Exhibit 4.7


 


INTERCREDITOR
AGREEMENT


 


This Intercreditor Agreement (this “Agreement”) dated
as of June 20, 2005 among HSBC BANK USA, NATIONAL ASSOCIATION as agent for
Lenders (as defined below) (in such capacity, “Agent”), THE BANK OF NEW YORK,
as Trustee and as Collateral Agent (“Subordinated Lienholder”), RAFAELLA
APPAREL GROUP, INC., a Delaware corporation (“Rafaella”), and VERRAZANO,
INC, a New York corporation (“Verrazano”).


 


BACKGROUND


 


As an inducement for Agent and Lenders (as defined
below) to provide a secured credit facility in favor of Rafaella, which credit
facility is guaranteed by Verrazano (Rafaella and Verrazano hereinafter each a “Credit
Party” and collectively “the Credit Parties”), Subordinated Lienholder has
agreed to enter into this Agreement to provide for the subordination of the
Liens (as defined below) in the assets of Credit Parties granted to
Subordinated Lienholder under the Indenture Security Agreements (as defined
below) to the Liens in such assets of Credit Parties granted to Agent for its
benefit and for the ratable benefit of Lenders.


 


AGREEMENTS


 


NOW, THEREFORE, for good and valuable consideration,
receipt of which is hereby acknowledged, the parties hereto agree as follows:


 


1.                                       Definitions.


 


1.1.                              General
Terms. For purposes of this Agreement, the following terms shall have the
following meanings:


 


“Agent” shall have the meaning set forth in the
introductory paragraph to this Agreement.


 


“Code” shall have the meaning set forth in Section 5.3(a) to
this Agreement.


 


“Collateral” shall mean all of the property and
interests in property, tangible or intangible, real or personal, now owned or
hereafter acquired by any Credit Party in or upon which Agent for its benefit
and for the ratable benefit of Lenders at any time has a Lien, and including,
without limitation, all proceeds and products of such property and interests in
property.


 


“Credit Party” and “Credit Parties”
shall have the meaning set forth in the background paragraph to this Agreement.


 


“Creditor Agreements” shall mean, collectively,
the Lending Agreements and the Subordinated Lienholder Agreements.


 


“Creditors” shall mean, collectively, Agent and
Subordinated Lienholder and their respective successors and assigns.


 


“Discharge of Senior Indebtedness” shall mean
payment in full in cash (or in the case of letters of credit and bank product
obligations, the cash collateralization as required by the Lending Agreements)
of the Senior Indebtedness (other than Senior Indebtedness consisting solely of
contingent indemnification obligations under the Lending Agreements) after or 


 


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concurrently with the
termination or expiration of all commitments to extend credit that would
constitute Senior Indebtedness.


 


“Documents” shall have the meaning given to the
term “Other Documents” in the Loan Agreement.


 


“Exercise Any Secured Creditor Remedies” or “Exercise
of Secured Creditor Remedies” means (a) the taking of any action to
enforce or realize upon any Lien, including the institution of any foreclosure
proceedings or the noticing of any public or private sale or other disposition
pursuant to Article 9 of the applicable Uniform Commercial Code, (b) the
exercise of any right or remedy provided to a secured creditor or otherwise on
account of a Lien under the Creditor Agreements, applicable law, in an
Insolvency Proceeding or otherwise, including the election to retain Collateral
in satisfaction of a Lien, (c) the taking of any action or the exercise of
any right or remedy in respect of the collection on, set off against,
marshaling of, or foreclosure on the Collateral or the Proceeds of Collateral, (d) the
sale, lease, license, or other disposition of all or any portion of the
Collateral, by private or public sale, other disposition or any other means
permissible under applicable law, (e) the solicitation of bids from third
parties to conduct the liquidation of all or a material portion of Collateral
to the extent undertaken and being diligently pursued in good faith to
consummate the sale of such Collateral within a commercially reasonable time, (f) the
engagement or retention of sales brokers, marketing agents, investment bankers,
accountants, appraisers, auctioneers or other third parties for the purposes of
valuing, marketing, promoting and selling the Collateral to the extent
undertaken and being diligently pursued in good faith to consummate the sale of
such Collateral within a commercially reasonable time, and (g) the
exercise of any other enforcement right relating to the Collateral (including
the exercise of any voting rights relating to any capital stock and including
any right of recoupment or set-off) whether under the Lending Agreements, the
Subordinated Lienholder Agreements, applicable law, in an Insolvency Proceeding
or otherwise.


 


“Indenture” shall mean that certain Indenture,
dated as of the date hereof, among Rafaella, the Guarantors (as defined
therein) and The Bank of New York, as trustee, pursuant to which Rafaella
issued $172,000,000 in aggregate principal amount of its 11.25% Senior Secured
Notes due 2011, as the same may be amended, supplemented, amended and
restated or otherwise modified and in effect from time to time, subject to Section 5.6
to this Agreement.


 


“Indenture Security Agreements” shall mean the
Second Lien Security Agreement dated as of the date hereof, made by Rafaella
and Verrazano to the Subordinated Lienholder (as Collateral Agent), together
with any agreements in substantially the form of any Exhibits to the
Second Lien Security Agreement which are executed and delivered in accordance
with the Second Lien Security Agreement.


 


“Insolvency Proceeding” shall have
the meaning set forth in Section 5.3(a) to this Agreement.


 


“Lenders” shall mean each of the financial
institutions named in or which hereafter become a party to the Loan Agreement.


 


“Lending Agreements” shall mean collectively,
the Loan Agreement, the Notes and the other Documents, each as from time to
time in effect.


 


“Lien” shall mean any mortgage, deed of trust,
pledge, hypothecation, assignment, deposit arrangement, security interest,
encumbrance (including, but not limited to, easements, 


 


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rights of way and the
like), lien (statutory or other), charge against or interest in property, 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, in each case of any kind. to secure
payment of a debt or performance of an obligation.


 


“Loan Agreement” shall mean the Revolving
Credit and Security Agreement dated as of June 20, 2005 among Credit
Parties, Lenders and Agent, as the same may be amended, supplemented,
modified or restated from time to time.


 


“Maximum Priority Debt Amount” shall mean, as
of any date of determination, the outstanding principal amount (including the
undrawn amount of all letters of credit) of Senior Indebtedness as of such date
up to, but not in excess of, an aggregate principal amount equal to the amount
permitted to be incurred pursuant to clause (2) of the definition of “Permitted
Indebtedness” contained in the Indenture, plus all costs, interest fees and
expenses payable by Credit Parties to Lenders and Agent, minus the amount of
all permanent commitment reductions made or required to be made pursuant to the
Indenture from and after the date hereof.


 


“Person” shall mean an individual, a
partnership, a corporation (including a business trust), a joint stock company,
a trust, an unincorporated association, a joint venture, a limited liability
company, a limited liability partnership or other entity or a government or any
agency, instrumentality or political subdivision thereof.


 


“Petition” shall have the meaning set forth in Section 5.3(a) to
this Agreement.


 


“Proceeds” shall mean (i) all “proceeds”
as defined in Article 9 of the UCC with respect to the Collateral, and (ii) whatever
is recoverable or recovered when Collateral is sold, exchanged, collected, or
disposed of, whether voluntarily or involuntarily.


 


“Senior Creditors” shall mean the Agent, the
Lenders and any other Persons for which a Lien on the Collateral is granted
pursuant to the Lending Agreements.


 


“Senior Indebtedness” shall mean all
Obligations of any kind owed by Credit Parties to Lenders and/or Agent from
time to time under or pursuant to any of the Lending Agreements including,
without limitation, all principal, interest (including all interest, charges,
expenses, fees and other sums accruing after commencement of any case,
proceeding or other action relating to the bankruptcy, insolvency or
reorganization of any Credit Party) accruing thereon, charges, expenses, fees
and other sums chargeable to any Credit Party by Lenders and/or Agent, and
reimbursement, indemnity or other obligations due and payable to Lenders and/or
Agent. Senior Indebtedness shall continue to constitute Senior Indebtedness,
notwithstanding the fact that such Senior Indebtedness or any claim for such
Senior Indebtedness is subordinated, avoided or disallowed under the Code or
other applicable law. Senior Indebtedness shall also include any indebtedness
of any Credit Party incurred in connection with a refinancing of the Senior Indebtedness
under the Lending Agreements provided that the terms and conditions of the
agreements, documents and instruments related to such refinancing, taken as a
whole, do not materially impair the rights of the Subordinated Creditors and
are not materially more adverse to the Subordinated Creditors than those set
forth in the Lending Agreements, as in effect on the date of such refinancing.


 


“Standstill Period” shall have the meaning set
forth in Section 2.7(b) of this Agreement.


 


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“Subordinated Creditors” shall mean the
Subordinated Lienholder, the Noteholders (as defined in the Indenture) and any
other Persons for which a Lien on the Collateral is granted pursuant to the
Indenture Security Agreements.


 


“Subordinated Indebtedness” shall mean all
Obligations (as defined in the Indenture) of any kind owed by Credit Parties to
any Subordinated Creditor from time to time under or pursuant to any of the
Subordinated Lienholder Agreements including, without limitation, all
principal, interest (including all interest, charges, expenses, fees and other
sums accruing after commencement of any case, proceeding or other action
relating to the bankruptcy, insolvency or reorganization of any Credit Party)
accruing thereon, charges, expenses, fees and other sums chargeable to any
Credit Party by any Subordinated Creditor, and reimbursement, indemnity or
other obligations due and payable to any Subordinated Creditor. Subordinated
Indebtedness shall continue to constitute Subordinated Indebtedness,
notwithstanding the fact that such Subordinated Indebtedness or any claim for
such Subordinated Indebtedness is subordinated, avoided or disallowed under the
Code or other applicable law. Subordinated Indebtedness shall also include any
indebtedness of any Credit Party incurred in connection with a refinancing of
the Subordinated Indebtedness under the Subordinated Lienholder Agreements if
the terms and conditions of the agreements, documents and instruments related
to such refinancing are permitted under the terms of the Lending Agreements.


 


“Subordinated Lienholder” shall have the
meaning set forth in the introductory paragraph of this Agreement.


 


“Subordinated Lienholder Agreements” shall
mean, collectively, the Indenture, Indenture Security Agreements and all
promissory notes, agreements, documents and instruments now or at any time
hereafter executed and/or delivered by any Credit Party or any other Person to,
with or in favor of the Subordinated Lienholder 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.


 


“UCC” shall mean the Uniform Commercial
Code as from time to time in effect in the State of New York.


 


1.2.                              Other
Terms. Capitalized terms not otherwise defined herein shall have the
meanings given to them in the Loan Agreement.


 


1.3.                              Certain
Matters of Construction. The terms “herein”, “hereof” and “hereunder” and
other words of similar import refer to this Agreement as a whole and not to any
particular section, paragraph or subdivision. Any pronoun used shall be deemed
to cover all genders. Wherever appropriate in the context, terms used herein in
the singular also include the plural and vice versa. All references to statutes
and related regulations shall include any amendments of same and any successor
statutes and regulations. Except as expressly set forth herein, all references
to any instruments or agreements, including, without limitation, references to
any of the Creditor Agreements shall include any and all modifications or
amendments thereto and any and all extensions or renewals thereof.


 


2.                                       Intercreditor
Provisions.


 


2.1.                              Acknowledgment
of Lien. Each Creditor hereby agrees and acknowledges that the other
Creditor has been granted a Lien upon the Collateral.


 


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2.2.                              Priority.
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 Lien in favor of each Creditor in
any Collateral, and notwithstanding any conflicting terms or conditions which may be
contained in any of the Creditor Agreements, the Liens upon the Collateral of
Agent have and shall have priority over the Liens upon the Collateral of
Subordinated Lienholder and such Liens of Subordinated Lienholder are and shall
be, in all respects, subject and subordinate to the Liens of Agent therein to
the full extent of the Maximum Priority Debt Amount outstanding from time to
time, so that:


 


(a)                                  any
Lien in respect of all or any portion of the Collateral now or hereafter held
by or on behalf of Subordinated Lienholder that secures all or any portion of
the Subordinated Indebtedness, shall in all respects be junior and subordinate
to all Liens granted to Agent in the Collateral to secure all or any portion of
the Senior Indebtedness up to (but not in excess of) the Maximum Priority Debt
Amount, and (ii) any Lien in respect of all or any portion of the
Collateral now or hereafter held by or on behalf of Agent that secures all or
any portion of the Senior Indebtedness in excess of the Maximum Priority Debt
Amount, shall in all respects be junior and subordinate to all Liens granted to
Subordinated Lienholder in the Collateral to secure all or any portion of the
Subordinated Indebtedness, and


 


(b)                                 any
Lien in respect of all or any portion of the Collateral now or hereafter held
by or on behalf of Agent that secures all or any portion of the Senior
Indebtedness up to (but not in excess of) the Maximum Priority Debt Amount,
shall in all respects be senior and prior to all Liens granted to Subordinated
Lienholder in the Collateral to secure all or any portion of the Subordinated
Indebtedness, and (ii) any Lien in respect of all or any portion of the
Collateral now or hereafter held by or on behalf of Subordinated Lienholder
that secures all or any portion of the Subordinated Indebtedness, shall in all
respects be senior and prior to all Liens granted to Agent in the Collateral to
secure all or any portion of the Senior Indebtedness in excess of the Maximum
Priority Debt Amount.


 


The subordination of Liens (up to the Maximum Priority
Debt Amount) by Subordinated Lienholder in favor of Agent herein shall not be
deemed to subordinate Subordinated Lienholder’s Liens to the Liens of any other
Person. The subordination of Liens (in excess of the Maximum Priority Debt
Amount) in favor of Subordinated Lienholder herein shall not be deemed to
subordinate Agent’s Liens to the Liens of any other Person.


 


2.3.                              No
Alteration of Priority. 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 (except
as may be otherwise provided in this Agreement in connection with any
refinancing) of any Senior Indebtedness or any indebtedness payable under the
Subordinated Lienholder Agreements, nor by any action or inaction which either
Creditor or Lenders may take or fail to take in respect of the Collateral.


 


2.4.                              Perfection.


 


(a)                                  Responsibility
to Perfect. 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; provided, however,
that, solely for purposes of perfecting the Liens of the Subordinated
Lienholder in any portion of the Collateral in the possession of the Agent (or
its agents or bailees) as part of the collateral securing the Senior
Indebtedness, including, without limitation, any instruments, goods, negotiable



 


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documents, tangible
chattel paper, certificated securities or money, the Agent acknowledges that
the Agent also holds that property as bailee for the benefit of the
Subordinated Lienholder for the benefit of the Subordinated Creditors. The
foregoing provisions of this Agreement are intended solely to govern the
respective Lien priorities as between the Creditors and shall not impose on
Agent 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.


 


(b)                                 Agreement
Not to Contest or Challenge. Each Creditor agrees that it will not contest
or challenge (or assist or support any other Person in contesting or
challenging), directly or indirectly, whether or not in any proceeding
(including any Insolvency Proceeding) the validity, perfection, priority or
enforceability of the Liens of the other Creditor in the Collateral, and that
as between Agent and Subordinated Lienholder, the terms of this Agreement shall
govern even if part or all of the Senior Indebtedness or the Liens of
Agent securing payment and performance thereof, on the one hand, or the
Subordinated Indebtedness or the Liens of Subordinated Lienholder securing
payment and performance thereof, on the other hand, are avoided, disallowed,
set aside or otherwise invalidated in any judicial proceeding or otherwise.


 


(c)                                  Obligations
Following Discharge of Senior Indebtedness. Following the Discharge of
Senior Indebtedness, the Agent, on behalf of itself and the Lenders, agrees
that it will not take any action that would hinder any exercise of remedies
undertaken by Subordinated Lienholder or any other Subordinated Creditor under
the Subordinated Lienholder Agreements, including any public or private sale,
lease, exchange, transfer, or other disposition of the Collateral, whether by
foreclosure or otherwise. Following the Discharge of Senior Indebtedness,
Agent, on behalf of itself and the Lenders, hereby waives any and all rights it
may have as a junior lien creditor or otherwise to contest, protest,
object to, interfere with the manner in which Subordinated Lienholder or any
other Subordinated Creditor seeks to enforce the Liens in any portion of the
Collateral (it being understood and agreed that the terms of this Agreement
shall govern with respect to the Collateral even if any portion of the Liens
securing the Subordinated Indebtedness are avoided, disallowed, set aside or
otherwise invalidated in any judicial proceeding or otherwise). Upon the
Discharge of Senior Indebtedness, the Agent will, to the extent permitted by
applicable law, deliver to (1) the Subordinated Lienholder or (2) such
other person as a court of competent jurisdiction may otherwise direct, (a) any
Collateral held by, or on behalf of, the Agent or any holder of Senior
Indebtedness, and (b) all proceeds of Collateral held by, or on behalf of,
the Agent or any holder of Senior Indebtedness, whether arising out of an
action taken to enforce, collect or realize upon any Collateral or otherwise.
Such Collateral and such proceeds will be delivered without recourse and
without any representation or warranty whatsoever as to the enforceability,
perfection, priority or sufficiency of any Lien securing or guarantee or other
supporting obligation for any Senior Indebtedness or Subordinated Indebtedness,
together with any necessary endorsements or as a court of competent
jurisdiction may otherwise direct.


 


2.5.                              Sale
of Collateral. Agent and Subordinated Lienholder shall release their
respective Liens upon any Collateral in the event that such Collateral is sold,
transferred or otherwise disposed of by any Credit Party in a transaction or
other circumstance that complies with Section 4.10 of the Indenture and is
permitted by all other Creditor Agreements, at the time of such sale, transfer
or other disposition or to the extent of the interest sold, transferred or 


 


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otherwise disposed of;
provided, that the Subordinated Lienholder’s Liens upon such Collateral will
not be released if the sale or disposition is subject to Section 5.01 of
the Indenture.


 


2.6.                              Management
of Collateral. Agent shall have the exclusive right to manage, perform and
enforce the terms of the Lending Agreements with respect to the Collateral and
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 enforce or settle insurance claims, take or
retake control or possession of such Collateral and to hold, prepare for sale,
process, sell, lease, dispose of, or liquidate such Collateral. In connection
therewith, Subordinated Lienholder waives any and all rights to affect the
method or challenge the appropriateness of any action by Agent.


 


2.7.                              Exercise
of Secured Creditor Remedies.


 


(a)                                  In
no event shall Subordinated Lienholder Exercise Any Secured Creditor Remedies (other
than those described in Section 2.7(e) below) prior to the Discharge
of Senior Indebtedness; nor shall Subordinated Lienholder join in, solicit any
other person to, or act to cause the commencement of, any case involving any
Credit Party under any state or federal bankruptcy or insolvency laws or seek
the appointment of a receiver for the affairs or property of any Credit Party
prior to the Discharge of Senior Indebtedness. In the event Subordinated
Lienholder shall receive any payment or distribution of any kind representing
proceeds of any Collateral as to which its Lien in the Collateral is or is
required to be subordinated to the Lien of Agent, prior to the Discharge of
Senior Indebtedness, such sums shall be held in trust by Subordinated
Lienholder for the benefit and on account of Agent and such amounts shall be
paid to Agent for application to the then unpaid Senior Indebtedness under the
Lending Agreements. Acceleration of the Subordinated Indebtedness in accordance
with the provisions of the Indenture shall not be deemed an “Exercise of
Secured Creditor Remedies” and is not prohibited by this Agreement.


 


(b)                                 Notwithstanding
the provisions of Section 2.7(a), following the expiration of 180 days
from the date Agent receives written notice from Subordinated Lienholder that
the Subordinated Lienholder has accelerated the obligations secured by the
Liens of the Subordinated Lienholder (the “Standstill Period”), the
Subordinated Lienholder may Exercise Any Secured Creditor Remedies unless
prior to the expiration of such time period or at any time thereafter, the
Agent has commenced and is diligently pursuing the Exercise of Secured Creditor
Remedies against all or a material portion of the Collateral.


 


(c)                                  No
Other Restrictions. Except as expressly set forth in this Agreement, each
of the Subordinated Lienholder, the other Subordinated Creditors, the Agent and
the Lenders shall have any and all rights and remedies it may have as a
creditor under applicable law, including the rights to exercise all rights and
remedies in foreclosure or otherwise with respect to any of the Collateral;
provided, however, that any such exercise by the Subordinated Lienholder or the
other Subordinated Creditors, and any collection or sale of all or any portion
of the Collateral by the Subordinated Lienholder or the other Subordinated
Creditors, shall be subject to the Liens of the Agent on the Collateral to the
extent provided in Section 2.2 and to the provisions of this Agreement
including Section 4.2 hereof. In exercising rights and remedies with
respect to the Collateral, the Agent may enforce the provisions of the
Lending Agreements and exercise remedies thereunder, all in such order and in
such manner as it may determine in the exercise of its sole discretion. Such
exercise and enforcement shall include the sale, lease, license, or other
disposition of all or any portion of the Collateral by 


 


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private
or public sale or any other means permissible under applicable law or any
agreement; provided, that the Agent agrees to provide copies of any notices
that it is required under applicable law to deliver to any Credit Party to the
Subordinated Lienholder; provided further, that the failure to provide any such
copies to the Subordinated Lienholder shall not impair any of the Agent’s
rights hereunder. In the event the Subordinated Lienholder is permitted by this
Agreement to exercise rights and remedies with respect to the Collateral, the
Subordinated Lienholder may enforce the provisions of the Subordinated
Lienholder Agreements and exercise remedies thereunder, all in such order and
in such manner as it may determine in the exercise of its sole discretion.
Such exercise and enforcement shall include the sale, lease, license, or other
disposition of all or any portion of the Collateral by private or public sale
or any other means permissible under applicable law or any agreement; provided,
that the Subordinated Lienholder agrees to provide copies of any notices that
it is required under applicable law to deliver to any Credit Party to the
Agent; provided further, that the failure to provide any such copies to the
Agent shall not impair any of the Subordinated Lienholder’s rights hereunder.


 


(d)                                 Release
of Liens.


 


(i)                                     In
the event of any such private or public sale, Subordinated Lienholder agrees,
on behalf of itself and the other Subordinated Creditors, that such sale will
be free and clear of the Liens securing the Subordinated Indebtedness and, if
the sale or other disposition includes the Equity Interests in any Borrower or
any Guarantor, agrees to release the entities whose Equity Interests are sold
from all Subordinated Indebtedness so long as Agent and Senior Lenders also
release the entities whose Equity Interests are sold from all Senior
Indebtedness. In furtherance thereof, Subordinated Lienholder agrees that it
will execute any and all Lien releases or other documents reasonably requested
by Agent in connection therewith, so long as the proceeds from such sale or
other disposition of the Collateral are applied in accordance with the terms of
this Agreement.


 


(ii)                                  If
and to the extent that the Agent or its designee releases any of its Liens on
any Collateral in connection with the sale, lease, exchange, transfer or other
disposition of the Collateral in accordance with the terms of this Agreement,
the Liens, if any, of the Subordinated Lienholder, for itself or for the
benefit of the other Subordinated Creditors, on such Collateral shall be
automatically, unconditionally and simultaneously released and the Subordinated
Lienholder, for itself and for each of the other Subordinated Creditors,
promptly shall execute and deliver to the Agent such termination statements,
releases and other documents as the Agent may request to effectively
confirm such release in respect of such payments. Notwithstanding the
foregoing, the obligation of the Subordinated Lienholder to release its Lien on
such Collateral shall arise only if such sale, lease, exchange, transfer or
other disposition of the Collateral is effected in connection with an exercise
of remedies or is permitted by (or permitted pursuant to a waiver of or consent
to a transaction otherwise prohibited by) the Lending Agreements and the terms
hereof


 


(e)                                  Filing
of Certain Claims. The Subordinated Lienholder may make such demands
or file such claims in respect of the Subordinated Indebtedness as may be
necessary to prevent the waiver or bar of such claims under applicable statutes
of limitations or other statutes, court orders or rules of procedure
(including, without limitation, the filing of any proofs of claim in any
Insolvency Proceeding), but except as provided in this Section 2.7 or 


 


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otherwise in this
Agreement, the Subordinated Lienholder shall not take any actions restricted by
this Agreement until the Discharge of Senior Indebtedness shall have occurred.


 


(f)                                    Following
the Discharge of Senior Indebtedness, the Subordinated Creditors may assert
their right under the UCC or otherwise to any proceeds following a sale or
other disposition of Collateral by, or on behalf of, the Senior Creditors.


 


2.8.                              Section 9-611
Notice and Waiver of Marshaling. Subordinated Lienholder and Agent
acknowledge that this Agreement shall constitute notice of their respective
interests in the Collateral as provided by Section 9-611 of the New York
Uniform Commercial Code and each hereby waive any right to compel any
marshaling of any of the Collateral.


 


3.                                       Actions
of the Parties.


 


3.1.                              Limitation
of Certain Actions. Notwithstanding any other provision hereof, prior to
the date that the Discharge of Senior Indebtedness occurs or, if earlier, the
termination of the Standstill Period, the Subordinated Lienholder will not:


 


(a)                                  commence
receivership or foreclosure proceedings against any Credit Party, or any
Collateral;


 


(b)                                 make
demands or file claims in respect of the Subordinated Indebtedness except as
permitted under Section 2.7(e) hereof;


 


(c)                                  sell,
collect, transfer or dispose of any Collateral or Proceeds; or


 


(d)                                 notify
third party account debtors to make payment directly to it or any of its agents
or other Persons acting on its behalf.


 


3.2.                              Receipt
of Proceeds or Collateral in Certain Cases. The Agent is not and shall not
be deemed to be a fiduciary of any kind for any Subordinated Creditor or any
other Person. The Subordinated Lienholder is not and shall not be deemed to be
a fiduciary of any kind for the Agent, the Lenders or any other Person. In the
event that (a) any of Subordinated Creditor receives any Proceeds or
Collateral in contravention of the priority of Liens under Section 2.2, or
(b) the Agent or any Lender receives any Proceeds or Collateral in
contravention of the priority of Liens under Section 2.2, it shall
promptly pay over such Proceeds or Collateral to (i) in the case of clause
(a), the Agent, or (ii) in the case of clause (b), the Subordinated
Lienholder, in the same form as received with any necessary endorsements,
for application in accordance with the provisions of Section 4.2 of this
Agreement.


 


4.                                       Notices
and Application of Proceeds.


 


4.1.                              Notices
of Exercise. Concurrently with any exercise by the Subordinated Lienholder
of any of its rights and remedies under the Subordinated Lienholder Agreements
following the occurrence of any default under the Subordinated Lienholder
Agreements, the Subordinated Lienholder shall give notice of such exercise to
the Agent and shall only exercise such rights or remedies in a manner
consistent with the terms of this Agreement. Concurrently with any exercise by
the Agent of any of its rights and remedies under the Lender Agreements
following the occurrence of any default under the Lender Agreements, the Agent
shall give notice of such exercise to the Subordinated Lienholder and shall
only exercise such rights or remedies in a manner consistent with the terms of
this Agreement.


 


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4.2.                              Application
of Proceeds. The Agent and Subordinated Lienholder hereby agree that all
Collateral and all Proceeds received by either of them upon the Exercise of
Secured Creditor Remedies shall be applied,


 


first, to the
payment of costs and expenses of the Agent or, to the extent it was permitted
to engage in the Exercise of Secured Creditor Remedies, Subordinated
Lienholder, as applicable, in connection with such exercise,


 


second, to the
payment of the Senior Indebtedness up to (but not in excess of) the Maximum
Priority Debt Amount,


 


third, to the
payment of the Subordinated Indebtedness,


 


fourth, to the
payment of any Senior Indebtedness in excess of the Maximum Priority Debt
Amount, and


 


fifth, any
surplus remaining after the payment in full in cash of the amounts described in
the preceding clause will be paid to the applicable Credit Party, its
successors or assigns, or as a court of competent jurisdiction may direct.


 


In exercising remedies, whether as a secured creditor
or otherwise, the Agent shall have no obligation or liability to the
Subordinated Lienholder or to any other Subordinated Creditor and the
Subordinated Lienholder shall have no obligation or liability to the Agent or
any Lender regarding the adequacy of any Proceeds following any commercially
reasonable sale or for any action or omission save and except solely an action
or omission that breaches the express obligations undertaken by each party
under the terms of this Agreement


 


5.                                       Miscellaneous.


 


5.1.                              Survival
of Rights. The right of Agent to enforce the provisions of this Agreement
shall not be prejudiced or impaired by any act or omitted act of any Credit
Party, Lenders or Agent, including forbearance, waiver, consent, compromise,
amendment, extension, renewal, or taking or release of security in respect of
any Senior Indebtedness or noncompliance by any Credit Party with such
provisions, regardless of the actual or imputed knowledge of Lenders or Agent. The
right of Subordinated Lienholder to enforce the provisions of this Agreement
shall not be prejudiced or impaired by any act or omitted act of any Credit
Party, or Subordinated Creditor, including forbearance, waiver, consent,
compromise, amendment, extension, renewal, or taking or release of security in
respect of any Subordinated Indebtedness or noncompliance by any Credit Party
with such provisions, regardless of the actual or imputed knowledge of any
Subordinated Creditor.


 


5.2.                              Amendments
to Lending Agreements. Nothing contained in this Agreement, or in any other
agreement or instrument binding upon any of the parties hereto, shall in any
manner limit or restrict the ability of Lenders and Agent from increasing or
changing the terms of the loans under the Lending Agreements, or to otherwise
waive, amend or modify the terms and conditions of the Lending Agreements, in
such manner as Lenders, Agent and each applicable Credit Party shall mutually
determine. Subordinated Lienholder hereby consents to any and all such waivers,
amendments, modifications and compromises, and any other renewals, extensions,
indulgences, releases of collateral or other accommodations granted by Lenders
and Agent to each applicable Credit Party from time to time, and agrees that,
to the extent consistent with the last sentence of the definition of “Senior
Indebtedness”, none of such actions shall in any manner affect or impair the
relative Lien priorities and subordination established by this 


 


10

















 


Agreement in respect of
the indebtedness payable under the Subordinated Lienholder Agreements.


 


5.3.                              Bankruptcy
Financing Issues.


 


(a)                                  This
Agreement shall continue in full force and effect after the filing of any
petition (each, a “Petition”) by or against any Credit Party under the United
States Bankruptcy Code (the “Code”) and all converted or succeeding cases in
respect thereof or any other insolvency or reorganization proceeding. All
references herein to any Credit Party shall be deemed to apply to such Credit
Party as debtor-in-possession and to a trustee for such Credit Party. If any Credit
Party shall become subject to a proceeding under the Code or any other
insolvency or reorganization proceeding (each, an “Insolvency Proceeding”), and
if Agent and/or Lenders shall desire to permit the use of cash collateral or to
provide post-petition financing from Agent and/or Lenders to such Credit Party
under the Code, Subordinated Lienholder agrees as follows: (1) adequate
notice to Subordinated Lienholder shall be deemed to have been provided for
such post-petition financing if Subordinated Lienholder receives notice thereof
at least three (3) Business Days (or such shorter notice as is given to
Agent) prior to the earlier of any hearing on a request to approve such
post-petition financing or the date of entry of an order approving the same; and
(2) no objection will be raised by Subordinated Lienholder to, and it will
not contest (or support any Person in contesting) any such use of cash
collateral or such post-petition financing from Agent and/or Lenders.


 


(b)                                 Subject
to Section 5.3(a), Subordinated Lienholder shall not contest (or support
any Person contesting) (i) any request by Agent and/or Lenders for
adequate protection or (ii) any objection by Agent and/or Lenders to any
motion, relief, action or proceeding based upon Agent and/or Lenders claiming a
lack of adequate protection. Notwithstanding the foregoing provisions in this Section 5.3(b),
in any Insolvency Proceeding (i) if Agent and/or Lenders are granted
adequate protection in the form of additional collateral in connection
with any use of cash collateral or post-petition financing, then Subordinated
Lienholder shall receive adequate protection in the form of a Lien on such
additional collateral, which Lien shall be subordinated to the Liens securing
the Senior Indebtedness and such post-petition financing on the same basis as
the other Liens securing the obligations secured by the Liens of the
Subordinated Lienholder are so subordinated to the Liens securing the Senior
Indebtedness under this Agreement, and (ii) prior to the Discharge of
Senior Indebtedness, in the event the Subordinated Lienholder seeks or requests
adequate protection in respect of the obligations secured by the Liens of the
Subordinated Lienholder and such adequate protection is granted in the form of
additional collateral, then the Agent shall also be granted a senior Lien on
such additional collateral as security for the Senior Indebtedness and for any
post-petition financing provided by Agent and/or Lenders and any Lien on such
additional collateral securing the obligations owed to the Subordinated
Lienholder shall be subordinate to the Liens on such collateral securing the
Senior Indebtedness and any such post-petition financing provided by Agent
and/or Lenders and to any other Liens granted to Agent as adequate protection
on the same terms as the other Liens securing the obligations owed to the
Subordinated Lienholder are subordinated to the Liens securing the Senior
Indebtedness.


 


(c)                                  Subordinated
Lienholder shall not join in, solicit any other Person to, or act to cause the
commencement of any Insolvency Proceeding or seek appointment of a receiver for
the affairs or property of any Credit Party prior to the Discharge of Senior
Indebtedness or, if earlier, the termination of the Standstill Period.


 


11

















 


5.4.                              Insurance
Proceeds. Proceeds of the Collateral include insurance proceeds, and
therefore, notwithstanding the terms set forth in the Lending Agreements or
Subordinated Lienholder Agreements, the priorities set forth in Section 2.2
govern the ultimate disposition of casualty insurance proceeds. Agent, as the
holder of a senior security interest on the Collateral insured shall have the
sole and exclusive right, as against Subordinated Lienholder, to adjust
settlement of insurance claims in the event of any covered loss, theft or
destruction of such Collateral. All proceeds of such insurance shall inure to
Agent, to the extent of Lenders’ and Agent’s claim, and Subordinated Lienholder
shall cooperate (if necessary) in a reasonable manner in effecting the payment
of insurance proceeds to Lenders and Agent. In the event Agent, in its sole
discretion or pursuant to agreement with any Credit Party, permits such Credit
Party to utilize the proceeds of insurance to replace Collateral, the consent
of Agent thereto shall be deemed to include the consent of Subordinated
Lienholder.


 


5.5.                              Receipt
of Agreements. Subordinated Lienholder hereby acknowledges that it has
delivered to Agent a correct and complete copy of the Subordinated Lienholder
Agreements as in effect on the date hereof. Subordinated Lienholder, solely for
the purposes of this Agreement, hereby acknowledges receipt of a correct and
complete copy of each of the Lending Agreements as in effect on the date
hereof.


 


5.6.                              No
Amendment of Subordinated Lienholder Agreements. Prior to the Discharge of
Senior Indebtedness, neither any Credit Party nor Subordinated Lienholder shall
enter into any amendment to or modification of any Subordinated Lienholder
Agreements which would (i) increase the principal amount of or interest
rate applicable to the Subordinated Indebtedness (excluding fluctuations in
underlying indices and imposition of a default rate), (ii) shorten the
maturity of the Subordinated Indebtedness, or (iii) add or make more
restrictive the covenants, agreements or events of default applicable to the
Subordinated Indebtedness, without the prior written consent of Agent.


 


5.7.                              Notice
of Default and Certain Events. Agent and the Subordinated Lienholder shall
undertake in good faith to notify the other of the occurrence of any of the
following as applicable:


 


(a)                                  the
obtaining of actual knowledge of the occurrence of any default under the
Subordinated Lienholder Agreement;


 


(b)                                 the
acceleration of any Senior Indebtedness or of any of the indebtedness payable
under the Subordinated Lienholder Agreements;


 


(c)                                  the
granting by Lenders and/or Agent of any waiver of any Event of Default under
the Loan Agreement or the granting by Subordinated Lienholder of any waiver of
any “default” or “event of default” under the Subordinated Lienholder
Agreements;


 


(d)                                 the
payment in full by the Credit Parties (whether as a result of refinancing or
otherwise) of all Senior Indebtedness; or


 


(e)                                  the
sale or liquidation of, or realization upon, the Collateral.


 


The failure of any party to give such notice shall not
affect the relative Lien priorities as provided in this Agreement.


 


5.8.                              Notices.
Any notice or other communication required or permitted pursuant to this
Agreement shall be deemed given (a) when personally delivered to any
officer of 


 


12

















 


the party to whom it is
addressed, (b) on the earlier of actual receipt thereof or three (3) days
following posting thereof by certified or registered mail, postage prepaid, (c) upon
actual receipt thereof when sent by a recognized overnight delivery service or (d) upon
actual receipt thereof when sent by telecopier to the number set forth below
with electronic confirmation of receipt, in each case addressed to each party
at its address or telecopier number set forth below or at such other address or
telecopier number as has been furnished in writing by a party to the other by
like notice:


 


If to Agent:


 


HSBC Bank USA, National
Association


452 Fifth Avenue


New York, New York 10018


Attention:                                           Douglas
Taliaferro


Telephone:                                      212-525-5799


Facsimile:                                            212-525-6905


 


with a copy to:


 


Hahn & Hessen
LLP


488 Madison Avenue


New York, New York 10022


Attention:                                           Steven
J. Seif


Telephone:                                      212-478-7200


Facsimile:                                            212-478-7400


 


If to Subordinated
Lienholder:


The Bank of New York


101 Barclay Street, 8W


New York, New York 10286


Attention:                                           Beata
Hryniewicka


Telephone:                                      212-815-6907


Facsimile:                                            626-835-8465


 


with a copy to:


 


Proskauer Rose LLP


1585 Broadway


New York, New York
10036-8299


Attention:                                           Julie
M. Allen


Telephone:                                      212-969-3155


Facsimile:                                            212-969-2900


 


If to any Credit Party:


 


Rafaella Apparel Group, Inc.


1411 Broadway, 2nd
Floor


New York, New York 10018


Attention:                                           Chad
Spooner


Telephone:                                      212-403-0300


Facsimile:                                            212-764-9725


 


13

















 


with copies to:


 


Cerberus Capital
Management, L.P.


299 Park Avenue, 22nd
Floor


New York, New York 10171


Attention:                                           George
Kollitides


Telephone:                                      212-284-7931


Facsimile:                                            212-284-7916


 


-and-


 


Schulte Roth &
Zabel LLP


919 Third Avenue


New York, New York 10022


Attention:                                           Ronald
Risdon


 and David Rosewater, Esq.


Telephone:                                      212-756-2203


Facsimile:                                            212-593-5955


 


5.9.                              Binding
Effect; Other. This Agreement shall be a continuing agreement, shall be binding
upon and shall inure to the benefit of the parties hereto from time to time and
their respective successors and assigns, shall be irrevocable and shall remain
in full force and effect until the Discharge of Senior Indebtedness, but shall
continue to be effective, or be reinstated, as the case may be, if at any
time payment, or any part thereof, of any amount paid by or on behalf of
any Credit Party with regard to the Senior Indebtedness is rescinded or must
otherwise be restored or returned upon the insolvency, bankruptcy, dissolution,
liquidation or reorganization of any Credit Party, or upon or as a result of
the appointment of a receiver, intervenor or conservator of, or trustee,
custodian, or similar officer, for any Credit Party or any substantial part of
its property, or otherwise, all as though such payments had not been made. No
action which Lenders, Agent or any Credit Party may take or refrain from
taking with respect to the Senior Indebtedness, including any amendments
thereto, shall affect the provisions of this Agreement or the obligations of
Subordinated Lienholder. Any waiver or amendment hereunder must be evidenced by
a signed writing of the party to be bound thereby, and shall only be effective
in the specific instance. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York. The headings in this
Agreement are for convenience of reference only, and shall not alter or
otherwise affect the meaning hereof.


 


6.                                       Representations
and Warranties.


 


(a)                                  Subordinated
Lienholder represents and warrants to Agent that (a) it is the holder of
the Liens which secure or will secure the indebtedness payable under the
Subordinated Lienholder Agreements, and (b) it has full right, power and
authority to enter into this Agreement and, to the extent Subordinated
Lienholder is an agent or trustee for other parties, that this Agreement shall
fully bind all such other parties. Subordinated Lienholder agrees that it shall
not assign or transfer any of the Liens without (i) prior notice being
given to Agent and (ii) such assignment or transfer being made expressly
subject to the terms of this Agreement.


 


(b)                                 Agent
represents and warrants to Subordinated Lienholder that (a) Lenders and
Agent are the holders of the Liens which secure or will secure the Senior
Indebtedness, and (b) it has full right, power and authority to enter into
this Agreement and, to 


 


14

















 


the extent Agent is an
agent or trustee for other parties, that this Agreement shall fully bind all
such other parties. Agent agrees that it shall not assign or transfer any of
the Liens without (i) prior notice being given to Subordinated Lienholder
and (ii) such assignment or transfer being made expressly subject to the
terms and provisions of this Agreement.


 


7.                                       Refinancing.
In the event that the Senior Indebtedness are refinanced in full in accordance
with the last sentence of “Senior Indebtedness”, Subordinated Lienholder agrees
at the request of such refinancing party to enter into an intercreditor
agreement on terms substantially similar to this Agreement.


 


8.                                       Proceedings.
ANY JUDICIAL PROCEEDING BROUGHT BY OR AGAINST SUBORDINATED LIENHOLDER OR ANY
CREDIT PARTY WITH RESPECT TO THIS AGREEMENT OR ANY RELATED AGREEMENT MAY BE
BROUGHT IN ANY COURT OF COMPETENT JURISDICTION IN STATE OF NEW YORK, UNITED
STATES OF AMERICA, AND, BY EXECUTION AND DELIVERY OF THIS AGREEMENT EACH PARTY
THERETO ACCEPTS FOR THEMSELVES AND IN CONNECTION WITH THEIR PROPERTIES,
GENERALLY AND UNCONDITIONALLY, THE NON-EXCLUSIVE JURISDICTION OF THE AFORESAID
COURTS, AND IRREVOCABLY AGREE TO BE BOUND BY ANY FINAL JUDGMENT RENDERED
THEREBY IN CONNECTION WITH THIS AGREEMENT. NOTHING HEREIN SHALL AFFECT THE
RIGHT TO SERVE PROCESS IN ANY MANNER PERMITTED BY LAW OR SHALL LIMIT THE RIGHT
OF AGENT OR LENDERS TO BRING PROCEEDINGS AGAINST SUBORDINATED LIENHOLDER OR ANY
CREDIT PARTY IN ANY COURTS OF ANY OTHER JURISDICTION. ANY JUDICIAL PROCEEDING
BY SUBORDINATED LIENHOLDER OR ANY CREDIT PARTY AGAINST AGENT OR LENDERS
INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER OR CLAIM IN ANY WAY ARISING OUT
OF, RELATED TO OR CONNECTED WITH THIS AGREEMENT OR ANY RELATED AGREEMENT, SHALL
BE BROUGHT ONLY IN A COURT LOCATED IN THE CITY OF NEW YORK, STATE OF NEW YORK;
PROVIDED THAT NOTWITHSTANDING THE FOREGOING, IF IN ANY JUDICIAL PROCEEDING BY
OR AGAINST SUBORDINATED LIENHOLDER OR ANY CREDIT PARTY THAT IS BROUGHT IN ANY
OTHER COURT SUCH COURT DETERMINES THAT AGENT IS AN INDISPENSABLE PARTY,
SUBORDINATED LIENHOLDER OR SUCH CREDIT PARTY SHALL BE ENTITLED TO JOIN OR
INCLUDE EACH PARTY HERETO IN SUCH PROCEEDINGS IN SUCH OTHER COURT. SUBORDINATED
LIENHOLDER AND EACH CREDIT PARTY WAIVE ANY OBJECTION TO JURISDICTION AND VENUE
OF ANY ACTION INSTITUTED HEREUNDER AND SHALL NOT ASSERT ANY DEFENSE BASED ON
LACK OF JURISDICTION OR VENUE OR BASED UPON FORUM NON CONVENIENS.


 


9.                                       Waiver
Of Jury Trial. EACH PARTY HERETO HEREBY EXPRESSLY WAIVES ANY RIGHT TO TRIAL
BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (A) ARISING UNDER
THIS AGREEMENT OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR
DELIVERED IN CONNECTION HEREWITH, OR (B) IN ANY WAY CONNECTED WITH OR
RELATED OR INCIDENTAL TO THE DEALINGS OF ANY CREDITOR, LENDERS OR ANY CREDIT
PARTY OR ANY OF THEM WITH RESPECT TO THIS AGREEMENT OR ANY OTHER INSTRUMENT,
DOCUMENTS OR AGREEMENT EXECUTED OR DELIVERED BY THEM IN CONNECTION HEREWITH, OR
THE TRANSACTIONS RELATED HERETO OR 


 


15

















 


THERETO, IN EACH CASE
WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER SOUNDING IN CONTRACT OR
TORT OR OTHERWISE AND EACH PARTY HERETO HEREBY AGREES AND CONSENTS THAT ANY
CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL
WITHOUT JURY, AND THAT ANY OF THEM MAY FILE AN ORIGINAL COUNTERPART OR
A COPY OF THIS SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF THEIR CONSENT
TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY.


 


10.                                 Credit
Party Acknowledgement. Each Credit Party agrees that (i) nothing
contained in this Agreement shall be deemed to amend, modify, supersede or
otherwise alter the terms of the respective agreements between such Credit
Party and each Creditor and (ii) this Agreement is solely for the benefit
of the Creditors and shall not give any Credit Party, its successors or assigns
or any other Person any rights vis-à-vis any Creditor.


 


11.                                 Counterparts;
Facsimile. This Agreement may be executed by the parties hereto in one
or more counterparts, each of which shall be deemed an original and all of
which when taken together shall constitute one and the same agreement. Any
signature delivered by a party by facsimile transmission shall be deemed to be
an original signature hereto.


 


16

















 


IN WITNESS WHEREOF, the undersigned have entered into
this Agreement as of this 20th day of June, 2005.


 


	
   

  	
  HSBC
  BANK USA, NATIONAL ASSOCIATION,

  
	
   

  	
  as
  Agent

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/
  Lisa H. Augustus

  	
   

  
	
   

  	
  Name:

  	
  Lisa
  H. Augustus

  	
   

  
	
   

  	
  Title:

  	
  Vice
  President

  	
   

  
	
   

  	
   

  
	
   

  	
  THE
  BANK OF NEW YORK,

  
	
   

  	
  as
  Subordinated Lienholder

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/
  Beata Hryniewieka

  	
   

  
	
   

  	
  Name:

  	
  Beata
  Hryniewieka

  	
   

  
	
   

  	
  Title:

  	
  Assistant
  Treasurer

  	
   

  
	
   

  	
   

  
	
   

  	
  RAFAELLA
  APPAREL GROUP, INC.

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/
  Glenn Palmer

  	
   

  
	
   

  	
  Name:

  	
  Glenn
  Palmer

  	
   

  
	
   

  	
  Title:

  	
  Chief
  Executive Officer

  	
   

  
	
   

  	
   

  
	
   

  	
  VERRAZANO, INC.

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/
  Glenn Palmer

  	
   

  
	
   

  	
  Name:

  	
  Glenn
  Palmer

  	
   

  
	
   

  	
  Title:

  	
  President

  	
   

  
						



 


17