florence, Italy. The wind-down process is ongoing, court filings said.

Daffy's has 1,162 employees in the U.S. The debtor has nine stores in New York City, eight in suburban retail centers in New York and New Jersey, one in Philadelphia and one at its Secaucus distribution facility. It listed assets of $51.1 million and liabilities of $36.6 million in schedules.

Its largest unsecured creditors are Chris Friedlander of Mt. Vernon, N.Y. (owed $612,993), Devito Verdi of New York ($352,739), Falc USA Inc. of Westmoreland, N.H. ($271,574), Peerless Clothing International Inc. of St. Albans, Vt. ($267,753), and Latico Leathers of Denville, N.J. ($238,863). Wilson owns 82.1% of Daffy's, and five family trusts own the remaining interests.

Brad E. Scheler of Fried, Frank, Harris, Shriver & Jacobson LLP represents Jericho Acquisitions I. Steven Reisman of Curtis, Mallet-Prevost, Colt & Mosle LLP is counsel to Gordon Brothers and Hilco. Donald E. Rothman of Riemer & Braunstein LLP represents Wells Fargo. Stuart H. Kessler of Clear Thinking Group LLC is the bank's financial adviser.